WILSON BANK HOLDING CO

Net Interest Income

The schedule which follows indicates the average balances for each major balance sheet item, an analysis of net interest income and net interest expense and the change in interest income and interest expense attributable to changes in volume and changes in rates.

The difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities is net interest income, which is the Company's gross margin. An analysis of net interest income is more meaningful when income from tax-exempt earning assets is adjusted to a tax equivalent basis. Accordingly, the following schedule includes a tax equivalent adjustment of tax-exempt earning assets, assuming a weighted average Federal income tax rate of 21% for 2023, 2022 and 2021.

In this schedule, "change due to volume" is the change in volume multiplied by the interest rate for the prior year. "Change due to rate" is the change in interest rate multiplied by the volume for the prior year. Changes in interest income and expense not due solely to volume or rate changes have been allocated to the “change due to volume” and “change due to rate” in proportion to the relationship of the absolute dollar amounts of the change in each category.

Non-accrual loans have been included in the loan category.

(1)

Yields on loans and total earning assets include the impact of State income tax credits related to incentive loans at below market rates and tax exempt loans to municipalities of $2.7 million and $3.0 million for the years ended December 31, 2023 and 2022, respectively.

(2)

Loan fees of $12.0 million are included in interest income in 2023. Loan fees of $12.9 million are included in interest income in 2022, inclusive of $139,000 in SBA fees related to PPP loans.

(3)

The tax equivalent adjustments have been computed using a 21% Federal tax rate.

(4)

Net interest income on a tax equivalent basis divided by average interest-earning assets.

(5)

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

(1)

Yields on loans and total earning assets include the impact of State income tax credits related to incentive loans at below market rates and tax exempt loans to municipalities of $3.0 million and $2.1 million for the years ended December 31, 2022 and 2021, respectively.

(2)

Loan fees of $12.9 million are included in interest income in 2022, inclusive of $139,000 in SBA fees related to PPP loans. Loan fees of $16.1 million are included in interest income in 2021, inclusive of $3.6 million in SBA fees related to PPP loans.

(3)

The tax equivalent adjustment for 2022 and 2021 have been computed using a 21% Federal tax rate.

(4)

Net interest income on a tax equivalent basis divided by average interest-earning assets.

(5)

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

The components of our loan yield, a key driver to our net interest margin for the years ended December 31, 2023, 2022, and 2021 were as follows:

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 2023 was $222,583,000, up 41.29% when compared with $157,540,000 in 2022, which was up 21.33% when compared to $129,841,000 in 2021, in each case excluding tax exempt adjustments relating to tax exempt securities and loans. The increase in total interest income in 2023 when compared to 2022 was primarily attributable to an increase in interest earned on loans, an increase in interest and dividends earned on securities, and an increase in interest earned on interest bearing deposits. The increase in interest earned on loans resulted from an overall increase in average loan balances and an increase in the average yield earned on loans, which was primarily due to the elevated short term interest rate environment in 2023, as new loans were put on at higher contractual interest rates and a portion of the Bank's variable loan portfolio repriced to current market rates. Approximately eighty two percent of the loans in our loan portfolio are variable rate loans, primarily indexed to the Federal Reserve prime rate. Fees earned on loans totaled $11,985,000, $12,880,000 and $16,084,000 for the years ended 2023, 2022, and 2021, respectively. The decrease in fees earned on loans for the year ended 2023 when compared to the year ended 2022 was attributable to a decrease in the absolute number of loan originations. The total amount of state income tax credits and tax-exempt loan interest included in our loan yields were $2,677,000, $2,953,000 and $2,112,000 for the years ended 2023, 2022 and 2021, respectively. The increase in interest and dividends earned on securities in 2023 when compared to 2022 resulted from higher yields earned on the securities purchased throughout 2022 as management invested liquid funds into the securities portfolio. The increase in interest earned on interest bearing deposits over the same period resulted from an increase in the yield earned due to the increased rate environment offset in part by declining average balances. The direction and speed with which short-term interest rates move has an impact on our net interest income. The Bank anticipates that its net interest margin is likely to continue to contract during 2024 because of the competitive pressures in its markets, which put pressure on the Bank's deposit and loan pricing which may contribute to a compression of its margin.

The ratio of average earning assets to total average assets was 95.3%, 95.3% and 96.0% for each of the years ended December 31, 2023, 2022 and 2021, respectively. Average earning assets increased $389,168,000 from $3,915,674,000 at December 31, 2022 to $4,304,842,000 at December 31, 2023. For the year ended December 31, 2021, average earning assets were $3,508,775,000. The average rate earned on earning assets for 2023 was 5.24%, compared with 4.11% in 2022 and 3.77% in 2021. The increase in average earning assets was largely due to an increase in the average balance of loans due to loan growth. This was partially offset by a decrease in the average balance of interest bearing deposits and a decrease in the average balance of securities. The increase in the average rate earned on earning assets resulted from the higher interest rate environment and the repricing of a portion of the bank's variable rate loan portfolio as mentioned previously.

Total interest expense for 2023 was $83,679,000, an increase of $67,546,000, or 418.68%, compared to total interest expense of $16,133,000 in 2022. For 2021, total interest expense totaled $11,636,000. Average interest-bearing deposits increased to $3,686,696,000 for 2023 compared to $3,267,962,000 for 2022. The average rate paid on interest-bearing deposits was 2.27% for 2023 compared to 0.49% for 2022. The increase in total interest expense in 2023 resulted from an increase in the volume and rate paid on average interest bearing deposits. Competitive pressures in the rising and subsequent elevated short-term interest rate environment required the Bank to raise, and then subsequently maintain, rates paid on deposits as well as the Bank's customers shifting deposits from lower rate earning or non-interest bearing accounts to higher rate earning accounts, and the Bank utilizing increased levels of brokered deposits. The Company was able to maintain its deposit rates at or below 2021 levels during the first two quarters of 2022 despite the rising rate environment. However, during the second half of 2022 the Company raised its time deposit rates to maintain liquidity levels and offer competitive rates in our markets. This continued throughout 2023 resulting in the increase in interest expense. the increase in brokered deposits, which typically carry higher rates than core deposits, that we experienced in 2023 also contributed to the increase in interest expense. Should our liquidity decrease, including as a result of loan growth that outpaces deposit growth, the rates we pay on our deposits may increase and we may have to further increase our use of brokered deposits. In addition, if interest rates remain elevated when those time deposits that were priced during the lower interest rate environment mature in 2024, our interest expense will likely increase if such deposits are renewed and repriced at current market rates.

Net interest income for 2023 totaled $138,904,000 as compared to $141,407,000 and $118,205,000 in 2022 and 2021, 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 2.97% in 2023 from 3.62% in 2022. The net interest spread was 3.36% in 2021. Net interest margin decreased to 3.30% in 2023 from 3.70% in 2022. The net interest margin was 3.44% in 2021. The decrease in net interest margin in 2023 was due to the increase in rates paid on our interest bearing liabilities outpacing the increase in the yield earned on all earning assets for the reasons discussed above. Changes in interest rates paid on products such as interest checking, savings, and money market accounts will generally increase or decrease in a manner that is consistent with changes in the short-term environment, but are also impacted by competitive market conditions.