Impaired loans also include loans that the Bank may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Bank may otherwise incur. These loans are classified as impaired loans and, if on non-accruing status as of the date of restructuring, the loans are included in the nonperforming loan balances. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date.

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

The following table summarizes the carrying balances of TDRs at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019.

The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 (in thousands, except for number of contracts):

As of ~~September 30, 2019~~ ~~and~~ ~~December~~March 31, ~~2018~~2020 the Company had 0one loan ~~relationships~~relationship totaling $311,000 that had been previously classified as ~~TDRs~~a TDR subsequently default within twelve months of restructuring. AAs of December 31, 2019, the Company had no loan relationships subsequently default ~~is defined as an occurrence which violates~~within twelve months of restructuring.

In response to the ~~terms~~COVID-19 pandemic and its economic impact to the Bank’s customers, the Bank proactively began providing relief to its customers in the middle of March 2020 through a 90 day interest only payment option or a full 90 day payment deferral option. Following the passage of the ~~receivable’s contract.~~CARES Act the Bank expanded this program to provide a six-month interest only payment option in an effort to provide flexibility to its customers as they navigate these uncertain times. Pursuant to interagency regulatory guidance and the CARES Act, the Bank may elect to not classify loans for which these deferrals are granted between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency as troubled debt restructurings.

As of ~~September~~April 30, ~~2019~~2020, the Bank had granted deferrals of principal or both principal and interest on approximately 855 loans, totaling $572.4 million in aggregate principal amount. Under the applicable guidance, none of these loans were considered troubled debt restructurings as of ~~December~~April 30, 2020.

Table of Contents

As of March 31, ~~2018~~2020, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to approximately $1.0 million. As of December 31, 2019, the Company did ~~$1,033,000 an~~not~~d $200,000, respectively.~~ have any consumer mortgage loans in the process of foreclosure.

Potential problem loans, which include nonperforming loans, amounted to ~~approximately $12.1~~approximately $9.6 million at ~~September 30, 2019~~March 31, 2020 and ~~$12.0~~$10.7 million atat December 31, ~~2018~~2019. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.

The following summary presents the Bank's loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:

The following table is a summary of the Bank’s loan portfolio by risk rating at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019:

Table of Contents

Note 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 ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are summarized as follows:

	September 30, 2019								March 31, 2020
	Securities Available-For-Sale								Securities Available-For-Sale
	In Thousands								In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
U.S. Government-sponsored enterprises (GSEs)	$	66,723	$	18	$	224	$	66,517	$	52,754	$	305	$	121	$	52,938
Mortgage-backed securities		276,383		1,254		1,084		276,553		248,255		6,219		258		254,216
Asset-backed securities		28,261		330		115		28,476		26,358		375		403		26,330
Obligations of states and political subdivisions		65,621		390		580		65,431		73,364		1,291		915		73,740
	$	436,988	$	1,992	$	2,003	$	436,977	$	400,731	$	8,190	$	1,697	$	407,224

	December 31, 2018								December 31, 2019
	Securities Available-For-Sale								Securities Available-For-Sale
	In Thousands								In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
U.S. Government-sponsored enterprises (GSEs)	$	71,446	$	—	$	2,979	$	68,467	$	59,735	$	48	$	204	$	59,579
Mortgage-backed securities		152,375		9		4,874		147,510		265,648		2,300		635		267,313
Asset-backed securities		22,534		10		844		21,700		27,531		1		303		27,229
Obligations of states and political subdivisions		49,328		22		1,775		47,575		67,293		559		828		67,024
	$	295,683	$	41	$	10,472	$	285,252	$	420,207	$	2,908	$	1,970	$	421,145

There were 0 debt and equity securities classified as held-to-maturity at ~~September 30, 2019~~March 31, 2020 or December 31, ~~2018~~2019. ~~During the year ended~~ ~~December 31, 2018~~~~, the Company sold securities classified as held-to-maturity with a book value of $4,843,000 for a loss of $79,000. Due to the sale, management determined the Company~~ no longer had the intent to hold the remaining securities classified as held-to-maturity to their respective maturity dates and transferred the remaining book value of $22,800,000 to the available-for-sale classification.

Included in mortgage-backed securities are collateralized mortgage obligations ~~totaling $48,932,000~~totaling $44,027,000 (fair value of ~~$49,404,000)~~ $45,045,000) and ~~$11,564,000~~$46,994,000 (fair value of ~~$11,295,000)~~$47,442,000) at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, respectively.

The amortized cost and estimated market value of debt securities at ~~September 30, 2019~~March 31, 2020, 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.

	Available-For-Sale				Available-For-Sale
	In Thousands				In Thousands
	Amortized Cost		Estimated Market Value		Amortized Cost		Estimated Market Value
Due in one year or less	$	—	$	—	$	470	$	469
Due after one year through five years		30,510		30,403		12,372		12,486
Due after five years through ten years		102,013		101,926		70,268		71,430
Due after ten years		304,465		304,648		317,621		322,839
	$	436,988	$	436,977	$	400,731	$	407,224

Table of Contents

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019.

	In Thousands, Except Number of Securities																In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total				Less than 12 Months						12 Months or More						Total
September 30, 2019	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
March 31, 2020																	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Available-for-Sale Securities:
GSEs	$	16,241	$	32		6	$	39,711	$	192		14	$	55,952	$	224	$	7,093	$	121		3	$	—	$	—		—	$	7,093	$	121
Mortgage-backed securities		71,622		249		30		70,931		835		58		142,553		1,084		17,935		206		9		5,163		52		14		23,098		258
Asset-backed securities		9,878		19		1		7,370		96		4		17,248		115		9,664		403		2		—		—		—		9,664		403
Obligations of states and political subdivisions		44,651		529		41		3,126		51		9		47,777		580		30,592		873		38		1,173		42		3		31,765		915
	$	142,392	$	829		78	$	121,138	$	1,174		85	$	263,530	$	2,003	$	65,284	$	1,603		52	$	6,336	$	94		17	$	71,620	$	1,697

	In Thousands, Except Number of Securities																In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total				Less than 12 Months						12 Months or More						Total
December 31, 2018	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
December 31, 2019																	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Available-for-Sale Securities:
GSEs	$	—	$	—		—	$	68,467	$	2,979		28	$	68,467	$	2,979	$	16,507	$	114		5	$	24,658	$	90		9	$	41,165	$	204
Mortgage-backed securities		8,651		64		10		137,457		4,810		94		146,108		4,874		45,862		182		21		56,917		453		52		102,779		635
Asset-backed securities		—		—		—		20,597		844		14		20,597		844		17,807		161		10		7,317		142		4		25,124		303
Obligations of states and political subdivisions		4,064		26		6		39,841		1,749		94		43,905		1,775		30,423		783		26		3,858		45		10		34,281		828
	$	12,715	$	90		16	$	266,362	$	10,382		230	$	279,077	$	10,472	$	110,599	$	1,240		62	$	92,750	$	730		75	$	203,349	$	1,970

Unrealized losses on securities have not been recognized into income because the Company does not consider these securities to be other-than-temporarily impaired at ~~September 30, 2019~~March 31, 2020, as the issuers’ securities are of high credit quality, management does not intend to sell the securities and it is not more likely than not that management will be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payment on the securities. The fair value is expected to recover as the securities approach maturity.

The carrying values of the Company’s investment securities could decline in the future if the financial condition of issuers deteriorates and management determines it is probable that the Company will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future given the current economic environment.

~~Table of Contents~~

Note 4. Earnings Per Share

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period, adjusted for stock splits. The computation of diluted earnings per share for the Company begins with the basic earnings per share and includes the effect of common shares contingently issuable from stock options.

The following is a summary of components comprising basic and diluted earnings per share (“EPS”) for the three ~~and~~ ~~nine~~months ended ~~September 30, 2019~~March 31, 2020 and ~~2018~~2019:

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
	(Dollars in Thousands Except Share and Per Share Amounts)				(Dollars in Thousands Except Share and Per Share Amounts)				(Dollars in Thousands Except Share and Per Share Amounts)
Basic EPS Computation:
Numerator – Earnings available to common stockholders	$	10,266	$	7,972	$	28,072	$	22,761	$	9,031	$	8,290
Denominator – Weighted average number of common shares outstanding		10,766,738		10,601,882		10,729,065		10,544,584		10,864,866		10,701,602
Basic earnings per common share		0.95	$	0.75		2.62	$	2.16		0.83	$	0.77
Diluted EPS Computation:
Numerator – Earnings available to common stockholders	$	10,266	$	7,972	$	28,072	$	22,761	$	9,031	$	8,290
Denominator – Weighted average number of common shares outstanding		10,766,738		10,601,882		10,729,065		10,544,584		10,864,866		10,701,602
Dilutive effect of stock options		20,014		9,884		17,065		6,952		21,590		15,270
Weighted average diluted common shares outstanding		10,786,752		10,611,766		10,746,130		10,551,536		10,886,456		10,716,872
Diluted earnings per common share		0.95	$	0.75		2.61	$	2.16		0.83	$	0.77

Table of Contents

Note 5. Income Taxes

Accounting Standards Codification (“ASC”) 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods. As of ~~September 30, 2019~~March 31, 2020, the Company had 0 unrecognized tax benefits related to Federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to ~~September 30, 2019~~March 31, 2020.

As of and for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020, the Company has not accrued or recognized interest or penalties related to uncertain tax positions. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

The Company and the Bank file consolidated U.S. Federal and State of Tennessee income tax returns. The Company is currently open to audit under the statute of limitations by the State of Tennessee for the years ended December 31, ~~2015~~2016 through ~~2018~~2019 and the IRS for the years ended December 31, ~~2016~~2017 through ~~2018.~~2019.

Note 6. Commitments and Contingent Liabilities

In the normal course of business, the Bank has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Standby letters of credit are generally issued on behalf of an applicant (the Bank's customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated sooner due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from the Bank under certain prescribed circumstances. Subsequently, the Bank would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

~~Table of Contents~~

The Bank follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash and cash equivalents, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.

The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, the Company’s maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

A summary of the Company’s total contractual amount for all off-balance sheet commitments at ~~September 30, 2019~~March 31, 2020 is as follows:

Commitments to extend credit		$	573,908,000			$	684,851,000
Standby letters of credit		$	77,372,000			$	72,727,000

The Bank originates residential mortgage loans, sells them to third-party purchasers, and does not retain the servicing rights. These loans are originated internally and are primarily to borrowers in the Company’s geographic market footprint. ~~Traditionally these~~These sales ~~have been on a best efforts basis~~are typically to investors that follow guidelines of conventional government sponsored entities ("GSE") and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs ("HUD/VA"). Generally, loans held for sale are underwritten by the Company, including HUD/VA loans. In the fourth quarter of 2018, the Bank began to participate in a mandatory delivery program that requires the Bank to deliver a particular volume of mortgage loans by agreed upon dates. A majority of the Bank’s secondary mortgage volume is delivered to the secondary market via mandatory ~~delivery.~~delivery with the remainder done on a best efforts basis. The Bank does not realize any exposure delivery penalties as the mortgage department only bids loans post-closing to ensure that 100% of the loans are deliverable to the investors.

Each purchaser has specific guidelines and criteria for sellers of loans, and the risk of credit loss with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold without recourse, the purchase agreements require the Bank to make certain representations and warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties or the loan had an early payoff or payment default, the Bank has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan.

To date, repurchase activity pursuant to the terms of these representations and warranties has been insignificant and has resulted in insignificant losses to the Company.

Based on information currently available, management believes that the Bank does not have significant exposure to contingent losses that may arise relating to the representations and warranties that it has made in connection with its mortgage loan sales.

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these claims outstanding at ~~September 30, 2019~~March 31, 2020 will not have a material impact on the Company’s consolidated financial statements.

Table of Contents

Note 7. Fair Value Measurements

FASB ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price (i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date). The statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.

Valuation Hierarchy

FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

	•	Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

	•	Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

	•	Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Assets

Securities available-for-sale — Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.

Impaired loans — A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the valuation hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower’s underlying financial condition.

Other real estate owned — Other real estate owned (“OREO”) represents real estate foreclosed upon by the Company through loan defaults by customers or acquired in lieu of foreclosure. Substantially all of these amounts relate to construction and land development, other loans secured by land, and commercial real estate loans for which the Company believes it has adequate collateral. Upon foreclosure, the property is recorded at the lower of cost or fair value, based on appraised value, less selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation downward adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are also reflected in noninterest expense, as applicable. OREO is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs into the determination of fair value. Appraisal values are property-specific and sensitive to the changes in the overall economic environment.

Bank Owned Life Insurance — The cash surrender value of bank owned life insurance policies is carried at fair value. The Company uses financial information received from insurance carriers indicating the performance of the insurance policies and cash surrender values in determining the carrying value of life insurance. The Company reflects these assets within Level 3 of the valuation hierarchy due to the unobservable inputs included in the valuation of these items. The Company does not consider the fair values of these policies to be materially sensitive to changes in these unobservable inputs.

Mortgage loans held-for-sale — Mortgage loans held-for-sale are carried at fair value, and are classified within Level 2 of the valuation hierarchy. The fair value of mortgage loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan.

~~Derivatives~~Mortgage banking derivatives —The fair values of mortgage banking derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Table of Contents

The following tables present the financial instruments carried at fair value as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, by caption on the consolidated balance sheet and by FASB ASC 820 valuation hierarchy (as described above):

	Assets and Liabilities Measured at Fair Value on a Recurring Basis								Assets and Liabilities Measured at Fair Value on a Recurring Basis
	(In Thousands)								(In Thousands)
	Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)		Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)
September 30, 2019
March 31, 2020
Investment securities available-for-sale:
U.S. Government sponsored enterprises	$	66,517		—		66,517		—	$	52,938		—		52,938		—
Mortgage-backed securities		276,553		—		276,553		—		254,216		—		254,216		—
Asset-backed securities		28,476		—		28,476		—		26,330		—		26,330		—
State and municipal securities		65,431		—		65,431		—		73,740		—		73,740		—
Total investment securities available-for-sale		436,977		—		436,977		—		407,224		—		407,224		—
Mortgage loans held for sale		10,783		—		10,783		—		22,183		—		22,183		—
Mortgage banking derivatives		513		—		513		—		503		—		503		—
Bank owned life insurance		31,560		—		—		31,560		31,945		—		—		31,945
Total assets	$	479,833		—		448,273		31,560	$	461,855		—		429,910		31,945

Mortgage banking derivatives	$	10		—		10		—	$	385		—		385		—
Total liabilities	$	10		—		10		—	$	385		—		385		—

December 31, 2018
December 31, 2019
Investment securities available-for-sale:
U.S. Government sponsored enterprises	$	68,467		—		68,467		—	$	59,579		—		59,579		—
Mortgage-backed securities		147,510		—		147,510		—		267,313		—		267,313		—
Asset-backed securities		21,700		—		21,700		—		27,229		—		27,229		—
State and municipal securities		47,575		—		47,575		—		67,024		—		67,024		—
Total investment securities available-for-sale		285,252		—		285,252		—		421,145		—		421,145		—
Mortgage loans held for sale		7,484		—		7,484		—		18,179		—		18,179		—
Mortgage banking derivatives		335		—		335		—		328		—		328		—
Bank owned life insurance		30,952		—		—		30,952		31,762		—		—		31,762
Total assets	$	324,023		—		293,071		30,952	$	471,414		—		439,652		31,762

Mortgage banking derivatives	$	88		—		88		—	$	23		—		23		—
Total liabilities	$	88		—		88		—	$	23		—		23		—

	Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis								Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
	(In Thousands)								(In Thousands)
	Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)		Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)
September 30, 2019
March 31, 2020
Other real estate owned	$	845		—		—		845	$	697		—		—		697
Impaired loans, net (¹)		4,148		—		—		4,148		1,498		—		—		1,498
Total	$	4,993		—		—		4,993	$	2,195		—		—		2,195
December 31, 2018
December 31, 2019
Other real estate owned	$	1,357		—		—		1,357	$	697		—		—		697
Impaired loans, net (¹)		4,195		—		—		4,195		3,916		—		—		3,916
Total	$	5,552		—		—		5,552	$	4,613		—		—		4,613

⁽¹⁾	Amount is net of a valuation allowance of ~~$1,704,000~~$935,000 at ~~September 30, 2019~~March 31, 2020 and ~~$1,164,000~~$1,136,000 at December 31, ~~2018~~2019 as required by ASC 310, “Receivables.”

Table of Contents

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019:

	Valuation Techniques (2)	Significant Unobservable Inputs	~~Range (Weighted Average)~~Weighted Average
Impaired loans	Appraisal	Estimated costs to sell	10%
Other real estate owned	Appraisal	Estimated costs to sell	10%

⁽²⁾	The fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent.

In the case of its investment securities portfolio, the Company monitors the valuation technique utilized by various pricing agencies to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020, there were no transfers between Levels 1, 2 or 3.

The table below includes a rollforward of the balance sheet amounts for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018~~2019 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):

	*For the Nine Months Ended September 30,*								*For the Three Months Ended March 31,*
	*2019*				*2018*				*2020*				*2019*
	Other Assets		Other Liabilities		Other Assets		Other Liabilities		Other Assets		Other Liabilities		Other Assets		Other Liabilities
Fair value, January 1	$	30,952		—	$	29,475		—	$	31,762		—	$	30,952		—
Total realized gains included in income		608		—		627		—		183		—		199		—
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at September 30		—		—		—		—
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at March 31										—		—		—		—
Purchases, issuances and settlements, net		—		—		637		—		—		—		—		—
Transfers out of Level 3		—		—		—		—		—		—		—		—
Fair value, September 30	$	31,560		—	$	30,739		—
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30	$	608		—	$	627		—
Fair value, March 31									$	31,945		—	$	31,151		—
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at March 31									$	183		—	$	199		—

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices or observable components are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Held-to-maturity securities — Estimated fair values for investment securities are based on quoted market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics.

Loans — The fair value of our loan portfolio includes a credit risk factor in the determination of the fair value of our loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. Our loan portfolio is initially fair valued using a segmented approach. We divide our loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk.

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk to determine the exit price.

~~Table of Contents~~

Deposits and Federal Home Loan Bank borrowings — Fair values for deposits and Federal Home Loan Bank borrowings are estimated using discounted cash flow models, using current market interest rates offered on deposits with similar remaining maturities.

Restricted equity securities — It is not practical to determine the fair value of Federal Home Loan Bank or Federal Reserve Bank stock due to restrictions placed on its transferability.

Accrued interest receivable/payable — The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the asset/liability with which they are associated.

Off-Balance Sheet Instruments — The fair values of the Company’s off-balance-sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value to the Company until such commitments are funded.

Table of Contents

The following table presents the carrying amounts, estimated fair value and placement in the fair valuation hierarchy of the Company’s financial instruments at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.

	Carrying/ Notional		Estimated		Quote Market Prices in an Active Market		Models with Significant Observable Market Parameters		Models with Significant Unobservable Market Parameters		Carrying/ Notional		Estimated		Quote Market Prices in an Active Market		Models with Significant Observable Market Parameters		Models with Significant Unobservable Market Parameters
(in Thousands)	Amount		Fair Value (¹)		(Level 1)		(Level 2)		(Level 3)		Amount		Fair Value (¹)		(Level 1)		(Level 2)		(Level 3)
September 30, 2019
March 31, 2020
Financial assets:
Cash and cash equivalents	$	214,759		214,759		214,759		—		—	$	177,217		177,217		177,217		—		—
Loans, net		1,954,980		1,956,245		—		—		1,956,245		2,131,731		2,141,796		—		—		2,141,796
Restricted equity securities		4,680		NA		NA		NA		NA		4,680		NA		NA		NA		NA
Accrued interest receivable		6,704		6,704		8		1,568		5,128		7,027		7,027		—		1,534		5,493
Financial liabilities:
Deposits		2,380,666		2,213,343		—		—		2,213,343		2,485,537		2,349,761		—		—		2,349,761
Federal Home Loan Bank borrowings		26,413		26,758		—		—		26,758		20,808		21,485		—		—		21,485
Accrued interest payable		4,153		4,153		—		—		4,153		3,214		3,214		—		—		3,214

December 31, 2018
December 31, 2019
Financial assets:
Cash and cash equivalents	$	99,191		99,191		99,191		—		—	$	159,770		159,770		159,770		—		—
Loans, net		2,016,005		2,017,272		—		—		2,017,272		2,057,175		2,053,212		—		—		2,053,212
Restricted equity securities		3,012		NA		NA		NA		NA		4,680		NA		NA		NA		NA
Accrued interest receivable		6,724		6,724		3		1,362		5,359		5,945		5,945		5		1,647		4,293
Financial liabilities:
Deposits		2,235,655		1,974,554		—		—		1,974,554		2,417,605		2,210,038		—		—		2,210,038
Federal Home Loan Bank borrowings												23,613		23,860		—		—		23,860
Accrued interest payable		3,132		3,132		—		—		3,132		3,814		3,814		—		—		3,814

⁽¹⁾	Estimated fair values are consistent with an exit-price concept. The assumptions used to estimate the fair values are intended to approximate those that a market-participant would realize in a hypothetical orderly transaction.

Table of Contents

Note 8. Equity Incentive Plans

In ~~April 1999,~~ ~~the stockholders of the Company approved the Wilson Bank Holding Company~~ ~~1999~~ ~~Stock Option Plan (the~~ ~~“1999~~ Stock Option Plan”). The Stock Option Plan provided for the granting of stock options, and authorized 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 subsidiary. Furthermore, the Company and its subsidiary could reserve additional shares for issuance under the ~~1999~~ ~~Stock Option Plan as needed in order that the aggregate number of shares that~~ ~~may~~ ~~be issued during the term of the~~ ~~1999~~ ~~Stock Option Plan was equal to~~ ~~five~~ ~~percent (5%) of the shares of common stock then issued and outstanding. The~~ ~~1999~~ ~~Stock Option Plan terminated on~~ ~~April~~ ~~13,~~~~2009,~~ ~~and 0 additional awards~~ ~~may~~ ~~be issued under the~~ ~~1999~~ ~~Stock Option Plan. The awards granted under the~~ ~~1999~~ ~~Stock Option Plan prior to the plan's termination remained outstanding until exercised or otherwise terminated. As of~~ ~~September 30, 2019~~~~, the Company had 0 outstanding options under the~~ ~~1999~~ ~~Stock Option Plan.~~

In April 2009, the Company’s shareholders approved the Wilson Bank Holding Company 2009 Stock Option Plan (the “2009 Stock Option Plan”). The 2009 Stock Option Plan was effective as of April 14, ~~2009~~2009. ~~and replaced the~~ ~~1999~~ ~~Stock Option Plan.~~ Under the 2009 Stock Option Plan, awards could be in the form of options to acquire common stock of the Company. Subject to adjustment as provided by the terms of the 2009 Stock Option Plan, the maximum number of shares of common stock with respect to which awards could be granted under the 2009 Stock Option Plan was 100,000 shares. The 2009 Stock Option Plan terminated on April 13, 2019, and 0no additional awards may be issued under the 2009 Stock Option Plan. The awards granted under the 2009 Stock Option Plan prior to the plan's expiration will remain outstanding until exercised or otherwise terminated.

~~Table of Contents~~

As of ~~September 30, 2019~~March 31, 2020, the Company had outstanding ~~23,441~~14,834 options under the 2009 Stock Option Plan with a weighted average exercise price of ~~$32.10.~~$33.76.

During the second quarter of 2016, the Company’s shareholders approved the Wilson Bank Holding Company 2016 Equity Incentive Plan, which authorizes awards of up to 750,000 shares of common stock. The 2016 Equity Incentive Plan was approved by the Board of Directors and effective as of January 25, 2016 and approved by the Company’s shareholders on April 12, 2016. On September 26, 2016, the Board of Directors approved an amendment and restatement of the 2016 Equity Incentive Plan (as amended and restated the “2016 Equity Incentive Plan”) to make clear that directors who are not also employees of the Company may be awarded stock appreciation rights. The primary purpose of the 2016 Equity Incentive Plan is to promote the interest of the Company and its shareholders by, among other things, (i) attracting and retaining key officers, employees and directors of, and consultants to, the Company and its subsidiaries and affiliates, (ii) motivating those individuals by means of performance-related incentives to achieve long-range performance goals, (iii) enabling such individuals to participate in the long-term growth and financial success of the Company, (iv) encouraging ownership of stock in the Company by such individuals, and (v) linking their compensation to the long-term interests of the Company and its shareholders. Except for certain limitations, awards can be in the form of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares and restricted share units, performance awards and other stock-based awards. As of ~~September 30, 2019~~March 31, 2020, the Company had ~~467,271~~471,004 shares remaining available for issuance under the 2016 Equity Incentive Plan. As of ~~September 30, 2019~~March 31, 2020, the Company had outstanding ~~126,803~~117,555 options with a weighted average exercise price of ~~$41.69~~$41.78 and ~~132,131~~128,696 cash-settled stock appreciation rights with a weighted average exercise price of ~~$41.97~~$42.00 under the 2016 Equity Incentive Plan.

As of ~~September 30, 2019~~March 31, 2020, the Company had outstanding ~~150,244~~132,389 stock options with a weighted average exercise price of ~~$40.19~~$40.88 and ~~132,131~~128,696 cash-settled stock appreciation rights each with a weighted average exercise price of ~~$41.97.~~$42.00.

The following table summarizes information about stock options and cash-settled SARs for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018~~2019:

	*September 30, 2019*				*September 30, 2018*				*March 31, 2020*				*March 31, 2019*
	*Shares*		*Weighted Average Exercise Price*		*Shares*		*Weighted Average Exercise Price*		*Shares*		*Weighted Average Exercise Price*		*Shares*		*Weighted Average Exercise Price*
Options and SARs outstanding at beginning of period		277,820	$	40.11		285,780	$	39.31		273,039	$	41.19		277,820	$	40.11
Granted		17,833		51.16		21,666		46.59		—		—		—		—
Exercised		13,278		35.51		20,672		37.37		7,654		33.82		9,013		35.13
Forfeited or expired		—		—		6,666		37.83		4,300		39.46		—		—
Outstanding at end of period		282,375	$	41.02		280,108	$	40.06		261,085	$	41.43		268,807	$	40.28
Options and SARs exercisable at September 30		126,201	$	39.88		88,673	$	38.90
Options and SARs exercisable at March 31										142,692	$	40.40		109,897	$	39.44

As of ~~September 30, 2019~~March 31, 2020, there was ~~$1,711,000~~$1,251,000 of total unrecognized cost related to non-vested share-based compensation arrangements granted under the Company's equity incentive plans. The cost is expected to be recognized over a weighted-average period of ~~2.73~~2.37 years.

Table of Contents

Note 9. Mortgage Banking Derivatives

~~Commitments~~Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors under the Bank's mandatory delivery program are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, the Company had approximately ~~$15,857,000~~$16,667,000 and ~~$9,655,000,~~$10,307,000, respectively, of interest rate lock commitments and approximately ~~$16,750,000~~$22,000,000 and ~~$11,750,000,~~$14,000,000, respectively, of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by derivative assets of ~~$513,000~~$503,000 and ~~$335,000~~$328,000 and derivative liabilities of ~~$10,000~~$385,000 and ~~$88,000,~~$23,000, respectively, at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sale of loans.

The net gains (losses) relating to free-standing derivative instruments used for risk management is summarized below (in thousands):

	*In Thousands*				*In Thousands*
	*September 30, 2019*		*September 30, 2018*		*March 31, 2020*			*March 31, 2019*
Forward contracts related to mortgage loans held for sale and interest rate contracts	$	78		—	$	(362	)		(70	)
Interest rate contracts for customers		178		—		175			440

The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):

	*In Thousands*										*In Thousands*
	*September 30, 2019*					*December 31, 2018*					*March 31, 2020*					*December 31, 2019*
	*Notional Amount*		*Fair Value*			*Notional Amount*		*Fair Value*			*Notional Amount*		*Fair Value*			*Notional Amount*		*Fair Value*
Included in other assets (liabilities):
Interest rate contracts for customers	$	15,857		513			9,655		335		$	16,667		503			10,307		328
Forward contracts related to mortgage loans held-for-sale		16,750		(10	)		11,750		(88	)		22,000		(385	)		14,000		(23	)

Note 10. Pandemic Impact (COVID-19)

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States. On April 2, 2020 the Governor of Tennessee declared a health emergency and issued an order to close all nonessential businesses until further notice. As a financial institution, Wilson Bank was deemed to be an essential business and accordingly, our operations were sustained. Nonetheless, out of concerns for our employees and customers and pursuant to government orders, branch operations were limited to drive through access and in-person appointments only. To the extent possible, a portion of our staff was moved to remote working locations and teleconferencing practices were established. To date, the operations of our company and the services offered to our customers have not been adversely affected in a material manner. The extent to which COVID-19 impacts our future operations will depend on further developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak and the actions that may be required to contain the COVID-19 or treat its impact. The coronavirus outbreak and government responses are creating disruption in global supply chains and adversely impacting many industries. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. While the Company believes this matter could negatively impact its results of operations, cash flows and financial position, the related impact cannot be reasonably estimated at this time. Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance and its financial results. Management's evaluation of the events and conditions as well as management's plans to mitigate these matters are described in the Management's Discussion and Analysis section elsewhere in this report.

As a result of the pandemic, many states and municipalities are facing a strain on resources and a reduction in tax collections. As a result, state and municipalities have asked for potential assistance from the Federal government to cover the cost of resource depletion and tax shortfalls. The ability of states and municipalities to fund shortfalls could have an affect on their ability to sustain debt maintenance, which would consequently impact the value of our municipal bond portfolio.

Table of Contents

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

The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its bank subsidiary. This discussion should be read in conjunction with the Company's consolidated financial statements appearing elsewhere in this report. Reference should also be made to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 for a more complete discussion of factors that impact the Company's liquidity, capital and results of operations.

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") regarding, among other things, the anticipated financial and operating results of the Company. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any modifications or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

The Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks and uncertainties, including, but not limited to those described in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, and also include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for these losses, (ii) the effects of the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on general economic and financial market conditions and on the Company's and its customers' business, results of operations, asset quality and financial condition; (iii) the effect on our allowance for loan losses and provisioning expense as a result of our decision to defer the implementation of CECL (iv) deterioration in the real estate market conditions in the Company’s market areas, ~~(iii)~~(v) the impact of increased competition with other financial institutions, including pricing pressures on loans and deposits, and the resulting impact on the Company's results, including as a result of compression to net yield on earning assets, ~~(iv)~~(vi) the deterioration of the economy in the Company’s market areas, ~~(v)~~(vii) fluctuations or differences in interest rates on earning assets and interest bearing liabilities from those that the Company is modeling or anticipating, including as a result of the Bank's inability to lower deposit rates with the speed and at the levels desired in connection with the declining short-term rate environment currently contemplated, or that affect the yield curve, ~~(vi)~~(viii) the ability to grow and retain low-cost core deposits, ~~(vii)~~(ix) significant downturns in the business of one or more large customers, ~~(viii)~~(x) the inability of the Company to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies, required capital maintenance levels, or regulatory requests or directives, ~~(ix)~~(xi) changes in state or Federal regulations, policies, or legislation applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act, ~~(x)~~(xii) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, ~~(xi)~~(xiii) inadequate allowance for loan losses, ~~(xii)~~(xiv) the effectiveness of the Company’s activities in improving, resolving or liquidating lower quality assets, ~~(xiii)~~(xv) results of regulatory examinations, ~~(xiv)~~(xvi) the vulnerability of the Company's network and online banking portals, and the systems of parties with whom the Company contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches, ~~(xv)~~(xvii) the possibility of additional increases to compliance costs or other operational expenses as a result of increased regulatory oversight, ~~(xvi)~~(xviii) loss of key personnel, and ~~(xvii)~~(xix) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future litigation, examinations or other legal and/or regulatory ~~actions.~~actions, including as a result of the Company's participation in and execution of government progress related to the COVID-19 pandemic. These risks and uncertainties may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. The Company’s future operating results depend on a number of factors which were derived utilizing numerous assumptions that could cause actual results to differ materially from those projected in forward-looking statements.

Impact of COVID-19

In March 2020, the outbreak of the novel Coronavirus Disease 2019 (“COVID-19”) was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in uncertainty, volatility and deterioration in financial markets and in governmental, commercial and consumer activity including in the United States, where we conduct substantially all of our activity.

To combat the spread of COVID-19, federal, state and local governments, including the Governor of the State of Tennessee and mayors and county executives of the communities in which we operate, have taken a variety of actions that have materially and adversely affected the businesses and lives of our customers. These actions have included orders or directives closing non-essential businesses and restricting movement of individuals through the issuance of shelter-in-place or safer-at-home orders and other guidance encouraging individuals to observe strict social distancing measures. At times, the actions being taken by these governmental authorities are not always coordinated or consistent across the state of Tennessee and the impact of those actions across our markets may be uneven. These actions, together with the independent actions of individuals and businesses aimed at slowing the spread of the virus, have resulted in extensive economic disruption and rapid declines in consumer and commercial activity.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program ("PPP"), a nearly $659 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

In response to the COVID-19 pandemic and its economic impact to our customers, we proactively began providing relief to our customers in the middle of March 2020 through a 90 day interest only payment option or a full 90 day payment deferral option. Following the passage of the CARES Act we expanded this program to provide a six-month interest only payment option in an effort to provide flexibility to our customers as they navigate these uncertain times. Pursuant to interagency regulatory guidance and the CARES Act, we may elect to not classify loans for which these deferrals are granted between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency as troubled debt restructurings.

As of April 30, 2020, the Bank had granted deferrals of principal or both principal and interest on approximately 855 loans, totaling $572.4 million in aggregate principal amount. Under the applicable guidance, none of these loans were considered troubled debt restructurings as of April 30, 2020.

In connection with our response to COVID-19 we have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and reserves supported by a strong capital position. Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to increase in coming months.

Table of Contents

In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including restricting employee travel, directing employees to work from home insofar as is possible and implementing our business continuity plans and protocols to the extent necessary. We also held a virtual annual shareholders’ meeting for the first time in our history.

Critical Accounting Estimates

The accounting principles we follow and our methods of applying these principles conform with U.S. generally accepted accounting principles and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses have been critical to the determination of our financial position and results of operations. There have been no significant changes to our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Allowance for Loan Losses (“allowance”). Our management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, current and anticipated economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partially charged off after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, is deemed to be uncollectible.

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, impairment measurement is based on the fair value of the collateral, less estimated disposal costs. If the measure of the impaired loan is less than the recorded investment in the loan, the Company recognizes an impairment by creating a valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. Management believes it follows appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans.

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the loan portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, we also consider the results of our ongoing loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process. We incorporate loan review results in the determination of whether or not it is probable that we will be able to collect all amounts due according to the contractual terms of a loan.

~~Table of Contents~~

As part of management’s quarterly assessment of the allowance, management divides the loan portfolio into twelve segments based on bank call reporting requirements. The allowance allocation begins with a process of estimating the probable losses in each of the twelve loan segments. The estimates for these loans are based on our historical loss data for that category over the last twenty quarters. Each segment is then analyzed such that an allocation of the allowance is estimated for each loan segment.

The estimated loan loss allocation for all twelve loan portfolio segments is then adjusted for several “environmental” factors. The allocation for environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies, increase in interest rates, or procedures and other influencing factors. These environmental factors are considered for each of the twelve loan segments and the allowance allocation, as determined by the processes noted above for each component, is increased or decreased through provision expense based on the incremental assessment of these various environmental factors.

We then test the resulting allowance by comparing the balance in the allowance to industry 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 allowance in its entirety. The board of directors reviews and approves the assessment prior to the filing of quarterly and annual financial information.

ASU 2016-13 was originally to become effective for us on January 1, 2020. Pursuant to the CARES Act, lenders, like us, were given the option to defer the implementation of ASU 2016-13, which is known as the Current Expected Credit Losses (CECL) standard, until 60 days after the declaration of the end of the public health emergency related to the COVID-19 pandemic or December 31, 2020, whichever comes first. In addition, the Securities and Exchange Commission (SEC) staff has stated that opting to delay the implementation of CECL shall be considered to be in accordance with generally accepted accounting principles. As a result, we elected to delay implementation of CECL. See Note 1. Recently Issued Accounting Pronouncements in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q for further information regarding our delayed implementation of CECL.

Table of Contents

Impairment of Goodwill ~~and Intangible Assets.~~ Long-lived assets, including purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

. Goodwill ~~and intangible assets that have indefinite useful lives are~~is evaluated for impairment annually and ~~are evaluated for impairment~~ more frequently if events and circumstances indicate that the asset might be impaired. ~~That annual assessment date for us is December 31. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The Company first has~~ASC 350, Intangibles — Goodwill and Other, provides an entity the option to first perform a qualitative assessment ~~of goodwill~~ to determine ~~if impairment has occurred. Based upon~~whether it is more likely than not that the qualitative assessment, if the fair value of goodwill exceeds the carrying value, the evaluation of goodwill is complete. If the qualitative assessment indicates that impairment is present, the goodwill impairment analysis continues with a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit ~~exceeds~~is less than its carrying ~~value,~~amount. If an entity does a qualitative assessment and determines it is necessary, or if a qualitative assessment is not performed, it is required to perform a goodwill ~~is considered not~~impairment test to ~~be impaired. If the carrying value exceeds estimated fair value, there is an indication of~~identify potential goodwill impairment and ~~the second step is performed to~~ measure the amount of ~~impairment.~~

~~If required,~~goodwill impairment loss to be recognized for that reporting unit (if any). The results of our quantitative assessment as of December 31, 2019, our annual assessment date, indicated that the ~~second step involves calculating an implied~~ fair value of ~~goodwill for each~~our reporting unit ~~for which the first step indicated potential impairment. The implied fair value~~was more than its carrying value.

Should our common stock experience a sustained price decline or other impairment indicators become known, additional impairment testing of goodwill ismay be required. Should it be determined in a ~~manner similar~~future period that the goodwill has become impaired, then a charge to ~~the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined~~earnings will be recorded in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, thereperiod such determination is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill.made.

~~In January 2017, FASB issued~~ ~~ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.”~~ ASU 2017-04 eliminates Step 2 from the goodwill impairment test. ASU 2017-04 will be effective for us on January 1, 2020, with early adoption permitted for interim or annual impairment tests beginning in 2017. See discussion of this ASU within Note 1. Summary of Significant Accounting Policies elsewhere in this Form 10-Q.

Other-than-temporary Impairment. A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount of the security. To determine whether impairment is other-than-temporary, management considers whether the entity expects to recover the entire amortized cost basis of the security by reviewing the present value of the future cash flows associated with the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit loss and is deemed to be other-than temporary impairment. If a credit loss is identified, the credit loss is recognized as a charge to earnings and a new cost basis for the security is established. If management concludes that no credit loss exists and it is not more-likely-than-not that the Company will be required to sell the security before maturity, then the security is not other-than-temporarily impaired and the shortfall is recorded as a component of equity.

Results of Operations

Net earnings increased ~~$5,311,000, or 23.33%,~~8.94% to ~~$28,072,000~~$9,031,000 for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020, from ~~$22,761,000~~$8,290,000 in the first ~~nine~~three months of ~~2018. Net earnings were $10,266,000 for the quarter ended September 30,~~ 2019 ~~an increase of $2,294,000, or 28.78%, from $7,972,000 for the three months ended September 2018 and an increase of $750,000, or 7.88%, over the quarter ended June 30, 2019.~~. The increase in net earnings during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 as compared to the prior year comparable period was primarily due to an increase in net interest income, reflecting an increase in average interest earning asset balances ~~and yields~~ between the relevant periods, as well as an increase in non-interest income, partially offset by a decrease in net yield on interest earning assets and an increase in ~~interest expense and~~ non-interest expense. The ~~increase in interest expense resulted from an increase in deposit rates along with an increase in balances, and the~~ increase in non-interest expense resulted from the Company's continued growth. ~~Income tax expense was also higher~~

The executive management and Board of Directors of the Company evaluate key performance indicators (KPIs) on a continuing basis. These KPIs serve as benchmarks of Company performance and are used in making strategic decisions. Return on average assets (ROA) is the ~~first nine months of 2019 when compared~~most common benchmark for bank profitability and is calculated by taking our annualized net earnings and dividing by the average assets. ROA measures a company’s return on investment in a format that is easily comparable to other financial institutions. It is particularly important to the ~~first nine months of 2018.~~Company as is it serves as the basis for certain executive and employee bonuses. The ROA for the periods ended March 31, 2020 and 2019 was 1.29% and 1.31%, respectively.

Table of Contents

Net Interest Income

The average balances, interest, and average rates of our assets and liabilities for the ~~nine month and~~ three month periods ended ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018~~ are presented in the following table (dollars in thousands):

	Nine Months Ended								Nine Months Ended								Three Months Ended								Three Months Ended
	September 30, 2019								September 30, 2018								March 31, 2020								March 31, 2019
	Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense
Loans, net of unearned interest (2) (3)	$	2,026,406			5.28	%	$	79,020	$	1,866,443			5.01	%	$	69,522	$	2,133,599			5.24	%	$	27,276	$	2,037,980			5.19	%	$	25,774
Investment securities—taxable		335,524			2.56			6,428		291,676			2.12			4,630		364,723			2.25			2,040		260,621			2.50			1,607
Investment securities—tax exempt		35,429			2.02			535		42,793			2.64			846		49,339			1.97			242		33,311			2.03			167
Taxable equivalent adjustment (1)		—			0.53			142		—			0.71			225		—			0.52			64		—			0.54			44
Total tax-exempt investment securities		35,429			2.55			677		42,793			3.35			1,071		49,339			2.49			306		33,311			2.57			211
Total investment securities		370,953			2.56			7,105		334,469			2.28			5,701		414,062			2.28			2,346		293,932			2.51			1,818
Loans held for sale		8,512			3.61			230		5,337			3.36			134		12,787			3.40			108		7,028			4.50			78
Federal funds sold		10,872			2.10			171		3,702			1.44			40		19,430			1.16			56		1,682			1.93			8
Accounts with depository institutions		115,422			1.91			1,652		48,765			1.74			633		105,050			1.21			316		109,329			2.23			600
Restricted equity securities		4,092			4.70			144		3,012			5.99			135		4,680			4.21			49		3,025			6.70			50
Total earning assets		2,536,257			4.71			88,322		2,261,728			4.53			76,165		2,689,608			4.59			30,151		2,452,976			4.74			28,328
Cash and due from banks		10,054								20,453								14,732								10,589
Allowance for loan losses		(27,947	)							(24,933	)							(28,957	)							(27,308	)
Bank premises and equipment		58,283								57,455								60,041								58,162
Other assets		72,950								69,163								70,716								72,822
Total assets	$	2,649,597							$	2,383,866							$	2,806,140							$	2,567,241

	Nine Months Ended							Nine Months Ended							Three Months Ended							Three Months Ended
	September 30, 2019							September 30, 2018							March 31, 2020							March 31, 2019
	Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense
Deposits:
Negotiable order of withdrawal accounts	$	518,857		0.47	%	$	1,807	$	503,807		0.33	%	$	1,257	$	561,960		0.32	%	$	443	$	504,978		0.46	%	$	572
Money market demand accounts		740,923		0.85			4,699		660,265		0.45			2,211		809,702		0.59			1,182		740,225		0.84			1,530
Time Deposits		640,472		2.00			9,566		540,263		1.34			5,398		626,592		1.95			3,041		625,895		1.87			2,886
Other savings		136,145		0.63			639		140,265		0.50			526		146,145		0.49			177		135,487		0.63			210
Total interest-bearing deposits		2,036,397		1.10			16,711		1,844,600		0.68			9,392		2,144,399		0.91			4,843		2,006,585		1.05			5,198
Federal Home Loan Bank advances		20,456		2.68			410		—		—			—		22,637		2.68			151		1,833		2.88			13
Securities sold under repurchase agreements		—		—			—		1,457		1.47			16
Federal funds purchased		798		0.67			4		798		0.67			4
Total interest-bearing liabilities		2,057,651		1.11			17,125		1,846,855		0.68			9,412		2,167,036		0.93			4,994		2,008,418		1.05			5,211
Non-interest bearing deposits		264,520							249,047							280,435							247,318
Other liabilities		13,994							13,077							15,295							9,909
Stockholders’ equity		313,432							274,887							343,374							301,596
Total liabilities and stockholders’ equity	$	2,649,597						$	2,383,866						$	2,806,140						$	2,567,241
Net interest income, on a tax equivalent basis						$	71,197						$	66,753						$	25,157						$	23,117
Net yield on earning assets (4)				3.80	%						3.97	%						3.84	%						3.88	%
Net interest spread (5)				3.60	%						3.85	%						3.66	%						3.69	%

Notes:

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

(2) 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.

(3) Loan fees of ~~$5.8~~ $2.0 million and ~~$5.6~~$1.9 million are included in interest income in 2020 and 2019, ~~and 2018.~~respectively.

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

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

Table of Contents

Three Months Ended

Three Months Ended

September 30, 2019

September 30, 2018

Average Balance Interest Rate Income/ Expense Average Balance Interest Rate Income/ Expense
Loans, net of unearned interest (2) (3)
$ 2,004,578 5.41 % $ 27,035 $ 1,939,529 5.01 % $ 24,342
Investment securities—taxable
386,017 2.38 2,318 260,873 2.07 1,362
Investment securities—tax exempt
43,797 1.97 217 38,569 2.52 245
Taxable equivalent adjustment (1)
— 0.52 57 — 0.67 65
Total tax-exempt investment securities
43,797 2.49 274 38,569 3.19 310
Total investment securities
429,814 2.39 2,592 299,442 2.22 1,672
Loans held for sale
9,525 3.54 85 6,458 3.26 53
Federal funds sold
21,865 2.05 113 2,542 1.56 10
Accounts with depository institutions
110,373 1.86 517 54,375 1.57 215
Restricted equity securities
4,680 3.73 44 3,012 9.35 71
Total earning assets
2,580,835 4.72 30,386 2,305,358 4.56 26,363
Cash and due from banks
10,911 12,149
Allowance for loan losses
(28,260 ) (25,786 )
Bank premises and equipment
58,573 58,681
Other assets
71,760 70,977
Total assets
$ 2,693,819 $ 2,421,379

Three Months Ended

Three Months Ended

September 30, 2019

September 30, 2018

Average Balance Interest Rate Income/ Expense Average Balance Interest Rate Income/ Expense
Deposits:

Negotiable order of withdrawal accounts
$ 527,077 0.47 % $ 619 $ 507,719 0.38 % $ 483
Money market demand accounts
742,352 0.85 1,592 670,319 0.56 949
Time Deposits
640,845 2.09 3,371 552,584 1.45 2,024
Other savings
136,378 0.63 215 140,708 0.56 198
Total interest-bearing deposits
2,046,652 1.12 5,797 1,871,330 0.77 3,654
Federal Home Loan Bank advances
28,237 2.67 190 — — —
Federal funds purchased
2,369 0.67 4 1,184 0.67 2
Total interest-bearing liabilities
2,077,258 1.14 5,991 1,872,514 0.77 3,656
Non-interest bearing deposits
273,944 252,916
Other liabilities
17,568 14,464
Stockholders’ equity
325,049 281,485
Total liabilities and stockholders’ equity
$ 2,693,819 $ 2,421,379
Net interest income, on a tax equivalent basis
$ 24,395 $ 22,707
Net yield on earning assets (4)
3.80 % 3.93 %
Net interest spread (5)
3.58 % 3.79 %

~~Notes:~~

~~(1) The tax equivalent adjustment has been computed using a 21% Federal tax rate.~~

~~(2) 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.~~

~~(3) Loan fees of $2.1 million and $1.7 million are included in interest income in 2019 and 2018.~~

~~(4) Annualized net interest income on a tax equivalent basis divided by average interest-earning assets.~~

~~(5) Average interest rate on interest-earning assets less average interest rate on interest-bearing liabilities.~~

~~Table of Contents~~

Net yield on earning assets for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 was 3.84% and ~~2018 was 3.80% and 3.97%~~3.88%, ~~respectively, and 3.80% and 3.93% for the quarter ended September 30, 2019 and 2018,~~ respectively. The decrease in net yield on earning assets was due to ~~an increase~~a decrease in the yield earned on our earning assets, specifically investment yields and the rate earned on fed funds and accounts with depository institutions, that outpaced the decrease in rates paid on our interest-bearing ~~liabilities that outpaced the increase in yield on earning assets, specifically loans and investment securities.~~liabilities. The yield on loans increased during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 when compared to the comparable period in ~~2018 primarily~~2019. 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 150 basis points late in the first quarter of 2020 and 75 basis points during the third quarter of 2019 as a result of ~~increases in rates enacted by the Board of Governors of the Federal Reserve (Federal Reserve)~~reductions in the ~~last three quarters of 2018, slightly offset by the impact of decreases in rates enacted~~federal funds rate by the Federal ~~Reserve since July 31, 2019.~~Reserve. Although prime rates decreased during the first quarter of 2020 and late 2019, and we continued to face competitive pressures in our markets, we were able to increase our yield on loans due to strategic loan pricing on certain loan segments, and an increase in loans qualified to receive state income tax credit. The ~~increase~~decrease in yield on securities was also due to ~~management's ability to invest~~the declining rate environment discussed above, in which higher yielding securities ~~as the overall rates in the~~were called and were replaced with securities yielding lower market ~~increased throughout 2018 before declining in the second half of 2019.~~rates. The net interest spread was ~~3.60%~~3.66% and ~~3.85%~~3.69% for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and March 31, 2019, ~~and September 30, 2018, respectively, and 3.58% and 3.79% for the quarter ended September 30, 2019 and 2018,~~ respectively. The rate we pay on our deposits and other funding sources ~~increased~~decreased in the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 when compared to the comparable periods in ~~2018,~~2019, as we ~~increased~~decreased the rates on several of ~~our~~our deposit products in response to ~~competitive pressures in our markets and increases~~decreases in short-term rates throughout ~~2018.~~2019 and the first quarter of 2020. We also incurred additional funding costs related to the utilization of Federal Home Loan Bank borrowings ~~and brokered deposits late in the first quarter of 2019~~ to increase our balance sheet liquidity. These borrowings are at a higher rate than our core deposits. ~~On July 31, 2019 and September 18, 2019, the Board of Governors~~As a result of the ~~Federal Reserve decreased~~significant reduction in short-term rates late in the ~~benchmark federal funds rate by 0.25%. As a result,~~first quarter of 2020 and the tremendous uncertainty resulting from COVID-19, our net yield on earning assets will likely continue to decline during the remainder of ~~2019~~2020 as will our net interest spread as the impact of the declining rate environment will more quickly impact our earning assets than our interest-bearing liabilities, and competitive pressures in our markets may limit our ability to reduce the rates we pay on our interest bearing liabilities. ~~Declining loan balances are~~Efforts to maintain elevated levels of on-balance sheet liquidity will also likely to negatively impact our net ~~interest spread as the yields we earn~~yield on ~~loans are typically higher than the yields we earn on investment securities and other interest-earning~~earning assets.

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. Reflecting loan growth and an increase in the yields earned on loans, ~~investment securities, accounts with depository institutions, and federal funds sold,~~ the Company’s total interest income, excluding tax equivalent adjustments relating to tax exempt securities and loans, increased ~~$12,240,000~~$1,803,000, or ~~16.12%~~6.37%, during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 as compared to the same period in 2018. The increase in total interest income was $4,031,000, or 15.33%, for the quarter ended September 30, 2019 as compared to the quarter ended September 30, 2018. Interest income in the third quarter of 2019 increased $762,000, or 2.58%, over the second quarter in 2019. The increase in the three and nine months ended September 30, 2019 when compared to the three and nine months ended September 30, 2018 was primarily attributable to an overall increase in average loans, an increase in the yield on loans, and the resulting increase in the net interest and fees earned on loans, partially offset by an increase in interest expense. The ratio of average earning assets to total average assets was ~~95.7%~~95.8% for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~94.9%~~95.5% for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019.

Interest expense ~~increased $7,713,000,~~decreased $217,000, or ~~81.95%~~4.16%, for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 as compared to the same period in ~~2018, and increased $2,335,000, or 63.87%,~~2019. The decrease for the three months ended September 30, 2019 as compared to the same period in 2018. Interest expense increased $68,000, or 1.15%, for the quarter ended September 30, 2019 over the second quarter of 2019. The increase for the three and nine months ended September 30, 2019March 31, 2020 as compared to the prior year's comparable ~~periods~~period was primarily due to ~~an increase~~a decrease in the ~~rate and volume~~rates of average interest bearing deposits, reflecting the ~~rising interest~~declining rate environment that we experienced throughout ~~2018~~2019 and the first ~~half~~quarter of ~~2019, competitive pressures~~2020, partially offset by an increase in ~~our markets, as well as the addition of~~ interest expense related to the FHLB ~~borrowings and brokered deposits. Interest expense was also impacted by our inability to quickly reprice deposits with the start of the downward rate environment.~~borrowings.

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. The provision for loan losses for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~$1,354,000, a decrease~~$1,469,000, an increase of ~~$1,847,000~~$436,000 from the provision of ~~$3,201,000~~$1,033,000 incurred in the first ~~nine~~three months of ~~2018.~~2019. The provision for loan losses for the quarter ended September 30, 2019 was $167,000, down $921,000 from the provision of $1,088,000 incurred in the third quarter of 2018 and up $13,000 from the $154,000 incurred in the second quarter of 2019. The decreaseincrease in provision expense for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 from the comparable ~~periods~~period in ~~2018~~2019 is primarily attributable to ~~a decrease~~increasing our allowance for loans losses in response to the ~~volume of loans originated during the period and a decrease in the amount of net loans charged off.~~expected economic downturn related to COVID-19. The provision for loan losses is based on past loan experience and other factors which, in management’s judgment, deserve current recognition in estimating loan losses. Such factors include changes in the amount and composition of the loan portfolio, review of specific problem loans, past due and nonperforming loans, change in lending staff, the recommendations of the Company’s regulators, and current economic conditions that may affect the borrowers’ ability to repay.

The Bank’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 a determination is made that the loan is uncollectible. The volume of net loans ~~charged off~~recovered for the first ~~nine~~three months of ~~2019~~2020 totaled ~~approximately $143,000 compared~~approximately $86,000 compared to ~~approximately $482,000~~approximately $73,000 in net ~~charge-offs~~recoveries during the first ~~nine~~three months of ~~2018. The volume~~2019. Though tremendous uncertainty remains regarding the length and severity of ~~net loans charged off for the third quarter of 2019 totaled approximately $52,000 compared to approximately $198,000 in~~COVID-19's impact, we believe net charge-offs ~~during~~could increase over the ~~third quarter~~remainder of ~~2018.~~2020.

The allowance for loan losses (net of charge-offs and recoveries) was $~~28,385,000~~30,281,000 at ~~September 30, 2019,~~March 31, 2020, an increase of $~~1,211,000~~1,555,000, or ~~4.46%~~5.41%, from ~~$27,174,000~~$28,726,000 at December 31, ~~2018,~~2019, and ~~of $1,757,000,~~of $2,001,000, or ~~6.60%~~7.08%, from ~~$26,628,000 at September 30, 2018.~~$28,280,000 at March 31, 2019. The allowance for loan losses was ~~1.43%~~1.40% of total loans outstanding at ~~September 30, 2019,~~March 31, 2020, compared to ~~1.33%~~1.38% at December 31, ~~2018~~2019 and ~~1.35% at September 30, 2018.~~ 1.38% at March 31, 2019. As a percentage of nonperforming loans at ~~September 30, 2019,~~March 31, 2020, December 31, ~~2018,~~2019, and ~~September 30, 2018,~~March 31, 2019, the allowance for loan losses ~~represented~~represente ~~579~~%d 760%, ~~667%~~359% and ~~456%~~701%, respectively. The internally classified loans as a percentage of the allowance for loan losses ~~were~~ ~~42.6%~~were31.8% and ~~49.9%~~44.1%, ~~respectively,~~respectively, at ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

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 quarterly by the Chief Financial Officer and provided to the Board of Directors 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 Company's independent Loan Review Department, 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 quarterly assessment. See the discussion above under “Critical Accounting Estimates” for more information. While the severity of the impact of the COVID-19 pandemic for individuals, small businesses and corporations is still unknown, leading economic indicators suggest that an economic downturn is likely. In an effort to recognize an appropriate allowance for loan losses, management incorporated qualitative factors into our quarterly assessment during the three months ended March 31, 2020, including current and anticipated economic conditions and value of collateral considerations, to increase the Company's reserve for the potential impact of the COVID-19 pandemic. Of the $1,469,000 total provision for loan loss that was recorded in the first quarter of 2020, $933,000 was attributable to management's estimates of the impact of the COVID-19 pandemic on our loan portfolio. Management believes the allowance for loan losses at ~~September 30, 2019~~March 31, 2020 to be adequate, but if economic conditions deteriorate beyond management’s current expectations and additional charge-offs are incurred, the allowance for loan losses may require an increase through additional provision for loan losses expense which would negatively impact earnings.Moreover, though we have deferred the implementation of CECL at this time pursuant to relief offered by the CARES Act, when we become obligated to adopt CECL we are likely to have to increase our allowance for loan losses meaningfully.

Table of Contents

Non-Interest Income

The components of the Company’s non-interest income include service charges on deposit accounts, other fees and commissions, income on BOLI and annuity earnings, gain on sale of loans, gain (loss) on sale of other real estate, gain (loss) on sale of fixed assets, gain (loss) on sale of securities, and gain (loss) on sale of other assets. Total non-interest income for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 increased ~~$2,768,000~~$175,000, or ~~15.02%~~2.80%, to ~~$21,192,000~~$6,435,000 from ~~$18,424,000~~$6,260,000 for the same period in ~~2018. Total non-interest income increased $1,063,000, or 16.27%, during the quarter ended September 30,~~ 2019 ~~compared to the third quarter of 2018 and there was an increase of $262,000, or 3.57%, over the second quarter of 2019.~~. The Company’s non-interest income in the ~~nine-month~~three-month period ended ~~September 30, 2019~~March 31, 2020 increased from the comparable period in 22019~~018~~ mainly due to ~~an increase in gain on sale of loans, service charges on deposit accounts, other fees and commissions, and a decrease in the loss on sale of securities, pa~~rtially offset by a decrease in income on BOLI and annuity contracts and an increase in the loss on sale of other real estate. The Company's non-interest income in the three-month period ended September 30, 2019 ~~increased from~~ ~~the comparable period in 2018~~ ~~mainly due to a decrease in the loss on sale of securities, an increase in the gain on sale of loans,~~ an increase in other fees and commissions and a ~~decrease in~~gain on the ~~loss on~~ sale of ~~other real estate,~~securities, partially offset by a decrease in ~~service charges on deposit accounts, a decrease in income on BOLI and annuity contracts, and an increase in~~ the ~~loss~~gain on sale of ~~other assets. Gain on sale of loans increased~~ loans. Other fees and commissions increas~~$1,820,000~~,ed $401,000, or ~~54.97%~~12.91%, to ~~$5,131,000~~$3,508,000 dur ~~during~~ing the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to the same period in ~~2018, and~~ ~~$583,000, or~~ ~~45.30%, to~~ ~~$1,870,000~~ ~~during the three months ended~~ ~~September 30,~~ 2019 ~~compared to the same period in 2018. This is a result of a new capital markets e~~xecution process which consisted of transitioning to the mandatory delivery process from the best efforts delivery process and an increase in the volume of loan originations. The mandatory delivery process was implemented by the mortgage department in November 2018. Service charges on deposit accounts increased $133,000, or 2.67%, to $5,114,000 during the nine months ended September 30, 2019 compared to the same period in 2018, primarily resulting from an increase in the number of consumer checking accounts and an increase in the number of transactions as well as an increase in the per item fee for service charge on insufficient funds. Service charges on deposit accounts decreased $14,000, or 0.79%, to $1,756,000, for the three months ended September 30, 2019. ~~Other~~ ~~fees and commissions increased $462,000, or 4.53%, to $10,660,000 during the nine months ended September 30, 2019 compared to the same period in 2018~~ primarily due to an increase in debit card interchange fee income and an increase in brokerage income. Debit card interchange fee income increased due to an increase in the number and volume of debit card holders and transactions. ~~Other fees and commissions~~Brokerage income increased $375,000, or 11.06%, to $3,765,000 during the three months ended September 30, 2019 compared to the same period in 2018 primarily due to an increase in debit card interchange fee income and total third party income due to new client acquisition and the opening of new investment accounts along with an increase in fees collected. Gain~~. Loss~~ on sale of securities ~~decreased~~ increased $467,000~~$382,000~~, or 151.13%, t~~58.77%,to~~o $158,000 ~~$268,000~~from a loss on sale of $309,000 for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to the same period in ~~2018, and decreased $120,000, or 151.90% resulting in a gain of~~ ~~$41,000~~2019, ~~during the three months ended September 30, 2019 compared to the same period in 2018,~~ due to ~~current market conditions and~~ management's ~~corresponding~~ decision in 2019 to sell securities for a loss and reinvest the proceeds in higher yielding assets in ~~2018.~~2019. Gain on sale of loans decreased $735,000, or, 44.65%, to $911,000 during the three months ended March 31, 2020 compared to the same period in 2019. This is a result of a new capital markets execution process implemented in January 2019 which reflected higher than normal gains at process launch. In addition, the Bank experienced lower refinance activity in the first quarter of 2020 when compared to the same period in 2019. The extreme economic worries associated with business closures, unemployment and the equity market sell-off related to the COVID-19 pandemic has contributed to unprecedented volatility with mortgage rates and caused us to pause issuing our rate locks via mandatory delivery methodology. We inserted issuing rates on our loans utilizing best efforts pricing methods. We anticipate that we will resume mandatory delivery when the volatility with the interest rate markets abates.

The stimulus packages associated with the CARES Act have required mortgage servicers to allow borrowers who are impacted by COVID-19 to have up to 12 months forbearance on their mortgage loans. This has all but eliminated the demand side of mortgage sales on the secondary market as investors have a diminished appetite to buy loans that have a high expectation of customers who will stop making their payments shortly after purchase. As a result, our revenue execution has deteriorated. We are in an environment of credit tightening from purchasers of mortgage loans and some product offerings have been eliminated. We have been able to sustain higher than normal closed loan production which should negate somewhat the lower revenue return, but if the disruption from the COVID-19 pandemic continues, our ability to maintain this elevated volume could be adversely impacted. While the Company believes this matter could negatively impact its results of operations, cash flows and financial position, the related impact cannot be reasonably estimated at this time. Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance and its financial results.

Non-Interest Expense

Non-interest expense consists primarily of employee costs, occupancy expenses, furniture and equipment expenses, advertising and public relations expenses, data processing expenses, ATM and interchange expenses, director’s fees, audit, legal and consulting fees, and other operating expenses. Total non-interest expense increased ~~$2,922,000,~~$1,284,000, or ~~5.72%~~7.37%, during the first ~~nine~~three months of ~~2019~~2020 compared to the same period in ~~2018 and increased $842,000, or 4.85%, for the quarter ended September 30,~~ 2019 ~~as compared to the same quarter in 2018.~~. The increase in non-interest expense for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 when compared to the comparable period in ~~2018~~2019 is primarily attributable to an increase in salaries and employee benefits, ~~furniture and equipment expenses, occupancy expenses,~~ data processing expenses, ATM and interchange fees, ~~audit, legal~~ and ~~consulting expenses~~advertising and ~~other operating expenses partially offset by a decrease in advertising. The increase in salaries~~public relations expenses. Salaries and employee benefits isincreased $722,000, or 6.94%, to $11,132,000 during the three months ended March 31, 2020 compared to the same period in 2019 primarily ~~attributable~~ due to an increase in the number of employees necessary to support the Company’s growth in ~~operations and branch expansion. The increase in furniture and equipment~~operations. Data processing expenses ~~is primarily attributable~~increased $191,000, or 19.53%, to ~~an increase in depreciation related~~$1,169,000 during the three months ended March 31, 2020 compared to the ~~opening of the operations building~~same period in Lebanon, Tennessee and Cool Springs office in Williamson County and an increase in the cost of maintenance and repairs. The increase in occupancy expense is similarly attributable to the opening of the operations center in the second quarter of 2018 and the lease expense associated with the opening of the new branch in Williamson County in the fourth quarter of 2018. The increase in data processing expenses is2019 primarily ~~attributable~~due to an increase in computer maintenance and computer ~~licenses due to the upgrade~~licenses. These expenses included upgrades of our current systems as well as additional investments in computer software, ~~due to branch expansion,~~ an increase in I.T. consulting expense and an increase in computer home banking expense ~~that resulted~~resulting from the evolution of our new mobile application. ~~This~~The mobile banking expense is now incurred on a per user basis as opposed to an overall flat fee. ~~The increase in~~ ATM and interchange fees isincreased $89,000, or 11.35%, to $873,000 during the three months ended March 31, 2020 compared to the same period in 2019 primarily due to ~~the addition of ATMs as branch expansion has occurred and~~ increasing interchange fees associated with a higher volume of debit card ~~transactions. The~~transactions, and an increase in ~~audit, legal~~debit card expenses. Advertising and ~~consulting~~public relations expenses ~~reflects~~ increased ~~legal accruals associated with~~$126,000, or 26.42% to $603,000 during the ~~Company's general operations as well as ongoing legal proceedings~~three months ended March 31, 2020 compared to ~~which~~ the ~~Bank is a party. The increase~~same period in ~~other operating expenses is~~2019 primarily ~~attributable~~due to an increase in ~~account servicing costs associated with an increase in~~print, digital media, design and development, and media plans as the ~~number~~Bank continues to market awareness of ~~consumer checking accounts and brokerage accounts.~~ the Bank's brand. The Company anticipates that salaries and employee benefits expense and occupancy expense will continue to increase as the Company's operations and facilities continue to ~~grow.~~grow though the growth rate may slow as a result of COVID-19's likely impact on our hiring plans.

As a financial institution, Wilson Bank was deemed to be an essential business and accordingly, our operations were sustained. To the extent possible, a portion of our staff was moved to remote working locations and teleconferencing practices were established. Wilson Bank is dedicated to retaining our employees and providing a stable income to them throughout this global pandemic; therefore, the Company does not anticipate salary and employee benefit expenses to decrease.

The efficiency ratio is a common and comparable KPI used in the banking industry. The Company uses this metric to monitor how effective management is at using our internal resources. It is calculated by taking our non-interest expense divided by our net interest income plus non-interest income. Our efficiency ratio for the periods ended March 31, 2020 and 2019 were 59.32% and 59.38%, respectively.

Income Taxes

The Company’s income tax expense was ~~$8,817,000~~$2,326,000 for the ~~nine~~three months ended ~~September 30, 2019, an increase~~March 31, 2020, a decrease of ~~$909,000~~$266,000 over the comparable period in ~~2018. Income tax expense was $3,290,000 for the quarter ended September 30,~~ 2019 ~~an increase of $544,000 over the same period in 2018.~~. The percentage of income tax expense to net income before taxes was ~~23.90%~~20.48% and ~~25.78%~~23.82% for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018, respectively, and 24.27% and 25.62% for the quarters ended September 30, 2019 and 2018,~~, respectively. The decrease in the percentage of income tax expense to earnings before taxes is primarily due to additional state tax credits that lowered our effective tax rate. Our effective tax rate represents our blended federal and state rate of 26.135% affected by the impact of anticipated favorable permanent differences between our book and taxable income such as bank-owned life insurance, income earned on tax-exempt securities and certain federal and state tax credits.

Table of Contents

Financial Condition

Balance Sheet Summary

The Company’s total assets increased ~~$215,202,000,~~$82,834,000, or ~~8.46%~~2.96%, to ~~$2,758,884,000~~$2,877,043,000 at ~~September 30, 2019~~March 31, 2020 from ~~$2,543,682,000~~$2,794,209,000 at December 31, ~~2018. Total assets increased $48,814,000, or 1.80%, at September 30,~~ 2019 ~~from June 30, 2019.~~. Loans, net of allowance for loan losses, totaled ~~$1,954,980,000~~$2,131,731,000 at ~~September 30, 2019,~~March 31, 2020, a ~~3.03% decrease~~3.62% increase compared to ~~$2,016,005,000~~$2,057,175,000 at December 31, ~~2018. Net loans decreased $37,863,000, or 1.90% from June 30,~~ 2019 ~~to September 30, 2019.~~. In the first half of 2019 management made a strategic decision to begin focusing loan growth in the commercial and industrial and residential 1-4 family segments of our loan portfolio, which have historically grown at slower rates than the other segments of the portfolio. As a result, loan growth slowed in 2019. In the first quarter of 2020, the strategic focus for loans also included construction and ~~net loans decreased slightly in the second and third quarters of 2019, and loans are anticipated~~commercial real estate lending which tends to grow at a ~~slower rate than~~more rapid pace, thus causing the ~~2018 comparable period for the fourth quarter of 2019. The decrease~~increase in loans ~~from December 31, 2018 to September 30, 2019 also resulted from the payoff of several large loan relationships.~~discussed above. We operate in a market area that iswas experiencing economic growth prior to the onset of COVID-19, which caused our commercial real estate and residential 1-4 family ~~and commercial and industrial~~ portfolio to increase as of ~~September 30, 2019,~~March 31, 2020, when compared to December 31, ~~2018.~~2019. Commercial real estate loans increased ~~6.28%~~6.07% and ~~5.08%~~15.69%, respectively, from December 31, ~~2018~~2019 and ~~September 30, 2018~~March 31, 2019 to ~~September 30, 2019,~~March 31, 2020, and comprised ~~37.45%~~38.79% of the Company’s loan portfolio at ~~September 30, 2019,~~March 31, 2020, compared to ~~34.19%~~37.91% at December 31, ~~2018~~2019 and ~~35.90%~~35.34% at ~~September 30, 2018.~~March 31, 2019. Residential 1-4 family loans increased ~~1.75%~~1.67% and ~~5.72%~~13.41%, respectively, from December 31, ~~2018~~2019 and ~~September 30, 2018~~March 31, 2019 to ~~September 30, 2019,~~March 31, 2020, and comprised ~~23.56%~~23.96% of the Company’s loan portfolio at ~~September 30, 2019,~~March 31, 2020, compared to ~~22.47%~~24.43% at December 31, ~~2018~~2019 and ~~22.45%~~22.27% at ~~September 30, 2018. Commercial and industrial loans increased 15.60% and 76.57%, respectively, from December~~March 31, ~~2018 and September 30, 2018 to September 30,~~ 2019 ~~and comprised 4.55% of the Company’s loan portfolio at September 30, 2019, compared to 3.82% at December 31, 2018 and 2.59% at September 30, 2018.The~~. The increase in commercial real estate loans is a result of an increase in demand for such loans in the overall economy and the Company’s ~~markets.~~markets prior to the onset of COVID-19. Construction and land development loans decreased ~~20.79%~~8.56% and ~~14.27%~~21.47%, respectively from December 31, ~~2018~~2019 and ~~September 30, 2018~~March 31, 2019 to ~~September 30, 2019~~March 31, 2020, and comprised ~~20.63%~~17.92% of the Company's loan portfolio at ~~September 30, 2019~~March 31, 2020, compared to ~~25.28%~~20.31% at December 31, ~~2018~~2019 and ~~24.25%~~24.06% at March 31, 2019. The decrease in construction and land development loans from December 31, 2019 to March 31, 2020 was primarily due to the completion of a large project which transitioned to permanent financing.~~t September 30, 2018.~~

Because construction loans remain a meaningful portion of our portfolio, the Bank has implemented an additional layer of monitoring as it seeks to avoid advancing funds that exceed the present value of the collateral securing the loan. The responsibility for monitoring percentage of completion and distribution of funds tied to these completion percentages is now monitored and administered by a Credit Administration Department independent of the lending function. The Bank continues to seek to diversify its real estate portfolio as it seeks to lessen concentrations in any one type of loan.

The COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closure of many businesses, "shelter in place" and other governmental orders and directives, and reduced consumer spending due to both job losses and other effects attributable to COVID-19. Many unknowns remain surrounding this situation. Although the Company has not experienced a decrease in demand from its customers for loan-related products, if the pandemic continues for an extended period of time and the economy continues to be negatively impacted, the Company could experience a decrease in demand for loans and the financial condition of the Company could be negatively impacted. The extent to which the COVID-19 outbreak will impact loan demand and thus affect financial results is uncertain.

On March 27, 2020, the President of the United States signed into law the CARES Act, which contains significant monetary relief for American workers and small businesses. One of the provisions of the CARES Act was to establish the PPP that allows certain companies and individuals to obtain a loan, a portion of which may be forgivable, through the Small Business Administration's (SBA) program to help fund operations and cover payroll expenses. Originally, Congress allocated $349 billion to the PPP, which amount has been fully utilized. On April 24, 2020, Congress approved an additional $310 billion for the PPP. Although the PPP is sponsored by the SBA, the CARES Act establishes that the loan itself will be made through lending institutions who are authorized to make SBA loans. We have taken the necessary steps to qualify as an approved lender under the PPP and have begun providing relief to small businesses and individuals in our community through the funding of these loans. Through the date of this report, the Company has funded $63.5 million of these loans to our small business customers.

Securities ~~increased $151,725,000,~~decreased $13,921,000, or ~~53.19%~~3.31%, to ~~$436,977,000~~$407,224,000 at ~~September 30, 2019~~March 31, 2020 from ~~$285,252,000~~$421,145,000 at December 31, ~~2018 and increased $13,185,000, or 3.11%, from June 30,~~ 2019 due to ~~management's strategy to improve the Company's balance sheet liquidity and~~an increased amount of securities being called as a result of ~~increasing deposit balances coupled with~~the declining ~~loan balances. Management borrowed funds from~~rate environment. The current rate environment also caused the Federal Home Loan Bank of Cincinnati and utilized brokered deposits to purchase securities that could be pledged to secure public deposits as part of our strategy to improve our balance sheet liquidity and as a result of declining loan balances. The brokered deposits matured in the third quarter of 2019 and are no longer reflected on the balance sheet. The borrowings were laddered so that the cash flow from the securities could be used to repay the principal on the borrowings. The fair market value on the securities ~~has increased~~portfolio to increase from December 31, ~~2018~~2019 to ~~September 30, 2019 due to management's strategy of investing in higher yielding securities and the decrease in rates enacted by the Federal Reserve.~~March 31, 2020. The average yield, excluding tax equivalent adjustment, of the securities portfolio at ~~September 30, 2019~~March 31, 2020 was ~~2.57%~~2.44% with a weighted average life of ~~7.67~~8.42 years, as compared to an average yield of ~~2.45%~~2.42% and a weighted average life of ~~6.50~~7.08 years at December 31, ~~2018.~~2019. The weighted average lives on mortgage-backed securities reflect the repayment rate used for book value calculations.

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. There were no debt and equity securities classified as held-to-maturity or trading securities at ~~September 30, 2019~~March 31, 2020 or December 31, 2018. During the year ended December 31, 2018, the Company sold securities classified as held-to-maturity with a book value of $4,843,000 for a loss of $79,000. Due to the sale, management determined the Company no longer had the intent to hold the remaining securities classified as held-to-maturity to their respective maturity dates and transferred the remaining book value of $22,800,000 to the available-for-sale classification.2019.

Premises and equipment ~~increased $241,000~~decreased $533,000 or ~~0.41%~~0.88% from December 31, ~~2018~~2019 to ~~September 30, 2019.~~ March 31, 2020. The primary reason for the decrease was due to current year depreciation of $998,000.

The increase in deposits ~~and borrowings from~~combined with the ~~Federal Home Loan Bank as well in a~~ decrease in ~~loans caused~~securities outpaced loan growth causing federal funds sold and interest bearing deposits ~~held~~to increase to $160,435,000 at ~~other banks to increase to $161,040,000~~March 31, 2020 from $146,827,000 at ~~September 30, 2019 from $80,215,000 at~~ December 31, ~~2018.~~2019.

Total liabilities increased by ~~8.14%~~2.88% to ~~$2,430,993,000~~$2,528,046,000 at ~~September 30, 2019~~March 31, 2020 compared to ~~$2,248,015,000~~$2,457,225,000 at December 31, ~~2018. Total liabilities increased $39,111,000, or 1.64%, at September 30,~~ 2019 ~~from the quarter ended June 30, 2019.~~. The increase in total liabilities since December 31, ~~2018~~2019 was composed of a ~~$145,011,000,~~$67,932,000, or ~~6.49%~~2.81%, increase in total deposits, ~~$26,413,000, or 100%, increase in Federal Home Loan Bank advances,~~ and a ~~$11,554,000,~~$5,694,000, or ~~93.48%~~35.57%, increase in accrued interest and other ~~liabilities.~~liabilities, partially offset by a $2,805,000, or 11.88%, decrease, in Federal Home Loan Bank advances. We experienced an increase in deposits in the second half of the quarter ended March 31, 2020 as customers sought more stable places for excess liquidity. At ~~September 30, 2019,~~March 31, 2020, our borrowing capacity with the Federal Home Loan Bank of Cincinnati totaled ~~$261,572,000.~~ $298,284,000. The Bank pledges substantially all of its 1-4 family residential real estate loans to secure its borrowings from the Federal Home Loan Bank of Cincinnati. The increase in total deposits since December 31, ~~2018~~2019 was primarily attributable to management's strategic decision to grow market share through ~~branch expansion~~targeted marketing strategies in our newer markets that resulted in the opening of new accounts. The ~~increase~~decrease in Federal Home Loan Bank advances was due to ~~management's decision to borrow funds to purchase pledgeable securities and improve~~scheduled principal payments that reduced the ~~Company's liquidity position.The~~outstanding balance. The increase in accrued interest and other liabilities since December 31, ~~2018~~2019 was primarily attributable to an increase in employee bonus payable, lease payable, other taxes payable and escrow tax payable.

Table of Contents

Non Performing Assets

The following tables present the Company’s non-accrual loans and past due loans as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

Loans on Nonaccrual Status

	In Thousands				In Thousands
	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
Residential 1-4 family	$	949	$	948	$	—	$	949
Multifamily		—		—		—		—
Commercial real estate		2,568		1,102		311		1,661
Construction		—		—		—		—
Farmland		—		—		—		—
Second mortgages		—		—		—		—
Equity lines of credit		—		—		—		—
Commercial		—		—		—		—
Agricultural, installment and other		—		—		—		—
Total	$	3,517	$	2,050	$	311	$	2,610

Past Due Loans

(In thousands)

30-59 Days Past Due 60-89 Days Past Due Non Accrual and Greater Than 90 Days Total Non Accrual and Past Due
Current
Total Loans Recorded Investment Greater Than 90 Days Past Due and Accruing
September 30, 2019

Residential 1-4 family
1,968 1,264 1,671 4,903 463,869 468,772 $ 722
Multifamily
— — — — 106,072 106,072 —
Commercial real estate
437 — 2,568 3,005 742,075 745,080 —
Construction
1,743 189 1 1,933 408,561 410,494 1
Farmland
218 58 9 285 20,140 20,425 9
Second mortgages
11 100 — 111 11,093 11,204 —
Equity lines of credit
57 325 96 478 69,188 69,666 96
Commercial
96 — — 96 90,354 90,450 —
Agricultural, installment and other
429 129 69 627 66,975 67,602 69
Total
$ 4,959 2,065 4,414 11,438 1,978,327 1,989,765 $ 897
December 31, 2018

Residential 1-4 family
$ 3,258 1,092 1,868 6,218 454,474 460,692 $ 920
Multifamily
— — — — 134,613 134,613 —
Commercial real estate
312 109 1,174 1,595 699,460 701,055 72
Construction
1,567 26 32 1,625 516,620 518,245 32
Farmland
43 9 21 73 23,998 24,071 21
Second mortgages
333 — — 333 10,864 11,197 —
Equity lines of credit
297 — 45 342 61,671 62,013 45
Commercial
93 — 24 117 78,128 78,245 24
Agricultural, installment and other
407 85 95 587 59,481 60,068 95
Total
$ 6,310 1,321 3,259 10,890 2,039,309 2,050,199 $ 1,209

~~Table of Contents~~

	(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		Non Accrual and Greater Than 90 Days		Total Non Accrual and Past Due		Current		Total Loans		Recorded Investment Greater Than 90 Days Past Due and Accruing
March 31, 2020
Residential 1-4 family	$	2,830		506		2,512		5,848		513,927		519,775	$	2,512
Multifamily		—		—		—		—		151,929		151,929		—
Commercial real estate		3,995		51		311		4,357		837,164		841,521		—
Construction		1,987		195		46		2,228		386,541		388,769		46
Farmland		84		—		5		89		18,521		18,610		5
Second mortgages		63		—		100		163		11,091		11,254		100
Equity lines of credit		50		—		448		498		74,410		74,908		448
Commercial		263		2		—		265		95,282		95,547		—
Agricultural, installment and other		583		248		64		895		66,479		67,374		64
Total	$	9,855		1,002		3,486		14,343		2,155,344		2,169,687	$	3,175
December 31, 2019
Residential 1-4 family	$	4,760		799		2,336		7,895		503,355		511,250	$	1,387
Multifamily		—		—		—		—		97,104		97,104		—
Commercial real estate		500		—		1,661		2,161		791,218		793,379		—
Construction		1,535		147		594		2,276		422,909		425,185		594
Farmland		57		—		8		65		19,203		19,268		8
Second mortgages		—		—		100		100		10,660		10,760		100
Equity lines of credit		143		—		372		515		71,864		72,379		372
Commercial		71		30		—		101		98,164		98,265		—
Agricultural, installment and other		517		116		46		679		64,773		65,452		46
Total	$	7,583		1,092		5,117		13,792		2,079,250		2,093,042	$	2,507

~~Generally,~~

Generally, at the time a loan is placed on nonaccrual status, all interest accrued 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 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 doubt. A nonaccrual loan may be restored to 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. Management has assessed the loans that are 90 days past due and determined that all are well-collateralized and in the process of collection, thus accrual of interest is appropriate.

Non-performing loans, which included non-accrual loans and loans 90 days past due, at ~~September 30, 2019~~March 31, 2020 totaled $~~4,414,000~~3,486,000, ~~an increase fr~~a decrease from ~~om $3,259,000~~$5,117,000 at December 31, ~~2018.~~2019. The ~~increase~~decrease in non-performing loans during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 of $~~1,155,000~~1,631,000 is due primarily to the ~~addition~~payoff of two large loan relationships and the pay-down of one large loan ~~relationship placed on non-accrual status that was classified as non-performing at September 30, 2019.~~relationship. Management believes that it is probable that it will incur losses on its non-performing loans but believes that these losses should not exceed the amount in the allowance for loan losses already allocated to these loans, unless there is unanticipated deterioration of local real estate ~~values.~~values or further, or greater than anticipated, economic disruption resulting from COVID-19. Although deterioration of the real estate market is not currently apparent, the coronavirus outbreak could have a continued material adverse impact on economic and market conditions and could potentially cause a negative impact on the value of real estate being held as collateral. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact to the value of real estate; however, the pandemic presents uncertainty and risk with respect to the Company, its performance, and its financial results.

The net non-performing asset ratio (NPA) is used as a measure of the overall quality of the Company's assets. Our NPA ratio is calculated by taking the total of our loans greater than 90 days past due and accruing interest, non-accrual loans and other real estate owned divided by our total assets outstanding. Our NPA ratio for the periods ended March 31, 2020 and December 31, 2019 were 0.15% and 0.21%, respectively.

Table of Contents

Other loans may be classified as impaired when the current net worth and financial capacity of the borrower or of the collateral pledged, if any, is viewed as inadequate and it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. Such loans generally have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, and if such deficiencies are not corrected, there is a probability that the Company will sustain some loss. In such cases, interest income continues to accrue as long as the loan does not meet the Company’s criteria for nonaccrual status. 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 impairment by creating a valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses.

At ~~September 30, 2019~~ March 31, 2020the Company had impaired loans of $ ~~5,852,000 up~~2,433,000 down from ~~$5,359,000~~$5,052,000 at December 31, ~~2018.~~2019. The ~~increase~~decrease in impaired loans during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 as compared to December 31, ~~2018~~2019 is due to the ~~addition~~removal of one impaired loan relationship, the pay-down of one large loan relationship, and the payoff of two ~~impaired~~large loan ~~relationships, partially offset by~~relationships. Overall, prior to the ~~upgrade~~onset of ~~one loan relationship no longer considered impaired. Overall,~~the COVID-19 pandemic the Company’s market areas ~~have~~had seen continued strengthening in the residential real estate market in recent years while the commercial real estate market ~~has~~had remained steady. The allowance for loan losses related to collateral dependent impaired loans was measured based upon the estimated fair value of related collateral. Although deterioration of the real estate market is not currently apparent, the coronavirus outbreak could have a continued material adverse impact on economic and market conditions and could potentially cause a negative impact on the value of real estate being held as collateral. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact to the value of real estate; however, the outbreak presents uncertainty and risk with respect to the Company, its performance, and its financial results.

The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic or other concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. The concessions typically result from the Company’s loss mitigation activities and could include reduction in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. Total TDRs decreased $ ~~783,000~~1,675,000 to $ ~~1,709,000~~2,872,000 from December 31, ~~2018~~2019 to ~~September 30, 2019~~March 31, 2020 due to the ~~partial pay down~~pay-down of one large loan relationship and the payoff of two large loan relationships that ~~was~~were classified as ~~a TDR~~TDRs at December ~~31, 2018.~~31,2019. The CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. If the pandemic continues for an extended period of time and the economy continues to be negatively impacted, the Company could experience an increase in TDRs and the financial condition of the Company could be negatively impacted. The extent to which the COVID-19 outbreak will impact our financial results and asset quality is uncertain. For more information regarding the deferrals we have offered to our customers see “Impact of COVID-19” above.

Loans are charged-off in the month when the determination is made that the loan is uncollectible. Net ~~charge-offs~~recoveries for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 were ~~$143,000~~$86,000 as compared to ~~$482,000~~$73,000 in net ~~charge-offs~~recoveries for the same period in ~~2018.~~2019. Overall, the Bank has experienced minimal charge-offs during ~~2019. We expect~~2020; however if the COVID-19 pandemic continues for an extended period of time and the economy continues to be negatively impacted, the Company could experience an increase in charge-offs and the financial condition of the Company could be negatively impacted. The extent to ~~remain modest during~~which the ~~remainder of 2019; however, changes in the local economy may negatively~~COVID-19 outbreak will impact ~~charge-offs in the future.~~financial results is uncertain.

At ~~September 30, 2019,~~March 31, 2020, our internally classified loans had ~~increased $57,000,~~decreased $1,027,000, or ~~0.47%~~9.64%, to ~~$12,096,000~~$9,624,000 from ~~$12,039,000~~$10,651,000 at December 31, ~~2018~~2019 primarily due to the ~~addition~~pay-down of one internally classified loan ~~relationship.~~relationship and payoffs of several internally classified loan relationships. Classified loan balances have remained relatively consistent due to ~~current~~ favorable economic ~~conditions.~~conditions prior to the onset of the COVID-19 pandemic. Loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement. ~~The loan classifications do not represent or~~As with other asset quality measures, prolonged economic disruption as a result ~~from trends or uncertainties which management expects~~of the ongoing COVID-19 pandemic will ~~materially impact future operating results, liquidity or capital resources.~~likely result in increased levels of classified loans.

The largest categories of internally graded loans at ~~September 30, 2019~~March 31, 2020 were residential real estate mortgage loans and commercial real estate. Included within the residential real estate category are residential real estate construction and development loans, including loans to home builders and developers of land, as well as 1-4 family mortgage loans. Residential real estate loans, including construction and land development loans that are internally classified totaled ~~$9,167,000~~$8,806,000 and ~~$8,883,000~~$8,663,000 at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Commercial real estate loans that are internally classified totaled ~~$2,676,000~~ $607,000and ~~$2,972,000~~$1,769,000 at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. These loans have been graded accordingly due to bankruptcies, inadequate cash flows and/or delinquencies. The ~~$284,000~~$143,000 increase in internally graded residential real estate loans since December 31, ~~2018~~2019 was due to the downgrade of ~~a few loans~~one loan due to insufficient payment history. The ~~$296,000~~$1,162,000 decrease in ~~internall~~yinternally graded commercial real estate loans since December 31, ~~2018~~2019 was due to the payoff of one large loan relationship ~~partially offset by downgrade~~and pay-down of one large ~~internally classified~~ loan ~~relationship due to insufficient payment history. Overall,~~relationship. As of March 31, 2020, the Bank ~~continues to experience~~has experienced a stabilization in internally graded loans as the cash flows from home builders, land developers, and commercial real estate borrowers have stabilized. ~~Management does not anticipate losses~~The COVID-19 pandemic has had a notable impact on general economic conditions and there are many unknowns surrounding this situation. If the pandemic continues for an extended period of time and the economy continues to be negatively impacted, the Company could experience an increase in internally ~~classified residential real estate construction~~graded loans and ~~development loans at September 30, 2019~~the financial condition of the Company could be negatively impacted.

Many of the Bank's customers have been negatively impacted by the COVID-19 pandemic either through supply chain shortages, government mandated closures, job loss, furloughs, salary decreases, reduced consumer spending and a reduced workforce, among many other factors. In an effort to ~~exceed~~provide relief to those customers, the ~~amount already allocated~~Bank proactively began providing relief to our customers in mid March 2020 through a 90 day interest only payment option or a full 90 day payment deferral option. The first week of April 2020, the Bank expanded its efforts to provide a six-month interest only payment option in an effort to provide flexibility to our customers as they navigate these uncertain economic times. The Bank is monitoring the bank's loan ~~losses.~~portfolio on a weekly basis to identify the segments that are utilizing the COVID relief efforts and the overall percentage of the loan portfolio that has taken advantage of the relief. These reports are being reviewed by executive management and appropriately communicated to the Board of Directors.

Table of Contents

Liquidity and Asset Management

The Company’s management seeks to maximize net interest income by managing the Company’s assets and liabilities within appropriate constraints on capital, liquidity and interest rate risk. Liquidity is the ability to maintain sufficient cash levels necessary to fund operations, meet the requirements of depositors and borrowers, and fund attractive investment opportunities. Higher levels of liquidity, like those we built up in response to the COVID-19 pandemic, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher interest expense involved in extending liability maturities.

Liquid assets include cash, due from banks, interest bearing deposits and unpledged investment securities that will mature within one year. At ~~September 30, 2019,~~March 31, 2020, the Company’s liquid assets t~~otaled $451.0 million.~~totaled $303.6 million. Additionally, as of ~~September 30, 2019,~~March 31, 2020, the Company had available ~~approximately $93.3~~approximately $90.4 million inin unused federal funds lines of credit with regional banks and, subject to certain restrictions and collateral requirements, approximately ~~$261.6~~$298.3 million of borrowing capacity with the Federal Home Loan Bank of Cincinnati to meet short term funding needs. The Company maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management in maintaining stability in net yield on earning assets under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.

Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Included in the analysis are cash flows and maturities of financial instruments held for purposes other than trading, changes in market conditions, loan volumes and pricing and deposit volume and mix. These assumptions are inherently uncertain, and, as a result, net interest income cannot be precisely estimated nor can the impact of higher or lower interest rates on net interest income be precisely predicted. Actual results will differ due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management’s strategies, among other factors.

The Company’s primary source of liquidity is a stable core deposit base. In addition, short-term borrowings, loan payments and investment security maturities provide a secondary source. At ~~September 30, 2019,~~March 31, 2020, the Company had a liability sensitive position (a negative gap). Liability sensitivity means that more of the Company’s liabilities are capable of re-pricing over certain time frames than its assets, and in a rising rate environment liability sensitivity could cause net yield on earning assets to experience compression which would negatively impact net interest income. The interest rates associated with these liabilities may not actually change over this period but are capable of changing. Liability sensitivity generally should lead to an expansion in net yield on earning assets in a declining rate environment, as we are currently experiencing, but for that to occur the Bank will need to reprice its deposits more quickly than it reprices rates it earns on loans. As discussed elsewhere herein, the Bank was not able to widen its net yield on earning assets in the period ended ~~September 30, 2019,~~March 31, 2020, and does not anticipate that it will be able to do so for the remainder of ~~2019~~2020 because of competitive pressures in its ~~markets.~~markets and the impacts of the COVID-19 pandemic.

The Company also uses simulation modeling to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. The Company's Asset Liability Committee meets quarterly to analyze the interest rate shock simulation. The interest rate shock simulation model is based on a number of assumptions. These assumptions include, but are not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows and balance sheet management strategies. We model instantaneous change in interest rates using a growth in the balance sheet as well as a flat balance sheet to understand the impact to earnings and capital. The Company also uses Economic Value of Equity (“EVE”) sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest rate scenarios. The EVE is a longer term view of interest rate risk because it measures the present value of the future cash flows. Presented below is the estimated impact on the Bank’s net interest income and EVE as of ~~September 30, 2019,~~March 31, 2020, assuming an immediate shift in interest rates:

	% Change from Base Case for Immediate Parallel Changes in Rates															% Change from Base Case for Immediate Parallel Changes in Rates
	-200 BP(1)			-100 BP(1)			+100 BP			+200 BP			+300 BP			-200 BP(1)			-100 BP(1)			+100 BP			+200 BP			+300 BP
Net interest income		(9.45	)%		(3.33	)%		0.32	%		(0.01	)%		(0.74	)%		(5.24	)%		(2.23	)%		(1.78	)%		1.69	%		3.17	%
EVE		(19.88	)%		(7.28	)%		2.09	%		2.33	%		1.51	%		(12.01	)%		(7.56	)%		0.03	%		0.72	%		1.86	%

(1)	Currently, some short term interest rates are below the standard down rate scenarios (100, 200, 300 bps). The asset liability model does not calculate negative interest rates and will floor any index at 0.

~~Table of Contents~~

While an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, we believe that a gradual shift in interest rates would have a more modest impact. Further, the earnings simulation model does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, and changing product spreads that could mitigate any potential adverse impact of changes in interest rates. Moreover, since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, and changing product spreads that could mitigate any potential adverse impact of changes in interest rates.

Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate risk management. The Company’s rate sensitivity position has an important impact on earnings. Senior management of the Company analyzes the rate sensitivity position quarterly. Management focuses on the spread between the Company’s cost of funds and interest yields generated primarily through loans and investments.

Table of Contents

The Company’s securities portfolio consists of earning assets that provide interest income. Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, the need or desire to increase capital and similar economic factors. At ~~September 30, 2019,~~March 31, 2020, securities totaling ~~approximately~~ approxim~~$16,615,000~~ately $15,405,000 mature or will be subject to rate adjustments within the next twelve months.

A secondary source of liquidity is the Company’s loan portfolio. At ~~September 30, 2019,~~March 31, 2020, loans totaling approximately ~~$704,435,000~~$705,078,000 either will become due or will be subject to rate adjustments within twelve months from that date.

As for liabilities, at ~~September 30, 2019,~~March 31, 2020, certificates of deposit of ~~$250,000~~$250,000 or greater totaling approximately ~~$79,874,000~~$55,478,000 will become due or reprice during the next twelve months. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit accounts and regular savings accounts. Management anticipates that there will be no significant withdrawals from these accounts in the future.

At ~~September 30, 2019,~~March 31, 2020, the scheduled maturities of these advances and interest rates were as follows (scheduled maturities will differ from scheduled repayments):

(in thousands)				(in thousands)
Scheduled Maturities	Amount		Weighted Average Rates		Amount	Weighted Average Rates
2019		$ —	—%
2020		2,000	2.65		$ —	—%
2021		3,000	2.67		2,000	2.67
2022		2,500	2.68		2,000	2.68
2023		2,625	2.68		2,250	2.68
2024					14,558	2.67
Thereafter		16,288	2.67		—	—
		$ 26,413	2.67%		$ 20,808	2.67%

Management believes that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future. The COVID-19 pandemic has presented overall uncertainty in the financial markets and the Bank has seen an increase in deposits as some customers have shifted funds from market based products to more stable FDIC insured options. In addition, the CARES Act includes an economic stimulus package for individuals who meet the federal income qualifications in the form of a direct payment. Management anticipates that these payments will increase the Bank's deposit accounts, thus increasing liquidity. At the present time, ~~there are no known trends or any known commitments, demands, events or uncertainties~~management does not believe that the COVID-19 pandemic will ~~result in or that are reasonably likely to~~ result in the Company’s liquidity changing in a materially adverse way.

Off Balance Sheet Arrangements

At ~~September 30, 2019,~~March 31, 2020, we had unfunded loan commitments outstanding of ~~$573,908,000~~$684,851,000 and outstanding standby letters of credit of ~~$77,372,000.~~$72,727,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. Additionally, the Bank could sell participations in these or other loans to correspondent banks. As mentioned above, the Bank has been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments, investment security maturities and short-term borrowings.

Table of Contents

Capital Position and Dividends

At ~~September 30, 2019,~~March 31, 2020, total stockholders’ equity was ~~$327,891,000,~~$348,997,000, or ~~11.88%~~12.13% of total assets, which ~~compares~~compares with $~~295,667,000~~336,984,000, or ~~11.62%~~12.06% of ~~tota~~ltotal assets, at December 31, ~~2018.~~2019. The dollar increase in stockholders’ equity during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 results from the Company’s net income of ~~$28,072,000,~~$9,031,000, proceeds from the issuance of common stock related to exercise of stock options of ~~$437,000,~~$239,000, the net effect of a ~~$10,420,000~~$5,555,000 unrealized gain on investment securities net of applicable income tax expense of ~~$2,723,000,~~$1,452,000, cash dividends declared of ~~$11,725,000~~$6,476,000 of which ~~$9,134,000~~$5,008,000 was reinvested under the Company’s dividend reinvestment plan, ~~$265,000~~and $108,000 related to stock option compensation, a $27,000 reclassification adjustment for the adoption of the new lease accounting standard, and the $1,629,000 repurchase of common stock from the Company's 401(k) plan. On June 11, 2019, the Company completed the repurchase of 31,774 shares of the Company’s common stock held in the Company’s 401(k) Plan for an aggregate purchase price of $1,629,000. These shares were repurchased following the Company’s decision to remove the Company’s common stock as an investment option under the 401(k) Plan to reduce the 401(k) Plan expense incurred by employees.compensation.

~~The Company~~Banks and ~~the Bank~~bank holding companies are subject to regulatory capital requirements administered by the FDIC, 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 and the Bank’s financial statements. Under capitalfederal banking agencies. Capital adequacy guidelines and, ~~in the case of the Bank, the regulatory framework~~additionally for banks, prompt corrective action ~~the Company and the Bank must meet specific capital guidelines that~~regulations, involve quantitative measures of ~~their~~ assets, liabilities, and certain ~~off-balance sheet~~off-balance-sheet items as calculated under regulatory accounting practices. ~~The capital~~Capital amounts and ~~classification~~classifications are also subject to qualitative judgments by ~~the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable~~regulators. Failure to ~~bank holding companies.~~

~~Quantitative measures established by regulation to ensure~~meet capital ~~adequacy require~~requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and ~~the Bank to maintain minimum amounts and ratios (set forth~~fully phased in ~~the following table) of total, common equity, and Tier~~by January 1, ~~capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).~~2019. Management believes that, as of ~~September 30, 2019 and~~ December 31, ~~2018, that~~2019, the Company and ~~the~~ Bank meet all capital adequacy requirements to which they are subject.

AsUnder the Basel III rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of ~~September 30,~~Common Equity Tier 1 Capital above its minimum risk-based capital requirements. The buffer is measured relative to risk weighted assets. Phase-in of the capital conservation buffer requirements began on January 1, 2016 and the requirements were fully phased in on January 1, 2019. The capital conservation buffer threshold for 2019 and the first quarter of 2020 was 2.5%. A banking organization with a buffer greater than 2.5% will not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% will be subject to increasingly stringent limitations as the buffer approaches zero. The rule also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income. Now that the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the prompt corrective action (“PCA”) well-capitalized thresholds. PCA regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2019, the most recent ~~notification from the FDIC~~regulatory notifications categorized the Bank 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~~

The Company’s and Wilson Bank’s ~~category. To be categorized as well capitalized~~actual capital amounts and ratios as of ~~September 30, 2019 and~~ December 31, ~~2018, an institution must have maintained minimum total risk-based, Tier 1 risk-based, common equity Tier 1, and Tier 1 leverage ratios as set forth~~2019 are presented in the following ~~tables and not be subject to a written agreement, order or directive to maintain a specific capital level.~~table:

	Actual					Minimum Capital Adequacy Requirement with Basel III Capital Conservation Buffer Phase -In Schedule					Minimum To Be Well Capitalized Under Applicable Regulatory Provisions					*Actual*		*Regulatory Minimum Capital Requirement with Basel III Capital Conservation Buffer*
	Amount		Ratio			Amount		Ratio			Amount		Ratio			*Amount*	*Ratio*	*Amount*	*Ratio*
	(dollars in thousands)															*(dollars in thousands)*
September 30, 2019
December 31, 2019
Total capital to risk weighted assets:
Consolidated	$	351,847		15.3	%	$	241,648		10.5	%	$	230,141		10.0	%	$360,645	15.0%	$253,215	10.5%
Wilson Bank		350,921		15.3			241,586		10.5			230,082		10.0		359,576	14.9	252,675	10.5
Tier 1 capital to risk weighted assets:
Consolidated		323,093		14.0			195,620		8.5			138,085		6.0		331,485	13.7	204,984	8.5
Wilson Bank		322,167		14.0			195,571		8.5			184,067		8.0		330,416	13.7	204,547	8.5
Common equity Tier 1 capital to risk weighted assets:
Consolidated		323,093		14.0			161,099		7.0			N/A		N/A		331,485	13.7	168,810	7.0
Wilson Bank		322,167		14.0			161,058		7.0			149,554		6.5		330,416	13.7	168,451	7.0
Tier 1 capital to average assets:
Consolidated		323,093		12.2			105,799		4.0			N/A		N/A		331,485	12.4	106,565	4.0
Wilson Bank		322,167		12.0			107,549		4.0			134,437		5.0		330,416	11.9	110,764	4.0

Actual
Minimum Capital Adequacy Requirement with Basel III Capital Conservation Buffer Phase-In Schedule Minimum To Be Well Capitalized Under Applicable Regulatory Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(dollars in thousands)

December 31, 2018

Total capital to risk weighted assets:

Consolidated
$ 326,099 14.1 % $ 227,974 9.875 % $ 230,860 10.0 %
Wilson Bank
323,852 14.0 227,915 9.875 230,800 10.0
Tier 1 capital to risk weighted assets:

Consolidated
298,566 12.9 181,802 7.875 138,516 6.0
Wilson Bank
296,319 12.8 181,756 7.875 184,641 8.0
Common equity Tier 1 capital to risk weighted assets:

Consolidated
298,566 12.9 147,173 6.375 N/A N/A
Wilson Bank
296,319 12.8 147,136 6.375 150,021 6.5
Tier 1 capital to average assets:

Consolidated
298,566 12.3 97,022 4.0 N/A N/A
Wilson Bank
296,319 11.9 99,373 4.0 124,217 5.0

Table of Contents

In July 2013, the Federal banking regulators, in response to the statutory requirements of The Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted new regulations implementing the Basel Capital Adequacy Accord (“Basel III”) and the related minimum capital ratios. The new capital requirements were effective January 1, 2015 and included a new “Common Equity Tier I Ratio”, which has stricter rules as to what qualifies as Common Equity Tier I Capital.

The guidelines under Basel III established a 2.5% capital conservation buffer requirement that was phased in over four years beginning January 1, 2016. The buffer is related to Risk Weighted Assets. In order to avoid limitations on capital distributions such as dividends and certain discretionary bonus payments to executive officers, a banking organization must maintain capital ratios above the minimum ratios including the buffer. The Basel III minimum requirements after giving effect to the buffer as of January 1, of each year presented are as follows:

2016

2017

2018

2019

Common Equity Tier I Ratio
5.125 % 5.75 % 6.375 % 7.0 %
Tier I Capital to Risk Weighted Assets Ratio
6.625 % 7.25 % 7.875 % 8.5 %
Total Capital to Risk Weighted Assets Ratio
8.625 % 9.25 % 9.875 % 10.5 %

The requirements of Basel III also place more restrictions on the inclusion of deferred tax assets and capitalized mortgage servicing rights as a percentage of Tier I Capital. In addition, the risk weights assigned to certain assets such as past due loans and certain real estate loans have been increased.

The requirements of Basel III allowed banks and bank holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank have opted out of this requirement.

In 2018, the U.S. Congress passed, and the President signed into law, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “Growth Act”). The Growth Act, among other things, requires the federal banking agencies to issue regulations allowing community bank organizations with total assets of less than $10.0 billion in assets and limited amounts of certain assets and off-balance sheet exposures to access a simpler capital regime focused on a bank’s Tier 1 leverage capital levels rather than risk-based capital levels that are the focus of the capital rules issued under the Dodd-Frank Act implementing Basel III.

In October 2019, the federal banking agencies approved final rules under the Growth Act that exempt a qualifying community bank and its holding company that have ~~community bank leverage ratios,~~Community Bank Leverage Ratios, calculated as Tier 1 capital over average total consolidated assets (the “Community Bank Leverage Ratio”), of greater than 9 percent from the risk-based capital requirements of the capital rules issued under the Dodd-Frank Act. A qualifying community banking organization and its holding company that have chosen the proposed framework are not required to calculate the existing risk-based and leverage capital requirements. Such a bank would also be considered to have met the capital ratio requirements to be well capitalized for the agencies' prompt corrective action rules provided it has a ~~community bank leverage ratio~~Community Bank Leverage Ratio greater than 9 percent. Tier 1 capital for purposes of calculating the Community Bank Leverage Ratio is defined as total equity less accumulated other comprehensive income, less goodwill, less all other intangible assets, less deferred tax assets that arise from net operating loss and tax carryforwards, net of any related valuation allowances.

~~The Growth~~Pursuant to the CARES Act, ~~also raised~~ the ~~eligibility for~~required Community Bank Leverage Ratio was lowered to 8% until the ~~small bank holding company policy statement~~earlier of December 31, 2020 and 60 days following the end of the national emergency declared with respect to ~~$3 billion of assets from $1 billion.~~COVID-19.

The Company ~~is still evaluating these new capital rules and has not yet made a determination regarding whether it will seek~~opted to take advantage of ~~such rules.~~this rule effective January 1, 2020. As a result, the capital conservation buffer applicable under the Basel III capital guidelines is not applicable to the Company or the Bank.

As a result of opting to utilize the Community Bank Leverage Ratio calculation, total off-balance sheet exposures must be 25% or less of total consolidated assets. For purposes of this test, off-balance sheet exposures include, among other items, unused portions of commitments, securities lent or borrowed, credit enhancements and financial standby letters of credit.

The Company and the Bank may subsequently opt out of utilizing the Community Bank Leverage Ratio and again calculate their capital ratios under those ratios that the Company and the Bank utilized prior to January 1, 2020.

Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits, and other restrictions on its business.

The Company’s and Wilson Bank’s Community Bank Leverage Ratio as of March 31, 2020 are presented in the following table:

	*Actual*		*Regulatory Minimum Capital Requirement Community Bank Leverage Ratio*
	*Amount*	*Ratio*	*Amount*	*Ratio*
	*(dollars in thousands)*
March 31, 2020
Community Bank Leverage Ratio:
Consolidated	$339,395	12.1%	$252,303	9.0%
Wilson Bank	339,643	12.1	252,121	9.0

Impact of Inflation

Although interest rates are significantly affected by inflation, the inflation rate is immaterial when reviewing the Company’s results of operations.

Table of Contents

Item 3. 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 short-term 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.

~~There have been no material changes in~~The COVID-19 pandemic and the government response to such pandemic has materially changed the reported market risks during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. Since March 3, 2020, the Federal Reserve has lowered the Fed Funds benchmark rate by a full 1.5 percentage points to a target range of 0 percent to 0.25 percent. The Fed also announced it would purchase more Treasury securities to encourage lending to try to offset the impact of the coronavirus outbreak. This was an emergency response as the coronavirus escalated sharply in the United States, with stay-at-home orders and directives in nearly all states, mandatory business closures and mandatory work-from-home policies. Because economic indicators suggested that a recession was impending, the Federal Reserve stepped in with a broad array of monetary policy actions including direct lending to banks and corporations, expanding the scope of repurchase agreements, lowering the reserve requirements for banks at the federal reserve and supporting small and mid size businesses. As discussed in the Management's Discussion and Analysis section above, the Bank has experienced some compression to its net yield on earning assets due to the rate cuts enacted by the Federal Reserve. The extent to which the COVID-19 pandemic and the response by federal, state and local governments will ultimately impact the financial performance of the Bank is uncertain and management continues to actively monitor and adopt to the rapid market changes.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, its Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

~~There~~Overall, there were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended ~~September 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Not applicable

Item 1A. RISK FACTORS

There were no material changes to the Company’s risk factors as previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019 except as set forth below.

The COVID-19 pandemic is adversely affecting our business and the businesses and lives of a significant percentage of our customers as well as certain of our third-party vendors and service providers, and the adverse impacts on our business, financial position, capital, liquidity, results of operations and prospects could be significant.

The spread of COVID-19 has created a global public health crisis that has resulted in uncertainty, volatility and deterioration in financial markets and in governmental, commercial and consumer activity including in the United States, where we conduct substantially all of our activity.

To combat the spread of COVID-19, federal, state and local governments, including the Governor of the state of Tennessee and mayors or county executives of many of the communities in which we operate, have taken a variety of actions that have materially and adversely affected the businesses and lives of our customers. These actions have included orders or directives closing non-essential businesses and restricting movement of individuals through the issuance of shelter-in-place or safer-at-home orders and other guidance encouraging individuals to observe strict social distancing measures. At times, the actions being taken by governmental authorities are not always coordinated or consistent across the state of Tennessee and the impact of those actions across our markets may be uneven. These actions, together with the independent actions of individuals and businesses aimed at slowing the spread of the virus, have resulted in extensive economic disruption and rapid declines in consumer and commercial activity. Many businesses are experiencing significant declines in revenue and there has been a rapid rise in unemployment rates throughout our markets with corresponding negative effects on consumer spending and behavior. Global supply chains have also been negatively impacted as have equity and debt markets. Whether the efforts to stop the spread of COVID-19 will be successful is unknown at this time, and continued spread of the disease or a recurrence later in 2020 or into 2021 will further negatively impact the businesses of our customers and our results of operations.

In March 2020, the Federal Reserve reduced the target federal funds rate by 150 basis points and for a portion of March 2020 the 10-year treasury bond rate fell to below 1.00% for the first time in history. These actions, and other actions being taken by governmental and regulatory agencies affecting monetary policy in response to the unprecedented challenges resulting from the spread of COVID-19, have negatively impacted our net yield on earnings assets and our results and are likely to continue to negatively impact our net yield on earning assets and our results throughout 2020. The fair values of certain of our investments are also likely to decline as a result of COVID-19.

As a result of COVID-19 many of our borrowers, including owners of commercial real estate properties, are experiencing varying degrees of financial distress, which is expected to continue, and may likely increase, over the coming months. As a result, these borrowers will likely have difficulty paying, on a timely basis, interest and principal payments on their loans and the value of collateral securing these obligations is likely to be adversely impacted as well. Though we have offered these borrowers, and others, the ability to defer interest and principal payments for 90 days with the right to extend the deferral of interest for an additional 90 days, that deferral period may not be sufficient to allow the impacts of COVID-19 to have sufficiently subsided, and these borrowers may still be experiencing distress at the expiration of those deferral periods.

The ability of states and municipalities to fund shortfalls could have an affect on their ability to sustain debt maintenance, which would consequently impact the value of our municipal bond portfolio.

As we sought to protect the health and safety of our employees and customers during the first quarter of 2020, we took numerous actions to modify our business operations, including restricting employee travel, directing a significant percentage of our employees that were able to do so to work from home, closing the lobbies of many of our branches and implementing our business continuity plans and protocols. We may take further actions in the future either of our own volition or as a result of government orders or directives. Though we believe we have been able to adequately service our clients under these restrictions, we cannot provide any assurances that our ability to do so wouldn’t be negatively impacted if additional restrictions are necessary in the future, including if key employees of ours or a significant number of our associates become ill as a result of contracting the virus. We rely on the services of various key vendors and business partners to service our clients and if those companies’ businesses or workforces are impacted in ways similar to those that may impact our business, our ability to service our customers could be impacted.

Under the CARES Act, Congress created the PPP and authorized the Treasury to implement rules regarding the program. Banks facilitated funding under the program on behalf of the SBA for borrowers that were eligible participants. Since the roll out of the PPP, Treasury has issued rules and other interpretive guidance seeking to address uncertainty surrounding the program and its eligibility and other criteria. This constantly changing guidance caused challenges for us and other lenders under the program in finalizing and submitting applications and, in some cases, borrowers’ requests were not met before the initial funding under the program was exhausted. Though Congress has approved additional funding under the program it is possible that not all borrowers that desire loans under the program will have their requests met. As a result, we, and other lenders under the PPP, may face criticism from customers or others that sought to apply for the program and were unable to receive funding. This criticism could cause reputational damage to us and there is a possibility that customers or others may threaten and pursue legal action against banks and other lenders like us under the program. Moreover, as a result of updated guidance regarding the PPP and its eligibility standards, some borrowers that received loans through our processing efforts, have repaid their loans in full and others may choose to do the same. If that happens, we may not receive the fees that we were entitled to as a result of originating these loans.

The economic uncertainty caused by COVID-19’s spread and the efforts of government and non-governmental authorities to slow its spread, are likely to cause certain of our borrowers to experience distress and as a result increases to our provision expense for loan losses. We have also taken efforts to increase our on-balance sheet liquidity and those efforts may cause our net yield on earning assets and our results of operations to be adversely impacted.

COVID-19 has not yet been contained, and given the ongoing and fluid nature of the country’s response to the pandemic, it is difficult for us to accurately estimate the length and severity of the economic disruption being caused by COVID-19. As a result, the extent to which our results of operations, provision expense, capital levels, liquidity ratios and published credit ratings will be impacted is difficult to predict.

Table of Contents

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None

(b) Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

(a) None

(b) Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable

Item 5. OTHER INFORMATION

None

~~Table of Contents~~

Item 6. EXHIBITS

31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH		Inline XBRL Taxonomy Extension Schema Document.

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		WILSON BANK HOLDING COMPANY
		(Registrant)

DATE: ~~November~~May 8, ~~2019~~2020		/s/ ~~Randall Clemons~~John C. McDearman III
		~~Randall Clemons~~John C. McDearman III
		President and Chief Executive Officer

DATE: ~~November~~May 8, ~~2019~~2020		/s/ Lisa Pominski
		Lisa Pominski
		Executive Vice President & Chief Financial Officer

Tennessee			62-1497076
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

623 West Main Street	Lebanon	TN	37087
(Address of principal executive offices)			(Zip Code)

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
~~(Do not check if a smaller reporting company)~~		Emerging growth company	☐

*Part I:*	*FINANCIAL INFORMATION*	3

Item 1.	Financial Statements.	3

The unaudited consolidated financial statements of the Company and its subsidiary are as follows:

	Consolidated Balance Sheets — ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.	3

	Consolidated Statements of Earnings — For the three months ended March 31, 2020 and ~~nine months ended September 30, 2019 and 2018.~~2019.	4

	Consolidated Statements of Comprehensive Earnings — For the three months ended March 31, 2020 and ~~nine months ended September 30, 2019 and 2018.~~2019.	5

	Consolidated Statements of Changes in Stockholders' Equity — For the three months ended March 31, 2020 and ~~nine months ended September 30, 2019 and 2018.~~2019.	6

	Consolidated Statements of Cash Flows — For the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.	87

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2927

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	4240

	Disclosures required by Item 3 are incorporated by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4.	Controls and Procedures.	4240

*Part II:*	*OTHER INFORMATION*	4341

Item 1.	Legal Proceedings.	4341

Item 1A.	Risk Factors.	4341

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	4342

Item 3.	Defaults Upon Senior Securities.	4342

Item 4.	Mine Safety Disclosures.	4342

Item 5.	Other Information.	4342

Item 6.	Exhibits.	4442

Signatures		4543

EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO
EX-101.INS
EX-101.SCH
EX-101.CAL
EX-101.DEF
EX-101.LAB
EX-101.PRE

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019		2018
	(In Thousands)
Net earnings	$	10,266		$	7,972		$	28,072	$	22,761
Other comprehensive earnings (loss), net of tax:
Unrealized gains (losses) on available-for-sale securities arising during period, net of taxes of $231, $614, $2,653, and $2,645, respectively		655			(1,737	)		7,499		(7,472	)
Reclassification adjustment for net losses (gains) on the sale of securities included in net earnings, net of taxes of $11, $21, $70, and $170, respectively		(30	)		58			198		480
Other comprehensive earnings (loss)		625			(1,679	)		7,697		(6,992	)
Comprehensive earnings	$	10,891		$	6,293		$	35,769	$	15,769

	(Unaudited)			(Audited)			(Unaudited)			(Audited)
	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(Dollars in Thousands Except Share Amounts)						(Dollars in Thousands Except Share Amounts)
Assets
Loans	$	1,983,365		$	2,043,179		$	2,162,012		$	2,085,901
Less: Allowance for loan losses		(28,385	)		(27,174	)		(30,281	)		(28,726	)
Net loans		1,954,980			2,016,005			2,131,731			2,057,175
Available-for-sale, at market (amortized cost $436,988 and $295,683, respectively)		436,977			285,252
Available-for-sale, at market (amortized cost $400,731 and $420,207, respectively)								407,224			421,145
Loans held for sale		10,783			7,484			22,183			18,179
Interest bearing deposits		161,040			80,215			134,460			126,827
Restricted equity securities		4,680			3,012			4,680			4,680
Federal funds sold		41,000			9,000			25,975			20,000
Total earning assets		2,609,460			2,400,968			2,726,253			2,648,006
Cash and due from banks		12,719			9,976			16,782			12,943
Bank premises and equipment, net		58,604			58,363			59,762			60,295
Accrued interest receivable		6,704			6,724			7,027			5,945
Deferred income tax asset		7,195			8,901			4,730			6,136
Other real estate		845			1,357			697			697
Bank owned life insurance		31,560			30,952			31,945			31,762
Other assets		26,992			21,636			25,042			23,620
Goodwill		4,805			4,805			4,805			4,805
Total assets	$	2,758,884		$	2,543,682		$	2,877,043		$	2,794,209
Liabilities and Stockholders’ Equity
Deposits	$	2,380,666		$	2,235,655		$	2,485,537		$	2,417,605
Federal home loan bank advances		26,413			—
Federal Home Loan Bank advances								20,808			23,613
Accrued interest and other liabilities		23,914			12,360			21,701			16,007
Total liabilities		2,430,993			2,248,015			2,528,046			2,457,225
Stockholders’ equity:
Common stock, $2.00 par value; authorized 50,000,000 shares, issued and outstanding 10,783,663 and 10,623,810 shares, respectively		21,567			21,248
Common stock, $2.00 par value; authorized 50,000,000 shares, issued and outstanding 10,891,672 and 10,792,999 shares, respectively								21,783			21,586
Additional paid-in capital		81,848			73,960			87,407			82,249
Retained earnings		224,484			208,164			235,011			232,456
Net unrealized losses on available-for-sale securities, net of income taxes of $3 and $2,726, respectively		(8	)		(7,705	)
Net unrealized gains on available-for-sale securities, net of income taxes of $1,697 and $245, respectively								4,796			693
Total stockholders’ equity		327,891			295,667			348,997			336,984
Total liabilities and stockholders’ equity	$	2,758,884		$	2,543,682		$	2,877,043		$	2,794,209

	Three Months Ended
	March 31,
	2020			2019
	(In Thousands)
Net earnings	$	9,031		$	8,290
Other comprehensive earnings , net of tax:
Unrealized gains on available-for-sale securities arising during period, net of taxes of $1,493 and $802, respectively		4,220			2,270
Reclassification adjustment for net losses (gains) on the sale of securities included in net earnings, net of taxes of $41 and $81, respectively		(117	)		228
Other comprehensive earnings		4,103			2,498
Comprehensive earnings	$	13,134		$	10,788

	*Dollars In Thousands*													*Dollars In Thousands*
	*Common Stock*		*Additional Paid-In Capital*		*Retained Earnings*			*Net Unrealized Gain (Loss) On Available-For-Sale Securities*			*Total*			*Common Stock*		*Additional Paid-In Capital*		*Retained Earnings*			*Net Unrealized Gain (Loss) On Available-For-Sale Securities*			*Total*
Three months ended:
September 30, 2019
March 31, 2020
Balance at beginning of period	$	21,390		77,331		220,100			(633	)		318,188		$	21,586		82,249		232,456			693			336,984
Cash dividends declared, $.55 per share		—		—		(5,882	)		—			(5,882	)
Issuance of 87,712 shares of common stock pursuant to the dividend reinvestment plan		175		4,408		—			—			4,583
Issuance of 919 shares of common stock pursuant to exercise of stock options		2		26		—			—			28
Cash dividends declared, $.60 per share															—		—		(6,476	)		—			(6,476	)
Issuance of 91,471 shares of common stock pursuant to the dividend reinvestment plan															183		4,825		—			—			5,008
Issuance of 7,202 shares of common stock pursuant to exercise of stock options															14		225		—			—			239
Share based compensation expense		—		83		—			—			83			—		108		—			—			108
Net change in fair value of available-for-sale securities during the period, net of taxes of $220		—		—		—			625			625
Net change in fair value of available-for-sale securities during the period, net of taxes of $1,452															—		—		—			4,103			4,103
Net earnings for the quarter		—		—		10,266			—			10,266			—		—		9,031			—			9,031
Balance at end of period	$	21,567		81,848		224,484			(8	)		327,891		$	21,783		87,407		235,011			4,796			348,997

September 30, 2018
March 31, 2019
Balance at beginning of period	$	21,049		69,346		196,149			(9,548	)		276,996		$	21,248		73,960		208,164			(7,705	)		295,667
Cash dividends declared, $.55 per share		—		—		(5,789	)		—			(5,789	)
Issuance of 96,677 shares of common stock pursuant to dividend reinvestment plan		193		4,375		—			—			4,568
Issuance of 675 shares of common stock pursuant to exercise of stock options		2		16		—			—			18
Cash dividends declared, $.55 per share															—		—		(5,843	)		—			(5,843	)
Issuance of 91,487 shares of common stock pursuant to dividend reinvestment plan															183		4,368		—			—			4,551
Issuance of 8,763 shares of common stock pursuant to exercise of stock options															17		289		—			—			306
Share based compensation expense		—		81		—			—			81			—		99		—			—			99
Net change in fair value of available-for-sale securities during the period, net of taxes of $594		—		—		—			(1,679	)		(1,679	)
Net change in fair value of available-for-sale securities during the period, net of taxes of $883															—		—		—			2,498			2,498
Reclassification adjustment for the adoption of lease standard															—		—		(27	)		—			(27	)
Net earnings for the quarter		—		—		7,972			—			7,972			—		—		8,290			—			8,290
Balance at end of period	$	21,244		73,818		198,332			(11,227	)		282,167		$	21,448		78,716		210,584			(5,207	)		305,541

	*Dollars In Thousands*
	Common Stock			Additional Paid-In Capital			Retained Earnings			Net Unrealized Gain (Loss) On Available-For-Sale Securities			Total
Nine months ended:
September 30, 2019
Balance at beginning of period	$	21,248			73,960			208,164			(7,705	)		295,667
Cash dividends declared, $1.10 per share		—			—			(11,725	)		—			(11,725	)
Issuance of 179,199 shares of common stock pursuant to dividend reinvestment plan		358			8,776			—			—			9,134
Issuance of 12,428 shares of common stock pursuant to exercise of stock options		25			412			—			—			437
Share based compensation expense		—			265			—			—			265
Net change in fair value of available-for-sale securities during the period, net of taxes of $2,723		—			—			—			7,697			7,697
Reclassification adjustment for the adoption of lease standard		—			—			(27	)		—			(27	)
Repurchase of 31,774 common shares		(64	)		(1,565	)		—			—			(1,629	)
Net earnings for the year		—			—			28,072			—			28,072
Balance at end of period	$	21,567			81,848			224,484			(8	)		327,891

September 30, 2018
Balance at beginning of period	$	20,901			66,047			185,017			(4,235	)		267,730
Cash dividends declared, $.90 per share		—			—			(9,446	)		—			(9,446	)
Issuance of 161,514 shares of common stock pursuant to dividend reinvestment plan		323			7,147			—			—			7,470
Issuance of 9,797 shares of common stock pursuant to exercise of stock options		20			314			—			—			334
Share based compensation expense		—			310			—			—			310
Net change in fair value of available-for-sale securities during the period, net of taxes of $2,475		—			—			—			(6,992	)		(6,992	)
Net earnings for the year		—			—			22,761			—			22,761
Balance at end of period	$	21,244			73,818			198,332			(11,227	)		282,167

	(In Thousands)																											(In Thousands)
	Residential 1-4 Family			Multifamily			Commercial Real Estate		Construction			Farmland			Second Mortgages		Equity Lines of Credit		Commercial			Agricultural, Installment and Other			Total			Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction			Farmland			Second Mortgages		Equity Lines of Credit			Commercial			Agricultural, Installment and Other			Total
September 30, 2019
March 31, 2020
Allowance for loan losses:
Beginning balance	$	6,297			1,481			9,753		7,084			221			118		731		622			867			27,174		$	7,144		1,117		11,114		5,997			187			123		889			1,044			1,111			28,726
Provision		285			(261	)		1,632		(1,564	)		(23	)		11		123		338			813			1,354			198		524		1,330		(816	)		(10	)		4		(44	)		(46	)		329			1,469
Charge-offs		(14	)		—			—		—			—			—		—		(15	)		(824	)		(853	)		—		—		—		—			—			—		—			—			(355	)		(355	)
Recoveries		20			—			—		408			—			—		—		15			267			710			9		—		300		19			—			—		—			—			113			441
Ending balance	$	6,588			1,220			11,385		5,928			198			129		854		960			1,123			28,385		$	7,351		1,641		12,744		5,200			177			127		845			998			1,198			30,281
Ending balance individually evaluated for impairment	$	789			—			915		—			—			—		—		—			—			1,704		$	715		—		220		—			—			—		—			—			—			935
Ending balance collectively evaluated for impairment	$	5,799			1,220			10,470		5,928			198			129		854		960			1,123			26,681		$	6,636		1,641		12,524		5,200			177			127		845			998			1,198			29,346
Loans:
Ending balance	$	468,772			106,072			745,080		410,494			20,425			11,204		69,666		90,450			67,602			1,989,765		$	519,775		151,929		841,521		388,769			18,610			11,254		74,908			95,547			67,374			2,169,687
Ending balance individually evaluated for impairment	$	2,648			—			3,195		—			—			—		—		—			—			5,843		$	1,429		—		999		—			—			—		—			—			—			2,428
Ending balance collectively evaluated for impairment	$	466,124			106,072			741,885		410,494			20,425			11,204		69,666		90,450			67,602			1,983,922		$	518,346		151,929		840,522		388,769			18,610			11,254		74,908			95,547			67,374			2,167,259

	In Thousands										In Thousands
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2019
March 31, 2020
With no related allowance recorded:
Residential 1-4 family	$	1,090		1,464		—		1,116		97	$	140		139		—		615		2
Multifamily		—		—		—		—		—		—		—		—		—		—
Commercial real estate		1,186		1,186		—		752		13		311		311		—		631		—
Construction		—		—		—		173		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—		—		—		—
Second mortgages		—		—		—		—		—		—		—		—		—		—
Equity lines of credit		—		—		—		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—		—		—		—		—		—
	$	2,276	$	2,650		—	$	2,041	$	110	$	451	$	450		—	$	1,246	$	2
With related allowance recorded:
Residential 1-4 family	$	1,563		1,558		789		1,628		62	$	1,292		1,290		715		1,391		17
Multifamily		—		—		—		—		—		—		—		—		—		—
Commercial real estate		2,013		2,010		915		2,013		12		690		688		220		1,106		8
Construction		—		—		—		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—		—		—		—
Second mortgages		—		—		—		—		—		—		—		—		—		—
Equity lines of credit		—		—		—		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—		—		—		—		—		—
	$	3,576	$	3,568	$	1,704	$	3,641	$	74	$	1,982	$	1,978	$	935	$	2,497	$	25
Total
Residential 1-4 family	$	2,653		3,022		789		2,744		159	$	1,432		1,429		715		2,006		19
Multifamily		—		—		—		—		—		—		—		—		—		—
Commercial real estate		3,199		3,196		915		2,765		25		1,001		999		220		1,737		8
Construction		—		—		—		173		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—		—		—		—
Second mortgages		—		—		—		—		—		—		—		—		—		—
Equity lines of credit		—		—		—		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—		—		—		—		—		—
	$	5,852	$	6,218	$	1,704	$	5,682	$	184	$	2,433	$	2,428	$	935	$	3,743	$	27

	September 30, 2019						September 30, 2018						March 31, 2020						March 31, 2019
	Number of Contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, Net of Related Allowance		Number of Contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, Net of Related Allowance		Number of Contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, Net of Related Allowance		Number of Contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, Net of Related Allowance
Residential 1-4 family		—	$	—	$	—		3	$	49	$	49		—	$	—	$	—		—	$	—	$	—
Multifamily		—		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate		1		109		16		—		—		—		1		111		132		—		—		—
Construction		—		—		—		—		—		—		—		—		—		—		—		—
Farmland		—		—		—		1		310		310		—		—		—		—		—		—
Second mortgages		—		—		—		—		—		—		—		—		—		—		—		—
Equity lines of credit		—		—		—		—		—		—		—		—		—		—		—		—
Commercial		—		—		��		—		—		—		—		—		—		—		—		—
Agricultural, installment and other		—		—		—		1		92		92		—		—		—		—		—		—
Total		1	$	109	$	16		5	$	451	$	451		1	$	111	$	132		—	$	—	$	—

	•	Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.

	•	Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

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

	2016			2017			2018			2019
Common Equity Tier I Ratio		5.125	%		5.75	%		6.375	%		7.0	%
Tier I Capital to Risk Weighted Assets Ratio		6.625	%		7.25	%		7.875	%		8.5	%
Total Capital to Risk Weighted Assets Ratio		8.625	%		9.25	%		9.875	%		10.5	%