WILSON BANK HOLDING CO

Current report

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

Current report

Results of Operations

Current report

Net earnings of the Company increased$3,875,000, or 10.27%, to$41,591,000 for thenine months ended September 30, 2024, from$37,716,000 in the first nine months of 2023. The increase in net earnings for the first nine months of 2024 compared to the first nine months of 2023 was primarily due to an increase in net interest income and non-interest income, partially offset by increases in non-interest expense and provision for credit losses.

Current report

Net earnings of the Company for the three months ended September 30, 2024 were $12,686,000, an increase of $1,200,000, or 10.45%, from $11,486,000 for the three months ended September 30, 2023. The increase in net earnings for the third quarter of 2024 compared to the third quarter of 2023 was primarily due to an increase in net interest income, partially offset by increases in non-interest expense and provision for credit losses, as well as a decrease in non-interest income. The decrease in non-interest income was primarily due to management's decision to strategically restructure the securities portfolio, which resulted in $1,414,000 of net losses from sales of $86,515,000 of available-for-sale securities.

Current report

The increase in net interest income for the three and nine months ended September 30, 2024 when compared to the comparable periods in 2023 was due to an increase in average interest earning asset balances and an increase in the average yield earned on earning assets, partially offset by an increase in cost of funds and an increase in average interest bearing deposit balances.

Current report

The changes in non-interest income and non-interest expenses are discussed in more detail below in the sections of this report titled, "Non-Interest Income" and "Non-Interest Expense". The changes in provision for credit losses is discussed in more detail below in the section of this report titled "Provision For Credit Losses".

Current report

Return on average assets (ROA) and return on average shareholders' equity (ROE) are common benchmarks for bank profitability and are calculated by taking our annualized net earnings for the relevant period and dividing that amount by our average assets and average equity for the relevant periods, respectively. ROA and ROE measure a company’s return on investment in a format that is easily comparable to other financial institutions. ROA is particularly important to the Company as it serves as the basis for certain executive and employee bonuses. The ROA for the three and nine months ended September 30, 2024 was 0.99% and 1.12%, respectively; while the ROA for the three and nine months ended September 30, 2023 was 1.00% and 1.13%, respectively. The ROE for the three and nine months ended September 30, 2024 was 10.66% and 12.42% , respectively; while the ROE for the three and nine months ended September 30, 2023 was 11.65% and 12.96%, respectively. The decrease in ROA and ROE for the three months ended September 30, 2024 was related to the increased provision for credit losses-loans in the third quarter of 2024 and the loss on sale of securities mentioned above. The decrease in ROA and ROE for the nine months ended September 30, 2024 was related to an increase in non-interest expense and the loss on sale of securities mentioned above, partially offset by lower provision for credit losses-loans.

Current report

Net Interest Income

Current report

The average balances, interest, and average rates of our assets and liabilities for thethree and nine months ended September 30, 2024 and 2023 are presented in the following table (dollars in thousands):

Current report

Notes:

Current report

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.

Current report

Loan fees of $4.4 million are included in interest income for the period ended September 30, 2024. Loan fees of $2.9 million are included in interest income for the period ended September 30, 2023.

Current report

The tax equivalent adjustment has been computed using a 21% Federal tax rate.

Current report

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

Current report

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

Current report

Notes:

Current report

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.

Current report

Loan fees of $11.3 million are included in interest income for the period ended September 30, 2024. Loan fees of $8.9 million are included in interest income for the period ended September 30, 2023.

Current report

The tax equivalent adjustment has been computed using a 21% Federal tax rate.

Current report

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

Current report

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

Current report

The components of our loan yield, a key driver to our net interest margin for thethree and nine months ended September 30, 2024 and 2023, were as follows:

Current report

Net interest margin for the nine months ended September 30, 2024 and 2023 was 3.29% and 3.33%, respectively. The decrease in net interest margin for the nine months ended September 30, 2024 compared to the prior year comparable periodwas primarily due to an increase in the cost of funds, partially offset by an increase in average interest earning asset balances and an increase in the yield earned on such assets. The net interest spread was 2.87% and 3.03% for the nine months ended September 30, 2024 and 2023, respectively, and was 2.94% and 2.81% for the three months ended September 30, 2024 and 2023, respectively. Net interest margin for the three months ended September 30, 2024 and 2023 was 3.39% and 3.18%, respectively. The increase in net interest margin for the third quarter of 2024 was primarily due to the increase in average interest earning asset balances and an increase in the yield earned on loans outpacing the increase in cost of funds as competitive pressures continued to improve in the third quarter of 2024. The yield on loans increased during the three and nine months ended September 30, 2024 when compared to the comparable periods in 2023 due to the higher rates charged on new loans and the repricing of a portion of the Bank's variable rate loan portfolio.

Current report

The direction and speed with which short-term interest rates move has an impact on our net interest income. The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit decreased by 50 basis points as the Federal Reserve cut the target rate for the federal funds rate by 50 basis points on September 18, 2024.

Current report

If short term rates continue to decline, as the Company believes is likely to happen in the fourth quarter of 2024, the Company’s net interest margin and earnings could be negatively impacted if the yields on loans decrease faster than the Company is able to lower deposit rates, including as a result of loan growth outpacing our ability to add lower cost core deposits or competitive pressures in our markets limiting our ability to reduce the rates we pay on deposits. However, if the Company is able to reprice its deposits more quickly than it reprices the rates it earns on loans in such a falling rate environment, the Company expects its net interest margin would expand.

Current report

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Net interest income, excluding tax equivalent adjustments relating to tax exempt securities and loans, for the three and nine months ended September 30, 2024 totaled$41,015,000 and $115,036,000, respectively. Net interest income, excluding tax equivalent adjustments relating to tax exempt securities and loans, for the three and nine months ended September 30, 2023 totaled $34,160,000 and $103,643,000, respectively.

Current report

The increase in net interest income for the three and nine months ended September 30, 2024 compared to the comparable periods in 2023 was primarily due to an increase in the volume of average interest earning assets, an increase in interest and fees on loans, an increase in interest earned on deposits with depository institutions, and an increase in interest and dividends earned on securities, partially offset by an increase in interest expense resulting from the increase in the cost of funds and an increase in the volume of average interest bearing deposits.

Current report

The ratio of average earning assets to total average assets for thethree and nine months ended September 30, 2024 was 96.0% and 95.8%, respectively, compared to 95.4% and 95.3%, respectively, for the same periods in 2023.

Current report

Interest expense increased in the three and nine months ended September 30, 2024 when compared to the comparable periods in 2023 due to an increase in the average balance of our interest bearing deposits combined with competitive pressures in the second half of 2023 and first part of 2024 in the elevated short-term interest rate environment which required the Bank to raise rates paid on deposits. Also negatively impacting interest expense in the three and nine months ended September 30, 2024, was Bank's customers' continued shift of deposits from transaction and money market accounts to time deposit accounts. As competitive pressures have begun to ease in the second half of the third quarter of 2024, and the 50 basis point rate cut by the Federal Reserve in late September 2024 has taken effect, we have begun to lower interest rates on some of our deposit products and anticipate that we will be able to continue to lower the rates we pay on deposits for the remainder of 2024 and into 2025 as time deposits reprice; however, if the competitive pressures begin to rise once again, the Federal Reserve does not cut the federal funds rate any further or at the pace we are anticipating or loan growth outpaces deposit growth, the Bank may have to lower rates at a slower pace. Despite the expectation the Bank will be able to lower rates paid on deposits, we expect interest expense to continue to increase due to an increase in overall deposit balances.

Current report

Provision for Credit Losses

Current report

The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation is adequate to provide coverage for all expected credit losses. The determination of the amount of the allowance for credit losses ("ACL") is complex and involves a high degree of judgment and subjectivity. Refer to Note 1, "Summary of Significant Accounting Policies" in the notes to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for a detailed discussion regarding ACL methodology.

Current report

The provision for credit losses-loans for the three and nine months ended September 30, 2024 was $3,563,000 compared to a provision of $1,641,000 and$5,681,000 for the three and nine months ended September 30, 2023, respectively. Significant loan growth in the third quarter and a single relationship downgrade during that quarter, partially offset by an improved economic outlook, contributed to management's decision in the third quarter of 2024 to record a provision of $3,563,000 after recording no provision in the first six months of 2024.

Current report

As discussed below under Financial Condition-Loans, loan growth was higher for the three and nine months ended September 30, 2024 compared to the same periods for 2023. Loan growth for the nine months ended September 30, 2024 was $393,851,000, while loan growth for the nine months ended September 30, 2023 was $379,987,000. For the three months ended September 30, 2024 loan growth was $231,968,000 compared to $117,297,000 for three months ended September 30, 2023.

Current report

There was a benefit to the provision for credit losses-off balance sheet exposures of $563,000 for the three and nine months ended September 30, 2024 compared to a benefit of $677,000 and $2,975,000 for the three and nine months ended September 30, 2023. A slight decline in unfunded balances for the first nine months of 2024 and an improved economic outlook in the third quarter of 2024 led to the release in the off balance sheet exposures in the third quarter of 2024.

Current report

The following detail provides a breakdown of the provision for credit loss-loans expense and net (charge-offs) recoveries as of and for the nine months ended September 30, 2024 and 2023:

Current report

The provision for credit losses-loans charged to operating expense requires us to estimate all expected credit losses over the remaining life of our loan portfolio. Other factors which, in management’s judgment, deserve current recognition in estimating expected credit losses include growth and composition of the loan portfolio, review of specific problem loans, the relationship of the allowance for credit losses to outstanding loans, adverse situations that may affect our borrowers' ability to repay, the estimated value of any underlying collateral and current economic conditions that may affect our borrowers' ability to pay.

Current report

There was no provision for credit losses on available-for-sale securities for the three and nine months ended September 30, 2024 and 2023, respectively.

Current report

Non-Interest Income

Current report

Our non-interest income is composed of several components, some of which vary significantly between quarterly and annual periods. The following is a summary of our non-interest income for the three and nine months ended September 30, 2024 and 2023 (in thousands):

Current report

The decrease in non-interest income for the three months ended September 30, 2024 when compared to the comparable period in 2023 is primarily attributable to an increase in loss on sale of securities, partially offset by an increase in brokerage income. The increase in non-interest income for the nine months ended September 30, 2024 was primarily attributable to an increase in brokerage income, an increase in service charges on deposit accounts, and an increase in gain on sale of loans, partially offset by an increase in the loss on sale of securities and a loss on sale of fixed assets.