Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Nature of Business — Wilson Bank Holding Company (the “Company”) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Wilson Bank & Trust (the “Bank”). The Bank is a commercial bank headquartered in Lebanon, Tennessee. The Bank provides a full range of banking services in its primary market areas of Wilson, Davidson, Rutherford, Trousdale, Sumner, Dekalb, Putnam, Smith, and Williamson Counties, Tennessee.
Basis of Presentation — The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements and related notes appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
These consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, the valuation of deferred tax assets, determination of any impairment of goodwill or other intangibles, other-than-temporary impairment of securities, the valuation of other real estate, and the fair value of financial instruments. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Loans — Loans are reported at their outstanding principal balances less unearned income, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income on loans is accrued based on the principal balance outstanding. Loan origination fees, net of certain loan origination costs, are deferred and recognized as an adjustment to the related loan yield using a method which approximates the interest method.
Loans are charged off when management believes that the full collectability of the loan is unlikely. As such, a loan may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.
Loans are placed on nonaccrual status when there is a significant deterioration in the financial condition of the borrower, which often is determined when the principal or interest on the loan is more than 90 days past due, unless the loan is both well-secured and in the process of collection. Generally, all interest accrued but not collected for loans that are placed on nonaccrual status, is reversed against current income. Interest income is subsequently recognized only to the extent cash payments are received while the loan is classified as nonaccrual, but interest income recognition is reviewed on a case-by-case basis. A nonaccrual loan is returned to accruing status once the loan has been brought current and collection is reasonably assured or the loan has been “well-secured” through other techniques. Past due status is determined based on the contractual due date per the underlying loan agreement.
All loans that are placed on nonaccrual are further analyzed to determine if they should be classified as impaired loans. At December 31, 2020 and March 31, 2021, there were no loans classified as nonaccrual that were not also deemed to be impaired except for those loans not individually evaluated for impairment as described below. A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan. This determination is made using one or more of a variety of techniques, which include a review of the borrower’s financial condition, debt-service coverage ratios, global cash flow analysis, guarantor support, other loan file information, meetings with borrowers, inspection or reappraisal of collateral and/or consultation with legal counsel as well as results of reviews of other similar industry credits (e.g. builder loans, development loans, church loans, etc). Loans with an identified weakness and principal balance of $500,000 or more are subject to individual identification for impairment. Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a specific valuation allowance is established as a component of the allowance for loan losses or, in the case of collateral dependent loans, the excess may be charged off. Changes to the valuation allowance are recorded as a component of the provision for loan losses. Any subsequent adjustments to present value calculations for impaired loan valuations as a result of the passage of time, such as changes in the anticipated payback period for repayment, are recorded as a component of the provision for loan losses. For loans less than $500,000, the Company assigns a valuation allowance to these loans utilizing an allocation rate equal to the allocation rate calculated for non-impaired loans of a similar type.
Allowance for Loan Losses — The allowance for loan losses is maintained at a level that management believes to be adequate to absorb probable losses in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, volume, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans, historical loan loss factors, loss experience of various loan segments, identified impaired loans and other factors related to the portfolio. This evaluation is performed quarterly and is inherently subjective, as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on any impaired loans.
In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, independent loan reviewers, and reviews that may have been conducted by third-party reviewers. We incorporate relevant loan review results in the loan impairment determination. In addition, regulatory agencies, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to record adjustments to the allowance based on their judgment about information available to them at the time of their examinations.
Recently Issued Accounting Pronouncements
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 along with several other subsequent codification updates related to accounting for credit losses, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
ASU 2016-13 was originally to become effective for the Company on January 1, 2020. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security ("CARES") Act. The law contains several provisions applicable to companies like the Company. Among others, it gives lenders, including the Company, the option to defer the implementation of ASU 2016-13, which is known as the Current Expected Credit Losses (CECL) standard, until 60 days after the declaration of the end of the public health emergency related to the COVID-19 pandemic or December 31, 2020, whichever comes first. On December 27, 2020, President Trump signed into law the Coronavirus Response and Relief Supplemental Appropriations Act. The law contains several provisions applicable to companies like the Company. Among them, it gives lenders, including the Company, the option to further defer the implementation of ASU 2016-13, until January 1, 2022. In addition, the Securities and Exchange Commission (SEC) staff has stated that opting to delay the implementation of CECL shall be considered to be in accordance with generally accepted accounting principles. As a result, the Company has elected to delay implementation of CECL until January 1, 2022.
We currently believe the adoption of ASU 2016-13 would have resulted in an approximately 2 - 6% increase in our allowance for loan losses as of January 1, 2020. That estimated increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As of March 31, 2021, we currently believe the adoption of ASU 2016-13 would have resulted in an approximately 2 - 6% increase in our allowance for loan losses over the level recorded at March 31, 2021.
Prior to the CARES Act being signed and the Company’s decision to delay the implementation of CECL, the Company was completing its CECL implementation plan with a cross-functional working group, under the direction of the Chief Credit Officer along with our Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. The Company’s implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. The Company contracted with a third-party vendor to assist it in the implementation of CECL. Implementation efforts have been finalized and controls and processes are in place. The ultimate impact of the adoption of ASU 2016-13 could differ from our current expectation. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for available-for-sale securities and other financial assets and it also applies to off-balance sheet credit exposure like loan commitments and other investments; however, we do not expect these allowances to be significant. Pursuant to an interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, the Company has the option to phase in over a three-year period the transition adjustments to capital resulting from the adoption of CECL for regulatory capital purposes. If adopted, the cumulative amount of the transition adjustments will become fixed at the start of the three-year period, and will be phased out of the regulatory capital calculations evenly over such period, with 75% recognized in year one, 50% recognized in year two, and 25% recognized in year three. The Company has not yet decided if it will take advantage of this option. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios.
ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 became effective for us on January 1, 2020, and did not have a significant impact on our financial statements.
ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 became effective for us on January 1, 2020 and did not have a significant impact on our financial statements.
ASU 2020-4, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-4 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-4 was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2020-4 did not significantly impact our financial statements.
ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs.” ASU 2020-08 clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates. ASU 2020-8 was effective for us on January 1, 2021 and did not have a significant impact on our financial statements.
ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2021-01 did not significantly impact our financial statements.
Other than those previously discussed, there were no other recently issued accounting pronouncements that are expected to materially impact the Company.
Note 2. Loans and Allowance for Loan Losses
For financial reporting purposes, the Company classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with that utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).
The following schedule details the loans of the Company at March 31, 2021 and December 31, 2020:
|
|
(In Thousands)
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
527,092
|
|
|
$
|
535,994
|
|
Multifamily
|
|
|
93,318
|
|
|
|
111,646
|
|
Commercial
|
|
|
865,388
|
|
|
|
837,766
|
|
Construction and land development
|
|
|
513,931
|
|
|
|
488,626
|
|
Farmland
|
|
|
12,377
|
|
|
|
15,429
|
|
Second mortgages
|
|
|
8,164
|
|
|
|
8,433
|
|
Equity lines of credit
|
|
|
76,633
|
|
|
|
78,889
|
|
Total mortgage loans on real estate
|
|
|
2,096,903
|
|
|
|
2,076,783
|
|
Commercial loans
|
|
|
170,712
|
|
|
|
172,811
|
|
Agricultural loans
|
|
|
1,019
|
|
|
|
1,206
|
|
Consumer installment loans
|
|
|
|
|
|
|
|
|
Personal
|
|
|
62,403
|
|
|
|
66,193
|
|
Credit cards
|
|
|
4,321
|
|
|
|
4,324
|
|
Total consumer installment loans
|
|
|
66,724
|
|
|
|
70,517
|
|
Other loans
|
|
|
9,147
|
|
|
|
9,283
|
|
Total loans before net deferred loan fees
|
|
|
2,344,505
|
|
|
|
2,330,600
|
|
Net deferred loan fees
|
|
|
(10,176
|
)
|
|
|
(9,295
|
)
|
Total loans
|
|
|
2,334,329
|
|
|
|
2,321,305
|
|
Less: Allowance for loan losses
|
|
|
(39,330
|
)
|
|
|
(38,539
|
)
|
Net loans
|
|
$
|
2,294,999
|
|
|
$
|
2,282,766
|
|
Risk characteristics relevant to each portfolio segment are as follows:
Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayments substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
1-4 family residential real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value ("LTV"), minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment.
1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV ratios, minimum credit scores, and maximum debt to income ratios. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans, as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans.
Multi-family and commercial real estate: Multi-family and commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.
Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property.
Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Also included in this category are PPP loans guaranteed by the SBA, which totaled $67.2 million at March 31, 2021 and $62.4 million at December 31, 2020. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower, if any. The cash flows of borrowers, however, may not be as expected and any collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV ratios on secured consumer loans, minimum credit scores, and maximum debt to income ratios. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle or other large personal items, or for consolidating debt. These loans may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.
The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, current and anticipated economic conditions, historical loss experience, industry and peer bank loan quality indicators and other pertinent factors, including regulatory recommendations.
Transactions in the allowance for loan losses for the three months ended March 31, 2021 and 2020 are summarized as follows:
|
|
(In Thousands)
|
|
|
|
Residential 1-4 Family
|
|
|
Multifamily
|
|
|
Commercial Real Estate
|
|
|
Construction
|
|
|
Farmland
|
|
|
Second Mortgages
|
|
|
Equity Lines of Credit
|
|
|
Commercial
|
|
|
Agricultural, Installment and Other
|
|
|
Total
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
8,098
|
|
|
|
1,541
|
|
|
|
16,802
|
|
|
|
7,936
|
|
|
|
154
|
|
|
|
105
|
|
|
|
997
|
|
|
|
1,378
|
|
|
|
1,528
|
|
|
|
38,539
|
|
Provision
|
|
|
(197
|
)
|
|
|
(207
|
)
|
|
|
756
|
|
|
|
526
|
|
|
|
(30
|
)
|
|
|
(3
|
)
|
|
|
(27
|
)
|
|
|
(80
|
)
|
|
|
89
|
|
|
|
827
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(224
|
)
|
|
|
(228
|
)
|
Recoveries
|
|
|
38
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
139
|
|
|
|
192
|
|
Ending balance
|
|
$
|
7,939
|
|
|
|
1,334
|
|
|
|
17,558
|
|
|
|
8,476
|
|
|
|
124
|
|
|
|
102
|
|
|
|
970
|
|
|
|
1,295
|
|
|
|
1,532
|
|
|
|
39,330
|
|
Ending balance individually evaluated for impairment
|
|
$
|
558
|
|
|
|
—
|
|
|
|
141
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
699
|
|
Ending balance collectively evaluated for impairment
|
|
$
|
7,381
|
|
|
|
1,334
|
|
|
|
17,417
|
|
|
|
8,476
|
|
|
|
124
|
|
|
|
102
|
|
|
|
970
|
|
|
|
1,295
|
|
|
|
1,532
|
|
|
|
38,631
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
527,092
|
|
|
|
93,318
|
|
|
|
865,388
|
|
|
|
513,931
|
|
|
|
12,377
|
|
|
|
8,164
|
|
|
|
76,633
|
|
|
|
170,712
|
|
|
|
76,890
|
|
|
|
2,344,505
|
|
Ending balance individually evaluated for impairment
|
|
$
|
2,314
|
|
|
|
—
|
|
|
|
962
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,276
|
|
Ending balance collectively evaluated for impairment
|
|
$
|
524,778
|
|
|
|
93,318
|
|
|
|
864,426
|
|
|
|
513,931
|
|
|
|
12,377
|
|
|
|
8,164
|
|
|
|
76,633
|
|
|
|
170,712
|
|
|
|
76,890
|
|
|
|
2,341,229
|
|
|
|
Residential 1-4 Family
|
|
|
Multifamily
|
|
|
Commercial Real Estate
|
|
|
Construction
|
|
|
Farmland
|
|
|
Second Mortgages
|
|
|
Equity Lines of Credit
|
|
|
Commercial
|
|
|
Agricultural, Installment and Other
|
|
|
Total
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
7,144
|
|
|
|
1,117
|
|
|
|
11,114
|
|
|
|
5,997
|
|
|
|
187
|
|
|
|
123
|
|
|
|
889
|
|
|
|
1,044
|
|
|
|
1,111
|
|
|
|
28,726
|
|
Provision
|
|
|
198
|
|
|
|
524
|
|
|
|
1,330
|
|
|
|
(816
|
)
|
|
|
(10
|
)
|
|
|
4
|
|
|
|
(44
|
)
|
|
|
(46
|
)
|
|
|
329
|
|
|
|
1,469
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(355
|
)
|
|
|
(355
|
)
|
Recoveries
|
|
|
9
|
|
|
|
—
|
|
|
|
300
|
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
|
|
441
|
|
Ending balance
|
|
$
|
7,351
|
|
|
|
1,641
|
|
|
|
12,744
|
|
|
|
5,200
|
|
|
|
177
|
|
|
|
127
|
|
|
|
845
|
|
|
|
998
|
|
|
|
1,198
|
|
|
|
30,281
|
|
Ending balance individually evaluated for impairment
|
|
$
|
715
|
|
|
|
—
|
|
|
|
220
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
935
|
|
Ending balance collectively evaluated for impairment
|
|
$
|
6,636
|
|
|
|
1,641
|
|
|
|
12,524
|
|
|
|
5,200
|
|
|
|
177
|
|
|
|
127
|
|
|
|
845
|
|
|
|
998
|
|
|
|
1,198
|
|
|
|
29,346
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
519,775
|
|
|
|
151,929
|
|
|
|
841,521
|
|
|
|
388,769
|
|
|
|
18,610
|
|
|
|
11,254
|
|
|
|
74,908
|
|
|
|
95,547
|
|
|
|
67,374
|
|
|
|
2,169,687
|
|
Ending balance individually evaluated for impairment
|
|
$
|
1,429
|
|
|
|
—
|
|
|
|
999
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,428
|
|
Ending balance collectively evaluated for impairment
|
|
$
|
518,346
|
|
|
|
151,929
|
|
|
|
840,522
|
|
|
|
388,769
|
|
|
|
18,610
|
|
|
|
11,254
|
|
|
|
74,908
|
|
|
|
95,547
|
|
|
|
67,374
|
|
|
|
2,167,259
|
|
Impaired Loans
At March 31, 2021 and December 31, 2020, the Company had certain impaired loans of $1.3 million which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The rest of the Company's impaired loans as of such dates remained on accruing status. The following table presents the Company’s impaired loans at March 31, 2021 and December 31, 2020.
|
|
In Thousands
|
|
|
|
Recorded Investment
|
|
|
Unpaid Principal Balance
|
|
|
Related Allowance
|
|
|
Average Recorded Investment
|
|
|
Interest Income Recognized
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
1,101
|
|
|
|
1,427
|
|
|
|
—
|
|
|
|
1,132
|
|
|
|
2
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
311
|
|
|
|
311
|
|
|
|
—
|
|
|
|
311
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Second mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural, installment and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
1,412
|
|
|
|
1,738
|
|
|
|
—
|
|
|
|
1,443
|
|
|
|
2
|
|
With related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
1,217
|
|
|
|
1,214
|
|
|
|
558
|
|
|
|
1,230
|
|
|
|
15
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
654
|
|
|
|
651
|
|
|
|
141
|
|
|
|
658
|
|
|
|
8
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Second mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural, installment and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
1,871
|
|
|
|
1,865
|
|
|
|
699
|
|
|
|
1,888
|
|
|
|
23
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
2,318
|
|
|
|
2,641
|
|
|
|
558
|
|
|
|
2,362
|
|
|
|
17
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
965
|
|
|
|
962
|
|
|
|
141
|
|
|
|
969
|
|
|
|
8
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Second mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural, installment and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
3,283
|
|
|
|
3,603
|
|
|
|
699
|
|
|
|
3,331
|
|
|
|
25
|
|
|
|
In Thousands
|
|
|
|
Recorded Investment
|
|
|
Unpaid Principal Balance
|
|
|
Related Allowance
|
|
|
Average Recorded Investment
|
|
|
Interest Income Recognized
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
1,162
|
|
|
|
1,507
|
|
|
|
—
|
|
|
|
395
|
|
|
|
26
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
311
|
|
|
|
311
|
|
|
|
—
|
|
|
|
311
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Second mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural, installment and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
1,473
|
|
|
|
1,818
|
|
|
|
—
|
|
|
|
706
|
|
|
|
26
|
|
With related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
1,242
|
|
|
|
1,240
|
|
|
|
594
|
|
|
|
1,273
|
|
|
|
66
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
662
|
|
|
|
659
|
|
|
|
148
|
|
|
|
676
|
|
|
|
22
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Second mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural, installment and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
1,904
|
|
|
|
1,899
|
|
|
|
742
|
|
|
|
1,949
|
|
|
|
88
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
2,404
|
|
|
|
2,747
|
|
|
|
594
|
|
|
|
1,668
|
|
|
|
92
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
973
|
|
|
|
970
|
|
|
|
148
|
|
|
|
987
|
|
|
|
22
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Second mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural, installment and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
3,377
|
|
|
|
3,717
|
|
|
|
742
|
|
|
|
2,655
|
|
|
|
114
|
|
Impaired loans also include loans that the Bank may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Bank may otherwise incur. These loans are classified as impaired loans and, if on non-accruing status as of the date of restructuring, the loans are included in the nonperforming loan balances. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date.
Troubled Debt Restructuring
The Bank’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring ("TDR"), where economic or other concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.
The following table summarizes the carrying balances of TDRs at March 31, 2021 and December 31, 2020.
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
(In thousands)
|
|
Performing TDRs
|
|
$
|
2,182
|
|
|
$
|
2,147
|
|
Nonperforming TDRs
|
|
|
449
|
|
|
|
529
|
|
Total TDRS
|
|
$
|
2,631
|
|
|
$
|
2,676
|
|
The following table outlines the amount of each troubled debt restructuring, categorized by loan classification, made during the three months ended March 31, 2021 and the three months ended March 31, 2020 (in thousands, except for number of contracts):
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
Number of Contracts
|
|
|
Pre Modification Outstanding Recorded Investment
|
|
|
Post Modification Outstanding Recorded Investment, Net of Related Allowance
|
|
|
Number of Contracts
|
|
|
Pre Modification Outstanding Recorded Investment
|
|
|
Post Modification Outstanding Recorded Investment, Net of Related Allowance
|
|
Residential 1-4 family
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
111
|
|
|
|
132
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Second mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural, installment and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
111
|
|
|
$
|
132
|
|
As of March 31, 2021 the Company had no loan relationships that had been previously classified as a TDR subsequently default within twelve months of restructuring. As of March 31, 2020 the Company had one loan relationship totaling $311,000 that had been previously classified as a TDR subsequently default within twelve months of restructuring.
In response to the COVID-19 pandemic and its economic impact to the Bank’s customers, the Bank proactively began providing relief to its customers in the middle of March 2020 through a 90 day interest only payment option or a full 90 day payment deferral option. Following the passage of the CARES Act the Bank expanded this program to provide a six-month interest only payment option in an effort to provide flexibility to its customers as they navigated uncertainties resulting from the pandemic. Pursuant to interagency regulatory guidance and the CARES Act, the Bank may elect to not classify loans as troubled debt restructurings for which these deferrals are granted between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. As of March 31, 2021, the Bank had 11 loans, totaling $51.4 million in aggregate principal amount for which principal or both principal and interest were being deferred and not classified as TDRs. Under the applicable guidance, none of these deferrals required a troubled debt restructuring designation as of March 31, 2021.
As of March 31, 2021, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to approximately $578,000. As of December 31, 2020, the Company had $301,000 of consumer mortgage loans in the process of foreclosure.
Potential problem loans, which include nonperforming loans, amounted to approximately $8.0 million at March 31, 2021 and $8.2 million at December 31, 2020. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.
The following summary presents the Bank's loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:
|
•
|
Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.
|
|
•
|
Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
|
|
•
|
Doubtful loans have all the characteristics of substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Bank considers all doubtful loans to be impaired and places such loans on nonaccrual status.
|
The following table is a summary of the Bank’s loan portfolio by risk rating at March 31, 2021 and December 31, 2020:
|
|
(In Thousands)
|
|
|
|
Residential 1-4 Family
|
|
|
Multifamily
|
|
|
Commercial Real Estate
|
|
|
Construction
|
|
|
Farmland
|
|
|
Second Mortgages
|
|
|
Equity Lines of Credit
|
|
|
Commercial
|
|
|
Agricultural, installment and other
|
|
|
Total
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
520,890
|
|
|
|
93,318
|
|
|
|
864,802
|
|
|
|
513,383
|
|
|
|
12,257
|
|
|
|
7,886
|
|
|
|
76,612
|
|
|
|
170,684
|
|
|
|
76,696
|
|
|
|
2,336,528
|
|
Special Mention
|
|
|
2,207
|
|
|
|
—
|
|
|
|
—
|
|
|
|
548
|
|
|
|
76
|
|
|
|
166
|
|
|
|
11
|
|
|
|
—
|
|
|
|
127
|
|
|
|
3,135
|
|
Substandard
|
|
|
3,995
|
|
|
|
—
|
|
|
|
586
|
|
|
|
—
|
|
|
|
44
|
|
|
|
112
|
|
|
|
10
|
|
|
|
28
|
|
|
|
67
|
|
|
|
4,842
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
527,092
|
|
|
|
93,318
|
|
|
|
865,388
|
|
|
|
513,931
|
|
|
|
12,377
|
|
|
|
8,164
|
|
|
|
76,633
|
|
|
|
170,712
|
|
|
|
76,890
|
|
|
|
2,344,505
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
529,546
|
|
|
|
111,646
|
|
|
|
837,028
|
|
|
|
488,571
|
|
|
|
15,301
|
|
|
|
8,148
|
|
|
|
78,565
|
|
|
|
172,779
|
|
|
|
80,770
|
|
|
|
2,322,354
|
|
Special Mention
|
|
|
2,745
|
|
|
|
—
|
|
|
|
149
|
|
|
|
27
|
|
|
|
79
|
|
|
|
169
|
|
|
|
314
|
|
|
|
—
|
|
|
|
156
|
|
|
|
3,639
|
|
Substandard
|
|
|
3,703
|
|
|
|
—
|
|
|
|
589
|
|
|
|
28
|
|
|
|
49
|
|
|
|
116
|
|
|
|
10
|
|
|
|
32
|
|
|
|
80
|
|
|
|
4,607
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
535,994
|
|
|
|
111,646
|
|
|
|
837,766
|
|
|
|
488,626
|
|
|
|
15,429
|
|
|
|
8,433
|
|
|
|
78,889
|
|
|
|
172,811
|
|
|
|
81,006
|
|
|
|
2,330,600
|
|
Note 3. Debt and Equity Securities
Debt and equity securities have been classified in the consolidated balance sheet according to management’s intent. Debt and equity securities at March 31, 2021 and December 31, 2020 are summarized as follows:
|
|
March 31, 2021
|
|
|
|
Securities Available-For-Sale
|
|
|
|
In Thousands
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Market Value
|
|
U.S. Government-sponsored enterprises (GSEs)
|
|
$
|
127,112
|
|
|
$
|
109
|
|
|
$
|
3,196
|
|
|
$
|
124,025
|
|
Mortgage-backed securities
|
|
|
287,126
|
|
|
|
4,825
|
|
|
|
3,289
|
|
|
|
288,662
|
|
Asset-backed securities
|
|
|
39,755
|
|
|
|
397
|
|
|
|
22
|
|
|
|
40,130
|
|
Corporate bonds
|
|
|
2,500
|
|
|
|
44
|
|
|
|
—
|
|
|
|
2,544
|
|
Obligations of states and political subdivisions
|
|
|
159,570
|
|
|
|
2,302
|
|
|
|
3,301
|
|
|
|
158,571
|
|
|
|
$
|
616,063
|
|
|
$
|
7,677
|
|
|
$
|
9,808
|
|
|
$
|
613,932
|
|
|
|
December 31, 2020
|
|
|
|
Securities Available-For-Sale
|
|
|
|
In Thousands
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Market Value
|
|
U.S. Government-sponsored enterprises (GSEs)
|
|
$
|
125,712
|
|
|
$
|
328
|
|
|
$
|
135
|
|
|
$
|
125,905
|
|
Mortgage-backed securities
|
|
|
258,774
|
|
|
|
5,636
|
|
|
|
620
|
|
|
|
263,790
|
|
Asset-backed securities
|
|
|
36,394
|
|
|
|
582
|
|
|
|
19
|
|
|
|
36,957
|
|
Corporate bonds
|
|
|
2,500
|
|
|
|
100
|
|
|
|
—
|
|
|
|
2,600
|
|
Obligations of states and political subdivisions
|
|
|
147,462
|
|
|
|
4,229
|
|
|
|
400
|
|
|
|
151,291
|
|
|
|
$
|
570,842
|
|
|
$
|
10,875
|
|
|
$
|
1,174
|
|
|
$
|
580,543
|
|
Included in mortgage-backed securities are collateralized mortgage obligations totaling $96,315,000 (fair value of $95,688,000) and $88,472,000 (fair value of $89,116,000) at March 31, 2021 and December 31, 2020, respectively.
The amortized cost and estimated market value of debt securities at March 31, 2021 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
Available-For-Sale
|
|
|
|
In Thousands
|
|
|
|
Amortized Cost
|
|
|
Estimated Market Value
|
|
Due in one year or less
|
|
$
|
1,196
|
|
|
$
|
1,196
|
|
Due after one year through five years
|
|
|
40,212
|
|
|
|
40,767
|
|
Due after five years through ten years
|
|
|
188,093
|
|
|
|
184,576
|
|
Due after ten years
|
|
|
386,562
|
|
|
|
387,393
|
|
|
|
$
|
616,063
|
|
|
$
|
613,932
|
|
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2021 and December 31, 2020.
|
|
In Thousands, Except Number of Securities
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
March 31, 2021
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Number of Securities Included
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Number of Securities Included
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSEs
|
|
$
|
107,005
|
|
|
$
|
3,196
|
|
|
|
42
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
107,005
|
|
|
$
|
3,196
|
|
Mortgage-backed securities
|
|
|
135,822
|
|
|
|
3,268
|
|
|
|
59
|
|
|
|
6,569
|
|
|
|
21
|
|
|
|
12
|
|
|
|
142,391
|
|
|
|
3,289
|
|
Asset-backed securities
|
|
|
5,409
|
|
|
|
22
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,409
|
|
|
|
22
|
|
Obligations of states and political subdivisions
|
|
|
74,576
|
|
|
|
3,301
|
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74,576
|
|
|
|
3,301
|
|
|
|
$
|
322,812
|
|
|
$
|
9,787
|
|
|
|
178
|
|
|
$
|
6,569
|
|
|
$
|
21
|
|
|
|
12
|
|
|
$
|
329,381
|
|
|
$
|
9,808
|
|
|
|
In Thousands, Except Number of Securities
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2020
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Number of Securities Included
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Number of Securities Included
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSEs
|
|
$
|
47,991
|
|
|
$
|
135
|
|
|
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
47,991
|
|
|
$
|
135
|
|
Mortgage-backed securities
|
|
|
78,381
|
|
|
|
573
|
|
|
|
29
|
|
|
|
6,776
|
|
|
|
47
|
|
|
|
12
|
|
|
|
85,157
|
|
|
|
620
|
|
Asset-backed securities
|
|
|
4,950
|
|
|
|
19
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,950
|
|
|
|
19
|
|
Corporate bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
|
44,061
|
|
|
|
394
|
|
|
|
33
|
|
|
|
689
|
|
|
|
6
|
|
|
|
1
|
|
|
|
44,750
|
|
|
|
400
|
|
|
|
$
|
175,383
|
|
|
$
|
1,121
|
|
|
|
83
|
|
|
$
|
7,465
|
|
|
$
|
53
|
|
|
|
13
|
|
|
$
|
182,848
|
|
|
$
|
1,174
|
|
Unrealized losses on securities have not been recognized into income because the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2021, as the issuers’ securities are of high credit quality, management does not intend to sell the securities and it is not likely that management will be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payment on the securities. The fair value is expected to recover as the securities approach maturity.
The carrying values of the Company’s investment securities could decline in the future if the financial condition of issuers deteriorates and management determines it is probable that the Company will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future given the current economic environment.
Note 4. Derivatives
Derivatives Designated as Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate loans. The hedging strategy on loans converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the maturity dates of the hedged loans.
During the second quarter of 2020, the Company entered into one swap transaction with a notional amount of $30,000,000 pursuant to which the Company pays the counter-party a fixed interest rate and receives a floating rate equal to 1 month LIBOR. The derivative transaction is designated as a fair value hedge.
A summary of the Company's fair value hedge relationships as of March 31, 2021 and December 31, 2020 are as follows (in thousands):
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Weighted Average Remaining Maturity (In Years)
|
|
|
Weighted Average Pay Rate
|
|
Receive Rate
|
|
Notional Amount
|
|
|
Estimated Fair Value
|
|
Interest rate swap agreements - loans
|
Other assets
|
|
|
9.17
|
|
|
|
0.65
|
%
|
1 month LIBOR
|
|
$
|
28,114
|
|
|
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Weighted Average Remaining Maturity (In Years)
|
|
|
Weighted Average Pay Rate
|
|
Receive Rate
|
|
Notional Amount
|
|
|
Estimated Fair Value
|
|
Interest rate swap agreements - loans
|
Other liabilities
|
|
|
9.42
|
|
|
|
0.65
|
%
|
1 month LIBOR
|
|
$
|
29,575
|
|
|
|
(51
|
)
|
The effects of fair value hedge relationships reported in interest income on loans on the consolidated statements of income for the three months ended March 31, 2021 and 2020 were as follows (in thousands):
|
|
Three Months Ended March 31,
|
|
Gain (loss) on fair value hedging relationship
|
|
2021
|
|
|
2020
|
|
Interest rate swap agreements - loans:
|
|
|
|
|
|
|
|
|
Hedged items
|
|
$
|
(1,462
|
)
|
|
|
—
|
|
Derivative designated as hedging instruments
|
|
|
1,512
|
|
|
|
—
|
|
The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at March 31, 2021 and December 31, 2020 (in thousands):
|
|
Carrying Amount of the Hedged Assets
|
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
|
|
Line item on the balance sheet
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Loans
|
|
$
|
28,114
|
|
|
|
29,575
|
|
|
|
(1,620
|
)
|
|
|
(158
|
)
|
Mortgage Banking Derivatives
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors under the Bank's mandatory delivery program are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. At March 31, 2021 and December 31, 2020, the Company had approximately $25,707,000 and $20,981,000, respectively, of interest rate lock commitments and approximately $31,000,000 and $21,250,000, respectively, of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by derivative assets of $720,000 and $714,000 at March 31, 2021 and December 31, 2020, respectively, and a derivative asset of $504,000 and a derivative liability of $157,000 at March 31, 2021 and December 31, 2020, respectively. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sale of loans.
The net gains (losses) relating to free-standing derivative instruments used for risk management is summarized below (in thousands):
|
|
In Thousands
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
Forward contracts related to mortgage loans held for sale and interest rate contracts
|
|
$
|
661
|
|
|
|
(362
|
)
|
Interest rate contracts for customers
|
|
|
6
|
|
|
|
175
|
|
The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as of March 31, 2021 and December 31, 2020 (in thousands):
|
|
In Thousands
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
Notional Amount
|
|
|
Fair Value
|
|
|
Notional Amount
|
|
|
Fair Value
|
|
Included in other assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts for customers
|
|
$
|
25,707
|
|
|
|
720
|
|
|
|
20,981
|
|
|
|
714
|
|
Forward contracts related to mortgage loans held-for-sale
|
|
|
31,000
|
|
|
|
504
|
|
|
|
21,250
|
|
|
|
(157
|
)
|
Note 5. Equity Incentive Plans
In April 2009, the Company’s shareholders approved the Wilson Bank Holding Company 2009 Stock Option Plan (the “2009 Stock Option Plan”). The 2009 Stock Option Plan was effective as of April 14, 2009. Under the 2009 Stock Option Plan, awards could be in the form of options to acquire common stock of the Company. Subject to adjustment as provided by the terms of the 2009 Stock Option Plan, the maximum number of shares of common stock with respect to which awards could be granted under the 2009 Stock Option Plan was 100,000 shares. The 2009 Stock Option Plan terminated on April 13, 2019, and no additional awards may be issued under the 2009 Stock Option Plan. The awards granted under the 2009 Stock Option Plan prior to the plan's expiration will remain outstanding until exercised or otherwise terminated. As of March 31, 2021, the Company had outstanding 10,989 options under the 2009 Stock Option Plan with a weighted average exercise price of $34.34.
During the second quarter of 2016, the Company’s shareholders approved the Wilson Bank Holding Company 2016 Equity Incentive Plan, which authorizes awards of up to 750,000 shares of common stock. The 2016 Equity Incentive Plan was approved by the Board of Directors and effective as of January 25, 2016 and approved by the Company’s shareholders on April 12, 2016. On September 26, 2016, the Board of Directors approved an amendment and restatement of the 2016 Equity Incentive Plan (as amended and restated the “2016 Equity Incentive Plan”) to make clear that directors who are not also employees of the Company may be awarded stock appreciation rights. The primary purpose of the 2016 Equity Incentive Plan is to promote the interest of the Company and its shareholders by, among other things, (i) attracting and retaining key officers, employees and directors of, and consultants to, the Company and its subsidiaries and affiliates, (ii) motivating those individuals by means of performance-related incentives to achieve long-range performance goals, (iii) enabling such individuals to participate in the long-term growth and financial success of the Company, (iv) encouraging ownership of stock in the Company by such individuals, and (v) linking their compensation to the long-term interests of the Company and its shareholders. Except for certain limitations, awards can be in the form of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares and restricted share units, performance awards and other stock-based awards. As of March 31, 2021, the Company had 405,272 shares remaining available for issuance under the 2016 Equity Incentive Plan. As of March 31, 2021, the Company had outstanding 151,844 options with a weighted average exercise price of $47.08 and 117,956 cash-settled stock appreciation rights with a weighted average exercise price of $44.38 under the 2016 Equity Incentive Plan.
As of March 31, 2021, the Company had outstanding 162,833 stock options with a weighted average exercise price of $46.22 and 117,956 cash-settled stock appreciation rights each with a weighted average exercise price of $44.38.
The following table summarizes information about stock options and cash-settled SARs for the three months ended March 31, 2021 and 2020:
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
Options and SARs outstanding at beginning of period
|
|
|
284,591
|
|
|
$
|
43.71
|
|
|
|
273,039
|
|
|
$
|
41.19
|
|
Granted
|
|
|
24,999
|
|
|
|
59.02
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
28,801
|
|
|
|
40.02
|
|
|
|
7,654
|
|
|
|
33.82
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
4,300
|
|
|
|
39.46
|
|
Outstanding at end of period
|
|
|
280,789
|
|
|
$
|
45.45
|
|
|
|
261,085
|
|
|
$
|
41.43
|
|
Options and SARs exercisable at March 31
|
|
|
141,993
|
|
|
$
|
41.00
|
|
|
|
142,692
|
|
|
$
|
40.40
|
|
As of March 31, 2021, there was $1,725,000 of total unrecognized cost related to non-vested share-based compensation arrangements granted under the Company's equity incentive plans. The cost is expected to be recognized over a weighted-average period of 3.17 years.
Note 6. Regulatory Capital
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of March 31, 2021, the Company and Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.
In 2018, the U.S. Congress passed, and the President signed into law, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the "Growth Act"). The Growth Act, among other things, requires the federal banking agencies to issue regulations allowing community bank organizations with total assets of less than $10.0 billion in assets and limited amounts of certain assets and off-balance sheet exposures to access a simpler capital regime focused on a bank's Tier 1 leverage capital levels rather than risk-based capital levels that are the focus of the capital rules issued under the Dodd-Frank Act implementing Basel III.
In October 2019, the federal banking agencies approved final rules under the Growth Act that exempt a qualifying community bank and its holding company that have Community Bank Leverage Ratios, calculated as Tier 1 capital over average total consolidated assets (the "Community Bank Leverage Ratio"), of greater than 9 percent from the risk-based capital requirements of the capital rules issued under the Dodd-Frank Act. A qualifying community banking organization and its holding company that have chosen the proposed framework are not required to calculate the existing risk-based and leverage capital requirements. Such a bank would also be considered to have met the capital ratio requirements to be well capitalized for the agencies' prompt corrective action rules provided it has a Community Bank Leverage Ratio greater than 9 percent. Tier 1 capital for purposes of calculating the Community Bank Leverage Ratio is defined as total equity less accumulated other comprehensive income, less goodwill, less all other intangible assets, less deferred tax assets that arise from net operating loss and tax carryforwards, net of any related valuation allowances. Institutions seeking to utilize the Community Bank Leverage Ratio must not have total off-balance sheet exposures equal to 25% or more of total consolidated assets. For purposes of this test, off-balance sheet exposures include, among other items, unused portions of commitments, securities lent or borrowed, credit enhancements and financial standby letters of credit. The federal regulators when establishing the Community Bank Leverage Ratio also established a grace period of two fiscal quarters during which a qualifying financial institution that temporarily failed to meet any of the qualifying criteria for use of the Community Bank Leverage Ratio would nonetheless be considered well capitalized so long as the institution maintained a Community Bank Leverage Ratio of greater than 7%.
Pursuant to the CARES Act the required Community Bank Leverage Ratio was lowered to 8% until the earlier of December 31, 2020 and 60 days following the end of the national emergency declared with respect to COVID-19. A banking organization that temporarily failed to meet this, or any other requirement necessary to qualify to utilize the Community Bank Leverage Ratio, would still be considered well capitalized so long as it maintained a Community Bank Leverage Ratio of at least 7%.
The Company opted to take advantage of this rule effective January 1, 2020. As a result, the capital conservation buffer applicable under the Basel III capital guidelines was not applicable to the Company or the Bank as of March 31, 2021.
Effective November 9, 2020, the federal banking regulatory agencies approved rules raising the Community Bank Leverage Ratio to 8.5% for 2021 and 9% thereafter. The regulatory agencies also modified the two-quarter grace period to require a Community Bank Leverage Ratio of 7.5% or greater in 2021 and 8%
thereafter.
The Company and the Bank may subsequently opt out of utilizing the Community Bank Leverage Ratio and again calculate their capital ratios under those ratios that the Company and the Bank utilized prior to January 1, 2020.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits, and other restrictions on its business.
The Company’s and Wilson Bank’s Community Bank Leverage Ratio as of March 31, 2021 and December 31, 2020 are presented in the following tables:
|
|
Actual
|
|
|
Regulatory Minimum Capital Requirement Community Bank Leverage Ratio
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(dollars in thousands)
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Bank Leverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
377,995
|
|
|
|
11.1
|
%
|
|
$
|
289,047
|
|
|
|
8.5
|
%
|
Wilson Bank
|
|
|
376,682
|
|
|
|
11.1
|
|
|
|
288,966
|
|
|
|
8.5
|
|
|
|
Actual
|
|
|
Regulatory Minimum Capital Requirement Community Bank Leverage Ratio
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Bank Leverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
368,150
|
|
|
|
11.2
|
%
|
|
$
|
279,400
|
|
|
|
8.5
|
%
|
Wilson Bank
|
|
|
364,976
|
|
|
|
11.1
|
|
|
|
279,486
|
|
|
|
8.5
|
|
Dividend Restrictions
The Company and the Bank are subject to dividend restrictions set forth by the State Banking Department and federal banking agencies. Additional restrictions may be imposed by the State Banking Department and federal banking agencies under the powers granted to them by law.
Note 7. Fair Value Measurements
FASB ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price (i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date). The statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.
Valuation Hierarchy
FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
|
•
|
Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
|
•
|
Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
|
|
•
|
Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Assets
Securities available-for-sale — Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.
Hedged Loans — The fair value of our hedged loan portfolio is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction.
Impaired loans — A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the valuation hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower’s underlying financial condition.
Other real estate owned — Other real estate owned (“OREO”) represents real estate foreclosed upon by the Company through loan defaults by customers or acquired in lieu of foreclosure. Substantially all of these amounts relate to construction and land development, other loans secured by land, and commercial real estate loans for which the Company believes it has adequate collateral. Upon foreclosure, the property is recorded at the lower of cost or fair value, based on appraised value, less selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation downward adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are also reflected in noninterest expense, as applicable. OREO is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs into the determination of fair value. Appraisal values are property-specific and sensitive to the changes in the overall economic environment.
Bank Owned Life Insurance — The cash surrender value of bank owned life insurance policies is carried at fair value. The Company uses financial information received from insurance carriers indicating the performance of the insurance policies and cash surrender values in determining the carrying value of life insurance. The Company reflects these assets within Level 3 of the valuation hierarchy due to the unobservable inputs included in the valuation of these items. The Company does not consider the fair values of these policies to be materially sensitive to changes in these unobservable inputs.
Mortgage loans held-for-sale — Mortgage loans held-for-sale are carried at fair value, and are classified within Level 2 of the valuation hierarchy. The fair value of mortgage loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan.
Mortgage banking derivatives —The fair values of mortgage banking derivatives are based on valuation models using observable market data as of the measurement date (Level 2).
The following tables present the financial instruments carried at fair value as of March 31, 2021 and December 31, 2020, by caption on the consolidated balance sheet and by FASB ASC 820 valuation hierarchy (as described above):
|
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
|
(In Thousands)
|
|
|
|
Total Carrying Value in the Consolidated Balance Sheet
|
|
|
Quoted Market Prices in an Active Market (Level 1)
|
|
|
Models with Significant Observable Market Parameters (Level 2)
|
|
|
Models with Significant Unobservable Market Parameters (Level 3)
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Loans
|
|
$
|
26,494
|
|
|
|
—
|
|
|
|
26,494
|
|
|
|
—
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
|
124,025
|
|
|
|
—
|
|
|
|
124,025
|
|
|
|
—
|
|
Mortgage-backed securities
|
|
|
288,662
|
|
|
|
—
|
|
|
|
288,662
|
|
|
|
—
|
|
Asset-backed securities
|
|
|
40,130
|
|
|
|
—
|
|
|
|
40,130
|
|
|
|
—
|
|
Corporate bonds
|
|
|
2,544
|
|
|
|
—
|
|
|
|
2,544
|
|
|
|
—
|
|
State and municipal securities
|
|
|
158,571
|
|
|
|
—
|
|
|
|
158,571
|
|
|
|
—
|
|
Total investment securities available-for-sale
|
|
|
613,932
|
|
|
|
—
|
|
|
|
613,932
|
|
|
|
—
|
|
Mortgage loans held for sale
|
|
|
28,635
|
|
|
|
—
|
|
|
|
28,635
|
|
|
|
—
|
|
Derivatives
|
|
|
2,685
|
|
|
|
—
|
|
|
|
2,685
|
|
|
|
—
|
|
Bank owned life insurance
|
|
|
35,401
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,401
|
|
Total assets
|
|
$
|
707,147
|
|
|
|
—
|
|
|
|
671,746
|
|
|
|
35,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
$
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Loans
|
|
$
|
29,417
|
|
|
|
—
|
|
|
|
29,417
|
|
|
|
—
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
|
125,905
|
|
|
|
—
|
|
|
|
125,905
|
|
|
|
—
|
|
Mortgage-backed securities
|
|
|
263,790
|
|
|
|
—
|
|
|
|
263,790
|
|
|
|
—
|
|
Asset-backed securities
|
|
|
36,957
|
|
|
|
—
|
|
|
|
36,957
|
|
|
|
—
|
|
Corporate bonds
|
|
|
2,600
|
|
|
|
—
|
|
|
|
2,600
|
|
|
|
—
|
|
State and municipal securities
|
|
|
151,291
|
|
|
|
—
|
|
|
|
151,291
|
|
|
|
—
|
|
Total investment securities available-for-sale
|
|
|
580,543
|
|
|
|
—
|
|
|
|
580,543
|
|
|
|
—
|
|
Mortgage loans held for sale
|
|
|
19,474
|
|
|
|
—
|
|
|
|
19,474
|
|
|
|
—
|
|
Derivatives
|
|
|
714
|
|
|
|
—
|
|
|
|
714
|
|
|
|
—
|
|
Bank owned life insurance
|
|
|
35,197
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,197
|
|
Total assets
|
|
$
|
665,345
|
|
|
|
—
|
|
|
|
630,148
|
|
|
|
35,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
208
|
|
|
|
—
|
|
|
|
208
|
|
|
|
—
|
|
Total liabilities
|
|
$
|
208
|
|
|
|
—
|
|
|
|
208
|
|
|
|
—
|
|
|
|
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
|
|
|
|
(In Thousands)
|
|
|
|
Total Carrying Value in the Consolidated Balance Sheet
|
|
|
Quoted Market Prices in an Active Market (Level 1)
|
|
|
Models with Significant Observable Market Parameters (Level 2)
|
|
|
Models with Significant Unobservable Market Parameters (Level 3)
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
183
|
|
|
|
—
|
|
|
|
—
|
|
|
|
183
|
|
Impaired loans, net (¹)
|
|
|
2,584
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,584
|
|
Total
|
|
$
|
2,767
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,767
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impaired loans, net (¹)
|
|
|
2,635
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,635
|
|
Total
|
|
$
|
2,635
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,635
|
|
(1)
|
Amount is net of a valuation allowance of $699,000 at March 31, 2021 and $742,000 at December 31, 2020 as required by ASC 310, “Receivables.”
|
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at March 31, 2021 and December 31, 2020:
|
|
Valuation Techniques (2)
|
|
Significant Unobservable Inputs
|
|
Weighted Average
|
|
Impaired loans
|
|
Appraisal
|
|
Estimated costs to sell
|
|
10%
|
|
Other real estate owned
|
|
Appraisal
|
|
Estimated costs to sell
|
|
10%
|
|
|
|
|
|
|
|
|
|
(2) The fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent.
|
|
In the case of its investment securities portfolio, the Company monitors the valuation technique utilized by various pricing agencies to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the three months ended March 31, 2021, there were no transfers between Levels 1, 2 or 3.
The table below includes a rollforward of the balance sheet amounts for the three months ended March 31, 2021 and 2020 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):
|
|
For the Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Other Assets
|
|
|
Other Liabilities
|
|
|
Other Assets
|
|
|
Other Liabilities
|
|
Fair value, January 1
|
|
$
|
35,197
|
|
|
|
—
|
|
|
$
|
31,762
|
|
|
|
—
|
|
Total realized gains included in income
|
|
|
204
|
|
|
|
—
|
|
|
|
183
|
|
|
|
—
|
|
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at March 31
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchases, issuances and settlements, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Transfers out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Fair value, March 31
|
|
$
|
35,401
|
|
|
|
—
|
|
|
$
|
31,945
|
|
|
|
—
|
|
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at March 31
|
|
$
|
204
|
|
|
|
—
|
|
|
$
|
183
|
|
|
|
—
|
|
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices or observable components are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2021 and December 31, 2020. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Loans — The fair value of our loan portfolio includes a credit risk factor in the determination of the fair value of our loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. Our loan portfolio is initially fair valued using a segmented approach. We divide our loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk.
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk to determine the exit price.
Deposits and Federal Home Loan Bank borrowings — Fair values for deposits and Federal Home Loan Bank borrowings are estimated using discounted cash flow models, using current market interest rates offered on deposits with similar remaining maturities.
Restricted equity securities — It is not practical to determine the fair value of Federal Home Loan Bank or Federal Reserve Bank stock due to restrictions placed on its transferability.
Accrued interest receivable/payable — The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the asset/liability with which they are associated.
Off-Balance Sheet Instruments — The fair values of the Company’s off-balance-sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value to the Company until such commitments are funded.
The following table presents the carrying amounts, estimated fair value and placement in the fair valuation hierarchy of the Company’s financial instruments at March 31, 2021 and December 31, 2020. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.
|
|
Carrying/ Notional
|
|
|
Estimated
|
|
|
Quote Market Prices in an Active Market
|
|
|
Models with Significant Observable Market Parameters
|
|
|
Models with Significant Unobservable Market Parameters
|
|
(in Thousands)
|
|
Amount
|
|
|
Fair Value (¹)
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
456,529
|
|
|
|
456,529
|
|
|
|
456,529
|
|
|
|
—
|
|
|
|
—
|
|
Loans, net
|
|
|
2,294,999
|
|
|
|
2,296,988
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,296,988
|
|
Restricted equity securities
|
|
|
5,089
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
Accrued interest receivable
|
|
|
7,933
|
|
|
|
7,933
|
|
|
|
1
|
|
|
|
2,099
|
|
|
|
5,833
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,140,826
|
|
|
|
2,896,171
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,896,171
|
|
Federal Home Loan Bank borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accrued interest payable
|
|
|
2,236
|
|
|
|
2,236
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
338,856
|
|
|
|
338,856
|
|
|
|
338,856
|
|
|
|
—
|
|
|
|
—
|
|
Loans, net
|
|
|
2,282,766
|
|
|
|
2,302,530
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,302,530
|
|
Restricted equity securities
|
|
|
5,089
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
Accrued interest receivable
|
|
|
7,516
|
|
|
|
7,516
|
|
|
|
1
|
|
|
|
2,210
|
|
|
|
5,305
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,960,595
|
|
|
|
2,796,339
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,796,339
|
|
Federal Home Loan Bank borrowings
|
|
|
3,638
|
|
|
|
3,755
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,755
|
|
Accrued interest payable
|
|
|
3,051
|
|
|
|
3,051
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,051
|
|
(1)
|
Estimated fair values are consistent with an exit-price concept. The assumptions used to estimate the fair values are intended to approximate those that a market-participant would realize in a hypothetical orderly transaction.
|
Note 8. Income Taxes
Accounting Standards Codification (“ASC”) 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods. As of March 31, 2021, the Company had no unrecognized tax benefits related to Federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to March 31, 2021.
As of and for the three months ended March 31, 2021, the Company has not accrued or recognized interest or penalties related to uncertain tax positions. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.
The Company and the Bank file consolidated U.S. Federal and State of Tennessee income tax returns. The Company is currently open to audit under the statute of limitations by the State of Tennessee for the years ended December 31, 2017 through 2020 and the IRS for the years ended December 31, 2018 through 2020.
Note 9. Earnings Per Share
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period, adjusted for stock splits. The computation of diluted earnings per share for the Company begins with the basic earnings per share and includes the effect of common shares contingently issuable from stock options.
The following is a summary of components comprising basic and diluted earnings per share (“EPS”) for the three months ended March 31, 2021 and 2020:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Dollars in Thousands Except Share and Per Share Amounts)
|
|
Basic EPS Computation:
|
|
|
|
|
|
|
|
|
Numerator – Earnings available to common stockholders
|
|
$
|
11,144
|
|
|
$
|
9,031
|
|
Denominator – Weighted average number of common shares outstanding
|
|
|
11,079,350
|
|
|
|
10,864,866
|
|
Basic earnings per common share
|
|
$
|
1.01
|
|
|
$
|
0.83
|
|
Diluted EPS Computation:
|
|
|
|
|
|
|
|
|
Numerator – Earnings available to common stockholders
|
|
$
|
11,144
|
|
|
$
|
9,031
|
|
Denominator – Weighted average number of common shares outstanding
|
|
|
11,079,350
|
|
|
|
10,864,866
|
|
Dilutive effect of stock options
|
|
|
29,216
|
|
|
|
21,590
|
|
Weighted average diluted common shares outstanding
|
|
|
11,108,566
|
|
|
|
10,886,456
|
|
Diluted earnings per common share
|
|
$
|
1.00
|
|
|
$
|
0.83
|
|
Note 10. Commitments and Contingent Liabilities
In the normal course of business, the Bank has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Standby letters of credit are generally issued on behalf of an applicant (the Bank's customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated sooner due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from the Bank under certain prescribed circumstances. Subsequently, the Bank would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.
The Bank follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash and cash equivalents, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.
The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, the Company’s maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.
A summary of the Company’s total contractual amount for all off-balance sheet commitments at March 31, 2021 is as follows:
Commitments to extend credit
|
|
$
|
907,144,000
|
|
Standby letters of credit
|
|
$
|
86,434,000
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The Bank originates residential mortgage loans, sells them to third-party purchasers, and does not retain the servicing rights. These loans are originated internally and are primarily to borrowers in the Company’s geographic market footprint. These sales are typically to investors that follow guidelines of conventional government sponsored entities ("GSE") and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs ("HUD/VA"). Generally, loans held for sale are underwritten by the Company, including HUD/VA loans. In the fourth quarter of 2018, the Bank began to participate in a mandatory delivery program that requires the Bank to deliver a particular volume of mortgage loans by agreed upon dates. A majority of the Bank’s secondary mortgage volume is delivered to the secondary market via mandatory delivery with the remainder done on a best efforts basis. The Bank does not realize any exposure delivery penalties as the mortgage department only bids loans post-closing to ensure that 100% of the loans are deliverable to the investors.
Each purchaser has specific guidelines and criteria for sellers of loans, and the risk of credit loss with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold without recourse, the purchase agreements require the Bank to make certain representations and warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties or the loan had an early payoff or payment default, the Bank has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan.
To date, repurchase activity pursuant to the terms of these representations and warranties or due to early payoffs or payment defaults has been insignificant and has resulted in insignificant losses to the Company.
Based on information currently available, management believes that the Bank does not have significant exposure to contingent losses that may arise relating to the representations and warranties that it has made in connection with its mortgage loan sales or for early payoffs or payment defaults of such mortgage loans.
Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these claims outstanding at March 31, 2021 will not have a material impact on the Company’s consolidated financial statements.
Note 11. Pandemic Impact (COVID-19)
The outbreak and spread of the novel Coronavirus Disease 2019 (“COVID-19”) has created a global public health crisis that has contributed to uncertainty, volatility and deterioration in financial markets and in governmental, commercial and consumer activity including in the United States, where we conduct substantially all of our activity. COVID-19 continues to spread throughout the United States, and cases, hospitalizations and deaths in some of our markets, though lower than earlier in 2021, remain elevated and recently new variants or mutations of the virus have begun to emerge that in some cases appear to be more contagious than the original virus. Accordingly, the COVID-19 pandemic continues to impact our operations and the operations of certain of our customers, though the impact appears to be lessening as the average number of cases, hospitalizations and deaths in our markets declines and the number of residents in our markets that have been vaccinated against the virus continues to rise. To date, our operations and the services offered to our customers have not been adversely affected in a material manner. The extent to which COVID-19 impacts our future operations will depend on further developments, which are difficult to predict with confidence, including the duration and severity of the outbreak and the actions that may be required to contain COVID-19 or treat its impact, including potential new shutdowns or strict social distancing measures, and the decisions of governmental agencies to pause the use of one or more vaccines, the efficacy against the virus and its mutations of those vaccines currently being distributed and public acceptance of those vaccines. The coronavirus outbreak and government responses have created disruption in global supply chains and adversely impacted many industries. The outbreak has had and may continue to have a material adverse impact on economic and market conditions and the ability of our customers and our company to continue to recover from the pandemic will depend on continued reductions in the number and severity of COVID-19 cases in our markets and continued government intervention to supports those individuals and businesses most adversely impacted by the virus.
As a result of the pandemic, many states and municipalities are facing a strain on resources and a reduction in tax collections. As a result, certain states and municipalities have asked for potential assistance from the Federal government to cover the cost of resource depletion and tax shortfalls. The American Rescue Plan, which was signed into law by President Biden on March 11, 2021, contains monetary relief for local and state governments. The first round of funding is anticipated to arrive mid- May. The ability of states and municipalities to fund shortfalls could have an affect on their ability to sustain debt maintenance, which would consequently impact the value of our municipal bond portfolio.