UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-20402

WILSON BANK HOLDING COMPANY

(Exact name of registrant as specified in its charter)

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)

(615) 444-2265

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock outstanding: ~~11,189,023~~11,195,270 shares at ~~August 6,~~November 9, 2021

Table of Contents

*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 — ~~June~~September 30, 2021 and December 31, 2020.	3

	Consolidated Statements of Earnings — For the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020.	4

	Consolidated Statements of Comprehensive Earnings — For the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020.	5

	Consolidated Statements of Changes in Stockholders' Equity — For the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020.	6

	Consolidated Statements of Cash Flows — For the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020.	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2930

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	4243

	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.	4243

*Part II:*	*OTHER INFORMATION*	4344

Item 1.	Legal Proceedings.	4344

Item 1A.	Risk Factors.	4344

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	4344

Item 3.	Defaults Upon Senior Securities.	4344

Item 4.	Mine Safety Disclosures.	4344

Item 5.	Other Information.	4344

Item 6.	Exhibits.	4344

Signatures		4445

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

EX-104

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

WILSON BANK HOLDING COMPANY

Consolidated Balance Sheets

~~June~~September 30, 2021 and December 31, 2020

	(Unaudited)			(Audited)			(Unaudited)			(Audited)
	June 30, 2021			December 31, 2020			September 30, 2021			December 31, 2020
	(Dollars in Thousands Except Share Amounts)						(Dollars in Thousands Except Share Amounts)
Assets
Loans	$	2,396,170		$	2,321,305		$	2,414,795		$	2,321,305
Less: Allowance for loan losses		(39,314	)		(38,539	)		(39,311	)		(38,539	)
Net loans		2,356,856			2,282,766			2,375,484			2,282,766
Available-for-sale, at market (amortized cost $749,948 and $570,842, respectively)		751,968			580,543
Securities available-for-sale, at market (amortized cost $810,735 and $570,842, respectively)								808,887			580,543
Loans held for sale		17,242			19,474			10,536			19,474
Interest bearing deposits		297,155			304,750			380,995			304,750
Restricted equity securities		5,089			5,089			5,089			5,089
Federal funds sold		52,004			675			26,995			675
Total earning assets		3,480,314			3,193,297			3,607,986			3,193,297
Cash and due from banks		24,165			33,431			25,577			33,431
Bank premises and equipment, net		57,732			58,202			62,664			58,202
Accrued interest receivable		7,857			7,516			8,197			7,516
Deferred income tax asset		9,832			7,089			11,164			7,089
Other real estate		22			0
Bank owned life insurance		35,609			35,197			45,899			35,197
Other assets		30,756			30,067			42,037			30,067
Goodwill		4,805			4,805			4,805			4,805
Total assets	$	3,651,092		$	3,369,604		$	3,808,329		$	3,369,604
Liabilities and Stockholders’ Equity
Deposits	$	3,230,464		$	2,960,595		$	3,374,496		$	2,960,595
Federal Home Loan Bank advances		0			3,638			0			3,638
Accrued interest and other liabilities		25,023			25,250			29,404			25,250
Total liabilities		3,255,487			2,989,483			3,403,900			2,989,483
Stockholders’ equity:
Common stock, $2.00 par value; authorized 50,000,000 shares, issued and outstanding 11,084,997 and 10,993,404 shares, respectively		22,170			21,987
Common stock, $2.00 par value; authorized 50,000,000 shares, issued and outstanding 11,194,320 and 10,993,404 shares, respectively								22,389			21,987
Additional paid-in capital		98,321			93,034			104,755			93,034
Retained earnings		273,622			257,935			278,650			257,935
Net unrealized gains (losses) on available-for-sale securities, net of income taxes of $528 and $2,536, respectively		1,492			7,165
Net unrealized gains (losses) on available-for-sale securities, net of income taxes of $483 and $2,536, respectively								(1,365	)		7,165
Total stockholders’ equity		395,605			380,121			404,429			380,121
Total liabilities and stockholders’ equity	$	3,651,092		$	3,369,604		$	3,808,329		$	3,369,604

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Earnings

Three Months and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

(Unaudited)

	Three Months Ended					Six Months Ended					Three Months Ended						Nine Months Ended
	June 30,					June 30,					September 30,						September 30,
	2021			2020		2021			2020		2021			2020			2021			2020
	(Dollars in Thousands Except Per Share Amounts)					(Dollars in Thousands Except Per Share Amounts)					(Dollars in Thousands Except Per Share Amounts)						(Dollars in Thousands Except Per Share Amounts)
Interest income:
Interest and fees on loans	$	28,945		$	29,254	$	57,438		$	56,530	$	30,773		$	28,590		$	88,211		$	85,120
Interest and dividends on securities:
Taxable securities		2,103			1,830		3,795			3,870		2,372			1,739			6,167			5,609
Exempt from federal income taxes		253			271		576			513		329			346			905			859
Interest on loans held for sale		160			118		260			226		80			166			340			392
Interest on federal funds sold		5			0		5			56		4			0			9			56
Interest on balances held at depository institutions		79			78		187			394		128			91			315			485
Interest and dividends on restricted securities		25			18		51			67		33			29			84			96
Total interest income		31,570			31,569		62,312			61,656		33,719			30,961			96,031			92,617
Interest expense:
Interest on negotiable order of withdrawal accounts		221			327		432			770		220			294			652			1,064
Interest on money market and savings accounts		565			1,063		1,105			2,422		482			1,009			1,587			3,431
Interest on time deposits		1,994			2,783		4,143			5,824		1,884			2,685			6,027			8,509
Interest on Federal Home Loan Bank advances		0			135		133			286		0			124			133			410
Total interest expense		2,780			4,308		5,813			9,302		2,586			4,112			8,399			13,414
Net interest income before provision for loan losses		28,790			27,261		56,499			52,354		31,133			26,849			87,632			79,203
Provision for loan losses		55			4,124		882			5,593		130			1,038			1,012			6,631
Net interest income after provision for loan losses		28,735			23,137		55,617			46,761		31,003			25,811			86,620			72,572
Non-interest income:
Service charges on deposit accounts		1,411			1,093		2,736			2,768		1,682			1,391			4,418			4,159
Brokerage income		1,681			1,020		3,079			2,209		1,586			1,254			4,665			3,463
Debit and credit card interchange income		3,353			2,378		5,882			4,380		3,012			2,331			8,894			6,711
Other fees and commissions		326			499		844			816		494			478			1,338			1,294
Income on BOLI and annuity contracts		208			212		412			395		260			214			672			609
Gain on sale of loans		2,048			2,122		5,654			3,033		2,275			3,775			7,929			6,808
Gain on sale of securities		0			267		0			425		28			0			28			425
Loss on sale of fixed assets		(23	)		0		(23	)		0		(6	)		(4	)		(29	)		(4	)
Gain (loss) on sale of other real estate		(11	)		660		(11	)		660		(4	)		(8	)		(15	)		652
Gain on sale of other assets		0			0		1			0		1			2			2			2
Other income												20			61			20			61
Total non-interest income		8,993			8,251		18,574			14,686		9,348			9,494			27,922			24,180
Non-interest expense:
Salaries and employee benefits		14,022			11,485		27,322			22,617		13,456			11,956			40,778			34,573
Occupancy expenses, net		1,340			1,323		2,631			2,473		1,436			1,406			4,067			3,879
Advertising & public relations expense		607			485		1,094			1,088		736			702			1,830			1,790
Furniture and equipment expense		836			800		1,662			1,568		846			849			2,508			2,417
Data processing expense		1,523			1,248		2,910			2,417		1,509			1,298			4,419			3,715
ATM & interchange expense		1,214			878		2,304			1,751		1,218			1,054			3,522			2,805
Directors’ fees		127			139		284			297		179			142			463			439
Audit, legal & consulting expenses		172			207		361			387		323			233			684			620
Other operating expenses		3,438			3,510		6,382			6,179		3,243			2,996			9,625			9,175
Total non-interest expense		23,279			20,075		44,950			38,777		22,946			20,636			67,896			59,413
Earnings before income taxes		14,449			11,313		29,241			22,670		17,405			14,669			46,646			37,339
Income taxes		3,310			2,286		6,958			4,612		4,063			3,137			11,021			7,749
Net earnings	$	11,139		$	9,027	$	22,283		$	18,058	$	13,342		$	11,532		$	35,625		$	29,590
Weighted average number of common shares outstanding-basic		11,084,411			10,892,859		11,081,894			10,878,863		11,165,313			10,963,411			11,110,006			10,907,251
Weighted average number of common shares outstanding-diluted		11,114,894			10,915,903		11,111,708			10,901,079		11,197,410			10,991,167			11,140,586			10,932,925
Basic earnings per common share	$	1.00		$	0.83	$	2.01		$	1.66	$	1.19		$	1.05		$	3.21		$	2.71
Diluted earnings per common share	$	1.00		$	0.83	$	2.01		$	1.66	$	1.19		$	1.05		$	3.20		$	2.71
Dividends per common share	$	0		$	0	$	0.60		$	0.60	$	0.75		$	0.60		$	1.35		$	1.20

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Comprehensive Earnings

Three Months and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

(Unaudited)

	Three Months Ended					Six Months Ended						Three Months Ended					Nine Months Ended
	June 30,					June 30,						September 30,					September 30,
	2021		2020			2021			2020			2021			2020		2021			2020
	(In Thousands)											(In Thousands)
Net earnings	$	11,139	$	9,027		$	22,283		$	18,058		$	13,342		$	11,532	$	35,625		$	29,590
Other comprehensive earnings gains (losses), net of tax:
Unrealized gains (losses) on available-for-sale securities arising during period, net of income taxes of $(1,085), $(953), $2,008, and $(2,446), respectively		3,066		2,693			(5,673	)		6,913
Reclassification adjustment for net gains on the sale of securities included in net earnings, net of taxes of $0, $70, $0, and $111, respectively		0		(197	)		0			(314	)
Unrealized gains (losses) on available-for-sale securities arising during period, net of tax of $1,004, $6, $3,012, and $2,452, respectively													(2,836	)		16		(8,509	)		6,929
Reclassification adjustment for net gains on the sale of securities included in net earnings, net of tax of $7, $0, $7, and $111, respectively													(21	)		0		(21	)		(314	)
Other comprehensive earnings (losses)		3,066		2,496			(5,673	)		6,599			(2,857	)		16		(8,530	)		6,615
Comprehensive earnings	$	14,205	$	11,523		$	16,610		$	24,657		$	10,485		$	11,548	$	27,095		$	36,205

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Changes in Stockholders’ Equity

Three Months and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

(Unaudited)

	*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:
June 30, 2021
September 30, 2021
Balance at beginning of period	$	22,168		98,150		262,483		(1,574	)		381,227	$	22,170		98,321		273,622			1,492			395,605
Issuance of 1,000 shares of common stock pursuant to exercise of stock options, net		2		43		0		0			45
Cash dividends declared, $.75 per share													0		0		(8,314	)		0			(8,314	)
Issuance of 103,141 shares of common stock pursuant to dividend reinvestment plan													206		6,080		0			0			6,286
Issuance of 6,182 shares of common stock pursuant to exercise of stock options, net													13		239		0			0			252
Share based compensation expense		0		128		0		0			128		0		115		0			0			115
Net change in fair value of available-for-sale securities during the period, net of taxes of $(1,085)		0		0		0		3,066			3,066
Net change in fair value of available-for-sale securities during the period, net of taxes of $1,011													0		0		0			(2,857	)		(2,857	)
Net earnings for the quarter		0		0		11,139		0			11,139		0		0		13,342			0			13,342
Balance at end of period	$	22,170		98,321		273,622		1,492			395,605	$	22,389		104,755		278,650			(1,365	)		404,429

June 30, 2020
September 30, 2020
Balance at beginning of period	$	21,783		87,407		235,011		4,796			348,997	$	21,789		87,592		244,038			7,292			360,711
Issuance of 2,866 shares of common stock pursuant to exercise of stock options, net		6		80		0		0			86
Cash dividends declared, $.60 per share													0		0		(6,537	)		0			(6,537	)
Issuance of 88,953 shares of common stock pursuant to dividend reinvestment plan													178		4,870		0			0			5,048
Issuance of 509 shares of common stock pursuant to exercise of stock options, net													1		21		0			0			22
Share based compensation expense		0		105		0		0			105		0		99		0			0			99
Net change in fair value of available-for-sale securities during the period, net of taxes of $(883)		0		0		0		2,496			2,496
Net change in fair value of available-for-sale securities during the period, net of taxes of $6													0		0		0			16			16
Net earnings for the quarter		0		0		9,027		0			9,027		0		0		11,532			0			11,532
Balance at end of period	$	21,789		87,592		244,038		7,292			360,711	$	21,968		92,582		249,033			7,308			370,891

Dollars In Thousands

Common Stock

Additional Paid-In Capital

Retained Earnings

Net Unrealized Gain (Loss) On Available-For-Sale Securities

Total

Six Months Ended:

June 30, 2021

Balance at beginning of period
$ 21,987 93,034 257,935 7,165 380,121
Cash dividends declared, $.60 per share
0 0 (6,596 ) 0 (6,596 )
Issuance of 83,442 shares of common stock pursuant to dividend reinvestment plan
167 4,735 0 0 4,902
Issuance of 8,151 shares of common stock pursuant to exercise of stock options, net
16 305 0 0 321
Share based compensation expense
0 247 0 0 247
Net change in fair value of available-for-sale securities during the period, net of taxes of $2,008
0 0 0 (5,673 ) (5,673 )
Net earnings for the period
0 0 22,283 0 22,283
Balance at end of period
$ 22,170 98,321 273,622 1,492 395,605

June 30, 2020

Balance at beginning of period
$ 21,586 82,249 232,456 693 336,984
Cash dividends declared, $.60 per share
0 0 (6,476 ) 0 (6,476 )
Issuance of 91,471 shares of common stock pursuant to dividend reinvestment plan
183 4,825 0 0 5,008
Issuance of 10,068 shares of common stock pursuant to exercise of stock options, net
20 305 0 0 325
Share based compensation expense
0 213 0 0 213
Net change in fair value of available-for-sale securities during the period, net of taxes of $(2,335)
0 0 0 6,599 6,599
Net earnings for the period
0 0 18,058 0 18,058
Balance at end of period
$ 21,789 87,592 244,038 7,292 360,711

	*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, 2021
Balance at beginning of period	$	21,987		93,034		257,935			7,165			380,121
Cash dividends declared, $1.35 per share		0		0		(14,910	)		0			(14,910	)
Issuance of 186,583 shares of common stock pursuant to dividend reinvestment plan		373		10,815		0			0			11,188
Issuance of 14,333 shares of common stock pursuant to exercise of stock options, net		29		544		0			0			573
Share based compensation expense		0		362		0			0			362
Net change in fair value of available-for-sale securities during the period, net of taxes of $3,019		0		0		0			(8,530	)		(8,530	)
Net earnings for the period		0		0		35,625			0			35,625
Balance at end of period	$	22,389		104,755		278,650			(1,365	)		404,429

September 30, 2020
Balance at beginning of period	$	21,586		82,249		232,456			693			336,984
Cash dividends declared, $1.20 per share		0		0		(13,013	)		0			(13,013	)
Issuance of 180,424 shares of common stock pursuant to dividend reinvestment plan		361		9,695		0			0			10,056
Issuance of 10,577 shares of common stock pursuant to exercise of stock options, net		21		326		0			0			347
Share based compensation expense		0		312		0			0			312
Net change in fair value of available-for-sale securities during the period, net of taxes of $2,341		0		0		0			6,615			6,615
Net earnings for the period		0		0		29,590			0			29,590
Balance at end of period	$	21,968		92,582		249,033			7,308			370,891

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows

~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

	Six Months Ended June 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
	(In Thousands)						(In Thousands)
OPERATING ACTIVITIES
Consolidated net income	$	22,283		$	18,058		$	35,625		$	29,590
Adjustments to reconcile consolidated net income to net cash provided (used) by operating activities
Provision for loan losses		882			5,593			1,012			6,631
Deferred income taxes provision		(735	)		(176	)		(1,056	)		(902	)
Depreciation and amortization of premises and equipment		2,107			2,074			3,180			3,155
Loss on disposal of premises and equipment		23			0			29			4
Net amortization of securities		2,684			1,787			3,999			3,101
Net realized gains on sales of securities		0			(425	)		(28	)		(425	)
Gains on mortgage loans sold, net		(5,654	)		(3,033	)		(7,929	)		(6,808	)
Stock-based compensation expense		704			667			986			904
Loss (gain) on other real estate		11			(660	)		15			(652	)
Gain on sale of repossessed assets		(1	)		0			(2	)		(2	)
Increase in value of life insurance and annuity contracts		(452	)		(383	)		(766	)		(635	)
Mortgage loans originated for resale		(128,810	)		(87,703	)		(167,429	)		(169,441	)
Proceeds from sale of mortgage loans		136,696			86,633			184,296			157,822
Gain on lease modification		0			(29	)		0			(29	)
Right of use asset amortization		194			183			1,299			912
Change in
Accrued interest receivable		(341	)		(2,341	)		(681	)		(2,040	)
Other assets		(19	)		(1,143	)		(4,598	)		(2,454	)
Accrued interest payable		(984	)		(778	)		(860	)		(554	)
Other liabilities		3,264			3,143			5,917			6,241
TOTAL ADJUSTMENTS		9,569			3,409			17,384			(5,172	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		31,852			21,467			53,009			24,418
INVESTING ACTIVITIES
Activities in available for sale securities
Purchases		(255,398	)		(183,390	)		(403,894	)		(324,197	)
Sales		0			24,028			39,652			24,028
Maturities, prepayments and calls		73,608			91,773			120,378			152,591
Purchase of restricted equity securities		0			(409	)		0			(409	)
Net increase in loans		(76,097	)		(190,499	)		(94,979	)		(202,994	)
Purchase of buildings, leasehold improvements, and equipment		(1,660	)		(830	)		(7,671	)		(1,734	)
Proceeds from sale of other assets		69			0			83			4
Proceeds from sale of other real estate		149			1,089			167			1,311
Purchase of life insurance and annuity contracts		0			(4,662	)		(15,000	)		(4,662	)
Increase in other investments								(2,000	)		0
NET CASH USED IN INVESTING ACTIVITIES		(259,329	)		(262,900	)		(363,264	)		(356,062	)
FINANCING ACTIVITIES
Net change in deposits - non-maturing		270,819			347,926			421,953			429,271
Net change in deposits - time		(950	)		(15,570	)		(8,052	)		(13,294	)
Net change in Federal Home Loan Bank Advances		(3,638	)		(4,615	)		(3,638	)		(6,430	)
Change in escrow balances		(2,913	)		13,201			(2,148	)		10,794
Issuance of common stock related to exercise of stock options		321			325			573			347
Issuance of common stock pursuant to dividend reinvestment plan		4,902			5,008			11,188			10,056
Cash dividends paid on common stock		(6,596	)		(6,476	)		(14,910	)		(13,013	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		261,945			339,799			404,966			417,731
NET CHANGE IN CASH AND CASH EQUIVALENTS		34,468			98,366			94,711			86,087
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		338,856			159,770			338,856			159,770
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	373,324		$	258,136		$	433,567		$	245,857

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows, Continued

~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

	Six Months Ended June 30,					Nine Months Ended September 30,
	2021			2020		2021			2020
	(In Thousands)					(In Thousands)
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest	$	6,797		$	10,080	$	9,259		$	12,860
Taxes	$	8,660		$	7,411	$	13,327		$	10,256
Non-cash investing and financing activities:
Change in fair value of securities available-for-sale, net of taxes of $2,008 and $(2,335) for the six months ended June 30, 2021 and 2020, respectively	$	(5,673	)	$	6,599
Change in fair value of securities available-for-sale, net of taxes of $3,019 and $2,341 for the nine months ended September 30, 2021 and 2020, respectively						$	(8,530	)	$	6,615
Non-cash transfers from loans to other real estate	$	182		$	0	$	182		$	992
Non-cash transfers from loans to other assets	$	68		$	2	$	81		$	5

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Nature of Business — Wilson Bank Holding Company (the “Company”) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Wilson Bank & Trust (the “Bank”). The Bank is a commercial bank headquartered in Lebanon, Tennessee. The Bank provides a full range of banking services in its primary market areas of Wilson, Davidson, Rutherford, Trousdale, Sumner, Dekalb, Putnam, Smith, and Williamson Counties, Tennessee.

Basis of Presentation — The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements and related notes appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

These consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany transactions and accounts are eliminated in consolidation.

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, the valuation of deferred tax assets, determination of any impairment of goodwill or other intangibles, other-than-temporary impairment of securities, the valuation of other real estate (if any), and the fair value of financial instruments. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Loans — Loans are reported at their outstanding principal balances less unearned income, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income on loans is accrued based on the principal balance outstanding. Loan origination fees, net of certain loan origination costs, are deferred and recognized as an adjustment to the related loan yield using a method which approximates the interest method.

Loans are charged off when management believes that the full collectability of the loan is unlikely. As such, 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.

Loans are placed on nonaccrual status when there is a significant deterioration in the financial condition of the borrower, which often is determined when the principal or interest on the loan is more than 90 days past due, unless the loan is both well-secured and in the process of collection. Generally, all interest accrued but not collected for loans that are placed on nonaccrual status, is reversed against current income. Interest income is subsequently recognized only to the extent cash payments are received while the loan is classified as nonaccrual, but interest income recognition is reviewed on a case-by-case basis. A nonaccrual loan is returned to accruing status once the loan has been brought current and collection is reasonably assured or the loan has been “well-secured” through other techniques. Past due status is determined based on the contractual due date per the underlying loan agreement.

All loans that are placed on nonaccrual are further analyzed to determine if they should be classified as impaired loans. At December 31, 2020 and ~~June~~September 30, 2021, there were 0no loans classified as nonaccrual that were not also deemed to be impaired except for those loans not individually evaluated for impairment as described below. 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. This determination is made using one or more of a variety of techniques, which include a review of the borrower’s financial condition, debt-service coverage ratios, global cash flow analysis, guarantor support, other loan file information, meetings with borrowers, inspection or reappraisal of collateral and/or consultation with legal counsel as well as results of reviews of other similar industry credits (e.g. builder loans, development loans, church loans, etc). Loans with an identified weakness and principal balance of $500,000 or more are subject to individual identification for impairment. Individually identified 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 if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a specific valuation allowance is established as a component of the allowance for loan losses or, in the case of collateral dependent loans, the excess may be charged off. Changes to the valuation allowance are recorded as a component of the provision for loan losses. Any subsequent adjustments to present value calculations for impaired loan valuations as a result of the passage of time, such as changes in the anticipated payback period for repayment, are recorded as a component of the provision for loan losses. For loans less than $500,000, the Company assigns a valuation allowance to these loans utilizing an allocation rate equal to the allocation rate calculated for non-impaired loans of a similar type.

Allowance for Loan Losses — The allowance for loan losses is maintained at a level that management believes to be adequate to absorb probable losses in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, volume, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans, historical loan loss factors, loss experience of various loan segments, identified impaired loans and other factors related to the portfolio. This evaluation is performed quarterly and is inherently subjective, as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on any impaired loans.

In assessing the adequacy of the allowance, we also consider the results of our ongoing independent 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, independent loan reviewers, and reviews that may have been conducted by third-party reviewers. We incorporate relevant loan review results in the loan impairment determination. In addition, regulatory agencies, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to record adjustments to the allowance based on their judgment about information available to them at the time of their examinations.

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Recently Issued Accounting Pronouncements

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 along with several other subsequent codification updates related to accounting for credit losses, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

ASU 2016-13 was originally to become effective for the Company on January 1, 2020. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security ("CARES") Act. The law contains several provisions applicable to companies like the Company. Among others, it gives lenders, including the Company, 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. On December 27, 2020, President Trump signed into law the Coronavirus Response and Relief Supplemental Appropriations Act. The law contains several provisions applicable to companies like the Company. Among them, it gives lenders, including the Company, the option to further defer the implementation of ASU 2016-13, until the fiscal year beginning after January 1, 2022. 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, the Company has elected to delay implementation of CECL until January 1, ~~2022.~~2023.

We currently believe the adoption of ASU 2016-13 would have resulted in an approximately 2 - 6% increase in our allowance for loan losses as of January 1, 2020. That estimated increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As of ~~June~~September 30, 2021, we currently believe the adoption of ASU 2016-13 would have resulted in an approximately 86 - ~~12%~~10% increase in our allowance for loan losses over the level recorded at ~~June~~September 30, 2021.

Prior to the CARES Act being signed and the Company’s decision to delay the implementation of CECL, the Company was completing its CECL implementation plan with a cross-functional working group, under the direction of the Chief Credit Officer along with our Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. The Company’s implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. The Company contracted with a third-party vendor to assist it in the implementation of CECL. Implementation efforts have been finalized and controls and processes are in place. The ultimate impact of the adoption of ASU 2016-13 could differ from our current expectation. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for available-for-sale securities and other financial assets and it also applies to off-balance sheet credit exposure like loan commitments and other investments; however, we do not expect these allowances to be significant. Pursuant to an interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, the Company has the option to phase in over a three-year period the transition adjustments to capital resulting from the adoption of CECL for regulatory capital purposes. If adopted, the cumulative amount of the transition adjustments will become fixed at the start of the three-year period, and will be phased out of the regulatory capital calculations evenly over such period, with 75% recognized in year one, 50% recognized in year two, and 25% recognized in year three. The Company has not yet decided if it will take advantage of this option. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios.

ASU 2020-01,“Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” These amendments, among other things, clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the adoption date. The amendments became effective on January 1, 2021 and had no impact on the Company’s consolidated financial statements.

ASU 2020-4, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-4 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-4 was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2020-4 did not significantly impact our financial statements.

ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs.” ASU 2020-08 clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates. ASU 2020-8 was effective for us on January 1, 2021 and did not have a significant impact on our financial statements.

ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2021-01 did not significantly impact our financial statements.

Other than those previously discussed, there were no other recently issued accounting pronouncements that are expected to materially impact the Company.

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Note 2. Loans and Allowance for Loan Losses

For financial reporting purposes, the Company classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with that utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).

The following schedule details the loans of the Company at ~~June~~September 30, 2021 and December 31, 2020:

	(In Thousands)						(In Thousands)
	June 30, 2021			December 31, 2020			September 30, 2021			December 31, 2020
Mortgage loans on real estate:
Residential 1-4 family	$	572,995		$	535,994		$	634,543		$	535,994
Multifamily		87,327			111,646			57,193			111,646
Commercial		849,320			837,766			848,166			837,766
Construction and land development		562,234			488,626			578,206			488,626
Farmland		11,912			15,429			10,149			15,429
Second mortgages		7,447			8,433			7,660			8,433
Equity lines of credit		82,893			78,889			88,348			78,889
Total mortgage loans on real estate		2,174,128			2,076,783			2,224,265			2,076,783
Commercial loans		154,201			172,811			130,144			172,811
Agricultural loans		1,441			1,206			1,538			1,206
Consumer installment loans
Personal		63,110			66,193			55,841			66,193
Credit cards		4,492			4,324			4,668			4,324
Total consumer installment loans		67,602			70,517			60,509			70,517
Other loans		9,835			9,283			9,786			9,283
Total loans before net deferred loan fees		2,407,207			2,330,600			2,426,242			2,330,600
Net deferred loan fees		(11,037	)		(9,295	)		(11,447	)		(9,295	)
Total loans		2,396,170			2,321,305			2,414,795			2,321,305
Less: Allowance for loan losses		(39,314	)		(38,539	)		(39,311	)		(38,539	)
Net loans	$	2,356,856		$	2,282,766		$	2,375,484		$	2,282,766

Risk characteristics relevant to each portfolio segment are as follows:

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

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

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

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

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

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Also included in this category are PPP loans guaranteed by the SBA, which totaled ~~$51.4~~$22.4 million at ~~June~~September 30, 2021 and $~~67.2~~51.4 million at ~~March 31,~~June 30, 2021. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower, if any. The cash flows of borrowers, however, may not be as expected and any collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

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

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon 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 borrowers’ 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 indicators and other pertinent factors, including regulatory recommendations.

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Transactions in the allowance for loan losses for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 are summarized as follows:

	(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
June 30, 2021
September 30, 2021
Allowance for loan losses:
Beginning balance	$	8,098		1,541			16,802			7,936			154			105			997		1,378			1,528			38,539		$	8,098		1,541			16,802			7,936			154			105			997		1,378			1,528			38,539
Provision		301		(353	)		(407	)		1,292			(35	)		(12	)		51		(100	)		145			882			635		(769	)		(609	)		1,793			(52	)		(15	)		53		(123	)		99			1,012
Charge-offs		0		0			0			(23	)		0			0			0		(3	)		(414	)		(440	)		0		0			0			(23	)		0			0			0		(3	)		(690	)		(716	)
Recoveries		48		0			0			29			0			0			0		4			252			333			58		0			0			47			0			0			0		5			366			476
Ending balance	$	8,447		1,188			16,395			9,234			119			93			1,048		1,279			1,511			39,314		$	8,791		772			16,193			9,753			102			90			1,050		1,257			1,303			39,311
Ending balance individually evaluated for impairment	$	532		0			31			0			0			0			0		0			0			563		$	0		0			18			0			0			0			0		0			0			18
Ending balance collectively evaluated for impairment	$	7,915		1,188			16,364			9,234			119			93			1,048		1,279			1,511			38,751		$	8,791		772			16,175			9,753			102			90			1,050		1,257			1,303			39,293
Loans:
Ending balance	$	572,995		87,327			849,320			562,234			11,912			7,447			82,893		154,201			78,878			2,407,207		$	634,543		57,193			848,166			578,206			10,149			7,660			88,348		130,144			71,833			2,426,242
Ending balance individually evaluated for impairment	$	2,267		0			542			0			0			0			0		0			0			2,809		$	135		0			538			0			0			0			0		0			0			673
Ending balance collectively evaluated for impairment	$	570,728		87,327			848,778			562,234			11,912			7,447			82,893		154,201			78,878			2,404,398		$	634,408		57,193			847,628			578,206			10,149			7,660			88,348		130,144			71,833			2,425,569

Residential 1-4 Family
Multifamily
Commercial Real Estate
Construction

Farmland
Second Mortgages Equity Lines of Credit
Commercial
Agricultural, Installment and Other
Total

June 30, 2020

Allowance for loan losses:

Beginning balance
$ 7,144 1,117 11,114 5,997 187 123 889 1,044 1,111 28,726
Provision
540 805 3,362 35 (12 ) 4 19 301 539 5,593
Charge-offs
0 0 0 0 0 0 (7 ) 0 (496 ) (503 )
Recoveries
13 0 300 33 0 19 41 0 244 650
Ending balance
$ 7,697 1,922 14,776 6,065 175 146 942 1,345 1,398 34,466
Ending balance individually evaluated for impairment
$ 714 0 150 0 0 0 0 0 0 864
Ending balance collectively evaluated for impairment
$ 6,983 1,922 14,626 6,065 175 146 942 1,345 1,398 33,602
Loans:

Ending balance
$ 522,215 144,531 837,263 415,068 17,513 11,273 74,366 195,694 68,045 2,285,968
Ending balance individually evaluated for impairment
$ 1,428 0 986 0 0 0 0 0 0 2,414
Ending balance collectively evaluated for impairment
$ 520,787 144,531 836,277 415,068 17,513 11,273 74,366 195,694 68,045 2,283,554

	Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction		Farmland			Second Mortgages			Equity Lines of Credit			Commercial			Agricultural, Installment and Other			Total
September 30, 2020
Allowance for loan losses:
Beginning balance	$	7,144		1,117		11,114		5,997		187			123			889			1,044			1,111			28,726
Provision		820		528		3,865		513		(23	)		(27	)		58			200			697			6,631
Charge-offs		0		0		0		0		0			0			(7	)		(8	)		(714	)		(729	)
Recoveries		17		0		300		54		0			19			41			0			382			813
Ending balance	$	7,981		1,645		15,279		6,564		164			115			981			1,236			1,476			35,441
Ending balance individually evaluated for impairment	$	612		0		156		0		0			0			0			0			0			768
Ending balance collectively evaluated for impairment	$	7,369		1,645		15,123		6,564		164			115			981			1,236			1,476			34,673
Loans:
Ending balance	$	531,485		123,650		846,521		430,599		16,422			9,239			77,492			189,655			72,041			2,297,104
Ending balance individually evaluated for impairment	$	1,403		0		979		0		0			0			0			0			0			2,382
Ending balance collectively evaluated for impairment	$	530,082		123,650		845,542		430,599		16,422			9,239			77,492			189,655			72,041			2,294,722

Transactions in the allowance for loan losses for the three months ended ~~June~~September 30, 2021 and 2020 are summarized as follows:

	(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
June 30, 2021
September 30, 2021
Allowance for loan losses:
Beginning balance April 1	$	7,939		1,334			17,558			8,476			124			102			970		1,295			1,532			39,330
Beginning balance July, 1																													$	8,447		1,188			16,395			9,234		119			93			1,048		1,279			1,511			39,314
Provision		498		(146	)		(1,163	)		766			(5	)		(9	)		78		(20	)		56			55			334		(416	)		(202	)		501		(17	)		(3	)		2		(23	)		(46	)		130
Charge-offs		0		0			0			(22	)		0			0			0		0			(190	)		(212	)		0		0			0			0		0			0			0		0			(276	)		(276	)
Recoveries		10		0			0			14			0			0			0		4			113			141			10		0			0			18		0			0			0		1			114			143
Ending balance	$	8,447		1,188			16,395			9,234			119			93			1,048		1,279			1,511			39,314		$	8,791		772			16,193			9,753		102			90			1,050		1,257			1,303			39,311

	(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
June 30, 2020
September 30, 2020
Allowance for loan losses:
Beginning balance April 1	$	7,351		1,641		12,744		5,200		177			127		845			998		1,198			30,281
Beginning balance July, 1																									$	7,697		1,922			14,776		6,065		175			146			942		1,345			1,398			34,466
Provision		342		281		2,032		851		(2	)		0		63			347		210			4,124			280		(277	)		503		478		(11	)		(31	)		39		(101	)		158			1,038
Charge-offs		0		0		0		0		0			0		(7	)		0		(141	)		(148	)		0		0			0		0		0			0			0		(8	)		(218	)		(226	)
Recoveries		4		0		0		14		0			19		41			0		131			209			4		0			0		21		0			0			0		0			138			163
Ending balance	$	7,697		1,922		14,776		6,065		175			146		942			1,345		1,398			34,466		$	7,981		1,645			15,279		6,564		164			115			981		1,236			1,476			35,441

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Impaired Loans

At ~~June~~September 30, 2021, the Company had ~~certain~~0 impaired loans o~~f $943,000~~ which were on non-accruing interest status. At December 31, 2020, the Company had certain impaired loans of $1.3 million which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The rest of the Company's impaired loans as of such dates remained on accruing status. The following table presents the Company’s impaired loans at ~~June~~September 30, 2021 and December 31, 2020.

	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
June 30, 2021
September 30, 2021
With no related allowance recorded:
Residential 1-4 family	$	1,080		1,402		—		1,114		3	$	137		135		—		870		6
Multifamily		0		0		—		0		0		0		0		—		0		0
Commercial real estate		0		0		—		207		0		369		368		—		248		11
Construction		0		0		—		0		0		0		0		—		0		0
Farmland		0		0		—		0		0		0		0		—		0		0
Second mortgages		0		0		—		0		0		0		0		—		0		0
Equity lines of credit		0		0		—		0		0		0		0		—		0		0
Commercial		0		0		—		0		0		0		0		—		0		0
Agricultural, installment and other		0		0		—		0		0		0		0		—		0		0
	$	1,080		1,402		—		1,321		3	$	506		503		—		1,118		17
With related allowance recorded:
Residential 1-4 family	$	1,190		1,188		532		1,216		31	$	0		0		0		912		0
Multifamily		0		0		0		0		0		0		0		0		0		0
Commercial real estate		544		542		31		620		12		171		170		18		508		7
Construction		0		0		0		0		0		0		0		0		0		0
Farmland		0		0		0		0		0		0		0		0		0		0
Second mortgages		0		0		0		0		0		0		0		0		0		0
Equity lines of credit		0		0		0		0		0		0		0		0		0		0
Commercial		0		0		0		0		0		0		0		0		0		0
Agricultural, installment and other		0		0		0		0		0		0		0		0		0		0
	$	1,734		1,730		563		1,836		43	$	171		170		18		1,420		7
Total
Residential 1-4 family	$	2,270		2,590		532		2,330		34	$	137		135		0		1,782		6
Multifamily		0		0		0		0		0		0		0		0		0		0
Commercial real estate		544		542		31		827		12		540		538		18		756		18
Construction		0		0		0		0		0		0		0		0		0		0
Farmland		0		0		0		0		0		0		0		0		0		0
Second mortgages		0		0		0		0		0		0		0		0		0		0
Equity lines of credit		0		0		0		0		0		0		0		0		0		0
Commercial		0		0		0		0		0		0		0		0		0		0
Agricultural, installment and other		0		0		0		0		0		0		0		0		0		0
	$	2,814		3,132		563		3,157		46	$	677		673		18		2,538		24

Table of Contents

	In Thousands
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2020
With no related allowance recorded:
Residential 1-4 family	$	1,162		1,507		—		395		26
Multifamily		0		0		—		0		0
Commercial real estate		311		311		—		311		0
Construction		0		0		—		0		0
Farmland		0		0		—		—		0
Second mortgages		0		0		—		0		0
Equity lines of credit		0		0		—		0		0
Commercial		0		0		—		0		0
Agricultural, installment and other		0		0		—		0		0
	$	1,473		1,818		—		706		26
With related allowance recorded:
Residential 1-4 family	$	1,242		1,240		594		1,273		66
Multifamily		0		0		0		0		0
Commercial real estate		662		659		148		676		22
Construction		0		0		0		0		0
Farmland		0		0		0		0		0
Second mortgages		0		0		0		0		0
Equity lines of credit		0		0		0		0		0
Commercial		0		0		0		0		0
Agricultural, installment and other		0		0		0		0		0
	$	1,904		1,899		742		1,949		88
Total:
Residential 1-4 family	$	2,404		2,747		594		1,668		92
Multifamily		0		0		0		0		0
Commercial real estate		973		970		148		987		22
Construction		0		0		0		0		0
Farmland		0		0		0		0		0
Second mortgages		0		0		0		0		0
Equity lines of credit		0		0		0		0		0
Commercial		0		0		0		0		0
Agricultural, installment and other		0		0		0		0		0
	$	3,377		3,717		742		2,655		114

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.

Troubled Debt Restructuring

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 ~~June~~September 30, 2021 and December 31, 2020.

	June 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
	(In thousands)				(In thousands)
Performing TDRs	$	2,124	$	2,147	$	892	$	2,147
Nonperforming TDRs		149		529		176		529
Total TDRS	$	2,273	$	2,676	$	1,068	$	2,676

Table of Contents

The following table outlines the amount of each troubled debt restructuring, categorized by loan classification, made during the ~~six~~nine months ended ~~June~~September 30, 2021 and the ~~six~~nine months ended ~~June~~September 30, 2020 (in thousands, except for number of contracts):

	June 30, 2021						June 30, 2020						September 30, 2021						September 30, 2020
	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		0	$	0	$	0		0	$	0	$	0		0	$	0	$	0		0	$	0	$	0
Multifamily		0		0		0		0		0		0		0		0		0		0		0		0
Commercial real estate		0		0		0		1		111		132		0		0		0		1		111		132
Construction		0		0		0		0		0		0		0		0		0		0		0		0
Farmland		0		0		0		0		0		0		0		0		0		0		0		0
Second mortgages		0		0		0		0		0		0		0		0		0		0		0		0
Equity lines of credit		0		0		0		0		0		0		0		0		0		0		0		0
Commercial		0		0		0		0		0		0		0		0		0		0		0		0
Agricultural, installment and other		0		0		0		0		0		0		0		0		0		0		0		0
Total		0	$	0	$	0		1	$	111	$	132		0	$	0	$	0		1	$	111	$	132

As of ~~June~~September 30, 2021 and ~~June~~September 30, 2020 the ~~Company~~ Company had no0 loan relationships that h~~had~~ad been previously classified as a TDR subsequently default within twelve months of restructuring.

In response to the COVID-19 pandemic and its economic impact to the Bank’s customers, the Bank proactively began providing relief to its customers in the middle of March 2020 through a 90 day interest only payment option or a full 90 day payment deferral option. Following the passage of the CARES Act the Bank expanded this program to provide a six-month interest only payment option in an effort to provide flexibility to its customers as they navigated uncertainties resulting from the pandemic. Pursuant to interagency regulatory guidance and the CARES Act, the Bank may elect to not classify loans as troubled debt restructurings for which these deferrals are granted between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. As of ~~June~~September 30, 2021, the Bank had 1 loan, totaling ~~$13.9 million~~$246,000 in aggregate principal amount, for which both principal ~~was~~and interest were being deferred and not classified as a TDR. Under the applicable guidance, this deferral did not require a troubled debt restructuring designation as of ~~June~~September 30, 2021.

As of ~~June~~September 30, 2021~~, there were 0 consumer mortgage loans in the process of foreclosure. As of~~ and December 31, 2020, the Company's recorded investment in consumer mortgage loans in the process of foreclosure totaled ~~$301,000.~~$101,000 and $301,000, respectively.

Potential problem loans, which include nonperforming loans, amounted to approximately $~~7.0~~8.4 million at ~~June~~September 30, 2021 and $8.2 million at December 31, 2020. 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:

	•	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.

The following table is a summary of the Bank’s loan portfolio by risk rating at ~~June~~September 30, 2021 and December 31, 2020:

	(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
June 30, 2021
September 30, 2021
Credit Risk Profile by Internally Assigned Rating
Pass	$	566,986		87,327		849,049		562,204		11,801		7,175		82,872		154,148		78,631		2,400,193	$	627,054		57,193		847,898		578,176		10,044		7,464		88,327		130,071		71,571		2,417,798
Special Mention		2,083		0		0		30		73		165		11		0		139		2,501		6,018		0		0		30		70		164		11		25		207		6,525
Substandard		3,926		0		271		0		38		107		10		53		108		4,513		1,471		0		268		0		35		32		10		48		55		1,919
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total	$	572,995		87,327		849,320		562,234		11,912		7,447		82,893		154,201		78,878		2,407,207	$	634,543		57,193		848,166		578,206		10,149		7,660		88,348		130,144		71,833		2,426,242
December 31, 2020
Credit Risk Profile by Internally Assigned Rating
Pass	$	529,546		111,646		837,028		488,571		15,301		8,148		78,565		172,779		80,770		2,322,354	$	529,546		111,646		837,028		488,571		15,301		8,148		78,565		172,779		80,770		2,322,354
Special Mention		2,745		0		149		27		79		169		314		0		156		3,639		2,745		0		149		27		79		169		314		0		156		3,639
Substandard		3,703		0		589		28		49		116		10		32		80		4,607		3,703		0		589		28		49		116		10		32		80		4,607
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total	$	535,994		111,646		837,766		488,626		15,429		8,433		78,889		172,811		81,006		2,330,600	$	535,994		111,646		837,766		488,626		15,429		8,433		78,889		172,811		81,006		2,330,600

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 ~~June~~September 30, 2021 and December 31, 2020 are summarized as follows:

	June 30, 2021								September 30, 2021
	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. Treasury and other U.S. government agencies	$	9,772	$	9	$	18	$	9,763	$	7,311	$	4	$	15	$	7,300
U.S. Government-sponsored enterprises (GSEs)		136,699		121		2,140		134,680		146,232		79		2,194		144,117
Mortgage-backed securities		367,092		4,276		2,449		368,919		404,697		3,854		3,981		404,570
Asset-backed securities		38,674		537		14		39,197		45,494		455		49		45,900
Corporate bonds		2,500		88		0		2,588		2,500		82		0		2,582
Obligations of states and political subdivisions		195,211		3,215		1,605		196,821		204,501		2,661		2,744		204,418
	$	749,948	$	8,246	$	6,226	$	751,968	$	810,735	$	7,135	$	8,983	$	808,887

	December 31, 2020
	Securities Available-For-Sale
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
U.S. Treasury and other U.S. government agencies	$	0	$	0	$	0	$	0
U.S. Government-sponsored enterprises (GSEs)		125,712		328		135		125,905
Mortgage-backed securities		258,774		5,636		620		263,790
Asset-backed securities		36,394		582		19		36,957
Corporate bonds		2,500		100		0		2,600
Obligations of states and political subdivisions		147,462		4,229		400		151,291
	$	570,842	$	10,875	$	1,174	$	580,543

Included in mortgage-backed securities are collateralized mortgage obligations totaling ~~$111,644,000~~$104,099,000 (fair value of ~~$111,117,000)~~$102,963,000) and $88,472,000 (fair value of $89,116,000) at ~~June~~September 30, 2021 and December 31, 2020, respectively.

Securities carried on the balance sheet of ~~approximately $328,681,000~~approximately $332,377,000 (approximate market value of ~~$330,419,000)~~$332,999,000) and ~~$282,028,000~~$282,028,000 (approximate market value of $288,013,000) were pledged to secure public deposits and for other purposes as required by law at ~~June~~September 30, 2021 and December 31, 2020, respectively.

The amortized cost and estimated market value of debt securities at ~~June~~September 30, 2021 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	$	1,215	$	1,215	$	35	$	35
Due after one year through five years		47,864		48,481		48,372		48,932
Due after five years through ten years		215,740		214,166		222,793		220,421
Due after ten years		485,129		488,106		539,535		539,499
	$	749,948	$	751,968	$	810,735	$	808,887

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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 ~~June~~September 30, 2021 and December 31, 2020.

	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
June 30, 2021	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
September 30, 2021																	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Available-for-Sale Securities:
U.S. Treasury and other U.S. government agencies	$	4,921	$	18		2	$	0	$	0		0	$	4,921	$	18	$	4,884	$	15		2	$	0	$	0		0	$	4,884	$	15
GSEs		108,607		2,140		41		0		0		0		108,607		2,140		102,634		1,574		34		23,376		620		9		126,010		2,194
Mortgage-backed securities		201,469		2,405		68		12,365		44		14		213,834		2,449		252,692		3,091		73		34,403		890		24		287,095		3,981
Asset-backed securities		507		14		1		0		0		0		507		14		14,305		49		6		0		0		0		14,305		49
Corporate bonds		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Obligations of states and political subdivisions		74,818		1,605		70		0		0		0		74,818		1,605		83,062		1,978		82		16,664		766		12		99,726		2,744
	$	390,322	$	6,182		182	$	12,365	$	44		14	$	402,687	$	6,226	$	457,577	$	6,707		197	$	74,443	$	2,276		45	$	532,020	$	8,983

	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
December 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:
U.S. Treasury and other U.S. government agencies	$	0	$	0		0	$	0	$	0		0	$	0	$	0
GSEs		47,991		135		18		0		0		0		47,991		135
Mortgage-backed securities		78,381		573		29		6,776		47		12		85,157		620
Asset-backed securities		4,950		19		3		0		0		0		4,950		19
Corporate bonds		0		0		0		0		0		0		0		0
Obligations of states and political subdivisions		44,061		394		33		689		6		1		44,750		400
	$	175,383	$	1,121		83	$	7,465	$	53		13	$	182,848	$	1,174

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 ~~June~~September 30, 2021, as the issuers’ securities are of high credit quality, management does not intend to sell the securities and it is not likely 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.

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Note 4. Derivatives

Derivatives Designated as Fair Value Hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate loans. The hedging strategy on loans converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the maturity dates of the hedged loans.

During ~~the~~the second quarter of 2020, the Company entered into one swap transaction with a notional amount of $30,000,000 ~~pursuant~~pursuant to which the Company pays the counter-party a fixed interest rate and receives a floating rate equal to 1 month LIBOR. The derivative transaction is designated as a fair value hedge.

A summary of the Company's fair value hedge relationships as of ~~June~~September 30, 2021 and December 31, 2020 are as follows (in thousands):

June 30, 2021

September 30, 2021

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Interest rate swap agreements - loans

Other assets

8.92

0.65

1 month LIBOR

28,701

834

Other assets

8.67

0.65

1 month LIBOR

28,589

1,002

December 31, 2020

Balance Sheet

Location

Weighted Average Remaining Maturity
(In Years)

Weighted
Average
Pay Rate

Receive
Rate

Notional
Amount

Estimated

Fair Value

Interest rate swap agreements - loans

Other liabilities

9.42

0.65

1 month LIBOR

29,575

(51

)

The effects of fair value hedge relationships reported in interest income on loans on the consolidated statements of income for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 were as follows (in thousands):

	*Six Months Ended June 30,*						*Nine Months Ended September 30,*
Gain (loss) on fair value hedging relationship	*2021*			*2020*			*2021*			*2020*
Interest rate swap agreements - loans:
Hedged items	$	(875	)		332		$	(986	)		213
Derivative designated as hedging instruments		885			(405	)		1,053			(390	)

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at ~~June~~September 30, 2021 and December 31, 2020 (in thousands):

	*Carrying Amount of the Hedged Assets*				*Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets*						*Carrying Amount of the Hedged Assets*				*Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets*
Line item on the balance sheet	*June 30, 2021*		*December 31, 2020*		*June 30, 2021*			*December 31, 2020*			*September 30, 2021*		*December 31, 2020*		*September 30, 2021*			*December 31, 2020*
Loans	$	28,701		29,575		(1,033	)		(158	)	$	28,589		29,575		(1,144	)		(158	)

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Mortgage Banking Derivatives

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 ~~June~~September 30, 2021 and December 31, 2020, the Company had approximately $~~20,422,000~~23,573,000 and $20,981,000, respectively, of interest rate lock commitments and approximately $~~17,500,000~~21,500,000 and $21,250,000, respectively, of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected ~~by derivativ~~bey derivative assets of $~~646,000~~801,000 and $714,000 at ~~June~~September 30, 2021 and December 31, 2020, respectively, and a derivative ~~liabilities~~asset of $~~10,000~~90,000 andderivative liability of $157,000 at ~~June~~September 30, 2021 and December 31, 2020, respectively. 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*
	*June 30, 2021*			*June 30, 2020*			*September 30, 2021*		*September 30, 2020*
Interest rate contracts for customers							$	87		651
Forward contracts related to mortgage loans held for sale and interest rate contracts	$	147			(93	)		247		(90	)
Interest rate contracts for customers		(68	)		706

The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as of ~~June~~September 30, 2021 and December 31, 2020 (in thousands):

	*In Thousands*										*In Thousands*
	*June 30, 2021*					*December 31, 2020*					*September 30, 2021*				*December 31, 2020*
	*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	$	20,422		646			20,981		714		$	23,573		801		20,981		714
Forward contracts related to mortgage loans held-for-sale		17,500		(10	)		21,250		(157	)		21,500		90		21,250		(157	)

Note 5. Equity Incentive Plans

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. 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 0 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. As of ~~June~~September 30, 2021, the Company had outstanding ~~10,834~~9,484 options under the 2009 Stock Option Plan with a weighted average exercise price of $~~34.38~~34.76.

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 ~~June~~September 30, 2021, the Company had 405,272 shares remaining available for issuance under the 2016 Equity Incentive Plan. As of ~~June~~September 30, 2021, the Company had outstanding ~~150,999~~145,167 options with a weighted average exercise price of $~~47.08~~47.14 and ~~117,156~~115,956 cash-settled stock appreciation rights with a weighted average exercise price of $~~44.41~~44.45 under the 2016 Equity Incentive Plan.

As of ~~June~~September 30, 2021, the Company had outstanding ~~161,833~~154,651 stock options with a weighted average exercise price of $~~46.23~~46.38 and ~~117,156~~115,956 cash-settled stock appreciation rights each with a weighted average exercise price of $~~44.41~~44.45.

The following table summarizes information about stock options and cash-settled SARs for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

	*June 30, 2021*				*June 30, 2020*				*September 30, 2021*				*September 30, 2020*
	*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		284,591	$	43.71		273,039	$	41.19		284,591	$	43.71		273,039	$	41.19
Granted		24,999		59.02		43,833		55.72		24,999		59.02		43,833		55.72
Exercised		30,601		40.17		12,470		36.13		38,883		40.75		15,477		36.90
Forfeited or expired		0		0		5,200		39.69		100		31.31		5,200		39.69
Outstanding at end of period		278,989	$	45.47		299,202	$	43.56		270,607	$	45.55		296,195	$	43.59
Options and SARs exercisable at June 30		156,360	$	42.11		145,541	$	40.82
Options and SARs exercisable at September 30										164,544	$	41.91		156,700	$	40.81

As of ~~June~~September 30, 2021, there was $~~1,500,000~~1,326,000 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 ~~3.10~~3.11 years.

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Note 6. Regulatory Capital

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of ~~June~~September 30, 2021, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action 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 ~~June~~September 30, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

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, 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 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. Institutions seeking to utilize the Community Bank Leverage Ratio must not have total off-balance sheet exposures equal to 25% or more 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 federal regulators when establishing the Community Bank Leverage Ratio also established a grace period of two fiscal quarters during which a qualifying financial institution that temporarily failed to meet any of the qualifying criteria for use of the Community Bank Leverage Ratio would nonetheless be considered well capitalized so long as the institution maintained a Community Bank Leverage Ratio of greater than 7%7.0%.

Pursuant to the CARES Act the required Community Bank Leverage Ratio was lowered to 8% until the earlier of December 31, 2020 and 60 days following the end of the national emergency declared with respect to COVID-19. A banking organization that temporarily failed to meet this, or any other requirement necessary to qualify to utilize the Community Bank Leverage Ratio, would still be considered well capitalized so long as it maintained a Community Bank Leverage Ratio of at least 7%7.5%.

The Company opted to take advantage of this rule effective January 1, 2020. As a result, the capital conservation buffer applicable under the Basel III capital guidelines was not applicable to the Company or the Bank as of ~~June~~September 30, 2021.

Effective November 9, 2020, the federal banking regulatory agencies approved rules raising the Community Bank Leverage Ratio to 8.5% for 2021 and 9% thereafter. The regulatory agencies also modified the two-quarter grace period to require a Community Bank Leverage Ratio of 7.5% or greater in 2021 and 8%
thereafter.

As of September 30, 2021 the Company had total off balance sheet exposures that exceeded 25% of total consolidated assets. Under the grace period mentioned above, the Company is still considered to be well capitalized with a Community Bank Leverage Ratio greater than 7.5%.

The Company and the Bank may subsequently opt out of utilizing the Community Bank Leverage Ratio (including if the Company was to continue to maintain off-balance sheet exposure in excess of 25% of its total consolidated assets) 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.

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The Company’s and Wilson Bank’s Community Bank Leverage Ratio as of ~~June~~September 30, 2021 and December 31, 2020 are presented in the following tables:

	*Actual*					*Regulatory Minimum Capital Requirement Community Bank Leverage Ratio*					*Actual*					*Regulatory Minimum Capital Requirement Community Bank Leverage Ratio*
	*Amount*		*Ratio*			*Amount*		*Ratio*			*Amount*		*Ratio*			*Amount*		*Ratio*
	*(dollars in thousands)*										*(dollars in thousands)*
June 30, 2021
September 30, 2021
Community Bank Leverage Ratio:
Consolidated	$	389,307		10.8	%	$	306,626		8.5	%	$	400,988		10.8	%	$	316,913		8.5	%
Wilson Bank		388,110		10.8			306,541		8.5			397,520		10.7			316,820		8.5

	*Actual*					*Regulatory Minimum Capital Requirement Community Bank Leverage Ratio*
	*Amount*		*Ratio*			*Amount*		*Ratio*
	*(dollars in thousands)*
December 31, 2020
Community Bank Leverage Ratio:
Consolidated	$	368,150		11.2	%	$	279,400		8.5	%
Wilson Bank		364,976		11.1			279,486		8.5

Dividend Restrictions

The Company and the Bank are subject to dividend restrictions set forth by the Tennessee Department of Financial Institutions and federal banking agencies, as applicable. Additional restrictions may be imposed by the Tennessee Department of Financial Institutions and federal banking agencies under the powers granted to them by law.

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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.

Hedged ~~Loans~~loans — The fair value of our hedged loan portfolio is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction.

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 loans, 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 —The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Other investments — Included in other investments are investments recorded at fair value primarily in certain nonpublic investments and funds. The valuation of these nonpublic investments requires management judgment due to the absence of observable quoted market prices, inherent lack of liquidity and the long-term nature of such assets. These investments are valued initially based upon transaction price. The carrying values of other investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties. These investments are included in Level 3 of the valuation hierarchy if the entities and funds are not widely traded and the underlying investments are in privately-held and/or start-up companies for which market values are not readily available.

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The following tables present the financial instruments carried at fair value as of ~~June~~September 30, 2021 and December 31, 2020, 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)
June 30, 2021
September 30, 2021
Hedged Loans	$	27,668		0		27,668		0	$	27,445		0		27,445		0
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agencies		9,763		9,763		0		0		7,300		7,300		0		0
U.S. Government sponsored enterprises		134,680		0		134,680		0		144,117		0		144,117		0
Mortgage-backed securities		368,919		0		368,919		0		404,570		0		404,570		0
Asset-backed securities		39,197		0		39,197		0		45,900		0		45,900		0
Corporate bonds		2,588		0		2,588		0		2,582		0		2,582		0
State and municipal securities		196,821		0		196,821		0		204,418		0		204,418		0
Total investment securities available-for-sale		751,968		9,763		742,205		0		808,887		7,300		801,587		0
Mortgage loans held for sale		17,242		0		17,242		0		10,536		0		10,536		0
Derivatives		1,480		0		1,480		0		1,893		0		1,893		0
Bank owned life insurance		35,609		0		0		35,609
Other investments										2,020		0		0		2,020
Total assets	$	833,967		9,763		788,595		35,609	$	850,781		7,300		841,461		2,020

Derivatives	$	10		0		10		0	$	0		0		0		0
Total liabilities	$	10		0		10		0	$	0		0		0		0

December 31, 2020
Hedged Loans	$	29,417		0		29,417		0	$	29,417		0		29,417		0
Investment securities available-for-sale:
U.S. Government sponsored enterprises		125,905		0		125,905		0		125,905		0		125,905		0
Mortgage-backed securities		263,790		0		263,790		0		263,790		0		263,790		0
Asset-backed securities		36,957		0		36,957		0		36,957		0		36,957		0
Corporate bonds		2,600		0		2,600		0		2,600		0		2,600		0
State and municipal securities		151,291		0		151,291		0		151,291		0		151,291		0
Total investment securities available-for-sale		580,543		0		580,543		0		580,543		0		580,543		0
Mortgage loans held for sale		19,474		0		19,474		0		19,474		0		19,474		0
Derivatives		714		0		714		0		714		0		714		0
Bank owned life insurance		35,197		0		0		35,197
Other investments										0		0		0		0
Total assets	$	665,345		0		630,148		35,197	$	630,148		0		630,148		0

Derivatives	$	208		0		208		0	$	208		0		208		0
Total liabilities	$	208		0		208		0	$	208		0		208		0

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Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

(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)
June 30, 2021

Other real estate owned
$ 22 0 0 22
Impaired loans, net (¹)
2,251 0 0 2,251
Total
$ 2,273 0 0 2,273
December 31, 2020

Other real estate owned
$ 0 0 0 0
Impaired loans, net (¹)
2,635 0 0 2,635
Total
$ 2,635 0 0 2,635

	Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
	(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)
September 30, 2021
Other real estate owned	$	0		0		0			0
Impaired loans, net (¹)		659		0		0			659
Total	$	659		0		0			659
December 31, 2020
Other real estate owned	$	0		0		0			0
Impaired loans, net (¹)		2,635		0		0			2,635
Total	$	2,635		0		0	��		2,635

⁽¹⁾	Amount is net of a valuation allowance of $~~563,000~~18,000 at ~~June~~September 30, 2021* and $742,000 at December 31, 2020 as required by ASC 310, “Receivables.”*

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 ~~June~~September 30, 2021 and December 31, 2020:

	Valuation Techniques ⁽²⁾	Significant Unobservable Inputs	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 ~~six~~nine months ended ~~June~~September 30, 2021, there were no transfers between Levels 1, 2 or 3.

The table below includes a rollforward of the balance sheet amounts for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 (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 Six Months Ended June 30,*								*For the Nine Months Ended September 30,*
	*2021*				*2020*				*2021*				*2020*
	Other Assets		Other Liabilities		Other Assets		Other Liabilities		Other Assets		Other Liabilities		Other Assets		Other Liabilities
Fair value, January 1	$	35,197		0	$	31,762		0	$	0		0	$	0		0
Total realized gains included in income		412		0		395		0		20		0		0		0
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at June 30		0		0		0		0
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at September 30										0		0		0		0
Purchases, issuances and settlements, net		0		0		2,610		0		2,000		0		0		0
Transfers out of Level 3		0		0		0		0		0		0		0		0
Fair value, June 30	$	35,609		0	$	34,767		0
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at June 30	$	412		0	$	395		0
Fair value, September 30									$	2,020		0	$	0		0
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30									$	20		0	$	0		0

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 ~~June~~September 30, 2021 and December 31, 2020. 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.

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

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.

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.

The following table presents the carrying amounts, estimated fair value and placement in the fair valuation hierarchy of the Company’s financial instruments at ~~June~~September 30, 2021 and December 31, 2020. 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)
June 30, 2021
September 30, 2021
Financial assets:
Cash and cash equivalents	$	373,324		373,324		373,324		0		0	$	433,567		433,567		433,567		0		0
Loans, net		2,356,856		2,360,535		0		0		2,360,535		2,375,484		2,369,388		0		0		2,369,388
Restricted equity securities		5,089		NA		NA		NA		NA		5,089		NA		NA		NA		NA
Accrued interest receivable		7,857		7,857		8		2,599		5,250
Financial liabilities:
Deposits		3,230,464		3,017,923		0		0		3,017,923		3,374,496		3,117,052		0		0		3,117,052
Accrued interest payable		2,067		2,067		0		0		2,067

December 31, 2020
Financial assets:
Cash and cash equivalents	$	338,856		338,856		338,856		0		0	$	338,856		338,856		338,856		0		0
Loans, net		2,282,766		2,302,530		0		0		2,302,530		2,282,766		2,302,530		0		0		2,302,530
Restricted equity securities		5,089		NA		NA		NA		NA		5,089		NA		NA		NA		NA
Accrued interest receivable		7,516		7,516		1		2,210		5,305
Financial liabilities:
Deposits		2,960,595		2,796,339		0		0		2,796,339		2,960,595		2,796,339		0		0		2,796,339
Federal Home Loan Bank borrowings		3,638		3,755		0		0		3,755		3,638		3,755		0		0		3,755
Accrued interest payable		3,051		3,051		0		0		3,051

⁽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.

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Note 8. 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 ~~June~~September 30, 2021, the Company had no 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 ~~June~~September 30, 2021.

As of and for the ~~six~~nine months ended ~~June~~September 30, 2021, 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, 2017 through 2020 and the IRS for the years ended December 31, 2018 through 2020.

Note 9. 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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2021		2020		2021		2020
	(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)				(Dollars in Thousands Except Share and Per Share Amounts)
Basic EPS Computation:
Numerator – Earnings available to common stockholders	$	11,139	$	9,027	$	22,283	$	18,058	$	13,342	$	11,532	$	35,625	$	29,590
Denominator – Weighted average number of common shares outstanding		11,084,411		10,892,859		11,081,894		10,878,863		11,165,313		10,963,411		11,110,006		10,907,251
Basic earnings per common share	$	1.00	$	0.83	$	2.01	$	1.66	$	1.19	$	1.05	$	3.21	$	2.71
Diluted EPS Computation:
Numerator – Earnings available to common stockholders	$	11,139	$	9,027	$	22,283	$	18,058	$	13,342	$	11,532	$	35,625	$	29,590
Denominator – Weighted average number of common shares outstanding		11,084,411		10,892,859		11,081,894		10,878,863		11,165,313		10,963,411		11,110,006		10,907,251
Dilutive effect of stock options		30,483		23,044		29,814		22,216		32,097		27,756		30,580		25,674
Weighted average diluted common shares outstanding		11,114,894		10,915,903		11,111,708		10,901,079		11,197,410		10,991,167		11,140,586		10,932,925
Diluted earnings per common share	$	1.00	$	0.83	$	2.01	$	1.66	$	1.19	$	1.05	$	3.20	$	2.71

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Note 10. 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.

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 ~~June~~September 30, 2021 is as follows:

Commitments to extend credit		$	966,700,000			$	1,115,285,000
Standby letters of credit		$	90,433,000			$	84,130,000

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. These sales 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 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 or due to early payoffs or payment defaults 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 or for early payoffs or payment defaults of such mortgage loans.

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 ~~June~~September 30, 2021 will not have a material impact on the Company’s consolidated financial statements.

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Note 11. Subsequent Events

ASC 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Wilson Bank Holding Company evaluated all events or transactions that occurred after September 30, 2021, through the date of the issued financial statements.

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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, 2020 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, 2020, 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 new outbreaks of COVID-19, including actions taken by governmental officials to curb ~~its~~the spread of the virus, and the resulting 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) further public acceptance of the ~~speed with which~~vaccines that were developed against the ~~COVID-19 vaccines can be widely distributed,~~virus as well as the decisions of governmental agencies with respect to ~~pause~~vaccines, including recommendations related to booster shots and requirements that seek to mandate that individuals receive or employers require that their employees receive the ~~use of one or more vaccines,~~vaccine, (iv) those vaccines' efficacy against the virus, including new variants, ~~and public acceptance of the vaccines; (iv)~~(v) the effect on our allowance for loan losses and provisioning expense as a result of our decision to defer the implementation of CECL, ~~(v)~~(vi) deterioration in the real estate market conditions in the Company’s market areas, ~~(vi)~~(vii) 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, ~~(vii)~~(viii) deterioration of the economy in the Company’s market areas, ~~(viii)~~(ix) 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 changes in the short-term rate environment, or that affect the yield curve, ~~(ix)~~(x) the ability to grow and retain low-cost core deposits, ~~(x)~~(xi) significant downturns in the business of one or more large customers, ~~(xi)~~(xii) 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, ~~(xii)~~(xiii) 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, ~~(xiii)~~(xiv) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, ~~(xiv)~~(xv) inadequate allowance for loan losses, ~~(xv)~~(xvi) the effectiveness of the Company’s activities in improving, resolving or liquidating lower quality assets, ~~(xvi)~~(xvii) results of regulatory examinations, ~~(xvii)~~(xviii) 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, ~~(xviii)~~(xix) the possibility of additional increases to compliance costs or other operational expenses as a result of increased regulatory oversight, ~~(xix)~~(xx) loss of key personnel, and ~~(xx)~~(xxi) 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, 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

The outbreak and spread of the novel Coronavirus Disease 2019 (“COVID-19”) has created a global public health crisis that has contributed to 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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included 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 were intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. On December 21, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act ("Coronavirus Relief Act") was signed into law. The Coronavirus Relief Act earmarked an additional $284 billion for a new round of PPP loans. The Company has funded $125.2 million of PPP loans to our small business and other eligible customers, ~~$51.4~~$22.4 million of which remained outstanding as of ~~June~~September 30, 2021.

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 sought to navigate the uncertainty caused by the pandemic. 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) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency as troubled debt restructurings.

As of ~~June~~September 30, 2021, the Bank had one loan, totaling ~~$13.9 million~~$246,000 in aggregate principal amount for which both principal ~~was~~and interest were being deferred. As of ~~March~~December 31, ~~2021,~~2020, the Bank had 1113 loans, totaling ~~$51.4~~$36.4 million in aggregate principal amount for which principal or both principal and interest were being deferred. Under the applicable guidance, none of these deferrals required a troubled debt restructuring designation as of ~~June~~September 30, 2021 and ~~March~~December 31, ~~2021~~.2020.

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In connection with our initial response to COVID-19, we took deliberate actions to ensure that we had the balance sheet strength to serve our clients and communities, including maintaining increased liquidity and reserves supported by a strong capital position. In ~~the second half of 2020 and into the first half of 2021, as economic conditions began to stabilize,~~addition, while we ~~reduced some of the non-core, on-balance sheet liquidity we had built up during the first few months of the pandemic. We~~ have ~~also~~ reduced the levels of provision expense we recorded during the second half of 2020 and into the first ~~half~~nine months of 2021 as many of our borrowers’ businesses have begun to improve and government intervention efforts have aided many of our customers affected by the pandemic in managing through the ~~pandemic. Nonetheless, some~~pandemic, we have not reversed any of ~~our business and consumer customers are continuing to experience varying degrees~~the significant levels of ~~financial distress, which could continue for~~provision expense recorded during the ~~remainder~~first half of ~~2021.~~2020. As a result, ~~despite some reductions,~~ we currently expect our levels of liquidity and reserves to remain above historical levels through 2021.

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, 2020.

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.

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, which is known as the Current Expected Credit Losses (CECL) standard, had an effective date of January 1, 2020. Pursuant to the CARES Act, lenders, like us, were given the option to defer the implementation of ASU 2016-13 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. The Coronavirus Relief Act subsequently gave lenders the option to further defer the implementation of CECL until the fiscal year beginning after January 1, 2022. 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 until January 1, ~~2022.~~2023. 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.

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~~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.

Selected Financial Information

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. The following table represents the KPIs that management has determined to be important in making decisions for the Bank:

	*As of or For the Three Months Ended June 30,*									*As of or For the Six Months Ended June 30,*									*As of or For the Three Months Ended September 30,*									*As of or For the Nine Months Ended September 30,*
	*2021*			*2020*			*2021 - 2020 Percent Increase (Decrease)*			*2021*			*2020*			*2021 - 2020 Percent Increase (Decrease)*			*2021*			*2020*			*2021 - 2020 Percent Increase (Decrease)*			*2021*			*2020*			*2021 - 2020 Percent Increase (Decrease)*
PER SHARE DATA:
Basic earnings per common share	$	1.00		$	0.83			20.48	%	$	2.01		$	1.66			21.08	%	$	1.19		$	1.05			13.33	%	$	3.21		$	2.71			18.45	%
Diluted earnings per common share	$	1.00		$	0.83			20.48	%	$	2.01		$	1.66			21.08	%	$	1.19		$	1.05			13.33	%	$	3.20		$	2.71			18.08	%
Cash dividends	$	—		$	—			—	%	$	0.60		$	0.60			—	%	$	0.75		$	0.60			25.00	%	$	1.35		$	1.20			12.50	%
Dividends declared per share as a percentage of basic earnings per share		—	%		—	%		—	%		29.85	%		36.14	%		(17.40	)%		63.03	%		57.14	%		10.30	%		42.06	%		44.28	%		(5.02	)%

	*As of or For the Three Months Ended June 30,*									*As of or For the Six Months Ended June 30,*									*As of or For the Three Months Ended September 30,*									*As of or For the Nine Months Ended September 30,*
	*2021*			*2020*			*2021 - 2020 Percent Increase (Decrease)*			*2021*			*2020*			*2021 - 2020 Percent Increase (Decrease)*			*2021*			*2020*			*2021 - 2020 Percent Increase (Decrease)*			*2021*			*2020*			*2021 - 2020 Percent Increase (Decrease)*
PERFORMANCE RATIOS:
Return on average stockholders' equity(1)		11.42	%		10.15	%		12.51	%		11.62	%		10.36	%		12.16	%		13.10	%		12.46	%		5.14	%		12.13	%		11.09	%		9.38	%
Return on average assets(1)		1.24	%		1.19	%		4.20	%		1.28	%		1.24	%		3.23	%		1.42	%		1.43	%		(0.70	)%		1.33	%		1.31	%		1.53	%
Efficiency ratio		61.61	%		56.53	%		8.99	%		59.88	%		57.84	%		3.53	%		56.68	%		56.78	%		(0.18	)%		58.76	%		57.47	%		2.24	%

(1) Annualized

	*June 30, 2021*			*December 31, 2020*			*2021 - 2020 Percent Increase (Decrease)*			*September 30, 2021*			*December 31, 2020*			*2021 - 2020 Percent Increase (Decrease)*
BALANCE SHEET RATIOS:
Total capital to assets		10.84	%		11.28	%		(3.90	)%		10.62	%		11.28	%		(5.85	)%
Non-performing asset ratio		0.04	%		0.08	%		(50.00	)%		0.01	%		0.08	%		(87.50	)%
Book value per common share	$	35.69		$	34.58			3.21	%	$	36.13		$	34.58			4.48	%

Results of Operations

Net earni ngs increased $~~4,225,000~~6,035,000 , or ~~23.40%~~20.40% , to $~~22,283,000~~35,625,000 for the ~~six~~nine months ended ~~June~~September 30, 2021, fr om $~~18,058,000~~29,590,000 in the first ~~six~~nine months of 2020. Net earnings were ~~$11,139,000~~$13,342,000 for the quarter ended ~~June~~September 30, 2021, an increase of $~~2,112,000~~1,810,000 , or ~~23.40%~~15.70% , from $~~9,027,000~~11,532,000 for the three months ended ~~June~~September 30, 2020 and ~~a decrease~~an increase of $~~5,000~~2,203,000 , or ~~0.04%~~19.78% , over the quarter ended ~~March 31,~~June 30, 2021 . The increase in net earnings during the ~~three and~~ ~~six~~nine months ended ~~June~~September 30, 2021 as compared to the prior year comparable ~~periods~~period was primarily due to an increase in net interest income, an increase in non-interest income and a reduction in provision expense, partially offset by an increase in non-interest expense. The increase in net earnings during the three months ended September 30, 2021 as compared to the prior year comparable period was primarily due to an increase in net interest income and a reduction in provision expense, partially offset by a decrease in non-interest income and an increase in non-interest expense. The increase in net interest income for the nine months ended September 30, 2021 compared to the comparable period in 2020 is due to an increase in average interest earning asset balances between the relevant periods ~~including loans originated pursuant to the PPP,~~ and a decrease in cost of funds, partially offset by decreased net yield on interest earning assets. The increase in net interest income for the three months ended September 30, 2021 is due to an increase in average interest earning asset balances between the relevant periods and a decrease in cost of funds, partially offset by decreased net yield on investment securities. The increase in non-interest expense resulted from the Company's continued growth.

Return on average assets (ROA) ~~is a~~and return on average equity (ROE) are common ~~benchmark~~benchmarks for bank profitability and isare calculated by taking our annualized net earnings and dividing by the average assets and average equity for the relevant ~~period.~~periods, respectively. ROA ~~measures~~and ROE measure a company’s return on investment in a format that is easily comparable to other financial institutions. ItROA is particularly important to the Company as it serves as the basis for certain executive and employee bonuses. The ROA for the ~~six-month~~nine-month periods ended ~~June~~September 30, 2021 and 2020 wer e ~~1.28%~~1.33% and ~~1.24%~~1.31% , respectively. The ROA for the three months ended ~~June~~September 30, 2021 and 2020 were ~~1.24%~~1.42% and ~~1.19%~~1.43% , respectively. The ROE for the nine-month periods ended September 30, 2021 and 2020 wer e 12.13% and 11.09% , respectively. The ROE for the three months ended September 30, 2021 and 2020 were 13.10% and 12.46% , respectively.

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Net Interest Income

The average balances, interest, and average rates of our assets and liabilities for the three and ~~six-month~~nine-month periods ended ~~June~~September 30, 2021 and ~~June~~September 30, 2020 are presented in the following table (dollars in thousands):

	Three Months Ended								Three Months Ended								Net Change Three Months Ended											Three Months Ended								Three Months Ended								Net Change Three Months Ended
	June 30, 2021								June 30, 2020								June 30, 2021 versus June 30, 2020											September 30, 2021								September 30, 2020								September 30, 2021 versus September 30, 2020
	Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Due to Volume		Due to Rate			Net Change			Percent Change			Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Loans, net of unearned interest ^{(2) (3)}	$	2,346,298			5.04	%	$	28,945	$	2,238,983			5.36	%	$	29,254	$	6,256	$	(6,565	)	$	(309	)				$	2,394,042			5.19	%	$	30,773	$	2,269,394			5.11	%	$	28,590	$	1,692		$	491		$	2,183
Investment securities—taxable		597,870			1.41			2,103		388,985			1.89			1,830		2,726		(2,453	)		273						686,671			1.37			2,372		464,827			1.49			1,739		1,483			(850	)		633
Investment securities—tax exempt		79,480			1.28			253		65,097			1.67			271		241		(259	)		(18	)					80,146			1.63			329		77,630			1.77			346		59			(76	)		(17	)
Taxable equivalent adjustment ⁽¹⁾		—			0.34			67		—			0.44			72		64		(69	)		(5	)					—			0.43			87		—			0.47			92		15			(20	)		(5	)
Total tax-exempt investment securities		79,480			1.62			320		65,097			2.11			343		305		(328	)		(23	)					80,146			2.06			416		77,630			2.24			438		74			(96	)		(22	)
Total investment securities		677,350			1.43			2,423		454,082			1.92			2,173		3,031		(2,781	)		250						766,817			1.44			2,788		542,457			1.60			2,177		1,557			(946	)		611
Loans held for sale		20,855			3.08			160		19,711			2.41			118		7		35			42						13,293			2.39			80		29,586			2.23			166		(158	)		72			(86	)
Federal funds sold		60,607			0.03			5		6,902			—			—		—		5			5						35,227			0.05			4		1,878			—			—		—			4			4
Accounts with depository institutions		352,958			0.09			79		215,063			0.15			78		152		(151	)		1						374,536			0.14			128		243,848			0.15			91		85			(48	)		37
Restricted equity securities		5,089			1.97			25		4,895			1.48			18		1		6			7						5,089			2.57			33		5,089			2.27			29		—			4			4
Total earning assets		3,463,157			3.73			31,637		2,939,636			4.41			31,641		9,447		(9,451	)		(4	)		(0.01	)%		3,589,004			3.80			33,806		3,092,252			4.06			31,053		3,176			(423	)		2,753			8.87	%
Cash and due from banks		45,026								16,837																			23,450								17,489
Allowance for loan losses		(39,317	)							(30,345	)																		(39,316	)							(34,467	)
Bank premises and equipment		57,720								59,554																			60,621								59,195
Other assets		84,732								72,706																			98,802								76,077
Total assets	$	3,611,318							$	3,058,388																		$	3,732,561							$	3,210,546

	Three Months Ended							Three Months Ended							Net Change Three Months Ended												Three Months Ended							Three Months Ended							Net Change Three Months Ended
	June 30, 2021							June 30, 2020							June 30, 2021 versus June 30, 2020												September 30, 2021							September 30, 2020							September 30, 2021 versus September 30, 2020
	Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change			Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Deposits:
Negotiable order of withdrawal accounts	$	831,907		0.11	%	$	221	$	655,293		0.20	%	$	327	$	411		$	(517	)	$	(106	)				$	873,251		0.10	%	$	220	$	708,485		0.17	%	$	294	$	315		$	(389	)	$	(74	)
Money market demand accounts		1,059,786		0.16			430		872,363		0.41			887		1,009			(1,466	)		(457	)					1,103,871		0.13			364		899,993		0.37			829		984			(1,449	)		(465	)
Time Deposits		610,940		1.31			1,994		616,435		1.82			2,783		(24	)		(765	)		(789	)					607,838		1.23			1,884		621,118		1.72			2,685		(56	)		(745	)		(801	)
Other savings		245,756		0.22			135		164,974		0.43			176		325			(366	)		(41	)					266,825		0.18			118		181,578		0.39			180		336			(398	)		(62	)
Total interest-bearing deposits		2,748,389		0.41			2,780		2,309,065		0.73			4,173		1,721			(3,114	)		(1,393	)					2,851,785		0.36			2,586		2,411,174		0.66			3,988		1,579			(2,981	)		(1,402	)
Federal Home Loan Bank advances		—		—			—		20,172		2.69			135		(67	)		(68	)		(135	)					—		—			—		18,374		2.68			124		(62	)		(62	)		(124	)
Total interest-bearing liabilities		2,748,389		0.41			2,780		2,329,237		0.74			4,308		1,654			(3,182	)		(1,528	)		(35.47	%)		2,851,785		0.36			2,586		2,429,548		0.67			4,112		1,517			(3,043	)		(1,526	)		(37.11	%)
Non-interest bearing deposits		453,267							342,052																			454,975							385,232
Other liabilities		18,276							29,500																			21,667							27,615
Stockholders’ equity		391,386							357,599																			404,134							368,151
Total liabilities and stockholders’ equity	$	3,611,318						$	3,058,388																		$	3,732,561						$	3,210,546
Net interest income, on a tax equivalent basis						$	28,857						$	27,333	$	7,793		$	(6,269	)	$	1,524			5.58	%						$	31,220						$	26,941	$	1,659		$	2,620		$	4,279			15.88	%
Net yield on earning assets ⁽⁴⁾				3.40	%						3.82	%																		3.51	%						3.54	%
Net interest spread ⁽⁵⁾				3.32	%						3.67	%																		3.44	%						3.39	%

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 ~~$3.8~~ $4.8 million aarree included in interest income in 2021, inclusive o~~f $1.1 million~~of $900,000 in 2021 in SBA fees related to PPP loans. Loan fees of ~~$3.8~~$3.4 million are included in interest income in 2020, inclusive of ~~$2.1 million~~$700,000 in 2020 in SBA fees related to PPP loans.

(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.

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	Six Months Ended								Six Months Ended								Net Change Three Months Ended											Nine Months Ended								Nine Months Ended								Net Change Three Months Ended
	June 30, 2021								June 30, 2020								June 30, 2021 versus June 30, 2020											September 30, 2021								September 30, 2020								September 30, 2021 versus September 30, 2020
	Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Due to Volume		Due to Rate			Net Change			Percent Change			Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Loans, net of unearned interest ^{(2) (3)}	$	2,332,183			5.06	%	$	57,438	$	2,186,370			5.31	%	$	56,530	$	6,963	$	(6,055	)	$	908					$	2,352,977			5.10	%	$	88,211	$	2,214,227			5.23	%	$	85,120	$	6,331		$	(3,240	)	$	3,091
Investment securities—taxable		558,587			1.37			3,795		376,898			2.06			3,870		3,024		(3,099	)		(75	)					601,697			1.37			6,167		406,277			1.84			5,609		2,873			(2,315	)		558
Investment securities—tax exempt		78,923			1.47			576		57,223			1.80			513		296		(233	)		63						79,338			1.53			905		64,074			1.79			859		238			(192	)		46
Taxable equivalent adjustment ⁽¹⁾		—			0.39			153		—			0.48			136		80		(63	)		17						—			0.41			241		—			0.48			228		64			(51	)		13
Total tax-exempt investment securities		78,923			1.86			729		57,223			2.28			649		376		(296	)		80						79,338			1.94			1,146		64,074			2.27			1,087		302			(243	)		59
Total investment securities		637,510			1.43			4,524		434,121			2.09			4,519		3,400		(3,395	)		5						681,035			1.44			7,313		470,351			1.90			6,696		3,175			(2,558	)		617
Loans held for sale		20,404			2.57			260		16,237			2.80			226		82		(48	)		34						18,002			2.53			340		20,701			2.53			392		(51	)		(1	)		(52	)
Federal funds sold		30,989			0.03			5		13,152			0.86			56		98		(149	)		(51	)					32,448			0.04			9		9,371			0.80			56		69			(116	)		(47	)
Accounts with depository institutions		340,474			0.11			187		160,086			0.49			394		597		(804	)		(207	)					351,906			0.12			315		188,295			0.34			485		385			(555	)		(170	)
Restricted equity securities		5,089			2.02			51		4,788			2.81			67		10		(26	)		(16	)					5,089			2.21			84		4,889			2.62			96		6			(18	)		(12	)
Total earning assets		3,366,649			3.81			62,465		2,814,754			4.50			61,792		11,150		(10,477	)		673			1.09	%		3,441,457			3.80			96,272		2,907,834			4.34			92,845		9,915			(6,488	)		3,427			3.69	%
Cash and due from banks		39,945								15,783																			34,384								16,335
Allowance for loan losses		(38,948	)							(29,651	)																		(39,072	)							(31,267	)
Bank premises and equipment		57,855								59,797																			58,782								59,595
Other assets		82,853								71,718																			88,207								73,179
Total assets	$	3,508,354							$	2,932,401																		$	3,583,758							$	3,025,676

	Six Months Ended							Six Months Ended							Net Change Three Months Ended												Nine Months Ended							Nine Months Ended							Net Change Three Months Ended
	June 30, 2021							June 30, 2020							June 30, 2021 versus June 30, 2020												September 30, 2021							September 30, 2020							September 30, 2021 versus September 30, 2020
	Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change			Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Deposits:
Negotiable order of withdrawal accounts	$	801,844		0.11	%	$	432	$	608,659		0.25	%	$	770	$	512		$	(850	)	$	(338	)				$	825,840		0.11	%	$	652	$	642,125		0.22	%	$	1,064	$	380		$	(792	)	$	(412	)
Money market demand accounts		1,034,255		0.17			852		841,085		0.49			2,069		1,108			(2,325	)		(1,217	)					1,057,663		0.15			1,216		860,824		0.45			2,898		880			(2,562	)		(1,682	)
Time Deposits		610,482		1.37			4,143		621,507		1.88			5,824		(102	)		(1,579	)		(1,681	)					609,602		1.32			6,027		621,367		1.83			8,509		(158	)		(2,324	)		(2,482	)
Other savings		231,579		0.22			253		155,561		0.46			353		308			(408	)		(100	)					243,435		0.20			371		164,284		0.43			533		282			(444	)		(162	)
Total interest-bearing deposits		2,678,160		0.43			5,680		2,226,812		0.81			9,016		1,826			(5,162	)		(3,336	)					2,736,540		0.40			8,266		2,288,600		0.76			13,004		1,384			(6,122	)		(4,738	)
Federal Home Loan Bank advances		1,730		15.50			133		21,404		2.69			286		(912	)		759			(153	)					1,147		15.50			133		20,389		2.69			410		(909	)		632			(277	)
Total interest-bearing liabilities		2,679,890		0.44			5,813		2,248,216		0.83			9,302		914			(4,403	)		(3,489	)		(37.51	%)		2,737,687		0.41			8,399		2,308,989		0.78			13,414		475			(5,490	)		(5,015	)		(37.39	%)
Non-interest bearing deposits		421,999							311,288																			433,106							336,119
Other liabilities		19,662							22,410																			20,385							24,193
Stockholders’ equity		386,803							350,487																			392,580							356,375
Total liabilities and stockholders’ equity	$	3,508,354						$	2,932,401																		$	3,583,758						$	3,025,676
Net interest income, on a tax equivalent basis						$	56,652						$	52,490	$	10,236		$	(6,074	)	$	4,162			7.93	%						$	87,873						$	79,431	$	9,440		$	(998	)	$	8,442			10.63	%
Net yield on earning assets ⁽⁴⁾				3.46	%						3.83	%																		3.48	%						3.72	%
Net interest spread ⁽⁵⁾				3.37	%						3.67	%																		3.39	%						3.56	%

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 ~~$7.5~~$12.3 million are included in interest income in 2021, inclusive of ~~$2.3~~$3.2 million in 2021 in SBA fees related to PPP loans. Loan fees of ~~$5.8~~$9.2 million are included in interest income in 2020, inclusive of ~~$2.1~~$2.8 million in 2020 in SBA fees related to PPP loans.

(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.

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Net yield on earning assets for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 was ~~3.46%~~3.48% and ~~3.83%~~3.72%, respectively, and ~~3.40%~~3.51% and ~~3.82%~~3.54%% for the quarter ended ~~June~~September 30, 2021 and ~~June~~September 30, 2020, respectively. The decrease in net yield on earning assets for the nine months ended September 30, 2021, was due to a decrease in the yield earned on ~~all~~our earning assets that outpaced the decrease in rates paid on our interest-bearing liabilities, partially offset by fees earned on PPP loans. The decrease in net yield on earning assets for the three months ended September 30, 2021, was due to a decrease in the yield earned on investment securities, partially offset by an increase in the yield earned on loans, including fees earned on PPP loans, and a decrease in the rates paid on our interest-bearing liabilities and the payoff of our FHLB borrowings. 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, as a result of reductions in the federal funds rate enacted by the Federal Reserve, which has thereafter been maintained at the reduced rate. ~~In the second quarter of 2021~~The direction and speed with which short-term interest rates move has an impact on our net interest income. At present, there is uncertainty about whether the Federal Reserve ~~announced it did not expect~~will raise short-term rates in 2023, as previously forecast, or in 2022 as some members of the Federal Open Markets Committee have suggested. The magnitude of any rate increases, whether in 2023 or 2022, remains uncertain as well. If short-term interest rates are increased and we remain liability-sensitive at that time, those increases could put pressure on our net interest spread, and consequently our net interest income, if we are unable to raise rates ~~until 2023.~~ on our loans faster than we are required to raise rates on our deposits, including as a result of competitive pricing pressures in our markets. Similarly, in a rising rate environment, loan floors that we have embedded in our floating rate loans may cause a lag in our ability to capture the benefit of rising rates on our loan products. The yield on loans decreased during the ~~three and six~~nine months ended ~~June~~September 30, 2021 when compared to the comparable period in 2020 due to the declining rate environment discussed ~~above, which was partially offset by~~above. The yield on loans increased during the three months ended September 30, 2021 when compared to the comparable period in 2020 due to an increase in ~~loan volume.~~fees earned on PPP loans and prepayment fees earned from the early payoff of loans. The yield on securities decreased due to the declining rate environment discussed above, in which higher yielding securities were called by issuers and were replaced with securities yielding lower market rates. In addition, excess liquidity on the Company's balance sheet led to additional investment purchases that had lower yields due to the current rate environment. The net interest spread was ~~3.37%~~3.39% and ~~3.67%~~3.56% for the ~~six~~nine months ended ~~June~~September 30, 2021 and ~~June~~September 30, 2020, respectively, and ~~3.32%~~3.44% and ~~3.67%~~3.39% for the quarter ended ~~June~~September 30, 2021 and ~~June~~September 30, 2020, respectively. The rate we pay on our deposits decreased in the three and ~~six~~nine months ended ~~June~~September 30, 2021 when compared to the comparable periods in 2020, as we decreased the rates on several of our deposit products in response to decreases in short-term rates in the first quarter of 2020 and the continuation of this low rate environment throughout 2020 and into ~~2021, partially offset by an overall increase in the volume of average interest-bearing deposits.~~2021. As a result of the significant reduction in short-term rates and the continued intense competitive pressures in our markets, and an anticipated future decrease in fees earned on PPP loans, our net yield on earning assets could continue to decline during the remainder of 2021 as could our net interest spread if we are unable to reduce the rates we pay on our interest-bearing liabilities at a pace necessary to offset declines in our earning asset yields. Elevated levels of on-balance sheet liquidity resulting from government stimulus programs will also likely negatively impact our net yield on 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. Net interest income, excluding tax equivalent adjustments relating to tax exempt securities and loans, for the three and ~~six~~nine months ended ~~June~~September 30, 2021 totaled $~~28,790,000~~31,133,000 and $~~56,499,000~~87,632,000, respectively, compared to $~~27,261,000~~26,849,000 and $~~52,354,000~~79,203,000 for the same periods in 2020, an increase of $~~1,529,000~~4,284,000 and $~~4,145,000~~8,429,000, between respective periods.

The increase in interest income for the three and nine months ended ~~June~~September 30, 2021 when compared to the three and nine months ended ~~June~~September 30, 2020 was primarily attributable to an increase in interest and fees earned on loans as well as as increase in interest and dividends earned on taxable ~~securities, partially offset by a decrease~~securities. The increase in interest and fees earned on ~~loans.~~loans resulted from an overall increase in average loans, an increase in SBA fees earned on PPP loans, and a resulting increase in origination fees earned on loans and, for the three months ended September 30, 2021, an increase in loan yields. The increase in interest and dividends earned on taxable securities resulted from an overall increase in the average balance of securities, due to management's decision to purchase additional securities to utilize excess liquidity. The decrease in interest and fees earned on loans resulted from a decrease in SBA fees earned on PPP loans, partially offset by an overall increase in average loans, and a resulting increase in origination fees earned on loans. The increase in interest income for the six months ended June 30, 2021 when compared to the six months ended June 30, 2020 was primarily attributable to an overall increase in average loans, and the resulting increase in net interest and fees earned on loans. This was partially offset by a decrease in interest and dividends earned on taxable securities and a decrease in interest earned on balances held at depository institutions. The ratio of average earning assets to total average assets for the three and ~~six~~nine months ended ~~June~~September 30, 2021 was ~~95.9%~~96.2% and 96.0%, respectively, compared to ~~96.1%~~96.3% and ~~96.0%~~96.1% for the same periods in 2020.

The decrease in interest expense for the three and ~~six~~nine months ended ~~June~~September 30, 2021 as compared to the prior year's comparable periods was primarily due to a decrease in the rates of average interest bearing deposits, reflecting the declining rate environment that we have experienced since the first quarter of 2020. The decrease in rates was partially offset by an overall increase in the volume of average interest-bearing deposits.

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 ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$882,000~~$1,012,000, a decrease of $~~4,711,000~~5,619,000 from the provision of $~~5,593,000~~6,631,000 incurred in the first ~~six~~nine months of 2020. The provision for loan losses for the quarter ended ~~June~~September 30, 2021 was $~~55,000~~130,000, down $~~4,069,000~~908,000 from the provision of $~~4,124,000~~1,038,000 incurred in the ~~second~~third quarter of 2020 and ~~down~~up $~~772,000~~75,000 from the $~~827,000~~55,000 incurred in the ~~first~~second quarter of 2021.The decrease in provision expense for the three and ~~six~~nine months ended ~~June~~September 30, 2021 from the comparable periods in 2020 is in response to the ~~suggestion from leading~~continued economic ~~indicators that economic conditions are improving including~~improvement as ~~a result of declining COVID cases, hospitalizations and COVID deaths in the quarter ended June 30, 2021. The decrease in provision expense for the second quarter of~~ ~~2021~~ ~~when compared to the first quarter of~~ ~~2021~~ ~~is in response to~~well as the lack of charge-offs, a decrease in ~~classified loans,~~ non-performing loans and impaired loans, and management's evaluation of the overall credit quality of the loan portfolio. ThThe increase in provision expense for the third quarter of e2021 when compared to the second quarter of 2021 is in response to an increase in charged off deposit accounts. The increased levels in the provision for loan losses for the three and nine months ended September 30, 2020 can be primarily attributed to the pandemic and the impact it had on the local and national economy. While the local and national economic outlooks have improved in 2021, we believe the ultimate impact of the pandemic remains uncertain due to the lingering effects of COVID-19, and challenges affecting supply chains globally and labor shortages that are impacting our clients. In addition, inflation remains a risk to the economic recovery. Loan loss provisions recorded during the three and nine months ended September 30, 2021, were largely the result of our loan portfolio growth. 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 results of regulatory examinations, and current and anticipated 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 foforr the first ~~six~~nine months of 2021 totaled approximately $~~107,000~~240,000 compared to approximately $~~147,000~~84,000 in net recoveries duri~~during~~ng the first ~~six~~nine months of 2020. The volume of net ~~loa~~lonsans charged off fofor r the ~~second~~third quarter of ~~June~~September 30, 2021 totaled approximately ~~$71,000 c~~$133,000 co~~ompared~~mpared to ~~approximately~~app ~~$61,000~~roximately $63,000 in net ~~recoveries d~~charge offs dur~~uring~~ing the ~~second~~third quarter of 2020.

The allowance for loan losses (net of charge-offs and recoveries) was ~~$39,314,000~~$39,311,000 at ~~June~~September 30, 2021, an increase of ~~$775,000~~$772,000 or ~~2.01%~~2.00%, from $38,539,000 at December 31, 2020, and of ~~$4,848,000~~$3,870,000, or ~~14.07%~~10.92%, from $~~34,466,000~~35,441,000 at ~~June~~September 30, 2020. The allowance for loan losses was ~~1.64%~~1.63% of total loans outstanding at ~~June~~September 30, 2021, compared to 1.66% at December 31, 2020 and ~~1.51%~~1.55% at ~~June~~September 30, 2020. As a percentage of nonperforming loans at ~~June~~September 30, 2021, December 31, 2020, and ~~June~~September 30, 2020, the allowance for loan losses ~~represent~~re~~ed 3,125%~~presented 9,206%, 1,482% and ~~1,154%~~2,767%, respectively. The internally classified loans as a percentage of the allowance for loan losses were ~~17.8%~~21.5%, 21.4%, and ~~26.7%~~23.9% respectively, at ~~June~~September 30, 2021, December 31, 2020, and ~~June~~September 30, 2020.

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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. Management believes the allowance for loan losses at ~~June~~September 30, 2021 to be adequate, but if economic conditions deteriorate beyond management’s current expectations and additional charge-offs are incurred in excess of the amount included in such expectations, the allowance for loan losses may require an increase through additional provision for loan losses expense which would negatively impact earnings.

~~Table of Contents~~

Non-Interest Income

Our non-interest income is composed of several components, some of which vary significantly between quarterly and annual periods. The following is a summary of our non-interest income for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 (in thousands):

	Three Months Ended June 30,											Six Months Ended June 30,											Three Months Ended September 30,												Nine Months Ended September 30,
	2021			2020		$ Increase (Decrease)			% Increase (Decrease)			2021			2020		$ Increase (Decrease)			% Increase (Decrease)			2021			2020			$ Increase (Decrease)			% Increase (Decrease)			2021			2020			$ Increase (Decrease)			% Increase (Decrease)
Service charges on deposit accounts	$	1,411		$	1,093	$	318			29.09	%	$	2,736		$	2,768	$	(32	)		(1.16	%)	$	1,682		$	1,391		$	291			20.92	%	$	4,418		$	4,159		$	259			6.23	%
Brokerage income		1,681			1,020		661			64.80			3,079			2,209		870			39.38			1,586			1,254			332			26.48			4,665			3,463			1,202			34.71
Debit and credit card interchange income		3,353			2,378		975			41.00			5,882			4,380		1,502			34.29			3,012			2,331			681			29.21			8,894			6,711			2,183			32.53
Other fees and commissions		326			499		(173	)		(34.67	)		844			816		28			3.43			494			478			16			3.35			1,338			1,294			44			3.40
Income on BOLI and annuity contracts		208			212		(4	)		(1.89	)		412			395		17			4.30			260			214			46			21.50			672			609			63			10.34
Gain on sale of loans		2,048			2,122		(74	)		(3.49	)		5,654			3,033		2,621			86.42			2,275			3,775			(1,500	)		(39.74	)		7,929			6,808			1,121			16.47
Gain on sale of securities		—			267		(267	)		(100.00	)		—			425		(425	)		(100.00	)		28			—		��	28			100.00			28			425			(397	)		(93.41	)
Loss on sale of fixed assets		(23	)		—		(23	)		100.00			(23	)		—		(23	)		100.00			(6	)		(4	)		(2	)		50.00			(29	)		(4	)		(25	)		625.00
Gain (loss) on sale of other real estate		(11	)		660		(671	)		(101.67	)		(11	)		660		(671	)		(101.67	)		(4	)		(8	)		4			(50.00	)		(15	)		652			(667	)		(102.30	)
Gain on sale of other assets		—			—		—			—			1			—		1			100.00			1			2			(1	)		(50.00	)		2			2			—			—
Other income																								20			61			(41	)		(67.21	)		20			61			(41	)		(67.21	)
Total non-interest income	$	8,993		$	8,251	$	742			8.99	%	$	18,574		$	14,686	$	3,888			26.47	%	$	9,348		$	9,494		$	(146	)		(1.54	%)	$	27,922		$	24,180		$	3,742			15.48	%

The ~~increase~~decrease in non-interest income for the three months ended ~~June~~September 30, 2021 when compared to the comparable period in 2020 is attributable to a decrease in gain on sale of loans; partially offset by an increase in debit and credit card interchange income, an increase in brokerage income, and an increase in service charges on deposit accounts. The increase in non-interest income for the nine months ended September 30, 2021 when compared to the comparable period in 2020 is primarily attributable to an increase in debit and credit card interchange income, an increase in brokerage income, an increase in gain on sale of loans, and an increase in service charges on deposit accounts, partially offset by an increase in the loss on sale of other real estate, a decrease in gain on sale of securities, and a decrease in other fees and commissions. The increase in non-interest income for the six months ended ~~June 30, 2021~~ ~~when compared to the comparable period in~~ ~~2020~~ ~~is primarily attributable to an increase in gain on sale of loans, an increase in debit and credit card interchange income, and an increase in brokerage income,~~ partially offset by an increase in the loss on sale of other real estate and a decrease in gain on sale of securities.

~~Debit~~The decrease in gain on sale of loans for the three months ended September 30, 2021 was due to a decrease in volume, as the volume of refinancing transactions is starting to decrease. The increase in gain on sale of loans for the nine months ended September 30, 2021 was attributable to increased mortgage refinancing activity due to low mortgage rates as a result of quantitative easing. As we experienced in the third quarter of 2021, the market has started to see upward pressure on mortgage rates as the economy has continued its recovery and as such, the Bank is seeing mortgage volume slowly tapering off and believes it could continue to decrease for the remainder of 2021.

The increase in debit and credit card interchange income ~~increased~~ for the three and ~~six~~nine months ended ~~June~~September 30, 2021 was due to an increase in the number and volume of debit card holders and transactions. The increase in the volume of transactions was partially attributable to an increase in economic activity as many businesses reopened, which resulted in increased consumer spending.

~~Brokerage~~The increase in brokerage income ~~increased~~ for the three and ~~six~~nine months ended ~~June~~September 30, 2021 was primarily due to client acquisition, ~~and~~ the opening of new investment ~~accounts.~~accounts, and the addition of new team members which resulted in new business opportunities. Brokerage income was also aided by the continued strong recovery in the stock market from first quarter 2020 lows resulting from the COVID-19 pandemic.

~~Service~~The increase in service charges on deposit accounts ~~increased~~ for the three and nine months ended ~~June~~September 30, 2021 primarily was due to an increase in service charges earned on overdraft ~~fees.~~ fees, fees for paper statements, analysis charges, and fees from ATM transactions.

The increase in gain on sale of securities for the three months ended September 30, 2021 resulted from management's decision to sell lower yielding securities and replace them with higher yielding securities. The decrease in gain on sale of securities for the ~~three and six~~nine months ended ~~June~~September 30, 2021 resulted from management’s opportunistic trading to recognize additional income in 2020.

Other fees and commissions decreased for the three months ended June 30, 2021 primarily due to a decrease in annuity income. Annuity income in the second quarter of 2020 was elevated due to several annuity plans that were purchased in which we received a purchase bonus up front.

~~Gain on sale of loans increased~~ ~~for the six months ended June 30, 2021 due to low mortgage rates a~~s a result of quantitative easing. While realizing the increase in refinance production, the market has started to see upward pressure on mortgage rates as the economy has recovered and as such, the Bank expects mortgage volume to taper off and decrease in the second half of 2021.

3536

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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. The following is a summary of our non-interest expense for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 (in thousands):

	Three Months Ended June 30,										Six Months Ended June 30,										Three Months Ended September 30,										Nine Months Ended September 30,
	2021		2020		$ Increase (Decrease)			% Increase (Decrease)			2021		2020		$ Increase (Decrease)			% Increase (Decrease)			2021		2020		$ Increase (Decrease)			% Increase (Decrease)			2021		2020		$ Increase (Decrease)		% Increase (Decrease)
Salaries and employee benefits	$	14,022	$	11,485	$	2,537			22.09	%	$	27,322	$	22,617	$	4,705			20.80	%	$	13,456	$	11,956	$	1,500			12.55	%	$	40,778	$	34,573	$	6,205		17.95	%
Occupancy expenses, net		1,340		1,323		17			1.28			2,631		2,473		158			6.39			1,436		1,406		30			2.13			4,067		3,879		188		4.85
Advertising & public relations expense		607		485		122			25.15			1,094		1,088		6			0.55			736		702		34			4.84			1,830		1,790		40		2.23
Furniture and equipment expense		836		800		36			4.50			1,662		1,568		94			5.99			846		849		(3	)		(0.35	)		2,508		2,417		91		3.76
Data processing expense		1,523		1,248		275			22.04			2,910		2,417		493			20.40			1,509		1,298		211			16.26			4,419		3,715		704		18.95
ATM & interchange expense		1,214		878		336			38.27			2,304		1,751		553			31.58			1,218		1,054		164			15.56			3,522		2,805		717		25.56
Directors’ fees		127		139		(12	)		(8.63	)		284		297		(13	)		(4.38	)		179		142		37			26.06			463		439		24		5.47
Audit, legal & consulting expenses		172		207		(35	)		(16.91	)		361		387		(26	)		(6.72	)		323		233		90			38.63			684		620		64		10.32
Other operating expenses		3,438		3,510		(72	)		(2.05	)		6,382		6,179		203			3.29			3,243		2,996		247			8.24			9,625		9,175		450		4.90
Total non-interest expense	$	23,279	$	20,075	$	3,204			15.96	%	$	44,950	$	38,777	$	6,173			15.92	%	$	22,946	$	20,636	$	2,310			11.19	%	$	67,896	$	59,413	$	8,483		14.28	%

The increase in non-interest expense for the three months ended ~~June~~September 30, 2021 when compared to the comparable period in 2020 is primarily attributable to an increase in salaries and employee benefits, an increase in ~~ATM and interchange expense,~~other operating expenses, an increase in data processing expense, and an increase in ~~advertising~~ATM and ~~public relations~~interchange expense. The increase in non-interest expense for the ~~six~~nine months ended ~~June~~September 30, 2021 when compared to the comparable period in 2020 is primarily attributable to an increase in salaries and employee benefits, an increase in ATM and interchange expense, an increase in data processing expense, an increase in other operating expenses, and an increase in occupancy expenses.

Salaries and employee benefits increased for the three and ~~six~~nine months ended ~~June~~September 30, 2021 primarily due to an increase in the number of employees necessary to support the Company’s growth in operations as well as an increase in incentives and commissions, due to an increase in the volume of booked mortgage loans and an increase in new investment client acquisition. This increase also resulted from the payment of a ~~$811,500,~~$812,000, in the aggregate, mid-year bonus paid to employees in the second quarter of 2021 to acknowledge their hard work and perseverance throughout the pandemic and implementation of PPP. The increase in occupancy expense is primarily attributable to an increase in maintenance and repairs on buildings, an increase in property taxes due to the expansion of our West End branch, an increase in depreciation expense on buildings resulting from improvements, an increase in lease expense due to an increase in leased branches, and ~~sanitation supplies related~~anincrease in utility expense due to ~~COVID-19.~~a transition back to the office by employees. 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.

~~ATM~~Other operating expenses increased for the three and ~~interchange~~nine months ended September 30, 2021 primarily due to an increase in fees and licenses, an increase in FDIC assessments, and an increase in telephone expense resulting from the conversion to a new vendor, partially offset by a decrease in professional fees on loans which resulted from the investment in required software to facilitate participation in PPP lending that occurred in June 2020.

Data processing expense increased for the three and ~~six~~nine months ended ~~June 30, 2021~~ primarily due to an increase in debit card interchange fee expense due to the volume of transactions, and an increase in economic activity. In addition, there was an increase in ATM expenses resulting from software upgrades and the outsourcing of ATM services.

~~Data processing expenses increased~~ ~~for the three and six months ended June~~September 30, 2021 primarily due to an increase in computer maintenance, computer license expense, and computer home banking. These expenses included upgrades of our current systems as well as additional investments in computer software, an increase in I.T. consulting expense and an increase in information security expenses. The Company anticipates that data processing expenses will continue to increase as the Company's operations grow and the focus on the acceleration of digital product offerings increases.

~~Advertising~~ATM and ~~public relations~~interchange expense increased for the three and nine months ended ~~June~~September 30, 2021 primarily due to an increase in ~~community events in the market areas in which we operate in comparison~~debit card interchange fee expense due to the ~~prior year comparable periods when COVID restrictions caused the cancellation~~volume of ~~many community events.~~

~~Other operating expenses increased~~ ~~for the six months ended June 30, 2021 primarily due~~ ~~to an increase in fees and licenses~~transactions, and an increase in FDIC assessments due to an increase in deposits, partially offset by a decrease in professional fees on loans which resulted from the investment in required software to facilitate participation in PPP lending that occurred in June 2020.economic activity.

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 dividing our non-interest expense by our net interest income plus non-interest income. Our efficiency ratio for the three months ended ~~June~~September 30, 2021 and 2020 were ~~61.61%~~56.68% and ~~56.53%~~56.78%, respectively. Our efficiency ratio for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 were ~~59.88%~~58.76% and ~~57.84%~~57.47%, respectively. The increase for the ~~three and six~~nine months ended ~~June~~September 30, 2021 when compared to the prior year comparable periods was attributable to the mid-year bonus paid to employees in the second quarter of 2021 ~~the investment in software upgrades to existing ATMs and the outsourcing of ATM services,~~ as well as investments in new technology.

Income Taxes

The ~~Company’s~~Company’s income tax expense was ~~$6,958,000 for~~$11,021,000 for the ~~six~~nine months ended ~~June~~September 30, 2021, an increase of $~~2,346,000~~3,272,000 over the comparable period in 2020. Income tax expense was $~~3,310,000~~4,063,000 for the quarter ended ~~June~~September 30, 2021,an increase of $~~1,024,000~~926,000 over the same period in 2020.The percentage of income tax expense to net income before taxes was ~~23.80%~~23.63% and ~~20.34%~~20.75% for the ~~six~~nine months ended ~~June~~September 30, 2021 and ~~June~~September 30, 2020, respectively, and ~~22.91%~~23.34% and ~~20.21%~~21.39% for the quarters ended ~~June~~September 30, 2021 and 2020, respectively. 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 loans, and certain federal and state tax credits.

3637

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Financial Condition

Balance Sheet Summary

The Company’s total assets increased $~~281,488,000~~438,725,000, or ~~8.35%~~13.02%, to $~~3,651,092,000~~3,808,329,000 at ~~June~~September 30, 2021 from $3,369,604,000 at December 31, 2020. Total assets increased $~~102,587,000~~157,237,000, or ~~2.89%~~4.31%, at ~~June~~September 30, 2021 from ~~March 31, 2021~~.June 30, 2021. Loans, net of allowance for loan losses, totaled $~~2,356,856,000~~2,375,484,000 at ~~June~~September 30, 2021, a ~~3.25%~~4.06% increase compared to $2,282,766,000 at December 31, 2020. Net loans increased$~~61,857,000~~18,628,000, or ~~2.70%~~0.79%, from June 30, 2021~~March 31, 2021~~ to ~~June~~September 30, 2021. In 2020, management focused on growing all segments of our loan portfolio. In 2021, management is targeting owner-occupied commercial real estate, residential real estate lending and consumer lending as areas of emphasis. Thought not initially an area of emphasis in 2021, construction and land development loans have increased $89.6 million in 2021, as a result of the addition of three large loan relationships.

The following details the loans of the Company at ~~June~~September 30, 2021 and December 31, 2020:

	June 30, 2021					December 31, 2020											September 30, 2021					December 31, 2020
	Balance		% of Portfolio			Balance		% of Portfolio			Balance $ Increase (Decrease)			Balance % Increase (Decrease)			Balance		% of Portfolio			Balance		% of Portfolio			Balance $ Increase (Decrease)			Balance % Increase (Decrease)
Residential 1-4 family	$	572,995		23.80	%	$	535,994		23.00	%	$	37,001			6.90	%	$	634,543		26.15	%	$	535,994		23.00	%	$	98,549			18.39	%
Multifamily		87,327		3.63			111,646		4.79			(24,319	)		(21.78	)		57,193		2.36			111,646		4.79			(54,453	)		(48.77	)
Commercial real estate		849,320		35.28			837,766		35.95			11,554			1.38			848,166		34.96			837,766		35.95			10,400			1.24
Construction and land development		562,234		23.36			488,626		20.97			73,608			15.06			578,206		23.83			488,626		20.97			89,580			18.33
Farmland		11,912		0.49			15,429		0.66			(3,517	)		(22.79	)		10,149		0.42			15,429		0.66			(5,280	)		(34.22	)
Second mortgages		7,447		0.31			8,433		0.36			(986	)		(11.69	)		7,660		0.32			8,433		0.36			(773	)		(9.17	)
Equity lines of credit		82,893		3.44			78,889		3.38			4,004			5.08			88,348		3.64			78,889		3.38			9,459			11.99
Commercial loans		154,201		6.41			172,811		7.41			(18,610	)		(10.77	)		130,144		5.36			172,811		7.41			(42,667	)		(24.69	)
Agricultural loans		1,441		0.06			1,206		0.05			235			19.49			1,538		0.06			1,206		0.05			332			27.53
Personal		63,110		2.62			66,193		2.84			(3,083	)		(4.66	)		55,841		2.30			66,193		2.84			(10,352	)		(15.64	)
Credit cards		4,492		0.19			4,324		0.19			168			3.89			4,668		0.19			4,324		0.19			344			7.96
Other loans		9,835		0.41			9,283		0.40			552			5.95			9,786		0.40			9,283		0.40			503			5.42
Total loans before net deferred loan fees	$	2,407,207		100.00	%	$	2,330,600		100.00	%	$	76,607			3.29	%	$	2,426,242		100.00	%	$	2,330,600		100.00	%	$	95,642			4.10	%

Overall, the Bank's loan demand and related new loan production has continued to be strong. The net loan growth of ~~3.29%~~4.10% from December 31, 2020, reflects the strong production, partially offset by several large loan payoffs due to the current interest rate environment, the temporary nature of our construction lending portfolio, and the capital constraints around the addition of loans in commercial real estate and, construction, acquisition and development lending, two areas where the Bank has historically experienced, and continues to experience, robust demand.environment. The demand is supported by the continued rise in new borrowers moving into the Bank's primary market areas. The increase in residential 1-4 family loans is attributable to the Bank being able to grow its residential portfolio through marketing efforts directed at those building houses, the developing investor sector of 1-4 family, and an increase in the number of loans held internally and therefore not sold on the secondary market. The increase in ~~commercial real estate~~construction and land development loans is ~~a result of~~primarily attributable to the addition of ~~several~~three large ~~loans as well as the completion of some construction projects converting to permanent financing.~~loan relationships. The decrease in multifamily loans is primarily a result of the payoff of several large loan relationships. The decrease in commercial and industrial loans is attributable to the forgiveness or repayment of PPP loans we previously made to small businesses and individuals as a result of the COVID-19 pandemic and the payoff of several large loan relationships. The Company funded $125.2 million of PPP loans to our small business and other eligible customers, ~~$51.4~~$22.4 million of which remained outstanding as of ~~June~~September 30, 2021, compared to $62.4 million at December 31, 2020.

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, and though economic conditions in our markets have been improving, some uncertainty remains surrounding the impact of the pandemic. Although the Company has continued to grow loans in 2021, the Company could experience a decline in demand for loans if the impact of the pandemic continues for an extended period of time.

Securities increased $~~171,425,000~~228,344,000, or ~~29.53%~~39.33%, to $~~751,968,000~~808,887,000 at ~~June~~September 30, 2021 from $580,543,000 at December 31, 2020, and increased $~~138,036,000~~56,919,000, or ~~22.48%~~7.57%, from ~~March 31,~~June 30, 2021 primarily as a result of management's decision to invest excess liquidity. The average yield, excluding tax equivalent adjustment, of the securities portfolio at ~~June~~September 30, 2021 was ~~1.54%~~1.60% with a weighted average life of ~~8.42~~8.50 years, as compared to an average yield of 1.63% and a weighted average life of 8.00 years at December 31, 2020. 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 ~~June~~September 30, 2021 or December 31, 2020.

Premises and equipment ~~decreased~~ increased$~~470,000~~4,462,000, or ~~0.81%~~7.67%, from December 31, 2020 to ~~June~~September 30, 2021. The primary reason for the ~~decrease~~increase was due to ~~current year depreciation~~an increase in construction-in-progress and an increase in contracts in process which resulted from the Bank's purchase of ~~$2,107,000. This decrease~~additional properties for bank expansion along with remodel expenses for several of our existing branches. The increase was ~~largely offset by~~also attributable to an increase in leasehold improvements due to the expansion of two of our leased branches, an increase in furniture, fixtures and equipment from the remodel of ~~our West End branch and the ongoing remodel of our Baddour~~a branch, an increase in computer hardware and software, and the purchase of a company ~~vehicle.~~vehicle; partially offset by current year depreciation of $3,180,000.

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The increase in deposits in the first ~~six~~nine months of 2021, ~~including those resulting from funded PPP loans, stimulus checks, and tax return refunds,~~which is described below, outpaced loan growth during the period, causing securities, interest bearing deposits with other financial institutions, and federal funds sold to increase. Management's decision to invest the excess liquidity caused securities to increase to ~~$751,968,000 a~~$808,887,000 ~~t June~~at September 30, 2021 from $580,543,000 at December 31, 2020. At ~~March~~June 30, 2021, securities totaled $751,968,000. Interest bearing deposits with other financial institutions increased to $380,995,000 at September 30, 2021 from $304,750,000 at December 31, ~~2021, securities totaled $613,932,000.~~2020. Federal funds sold increased to ~~$52,004,000~~ $26,995,000 at ~~June~~September 30, 2021 from $675,000 at December 31, ~~2020 and March 31, 2021.~~

~~Table of Contents~~

2020.

Total ~~liabilitie~~s liabilities increased by ~~8.90%~~13.86% to $~~3,255,487,000~~3,403,900,000 aat ~~t June~~September 30, 2021 compared to ~~$2,989,483,000~~$2,989,483,000 at December 31, ~~2020.~~2020. Total liabilities increased $~~88,209,000~~148,413,000, or ~~2.79%~~4.56%, at ~~June~~September 30, 2021 from the quarter ended ~~March 31, 2021.~~June 30, 2021. The increase in ~~tota~~ltotal liabilities since December 31, 2020 was composed of a $~~269,869,000~~413,901,000, or ~~9.12%~~13.98%, increase in total ~~deposits,~~deposits, and a $4,154,000, or 16.45%, increase in accrued interest and other liabilities, partially offset by a $3,638,000, or 100.00%, decrease in Federal Home Loan Bank advances. TheThe increase in total deposits since December 31, 2020 was primarily attributable to the government issued economic stimulus relief ~~attributable to COVID-19.~~programs associated with COVID-19 as well as growth in market share which resulted in the opening of new accounts. Deposit growth was also the result of PPP loan proceeds being deposited in the Bank pending use of the funds by the borrower, ~~and~~ refunds to customers from the filing of their tax ~~returns. It is anticipated~~returns, and advance ~~payments of the~~ child tax credit ~~will lead~~payments. The increase in accrued interest and other liabilities since December 31, 2020 was primarily attributable to ~~further deposit growth.~~an increase in employee bonus payable, partially offset by a decrease in escrow payable. The decrease in Federal Home Loan Bank advances since December 31, 2020 was due to management's strategic decision to utilize excess liquidity to pay off these advances. A~~At June~~t September 30, 2021, our borrowing capacity with the Federal Home Loan Bank of Cincinnati totaled ~~$356,396,000. T~~$389,383,000. Thehe 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.

~~Non Performing~~Non-Performing Assets

The following tables present the Company’s ~~non-accrual~~nonaccrual loans and past due loans as of ~~June~~September 30, 2021 and December 31, 2020.

Loans on Nonaccrual Status

	In Thousands				In Thousands
	June 30,		December 31,		September 30,		December 31,
	2021		2020		2021		2020
Residential 1-4 family	$	943	$	1,022	$	—	$	1,022
Multifamily		—		—		—		—
Commercial real estate		—		311		—		311
Construction		—		—		—		—
Farmland		—		—		—		—
Second mortgages		—		—		—		—
Equity lines of credit		—		—		—		—
Commercial		—		—		—		—
Agricultural, installment and other		—		—		—		—
Total	$	943	$	1,333	$	—	$	1,333

Past Due Loans

	(In thousands)														(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		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
June 30, 2021
September 30, 2021
Residential 1-4 family	$	1,264		356		1,022		2,642		570,353		572,995	$	79	$	678		839		187		1,704		632,839		634,543	$	187
Multifamily		—		—		—		—		87,327		87,327		—		—		—		—		—		57,193		57,193		—
Commercial real estate		—		—		—		—		849,320		849,320		—		—		450		—		450		847,716		848,166		—
Construction		1,256		27		—		1,283		560,951		562,234		—		767		66		—		833		577,373		578,206		—
Farmland		10		—		—		10		11,902		11,912		—		—		—		—		—		10,149		10,149		—
Second mortgages		—		—		—		—		7,447		7,447		—		—		42		—		42		7,618		7,660		—
Equity lines of credit		46		—		—		46		82,847		82,893		—		20		—		—		20		88,328		88,348		—
Commercial		3		—		29		32		154,169		154,201		29		63		—		35		98		130,046		130,144		35
Agricultural, installment and other		123		108		58		289		78,589		78,878		58		187		47		61		295		71,538		71,833		61
Total	$	2,702		491		1,109		4,302		2,402,905		2,407,207	$	166	$	1,715		1,444		283		3,442		2,422,800		2,426,242	$	283
December 31, 2020
Residential 1-4 family	$	2,634		511		1,818		4,963		531,031		535,994	$	796	$	2,634		511		1,818		4,963		531,031		535,994	$	796
Multifamily		—		—		—		—		111,646		111,646		—		—		—		—		—		111,646		111,646		—
Commercial real estate		—		—		460		460		837,306		837,766		149		—		—		460		460		837,306		837,766		149
Construction		768		—		44		812		487,814		488,626		44		768		—		44		812		487,814		488,626		44
Farmland		—		—		—		—		15,429		15,429		—		—		—		—		—		15,429		15,429		—
Second mortgages		265		—		—		265		8,168		8,433		—		265		—		—		265		8,168		8,433		—
Equity lines of credit		31		302		—		333		78,556		78,889		—		31		302		—		333		78,556		78,889		—
Commercial		114		104		—		218		172,593		172,811		—		114		104		—		218		172,593		172,811		—
Agricultural, installment and other		363		81		60		504		80,502		81,006		60		363		81		60		504		80,502		81,006		60
Total	$	4,175		998		2,382		7,555		2,323,045		2,330,600	$	1,049	$	4,175		998		2,382		7,555		2,323,045		2,330,600	$	1,049

3839

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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~~Non-performing loans, which included ~~non-accrual~~nonaccrual loans and loans 90 days past due, at ~~June~~September 30, 2021 totaled $~~1,109,000~~283,000, a decrease from $2,382,000 at December 31, 2020. The decrease in non-performing loans during the ~~six~~nine months ended ~~June~~September 30, 2021 of $~~1,273,000~~2,099,000 is due primarily to ~~three~~one nonaccrual residential 1-4 family loan ~~relationships~~relationship that ~~are~~was upgraded due to payment performance, one residential 1-4 family loan relationship that is no longer 90 days past due, the payoff of ~~one~~two residential 1-4 family loan ~~relationship,~~relationships that were 90 days past due at December 31, 2020, the payoff of one nonaccrual commercial real estate loan relationship, and the transfer of one commercial real estate loan relationship to other real estate. 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.

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~~nonaccrual loans, non-performing TDRs and other real estate owned divided by our total assets outstanding. Our NPA ratio for the periods ended ~~June~~September 30, 2021 and December 31, 2020 were ~~0.04%~~0.01% and 0.08%, respectively. The NPA ratio was favorably impacted by the payment deferrals we offered customers in connection with the pandemic, which we did not have to account for as non-performing, and the increase in our total assets as a result of ~~PPP loans~~loan growth (including from the PPP) and the increase in deposits associated with the pandemic.

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 ~~June~~September 30, 2021 the Company had a recorded investment in impaired loans of $~~2,814,000~~677,000 down from $3,377,000 at December 31, 2020. The decrease in impaired loans during the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to December 31, 2020 is primarily due to the payoff of ~~one~~two loan ~~relationship and~~relationships that were impaired, the pay-down and subsequent removal from impaired loans of one loan ~~relationship. O~~relationship, and the upgrade and subsequent removal of one loan relationship based on payment performance. Overal~~verall,~~l, the Company’s market areas have seen continued strengthening in the residential real estate market in recent years while the commercial real estate market has remained steady. The allowance for loan losses related to collateral dependent impaired loans was measured based upon the estimated fair value of related collateral.

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 efforts 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 $~~403,000~~1,608,000 to $~~2,273,000~~1,068,000 from December 31, 2020 to ~~June~~September 30, 2021 due to the payoff of ~~one~~two loan ~~relationship~~relationships that were classified as TDRs and the pay-down of several loan relationships that were classified as TDRs atDecember 31, 2020. The CARES Act and interagency guidance provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for those loans which have been granted deferrals due to the effects of COVID-19. 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 fofor r the ~~six~~nine months ended ~~June~~September 30, 2021 ~~were$107,000~~ were $240,000 as compared to $~~147,000~~84,000 in net recoveries for the s~~ame~~same period in ~~2020.~~2020. Overall, the Bank has experienced minimal charge-offs ~~duri~~during ~~ng 2021.~~2021. It is expected that charge-offs will be modest for the remainder of 2021; however, unanticipated changes in local economic conditions may negatively impact charge-offs in the future.

At ~~June~~September 30, 2021, our internally classified loans~~had decreased~~ increased $~~1,232,000~~198,000, or ~~14.94%~~2.40%, to $~~7,014,000~~8,444,000 from $8,246,000 at December 31, 2020 primarily due to the downgrade of three loan relationships, partially offset by the upgrade of two internally classified loan relationships, the payoff of ~~two~~three internally classified loan relationships, and the transfer of one internally classified loan relationship to other real ~~estate, partially offset by the downgrade of one large loan relationship.~~estate. Classified loan balances have remained relatively consistent due to the ~~stabilization of cash flows from home builders, land developers,~~stable markets in which we operate and ~~commercial real estate borrowers.~~economic stimulus provided in response to 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 result from trends or uncertainties which management expects will materially impact future operating results, liquidity or capital resources.

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 provide relief to those customers, the 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~~navigated the uncertain economic ~~times.~~environment brought on by COVID-19. As of ~~June~~September 30, 2021, the Bank had one loan, totaling ~~$13.9 million~~$246,000 in aggregate principal amount for which both principal ~~was~~and interest were being deferred. As of ~~March~~December 31, ~~2021,~~2020, the Bank had 1113 loans, totaling ~~$51.4~~$36.4 million in aggregate principal amount for which principal or both principal and interest were being deferred. The Bank is monitoring its loan portfolio on a ~~weekly~~monthly basis to determine 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.

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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 in other financial institutions and unpledged investment securities that will mature within one year. At ~~June~~September 30, 2021, the Company’s liquid ~~assets total~~asse~~ed $784.9~~ts totaled $909.6 million up from $627.8 million at December 31, 2020. Additionally, as of ~~June~~September 30, 2021, the Company had available ~~approximatel~~approxima~~y $101.6~~tely $100.4 million in unused federal ff~~ederal funds~~unds lines of credit with regional banks and, subject to certain restrictions and collateral requirements, ~~appr~~app~~oximately $356.4~~roximately $389.4 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 as management seeks to maintain 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 and competitive market conditions.

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 ~~June~~September 30, 2021, 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. 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 experienced in 2020,~~ but for that to occur the Bank will need to reprice its deposits more quickly than it reprices rates it earns on loans. Conversely, a rising rate environment and a liability sensitive balance sheet could have a short-term negative impact on net yield on earning assets, as deposits would likely re-price faster than ~~assets.~~assets and rates would need to rise above those loan floors that we have included in certain of our variable rate loans before we began to see the benefit of rising rates on those loans. Management regularly monitors the deposit rates of the Company’s competitors and these rates continue to put pressure on the Company’s deposit pricing, just as loan pricing pressure from competition within our markets continues to negatively impact loan yields. This pressure could continue to negatively impact the Company’s net yield on earning assets and earnings if short-term rates begin to rise or these competitive pressures limit the Company's ability to further lower deposit ~~rates in a declining rate environment.~~rates. As discussed elsewhere herein, the Bank anticipates that its net yield on earning assets is likely to contract ~~further into~~during the remainder of 2021 because of such competitive pressures in its markets, excess on-balance sheet liquidity and the expected continuation of the historically low short-term interest rate environment we are experiencing.

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 ~~June~~September 30, 2021, 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		(6.43	)%		(4.28	)%		0.80	%		2.27	%		3.52	%		(7.39	)%		(4.69	)%		1.01	%		2.47	%		3.72	%
EVE		(13.28	)%		(9.33	)%		1.64	%		2.26	%		1.81	%		(15.29	)%		(9.09	)%		1.09	%		1.04	%		0.11	%

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

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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, hedging strategies that we may institute, 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.

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, or the need ~~or desire~~ to ~~increase capital and similar economic factors.~~fund loan demand. At ~~June~~September 30, 2021, securities totaling approxim at ely ~~$22,856,000 matur~~$30,271,000 mature or~~e or~~ will be subject to rate adjustments within the next twelve months.

A secondary source of liquidity is the Company’s loan portfolio. At ~~June~~September 30, 2021 , loans totaling approx imately ~~$822,837,000~~$838,066,000 either will become du e or will be subject to rate adjustments within twelve months from that date.

As for liabilities, at ~~June~~September 30, 2021 , certificates of deposit of $250,000 or greater totaling ~~approxima~~approximte ~~ly $95,360,000 wi~~ately $82,999,000 will be~~ll beco~~co me 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.

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, the Coronavirus Relief Act and American Recovery Act all included economic stimulus packages for individuals who met the federal income qualifications in the form of a direct payment as well as funding received by public depositories. At the present time, management does not believe that the COVID-19 pandemic will result in the Company’s liquidity changing in a materially adverse way other than the potential negative impact of the maintenance of higher levels of on-balance sheet liquidity.

Off Balance Sheet Arrangements

At ~~June~~September 30, 2021, we had unfunded loan commitments outstanding of $~~966,700,000~~1,115,285,000 and outstanding standby letters of credit of $~~90,433,000~~84,130,000. 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.

Capital Position and Dividends

At ~~June~~September 30, 2021, total stockholders’ equity waswas $~~395,605,000~~404,429,000, or ~~10.84%~~10.62% of total assets, which compares with $380,121,000, or 11.28% of total ~~assets,~~assets, at December 31, ~~2020.~~2020. The ~~doll~~ardollar increase in ~~stockholders’~~stockholders’ equity during the ~~six~~nine months ended ~~June~~September 30, 2021 is the result of the Company’s net ~~incom~~eincome of $~~22,283,000~~35,625,000, proceeds from the issuance of common stock related to exercise of stock options of $~~321,000,~~573,000, the net effect ofof a ~~$5,673,000~~$8,530,000 unrealized loss onon investment securities net of applicable income taxtax benefit of ~~$2,008,000,~~$3,019,000, cash dividends declared ofof $~~6,596,000~~14,910,000 of which $~~4,902,000~~11,188,000 was reinvested under the Company’s dividend reinvestment plan, and $~~247,000~~362,000 ~~related~~related to stock option compensation.

Impact of Inflation

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

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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 reported market risks during the ~~six~~nine months ended ~~June~~September 30, 2021.

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.

Overall, there were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended ~~June~~September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2020.

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

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)

*		Management compensatory plan or contract.

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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: ~~August 6,~~November 9, 2021		/s/ John C. McDearman III
		John C. McDearman III
		President and Chief Executive Officer

DATE: ~~August 6,~~November 9, 2021		/s/ Lisa Pominski
		Lisa Pominski
		Executive Vice President & Chief Financial Officer

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