WILSON BANK HOLDING COMPANY The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its bank subsidiary,Wilson Bank (the "Bank") andEncompass Home Loan Lending, LLC ("Encompass"), a company offering mortgage banking services that is 51% owned by the Bank and 49% owned by two home builders operating in the Bank's market areas. The results of Encompass, which commenced operations onJune 1, 2022 , are consolidated in the Company's financial statements included elsewhere in this Quarterly Report. This discussion should be read in conjunction with the Company's 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 endedDecember 31, 2022 for a more complete discussion of factors that impact the Company's liquidity, capital and results of operations. Forward-Looking Statements This Form 10-Q contains certain forward-looking statements within the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") 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. 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 endedDecember 31, 2022 , and also include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in credit losses and provisions for these losses, (ii) deterioration in the real estate market conditions in the Company's market areas including demand for residential real estate loans as a result of rising rates on residential real estate mortgage loans, (iii) the impact of increased competition with other financial institutions, including pricing pressures on loans and deposits, and the resulting impact on the Company's results, including as a result of compression to net interest margin, (iv) adverse conditions in local or national economies, including the economy in the Company's market areas, including as a result of inflationary pressures on our customers and on their businesses, (v) the sale of investment securities in a loss position before the value of the securities recovers, including as a result of asset liability management strategies or in response to liquidity needs, (vi) fluctuations or differences in interest rates on earning assets and interest bearing liabilities from those that the Company is modeling or anticipating, including as a result of the Bank's inability to maintain deposit rates or defer increases to those rates in a rising rate environment in connection with the changes in the short-term rate environment, or that affect the yield curve, (vii) the ability to grow and retain low-cost core deposits and retain large uninsured deposits, including during times when the Bank is seeking to limit the rates it pays on deposits or uncertainty exists in the financial services sector, (viii) significant downturns in the business of one or more large customers, (ix) the inability of the Company to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies, required capital maintenance levels, or regulatory requests or directives, (x) changes in state or Federal regulations, policies, or legislation applicable to banks and other financial service 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, (xi) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, (xii) inadequate allowance for credit losses, (xiii) the effectiveness of the Company's activities in improving, resolving or liquidating lower quality assets, (xiv) results of regulatory examinations, (xv) the vulnerability of the Company's network and online banking portals, and the systems of parties with whom the Company contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches, (xvi) the possibility of additional increases to compliance costs or other operational expenses as a result of increased regulatory oversight, (xvii) loss of key personnel, and (xviii) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future litigation, examinations or other legal and/or regulatory actions. 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. Impact of COVID-19 Information regarding the impact of the COVID-19 pandemic on our financial condition and results of operations as of and for the three months endedMarch 31, 2023 and the comparable prior year period is noted throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q.
Application of Critical Accounting Policies and Accounting Estimates
We follow accounting and reporting policies that conform, in all material respects, to accounting principles generally accepted inthe United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information, forecasted economic conditions, and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. 35
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Accounting policies related to the allowance for credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. As discussed in Note 1 - Summary of Significant Accounting Policies, our policies related to allowances for credit losses changed onJanuary 1, 2022 in connection with the adoption of a new accounting standard update as codified in Accounting Standards Codification ("ASC") Topic 326 ("ASC 326") Financial Instruments - Credit Losses. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Loans and Allowance for Credit Losses in the notes to consolidated financial statements contained elsewhere in this Quarterly Report. Non-GAAP Financial Measures This Quarterly Report contains certain financial measures that are not measures recognized underU.S. GAAP and, therefore, are considered non-GAAP financial measures. Members of Company management use these non-GAAP financial measures in their analysis of the Company's performance, financial condition, and efficiency of operations. Management of the Company believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods. Management of the Company also believes that investors find these non-GAAP financial measures useful as they assist investors in understanding underlying operating performance and identifying and analyzing ongoing operating trends. However, the non-GAAP financial measures discussed herein should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance withU.S. GAAP. Moreover, the manner in which the non-GAAP financial measures discussed herein are calculated may differ from the manner in which measures with similar names are calculated by other companies. You should understand how other companies calculate their financial measures similar to, or with names similar to, the non-GAAP financial measures we have discussed herein when comparing such non-GAAP financial measures. The non-GAAP measures in this Quarterly Report include "pre-tax pre-provision income," "pre-tax pre-provision basic earnings per share," "pre-tax pre-provision annualized return on average stockholders' equity," and "pre-tax pre-provision annualized return on average assets." A reconciliation of these measures to the comparable GAAP measures is included below. 36
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Selected Financial Information
The executive management and Board of Directors of the Company evaluate key
performance indicators (KPIs) on a continuing basis. These KPIs serve as
benchmarks of Company performance and are used in making strategic decisions.
The following table represents the KPIs that management presently has determined
to be important in making decisions for the Bank:
As of or For the Three Months Ended
March 31,
2023 - 2022
Percent Increase
2023 2022 (Decrease)
PER SHARE DATA:
Basic earnings per common share (GAAP) $ 1.20 $ 1.01 18.81 %
Pre-tax pre-provision basic earnings per
share (1) $ 1.61 $ 1.53 5.24 %
Diluted earnings per common share (GAAP) $ 1.20 $ 1.01 18.81 %
Cash dividends per common share $ 0.75 $ 0.75 - %
Dividends declared per common share as a
percentage of basic earnings per common
share 62.50 % 74.26 % (15.83 )%
(1) Excludes income tax expense, provision for credit losses-loans and provision for credit losses on off-balance sheet exposures.
As of or For the Three Months Ended
March 31,
2023 - 2022
Percent Increase
2023 2022 (Decrease)
PERFORMANCE RATIOS:
Annualized return on average stockholders'
equity (GAAP) (1) 14.65 % 11.70 % 25.21 %
Pre-tax pre-provision annualized return on
average stockholders' equity (2) 19.69 % 17.75 % 10.93 %
Annualized return on average assets (GAAP)
(3) 1.30 % 1.15 % 13.04 %
Pre-tax pre-provision annualized return on
average assets (2) 1.74 % 1.74 % - %
Efficiency ratio (GAAP) (4) 56.14 % 56.29 % (0.27 )%
(1) Annualized return on average stockholders' equity is the result of net income for the reported period on an annualized basis, divided by average stockholders' equity for the period.
(2) Excludes income tax expense, provision for credit losses-loans and provision for credit losses on off-balance sheet exposures.
(3) Annualized return on average assets is the result of net income for the reported period on an annualized basis, divided by average assets for the period.
(4) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and non-interest income.
2023 - 2022
March 31, 2023 2022 (Decrease)
BALANCE SHEET RATIOS:
Total capital to assets ratio 8.69 % 8.41 % 3.33 %
Equity to asset ratio (Average equity
divided by average total assets) 8.84 % 8.99 % (1.67 )%
Tier 1 capital to average assets 10.70 % 11.18 % (4.29 )%
Non-performing asset ratio 0.02 % 0.02 % - %
Book value per common share $ 33.60 $ 31.42 6.94 %
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Reconciliation of Non-GAAP Financial Measures
Three Months Ended
March 31, 2023 March 31, 2022
Pre-tax pre-provision income:
Net income attributable to common stockholders (GAAP) $ 13,841 $ 11,373
Add: provision for credit losses 1,962 1,892
Add: provision expense (benefit) for credit losses on
unfunded commitments (1,278 ) 825
Add: income tax expense 4,071 3,171
Pre-tax pre-provision income $ 18,596 $ 17,261
Pre-tax pre-provision basic earnings per share:
Pre-tax pre-provision income $ 18,596 $ 17,261
Weighted average shares 11,543,497 11,276,121
Basic earnings per common share (GAAP) $ 1.20 $ 1.01
Provision for credit losses $ 0.17 $ 0.17
Provision expense (benefit) for credit losses on
unfunded commitments $ (0.11 ) $ 0.07
Income tax expense $ 0.35 $ 0.28
Pre-tax pre-provision basic earnings per common share $ 1.61 $ 1.53
Pre-tax pre-provision annualized return on average
assets:
Pre-tax pre-provision income $ 18,596 $ 17,261
Average assets 4,333,731 4,018,591
Annualized return on average assets (GAAP) 1.30 % 1.15 %
Provision for credit losses 0.18 % 0.19 %
Provision expense (benefit) for credit losses on
unfunded commitments (0.12 )% 0.08 %
Income tax expense 0.38 % 0.32 %
Pre-tax pre-provision annualized return on average assets
1.74 % 1.74 %
Pre-tax pre-provision annualized return on average stockholders' equity: Pre-tax pre-provision income
$ 18,596 $ 17,261
Average total stockholders' equity 383,045 394,376
Annualized return on average stockholders' equity (GAAP) 14.65 % 11.70 %
Provision for credit losses 2.08 % 1.95 %
Provision expense (benefit) for credit losses on
unfunded commitments (1.35 )% 0.85 %
Income tax expense 4.31 % 3.25 %
Pre-tax pre-provision annualized return on average
stockholders' equity 19.69 % 17.75 %
Results of Operations
Net earnings of the Company increased $2,468,000 , or 21.70%, to $13,841,000 for
the three months ended March 31, 2023 , from $11,373,000 in the first three
months of 2022. The increase in net earnings during the three months ended March
31, 2023 as compared to the prior year comparable period was primarily due to an
increase in net interest income, partially offset by a decrease in non-interest
income, and an increase in non-interest expense. The increase in net interest
income for the three months ended March 31, 2023 compared to the comparable
period in 2022 is due to an increase in average interest earning asset balances
and an increase in the yield earned on interest earning assets, partially offset
by an increase in cost of funds. The increase in the yield earned on interest
earning assets is primarily due to the increase in rates experienced since the
1st quarter 2022 as the Federal Reserve increased the fed funds rate by 475
basis points. The increase in cost of funds for the three months ended March 31,
2023 when compared to the comparable period in 2022 occurred as we increased the
rates we are paying on our deposit products as a result of competitive pressures
in our markets and the impact of the rising rate environment. The decrease in
non-interest income for the three months ended March 31, 2023 compared to the
comparable periods in 2022 primarily resulted from a decrease in the gain on
sale of loans which resulted from a decrease in the volume of refinancing and
purchase money transactions for residential real estate loans due to
higher mortgage interest rates. The increase in non-interest expense for the
three months ended March 31, 2023 compared to the comparable periods in 2022
resulted from the Company's continued growth.
Return on average assets (ROA) and return on average stockholders' equity (ROE)
are common benchmarks for bank profitability and are calculated by taking our
annualized net earnings for the relevant period and dividing by the average
assets and average equity for the relevant periods, respectively. ROA and ROE
measure a company's return on investment in a format that is easily comparable
to other financial institutions. ROA is particularly important to the Company
as it serves as the basis for certain executive and employee bonuses. The ROA
for the three month periods ended March 31, 2023 and 2022 was 1.30% and 1.15%,
respectively. The ROE for the three month periods ended March 31, 2023 and
2022 was 14.65% and 11.70%, respectively.
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Table of Contents Net Interest Income
The average balances, interest, and average rates of our assets and liabilities
for the three month periods ended
Three Months Ended Three Months Ended Net Change Three Months Ended
March 31, 2023 March 31, 2022 March 31, 2023 versus March 31, 2022
Income/ Income/ Percent
Average Balance Interest Rate
Expense Average Balance Interest Rate Expense Due to Volume Due to Rate Net Change Change
Loans, net of unearned
interest (1) (2)
5.56 % $ 43,284 $ 2,535,031 4.82 % $ 29,604 $ 8,645 $ 5,035 $ 13,680
Investment
securities-taxable 763,968 2.38 4,485 832,808 1.57 3,231 (1,692 ) 2,946 1,254
Investment
securities-tax exempt 67,965 2.33 390 77,525 1.69 324 (227 ) 293 66
Taxable equivalent
adjustment (3) - 0.62 104 - 0.45 86 (61 ) 79 18
Total tax-exempt
investment securities 67,965 2.95 494 77,525 2.14 410 (288 ) 372 84
Total investment
securities 831,933 2.43 4,979 910,333 1.62 3,641 (1,980 ) 3,318 1,338
Loans held for sale 3,523 8.17 71 12,655 4.94 154 (473 ) 390 (83 )
Federal funds sold 3,579 4.76 42 27,290 0.10 7 (48 ) 83 35
Accounts with
depository institutions 71,575 3.32 586 366,849 0.16 145 (892 ) 1,333 441
Restricted equity
securities 3,835 7.51 71 5,089 2.71 34 (55 ) 92 37
Total earning assets 4,121,038 4.89 49,033 3,857,247 3.58 33,585 5,197 10,251 15,448 46.00 %
Cash and due from banks 25,293 23,214
Allowance for credit
losses (39,649 ) (39,476 )
Bank premises and
equipment 61,917 62,828
Other assets 165,132 114,778
Total assets $ 4,333,731 $ 4,018,591 Three Months Ended Three Months Ended Net Change Three Months Ended March 31, 2023 March 31, 2022 March 31, 2023 versus March 31, 2022 Income/ Income/ Percent Average Balance Interest Rate Expense Average Balance Interest Rate Expense Due to Volume Due to Rate Net Change Change Deposits: Negotiable order of withdrawal accounts$ 1,029,312 0.50 %$ 1,260 $ 1,056,065 0.18 %$ 465 $ (83 ) $ 878$ 795 Money market demand accounts 1,213,698 1.45 4,344 1,219,000 0.11 342 (11 ) 4,013 4,002 Time Deposits 945,595 3.00 6,987 581,088 0.85 1,221 1,150 4,616 5,766 Other savings 332,515 1.06 869 309,205 0.13 100 8 761 769 Total interest-bearing deposits 3,521,120 1.55 13,460 3,165,358 0.27 2,128 1,064 10,268 11,332Federal Home Loan Bank advances 256 3.17 2 - - - 2 - 2 Finance leases 2,276 2.85 16 818 7.93 16 62 (62 ) - Fed funds purchased 2,038 4.18 21 - - - 21 - 21 Total interest-bearing liabilities 3,525,690 1.55 13,499 3,166,176 0.27 2,144 1,149 10,206 11,355 529.62 % Non-interest bearing deposits 402,861 426,676 Other liabilities 22,135 31,363 Stockholders' equity 383,045 394,376 Total liabilities and stockholders' equity$ 4,333,731 $ 4,018,591 Net interest income, on a tax equivalent basis$ 35,534 $ 31,441 $ 4,048 $ 45$ 4,093 13.02 % Net interest margin (4) 3.56 % 3.36 % Net interest spread (5) 3.34 % 3.31 % Notes:
(1) Yields on loans and total earning assets include the impact of State income tax credits related to incentive loans at below market rates and tax exempt loans to municipalities.
(2) Loan fees of$2.8 million are included in interest income for the period endedMarch 31, 2023 . Loan fees of$3.0 million are included in interest income for the period endedMarch 31, 2022 , inclusive of$102,000 in 2022 in SBA fees related to PPP loans.
(3) The tax equivalent adjustment has been computed using a 21% Federal tax rate.
(4) Annualized net interest income on a tax equivalent basis divided by average interest-earning assets.
(5) Average interest rate on interest-earning assets less average interest rate on interest-bearing liabilities.
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The components of our loan yield, a key driver to our net interest margin for
the three months ended
Three Months Ended March 31,
2023 2022
Interest Interest
Income Average Yield Income Average Yield
Loan yield components:
Contractual interest rates 40,532 5.13 % 26,572 4.25 %
Origination and other fee income 2,752 0.35 % 2,930 0.47 %
PPP loan fee income - - % 102 0.02 %
Loan tax credits 670 0.08 % 500 0.08 %
Total $ 43,954 5.56 % $ 30,104 4.82 %
Net interest margin for the three months ended March 31, 2023 and 2022 was
3.56% and 3.36%, respectively. The increase in net interest margin for the three
months ended March 31, 2023 compared to the three months ended March 31, 2022
was due to an increase in the yield earned on our earning assets and an increase
in earning assets partially offset by an increase in cost of funds and an
increase in deposit balances, including brokered deposits. The Federal Reserve
influences the general market rates of interest, including the deposit and loan
rates offered by many financial institutions. Our loan portfolio is
significantly affected by changes in the prime interest rate. The prime interest
rate, which is the rate offered on loans to borrowers with strong
credit, increased 475 basis points from March 31, 2022 through the end of the
1st quarter of 2023 as the Federal Reserve sought to address high levels of
inflation. The direction and speed with which short-term interest rates move has
an impact on our net interest income. The Bank anticipates that its net interest
margin is likely to contract throughout 2023 because of the rising short-term
interest rates and the impact of competitive pressures in our market,
which pressure the Bank's deposit pricing and contribute to a compression in
our margin. The increase in brokered deposits, which can carry higher rates than
core deposits, that we experienced in the first quarter of 2023, is also likely
to negatively impact our net interest margin. The yield on loans increased
during the three months ended March 31, 2023 when compared to the comparable
period in 2022 due to the higher rates charged on new loans and the repricing of
a portion of the Bank's variable rate loan portfolio. The net interest spread
was 3.34% and 3.31% for the three months ended March 31, 2023 and March 31,
2022 , respectively.
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. Net
interest income, excluding tax equivalent adjustments relating to tax exempt
securities and loans, for the three months ended March 31,
2023 totaled $35,430,000 compared to $31,355,000 for the same period in 2022, an
increase of $4,075,000 .
The increase in interest income for the three months ended March 31, 2023 when
compared to the three months ended March 31, 2022 was primarily attributable to
an increase in interest and fees earned on loans as well as as increase
in interest and dividends earned on securities. The increase in interest and
fees earned on loans resulted from an overall increase in average loans and an
increase in rates as mentioned above. The ratio of average earning assets to
total average assets for the three months ended March 31,
2023 was 95.1% compared to 96.0% for the same period in 2022.
Interest expense increased in the three months ended March 31, 2023 when
compared to the comparable period in 2022, as competitive pressures required the
Bank to raise rates paid on deposits as well as the Bank's customers shifting
deposits from non-interest bearing accounts to interest bearing accounts. We
expect deposit costs to continue to increase during the remainder of 2023 due to
those same factors and the expected repricing of a portion of the Bank's time
deposits that are currently below the current market rates.
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Table of Contents Provision for Credit Losses OnJanuary 1, 2022 , we adopted FASB ASU 2016-13, which introduces the current expected credit losses (CECL) methodology and requires us to estimate all expected credit losses over the remaining life of our loan portfolio. The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation is adequate to provide coverage for all expected credit losses. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Refer to Note 1, "Summary of Significant Accounting Policies" in the notes to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for a detailed discussion regarding ACL methodology.
The provision for credit losses-loans was
Although loan growth tapered from$141,545,000 for the period endedMarch 31, 2022 to$114,619,000 during the period endedMarch 31, 2023 , our provision for credit losses - loans increased$70,000 when comparing the two periods. We increased our historical modeled loss rates and reduced our qualitative adjustments during the first quarter 2023 due to changes in our macroeconomic forecasts, which are discussed below under "Allowance for Credit Losses". The increase in our modeled historical loss rate slightly outpaced the reduction in our qualitative adjustments, which resulted in a provision for credit losses - loans comparable to our provision for credit losses - loans for the three months endedMarch 31, 2022 , despite a decrease in the overall volume of loans originated during the period. The downward adjustment of our qualitative factor relating to changes in international, national, regional, and local conditions was due to theMarch 31, 2023 macroeconomic forecast capturing the potential for a recession, that was not captured in our previous forecasts. The decrease in the provision for credit losses-off-balance sheet credit exposures for the three months endedMarch 31, 2023 was the result of a decrease in our off-balance sheet commitments and an increase in our unconditionally cancellable commitments.
The following detail provides a breakdown of the provision for credit loss-loans
expense and net (charge-offs) recoveries at
In Thousands, Except Percentages
Provision
for Credit
Loss - Ratio of Net
Loans (Charge-offs)
Expense Net (Charge-Offs) Recoveries to
(Benefit) Recoveries Average Loans Average Loans
March 31, 2023
Residential 1-4 family real estate $ 647 $ - $ 860,301 - %
Commercial and multi-family real
estate 387 - 1,076,520 -
Construction, land development and
farmland 488 4 900,627 -
Commercial, industrial and
agricultural 118 - 124,144 -
1-4 family equity lines of credit 54 - 152,754 -
Consumer and other 268 (333 ) 92,247 (0.36 )
Total $ 1,962 $ (329 ) $ 3,206,593 (0.01 )%
March 31, 2022
Residential 1-4 family real estate $ 53 $ 8 $ 687,794 - %
Commercial and multi-family real
estate 619 - 920,859 -
Construction, land development and
farmland 902 3 637,619 -
Commercial, industrial and
agricultural 33 7 116,623 0.01
1-4 family equity lines of credit 83 - 96,586 -
Consumer and other 202 (200 ) 75,550 (0.26 )
Total $ 1,892 $ (182 ) $ 2,535,031 (0.01 )%
Following our adoption of CECL, the provision for credit losses-loans charged to
operating expense requires us to estimate all expected credit losses over the
remaining life of our loan portfolio. Other factors which, in management's
judgment, deserve current recognition in estimating expected credit losses
include growth and composition of the loan portfolio, review of specific problem
loans, the relationship of the allowance for credit losses to outstanding loans,
adverse situations that may affect our borrowers' ability to repay, the
estimated value of any underlying collateral and current economic conditions
that may affect our borrowers' ability to pay.
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Table of Contents Non-Interest Income Our non-interest income is composed of several components, some of which vary significantly between quarterly and annual periods. The following is a summary of our non-interest income for the three months endedMarch 31, 2023 and 2022 (in thousands): Three Months Ended March 31, $ Increase % Increase 2023 2022 (Decrease) (Decrease) Service charges on deposit accounts$ 1,868 $ 1,719 $ 149 8.67 % Brokerage income 1,652 1,739 (87 ) (5.00 )
Debit and credit card interchange income 1,972 1,794
178 9.92
Other fees and commissions 337 308 29 9.42
Income on BOLI and annuity contracts 442 335 107 31.94
Gain on sale of loans 730 2,214 (1,484 ) (67.03 )
Mortgage servicing income 3 - 3 100.00
Gain (loss) on sale of fixed assets (42 ) 28 (70 ) (250.00 )
Gain (loss) on sale of other assets (1 ) 8 (9 ) (112.50 )
Other income (expense) 42 (10 ) 52 520.00
Total non-interest income $ 7,003 $ 8,135 $ (1,132 ) (13.92 %)
The decrease in non-interest income for the three months ended March 31,
2023 when compared to the comparable periods in 2022 is primarily attributable
to a decrease in gain on sale of loans and a loss on the sale of fixed assets,
partially offset by an increase in service charges on deposit accounts, an
increase in debit and credit card interchange income, and an increase in income
on BOLI and annuity contracts.
The decrease in gain on sale of loans for the three months ended March 31, 2023
was due to the higher interest rate environment which contributed to weakened
demand for purchase money mortgage loans and refinancing transactions. The
volume of mortgage loans originated for the three months ended March 31,
2023 was $20,826,000 compared to $53,117,000 for the three months ended March
31, 2022 . The mortgage industry expects volume to remain lower during 2023. In
anticipation of the slowing of mortgage origination volume due to the
higher rate environment, the Company began to retain servicing rights on some of
the loans it originates during the first quarter of 2022. We expect Encompass to
contribute additional income through gain on sale of loans and operating fees
paid to the Bank which should increase as the volume of mortgages made by
Encompass increases.
The loss on sale of fixed assets in the first quarter of 2023 was attributable to the sale of a company vehicle.
The increase in service charges on deposit accounts for the three months ended
The increase in debit and credit card interchange income for the three months endedMarch 31, 2023 was due to an increase in the number and volume of debit and credit card holders and transactions.
The increase in income on BOLI and annuity contracts was attributable to the purchase of an additional policy.
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Table of Contents Non-Interest Expense Non-interest expense consists primarily of employee costs, occupancy expenses, furniture and equipment expenses, advertising and public relations expenses, data processing expenses, director's fees, audit, legal and consulting fees, and other operating expenses. The following is a summary of our non-interest expense for the three months endedMarch 31, 2023 and 2022 (in thousands): Three Months Ended March 31, $ Increase % Increase 2023 2022 (Decrease) (Decrease) Salaries and employee benefits$ 15,017 $ 14,396 $ 621 4.31 % Occupancy expenses, net 1,414 1,348 66 4.90 Advertising & public relations expense 768 659 109 16.54 Furniture and equipment expense 830 856 (26 ) (3.04 ) Data processing expense 2,212 1,757 455 25.90 Directors' fees 144 153 (9 ) (5.88 ) Audit, legal & consulting expenses 267 227 40 17.62 Other operating expenses 3,170 2,833 337 11.90 Total non-interest expense$ 23,822 $ 22,229 $ 1,593 7.17 %
The increase in non-interest expense for the three months ended
Salaries and employee benefits increased for the three months endedMarch 31, 2023 compared to the comparable period in 2022 primarily due to an increase in the number of employees necessary to support the Company's growth in operations and branch count as well as an increase in recruiting costs
The increase in occupancy expense for the three months ended
Data processing expense increased for the three months endedMarch 31, 2023 compared to the comparable period in 2022 primarily due to an increase in computer maintenance, computer license expense, and call center expense. The computer maintenance and license expenses included movement of in-house systems to cloud servers, additional investments in digital banking solutions, and an increase in information security expenses. The Company anticipates that data processing expenses will continue to increase as the Company's operations grow and the Company places additional emphasis on the acceleration of digital product offerings. Advertising and public relations expense increased for the three months endedMarch 31, 2023 due to an increase in customer acquisition costs as well as an overall increase in the cost of marketing materials. The increase in other operating expenses is primarily due to an increase inFDIC assessment costs due to the Bank's growth in 2022, as well as the purchase of new products for customers and the conversion of several account types. The Bank expects ourFDIC assessment cost to increase during the remainder of 2023 due to the recent bank failures. The efficiency ratio is a common and comparable KPI used in the banking industry. The Company uses this metric to monitor how effective management is at using our internal resources. It is calculated by dividing our non-interest expense by our net interest income plus non-interest income. Our efficiency ratio for the three months endedMarch 31, 2023 and 2022 was 56.14% and 56.29%, respectively. The improvement in the efficiency ratio in the first three months of 2023 is due to the increase in net interest income offsetting the impact of the higher non-interest expense. Income Taxes The Company's income tax expense was$4,071,000 for the three months endedMarch 31, 2023 , an increase of$900,000 over the comparable period in 2022. The percentage of income tax expense to net income before taxes was 22.71% and 21.80% for the three months endedMarch 31, 2023 and 2022, respectively. Our effective tax rate represents our blended federal and state rate of 26.14% affected by the impact of anticipated favorable permanent differences between our book and taxable income such as bank-owned life insurance, income earned on tax-exempt securities and loans, and certain federal and state tax credits. 43
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Table of Contents Financial Condition Balance Sheet Summary The Company's total assets increased$191,108,000 , or 4.46%, to$4,476,758,000 atMarch 31, 2023 from$4,285,650,000 atDecember 31, 2022 . Loans, net of allowance for credit losses, totaled$3,227,138,000 atMarch 31, 2023 , a 3.64% increase compared to$3,113,796,000 atDecember 31, 2022 . In 2022, management targeted owner-occupied commercial real estate, residential real estate lending and small business lending as areas of focus. In 2023, management is targeting these same areas as areas of focus. Total liabilities increased by 4.15% to$4,087,918,000 atMarch 31, 2023 compared to$3,925,198,000 atDecember 31, 2022 . Loans The following details the loans of the Company atMarch 31, 2023 andDecember 31, 2022 : March 31, 2023 December 31, 2022 Balance $ Balance % Increase Increase Balance % of Portfolio Balance % of Portfolio (Decrease) (Decrease) Residential 1-4 family real estate$ 875,547 26.67 %$ 854,970 26.99 %$ 20,577 2.41 % Commercial and multi-family real estate 1,101,151 33.55 1,064,297 33.60 36,854 3.46 Construction, land development and farmland 932,107 28.40 879,528 27.76 52,579 5.98 Commercial, industrial and agricultural 125,115 3.81 124,603 3.93 512 0.41 1-4 family equity lines of credit 156,236 4.76 151,032 4.77 5,204 3.45 Consumer and other 92,225 2.81 93,332 2.95 (1,107 ) (1.19 ) Total loans before net deferred loan
fees$ 3,282,381 100.00 %$ 3,167,762 100.00 %$ 114,619 3.62 % Overall, the Bank's loan demand and related new loan production has continued to be strong, though loan demand slightly slowed in the second half of 2022. The net loan growth of 3.64% fromDecember 31, 2022 reflects the continued emphasis of management on growing the loan portfolio. Contributing to the Company's loan growth in the first quarter were the continued population growth and corporate relocations in the Bank's primary market areas, the opening of new branches, and increased marketing efforts. The increase in residential 1-4 family real estate loans is attributable to the Bank successfully growing its residential portfolio through enhanced marketing efforts directed at homebuilders in the Company's market areas, and the increase the Company is seeing in the investor sector of 1-4 family. The increase in construction, land development and farmland loans, commercial and multi-family real estate, and 1-4 family equity lines of credit is primarily attributable to continued economic growth and expansion in the Bank's primary market areas. Although the Company has continued to grow loans throughMarch 2023 , the Company expects to experience a decline in demand for loans as interest rates continue to rise, particularly if the economy worsens including as a result of persistent high inflation and the recessionary environment some are predicting for 2023. Because construction loans remain a meaningful portion of our portfolio, the Bank has implemented an additional layer of monitoring as it seeks to avoid advancing funds that exceed the present value of the collateral securing the loan. The responsibility for monitoring percentage of completion and distribution of funds tied to these completion percentages is now monitored and administered by aCredit Administration Department independent of the lending function. The Bank continues to seek to diversify its real estate portfolio as it seeks to lessen concentrations in any one type of loan. Allowance for Credit Losses OnJanuary 1, 2022 , we adopted FASB ASU 2016-13, which introduces the current expected credit losses (CECL) methodology and requires us to estimate all expected credit losses over the remaining life of our loan portfolio. The provision for credit losses for loans represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation, is adequate to provide coverage for all expected credit losses on loans. The allowance for credit losses for loans represents the portion of the loan's amortized cost basis that we do not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses for loans is based on the loan's amortized cost basis, excluding accrued interest receivables, as we promptly charge off accrued interest receivable determined to be uncollectible. We determine the appropriateness of the allowance through quarterly discounted cash flow modeling of the loan portfolio which considers lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. In future quarters, we may update information and forecasts that may cause significant changes in the estimate in those future quarters. Our allowance for credit losses atMarch 31, 2023 reflects an amount deemed appropriate to adequately cover all expected future losses as of the date the allowance is determined based on our allowance for credit losses assessment methodology. Provision for credit losses in 2023 resulted in an increase of the allowance for credit losses (net of charge-offs and recoveries) to$41,446,000 atMarch 31, 2023 from$39,813,000 atDecember 31, 2022 . The allowance for credit losses was 1.27% of total loans outstanding atMarch 31, 2023 compared to 1.26% atDecember 31, 2022 . The internally classified loans as a percentage of the allowance for credit losses were 14.3% and 16.0% respectively, atMarch 31, 2023 andDecember 31, 2022 . 44
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The following schedule provides an allocation of the allowance for credit losses on loans by portfolio segment for the Company as ofMarch 31, 2023 andDecember 31, 2022 : In Thousands, Except Percentages Ratio of Percent of Allowance Amount of Loans in Each Allocated to Allowance Category to Loans in Each Allocated Total Loans Total Loans CategoryMarch 31, 2023 Residential 1-4 family real estate $ 7,957 26.7 %$ 875,547 0.91 % Commercial and multi-family real estate 15,686 33.5 1,101,151 1.42 Construction, land development and farmland 13,797 28.4 932,107 1.48 Commercial, industrial and agricultural 1,555 3.8 125,115 1.24 1-4 family equity lines of credit 1,224 4.8 156,236 0.78 Consumer and other 1,227 2.8 92,225 1.33 Total $ 41,446 100.0 % 3,282,381 1.26 Net deferred loan fees
(13,797 )
$ 3,268,584 1.27 %December 31, 2022 Residential 1-4 family real estate $ 7,310 27.0 %$ 854,970 0.86 % Commercial and multi-family real estate 15,299 33.6 1,064,297 1.44 Construction, land development and farmland 13,305 27.8 879,528 1.51 Commercial, industrial and agricultural 1,437 3.9 124,603 1.15 1-4 family equity lines of credit 1,170 4.8 151,032 0.77 Consumer and other 1,292 2.9 93,332 1.38 Total $ 39,813 100.0 % 3,167,762 1.26 Net deferred loan fees (14,153 )$ 3,153,609 1.26 % The allowance for credit losses is an amount that management believes will be adequate to absorb expected losses on existing loans that may become uncollectible. The allowance for credit losses as a percentage of total loans outstanding atMarch 31, 2023 , net of deferred fees, increased from the year endedDecember 31, 2022 . This increase was due to an increase in provision expense due to loan growth. We measure expected credit losses over the life of each loan utilizing two models. For residential 1-4 family, commercial and multi-family real estate, construction and land development, commercial and industrial, 1-4 family equity lines of credit, municipal, and certain other loan types, we use discounted cash flow models which measure probability of default and loss given default. For farmland, agricultural, credit cards, auto, and other consumer loans we use the remaining life method to estimate credit losses. The measurement of expected credit losses for loan segments utilizing discounted cash flow is impacted by certain macroeconomic variables. Models are adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. In estimating expected credit losses as ofMarch 31, 2023 , we utilized the Moody's AnalyticsMarch 2023 Next-Cycle Recession Scenario (the "March NC-R Scenario") to forecast the macroeconomic variables used in our models. The March NC-R Scenario was based on the review of a variety of surveys of forecasts of theU.S. economy. The March NC-R Scenario projections included, among other things, (i)U.S. Gross Domestic Product ("GDP") annualized quarterly growth rates in the range of approximately (1.13)% to 2.19% during the next 12 months and (1.51)% to 1.86% in the following 12 months; (ii) aU.S. unemployment rate in the range of approximately 3.68% to 5.58% during the next 12 months and 5.00% to 5.99% in the following 12 months; and (iii) a Home Price Index annualized quarterly growth rates in the range of approximately (5.93)% to 0.46% during the next 12 months and (7.51)% to (3.73)% in the following 12 months. As a result of these changes in the macroeconomic factors, we increased our historical modeled loss rate during the first quarter of 2023. We adjust model results using qualitative factor ("Q-factor") adjustments. Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of major risk to improvement and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. We increased our historical modeled loss rates during the first quarter 2023 due to changes in our macroeconomic forecasts, which are discussed above, and reduced our qualitative adjustments. The downward adjustment of our qualitative factor relating to changes in international, national, regional, and local conditions was due to theMarch 31, 2023 macroeconomic forecast capturing the potential for a recession, that was not captured in our previous forecasts.Wilson Bank's charge-off policy for collateral dependent loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when a determination is made that the loan is uncollectible. Net charge-offs increased to$329,000 for the three months endedMarch 31, 2023 , compared to net charge-offs of$182,000 for the same period in 2022 . The ratio of net charge-offs to average total outstanding loans was 0.01% for the three months endedMarch 31, 2023 and 2022 . Overall, the Bank experienced minimal charge-offs during three months endedMarch 31, 2023 . It is expected that charge-offs will be modest for 2023; however, a deterioration in local economic conditions may negatively impact charge-offs in the future. 45
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We also maintain an allowance for credit losses on off-balance sheet exposures, which decreased$1,278,000 fromDecember 31, 2022 to$4,858,000 atMarch 31, 2023 as a result of a decrease in our off-balance sheet commitments and an increase in our unconditionally cancellable commitments. The level of the allowance and the amount of the provision for credit losses involve evaluation of uncertainties and matters of judgment. The Company maintains an allowance for credit losses which management believes is adequate to absorb losses in the loan portfolio. A formal calculation is prepared quarterly by the Company's Chief Financial Officer and provided to the Board of Directors to determine the adequacy of the allowance for credit losses. The calculation includes an evaluation of historical default and loss experience, current and forecasted economic conditions, an evaluation of qualitative factors, industry and peer bank loan quality indicators and other factors. See the discussion above under "Application of Critical Accounting Policies and Accounting Estimates" for more information. Management believes the allowance for credit losses atMarch 31, 2023 to be adequate, but if forecasted economic conditions do not meet management's current expectations, the allowance for credit losses may require an increase through additional provision for credit loss expense which would negatively impact earnings.
For a detailed discussion regarding our allowance for credit losses, see "Provision for Credit Losses and Allowance for Credit Losses" above.
Securities Securities increased$11,265,000 , or 1.37%, to$834,077,000 atMarch 31, 2023 from$822,812,000 atDecember 31, 2022 , primarily due to an increase of the fair value of our securities caused by an improvement in the underlying market conditions. The average yield, excluding tax equivalent adjustment, of the securities portfolio atMarch 31, 2023 was 2.15% with a weighted average life of 8.58 years, as compared to an average yield of 2.15% and a weighted average life of 8.25 years atDecember 31, 2022 . The weighted average lives on mortgage-backed securities reflect the repayment rate used for book value calculations. Premises and Equipment Premises and equipment decreased$262,000, or 0.42%, fromDecember 31, 2022 toMarch 31, 2023 . The primary reason for the decrease was due to current year depreciation of$1,117,000 , offset by the purchase of equipment and furniture and fixtures for two branches as well as an increase in computer software.
Deposits and Other Liabilities
The increase in deposits in the first three months of 2023, which is described below, outpaced loan growth during the period, causing interest bearing deposits with other financial institutions to increase. Interest bearing deposits with other financial institutions increased to$124,867,000 atMarch 31, 2023 from$78,948,000 atDecember 31, 2022 . Included in deposits atMarch 31, 2023 were$74,272,000 in brokered deposits, compared to$35,024,000 atDecember 31, 2022 . The increase in brokered deposits fromDecember 31, 2022 toMarch 31, 2023 was the result of management's decision to increase liquidity to fund anticipated loan growth during the remainder of 2023.
The average balance and weighted average interest rate paid for deposit
types for the quarters ended
March 31, 2023 December 31, 2022 March 31, 2022
Average Average Average
Balance Balance Balance
In Average In Average In Average
Thousands Rate Thousands Rate Thousands Rate
Non-interest bearing
deposits $ 402,861 - % $ 431,935 - % $ 426,676 - %
Interest-bearing
deposits:
Negotiable order of
withdrawal accounts 1,029,312 0.50 1,081,111 0.40 1,056,065 0.18
Money market demand
accounts 1,213,698 1.45 1,252,302 1.06 1,219,000 0.11
Time deposits 945,595 3.00 679,526 1.62 581,088 0.85
Other savings 332,515 1.06 342,818 0.70 309,205 0.13
Total interest-bearing
deposits 3,521,120 1.55 % 3,355,757 0.93 % 3,165,358 0.27 %
Total deposits $ 3,923,981 1.39 % $ 3,787,692 0.82 % $ 3,592,034 0.24 %
At March 31, 2023 and December 31, 2022 , we estimate that we had approximately
$1.2 billion in uninsured deposits, which are the portion of deposit amounts
that exceed the FDIC insurance limit.
Principal maturities of certificates of deposit and individual retirement
accounts at
In Thousands
Maturity
2023 $ 483,594
2024 420,505
2025 120,657
2026 14,833
2027 22,869
Thereafter 3,981
$ 1,066,439
The increase in other liabilities since December 31, 2022 was composed of a
$156,638,000 , or 4.02% increase in total deposits and a $6,082,000 , or 18.72%,
increase in accrued interest and other liabilities. The increase in total
deposits since December 31, 2022 was primarily attributable to growth in market
share which resulted in the opening of new deposit accounts, a targeted effort
to increase customer time deposits and the increase in brokered deposits
mentioned above. The increase in accrued interest and other liabilities
since December 31, 2022 was attributable to an increase in reserve for taxes and
an increase in employee bonus payable.
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Table of Contents Non-Performing Assets Non-performing loans, which included nonaccrual loans and loans 90 days past due, atMarch 31, 2023 totaled$1,063,000 , an increase from$869,000 atDecember 31, 2022 . The increase in non-performing loans during the three months endedMarch 31, 2023 of$194,000 is due primarily to the addition of one construction loan relationship and the addition of overdrafts that were not 90 days past due atDecember 31, 2022 , partially offset by two residential 1-4 family real estate loan relationships that are no longer 90 days past due. Management believes that it is probable that it will incur losses on its non-performing loans but believes that these losses should not exceed the amount in the allowance for credit losses already allocated to these loans, unless there is unanticipated deterioration of local real estate values. The net non-performing asset ratio (NPA) is used as a measure of the overall quality of the Company's assets. Our NPA ratio is calculated by taking the total of our loans greater than 90 days past due and accruing interest, nonaccrual loans and other real estate owned and dividing that sum by our total assets outstanding. Our NPA ratio for the periods endedMarch 31, 2023 andDecember 31 , 2022was 0.02% and 0.02%, respectively. Other loans may be classified as collateral dependent when the current net worth and financial capacity of the borrower or of the collateral pledged, if any, is viewed as inadequate and it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. 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. Collateral dependent loans are measured at the fair value of the collateral less estimated selling costs. If the measure of the collateral dependent loan is less than the recorded investment in the loan, the Company shall recognize impairment by creating a valuation allowance with a corresponding charge to the provision for credit losses or by adjusting an existing valuation allowance for the collateral dependent loan with a corresponding charge or credit to the provision for credit losses. AtMarch 31, 2023 the Company had a recorded investment in collateral dependent loans totaling$4,115,000 an increase from a recorded investment in collateral dependent loans totaling$638,000 atDecember 31, 2022 . The increase during the three months endedMarch 31, 2023 as compared toDecember 31, 2022 is primarily due to the addition of one 1-4 family real estate relationship and the addition of two commercial real estate relationships. As ofMarch 31, 2023 andDecember 31, 2022 , no valuation allowance was recorded on collateral dependent loans. The allowance for credit losses related to collateral dependent loans was measured based upon the estimated fair value of related collateral. AtMarch 31, 2023 , our internally classified loans decreased$450,000 , or 7.06%, to$5,926,000 from$6,376,000 atDecember 31, 2022 . Classified loan balances have remained relatively consistent due to the stable markets in which we operate; however, if short-term rates continue to rise and economic conditions worsen, our classified loan balances could increase. 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. 47
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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, like those we built up in response to the COVID-19 pandemic and the uncertain economic environment in the first quarter of 2023, 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, due from banks, interest bearing deposits in other financial institutions and unpledged investment securities that will mature within one year. The Company's primary source of liquidity is a stable core deposit base. In addition, Federal funds purchased, FHLB advances, and brokered deposits provide a secondary source. These sources of liquidity are generally short-term in nature and are used to fund asset growth and meet other short-term liquidity needs. Liquidity needs can also be met from loan payments and investment security sales or maturities. AtMarch 31, 2023 , the Company's liquid assets totaled$579.8 million an increase from$522.7 million atDecember 31, 2022 , though a portion of these liquid assets include$811.1 million of available-for-sale securities that are in an unrealized loss position totaling$127.7 million atMarch 31, 2023 . If the Company was required to sell any of these securities, including to meet liquidity needs, while they are in an unrealized loss position the Company would be required to recognize the loss on those securities through the income statement when they are sold. Recognition of these losses would negatively impact the Bank's and the Company's regulatory capital levels. Additionally, as ofMarch 31, 2023 , the Company had available approximately$127.4 million in unused federal funds lines of credit with regional banks and, subject to certain restrictions and collateral requirements, approximately$552.2 million of borrowing capacity with theFederal Home Loan Bank of Cincinnati to meet short term funding needs. The Company maintains a formal asset and liability management process in an effort to quantify, monitor and control interest rate risk and to assist management as management seeks to maintain stability in 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 and competitive market conditions. 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 also uses simulation modeling to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. The Company's Asset Liability Committee meets quarterly to analyze the interest rate shock simulation. The interest rate shock 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. Based on the Company's IRR simulation, the Company had a neutral interest-rate risk position as ofMarch 31, 2023 . The Company's net interest margin and earnings could be negatively impacted if short-term rates continue to rise and competitive pressures in the Company's market areas force the Company to increase deposit rates faster than it is able to increase yields on loans. As discussed elsewhere herein, the Bank anticipates that its net interest margin is likely to contract during the remainder of 2023 because of such competitive pressures and the rising rate environment we are currently experiencing and expect to continue in the near term and costs of increased brokered deposits. 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 EVE 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 the Bank's net interest income and EVE as ofMarch 31, 2023 , assuming an immediate shift in interest rates: % Change from Base Case for
Immediate Parallel Changes in Rates
-300 BP -200 BP -100 BP +100 BP +200 BP +300 BP
Net interest income (7.57 )% (3.79 )% (1.79 )% (1.68 )% (3.23 )% (4.87 )%
EVE (15.59 )% (5.58 )% (1.19 )% (2.27 )% (4.86 )% (8.12 )%
While an instantaneous and severe shift in interest rates was used in this
analysis to provide an estimate of exposure under these scenarios, we believe
that a gradual shift in interest rates would have a more modest impact. Further,
the earnings simulation model does not take into account factors such as future
balance sheet growth, changes in product mix, changes in yield curve
relationships, and changing product spreads that could mitigate any potential
adverse impact of changes in interest rates. Moreover, since EVE measures the
discounted present value of cash flows over the estimated lives of instruments,
the change in EVE does not directly correlate to the degree that earnings would
be impacted over a shorter time horizon (i.e., the current year). Further, EVE
does not take into account factors such as future balance sheet growth, changes
in product mix, changes in yield curve relationships, hedging strategies that we
may institute, and changing product spreads that could mitigate any potential
adverse impact of changes in interest rates.
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.
The Company's securities portfolio consists of earning assets that provide interest income. 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, or the need to fund loan demand or other liquidity needs. AtMarch 31, 2023 , securities totaling approximately$41,211,000 mature or will be subject to rate adjustments within the next twelve months. A secondary source of liquidity is the Company's loan portfolio. AtMarch 31, 2023 , loans totaling appro ximately$1,030,646,000 either will become due or will be subject to rate adjustments within twelve months from that date. As for liabilities, atMarch 31, 2023 , certificates of deposit of$250,000 or greater totaling approximately$297,203,000 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 does not anticipate that there will be significant withdrawals from these accounts in the future.
Management believes that with present maturities, borrowing capacity with the
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Off Balance Sheet Arrangements
AtMarch 31, 2023 , we had unfunded loan commitments outstanding of$1,166,887,000 and outstanding standby letters of credit of$111,479,000 , compared to$1,217,963,000 and$118,064,000 , respectively, atDecember 31, 2022 . 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 historically 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
AtMarch 31, 2023 , total stockholders' equity was$388,840,000 , or 8.69% of total assets, which compares with$360,452,000 , or 8.41% of total assets, atDecember 31, 2022 . The dollar increase in stockholders' equity during the three months endedMarch 31, 2023 is the result of the net effect of a$16,271,000 unrealized gain on investment securities (described elsewhere in this report) net of applicable income tax expense of$5,758,000 , cash dividends declared of$8,605,000 , net of$6,566,000 reinvested under the Company's dividend reinvestment plan,$227,000 related to stock option compensation, the Company's net earnings of$13,841,000 and proceeds from the issuance of common stock related to exercise of stock options of$73,000 . Also included was$15,000 of net earnings related to non-controlling interest. 49
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