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Note 2 - Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2020

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

(2)

Loans and Allowance for Loan Losses

The classification of loans at December 31, 2020 and 2019 is as follows:

	*In Thousands*
	*2020*			*2019*
Mortgage loans on real estate:
Residential 1-4 family	$	535,994			511,250
Multifamily		111,646			97,104
Commercial		837,766			793,379
Construction		488,626			425,185
Farmland		15,429			19,268
Second mortgages		8,433			10,760
Equity lines of credit		78,889			72,379
Total mortgage loans on real estate		2,076,783			1,929,325
Commercial loans		172,811			98,265
Agricultural loans		1,206			1,569
Consumer installment loans:
Personal		66,193			50,532
Credit cards		4,324			4,302
Total consumer installment loans		70,517			54,834
Other loans		9,283			9,049
		2,330,600			2,093,042
Net deferred loan fees		(9,295	)		(7,141	)
Total loans		2,321,305			2,085,901
Less: Allowance for loan losses		(38,539	)		(28,726	)
Loans, net	$	2,282,766			2,057,175

At December 31, 2020, variable rate and fixed rate loans totaled $1,777,303,000 and $553,297,000, respectively. At December 31, 2019, variable rate and fixed rate loans totaled $1,640,991,000 and $452,051,000, respectively.

Risk characteristics relevant to each portfolio segment are as follows:

Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

1-4 family residential real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value (LTV), minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment.

1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans, as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans.

Multi-family and commercial real estate: Multi-family and commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans (which are discussed below), in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property.

Commercial and industrial: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Also included in this category are PPP loans guaranteed by the SBA, which totaled $62.4 million at December 31, 2020. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporates a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV on secured consumer loans, minimum credit scores, and maximum debt to income. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle or other large personal items, or for consolidating debt. These loans may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

The following tables present the Company’s nonaccrual loans, credit quality indicators and past due loans as of December 31, 2020 and 2019.

Loans on Nonaccrual Status

	In Thousands
	2020		2019
Residential 1-4 family	$	1,022		949
Multifamily		—		—
Commercial real estate		311		1,661
Construction		—		—
Farmland		—		—
Second mortgages		—		—
Equity lines of credit		—		—
Commercial		—		—
Agricultural, installment and other		—		—
Total	$	1,333		2,610

At December 31, 2020, the Company had two impaired loans totaling $1,333,000 which were on non-accruing interest status. At December 31, 2019, the Company had three impaired loans totaling $2,610,000 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.

The impact on net interest income for these loans was not material to the Company’s results of operations for the years ended December 31, 2020, 2019 and 2018.

Potential problem loans, which include nonperforming loans, amounted to approximately $8.2 million at December 31, 2020 compared to $10.7 million at December 31, 2019. 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 Company’s primary federal regulator, for loans classified as special mention, substandard, or doubtful, excluding the impact of nonperforming loans.

The following table 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 Company’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 Company will sustain some loss if the deficiencies are not corrected.


	•	Doubtful loans have all the characteristics of substandard loans with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Company considers all doubtful loans to be impaired and places the loans on nonaccrual status.

Credit Quality Indicators

The following table presents loan balances classified within each risk rating category by primary loan type as of December 31, 2020 and December 31, 2019.

	*In Thousands*
																	*Agricultural,*
	*Residential 1-4*				*Commercial*						*Second*		*Equity Lines*				*Installment and*
	*Family*		*Multifamily*		*Real Estate*		*Construction*		*Farmland*		*Mortgages*		*of Credit*		*Commercial*		*Other*		*Total*
Credit Risk Profile by Internally Assigned Grade
December 31, 2020
Pass	$	529,546		111,646		837,028		488,571		15,301		8,148		78,565		172,779		80,770		2,322,354
Special mention		2,745		—		149		27		79		169		314		—		156		3,639
Substandard		3,703		—		589		28		49		116		10		32		80		4,607
Total	$	535,994		111,646		837,766		488,626		15,429		8,433		78,889		172,811		81,006		2,330,600
December 31, 2019
Pass	$	503,861		97,104		791,610		424,517		19,106		10,458		72,237		98,243		65,255		2,082,391
Special mention		2,923		—		—		635		103		174		—		—		101		3,936
Substandard		4,466		—		1,769		33		59		128		142		22		96		6,715
Total	$	511,250		97,104		793,379		425,185		19,268		10,760		72,379		98,265		65,452		2,093,042

Age Analysis of Past Due Loans

In Thousands

30-59 Days Past Due

60-89 Days Past Due

Nonaccrual and Greater Than 90 Days

Total Nonaccrual and Past Due

Current

Total Loans

Recorded Investment Greater Than 90 Days and Accruing

December 31, 2020

Residential 1-4 family
$ 2,634 511 1,818 4,963 531,031 535,994 $ 796

Multifamily — — — — 111,646 111,646 —

Commercial real estate
— — 460 460 837,306 837,766 149

Construction
768 — 44 812 487,814 488,626 44

Farmland — — — — 15,429 15,429 —

Second mortgages
265 — — 265 8,168 8,433 —

Equity lines of credit 31 302 — 333 78,556 78,889 —

Commercial
114 104 — 218 172,593 172,811 —

Agricultural, installment and other
363 81 60 504 80,502 81,006 60

Total
$ 4,175 998 2,382 7,555 2,323,045 2,330,600 $ 1,049

December 31, 2019

Residential 1-4 family
$ 4,760 799 2,336 7,895 503,355 511,250 $ 1,387

Multifamily — — — — 97,104 97,104 —

Commercial real estate
500 — 1,661 2,161 791,218 793,379 —

Construction
1,535 147 594 2,276 422,909 425,185 594

Farmland 57 — 8 65 19,203 19,268 8

Second mortgages — — 100 100 10,660 10,760 100

Equity lines of credit 143 — 372 515 71,864 72,379 372

Commercial
71 30 — 101 98,164 98,265 —

Agricultural, installment and other 517 116 46 679 64,773 65,452 46

Total
$ 7,583 1,092 5,117 13,792 2,079,250 2,093,042 $ 2,507

Transactions in the allowance for loan losses for the years ended December 31, 2020 and 2019 are summarized as follows:

In Thousands

Agricultural,

Residential 1-4

Commercial

Second

Equity Lines

Installment and

Family

Multifamily

Real Estate

Construction

Farmland

Mortgages

of Credit

Commercial

Other

Total

December 31, 2020

Allowance for loan losses:

Beginning balance $ 7,144 1,117 11,114 5,997 187 123 889 1,044 1,111 28,726

Provision
920 424 5,388 1,766 (33 ) (37 ) 74 343 851 9,696

Charge-offs
— — — — — — (7 ) (9 ) (898 ) (914 )

Recoveries
34 — 300 173 — 19 41 — 464 1,031

Ending balance $ 8,098 1,541 16,802 7,936 154 105 997 1,378 1,528 38,539

Ending balance individually evaluated for impairment
$ 594 — 148 — — — — — — 742

Ending balance collectively evaluated for impairment
$ 7,504 1,541 16,654 7,936 154 105 997 1,378 1,528 37,797

Loans:

Ending balance
$ 535,994 111,646 837,766 488,626 15,429 8,433 78,889 172,811 81,006 2,330,600

Ending balance individually evaluated for impairment
$ 2,399 — 970 — — — — — — 3,369

Ending balance collectively evaluated for impairment
$ 533,595 111,646 836,796 488,626 15,429 8,433 78,889 172,811 81,006 2,327,231

In Thousands

Agricultural,

Residential 1-4

Commercial

Second

Equity Lines

Installment and

Family

Multifamily

Real Estate

Construction

Farmland

Mortgages

of Credit

Commercial

Other

Total

December 31, 2019

Allowance for loan losses:

Beginning balance
$ 6,297 1,481 9,753 7,084 221 118 731 622 867 27,174

Provision
838 (364 ) 1,484 (1,510 ) (34 ) 5 158 422 1,041 2,040

Charge-offs
(15 ) — (173 ) — — — — (15 ) (1,160 ) (1,363 )

Recoveries
24 — 50 423 — — — 15 363 875

Ending balance
$ 7,144 1,117 11,114 5,997 187 123 889 1,044 1,111 28,726

Ending balance individually evaluated for impairment
$ 795 — 341 — — — — — — 1,136

Ending balance collectively evaluated for impairment
$ 6,349 1,117 10,773 5,997 187 123 889 1,044 1,111 27,590

Loans:

Ending balance
$ 511,250 97,104 793,379 425,185 19,268 10,760 72,379 98,265 65,452 2,093,042

Ending balance individually evaluated for impairment
$ 2,569 — 2,471 — — — — — — 5,040

Ending balance collectively evaluated for impairment
$ 508,681 97,104 790,908 425,185 19,268 10,760 72,379 98,265 65,452 2,088,002

The following tables present the Company’s impaired loans (including loans on nonaccrual status and loans past due 90 days or more) at December 31, 2020 and 2019:

In Thousands

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

December 31, 2020

With no related allowance recorded:

Residential 1-4 family
$ 1,162 1,507 — 395 26

Multifamily
— — — — —

Commercial real estate
311 311 — 311 —

Construction
— — — — —

Farmland
— — — — —

Second mortgages
— — — — —

Equity lines of credit
— — — — —

Commercial
— — — — —

Agricultural, installment and other
— — — — —

$ 1,473 1,818 — 706 26

With allowance recorded:

Residential 1-4 family
$ 1,242 1,240 594 1,273 66

Multifamily
— — — — —

Commercial real estate
662 659 148 676 22

Construction
— — — — —

Farmland
— — — — —

Second mortgages
— — — — —

Equity lines of credit
— — — — —

Commercial
— — — — —

Agricultural, installment and other
— — — — —

$ 1,904 1,899 742 1,949 88

Total:

Residential 1-4 family
$ 2,404 2,747 594 1,668 92

Multifamily
— — — — —

Commercial real estate
973 970 148 987 22

Construction
— — — — —

Farmland
— — — — —

Second mortgages
— — — — —

Equity lines of credit
— — — — —

Commercial
— — — — —

Agricultural, installment and other
— — — — —

$ 3,377 3,717 742 2,655 114

In Thousands

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

December 31, 2019

With no related allowance recorded:

Residential 1-4 family
$ 1,090 1,464 — 1,090 99

Multifamily — — — — —

Commercial real estate
951 1,124 — 910 17

Construction
— — — — —

Farmland — — — — —

Second mortgages
— — — — —

Equity lines of credit — — — — —

Commercial
— — — — —

Agricultural, installment and other
— — — — —

$ 2,041 2,588 — 2,000 116

With allowance recorded:

Residential 1-4 family
$ 1,489 1,480 795 1,590 83

Multifamily — — — — —

Commercial real estate
1,522 1,520 341 2,015 17

Construction
— — — — —

Farmland — — — — —

Second mortgages
— — — — —

Equity lines of credit — — — — —

Commercial
— — — — —

Agricultural, installment and other
— — — — —

$ 3,011 3,000 1,136 3,605 100

Total:

Residential 1-4 family $ 2,579 2,944 795 2,680 182

Multifamily — — — — —

Commercial real estate
2,473 2,644 341 2,925 34

Construction
— — — — —

Farmland — — — — —

Second mortgages — — — — —

Equity lines of credit — — — — —

Commercial
— — — — —

Agricultural, installment and other — — — — —

$ 5,052 5,588 1,136 5,605 216

The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic or other concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. The concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

The following table summarizes the carrying balances of TDRs at December 31, 2020 and December 31, 2019 (dollars in thousands):

2020

2019

Performing TDRs
$ 2,147 3,080

Nonperforming TDRs
529 1,467

Total TDRs
$ 2,676 4,547

The following table outlines the amount of each TDR categorized by loan classification for the years ended December 31, 2020 and 2019 (dollars in thousands):

December 31, 2020

December 31, 2019

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 $ 1,338 $ 619

Multifamily — — — — — —

Commercial real estate
1 111 132 4 2,677 2,399

Construction
— — — — — —

Farmland — — — — — —

Second mortgages — — — — — —

Equity lines of credit — — — — — —

Commercial
— — — — — —

Agricultural, installment and other
— — — — — —

Total
1 $ 111 $ 132 5 $ 4,015 $ 3,018

As of December 31, 2020 and 2019 the Company did not have any loan previously classified as a TDR default within twelve months of the restructuring. A default is defined as an occurrence which violates the terms of the receivable’s contract.

In response to the COVID-19 pandemic and its economic impact to the Bank’s customers, the Bank proactively began providing relief to its customers in the middle of March 2020 through a 90-day interest-only payment option or a full 90-day payment deferral option. Following the passage of the CARES Act, the Bank expanded this program to provide a six-month interest only payment option in an effort to provide flexibility to its customers as they navigate uncertainties resulting from the pandemic. Pursuant to interagency regulatory guidance and the CARES Act, the Bank may elect to not classify loans as troubled debt restructurings for which these deferrals are granted between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. As of December 31, 2020, the Bank had 13 loans, totaling $36.4 million in aggregate principal amount for which principal or both principal and interest were being deferred and not classified as TDRs. Under the applicable guidance, none of these deferrals required a troubled debt restructuring designation as of December 31, 2020.

As of December 31, 2020 the Bank had $301,000 of consumer mortgage loans in the process of foreclosure. As of December 31, 2019 the Bank did not have any consumer mortgage loans in the process of foreclosure.

The Company’s principal customers are primarily in the Middle Tennessee area with a concentration in Wilson County, Tennessee. Credit is extended to businesses and individuals and is evidenced by promissory notes. The terms and conditions of the loans including collateral vary depending upon the purpose of the credit and the borrower’s financial condition.

In the normal course of business, Wilson Bank has made loans at prevailing interest rates and terms to directors and executive officers of the Company and to their affiliates. The aggregate amount of these loans was $7,675,000 and $12,878,000 at December 31, 2020 and 2019, respectively. None of these loans were restructured, charged-off or involved more than the normal risk of collectibility or presented other unfavorable features during the three years ended December 31, 2020.

An analysis of the activity with respect to such loans to related parties is as follows:

In Thousands

December 31,

2020

2019

Balance, January 1
$ 12,878 13,019

New loans and renewals during the year
11,153 31,548

Repayments (including loans paid by renewal) during the year
(16,356 ) (31,689 )

Balance, December 31
$ 7,675 12,878

In 2020, 2019 and 2018, Wilson Bank originated mortgage loans for sale into the secondary market of $213,483,000, $160,921,000 and $129,060,000, respectively. The fees and gain on sale of these loans totaled $9,560,000, $6,802,000 and $4,639,000 in 2020, 2019 and 2018, respectively. All of these loan sales transfer servicing rights to the buyer.

In some instances, Wilson Bank sells loans that contain provisions which permit the buyer to seek recourse against Wilson Bank in certain circumstances. At December 31, 2020 and 2019, total mortgage loans sold with recourse in the secondary market aggregated $181,700,000 and $115,789,000, respectively. At December 31, 2020, Wilson Bank has not been required to repurchase a significant amount of the mortgage loans originated by Wilson Bank and sold in the secondary market. Management expects no material losses to result from these recourse provisions.