Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 0-20402

 

 

WILSON BANK HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Tennessee   62-1497076

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

623 West Main Street, Lebanon, TN   37087
(Address of principal executive offices)   (Zip Code)

(615) 444-2265

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock outstanding: 7,649,620 shares at August 7, 2015

 

 

 


Table of Contents

Part I:

  FINANCIAL INFORMATION    3

Item 1.

  Financial Statements.    3

The unaudited consolidated financial statements of the Company and its subsidiary are as follows:

  
 

Consolidated Balance Sheets — June 30, 2015 and December 31, 2014.

   3
 

Consolidated Statements of Earnings — For the three months and six months ended June  30, 2015 and 2014.

   4
  Consolidated Statements of Comprehensive Earnings — For the three months and six months ended June 30, 2015 and 2014.    5
 

Consolidated Statements of Cash Flows — For the six months ended June 30, 2015 and 2014.

   6

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations.    28

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk.    42
 

Disclosures required by Item 3 are incorporated by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations.

  

Item 4.

  Controls and Procedures.    42

Part II:

  OTHER INFORMATION    44

Item 1.

  Legal Proceedings.    44

Item A.

  Risk Factors.    44

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds.    44

Item 3.

  Defaults Upon Senior Securities.    44

Item 4.

  Mine Safety Disclosures.    44

Item 5.

  Other Information.    44

Item 6.

  Exhibits.    44

Signatures

     46

EX-31.1 SECTION 302 CERTIFICATION OF THE CEO

  

EX-31.2 SECTION 302 CERTIFICATION OF THE CFO

  

EX-32.1 SECTION 906 CERTIFICATION OF THE CEO

  

EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

  

EX -101 INTERACTIVE DATA FILE

  


Table of Contents

Part I. Financial Information

Item 1. Financial Statements

WILSON BANK HOLDING COMPANY

Consolidated Balance Sheets

June 30, 2015 and December 31, 2014

(Unaudited)

 

     June 30,     December 31,  
     2015     2014  
    

(Dollars in Thousands

Except Share Amounts)

 
Assets     

Loans

   $ 1,433,461      $ 1,352,437   

Less: Allowance for loan losses

     (22,412     (22,572
  

 

 

   

 

 

 

Net loans

     1,411,049        1,329,865   
  

 

 

   

 

 

 

Securities:

    

Held to maturity, at cost (market value $26,251 and $28,400, respectively)

     26,204        28,123   

Available-for-sale, at market (amortized cost $329,655 and $347,520, respectively)

     328,484        346,420   
  

 

 

   

 

 

 

Total securities

     354,688        374,543   
  

 

 

   

 

 

 

Loans held for sale

     10,076        9,466   

Restricted equity securities

     3,012        3,012   

Federal funds sold

     13,805        16,005   
  

 

 

   

 

 

 

Total earning assets

     1,792,630        1,732,891   

Cash and due from banks

     49,852        52,002   

Bank premises and equipment, net

     40,334        40,123   

Accrued interest receivable

     5,319        5,463   

Deferred income tax asset

     9,469        9,171   

Other real estate

     6,477        7,298   

Bank owned life insurance and annuity contracts

     25,543        17,331   

Other assets

     4,999        4,158   

Goodwill

     4,805        4,805   
  

 

 

   

 

 

 

Total assets

   $ 1,939,428      $ 1,873,242   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Deposits

   $ 1,712,348      $ 1,660,270   

Securities sold under repurchase agreements

     2,212        3,437   

Accrued interest and other liabilities

     12,703        8,643   
  

 

 

   

 

 

 

Total liabilities

     1,727,263        1,672,350   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $2.00 par value; authorized 15,000,000 shares, issued 7,610,250 and 7,571,968 shares, respectively

     15,221        15,144   

Additional paid-in capital

     59,404        57,709   

Retained earnings

     138,263        128,718   

Net unrealized losses on available-for-sale securities, net of income taxes of $448 and $421, respectively

     (723     (679
  

 

 

   

 

 

 

Total stockholders’ equity

     212,165        200,892   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,939,428      $ 1,873,242   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements (unaudited)

 

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Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Earnings

Three Months and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  
    

(Dollars in Thousands

Except Per Share Amounts)

 

Interest income:

           

Interest and fees on loans

   $ 17,753       $ 16,344       $ 34,861       $ 32,387   

Interest and dividends on securities:

           

Taxable securities

     1,525         1,640         3,136         3,240   

Exempt from Federal income taxes

     172         168         343         332   

Interest on loans held for sale

     95         62         165         113   

Interest on Federal funds sold

     41         41         78         87   

Interest and dividends on restricted securities

     31         31         61         61   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     19,617         18,286         38,644         36,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on negotiable order of withdrawal accounts

     388         400         754         791   

Interest on money market and savings accounts

     493         568         998         1,168   

Interest on certificates of deposit

     1,307         1,464         2,650         2,972   

Interest on federal funds purchased

     1         —           1         —     

Interest on securities sold under repurchase agreements

     2         5         4         14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     2,191         2,437         4,407         4,945   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income before provision for loan losses

     17,426         15,849         34,237         31,275   

Provision for loan losses

     81         28         156         277   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     17,345         15,821         34,081         30,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income:

           

Service charges on deposit accounts

     1,255         1,049         2,354         1,965   

Other fees and commissions

     2,449         2,432         4,990         4,379   

Gain on sale of loans

     1,133         629         1,996         1,130   

Gain on the sale of fixed assets

     —           7         —           7   

Gain on sale of other assets

     —           1         —           —     

Gain on sale of other real estate

     28         4         46         —     

Gain on sale of securities

     166         288         166         288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     5,031         4,410         9,552         7,769   

Non-interest expense:

           

Salaries and employee benefits

     8,294         6,829         15,546         13,536   

Occupancy expenses, net

     832         696         1,598         1,392   

Furniture and equipment expense

     499         433         997         839   

Data processing expense

     557         561         1,088         1,139   

Directors’ fees

     181         164         357         346   

Other operating expenses

     2,115         3,045         4,994         5,929   

Loss on the sale of fixed assets

     8         —           8         —     

Loss on sale of other assets

     1         —           2         3   

Loss on sale of other real estate

     —           —           —           156   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     12,487         11,728         24,590         23,340   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     9,889         8,503         19,043         15,427   

Income taxes

     3,688         3,349         7,226         6,101   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 6,201       $ 5,154       $ 11,817       $ 9,326   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding-basic

     7,610,002         7,534,761         7,603,734         7,528,555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding-diluted

     7,613,368         7,539,232         7,607,185         7,533,041   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ .81       $ .68       $ 1.55       $ 1.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ .81       $ .68       $ 1.55       $ 1.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per share

   $ —         $ —         $ .30       $ .30   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements (unaudited)

 

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Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Comprehensive Earnings

Three Months and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Thousands)  

Net earnings

   $ 6,201      $ 5,154      $ 11,817      $ 9,326   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive earnings (loss), net of tax:

        

Unrealized gains (losses) on available-for-sale securities arising during period, net of taxes of $694, $1,002, $37 and $1,737, respectively

     (1,121     1,615        58        2,800   

Reclassification adjustment for net gains included in net earnings, net of taxes of $64, $110, $64, and $110, respectively

     (102     (178     (102     (178
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive earnings (loss)

     (1,223     1,437        (44     2,622   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive earnings

   $ 4,978      $ 6,591      $ 11,773      $ 11,948   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements (unaudited)

 

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Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2015 and 2014

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

 

     Six Months Ended June 30,  
     2015     2014  
     (In Thousands)  

Cash flows from operating activities:

    

Interest received

   $ 39,722      $ 37,141   

Fees and commissions received

     7,344        6,344   

Proceeds from sale of loans held for sale

     76,152        42,837   

Origination of loans held for sale

     (74,766     (41,445

Interest paid

     (4,660     (5,262

Cash paid to suppliers and employees

     (19,956     (19,761

Income taxes paid

     (7,966     (6,571
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,870        13,283   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities, calls, and principal payments of held-to-maturity securities

     2,048        1,062   

Proceeds from maturities, calls, and principal payments of available-for-sale securities

     38,908        40,693   

Proceeds from the sale of available-for-sale securities

     32,326        39,323   

Purchase of held-to-maturity securities

     (249     (3,609

Purchase of available-for-sale securities

     (54,017     (97,388

Loans made to customers, net of repayments

     (81,448     (42,691

Purchase of Bank owned life insurance

     (7,654     (5,000

Purchase of premises and equipment

     (1,449     (2,525

Proceeds from sale of premises and equipment

     —          7   

Proceeds from sale of other real estate

     972        2,175   

Proceeds from sale of other assets

     11        1   
  

 

 

   

 

 

 

Net cash used in investing activities

     (70,552     (67,952
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in non-interest bearing, savings and NOW deposit accounts

     67,945        62,121   

Net decrease in time deposits

     (15,867     (18,665

Net decrease in securities sold under repurchase agreements

     (1,225     (4,021

Dividends paid

     (2,272     (2,250

Proceeds from sale of common stock pursuant to dividend reinvestment

     1,603        1,606   

Repurchase of common stock

     —          (94

Proceeds from exercise of stock options

     148        121   
  

 

 

   

 

 

 

Net cash provided by financing activities

     50,332        38,818   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (4,350     (15,851

Cash and cash equivalents at beginning of period

     68,007        111,504   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 63,657      $ 95,653   
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements (unaudited)

 

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Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows, Continued

Six Months Ended June 30, 2015 and 2014

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

 

     Six Months Ended June 30,  
     2015     2014  
     (In Thousands)  

Reconciliation of net earnings to net cash provided by operating activities:

    

Net earnings

   $ 11,817      $ 9,326   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Depreciation, amortization, and accretion

     2,172        2,096   

Provision for loan losses

     156        277   

Loss (gain) on sale and writedown of other real estate

     (46     156   

Security gains

     (166     (288

Stock option compensation

     21        23   

Increase (decrease) in taxes payable

     (469     200   

Loss on the sale of other assets

     2        3   

Gain on the sale of fixed assets

     —          (7

Decrease (increase) in loans held for sale

     (610     262   

Increase in deferred tax assets

     (271     (670

Increase in other assets, net

     (1,409     (882

Decrease (increase) in interest receivable

     144        (130

Increase in other liabilities

     4,782        3,234   

Decrease in interest payable

     (253     (317
  

 

 

   

 

 

 

Total adjustments

   $ 4,053      $ 3,957   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 15,870      $ 13,283   
  

 

 

   

 

 

 

Supplemental schedule of non-cash activities:

    

Unrealized gain (loss) in values of securities available-for-sale, net of taxes of $27 and $1,627 for the six months ended June 30, 2015 and 2014, respectively

   $ (44   $ 2,622   
  

 

 

   

 

 

 

Non-cash transfers from loans to other real estate

   $ 105      $ 423   
  

 

 

   

 

 

 

Non-cash transfers from other real estate to loans

   $ —        $ 1,049   
  

 

 

   

 

 

 

Non-cash transfers from loans to other assets

   $ 3      $ —     
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements (unaudited)

 

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Table of Contents

WILSON BANK HOLDING COMPANY

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 and Smith 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 financial statements and related notes appearing in the 2014 Annual Report previously filed on Form 10-K.

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. 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 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 Wilson Bank Holding Company’s Annual Report on Form 10-K for the year ended December 31, 2014. There have been no significant changes to Wilson Bank Holding Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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 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.

 

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Table of Contents

All loans that are placed on nonaccrual are further analyzed to determine if they should be classified as impaired loans. At December 31, 2014 and at June 30, 2015, 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 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). Prior to January 1, 2015, loans with an identified weakness and principal balance of $100,000 or more were subject to individual identification for impairment. During the first quarter of 2015, the Company increased the threshold for identification of individually impaired loans to $500,000, based on regulatory developments, continued improvement in loan quality trends and ratios and strengthening local economies in which the Company operates. Management believes that increasing the threshold will not materially impact the calculation of the allowance for loan losses. 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 greater than $500,000 and for homogeneous pools of loans collectively evaluated.

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.

 

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Recently Adopted Accounting Pronouncements

There were no 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 those 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 June 30, 2015 and December 31, 2014:

 

     (In Thousands)  
     June 30,
2015
     December 31,
2014
 

Mortgage loans on real estate

     

Residential 1-4 family

   $ 355,924       $ 350,758   

Multifamily

     50,559         31,242   

Commercial

     585,217         564,965   

Construction and land development

     277,518         245,830   

Farmland

     31,479         30,236   

Second mortgages

     8,681         9,026   

Equity lines of credit

     45,818         41,496   
  

 

 

    

 

 

 

Total mortgage loans on real estate

     1,355,196         1,273,553   
  

 

 

    

 

 

 

Commercial loans

     29,532         30,000   
  

 

 

    

 

 

 

Agricultural loans

     1,451         1,670   
  

 

 

    

 

 

 

Consumer installment loans

     

Personal

     39,279         37,745   

Credit cards

     3,169         3,280   
  

 

 

    

 

 

 

Total consumer installment loans

     42,448         41,025   
  

 

 

    

 

 

 

Other loans

     9,592         10,530   
  

 

 

    

 

 

 
     1,438,219         1,356,778   
  

 

 

    

 

 

 

Net deferred loan fees

     (4,758      (4,341
  

 

 

    

 

 

 

Total loans

     1,433,461         1,352,437   
  

 

 

    

 

 

 

Less: Allowance for loan losses

     (22,412      (22,572
  

 

 

    

 

 

 

Net Loans

   $ 1,411,049       $ 1,329,865   
  

 

 

    

 

 

 

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, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.

 

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Table of Contents

Transactions in the allowance for loan losses for the six months ended June 30, 2015 and year ended December 31, 2014 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  

June 30, 2015

                     

Allowance for loan losses:

                     

Beginning balance

  $ 5,582        172        9,578        5,578        795        61        304        176        2        324        22,572   

Provision

    99        61        (1,122     1,027        (250     50        45        50        2        194        156   

Charge-offs

    (135     —          (43     (1     —          (20     (6     —          (2     (302     (509

Recoveries

    27        —          3        22        —          —          1        5        3        132        193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 5,573        233        8,416        6,626        545        91        344        231        5        348        22,412   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

  $ 208        —          711        —          —          —          —          —          —          —          919   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

  $ 5,365        233        7,705        6,626        545        91        344        231        5        348        21,493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance loans acquired with deteriorated credit quality

  $ —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                     

Ending balance

  $ 355,924        50,559        585,217        277,518        31,479        8,681        45,818        29,532        1,451        52,040        1,438,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

  $ 1,386        —          10,559        —          575        —          —          —          —          —          12,520   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

  $ 354,538        50,559        574,658        277,518        30,904        8,681        45,818        29,532        1,451        52,040        1,425,699   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance loans acquired with deteriorated credit quality

  $ —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents
    Residential
1-4 Family
    Multifamily     Commercial
Real Estate
    Construction     Farmland     Second
Mortgages
    Equity Lines
of Credit
    Commercial     Agricultural     Installment
and Other
    Total  

December 31, 2014

                     

Allowance for loan losses:

                     

Beginning balance

  $ 4,935        77        10,918        5,159        618        205        300        395        7        321        22,935   

Provision

    1,059        95        (378     102        176        (164     3        (641     (10     256        498   

Charge-offs

    (468     —          (968     (7     —          —          —          (37     —          (387     (1,867

Recoveries

    56        —          6        324        1        20        1        459        5        134        1,006   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 5,582        172        9,578        5,578        795        61        304        176        2        324        22,572   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

  $ 376        —          1,135        —          120        —          —          —          —          —          1,631   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

  $ 5,206        172        8,443        5,578        675        61        304        176        2        324        20,941   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance loans acquired with deteriorated credit quality

  $ —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                     

Ending balance

  $ 350,758        31,242        564,965        245,830        30,236        9,026        41,496        30,000        1,670        51,555        1,356,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

  $ 3,061        —          6,455        —          701        280        —          —          —          —          10,497   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

  $ 347,697        31,242        558,510        245,830        29,535        8,746        41,496        30,000        1,670        51,555        1,346,281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance loans acquired with deteriorated credit quality

  $ —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Impaired Loans

At June 30, 2015, the Company had certain impaired loans of $6.7 million which were on non-accruing interest status. At December 31, 2014, the Company had certain impaired loans of $616,000 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 following table presents the Company’s impaired loans at June 30, 2015 and December 31, 2014.

 

     In Thousands  
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
     Investment      Balance      Allowance      Investment      Recognized  

June 30, 2015

              

With no related allowance recorded:

              

Residential 1-4 family

   $ 631         626         —           817         19   

Multifamily

     —           —           —           —           —     

Commercial real estate

     6,120         6,120         —           5,628         (9

Construction

     —           —           —           —           —     

Farmland

     575         575         —           288         —     

Second mortgages

     —           —           —           —           —     

Equity lines of credit

     —           —           —           —           —     

Commercial

     —           —           —           —           —     

Agricultural

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,326         7,321         —           6,733         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With allowance recorded:

              

Residential 1-4 family

   $ 769         760         208         771         22   

Multifamily

     —           —           —           —           —     

Commercial real estate

     4,449         6,143         711         4,628         98   

Construction

     —           —           —           —           —     

Farmland

     —           —           —           287         —     

Second mortgages

     —           —           —           —           —     

Equity lines of credit

     —           —           —           —           —     

Commercial

     —           —           —           —           —     

Agricultural

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,218         6,903         919         5,686         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Residential 1-4 family

   $ 1,400         1,386         208         1,588         41   

Multifamily

     —           —           —           —           —     

Commercial real estate

     10,569         12,263         711         10,256         89   

Construction

     —           —           —           —           —     

Farmland

     575         575         —           575         —     

Second mortgages

     —           —           —           —           —     

Equity lines of credit

     —           —           —           —           —     

Commercial

     —           —           —           —           —     

Agricultural

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,544         14,224         919         12,419         130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents
     In Thousands  
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
     Investment      Balance      Allowance      Investment      Recognized  

December 31, 2014

              

With no related allowance recorded:

              

Residential 1-4 family

   $ 1,891         1,854         —           1,081         114   

Multifamily

     —           —           —           —           —     

Commercial real estate

     1,352         2,188         —           5,984         95   

Construction

     —           —           —           673         —     

Farmland

     —           —           —           —           —     

Second mortgages

     281         280         —           222         3   

Equity lines of credit

     —           —           —           —           —     

Commercial

     —           —           —           —           —     

Agricultural, installment and other

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,524         4,322         —           7,960         212   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With allowance recorded:

              

Residential 1-4 family

   $ 1,219         1,207         376         1,363         61   

Multifamily

     —           —           —           —           —     

Commercial real estate

     5,131         6,811         1,135         5,755         202   

Construction

     —           —           —           1,815         —     

Farmland

     702         701         120         767         7   

Second mortgages

     —           —           —           —           —     

Equity lines of credit

     —           —           —           —           —     

Commercial

     —           —           —           —           —     

Agricultural, installment and other

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,052         8,719         1,631         9,700         270   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Residential 1-4 family

   $ 3,110         3,061         376         2,444         175   

Multifamily

     —           —           —           —           —     

Commercial real estate

     6,483         8,999         1,135         11,739         297   

Construction

     —           —           —           2,488         —     

Farmland

     702         701         120         767         7   

Second mortgages

     281         280         —           222         3   

Equity lines of credit

     —           —           —           —           —     

Commercial

     —           —           —           —           —     

Agricultural, installment and other

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,576         13,041         1,631         17,660         482   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans also include loans that the Company 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 Company may have to 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.

 

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Table of Contents

Troubled Debt Restructuring

The Bank’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic 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 TDR’s at June 30, 2015 and December 31, 2014.

 

     June 30, 2015      December 31, 2014  
     (In thousands)  

Performing TDRs

   $ 4,226       $ 4,443   

Nonperforming TDRs

     3,035         3,597   
  

 

 

    

 

 

 

Total TDRS

   $ 7,261       $ 8,040   
  

 

 

    

 

 

 

 

15


Table of Contents

The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the six months ended June 30, 2015 and the year ended December 31, 2014 (in thousands, except for number of contracts):

 

     June 30, 2015      December 31, 2014  
     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

     1       $ 56       $ 56         6       $ 1,346       $ 1,218   

Multifamily

     —           —           —           —           —           —     

Commercial real estate

     —           —           —           2         1,020         1,020   

Construction

     —           —           —           —           —           —     

Farmland

     —           —           —           —           —           —     

Second mortgages

     —           —           —           —           —           —     

Equity lines of credit

     —           —           —           —           —           —     

Commercial

     —           —           —           1         3         3   

Agricultural, installment and other

     1         2         2         1         1         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 58       $ 58         10       $ 2,370       $ 2,242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2015, the Company had one loan relationship in the amount of $1.0 million that had been previously classified as a troubled debt restructuring that subsequently defaulted within twelve months of restructuring. As of December 31, 2014, the Company did not have any loans previously classified as troubled debt restructurings subsequently default within twelve months of restructuring. A default is defined as an occurrence which violates the terms of the receivable’s contract.

 

16


Table of Contents

As of June 30, 2015, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $601,000.

Potential problem loans, which include nonperforming loans, amounted to approximately $34.1 million at June 30, 2015 compared to $35.8 million at December 31, 2014. 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 our 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 the loan on nonaccrual status.

 

17


Table of Contents

The following table is a summary of the Bank’s loan portfolio by risk rating:

 

    (In Thousands)  
    Residential
1-4 Family
    Multifamily     Commercial
Real Estate
    Construction     Farmland     Second
Mortgages
    Equity
Lines
of Credit
    Commercial     Agricultural     Installment
and Other
    Total  

June 30, 2015

                     

Credit Risk Profile by Internally Assigned Rating

                     

Pass

  $ 346,779        50,559        562,510        277,150        30,451        8,089        45,637        29,516        1,451        51,947        1,404,089   

Special Mention

    5,538        —          11,603        320        33        296        181        13        —          8        17,992   

Substandard

    3,607        —          11,104        48        995        296        —          3        —          85        16,138   

Doubtful

    —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 355,924        50,559        585,217        277,518        31,479        8,681        45,818        29,532        1,451        52,040        1,438,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2014

                     

Credit Risk Profile by Internally Assigned Rating

                     

Pass

  $ 339,529        31,242        545,301        243,416        29,260        8,007        41,274        29,893        1,661        51,387        1,320,970   

Special Mention

    7,681        —          13,313        2,362        57        347        176        18        2        14        23,970   

Substandard

    3,548        —          6,351        52        919        672        46        89        7        154        11,838   

Doubtful

    —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 350,758        31,242        564,965        245,830        30,236        9,026        41,496        30,000        1,670        51,555        1,356,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 June 30, 2014 and December 31, 2013 are summarized as follows:

 

     June 30, 2015  
     Securities Available-For-Sale  
     In Thousands  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Market
Value
 

U.S. Government-sponsored enterprises (GSEs)*

   $ 113,691       $ 241       $ 787       $ 113,145   

Mortgage-backed:

           

GSE residential

     163,538         477         857         163,158   

Asset-backed:

           

SBAP

     29,147         92         122         29,117   

Obligations of states and political subdivisions

     23,279         37         252         23,064   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 329,655       $ 847       $ 2,018       $ 328,484   
  

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2015  
     Securities Held-To-Maturity  
     In Thousands  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Market
Value
 

Mortgage-backed:

           

Government-sponsored enterprises (GSEs)* residential

   $ 7,189       $ 67       $ 191       $ 7,065   

Obligations of states and political subdivisions

     19,015         258         87         19,186   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,204       $ 325       $ 278       $ 26,251   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Bank, and Federal Farm Credit Bank.

 

     December 31, 2014  
     Securities Available-For-Sale  
     In Thousands  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Market
Value
 

Government-sponsored enterprises (GSEs)*

   $ 131,767         129         1,329         130,567   

Mortgage-backed:

           

GSE residential

     170,802         731         464         171,069   

Asset-backed:

           

SBAP

     30,627         98         205         30,520   

Obligations of states and political subdivisions

     14,324         98         158         14,264   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 347,520         1,056         2,156         346,420   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2014
Securities Held-To-Maturity
 
     In Thousands  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Market
Value
 

Mortgage-backed:

           

Government-sponsored enterprises (GSEs)* residential

   $ 7,398         76         147         7,327   

Obligations of states and political subdivisions

     20,725         389         41         21,073   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 28,123         465         188         28,400   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Bank, and Federal Farm Credit Bank.

The amortized cost and estimated market value of debt securities at June 30, 2015, 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.

 

     Held-to-Maturity      Available-for-sale  
     In Thousands  
            Estimated             Estimated  
     Amortized      Market      Amortized      Market  
     Cost      Value      Cost      Value  

Due in one year or less

   $ 2,777       $ 2,813       $ 2,000       $ 2,001   

Due after one year through five years

     9,978         10,082         46,710         46,724   

Due after five years through ten years

     3,382         3,419         138,966         138,322   

Due after ten years

     10,067         9,937         141,979         141,437   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,204       $ 26,251       $ 329,655       $ 328,484   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and December 31, 2014.

 

     In Thousands, Except Number of Securities  
     Less than 12 Months      12 Months or More      Total  
June 30, 2015    Fair
Value
     Unrealized
Losses
     Number
of
Securities
Included
     Fair
Value
     Unrealized
Losses
     Number
of
Securities
Included
     Fair Value      Unrealized
Losses
 

Held to Maturity Securities:

                       

Mortgage-backed:

                       

Government-sponsored enterprises (GSEs) residential

   $ 1,574       $ 25         1       $ 2,996       $ 166         3       $ 4,570       $ 191   

Obligations of states and political subdivisions

     9,239         83         24         298         4         1         9,537         87   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,813       $ 108         25       $ 3,294       $ 170         4       $ 14,107       $ 278   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale Securities:

                       

GSEs

   $ 29,940       $ 151         11       $ 46,605       $ 636         14       $ 76,545       $ 787   

Mortgage-backed:

                       

GSE residential

     91,809         756         46         4,414         101         8         96,223         857   

Asset-baked: SBAP

     14,692         103         7         2,722         19         1         17,414         122   

Obligations of states and political subdivisions

     12,072         123         32         3,264         129         9         15,336         252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 148,513       $ 1,133         96       $ 57,005       $ 885         32       $ 205,518       $ 2,018   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     In Thousands, Except Number of Securities  
     Less than 12 Months      12 Months or More      Total  
                   Number                    Number                
                   of                    of                
     Fair      Unrealized      Securities      Fair      Unrealized      Securities      Fair      Unrealized  
December 31, 2014    Value      Losses      Included      Value      Losses      Included      Value      Losses  

Held to Maturity Securities:

                       

Mortgage-backed:

                       

Government-sponsored enterprises (GSEs) residential

   $ —         $ —           —         $ 4,674       $ 147         4       $ 4,674       $ 147   

Obligations of states and political subdivisions

     —           —           —           2,577         41         6         2,577         41   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —           —         $ 7,251       $ 188         10       $ 7,251       $ 188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale Securities:

                       

GSEs

   $ 34,753       $ 143         10       $ 74,250       $ 1,186         24       $ 109,003       $ 1,329   

Mortgage-backed:

                       

GSE residential

     66,504         279         36         22,172         185         13         88,676         464   

Asset-backed: SBAP

     16,114         205         9         —           —           —           16,114         205   

Obligations of states and political subdivisions

     2,078         8         4         4,699         150         13         6,777         158   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 119,449       $ 635         59       $ 101,121       $ 1,521         50       $ 220,570       $ 2,156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unrealized losses on securities have not been recognized into income because the issuers’ securities are of high credit quality, management does not intend to sell the securities and it is likely that management will not 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 continues to make timely principal and interest payment on the securities. The fair value is expected to recover as the securities approach maturity. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.

The carrying values of the Company’s investment securities could decline in the future if the financial condition of issuers deteriorate 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.

 

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Table of Contents

Note 4. Earnings Per Share

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share for the Company begins with the basic earnings per share plus 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 and six months ended June 30, 2015 and 2014:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  
     (Dollars in Thousands      (Dollars in Thousands  
     Except Per Share Amounts)      Except Per Share Amounts)  

Basic EPS Computation:

           

Numerator – Earnings available to common stockholders

   $ 6,201       $ 5,154       $ 11,817       $ 9,326   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator – Weighted average number of common shares outstanding

     7,610,002         7,534,761         7,603,734         7,528,555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ .81       $ .68       $ 1.55       $ 1.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS Computation:

           

Numerator – Earnings available to common stockholders

   $ 6,201       $ 5,154       $ 11,817       $ 9,326   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator – Weighted average number of common shares outstanding

     7,610,002         7,534,761         7,603,734         7,528,555   

Dilutive effect of stock options

     3,366         4,471         3,451         4,486   
  

 

 

    

 

 

    

 

 

    

 

 

 
     7,613,368         7,539,232         7,607,185         7,533,041   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ .81       $ .68       $ 1.55       $ 1.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. 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 June 30, 2015, 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 June 30, 2015.

As of June 30, 2015, the Company has accrued no interest and no 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 its subsidiaries 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, 2011 through 2014 and the IRS for the years ended December 31, 2012 through 2014.

 

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Table of Contents

Note 6. 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 (our 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 beforehand 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 Company under certain prescribed circumstances. Subsequently, the Company would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

The Company 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, 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 June 30, 2015 is as follows:

 

Commitments to extend credit

   $ 329,816,000   

Standby letters of credit

   $ 33,214,000   

The Company 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 on a best efforts basis to investors that follow conventional government sponsored entities (GSE) and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines. Generally, loans held for sale are underwritten by the Company, including HUD/VA loans.

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 Company 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 Company 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.

 

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Table of Contents

To date, repurchase activity pursuant to the terms of these representations and warranties has been insignificant and has resulted in insignificant losses to the Company.

Based on information currently available, management believes that it 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.

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 June 30, 2015 will not have a material impact on the Company’s financial statements.

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.

 

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Table of Contents

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 land secured loans, 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.

Mortgage loans held-for-sale — Mortgage loans held-for-sale are carried at the fair value. The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

Other assets — Included in other assets are certain assets carried at fair value, including the cash surrender value of bank owned life insurance policies and annuity contracts. The Company uses financial information received from insurance carriers indicating the performance of the insurance policies, cash surrender values, and annuity contracts in determining the carrying value. 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 and contracts to be materially sensitive to changes in these unobservable inputs.

The following tables present the financial instruments carried at fair value as of June 30, 2015 and December 31, 2014, by caption on the consolidated balance sheet and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):

 

     Assets and Liabilities Measured at Fair Value on a Recurring Basis  
                   Models with      Models with  
     Total Carrying             Significant      Significant  
     Value in the      Quoted Market      Observable      Unobservable  
     Consolidated      Prices in an      Market      Market  
     Balance      Active Market      Parameters      Parameters  
     Sheet      (Level 1)      (Level 2)      (Level 3)  

June 30, 2015

           

Investment securities available-for-sale:

           

U.S. Government sponsored enterprises

   $ 113,145         —           113,145         —     

Mortgage-backed securities

     163,158         —           163,158         —     

Asset-backed securities

     29,117         —           29,117         —     

State and municipal securities

     23,064         —           23,064         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

     328,484         —           328,484         —     

Loans held for sale

     10,076         —           10,076         —     

Other assets

     25,543         —           —           25,543   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 364,103         —           338,560         25,543   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Investment securities available-for-sale:

           

U.S. Government sponsored enterprises

   $ 130,567         —           130,567         —     

Mortgage-backed securities

     171,069         —           171,069         —     

Asset-backed securities

     30,520         —           30,520         —     

State and municipal securities

     14,264         —           14,264         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

     346,420         —           346,420         —     

Loans held for sale

     9,466         —           9,466         —     

Other assets

     17,331         —           —           17,331   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 373,217         —           355,886         17,331   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Assets and Liabilities Measured at Fair Value on a Non-Recurring  Basis  
                   Models with      Models with  
     Total Carrying             Significant      Significant  
     Value in the      Quoted Market      Observable      Unobservable  
     Consolidated      Prices in an      Market      Market  
     Balance      Active Market      Parameters      Parameters  
     Sheet      (Level 1)      (Level 2)      (Level 3)  

June 30, 2015

           

Other real estate owned

   $ 6,477         —           —           6,477   

Impaired loans, net (¹)

     11,601         —           —           11,601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,078         —           —           18,078   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Other real estate owned

   $ 7,298         —           —           7,298   

Impaired loans, net (¹)

     8,866         —           —           8,866   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,164         —           —           16,164   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(¹)

Amount is net of a valuation allowance of $0.9 million at June 30, 2015 and $1.6 million at December 31, 2014 as required by ASC 310, “Receivables.”

In the case of the bond 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 six months ended June 30, 2015, there were no transfers between Levels 1, 2 or 3.

The table below includes a rollforward of the balance sheet amounts for the six months ended June 30, 2015 and 2014 (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 Six Months Ended June 30,  
     2015      2014  
     Other      Other      Other      Other  
     Assets      Liabilities      Assets      Liabilities  

Fair value, January 1

   $ 17,331         —         $ 11,390         —     

Total realized gains included in income

     558         —           186         —     

Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at June 30

     —           —           —           —     

Purchases, issuances and settlements, net

     7,654         —           5,000         —     

Transfers out of Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value, June 30

   $ 25,543         —         $ 16,576         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at June 30

   $ 558         —           186         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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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 June 30, 2015 and December 31, 2014. 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.

Held-to-maturity securities — Estimated fair values for investment securities are based on quoted market prices where available. 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.

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 Securities sold under agreements to repurchase — Fair values for deposits are estimated using discounted cash flow models, using current market interest rates offered on deposits with similar remaining maturities.

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 June 30, 2015 and December 31, 2014. 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.

 

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                          Models with      Models with  
                   Quoted Market      Significant      Significant  
                   Prices in      Observable      Unobservable  
     Carrying/             an Active      Market      Market  
     Notional      Estimated      Market      Parameters      Parameters  

(in Thousands)

   Amount      Fair Value (¹)      (Level 1)      (Level 2)      (Level 3)  

June 30, 2015

              

Financial assets:

              

Securities held-to-maturity

   $ 26,204         26,251         —           26,251         —     

Loans, net

     1,411,049         1,420,561         —           —           1,420,561   

Financial liabilities:

              

Deposits and securities sold under agreements to repurchase

     1,714,560         1,554,841         —           —           1,554,841   

Off-balance sheet instruments:

              

Commitments to extend credit

     —           —           —           —           —     

Standby letters of credit

     —           —           —           —           —     

December 31, 2014

              

Financial assets:

              

Securities held-to-maturity

   $ 28,123         28,400         —           28,400         —     

Loans, net

     1,329,865         1,346,569         —           —           1,346,569   

Financial liabilities:

              

Deposits and securities sold under agreements to repurchase

     1,663,707         1,530,607         —           —           1,530,607   

Off-balance sheet instruments:

              

Commitments to extend credit

     —           —           —           —           —     

Standby letters of credit

     —           —           —           —           —     

 

(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.

Part I. Financial Information

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its bank subsidiary. This discussion should be read in conjunction with the consolidated financial statements appearing elsewhere in this report. Reference should also be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 for a more complete discussion of factors that impact liquidity, capital and the results of operations.

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of the Company. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any modifications or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks and uncertainties, including, but not limited to those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and also include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for these losses, (ii) renewed deterioration in the real estate market conditions in the Company’s market areas, (iii) increased competition with other financial institutions, (iv) the deterioration of the economy in the Company’s market areas, (v) continuation of the extremely low short-term interest rate environment or rapid fluctuations in short-term interest rates, (vi) significant downturns in the business of one or more large customers, (vii) the inability of the Company to comply with regulatory capital requirements, including those resulting from recently effective changes to capital calculation methodologies and required capital maintenance levels; (viii) changes in state or Federal regulations, policies, or legislation applicable to banks and other financial service

 

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providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act, (ix) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, (x) inadequate allowance for loan losses, (xi) the effectiveness of the Company’s activities in improving, resolving or liquidating lower quality assets, (xii) results of regulatory examinations, (xiii) the vulnerability of our network and online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xiv) the possibility of additional increases to compliance costs as a result of increased regulatory oversight; and (xv) loss of key personnel. These risks and uncertainties may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. The Company’s future operating results depend on a number of factors which were derived utilizing numerous assumptions that could cause actual results to differ materially from those projected in forward-looking statements.

Critical Accounting Estimates

The accounting principles we follow and our methods of applying these principles conform with U.S. generally accepted accounting principles and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses have been critical to the determination of our financial position and results of operations. There have been no significant changes to our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2014.

Allowance for Loan Losses (“allowance”). Our management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s 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 borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. 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. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, is deemed to be uncollectible.

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, impairment measurement is based on the fair value of the collateral, less estimated disposal costs. If the measure of the impaired loan is less than the recorded investment in the loan, the Company recognizes an impairment by creating a valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. Management believes it follows appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans.

 

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The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, we also consider the results of our ongoing 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, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process. We incorporate loan review results in the determination of whether or not it is probable that we will be able to collect all amounts due according to the contractual terms of a loan.

As part of management’s quarterly assessment of the allowance, management divides the loan portfolio into twelve segments based on bank call reporting requirements. Each segment is then analyzed such that an allocation of the allowance is estimated for each loan segment.

The allowance allocation begins with a process of estimating the probable losses in each of the twelve loan segments. The estimates for these loans are based on our historical loss data for that category over the last twenty quarters. During the first quarter of 2015, Management increased the number of quarters of loss data that it reviews from twelve quarters to the last twenty quarters. Management believes that twenty quarters is a more accurate representation of an economic business cycle.

The estimated loan loss allocation for all twelve loan portfolio segments is then adjusted for several “environmental” factors. The allocation for environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing factors. These environmental factors are considered for each of the twelve loan segments and the allowance allocation, as determined by the processes noted above for each component, is increased or decreased based on the incremental assessment of these various environmental factors.

We then test the resulting allowance by comparing the balance in the allowance to industry and peer information. Our management then evaluates the result of the procedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the allowance in its entirety. The board of directors reviews and approves the assessment prior to the filing of quarterly and annual financial information.

Impairment of Intangible Assets. Long-lived assets, including purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

 

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Goodwill and intangible assets that have indefinite useful lives are evaluated for impairment annually and are evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. That annual assessment date is December 31. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The Company first has the option to perform a qualitative assessment of goodwill to determine if impairment has occurred. Based upon the qualitative assessment, if the fair value of goodwill exceeds the carrying value, the evaluation of goodwill is complete. If the qualitative assessment indicates that impairment is present, the goodwill impairment analysis continues with a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated potential impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill.

Other-than-temporary Impairment. A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount of the security. To determine whether impairment is other-than-temporary, management considers whether the entity expects to recover the entire amortized cost basis of the security by reviewing the present value of the future cash flows associated with the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit loss and is deemed to be other-than temporary impairment. If a credit loss is identified, the credit loss is recognized as a charge to earnings and a new cost basis for the security is established. If management concludes that no credit loss exists and it is not more-likely-than-not that the Company will be required to sell the security before maturity, then the security is not other-than-temporarily impaired and the shortfall is recorded as a component of equity.

Results of Operations

Net earnings increased 26.71% to $11,817,000 for the six months ended June 30, 2015 from $9,326,000 in the first six months of 2014. Net earnings were $6,201,000 for the quarter ended June 30, 2015, an increase of $1,047,000, or 20.31%, from $5,154,000 for the three months ended June 30, 2014 and an increase of $585,000, or 10.43%, over the quarter ended March 31, 2015. The increase in net earnings during the six months ended June 30, 2015 as compared to the prior year comparable period was primarily due to an increase in net interest income and an increase in noninterest income, slightly offset by an increase in noninterest expense. Net yield on earning assets for the six months ended June 30, 2015 was 3.75% compared to 3.70% for the first six months of 2014, and the net interest spread was 3.65% and 3.60%, respectively, for the six months ended June 30, 2015 and the six months ended June 30, 2014. The reduction in yields on loans resulted from continued competition for loans in our market area and contributed to the decline in net yield on earning assets in first six months of 2015 as compared to the comparable period in 2014.

 

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The average balances, interest, and average rates for the six-month periods ended June 30, 2015 and June 30, 2014 are presented in the following table:

 

     June 30, 2015      June 30, 2014  
     Average     Interest     Income/      Average     Interest     Income/  
     Balance     Rate     Expense      Balance     Rate     Expense  

Loans, net of unearned interest (3)

   $ 1,381,506        5.05     34,861       $ 1,224,400        5.29     32,387   

Investment securities—taxable

     327,720        1.91        3,136         345,065        1.88        3,240   

Investment securities—tax exempt

     34,483        1.99        343         31,461        2.11        332   

Taxable equivalent adjustment

     —          1.02        177         —          1.09        171   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total tax-exempt investment securities

     34,483        3.01        520         31,461        3.20        503   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total investment securities

     362,203        2.02        3,656         376,526        1.99        3,743   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Loans held for sale

     9,776        3.38        165         5,795        3.90        113   

Federal funds sold

     78,073        .20        78         91,200        .19        87   

Restricted equity securities

     3,012        4.05        61         3,012        4.05        61   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total earning assets

     1,834,570        4.23     38,821         1,700,933          36,391   
  

 

 

   

 

 

   

 

 

    

 

 

     

 

 

 

Cash and due from banks

     9,126             10,887       

Allowance for loan losses

     (22,475          (23,233    

Bank premises and equipment

     40,315             38,989       

Other assets

     53,637             50,750       
  

 

 

        

 

 

     

Total assets

   $ 1,915,173           $ 1,778,326       
  

 

 

        

 

 

     

 

     June 30, 2015      June 30, 2014  
     Average      Interest     Income/      Average      Interest     Income/  
     Balance      Rate     Expense      Balance      Rate     Expense  

Deposits:

               

Negotiable order of withdrawal accounts

   $ 385,556         .39     754       $ 341,065         .46     791   

Money market demand accounts

     495,706         .31        766         424,182         .43        902   

Individual retirement accounts

     90,226         1.00        451         94,502         1.13        534   

Other savings deposits

     103,122         .45        232         96,529         .55        266   

Certificates of deposit $100,000 and over

     229,562         1.06        1,212         250,728         1.06        1,324   

Certificates of deposit under $100,000

     220,195         .90        987         235,133         .95        1,114   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-bearing deposits

     1,524,367         .58        4,402         1,442,139         .68        4,931   

Securities sold under repurchase agreements

     2,762         .29        4         6,683         .42        14   

Federal funds purchased

     177         —          1         55         —          —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     1,527,306         .58        4,407         1,448,877         .68        4,945   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Demand deposits

     171,554              137,929        

Other liabilities

     9,784              8,172        

Stockholders’ equity

     206,529              183,348        
  

 

 

         

 

 

      

Total liabilities and stockholders’ equity

   $ 1,915,173            $ 1,778,326        
  

 

 

         

 

 

      

Net interest income, on a tax equivalent basis

  

  $ 34,414            $ 31,446   
       

 

 

         

 

 

 

Net yield on earning assets (1)

        3.75           3.70  
     

 

 

         

 

 

   

Net interest spread (2)

        3.65           3.60  
     

 

 

         

 

 

   

 

(1)

Net interest income divided by average interest-earning assets.

(2)

Average interest rate on interest-earning assets less average interest rate on interest-bearing liabilities.

(3)

Loan fees of $2.8 million and $2.3 million are included in interest income in 2015 and 2014, respectively.

 

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Net Interest Income

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Reflecting loan growth that outpaced the reduction in loan yields and an increase in the yields on taxable securities, the Company’s total interest income, excluding tax equivalent adjustments relating to tax exempt securities, increased $2,424,000, or 6.69%, during the six months ended June 30, 2015 as compared to the same period in 2014. The increase in total interest income was $1,331,000, or 7.28%, for the quarter ended June 30, 2015 as compared to the quarter ended June 30, 2014. Interest income for the second quarter of 2015 increased $590,000, or 3.10%, over the first three months of 2015. The increase in the first six months of 2015 was primarily attributable to an overall increase in loans and the resulting increase in the interest and fees earned on loans. The ratio of average earning assets to total average assets was 95.8% and 95.7% for the six months ended June 30, 2015 and June 30, 2014, respectively.

Interest expense decreased $538,000, or 10.88%, for the six months ended June 30, 2015 as compared to the same period in 2014. The decrease was $246,000, or 10.09%, for the three months ended June 30, 2015 as compared to the same period in 2014. Interest expense decreased $25,000, or 1.13%, for the quarter ended June 30, 2015 over the first three months of 2015. The decrease for the six months ended June 30, 2015 and the quarter ended June 30, 2015 as compared to the prior year’s comparable periods was primarily due to a decrease in the rates paid on deposits, particularly time deposits, reflecting the low interest rate environment and a shift in the mix of deposits from certificates of deposits to transaction and money market accounts.

Provision for Loan Losses

The allowance for loan losses totaled $22,412,000 as of June 30, 2015 compared to $22,572,000 as of December 31, 2014 and $23,276,000 as of June 30, 2014. An analytical model based on historical loss experience, current trends and economic conditions as well as reasonably foreseeable events is used to determine the amount of provision to be recognized and to test the adequacy of the loan loss allowance. The volume of net loans charged off for the first six months of 2015 totaled approximately $316,000 compared to approximately $64,000 in net recoveries the first six months of 2014 and $1,080,000 of net chargeoffs for the first six months of 2013. Overall, net charge offs were up for the three and six month periods ended June 30, 2015 when compared to the comparable periods in 2014 due to single large recovery that occurred in the first quarter of 2014. In general, the Bank has seen an overall improvement in its loan portfolio. Reflecting the improving asset quality trends experienced by the Bank in the first six months of 2015, the provision for loan losses during the six months ended June 30, 2015 was $156,000, down $121,000 from the $277,000 incurred in the first six months of 2014. Provision expense for the three months ended June 30, 2014 was $81,000, up $53,000 from the $28,000 incurred in the second quarter of 2014 and up $6,000 from the first quarter of 2015.

The allowance for loan losses is based on past loan experience and other factors which, in management’s judgment, deserve current recognition in estimating possible loan losses. Such factors include growth and composition of the loan portfolio, review of specific problem loans, review of updated appraisals and borrower financial information, the recommendations of the Company’s regulators, and current economic conditions that may affect the borrower’s ability to repay. Management has in place a system designed for monitoring its loan portfolio and identifying potential problem loans. Reflecting improving asset quality metrics, the allowance for loan losses (net of charge-offs and recoveries) was $22,412,000 at June 30, 2015, a decrease of 0.71% from $22,572,000 at December 31, 2014 and a decrease of $864,000, or 3.71%, from June 30, 2014. The allowance for loan losses was 1.56%, 1.67%, and 1.86% of total loans at June 30, 2015, December 31, 2014, and June 30, 2014, respectively.

 

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Management believes the allowance for loan losses at June 30, 2015 to be adequate, but if economic conditions deteriorate beyond management’s current expectations and additional charge-offs are incurred, the allowance for loan losses may require an increase through additional provision for loan losses which would negatively impact earnings.

Non-Interest Income

The components of the Company’s non-interest income include service charges on deposit accounts, other fees and commissions and gain on sale of loans. Total non-interest income for the six months ended June 30, 2015 increased 22.95% to $9,552,000 from $7,769,000 for the same period in 2014. Total non-interest income increased $621,000, or 14.08%, during the quarter ended June 30, 2015 compared to the second quarter in 2014 and there was an increase of $510,000, or 11.28%, over the first three months of 2015. The Company’s non-interest income in the first six months of 2015 increased from the first six months of 2014 mainly due to an increase in other fees and commissions, an increase in service charges on deposit accounts, and an increase in gain on sale of loans. Gain on sale of loans increased $866,000, or 76.64%, during the six months ended June 30, 2015 compared to the same period in 2014. The increase in gain on sale of loans during the first six months of 2015 related primarily to the increase in consumer demand for residential mortgages and the continued improvement in the real estate market in the bank’s lending areas. Service charges on deposit accounts increased $389,000, or 19.80%, to $2,354,000 during the six months ended June 30, 2015 compared to the same period in 2014 and increased $206,000, or 19.64%, during the quarter ended June 30, 2015 compared to the second quarter of 2014 as a result of an increase in service charge on insufficient accounts as the result of an overdraft program implemented by the Bank in the third quarter of 2014 and an increase in consumer checking accounts. Other fees and commissions increased $611,000, or 13.95%, to $4,990,000 during the six months ended June 30, 2015 compared to the same period in 2014. The increase was $17,000 during the quarter ended June 30, 2015 compared to the second quarter of 2014, relating primarily to an increase in life insurance income that resulted from the $7.6 million purchase of bank owned life insurance that occurred in the first six months of 2015. Other fees and commissions include income on brokerage accounts, insurance policies sold, and various other fees.

Non-Interest Expenses

Non-interest expenses consist primarily of employee costs, occupancy expenses, furniture and equipment expenses, advertising and marketing expenses, FDIC premiums, data processing expenses, director’s fees, loss on sale of other real estate, and other operating expenses. Total non-interest expenses increased $1,250,000, or 5.36%, during the first six months of 2015 compared to the same period in 2014. The increase for the quarter ended June 30, 2015 was $759,000, or 6.47%, as compared to the same quarter in 2014. The Company experienced an increase of $384,000, or 3.17%, in non-interest expenses in the second quarter of 2015 as compared to the first three months of 2015. The increase in non-interest expenses for the six months ended June 30, 2015 when compared to the comparable period in 2014 is primarily attributable to an increase in salaries and employee bonuses associated with a one-time mid-year bonus that was paid to all employees in the second quarter of 2015 in recognition of the Bank being named one of the 2015 Top Workplaces by the Tennessean. The increase in salaries was offset by a settlement of a claim during the second quarter of 2015 resulting in a $1,325,000 reversal of an accrual for potential litigation losses due the settlement of a claim against the Company during the second quarter of 2015. Loss on the sale of other real estate decreased $156,000 for the six months ended June 30, 2015 as compared to the same period in 2014 due to a lower volume of foreclosures as well as improved economic conditions and an improved housing market.

Income Taxes

The Company’s income tax expense was $7,226,000 for the six months ended June 30, 2015, an increase of $1,125,000 over the comparable period in 2014. Income tax expense was $3,688,000 for the quarter ended June 30, 2015, an increase of $339,000 over the same period in 2014. The percentage of income tax expense to net income before taxes was 37.94% and 39.55% for the six months ended June 30, 2015 and June 30, 2014, respectively, and 37.29% and 39.39% for the quarters ended June 30, 2015 and 2014, respectively. The percentage of income tax expense to net income before taxes was 38.65% for the first three months of 2015.

 

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Financial Condition

Balance Sheet Summary

The Company’s total assets increased 3.53% to $1,939,428,000 during the six months ended June 30, 2015 from $1,873,242,000 at December 31, 2014. Total assets increased $14,032,000 during the three-month period ended June 30, 2015 and increased $52,154,000, or 2.78%, during the three-month period ended March 31, 2015. Loans, net of allowance for loan losses, totaled $1,411,049,000 at June 30, 2015, a 6.10% increase compared to $1,329,865,000 at December 31, 2014. Net loans increased $55,268,000, or 4.08%, during the three months ended June 30, 2015. The increase in loans resulted from an overall increase in loan demands in the housing market, as well other sectors in which we lend money. Reflecting an increase in loans, fed funds sold and securities decreased. Securities decreased $19,855,000, or 5.30%, to $354,688,000 at June 30, 2015 from $374,543,000 at December 31, 2014. Securities decreased $10,077,000, or 2.76%, during the three months ended June 30, 2015. Federal funds sold decreased to $13,805,000 at June 30, 2015 from $16,005,000 at December 31, 2014.

Total liabilities increased by 3.28% to $1,727,263,000 at June 30, 2015 compared to $1,672,350,000 at December 31, 2014. For the quarter ended June 30, 2015, total liabilities increased $9,033,000, or 0.53%. The increase in total liabilities since December 31, 2014 was composed of a $52,078,000, or 3.14%, increase in total deposits and a $4,060,000, or 46.97%, increase in accrued interest and other liabilities, partially offset by a $1,225,000, or 35.64%, decrease in securities sold under repurchase agreements. The increase in accrued interest and other liabilities is attributable to an increase in employee bonus payable as well as an increase in federal and state taxes payable.

Non Performing Assets

The following tables present the Company’s non-accrual loans and past due loans as of June 30, 2015 and December 31, 2014.

Loans on Nonaccrual Status

 

     In Thousands  
     June 30,
2015
     December 31,
2014
 

Residential 1-4 family

   $ 41       $ 42   

Multifamily

     —           —     

Commercial real estate

     6,120         —     

Construction

     —           —     

Farmland

     575         574   

Second mortgages

     —           —     

Equity lines of credit

     —           —     

Commercial

     —           —     

Agricultural, installment and other

     —           —     
  

 

 

    

 

 

 

Total

   $ 6,736       $ 616   
  

 

 

    

 

 

 

 

 

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Table of Contents
     (In thousands)  
     30-59
Days
Past Due
     60-89
Days
Past Due
     Non
Accrual
and Greater
Than
90 Days
     Total
Non
Accrual
and
Past Due
     Current      Total Loans      Recorded
Investment Greater
Than 90 Days Past
Due and
Accruing
 

June 30, 2015

                    

Residential 1-4 family

   $ 4,934         418         692         6,044         349,880         355,924       $ 651   

Multifamily

     —           —           —           —           50,559         50,559         —     

Commercial real estate

     245         —           6,143         6,388         578,829         585,217         23   

Construction

     1,845         —           57         1,902         275,616         277,518         57   

Farmland

     241         53         663         957         30,522         31,479         88   

Second Mortgages

     33         1         130         164         8,517         8,681         130   

Equity Lines of Credit

     —           9         260         269         45,549         45,818         260   

Commercial

     —           —           —           —           29,532         29,532         —     

Agricultural, installment and other

     340         131         52         523         52,968         53,491         52   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,638         612         7,997         16,247         1,421,972         1,438,219       $ 1,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                    

Residential 1-4 family

   $ 6,166         1,275         1,352         8,793         341,965         350,758       $ 1,310   

Multifamily

     —           —           —           —           31,242         31,242         —     

Commercial real estate

     2,151         242         19         2,412         562,553         564,965         19   

Construction

     125         91         73         289         245,541         245,830         73   

Farmland

     88         —           594         682         29,554         30,236         20   

Second Mortgages

     286         18         70         374         8,652         9,026         70   

Equity Lines of Credit

     346         —           5         351         41,145         41,496         5   

Commercial

     37         —           —           37         29,963         30,000         —     

Agricultural, installment and other

     301         126         44         471         52,754         53,225         44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,500         1,752         2,157         13,409         1,343,369         1,356,778       $ 1,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Generally, at the time a loan is placed on nonaccrual status, all interest accrued on the loan in the current fiscal year is reversed from income, and all interest accrued and uncollected from the prior year is charged off against the allowance for loan losses. Thereafter, interest on nonaccrual loans is recognized as interest income only to the extent that cash is received and future collection of principal is not in doubt. A nonaccrual loan may be restored to accruing status when principal and interest are no longer past due and unpaid and future collection of principal and interest on a timely basis is not in doubt.

Non-performing loans, which included non-accrual loans and loans 90 days past due, at June 30, 2015 totaled $7,997,000, an increase from $2,157,000 at December 31, 2014. The increase in non-performing loans during the six months ended June 30, 2015 of $5,840,000 is due primarily to an increase in non-performing commercial real estate mortgage loans of $6,124,000 that resulted primarily from one large commercial real estate loan changing to non-performing status. Management believes that it is probable that it will incur losses on these loans but believes that these losses should not exceed the amount in the allowance for loan losses already allocated to these loans, unless there is renewed deterioration of local real estate values.

Other loans may be classified as impaired when the current net worth and financial capacity of the borrower or of the collateral pledged, if any, is viewed as inadequate. Such loans generally have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, and if such deficiencies are not corrected, there is a probability that the Company will sustain some loss. In such cases, interest income continues to accrue as long as the loan does not meet the Company’s criteria for nonaccrual status.

 

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The increase in impaired loans during the six months ended June 30, 2015 was primarily due to one loan relationship becoming impaired. Overall, the Company’s market areas have seen improvements in the residential real estate market and the commercial real estate market remains steady. The allowance for loan loss related to collateral dependent impaired loans was measured based upon the estimated fair value of related collateral.

Loans are charged-off in the month when the determination is made that the loan is uncollectible. Net charge-offs for the six months ended June 30, 2015 were $316,000 as compared to $64,000 in net recoveries for the same period in 2014 and $861,000 in net charge-offs for the year ended December 31, 2014. The Bank has continued to experience a decrease in past dues and nonaccruals, with the exception of one large loan placed on non-accrual during the first quarter of 2015, and is experiencing fewer foreclosures which has resulted in fewer charge offs.

The collateral values securing potential problem loans, including impaired loans, based on estimates received by management, total approximately $63.6 million. The internally classified loans have decreased $1,678,000, or 4.69%, from $35,808,000 at December 31, 2014. Loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement. The loan classifications do not represent or result from trends or uncertainties which management expects will materially impact future operating results, liquidity or capital resources.

The largest category of internally graded loans at June 30, 2015 was real estate mortgage loans. Included within this category are residential real estate construction and development loans, including loans to home builders and developers of land, as well as one-to-four family mortgage loans, and commercial real estate loans. Residential real estate loans, including construction and land development loans that are internally classified totaled $11,314,000 and $15,860,000 at June 30, 2015 and December 31, 2014, respectively. These loans have been graded accordingly due to bankruptcies, inadequate cash flows and delinquencies. The Bank continues to see an improvement in internally graded loans as the cash flows from home builders, land developers, and commercial real estate borrowers continue to improve. Management does not anticipate losses on the internally classified residential real estate construction and development loans at June 30, 2015 to exceed the amount already allocated to loan losses.

Liquidity and Asset Management

The Company’s management seeks to maximize net interest income by managing the Company’s assets and liabilities within appropriate constraints on capital, liquidity and interest rate risk. Liquidity is the ability to maintain sufficient cash levels necessary to fund operations, meet the requirements of depositors and borrowers, and fund attractive investment opportunities. Higher levels of liquidity bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher interest expense involved in extending liability maturities.

Liquid assets include cash and cash equivalents and investment securities and money market instruments that will mature within one year. At June 30, 2015, the Company’s liquid assets totaled $290 million. Additionally, as of June 30, 2015, we had available to us approximately $53.0 million in unused federal funds line of credit with regional banks, subject to certain restrictions and collateral requirements, to meet short term funding needs. The Company maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.

 

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Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Included in the analysis are cash flows and maturities of financial instruments held for purposes other than trading, changes in market conditions, loan volumes and pricing and deposit volume and mix. These assumptions are inherently uncertain, and, as a result, net interest income cannot be precisely estimated nor can the impact of higher or lower interest rates on net interest income be precisely predicted. Actual results will differ due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management’s strategies, among other factors.

The Company’s primary source of liquidity is a stable core deposit base. In addition, short-term borrowings, loan payments and investment security maturities provide a secondary source. At June 30, 2015, the Company had a liability sensitive position (a negative gap). Liability sensitivity means that more of the Company’s liabilities are capable of re-pricing over certain time frames than its assets. The interest rates associated with these liabilities may not actually change over this period but are capable of changing.

The Company also uses simulation modeling to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. The Asset Liability Committee meets quarterly to analyze the interest rate shock simulation. The interest rate simulation model is based on a number of assumptions. These assumptions include, but are not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows and balance sheet management strategies. We model instantaneous change in interest rates using a growth in the balance sheet as well as a flat balance sheet to understand the impact to earnings and capital. The Company also uses Economic Value of Equity (“EVE”) sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest rate scenarios. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. Presented below is the estimated impact on Wilson Bank’s net interest income and EVE as of June 30, 2015, assuming an immediate shift in interest rates:

 

     % Change from Base Case for  
     Immediate Parallel Changes in Rates  
     -100 BP(1)     +100 BP      +200 BP  

Net interest income

     (4.38 )%      (3.74      (7.21

EVE

     (6.28     (1.34      (3.31

 

(1)

Because certain current interest rates are at or below 1.00%, the 100 basis points downward shock assumes that certain corresponding interest rates reflects a decrease of less than the full 100 basis point downward shock.

Management believes that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in, or that are reasonably likely to result in, the Company’s liquidity changing in a materially adverse way.

Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate risk management. The Company’s rate sensitivity position has an important impact on earnings. Senior management of the Company analyzes the rate sensitivity position quarterly. Management focuses on the spread between the Company’s cost of funds and interest yields generated primarily through loans and investments.

 

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The Company’s securities portfolio consists of earning assets that provide interest income. For those securities classified as held-to-maturity, the Company has the ability and intent to hold these securities to maturity or on a long-term basis. Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, the need or desire to increase capital and similar economic factors. At June 30, 2015, securities totaling approximately $20.4 million mature or will be subject to rate adjustments within the next twelve months.

A secondary source of liquidity is the Company’s loan portfolio. At June 30, 2015, loans totaling approximately $370.9 million either will become due or will be subject to rate adjustments within twelve months from that date. Continued emphasis will be placed on structuring adjustable rate loans.

As for liabilities, certificates of deposit of $100,000 or greater totaling approximately $121.0 million will become due or reprice during the next twelve months. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit accounts and regular savings accounts. Management anticipates that there will be no significant withdrawals from these accounts in the future.

Management believes that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity changing in a materially adverse way.

Off Balance Sheet Arrangements

At June 30, 2015, we had unfunded loan commitments outstanding of $329.8 million and outstanding standby letters of credit of $33.2 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase Federal funds from other financial institutions. Additionally, the Bank could sell participations in these or other loans to correspondent banks. As mentioned above, the Bank has been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments, investment security maturities and short-term borrowings.

Capital Position and Dividends

At June 30, 2015, total stockholders’ equity was $212,165,000, or 10.94% of total assets, which compares with $200,892,000, or 10.72% of total assets, at December 31, 2014. The dollar increase in stockholders’ equity during the six months ended June 30, 2015 results from the Company’s net income of $11,817,000, proceeds from the issuance of common stock related to exercise of stock options of $148,000, the net effect of a $71,000 unrealized loss on investment securities net of applicable income taxes of $27,000, cash dividends declared of $2,272,000 of which $1,603,000 was reinvested under the Company’s dividend reinvestment plan and $21,000 related to stock option compensation.

The Company and the Bank are subject to regulatory capital requirements administered by the FDIC, the Federal Reserve and the Tennessee Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

 

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Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, common equity, and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of June 30, 2015 and December 31, 2014, that the Company and Wilson Bank meet all capital adequacy requirements to which they are subject.

As of June 30, 2015, the most recent notification from the FDIC categorized Wilson Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category. To be categorized as well capitalized as of December 31, 2014, an institution must have maintained minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables and not have been subject to a written agreement, order or directive to maintain a higher capital level. The minimum capital levels required to be considered well-capitalized from and after January 1, 2015, are as follows: a Tier 1 leverage capital ratio of 5%, a common equity Tier 1 capital ratio of 6.5%, a Tier 1 risk-based capital ratio of 8% (up from 6.0% under the previous rules) and a total risk-based capital ratio of 10%. The Company’s and the Bank’s actual capital amounts and ratios as of June 30, 2015 and December 31, 2014, are also presented in the table:

 

     Actual     Minimum Capital
Requirement
    Minimum To Be
Well Capitalized
Under Applicable
Regulatory
Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)  

June 30, 2015:

               

Total capital to risk weighted assets:

               

Consolidated

   $ 227,694         14.5   $ 125,624         8.0   $ 157,030         10.0

Wilson Bank

     225,001         14.4        125,001         8.0        156,251         10.0   

Tier 1 capital to risk weighted assets:

               

Consolidated

     208,082         13.3        93,872         6.0        125,162         8.0   

Wilson Bank

     205,386         13.1        94,070         6.0        125,427         8.0   

Common equity tier 1 capital to average assets:

               

Consolidated

     208,082         13.3        70,404         4.5        101,694         6.5   

Wilson Bank

     205,386         13.1        70,552         4.5        101,909         6.5   

Tier 1 capital to average assets:

               

Consolidated

     208,082         10.9        76,360         4.0        N/A         N/A   

Wilson Bank

     205,386         10.7        76,780         4.0        95,975         5.0   

 

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Table of Contents
     Actual     Minimum Capital
Requirement
    Minimum To Be
Well Capitalized
Under Applicable
Regulatory
Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)  

December 31, 2014:

               

Total capital to risk weighted assets:

               

Consolidated

   $ 214,779         15.0   $ 114,549         8.0   $ 143,186         10.0

Wilson Bank

     213,447         14.9        114,602         8.0        143,253         10.0   

Tier 1 capital to risk weighted assets:

               

Consolidated

     196,765         13.7        57,450         4.0        86,174         6.0   

Wilson Bank

     195,433         13.6        57,480         4.0        86,220         6.0   

Tier 1 capital to average assets:

               

Consolidated

     196,765         10.6        74,251         4.0        N/A         N/A   

Wilson Bank

     195,433         10.5        74,451         4.0        93,063         5.0   

In July 2013, the Federal banking regulators, in response to the statutory requirements of The Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted new regulations implementing the Basel Capital Adequacy Accord (“Basel III”) and the related minimum capital ratios. The new capital requirements were effective January 1, 2015 and included a new “Common Equity Tier I Ratio”, which has stricter rules as to what qualifies as Common Equity Tier I Capital. Comparability between the ratios at December 31, 2014 and June 30, 2015 may be limited due to a change in the capital requirements and calculation of capital ratios. A summary of the changes to the Regulatory Capital Ratios are as follows:

 

     Guideline in Effect
At December 31, 2014
    Basel III Requirements in Effect
At June 30, 2015
 
     Minimum     Well Capitalized     Minimum     Well
Capitalized
 

Common Equity Tier I Ratio (Common Equity to Risk Weighted Assets)

     Not Applicable        Not Applicable        4.5     6.5

Tier I Capital to Risk Weighted Assets

     4     6     6     8

Total Capital to Risk Weighted Assets

     8     10     8     10

Tier I Leverage Ratio

     4     5     4     5

 

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The guidelines under Basel III establish a 2.5% capital conservation buffer requirement that is phased in over three years beginning January 1, 2016. The buffer is related to Risk Weighted Assets. The Basel III minimum requirements after giving effect to the buffer are as follows:

 

     2016     2017     2018     2019  

Common Equity Tier I Ratio

     5.125     5.75     6.375     7.0

Tier I Capital to Risk Weighted Assets Ratio

     6.625     7.25     7.875     8.5

Total Capital to Risk Weighted Assets Ratio

     8.625     9.25     9.875     10.5

In order to avoid limitations on capital distributions such as dividends and certain discretionary bonus payments to executive officers, a banking organization must maintain capital ratios above the minimum ratios including the buffer.

Impact of Inflation

Although interest rates are significantly affected by inflation, the inflation rate is immaterial when reviewing the Company’s results of operations.

Part I. Financial Information

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.

Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both short-term and long-term earnings through funds management/interest rate risk management. The Company’s rate sensitivity position has an important impact on earnings. Senior management of the Company meets monthly to analyze the rate sensitivity position. These meetings focus on the spread between the cost of funds and interest yields generated primarily through loans and investments.

There have been no material changes in reported market risks during the six months ended June 30, 2015.

Part I. Financial Information

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, its Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

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There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Not applicable

Item 1A. RISK FACTORS

There were no material changes to the Company’s risk factors as previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December  31, 2014.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None

(b) Not applicable.

(c) None

Item 3. DEFAULTS UPON SENIOR SECURITIES

(a) None

(b) Not applicable

Item 4. MINE SAFETY DISCLOSURES

Not applicable

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS

 

10.1  

Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and J. Randall Clemons (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 29, 2015)*.

10.2  

Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and Elmer Richerson (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 29, 2015)*.

10.3  

Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and Lisa T. Pominski (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 29,
2015)*.

10.4  

Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and Gary Whitaker (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 29, 2015)*.

10.5  

Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and John C. McDearman III (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 29, 2015)*.

31.1  

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

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31.2   

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1   

Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2   

Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101   

Interactive Data File

 

*

Management compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  WILSON BANK HOLDING COMPANY
  (Registrant)

DATE: August 7, 2015

  /s/ Randall Clemons
  Randall Clemons
  President and Chief Executive Officer

DATE: August 7, 2015

  /s/ Lisa Pominski
  Lisa Pominski
  Senior Vice President & Chief Financial Officer

 

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