EXHIBIT 13.1
WILSON BANK HOLDING COMPANY
COMMON STOCK MARKET INFORMATION
The common stock of Wilson Bank Holding Company is not traded on an exchange nor
is there a known active trading market. The number of stockholders of record
February 1, 2004 was 1,551. Based solely on information made available to the
Company from limited numbers of buyers and sellers, the Company believes that
the following table sets forth the quarterly range of sale prices for the
Company's common stock during the years 2002 and 2003. The information set forth
below has been adjusted to reflect a 2-for-1 stock split paid by the Company on
October 30, 2003.
Stock Prices
2002 HIGH LOW
First Quarter $19.75 $19.38
Second Quarter 20.38 19.75
Third Quarter 21.13 20.38
Fourth Quarter 21.75 21.13
2003 HIGH LOW
First Quarter $22.50 $21.75
Second Quarter 23.25 22.50
Third Quarter 24.12 23.25
Fourth Quarter 27.50 24.12
-----------------
On January 1, 2002, a $.28 per share cash dividend was declared and on
July 1, 2002, a $.30 per share cash dividend was declared and paid to
shareholders of record as of those dates. On January 1, 2003, a $.30 per share
cash dividend was declared and on July 1, 2003, a $.33 per share cash dividend
was declared and paid to stockholders of record as of those dates. Future
dividends will be dependent on the Company's profitability, its capital needs,
overall financial condition, economic and regulatory consideration.
WILSON BANK HOLDING COMPANY FINANCIAL HIGHLIGHTS (UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE INFORMATION
AS OF DECEMBER 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- ------- ------- ------- -------
CONSOLIDATED
BALANCE SHEETS:
Total assets end of year $852,619 752,786 667,804 602,218 495,218
Loans, net $584,714 543,658 489,277 427,764 354,758
Securities $152,095 118,342 98,561 91,064 83,780
Deposits $770,419 679,408 602,576 543,583 447,792
Stockholders' equity $ 63,323 55,031 45,971 38,735 32,250
Years Ended December 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- ------- ------- ------- -------
CONSOLIDATED STATEMENTS
OF EARNINGS:
Interest income $44,115 45,090 47,883 42,426 35,193
Interest expense 15,217 18,215 25,633 22,860 17,457
------- ------- ------- ------- -------
Net interest income 28,898 26,875 22,250 19,566 17,736
Provision for possible loan losses 1,904 2,344 1,976 1,417 1,103
------- ------- ------- ------- -------
Net interest income after provision for
possible loan losses 26,994 24,531 20,274 18,149 16,633
Non-interest income 9,060 8,076 7,732 5,752 4,350
Non-interest expense 20,377 18,685 17,314 14,871 13,265
------- ------- ------- ------- -------
Earnings before income taxes 15,677 13,922 10,692 9,030 7,718
Income taxes 6,242 5,393 4,041 3,397 2,816
------- ------- ------- ------- -------
Net earnings $ 9,435 8,529 6,651 5,633 4,902
======= ======= ======= ======= =======
Minority interest in net earnings of
subsidiaries $ 916 866 587 460 271
======= ======= ======= ======= =======
Cash dividends declared $ 2,651 2,378 1,920 1,579 1,447
======= ======= ======= ======= =======
PER SHARE DATA: (1)
Basic earnings per common share $ 2.20 2.04 1.63 1.42 1.26
Diluted earnings per common share $ 2.20 2.04 1.63 1.42 1.26
Cash dividends $ 0.63 0.58 0.48 0.40 0.38
Book value $ 14.66 13.05 11.19 9.66 8.22
RATIOS:
Return on average stockholders'
equity 16.00% 16.98% 15.70% 16.39% 16.04%
Return on average assets (2) 1.31% 1.33% 1.14% 1.14% 1.12%
Capital to assets (3) 8.19% 8.08% 7.61% 7.13% 7.25%
Dividends declared per share as percentage
of basic earnings per share 26.36% 28.19% 29.14% 28.27% 29.76%
(1) Per share data has been retroactively adjusted to reflect a 2 for 1 split
which occurred effective October 31, 2003.
(2) Includes minority interest earnings of consolidated subsidiaries in
numerator.
(3) Includes minority interest of consolidated subsidiaries in numerator.
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
This report includes certain forward-looking statements (any statement
other than those made solely with respect to historical fact) based upon
management's beliefs, as well as assumptions made by and data currently
available to management. This information has been, or in the future may be,
included in reliance on the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The words "expect," "anticipate," "intend,"
"should," "may," "could," "plan," "believe," "seek," "estimate" and similar
expressions are intended to identify such forward-looking statements, but other
statements not based on historical information may also be considered
forward-looking. All forward-looking statements are subject to risks,
uncertainties and other facts that may cause the actual results, performance or
achievements of Wilson Bank Holding Company (the "Company") to differ materially
from any results expressed or implied by such forward-looking statements. Such
factors include, without limitation, (i) increased competition with other
financial institutions, (ii) lack of sustained growth in the economy in the
Company's market area, (iii) rapid fluctuations in interest rates, (iv)
significant downturns in the businesses of one or more large customers, (v)
changes in the legislative and regulatory environment, (vi) inadequate allowance
for loan losses, and (vii) loss of key personnel. Many of such factors are
beyond the Company's ability to control or predict, and readers are cautioned
not to put undue reliance on such forward-looking statements. The Company
disclaims any obligation to update or revise any forward-looking statements
contained in this discussion, whether as a result of new information, future
events or otherwise.
The Company is a registered bank holding company that owns 100% of the
common stock of Wilson Bank and Trust, a state bank headquartered in Lebanon,
Tennessee. The Company was formed in 1992.
During 1996, the Company and other organizers consisting primarily of
residents of DeKalb and Smith Counties, Tennessee formed DeKalb Community Bank
and Community Bank of Smith County. The Company acquired 50% of the common stock
of each bank. Each of the banks were capitalized with $3,500,000; and
accordingly, the Company's initial investment in each bank was $1,750,000. Each
of the banks have a dividend reinvestment plan whereby the stockholders are
given the opportunity to reinvest all or a portion of their dividends in the
bank's stock. The Company reinvests its dividends in the amount necessary to
maintain a 50% ownership interest. DeKalb Community Bank and Community Bank of
Smith County are accounted for as consolidated subsidiaries of the Company and
their accounts are included in the consolidated financial statements. The equity
and earnings applicable to the minority stockholders are shown as minority
interest in the consolidated financial statements.
The Company's three subsidiary banks are community banks headquartered
in Lebanon, Smithville and Carthage, Tennessee, respectively, serving Wilson
County, DeKalb County, Smith County, Trousdale County, and the eastern part of
Davidson County, Tennessee as their primary market areas. The subsidiary banks
have fourteen locations including their three main offices. Davidson, DeKalb,
Smith and Trousdale Counties adjoin Wilson County. Management believes that
these counties offer an environment for continued growth, and the Company's
target market is local consumers, professionals and small businesses. The banks
offer a wide range of banking services, including checking, savings, and money
market deposit accounts, certificates of deposit and loans for consumer,
commercial and real estate purposes. The Company also offers custodial and trust
services and an investment center which offers a full line of investment
services to its customers.
The following discussion and analysis is designed to assist readers in
their analysis of the Company's consolidated financial statements and must be
read in conjunction with such consolidated financial statements. The Company's
Board of Directors voted a 2 for 1 stock split for stockholders of record as of
October 1, 2003 payable October 30, 2003. Each stockholder received one (1)
additional share for each one (1) share owned with allowance for fractional
shares. Per share data included in these consolidated financial statements has
been restated to give effect to the stock split.
CRITICAL ACCOUNTING POLICIES
The accounting principles we follow and our methods of applying these
principles conform with accounting principles generally accepted in the United
States and with general practices within the banking industry. In connection
with the application of those principles to the determination of our allowance
for loan losses (ALL), we have made judgments and
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
estimates which have significantly impacted our financial position and results
of operations.
Our management assesses the adequacy of the ALL on a regular basis.
This assessment includes procedures to estimate the ALL and test the adequacy
and appropriateness of the resulting balance. The ALL consists of two portions
(1) an allocated amount representative of specifically identified credit
exposure and exposures readily predictable by historical or comparative
experience, and (2)an unallocated amount representative of inherent loss which
is not readily identifiable. Even though the ALL is composed of two components,
the entire allowance is available to absorb any credit losses.
We establish the allocated amount separately for two different risk
groups (1) unique loans (commercial loans, including those loans considered
impaired); and (2) homogenous loans (generally consumer loans). We base the
allocation for unique loans primarily on risk rating grades assigned to each of
these loans as a result of our loan management and review processes. Each
risk-rating grade is assigned an estimated loss ratio, which is determined based
on the experience of management, discussions with banking regulators, historical
and current economic conditions and our independent loan review process. We
estimate losses on impaired loans based on estimated cash flows discounted at
the loan's original effective interest rate or the underlying collateral value.
We also assign estimated loss ratios to our consumer portfolio. However, we base
the estimated loss ratios for these homogenous loans on the category of consumer
credit (e.g., automobile, residential mortgage, home equity) and not on the
results of individual loan reviews.
The unallocated amount is particularly subjective and does not lend
itself to the exact mathematical calculation. We use the unallocated amount to
absorb inherent losses which may exist as of the balance sheet date for such
matters as changes in the local or national economy, the depth or experience of
the lending staff, any concentrations of credit in any particular industry
group, and new banking laws or regulations. After we assess applicable factors,
we evaluate the aggregate unallocated amount based on our management's
experience.
We then test the resulting ALL balance by comparing the balance in the
allowance account to historical trends and peer information. Our management then
evaluates the result of the procedures performed, including the result of our
testing, and concludes on the appropriateness of the balance of the ALL in its
entirety. The loan review and the finance committee of our board of directors
review the assessment prior to the filing of financial information.
RESULTS OF OPERATIONS
Net earnings for the year ended December 31, 2003 were $9,435,000, an
increase of $906,000, or 10.6%, over 2002. Net earnings for the year ended
December 31, 2002 were $8,529,000, an increase of $1,878,000, or 28.2%, over
2001. On a per share basis, net income equaled $2.20 in 2003, compared with
$2.04 in 2002 and $1.63 in 2001.
NET INTEREST INCOME
Net interest income represents the amount by which interest earned on
various earning assets exceeds interest paid on deposits and other
interest-bearing liabilities and is the most significant component of the
Company's earnings. Total interest income in 2003 was $44,115,000, compared with
$45,090,000 in 2002 and $47,833,000 in 2001. The decrease in total interest
income in 2003 was primarily due to a decrease in the average interest rate of
..9% offset by a $85 million or 12.7% increase in average earning assets over
2002. Average earning assets increased $69 million from December 31, 2001 to
December 31, 2002. The average interest rate earned on earning assets was 5.88%
in 2003 compared with 6.78% in 2002 and 8.03% in 2001.
Interest earned on earning assets does not include any interest income
which would have been recognized on non-accrual loans if such loans were
performing. The amount of interest not recognized on nonaccrual loans totaled
$8,000 in 2003, compared with $12,000 in 2002 and $12,000 in 2001.
Total interest expense for 2003 was $15,217,000, a decrease of
$2,998,000, or 16.5%, compared to total interest expense of $18,215,000 in 2002.
The decrease in total interest expense was due to a decrease in the weighted
average cost of funds from 2.83% to 2.11%, offset by an increase in average
interest bearing deposits of approximately $69,218,000. Interest expense
decreased from $25,633,000 in 2001 to $18,215,000 in 2002 or a decrease of
$7,418,000, or 28.9%. The decrease in 2002 was due to a decrease in the weighted
average cost of funds from 4.39% to
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
2.83% net of the effect of a $60,718,000 increase in average interest bearing
deposits.
Net interest income for 2003 totaled $28,898,000 as compared to
$26,875,000 and $22,250,000 in 2002 and 2001, respectively. The net interest
spread, defined as the effective yield on earning assets less the effective cost
of deposits and borrowed funds (calculated on a fully taxable equivalent basis),
decreased to 3.77% from 3.94% in 2002. The net interest spread was 3.64% in
2001. The net interest yield, which is net interest income expressed as a
percentage of average earning assets, decreased to 3.87% for 2003 compared to
4.07% in 2002 and 3.77% in 2001. Interest rates decreased in 2003 as a result of
the Federal Reserve Bank's decision to lower the discount rate to stimulate the
economy. The Company believes that interest rates will remain stable in 2004.
The Company is in a position to reprice its liabilities faster than the assets
are repricing. However, due to the very low interest rate environment, the
Company may have to pay more for deposits to compete with the customers' other
investment opportunities. Management also believes that growth in 2004 will
generally approximate the growth experienced in 2003. A significant increase in
interest rates could have an adverse impact on net interest yields and earnings.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for loan losses represents a charge to earnings necessary
to establish an allowance for possible loan losses that, in management's
evaluation, should be adequate to provide coverage for estimated losses on
outstanding loans and to provide for uncertainties in the economy. The 2003
provision for loan losses was $1,904,000, a decrease of $440,000 from the
provision of $2,344,000 in 2002. The decrease in the provision was primarily a
result of smaller increases in loans, a decrease in net charge-offs, and the
Company's perception that the general economic conditions were improving. The
provision for loan losses was $1,976,000 in 2001. Net charge-offs decreased to
$770,000 in 2003 from $890,000 in 2002. Net charge-offs in 2001 totaled
$1,012,000. The ratio of net charge-offs to average total outstanding loans in
2003 was .14% and in 2002 was .17% and in 2001 was .22%. The provision for loan
losses in 2003 exceeded net charge-offs by $1,134,000 compared to $1,454,000 in
2002 and $964,000 in 2001.
The provision for loan losses raised the allowance for possible loan
losses (net of charge-offs and recoveries) to $8,077,000 at December 31, 2003
from $6,943,000 and $5,489,000 at December 31, 2002 and 2001, respectively. This
represents a 16.3% increase in the allowance at December 31, 2003 over December
31, 2002 as compared to a 7.7% increase in total loans. The allowance for
possible loan losses was 1.36% of total loans outstanding at December 31, 2003
compared to 1.26% at December 31, 2002 and 1.11% at December 31, 2001.
Additionally, as a percentage of nonperforming loans at year end 2003, 2002 and
2001, the allowance for possible loan losses represented 363%, 564% and 725%,
respectively. Although net charge-offs decreased, the level of nonperforming
loans increased as discussed under "Loans".
The level of the allowance and the amount of the provision involve
evaluation of uncertainties and matters of judgment. The Company maintains an
allowance for loan losses which management believes is adequate to absorb losses
inherent in the loan portfolio. A formal review is prepared bi-monthly by the
Loan Review Officer to assess the risk in the portfolio and to determine the
adequacy of the allowance for loan losses. The review includes analysis of
historical performance, the level of non-performing and adversely rated loans,
specific analysis of certain problem loans, loan activity since the previous
assessment, reports prepared by the Loan Review Officer, consideration of
current economic conditions, and other pertinent information. The level of the
allowance to net loans outstanding will vary depending on the overall results of
this bi-monthly assessment. The review is presented to the Finance Committee and
subsequently approved by the Board of Directors. See the discussion under
"Critical Accounting Policies" for more information. Management believes the
allowance for possible loan losses at December 31, 2003 to be adequate.
NON-INTEREST INCOME
The components of the Company's non-interest income include service
charges on deposit accounts, other fees, gains on sales of loans, gains on sales
of fixed assets and other income. Total non-interest income for 2003 was
$9,060,000 compared with $8,076,000 in 2002 and $7,732,000 in 2001. The 12.2%
increase over 2002 was primarily due to increases in the volume of service
charges on deposit accounts (which increased $199,000) and gains on sales of
loans (which increased $741,000). The Company
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
has entered into a commission participation arrangement with a local insurance
agency to sell insurance products. Management does not anticipate that this
arrangement will materially impact 2004 non-interest income.
NON-INTEREST EXPENSES
Non-interest expenses consist primarily of employee costs, occupancy
expenses, furniture and equipment expenses and other operating expenses. Total
non-interest expenses for 2003 increased 9.1% to $20,377,000 from $18,685,000 in
2002. The 2002 non-interest expense was up 7.3% over non-interest expense in
2001 which totaled $17,314,000. The increases in non-interest expenses in 2003
resulted primarily from increases in employee salaries and related benefits.
This increase was principally due to an increase in the number of employees
necessary to support the Company's expanded operations. Other operating expenses
increased to $4,868,000 in 2003 from $4,854,000 in 2002. These expenses included
data processing, supplies and general operating expenses, which increased as a
result of continued growth of the Company.
INCOME TAXES
The Company's income tax expense was $6,242,000 for 2003 an increase of
$849,000 from $5,393,000 for 2002. The percentage of income tax expense to
earnings before taxes increased to 39.8% in 2003 from 38.7% in 2002. The
percentage was 37.8% in 2001. The percentage for 2003 as compared to 2002
increased primarily as a result of a decrease in the percentage of interest
income exempt from Federal income taxes to earnings before taxes from 5.7% in
2002 to 4.6% in 2003 and an increase in the Federal income tax rate from 34% to
35% for taxable earnings over $10 million. The increase from 2001 to 2002 is
also due to a decrease in the percentage of interest income exempt from Federal
income taxes from 7.9% in 2001 to 5.7% in 2002 and an increase in the state tax
rate from 6% to 6.5% in 2002.
FINANCIAL CONDITION
BALANCE SHEET SUMMARY. The Company's total assets increased $99,833,000 or 13.3%
to $852,619,000 at December 31, 2003, after increasing 12.7% in 2002 to
$752,786,000 at December 31, 2002. Loans, net of allowance for possible loan
losses, totaled $584,714,000 at December 31, 2003, a 7.6% increase compared to
December 31, 2002. Investment securities increased in 2003, primarily as a
result of increased deposits in excess of funds necessary to fund loan growth.
At year end 2003 securities totaled $152,095,000, an increase of 28.5% from
$118,342,000 at December 31, 2002. The increase in securities in 2003 includes a
$1,663,000 decrease in unrealized gains and losses on securities
available-for-sale.
Total liabilities increased $90,761,000 at December 31, 2003 to
$782,747,000 compared to $691,986,000 at December 31, 2002. This increase was
composed primarily of the $91,011,000 increase in total deposits to $770,419,000
(a 13.4% increase) which was offset by a decrease in advances from the Federal
Home Loan Bank from $997,000 at December 31, 2002 to $712,000 at December 31,
2003. Securities sold under repurchase agreements increased to $8,606,000 from
$7,868,000 at the respective year ends 2003 and 2002.
Stockholders' equity increased $8,292,000 or 15.1% due to net earnings
and sales of stock pursuant to the Company's Dividend Reinvestment Plan, net of
dividends paid on the Company's common stock. The increase includes a $915,000
increase in unrealized gains and losses on available-for-sale securities, net of
taxes. A more detailed discussion of assets, liabilities and capital follows.
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LOANS:
Loan category amounts and the percentage of loans in each category to total
loans are as follows:
2003 2002
--------------------------------- ----------------------------------
(In Thousands) AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
Commercial, financial
and agricultural $ 174,235 29.4% $ 192,945 35.1%
Installment 64,880 10.9 59,721 10.8
Real estate - mortgage 314,168 53.0 267,145 48.5
Real estate - construction 39,508 6.7 30,794 5.6
---------------- ----- ---------------- -----
TOTAL $ 592,791 100.0% $ 550,605 100.0%
================ ===== ================ =====
Loans are the largest component of the Company's assets and are its
primary source of income. The Company's loan portfolio, net of allowance for
possible loan losses, increased 7.6% as of year end 2003. The loan portfolio is
composed of four primary loan categories: commercial, financial and
agricultural; installment; real estate-mortgage; and real estate-construction.
The table above sets forth the loan categories and the percentage of such loans
in the portfolio at December 31, 2003 and 2002.
As represented in the table, primary loan growth was in real estate
mortgage loans and installment loans. Real estate mortgage loans increased 17.6%
in 2003 and at December 31, 2003 comprised 53.0% of total loans compared to
48.5% of total loans at December 31, 2002. Management believes this increase was
primarily due to the favorable interest rate environment and the Company's
ability to increase its market share of such loans while maintaining its loan
underwriting standards. Installment loans increased 8.6% in 2003 and comprised
10.9% of the total loan portfolio at December 31, 2003, compared to 10.8% at
December 31, 2002.
Banking regulators define highly leveraged transactions to include
leveraged buy-outs, acquisition loans, and recapitalization loans of an existing
business. Under the regulatory definition, at December 31, 2003, the Company had
no highly leveraged transactions, and there were no foreign loans outstanding
during any of the reporting periods.
Non-performing loans, which include non-accrual loans, loans 90 days
past due, and renegotiated loans totaled $2,228,000 at December 31, 2003, an
increase from $1,230,000 at December 31, 2002. Non-accrual loans are loans on
which interest is no longer accrued because management believes collection of
such interest is doubtful due to management's evaluation of the borrower's
financial condition, collateral liquidation value, economic and business
conditions and other factors affecting the borrower's ability to pay.
Non-accrual loans totaled $462,000 at December 31, 2003 compared to $483,000 at
December 31, 2002. Loans 90 days past due, as a component of non-performing
loans, increased to $1,766,000 at December 31, 2003 from $747,000 at December
31, 2002. This increase is primarily a result of increases in installment loans
and real estate mortgage loans that are 90 days past due. The Company had no
renegotiated loans, which would have been included in non-performing loans.
The Company also internally classifies loans about which management
questions the borrower's ability to comply with the present repayment terms of
the loan agreement. These internally classified loans, inclusive of certain
non-performing loans, totaled $6,656,000 at December 31, 2003 as compared to
$4,038,000 at December 31, 2002. Of the internally classified loans at December
31, 2003, $5,280,000 are real estate related loans and $1,376,000 are various
other types of loans. The internally classified loans as a percentage of the
allowance for possible loan losses were 82.4% and 58.2%, respectively, at
December 31, 2003 and 2002.
The allowance for possible loan losses is discussed under "Critical
Accounting Policies" and "Provision for Possible Loan Losses." The Company
maintains its allowance for possible loan losses at an amount believed by
management to be adequate to
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
provide for the possibility of loan losses in the loan portfolio.
Essentially all of the Company's loans were from Wilson, DeKalb, Smith,
Trousdale and adjacent counties. The Company seeks to exercise prudent risk
management in lending, including diversification by loan category and industry
segment as well as by identification of credit risks. At December 31, 2003 no
single industry segment accounted for more than 10% of the Company's portfolio
other than real estate loans.
The Company's management believes there is a significant opportunity to
continue to increase the loan portfolio in the Company's primary market area
which was expanded in 1999 to include eastern Davidson County, Tennessee. The
Company has targeted commercial business lending, commercial and residential
real estate lending and consumer lending. Although it is the Company's objective
to achieve a loan portfolio equal to approximately 85% of deposit balances,
various factors, including demand for loans which meet its underwriting
standards, will likely determine the size of the loan portfolio in a given
economic climate. This loan demand is reflected in the past two years when the
Company's average loan to average deposit ratio was 79.9% and 82.7%,
respectively, despite significant deposit growth. As a practice, the Company
generates its own loans and does not buy participations from other institutions.
The Company may sell some of the loans it generates to other financial
institutions if the transaction profits the Company and improves the liquidity
of the loan portfolio. The subsidiary banks also sell loan participations to
other banks within the consolidated group.
SECURITIES
Securities increased 28.5% to $152,095,000 at year end 2003 from
$118,342,000 at December 31, 2002, and comprised the second largest and other
primary component of the Company's earning assets. This increase followed a
20.1% securities portfolio increase from year end 2001 to 2002. The growth in
securities resulted from continued deposit growth in excess of funds necessary
to fund loan growth.
The primary increase in the Company's securities portfolio was in U.S.
Treasury and other U.S. Government agencies which increased $24,172,000 or 24.1%
in 2003 and in mortgage backed securities which increased $8,252,000 or 487% in
2003. The average yield of the securities portfolio at December 31, 2003 was
3.51% with an average maturity of 3.92 years, as compared to an average yield of
4.18% and an average maturity of 3.92 years at December 31, 2002. Due to falling
interest rates in 2003, payoffs in the securities portfolio increased.
Management reinvested in lower yielding securities, with shorter maturities,
which resulted in the decrease in both average yields and average maturities
from 2002 to 2003.
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments
in Debt and Equity Securities". Under the provisions of the Statement,
securities are to be classified in three categories and accounted for as
follows:
- - Debt securities that the enterprise has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported
at amortized cost.
- - Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value with unrealized gains and losses
included in earnings.
- - Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value with unrealized gains and losses
excluded from earnings and reported in a separate component of
shareholders' equity.
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's classification of securities as of December 31, 2003 is as
follows:
(In Thousands) HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------- -----------------------
Amortized Estimated Amortized Estimated
Cost Market Val Cost Market Value
--------- ---------- --------- ------------
U.S. Treasury and other U.S. Government agencies
and Corporations $ - - 124,605 124,340
Obligations of states and political
Subdivisions 15,851 16,534 1,380 1,461
Corporate bonds - - 500 499
Mortgage-backed securities 792 792 9,191 9,152
------- ------ ------- -------
$16,643 17,326 135,676 135,452
======= ====== ======= =======
No securities have been classified as trading securities.
The classification of a portion of the securities portfolio as
available-for-sale was made to provide for more flexibility in asset/liability
management and capital management.
DEPOSITS
The increases in assets in 2003 and 2002 were funded primarily by
increases in deposits. Total deposits, which are the principal source of funds
for the Company, totaled $770,419,000 at December 31, 2003 compared to
$679,408,000 and $602,576,000 at December 31, 2002 and 2001, respectively. The
Company has targeted local consumers, professionals, and small businesses as its
central clientele; therefore, deposit instruments in the form of demand
deposits, savings accounts, money market demand accounts, certificates of
deposits and individual retirement accounts are offered to customers. Management
believes the Wilson County, Davidson County, DeKalb County, Smith County and
Trousdale County areas are growing economic markets offering growth
opportunities for the Company; however, the Company competes with several of the
larger bank holding companies that have bank offices in these counties; and
therefore, no assurances of market growth or maintenance of current market share
can be given. Even though the Company is in a very competitive market,
management currently believes that its market share can be maintained or
expanded.
The $91,011,000, or 13.4%, growth in deposits in 2003 consisted of
changes in several deposit categories: savings accounts increased
$4,890,000(11.7%) to $44,000,000, total certificates of deposit (including
individual retirement accounts) increased $13,594,000 (3.8%) to $374,940,000,
NOW accounts increased $10,886,000 (19.7%) to $66,196,000, money market accounts
increased $40,509,000 (25.6%) to $198,553,000 and demand deposits increased
$21,132,000 (32.2%) to $86,730,000.
The average rate paid on average total interest-bearing deposits was
2.3% for 2003, compared to 3.1% for 2002. The average rate paid in 2001 was
4.9%.
The ratio of average loans to average deposits was 79.9% in 2003
compared with 82.7% and 80.7% in 2002 and 2001, respectively.
CONTRACTUAL OBLIGATIONS
The Company has the following contractual obligations as of December 31, 2003:
Less More
(In than 1 -3 3-5 than 5
Thousands) 1 Year Years Years Years Total
------- ------- ------- -------- -------
Long-Term
Debt - - - 712 712
Capital
Leases - - - - -
Operating 51 10 - - 61
Leases
Purchases - - - - -
Other - - - - -
Long-Term
Liabilities
-- -- -- --- ---
Total 51 10 - 712 773
== == == === ===
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Long-term debt contractual obligations consist of advances from the Federal Home
Loan Bank. The Company leases land for certain branch facilities and automatic
teller machine locations. Future minimum rental payments required under the
terms of these noncancellable leases are included in operating lease
obligations.
OFF BALANCE SHEET ARRANGEMENTS
At December 31, 2003, the Company had unfunded loan commitments
outstanding of $74.7 million, unfunded lines of credit of $23.9 million and
outstanding standby letters of credit of $4.8 million. Because these commitments
generally have fixed expiration dates and many will expire without being drawn
upon, the total commitment level does not necessarily represent future cash
requirements. If needed to fund these outstanding commitments, the Company's
bank subsidiary 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 Company's bank subsidiary
could sell participations in these or other loans to correspondent banks. As
mentioned above, the Company's bank subsidiary has been able to fund its ongoing
liquidity needs through its stable core deposit base, loan payments, its
investment security maturities and short-term borrowings.
LIQUIDITY AND ASSET MANAGEMENT
The Company's management seeks to maximize net interest income by
managing the Company's assets and liabilities within appropriate constraints on
capital, liquidity and interest rate risk. Liquidity is the ability to maintain
sufficient cash levels necessary to fund operations, meet the requirements of
depositors and borrowers and fund attractive investment opportunities. Higher
levels of liquidity bear corresponding costs, measured in terms of lower yields
on short-term, more liquid earning assets and higher interest expense associated
with extending liability maturities. Liquid assets include cash and cash
equivalents and investment securities and money market instruments that will
mature within one year. At December 31, 2003, the Company's liquid assets
approximated $134.2 million.
The Company's primary source of liquidity is a stable core deposit
base. In addition, short-term investments, loan payments and investment security
maturities provide a secondary source.
At December 31, 2003, the Company had a liability sensitive position (a
negative gap) for 2004. Liability sensitivity means that more of the Company's
liabilities are capable of repricing over certain time frames than its assets.
The interest rates associated with these liabilities may not actually change
over this period but are capable of changing. The 2003 net earnings increased in
the slightly declining rate environment primarily due to a $2,998,000 reduction
in interest cost which resulted from savings related to rate declines of
$5,208,000 net of additional interest cost of $2,210,000 related to increased
volume. The declining rates resulted in a reduction of interest income of
$6,791,000 which was offset by an increase in income related to volume of
$5,782,000. The 2002 and 2001 net earnings increased in the declining rate
environment primarily due to a 11.5% growth in earning assets in 2002 and a
20.6% growth in earnings assets in 2001.
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
meets monthly to analyze the rate sensitivity position. These meetings focus on
the spread between the cost of funds and interest yields generated primarily
through loans and investments.
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table shows the rate sensitivity gaps for different time periods
as of December 31, 2003:
INTEREST RATE SENSITIVITY GAPS One Year
December 31, 2003 1-90 91-180 181-365 and
(In Thousands) Days Days Days Longer Total
- ------------------------------- ---- ------ ------- ------ -----
Interest-earning assets $ 175,677 51,546 89,977 485,567 802,767
Interest-bearing liabilities 377,758 75,391 82,797 157,061 693,007
------------ -------- -------- ------- -------
Interest-rate sensitivity gap $ (202,081) (23,845) 7,180 328,506 109,760
============ ======== ======== ======= =======
Cumulative gap $ (202,081) (225,926) (218,746) 109,760
============ ======== ======== =======
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
At the present time there are no known trends or any known commitments,
demands, events or uncertainties that will result in, or that are reasonably
likely to result in, the Company's liquidity changing in any material way.
CAPITAL POSITION AND DIVIDENDS
CAPITAL. At December 31, 2003, total stockholders' equity was
$63,323,000, or 7.4% of total assets, which compares with $55,031,000, or 7.3%
of total assets at December 31, 2002, and $45,971,000, or 6.9% of total assets,
at December 31, 2001. The dollar increase in stockholders' equity during 2003
reflects (i) the Company's net income of $9,435,000 less cash dividends of $.58
per share totaling $2,651,000, (ii) the issuance of 51,284 shares of common
stock for $2,392,000 in lieu of payment of cash dividends, (iii) the issuance of
1,275 shares of common stock pursuant to exercise of stock options for $31,000
and (iv) the decrease in the net unrealized gain on available-for-sale
securities of $915,000. In addition the Company approved a two for one stock
split effective October 30, 2003. Pursuant to this split 2,160,028 shares of
stock were issued. All share and per share data have been restated to reflect
this two for one stock split.
The Company's principal regulators have established minimum risk-based
capital requirements and leverage capital requirements for the Company and its
subsidiary banks. These guidelines classify capital into two categories of Tier
I and Total risk-based capital. Total risk-based capital consists of Tier I (or
core) capital (essentially common equity less intangible assets) and Tier II
capital (essentially qualifying long-term debt, of which the Company and
subsidiary banks have none, and a part of the allowance for possible loan
losses). In determining risk-based capital requirements, assets are assigned
risk-weights of 0% to 100%, depending on regulatory assigned levels of credit
risk associated with such assets. The risk-based capital guidelines require the
subsidiary banks and the Company to have a total risk-based capital ratio of
8.0% and a Tier I risk-based capital ratio of 4.0%. At December 31, 2003 the
Company's total risk-based capital ratio was 13.6% and its Tier I risk-based
capital ratio was 12.4%, respectively, compared to ratios of 12.9% and 11.7%,
respectively at December 31, 2002. The required Tier I leverage capital ratio
(Tier I capital to average assets for the most recent quarter) for the Company
is 4.0%. At December 31, 2003, the Company had a leverage ratio of 8.8% compared
to 7.6% at December 31, 2002. Management believes it can adequately capitalize
its growth for the next few years with earnings.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary component of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact both the level
of income and expense recorded on a large portion of the Company's assets and
liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity. Based upon the nature of the Company's operations, the Company is not
subject to foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the earnings risk
associated with changing interest rates. Management seeks to maintain
profitability in both 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
meets monthly to analyze the rate sensitivity position. These meetings focus on
the spread between the cost of funds and interest yields generated primarily
through loans and investments. The following table provides information about
the Company's financial instruments that are sensitive to changes in interest
rates as of December 31, 2003.
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
EXPECTED MATURITY DATE - YEAR ENDING DECEMBER 31,
------------------------------------------------------------- FAIR
2004 2005 2006 2007 2008 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
EARNING ASSETS:
Loans, net of unearned interest:
Variable rate $ 23,544 4,606 4,326 5,292 10,808 249,032 297,608 297,608
Average interest rate 4.48% 6.16% 6.24% 6.15% 5.78% 6.92% 6.13%
Fixed rate 114,379 30,785 37,626 45,137 19,344 47,912 295,183 286,048
Average interest rate 5.90% 7.04% 6.97% 6.40% 6.35% 6.75% 6.51%
Securities 4,314 15,786 25,839 35,933 27,040 43,183 152,095 152,778
Average interest rate 3.71% 3.25% 2.83% 3.34% 3.76% 3.79% 3.35%
Loans held for sale 3,972 - - - - - 3,972 3,972
Average interest rate 5.39% - - - - - 5.39%
Federal funds sold 53,909 - - - - - 53,909 53,909
Average interest rate 1.04% - - - - - 1.04%
Interest-bearing deposits 570,663 47,241 47,231 9,115 9,349 - 683,689 690,208
Average interest rate 2.73% 3.39% 3.54% 3.95% 3.98% - 2.33%
Short-term borrowings 8,606 - - - - - 8,606 8,606
Average interest rate 1.92% - - - - - 1.92%
Advances from Federal
Home Loan Bank - - - - - 712 712 819
Average interest rate - - - - - 7.13% 7.13%
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Since the
Company does not have any legal obligations as described above, this statement
has not had any impact on the Company's financial position or results of
operations.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, SFAS 144. This statement supersedes
SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business (as previously defined in that Opinion). SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years. This statement has not had
a significant impact on the Company's financial position or results of
operations.
In October 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 147, Acquisitions of Certain
Financial Institutions. SFAS No. 147 amends SFAS No. 72 and FASB Interpretation
No. 9 to eliminate all acquisitions of financial institutions other than
transactions between mutual enterprises from their scope. Accordingly, the
excess of the purchase price
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
paid to acquire a financial institution over the fair value of the identifiable
tangible and intangible assets and liabilities acquired now must be recorded as
goodwill following SFAS No. 141 and assessed for impairment following SFAS No.
142, Goodwill and Other Intangible Assets. Furthermore, any previously
recognized unidentifiable intangible assets resulting from prior business
combinations that do not meet SFAS No. 141's criteria for separate recognition
must be reclassified to goodwill. The Company has adopted SFAS 147, but it is
not expected to have any current impact on the Company's financial position or
results of operations.
In June 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard NO. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
Under SFAS 149 loan commitments that relate to the origination of mortgage loans
that will be held for sale, commonly referred to as interest rate lock
commitments, must be accounted for as derivatives by the issuer of the
commitment. Commitments to originate mortgage loans that will be held for
investment purposes and commitments to originate other types of loans are not
considered derivatives. The Company has adopted SFAS 149, but it is not expected
to have any impact on the Company's financial position or results of operations.
In June 2003 the American Institute of Certified Public Accountants
issued an exposure draft on a Proposed Statement of Position (SOP) on Allowance
for Credit Losses. If approved the Proposed SOP would significantly change the
way the allowance for possible loan losses is calculated. Under the Proposed
SOP, any loans determined to be impaired, as defined in FASB Statement No. 114,
would be assigned a specific reserve based on facts and circumstances
surrounding the particular loan and no loss percentage would be assigned. If a
loan is determined not to be impaired, it would be assigned to a pool of similar
homogeneous loans. A loss percentage would then be assigned to the pool based on
historical charge-offs adjusted for internal or external factors such as the
economy, changes in underwriting standards, etc. Management has not yet
determined the impact this Proposed SOP would have on their consolidated
financial statements, but anticipates that it could result in a significant
reduction in the allowance for loan loss. Under the Proposal, any changes
resulting from the initial application of this Proposed SOP would be treated as
a change in accounting estimate.
SUPERVISION AND REGULATION
Bank Holding Company Act of 1956. As a bank holding company, the
Company is subject to regulation under the Bank Holding Company Act of 1956 (the
"Act"), and the regulations adopted by the Board of Governors of the Federal
Reserve System (the "Board") under the Act. The Company is required to file
reports with, and is subject to examination by, the Board. The subsidiary banks
are Tennessee state chartered non member banks, and are therefore subject to the
supervision of and are regularly examined by the Tennessee Department of
Financial Institutions (the "TDFI") and the Federal Deposit Insurance
Corporation ("FDIC").
Under the Act, a bank holding company may not directly or indirectly
acquire the ownership or control of more than five percent of the voting shares
or substantially all of the assets of any company, including a bank, without the
prior approval of the Board. In addition, bank holding companies are generally
prohibited under the Act from engaging in non-banking activities, subject to
certain exceptions. Under the Act, the Board is authorized to approve the
ownership by a bank holding company of shares of any company whose activities
have been determined by the Board to be so closely related to banking or to
managing or controlling banks as to be a proper incident thereto.
In November, 1999, the Gramm-Leach-Bliley Act of 1999 (the "GLB Act")
became law. Under the GLB Act, a "financial holding company" may engage in
activities the Board determines to be financial in nature or incidental to such
financial activity or complementary to a financial activity and not a
substantial risk to the safety and soundness of such depository institutions or
the financial system. Generally, such companies may engage in a wide range of
securities activities and insurance underwriting and agency activities.
Under the Tennessee Bank Structure Act, a bank holding company which
controls 30% or more of the total deposits (excluding certain deposits) in all
federally insured financial institutions in Tennessee is prohibited from
acquiring any bank in Tennessee. State
WILSON BANK HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
banks and national banks in Tennessee may establish branches anywhere in the
state and generally may branch across state lines either through interstate
merger or branch acquisition , provided the other state's law affords
reciprocity.
The Company and the subsidiary banks are subject to certain
restrictions imposed by the Federal Reserve Act and the Federal Deposit
Insurance Act, respectively, on any extensions of credit to the Company or the
subsidiary banks, on investments in the stock or other securities of the Company
or the subsidiary banks, and on taking such stock or other securities as
collateral for loans of any borrower.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), the federal banking regulators have assigned each insured
institution to one of five categories ("well capitalized," "adequately
capitalized" or one of three under capitalized categories) based upon the three
measures of capital adequacy discussed above, see "Capital Position and
Dividends". Institutions which have a Tier I leverage capital ratio of 5%, a
Tier I risk based capital ratio of 5% and a total risk based capital ratio of
10% are defined as "well capitalized". All institutions, regardless of their
capital levels, are restricted from making any capital distribution or paying
any management fees that would cause the institution to fail to satisfy the
minimum levels for any of its capital requirements for "adequately capitalized"
status. All of the subsidiary banks currently meet the requirements for "well
capitalized" status.
An institution that fails to meet the minimum level for any relevant
capital measure (an "undercapitalized institution") may be: (i) subject to
increased monitoring by the appropriate federal banking regulator; (ii) required
to submit an acceptable capital restoration plan within 45 days (which must be
guaranteed by the institution's holding company); (iii) subject to asset growth
limits; and (iv) required to obtain prior regulatory approval for acquisitions,
branching and new lines of businesses. The bank regulatory agencies have
discretionary authority to reclassify a "well capitalized" institution as
"adequately capitalized" or to impose on an "adequately capitalized" institution
requirements or actions specified for undercapitalized institutions if the
agency determines that the institution is in an unsafe or unsound condition or
is engaging in an unsafe or unsound practice.
A "significantly undercapitalized" institution may be subject to a
number of additional requirements and restrictions, including (1) orders to sell
sufficient voting stock to become "adequately capitalized," (2) requirements to
reduce total assets and (3) cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions are subject to the appointment
of a receiver or conservator.
Under FDICIA, bank regulatory agencies have prescribed safety and
soundness guidelines for all insured depository institutions relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, earnings and compensation.
The subsidiary banks are assessed quarterly at the rate of .00385% of
insured deposits for deposit insurance.
Management is not aware of any current recommendations by the
regulatory authorities which, if implemented, would have a material effect on
the Company's liquidity, capital resources or operations.
Monetary Policy. The subsidiary banks are affected by commercial bank
credit policies of regulatory authorities, including the Board. An important
function of the Board is to regulate the national supply of bank credit in order
to attempt to combat recessionary and curb inflationary pressures. Among the
instruments of monetary policy used by the Board to implement these objectives
are: open market operations in U.S. Government securities, changes in discount
rates on member borrowings, changes in reserve requirements against bank
deposits and limitations on interest rates which member banks may pay on time
and savings deposits. The monetary policies of the Board have had a significant
effect on the operating results of commercial banks, including nonmembers (such
as the Company's bank subsidiaries) as well as members, in the past and are
expected to continue to do so in the future.
IMPACT OF INFLATION
Although interest rates are significantly affected by inflation, the
inflation rate is believed to be material when reviewing the Company's results
of operations.
WILSON BANK HOLDING COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(WITH INDEPENDENT AUDITOR'S REPORT THEREON)
MAGGART & ASSOCIATES, P.C.
Certified Public Accountants
150 FOURTH AVENUE, NORTH
SUITE 2150
NASHVILLE, TENNESSEE 37219-2417
Telephone (615) 252-6100
Facsimile (615) 252-6105
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Wilson Bank Holding Company:
We have audited the accompanying consolidated balance sheets of Wilson Bank
Holding Company and Subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of earnings, comprehensive earnings, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Wilson
Bank Holding Company and Subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ MAGGART & ASSOCIATES, P.C.
Nashville, Tennessee
January 9, 2004
WILSON BANK HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
In Thousands
------------------------------
2003 2002
---- ----
ASSETS
Loans, net of allowance for possible loan losses of $8,077,000
and $6,943,000, respectively $ 584,714 543,658
Securities:
Held-to-maturity, at amortized cost (market value $17,326,000
and $14,838,000, respectively) 16,643 14,213
Available-for-sale, at market (amortized cost $135,676,000 and
$102,690,000, respectively) 135,452 104,129
------------ -------
Total securities 152,095 118,342
Loans held for sale 3,972 10,859
Federal funds sold 53,909 27,366
------------ -------
Total earning assets 794,690 700,225
------------ -------
Cash and due from banks 28,414 27,797
Premises and equipment, net 19,166 15,409
Accrued interest receivable 4,740 4,625
Deferred income taxes 2,483 1,582
Other real estate 417 818
Other assets 2,709 2,330
------------ -------
Total assets $ 852,619 752,786
============ =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 770,419 679,408
Securities sold under repurchase agreements 8,606 7,868
Advances from Federal Home Loan Bank 712 997
Accrued interest and other liabilities 3,010 3,713
------------ -------
Total liabilities 782,747 691,986
------------ -------
Minority interest 6,549 5,769
------------ -------
Stockholders' equity:
Common stock, par value $2.00 per share, authorized 5,000,000 shares,
4,320,606 and 2,108,019 shares issued and outstanding, respectively 8,642 4,216
Additional paid-in capital 11,928 13,931
Retained earnings 42,838 36,054
Net unrealized gains (losses) on available-for-sale securities, net of
income taxes of $53,000 and $514,000, respectively (85) 830
------------ -------
Total stockholders' equity 63,323 55,031
------------ -------
COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders' equity $ 852,619 752,786
============ =======
See accompanying notes to consolidated financial statements.
2
WILSON BANK HOLDING COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 2003
In Thousands (except per share data)
--------------------------------------------
2003 2002 2001
---- ---- ----
Interest income:
Interest and fees on loans $ 38,687 39,120 40,262
Interest and dividends on securities:
Taxable securities 3,755 4,390 5,136
Exempt from Federal income taxes 731 798 850
Interest on loans held for sale 358 197 182
Interest on Federal funds sold 584 585 1,453
---------- ------- -------
Total interest income 44,115 45,090 47,883
---------- ------- -------
Interest expense:
Interest on negotiable order of withdrawal accounts 234 378 515
Interest on money market accounts and other
savings accounts 2,920 3,879 4,610
Interest on certificates of deposit 11,799 13,621 20,000
Interest on securities sold under repurchase agreements 203 249 392
Interest on advances from Federal Home Loan Bank 59 82 112
Interest on Federal funds purchased 2 6 4
---------- ------- -------
Total interest expense 15,217 18,215 25,633
---------- ------- -------
Net interest income before provision for possible loan losses 28,898 26,875 22,250
Provision for possible loan losses (1,904) (2,344) (1,976)
---------- ------- -------
Net interest income after provision for possible loan losses 26,994 24,531 20,274
Non-interest income 9,060 8,076 7,732
Non-interest expense (20,377) (18,685) (17,314)
---------- ------- -------
Earnings before income taxes 15,677 13,922 10,692
Income taxes 6,242 5,393 4,041
---------- ------- -------
Net earnings $ 9,435 8,529 6,651
========== ======= =======
Basic earnings per common share $ 2.20 2.04 1.63
========== ======= =======
Diluted earnings per common share $ 2.20 2.04 1.63
========== ======= =======
See accompanying notes to consolidated financial statements.
3
WILSON BANK HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
THREE YEARS ENDED DECEMBER 31, 2003
In Thousands
------------------------------
2003 2002 2001
---- ---- ----
Net earnings $ 9,435 8,529 6,651
---------- --------- -----
Other comprehensive earnings (losses), net of tax:
Net unrealized gains (losses) on available-for-sale securities
arising during period, net of taxes of $567,000
$445,000 and $442,000, respectively (915) 717 724
Less: reclassification adjustment for net gains included
in net earnings, net of taxes - (1) -
---------- --------- -----
Other comprehensive earnings (losses) (915) 716 724
---------- --------- -----
Comprehensive earnings $ 8,520 $ 9,245 7,375
========== ========= =====
See accompanying notes to consolidated financial statements.
4
WILSON BANK HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 2003
In Thousands
-------------------------------------------------------------------------------
Net Unrealized
Additional Gain (Loss) On
Common Paid-In Retained Available-For-
Stock Capital Earnings Sale Securities Total
------------- ---------- -------- --------------- -------
Balance December 31, 2000 $ 4,012 10,162 25,172 (611) 38,735
Cash dividends declared, $.48 per share - - (1,920) - (1,920)
Issuance of 93,730 shares of stock
pursuant to dividend reinvestment plan 94 1,649 - - 1,743
Issuance of 2,532 shares of stock pursuant
to exercise of stock options 2 36 - - 38
Net change in unrealized gain (loss) on
available-for-sale securities during
the year, net of taxes of $442,000 - - - 724 724
Net earnings for the year - - 6,651 - 6,651
------------- --------- ------- ---------- ------
Balance December 31, 2001 4,108 11,847 29,903 113 45,971
Cash dividends declared, $.58 per share - - (2,378) - (2,378)
Issuance of 105,194 shares of stock
pursuant to dividend reinvestment plan 105 2,046 - - 2,151
Issuance of 2,666 shares of stock pursuant
to exercise of stock options 3 38 - - 41
Net change in unrealized gain on
available-for-sale securities during
the year, net of taxes of $445,000 - - - 717 717
Net earnings for the year - - 8,529 - 8,529
------------- --------- ------- ---------- ------
Balance December 31, 2002 4,216 13,931 36,054 830 55,031
Cash dividends declared, $.63 per share - - (2,651) - (2,651)
Issuance of 102,568 shares of stock
pursuant to dividend reinvestment plan 103 2,289 - - 2,392
Issuance of 2,000 shares of stock pursuant
to exercise of stock options 3 28 - - 31
Issuance of 2,160,028 shares of stock
pursuant to a 2 for 1 stock split 4,320 (4,320) - - -
Net change in unrealized gain (loss) on
available-for-sale securities during
the year, net of taxes of $567,000 - - - (915) (915)
Net earnings for the year - - 9,435 - 9,435
------------- --------- ------- ---------- ------
Balance December 31, 2003 $ 8,642 11,928 42,838 (85) 63,323
============= ========= ======= ========== ======
See accompanying notes to consolidated financial statements.
5
WILSON BANK HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 2003
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
In Thousands
-------------------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Interest received $ 43,901 45,010 48,046
Fees received 6,924 6,697 6,692
Proceeds from sales of loans 129,706 84,817 62,005
Origination of loans held for sale (120,704) (89,933) (64,039)
Interest paid (15,499) (18,967) (26,027)
Cash paid to suppliers and employees (18,206) (16,678) (15,193)
Income taxes paid (7,108) (5,815) (4,422)
------------- ------- -------
Net cash provided by operating activities 19,014 5,131 7,062
------------- ------- -------
Cash flows from investing activities:
Purchase of available-for-sale securities (166,265) (100,513) (96,899)
Proceeds from maturities of available-for-sale securities 133,378 79,668 89,893
Proceeds from sale of available-for-sale securities - 501 -
Purchase of held-to-maturity securities (5,211) (1,076) (1,475)
Proceeds from maturities of held-to-maturity securities 2,781 2,993 2,394
Loans made to customers, net of repayments (43,980) (58,135) (64,379)
Purchase of bank premises and equipment (5,160) (1,504) (870)
Proceeds from sales of fixed assets 137 3 -
Proceeds from sales of other assets 188 105 -
Proceeds from sales of other real estate 1,067 761 875
------------- ------- -------
Net cash used in investing activities (83,065) (77,197) (70,461)
------------- ------- -------
Cash flows from financing activities:
Net increase in non-interest bearing, savings, NOW
and money market deposit accounts 77,416 48,349 44,361
Net increase in time deposits 13,595 28,483 14,632
Proceeds from (purchase of) sale of securities under
agreements to repurchase 738 (683) (1,159)
Repayments to Federal Home Loan Bank, net (285) (373) (487)
Dividends paid (2,651) (2,378) (1,920)
Dividends paid to minority shareholders (249) (207) (120)
Proceeds from sale of stock to minority shareholders 224 186 105
Proceeds from sale of common stock dividend reinvestment 2,392 2,151 1,743
Proceeds from sale of common stock pursuant to exercise
of stock options 31 41 38
------------- ------- -------
Net cash provided by financing activities 91,211 75,569 57,193
------------- ------- -------
Net increase (decrease) in cash and cash equivalents 27,160 3,503 (6,206)
Cash and cash equivalents at beginning of year 55,163 51,660 57,866
------------- ------- -------
Cash and cash equivalents at end of year $ 82,323 55,163 51,660
============= ====== =======
See accompanying notes to consolidated financial statements.
6
WILSON BANK HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
THREE YEARS ENDED DECEMBER 31, 2003
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
In Thousands
--------------------------------------------
2003 2002 2001
---- ---- ----
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 9,435 8,529 6,651
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,287 1,234 1,230
Provision for possible loan losses 1,904 2,344 1,976
Provision for deferred taxes (266) (482) (512)
Loss on sales of other real estate 112 68 27
Loss on sales of other assets 35 21 -
Security gains - (1) -
Gain on sales of fixed assets (21) (3) -
FHLB dividend reinvestment (99) (103) (123)
Decrease (increase) in loans held for sale 6,887 (6,490) (3,074)
Increase (decrease) in taxes payable (602) 60 131
Decrease (increase) in accrued interest receivable (115) 23 286
Decrease in interest payable (282) (752) (394)
Increase in other assets (358) (122) (342)
Increase (decrease) in accrued expenses 181 (61) 619
Net gains of minority interests of commercial
bank subsidiaries 916 866 587
------------- ------ ------
Total adjustments 9,579 (3,398) 411
------------- ------ ------
Net cash provided by operating activities $ 19,014 5,131 7,062
============= ====== ======
Supplemental Schedule of Non-Cash Activities:
Unrealized gain (loss) in value of securities available-for-sale,
net of taxes of $567,000 in 2003, $445,000 in 2002,
and $442,000 in 2001 $ (915) 717 724
============= ====== ======
Non-cash transfers from loans to other real estate $ 778 1,232 890
============= ====== ======
Non-cash transfers from loans to other assets $ 242 178 -
============= ====== ======
See accompanying notes to consolidated financial statements.
7
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Wilson Bank Holding Company
and Subsidiaries ("the Company") are in accordance with accounting
principles generally accepted in the United States of America and
conform to general practices within the banking industry. The following
is a brief summary of the significant policies.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiary, Wilson Bank & Trust,
DeKalb Community Bank, a 50% owned subsidiary, and Community
Bank of Smith County, a 50% owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(b) NATURE OF OPERATIONS
Wilson Bank & Trust, DeKalb Community Bank and Community Bank
of Smith County operate under state bank charters and provide
full banking services. As state banks, the subsidiary banks
are subject to regulations of the Tennessee Department of
Financial Institutions and the Federal Deposit Insurance
Corporation. The areas served by the banks include Wilson
County, DeKalb County, Smith County and Trousdale County,
Tennessee and surrounding counties in Middle Tennessee.
Services are provided at the three main offices and eleven
branch locations.
(c) ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to
determination of the allowance for possible loan losses and
the valuation of debt and equity securities and the related
deferred taxes.
(d) LOANS
Loans are stated at the principal amount outstanding. Unearned
discount, deferred loan fees net of loan acquisition costs,
and the allowance for possible loan losses are shown as
reductions of loans. Loan origination and commitment fees and
certain loan-related costs are being deferred and the net
amount amortized as an adjustment of the related loan's yield
over the contractual life of the loan. Unearned discount
represents the unamortized amount of finance charges,
principally related to certain installment loans. Interest
income on most loans is accrued based on the principal amount
outstanding.
8
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(d) LOANS, CONTINUED
The Company follows the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors
for Impairment of a Loan" and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." These pronouncements apply to impaired loans
except for large groups of smaller-balance homogeneous loans
that are collectively evaluated for impairment including
residential mortgage and installment loans.
A loan is impaired when 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. Impaired loans are measured at the present value of
expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the
fair value of the collateral if the loan is collateral
dependent. If the measure of the impaired loan is less than
the recorded investment in the loan, the Company shall
recognize an impairment by creating a valuation allowance with
a corresponding charge to the provision for possible loan
losses or by adjusting an existing valuation allowance for the
impaired loan with a corresponding charge or credit to the
provision for possible loan losses.
The Company's installment loans are divided into various
groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment and, thus, are not
subject to the provisions of SFAS Nos. 114 and 118.
Substantially all other loans of the Company are evaluated for
impairment under the provisions of SFAS Nos. 114 and 118.
The Company considers all loans on nonaccrual status that are
subject to the provisions of SFAS Nos. 114 and 118 to be
impaired. Loans are placed on nonaccrual status when doubt as
to timely collection of principal or interest exists, or when
principal or interest is past due 90 days or more unless such
loans are well-secured and in the process of collection.
Delays or shortfalls in loan payments are evaluated along with
various other factors to determine if a loan is impaired.
Generally, delinquencies under 90 days are considered
insignificant unless certain other factors are present which
indicate impairment is probable. The decision to place a loan
on nonaccrual status is also based on an evaluation of the
borrower's financial condition, collateral, liquidation value,
and other factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status,
all interest accrued and uncollected on the loan in the
current fiscal year is reversed from income, and all interest
accrued and uncollected from the prior year is charged off
against the allowance for possible loan losses. Thereafter,
interest on nonaccrual loans is recognized as interest income
only to the extent that cash is received and future collection
of principal is not in
9
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(d) LOANS, CONTINUED
doubt. If the collectibility of outstanding principal is
doubtful, such cash received is applied as a reduction of
principal. A nonaccrual loan may be restored to an accruing
status when principal and interest are no longer past due and
unpaid and future collection of principal and interest on a
timely basis is not in doubt.
Loans not on nonaccrual status are classified as impaired in
certain cases when there is inadequate protection by the
current net worth and financial capacity of the borrower or of
the collateral pledged, if any. In those cases, such loans
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.
Generally, the Company also classifies as impaired any loans
the terms of which have been modified in a troubled debt
restructuring. Interest is generally accrued on such loans
that continue to meet the modified terms of their loan
agreements.
The Company's charge-off policy for impaired loans is similar
to its charge-off policy for all loans in that loans are
charged off in the month when they are considered
uncollectible.
(e) ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses represents a charge to
earnings necessary, after loan charge-offs and recoveries, to
maintain the allowance for possible loan losses at an
appropriate level which is adequate to absorb estimated losses
inherent in the loan portfolio. Such estimated losses arise
primarily from the loan portfolio but may also be derived from
other sources, including commitments to extend credit and
standby letters of credit. The level of the allowance is
determined on a quarterly basis using procedures which
include: (1) categorizing commercial and commercial real
estate loans into risk categories to estimate loss
probabilities based primarily on the historical loss
experience of those risk categories and current economic
conditions; (2) analyzing significant commercial and
commercial real estate credits and calculating specific
reserves as necessary; (3) assessing various homogeneous
consumer loan categories to estimate loss probabilities based
primarily on historical loss experience; (4) reviewing
unfunded commitments; and (5) considering various other
factors, such as changes in credit concentrations, loan mix,
and economic conditions which may not be specifically
quantified in the loan analysis process.
10
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) ALLOWANCE FOR POSSIBLE LOAN LOSSES, CONTINUED
The allowance for possible loan losses consists of an
allocated portion and an unallocated, or general portion. The
allocated portion is maintained to cover estimated losses
applicable to specific segments of the loan portfolio. The
unallocated portion is maintained to absorb losses which
probably exist as of the evaluation date but are not
identified by the more objective processes used for the
allocated portion of the allowance due to risk of errors or
imprecision. While the total allowance consists of an
allocated portion and an unallocated portion, these terms are
primarily used to describe a process. Both portions of the
allowance are available to provide for inherent loss in the
entire portfolio.
The allowance for possible loan losses is increased by
provisions for possible loan losses charged to expense and is
reduced by loans charged off net of recoveries on loans
previously charged off. The provision is based on management's
determination of the amount of the allowance necessary to
provide for estimated loan losses based on its evaluation of
the loan portfolio. Determining the appropriate level of the
allowance and the amount of the provision involves
uncertainties and matters of judgment and therefore cannot be
determined with precision.
(f) DEBT AND EQUITY SECURITIES
The Company applies the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under the
provisions of the Statement, securities are classified in
three categories and accounted for as follows:
- Securities Held-to-Maturity
Debt securities that the enterprise has the positive
intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized
cost. Amortization of premiums and accretion of
discounts are recognized by the interest method.
- Trading Securities
Debt and equity securities that are bought and held
principally for the purpose of selling them in the near
term are classified as trading securities and reported
at fair value, with unrealized gains and losses included
in earnings.
11
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- Securities Available-for-Sale
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported
at estimated fair value, with unrealized gains and
losses excluded from earnings and reported in a separate
component of stockholders' equity. Premiums and
discounts are recognized by the interest method.
No securities have been classified as trading securities.
(f) DEBT AND EQUITY SECURITIES, CONTINUED
Realized gains or losses from the sale of debt and equity
securities are recognized based upon the specific
identification method.
(g) LOANS HELD FOR SALE
Mortgage loans held for sale are reported at the lower of cost
or market value determined by outstanding commitments from
investors at the balance sheet date. These loans are valued on
an aggregate basis.
(h) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost. Depreciation is
computed primarily by the straight-line method over the
estimated useful lives of the related assets. Gain or loss on
items retired and otherwise disposed of is credited or charged
to operations and cost and related accumulated depreciation
are removed from the asset and accumulated depreciation
accounts.
Expenditures for major renewals and improvements of premises
and equipment are capitalized and those for maintenance and
repairs are charged to earnings as incurred.
(i) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
Federal funds sold. Generally, Federal funds sold are
purchased and sold for one-day periods. Management makes
deposits only with financial institutions it considers to be
financially sound.
12
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(j) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Substantially all repurchase agreement liabilities represent
amounts advanced by various customers. Securities are pledged
to cover these liabilities, which are not covered by federal
deposit insurance.
(k) LONG-TERM ASSETS
Premises and equipment, intangible assets, and other long-term
assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded
at fair value.
(l) INCOME TAXES
Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of
non-taxable income such as interest on state and municipal
securities) and deferred taxes on temporary differences
between the amount of taxable and pretax financial income and
between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax
assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to
the period in which the deferred tax asset and liabilities are
expected to be realized or settled as prescribed in Statement
of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the
provision for income taxes.
The Company and its wholly-owned subsidiaries file a
consolidated Federal income tax return. The 50% owned
subsidiaries file a separate Federal income tax return but are
included in the Company's consolidated state income tax
return. Each subsidiary provides for income taxes on a
separate-return basis.
(m) STOCK OPTIONS
The Company uses the fair value method to calculate the
compensation reported in the proforma earnings in note 17 to
the consolidated financial statements.
13
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(n) ADVERTISING COSTS
Advertising costs are expensed when incurred by the Company.
(o) STOCK SPLIT
The Company's Board of Directors voted a 2 for 1 stock split
for stockholders of record as of October 1, 2003 payable
October 31, 2003. Each stockholder received one (1) additional
share for each one (1) share owned with no allowance for
fractional shares. Per share data included in these
consolidated financial statements has been restated to give
effect to the stock split.
(p) OTHER REAL ESTATE
Real estate acquired in settlement of loans is initially
recorded at the lower of cost (loan value of real estate
acquired in settlement of loans plus incidental expense) or
estimated fair value, less estimated cost to sell. Based on
periodic evaluations by management, the carrying values are
reduced by a direct charge to earnings when they exceed net
realizable value. Costs relating to the development and
improvement of the property are capitalized, while holding
costs of the property are charged to expense in the period
incurred.
(q) RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 and 2001
figures to conform to the presentation for 2003.
(r) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the subsidiary banks have
entered into off-balance-sheet financial instruments
consisting of commitments to extend credit, commitments under
credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or
related fees are incurred or received.
14
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(2) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The classification of loans at December 31, 2003 and 2002 is as
follows:
In Thousands
---------------------------
2003 2002
---- ----
Commercial, financial and agricultural $ 174,235 192,945
Installment 64,880 59,721
Real estate - construction 39,508 30,794
Real estate - mortgage 314,168 267,145
------------ -------
592,791 550,605
Unearned interest - (4)
Allowance for possible loan losses (8,077) (6,943)
------------ -------
$ 584,714 543,658
============ =======
The principal maturities on loans at December 31, 2003 are as follows:
In Thousands
---------------------------------------------------------------------------------
Commercial,
Financial
and Real Estate - Real Estate-
Agricultural Installment Construction Mortgage Total
-------------- ----------- ------------ ------------ -----
3 months or less $ 30,162 4,662 18,885 3,337 57,046
3 to 12 months 67,983 4,481 19,262 3,559 95,285
1 to 5 years 53,249 51,468 1,361 51,205 157,283
Over 5 Years 22,841 4,269 - 256,067 283,177
------------- ------ ------ ------- -------
$ 174,235 64,880 39,508 314,168 592,791
============= ====== ====== ======= =======
At December 31, 2003, variable rate loans were $297,608,000 and fixed
rate loans totaled $295,183,000. At December 31, 2002, variable rate
and fixed rate loans total $255,229,000 and $295,376,000, respectively.
In the normal course of business, the Company's subsidiaries have 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 $14,092,000 and $11,589,000 at December 31, 2003 and
2002, respectively. As of December 31, 2003 none of these loans were
restructured, nor were any related party loans charged-off during the
past three years.
15
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(2) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES, CONTINUED
An analysis of the activity with respect to such loans to related
parties is as follows:
In Thousands
-------------------------
December 31,
-------------------------
2003 2002
---- ----
Balance, January 1 $ 11,589 12,471
New loans during the year 19,112 13,756
Repayments during the year (16,609) (14,638)
--------- -------
Balance, December 31 $ 14,092 11,589
========= =======
A director of the Company performs appraisals related to certain loan
customers. Fees paid to the director for these services were $493,000
in 2003, $314,000 in 2002 and $208,000 in 2001.
Loans which had been placed on non-accrual status totaled $462,000 and
$483,000 at December 31, 2003 and 2002, respectively. Had interest on
these loans been accrued, interest income would have been increased by
approximately $8,000 in 2003 and $12,000 in 2002. In 2001, interest
income that would have been earned had there been no non-accrual loans
totaled approximately $12,000.
Transactions in the allowance for possible loan losses for the years
ended December 31, 2003, 2002 and 2001 are summarized as follows:
In Thousands
-----------------------------------------------
2003 2002 2001
---- ---- ----
Balance, beginning of year $ 6,943 5,489 4,525
Provision charged to operating expense 1,904 2,344 1,976
Loans charged off (966) (1,099) (1,251)
Recoveries on losses 196 209 239
------------ ------ ------
Balance, end of year $ 8,077 6,943 5,489
============ ====== ======
The Company's principal customers are basically 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
varies depending upon the purpose of the credit and the borrower's
financial condition.
16
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(2) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES, CONTINUED
Impaired loans and related loan loss reserve amounts at December 31,
2003 and 2002 were as follows:
In Thousands
------------------------
December 31,
------------------------
2003 2002
---- ----
Recorded investment $ 3,364 483
Loan loss reserve $ 121 108
The average recorded investment in impaired loans for the years ended
December 31, 2003, 2002 and 2001 was $1,006,000, $133,000 and $111,000,
respectively. The related total amount of interest income recognized on
the accrual basis for the period that such loans were impaired was
$69,000 during 2003. There was no interest income recognized on these
loans during 2002 or 2001.
In 2003, 2002 and 2001, the Company originated and sold loans in the
secondary market of $120,704,000, $89,933,000 and $64,039,000,
respectively. At December 31, 2003, the wholly-owned subsidiary Bank
had not been required to repurchase any of the loans originated by the
Bank and sold in the secondary market. The gain on sale of these loans
totaled $2,115,000, $1,374,000 and $1,040,000 in 2003, 2002 and 2001,
respectively.
Of the loans sold in the secondary market, the recourse to the
wholly-owned subsidiary Bank is limited. On loans sold to the Federal
Home Loan Mortgage Corporation, the Bank has a recourse obligation for
one year from the purchase date. At December 31, 2003, loans sold to
the Federal Home Loan Mortgage Corporation with existing recourse
totaled $246,000. All other loans sold in the secondary market provide
the purchase recourse to the Bank for a period of 90 days from the date
of purchase and only in the event of a default by the borrower pursuant
to the terms of the individual loan agreement. At December 31, 2003,
total loans sold with recourse to the Bank, including those sold to the
Federal Home Loan Mortgage Corporation, aggregated $47,522,000.
Management expects no loss to result from these recourse provisions.
(3) DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the consolidated
balance sheet according to management's intent. Debt and equity
securities at December 31, 2003 consist of the following:
Securities Held-To-Maturity
-----------------------------------------------------------------
In Thousands
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- ---------
Obligations of states and political
subdivisions $ 15,851 709 26 16,534
Mortgage-backed securities 792 1 1 792
------------ --- -- ------
$ 16,643 710 27 17,326
============ === == ======
17
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(3) DEBT AND EQUITY SECURITIES, CONTINUED
Securities Available-For-Sale
-----------------------------------------------------------------
In Thousands
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ---------- ---------- ---------
U.S. Treasury and other
U.S. Government agencies and
corporations $ 124,605 621 886 124,340
Obligations of states and political
subdivisions 1,380 81 - 1,461
Corporate bonds 500 - 1 499
Mortgage-backed securities 9,191 6 45 9,152
------------ --- --- -------
$ 135,676 708 932 135,452
============ === === =======
The Company's classification of securities at December 31, 2002 is as
follows:
Securities Held-To-Maturity
-----------------------------------------------------------------
In Thousands
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ---------- ---------- ---------
Obligations of states and political
subdivisions $ 12,877 626 - 13,503
Mortgage-backed securities 1,336 3 4 1,335
------------ --- -- ------
$ 14,213 629 4 14,838
============ === == ======
Securities Available-For-Sale
-----------------------------------------------------------------
In Thousands
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ---------- ---------- ---------
U.S. Treasury and other U.S.
Government agencies and
corporations $ 98,835 1,359 26 100,168
Obligations of states and political
subdivisions 1,804 80 - 1,884
Corporate bonds 1,705 16 - 1,721
Mortgage-backed securities 346 10 - 356
------------ ----- -- -------
$ 102,690 1,465 26 104,129
============ ===== == =======
18
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(3) DEBT AND EQUITY SECURITIES, CONTINUED
The amortized cost and estimated market value of debt securities at
December 31, 2003, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
In Thousands
----------------------------------
Estimated
Amortized Market
Securities Held-To-Maturity Cost Value
- --------------------------- --------------- -----------
Due in one year or less $ 1,114 1,134
Due after one year through five years 3,241 3,420
Due after five years through ten years 7,644 7,921
Due after ten years 3,852 4,059
------------ ------
15,851 16,534
Mortgage-backed securities 792 792
------------ ------
$ 16,643 17,326
============ ======
In Thousands
----------------------------------
Estimated
Amortized Market
Securities Available-For-Sale Cost Value
- --------------------------- --------------- -----------
Due in one year or less $ 3,201 3,231
Due after one year through five years 101,031 101,201
Due after five years through ten years 19,196 18,798
Due after ten years 498 511
---------- -------
123,926 123,741
Mortgage-backed securities 9,191 9,152
Federal Home Loan Bank stock 2,471 2,471
Bankers Bank stock 88 88
---------- -------
$ 135,676 135,452
========== =======
The Company periodically applies the stress test to its securities
portfolio. To satisfy the stress test a security's estimated market
value should not decline more than certain percentages given certain
assumed interest rate increases. The Company had no securities that
failed to meet the stress test.
19
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(3) DEBT AND EQUITY SECURITIES, CONTINUED
Results from sales of debt and equity securities are as follows:
In Thousands
--------------------------------------
2003 2002 2001
---- ---- ----
Gross proceeds $ - 501 -
===== === ===
Gross realized gains $ - 1 -
Gross realized losses - - -
----- --- ---
Net realized gains $ - 1 -
===== === ===
Securities carried in the balance sheet of approximately $98,302,000
(approximate market value of $98,802,000) and $90,834,000 (approximate
market value of $92,681,000), were pledged to secure public deposits
and for other purposes as required or permitted by law at December 31,
2003 and 2002, respectively.
Included in the securities above are $16,695,000 (approximate market
value of $17,427,000) and $13,724,000 (approximate market value of
$14,378,000) at December 31, 2003 and 2002, respectively, in
obligations of political subdivisions located within the State of
Tennessee. Management purchases only obligations of such political
subdivisions it considers to be financially sound.
Securities that have rates that adjust prior to maturity totaled
$912,000 (approximate market value of $912,000) and $1,521,000
(approximate market value of $1,525,000) at December 31, 2003 and 2002,
respectively.
Included in the securities portfolio is stock of the Federal Home Loan
Bank and Bankers Bank amounting to $2,471,000 and $88,000,
respectively, at December 31, 2003. Included in the securities
portfolio is stock of the Federal Home Loan Bank and Bankers Bank
amounting to $2,372,000 and $88,000, respectively, at December 31,
2002. The stock can be sold back at par and only to the Federal Home
Loan Bank or to another member institution or to Bankers Bank,
respectively.
20
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(4) PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 2003 and 2002 is
as follows:
In Thousands
---------------------------
2003 2002
---- ----
Land $ 4,522 3,413
Buildings 13,699 11,918
Construction in progress 993 4
Leasehold improvements 140 137
Furniture and equipment 6,179 9,300
Automobiles 134 153
------------ ------
25,667 24,925
Less accumulated depreciation (6,501) (9,516)
------------ ------
$ 19,166 15,409
============ ======
Building additions during 2003 and 2002 include payments of $1,844,000
and $171,000, respectively, to a construction company owned by a
director of the Company.
(5) DEPOSITS
Deposits at December 31, 2003 and 2002 are summarized as follows:
In Thousands
---------------------------
2003 2002
---- ----
Demand deposits $ 86,730 65,598
Savings accounts 44,000 39,110
Negotiable order of withdrawal accounts 66,196 55,310
Money market demand accounts 198,553 158,044
Certificates of deposit $100,000 or greater 127,083 136,220
Other certificates of deposit 208,846 193,377
Individual retirement accounts $100,000 or greater 12,006 9,331
Other individual retirement accounts 27,005 22,418
------------ -------
$ 770,419 679,408
============ =======
21
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(5) DEPOSITS, CONTINUED
Principal maturities of certificates of deposit and individual
retirement accounts at December 31, 2003 are as follows:
(In Thousands)
----------------
Maturity Total
- -------- -----
2004 $ 206,191
2005 74,947
2006 64,309
2007 18,995
2008 10,263
Thereafter 235
------------
$ 374,940
============
The subsidiary banks are required to maintain cash balances or balances
with the Federal Reserve Bank or other correspondent banks based on
certain percentages of deposit types. The average required amounts for
the years ended December 31, 2003 and 2002 were approximately
$10,900,000 and $8,458,000, respectively.
(6) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The maximum amounts of outstanding repurchase agreements at any month
end during 2003 and 2002 was $14,691,000 and $15,804,000, respectively.
The average daily balance outstanding during 2003, 2002 and 2001 was
$14,460,000, $13,700,000 and $11,540,000, respectively. The underlying
securities are typically held by other financial institutions and are
designated as pledged.
(7) ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank at December 31, 2003 and
2002 consist of the following:
In Thousands
-----------------------------
December 31,
-----------------------------
Interest Rate 2003 2002
- ------------- ---- ----
6.90% $ 170 236
7.25% 542 761
------- ---
$ 712 997
======= ===
22
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(7) ADVANCES FROM FEDERAL HOME LOAN BANK, CONTINUED
Advances from the Federal Home Loan Bank are to mature as follows at
December 31, 2003:
Year Ending In Thousands
December 31, Amount
- ------------ ---------------
2010 $ 712
===============
These advances are collateralized by approximately $971,000 of the
Company's mortgage loan portfolio.
(8) NON-INTEREST INCOME AND NON-INTEREST EXPENSE
The significant components of non-interest income and non-interest
expense for the years ended December 31 are presented below:
In Thousands
-------------------------------------------
2003 2002 2001
---- ---- ----
Non-interest income:
Service charges on deposits $ 4,433 4,234 3,863
Other fees 2,491 2,463 2,820
Gains on sales of loans 2,115 1,374 1,040
Security gains - 1 -
Gains on sales of fixed assets 21 3 -
Other income - 1 9
------------- ------ ------
$ 9,060 8,076 7,732
============ ====== ======
Non-interest expense:
Employee salaries and benefits $ 10,468 9,308 8,553
Employee benefit plan 614 529 508
Occupancy expenses 1,152 1,162 991
Furniture and equipment expenses 1,421 1,106 1,154
Loss on sales of other assets 35 21 -
Loss on sales of other real estate 112 68 27
FDIC insurance 108 106 103
Directors' fees 683 665 601
Other operating expenses 4,868 4,854 4,790
Minority interest in net earnings of
subsidiaries 916 866 587
------------- ------ ------
$ 20,377 18,685 17,314
============ ====== ======
23
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(9) INCOME TAXES
The components of the net deferred tax asset are as follows:
In Thousands
----------------------------
2003 2002
---- ----
Deferred tax asset:
Federal $ 2,641 2,194
State 540 448
------------ ------
3,181 2,642
------------ ------
Deferred tax liability:
Federal (580) (880)
State (118) (180)
------------ ------
(698) (1,060)
------------ ------
$ 2,483 1,582
============ ======
The tax effects of each type of significant item that gave rise to
deferred taxes are:
In Thousands
-----------------------------
2003 2002
---- ----
Financial statement allowance for loan losses
in excess of tax allowance $ 2,857 2,427
Excess of depreciation deducted for tax purposes
over the amounts deducted in the financial statements (406) (255)
Financial statement deduction for deferred compensation
in excess of deduction for tax purposes 238 215
Financial statement income on FHLB stock dividends
not recognized for tax purposes (292) (254)
Unrealized (gain) loss on securities available-for-sale 86 (551)
------------- -----
$ 2,483 1,582
============= =====
24
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(9) INCOME TAXES, CONTINUED
The components of income tax expense (benefit) are summarized as
follows:
In Thousands
---------------------------------------------
Federal State Total
------------- -------- ---------
2003
Current $ 5,369 1,139 6,508
Deferred (221) (45) (266)
------------- ----- -----
Total $ 5,148 1,094 6,242
============= ===== =====
2002
Current $ 4,850 1,025 5,875
Deferred (389) (93) (482)
------------- ----- -----
Total $ 4,461 932 5,393
============= ===== =====
2001
Current $ 3,808 745 4,553
Deferred (431) (81) (512)
------------- ----- -----
Total $ 3,377 664 4,041
============= ===== =====
A reconciliation of actual income tax expense of $6,242,000, $5,393,000
and $4,041,000 for the years ended December 31, 2003, 2002 and 2001,
respectively, to the "expected" tax expense (computed by applying the
statutory rate of 34% to earnings before income taxes) is as follows:
In Thousands
---------------------------------------
2003 2002 2001
---- ---- ----
Computed "expected" tax expense $ 5,330 4,733 3,635
State income taxes, net of Federal income tax benefit 722 624 439
State deferred income taxes related to state income tax
rate increase - (14) -
Tax exempt interest, net of interest expense exclusion (213) (237) (225)
Tax expense related to minority interest income in
subsidiaries 311 294 200
Federal income tax expense above statutory
rate related to taxable income over $10 million 32 - -
Other 60 (7) (8)
---------- ----- -----
$ 6,242 5,393 4,041
========== ===== =====
Total income tax expense for 2002 includes tax expense of less than
$1,000 related to the gain on sale of securities. There were no sales
of securities in 2003 and 2001.
25
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel,
believes that the liabilities, if any, arising from such litigation and
claims will not be material to the consolidated financial position.
The subsidiary banks lease land for certain branch facilities and
automatic teller machine locations. Future minimum rental payments
required under the terms of the noncancellable leases are as follows:
Years Ending December 31, In Thousands
- ------------------------- ------------
2004 $ 51
2005 10
------------
$ 61
============
Total rent expense amounted to $52,000, $52,000 and $58,000,
respectively, during the years ended December 31, 2003, 2002 and 2001.
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist primarily of
commitments to extend credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in
the consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
In Thousands
-------------------------------
Contract or
Notional Amount
-------------------------------
2003 2002
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commercial loan commitments $ 74,760 68,267
Unfunded lines-of-credit 23,896 22,840
Letters of credit 4,772 5,016
------------- ------
Total $ 103,428 96,123
============= ======
26
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to be drawn upon, the total commitment amounts
generally represent future cash requirements. The Company evaluates
each customer's credit-worthiness on a case-by-case basis. The amount
of collateral, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral normally consists of real property.
(12) CONCENTRATION OF CREDIT RISK
Practically all of the Company's loans, commitments, and commercial and
standby letters of credit have been granted to customers in the
Company's market area. Practically all such customers are depositors of
the subsidiary banks. Investment in state and municipal securities also
include governmental entities within the Company's market area. The
concentrations of credit by type of loan are set forth in note 2 to the
consolidated financial statements.
Federal funds sold were deposited with six banks.
(13) EMPLOYEE BENEFIT PLAN
The Company has in effect a 401(k) plan which covers eligible
employees. To be eligible an employee must have obtained the age of 20
1/2. The provisions of the plan provide for both employee and employer
contributions. For the years ended December 31, 2003, 2002 and 2001,
the subsidiary banks contributed $614,000, $529,000 and $508,000,
respectively, to this plan.
(14) DIVIDEND REINVESTMENT PLAN
Under the terms of the Company's dividend reinvestment plan holders of
common stock may elect to automatically reinvest cash dividends in
additional shares of common stock. The Company may elect to sell
original issue shares or to purchase shares in the open market for the
account of participants. Original issue shares of 102,568 in 2003,
105,194 in 2002 and 93,730 in 2001 were sold to participants under the
terms of the plan after giving effect to the 2 for 1 stock split.
(15) REGULATORY MATTERS AND RESTRICTIONS ON DIVIDENDS
The Company and its bank subsidiaries are subject to regulatory capital
requirements administered by the Federal Deposit Insurance Corporation,
the Federal Reserve and the Tennessee Department of Financial
Institutions. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
the Company's financial statements. The Company's capital
classification is also subject to qualitative judgments about
components, risk weightings and other factors. Those qualitative
judgments could also affect the subsidiary banks' capital statuses and
the amount of dividends the subsidiaries may distribute.
27
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(15) REGULATORY MATTERS AND RESTRICTIONS ON DIVIDENDS, CONTINUED
The Company and its subsidiary banks are required to maintain minimum
amounts of capital to total "risk weighted" assets, as defined by the
banking regulators. At December 31, 2003, the Company and its bank
subsidiaries are required to have minimum Tier I and total risk-based
capital ratios of 4% and 8%, respectively and a leverage ratio of 4%.
The actual ratios of the Company and each of its bank subsidiaries were
as follows:
Wilson Bank Wilson DeKalb Community Bank
Holding Company Bank & Trust Community Bank of Smith County
--------------- --------------- --------------- ---------------
2003 2002 2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ---- ---- ----
Tier I ratio 12.36% 11.65% 12.48% 11.55% 11.74% 11.85% 11.77% 11.88%
Total risk-based
ratio 12.61% 12.90% 13.73% 12.80% 12.99% 13.11% 13.02% 13.13%
Leverage ratio 8.83% 7.57% 8.89% 7.47% 7.89% 7.24% 9.38% 8.74%
As of December 31, 2003, the most recent notification from the banking
regulators categorized the Company and its subsidiaries as well
capitalized under the regulatory framework for prompt corrective
action. There are no conditions or events since the notification that
management believes have changed the Company's category.
(16) DEFERRED COMPENSATION PLAN
The Company's wholly-owned subsidiary bank provides its executive
officers a deferred compensation plan, which also provides for death
and disability benefits. The plan was established by the Board of
Directors to reward executive management for past performance and to
provide additional incentive to retain the service of executive
management. There were six employees participating in the plan at
December 31, 2003.
The plan provides retirement benefits for a period of 180 months after
the employee reaches the age of 65. This benefit can be reduced if the
wholly-owned subsidiary bank's average return on assets falls below 1%.
The plan also provides benefits in the event the executive should die
or become disabled prior to reaching retirement. The wholly-owned
subsidiary bank has purchased insurance policies or other assets to
provide the benefits listed above. The insurance policies remain the
sole property of the wholly-owned subsidiary bank and are payable to
the Bank. At December 31, 2003 and 2002, the deferred compensation
liability totaled $622,000 and $561,000, respectively, the cash
surrender value of life insurance was $802,000 and $710,000,
respectively, and the face amount of the insurance policies in force
approximated $3,892,000 in 2003 and 2002, respectively. The deferred
compensation plan is not qualified under Section 401 of the Internal
Revenue Code.
28
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(17) STOCK OPTION PLAN
In April, 1999, the stockholders of the Company approved the Wilson
Bank Holding Company 1999 Stock Option Plan (the "Stock Option Plan").
The Stock Option Plan provides for the granting of stock options, and
authorizes the issuance of common stock upon the exercise of such
options, for up to 200,000 shares of common stock, to officers and
other key employees of the Company and its subsidiaries. Furthermore,
the Company may issue additional shares under the Stock Option Plan as
needed in order that the aggregate number of shares that may be issued
during the term of the Plan is equal to five percent (5%) of the shares
of common stock then issued and outstanding.
Under the Stock Option Plan, stock option awards may be granted in the
form of incentive stock options or nonstatutory stock options, and are
generally exercisable for up to ten years following the date such
option awards are granted. Exercise prices of incentive stock options
must be equal to or greater than 100% of the fair market value of the
common stock on the grant date.
Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting
for Stock Based Compensation", as amended by SFAS No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure", sets forth
the method for recognition of cost of plans similar to those of the
Company. As is permitted, management has elected to continue accounting
for the plan under APB Opinion 25 and related Interpretations. However,
under SFAS No. 123, the Company is required to make proforma
disclosures as if cost had been recognized in accordance with the
pronouncement. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of SFAS No. 123, the
Company's net earnings, basic earnings per common share and diluted
earnings per common share would have been reduced to the proforma
amounts indicated below:
In Thousands
Except Per Share Amounts
-------------------------------------------------------
2003 2002 2001
---- ---- ----
Net earnings As Reported $ 9,435 8,529 6,651
Proforma $ 9,375 8,465 6,573
Basic earnings per As Reported $ 2.20 2.04 1.63
common share Proforma $ 2.19 2.03 1.61
Diluted earnings per As Reported $ 2.20 2.04 1.63
common share Proforma $ 2.18 2.02 1.61
29
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(17) STOCK OPTION PLAN, CONTINUED
A summary of the stock option activity for 2003, 2002 and 2001 is as
follows:
2003 2002 2001
----------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ---------- ------ ---------- ------ ---------
Outstanding at
beginning of year 93,634 $ 15.80 94,298 $ 15.45 94,962 $ 15.32
Granted 10,500 22.50 8,000 19.75 4,500 18.13
Exercised (2,000) (15.32) (2,666) (15.28) (2,532) (15.28)
Forfeited (1,400) (15.28) (5,998) (15.88) (2,632) (15.28)
--------- ---------- ------ ---------- ------ ----------
Outstanding at end of
year 100,734 $ 16.50 93,634 $ 15.80 94,298 $ 15.45
========= ========== ====== ========== ====== ==========
Options exercisable at
year end 31,852 24,642 17,510
========= ====== ======
The following table summarizes information about fixed stock options
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted
Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Outstanding Exercise Contractual Exercisable Exercise
Prices at 12/31/03 Price Life at 12/31/03 Price
- -------- ----------- -------- ----------- ----------- --------
$ 15.28 -
$ 19.75 90,734 $ 15.84 6.4 years 31,852 $ 15.49
$ 22.50 10,000 $ 22.50 10.0 years - $ -
Share and per share data above for 2002 and 2001 have been restated to
reflect a 2 for 1 stock split effective October 31, 2003.
The fair value of options granted in 2003, 2002 and 2001 was $2.69,
$.93 and $3.59, respectively, for each option. The fair value was
estimated using the Black-Scholes option-pricing model. The weighted
average assumptions used to calculate the minimum value were as follows
for 2003, 2002 and 2001, respectively: risk free interest rate of
3.97%, 3.43% and 5.11%, expected life of ten years; and dividend yield
of 2.56%, 2.91% and 2.62%. The dividend yield was computed assuming a
dividend payout of $.58, $.58 and $.48 per share, respectively.
30
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(18) EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings
Per Share" establishes uniform standards for computing and presenting
earnings per share. The computation of basic earnings per share is
based on the weighted average number of common shares outstanding
during the period. For the Company the computation of diluted earnings
per share begins with the basic earnings per share plus the effect of
common shares contingently issuable from stock options. Share and per
share data for 2002 and 2001 have been restated to reflect a 2 for 1
stock split effective October 31, 2003.
The following is a summary of the components comprising basic and
diluted earnings per share (EPS):
In Thousands (except share data)
------------------------------------------------------
2003 2002 2001
---- ---- ----
Basic EPS Computation:
Numerator - Earnings available to
common stockholders $ 9,435 8,529 6,651
--------------- --------- ---------
Denominator - Weighted average number
of common shares outstanding 4,285,000 4,178,976 4,075,792
--------------- --------- ---------
Basic earnings per common share $ 2.20 2.04 1.63
=============== ========= =========
Diluted EPS Computation:
Numerator - Earnings available to
common stockholders $ 9,435 8,529 6,651
--------------- --------- ---------
Denominator:
Weighted average number of common
shares outstanding 4,285,000 4,178,976 4,075,792
Dilutive effect of stock options 9,844 6,146 3,078
--------------- --------- ---------
4,294,844 4,185,122 4,078,870
--------------- --------- ---------
Diluted earnings per common
share $ 2.20 2.04 1.63
=============== ========= =========
31
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(19) WILSON BANK HOLDING COMPANY -
PARENT COMPANY FINANCIAL INFORMATION
WILSON BANK HOLDING COMPANY
(PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
In Thousands
-------------------------------
2003 2002
---- ----
ASSETS
Cash $ 61* 54*
Investment in wholly-owned commercial bank subsidiary 56,598* 49,085*
Investment in 50% owned commercial bank subsidiaries 6,549* 5,769*
Refundable income taxes 115 123
--------------- ------
Total assets $ 63,323 55,031
=============== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity:
Common stock, par value $2.00 per share, authorized
5,000,000 shares, 4,320,606 and 2,108,019 shares
issued and outstanding, respectively $ 8,642 4,216
Additional paid-in capital 11,928 13,931
Retained earnings 42,838 36,054
Unrealized gains (losses) on available-for-sale securities, net
of income taxes of $53,000 and $514,000, respectively (85) 830
--------------- ------
Total stockholders' equity 63,323 55,031
--------------- ------
Total liabilities and stockholders' equity $ 63,323 55,031
=============== ======
* Eliminated in consolidation.
32
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(19) WILSON BANK HOLDING COMPANY -
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
WILSON BANK HOLDING COMPANY
(PARENT COMPANY ONLY)
STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
THREE YEARS ENDED DECEMBER 31, 2003
In Thousands
---------------------------------------------------
2003 2002 2001
---- ---- ----
Expenses:
Directors' fees $ 301 299 272
Other - 21 1
-------------- ----- -----
Loss before Federal income tax benefits
and equity in undistributed earnings of
commercial bank subsidiaries (301) (320) (273)
Federal income tax benefits 115 123 104
-------------- ----- -----
(186) (197) (169)
Equity in undistributed earnings of commercial
bank subsidiaries 9,621* 8,726* 6,820*
-------------- ----- -----
Net earnings 9,435 8,529 6,651
-------------- ----- -----
Other comprehensive earnings (losses), net of tax:
Unrealized gains (losses) on available-for-sale-
securities arising during period, net of taxes
of $567,000, $445,000 and $442,000,
respectively (915) 717 724
Less reclassification adjustments for net gains
included in net earnings, net of taxes - (1) -
Other comprehensive earnings (losses) (915) 716 724
-------------- ----- -----
Comprehensive earnings $ 8,520 9,245 7,375
-------------- ===== =====
* Eliminated in consolidation.
33
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(19) WILSON BANK HOLDING COMPANY -
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
WILSON BANK HOLDING COMPANY
(PARENT COMPANY ONLY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 2003
In Thousands
----------------------------------------------------------------------
Net Unrealized
Additional Gain (Loss) On
Common Paid-In Retained Available-For-
Stock Capital Earnings Sale Securities Total
--------- ---------- -------- ---------------- --------
Balance December 31, 2000 $ 4,012 10,162 25,172 (611) 38,735
Cash dividends declared, $.48 per share - - (1,920) - (1,920)
Issuance of 93,730 shares of stock pursuant
to dividend reinvestment plan 94 1,649 - - 1,743
Issuance of 2,532 shares of stock pursuant
to exercise of stock options 2 36 - - 38
Net change in unrealized gain (loss) on
available-for-sale securities during the
year, net of taxes of $442,000 - - - 724 724
Net earnings for the year - - 6,651 - 6,651
--------- ------ ------ ---- ------
Balance December 31, 2001 4,108 11,847 29,903 113 45,971
Cash dividends declared, $.58 per share - - (2,378) - (2,378)
Issuance of 105,194 shares of stock
pursuant to dividend reinvestment plan 105 2,046 - - 2,151
Issuance of 2,666 shares of stock pursuant
to exercise of stock options 3 38 - - 41
Net change in unrealized gain on
available-for-sale securities during the
year, net of taxes of $445,000 - - - 717 717
Net earnings for the year - - 8,529 - 8,529
--------- ------ ------ ---- ------
Balance December 31, 2002 4,216 13,931 36,054 830 55,031
Cash dividends declared, $.63 per share (2,651) (2,651)
Issuance of 102,568 shares of stock
pursuant to dividend reinvestment plan 103 2,289 - - 2,392
Issuance of 2,000 shares of stock pursuant
to exercise of stock options 3 28 - - 31
Issuance of 2,160,028 shares of stock
pursuant to a 2 for 1 stock split 4,320 (4,320) - - -
Net change in unrealized gain (loss) on
available-for-sale securities during the
year, net of taxes of $567,000 - - - (915) (915)
Net earnings for the year - - 9,435 - 9,435
--------- ------ ------ ---- ------
Balance December 31, 2003 $ 8,642 11,928 42,838 (85) 63,323
========= ====== ====== ==== ======
34
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(19) WILSON BANK HOLDING COMPANY -
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
WILSON BANK HOLDING COMPANY
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 2003
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
In Thousands
--------------------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Cash paid to suppliers and other $ (301) (320) (273)
Tax benefits received 123 104 109
------------- ------ ------
Net cash used in operating activities (178) (216) (164)
------------- ------ ------
Cash flows from investing activities:
Dividends received from commercial bank
subsidiaries 639 616 445
Dividends reinvested in commercial bank
subsidiaries (226) (186) (105)
Capital contribution to bank subsidiary - - (38)
------------- ------ ------
Net cash provided by investing activities 413 430 302
------------- ------ ------
Cash flows from financing activities:
Dividends paid (2,651) (2,378) (1,920)
Proceeds from sale of stock 2,392 2,151 1,743
Proceeds from exercise of stock options 31 41 38
------------- ------ ------
Net cash used in financing activities (228) (186) (139)
------------- ------ ------
Net increase (decrease) in cash and cash
equivalents 7 28 (1)
Cash and cash equivalents at beginning of year 54 26 27
------------- ------ ------
Cash and cash equivalents at end of year $ 61 54 26
------------- ====== ======
35
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(19) WILSON BANK HOLDING COMPANY -
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
WILSON BANK HOLDING COMPANY
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS, CONTINUED
THREE YEARS ENDED DECEMBER 31, 2003
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
In Thousands
-------------------------------------------------
2003 2002 2001
---- ---- ----
Reconciliation of net earnings to net cash used in
operating activities:
Net earnings $ 9,435 8,529 6,651
Adjustments to reconcile net earnings to net cash used
in operating activities:
Equity in earnings of commercial bank
subsidiaries (9,621) (8,726) (6,820)
Decrease (increase) in refundable income taxes 8 (19) 5
------------- ------ ------
Total adjustments (9,613) (8,745) (6,815)
------------- ------ ------
Net cash used in operating activities $ (178) (216) (164)
============= ====== ======
36
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(20) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments (SFAS No. 107), requires that the
Company disclose estimated fair values for its financial instruments.
Fair value estimates, methods, and assumptions are set forth below for
the Company's financial instruments.
Cash and short-term investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Securities
The carrying amounts for short-term securities approximate
fair value because they mature in 90 days or less and do not
present unanticipated credit concerns. The fair value of
longer-term securities and mortgage-backed securities,
except certain state and municipal securities, is estimated
based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value
of certain state and municipal securities is not readily
available through market sources other than dealer
quotations, so fair value estimates are based on quoted
market prices of similar instruments, adjusted for
differences between the quoted instruments and the
instruments being valued.
SFAS No. 107 specifies that fair values should be calculated
based on the value of one unit without regard to any premium
or discount that may result from concentrations of ownership
of a financial instrument, possible tax ramifications, or
estimated transaction costs. Accordingly, these
considerations have not been incorporated into the fair
value estimates.
Loans
Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by
type such as commercial, mortgage, credit card and other
consumer. Each loan category is further segmented into fixed
and adjustable rate interest terms.
37
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(20) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Loans, Continued
The fair value of the various categories of loans is
estimated by discounting the future cash flows using the
current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining average estimated maturities.
The estimated maturity for mortgages is modified from the
contractual terms to give consideration to management's
experience with prepayments. Management has made estimates
of fair value discount rates that it believes to be
reasonable. However, because there is no market for many of
these financial instruments, management has no basis to
determine whether the fair value presented below would be
indicative of the value negotiated in an actual sale.
The value of the loan portfolio is also discounted in
consideration of the credit quality of the loan portfolio as
would be the case between willing buyers and sellers.
Particular emphasis has been given to loans on the
subsidiary banks' internal watch list. Valuation of these
loans is based upon borrower performance, collateral values
(including external appraisals), etc.
Deposit Liabilities
The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on
demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using
the rates currently offered for deposits of similar
remaining maturities. Under the provision of SFAS No. 107
the fair value estimates for deposits does not include the
benefit that results from the low cost funding provided by
the deposit liabilities compared to the cost of borrowing
funds in the market.
Securities Sold Under Repurchase Agreements
The securities sold under repurchase agreements are payable
upon demand. For this reason the carrying amount is a
reasonable estimate of fair value.
Advances from Federal Home Loan Bank
The fair value of the advances from the Federal Home Loan
Bank are estimated by discounting the future cash outflows
using the current market rates.
38
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(20) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Commitments to Extend Credit, Standby Letters of Credit and
Financial Guarantees Written
Loan commitments are made to customers generally for a
period not to exceed one year and at the prevailing interest
rates in effect at the time the loan is closed. Commitments
to extend credit related to construction loans are made for
a period not to exceed six months with interest rates at the
current market rate at the date of closing. In addition,
standby letters of credit are issued for periods up to three
years with rates to be determined at the date the letter of
credit is funded. Fees are only charged for the construction
loans and the standby letters of credit and the amounts
unearned at December 31, 2003 and 2002 are insignificant.
Accordingly, these commitments have no carrying value and
management estimates the commitments to have no significant
fair value.
The carrying value and estimated fair values of the
Company's financial instruments at December 31, 2003 and
2002 are as follows:
In Thousands
----------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------- ---------- ---------- ----------
Financial assets:
Cash and short-term
investments $ 82,323 82,323 55,163 55,163
Securities 152,095 152,778 118,342 118,967
Loans, net of unearned
interest 592,791 550,601
Less: allowance for possible
loan losses 8,077 6,943
------------- -------
Loans, net of allowance 584,714 591,733 543,658 547,123
------------- -------
Loans held for sale 3,972 3,972 10,859 10,859
Financial liabilities:
Deposits 770,419 776,938 679,408 684,375
Securities sold
under repurchase
agreements 8,606 8,606 7,868 7,868
Advances from Federal Home
Loan Bank 712 819 997 1,160
Unrecognized financial
instruments:
Commitments to
extend credit - - - -
Standby letters of credit - - - -
39
WILSON BANK HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2003, 2002 AND 2001
(20) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Limitations
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
the financial instruments. These estimates do not reflect
any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists
for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on estimating
on-and-off-balance sheet financial instruments without
attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are
not considered financial instruments. For example, a
subsidiary Bank has a mortgage department that contributes
net fee income annually. The mortgage department is not
considered a financial instrument, and its value has not
been incorporated into the fair value estimates. Other
significant assets and liabilities that are not considered
financial assets or liabilities include deferred tax assets
and liabilities and property, plant and equipment. In
addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered
in the estimates.
40