wilson bank holding company
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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549__________________________________________________________
FORM 10-K__________________________________________________________
(Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from toCommission 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, Tennessee 37087
(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code:
(615) 444-2265Securities registered pursuant to Section 12(b) of the Act:
NoneSecurities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.00 par value per share (Title of class)
__________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒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 thepreceding 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 past90 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 RegulationS-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, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 revisedfinancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control overfinancial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its auditreport. ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2020, the last business day of the registrant’s most recentlycompleted second fiscal quarter, was approximately $588,929,083.75. For purposes of this calculation, “affiliates” are considered to be the directors and executiveofficers of the registrant. The market value calculation was determined using $56.75 per share.
Shares of common stock, $2.00 par value per share, outstanding on March 12, 2021 were 11,080,433.
DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Documents from which portions are incorporated by referencePart II
Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2020 are incorporated by reference intoItems 1, 5, 6, 7, 7A and 8.
Part III
Portions of the Registrant’s Proxy Statement to be filed relating to the Registrant’s Annual Meeting of Shareholders to be held on April 27,2021 are incorporated by reference into Items 10, 11, 12, 13 and 14.
PART IItem 1. Business. General Wilson Bank Holding Company (the “Company”) was incorporated on March 17, 1992 under the laws of the State of Tennessee. The purpose of the Company wasto acquire all of the issued and outstanding capital stock of Wilson Bank and Trust (the “Bank”) and act as a one-bank holding company. On November 17, 1992,the Company acquired 100% of the capital stock of the Bank pursuant to the terms of an agreement and plan of share exchange. All of the Company’s banking business is conducted through the Bank, a state chartered bank organized under the laws of the State of Tennessee. The Bank, onDecember 31, 2020, had the following full service banking offices located in the following counties:
TennesseeCounty
Number of FullService Banking
OfficesDavidson 3DeKalb 2Putnam 1Rutherford 5Smith 2Sumner 2Trousdale 1Williamson 1Wilson 11Total 28
Management believes that Wilson County, Trousdale County, Davidson County, Rutherford County, DeKalb County, Smith County, Sumner County, PutnamCounty and Williamson County offer an environment for continued banking growth in the Company’s target market, which consists of local consumers,professionals and small businesses. The Bank offers a wide range of banking services, including checking, savings, and money market deposit accounts, certificatesof deposit and loans for consumer, commercial and real estate purposes. The Bank also offers custodial, trust and discount brokerage services to its customers. TheBank does not have a concentration of deposits obtained from a single person or entity or a small group of persons or entities, the loss of which would have amaterial adverse effect on the business of the Bank. The Bank was organized in 1987 to provide Wilson County with a locally-owned, locally-managed commercial bank. Since its opening, the Bank has experienceda steady growth in deposits and loans, while expanding into other counties in and around middle Tennessee as a result of providing personal, service-orientedbanking services to its targeted market. For the year ended December 31, 2020, the Company reported net earnings of approximately $38.492 million and atDecember 31, 2020 it had total assets of approximately $3.370 billion. COVID-19 Pandemic In March 2020, the outbreak of the novel Coronavirus Disease 2019 (“COVID-19”) was recognized as a pandemic by the World Health Organization. The spread ofCOVID-19 in 2020 created a global public health crisis that resulted in uncertainty, volatility and deterioration in financial markets and in governmental,commercial and consumer activity including in the United States, where we conduct all of our activity. From the temporary closure of many of our lobbies and anincreased reliance on associates working and serving clients remotely, to the Federal Reserve lowering short-term interest rates late in the first quarter of 2021 tonear historic lows and the United States government approving unprecedented levels of economic stimulus and relief programs, including the Coronavirus Aid,Relief and Economic Security Act (“CARES Act”) and its Paycheck Protection Program (“PPP”), we were forced to take a number of unprecedented actions in2020. 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 March2020 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 programto provide a six-month interest only payment option in an effort to provide flexibility to our customers as they navigate these uncertain times. Pursuant tointeragency 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 earlierof (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency as troubled debt restructurings. In 2020, we also expended significant resources and energy to extend loans to new and existing customers pursuant to the PPP, a CARES Act program designed toaid small- and medium-sized businesses, sole proprietors and other self-employed persons through federally guaranteed loans distributed through banks. Theseloans were intended to guarantee eight to 24 weeks of payroll and other costs to provide support to participating businesses and increase the ability of thesebusinesses to retain workers. The Company funded $85.6 million of PPP loans to our small business and other eligible customers, $62.4 million of which remainedoutstanding as of December 31, 2020. 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 is currently acceptingapplications from eligible small businesses, some of which may be requesting their second round of PPP assistance. In connection with our initial response to COVID-19 the Company and the Bank took deliberate actions to ensure that we had the balance sheet strength to serveour clients and communities, including maintaining increased liquidity and reserves supported by a strong capital position. Our business and consumer customersare continuing to experience varying degrees of financial distress, which is expected to continue in 2021. For more information regarding the impact of the COVID-19 pandemic on our financial condition and results of operations as of and for the fiscal year ended
December 31, 2020 see “Risk Factors – Risks Related to Our Business – COVID-19 Risks” elsewhere in this report and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Impact of COVID-19” contained in the Company’s Annual Report to Shareholders for the year ended December31, 2020, filed as Exhibit 13.1 to this Form 10-K (the “2020 Annual Report”). Financial and Statistical Information The Company’s audited consolidated financial statements, selected financial data and Management’s Discussion and Analysis of Financial Condition and Results ofOperations contained in the 2020 Annual Report, are incorporated herein by reference.
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Regulation and Supervision The banking industry is generally subject to extensive regulatory oversight. Both the Company and the Bank are subject to extensive state and federal banking lawsand regulations that impose restrictions on and provide for general regulatory oversight of the Company’s and the Bank’s operations. These laws and regulations aregenerally intended to protect depositors and borrowers, and may not necessarily protect shareholders. Many of these laws and regulations have undergonesignificant change in recent years. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act and theregulations promulgated thereunder implements far-reaching reforms of major elements of the financial landscape, particularly for larger financial institutions.Many of its most far-reaching provisions do not directly apply to community-based institutions like the Company or the Bank. For instance, provisions that regulatederivative transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, imposenew regulatory authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital forinstitutions with greater than $15.0 billion in total assets are among the provisions that do not directly impact the Company or the Bank either because ofexemptions for institutions below a certain asset size or because of the nature their operations. Failure to comply with the requirements of the Dodd-Frank Act would negatively impact the Company’s results of operations and financial condition and couldlimit its growth or expansion activities. While the Company cannot predict what effect any presently contemplated or future changes in the laws or regulations ortheir interpretations would have on it or the Bank, such changes could be materially adverse to the Company’s investors. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “BHC Act”) and is registered with the Board ofGovernors of the Federal Reserve System (the “FRB”). The Company is required to file annual reports and other information regarding its business operations andthose of its bank subsidiary with, and is subject to examination by, the FRB. The Bank is chartered under the laws of the State of Tennessee and is subject to thesupervision of, and is regularly examined by, the Tennessee Department of Financial Institutions (the “TDFI”). The Bank is also regularly examined by the FederalDeposit Insurance Corporation (“FDIC”), the government entity that insures the Bank’s deposits subject to applicable limitations. Under the BHC Act, a bank holding company may not directly or indirectly acquire ownership or control of more than five percent of the voting shares orsubstantially all of the assets of any company, including a bank, without the prior approval of the FRB unless the bank holding company already owns a majority ofsuch company. In addition, bank holding companies are generally prohibited under the BHC Act from engaging directly or indirectly in activities other than thoseof banking or managing or controlling banks, or furnishing services to their subsidiaries, subject to certain exceptions and the modernization of the financialservices industry in connection with the passing of the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”). The GLB Act amended the BHC Act and expanded theactivities in which bank holding companies and affiliates of banks are permitted to engage. Under the BHC Act, as amended by the GLB Act, the FRB is authorizedto approve the ownership by a bank holding company of shares of any company whose activities have been determined by the FRB to be so closely related tobanking or to managing or controlling banks as to be a proper incident thereto. Subject to various exceptions, the Federal Change in Bank Control Act, together with related regulations, require FRB approval prior to any person or companyacquiring "control" of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of votingsecurities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class ofvoting securities and either: • The bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or • No other person owns a greater percentage of that class of voting securities immediately after the transaction. The Company’s common stock is registered under Section 12 of the Securities Exchange Act of 1934. The regulations provide a procedure for challenge of therebuttable control presumption. Under the GLB Act, a “financial holding company” may engage in activities the FRB determines to be financial in nature or incidental to such financial activity orcomplementary to a financial activity and not a substantial risk to the safety and soundness of such depository institutions or the financial system generally.Generally, such companies may engage in a wide range of securities activities and insurance underwriting and agency activities. The Company has not madeapplication to the FRB to become a “financial holding company.” Under the BHC Act, a bank holding company, which has not qualified or elected to become a financial holding company, is generally prohibited from engaging inor acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities unless, prior to the enactment of theGLB Act, the FRB found those activities to be so closely related to banking as to be a proper incident to the business of banking. Activities that the FRB has foundto be so closely related to banking as to be a proper incident to the business of banking include: • Factoring accounts receivable; • Acquiring or servicing loans; • Leasing personal property; • Conducting discount securities brokerage activities; • Performing selected data processing services; • Acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and • Underwriting certain insurance risks of the holding company and its subsidiaries. Despite prior approval, the FRB may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control ofany subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to thefinancial safety, soundness, or stability of any of its bank subsidiaries.
Under the Tennessee Bank Structure Act, a bank holding company which controls 30% or more of the total deposits (excluding certain deposits) in all federallyinsured financial institutions in Tennessee is prohibited from acquiring any bank in Tennessee. With prior regulatory approval, Tennessee law permits banks basedin the state to either establish new or acquire existing branch offices throughout Tennessee. As a result of the Dodd-Frank Act, the Bank and other state-chartered ornational banks generally may establish new branches in another state to the same extent as banks chartered in the other state may establish new branches in thatstate.
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The Company and the Bank are subject to certain restrictions imposed by the Federal Reserve Act and the Federal Deposit Insurance Act, respectively, on anyextensions of credit to the bank holding company or its subsidiary bank, on investments in the stock or other securities of the bank holding company or itssubsidiary bank, and on taking such stock or other securities as collateral for loans of any borrower. The Bank takes Company common stock as collateral forborrowings subject to the aforementioned restrictions. Both the Company and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of: • A bank’s loans or extensions of credit, including purchases of assets subject to an agreement to repurchase, to or for the benefit of affiliates; • A bank’s investment in affiliates; • Assets a bank may purchase from affiliates, except for real and personal property exempted by the FRB; • The amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; • Transactions involving the borrowing or lending of securities and any derivative transaction that results in credit exposure to an affiliate; and • A bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate. The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specifiedcollateral requirements. The Bank must also comply with other provisions designed to avoid the taking of low-quality assets. The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution fromengaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or itssubsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal stockholders and their related interests. These extensionsof credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions withthird parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features. The FRB has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The FRB has issued a policystatement expressing its view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficientto cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.As noted below, FRB regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if a bank holding company’s capital is belowthe level of regulatory minimums plus the applicable capital conservation buffer. FRB policy also provides that a bank holding company should inform the FRBreasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a materialadverse change to the bank holding company's capital structure. The Company is a legal entity separate and distinct from the Bank. Over time, the principal source of the Company’s cash flow, including cash flow to paydividends to the Company’s common stock shareholders, will be dividends that the Bank pays to the Company as its sole shareholder. Under Tennessee law, theCompany is not permitted to pay dividends if, after giving effect to such payment, the Company would not be able to pay its debts as they become due in the normalcourse of business or the Company’s total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if theCompany were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, the Company’s board of directors must consider theCompany’s current and prospective capital, liquidity, and other needs. Statutory and regulatory limitations also apply to the Bank’s payment of dividends to the Company. Under Tennessee law, the Bank in any one calendar year canonly pay dividends to the Company in an amount equal to or less than the total amount of its net income for that calendar year combined with retained net incomefor the preceding two years. Payment of dividends in excess of this amount requires the consent of the Commissioner of the TDFI. The payment of dividends by the Bank and the Company may also be affected by other factors, such as the requirement to maintain adequate capital aboveregulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate levelwould be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institutionmay not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Under the Dodd-Frank Act, and previously under FRB policy, the Company is required to act as a source of financial strength for the Bank and to commit resourcesto support the Bank. This support can be required at times when it would not be in the best interest of the Company’s shareholders or creditors to provide it. Further,if the Bank’s capital levels were to fall below certain minimum regulatory guidelines, the Bank would need to develop a capital plan to increase its capital levelsand the Company would be required to guarantee the Bank’s compliance with the capital plan in order for such plan to be accepted by the federal regulatory agency.In the event of bankruptcy, any commitment by the Company to a federal regulatory agency to maintain the capital of the Bank would be assumed by thebankruptcy trustee and entitled to a priority of payment. Both the Company and the Bank are required to comply with the capital adequacy standards established by the FRB, in the Company’s case, and the FDIC, in thecase of the Bank. The FRB has established a risk-based and a leverage measure of capital adequacy for bank holding companies, like the Company. The Bank isalso subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the FRB for bank holdingcompanies. In addition, the FDIC and TDFI may require state banks that are not members of the FRB, like the Bank, to maintain capital at levels higher than thoserequired by general regulatory requirements. Tennessee state banks are required to have the capital structure that the TDFI deems adequate, and the Commissionerof the TDFI as well as federal regulators may require a state bank (or its holding company in the case of federal regulators) to increase its capital levels to the pointdeemed adequate by the Commissioner or such other federal regulator before granting approval of a branch application, merger application or charter amendment. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holdingcompanies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of
credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as apercentage of total risk-weighted assets and off-balance-sheet items.
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In July 2013, the FRB and the FDIC approved final rules that substantially amended the regulatory capital rules applicable to the Bank and the Company, effectiveJanuary 1, 2015. The final rules implemented the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in "Basel III: A GlobalRegulatory Framework for More Resilient Banks and Banking Systems" (Basel III) and changes required by the Dodd-Frank Act. Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insureddepository institutions. The final capital rules implementing Basel III, among other things, included new minimum risk-based capital and leverage ratios for banksand their holding companies. Moreover, these rules refined the definition of what constitutes “capital” for purposes of calculating those ratios, including thedefinitions of Tier 1 capital and Tier 2 capital. Total capital consists of two components, Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists ofcommon stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatorydeductions. Cumulative preferred stock and trust preferred securities issued after May 19, 2010 no longer qualify as Tier 1 capital, but such securities issued prior toMay 19, 2010, including in the case of bank holding companies with less than $15.0 billion in total assets as of December 31, 2009, trust preferred securities issuedprior to that date, continue to count as Tier 1 capital subject to certain limitations. Tier 2 capital generally consists of perpetual preferred stock and related surplusnot meeting the Tier 1 capital definition, qualifying subordinated debt, qualifying mandatorily convertible debt securities, and a limited amount of loan lossreserves. The minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a Tier 1 common equity (“CET1”) capital ratioof 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also established a"capital conservation buffer" of 2.5% (consisting of CET1 capital) above the regulatory minimum capital ratios, and have resulted in the following minimum ratios:(i) a CET1 capital ratio of 7%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The phase-in of the capital conservation buffer requirementwas fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionarybonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income thatcould be utilized for such actions. Under the Basel III capital rules, CET1 capital consists of common stock and paid in capital and retained earnings. CET1 capital is reduced by goodwill, certainintangible assets, net of associated deferred tax liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuationallowance, and certain other items specified in the Basel III capital rules. The Basel III capital rules also provide for a number of deductions from and adjustmentsto CET1 capital. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not berealized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 capital to the extent thatany one such category exceeds 10% of CET1 capital or all such categories in the aggregate exceed 15% of CET1 capital. The final rules implementing Basel III allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of arequirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank each optedout of this requirement. Additionally, the FDICIA establishes a system of prompt corrective action ("PCA") to resolve the problems of undercapitalized financial institutions. Under thissystem, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantlyundercapitalized and critically undercapitalized) into one of which all institutions are categorized. Federal banking regulators are required to take various mandatorysupervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of theaction depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiveror conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for eachcategory (excluding the Basel III capital conservation buffer amounts), as set forth in the following table:
CET1 capital
ratio
Total risk-based capital
ratio
Tier 1 risk-based
capital ratio
Tier 1leverage
ratioWell capitalized 6.5% 10% 8% 5%Adequately capitalized 4.5% 8% 6% 4%Undercapitalized < 4.5% < 8% < 6% < 4%Significantlyundercapitalized < 3% < 6% < 4% < 3%Criticallyundercapitalized Tangible Equity/Total Assets ≤ 2%
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a depository institution or its holding company by itsregulators could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of depositinsurance 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,limitations on the ability to hire senior executive officers or add directors without prior approval and other restrictions on its business. As described above,significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements. A state regulated bank which is not a member of the Federal Reserve, like the Bank, is required to be “well-capitalized" under PCA in order to take advantage ofexpedited procedures on certain applications, such as branches and mergers, and to accept and renew brokered deposits without further regulatory approval. The Basel III capital rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I-derived categories(0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% forU.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specific changesto the rules impacting the Company’s and the Bank’s determination of risk-weighted assets include, among other things:
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• applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction
loans; • assigning a 150% risk weight to the unsecured portion of non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status; • providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not
unconditionally cancellable (previously set at 0%); • providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of
the underlying collateral securing the transaction; and • eliminating the 50% cap on the risk weight for OTC derivatives. In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred to as “Basel IV.” The BaselCommittee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of risk-weighted assets (“RWA”), whichwill be accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will facilitate thecomparability of banks’ capital ratios; constraining the use of internally modeled approaches; and complementing the risk-weighted capital ratio with a finalizedleverage ratio and a revised and robust capital floor. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregateoutput floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only toadvanced approaches institutions, and not to the Company or the Bank. The impact of Basel IV on us will depend on the manner in which it is implemented by thefederal bank regulators to institutions of our size and risk profile. 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 “GrowthAct”). The Growth Act, among other things, required the federal banking agencies to issue regulations allowing community bank organizations with total assets ofless than $10.0 billion and limited amounts of certain assets and off-balance sheet exposures to access a simpler capital regime focused on a bank’s Tier 1 leveragecapital 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 that, as of January 1, 2020, exempt from the risk-based and leverage capital requirements of thecapital rules issued under the Dodd-Frank Act any qualifying community bank and its holding company that have leverage ratios, calculated as Tier 1 capital overaverage total consolidated assets (the “Community Bank Leverage Ratio”), of greater than 9 percent and hold 25% or less of total assets in off-balance sheetexposures and 5% or less of total assets in trading assets and liabilities. As such, a qualifying community banking organization and its holding company that havechosen the proposed framework are no longer required to calculate the generally applicable risk-based and leverage capital requirements. Such a bank is alsoconsidered to have met the capital ratio requirements to be well capitalized for the agencies' PCA rules provided it has a community bank leverage ratio greater than9 percent. The final rules also established a grace period of two fiscal quarters during which a qualifying financial institution that temporarily failed to meet any ofthe qualifying criteria for use of the Community Bank Leverage Ratio would nonetheless be considered well capitalized so long as the institution maintained aCommunity Bank Leverage Ratio of greater than 7%. 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 theend of the national emergency declared with respect to COVID-19. A banking organization that temporarily failed to meet this, or any other requirement necessaryto qualify to utilize the Community Bank Leverage Ratio, would still be considered well capitalized so long as it maintained a Community Bank Leverage Ratio ofat least 7%. The Company opted to take advantage of this rule effective January 1, 2020. As a result, the capital conservation buffer applicable under the Basel IIIcapital guidelines was not applicable to the Company or the Bank as of December 31, 2020. 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. The Company and the Bank may subsequently opt out of utilizing the Community Bank Leverage Ratio and again calculate their capital ratios underthose ratios that the Company and the Bank utilized prior to January 1, 2020. The Growth Act also raised the eligibility for the small bank holding company policy statement to $3 billion of assets from $1 billion. Pursuant to the CARES Act, lenders, like the Bank, were given the option to defer the implementation of ASU 2016-13, “Financial Instruments – Credit Losses(Topic 326): Measurement of Credit Losses on Financial Instruments” (“CECL”) until 60 days after the declaration of the end of the public health emergencyrelated to the COVID19 pandemic or December 31, 2020, whichever came first. The Coronavirus Relief Act subsequently gave lenders the option to further deferthe implementation of CECL until January 1, 2022. In addition, the Securities and Exchange Commission (“SEC”) staff has stated that opting to delay theimplementation of CECL shall be considered to be in accordance with generally accepted accounting principles. As a result, the Bank has elected to delayimplementation of CECL until January 1, 2022. In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes tocredit loss accounting under U.S. generally accepted accounting principles (“GAAP”). The 2019 CECL Rule included a transition option that allows bankingorganizations to phase in, over a three-year period, the day-one adverse effects of adopting a new accounting standard related to the measurement of CECL on theirregulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-yeartransition option of the 2019 CECL Rule following the adoption of CECL. If adopted, the cumulative amount of transition adjustments will become fixed at the startof 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 inyear two, and 25% recognized in year three. The Company has not yet decided if it will take advantage of this option. Banking organizations must have appropriate capital planning processes, with proper oversight from the board of directors. Accordingly, pursuant to a separate,general supervisory letter from the FRB, bank holding companies are expected to conduct and document comprehensive capital adequacy analyses prior to thedeclaration of any dividends (on common stock, preferred stock, trust preferred securities or other Tier 1 capital instruments), capital redemptions or capitalrepurchases. Moreover, the federal banking agencies have adopted a joint agency policy statement, noting that the adequacy and effectiveness of a bank’s interestrate risk management process and the level of its interest rate exposures are critical factors in the evaluation of the bank’s capital adequacy. A bank with materialweaknesses in its interest rate risk management process or high levels of interest rate exposure relative to its capital will be directed by the relevant federal banking
agencies to take corrective actions. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories andconcentrations of assets and liabilities. Under the Dodd-Frank Act, the FDIC adopted regulations that base deposit insurance assessments on total assets less capitalrather than deposit liabilities and include off-balance sheet liabilities of institutions and their affiliates in risk-based assessments. The Dodd-Frank Act increased the basic limit on federal deposit insurance coverage to $250,000 per depositor at each insured depository institution. The Dodd-Frank Act also repealed the prohibition on paying interest on demand transaction accounts, but did not extend unlimited insurance protection for these accounts.
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The FDIC may terminate its insurance of deposits if it finds that a depository institution has engaged in unsafe and unsound practices, is in an unsafe or unsoundcondition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Financial Reform, Recovery and Enforcement Act of 1989 provides that a holding company’s controlled insured depository institutions are liable for any lossincurred by the FDIC in connection with the default of, or any FDIC-assisted transaction involving, an affiliated insured bank or savings association. The maximum permissible rates of interest on most commercial and consumer loans made by the Bank are governed by Tennessee’s general usury law and theTennessee Industrial Loan and Thrift Companies Act (“Industrial Loan Act”). Certain other usury laws affect limited classes of loans, but the Company believesthat the laws referenced above are the most significant. Tennessee’s general usury law authorizes a floating rate of 4% per annum over the average prime or basecommercial loan rate, as published by the FRB from time to time, subject to an absolute 24% per annum limit. The Industrial Loan Act, which is generallyapplicable to most of the loans made by the Bank in Tennessee, authorizes an interest rate of up to 24% per annum and also allows certain loan charges, generallyon a more liberal basis than does the general usury law. The Bank's loan operations are also subject to federal laws, rules and regulations applicable to credit transactions, such as the: • Federal Truth-In-Lending Act, governing disclosures of credit terms and costs to consumer borrowers giving consumers the right to cancel certain credit
transactions, and defining requirements for servicing consumer loans secured by a dwelling; • Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine
whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; • Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; • Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies; • Service Members' Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons in active military
service; • Rules and regulations of the various federal agencies charged with the responsibility of implementing the federal laws; • Electronic Funds Transfer Act, which regulates fees and other terms of electronic funds transactions; • Fair and Accurate Credit Transactions Act of 2003, which permanently extended the national credit reporting standards of the Fair Credit Reporting Act,
and permits consumers, including the Bank’s customers, to opt out of information sharing among affiliated companies for marketing purposes andrequires financial institutions, including banks, to notify a customer if the institution provides negative information about the customer to a nationalcredit reporting agency or if the credit that is granted to the customer is on less favorable terms than those generally available; and
• the Real Estate Settlement and Procedures Act of 1974, which affords consumers greater protection pertaining to federally related mortgage loans byrequiring, among other things, improved and streamlined good faith estimate forms including clear summary information and improved disclosure ofyield spread premiums.
The Bank’s deposit operations are subject to the: • Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying
with administrative subpoenas of financial records; • Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and
withdrawals from deposit accounts and customers' rights and liabilities (including with respect to the permissibility of overdraft charges) arising fromthe use of automated teller machines and other electronic banking services;
• the Truth in Savings Act, which requires depository institutions to disclose the terms of deposit accounts to consumers; • the Expedited Funds Availability Act, which requires financial institutions to make deposited funds available according to specified time schedules and
to disclose funds availability policies to consumers; and • the Check Clearing for the 21st Century Act (“Check 21”), which is designed to foster innovation in the payments system and to enhance its efficiency
by reducing some of the legal impediments to check truncation. Check 21 created a new negotiable instrument called a substitute check and permits, butdoes not require, banks to truncate original checks, process check information electronically, and deliver substitute checks to banks that wish to continuereceiving paper checks.
The Office of Foreign Assets Control (“OFAC”), which is an office in the U.S. Department of the Treasury, is responsible for helping to ensure that U.S. entities donot engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of names ofpersons and organizations suspected of aiding, harboring or engaging in terrorist acts; owned or controlled by, or acting on behalf of target countries, and narcoticstraffickers. If a bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze or block the transactions on the account. TheBank has appointed a compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFACareas such as new accounts, wire transfers and customer files. These checks are performed using software that is updated each time a modification is made to thelists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons. Failure to comply with these sanctions could have seriousfinancial, legal and reputational consequences. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found tobe violating these obligations. Pursuant to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”),as amended, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and"know your customer" standards in their dealings with foreign financial institutions and foreign customers.
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A major focus of governmental policy on financial institutions has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act (the"BSA") and its implementing regulations and parallel requirements of the federal banking regulators require the Bank to maintain a risk-based anti-moneylaundering (“AML”) program reasonably designed to prevent and detect money laundering and terrorist financing and to comply with the recordkeeping andreporting requirements of the BSA, including the requirement to report suspicious activity. The Patriot Act substantially broadened the scope of AML laws andregulations by imposing significant new compliance and due diligence obligations on financial institutions, creating new crimes and penalties and expanding theextra-territorial jurisdiction of the United States. Financial institutions, including banks, are required under final rules implementing Section 326 of the Patriot Actto establish procedures for collecting standard information from customers opening new accounts and verifying the identity of these new account holders within areasonable period of time. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must takecertain steps to assist government agencies in detecting and preventing money laundering and to report certain types of suspicious transactions. In May 2016,Treasury’s Financial Crimes Enforcement Network issued rules under the BSA requiring financial institutions to identify the beneficial owners who own or controlcertain legal entity customers at the time an account is opened and to update their AML compliance programs to include risk-based procedures for conductingongoing customer due diligence. In January 2021, the Anti-Money Laundering Act of 2020 (“AMLA”), which amends the BSA, was enacted as part of the NationalDefense Authorization Act for Fiscal Year 2021. Among other things, the AMLA codifies a risk-based approach to anti-money laundering compliance for financialinstitutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; and expands enforcement andinvestigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.The Bank currently has policies and procedures in place designed to comply with the Patriot Act, the BSA and the other regulations targeting terrorism and moneylaundering, and it will modify these policies and procedures as necessary to comply with the changes reflected in the AMLA and its future implementingregulations. The Community Reinvestment Act of 1977 (the “CRA”) requires that, in connection with examinations of financial institutions within their respective jurisdictions,the FRB and the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local communities, including low- and moderate-income neighborhoods consistent with safe and sound operations of the institutions. These facts are also considered in evaluating mergers, acquisitions, andapplications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Additionally,banks are required to publicly disclose the terms of various CRA-related agreements. The Bank received a “satisfactory” CRA rating from its primary federalregulator on its most recent regulatory examination. In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would significantly change existing CRAregulations. The proposed rules are intended to increase bank activity in low- and moderate-income communities where there is significant need for credit, moreresponsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying whatactivities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRAperformance; and (iv) revising CRA-related data collection, record keeping, and reporting. However, the FRB did not join in that proposed rulemaking. In May2020, the OCC issued its final CRA rule, effective October 1, 2020. The FDIC has not finalized the revisions to its proposed CRA rule. In September 2020, the FRBissued an Advance Notice of Proposed Rulemaking (“ANPR”) that invites public comment on an approach to modernize the regulations that implement the CRA bystrengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA. The ANPR seeks feedback onways to evaluate how banks meet the needs of low- and moderate-income communities and address inequities in credit access. As such, the Company will continueto evaluate the impact of any changes to the regulations implementing the CRA and their impact to the Company’s financial condition, results of operations, and/orliquidity, which cannot be predicted at this time. The Bank is also subject to fair lending requirements and reporting obligations involving its home mortgage lending operations. Fair lending laws prohibitdiscrimination in the provision of banking services, and bank regulators have increasingly focused on the enforcement of these laws. Fair lending laws include theEqual Credit Opportunity Act of 1974 and the Fair Housing Act of 1968, which prohibit discrimination in credit and residential real estate transactions on the basisof prohibited factors including, among others, race, color, national origin, gender and religion. The Bank may be liable, either through administrative enforcementor private civil actions, for policies that result in a disparate treatment of or have a disparate impact on a protected class of applicants or borrowers. If a pattern orpractice of lending discrimination is alleged by a regulator, then that agency may refer the matter to the U.S. Department of Justice (“DOJ”) for investigation.Pursuant to a Memorandum of Understanding, the DOJ and (“ the CFPB”) have agreed to share information, coordinate investigations and generally commit tostrengthen their coordination efforts. The Bank is required to have a fair lending program that is of sufficient scope to monitor the inherent fair lending risk of theinstitution and that appropriately remediates issues which are identified. State and federal banking regulators have issued various policy statements and, in some cases, regulations, emphasizing the importance of technology riskmanagement and supervision. For example, in December 2020, the federal banking agencies issued a Notice of Proposed Rulemaking that would require bankingorganizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” or a “notification incident.” This Notice ofProposed Rulemaking and earlier policy statements and regulations indicate that financial institutions should design multiple layers of security controls to establishlines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measuresto reliably authenticate customers accessing internet-based services of the financial institution. A financial institution’s management is expected to maintainsufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attackinvolving destructive malware. A financial institution is expected to develop appropriate processes to enable recovery of data and business operations and addressrebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. Federal statutes and regulations, including the GLB Act and the Right to Financial Privacy Act of 1978, limit the Company’s and the Bank’s ability to disclose non-public information about consumers, customers and employees to nonaffiliated third parties. Specifically, the GLB Act requires disclosure of the Company’sprivacy policies and practices relating to sharing non-public information and enables retail customers to opt out of the institution’s ability to share information withunaffiliated third parties under certain circumstances. The GLB Act also requires the Company and the Bank to implement a comprehensive information securityprogram that includes administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information and, ifapplicable state law is more protective of customer privacy than the GLB Act, financial institutions, including the Bank, will be required to comply with such statelaw. An increasing number of state laws and regulations have been enacted in recent years to implement privacy and cybersecurity standards and regulations,including data breach notification and data privacy requirements. This trend of state-level activity is expected to continue to expand, requiring continual monitoringof developments in the states in which our customers are located and ongoing investments in our information systems and compliance capabilities.
Other laws and regulations impact the Company’s and the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Inconnection with the regulations governing the privacy of consumer financial information, the federal banking agencies, including the FDIC, have adoptedguidelines for establishing information security standards and programs to protect such information. In addition, the Bank has established a privacy policy that itbelieves promotes compliance with the federal requirements.
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Examination and enforcement by the state and federal banking agencies, including the CFPB, and other such enforcement authorities, for non-compliance withconsumer protection laws and their implementing regulations have increased and become more intense. Due to these heightened regulatory concerns, includingincreased enforcement of the CRA by the federal banking agencies, and the powers and authority of the CFPB, the Bank may incur additional compliance costs orbe required to expend additional funds for investments in its local community. The Company’s securities are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, the Company is subject to theinformation, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions of the Exchange Act. As a public company, theCompany is also subject to the accounting oversight and corporate governance requirements of the Sarbanes-Oxley Act of 2002, including, among other things,required executive certification of financial presentations, increased requirements for board audit committees and their members, and enhanced requirementsrelating to disclosure controls and procedures and internal control over financial reporting. New regulations and statutes are regularly proposed that contain wide-ranging provisions for altering the structures, regulations and competitive relationships of thenation’s financial institutions. The Company cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which theCompany’s business may be affected by any new regulation or statute or change in applicable rules or regulations. Even if modifications are enacted to existing orproposed regulations, including raising certain assets thresholds above those currently in place, the Company may continue to face enhanced scrutiny from itsregulators who may expect it to continue to comply with the current, more stringent requirements as part of their safety and soundness and compliance examinationsand general oversight of the Company’s operations. Competition The banking business is highly competitive. The Company’s primary market areas consist of Wilson, Trousdale, Davidson, Rutherford, DeKalb, Smith, Sumner,Putnam and Williamson Counties in Tennessee. The Company competes with numerous commercial banks and savings institutions with offices in these marketareas. In addition to these competitors, the Company competes for loans with insurance companies, regulated small loan companies, credit unions, and certaingovernment agencies. The Company also competes with numerous companies and financial institutions engaged in similar lines of business, such as mortgagebanking companies, brokerage companies and non-bank lending companies. Also, technology has lowered barriers to entry and made it possible for nonbanks tooffer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our non-bank competitors havefewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and,as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Bank can. Continued consolidationin the financial services industry, due in part to the regulatory changes made under the Growth Act, including the increased asset threshold for required stresstesting, has contributed to increases in the number of large competitors we face in our markets. Some of the Company’s competitors have significantly greaterfinancial resources and offer a greater number of branch locations. To offset this advantage of its larger competitors, the Company believes it can attract customersby providing loan and management decisions at the local level and by being more responsive to customers than some of its larger competitors. The Company doesnot experience significant seasonal trends in its operations. Monetary Policies The results of operations of the Bank and the Company are affected by the policies of the regulatory authorities, particularly the FRB. An important function of theFRB is to regulate the national supply of bank credit in order to combat recession and curb inflation. Among the instruments used to attain these objectives are openmarket operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements relating to member bankdeposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their usemay also affect interest rates charged on loans and paid for deposits. Policies of the regulatory agencies have had a significant effect on the operating results ofcommercial banks in the past and are expected to do so in the future. The effect of such policies upon the future business and results of operations of the Companyand the Bank cannot be predicted with accuracy. Human Capital As of March 12, 2021, the Company and the Bank collectively employed 522 full-time equivalent employees. As an independent, community-based bank, the Bankstrives to provide friendly, professional, personal service from a caring staff, while offering an extensive assortment of financial services to its customers. As such,the Bank’s employees are central to the successful execution of its business strategy. The Bank strives to recruit and attract employees and future leaders whose skills and experience advance the mission of the Bank. The Bank's Human ResourcesDepartment works closely with its Training Department, managers and mentors to ensure a positive start for new employees. With regard to talent development, theBank works to identify future leaders within the Bank to develop the skills necessary for career growth. The Bank is committed to professional developmentthrough internal and external training programs, mentorships and dedicated leadership workshops. In 2020, an employee engagement survey was conducted with aresponse rate of 94%. The survey resulted in an employee engagement score of 80% and an employee satisfaction rate of 87%. Although these are consideredstrong scores by industry observers, the Bank continually works to improve the employee experience. Additionally, the Human Resources Department focuses onstrong hiring practices in order to create and maintain a qualified, diverse and inclusive workforce with strong retention rates. In 2020, the Bank's retention rate was86%. The health and safety of the Bank’s employees has been and continues to be a top priority. Throughout the COVID-19 pandemic, the Bank has been intentionalabout ensuring compliance with all federal, state, and local recommendations related to the pandemic, in addition to taking further precautionary measures. In earlyMarch 2020, the Bank created a COVID-19 team consisting of executive management, facilities, technology and human resources. The COVID-19 team closelymonitors infection rates nationwide, statewide and within the Bank’s market areas in order to respond appropriately to changes in the virus situation. In April 2020,the Governor of Tennessee declared a health emergency and issued an order to close all nonessential businesses until further notice. As a financial institution, theBank was deemed to be an essential business and accordingly, its operations were sustained. Nonetheless, out of concerns for the Bank’s employees and customers,branch operations were temporarily limited to drive through access and in-person appointments only. To the extent possible, a portion of the Bank’s staff wasmoved to remote working locations and video and teleconferencing practices were established. Starting in late May 2020, the Governor of Tennessee and mayorsand county executives of the communities in which the Bank operates issued procedures to begin a phased reopening for nonessential businesses. As a part of this
reopening, the Bank transitioned branch operations back to normal procedures with additional precautions intended to protect the health of our employees andcustomers. During the reopening phase, physical barriers were added for front-line staff, social distancing signage was added to lobbies and masks andsanitizing/disinfecting products were provided for all employees. Regular email communication from the CEO encourages employees to follow all safety protocols(hand washing, mask wearing, diligent disinfecting procedures and social distancing) while at work and at home. Human Resources is designated as the centralcontact for all COVID-related questions and employees are instructed to contact HR with questions/concerns. Employees impacted by the virus are allowedadditional bank-paid days to offset the impact of quarantine/isolation or testing timeframes.
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In addition to the substantial investments in employee professional development and safety, the Bank’s benefits and compensation programs are designed to ensureit recruits and retains top talent. The Bank offers employees a comprehensive health benefits package, provides a 401(k) match of $0.50 on the dollar up to 8% of anemployee's contributions to encourage retirement savings, and structures its bonus program for officers to create meaningful performance-based incentives. TheBank believes that these programs, combined with an intentional focus to create a positive, values-based culture will help to ensure that the Bank retains its status asa leading community bank in the markets that it serves. Serving the needs of all of the members of the Company’s communities also remains a vital part of the Company’s mission. Besides continuing its annualdonations, fundraising and sponsorships in 2020, the Company’s departments and employees were able to support local nonprofit organizations of their choosingthrough the We Believe Together giving program – including hundreds of hands-on volunteer hours with the recipient organizations that could permit them. TheBank created the We Believe Together Program in 2017 as a way for employees to contribute work hours and earn matching contribution funds from the Bank forlocal charities. Following the tornadoes that struck Middle Tennessee in March 2020, employees were also permitted to commit works hours to tornado-reliefefforts. The Bank also actively participates in the School Bank Program which allows elementary students to become familiar with banking at a young age. TheCompany also sponsors popular community events in its market areas, including the annual Southern Home & Garden Expo and the Wilson County Fair. Information about our Executive Officers The following information regarding the Company’s executive officers is included in Part I of this report in lieu of being included in the Company’s definitiveproxy materials to be filed in connection with the Company’s 2021 Annual Meeting of Shareholders (the “2021 Annual Meeting of Shareholders”).
John McDearman (51) – Mr. McDearman is President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank. Mr.McDearman joined the Bank in November of 1998. He has held positions in branch administration and commercial lending. From November 2002 toJanuary 2009, he held the position of Senior Vice President-Central Division of the Bank. From January 2009 to January 2018, he served as ExecutiveVice President of the Bank and from January 2018 to January 1, 2020, he served as President of the Bank. Prior to joining the Bank in 1998, he wasAssistant Vice President, Banking Center Manager for NationsBank, Chattanooga, Tennessee, a position he held from 1994 to 1998. Mr. McDearman alsoserves on the Boards of Directors of the Company and the Bank. John Foster (48) – Mr. Foster joined the Bank in January 1998. He has held positions in branch administration and consumer lending. From August 2017to July 2018, Mr. Foster served as Senior Vice President/Head of Consumer Lending for the Bank, after having served as a Senior Vice President of theBank from January 2013 to August 2017. From July 2018 to April 2019, he served as Executive Vice President/Small Business & Consumer Lending forthe Bank. From April 2019 to January 1, 2020, he served as the Bank’s Executive Vice President/Chief Consumer/Commercial Banking Officer.Currently, he serves as President of the Bank, a position he has held since January 1, 2020.
Gary Whitaker (63) – Mr. Whitaker joined the Bank in May 1996. Prior to that time Mr. Whitaker was employed with NationsBank of Tennessee, N.A. inNashville (and its predecessors) from 1979. He has held positions in collections, as branch manager, in construction lending, retail marketing, automobilelending, loan administration, operations analyst, as Vice President, Senior Vice President and most recently as Executive Vice President since 2002. Hisprincipal duties include overseeing the Bank’s lending function and loan operations.
Lisa Pominski (56) – Ms. Pominski is Executive Vice President and the Chief Financial Officer of the Bank and the Company, positions she has held sinceJanuary 2017 and September 1997, respectively, and is the Company’s principal financial and accounting officer. Ms. Pominski has held several positionswith the Bank including Asst. Cashier, Asst. Vice President and Senior Vice President since the Bank’s formation in May of 1987. Prior to 1987 Ms.Pominski was employed by People’s Bank, Lebanon, Tennessee.
Clark Oakley (51) – Mr. Oakley joined the Bank in October of 1995. He has held positions in mortgage origination and branch administration. From 2008to 2016 he held the position of Senior Vice President- Eastern Division of the Bank, and from January 1, 2017 until December 31, 2017, he served asExecutive Vice President and Chief Operating Officer of the Bank. Currently he serves as Executive Vice President and Chief Operating Officer of theCompany and the Bank. Prior to joining the Bank, Mr. Oakley was most recently employed at Union Planters Bank in Alexandria, Tennessee. His primaryduties include overseeing the operations of the Company and the Bank, including information technology and electronic banking.
Available Information The Company’s Internet website is http://www.wilsonbank.com. Please note that the Company’s website address is provided as an inactive textual reference only.The Company makes available free of charge on its website the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form8-K and amendments to those reports as soon as reasonably practicable after it files or furnishes such materials to the SEC. The information provided on theCompany’s website is not part of this report, and is therefore not incorporated by reference herein unless such information is otherwise specifically referencedelsewhere in this report. Statistical Information Required by Guide 3 The statistical information required to be displayed under Item 1 pursuant to Guide 3, “Statistical Disclosure by Bank Holding Companies,” of the Exchange ActIndustry Guides is incorporated herein by reference to the Consolidated Financial Statements and the notes thereto and the Management’s Discussion and Analysissections in the Company’s 2020 Annual Report.
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Item 1A. Risk Factors. Investing in the Company’s common stock involves various risks which are particular to the Company, its industry and its market areas. Several risk factorsregarding investing in the Company’s common stock are discussed below. If any of the following risks were to occur, the Company may not be able to conduct itsbusiness as currently planned and its financial condition or operating results could be materially and negatively impacted. These matters could cause the tradingprice of the Company’s common stock to decline in future periods. Summary Risk Factors The Company’s business is subject to a number of risks, including risks that may prevent the Company from achieving its business objectives or may adverselyaffect its business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below and include, but are not limitedto, risks related to: COVID-19 Risks ● The COVID-19 pandemic is adversely affecting our business and the businesses and lives of a significant percentage of our customers. ● Our participation in the PPP may expose us to financial liability, credit losses, compliance costs or reputational damage. Interest Rate Risks ● The Company’s yield on earning assets, and consequently its net earnings, are significantly affected by interest rate levels. ● The Company’s hedging strategy may not be effective, including in the event that interest rates move in unanticipated manners.
● The performance of the Company’s investment securities portfolio is subject to fluctuation due to changes in interest rates and market conditions,including credit deterioration of the issuers of individual securities.
Credit and Lending Risks
● The Company’s loan portfolio includes a significant amount of real estate loans, including construction and development loans, which loans have agreater credit risk than residential mortgage loans.
● The Company has significant credit exposure to borrowers that are homebuilders and land developers and the Company also targets small businesses. ● Changes in accounting standards may change the way the Company calculates its allowance for credit losses. ● An inadequate allowance for credit losses would negatively impact the Company’s results of operations and financial condition. ● The Company’s accounting estimates and risk management processes rely on analytical and forecasting models and tools. ● The Company could sustain losses if its asset quality declines. ● Environmental liability associated with commercial lending could result in losses. ● The Company depends on the accuracy and completeness of information about customers. ● The Company may be subject to claims and litigation asserting lender liability. Liquidity and Capital Risks ● Liquidity risk could impair the Company’s ability to fund its operations and jeopardize its financial condition.
● The ability to maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in the capital markets anddeteriorating economic and market conditions.
Operational and Market Risks ● Negative developments in the U.S. and local economy may adversely impact the Company’s results in the future.
● The Company is geographically concentrated in Wilson County, Tennessee and its surrounding counties and changes in local economic conditionscould impact its profitability.
● The Company has sought to expand its franchise by developing new markets or expanding its operations in existing markets and may continue to doso in future years.
● The Company is dependent on its information technology and telecommunications systems and third-party servicers, and systems failures,interruptions or breaches of security could have an adverse effect on its financial condition.
● Competition from financial institutions and other financial service providers may adversely affect the Company’s profitability. ● The Company’s key management personnel may leave at any time.
● An ineffective risk management framework could have a material adverse effect on the Company’s strategic planning and its ability to mitigate risksand/or losses and could have adverse regulatory consequences.
● The Company’s selection of accounting policies and methods may affect its reported financial results. ● The Company currently invests in bank owned life insurance and may continue to do so in the future. ● The Company’s business reputation and relationships are important and any damage to them could have a material adverse effect on its business.
● The Company is subject to regulatory oversight and certain litigation, and its expenses related to this regulatory oversight and litigation may adverselyaffect its results.
● The soundness of other financial institutions could adversely affect the Company. ● Natural disasters may adversely affect the Company.
● The Company’s asset valuations may include methodologies, estimations and assumptions which are subject to differing interpretations and couldresult in changes to asset valuations that may materially adversely affect its results of operations or financial condition.
● If the Company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately report its financialresults.
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Regulatory and Compliance Risks ● Federal or state legislation or regulation may increase the Company’s expenses and reduce earnings.
● The Company, as well as the Bank, operates in an increasingly highly regulated environment and each is supervised and examined by various federaland state regulatory agencies who may adversely affect their ability to conduct business.
● The Company and the Bank must maintain adequate regulatory capital to support the Company’s business objectives. ● The Company is required to act as a source of financial and managerial strength for the Bank in times of stress. ● Non-compliance with the USA Patriot Act, the Bank Secrecy Act or other laws and regulations could result in fines or sanctions against the Company. Risks Relating to the Company’s Securities ● The Company’s common stock is thinly traded, and recent prices may not reflect the prices at which the stock would trade in an active trading market. ● The Company’s ability to declare and pay dividends is limited. ● An investment in the Company’s common stock is not an insured deposit. COVID-19 Risks
The COVID-19 pandemic is adversely affecting our business and the businesses and lives of a significant percentage of our customers as well ascertain of our third-party vendors and service providers, and the adverse impacts on our business, financial position, capital, liquidity, results of operationsand prospects could be significant.
The spread of COVID-19 has created a global public health crisis that has resulted in uncertainty, volatility and deterioration in financial markets and in
governmental, commercial and consumer activity including in the United States, where we conduct all of our activity.
To combat the spread of COVID-19, federal, state and local governments, including the Governor of the state of Tennessee and mayors or countyexecutives of many of the communities in which we operate, have taken a variety of actions that have materially and adversely affected the businesses and livesof our customers. These actions have included orders or directives closing non-essential businesses and restricting movement of individuals through the issuanceof shelter-in-place or safer-at-home orders and other guidance encouraging individuals to observe strict social distancing measures. At times, the actions beingtaken by governmental authorities are not always coordinated or consistent across the state of Tennessee and the impact of those actions across our markets hasbeen and may continue to be uneven. These actions, together with the independent actions of individuals and businesses aimed at slowing the spread of thevirus, have resulted in extensive economic disruption and rapid declines in certain consumer and commercial activity. Many businesses experienced, and insome cases are continuing to experience, significant declines in revenue and there have been, and continue to be, elevated unemployment rates throughout ourmarkets with corresponding negative effects on consumer spending and behavior. Whether the efforts to stop the spread of COVID-19 will be successful isunknown at this time as cases, hospitalizations and deaths in some of our markets remain elevated and in recent weeks new variants or mutations of the virushave begun to emerge that in some cases are more contagious than the original virus, and continued spread of the disease or a continuation of the higher levels ofcases, hospitalizations and deaths will further negatively impact the businesses and lives of our customers and our results of operations.
In March 2020, the Federal Reserve reduced the target federal funds rate by 150 basis points and for a portion of March 2020 the 10-year treasury bond
rate fell to below 1.00% for the first time in history. These actions, and other actions being taken by governmental and regulatory agencies affecting monetarypolicy in response to the unprecedented challenges resulting from the spread of COVID-19, have negatively impacted our assets and our results and are likely tocontinue to negatively impact our net yield on earning assets and our results into 2021.
As a result of COVID-19, some of our borrowers, including owners of commercial real estate properties, are experiencing varying degrees of financial
distress, which is expected to continue, over the coming months. As a result and without the assistance of additional government stimulus programs, theseborrowers may have difficulty paying, on a timely basis, interest and principal payments on their loans and the value of collateral securing these obligations maybe adversely impacted as well. Though we have offered these borrowers, and others, the ability to defer interest and principal payments for 90 days and in somecases principal payments for 180 days, these borrowers may still be experiencing distress.
State and municipal tax revenues have also been adversely impacted by COVID-19. The ability of states and municipalities to fund shortfalls could have
an effect on their ability to sustain debt maintenance, which would consequently impact the value of our municipal bond portfolio if we hold bonds issued bythose states or municipalities.
As we have sought to protect the health and safety of our employees and customers during the pandemic, we have taken numerous actions to modify our
business operations, including restricting employee travel, directing a significant percentage of our employees that were able to do so to work from home,closing the lobbies of many of our branches and implementing our business continuity plans and protocols. In the second quarter of 2020, we initiated a phasedreopening that included reopening the lobbies of all of our branches and bringing the majority of our employees back to the office to work. Though we believewe have been able to adequately service our clients under these restrictions, we cannot provide any assurances that our ability to do so wouldn’t be negativelyimpacted if additional restrictions are necessary in the future, including if key employees of ours or a significant number of our associates become ill as a resultof contracting the virus. We rely on the services of various key vendors and business partners to service our clients and if those companies’ businesses orworkforces are impacted in ways similar to those that may impact our business, our ability to service our customers could be impacted.
The economic uncertainty caused by COVID-19’s spread and the efforts of government and non-governmental authorities to slow its spread, are likely to
cause certain of our borrowers to experience distress and as a result increases to our provision expense for loan losses. We have also taken efforts to increase ouron-balance sheet liquidity and those efforts may cause our net yield on earning assets and our results of operations to be adversely impacted.
COVID-19 has not yet been contained, and given the ongoing and fluid nature of the country’s response to the pandemic, it is difficult for us to accurately
estimate the length and severity of the economic disruption being caused by COVID-19 or when normal economic and operating conditions will resume. As aresult, the extent to which our results of operations, provision expense, capital levels, liquidity ratios and published credit ratings will be impacted is difficult to
predict, and depends on, among other things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic, actionstaken by governmental authorities and other parties in response to the pandemic, the speed with which the vaccines for COVID-19 can be widely distributed,those vaccines’ efficacy against the virus and public acceptance of the vaccines. The adverse impact of COVID-19 on the markets in which we operate and onour business, financial condition and results of operations is expected to remain elevated until the pandemic subsides.
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Our participation in the PPP may expose us to financial liability, credit losses, compliance costs or reputational damage.
Under the CARES Act, Congress created the PPP and authorized the Treasury to implement rules regarding the program. Funding under the original loan
program expired on August 8, 2020 and a second round of PPP funding was approved on December 27, 2020 under the Coronavirus Relief Act. Banks, like us,and non-bank lenders facilitated funding under the original program, and are facilitating funding currently under the second round of the program, on behalf ofthe SBA for borrowers that were eligible participants. We also remain in the process of receiving and processing requests from our customers for forgiveness oftheir obligations under their original PPP loans. We and other lenders under the PPP, may face criticism from customers or others that are seeking forgiveness orapplying for funding, which may be related to challenges we and others have faced due to inconsistent, constantly changing and incomplete rules and guidanceadopted by the SBA and Treasury under the PPP. This criticism could cause reputational damage to us and there is a possibility that customers or others maythreaten and pursue legal action against banks and other lenders like us under the program.
Among other regulatory requirements, PPP loans are subject to forbearance of loan payments for a ten-month period to the extent that loans are not
eligible for forgiveness. If PPP borrowers fail to qualify for loan forgiveness, including by failing to use the funds appropriately in order to qualify forforgiveness under the program, we have a greater risk of holding these loans at unfavorable interest rates. In addition, because of the short time period betweenthe passing of the CARES Act and the implementation of the PPP, there is ambiguity in the laws, rules, and guidance regarding the operation of the PPP, whichexposes us to risks relating to noncompliance with the PPP. There is risk that the SBA or another governmental entity could conclude there is a deficiency in themanner in which we originated, funded, or serviced PPP loans, which may or may not be related to the ambiguity in the CARES Act or the rules and guidancepromulgated by the SBA and the Treasury regarding the operation of the PPP. In the event of such deficiency, the SBA may deny its liability under the guaranty,reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from us.
In addition, we may be subject to regulatory scrutiny regarding our processing of PPP applications or forgiveness requests or our origination or servicing
of PPP loans. While the SBA has said that in many instances, banks may rely on the certifications of borrowers regarding their eligibility for PPP loans, we dohave several obligations under the PPP, and if the SBA found that we did not meet those obligations, the remedies the SBA may seek against us are unknownbut may include not guarantying the PPP loans resulting in credit exposure to borrowers who may be unable to repay their loans. The PPP may also attractsignificant interest from federal and state enforcement authorities, oversight agencies, regulators, and Congressional committees. State Attorneys General andother federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling us to rely on borrowercertifications, and take more aggressive action against us for alleged violations of the provisions governing our participation in the PPP.
Interest Rate Risks
The Company’s yield on earning assets, and consequently its net earnings, are significantly affected by interest rate levels.
The Company’s profitability is dependent to a large extent on net interest income, which is the difference between interest income earned on loans andinvestment securities and interest expense paid on deposits and other borrowings. The absolute level of interest rates as well as changes in interest rates or thataffect the yield curve may affect the Company’s level of interest income, the primary component of its gross revenue, as well as the level of its interest expense.Interest rate fluctuations are caused by many factors which, for the most part, are not under the Company’s direct control. For example, national monetary policyplays a significant role in the determination of interest rates. Additionally, competitor pricing and the resulting negotiations that occur with the Company’scustomers also impact the rates the Company collects on loans and the rates it pays on deposits. In addition, changes in the method of determining the LondonInterbank Offered Rate (LIBOR) or other reference rates, or uncertainty related to such potential changes, may adversely affect the value of reference rate-linkeddebt securities that the Company holds or issues or its variable pricing loans, which could further impact the Company’s interest rate spread.
Changes in the level of interest rates also may negatively affect the Company’s ability to originate real estate loans, the value of its assets and its ability to
realize gains from the sale of its assets, all of which could ultimately affect the Company’s results of operations and financial condition. A decline in the marketvalue of the Company’s assets may limit the Company’s ability to borrow additional funds. As a result, the Company could be required to sell some of its loansand investments under adverse market conditions, upon terms that are not favorable to the Company, in order to maintain its liquidity. If those sales are made atprices lower than the amortized costs of the investments, the Company will incur losses. Following changes in the general level of interest rates, the Company’sability to maintain a positive net interest spread is dependent on its ability to increase (in a rising rate environment) or maintain or minimize the decline in (in afalling rate environment) its loan offering rates, minimize increases on its deposit rates in a rising rate environment or promptly reduce the rates it pays ondeposits in a falling rate environment, and maintain an acceptable level and mix of funding. Although the Company has implemented strategies it believes willreduce the potential effects of changes in interest rates on its net interest income, these strategies may not always be successful. Accordingly, changes in levelsof market interest rates could materially and adversely affect the Company’s net interest income and net yield on earning assets, asset quality, loan originationvolume, liquidity, and overall profitability. The Company cannot assure you that it can minimize its interest rate risk.
As interest rates change, the Company expects that it will periodically experience “gaps” in the interest rate sensitivities of its assets and liabilities,
meaning that either its interest-bearing liabilities (usually deposits and borrowings) will be more sensitive to changes in market interest rates than its interest-earning assets (usually loans and investment securities), or vice versa. In either event, if market interest rates should move contrary to the Company’s position,this “gap” may work against the Company, and its results of operations and financial condition may be negatively affected. The Company attempts to manage itsrisk from changes in market interest rates by adjusting the rates, maturity, repricing characteristics, and balances of the different types of interest-earning assetsand interest-bearing liabilities. Interest rate risk management techniques are not exact. The Company employs the use of models and modeling techniques toquantify the levels of risk to net interest income, which inherently involve the use of assumptions, judgments, and estimates. While the Company strives toensure the accuracy of its modeled interest rate risk profile, there are inherent limitations and imprecisions in this determination and actual results may differ.
The Company’s hedging strategy may not be effective, including in the event that interest rates move in unanticipated manners.
The Company has entered into certain hedging transactions including interest rate swaps, which are designed to lessen elements of its interest rate
exposure. This hedging strategy converts the fixed interest rates on certain of the Bank’s outstanding loans to LIBOR-based variable interest rates. In the eventthat interest rates do not change in the manner that the Company anticipates at the times it institutes its hedging strategies or at the pace that the Companyanticipated, such transactions may materially and adversely affect its results of operations.
Hedging creates certain risks for the Company, including the risk that the other party to the hedge transaction will fail to perform (counterparty risk,
which is a type of credit risk), and the risk that the hedge will not fully protect the Company from loss as intended (hedge failure risk). Unexpected counterpartyfailure or hedge failure could have a significant adverse effect on the Company’s liquidity and earnings.
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The performance of the Company’s investment securities portfolio is subject to fluctuation due to changes in interest rates and market conditions,including credit deterioration of the issuers of individual securities.
Changes in interest rates can negatively affect the performance of most of the Company’s investment securities. Interest rate volatility can reduce
unrealized gains or increase unrealized losses in the Company’s portfolio. Interest rates are highly sensitive to many factors including monetary policies,domestic and international economic, social and political issues, including trade disputes and global health pandemics, and other factors beyond the Company’scontrol. Fluctuations in interest rates can materially affect both the returns on and market value of the Company’s investment securities. Additionally, actualinvestment income and cash flows from investment securities that carry prepayment risk, such as mortgage-backed securities and callable securities, maymaterially differ from those anticipated at the time of investment or subsequently as a result of changes in interest rates and market conditions.
The Company’s investment securities portfolio consists of several securities whose trading markets are “not active.” As a result, the Company utilizes
alternative methodologies for pricing these securities that include various estimates and assumptions. There can be no assurance that the Company can sell theseinvestment securities at the price derived by these methodologies, or that it can sell these investment securities at all, which could have an adverse effect on theCompany’s financial condition, results of operations and liquidity.
The Company monitors the financial position of the various issuers of investment securities in its portfolio, including each of the state and local
governments and other political subdivisions where it has exposure. To the extent the Company has securities in its portfolio from issuers who have experienceda deterioration of financial condition, or who may experience future deterioration of financial condition, the value of such securities may decline and could resultin an other-than-temporary impairment charge, which could have an adverse effect on the Company’s financial condition, results of operations and liquidity.
In addition, from time to time the Company may restructure portions of its investment securities portfolio as part of its asset liability management
strategies, and may incur loses, which may be material, in connection with any such restructuring.
Credit and Lending Risks
The Company’s loan portfolio includes a significant amount of real estate loans, including construction and development loans, which loans have agreater credit risk than residential mortgage loans.
As of December 31, 2020, approximately 89% of the Company’s loans held for investment were secured by real estate. Of this amount, approximately
40% were commercial real estate loans, 30% were residential real estate loans, 24% were construction and development loans and 6% were other real estateloans. In total these loans made up approximately 97% of the Company’s non-performing loans at December 31, 2020. Construction and development lending isgenerally considered to have relatively high credit risks because the principal is concentrated in a limited number of loans with repayment dependent on thesuccessful completion and operation of the related real estate project. Real estate industry pricing dynamics in the geographical markets in which the Companyoperates can vary from year to year, and with respect to construction, can vary between project funding and project completion. Asset values to which theCompany underwrites loans can fluctuate from year to year and impact collateral values and the ability of its borrowers to repay their loans.
Weakness in residential real estate market prices as well as demand could result in price reductions in home and land values adversely affecting the value
of collateral securing some of the construction and development loans that the Company holds. Should the Company experience the return of adverse economicand real estate market conditions similar to those it experienced from 2008 through 2010, the Company may again experience increases in non-performing loansand other real estate owned, increased losses and expenses from the management and disposition of non-performing assets, increased charge-offs from thedisposition of non-performing assets, increases in provision for loan losses, and increases in operating expenses as a result of the allocation of management timeand resources to the collection and work out of these loans, all of which would negatively impact the Company’s financial condition and results of operations.
The Company has significant credit exposure to borrowers that are homebuilders and land developers and the Company also targets small businesses.
At December 31, 2020, the Company had significant credit exposures to borrowers in certain businesses, including new home builders and land
subdividers. If the negative economic impact of the COVID-19 pandemic extends deep into 2021 or beyond and begins to negatively impact real estateconditions in the Company’s markets more than has been the case thus far, these industry or other concentrations could result in higher than normal deteriorationin credit quality, past dues, loan charge-offs and collateral value declines, all of which would negatively impact the Company’s financial condition and results ofoperations. Furthermore, any of the Company’s large credit exposures that deteriorate unexpectedly could cause the Company to have to make significantadditional loan loss provisions, negatively impacting the Company’s financial condition and results of operations.
A substantial focus of the Company’s marketing and business strategy is to serve small businesses in its market areas. As a result, a relatively high
percentage of the Company’s loan portfolio consists of commercial loans primarily to small businesses. During periods of lower economic growth orchallenging economic periods like those resulting from the COVID-19 pandemic, small businesses may be impacted more severely and more quickly than largerbusinesses. Consequently, the ability of such businesses to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, whichwould adversely impact the Company’s results of operations and financial condition.
Changes in accounting standards may change the way the Company calculates its allowance for loan losses and could have a material adverse effect
on its financial condition and results of operations.
The Financial Accounting Standards Board and the SEC may change the financial accounting and reporting standards, or the interpretation of thosestandards, that govern the preparation of our external financial statements from time to time. The impact of these changes or the application thereof on ourfinancial condition and operations can be difficult to predict. For example, the Financial Accounting Standards Board adopted a new accounting standard thatbecame effective for the Company on January 1, 2020, though, pursuant to the Coronavirus Relief Act, the Company has elected to defer implementation untilJanuary 1, 2022. This standard, referred to as current expected credit loss, or CECL, requires financial institutions to determine periodic estimates of lifetimeexpected credit losses on financial assets, including loans, and recognize the expected credit losses through provision for credit losses. CECL replaced theprevious method of provisioning for credit losses that are probable, and, when it is fully adopted by the Company, it will require the Company to increase its
allowance for credit losses in the first quarter of 2022, and will also increase the types of data the Company needs to collect and review to determine theappropriate level of its allowance for credit losses. In addition, the adoption of CECL may result in more volatility in the level of the Company’s allowance forcredit losses. An increase, to the extent material, in the Company’s allowance for credit losses or expenses incurred to determine the appropriate level of theallowance for credit losses could have a material adverse effect on the Company’s capital levels, financial condition and results of operations. A reduction in theCompany’s or the Bank’s capital levels could subject it to a variety of enforcement remedies available to the federal regulatory authorities and would negativelyimpact the Company’s ability to pursue expansion opportunities if it is unable to satisfactorily raise additional capital.
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An inadequate allowance for loan losses would negatively impact the Company’s results of operations and financial condition.
The Company maintains an allowance for loan losses on loans. The risk of credit losses on loans varies with, among other things, general economicconditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value andmarketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, anevaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes variousassumptions and judgments about the ultimate collectibility of the loan portfolio, provides an allowance for loan losses based upon a percentage of theoutstanding balances and takes a charge against earnings with respect to specific loans when their ultimate collectibility is considered questionable. Actuallosses are difficult to forecast especially if those losses stem from factors beyond the Company’s historical experience or are otherwise inconsistent with theCompany’s credit quality assessments. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate toabsorb losses, the Company’s results of operations and financial condition could be negatively impacted.
In addition, federal and state regulators periodically review the Company’s loan portfolio and may require it to increase its allowance for loan losses or
recognize loan charge-offs. Their conclusions about the quality of the Company’s loan portfolio may be different than the Company’s. Any increase in theCompany’s allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on the Company’s results ofoperations or financial condition. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, newinformation regarding existing loans or borrowers, identification of additional problem loans and other factors, both within and outside of the Company’smanagement’s control. These additions may require increased provision expense which would negatively impact the Company’s results of operations.
The Company’s accounting estimates and risk management processes rely on analytical and forecasting models and tools.
The processes the Company uses to estimate expected loan losses, calculate its allowance for loan losses and to measure the fair value of financial
instruments, as well as the processes used to estimate the effects of changing interest rates and other measures of the Company’s financial condition and resultsof operations, depend upon the use of analytical and forecasting models and tools. These models and tools reflect assumptions that may not be accurate,particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models and tools may prove to beinadequate or inaccurate because of other flaws in their design or their implementation. Any such failure in the Company’s analytical or forecasting models andtools could have a material adverse effect on its business, financial condition and results of operations.
The Company could sustain losses if its asset quality declines.
The Company’s earnings are significantly affected by its ability to properly originate, underwrite and service loans. The Company could sustain losses if
it incorrectly assesses the creditworthiness of its borrowers or fails to detect or respond to deterioration in asset quality in a timely manner. Problems with assetquality, particularly within the commercial real estate segment of the Company’s loan portfolio, could cause the Company’s interest income and net yield onearning assets to decrease and its provisions for loan losses and non-interest expenses to increase, which could adversely affect its results of operations andfinancial condition.
Environmental liability associated with commercial lending could result in losses.
In the course of business, the Bank may acquire, through foreclosure, properties securing loans it has originated or purchased which are in default.
Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company, orthe Bank, might be required to remove these substances from the affected properties at the Company’s sole cost and expense. The cost of this removal couldsubstantially exceed the value of affected properties. The Company and the Bank may not have adequate remedies against the prior owner or other responsibleparties and could find it difficult or impossible to sell the affected properties. These events could have a material adverse effect on the Company’s business,results of operations and financial condition.
The Company has acquired a number of retail banking facilities and other real properties, any of which may contain hazardous or toxic substances. Ifhazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmentallaws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use orsell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase theCompany’s exposure to environmental liability.
The Company depends on the accuracy and completeness of information about customers.
In deciding whether to extend credit or enter into certain transactions, the Company relies on information furnished by or on behalf of customers,
including financial statements, credit reports, tax returns and other financial information. The Company may also rely on representations of those customers orother third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading personalinformation, financial statements, credit reports, tax returns or other financial information, including information falsely provided as a result of identity theft,could have an adverse effect on the Company’s business, financial condition and results of operations.
The Company may be subject to claims and litigation asserting lender liability.
From time to time, and particularly during periods of economic stress, customers, including real estate developers and consumer borrowers, may make
claims or otherwise take legal action pertaining to performance of the Company’s responsibilities. These claims are often referred to as “lender liability” claimsand are sometimes brought in an effort to produce or increase leverage against the Company in workout negotiations or debt collection proceedings. Lenderliability claims frequently assert one or more of the following allegations: breach of fiduciary duties, fraud, economic duress, breach of contract, breach of theimplied covenant of good faith and fair dealing, and similar claims. Whether customer claims and legal action related to the performance of the Company’sresponsibilities are founded or unfounded, if such claims and legal actions are not resolved in a favorable manner, they may result in significant financial
liability and/or adversely affect the Company’s market reputation, products and services, as well as potentially affecting customer demand for those productsand services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a materialadverse effect on its financial condition, results of operations and liquidity.
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Liquidity and Capital Risks
Liquidity risk could impair the Company’s ability to fund its operations and jeopardize its financial condition.
Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors, borrowers and other creditors by either converting assetsinto cash or accessing new or existing sources of incremental funds. Liquidity risk arises from the possibility that the Company may be unable to satisfy currentor future funding requirements and needs.
The objective of managing liquidity risk is to ensure that the Company’s cash flow requirements resulting from depositor, borrower and other creditor
demands are met, as well as the Company’s operating cash needs, and that the Company’s cost of funding such requirements and needs is reasonable. TheCompany maintains an asset/liability and interest rate risk policy and a liquidity and funds management policy, including a contingency funding plan that,among other things, include procedures for managing and monitoring liquidity risk. Generally the Company relies on deposits, repayments of loans and cashflows from its investment securities as its primary sources of funds. The Company’s principal deposit sources include consumer, commercial and public fundscustomers in the Company’s markets. The Company has used these funds, together with wholesale deposit sources such as federal funds purchased and othersources of short-term and long-term borrowings, including advances from the FHLB Cincinnati, to make loans, acquire investment securities and other assetsand to fund continuing operations.
An inability to maintain or raise funds in amounts necessary to meet the Company’s liquidity needs could have a substantial negative effect, individually
or collectively, on the Company’s and the Bank's liquidity. The Company’s access to funding sources in amounts adequate to finance its activities, or on termsattractive to it, could be impaired by factors that affect the Company specifically or the financial services industry in general. For example, factors that coulddetrimentally impact the Company’s access to liquidity sources include a decrease in the level of its business activity due to a market downturn or adverseregulatory action against it or the Bank, a reduction in its credit rating, any damage to its reputation or any other decrease in depositor or investor confidence inthe Company’s creditworthiness and business. The Company’s access to liquidity could also be impaired by factors that are not specific to it, such as severevolatility or disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Any suchevent or failure to manage the Company’s liquidity effectively could affect its competitive position, increase its borrowing costs and the interest rates it pays ondeposits, limit its access to the capital markets, cause its regulators to criticize its operations and have a material adverse effect on its financial condition orresults of operations.
Deposit levels may be affected by a number of factors, including demands by customers, rates paid by competitors, general interest rate levels, returns
available to customers on alternative investments, general economic and market conditions and other factors. Loan repayments are a relatively stable source offunds but are subject to the borrowers’ ability to repay loans, which can be adversely affected by a number of factors including changes in general economicconditions, adverse trends or events affecting business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters, prolonged government shutdowns and other factors. Furthermore, loans generally are not readily convertible to cash.Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet growth in loans, deposit withdrawal demands orotherwise fund operations. Such secondary sources include advances from the FHLB Cincinnati, brokered deposits, secured and unsecured federal funds lines ofcredit from correspondent banks, FRB borrowings and/or accessing the equity or debt capital markets.
The Company anticipates it will continue to rely primarily on deposits, loan repayments, and cash flows from its investment securities to provide
liquidity. Additionally, where necessary, the secondary sources of borrowed funds described above, like advances from the FHLB Cincinnati, which the Bankhas accessed from time to time, will be used to augment the Company’s primary funding sources. If the Company is unable to access any of these secondaryfunding sources when needed, it might be unable to meet its customers’ or creditors’ needs, which would adversely affect its financial condition, results ofoperations, and liquidity.
The Company’s and the Bank’s ability to maintain required capital levels and adequate sources of funding and liquidity could be impacted by
changes in the capital markets and deteriorating economic and market conditions.
Federal and state bank regulators require the Company and the Bank to maintain adequate levels of capital to support operations. At December 31, 2020,the Bank’s regulatory capital ratios were at “well-capitalized” levels under regulatory guidelines. Growth in assets (either organically or as a result ofacquisitions) at rates in excess of the rate at which the Bank’s capital is increased through retained earnings will reduce its capital ratios unless it continues toincrease capital. Failure by the Bank to meet applicable capital guidelines or to satisfy certain other regulatory requirements could subject the Bank and theCompany to a variety of enforcement remedies available to the federal regulatory authorities and would negatively impact the Company’s ability to pursueexpansion opportunities.
The Company may need to raise additional capital (including through the issuance of common stock or additional Tier 2 capital instruments) in the future
to provide the Company and the Bank with sufficient capital resources and liquidity to meet their commitments and business needs or in connection with growthor as a result of deterioration in asset quality. The Company’s and the Bank’s ability to maintain capital levels, sources of funding and liquidity could beimpacted by negative perceptions of our business or prospects, changes in the capital markets and deteriorating economic and market conditions. The Bank isrequired to obtain regulatory approval in order to pay dividends to the Company unless the amount of such dividends does not exceed its net income for thatcalendar year plus retained net income for the preceding two years. Any restriction on the ability of the Bank to pay dividends to the Company could impact theCompany’s ability to continue to pay dividends on its common stock or its ability to pay interest on its indebtedness.
In addition, the Company receives additional capital from the issuance of common stock under its dividend reinvestment plan. Any unexpected
termination or suspension of the Company's dividend reinvestment plan, or the related payment of its historical biannual cash dividend, could materially andadversely affect the Company's capital levels.
Operational and Market Risks
Negative developments in the U.S. and local economy may adversely impact the Company’s results in the future.
The Company’s financial performance is highly dependent on the business environment in the markets where it operates and in the U.S. as a whole.
Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, investor or business confidence,consumer sentiment, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, natural disasters,international trade disputes and retaliatory tariffs, terrorist attacks, global pandemics, acts of war, or a combination of these or other factors. Economicconditions in certain industries in the markets in which the Company operates deteriorated rapidly in 2020 as a result of the COVID-19 pandemic. Thesechallenges manifested themselves primarily within the restaurant, retail, commercial real estate, travel and entertainment industries and contributed to increasedlevels of provisions for loan losses. A continued worsening of business and economic conditions generally or specifically in the principal markets in which theCompany conducts business could have adverse effects, including the following:
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●a decrease in deposit balances or the demand for loans and other products and services the Company offers;
● an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations tothe Company, which could lead to higher levels of nonperforming assets, net charge-offs and provisions for credit losses;
● a decrease in the value of loans and other assets secured by real estate; ● a decrease in net interest income from the Company’s lending and deposit gathering activities; and ● an increase in competition resulting from financial services companies.
Although economic conditions have improved in most of the Company’s markets when compared to the first and second quarters of 2020, the Companybelieves that it is possible it will continue to experience an uncertain and volatile economic environment during 2021, including as a result of issues of nationalsecurity, COVID-19 and other health crises around the world and prolonged international trade disputes. There can be no assurance that these conditions willimprove in the near term or that conditions will not worsen. Such conditions could adversely affect the Company’s business, financial condition, and results ofoperations.
In addition, over the last several years, including from December 22, 2018 until January 25, 2019, the federal government has shut down several times, in
some cases for prolonged periods. It is possible that the federal government may shut down again in the future, particularly in light of the evenly divided UnitedStates Senate. If a prolonged government shutdown occurs, it could significantly impact business and economic conditions generally or specifically in theCompany’s markets, which could have a material adverse effect on the Company’s results of operations and financial condition.
The Company is geographically concentrated in Wilson County, Tennessee and its surrounding counties and changes in local economic conditions
could impact its profitability.
The Company operates primarily in Wilson, DeKalb, Smith, Rutherford, Putnam, Davidson, Williamson and Sumner counties in Tennessee and certain ofthe surrounding counties and substantially all of its loan customers and most of its deposit and other customers live or have operations in this same geographicarea. Accordingly, the Company’s success significantly depends upon the growth in population, income levels, and deposits in these areas, along with thecontinued attraction of business ventures to the area and the area’s economic stability and strength of the housing market, and its profitability is impacted by thechanges in general economic conditions in these markets. The Company cannot assure investors that economic conditions in its markets will not remain sluggishduring 2021 or thereafter, and continued weakened economic conditions in the Company’s markets could cause the Company to constrict its growth rate, affectthe ability of its customers to repay their loans and negatively impact the Company’s financial condition and results of operations.
The Company is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified
economies. Moreover, the Company cannot give any assurance that it will benefit from any market growth or return of more favorable economic conditions inits primary market areas if they do occur.
The Company has sought to expand its franchise by developing new markets or expanding its operations in existing markets and may continue to do
so in future years.
Since 2014, the Company has opened branch locations in Putnam County, Rutherford County, Davidson County and Williamson County as it sought toexpand its footprint beyond its historical markets. Expansion, whether by opening new branches or acquiring existing branches or whole banks, involvesvarious risks, including:
Management of Growth. The Company may be unable to successfully:
● maintain loan quality in the context of significant loan growth; ● identify and expand into suitable markets; ● obtain regulatory and other approvals; ● identify and acquire suitable sites for new banking offices; ● attract sufficient deposits and capital to fund anticipated loan growth; ● avoid diversion or disruption of its existing operations or management as well as those of an acquired institution; ● maintain adequate management personnel and systems to oversee and support such growth; ● maintain adequate internal audit, loan review and compliance functions; and ● implement additional policies, procedures and operating systems required to support such growth.
Results of Operations. There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan balances or otheroperating results necessary to avoid losses or produce profits. Execution on a growth strategy could lead to increases in overhead expenses if the Company wereto add new offices and staff. The Company’s historical results may not be indicative of future results or results that may be achieved if it were to increase thenumber and concentration of its branch offices in its existing or new markets.
Development of Offices. There are considerable costs involved in opening branches, and new branches generally do not generate sufficient revenues to
offset their costs until they have been in operation for at least a year or more. Accordingly, any new branches the Company establishes can be expected tonegatively impact the Company’s earnings for some period of time until they reach certain economies of scale. The same is true for the Company’s efforts toexpand in these markets with the hiring of additional seasoned professionals with significant experience in that market. The Company’s expenses could befurther increased if it encounters delays in opening any of its new branches. The Company may be unable to accomplish future branch expansion plans due to alack of available satisfactory sites, difficulties in acquiring such sites, failure to receive any required regulatory approvals, on a timely basis or at all, increasedexpenses or loss of potential sites due to complexities associated with zoning and permitting processes, higher than anticipated merger and acquisition costs orother factors. Finally, any branch may not meet the Company’s long-term profitability expectations or otherwise be successful even after it has been establishedor acquired, as the case may be.
Regulatory and Economic Factors. Growth of banks like the Bank may be adversely affected by a number of regulatory and economic developments or
other events. Failure to obtain required regulatory approvals, changes in laws and regulations or other regulatory developments and changes in prevailingeconomic conditions, such as those that occurred as a result of the COVID-19 pandemic, or other unanticipated events may prevent or adversely affect theCompany’s growth and expansion. Such factors may cause the Company to alter its growth and expansion plans or slow or halt the growth and expansionprocess, which may prevent the Company from entering into or expanding in its targeted markets or allow competitors to gain or retain market share in theCompany’s existing markets.
Failure to successfully address these and other issues related to the Company’s expansion could have a material adverse effect on its financial condition
and results of operations, and could adversely affect its ability to successfully implement its business strategy.
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The Company is dependent on its information technology and telecommunications systems and third-party servicers, and systems failures,interruptions or breaches of security could have an adverse effect on its financial condition and results of operations, as well as cause legal or reputationalharm.
The Company is dependent upon information technologies, computer systems and networks, including those the Company maintains and those
maintained and provided to the Company by third parties, to conduct operations and is reliant on technology to help increase efficiency in its business. Theimportance of technology has been sharpened as a result of COVID-19, and will likely remain even after the pandemic wanes. These systems could becomeunavailable or impaired due to a variety of causes, including storms and other natural disasters, terrorist attacks, fires, utility outages, internal or external theft orfraud, design defects, human error, misconduct or complications or failures encountered as existing systems are maintained, replaced or upgraded. For example,the Company’s financial, accounting, data processing, or other operating or security systems or infrastructure or those of third parties upon which it relies mayfail to operate properly or become disabled or damaged, which could adversely affect the Company’s ability to process transactions or provide services. In theevent that backup systems are utilized, they may not process data as quickly as the Company’s primary systems and the Company may experience data losses inthe course of such recovery. The Company continuously updates the systems on which it relies to support its operations and growth and to remain compliantwith all applicable laws, rules and regulations globally. This updating entails significant costs and creates risks associated with implementing new systems andintegrating them with existing ones, including business interruptions that may occur in the course of such implementation challenges. The Company maintains asystem of internal controls and security to mitigate the risks of many of these occurrences and maintains insurance coverage for certain risks; however, shouldan event occur that is not prevented or detected by the Company’s internal controls, causes an interruption, degradation or outage in service, or is uninsuredagainst or in excess of applicable insurance limits, such occurrence could have an adverse effect on the Company’s business and its reputation, which, in turn,could have a material adverse effect on its financial condition, results of operations and liquidity.
The Company’s operations rely on the secure processing, storage and transmission of confidential, proprietary, personal and other information in its
computer systems and networks. Although the Company takes protective measures and endeavors to modify these systems as circumstances warrant, thesecurity of its computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, ransomware or othermalicious code and other events that could have a security impact. The Company provides its customers the ability to bank remotely, including over the Internetor through their mobile device. The secure transmission of confidential information is a critical element of remote and mobile banking. The Company’s network,and the systems of parties with whom it contracts or on which it relies, as well as those of its customers and regulators, could be vulnerable to unauthorizedaccess, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. Sources of attacks vary andmay include hackers, disgruntled employees or vendors, organized crime, terrorists, foreign governments, corporate espionage and activists. In recent periods,there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in thecommercial banking sector due to cyber criminals targeting commercial bank accounts.
Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the
use of the Internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as theCompany continues to increase its mobile-payment and other Internet-based product offerings and expand its internal use of web-based products andapplications. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are becoming moreprevalent and sophisticated, and are extremely difficult to prevent. The techniques used by bad actors change frequently, may not be recognized until launchedand may not be recognized until well after a breach has occurred. Additionally, the existence of cyber-attacks or security breaches at third parties with access tothe Company’s data, such as vendors, may not be disclosed to the Company in a timely manner. Consistent with industry trends, the Company remains at riskfor attempted electronic fraudulent activity, as well as attempts at security breaches and cybersecurity-related incidents. The Company may be required to spendsignificant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by securitybreaches or viruses. To the extent that the Company’s activities or the activities of its vendors, regulators or customers involve the storage and transmission ofconfidential information, security breaches (including breaches of security of customer, vendor or regulatory systems and networks) and viruses could exposethe Company to claims, litigation and other possible liabilities, which may be significant. Any inability to prevent security breaches or computer viruses couldalso cause existing customers to lose confidence in the Company’s systems and could adversely affect its reputation, results of operations and ability to attractand retain customers and businesses. Further, a security breach could also subject the Company to additional regulatory scrutiny, expose it to civil litigation andpossible financial liability and cause reputational damage.
The Company contracts with third-party vendors to provide software or services for many of its major systems, such as data processing, loan servicing
and deposit processing system. The failure of these systems, or the termination of a third-party software license or service agreement on which any of thesesystems is based, could interrupt the Company’s operations. Because the Company’s information technology and telecommunications systems interface withand depend on third-party systems, the Company could experience service denials if demand for such services exceeds capacity or such third-party systems failor experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of the Company’s ability to process new andrenewal loans, gather deposits and provide customer service, compromise its ability to operate effectively, damage its reputation, result in a loss of customerbusiness and/or subject it to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on the Company’sfinancial condition and results of operations.
The Company also faces the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate its business
activities, including vendors, exchanges, and other financial intermediaries. Such parties could also be the source or cause of an attack on, or breach of, theCompany’s operational systems, data or infrastructure, and could disclose such attack or breach to the Company in a delayed manner or not at all. In addition,the Company may be at risk of an operational failure with respect to its customers’ systems. The Company’s risk and exposure to these matters remainsheightened because of, among other things, the evolving nature of these threats and the continued uncertain global economic environment.
As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance its
protective measures, investigate and remediate any information security vulnerabilities, or respond to any changes to state or federal regulations, policystatements or laws concerning information systems or security. Any failure to maintain adequate security over its information systems, its technology-drivenproducts and services or its customers’ personal and transactional information could negatively affect its business and its reputation and result in fines, penalties,or other costs, including litigation expense and/or additional compliance costs, all of which could have a material adverse effect on its financial condition, resultsof operations and liquidity. Furthermore, the public perception that a cyber-attack on the Company’s systems has been successful, whether or not this perception
is correct, may damage the Company’s reputation with customers and third parties with whom it does business. A successful penetration or circumvention ofsystem security could cause the Company negative consequences, including loss of customers and business opportunities, disruption to the Company’soperations and business, misappropriation or destruction of the Company’s confidential information and/or that of its customers, or damage to its customers’and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines,penalties or intervention, loss of confidence in the Company’s security measures, reputational damage, reimbursement or other compensatory costs, additionalcompliance costs, and could adversely impact the Company’s results of operations, liquidity and financial condition.
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Competition from financial institutions and other financial service providers may adversely affect the Company’s profitability.
The banking business is highly competitive and the Company experiences competition in each of its markets from many other financial and non-financialinstitutions. The Company competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer financecompanies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, mobile payment platforms, as well as othercommunity banks and super-regional and national financial institutions that operate offices in the Company’s primary market areas and elsewhere. Many of theCompany’s competitors are well-established, larger financial institutions that have greater resources and lending limits and a lower cost of funds than theCompany has.
Additionally, the Company faces competition from similarly sized and smaller community banks, including those with senior management who were
previously affiliated with other local or regional banks or those controlled by investor groups with strong local business and community ties. These communitybanks may offer higher deposit rates or lower cost loans in an effort to attract the Company’s customers, and may attempt to hire the Company’s managementand employees.
Some of the Company’s competitors, including credit unions, are not subject to certain regulatory constraints, such as the CRA, which requires the
Company to, among other things, implement procedures to make and monitor loans throughout the communities it serves. Credit unions also have federal taxexemptions that may allow them to offer lower rates on loans and higher rates on deposits than taxpaying financial institutions such as commercial banks. Inaddition, non-depository institution competitors are generally not subject to the extensive regulation applicable to institutions, like the Bank, that offer federallyinsured deposits, which affords them the advantage of operating with greater flexibility and lower cost structures. Other institutions may have other competitiveadvantages in particular markets or may be willing to accept lower profit margins on certain products.
The Company competes with these other financial and non-financial institutions both in attracting deposits and in making loans. In addition, the
Company has to attract its customer base from other existing financial institutions and from new residents. This competition at times has made it more difficultfor the Company to make new loans and at times has forced the Company to offer higher deposit rates or utilize secondary sources of liquidity. Pricecompetition for loans and deposits might result in the Company earning less interest on its loans and paying more interest on its deposits, which reduces theCompany’s net interest income. The Company’s profitability depends upon its continued ability to successfully compete with an array of financial and non-financial institutions in its market areas.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued
consolidation. For example, the Growth Act and certain implementing regulations, significantly reduce the regulatory burden of certain large bank holdingcompanies and raise the asset thresholds at which more onerous requirements apply, which could cause certain large bank holding companies to become morecompetitive, to more aggressively pursue expansion or to more readily consolidate with similar sized financial institutions. Also, technology has loweredbarriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as mobile payment and other automatictransfer and payment systems, and for banks that do not have a physical presence in the Company’s markets to compete for deposits. The absence of regulatoryrequirements may give non-bank financial companies a competitive advantage over the Company.
The Company’s key management personnel may leave at any time.
The Company’s future success depends to a significant extent on the continued service of its key management personnel, especially John McDearman,
III, its president and chief executive officer, and John Foster, the president of the Bank. While the Company does not have employment agreements with any ofits personnel and can provide no assurance that it will be able to retain any of its key officers and employees or attract and retain qualified personnel in thefuture, it has entered into non-competition agreements with such persons which would prevent them, in most circumstances, from competing with the Bank forone year following their termination. In addition, these persons are parties to certain deferred compensation, supplemental retirement and equity incentive plans,the benefits of which would cease to accrue upon the termination of the person’s employment with the Company or the Bank.
An ineffective risk management framework could have a material adverse effect on the Company’s strategic planning and its ability to mitigate risks
and/or losses and could have adverse regulatory consequences.
The Company has implemented a risk management framework to identify and manage its risk exposure. This framework is comprised of variousprocesses, systems and strategies, and is designed to manage the types of risk to which it is subject, including, among others, credit, market, liquidity,operational, capital, compliance, strategic and reputational risks. The Company’s framework also includes financial, analytical, forecasting, or other modelingmethodologies, which involves management assumptions and judgment. However, there is no assurance that the Company’s risk management framework willbe effective under all circumstances or that it will adequately identify, manage or mitigate any risk or loss to it. If the Company’s risk management framework isnot effective, it could suffer unexpected losses and become subject to regulatory consequences, as a result of which its business, financial condition, results ofoperations or prospects could be materially adversely affected.
The Company’s selection of accounting policies and methods may affect its reported financial results.
The Company’s accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of
operations. The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply withGAAP and reflect management’s judgment of the most appropriate manner to report its financial condition and results of operations. In some cases,management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yetwhich may result in the Company reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting the Company’s financial condition and results of operations. They require management to make
difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or usingdifferent assumptions or estimates. Because of the uncertainty of estimates involved in these matters, the Company may be required to do one or more of thefollowing: significantly increase the allowance for loan losses or sustain loan losses that are significantly higher than the reserve provided; reduce the carrying
value of an asset measured at fair value; recognize an other-than-temporary impairment of securities; or significantly increase the Company’s accrued taxliability. Any of these could have a material adverse effect on the Company’s business, financial condition or results of operations. For a discussion of theCompany’s critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical AccountingEstimates” contained in the 2020 Annual Report.
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The Company currently invests in bank owned life insurance (“BOLI”) and may continue to do so in the future.
The Company had approximately $35.2 million in general, hybrid and separate account BOLI contracts at December 31, 2020. BOLI is an illiquid long-term asset that provides tax savings because cash value growth and life insurance proceeds are not taxable, subject to certain exceptions. However, if theCompany needed additional liquidity and converted the BOLI to cash, such transaction would be subject to ordinary income tax and applicable penalties. TheCompany is also exposed to the credit risk of the underlying securities in the investment portfolio and to the insurance carrier’s credit risk (in a general accountcontract). If BOLI was exchanged to another carrier, additional fees would be incurred and a tax-free exchange could only be done for insureds that were stillactively employed by the Company at that time. There is interest rate risk relating to the market value of the underlying investment securities associated with theBOLI in that there is no assurance that the market value of these securities will not decline. Investing in BOLI exposes the Company to liquidity, credit andinterest rate risk, which could adversely affect the Company’s results of operations, financial condition and liquidity.
The Company’s business reputation and relationships are important and any damage to them could have a material adverse effect on its business.
The Company’s reputation is very important in sustaining its business and it relies on its relationships with its current, former and potential clients and
shareholders and other actors in the industries that it serves. Any damage to the Company’s reputation, whether arising from regulatory, supervisory orenforcement actions, matters affecting the Company’s financial reporting or compliance with SEC requirements, negative publicity, the way in which theCompany conducts its business or otherwise could strain its existing relationships and make it difficult for the Company to develop new relationships. Any suchdamage to the Company’s reputation and relationships could in turn lead to a material adverse effect on its business.
The Company is subject to regulatory oversight and certain litigation, and its expenses related to this regulatory oversight and litigation may
adversely affect its results.
The Company is from time to time subject to certain litigation in the ordinary course of its business. The Company may also be subject to claims relatedto its loan servicing programs, particularly those involving servicing of commercial real estate loans. These and other claims and legal actions, as well assupervisory and enforcement actions by the Company’s regulators, including those with oversight of its loan servicing programs, could involve large monetaryclaims, capital directives, agreements with federal regulators, cease and desist penalties and orders and significant defense costs. The outcome of any such casesor actions is uncertain. Substantial legal liability or significant regulatory action against the Company could have material adverse financial effects or causesignificant reputational harm to the Company, which in turn could seriously harm its business prospects.
In accordance with GAAP, for matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. For matters
where it is probable the Company will incur a loss and the amount can be reasonably estimated, the Company establishes an accrual for the loss. Onceestablished, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings or threatened claims,however, may turn out to be substantially higher than the amount accrued. Further, the Company’s insurance may not cover all litigation, other proceedings orclaims, or the costs of defense. Future developments could result in an unfavorable outcome for any existing or new lawsuits or investigations in which theCompany is, or may become, involved, which may have a material adverse effect on its business and its results of operations.
The soundness of other financial institutions could adversely affect the Company.
The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and financial stability of other financial
institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure tovarious counterparties, including brokers and dealers, commercial and correspondent banks, and others. As a result, defaults by, or rumors or questions about,one or more financial services institutions, or the financial services industry generally, may result in market-wide liquidity problems and could lead to losses ordefaults by such other institutions. Such occurrences could expose the Company to credit risk in the event of default of one or more counterparties and couldhave a material adverse effect on the Company’s financial position, results of operations and liquidity.
Natural disasters may adversely affect the Company.
The Company’s operations and customer base are located in markets where natural disasters, including tornadoes, severe storms, fires and floods often
occur. Such natural disasters, like the tornado that struck the Company's markets in March 2020, could significantly impact the local population and economiesand the Company’s business, and could pose physical risks to its properties. Although the Company maintains insurance coverages for such events, a significantnatural disaster in or near one or more of the Company’s markets could have a material adverse effect on its financial condition, results of operations orliquidity.
The Company’s asset valuation may include methodologies, estimations and assumptions which are subject to differing interpretations and could
result in changes to asset valuations that may materially adversely affect its results of operations or financial condition.
The Company uses estimates, assumptions, and judgments when financial assets and liabilities are measured and reported at fair value. Assets andliabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuationadjustments for certain assets and liabilities are based on quoted market prices and/or other observable inputs provided by independent third-party sources, whenavailable. When such third-party information is not available, fair value is estimated primarily by using cash flow and other financial modeling techniquesutilizing assumptions such as credit quality, liquidity, interest rates and other relevant inputs. Changes in underlying factors, assumptions, or estimates in any ofthese areas could materially impact the Company’s future financial condition and results of operations.
During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may
be difficult to value certain assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were inactive markets with significant observable data that become illiquid due to the current financial environment. In such cases, certain asset valuations may requiremore subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation.Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of assets as reported within the
Company’s consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverseeffect on results of operations or financial condition.
Valuation methodologies which are particularly susceptible to the conditions mentioned above include those used to value certain securities in the
Company’s available for sale investment portfolio such as non-agency mortgage and asset-backed securities, in addition to loans held for sale and intangibleassets.
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If the Company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately report its financialresults. As a result, current and potential holders of the Company’s common stock could lose confidence in the Company’s financial reporting, which wouldharm the Company’s business and the trading price of its securities.
Maintaining and adapting the Company’s internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, is expensive
and requires significant management attention. Moreover, as the Company continues to grow, its internal controls may become more complex and requireadditional resources to ensure they remain effective amid dynamic regulatory and other guidance. Failure to maintain effective controls or implement requirednew or improved controls or difficulties encountered in the process may harm the Company’s results of operations and financial condition or cause it to fail tomeet its reporting obligations. If the Company or its independent registered public accounting firm identify material weaknesses in the Company’s internalcontrol over financial reporting or the Company is required to restate the its financial statements, the Company could be required to implement expensive andtime-consuming remedial measures and could lose investor confidence in the accuracy and completeness of its financial reports. The Company may also faceregulatory enforcement or other actions. This could have an adverse effect on the Company’s business, financial condition or results of operations, as well as thetrading price of the Company’s securities, and could potentially subject the Company to litigation.
Regulatory and Compliance Risks
Federal or state legislation or regulation may increase the Company’s expenses and reduce earnings.
Federal bank regulators continue to closely scrutinize financial institutions, and additional restrictions (including those originating from the Dodd-Frank
Act) have been proposed or adopted by regulators and by Congress. Changes in tax law, federal legislation, regulation or policies, such as bankruptcy laws,deposit insurance, consumer protection laws, and capital requirements, among others, can result in significant increases in the Company’s expenses and/orcharge-offs, which may adversely affect its results of operations and financial condition. Changes in state or federal tax laws or regulations can have a similarimpact. State and municipal governments, including the State of Tennessee, could seek to increase their tax revenues through increased tax levies which couldhave a meaningful impact on the Company’s results of operations. Furthermore, financial institution regulatory agencies may continue to be aggressive inresponding to concerns and trends identified in examinations, including the continued issuance of additional formal or informal enforcement or supervisoryactions. These actions, whether formal or informal, could result in the Company’s or the Bank’s agreeing to limitations or monetary penalties or to take actionsthat limit its operational flexibility, restrict its growth, increase its operating expenses or increase its capital or liquidity levels, any of which could materially andadversely affect the Company’s results of operations and financial condition. Failure to comply with any formal or informal regulatory actions or restrictions,including informal supervisory actions, could lead to further regulatory enforcement actions. Negative developments in the financial services industry and theimpact of recently enacted or new legislation in response to those developments could negatively impact the Company’s operations by restricting its businessoperations, including its ability to originate or sell loans, and adversely impact its financial performance. In addition, industry, legislative or regulatorydevelopments may cause the Company to materially change its existing strategic direction, capital strategies, compensation or operating plans.
Additionally, the Company is subject to laws regarding its handling, disclosure and processing of personal and confidential information of certain parties,
such as its employees, customers, suppliers, counterparties and other third parties. The GLB Act requires the Company to periodically disclose its privacypolicies and practices relating to sharing such information and enables retail customers to opt out of the Company’s ability to share information with unaffiliatedthird parties, under certain circumstances. Other laws and regulations impact the Company’s ability to share certain information with affiliates and non-affiliatesfor marketing and/or non-marketing purposes, or to contact customers with marketing offers. The Company is subject to laws that require it to implement acomprehensive information security program that includes administrative, technical and physical safeguards to provide the security and confidentiality ofcustomer records and information. Additionally, other legislative and regulatory activity continue to lend uncertainty to privacy compliance requirements thatimpact the Company’s business. The Company also expects that there will continue to be new laws, regulations and industry standards concerning privacy, dataprotection and information security proposed and enacted in various jurisdictions. The potential effects of pending legislation are far-reaching and may requirethe Company to modify its data processing practices and policies and to incur substantial costs and expenses in an effort to comply.
The Company, as well as the Bank, operate in an increasingly highly regulated environment and are supervised and examined by various federal and
state regulatory agencies who may adversely affect the Company’s ability to conduct business.
The TDFI and the FRB supervise and examine the Bank and the Company, respectively. Because the Bank’s deposits are federally insured, the FDIC alsoregulates its activities. These and other regulatory agencies impose certain regulations and restrictions on the Bank, including:
● explicit standards as to capital and financial condition; ● limitations on the permissible types, amounts and extensions of credit and investments; ● restrictions on permissible non-banking activities; and ● restrictions on dividend payments.
Federal and state regulatory agencies have extensive discretion and power to prevent or remedy unsafe or unsound practices or violations of law by banksand bank holding companies. As a result, the Company must expend significant time and expense to assure that it is in compliance with regulatory requirementsand agency practices.
The Company, as well as the Bank, also undergoes periodic examinations by one or more regulatory agencies. Following such examinations, the
Company or the Bank may be required, among other things, to make additional provisions to its allowance for loan loss, to restrict its operations or to increaseits capital levels. These actions would result from the regulators’ judgments based on information available to them at the time of their examination. The Bank’soperations are also governed by a wide variety of state and federal consumer protection laws and regulations. These federal and state regulatory restrictions limitthe manner in which the Company and the Bank may conduct business and obtain financing. These laws and regulations can and do change significantly fromtime to time, and any such changes could adversely affect the Company’s results of operations.
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The Company and the Bank must maintain adequate regulatory capital to support the Company’s business objectives.
Under regulatory capital adequacy guidelines and other regulatory requirements, the Company and the Bank must satisfy capital requirements based uponquantitative measures of assets, liabilities and certain off-balance sheet items. The satisfaction of these requirements by the Company and the Bank is subject toqualitative judgments by regulators that may differ materially from management’s and that are subject to being determined retroactively for prior periods.Additionally, regulators can make subjective assessments about the adequacy of capital levels, even if the Bank’s reported capital exceeds the “well-capitalized”requirements.
Failure to meet regulatory capital standards could have a material adverse effect on the Company’s business, including damaging the confidence of
customers in the Company, and adversely impacting its reputation and competitive position and retention of key personnel. Any of these developments couldlimit our access to: brokered deposits; the FRB discount window; advances from the FHLB; capital markets transactions; and development of new financialservices.
Failure to meet regulatory capital standards may also result in higher FDIC assessments. If the Bank falls below guidelines for being deemed “adequately
capitalized” the FDIC or FRB could impose restrictions on the Company’s activities and a broad range of regulatory requirements in order to effect “promptcorrective action.” The capital requirements applicable to the Company and the Bank are in a process of continuous evaluation and revision in connection withactions of the Basel Committee, regulators and the requirements of the Dodd-Frank Act. The Company cannot predict the final form, or the effects, of theseregulations on its business, but among the possible effects are requirements that the Company slow its rate of growth or obtain additional capital which couldreduce the Company’s earnings or dilute its existing shareholders.
The Company is required to act as a source of financial and managerial strength for the Bank in times of stress.
Under federal law, the Company is required to act as a source of financial and managerial strength to the Bank, and to commit resources to support the
Bank if necessary. The Company may be required to commit additional resources to the Bank, or guarantee the Bank’s compliance with a capital plan developedby the Bank to raise capital, at times when the Company may not be in a financial position to provide such resources or guarantee or when it may not be in theCompany’s, or its shareholders’ or its creditors’ best interests to do so. Providing such support is more likely during times of financial stress for the Companyand the Bank, which may make any capital the Company is required to raise to provide such support more expensive than it might otherwise be. In addition, anycapital loans the Company makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of theCompany’s bankruptcy, any commitment by it to a federal banking regulator to maintain the capital of the Bank will be assumed by the bankruptcy trustee andentitled to priority of payment.
Non-compliance with the Patriot Act, the BSA or other laws and regulations could result in fines or sanctions against the Company.
The BSA, as amended by the Patriot Act, requires financial institutions to design and implement programs to prevent financial institutions from being
used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with theTreasury's Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity ofcustomers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions onconducting acquisitions or establishing new branches, as well as additional operating expenses to add staff and/or technological enhancements to the Company’ssystems to better comply.
Risks Relating to the Company’s Securities
The Company’s common stock is thinly traded, and recent prices may not reflect the prices at which the stock would trade in an active trading
market.
The Company’s common stock is not traded through an organized exchange, but rather is traded in individually-arranged transactions between buyers andsellers. Therefore, recent prices at which the stock has traded may not necessarily reflect the actual value of the Company’s common stock. A shareholder’sability to sell the shares of Company common stock in a timely manner may be substantially limited by the lack of a trading market for the common stock.
The Company’s ability to declare and pay dividends is limited.
While the Company has historically paid a biannual cash dividend on its common stock, there can be no assurance of whether or when it may pay
dividends on its common stock in the future. Future dividends, if any, will be declared and paid at the discretion of the Company’s board of directors and willdepend on a number of factors, including the Company’s and the Bank’s capital levels. The Company’s principal source of funds used to pay cash dividends onits common stock will be dividends that it receives from the Bank. Although the Bank’s asset quality, earnings performance, liquidity and capital requirementswill be taken into account before the Company declares or pays any future dividends on its common stock, the Company’s board of directors will also considerits liquidity and capital requirements and its board of directors could determine to declare and pay dividends without relying on dividend payments from theBank.
Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends the Company may declare and pay and that the
Bank may declare and pay to the Company. For example, FRB regulations implementing the capital rules required under Basel III do not permit dividendsunless capital levels exceed certain higher levels applying capital conservation buffers. In addition, the FRB has issued supervisory guidance advising bankholding companies to eliminate, defer or reduce dividends paid on common stock and other forms of Tier 1 capital where the company’s net income available toshareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, the company’sprospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition or the companywill not meet, or is in danger of not meeting, minimum regulatory capital adequacy ratios. Recent supplements to this guidance reiterate the need for bankholding companies to inform their applicable reserve bank sufficiently in advance of the proposed payment of a dividend in certain circumstances.
An investment in the Company’s common stock is not an insured deposit.
The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by anyother public or private entity. Investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section andelsewhere in this report and is subject to the equity market forces like other common stock. As a result, if you acquire the Company’s stock, you could lose someor all of your investment.
23
Item 1B. Unresolved Staff Comments. None. Item 2. Properties
The Company’s main office is owned by the Company and consists of approximately four acres at 623 West Main Street, Lebanon, Tennessee. The
building is a two story, brick building, with approximately 35,000 square feet. The lot has approximately 350 feet of road frontage on West Main Street. The Bank's67,000 square foot operations center is located at 105 North Castle Heights Avenue, Lebanon, Tennessee, which is adjacent to the 623 West Main Street office. Inaddition thereto, the Bank has twenty-eight branch locations located at the following locations: 1436 West Main Street, Lebanon, Tennessee; 1444 BaddourParkway, Lebanon, Tennessee; 200 Tennessee Boulevard, Lebanon, Tennessee; 8875 Stewart’s Ferry Pike, Gladeville, Tennessee; 402 Public Square, Watertown,Tennessee; 1476 North Mt. Juliet Road, Mt. Juliet, Tennessee; 11835 Highway 70, Mount Juliet, Tennessee; 1130 Castle Heights Avenue North, Lebanon,Tennessee; 127 McMurry Blvd., Hartsville, Tennessee; the Wal-Mart Supercenter, Lebanon, Tennessee; 440 Highway 109 North, Lebanon, Tennessee; 4736Andrew Jackson Parkway in Hermitage, Tennessee; 3110 Memorial Blvd in Murfreesboro, Tennessee; 210 Commerce Drive in Smyrna, Tennessee; 2640 SouthChurch Street, Murfreesboro, Tennessee; 217 Donelson Pike, Nashville, Tennessee; 2930 West End Avenue, Nashville, Tennessee; 710 NW Broad inMurfreesboro, Tennessee; 4195 Franklin Road, Murfreesboro, Tennessee; 576 West Broad Street in Smithville, Tennessee; 306 Brush Creek Road in Alexandria,Tennessee; 1300 Main Street North in Carthage, Tennessee; 7 New Middleton Highway in Gordonsville, Tennessee; 709 South Mt. Juliet Road, Mt. Juliet,Tennessee; 455 West Main Street, Gallatin, Tennessee; 175 East Main Street, Hendersonville, Tennessee; 320 South Jefferson Avenue, Cookeville, Tennessee; and9200 Carothers Parkway, Suite 108, Franklin, Tennessee.
The Mt. Juliet office contains approximately 16,000 square feet of space; the Castle Heights Office contains 2,400 square feet of space; the HartsvilleOffice contains 8,000 square feet of space; the Leeville-109 branch contains approximately 4,000 square feet. The Hermitage branch opened in the fall of 1999 andcontains 8,000 square feet of space. The Gladeville branch contains approximately 3,400 square feet of space. The Lebanon facility at Tennessee Boulevard wasexpanded in 1997 to 2,200 square feet of space. The Mt. Juliet facility on Highway 70 was completed in July 2004 and contains approximately 3,450 square feet ofspace and the Providence facility which was opened in 2011 contains approximately 4,450 square feet of space. The NorthWest Broad Street facility was relocatedfrom a leased office to an office owned by the Bank in 2011 and contains approximately 6,300 square feet of space. The Smyrna office opened in September of2006 and contains approximately 3,600 square feet of space. The Memorial Blvd office in Murfreesboro opened in October of 2006 and contains approximately7,800 square feet of space. The Highway 96 office in Murfreesboro opened in January 2017 and contains approximately 4,700 square feet of space. The SouthChurch Street office in Murfreesboro opened in January 2008 and contains approximately 7,800 square feet of space. The West End office in Nashville opened inAugust 2017 and contains approximately 7,062 square feet of space. The Cool Springs office in Franklin opened in December 2018 and contains approximately5,940 square feet of space. Each of the branch facilities of the Bank not otherwise described above contains approximately 1,000 square feet of space.
The Bank also has a facility at 576 West Broad Street in Smithville, Tennessee which was expanded in 2001 and now contains approximately 10,300square feet of space and a facility at 306 Brush Creek Road in Alexandria, Tennessee which occupies approximately 2,400 square feet of space. The Bank ownsboth facilities. The Bank also owns a building at 1300 Main Street North, Carthage, Tennessee, which was expanded in 2005 and now contains approximately11,000 square feet and a second facility in Gordonsville, Tennessee at 7 New Middleton Highway, Gordonsville, Tennessee. The Bank owns a building at 455 WestMain Street in Gallatin, Tennessee which occupies approximately 4,800 square feet of space and a building at 175 East Main Street in Hendersonville, Tennesseewhich occupies approximately 6,300 square feet of space. The Bank owns a building at 217 Donelson Pike, Donelson, Tennessee which occupies approximately8,000 square feet of space and a building at 320 South Jefferson Avenue, Cookeville, Tennessee, which occupies approximately 6,300 square feet of space. TheBank owns all of its branch facilities except for the Lebanon facility at Tennessee Boulevard, its space in the Wal-Mart Supercenter, its West End office inNashville and its Cool Springs office in Franklin. The Bank also leases space at six locations within Wilson County, DeKalb County, Rutherford County, DavidsonCounty and Smith County where it maintains and operates automatic teller machines.
Item 3. Legal Proceedings
As of the date hereof, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of itsproperties are subject; nor are there material proceedings known to the Company or its subsidiaries to be contemplated by any governmental authority; nor are therematerial proceedings known to the Company or its subsidiaries, pending or contemplated, in which any director, officer or affiliate or any principal security holderof the Company or any of its subsidiaries or any associate of any of the foregoing, is a party or has an interest adverse to the Company or any of its subsidiaries.
Item 4. Mine Safety Disclosures Not Applicable.
24
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchasers of Equity Securities Information required by this item is contained under the heading “Holding Company & Stock Information” on page 14 of the Company’s 2020Annual Report and isincorporated herein by reference. The Company did not repurchase any shares of its common stock during the quarter ended December 31, 2020. Item 6. Selected Financial Data Information required by this item is contained under the heading “Wilson Bank Holding Company Financial Highlights (Unaudited)” on page 15 of the Company’s2020Annual Report and is incorporated herein by reference. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Information required by this item is contained under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as setforth on pages 1 through 24 of the financial information included with the Company’s 2020Annual Report and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Information required by this item is contained under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Quantitative and Qualitative Disclosures About Market Risk” as set forth on pages 21 of the financial information included with the Company’s 2020Annual Reportand is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The consolidated financial statements and the independent auditor’s report of Maggart & Associates, P.C. required by this item are contained in pages 26 through78 of the financial information included with the Company’s 2020 Annual Report and are incorporated herein by reference. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “ExchangeAct”), that are designed to ensure that information required to be disclosed by it in the reports that if 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 accumulatedand communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its ChiefExecutive 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 periodcovered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective. Management Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal controlsystem was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation ofpublished financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making thisassessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-IntegratedFramework (2013). Based on that assessment, management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective based onthose criteria. The Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting, whichreport is contained on pages 29 through 30 of the Company’s 2020 Annual Report and is incorporated herein by reference. Changes in Internal Controls No changes were made to the Company’s internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or thatare reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information None.
25
PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item with respect to directors is incorporated herein by reference to the sections entitled “Item-1 Election of Directors-InformationConcerning Nominees” and “Item-1 Election of Directors-Director Qualifications” in the Company’s definitive proxy materials filed in connection with the 2021Annual Meeting of Shareholders. The information required by this item with respect to executive officers is set forth in Part I of this report under the caption“Information about our Executive Officers.” All officers serve at the pleasure of the Board of Directors. No officers are involved in any legal proceedings which are material to an evaluation of their ability andintegrity. The Company has adopted a code of conduct for its senior executive and financial officers (the “Code of Conduct”), a copy of which will be provided to anyperson, without charge, upon request to the Company at 623 West Main Street, Lebanon, Tennessee 37087, Attention: Corporate Secretary. The Company willmake any legally required disclosures regarding amendments to, or waivers of, provisions of its Code of Conduct either in a Current Report on Form 8-K or on itswebsite, in each case in accordance with the rules and regulations of the SEC. The information required by this item with respect to the Company’s audit committee and any “audit committee financial expert” is incorporated herein byreference to the section entitled “Item-1 Election of Directors - Description of the Board and Committees of the Board” in the Company’s definitive proxy materialsto be filed in connection with the 2021 Annual Meeting of Shareholders. The information required by this item with respect to Section 16(a) of the Exchange Act is incorporated herein by reference to the section entitled “Item-1 Electionof Directors - Delinquent Section 16(a) Reports” in the Company’s definitive proxy materials to be filed in connection with the 2021 Annual Meeting ofShareholders. Item 11. Executive Compensation Information required by this item is incorporated herein by reference to the information under the principal heading entitled “Executive Compensation,” includingbut not limited to the subheading entitled “Personnel Committee Report on Executive Compensation,” and the principal heading entitled “Director Compensation,”including but not limited to the subheading entitled “Personnel Committee Interlocks and Insider Participation,” in the Company’s definitive proxy materials to befiled in connection with the 2021 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated herein by reference to the section entitled “Stock Ownership” in the Company’s definitive proxy materials to befiled in connection with the 2021 Annual Meeting of Shareholders. The following table summarizes information concerning the Company’s equity compensation plans at December 31, 2020:
Number of securities to be
issued Weighted average exercise
price of Number of securities remaining available
for future
upon exercise of outstanding
options, outstanding options,
warrants and issuance under equity compensation plans
(excludingPlan Category warrants and rights rights securities reflected in first column)Equity compensation plans approved byshareholders 284,591 43.71 430,271
Equity compensation plans not approved byshareholders — — —
Total 284,591 43.71 430,271 Item 13. Certain Relationships and Related Transactions, and Director Independence Information required by this item with respect to certain relationships and related transactions is incorporated herein by reference to the section entitled “CertainRelationships and Related Transactions” in the Company’s definitive proxy materials to be filed in connection with the 2021 Annual Meeting of Shareholders. Information required by this item with respect to director independence is incorporated herein by reference to the section entitled “Item-1 Election of Directors -Director Independence” in the Company’s definitive proxy materials to be filed in connection with the 2021 Annual Meeting of Shareholders. Item 14. Principal Accountant Fees and Services Information required by this item is incorporated herein by reference to the section entitled “Item-2 Ratification of the Appointment of the Independent RegisteredPublic Accounting Firm” in the Company’s definitive proxy materials to be filed in connection with the 2021 Annual Meeting of Shareholders. Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements. See Item 8. (a)(2) Financial Statement Schedules. Not Applicable.
(a)(3) Exhibits. See Index to Exhibits.
Item 16. Form 10K Summary
None.
26
INDEX TO EXHIBITS
3.1
Charter of Wilson Bank Holding Company, as amended (restated for SEC electronic filling purposes only) (incorporated herein byreference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SECon August 9, 2016).
3.2
Bylaws of Wilson Bank Holding Company, as amended (restated for SEC electronic filling purposes only) (incorporated herein byreference to Exhibit 3.2 of the Company’s Quarterly Report on form 10-Q for the quarter ended March 31, 2016 filed with the SECon May 10, 2016).
4.1
Specimen Common Stock Certificate. (incorporated herein by reference to Exhibit 4.1 of the Company’s Registration Statement onForm S-4 (Registration No. 333-121943)).
4.2 Description of the Company's Securities.+
10.1
Wilson Bank Holding Company 2009 Stock Option Plan (incorporated herein by reference to Exhibit 4.3 of the Company’sRegistration Statement on Form S-8 (Registration No. 333-158621)).*
10.2
Form of Wilson Bank Holding Company Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.7 ofthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 000-20402)).*
10.3
Amendment, dated December 30, 2008, to Amended and Restated Executive Salary Continuation Agreement dated as of October7, 2002, by and between Wilson Bank and Trust and J. Randall Clemons (incorporated by reference to Exhibit 10.1 of theCompany’s Current Report on Form 8-K filed with the SEC on January 6, 2009 (File No. 000-20402)).*
10.4
Amendment, dated December 30, 2008, to Amended and Restated Executive Salary Continuation Agreement dated as of October7, 2002, by and between Wilson Bank and Trust and Elmer Richerson (incorporated by reference to Exhibit 10.2 of the Company’sCurrent Report on Form 8-K filed with the SEC on January 6, 2009 (File No. 000-20402)).*
10.5
Amendment, dated December 30, 2008, to Amended and Restated Executive Salary Continuation Agreement dated as of October7, 2002, by and between Wilson Bank and Trust and Lisa T. Pominski (incorporated by reference to Exhibit 10.3 the Company’sCurrent Report on Form 8-K filed with the SEC on January 6, 2009 (File No. 000-20402)).*
10.6
Amendment, dated December 30, 2008, to Amended and Restated Executive Salary Continuation Agreement dated as of October7, 2002, by and between Wilson Bank and Trust and Gary Whitaker (incorporated by reference to Exhibit 10.5 of the Company’sCurrent Report on Form 8-K filed with the SEC on January 6, 2009 (File No. 000-20402)).*
10.7
Amendment, dated December 30, 2008, to Executive Salary Continuation Agreement dated as of January 1, 2006, by and betweenWilson Bank and Trust and John C. McDearman III (incorporated by reference to Exhibit 10.6 of the Company’s Current Reporton Form 8-K filed with the SEC on January 6, 2009 (File No. 000-20402)).*
10.8
Amended and Restated Executive Salary Continuation Agreement dated as of October 7, 2002, by and between Wilson Bank andTrust and J. Randall Clemons (incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed withthe SEC on January 6, 2009 (File No. 000-20402)).*
10.9
Amended and Restated Executive Salary Continuation Agreement dated as of October 7, 2002, by and between Wilson Bank andTrust and Elmer Richerson (incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K filed with theSEC on January 6, 2009 (File No. 000-20402)).*
10.10
Amended and Restated Executive Salary Continuation Agreement dated as of October 7, 2002, by and between Wilson Bank andTrust and Lisa T. Pominski (incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K filed withthe SEC on January 6, 2009 (File No. 000-20402)).*
10.11
Amended and Restated Executive Salary Continuation Agreement dated as of October 7, 2002, by and between Wilson Bank andTrust and Gary Whitaker (incorporated by reference to Exhibit 10.11 of the Company’s Current Report on Form 8-K filed with theSEC on January 6, 2009 (File No. 000-20402)).*
10.12
Executive Salary Continuation Agreement dated as of July 28, 2006, by and between Wilson Bank and Trust and John C.McDearman III (incorporated by reference to Exhibit 10.12 of the Company’s Current Report on Form 8-K filed with the SEC onJanuary 6, 2009 (File No. 000-20402)).*
10.13
Amendment, dated November 23, 2012, to Amended and Restated Executive Salary Continuation Agreement dated as ofOctober 7, 2002, by and between Wilson Bank and Trust and J. Randall Clemons (incorporated by reference to Exhibit 10.1 of theCompany’s Current Report on Form 8-K filed with the SEC on November 29, 2012).*
10.14
Amendment, dated November 23, 2012, to Amended and Restated Executive Salary Continuation Agreement dated as of October7, 2002, by and between Wilson Bank and Trust and Elmer Richerson (incorporated by reference to Exhibit 10.2 of the Company’sCurrent Report on Form 8-K filed with the SEC on November 29, 2012).*
10.15
Amendment, dated November 23, 2012, to Amended and Restated Executive Salary Continuation Agreement dated as of October7, 2002, by and between Wilson Bank and Trust and Lisa T. Pominski (incorporated by reference to Exhibit 10.3 of the Company’sCurrent Report on Form 8-K filed with the SEC on November 29, 2012).*
27
10.16
Amendment, dated November 23, 2012, to Amended and Restated Executive Salary Continuation Agreement dated as of October7, 2002, by and between Wilson Bank and Trust and Gary Whitaker (incorporated by reference to Exhibit 10.4 of the Company’sCurrent Report on Form 8-K filed with the SEC on November 29, 2012).*
10.17
Amendment, dated November 23, 2012, to Executive Salary Continuation Agreement dated as of January 1, 2006, by and betweenWilson Bank and Trust and John C. McDearman III (incorporated by reference to Exhibit 10.5 of the Company’s Current Reporton Form 8-K filed with the SEC on November 29, 2012).*
10.18
Second Amendment, dated November 23, 2012 to Wilson Bank and Trust Amended and Restated Life Insurance EndorsementMethod Split Dollar Plan Agreement dated October 7, 2002 by and between Wilson Bank and Trust and J. Randall Clemons(incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the SEC on November 29,2012).*
10.19
Second Amendment, dated November 23, 2012 to Wilson Bank and Trust Amended and Restated Life Insurance EndorsementMethod Split Dollar Plan Agreement dated October 7, 2002 by and between Wilson Bank and Trust and Elmer Richerson(incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed with the SEC on November 29,2012).*
10.20
Second Amendment, dated November 23, 2012 to Wilson Bank and Trust Amended and Restated Life Insurance EndorsementMethod Split Dollar Plan Agreement dated October 7, 2002 by and between Wilson Bank and Trust and Lisa T. Pominski(incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K filed with the SEC on November 29,2012).*
10.21
Second Amendment, dated November 23, 2012 to Wilson Bank and Trust Amended and Restated Life Insurance EndorsementMethod Split Dollar Plan Agreement dated October 7, 2002 by and between Wilson Bank and Trust and Gary Whitaker(incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K filed with the SEC on November 29,2012).*
10.22
Amendment, dated November 23, 2012 to Wilson Bank and Trust Life Insurance Endorsement Method Split Dollar PlanAgreement dated as of July 28, 2006 by and between Wilson Bank and John C. McDearman III (incorporated by reference toExhibit 10.10 of the Company’s Current Report on Form 8-K filed with the SEC on November 29, 2012).*
10.23
Supplemental Executive Retirement Plan Agreement, dated November 23, 2012, by and between Wilson Bank and Trust and J.Randall Clemons (incorporated by reference to Exhibit 10.11 of the Company’s Current Report on Form 8-K filed with the SEC onNovember 29, 2012).*
10.24
Supplemental Executive Retirement Plan Agreement, dated November 23, 2012, by and between Wilson Bank and Trust andElmer Richerson (incorporated by reference to Exhibit 10.12 of the Company’s Current Report on Form 8-K filed with the SEC onNovember 29, 2012).*
10.25
Supplemental Executive Retirement Plan Agreement, dated November 23, 2012, by and between Wilson Bank and Trust and LisaT. Pominski (incorporated by reference to Exhibit 10.13 of the Company’s Current Report on Form 8-K filed with the SEC onNovember 29, 2012).*
10.26
Supplemental Executive Retirement Plan Agreement, dated November 23, 2012, by and between Wilson Bank and Trust and GaryWhitaker (incorporated by reference to Exhibit 10.14 of the Company’s Current Report on Form 8-K filed with the SEC onNovember 29, 2012).*
10.27
Supplemental Executive Retirement Plan Agreement, dated November 23, 2012, by and between Wilson Bank and Trust and JohnC. McDearman III (incorporated by reference to Exhibit 10.15 of the Company’s Current Report on Form 8-K filed with the SECon November 29, 2012).*
10.28
Amendment, dated August 21, 2003 to Wilson Bank and Trust Amended and Restated Life Insurance Endorsement Method SplitDollar Plan Agreement dated October 7, 2002, by and between Wilson Bank and Trust and J. Randall Clemons (incorporated byreference to Exhibit 10.16 of the Company’s Current Report on Form 8-K filed with the SEC on November 29, 2012).*
10.29
Amendment, dated August 21, 2003 to Wilson Bank and Trust Amended and Restated Life Insurance Endorsement Method SplitDollar Plan Agreement dated October 7, 2002, by and between Wilson Bank and Trust and Elmer Richerson (incorporated byreference to Exhibit 10.17 of the Company’s Current Report on Form 8-K filed with the SEC on November 29, 2012).*
10.30
Amendment, dated August 21, 2003 to Wilson Bank and Trust Amended and Restated Life Insurance Endorsement Method SplitDollar Plan Agreement dated October 7, 2002, by and between Wilson Bank and Trust and Lisa T. Pominski (incorporated byreference to Exhibit 10.18 of the Company’s Current Report on Form 8-K filed with the SEC on November 29, 2012).*
10.31
Amendment, dated August 21, 2003 to Wilson Bank and Trust Amended and Restated Life Insurance Endorsement Method SplitDollar Plan Agreement dated October 7, 2002, by and between Wilson Bank and Trust and Gary Whitaker (incorporated byreference to Exhibit 10.19 of the Company’s Current Report on Form 8-K filed with the SEC on November 29, 2012).*
10.32
Wilson Bank and Trust Amended and Restated Life Insurance Endorsement Method Split Dollar Plan Agreement dated October 7,2002, by and between Wilson Bank and Trust and J. Randall Clemons (incorporated by reference to Exhibit 10.20 of theCompany’s Current Report on Form 8-K filed with the SEC on November 29, 2012).*
10.33
Wilson Bank and Trust Amended and Restated Life Insurance Endorsement Method Split Dollar Plan Agreement dated October 7,2002, by and between Wilson Bank and Trust and Elmer Richerson (incorporated by reference to Exhibit 10.21 of the Company’sCurrent Report on Form 8-K filed with the SEC on November 29, 2012).*
28
10.34
Wilson Bank and Trust Amended and Restated Life Insurance Endorsement Method Split Dollar Plan Agreement dated October 7,2002, by and between Wilson Bank and Trust and Lisa T. Pominski (incorporated by reference to Exhibit 10.22 of the Company’sCurrent Report on Form 8-K filed with the SEC on November 29, 2012).*
10.35
Wilson Bank and Trust Amended and Restated Life Insurance Endorsement Method Split Dollar Plan Agreement dated October 7,2002, by and between Wilson Bank and Trust and Gary Whitaker (incorporated by reference to Exhibit 10.23 of the Company’sCurrent Report on Form 8-K filed with the SEC on November 29, 2012).*
10.36
Wilson Bank and Trust Life Insurance Endorsement Method Split Dollar Plan Agreement dated July 28, 2006, by and betweenWilson Bank and Trust and John C. McDearman III (incorporated by reference to Exhibit 10.24 of the Company’s Current Reporton Form 8-K filed with the SEC on November 29, 2012).*
10.37
Executive Survivor Income Agreement, dated April 14, 2014, by and between the Bank and Lisa Pominski (incorporated byreference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2014).
10.38
Executive Survivor Income Agreement, dated April 14, 2014, by and between the Bank and Gary Whitaker (incorporated byreference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2014).
10.39
Executive Survivor Income Agreement, dated April 14, 2014, by and between the Bank and John C. McDearman, III (incorporatedby reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2014).
10.40
Director Survivor Income Agreement, dated April 14, 2014, by and between the Bank and J. Randall Clemons (incorporated byreference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2014).
10.41
Director Survivor Income Agreement, dated April 14, 2014, by and between the Bank and H. Elmer Richerson (incorporated byreference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2014).
10.42
Director Survivor Income Agreement, dated April 14, 2014, by and between the Bank and Jack Bell (incorporated by reference toExhibit 10.6 of the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2014).
10.43
Director Survivor Income Agreement, dated April 14, 2014, by and between the Bank and James Comer (incorporated by referenceto Exhibit 10.7 of the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2014).
10.44
Director Survivor Income Agreement, dated April 14, 2014, by and between the Bank and James Patton (incorporated by referenceto Exhibit 10.8 of the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2014).
10.45
Director Survivor Income Agreement, dated April 6, 2015, by and between the Bank and William Jordan (incorporated byreference to Exhibit 10.46 of the Company's Annual Report on Form 10-K for the year ended December 31, 2015, filed with theSEC on March 14, 2016).
10.46
Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and J. RandallClemons (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on May 29,2015).*
10.47
Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and ElmerRicherson (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on May29, 2015).*
10.48
Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and Lisa T.Pominski (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on May 29,2015).*
10.49
Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and GaryWhitaker (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on May 29,2015).*
10.50
Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and John C.McDearman III (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the SEC onMay 29, 2015).*
10.51
Second Amendment to the Amended and Restated Executive Salary Continuation Agreement dated as of October 7, 2002, by andbetween Wilson Bank and Trust and J. Randall Clemons (incorporated by reference to Exhibit 10.1 of the Company’s CurrentReport on Form 8-K filed with the SEC on September 30, 2016).*
10.52
Second Amendment to the Amended and Restated Executive Salary Continuation Agreement dated as of October 7, 2002, by andbetween Wilson Bank and Trust and Elmer Richerson (incorporated by reference to Exhibit 10.2 of the Company’s Current Reporton Form 8-K filed with the SEC on September 30, 2016).*
10.53
Second Amendment to the Amended and Restated Executive Salary Continuation Agreement dated as of October 7, 2002, by andbetween Wilson Bank and Trust and Lisa T. Pominski (incorporated by reference to Exhibit 10.3 of the Company’s Current Reporton Form 8-K filed with the SEC on September 30, 2016).*
10.54
Second Amendment to the Amended and Restated Executive Salary Continuation Agreement dated as of October 7, 2002, by andbetween Wilson Bank and Trust and Gary Whitaker (incorporated by reference to Exhibit 10.4 of the Company’s Current Reporton Form 8-K filed with the SEC on September 30, 2016).*
10.55
Second Amendment to the Executive Salary Continuation Agreement dated as of January 1, 2006, by and between Wilson Bankand Trust and John C. McDearman III (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-Kfiled with the SEC on September 30, 2016).*
29
10.56
Wilson Bank Holding Company Amended and Restated 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 ofthe Company’s Current Report on Form 8-K filed with the SEC on September 30, 2016).*
10.57
Form of Stock Appreciation Rights Agreement for employees under the Wilson Bank Holding Company Amended and Restated2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed withthe SEC on September 30, 2016).*
10.58
Form of Non-qualified Stock Option Agreement for employees under the Wilson Bank Holding Company Amended and Restated2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K filed withthe SEC on September 30, 2016).*
10.59
Form of Stock Appreciation Rights Agreement for employee directors under the Wilson Bank Holding Company Amended andRestated 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-Kfiled with the SEC on September 30, 2016).*
10.60
Form of Non-qualified Stock Option Agreement for employee directors under the Wilson Bank Holding Company Amended andRestated 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 of the Company’s Current Report on Form 8-Kfiled with the SEC on September 30, 2016).*
10.61
Form of Stock Appreciation Rights Agreement for directors under the Wilson Bank Holding Company Amended and Restated2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 of the Company’s Current Report on Form 8-K filed withthe SEC on September 30, 2016).*
10.62
Form of Non-qualified Stock Option Agreement for directors under the Wilson Bank Holding Company Amended and Restated2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.12 of the Company’s Current Report on Form 8-K filed withthe SEC on September 30, 2016).*
10.63
Wilson Bank and Trust Life Insurance Endorsement Method Split Dollar Plan Agreement dated November 23, 2012, by andbetween Wilson Bank and Trust and Clark Oakley (incorporated by reference to Exhibit 10.64 of the Company's Annual Report onForm 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 8, 2019).*
10.64
Supplemental Executive Retirement Plan Agreement, dated November 23, 2012, by and between Wilson Bank and Trust and ClarkOakley (incorporated by reference to Exhibit 10.65 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018, filed with the SEC on March 8, 2019).*
10.65
First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement as of September 26, 2016, byand between Wilson Bank and Trust and Clark Oakley (incorporated by reference to Exhibit 10.66 of the Company's AnnualReport on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 8, 2019).*
10.66
Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and ClarkOakley (incorporated by reference to Exhibit 10.67 of the Company's Annual Report of Form 10-K for the fiscal year endedDecember 31, 2018 filed with the SEC on March 8, 2019).*
10.67
First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement Implemented May 22, 2015by and between Wilson Bank and Trust and Clark Oakley (incorporated by reference to Exhibit 10.68 of the Company's AnnualReport of Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on March 8, 2019).*
10.68
Supplemental Executive Retirement Plan Agreement, dated May 22, 2015, by and between Wilson Bank and Trust and John Foster(incorporated by reference to Exhibit 10.68 of the Company’s Annual Report on Form 10-K for the fiscal year ended December31, 2019, filed with the SEC on March 12, 2020).*
10.69
Wilson Bank and Trust Life Insurance Endorsement Method Split Dollar Plan Agreement dated May 22, 2015, by and betweenWilson Bank and Trust and John Foster (incorporated by reference to Exhibit 10.69 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 12, 2020).*
10.70
First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, byand between Wilson Bank and Trust and John McDearman (incorporated herein by reference to Exhibit 10.1 of the Company’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 9, 2020).*
10.71
Second Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020,by and between Wilson Bank and Trust and Clark Oakley (incorporated herein by reference to Exhibit 10.2 of the Company’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 9, 2020).*
10.72
First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, byand between Wilson Bank and Trust and Lisa Pominski (incorporated herein by reference to Exhibit 10.3 of the Company’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 9, 2020).*
10.73 First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by
and between Wilson Bank and Trust and Gary Whitaker (incorporated herein by reference to Exhibit 10.4 of the Company’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 9, 2020).*
10.74
First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, byand between Wilson Bank and Trust and John Foster (incorporated herein by reference to Exhibit 10.5 of the Company’s QuarterlyReport on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 9, 2020).*
30
10.75
First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, byand between Wilson Bank and Trust and John McDearman (incorporated herein by reference to Exhibit 10.6 of the Company’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 9, 2020).*
10.76
Second Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020,by and between Wilson Bank and Trust and Clark Oakley (incorporated herein by reference to Exhibit 10.7 of the Company’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 9, 2020).*
10.77
First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, byand between Wilson Bank and Trust and Lisa Pominski (incorporated herein by reference to Exhibit 10.8 of the Company’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 9, 2020).*
10.78
First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, byand between Wilson Bank and Trust and Gary Whitaker (incorporated herein by reference to Exhibit 10.9 of the Company’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 9, 2020).*
10.79
Second Amendment to the Wilson Bank & Trust Supplemental Executive Retirement Plan Agreement Implemented May 22, 2015,by and between Wilson Bank and Trust and John C. McDearman.*+
10.80
Second Amendment to the Wilson Bank & Trust Supplemental Executive Retirement Plan Agreement Implemented May 22, 2015,by and between Wilson Bank and Trust and John Foster.*+
10.81
Second Amendment to the Wilson Bank & Trust Supplemental Executive Retirement Plan Agreement Implemented May 22, 2015,by and between Wilson Bank and Trust and Lisa Pominski.*+
13.1
Selected Portions of the Wilson Bank Holding Company Annual Report to Shareholders for the year ended December 31, 2020incorporated by reference into items 1, 5, 6, 7, 7A and 8.+
21.1 Subsidiaries of the Company.+
23.1 Consent of Independent Registered Public Accounting Firm.+
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 areembedded 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 + Filed herewith
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
WILSON BANK HOLDING COMPANYBy: /s/ John C. McDearman, III
John C. McDearman, IIITitle: President and Chief Executive OfficerDate: March 12, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date /s/ John C. McDearman, IIIJohn C. McDearman, III
President, Chief Executive Officer and Director (PrincipalExecutive Officer)
March 12, 2021
/s/ Lisa PominskiLisa Pominski
Chief Financial Officer (Principal Financial and AccountingOfficer)
March 12, 2021
/s/ Jack W. BellJack W. Bell Director
March 12, 2021
/s/ James F. ComerJames F. Comer Director
March 12, 2021
/s/ William P. JordanWilliam P. Jordan Director
March 12, 2021
/s/ James Anthony PattonJames Anthony Patton Director
March 12, 2021
/s/ J. Randall ClemonsJ Randall Clemons Director
March 12, 2021
/s/ Michael G. MaynardMichael G. Maynard Director
March 12, 2021
/s/ Clinton M. SwainClinton M. Swain Director
March 12, 2021
/s/ H. Elmer RichersonH. Elmer Richerson Director
March 12, 2021
/s/ Deborah VaralloDeborah Varallo Director
March 12, 2021
32
Exhibit 4.2
DESCRIPTION OF REGISTRANT’S SECURITIESREGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
The following description sets forth certain material terms and provisions of Wilson Bank Holding Company’s securities that are registered under Section 12of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of the date of the Annual Report on Form 10-K of which this exhibit is a part, theregistrant has one class of securities registered under Section 12 of the Exchange Act: Wilson Bank Holding Company’s common stock, par value $2.00 per share.
DESCRIPTION OF COMMON STOCK Wilson Bank Holding Company has the authority to issue 50,000,000 shares of common stock. As of March 12, 2021, 11,080,433 shares of Wilson BankHolding Company common stock were outstanding. The following summary of the common stock of Wilson Bank Holding Company and certain provisions of Wilson Bank Holding Company’s charter, asamended, and bylaws, as amended, and certain provisions of applicable law, does not purport to be complete and is qualified by applicable law and by theprovisions of Wilson Bank Holding Company’s charter, as amended, and bylaws, as amended, which are incorporated by reference as exhibits to the Annual Reporton Form 10-K, of which this exhibit is a part. Common Stock The holders of Wilson Bank Holding Company’s common stock are entitled to one vote per share on all matters to be voted on by shareholders, including theelection of directors. Holders of common stock have no preemptive rights, and there are no conversion rights or redemption or sinking fund provisions with respectto shares of Wilson Bank Holding Company’s common stock. Anti-Takeover Effect of Wilson Bank Holding Company’s Charter and Bylaw Provisions Wilson Bank Holding Company’s charter and bylaws contain provisions that could make it more difficult to consummate an acquisition of Wilson Bank HoldingCompany by means of a tender offer, a proxy contest or otherwise. Board of Directors. Wilson Bank Holding Company’s bylaws provide that the number of directors shall be no fewer than five nor more than 15. The WilsonBank Holding Company charter and bylaws provide that the directors will be classified into three classes, as nearly equal in number as possible with each class toserve for staggered three year terms. Under the Wilson Bank Holding Company bylaws, the shareholders may remove one or more directors with or without cause.If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove him without cause. TheWilson Bank Holding Company bylaws provides that if so provided in the Wilson Bank Holding Company charter, any of the directors may be removed for causeby the affirmative vote of a majority of the entire board of directors; however, such a method of removal is not provided for in the Wilson Bank Holding Companycharter. A director may be removed by the shareholders or directors only at a meeting called for the purpose of removing him, and the meeting notice must state thepurpose, or one of the purposes, of the meeting is the removal of directors. Directors may be removed without cause only by vote of a majority of the shareholdersentitled to vote at a regular or special meeting. The Wilson Bank Holding Company charter provides that any vacancy on the board of directors, including a vacancythat results from an increase in the number of directors or a vacancy that results from the removal of a director with cause, may be filled only by the board ofdirectors. Any director elected to fill a vacancy shall hold office until the next annual meeting following his or her election to the board of directors at which timesuch person will be subject to election and classification. Under the Wilson Bank Holding Company bylaws, if the directors remaining in office constitute fewerthan a quorum of the board of directors, they may fill such vacancies by the affirmative vote of a majority of all the directors remaining in office. Charter Provisions. The Wilson Bank Holding Company charter provides that the affirmative vote of holders of two-thirds of the voting power of the sharesentitled to vote at an election of directors shall be required to amend, alter, change or repeal, or to adopt any provision as part of the charter or as part of WilsonBank Holding Company’s bylaws inconsistent with the purpose and intent of Article 8 of the charter, which creates staggered terms for the board of directors. Tennessee’s Anti-takeover Provisions Provisions in Tennessee law could make it harder for someone to acquire Wilson Bank Holding Company through a tender offer, proxy contest or otherwise. Tennessee Business Combination Act. The Tennessee Business Combination Act provides that a party owning shares equal to 10% or more of the voting powerof any class or series of the then outstanding voting stock of a “resident domestic corporation” is an “interested shareholder.” An interested shareholder alsoincludes a party that is an affiliate or associate, as defined in the Tennessee Business Combination Act, of a “resident domestic corporation.” Wilson Bank HoldingCompany is currently a resident domestic corporation within the meaning of this act. An interested shareholder cannot engage in a business combination with theresident domestic corporation unless the combination: • takes place at least five years after the interested shareholder first acquired 10% or more of the voting power of any class or series of the then outstanding
voting stock of the resident domestic corporation; and
• either is approved by at least two-thirds of the non-interested voting shares of the resident domestic corporation or satisfies fairness conditions specified
in the Tennessee Business Combination Act.
These provisions apply unless one of the following exemptions is available: • a business combination with an entity can proceed without delay when approved by the target corporation’s board of directors before that entity becomes
an interested shareholder;
• a business combination is exempt, if in its original charter or original bylaws, the resident domestic corporation elects not to be governed by theTennessee Business Combination Act;
• unless the charter of the resident domestic corporation provides otherwise, the Tennessee Business Combination Act does not apply to a business
combination of a resident domestic corporation with, or proposed by or on behalf of, an interested shareholder if the resident domestic corporation didnot have, on such interested shareholder’s share acquisition date, a class of voting stock registered or traded on a national securities exchange orregistered with the securities and exchange commission pursuant to Section 12(g) of the Exchange Act; or
• the resident corporation may enact a charter or bylaw amendment to remove itself entirely from the Tennessee Business Combination Act that must be
approved by a majority of the shareholders who have held shares for more than one year before the vote and which cannot become operative until twoyears after the vote.
Wilson Bank Holding Company has not adopted a charter amendment or bylaw to remove it from the Tennessee Business Combination Act. Tennessee Greenmail Act. The Tennessee Greenmail Act prohibits Wilson Bank Holding Company from purchasing or agreeing to purchase any of its securities,at a price higher than fair market value, from a holder of 3% or more of any class of its securities who has beneficially owned the securities for less than two years.Wilson Bank Holding Company can, however, make this purchase if the majority of the outstanding shares of each class of voting stock issued by it approves thepurchase or if it makes an offer of at least equal value per share to all holders of shares of the same class of securities as those held by the prospective seller. Tennessee Control Share Acquisition Act. The Tennessee Control Share Acquisition Act strips a purchaser’s shares of voting rights any time an acquisition ofshares in a Tennessee corporation which has elected to be covered by the Tennessee Control Share Acquisition Act (which Wilson Bank Holding Company at thistime has not) brings the purchaser’s voting power to one-fifth, one-third or a majority of all voting power. The purchaser’s voting rights can be restored only by amajority vote of the other shareholders. The purchaser may demand a meeting of shareholders to conduct such a vote. The purchaser can demand a meeting for thispurpose before acquiring shares in excess of the thresholds described above, which we refer to as a control share acquisition, only if it holds at least 10% of theoutstanding shares and announces a good faith intention to make the acquisition of shares having voting power in excess of the thresholds stated above. If a targetcorporation so elects prior to the date on which a purchaser makes a control share acquisition, a target corporation may redeem the purchaser’s shares if the sharesare not granted voting rights. The effect of these provisions may make a change of control of Wilson Bank Holding Company harder by delaying, deferring or preventing a tender offer ortakeover attempt that you might consider to be in your best interest, including those attempts that might result in the payment of a premium over the market pricefor Wilson Bank Holding Company’s shares. They may also promote the continuity of Wilson Bank Holding Company’s management by making it harder for youto remove or change the incumbent members of the board of directors. Limitations on Liability and Indemnification of Directors and Officers. The Tennessee Business Corporation Act provides that a corporation may indemnify anyof its directors and officers against liability incurred in connection with a proceeding if: • the director or officer acted in good faith; • in the case of conduct in his or her official capacity with the corporation, the director or officer reasonably believed such conduct was in the
corporation’s best interest;
• in all other cases, the director or officer reasonably believed that his or her conduct was not opposed to the best interest of the corporation; and • in connection with any criminal proceeding, the director or officer had no reasonable cause to believe that his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the Tennessee Business Corporation Act provides that no indemnification may be made if thedirector or officer was adjudged to be liable to the corporation. In cases where the director or officer is wholly successful, on the merits or otherwise, in the defenseof any proceeding instituted because of his or her status as an officer or director of a corporation, the Tennessee Business Corporation Act mandates that thecorporation indemnify the director or officer against reasonable expenses incurred in the proceeding. The Tennessee Business Corporation Act also provides that inconnection with any proceeding charging improper personal benefit to an officer or director, no indemnification may be made if the officer or director is adjudgedliable on the basis that personal benefit was improperly received. Notwithstanding the foregoing, the Tennessee Business Corporation Act provides that a court ofcompetent jurisdiction, upon application, may order that an officer or director be indemnified for reasonable expenses if, in consideration of all relevantcircumstances, the court determines that the individual is fairly and reasonably entitled to indemnification, notwithstanding the fact that: • the officer or director was adjudged liable to the corporation in a proceeding by or in the right of the corporation; • the officer or director was adjudged liable on the basis that personal benefit was improperly received by him or her; or • the officer or director breached his or her duty of care to the corporation. Wilson Bank Holding Company’s charter provides that to the extent permitted by the Tennessee Business Corporation Act, the company may indemnify everyofficer, director or employee, his heirs, executors and administrators, against judgments resulting from the expenses reasonably incurred by him in connection withany action to which he may be made a party by reason of his being an officer, director or employee of the company, including any action based upon any alleged actor omission on his part as an officer, director or employee of the company, except in relation to matters as to which he shall be finally adjudged in such action to beliable for negligence or misconduct. Under the Tennessee Business Corporation Act, this provision relieves Wilson Bank Holding Company’s directors frompersonal liability to it or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability arising from a judgment or other finaladjudication establishing: • any breach of the director’s duty of loyalty; • acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or
• any unlawful distributions.
Exhibit 10.79SECOND AMENDMENT TO THE
WILSON BANK & TRUSTSUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
MADE EFFECTIVE MAY 22, 2015
This Second Amendment is adopted this 28th day of December, 2020, by and between Wilson Bank & Trust, a Tennessee corporation (the “Bank”) andJohn C. McDearman (the “Executive”).
WHEREAS, the Bank and the Executive have previously entered into a Supplemental Executive Retirement Plan made effective on May 22, 2015, (the“Agreement”), an unfunded arrangement maintained to encourage the Executive to remain an employee of the Bank by providing retirement benefits to theExecutive upon his retirement, or other events as provided in the Agreement, payable out of the Bank’s general assets;
WHEREAS, the Bank and the Executive have agreed to amend the Agreement to increase the amount of benefit payable under the agreement withoutaffecting the time or form of payments thereunder;
NOW, THEREFORE, for good and valuable consideration, the adequacy of which is acknowledged by the parties hereto, the Agreement is herebyamended as follows:
Paragraph 1.2 is hereby deleted in its entirety and replaced with the following:1.2. “Annuity Contract” means the following annuity contracts purchased and solely owned by the Bank, or such other annuity contracts as theBank may purchase from time to time for the benefit of the Executive:
Insurance Carrier Policy Number
Midland National Life InsuranceCompany 8500543838
National Western Life InsuranceCompany 0101396047
The Agreement is otherwise ratified and confirmed in all respects.
IN WITNESS WHEREOF, the Executive and a duly authorized officer of the Bank have signed this Agreement as of the date first written above.
EXECUTIVE: /s/ John C. McDearman WILSON BANK & TRUST By: /s/ John Foster Its: President
Exhibit 10.80SECOND AMENDMENT TO THE
WILSON BANK & TRUSTSUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
MADE EFFECTIVE MAY 22, 2015
This Second Amendment is adopted this 28th day of December, 2020, by and between Wilson Bank & Trust, a Tennessee corporation (the “Bank”) andJohn Foster (the “Executive”).
WHEREAS, the Bank and the Executive have previously entered into a Supplemental Executive Retirement Plan made effective on May 22, 2015, (the“Agreement”), an unfunded arrangement maintained to encourage the Executive to remain an employee of the Bank by providing retirement benefits to theExecutive upon his retirement, or other events as provided in the Agreement, payable out of the Bank’s general assets;
WHEREAS, the Bank and the Executive have agreed to amend the Agreement to increase the amount of benefit payable under the agreement withoutaffecting the time or form of payments thereunder;
NOW, THEREFORE, for good and valuable consideration, the adequacy of which is acknowledged by the parties hereto, the Agreement is herebyamended as follows:
Paragraph 1.2 is hereby deleted in its entirety and replaced with the following:1.2. “Annuity Contract” means the following annuity contracts purchased and solely owned by the Bank, or such other annuity contracts as theBank may purchase from time to time for the benefit of the Executive:
Insurance Carrier Policy Number
Midland National Life InsuranceCompany 8500543841
National Western Life InsuranceCompany 0101396046
The Agreement is otherwise ratified and confirmed in all respects.
IN WITNESS WHEREOF, the Executive and a duly authorized officer of the Bank have signed this Agreement as of the date first written above.
EXECUTIVE: /s/ John Foster WILSON BANK & TRUST By: /s/ John C. McDearman Its: CEO
Exhibit 10.81SECOND AMENDMENT TO THE
WILSON BANK & TRUSTSUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
MADE EFFECTIVE MAY 22, 2015
This Second Amendment is adopted this 28th day of December, 2020, by and between Wilson Bank & Trust, a Tennessee corporation (the “Bank”) andLisa Pominski (the “Executive”).
WHEREAS, the Bank and the Executive have previously entered into a Supplemental Executive Retirement Plan made effective on May 22, 2015, (the“Agreement”), an unfunded arrangement maintained to encourage the Executive to remain an employee of the Bank by providing retirement benefits to theExecutive upon his retirement, or other events as provided in the Agreement, payable out of the Bank’s general assets;
WHEREAS, the Bank and the Executive have agreed to amend the Agreement to increase the amount of benefit payable under the agreement withoutaffecting the time or form of payments thereunder;
NOW, THEREFORE, for good and valuable consideration, the adequacy of which is acknowledged by the parties hereto, the Agreement is herebyamended as follows:
Paragraph 1.2 is hereby deleted in its entirety and replaced with the following:1.2. “Annuity Contract” means the following annuity contracts purchased and solely owned by the Bank, or such other annuity contracts as theBank may purchase from time to time for the benefit of the Executive:
Insurance Carrier Policy Number
Midland National Life InsuranceCompany 8500543835
National Western Life InsuranceCompany 0101397997
The Agreement is otherwise ratified and confirmed in all respects.
IN WITNESS WHEREOF, the Executive and a duly authorized officer of the Bank have signed this Agreement as of the date first written above.
EXECUTIVE: /s/ Lisa Pominski WILSON BANK & TRUST By: /s/ John C. McDearman Its: CEO
Exhibit 13.1
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Forward-Looking Statements This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the SecuritiesAct of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, the anticipated financial andoperating 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 circumstancesoccurring 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 onbehalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan,” “estimate” and similarexpressions 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 AnnualReport on Form 10-K for the year ended December 31, 2020, and also include, without limitation, (i) deterioration in the financial condition of borrowers of WilsonBank resulting in significant increases in loan losses and provisions for those losses, (ii) the further effects of the emergence of widespread health emergencies orpandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on general economic and financial market conditions and on theCompany's and its customers' business, results of operations, asset quality and financial condition, (iii) the speed with which the COVID-19 vaccines can be widelydistributed, those vaccines' efficacy against the virus, and public acceptance of the vaccines, (iv) the effect on our allowance for loan losses and provisioningexpense as a result of our decision to defer the implementation of CECL, (v) renewed deterioration in the real estate market conditions in the Company’s marketareas, (vi) the impact of increased competition with other financial institutions, including pricing pressures, and the resulting impact on the Company's results,including as a result of compression to net yield on earning assets, (vii) the further deterioration of the economy in the Company’s market areas, (viii) fluctuationsor differences in interest rates on loans or deposits from those that the Company is modeling or anticipating, including as a result of Wilson Bank's inability to bettermatch deposit rates with the changes in the short-term rate environment, or that affect the yield curve, (ix) the ability to grow and retain low-cost core deposits, (x)significant downturns in the business of one or more large customers, (xi) the inability of Wilson Bank to maintain the long-term historical growth rate of its loanportfolio, (xii) risks of expansion into new geographic or product markets, (xiii) the possibility of increased compliance and operational costs as a result ofincreased regulatory oversight, (xiv) the inability of the Company to comply with regulatory capital requirements, including those resulting from changes to capitalcalculation methodologies and required capital maintenance levels, (xv) changes in state or Federal regulations, policies, or legislation applicable to banks and otherfinancial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation ofthe Dodd Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), (xvi) changes in capital levels and loan underwriting, credit review orloss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, (xvii) inadequate allowance for loan losses, (xviii)the effectiveness of the Company’s activities in improving, resolving or liquidating lower quality assets, (xix) results of regulatory examinations, (xx) theineffectiveness of the Company's hedging strategies, or the unexpected counterparty failure or hedge failure of the underlying hedges; (xxi) the vulnerability of ournetwork 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, (xxii) loss of key personnel, and (xxiii) adverse results (including costs, fines,reputational harm and/or other negative effects) from current or future obligatory litigation, examinations or other legal and/or regulatory actions, including as aresult of the Company's participation in and execution of government programs related to the COVID-19 pandemic. These risks and uncertainties may cause theactual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-lookingstatements. The Company’s future operating results depend on a number of factors which were derived utilizing numerous assumptions that could cause actualresults to differ materially from those projected in forward-looking statements.
WILSON BANK HOLDING COMPANYMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSImpact of COVID-19
In March 2020, the outbreak of the novel Coronavirus Disease 2019 (“COVID-19”) was recognized as a pandemic by the World Health Organization. The spread ofCOVID-19 has created a global public health crisis that has resulted in uncertainty, volatility and deterioration in financial markets and in governmental,commercial and consumer activity including in the United States, where we conduct substantially all of our activity.
To combat the spread of COVID-19, federal, state and local governments, including the Governor of the State of Tennessee and mayors and county executives ofthe communities in which we operate, have taken a variety of actions that have materially and adversely affected the businesses and lives of our customers. InMarch 2020, these actions included orders or directives closing non-essential businesses and restricting movement of individuals through the issuance of shelter-in-place or safer-at-home orders and other guidance encouraging individuals to observe strict social distancing measures. Starting in late May 2020, the governor ofTennessee and mayors and county executives of the communities in which we operate issued procedures to begin a phased reopening for nonessential businesses.As a part of this reopening, our bank transitioned branch operations back to normal operating procedures. At times, the actions being taken by these governmental authorities are not always coordinated or consistent across the state of Tennessee and the impact of thoseactions across our markets has been and may continue to be uneven, including pausing or reverting to more restrictive phases in the course of reopening economies.These actions, together with the independent actions of individuals and businesses aimed at slowing the spread of the virus, have resulted in extensive economicdisruption and rapid declines in consumer and commercial activity.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contains substantial tax and spending provisionsintended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program ("PPP"), a nearly $659 billion programdesigned to aid small and medium-sized businesses through federally guaranteed loans distributed through banks. These loans were intended to guarantee eightweeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. The Company funded $85.6 million of PPP loansto our small business and other eligible customers, $62.4 million of which remained outstanding as of December 31, 2020. On December 21, 2020, the CoronavirusResponse 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 is currently accepting applications from eligible small businesses, some of which may be requesting theirsecond round of PPP assistance. 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 March2020 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 programto provide a six-month interest only payment option in an effort to provide flexibility to our customers as they navigate these uncertain times. Pursuant tointeragency 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 earlierof (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency as troubled debt restructurings.
As of December 31, 2020, the Bank had 13 loans, totaling $36.4 million in aggregate principal amount for which principal or both principal and interest were beingdeferred. Under the applicable guidance, none of these deferrals required a troubled debt restructuring designation as of December 31, 2020. As of January 31,2021, the Bank had 17 loans, totaling $49.9 million in aggregate principal amount for which principal or both principal and interest were being deferred. Under theapplicable guidance, none of these deferrals required a troubled debt restructuring designation as of January 31, 2021. 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 andcommunities, including maintaining increased liquidity and reserves supported by a strong capital position. Our business and consumer customers are experiencingvarying degrees of financial distress, which is expected to continue into 2021. As a result, we expect our heightened levels of liquidity and reserves to persistthrough 2021.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
General The Company is a registered bank holding company that owns 100% of the common stock of Wilson Bank and Trust (“Wilson Bank”), a Tennessee state-charteredbank headquartered in Lebanon, Tennessee. The Company was formed in 1992. Wilson Bank is a community bank headquartered in Lebanon, Tennessee, serving Wilson County, DeKalb County, Smith County, Trousdale County, RutherfordCounty, Davidson County, Putnam County, Sumner County, and Williamson County, Tennessee as its primary market areas. Generally, this market is theNashville-Davidson-Murfreesboro-Franklin, Tennessee metropolitan statistical area. At December 31, 2020, Wilson Bank had twenty-eight locations in Wilson,Davidson, DeKalb, Smith, Sumner, Rutherford, Putnam, Trousdale and Williamson Counties. Management believes that these counties offer an environment forcontinued growth, and the Company’s target market is local consumers, professionals and small businesses. Wilson Bank offers a wide range of banking services,including checking, savings and money market deposit accounts, certificates of deposit and loans for consumer, commercial and real estate purposes. The Companyalso offers an investment center which offers a full line of investment services to its customers. The following discussion and analysis is designed to assist readers in their analysis of the Company’s consolidated financial statements and should be read inconjunction with such consolidated financial statements and the notes thereto. 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 generalpractices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of thedetermination of our allowance for loan losses have been critical to the determination of our financial position and results of operations. Additional informationregarding significant accounting policies is described in Note 1 to the Company's consolidated financial statements for the year ended December 31, 2020 includedin the Company’s Annual Report on Form 10-K. Allowance for Loan Losses (“allowance”)-Our management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessmentincludes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based uponmanagement’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situationsthat may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loanportfolio, economic conditions, industry and peer bank loan quality indicators and other pertinent factors, including regulatory recommendations. This evaluation isinherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, that may besusceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partiallycharged-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 theallowance 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 termsof 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 becollected 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 principalbalance 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 collateraldependent, 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 therecorded investment in the loan, the Company recognizes an impairment by creating a valuation allowance with a corresponding charge to the provision for loanlosses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. Managementbelieves 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 portfolio at the balance sheet date. Theallowance 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 whetherthere 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 loanportfolio. Our loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have beenconducted by bank regulatory agencies as part of their usual examination process. We incorporate loan review results in the determination of whether or not it isprobable 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 reportingrequirements. Each segment is then analyzed such that an allocation of the allowance is estimated for each loan segment.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
The allowance allocation begins with a process of estimating the loan losses in each of the twelve loan segments. The estimates for these loans are based on ourhistorical loss data for that category over the last twenty quarters. The estimated loan loss allocation for all twelve loan portfolio segments is then adjusted for several “environmental” factors. The allocation for environmentalfactors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated inherent credit losses which exist, buthave 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 or procedures, changes ininterest rate, and other influencing factors. These environmental factors are considered for each of the twelve loan segments, and the allowance allocation, asdetermined by the processes noted above for each component, is increased or decreased 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 theprocedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the allowance in its entirety. The board of directorsreviews 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 emergencyrelated to the COVID-19 pandemic or December 31, 2020, whichever comes first. The Coronavirus Relief Act subsequently gave lenders the option to further deferthe implementation of CECL until January 1, 2022. In addition, the Securities and Exchange Commission (SEC) staff has stated that opting to delay theimplementation of CECL shall be considered to be in accordance with generally accepted accounting principles. As a result, we have elected to delayimplementation of CECL until January 1, 2022. See Note 1. Recently Issued Accounting Pronouncements in the Notes to our Consolidated Financial Statementselsewhere in this Form 10-K for further information regarding our delayed implementation of CECL. Other-than-temporary Impairment - Impaired securities are assessed quarterly for the presence of other-than-temporary impairment (“OTTI”). A decline in the fairvalue 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 thesecurity. To determine whether OTTI has occurred, management considers factors such as (1) length of time and extent that fair value has been less than cost,(2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for ananticipated recovery in fair value. If management deems a security to be OTTI, management reviews the present value of the future cash flows associated with thesecurity. A 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. If a creditloss is identified, the credit loss is recognized in that period as a charge to earnings and a new cost basis for the security is established. If management concludesthat no credit loss exists and it is not more-likely-than-not that the Company will be required to sell the security before the recovery of the security’s cost basis, thenthe security is not deemed OTTI and the shortfall is recorded as a component of equity. Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fullydisclosed in Note 22 to the Company's consolidated financial statements for the year ended December 31, 2020 included in the Company's Annual Report on Form10-K. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especiallyin the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
WILSON BANK HOLDING COMPANYMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 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 asbenchmarks of Company performance and are used in making strategic decisions. The following table represents the KPIs that management has determined to beimportant in making decisions for the Bank, in each case as of and for the year ended December 31, 2020, 2019 and 2018: 2020 2019 2018 Return on average assets (Net income divided by average total assets) 1.24% 1.34% 1.35%Return on average stockholders' equity (Net income divided by average stockholders'equity) 10.65% 11.31% 11.70%Dividend payout ratio (Dividends declared per share divided by net income per share) 34.09% 32.74% 29.13%Equity to asset ratio (Average equity divided by average total assets) 11.68% 11.88% 11.56%Leverage capital ratio (Equity excluding the net unrealized gain (loss) on available-for-sale securities and intangible assets divided by average total assets) 11.16% 11.97% 12.31%Efficiency ratio (Non-interest expense divided by net-interest income plus non-interestincome) 58.33% 60.29% 60.20%Non-performing asset ratio (Loans greater than 90 days past due and accruing interest,non-accrual loans, other real estate owned, and nonperforming TDRs divided by totalassets) 0.08% 0.22% 0.21% Results of Operations Net earnings for the year ended December 31, 2020 were $38,492,000, an increase of $2,448,000, or 6.79%, compared to net earnings of $36,044,000 for the yearended December 31, 2019. Our 2019 net earnings were 10.58%, or $3,450,000, above our net earnings of $32,594,000 for 2018. Basic earnings per sharewere $3.52 in 2020, compared with $3.36 in 2019 and $3.09 in 2018. Diluted earnings per share were $3.51 in 2020, compared to $3.35 in 2019 and $3.08 in2018. The increase in net earnings and diluted and basic earnings per share during the year ended December 31, 2020 as compared to the year ended December 31,2019 was primarily due to an increase in net interest income, and an increase in non-interest income, partially offset by an increase in provision for loan loss and anincrease in non-interest expense. The increase in net interest income was due to an increase in average interest earning asset balances between the relevant periods,including loans originated pursuant to the PPP, partially offset by increased deposit balances and provision expense and decreased net yield on interest earningassets. Net yield on earning assets for the year ended December 31, 2020 was 3.63%, compared to 3.81% and 4.01% for the years ended December 31, 2019 andDecember 31, 2018, respectively. Net interest spread for the year ended December 31, 2020 was 3.48%, compared to 3.60% and 3.87% for the yearsended December 31, 2019 and December 31, 2018, respectively. The increase in non-interest expense resulted from the Company's continued growth. See below forfurther discussion regarding variances related to net interest income, provision for loan losses, non-interest income, non-interest expense and income taxes. The decrease in Return on Average Assets (ROA) for the year ended December 31, 2020 when compared to December 31, 2019 and December 31, 2018 wasprimarily attributable to a decrease in the yield earned on all earning assets that outpaced the decrease in rates paid on our interest-bearing liabilities which resultedfrom a decrease in rates enacted by the Federal Reserve as well as the impact of increased provision expense and the deferral of principal or both principaland interest payments by some borrowers during the year. The influx of deposit money that resulted from the Federal stimulus package also contributed to thedecrease in ROA as deposits increased faster than loans, causing a corresponding increase in lower-yielding investment securities and low interest-bearing depositaccounts with other financial institutions. In addition, due to the uncertainty created by COVID-19, we maintained higher levels of on-balance sheet liquidity in2020, which created further pressure on ROA. Net Interest Income The schedule which follows indicates the average balances for each major balance sheet item, an analysis of net interest income and net interest expense and thechange in interest income and interest expense attributable to changes in volume and changes in rates. The difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities is net interest income, which is the Company'sgross margin. Analysis of net interest income is more meaningful when income from tax-exempt earning assets is adjusted to a tax equivalent basis. Accordingly,the following schedule includes a tax equivalent adjustment of tax-exempt earning assets, assuming a weighted average Federal income tax rate of 21%for 2020, 2019 and 2018. In this schedule, "change due to volume" is the change in volume multiplied by the interest rate for the prior year. "Change due to rate" is the change in interest ratemultiplied by the volume for the prior year. Changes in interest income and expense not due solely to volume or rate changes have been allocated to the “changedue to volume” and “change due to rate” in proportion to the relationship of the absolute dollar amounts of the change in each category. Non-accrual loans have been included in the loan category.
WILSON BANK HOLDING COMPANYMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Dollars In Thousands 2020 2019 2020/2019 Change Average Income/ Average Income/ Due to Due to Balance Rates/Yields Expense Balance Rates/Yields Expense Volume Rate Total Loans, net of unearned interest (2) (3) $2,236,815 5.16% 113,224 $2,030,861 5.31% 105,783 $ 10,685 (3,244) 7,441 Investment securities—taxable 430,349 1.69 7,272 347,873 2.46 8,559 1,755 (3,042) (1,287)Investment securities—tax exempt 67,333 1.64 1,102 38,859 1.99 773 485 (156) 329 Taxable equivalent adjustment (1) — 0.44 293 — 0.53 205 130 (42) 88
Total tax-exempt investmentsecurities 67,333 2.08 1,395 38,859 2.52 978 615 (198) 417
Total investment securities 497,682 1.74 8,667 386,732 2.47 9,537 2,370 (3,240) (870)Loans held for sale 22,432 2.75 616 9,613 3.38 325 362 (71) 291 Federal funds sold 7,183 0.78 56 14,645 1.88 275 (102) (117) (219)Interest bearing deposits 206,281 0.28 582 121,399 1.78 2,164 935 (2,517) (1,582)Restricted equity securities 4,939 2.35 116 4,241 4.67 198 29 (111) (82)
Total earning assets 2,975,332 4.22 123,261 2,567,491 4.69 118,282 14,279 (9,300) 4,979 Cash and due from banks 19,145 10,480 Allowance for loan losses (32,360) (28,073) Bank premises and equipment 59,353 58,545 Other assets 74,114 72,487
Total assets $3,095,584 $2,680,930 Dollars In Thousands 2020 2019 2020/2019 Change Average Income/ Average Income/ Due to Due to Balance Rates/Yields Expense Balance Rates/Yields Expense Volume Rate Total Deposits: Negotiable order of withdrawalaccounts $ 669,224 0.20% 1,314 $ 526,026 0.44% 2,311 $ 514 (1,511) (997)Money market demand accounts 881,669 0.40 3,496 749,366 0.80 6,030 926 (3,460) (2,534)
Time deposits 619,387 1.77 10,939 642,513 2.01 12,896 (451) (1,506) (1,957)Other savings deposits 171,849 0.39 667 136,912 0.60 825 180 (338) (158)Total interest-bearing deposits 2,342,129 0.70 16,416 2,054,817 1.07 22,062 1,169 (6,815) (5,646)
Federal Home Loan Bank advances 18,858 5.13 967 21,712 2.68 581 581 (195) 386 Federal funds purchased — — — 597 0.67 4 (4) — (4)
Total interest-bearing liabilities 2,360,987 0.74 17,383 2,077,126 1.09 22,647 1,746 (7,010) (5,264)Demand deposits 348,677 270,136 Other liabilities 24,376 14,994 Stockholders’ equity 361,544 318,674
Total liabilities and stockholders’equity $3,095,584 $2,680,930
Net interest income 105,878 95,635 Net yield on earning assets (4) 3.63% 3.81% Net interest spread (5) 3.48% 3.60% (1)The tax equivalent adjustment for 2020 and 2019 have 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 incentive loans at below market rates and tax exempt loans tomunicipalities of $2.2 million and $2.2 million for the years ended December 31, 2020 and 2019.
(3)Loan fees of $12.0 million and $7.8 million are included in interest income in 2020 and 2019, respectively, inclusive, in 2020, of approximately $3.2million 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.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Dollars In Thousands 2019 2018 2019/2018 Change Average Income/ Average Income/ Due to Due to Balance Rates/Yields Expense Balance Rates/Yields Expense Volume Rate Total Loans, net of unearned interest (2) (3) $2,030,861 5.31% 105,783 $1,898,772 5.11% 94,917 $ 6,873 3,993 10,866 Investment securities—taxable 347,873 2.46 8,559 281,154 2.19 6,158 1,580 821 2,401 Investment securities—tax exempt 38,859 1.99 773 40,675 2.51 1,020 (44) (203) (247)Taxable equivalent adjustment (1) — 0.53 205 — 0.66 271 (12) (54) (66)
Total tax-exempt investmentsecurities 38,859 2.52 978 40,675 3.17 1,291 (56) (257) (313)
Total investment securities 386,732 2.47 9,537 321,829 2.31 7,449 1,524 564 2,088 Loans held for sale 9,613 3.38 325 5,343 3.44 184 144 (3) 141 Federal funds sold 14,645 1.88 275 4,801 1.73 83 184 8 192 Interest bearing deposits 121,399 1.78 2,164 55,911 1.75 979 1,167 18 1,185 Restricted equity securities 4,241 4.67 198 3,012 6.11 184 64 (50) 14
Total earning assets 2,567,491 4.69 118,282 2,289,668 4.62 103,796 9,956 4,530 14,486 Cash and due from banks 10,480 17,820 Allowance for loan losses (28,073) (25,365) Bank premises and equipment 58,545 57,712 Other assets 72,487 70,071
Total assets $2,680,930 $2,409,906 Dollars In Thousands 2019 2018 2019/2018 Change Average Income/ Average Income/ Due to Due to Balance Rates/Yields Expense Balance Rates/Yields Expense Volume Rate Total Deposits: Negotiable order of withdrawalaccounts $ 526,026 0.44% 2,311 $ 503,312 0.36% 1,823 $ 85 403 488 Money market demand accounts 749,366 0.80 6,030 668,007 0.52 3,487 467 2,076 2,543
Time deposits 642,513 2.01 12,896 556,054 1.43 7,944 1,374 3,578 4,952 Other savings deposits 136,912 0.60 825 139,664 0.53 744 (15) 96 81 Total interest-bearing deposits 2,054,817 1.07 22,062 1,867,037 0.75 13,998 1,911 6,153 8,064
Federal Home Loan Bank advances 21,712 2.68 581 — — — 581 — 581 Securities sold under repurchaseagreements — — — 1,090 1.47 16 (16) — (16)Federal funds purchased 597 0.67 4 588 0.68 4 — — —
Total interest-bearing liabilities 2,077,126 1.09 22,647 1,868,715 0.75 14,018 2,476 6,153 8,629 Demand deposits 270,136 250,328 Other liabilities 14,994 12,342 Stockholders’ equity 318,674 278,521
Total liabilities and stockholders’equity $2,680,930 $2,409,906
Net interest income 95,635 89,778 Net yield on earning assets (4) 3.81% 4.01% Net interest spread (5) 3.60% 3.87% (1)The tax equivalent adjustment for 2019 and 2018 have 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 incentive loans at below market rates and tax exempt loans tomunicipalities of $2.2 million and $2.0 million for the years ended December 31, 2019 and 2018.
(3)Loan fees of $7.8 million and $7.4 million are included in interest income in 2019 and 2018. (4)Annualized net interest income on a tax equivalent basis divided by average interest-earning assets. (5)Average interest rate on interest-earning assets less average interest rate on interest-bearing liabilities.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilitiesand is the most significant component of the Company’s earnings. Total interest income in 2020 was $122,968,000, up 4.14% when comparedwith $118,077,000 in 2019, which was up 14.06% when compared to $103,525,000 in 2018, in each case excluding tax exempt adjustments relating to tax exemptsecurities and loans. The increase in total interest income in 2020 when compared to 2019 was primarily attributable to an overall increase in average loan balancesand the resulting increase in the aggregate amount of interest and fees earned on loans, which included Small Business Administration ("SBA") fees earned on PPPloans totaling $3,189,000. The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financialinstitutions. Our loan portfolio is significantly affected by changes in the prime interest rate, which is the rate offered on loans to borrowers with strong credit. Theprime interest rate decreased 150 basis points during 2020, decreased 75 basis points during 2019, and increased 100 basis points in 2018 as a result ofcorresponding changes in the federal funds rate by the Federal Reserve. In the third quarter of 2020 the Federal Reserve announced it did not expect to raise ratesuntil the end of 2023 at the earliest. The yield on loans decreased due to the declining rate environment discussed above, which was partially offset by an increase inloan volume, an increase in loans qualified to receive state income tax credit, and the impact of fees we were entitled to receive in connection with the origination ofSBA PPP loans. Fees earned on loans totaled $12,043,000, $7,751,000 and $7,400,000 for the years ended 2020, 2019 and 2018, respectively. The total amount ofstate income tax credits included in our loan yields were $2,191,000, $2,154,000 and $1,997,000 for the years ended 2020, 2019 and 2018, respectively. The yieldon securities decreased due to the declining rate environment discussed above, in which higher yielding securities were called and were replaced with securitiesyielding lower market rates. In addition, excess liquidity led to additional investment purchases that had lower yields due to the current rate environment. The ratio of average earning assets to total average assets was 96.1%, 95.8% and 95.0% for each of the years ended December 31, 2020, 2019 and 2018,respectively. Average earning assets increased $407,841,000 from December 31, 2019 to December 31, 2020. The average rate earned on earning assetsfor 2020 was 4.22%, compared with 4.69% in 2019 and 4.62% in 2018.
Total interest expense for 2020 was $17,383,000, a decrease of $5,264,000, or 23.24%, compared to total interest expense of $22,647,000 in 2019. Average interest-bearing deposits increased to $2,342,129,000 for 2020 compared to $2,054,817,000 for 2019. The average rate paid on interest-bearing depositswas 0.70% for 2020 compared to 1.07% for 2019. Total interest expense increased from $14,018,000 in 2018 to $22,647,000 in 2019, an increase of $8,629,000, or61.56%. The decrease in total interest expense in 2020 resulted primarily from a decrease in the rates of interest bearing deposits, as we decreased the rates onseveral of our deposit products in response to decreases in short-term rates throughout 2019 and the first quarter of 2020, partially offset by an overall increase inthe volume of average interest-bearing deposits. The increase in total interest expense in 2019 resulted primarily from the higher rates on deposits from the risingrate environment of 2018 and the first half of 2019, and competitive pressures in our markets, as well as an overall increase in the volume of average interest-bearing deposits. Net interest income for 2020 totaled $105,585,000 as compared to $95,430,000 and $89,507,000 in 2019 and 2018, respectively. The net interest spread, defined asthe effective yield on earning assets less the effective cost of deposits and borrowed funds (calculated on a fully taxable equivalent basis), decreasedto 3.48% in 2020 from 3.60% in 2019. The net interest spread was 3.87% in 2018. Net yield on earning assets decreased to 3.63% in 2020 from 3.81% in 2019. Thenet yield on earning assets was 4.01% in 2018. The decrease in net yield on earning assets was due to a decrease in the yield earned on all earning assets thatoutpaced the decrease in rates paid on our interest-bearing liabilities, in each case for the reasons discussed above. As a result of the significant reduction in short-term rates and the tremendous uncertainty resulting from COVID-19, our net yield on earning assets could continue to decline during 2021 as could our net interestspread 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. Efforts tomaintain elevated levels of on-balance sheet liquidity will also likely negatively impact our net yield on earning assets.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
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 toprovide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. The 2020 provision for loan losses was $9,696,000, anincrease of $7,656,000 from the provision of $2,040,000 in 2019, which was $2,258,000 lower than the provision in 2018. The increase in the provision for the yearended December 31, 2020 is primarily attributable to increasing our allowance for loan losses as a result of growth in the loan portfolio (other than growthattributable to PPP loans) and in response to the economic disruptions related to COVID-19. Gross loan growth totaled $237,558,000 ($62,437,000 of which wasattributable to PPP loans), $42,843,000 and $291,658,000 for the years ended 2020, 2019 and 2018, respectively. Management continues to fund the allowance forloan losses through provisions based on management’s calculation of the allowance for loan losses. The provision for loan losses is based on past loan experienceand other factors which, in management’s judgment, deserve current recognition in estimating loan losses. Such factors include growth and composition of the loanportfolio, review of specific problem loans, past due and nonperforming loans, change in lending staff, the recommendations of the Company’s regulators, andcurrent economic conditions that may affect the borrowers’ ability to repay.
Wilson 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 ismade that the loan is uncollectible. Net recoveries increased to $117,000 in 2020 from net charge-offs of $488,000 in 2019. Net charge-offs in 2018 totaled$1,033,000. The ratio of net charge-offs to average total outstanding loans was (0.01%) in 2020, 0.02% in 2019 and 0.05% in 2018. The net recoveries in 2020are due to two large recoveries received during the year in the commercial real estate segment and the construction segment. Overall, the Bank experienced minimalcharge-offs during 2020; however if the COVID-19 pandemic continues for an extended period of time and the economy continues to be negatively impacted, theCompany anticipates chargeoffs may increase and the financial condition of the Company could be negatively impacted. Due to the speed and unpredictable naturewith which the pandemic is developing and evolving and the continued uncertainty of its duration and timing of recovery (including the uncertainty around the sizeand number of additional government stimulus programs that may be adopted), we are not able to predict the extent to which COVID-19 will impact our financialresults. The net recoveries and provision for loan losses in 2020 resulted in an increase of the allowance for loan losses (net of charge-offs and recoveries) to$38,539,000 at December 31, 2020 from $28,726,000 at December 31, 2019 and $27,174,000 a t December 31, 2018. The allowance for loan lossesincreased 34.16% between December 31, 2019 and December 31, 2020 as compared to the 11.29% increase in total loans (including PPP loans) over the sameperiod. The allowance for loan losses was 1.66% of total loans outstanding at December 31, 2020 (or 1.71% when excluding the $62,437,000 of PPP loansoutstanding at that date) compared to 1.38% at December 31, 2019 and 1.33% at December 31, 2018. As a percentage of nonperforming loans at December 31,2020, 2019 and 2018, the allowance for loan losses represented 1,482%, 359% and 473%, respectively. The internally classified loans as a percentage of theallowance for loan losses were 21.4% and 37.1%, respectively, at December 31, 2020 and 2019.
The level of the allowance and the amount of the provision involve evaluation of uncertainties and matters of judgment. The Company maintains an allowance forloan losses which management believes is adequate to absorb losses inherent in the loan portfolio. A formal review is prepared quarterly by the Chief FinancialOfficer and Chief Credit Officer and is provided to the Board of Directors to assess the risk in the portfolio and to determine the adequacy of the allowance for loanlosses. 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 economicconditions and other pertinent information. The level of the allowance to net loans outstanding will vary depending on the overall results of this quarterlyassessment. See the discussion above under “Critical Accounting Estimates” for more information. While the severity of the impact of the COVID-19 pandemic forindividuals, small businesses and corporations is still not fully known, leading economic indicators suggest that deteriorated economic conditions will continueduring 2021. In an effort to recognize an appropriate allowance for loan losses, management incorporated qualitative factors into our quarterly assessment duringthe year ended December 31, 2020, including current economic conditions and value of collateral considerations, to increase the Company's reserve for the potentialimpact of the COVID-19 pandemic. Management believes the allowance for loan losses at December 31, 2020 to be adequate, but if economic conditionsdeteriorate beyond management’s current expectations and additional charge-offs are incurred, the allowance for loan losses may require an increase throughadditional provision for loan losses expense which would negatively impact earnings. If the situation surrounding the COVID-19 pandemic vastly improves and theoverall economy is not as negatively affected as we had originally anticipated, the need for additional provision may not be necessary and could even result in thepotential reversal of a portion of the current recorded allowance.
WILSON BANK HOLDING COMPANYMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Non-Interest Income The Company's non-interest income is composed of several components, some of which vary significantly between periods. Service charges on deposit accountsand other non-interest income generally reflect the Company’s growth, while fees for origination of mortgage loans and brokerage fees and commissions will oftenreflect home mortgage market and stock market conditions and fluctuate more widely from period to period. The following is a summary of our non-interest income for the years ended December 31, 2020, 2019 and 2018 (in thousands): Twelve Months Ended December 31, Twelve Months Ended December 31,
2020 2019 $ Increase(Decrease)
% Increase(Decrease) 2019 2018
$ Increase(Decrease)
% Increase(Decrease)
Service charges on deposits $ 5,659 $ 6,952 $ (1,293) (18.60%) $ 6,952 $ 6,799 $ 153 2.25%Brokerage income 4,837 4,411 426 9.66 4,411 4,255 156 3.67 Debit and credit card interchangeincome 9,187 8,301 886 10.67 8,301 7,325 976 13.32 Other fees and commissions 1,540 1,521 19 1.25 1,521 2,124 (603) (28.39)BOLI and annuity earnings 823 810 13 1.60 810 841 (31) (3.69)Security gain (losses), net 882 (268) 1,150 (429.10) (268) (650) 382 (58.77)Fees and gains on sales of mortgageloans 9,560 6,802 2,758 40.55 6,802 4,639 2,163 46.63 Gain (loss) on sale of other real estate,net 658 (48) 706 (1,470.83) (48) (80) 32 (40.00)Loss on the sale of fixed assets, net (63) (128) 65 (50.78) (128) (2) (126) 6,300.00 Loss on sale of other assets, net (4) (4) — 0.00 (4) (3) (1) 33.33 Other income 61 — 61 100.00 — — — — Total non-interest income $ 33,140 $ 28,349 $ 4,791 16.90% $ 28,349 $ 25,248 $ 3,101 12.28%
The increase in non-interest income for the year ended December 31, 2020 when compared to the year ended December 31, 2019 is primarily attributable to anincrease in fees and gains on sales of mortgage loans, an increase in the gain on the sale of securities, an increase in debit and credit card interchange income, anincrease in a gain on the sale of other real estate, and an increase in brokerage income, offset in part by a decrease in service charges on deposits. The fees and gains on sales of mortgage loans primarily increased due to an increase in the overall volume from the sale of loans of $64,720,000, as a result of ourmortgage group experiencing heightened demand in 2020. This increased demand was due to mortgage rates hitting all-time lows as a result of quantitative easingand the government's purchase of mortgage backed securities, as well as strong demand and related housing starts in Wilson County and the surrounding counties inwhich we serve. We currently expect mortgage demand to remain elevated through the first quarter of 2021, as mortgage rates are expected to remain low due tocontinued quantitative easing. We currently expect the Federal Reserve to decrease quantitative easing in the third or fourth quarter of 2021, which should shiftmortgage markets back to pre-2020 rate and volume levels. Gain on sale of securities primarily increased from a loss on sale of securities in 2019 due to management's opportunistic trading to recognize additional income andmanagement's strategy to sell securities in the fourth quarter of 2020 and use the gain to pay down Federal Home Loan Bank advances. The loss on sale of securitiesin 2019 was due to management's decision to sell securities for a loss and reinvest the proceeds in higher yielding assets. Debit and credit card interchange income primarily increased due to an increase in the number and volume of debit card and credit card holders and transactions.The increase in the volume of transactions was partially attributable to an increase in online shopping as consumers sought to purchase more goods and servicesremotely due to COVID-19. Brokerage income primarily increased due to client acquisition and the opening of new investment accounts. Brokerage income was also aided by the continuedstrong recovery in the stock market from first quarter 2020 lows resulting from the COVID-19 pandemic, with the market ending 2020 at then all-time highs. Service charges on deposit accounts primarily decreased due to a decrease in service charges earned on insufficient income that resulted from the economicstimulus payments received by our customers and corresponding increases in deposit account balances and less consumer spending as a result of COVID-19.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Non-Interest Expenses Non-interest expenses consist primarily of employee costs, FDIC premiums, occupancy expenses, furniture and equipment expenses, advertising and publicrelations expenses, data processing expenses, ATM & interchange expenses, directors’ fees, audit, legal and consulting fees, and other operating expenses. The following is a summary of the Company's non-interest expense for the years ended December 31, 2020, 2019 and 2018 (in thousands): Twelve Months Ended December 31, Twelve Months Ended December 31,
2020 2019 $ Increase(Decrease)
% Increase(Decrease) 2019 2018
$ Increase(Decrease)
% Increase(Decrease)
Employee salaries and benefits $ 45,661 $ 42,541 $ 3,120 7.33% $ 42,541 $ 39,590 $ 2,951 7.45%Equity-based compensation 1,180 786 394 50.13 786 1,237 (451) (36.46)Occupancy expenses 5,216 4,789 427 8.92 4,789 4,403 386 8.77 Furniture and equipmentexpenses 3,267 3,110 157 5.05 3,110 2,767 343 12.40 Data processing expenses 5,101 4,495 606 13.48 4,495 2,900 1,595 55.00 Advertising expenses 2,487 2,498 (11) (0.44) 2,498 2,552 (54) (2.12)ATM & interchange fees 3,880 3,439 441 12.82 3,439 3,091 348 11.26 Accounting, legal & consultingexpenses 909 1,382 (473) (34.23) 1,382 977 405 41.45 FDIC insurance 598 373 225 60.32 373 843 (470) (55.75)Directors’ fees 634 586 48 8.19 586 543 43 7.92 Other operating expenses 11,986 10,629 1,357 12.77 10,629 10,177 452 4.44 Total non-interest expense $ 80,919 $ 74,628 $ 6,291 8.43% $ 74,628 $ 69,080 $ 5,548 8.03%
The increase in non-interest expenses for the year ended December 31, 2020 when compared to the year ended December 31, 2019 is primarily attributable to ayear-over-year increase in salaries and employee benefits, equity-based compensation, occupancy expenses, other operating expenses, data processing expenses,ATM and interchange fees, and FDIC insurance, partially offset by a decrease in accounting, legal and consulting fees. The increase in salaries and employee benefits for the year ended December 31, 2020 when compared to the year ended December 31, 2019 is primarily attributableto an increase in the number of employees necessary to support the Company’s growth in operations and branch expansion. The increase in equity-basedcompensation is due to equity awards granted to certain of our directors, senior executive officers and other officers, including in connection with their assumptionof additional responsibilities. The increase in occupancy expense is primarily attributable to an increase in maintenance and repairs on buildings, an increase indepreciation expense on buildings resulting from improvements, an increase in lease expense due to an increase in leased branches, and an increase in sanitationsupplies and protective facial masks related to COVID-19. The Company anticipates that salaries and employee benefits expense and occupancy expense willcontinue to increase as the Company's operations grow. The increase in other operating expenses is primarily attributable to an increase of $896,000 in professional fees on loans. This increase was largely attributable toexpenses relating to the origination of PPP loans. The increase in data processing expenses is primarily attributable to an increase in computer maintenance and computer licenses. These expenses included upgradesof our current systems as well as additional investments in computer software, an increase in I.T. consulting expense and an increase in information securityexpenses. COVID-19 related expenses contributed to this increase with more reliance on virtual meetings and remote work. The Company anticipates that dataprocessing expenses will continue to increase as the Company's operations grow and the focus on the acceleration of digital product offerings increases. The increase in ATM and interchange fees is primarily attributable to an increase in debit card interchange fee expense due to the volume of transactions, whichresulted in part from increased online shopping due to COVID-19, as well as an increase in ATM expenses resulting from the purchase of new ATMs for allexisting locations. The increase in FDIC insurance is primarily attributable an increase in deposit accounts resulting from the government issued economic stimulus relief attributableto COVID-19, the result of PPP loan proceeds being deposited in the Bank pending use of the funds by the borrower, and reduced consumer spending as a result ofthe pandemic. FDIC insurance could increase in 2021 as additional stimulus relief could contribute to further deposit growth. The decrease in accounting, legal and consulting fees is primarily attributable to a decrease in legal and professional fees associated with the Company's generaloperations. 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 usingour internal resources. It is calculated by taking our non-interest expense divided by our net-interest income plus non-interest income. Our efficiency ratio for theyears ended 2020, 2019 and 2018 was 58.33%, 60.29% and 60.20%, respectively.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Income Taxes The Company’s income tax expense was $9,618,000 for 2020, a decrease of $1,449,000 from $11,067,000 for 2019, which was up by $2,284,000 from the 2018total of $8,783,000. The percentage of income tax expense to earnings before taxes was 20.0% in 2020, 23.5% in 2019 and 21.2% in 2018. The decrease in incometax expense in 2020 from 2019 was due to additional state tax credits that lowered our effective tax rate and the increase in 2019 from 2018 was due to an increasein earnings before income tax. Our effective tax rate represents our blended federal and state rate of 26.135% affected by the impact of anticipated favorablepermanent differences between our book and taxable income such as bank-owned life insurance, income earned on tax-exempt securities and certain federal andstate tax credits. Our income tax expense, deferred tax assets and liabilities reflect management’s best assessment of estimated future taxes to be paid. We are subject to incometaxes at both the federal and state level. Significant judgments and estimates are required in determining the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability torecover our deferred tax assets we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected futuretaxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we begin with historical results adjusted for changes inaccounting policies and incorporate assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences,and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable incomeand are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical resultsprovide, we consider three years of cumulative operating income. Changes in current tax laws and rates could also affect recorded deferred tax assets and liabilitiesin the future as was the case with the passage of the Tax Cuts and Jobs Act in 2017. Financial Accounting Standards Board (“FASB”) ASC Topic 740, Income Taxes (“ASC 740”) provides that a tax benefit from an uncertain tax position may berecognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes,based on the technical merits. ASC Topic 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. We recognize tax liabilities in accordance with ASC Topic 740 and we adjust these liabilities when our judgment changes as a result of the evaluation of newinformation not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materiallydifferent from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in whichthey are determined.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Financial Condition Balance Sheet Summary The Company’s total assets increased in 2020 by $575,395,000 or 20.59%, to $3,369,604,000 at December 31, 2020, after increasing 9.85% in 2019 to$2,794,209,000 at December 31, 2019. Loans, net of allowance for loan losses, totaled $2,282,766,000 at December 31, 2020, a $225,591,000, or 10.97%, increasecompared to December 31, 2019. In the first half of 2019 management made a strategic decision to begin focusing on loan growth in the commercial and industrialand residential 1-4 family segments of our loan portfolio, which have historically grown at slower rates than the other segments of the portfolio. As a result, loangrowth slowed in 2019. In 2020, management focused on growing all segments of our loan portfolio. The increase in loans in 2020 resulted from an overall increasein loan demand in the housing market, as well as other sectors in which we lend money, along with demand for PPP loans by small businesses and individuals as aresult of the COVID-19 pandemic. Of the $225,591,000 increase in loans, 27.68% was attributable to PPP loans. At year end 2020, securities totaled $580,543,000,an increase of 37.85% from $421,145,000 at December 31, 2019, primarily as a result of management's decision to invest excess liquidity. The current rateenvironment also caused the fair market value on the securities portfolio to increase. As a result of deposit growth that outpaced loan growth, interest bearingdeposits increased by $177,923,000, to $304,750,000 at December 31, 2020. Total liabilities increased by $532,258,000, or 21.66%, to $2,989,483,000 at December 31, 2020 compared to $2,457,225,000 at December 31, 2019. This increasewas composed primarily of the $542,990,000 increase in total deposits to $2,960,595,000, a 22.46% increase from December 31, 2019. The increase in totaldeposits since December 31, 2019 was primarily attributable to management's strategic decision to grow market share through targeted marketing strategies in ournewer markets that resulted in the opening of new accounts and the government issued economic stimulus relief attributable to COVID-19. Deposit growth was alsothe result of PPP loan proceeds being deposited in the Bank pending use of the funds by the borrower, reduced consumer spending as a result of the pandemic, andcustomers seeking to move their funds to deposit accounts they perceived to be less risky. Additional stimulus relief could contribute to further depositgrowth. Federal Home Loan Bank advances decreased to $3,638,000 from $23,613,000 at respective year ends 2020 and 2019. The decrease in Federal Home LoanBank advances was due to management's opportunistic trading of our securities portfolio, in which the gain on sale of these securities were used to offset theprepayment penalties on the pay-down of the Federal Home Loan Bank advances. Stockholders’ equity increased$43,137,000, or 12.80%, in 2020, due to net earnings, the issuance of stock pursuant to the Company’s Dividend Reinvestment Plan,an increase in the fair value of available-for-sale securities, and the exercise of stock options, offset by dividends paid on the Company’s common stock. Thechange in stockholders’ equity includes a $6,472,000 increase in net unrealized gains on available-for-sale securities, net of taxes during the period. A more detaileddiscussion of assets, liabilities and capital follows.
WILSON BANK HOLDING COMPANYMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSLoans The following schedule details the loans and percentage of loans in each category of the Company at December 31, 2020, 2019, 2018, 2017 and 2016: December 31, 2020 December 31, 2019 December 31, 2018 (Dollar Amounts in Thousands) (Dollar Amounts in Thousands) (Dollar Amounts in Thousands) AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE Commercial, financial and agricultural $ 183,300 7.9% $ 108,883 5.2% $ 89,554 4.3%Real estate—construction 488,626 21.0 425,185 20.3 518,245 25.3 Real estate—mortgage 1,588,157 68.1 1,504,140 71.9 1,393,641 68.0 Installment 70,517 3.0 54,834 2.6 48,759 2.4 Total loans 2,330,600 100.0% 2,093,042 100.0% 2,050,199 100.0%
Deferred loan fees (9,295) (7,141) (7,020) Total loans, net of deferred fees 2,321,305 2,085,901 2,043,179
Less allowance for loan losses (38,539) (28,726) (27,174) Net loans $ 2,282,766 $ 2,057,175 $ 2,016,005
December 31, 2017 December 31, 2016 (Dollar Amounts in Thousands) (Dollar Amounts in Thousands) AMOUNT PERCENTAGE AMOUNT PERCENTAGE Commercial, financial and agricultural 59,266 3.4% 50,437 3.0% Real estate—construction 392,039 22.3 297,315 17.5 Real estate—mortgage 1,263,696 71.9 1,303,918 76.9 Installment 43,540 2.4 44,755 2.6 Total loans 1,758,541 100.0% 1,696,425 100.0%
Deferred loan fees (7,379) (6,606) Total loans, net of deferred fees 1,751,162 1,689,819
Less allowance for loan losses (23,909) (22,731) Net loans $ 1,727,253 $ 1,667,088
Loans are the largest component of the Company’s assets and are its primary source of income. The Company’s loan portfolio, net of allowance for loan losses,increased 10.97% at year end 2020 when compared to year end 2019. The loan portfolio is composed of four primary loan categories: commercial, financial andagricultural; installment and other; real estate-mortgage; and real estate-construction. The table above sets forth the loan categories and the percentage of such loansin the portfolio as of December 31, 2020 and 2019. As represented in the table, Wilson Bank experienced loan growth for the year ended December 31, 2020 in all four loan categories. Real estate mortgage loansincreased 5.59% in 2020 and comprised 68.1% of the total loan portfolio at December 31, 2020, compared to 71.9% at December 31, 2019. Management believesthe increase in real estate mortgage loans was primarily due to an increase in demand for such loans due to, among other things, favorable interest rates resultingfrom the declining rate environment experienced in the third and fourth quarters of 2019 and throughout much of 2020, as well as the completion of someconstruction projects which transitioned to permanent financing. Commercial, financial and agricultural loans increased 68.35% in 2020 and comprised 7.9% of thetotal loan portfolio at December 31, 2020, compared to 5.2% at December 31, 2019. The increase in commercial, financial and agricultural loans is largelyattributable to the demand for PPP loans by small businesses and other eligible customers as a result of the COVID-19 pandemic. The Company funded $85.6million of PPP loans, $62.4 million of which remained outstanding as of December 31, 2020. Installment loans increased 28.60% in 2020 and comprised 3.0% ofthe portfolio at December 31, 2020, compared to 2.6% at December 31, 2019. The increase in installment loans was primarily attributable to an increase in loanssecured by investments. Real estate construction loans increased 14.92% in 2020 and comprised 21.0% of the total loan portfolio at December 31, 2020, comparedto 20.3% at December 31, 2019. The increase in real estate construction loans reflected the overall increase in demand for such loans in the overall economy and theCompany's markets. Because the construction portfolio remains a meaningful portion of our portfolio, Wilson Bank actively monitors these loans as it seeks toavoid advancing funds that exceed the present value of the collateral securing the loan. The responsibility for monitoring percentage of completion and distributionof funds tied to these completion percentages are monitored and administered by a credit administration department independent of the lending function. WilsonBank continues to seek to diversify its real estate portfolio as it seeks to lessen concentrations in any one type of loan.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
The COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closure of many businesses, "shelterin place", modified or phased economic reopening plans and other governmental orders and directives, and reduced consumer spending due to both job losses andother effects attributable to COVID-19. Many unknowns remain surrounding this situation. Although the Company has not experienced a decrease in demand fromits customers for loan-related products, if the pandemic continues deep into 2021 and the economy continues to be negatively impacted, including if additionalgovernmental stimulus is not approved, the Company could experience a decrease in demand for loans and the financial condition of the Company could benegatively impacted. Given the rapidly evolving nature of the COVID-19 virus, and the unknowns which remain about it, the complete extent to which the COVID-19 outbreak will impact loan demand and thus affect financial results remains uncertain. Banking regulators define highly leveraged transactions to include leveraged buy-outs, acquisition loans and recapitalization loans of an existing business. Underthe regulatory definition, at December 31, 2020, the Company had no highly leveraged transactions, and there were no foreign loans outstanding during any of thereporting periods. As of December 31, 2020, the Company had not underwritten any loans in connection with capital leases.
The following table classifies the Company's fixed and variable rate loans at December 31, 2020 according to contractual maturities of: (1) one year or less, (2) afterone year through five years, and (3) after five years. The table also classifies the Company's variable rate loans pursuant to the contractual repricing dates of theunderlying loans (dollars in thousands):
Amounts at December 31, 2020 At December 31, Fixed Rates Variable Rates Totals 2020 Based on contractual maturity: Due within one year $ 157,447 129,963 287,410 12.3%Due in one year to five years 304,801 123,708 428,509 18.4 Due after five years 91,049 1,523,632 1,614,681 69.3 Totals $ 553,297 1,777,303 2,330,600 100.0%
Based on contractual repricing dates: Daily floating rate $ — 24,872 24,872 1.1%Due within one year 157,447 582,426 739,873 31.7 Due in one year to five years 304,801 921,096 1,225,897 52.6 Due after five years 91,049 248,909 339,958 14.6 Totals $ 553,297 1,777,303 2,330,600 100.0%
The following table represents the contractual maturities of the loan portfolio as of December 31, 2020 (dollars in thousands):
Due Within One Due in One to
Five Due After Five Year Years Years Total Commercial, financial and agricultural $ 11,950 97,629 73,721 183,300 Real estate—construction 197,129 144,443 147,054 488,626 Real estate—mortgage 61,827 147,027 1,379,303 1,588,157 Installment 16,504 39,410 14,603 70,517 $ 287,410 428,509 1,614,681 2,330,600
WILSON BANK HOLDING COMPANYMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS The following schedule details selected information related to the allowance for loan loss account of the Company at December 31, 2020, 2019, 2018, 2017 and2016 and for the years then ended: In Thousands, Except Percentages 2020 2019 2018 2017 2016 Allowance for loan losses at beginning of period $ 28,726 27,174 23,909 22,731 22,900 Charge-offs: Commercial, financial and agricultural (9) (15) — (16) (11)Real estate – construction — — (19) — (66)Real estate – mortgage (7) (188) (492) (132) (209)Installment (898) (1,160) (1,152) (1,074) (674)
(914) (1,363) (1,663) (1,222) (960)Recoveries: Commercial, financial and agricultural — 15 3 6 15 Real estate – construction 173 423 88 121 34 Real estate – mortgage 394 74 116 174 131 Installment 464 363 423 418 232
1,031 875 630 719 412 Net loan recoveries (charge-offs) 117 (488) (1,033) (503) (548)
Provision for loan losses charged to expense 9,696 2,040 4,298 1,681 379 Allowance for loan losses at end of period 38,539 28,726 27,174 23,909 22,731
Total loans, net of deferred fees, at end of year 2,321,305 2,085,901 2,043,179 1,751,162 1,689,819
Average total loans outstanding, net of deferred fees, during year 2,236,815 2,030,861 1,898,772 1,727,499 1,571,528 Net recoveries (charge-offs) as a percentage of average totalloans outstanding, net of deferred fees, during year (0.01%) 0.02 0.05 0.03 0.04 Ending allowance for loan losses as a percentage of total loansoutstanding net of deferred fees, at end of year 1.66% 1.38 1.33 1.37 1.35 The allowance for loan losses is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible.The provision for loan losses charged to operating expense is based on past loan loss experience and other factors which, in management’s judgment, deservecurrent recognition in estimating possible loan losses. Such other factors considered by management include growth and composition of the loan portfolio, reviewof specific problem loans, the relationship of the allowance for loan losses to outstanding loans, adverse situations that may affect the borrower’s ability to repay,the estimated value of any underlying collateral and current economic conditions that may affect the borrower’s ability to pay.
Management conducts a continuous review of all loans that are delinquent, previously charged down or which are determined to be potentially uncollectible. Loanclassifications are reviewed periodically by a person independent of the lending function. The Board of Directors of the Company periodically reviews the adequacyof the allowance for loan losses.
The allowance for loan losses as a percentage of total loans outstanding at December 31, 2020, net of deferred fees, increased from each of the yearsended December 31, 2019 and December 31, 2018 largely due to increased provision expense in 2020 as a result of COVID-19 and the uncertainty of its impact onour customers as discussed above.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
The following detail provides a breakdown of the allocation of the allowance for loan losses: December 31, 2020 December 31, 2019 Percent of Percent of Loans In Loans In In Each Category In Each Category Thousands To Total Loans Thousands To Total Loans Commercial, financial and agricultural $ 1,459 7.9% $ 1,058 5.2%Real estate—construction 7,936 21.0 5,997 20.3 Real estate—mortgage 27,697 68.1 20,574 71.9 Installment 1,447 3.0 1,097 2.6 $ 38,539 100% $ 28,726 100% December 31, 2018 December 31, 2017 Percent of Percent of Loans In Loans In In Each Category In Each Category Thousands To Total Loans Thousands To Total Loans Commercial, financial and agricultural $ 682 4.3% $ 411 3.4%Real estate—construction 7,084 25.3 6,094 22.3 Real estate—mortgage 18,601 68.0 16,738 71.9 Installment 807 2.4 666 2.4 $ 27,174 100% $ 23,909 100% December 31, 2016 Percent of Loans In In Each Category Thousands To Total Loans Commercial, financial and agricultural $ 386 3.0%Real estate—construction 5,387 17.5 Real estate—mortgage 16,396 76.9 Installment 562 2.6 $ 22,731 100%
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
The following table details selected information as to non-performing loans of the Company at December 31, 2020, 2019, 2018, 2017 and 2016: In Thousands, Except Percentages 2020 2019 2018 2017 2016 Non-accrual loans: Commercial, financial and agricultural $ — — — — — Real estate—construction — — — — — Real estate—mortgage 1,333 2,610 2,050 2,039 3,565 Installment — — — 1 — Total non-accrual $ 1,333 2,610 2,050 2,040 3,565 Loans 90 days past due still accruing: Commercial, financial and agricultural $ — — 24 — 14 Real estate—construction 44 594 32 113 22 Real estate—mortgage 945 1,867 1,058 716 1,642 Installment 60 46 95 148 129 Total loans 90 days past due still accruing $ 1,049 2,507 1,209 977 1,807 Troubled debt restructurings, excluding those included in non-accrual above $ 2,366 2,886 2,492 4,084 4,596
Total non-performing loans $ 4,748 8,003 5,751 7,101 9,968 Total loans, net of deferred fees $ 2,321,305 2,085,901 2,043,179 1,751,162 1,689,819 Percentage of total non-performing loans to total loansoutstanding, net of deferred fees 0.20% 0.38 0.28 0.41 0.59 Other real estate owned $ — 697 1,357 1,635 4,527 The accrual of interest income is discontinued when it is determined that collection of interest is less than probable or the collection of any amount of principal isdoubtful. The decision to place a loan on a non-accrual status is based on an evaluation of the borrower’s financial condition, collateral liquidation value, economicand business conditions and other factors that affect the borrower’s ability to pay. At the time a loan is placed on a non-accrual status, the accrued but unpaidinterest is also evaluated as to collectability. If collectability is doubtful, the unpaid interest is charged off. Thereafter, interest on non-accrual loans is recognizedonly as received. Non-accrual loans totaled $1,333,000 at December 31, 2020, $2,610,000 at December 31, 2019, $2,050,000 at December 31,2018, $2,040,000 at December 31, 2017, and $3,565,000 at December 31, 2016. For the years ended December 31, 2020, 2019, 2018, 2017 and 2016, the amount ofinterest income on non-accrual loans that would have been recognized if loans were on accruing status was insignificant. The amount of interest and fee incomerecognized on total loans during 2020 totaled $113,224,000 as compared to $105,783,000 in 2019, $94,917,000 in 2018, $83,120,000 in 2017 and $77,024,000 in2016. At December 31, 2020, loans, which include the above non-accrual loans, totaling $8,246,000 were included in the Company’s internal classified loan list. Of theseloans $7,978,000 are real estate secured and $268,000 are secured by various other types of collateral. The value collateralizing these loans is estimated bymanagement to be approximately $15,802,000 ($15,445,000 related to real property securing real estate loans and $357,000 related to the various other types ofloans). Such loans are listed as classified when information obtained about possible credit problems of the borrowers has prompted management to question theability of the borrower to comply with the repayment terms of the loan agreement. The loan classifications do not represent or result from trends or uncertaintieswhich management expects will materially impact future operating results, liquidity or capital resources. The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic, or other, concessions havebeen granted to borrowers who have experienced or are expected to experience financial difficulties. The concessions typically result from the Company’s lossmitigation activities and could include reduction in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs areclassified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repaymentperformance for a reasonable period, generally six months. Nonperforming TDRs as of December 31, 2020 decreased $938,000 to $529,000 at December 31, 2020when compared to December 31, 2019 due to the payoff of one large TDR loan relationship and the pay down of one large TDR loan relationship that were non-performing at December 31, 2019. Total TDRs decreased $1,871,000 to $2,676,000 from December 31, 2019 to December 31, 2020 due the payoff of 5 loanrelationships that were classified as TDRs in 2019. The CARES Act and interagency guidance provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for alimited period of time to account for those loans which have been granted deferrals due to the effects of COVID-19. If the pandemic continues deep into 2021 andthe economy continues to be negatively impacted, the Company anticipates an increase in TDRs and the financial condition of the Company could be negativelyimpacted. The extent to which the COVID-19 outbreak will impact the Company's financial results and asset quality in 2021 remains uncertain. For moreinformation regarding the deferrals we have offered to our customers, see "Impact of COVID-19" above. At December 31, 2020, real estate construction and mortgage loans made up 21.0% and 68.1%, respectively, of the Company’s loan portfolio. At December 31, 2020, there was no other real estate owned outstanding. At December 31, 2019, other real estate owned totaled $697,000.
WILSON BANK HOLDING COMPANYMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth loans that were at least 30 days but less than 60 days past due, 60 days but less than 90 days past due and nonaccrual loans and thoseloans past due greater than 90 days:
(In thousands)
30-59 DaysPast Due
60-89 DaysPast Due
Nonaccrualand Greater
Than 90Days Past
Due Past Due Current Total Loans
LoansGreaterThan 90
Days PastDue andAccruingInterest
December 31, 2020 Residential 1-4 family $ 2,634 511 1,818 4,963 531,031 535,994 $ 796 Multifamily — — — — 111,646 111,646 — Commercial real estate — — 460 460 837,306 837,766 149 Construction 768 — 44 812 487,814 488,626 44 Farmland — — — — 15,429 15,429 — Second mortgages 265 — — 265 8,168 8,433 — Equity lines of credit 31 302 — 333 78,556 78,889 — Commercial 114 104 — 218 172,593 172,811 — Agricultural, installment andother 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 December 31, 2019 Residential 1-4 family $ 4,760 799 2,336 7,895 503,355 511,250 $ 1,387 Multifamily — — — — 97,104 97,104 — Commercial real estate 500 — 1,661 2,161 791,218 793,379 — Construction 1,535 147 594 2,276 422,909 425,185 594 Farmland 57 — 8 65 19,203 19,268 8 Second mortgages — — 100 100 10,660 10,760 100 Equity lines of credit 143 — 372 515 71,864 72,379 372 Commercial 71 30 — 101 98,164 98,265 — Agricultural, installment andother 517 116 46 679 64,773 65,452 46
Total $ 7,583 1,092 5,117 13,792 2,079,250 2,093,042 $ 2,507 Non-performing loans, which include nonaccrual loans and loans 90 days past due, totaled $2,382,000 at December 31, 2020, a decrease from $5,117,000 atDecember 31, 2019, resulting from a $1,277,000, or 48.93%, decrease in nonaccrual loans and a $1,458,000, or 58.16%, decrease in 90 day past due and accruingloans. The decrease in non-performing loans during the year ended December 31, 2020 of $2,735,000 was due primarily to a decrease in non-performingcommercial real estate loans of $1,201,000, a decrease in non-performing construction loans of $550,000, a decrease in non-performing residential 1-4 family loansof $518,000, and a decrease in non-performing equity lines of credit of $372,000. The decrease in non-performing loans resulted primarily from the payoff of twolarge loan relationships that were greater than 90 days past due, and the paydown of one large commercial real estate loan and payoff of one large commercial realestate loan that were on nonaccrual status. Management believes that it is probable that it will incur losses on nonperforming loans but believes that these lossesshould not exceed the amount in the allowance for loan losses already allocated to these loans, unless there is a deterioration of local real estate values or further, orgreater than anticipated, economic disruption resulting from COVID-19. Although deterioration of the real estate market is not currently apparent, the prolongedcoronavirus outbreak could have a material adverse impact on economic and market conditions and could potentially cause a negative impact on the value of realestate being held as collateral. The initial rapid development and ongoing fluidity of this situation precludes any prediction as to the ultimate material adverseimpact to the value of real estate; however, the pandemic presents continued uncertainty and risk with respect to the Company, its performance, and its financialresults.
WILSON BANK HOLDING COMPANYMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 ourloans greater than 90 days past due and accruing interest, non-accrual loans, nonperforming TDRs, and other real estate owned divided by our total assetsoutstanding. Our NPA ratio for the periods ended December 31, 2020 and December 31, 2019 were 0.08% and 0.22%, respectively. The NPA ratio was favorablyimpacted by the payment deferrals we offered customers in connection with the pandemic and the increase in our total assets as a result of PPP loans and theincrease in deposits associated with the pandemic. The Company also internally classifies loans which, although current, management questions the borrower’s ability to comply with the present repayment terms ofthe loan agreement. As with other asset quality measures, prolonged economic disruption as a result of the ongoing COVID-19 pandemic could result in increasedlevels of classified loans. These internally classified loans totaled $8,246,000, inclusive of the Company’s non-performing loans, at December 31, 2020, ascompared to $10,651,000 at December 31, 2019. Of the internally classified loans at December 31, 2020, $7,978,000 are real estate secured loans (including loansto home builders and developers of land, commercial real estate loans, as well as multifamily mortgage loans) and $268,000 are various other types of loans. Theseloans have been graded accordingly considering bankruptcies, inadequate cash flows and delinquencies. Overall, in 2020 Wilson Bank experienced a stabilization ininternally graded loans as the cash flows from home builders, land developers, and commercial real estate borrowers have stabilized. The COVID-19 pandemic hashad a notable impact on general economic conditions and there are many unknowns surrounding this situation. If the pandemic continues deep into 2021 and theeconomy continues to be negatively impacted, including if no additional governmental stimulus is approved, the Company anticipates an increase in internallygraded loans and the financial condition of the Company could be negatively impacted. Management does not anticipate losses on these loans to exceed the amountalready allocated to loan losses for these loans, unless there is a deterioration of local real estate values. The internally classified loans as a percentage of the allowance for loan losses were 21.4% and 37.1%, respectively, at December 31, 2020 and 2019. The allowance for loan losses is discussed under “Critical Accounting Estimates” and “Provision for Loan Losses.” The Company maintains its allowance for loanlosses at an amount believed by management to be adequate to absorb probable loan losses inherent in the loan portfolio as of December 31, 2020. Substantially all of the Company’s loans are from Wilson, DeKalb, Smith, Putnam, Trousdale, Davidson, Rutherford, Williamson and adjacent counties. Althoughthe majority of the Company's loans are in the real estate market, the Company seeks to exercise prudent risk management in lending through the diversification byloan category within the real estate segment, including 1-4 family residential real estate, commercial real estate, multifamily, construction, second mortgages,farmland, and equity lines of credit. At December 31, 2020, no single industry segment accounted for more than 10% of the Company’s portfolio other thanconstruction, commercial real estate, and residential 1-4 family real estate loans. The Company’s management believes there is an opportunity to increase the loan portfolio in 2021 as economic conditions in the Company's primary market areascontinue to outperform other markets. The Company will target owner-occupied commercial real estate, residential real estate lending and consumer lending asareas of emphasis in 2021. At December 31, 2020, the Company’s total loans equaled 78.4% of its total deposits. As a practice, the Company generates its ownloans and does not buy participations from other institutions. The Company may sell portions of the loans it generates to other financial institutions for cash in orderto improve the liquidity of the Company’s loan portfolio or extend its lending capacity. 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 thosecustomers, 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 paymentdeferral 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 toour customers as they navigate these uncertain economic times. As of December 31, 2020, the Bank had 13 loans, totaling $36.4 million in aggregate principalamount for which principal or both principal and interest were being deferred, compared to 48 loans totaling $79.1 million on deferral at September 30, 2020. As ofJanuary 31, 2021, the Bank had 17 loans, totaling $49.9 million in aggregate principal amount for which principal or both principal and interest were beingdeferred. The Bank is monitoring its loan portfolio on a weekly basis to identify the segments that are utilizing the COVID relief efforts and the overall percentageof the loan portfolio that has taken advantage of the relief. These reports are being reviewed by executive management and appropriately communicated to theBoard of Directors.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Securities Securities increased 37.85% to $580,543,000 at December 31, 2020 from $421,145,000 at December 31, 2019, and comprised the second largest and other primarycomponent of the Company’s earning assets. Securities increased as the result of deposit growth that outpaced loan growth and increased liquidity during thepandemic resulting from, among other things, increased deposit balances. The current rate environment also caused the fair market value on the securities portfolioto increase. The average yield, excluding tax equivalent adjustment, of the securities portfolio at December 31, 2020 was 1.63% with a weighted average life of8.00 years, as compared to an average yield of 2.42% and a weighted average life of 7.08 years at December 31, 2019. The weighted average lives on mortgage-backed securities reflect the repayment rate used for book value calculations. Certain 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 equitysecurities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded fromearnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the termsof the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. No securities have been classified as trading securities or held-to-maturity at December 31, 2020, December 31, 2019, or December 31, 2018. Investment securities at December 31, 2020, December 31, 2019, and December 31, 2018 consist of the following:
December 31, 2020 Securities Available-For-Sale (In Thousands) Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value 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 — 2,600 Obligations of states and politicalsubdivisions 147,462 4,229 400 151,291 $ 570,842 10,875 1,174 580,543
December 31, 2019 Securities Available-For-Sale (In Thousands) Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Government-sponsored enterprises(GSEs) $ 59,735 48 204 59,579 Mortgage-backed securities 265,648 2,300 635 267,313 Asset-backed securities 27,531 1 303 27,229 Obligations of states and politicalsubdivisions 67,293 559 828 67,024 $ 420,207 2,908 1,970 421,145
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
December 31, 2018 Securities Available-For-Sale (In Thousands) Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Government-sponsored enterprises(GSEs) $ 71,446 — 2,979 68,467 Mortgage-backed securities 152,375 9 4,874 147,510 Asset-backed securities 22,534 10 844 21,700 Obligations of state and politicalsubdivisions 49,328 22 1,775 47,575 $ 295,683 41 10,472 285,252
The following table details the contractual maturities and weighted average yields of investment securities of the Company. Actual maturities may differ fromcontractual maturities of mortgage and asset-backed securities because the mortgages or other assets underlying such securities may be called or prepaid with orwithout penalty. Therefore, these securities are not included in the maturity categories noted below as of December 31, 2020 and December 31, 2019:
December 31, 2020 December 31, 2019
Available-For-Sale Securities Amortized
Cost
EstimatedMarketValue
WeightedAverageYields
AmortizedCost
EstimatedMarketValue
WeightedAverageYields
(In Thousands, Except Yields) Mortgage and asset-backed securities $ 295,168 300,747 1.50% $ 293,179 294,542 2.33%U.S. Government-sponsoredenterprises (GSEs): Less than one year — — — — — — One to three years 9,500 9,507 0.33 8,950 8,944 1.77 Three to five years 9,750 9,753 0.52 8,746 8,737 1.96 Five to ten years 67,622 67,657 1.16 35,505 35,402 2.41 More than ten years 38,840 38,988 1.41 6,534 6,496 2.65 Total U.S. Government-sponsoredenterprises (GSEs) 125,712 125,905 1.12 59,735 59,579 2.27
Obligations of states and politicalsubdivisions*: Less than one year 1,196 1,198 0.79 472 471 1.54 One to three years 1,632 1,637 0.69 — — — Three to five years 2,943 3,045 1.92 636 638 2.25 Five to ten years 39,719 40,527 1.95 21,120 21,220 2.39 More than ten years 101,972 104,884 2.51 45,065 44,695 3.24 Total obligations of states andpolitical subdivisions 147,462 151,291 2.32 67,293 67,024 2.95
Corporate bonds: Less than one year — — — — — — One to three years — — — — — — Three to five years 2,500 2,600 4.25 — — — Five to ten years — — — — — — More than ten years — — — — — — Total corporate bonds 2,500 2,600 4.25 — — — Total available-for-sale securities $ 570,842 580,543 1.64% $ 420,207 421,145 2.42%
* Weighted average yield is stated on a tax-equivalent basis, assuming a weighted average Federal income tax rate of21%.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Deposits The increases in assets in 2020 and 2019 were funded primarily by increases in deposits and the Company’s earnings. Total deposits, which are the principal sourceof funds for the Company, totaled $2,960,595,000 at December 31, 2020 compared to $2,417,605,000 at December 31, 2019, an increase of 22.46%. The Companyhas targeted local consumers, professionals and small businesses as its central clientele; therefore, deposit instruments in the form of demand deposits, savingsaccounts, money market demand accounts, certificates of deposits and individual retirement accounts are offered to customers. Management believes the WilsonCounty, Davidson County, DeKalb County, Putnam County, Smith County, Sumner County, Rutherford County, Trousdale County and Williamson County areasare attractive economic markets offering growth opportunities for the Company; however, the Company competes with several larger banks and community banksthat have bank offices in these counties which may negatively impact market growth or maintenance of current market share. Even though the Company is in a verycompetitive market, management currently believes that its market share can be maintained or expanded. The $542,990,000, or 22.46%, growth in deposits in 2020 was due to a $182,691,000, or 22.78%, increase in money market accounts, a $106,749,000, or 37.51%,increase in demand deposit accounts, a $212,450,000, or 38.02%, increase in NOW accounts, and a $61,714,000, or 44.00%, increase in savings accounts, partiallyoffset by a decrease in certificates of deposits of $19,126,000, or 3.43%, and a decrease in individual retirement accounts of $1,488,000, or 1.99%. The decrease incertificates of deposits and the decrease in individual retirement accounts reflect the reduction in short-term interest rates and a shift in deposits to lower payingtransaction and money market accounts. The average rate paid on average total interest-bearing deposits was 0.70% for 2020 compared to 1.07% for 2019. Theaverage rate paid in 2018 was 0.75%. The increase in total deposits since December 31, 2019 was primarily attributable to management's strategic decision to growmarket share through targeted marketing strategies in our newer markets that resulted in the opening of new accounts and the government issued economic stimulusrelief attributable to COVID-19. Deposit growth was also the result of PPP loan proceeds being deposited in the Bank pending use of the funds by theborrower, reduced consumer spending as a result of the pandemic, and customers seeking to move their funds to deposit accounts with perceived less risk.Additional stimulus relief could contribute to further deposit growth. Competitive pressure from other banks in our market area relating to deposit pricingcould adversely affect the rates paid on deposit accounts as it limits our ability to lower deposit rates as short-term interest rates fall. It’s these same competitivepressures that may cause our deposit rates to rise more quickly than we are able to increase the rates we earn on loans in a rising rate environment. If either of thesescenarios were to happen, our net yield on earning assets would experience compression and our results of operations would be negatively impacted, as was the casein 2020, during which the impact of the declining rate environment more quickly impacted our earning assets than our interest-bearing liabilities, whichconsequently compressed our net yield on earning assets. The ratio of average loans to average deposits was 83.1% in 2020, 87.4% in 2019, and 89.7% in 2018. The average amounts and average interest rates for deposits for 2020, 2019 and 2018 are detailed in the following schedule:
2020 2019 2018 Average Average Average Balance Balance Balance In Average In Average In Average Thousands Rate Thousands Rate Thousands Rate Non-interest bearing deposits $ 348,677 —% $ 270,136 —% $ 250,328 —%Negotiable order of withdrawal accounts 669,224 0.20 526,026 0.44 503,312 0.36 Money market demand accounts 881,669 0.40 749,366 0.80 668,007 0.52 Time deposits 619,387 1.77 642,513 2.01 556,054 1.43 Other savings 171,849 0.39 136,912 0.60 139,664 0.53 $ 2,690,806 0.61% $ 2,324,953 0.95% $ 2,117,365 0.66%
The following schedule details the maturities of certificates of deposit and individual retirement accounts of $100,000 and more at December 31, 2020:
In Thousands Certificates Individual of Average Retirement Average Deposit Rate Accounts Rate Total Less than three months $ 50,726 1.44% 3,751 0.87% 54,477 Three to six months 32,531 1.34 4,353 1.26 36,884 Six to twelve months 105,151 1.60 9,938 1.55 115,089 More than twelve months 144,157 1.82 16,976 1.47 161,133 $ 332,565 1.64% 35,018 1.40% 367,583
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Contractual Obligations The Company’s contractual obligations at December 31, 2020 are as follows:
(In Thousands) Less than 1
Year 1 –3 Years 3-5 Years More than
5 Years Total Federal Home Loan Bank Advances $ 1,350 $ 2,138 $ 150 $ — $ 3,638 Operating Leases 494 934 975 2,521 4,924 Deposits with stated maturity dates 342,291 226,202 42,428 458 611,379 Total $ 344,135 $ 229,274 $ 43,553 $ 2,979 $ 619,941
Long-term debt contractual obligations include advances from the Federal Home Loan Bank, and at December 31, 2020, the Company had $3,638,000 in advances.The Company leases land for certain branch facilities and automatic teller machine locations. Future minimum rental payments required under the terms of thesenon-cancellable leases are included in operating lease obligations. Off Balance Sheet Arrangements At December 31, 2020, the Company had unfunded lines of credit of $851 million and outstanding standby letters of credit of $82 million. Since many of thecommitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements. If needed to fund these outstandingcommitments, the Company’s bank subsidiary has the ability to liquidate Federal funds sold or securities available-for-sale or on a short-term basis to borrow andpurchase Federal funds from other financial institutions. Additionally, the Company’s bank subsidiary could sell participations in these or other loans tocorrespondent banks. As mentioned below, Wilson Bank has been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments, itsinvestment security maturities, and short-term borrowings. 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 andexpense 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, otherthan 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 orcommodity price risk. Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in bothshort term and long term earnings through funds management/interest rate risk management. The Company’s rate sensitivity position has an important impact onearnings. Senior management of the Company meets quarterly to analyze the rate sensitivity position. These meetings focus on the spread between the cost of fundsand interest yields generated primarily through loans and investments. The COVID-19 pandemic and the government response to such pandemic has materially changed the reported market risks during the twelve months endedDecember 31, 2020. Since March 3, 2020, the Federal Reserve has lowered the Fed Funds benchmark rate by a full 1.5 percentage points to a target range of 0percent to 0.25 percent. In the third quarter of 2020 the Federal Reserve announced they would not likely be moving rates until the end of 2023 at the earliest. TheFederal Reserve also announced it would purchase more Treasury securities to encourage lending to try to offset the impact of the coronavirus outbreak. This wasan emergency response as the coronavirus escalated sharply in the United States, with stay-at-home orders and directives in nearly all states, mandatory businessclosures and mandatory work-from-home policies. Because economic indicators suggested that a recession was impending, the Federal Reserve stepped in with abroad array of monetary policy actions including direct lending to banks and corporations, expanding the scope of repurchase agreements, lowering the reserverequirements for banks at the Federal Reserve and supporting small and mid size businesses. As discussed elsewhere herein, Wilson Bank has experiencedcompression to its net yield on earning assets due to the rate cuts enacted by the Federal Reserve. The extent to which the COVID-19 pandemic and the response byfederal, state and local governments will ultimately impact the financial performance of Wilson Bank remains uncertain due to the evolving and complex nature ofthe COVID-19 virus (including the uncertainty around the size and number of additional government stimulus programs that may be adopted), and managementcontinues to actively monitor and adapt to the rapid market changes.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
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 andborrowers and fund attractive investment opportunities. Higher levels of liquidity, like those we built up in response to the COVID-19 pandemic, bearcorresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher interest expense involved in extending liabilitymaturities. Liquid assets include cash, due from banks, interest bearing deposits in other financial institutions and unpledged investment securities. At December 31,2020, the Company’s liquid assets totaled approximately $627.8 million. Additionally, as of December 31, 2020, the Company had available approximately $95.5million in unused federal funds lines of credit and, subject to certain restrictions and collateral requirements, approximately $336.4 million of borrowing capacitywith 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 inmaintaining stability in the net interest margin under varying interest rate environments. The Company accomplishes this process through the development andimplementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specificliquidity and interest rate risk guidelines. Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess the direction and magnitude of changes in net interest income resulting fromchanges in interest rates. Included in the analysis are cash flows and maturities of financial instruments held for purposes other than trading, changes in marketconditions, loan volumes and pricing and deposit volume and mix. These assumptions are inherently uncertain, and, as a result, net interest income can not beprecisely 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 maturitiesprovide a secondary source. At December 31, 2020, the Company had a liability sensitive position (a negative gap). Liability sensitivity means that more of theCompany’s liabilities are capable of re-pricing over certain time frames than its assets. The interest rates associated with these liabilities may not actually changeover this period but are capable of changing. Liability sensitivity generally should lead to an expansion in net yield on earning assets in a declining rateenvironment, as we experienced during a portion of 2020, but for that to occur the Bank will need to reprice its deposits more quickly than it reprices rates it earnson loans. Conversely, a rising rate environment could have a short-term negative impact on net yield on earning assets, as deposits would likely re-price faster thanassets. 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 theCompany’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 lower deposit ratesin a declining rate environment. As discussed elsewhere herein, the Bank anticipates that its net yield on earning assets is likely to contract further in 2021 becauseof such competitive pressures in its markets and the ongoing impacts of the COVID-19 pandemic, including the continuation of the historically low short-terminterest rate environment we are experiencing. The Company’s securities portfolio consists of earning assets that provide interest income. Securities classified as available-for-sale include securities intended tobe used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rates, prepayment risk, the need ordesire to increase capital and similar economic factors. At December 31, 2020, securities totaling approximately $45.1 million mature or will be subject to rateadjustments within the next twelve months. A secondary source of liquidity is the Company’s loan portfolio. At December 31, 2020, loans totaling approximately $755.5 million either will become due or willbe subject to rate adjustments within twelve months from that date. Continued emphasis will be placed on structuring adjustable rate loans. As for liabilities, certificates of deposit and individual retirement accounts of $250,000 or greater totaling approximately $79.0 million will become due or repriceduring the next twelve months. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawalaccounts, money market demand accounts, demand deposit accounts and regular savings accounts. Management anticipates that there will be no significantwithdrawals from these accounts in 2021.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
At December 31, 2020, the scheduled maturities of the Federal Home Loan Bank advances and interest rates were as follows (scheduled maturities will differ fromscheduled repayments):
Scheduled Maturities Amount
WeightedAverageRates
2021 $ — —%2022 — — 2023 1,688 2.68 2024 1,950 2.68 2025 — — Thereafter — — $ 3,638 2.68%
Interest Rate Sensitivity Gaps The following schedule details the Company's interest rate sensitivity gaps for different time periods at December 31, 2020: Repricing Within (In Thousands) Total 0-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year Earning assets:
Loans, net of deferred fees $ 2,321,305 338,945 48,375 92,247 275,884 1,565,854 Securities 580,543 42,297 32 1,554 1,198 535,462 Loans held for sale 19,474 — — — — 19,474 Interest bearing deposits 304,750 304,750 — — — — Federal funds sold 675 675 — — — — Restricted equity securities 5,089 5,089 — — — —
Total earning assets 3,231,836 691,756 48,407 93,801 277,082 2,120,790 Interest-bearing liabilities:
Negotiable order of withdrawalaccounts 771,195 771,195 — — — — Money market demand accounts 984,677 984,677 — — — — Individual retirement accounts 73,384 2,744 7,086 11,270 20,049 32,235 Other savings 201,984 201,984 — — — — Certificates of deposit 537,995 33,627 49,274 55,047 163,194 236,853 FHLB 3,638 — — — — 3,638
2,572,873 1,994,227 56,360 66,317 183,243 272,726 Interest-sensitivity gap $ 658,963 (1,302,471) (7,953) 27,484 93,839 1,848,064
Cumulative gap (1,302,471) (1,310,424) (1,282,940) (1,189,101) 658,963
Interest-sensitivity gap as % of total assets (38.7)% (0.2)% 0.8% 2.8% 54.8%
Cumulative gap as % of total assets (38.7)% (38.9)% (38.1)% (35.3)% 19.6% As detailed in the chart, as of December 31, 2020, the Company is forecasted to maintain a liability sensitive position over the next twelve months. However,management expects that liabilities of a demand nature will renew and that it will not be necessary to replace them with significantly higher cost funds.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
The Company also uses simulation modeling to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. The Asset LiabilityCommittee meets quarterly to analyze the interest rate shock simulation. The interest rate simulation model is based on a number of assumptions. The assumptionsrelate primarily to loan and deposit growth, asset and liability prepayments, the call features of investment securities, interest rates and balance sheet managementstrategies. The Company also uses Economic Value of Equity (“EVE”) sensitivity analysis to understand the impact of changes in interest rates on long-term cashflows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest rate scenarios. The EVE is alonger term view of interest rate risk because it measures the present value of the future cash flows. Presented below is the estimated impact on Wilson Bank’s netinterest income and EVE as of December 31, 2020, assuming an immediate shift in interest rates:
% Change from Base Case for Immediate Parallel Changes in Rates -200 BP(1) -100 BP(1) +100 BP +200 BP +300 BP Net interest income (4.75)% (3.42)% (0.48)% 3.10% 4.52%EVE (13.05) (11.83) 4.36 7.49 8.76 (1) Currently, some short term interest rates are below the standard down rate scenarios (100, 200, 300 bps). The assetliability model does not calculate negative interest rates and will floor any index at 0.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Incomeassociated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition,the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilitiesmay have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assetsand liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. Inaddition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes in interestrates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability ofmany borrowers to service their debts also may decrease during periods of rising interest rates. We review each of the above interest rate sensitivity analyses alongwith several different interest rate scenarios as part of our responsibility to seek to provide a satisfactory, consistent level of profitability within the framework ofestablished liquidity, loan, investment, borrowing, and capital policies. 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 Wilson Bank hasseen an increase in deposits as some customers have shifted funds from market based products to more stable FDIC insured options. In addition, the CARES Actand the Coronavirus Relief Act included an economic stimulus package for individuals who met the federal income qualifications in the form of a direct payment.Further stimulus checks may have the effect of further increasing the Bank's deposit accounts, thus increasing liquidity. At the present time, management does notbelieve 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 themaintenance of higher levels of on-balance sheet liquidity.
Impact of Inflation Although interest rates are significantly affected by inflation, for the fiscal years ended December 31, 2020, 2019, and 2018, the inflation rate is believed to havehad an immaterial impact on the Company’s results of operations. Capital Resources, Capital Position and Dividends At December 31, 2020, total stockholders’ equity was $380,121,000, or 11.28% of total assets, which compares with $336,984,000, or 12.06% of total assets, atDecember 31, 2019, and $295,667,000, or 11.62% of total assets, at December 31, 2018. The dollar increase in the Company’s stockholders’ equity during 2020reflects (i) net income of $38,492,000 less cash dividends of $1.20 per share totaling $13,013,000, (ii) the issuance of 180,424 shares of common stock for$10,056,000, as reinvestment of cash dividends, (iii) the issuance of 19,981 shares of common stock pursuant to exercise of stock options for $718,000, (iv) the netchange in unrealized gain on available-for-sale securities of $6,472,000, and (v) a stock-based compensation expense of $412,000. For a discussion of the Company's and Wilson Bank's capital levels and required minimum levels of capital each is required to maintain under applicable regulatoryrequirements see Note 17, Regulatory Matters and Restrictions on Dividends in the notes to the Company's consolidated financial statements appearing elsewhere inthis report.
Holding Company & Stock InformationWilson Bank Holding Company Directors
James Anthony Patton, Chairman; James F. Comer; J. Randall Clemons; Jack W. Bell; William P. Jordan; John C. McDearman III; H. Elmer
Richerson; Clinton M. Swain; Michael G. Maynard; and Deborah Varallo.
Common Stock Market Information
The common stock of Wilson Bank Holding Company is not traded on an exchange nor is there a known active trading market. The number ofstockholders of record at February 19, 2021 was 4,464. Based solely on information made available to the Company from limited numbers of buyers and sellers, theCompany believes that the following table sets forth the quarterly range of sale prices for the Company’s common stock during the years 2019 and 2020.
On January 2, 2019, a $.55 per share cash dividend was declared and on July 1, 2019, a $.55 per share cash dividend was declared and paid to shareholders
of record on those dates. On January 2, 2020, a $.60 per share cash dividend was declared and on July 1, 2020, a $.60 per share cash dividend was declared and paidto shareholders of record on those dates. Future dividends will be dependent upon the Company’s profitability, its capital needs, overall financial condition andeconomic and regulatory considerations.
Stock Prices
2019 High Low First Quarter $ 51.00 $ 49.75 Second Quarter $ 52.25 $ 51.00 Third Quarter $ 53.50 $ 52.25 Fourth Quarter $ 54.75 $ 53.50 2020 High Low First Quarter $ 55.75 $ 54.75 Second Quarter $ 56.75 $ 54.75 Third Quarter $ 60.00 * $ 56.75 Fourth Quarter $ 58.75 $ 56.75
*Represents one transaction of 377 shares during the third quarter of 2020 of which the Company is aware where the sale price was at least $2.25 higher than any other tradeduring the quarter. The volume weighted average stock price during the third quarter of 2020 was $56.83.
Annual Meeting and Information Contacts
The 2021 Annual Meeting of Shareholders will be held virtually at 7:00 P.M., April 27, 2021. Additional details on attending the Annual Meeting virtuallywill be included in the proxy material distributed in advance of the Annual Meeting.
For further information concerning Wilson Bank Holding Company or Wilson Bank & Trust, or to obtain a copy of the Company’s Annual Report on
Form 10-K as filed with the Securities and Exchange Commission, which is available without charge to shareholders, please contact Lisa Pominski, CFO, WilsonBank & Trust, P.O. Box 768, Lebanon, Tennessee 37088-0768, phone (615) 443-6612.
WILSON BANK HOLDING COMPANY FINANCIAL HIGHLIGHTS (UNAUDITED) In Thousands, Except Per Share Information As Of December 31, 2020 2019 2018 2017 2016 CONSOLIDATED BALANCE SHEETS: Total assets end of year $ 3,369,604 2,794,209 2,543,682 2,317,033 2,198,051 Loans, net $ 2,282,766 2,057,175 2,016,005 1,727,253 1,667,088 Securities $ 580,543 421,145 285,252 365,196 349,209 Deposits $ 2,960,595 2,417,605 2,235,655 2,037,745 1,942,135 Stockholders’ equity $ 380,121 336,984 295,667 267,730 244,620 Years Ended December 31, 2020 2019 2018 2017 2016 CONSOLIDATED STATEMENTS OF EARNINGS: Interest income $ 122,968 118,077 103,525 91,020 84,746 Interest expense 17,383 22,647 14,018 8,889 8,284 Net interest income 105,585 95,430 89,507 82,131 76,462 Provision for loan losses 9,696 2,040 4,298 1,681 379 Net interest income after provision for loan losses 95,889 93,390 85,209 80,450 76,083 Non-interest income 33,140 28,349 25,248 22,821 21,654 Non-interest expense 80,919 74,628 69,080 60,391 57,263 Earnings before income taxes 48,110 47,111 41,377 42,880 40,474 Income taxes 9,618 11,067 8,783 19,354 14,841 Net earnings $ 38,492 36,044 32,594 23,526 25,633
Cash dividends declared $ 13,013 11,725 9,447 6,729 5,756 PER SHARE DATA: Basic earnings per common share $ 3.52 3.36 3.09 2.26 2.49 Diluted earnings per common share $ 3.51 3.35 3.08 2.26 2.49 Cash dividends $ 1.20 1.10 0.90 0.65 0.56 Book value $ 34.58 31.24 27.83 25.62 23.71 RATIOS: Return on average stockholders’ equity 10.65% 11.31 11.70 9.06 10.80 Return on average assets 1.24% 1.34 1.35 1.04 1.21 Total capital to assets 11.28% 12.06 11.62 11.55 11.13 Dividends declared per share as a percentage of basic earningsper share 34.09% 32.74 29.13 28.76 22.49
WILSON BANK HOLDING COMPANY
Consolidated Financial Statements
December 31, 2020 and 2019
(With Independent Auditor’s Report Thereon)
Stephen M. Maggart, CPA, ABV, CFF J. Mark Allen, CPA Joshua K. Cundiff, CPA Michael T. Holland, CPA, ABV, CFF M. Todd Maggart, CPA, ABV, CFF Michael F. Murphy, CPA P. Jason Ricciardi, CPA, CGMA David B. von Dohlen, CPA T. Keith Wilson, CPA, CITP
To the Shareholders and the Board of Directors ofWilson Bank Holding Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Wilson Bank Holding Company (the Company) as of December 31, 2020 and 2019, and therelated consolidated statements of earnings, comprehensive earnings, changes in stockholders’ equity and cash flows for each of the three years in the periodended December 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internalcontrol over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 12, 2021 expressed an unqualified opinion thereon.
Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statementsbased on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordancewith the U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures toassess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Suchprocedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating theaccounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe thatour audits provide a reasonable basis for our opinion.
1201 DEMONBREUN STREET ▪ SUITE 1220 ▪ NASHVILLE, TENNESSEE 37203-3140 ▪ (615) 252-6100 ▪ Fax ▪ (615) 252-6105www.maggartpc.com
To the Shareholders and the Board of Directors ofWilson Bank Holding CompanyPage Two Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to becommunicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especiallychallenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financialstatements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on theaccount or disclosures to which it relates. Allowance for Loan Losses Description of the Matter The Company’s loan portfolio totaled $2.3 billion as of December 31, 2020 and the associated allowance for loan losses (ALL) was $38.5 million. As discussed inNotes 1 and 2 to the consolidated financial statements, the ALL is established to absorb inherent losses that have been incurred within the existing portfolio ofloans. Management’s estimate of inherent losses within the loan portfolio is established using quantitative, as well as qualitative, considerations. The Company’smethodology to determine the ALL considers quantitative calculations including: specific valuation allowances determined in accordance with ASC Topic 310based on probable losses on specific loans, historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experiencefor similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions, and general valuation allowancesdetermined in accordance with ASC Topic 450 based on various risk factors that are internal to the Company. The Company’s ALL methodology also includesqualitative amounts that include valuation allowances based on general economic conditions and other risk factors to the Company. Management’s estimate of the ALL involves significant estimates and subjective assumptions, which require a high degree of judgment. The level of the allowanceis based upon management's evaluation of the loan portfolio, loan loss experience, asset quality trends, known and inherent risks in the loan portfolio, adversesituations that may affect the borrowers' ability to repay the loan (including the timing of future payment), the estimated value of any underlying collateral,composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatoryrecommendations. Changes in these assumptions could have a material effect on the Company’s financial results. How We Addressed the Matter in Our Audit We obtained an understanding of the Company’s process for establishing the ALL, including the qualitative valuation allowances of the ALL. We evaluated thedesign and tested the operating effectiveness of related controls over the reliability and accuracy of data used to calculate and estimate the various components ofthe ALL, the accuracy of the calculation of the ALL, management’s review and approval of methodologies used to establish the ALL, analysis of changes invarious components of the ALL relative to changes in the Company’s loan portfolio and economy and evaluation of the overall reasonableness and appropriatenessof the ALL. In doing so, we tested the operating effectiveness of review and approval controls in the Company’s governance process designed to identify and assessthe qualitative valuation allowances which is meant to measure inherent loan losses associated with factors not captured fully in the other components of the ALL.
To the Shareholders and the Board of Directors ofWilson Bank Holding CompanyPage Three To test the reasonableness of the qualitative valuation allowances, we performed audit procedures that included, among others testing the appropriateness of themethodologies used by the Company to estimate the ALL, testing the completeness and accuracy of data and information used by the Company in estimating thecomponents of the ALL, evaluating the appropriateness of assumptions used in estimating the qualitative valuation allowances, analyzing the changes inassumptions and various components of the ALL relative to changes in the Company’s loan portfolio and the economy and evaluating the appropriateness and levelof the qualitative valuation allowances. For example, specific to the qualitative valuation allowances, we 1) analyzed the changes, assumptions and adjustmentsmade to the qualitative valuation allowances; and 2) evaluated the appropriateness and completeness of risk factors used in determining the amount of thequalitative valuation allowances. We also evaluated the data and information utilized by management to estimate the qualitative valuation allowances byindependently obtaining internal and external data and information to assess the appropriateness of the data and information used by management. In addition, weevaluated the overall ALL amount, inclusive of the adjustments for the qualitative valuation allowances, and whether the amount appropriately reflects lossesincurred in the loan portfolio as of the consolidated balance sheet date by comparing the overall ALL to those established by similar banking institutions withsimilar loan portfolios. We also reviewed subsequent events and transactions and considered whether they corroborate or contradict the Company’s conclusion.
/s/ MAGGART & ASSOCIATES, P.C. We have served as the Company’s auditor since 1987.Nashville, TennesseeFebruary 12, 2021
Stephen M. Maggart, CPA, ABV, CFF J. Mark Allen, CPA Joshua K. Cundiff, CPA Michael T. Holland, CPA, ABV, CFF M. Todd Maggart, CPA, ABV, CFF Michael F. Murphy, CPA P. Jason Ricciardi, CPA, CGMA David B. von Dohlen, CPA T. Keith Wilson, CPA, CITP
To the Shareholders and the Board of Directors ofWilson Bank Holding Company Opinion on Internal Control over Financial Reporting We have audited Wilson Bank Holding Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in InternalControl - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In ouropinion, Wilson Bank Holding Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31,2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balancesheets of the Company as of December 31, 2020 and 2019, and the related consolidated statements of earnings, comprehensive earnings, changes in stockholders’equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 12, 2021 expressed anunqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to expressan opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and arerequired to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securitiesand Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.
1201 DEMONBREUN STREET ▪ SUITE 1220 ▪ NASHVILLE, TENNESSEE 37203-3140 ▪ (615) 252-6100 ▪ Fax ▪ (615) 252-6105www.maggartpc.com
To the Shareholders and the Board of Directors ofWilson Bank Holding CompanyPage Two Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.
/s/ MAGGART & ASSOCIATES, P.C.
Nashville, TennesseeFebruary 12, 2021
WILSON BANK HOLDING COMPANYConsolidated Balance SheetsDecember 31, 2020 and 2019
Dollars in thousands 2020 2019
ASSETS Loans, net of allowance for loan losses of $38,539 and $28,726, respectively $ 2,282,766 2,057,175 Available-for-sale securities, at market (amortized cost $570,842 and $420,207, respectively) 580,543 421,145 Loans held for sale 19,474 18,179 Interest bearing deposits 304,750 126,827 Federal funds sold 675 20,000 Restricted equity securities, at cost 5,089 4,680
Total earning assets 3,193,297 2,648,006 Cash and due from banks 33,431 12,943 Premises and equipment, net 58,202 60,295 Accrued interest receivable 7,516 5,945 Deferred income taxes 7,089 6,136 Other real estate — 697 Bank owned life insurance 35,197 31,762 Goodwill 4,805 4,805 Other assets 30,067 23,620
Total assets $ 3,369,604 2,794,209 LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits $ 2,960,595 2,417,605 Federal Home Loan Bank advances 3,638 23,613 Accrued interest and other liabilities 25,250 16,007
Total liabilities 2,989,483 2,457,225 Stockholders’ equity:
Common stock, par value $2.00 per share, authorized 50,000,000 shares, 10,993,404 and 10,792,999 sharesissued and outstanding, respectively 21,987 21,586 Additional paid-in capital 93,034 82,249 Retained earnings 257,935 232,456 Net unrealized gains on available-for-sale securities, net of taxes of $2,536 and $245, respectively 7,165 693
Total stockholders’ equity 380,121 336,984 COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders’ equity $ 3,369,604 2,794,209 See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANY
Consolidated Statements of EarningsThree Years Ended December 31, 2020
Dollars In Thousands (except per share data) 2020 2019 2018 Interest income:
Interest and fees on loans $ 113,224 105,783 94,917 Interest and dividends on securities:
Taxable securities 7,272 8,559 6,158 Exempt from Federal income taxes 1,102 773 1,020
Interest on loans held for sale 616 325 184 Interest on Federal funds sold 56 275 83 Interest on interest bearing deposits 582 2,164 979 Interest and dividends on restricted equity securities 116 198 184
Total interest income 122,968 118,077 103,525 Interest expense:
Interest on negotiable order of withdrawal accounts 1,314 2,311 1,823 Interest on money market accounts and other savings accounts 4,163 6,855 4,231 Interest on certificates of deposit and individual retirement accounts 10,939 12,896 7,944 Interest on securities sold under repurchase agreements — — 16 Interest on Federal funds purchased — 4 4 Interest on Federal Home Loan Bank advances 967 581 —
Total interest expense 17,383 22,647 14,018 Net interest income before provision for loan losses 105,585 95,430 89,507 Provision for loan losses 9,696 2,040 4,298 Net interest income after provision for loan losses 95,889 93,390 85,209 Non-interest income 33,140 28,349 25,248 Non-interest expense 80,919 74,628 69,080
Earnings before income taxes 48,110 47,111 41,377 Income taxes 9,618 11,067 8,783
Net earnings $ 38,492 36,044 32,594
Basic earnings per common share $ 3.52 3.36 3.09
Diluted earnings per common share $ 3.51 3.35 3.08 Weighted average common shares outstanding:
Basic 10,927,065 10,743,269 10,564,172
Diluted 10,953,746 10,761,467 10,572,221
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANYConsolidated Statements of Comprehensive Earnings
Three Years Ended December 31, 2020
Dollars In Thousands 2020 2019 2018 Net earnings $ 38,492 36,044 32,594 Other comprehensive earnings (losses), net of tax:
Net unrealized gains (losses) on available-for-sale securities arising during period,net of taxes of $2,522, $2,901, and $1,398, respectively 7,123 8,200 (3,950)
Reclassification adjustment for net losses (gains) included in net earnings, net oftaxes of $231, $70, and $170, respectively (651) 198 480
Other comprehensive earnings (losses) 6,472 8,398 (3,470)Comprehensive earnings $ 44,964 44,442 29,124
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANYConsolidated Statements of Changes in Stockholders’ Equity
Three Years Ended December 31, 2020
Dollars In Thousands
Common Stock Additional
Paid In Capital RetainedEarnings
Net UnrealizedGain (Loss)
On AvailableFor Sale
Securities Total Balance December 31, 2017 $ 20,901 66,047 185,017 (4,235) 267,730 Cash dividends declared, $.90 per share — — (9,447) — (9,447)Issuance of 161,514 shares of common stock pursuant todividend reinvestment plan 324 7,146 — — 7,470
Issuance of 11,585 shares of common stock pursuant to exerciseof stock options 23 371 — — 394
Share based compensation expense — 396 — — 396 Net change in fair value of available-for-sale securities during theyear, net of taxes of $1,228 — — — (3,470) (3,470)
Net earnings for the year — — 32,594 — 32,594 Balance December 31, 2018 21,248 73,960 208,164 (7,705) 295,667 Cash dividends declared, $1.10 per share — — (11,725) — (11,725)Issuance of 179,199 shares of common stock pursuant todividend reinvestment plan 358 8,776 — — 9,134
Issuance of 21,764 shares of common stock pursuant to exerciseof stock options 44 731 — — 775
Share based compensation expense — 347 — — 347 Net change in fair value of available-for-sale securities during theyear, net of taxes of $2,971 — — — 8,398 8,398
Reclassification adjustment for the adoption of lease standard — — (27) — (27)Repurchase of 31,774 common shares (64) (1,565) — — (1,629)Net earnings for the year — — 36,044 — 36,044 Balance December 31, 2019 21,586 82,249 232,456 693 336,984 Cash dividends declared, $1.20 per share — — (13,013) — (13,013)Issuance of 180,424 shares of common stock pursuant todividend reinvestment plan 361 9,695 — — 10,056
Issuance of 19,981 shares of common stock pursuant to exerciseof stock options 40 678 — — 718
Share based compensation expense — 412 — — 412 Net change in fair value of available-for-sale securities during theyear, net of taxes of $2,291 — — — 6,472 6,472
Net earnings for the year — — 38,492 — 38,492 Balance December 31, 2020 $ 21,987 93,034 257,935 7,165 380,121
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANYConsolidated Statements of Cash FlowsThree Years Ended December 31, 2020
Increase (Decrease) in Cash and Cash Equivalents
Dollars In Thousands 2020 2019 2018 Cash flows from operating activities:
Interest received $ 126,194 121,366 105,318 Fees and other income received 21,284 21,185 20,503 Proceeds from sales of loans 221,748 157,028 131,321 Origination of loans held for sale (213,483) (160,921) (129,060)Interest paid (18,146) (21,966) (12,565)Cash paid to suppliers and employees (75,082) (69,412) (64,351)Income taxes paid (12,106) (10,934) (10,558)
Net cash provided by operating activities 50,409 36,346 40,608 Cash flows from investing activities:
Purchase of available-for-sale securities (409,996) (255,432) (9,118)Proceeds from calls, maturities and paydowns of available-for-sale securities 200,785 90,805 36,955 Proceeds from sale of available-for-sale securities 54,870 37,325 35,093 Purchase of restricted equity securities (409) (1,668) — Proceeds from maturities and paydowns of held-to-maturity securities — — 4,651 Proceeds from sale of held-to-maturity securities — — 4,764 Loans made to customers, net of repayments (236,402) (43,568) (293,655)Purchase of bank owned life insurance and annuity contracts (6,867) — (4,301)Purchase of premises and equipment (2,220) (6,044) (7,752)Proceeds from sale of other assets 9 14 4 Proceeds from sale of other real estate 2,307 952 796
Net cash used in investing activities (397,923) (177,616) (232,563)Cash flows from financing activities:
Net increase in non-interest bearing, savings, NOW and money market depositaccounts 563,605 163,720 101,248 Net increase (decrease) in time deposits (20,615) 18,230 96,662 Net decrease in securities sold under agreements to repurchase — — (864)Net increase (decrease) in Federal Home Loan Bank advances (19,975) 23,613 — Escrow payable, net 5,824 (269) 165 Common stock dividends paid (13,013) (11,725) (9,447)Proceeds from sale of common stock pursuant to dividend reinvestment 10,056 9,134 7,470 Proceeds from sale of common stock pursuant to exercise of stock options 718 775 394 Repurchase of common stock — (1,629) —
Net cash provided by financing activities 526,600 201,849 195,628 Net increase in cash and cash equivalents 179,086 60,579 3,673 Cash and cash equivalents at beginning of year 159,770 99,191 95,518 Cash and cash equivalents at end of year $ 338,856 159,770 99,191
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANYConsolidated Statements of Cash Flows, Continued
Three Years Ended December 31, 2020Increase (Decrease) in Cash and Cash Equivalents
Dollars In Thousands 2020 2019 2018 Reconciliation of net earnings to net cash provided by operating activities:
Net earnings $ 38,492 36,044 32,594 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and accretion 8,838 6,494 5,853 Provision for loan losses 9,696 2,040 4,298 Equity-based compensation expense 1,180 786 1,237 Provision for deferred tax benefit (3,304) (478) (248)Loss (gain) on sales of other real estate, net (658) 48 80 Loss on sales of other assets 4 4 3 Loss on sales of premises and equipment 63 128 2 Security loss (gain) (882) 268 650 Increase in derivative liability, net 209 — — Increase in loans held for sale (1,295) (10,695) (2,378)Increase (decrease) in taxes payable 756 339 (1,526)Increase in other assets, bank owned life insurance and annuity contract earnings (3,023) (194) (1,684)Decrease (increase) in accrued interest receivable (1,571) 779 (458)Increase (decrease) in interest payable (763) 682 1,453 Increase in other liabilities 2,667 101 732
Total adjustments 11,917 302 8,014 Net cash provided by operating activities $ 50,409 36,346 40,608
Supplemental Schedule of Non-Cash Activities: Change in fair value of securities available-for-sale, net of taxes of $2,291 in 2020,$2,971 in 2019, and $1,228 in 2018 $ 6,472 8,398 (3,470)Non-cash transfers from held-to-maturity to available-for-sale securities $ — — 22,800 Non-cash transfers from loans to other real estate $ 992 884 693 Non-cash transfers from other real estate to loans $ 40 544 95 Non-cash transfers from loans to other assets $ 5 18 7
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial StatementsDecember 31, 2020, 2019 and 2018
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Wilson Bank Holding Company (“the Company”) and Wilson Bank & Trust (“Wilson Bank” or "the Bank") are inaccordance with accounting principles generally accepted in the United States of America (“U.S.”) and conform to general practices within the bankingindustry. The following is a brief summary of the significant policies.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Wilson Bank. All significant intercompanyaccounts and transactions have been eliminated in consolidation.
(b) Nature of Operations
Wilson Bank operates under a state bank charter and provides full banking services. As a state-chartered bank that is not a member of the Federal Reserve,Wilson Bank is subject to regulations of the Tennessee Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). Theareas served by Wilson Bank include Wilson County, DeKalb County, Rutherford County, Smith County, Trousdale County, Putnam County, SumnerCounty, Davidson County and Williamson County, Tennessee and surrounding counties in Middle Tennessee. Services are provided at the main office andtwenty-seven branch locations.
(c) Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”),management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet andreported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that areparticularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assetsand other real estate, other-than-temporary impairments of securities, and the fair value of financial instruments.
(d) Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within Middle Tennessee. The types of securities in which the Company invests are describedin note 3. The types of lending in which the Company engages are described in note 2. The Company does not have any significant concentrations to any oneindustry or customer other than as disclosed in note 2.
Residential 1-4 family, commercial real estate and construction mortgage loans, represente d 23%, 36% and 21% and 24%, 38% and 20% of the loanportfolio at December 31, 2020 and 2019, respectively.
(e) Loans
The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loansthroughout Middle Tennessee. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economicconditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstandingunpaid principal balances adjusted for unearned income, the allowance for loan losses, and any unamortized deferred fees or costs on originated loans, andpremiums or discounts on purchased loans.
Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized on a straight line basis over therespective term of the loan. As part of its routine credit monitoring process, the Company performs regular credit reviews of the loan portfolio and loans receive risk ratings by theassigned credit officer, which are subject to validation by the Company's independent loan review department. Risk ratings are categorized as pass, specialmention, substandard or doubtful. The Company believes that its categories follow those outlined by the FDIC, Wilson Bank's primary federal regulator.
Generally the accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-securedand in process of collection. Credit card loans and other personal loans are typically charged off no later than when they become 180 days past due. Past duestatus is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal orinterest is considered doubtful.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial StatementsDecember 31, 2020, 2019 and 2018
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans isaccounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal andinterest amounts contractually due are brought current and future payments are reasonably assured.
(f) Allowance for Loan Losses
Management provides for loan losses by establishing an allowance. The allowance for loan losses is established as losses are estimated to have occurredthrough a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of aloan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s quarterly review of the collectability of theloans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay,estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that aresusceptible to significant revision as more information becomes available.
In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both toascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristicsof the entire loan portfolio. Our loan review process includes the judgment of management, independent loan reviewers, and reviews that may have beenconducted by third-party reviewers. We incorporate relevant loan review results in the loan impairment determination. In addition, regulatory agencies, as anintegral part of their examination process, will periodically review the Company’s allowance for loan losses and may require the Company to recordadjustments to the allowance based on their judgment about information available to them at the time of their examinations.
In addition to the independent loan review process, the aforementioned risk ratings are subject to continual review by loan officers to determine that theappropriate risk ratings are being utilized in our allowance for loan loss process. Each risk rating is also subject to review by our independent loan reviewdepartment. Currently, our independent loan review department targets reviews of 100% of existing loan relationships with aggregate debt of $2.0 millionand greater and new loans with aggregate debt of $500,000 and greater. In addition, our independent loan review department targets particular portfoliosegments, loans assigned to a particular lending officer, past due loans, and loans with four or more renewals.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that areindividually classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of theimpaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-offexperience, historical loan loss factors, loss experience of various loan segments, and other adjustments based on management’s assessment of internal orexternal influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduledpayments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determiningimpairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans thatexperience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of paymentdelays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including thelength of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interestowed. Impairment is measured on a loan by loan basis for commercial, mortgage and agricultural loans by either the present value of expected future cashflows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identifyindividual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of theborrower.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(g) Debt and Equity Securities
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortizedcost. 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 based on available marketprices, with unrealized gains and losses excluded from earnings and reported in other comprehensive income on an after-tax basis. Securities classified as“available-for-sale” are held for indefinite periods of time and may be sold in response to movements in market interest rates, changes in the maturity or mixof Company assets and liabilities or demand for liquidity. Purchase premiums and discounts are recognized in interest income using the interest method overthe terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identificationmethod.
Other-than-temporary Impairment—Impaired securities are assessed quarterly for the presence of other-than-temporary impairment (“OTTI”). A decline inthe 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 carryingamount of the security. To determine whether OTTI has occurred, management considers factors such as (1) length of time and extent that fair value hasbeen less than cost, (2) the financial condition and near term prospects of the issuer, and (3) Wilson Bank’s ability and intent to hold the security for a periodsufficient to allow for any anticipated recovery in fair value. If management deems a security to be OTTI, management reviews the present value of thefuture cash flows associated with the security. A shortfall of the present value of the cash flows expected to be collected in relation to the amortized costbasis is referred to as a credit loss. If a credit loss is identified, the credit loss is recognized as a charge to earnings and a new cost basis for the security isestablished. 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 securitybefore the recovery of the security’s cost basis, then the security is not deemed OTTI and the shortfall is recorded as a component of equity.
No securities have been classified as trading securities or held-to-maturity securities at December 31, 2020 or 2019.
(h) Federal Home Loan Bank Stock
The Company, as a member of the Federal Home Loan Bank (“FHLB”) Cincinnati system, is required to maintain an investment in capital stock of theFHLB. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at par value, which approximates its fair value.Management reviews the investment for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. As of December 31, 2020, thisminimum required investment was valued at approximately $4.4 million. Stock redemptions are at the discretion of the FHLB.
(i) Loans Held for Sale
Mortgage loans held for sale are carried at fair value. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted forspecific attributes of that loan.
(j) Premises and Equipment
Premises and equipment are stated at cost. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the relatedassets. Gains or losses realized on items retired and otherwise disposed of are credited or charged to operations and cost and related accumulateddepreciation are removed from the asset and accumulated depreciation accounts. Expenditures for major renovations and improvements of premises and equipment are capitalized and those for maintenance and repairs are charged toearnings as incurred.
(k) Other Real Estate
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less the estimated cost to sell at the date theCompany acquires the property, establishing a new cost basis. Subsequent to their acquisition by the Company, valuations of these assets are periodicallyperformed by management, and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operationsand changes in the valuation allowance [i.e. any direct write-downs] are included within non-interest expense.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(l) Goodwill and Intangible Assets
The Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 350, Goodwill and Other Intangible Assets requires thatmanagement determine the allocation of intangible assets into identifiable groups at the date of acquisition and that appropriate amortization periods beestablished. Under the provisions of FASB ASC 350, goodwill is not to be amortized; rather, it is to be monitored for impairment and written down to theimpairment value at the time impairment occurs. The Company determined that no impairment loss needs to be recognized related to its goodwill at December 31, 2020 and December 31, 2019.
(m) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, interest-bearing deposits, amounts due from banks and Federal fundssold. Generally, Federal funds sold are purchased and sold for one day periods. Management makes deposits only with financial institutions it considers to befinancially sound.
(n) Long-Term Assets
Premises and equipment, intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not berecoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
(o) Securities Sold Under Agreements to Repurchase
Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, whichare not covered by Federal deposit insurance.
(p) Income Taxes
The Company accounts for Income Taxes in accordance with income tax accounting guidance (FASB ASC 740, Income Taxes). The Company followsaccounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of taxreserves to maintain for uncertain tax positions.
The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to bepaid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income. The Company determines deferred incometaxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differencesbetween the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likelythan not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term "more-likely-than- not" means alikelihood of more than 50 percent. The terms "examined" and "upon examination" also include resolution of the related appeals or litigation processes, ifany. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit thathas a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Thedetermination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and informationavailable at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight ofevidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(q) Derivatives Mortgage Banking Derivatives Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of thesemortgage loans are accounted for as free standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund themortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Fair values of these mortgage derivativesare estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. The Company enters into forwardcommitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting fromits commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on sale of mortgage loans. 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 orgain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument ispresented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair valuehedges 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 toLIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time priorto the maturity dates of the hedged loans.
(r) Equity-Based Incentives
Stock compensation accounting guidance (FASB ASC 718, “Compensation—Stock Compensation”) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liabilityinstruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options,restricted share plans, performance-based awards, cash-settled stock appreciation rights (SARs), and employee share purchase plans. Because cash-settledSARs do not give the grantee the choice of receiving stock, all cash-settled SARs are accounted for as liabilities, not equity, as compensation is accrued overthe requisite service period.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ serviceperiod, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisiteservice period for the entire award. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options and cash-settledSARs.
(s) Advertising Costs
Advertising costs are expensed as incurred by the Company and totaled $2,487,000, $2,498,000 and $2,552,000 for 2020, 2019 and 2018, respectively.
(t) Earnings Per Share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstandingduring the period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential commonshares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by theCompany relate solely to outstanding stock options and are determined using the treasury stock method.
(u) Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 22 - DisclosuresAbout Fair Value of Financial Instruments of the consolidated financial statements. Fair value estimates involve uncertainties and matters of significantjudgment. Changes in assumptions or in market conditions could significantly affect the estimates.
(v) Reclassification
Certain reclassifications have been made to the 2019 and 2018 figures to conform to the presentation for 2020.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(w) Off-Balance-Sheet Financial Instruments
In the ordinary course of business, Wilson Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit,commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in thefinancial statements when they are funded or related fees are incurred or received.
(x) Accounting Standard Updates ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 along withseveral other subsequent codification updates related to accounting for credit losses, requires the measurement of all expected credit losses for financialassets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanceddisclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of anorganization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financialassets 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 CoronavirusAid, Relief and Economic Security ("CARES") Act. The law contains several provisions applicable to companies like the Company. Among others, it giveslenders, 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, whichevercomes first. On December 27, 2020, President Trump signed into law the Coronavirus Response and Relief Supplemental Appropriations Act. Thelaw contains several provisions applicable to companies like the Company. Among them, it gives lenders, including the Company, the option to further deferthe implementation of ASU 2016-13, until January 1, 2022. In addition, the Securities and Exchange Commission (SEC) staff has stated that opting to delaythe implementation of CECL shall be considered to be in accordance with generally accepted accounting principles. As a result, the Company has elected todelay implementation of CECL until January 1, 2022.
We currently believe the adoption of ASU 2016-13 would have resulted in an approximately 4 - 6% increase in our allowance for loan losses as of January 1,2020. That expected increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losseswithin the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As ofDecember 31, 2020, we currently believe the adoption of ASU 2016-13 would have resulted in an approximately 4 - 6% increase in our allowance for loanlosses over the level recorded at December 31, 2020.
Prior to the CARES Act being signed and the Company’s decision to delay the implementation of CECL, the Company was completing its CECLimplementation plan with a cross-functional working group, under the direction of the Chief Credit Officer along with our Chief Financial Officer. Theworking group also included individuals from various functional areas including credit, risk management, accounting and information technology, amongothers. 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 theimplementation of CECL. Implementation efforts have been finalized and controls and processes are in place. The ultimate impact of the adoption of ASU2016-13 could differ from our current expectation. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses foravailable-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 regulatoryagencies, the Company has the option to phase in over a three-year period the transition adjustments to capital resulting from the adoption of CECL forregulatory capital purposes. If adopted, the cumulative amount of the transition adjustments will become fixed at the start of the three-year period, and willbe 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 asignificant impact on our regulatory capital ratios.
ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from thegoodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, orinterim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment chargefor the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount ofgoodwill allocated to that reporting unit. ASU 2017-04 became effective for us on January 1, 2020, and did not have a significant impact on our financialstatements.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longerare considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU2018-13 became effective for us on January 1, 2020 and did not have a significant impact on our financial statements.
ASU 2020-4, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-4 providesoptional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform ifcertain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rateexpected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into orevaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedientsfor and that are retained through the end of the hedging relationship. ASU 2020-4 was effective upon issuance and generally can be applied throughDecember 31, 2022. The adoption of ASU 2020-4 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.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(2) Loans and Allowance for Loan Losses
The classification of loans at December 31, 2020 and 2019 is as follows: In Thousands 2020 2019 Mortgage loans on real estate: Residential 1-4 family $ 535,994 511,250 Multifamily 111,646 97,104 Commercial 837,766 793,379 Construction 488,626 425,185 Farmland 15,429 19,268 Second mortgages 8,433 10,760 Equity lines of credit 78,889 72,379
Total mortgage loans on real estate 2,076,783 1,929,325 Commercial loans 172,811 98,265 Agricultural loans 1,206 1,569 Consumer installment loans: Personal 66,193 50,532 Credit cards 4,324 4,302
Total consumer installment loans 70,517 54,834 Other loans 9,283 9,049 2,330,600 2,093,042 Net deferred loan fees (9,295) (7,141)
Total loans 2,321,305 2,085,901 Less: Allowance for loan losses (38,539) (28,726)
Loans, net $ 2,282,766 2,057,175
At December 31, 2020, variable rate and fixed rate loans totaled $1,777,303,000 and $553,297,000, respectively. At December 31, 2019, variable rate andfixed rate loans totaled $1,640,991,000 and $452,051,000, respectively.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
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 ofthe Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-familyconstruction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company mayoriginate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record ofsuccess. 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 valueassociated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds withrepayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanentloans 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 repaymentbeing 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 borrowersto 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 theproperty 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 theborrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved basedon a number of credit quality criteria including limits on maximum Loan-to-Value (LTV), minimum credit scores, and maximum debt to income. Real estatemarket values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property valuesimpact 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 approvedbased on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate marketvalues 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 thedepth 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 (which are discussed below), in addition to those of real estate loans. These loans are viewed primarily as cash flow loansand secondarily as loans secured by real estate.
Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent onthe successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may bemore adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estateportfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market orindustry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizesthird-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracksthe level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loanssecured 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 industrialbuildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from theongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
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 thiscategory are PPP loans guaranteed by the SBA, which totaled $62.4 million at December 31, 2020. Collection risk in this portfolio is driven by thecreditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily madebased on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers,however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by theassets being financed or other business assets such as accounts receivable or inventory and usually incorporates 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 loansmay 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 areunderwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV on secured consumer loans, minimumcredit scores, and maximum debt to income. Many traditional forms of consumer installment credit have standard monthly payments and fixed repaymentschedules 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 avariety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle or other large personal items, or for consolidating debt. Theseloans 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 installmentloans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segmentare sensitive to unemployment and other key consumer economic measures.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
The following tables present the Company’s nonaccrual loans, credit quality indicators and past due loans as of December 31, 2020 and 2019. Loans on Nonaccrual Status In Thousands 2020 2019 Residential 1-4 family $ 1,022 949 Multifamily — — Commercial real estate 311 1,661 Construction — — Farmland — — Second mortgages — — Equity lines of credit — — Commercial — — Agricultural, installment and other — — Total $ 1,333 2,610
At December 31, 2020, the Company had two impaired loans totaling $1,333,000 which were on non-accruing interest status. At December 31, 2019, theCompany had three impaired loans totaling $2,610,000 which were on non-accruing interest status. In each case, at the date such loans were placed onnonaccrual status, the Company reversed all previously accrued interest income.
The impact on net interest income for these loans was not material to the Company’s results of operations for the years ended December 31, 2020, 2019 and2018.
Potential problem loans, which include nonperforming loans, amounted to approximately $8.2 million at December 31, 2020 compared to $10.7 million atDecember 31, 2019. Potential problem loans represent those loans with a well defined weakness and where information about possible credit problems ofborrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed tobe substantially consistent with the standards established by the FDIC, the Company’s primary federal regulator, for loans classified as special mention,substandard, or doubtful, excluding the impact of nonperforming loans.
The following table presents our loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loansinclude 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 Company’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 distinctpossibility that the Company will sustain some loss if the deficiencies are not corrected.
• Doubtful loans have all the characteristics of substandard loans with the added characteristics that the weaknesses make collection or liquidation in full,
on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Company considers all doubtful loans to beimpaired and places the loans on nonaccrual status.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
Credit Quality Indicators The following table presents loan balances classified within each risk rating category by primary loan type as of December 31, 2020 and December 31, 2019. In Thousands Agricultural,
Residential
1-4 Commercial Second EquityLines
Installmentand
Family Multifamily Real Estate Construction Farmland Mortgages of
Credit Commercial Other Total Credit RiskProfile byInternallyAssignedGrade December 31,2020 Pass $ 529,546 111,646 837,028 488,571 15,301 8,148 78,565 172,779 80,770 2,322,354 Specialmention 2,745 — 149 27 79 169 314 — 156 3,639 Substandard 3,703 — 589 28 49 116 10 32 80 4,607
Total $ 535,994 111,646 837,766 488,626 15,429 8,433 78,889 172,811 81,006 2,330,600 December 31,2019 Pass $ 503,861 97,104 791,610 424,517 19,106 10,458 72,237 98,243 65,255 2,082,391 Specialmention 2,923 — — 635 103 174 — — 101 3,936 Substandard 4,466 — 1,769 33 59 128 142 22 96 6,715
Total $ 511,250 97,104 793,379 425,185 19,268 10,760 72,379 98,265 65,452 2,093,042
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
Age Analysis of Past Due Loans
In Thousands
30-59 DaysPast Due
60-89 DaysPast Due
Nonaccrualand
GreaterThan 90
Days
TotalNonaccrual
and PastDue Current Total Loans
RecordedInvestment
GreaterThan 90Days andAccruing
December 31, 2020 Residential 1-4 family $ 2,634 511 1,818 4,963 531,031 535,994 $ 796 Multifamily — — — — 111,646 111,646 — Commercial real estate — — 460 460 837,306 837,766 149 Construction 768 — 44 812 487,814 488,626 44 Farmland — — — — 15,429 15,429 — Second mortgages 265 — — 265 8,168 8,433 — Equity lines of credit 31 302 — 333 78,556 78,889 — Commercial 114 104 — 218 172,593 172,811 — Agricultural, installment andother 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
December 31, 2019 Residential 1-4 family $ 4,760 799 2,336 7,895 503,355 511,250 $ 1,387 Multifamily — — — — 97,104 97,104 — Commercial real estate 500 — 1,661 2,161 791,218 793,379 — Construction 1,535 147 594 2,276 422,909 425,185 594 Farmland 57 — 8 65 19,203 19,268 8 Second mortgages — — 100 100 10,660 10,760 100 Equity lines of credit 143 — 372 515 71,864 72,379 372 Commercial 71 30 — 101 98,164 98,265 — Agricultural, installment andother 517 116 46 679 64,773 65,452 46 Total $ 7,583 1,092 5,117 13,792 2,079,250 2,093,042 $ 2,507
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
Transactions in the allowance for loan losses for the years ended December 31, 2020 and 2019 are summarized as follows:
In Thousands Agricultural,
Residential
1-4 Commercial Second EquityLines
Installmentand
Family Multifamily Real Estate Construction Farmland Mortgages of
Credit Commercial Other Total December 31,2020 Allowance forloan losses: Beginningbalance $ 7,144 1,117 11,114 5,997 187 123 889 1,044 1,111 28,726 Provision 920 424 5,388 1,766 (33) (37) 74 343 851 9,696 Charge-offs — — — — — — (7) (9) (898) (914)Recoveries 34 — 300 173 — 19 41 — 464 1,031
Ending balance $ 8,098 1,541 16,802 7,936 154 105 997 1,378 1,528 38,539 Ending balanceindividuallyevaluated forimpairment $ 594 — 148 — — — — — — 742 Ending balancecollectivelyevaluated forimpairment $ 7,504 1,541 16,654 7,936 154 105 997 1,378 1,528 37,797 Loans: Ending balance $ 535,994 111,646 837,766 488,626 15,429 8,433 78,889 172,811 81,006 2,330,600 Ending balanceindividuallyevaluated forimpairment $ 2,399 — 970 — — — — — — 3,369 Ending balancecollectivelyevaluated forimpairment $ 533,595 111,646 836,796 488,626 15,429 8,433 78,889 172,811 81,006 2,327,231
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
In Thousands Agricultural,
Residential
1-4 Commercial Second EquityLines
Installmentand
Family Multifamily Real Estate Construction Farmland Mortgages of
Credit Commercial Other Total December 31,2019 Allowance forloan losses: Beginningbalance $ 6,297 1,481 9,753 7,084 221 118 731 622 867 27,174 Provision 838 (364) 1,484 (1,510) (34) 5 158 422 1,041 2,040 Charge-offs (15) — (173) — — — — (15) (1,160) (1,363)Recoveries 24 — 50 423 — — — 15 363 875
Ending balance $ 7,144 1,117 11,114 5,997 187 123 889 1,044 1,111 28,726 Ending balanceindividuallyevaluated forimpairment $ 795 — 341 — — — — — — 1,136 Ending balancecollectivelyevaluated forimpairment $ 6,349 1,117 10,773 5,997 187 123 889 1,044 1,111 27,590 Loans: Ending balance $ 511,250 97,104 793,379 425,185 19,268 10,760 72,379 98,265 65,452 2,093,042 Ending balanceindividuallyevaluated forimpairment $ 2,569 — 2,471 — — — — — — 5,040 Ending balancecollectivelyevaluated forimpairment $ 508,681 97,104 790,908 425,185 19,268 10,760 72,379 98,265 65,452 2,088,002
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
The following tables present the Company’s impaired loans (including loans on nonaccrual status and loans past due 90 days or more) at December 31,2020 and 2019:
In Thousands
Recorded
Investment
UnpaidPrincipalBalance
RelatedAllowance
AverageRecorded
Investment
InterestIncome
Recognized December 31, 2020 With no related allowance recorded: Residential 1-4 family $ 1,162 1,507 — 395 26 Multifamily — — — — — Commercial real estate 311 311 — 311 — Construction — — — — — Farmland — — — — — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — —
$ 1,473 1,818 — 706 26 With allowance recorded: Residential 1-4 family $ 1,242 1,240 594 1,273 66 Multifamily — — — — — Commercial real estate 662 659 148 676 22 Construction — — — — — Farmland — — — — — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — —
$ 1,904 1,899 742 1,949 88 Total: Residential 1-4 family $ 2,404 2,747 594 1,668 92 Multifamily — — — — — Commercial real estate 973 970 148 987 22 Construction — — — — — Farmland — — — — — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — —
$ 3,377 3,717 742 2,655 114
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
In Thousands
Recorded
Investment
UnpaidPrincipalBalance
RelatedAllowance
AverageRecorded
Investment
InterestIncome
Recognized December 31, 2019 With no related allowance recorded: Residential 1-4 family $ 1,090 1,464 — 1,090 99 Multifamily — — — — — Commercial real estate 951 1,124 — 910 17 Construction — — — — — Farmland — — — — — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — —
$ 2,041 2,588 — 2,000 116 With allowance recorded: Residential 1-4 family $ 1,489 1,480 795 1,590 83 Multifamily — — — — — Commercial real estate 1,522 1,520 341 2,015 17 Construction — — — — — Farmland — — — — — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — —
$ 3,011 3,000 1,136 3,605 100 Total: Residential 1-4 family $ 2,579 2,944 795 2,680 182 Multifamily — — — — — Commercial real estate 2,473 2,644 341 2,925 34 Construction — — — — — Farmland — — — — — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — —
$ 5,052 5,588 1,136 5,605 216
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic or other concessionshave been granted to borrowers who have experienced or are expected to experience financial difficulties. The concessions typically result from theCompany’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or otheractions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering theborrower’s sustained repayment performance for a reasonable period, generally six months. The following table summarizes the carrying balances of TDRs at December 31, 2020 and December 31, 2019 (dollars in thousands):
2020 2019 Performing TDRs $ 2,147 3,080 Nonperforming TDRs 529 1,467 Total TDRs $ 2,676 4,547
The following table outlines the amount of each TDR categorized by loan classification for the years ended December 31, 2020 and 2019 (dollars inthousands):
December 31, 2020 December 31, 2019
Number ofContracts
PreModificationOutstanding
RecordedInvestment
PostModificationOutstanding
RecordedInvestment, Net
of RelatedAllowance
Number ofContracts
PreModificationOutstanding
RecordedInvestment
PostModificationOutstanding
RecordedInvestment, Net
of RelatedAllowance
Residential 1-4 family — $ — $ — 1 $ 1,338 $ 619 Multifamily — — — — — — Commercial real estate 1 111 132 4 2,677 2,399 Construction — — — — — — Farmland — — — — — — Second mortgages — — — — — — Equity lines of credit — — — — — — Commercial — — — — — — Agricultural, installment and other — — — — — — Total 1 $ 111 $ 132 5 $ 4,015 $ 3,018
As of December 31, 2020 and 2019 the Company did not have any loan previously classified as a TDR default within twelve months of the restructuring. Adefault is defined as an occurrence which violates the terms of the receivable’s contract. 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 themiddle 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, theBank expanded this program to provide a six-month interest only payment option in an effort to provide flexibility to its customers as theynavigate uncertainties resulting from the pandemic. Pursuant to interagency regulatory guidance and the CARES Act, the Bank may elect to not classifyloans 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 afterthe end of the COVID-19 national emergency. As of December 31, 2020, the Bank had 13 loans, totaling $36.4 million in aggregate principal amount forwhich principal or both principal and interest were being deferred and not classified as TDRs. Under the applicable guidance, none of these deferralsrequired a troubled debt restructuring designation as of December 31, 2020. As of December 31, 2020 the Bank had $301,000 of consumer mortgage loans in the process of foreclosure. As of December 31, 2019 the Bank did not haveany consumer mortgage loans in the process of foreclosure.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
The Company’s principal customers are primarily in the Middle Tennessee area with a concentration in Wilson County, Tennessee. Credit is extended tobusinesses and individuals and is evidenced by promissory notes. The terms and conditions of the loans including collateral vary depending upon the purposeof the credit and the borrower’s financial condition.
In the normal course of business, Wilson Bank has made loans at prevailing interest rates and terms to directors and executive officers of the Company andto their affiliates. The aggregate amount of these loans was $7,675,000 and $12,878,000 at December 31, 2020 and 2019, respectively. None of these loanswere restructured, charged-off or involved more than the normal risk of collectibility or presented other unfavorable features during the three years endedDecember 31, 2020.
An analysis of the activity with respect to such loans to related parties is as follows:
In Thousands December 31, 2020 2019 Balance, January 1 $ 12,878 13,019 New loans and renewals during the year 11,153 31,548 Repayments (including loans paid by renewal) during the year (16,356) (31,689)Balance, December 31 $ 7,675 12,878
In 2020, 2019 and 2018, Wilson Bank originated mortgage loans for sale into the secondary market of $213,483,000, $160,921,000 and $129,060,000,respectively. The fees and gain on sale of these loans totaled $9,560,000, $6,802,000 and $4,639,000 in 2020, 2019 and 2018, respectively. All of these loansales transfer servicing rights to the buyer.
In some instances, Wilson Bank sells loans that contain provisions which permit the buyer to seek recourse against Wilson Bank in certain circumstances.At December 31, 2020 and 2019, total mortgage loans sold with recourse in the secondary market aggregated $181,700,000 and $115,789,000, respectively.At December 31, 2020, Wilson Bank has not been required to repurchase a significant amount of the mortgage loans originated by Wilson Bank and sold inthe secondary market. Management expects no material losses to result from these recourse provisions.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(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 December31, 2020 consist of the following:
Securities Available-For-Sale In Thousands
Gross
Unrealized Gross
Unrealized Estimated
Market
Amortized
Cost Gains Losses Value 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 — 2,600 Obligations of states and political subdivisions 147,462 4,229 400 151,291 $ 570,842 10,875 1,174 580,543
The Company’s classification of securities at December 31, 2019 was as follows: Securities Available-For-Sale In Thousands
Gross
Unrealized Gross
Unrealized Estimated
Market
Amortized
Cost Gains Losses Value Government-sponsored enterprises (GSEs) $ 59,735 48 204 59,579 Mortgage-backed securities 265,648 2,300 635 267,313 Asset-backed securities 27,531 1 303 27,229 Corporate bonds — — — — Obligations of states and political subdivisions 67,293 559 828 67,024 $ 420,207 2,908 1,970 421,145
Included in mortgage-backed securities are collateralized mortgage obligations totaling $88,472,000 (fair value of $89,116,000) and $46,994,000 (fair valueof $47,442,000) at December 31, 2020 and 2019, respectively.
The amortized cost and estimated market value of debt securities at December 31, 2020, by contractual maturity, are shown below. Expected maturities willdiffer from contractual maturities of mortgage and asset-backed securities because borrowers may have the right to call or prepay obligations with or withoutcall or prepayment penalties.
In Thousands
Securities Available-For-Sale Amortized Cost Estimated Market
Value Due in one year or less $ 1,196 1,198 Due after one year through five years 26,325 26,542 Due after five years through ten years 107,341 108,184 Due after ten years 140,812 143,872 275,674 279,796 Mortgage and asset-backed securities 295,168 300,747 $ 570,842 580,543
Results from sales of debt and equity securities are as follows:
In Thousands 2020 2019 2018 Gross proceeds $ 54,870 37,325 39,857 Gross realized gains $ 901 75 102 Gross realized losses (19) (343) (752)
Net realized gains (losses) $ 882 (268) (650)
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
Securities carried on the balance sheet of approximately $282,028,000 (approximate market value of $288,013,000) and $256,300,000 (approximate marketvalue of $256,598,000) were pledged to secure public deposits and for other purposes as required or permitted by law at December 31, 2020 and 2019,respectively.
Included in the securities above are $78,931,000 (approximate market value of $80,713,000) at December 31, 2020 in obligations of political subdivisionslocated within the states of Tennessee, Alabama, and Texas. Securities that have rates that adjust prior to maturity totaled $48,215,000 (approximate market value of $48,439,000) and $48,018,000 (approximate marketvalue of $47,784,000) at December 31, 2020 and 2019, respectively. Temporarily Impaired Securities
The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale securities with unrealized losses that are notdeemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuousunrealized loss position at December 31, 2020 and 2019.
In Thousands, Except Number of Securities Less than 12 Months 12 Months or More Total Number of Number of Unrealized Securities Unrealized Securities Unrealized
2020 Fair
Value Losses Included Fair
Value Losses Included Fair
Value Losses Available-for-Sale Securities:
Debt securities: GSEs $ 47,991 $ 135 18 $ — $ — — $ 47,991 $ 135 Mortgage-backed securities 78,381 573 29 6,776 47 12 85,157 620 Asset-backed securities 4,950 19 3 — — — 4,950 19
Corporate bonds — — — — — — — — Obligations of states and politicalsubdivisions 44,061 394 33 689 6 1 44,750 400
$ 175,383 $ 1,121 83 $ 7,465 $ 53 13 $ 182,848 $ 1,174
In Thousands, Except Number of Securities Less than 12 Months 12 Months or More Total Number of Number of Unrealized Securities Unrealized Securities Unrealized
2019 Fair
Value Losses Included Fair
Value Losses Included Fair
Value Losses Available-for-Sale Securities:
Debt securities: GSEs $ 16,507 $ 114 5 $ 24,658 $ 90 9 $ 41,165 $ 204 Mortgage-backed securities 45,862 182 21 56,917 453 52 102,779 635 Asset-backed securities 17,807 161 10 7,317 142 4 25,124 303
Corporate bonds — — — — — — — — Obligations of states and politicalsubdivisions 30,423 783 26 3,858 45 10 34,281 828
$ 110,599 $ 1,240 62 $ 92,750 $ 730 75 $ 203,349 $ 1,970
As of December 31, 2020, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believesthat it is more likely than not the Company will not have to sell any such securities before a recovery of cost. Any unrealized losses are largely due toincreases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as thebonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities areimpaired due to reasons of credit quality. Accordingly, as of December 31, 2020, management believes the impairments detailed in the table above aretemporary and no impairment loss has been realized in our consolidated statement of earnings.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(4) Leases
Lessee Accounting The majority of leases in which the Company is the lessee are comprised of real estate property for branches and office space and are recorded as operatingleases with terms extending beyond 2025. These leases are classified as operating leases at commencement. Right-of-use assets representing the right to usethe underlying asset and lease liabilities representing the obligation to make future lease payments are recognized on the balance sheet. These assets andliabilities are estimated based on the present value of future lease payments discounted using the Company's incremental secured borrowing rates as of thecommencement date of the lease. Certain lease agreements contain renewal options which are considered in the determination of the lease term if they aredeemed reasonably certain to be exercised. The Company has elected not to recognize leases with an original term of less than 12 months on the balancesheet. The following table represents lease assets and lease liabilities as of December 31, 2020 and December 31, 2019 (in thousands).
Lease right-of-use assets Classification December 31,
2020 December 31,
2019 Operating lease right-of-use assets Other Assets $ 3,825 2,573
Lease liabilities Classification December 31,
2020 December 31,
2019 Operating lease liabilities Other Liabilities $ 3,947 2,614
The total lease cost related to operating leases and short term leases is recognized on a straight-line basis over the lease term. The components of the Bank'stotal least cost were as follows for the year ended December 31, 2020 and 2019.
In Thousands 2020 2019 Operating lease cost $ 535 372 Short-term lease cost 4 21 Net lease cost $ 539 393
The weighted average remaining lease term and weighted average discount rate for operating leases at December 31, 2020 and 2019 were as follows:
2020 2019 Operating Leases
Weighted average remaining lease term (in years) 11.31 11.79 Weighted average discount rate 4.00% 4.00%
Cash flows related to operating leases during the year ended December 31, 2020 and 2019 were as follows:
In Thousands 2020 2019 Operating cash flows related to operating leases $ 426 360
Future undiscounted lease payments for operating leases with initial terms of more than 12 months at December 31, 2020 and 2019 were as follows:
In Thousands 2020 2021 $ 494 2022 463 2023 471 2024 485 2025 490 Thereafter 2,521 Total undiscounted lease payments 4,924 Less: imputed interest (977)Net lease liabilities $ 3,947
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(5) Restricted Equity Securities
Restricted equity securities consists of stock of the FHLB of Cincinnati amounting to $5,089,000 and $4,680,000 at December 31, 2020 and 2019,respectively. The stock can be sold back only at par or a value as determined by the issuing institution and only to the respective financial institution or toanother member institution. These securities are recorded at cost.
(6) Premises and Equipment
The detail of premises and equipment at December 31, 2020 and 2019 is as follows:
In Thousands 2020 2019 Land $ 17,093 17,093 Buildings 46,584 46,389 Leasehold improvements 573 533 Furniture and equipment 13,861 13,000 Automobiles 175 243 Construction-in-progress 317 1,339 78,603 78,597 Less accumulated depreciation (20,401) (18,302) $ 58,202 60,295
During 2020, 2019 and 2018, payments of $571,000, $2,207,000 and $2,633,000, respectively, were made to an entity owned by a director for theconstruction of buildings and repair work on existing buildings.
Depreciation expense was $4,250,000, $3,984,000 and $3,602,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
(7) Goodwill
The Company's intangible assets result from the excess of purchase price over the applicable book value of the net assets acquired related to outsideownership of two previously 50% owned subsidiaries that the Company acquired 100% of in 2005.
In Thousands 2020 2019 Goodwill:
Balance at January 1, $ 4,805 4,805 Goodwill acquired during year — — Impairment loss — — Balance at December 31, $ 4,805 4,805
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(8) Deposits
Deposits at December 31, 2020 and 2019 are summarized as follows:
In Thousands 2020 2019 Demand deposits $ 391,360 284,611 Savings accounts 201,984 140,270 Negotiable order of withdrawal accounts 771,195 558,745 Money market demand accounts 984,677 801,986 Certificates of deposit $250,000 or greater 112,696 131,899 Other certificates of deposit 425,299 425,222 Individual retirement accounts $250,000 or greater 10,323 10,646 Other individual retirement accounts 63,061 64,226 $ 2,960,595 2,417,605
Principal maturities of certificates of deposit and individual retirement accounts at December 31, 2020 are as follows:
(In Thousands) Maturity Total 2021 $ 342,291 2022 138,959 2023 87,243 2024 23,157 2025 19,271 Thereafter 458 $ 611,379
The aggregate amount of overdrafts reclassified as loans receivable was $284,000 and $529,000 at December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, Wilson Bank was not required to maintain a cash balance with the Federal Reserve.
(9) Federal Home Loan Bank Advances
At December 31, 2020 and 2019, the Company had $3,638,000 and $23,613,000 in outstanding advances from the FHLB of Cincinnati. Each advance isamortized and payable monthly with a prepayment penalty for fixed rate advances. The weighted average rate of the total borrowings at December 31, 2020was 2.68%. The advances are collateralized by a blanket security agreement which includes Wilson Bank's 1-4 family loans. The Company’s additionalborrowing capacity was $336,432,000 at December 31, 2020. Required future principal payments on Federal Home Loan Bank borrowings are as follows:
(In Thousands) Maturity Total 2021 $ 1,350 2022 1,350 2023 788 2024 150 2025 — Thereafter — Total $ 3,638
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(10) Non-Interest Income and Non-Interest Expense
The significant components of non-interest income and non-interest expense for the years ended December 31, 2020, 2019 and 2018 are presented below: In Thousands 2020 2019 2018 Non-interest income:
Service charges on deposits $ 5,659 6,952 6,799 Brokerage income 4,837 4,411 4,255 Debit and credit card interchange income 9,187 8,301 7,325 Other fees and commissions 1,540 1,521 2,124 BOLI and annuity earnings 823 810 841 Security gain (loss), net 882 (268) (650)Fees and gains on sales of mortgage loans 9,560 6,802 4,639 Gain (loss) on sale of other real estate, net 658 (48) (80)Loss on sale of fixed assets, net (63) (128) (2)Loss on sale of other assets, net (4) (4) (3)Other income 61 — —
$ 33,140 28,349 25,248
In Thousands 2020 2019 2018 Non-interest expense:
Employee salaries and benefits $ 45,661 42,541 39,590 Equity-based compensation 1,180 786 1,237 Occupancy expenses 5,216 4,789 4,403 Furniture and equipment expenses 3,267 3,110 2,767 Data processing expenses 5,101 4,495 2,900 Advertising expenses 2,487 2,498 2,552 ATM & interchange fees 3,880 3,439 3,091 Accounting, legal & consulting expenses 909 1,382 977 FDIC insurance 598 373 843 Directors’ fees 634 586 543 Other operating expenses 11,986 10,629 10,177
$ 80,919 74,628 69,080
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(11) Income Taxes
The components of the net deferred tax asset are as follows: In Thousands 2020 2019 Deferred tax asset:
Federal $ 9,500 7,444 State 2,913 2,240
12,413 9,684 Deferred tax liability:
Federal (4,000) (2,666)State (1,324) (882)
(5,324) (3,548)Net deferred tax asset $ 7,089 6,136
The tax effects of each type of significant item that gave rise to deferred tax assets (liabilities) are:
In Thousands 2020 2019 Financial statement allowance for loan losses in excess of tax allowance $ 9,840 7,283 Excess of depreciation deducted for tax purposes over the amounts deducted in the financial statements (2,461) (2,976)Financial statement deduction for deferred compensation in excess of deduction for tax purposes 1,253 1,193 Writedown of other real estate not deductible for income tax purposes until sold — 157 Financial statement income on FHLB stock dividends not recognized for tax purposes (327) (327)Unrealized gain on securities available-for-sale (2,535) (245)Equity based compensation 854 625 Other items, net 465 426 Net deferred tax asset $ 7,089 6,136
The components of income tax expense (benefit) are summarized as follows:
In Thousands Federal State Total 2020
Current $ 11,383 1,539 12,922 Deferred (2,503) (801) (3,304)Total $ 8,880 738 9,618
2019 Current $ 10,134 1,411 11,545 Deferred (335) (143) (478)Total $ 9,799 1,268 11,067
2018 Current $ 8,310 721 9,031 Deferred (136) (112) (248)Total $ 8,174 609 8,783
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
A reconciliation of actual income tax expense of $9,618,000, $11,067,000 and $8,783,000 for the years ended December 31, 2020, 2019 and 2018,respectively, to the “expected” tax expense (computed by applying the statutory rate of 21% for 2020, 2019 and 2018 to earnings before income taxes) is asfollows:
In Thousands 2020 2019 2018 Computed “expected” tax expense $ 10,103 9,893 8,689 State income taxes, net of Federal income tax benefit 552 1,056 432 Tax exempt interest, net of interest expense exclusion (245) (186) (226)Earnings on cash surrender value of life insurance (173) (170) (177)Expenses not deductible for tax purposes 14 37 16 Equity based compensation (6) 15 (39)Other (627) 422 88 $ 9,618 11,067 8,783
Total income tax expense for 2020, 2019 and 2018, includes $231,000, $70,000 and $170,000 of benefit related to the realized gain and loss on sale ofsecurities, respectively.
As of December 31, 2020, 2019 and 2018 the Company has not accrued or recognized interest or penalties related to uncertain tax positions. It is theCompany’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.
There were no unrecognized tax benefits at December 31, 2020.
Wilson Bank does not expect that unrecognized tax benefits will significantly increase or decrease within the next 12 months. Included in the balance atDecember 31, 2020, were approximately $12.4 million of tax positions (deferred tax assets) for which the ultimate deductibility is highly certain but forwhich there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest, the disallowance ofthe shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlierperiod.
The Company and Wilson Bank file income tax returns in the United States (“U.S.”), as well as in the State of Tennessee. The Company is no longer subjectto U.S. federal or state income tax examinations by tax authorities for years before 2017. The Company’s Federal tax returns have been audited throughDecember 31, 2005 with no changes.
(12) Commitments and Contingent Liabilities
The Company is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that theliabilities, if any, arising from such litigation and claims will not be material to the Company's consolidated financial position. At December 31, 2020 and 2019, respectively, the Company has lines of credit with other correspondent banks totaling $95,488,000 and $93,616,000. AtDecember 31, 2020 and 2019, respectively, there was no balance outstanding under these lines of credit.
The Company also has a Cash Management Advance ("CMA") Line of Credit agreement. The CMA is a component of the Company's Blanket Agreementfor advances with the FHLB. The purpose of the CMA is to assist with short-term liquidity management. Under the terms of the CMA, the Company mayborrow a maximum of $25,000,000, selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. There were noborrowings outstanding under the CMA at December 31, 2020 or December 31, 2019.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(13) Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.These financial instruments consist primarily of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk inexcess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvementthe Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit isrepresented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditionalobligations as it does for on-balance-sheet instruments.
In Thousands Contract or Notional Amount 2020 2019 Financial instruments whose contract amounts represent credit risk:
Unused commitments to extend credit $ 851,196 632,686 Standby letters of credit 81,952 72,901
Total $ 933,148 705,587
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments areexpected to be drawn upon, the total commitment amounts generally represent future cash requirements. The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral, if deemed necessary by the Company upon extension of credit, is based on management's creditevaluation of the counterparty. Collateral normally consists of real property.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guaranteesare primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Mostguarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loanfacilities to customers. The fair value of standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking intoaccount the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments and the present creditworthiness ofsuch counterparties. Such commitments have been made on terms which are competitive in the markets in which the Company operates; thus, the fair valueof standby letters of credit equals the carrying value for the purposes of this disclosure. The maximum potential amount of future payments that the Companycould be required to make under the guarantees totaled $81,952,000 at December 31, 2020.
(14) Concentration of Credit Risk
Practically all of the Company’s loans, commitments, and commercial and standby letters of credit have been granted to customers in the Company’s marketarea. Practically all such customers are depositors of Wilson Bank. The concentrations of credit by type of loan are set forth in note 2 - Loans and Allowancefor Loan Losses.
Interest bearing deposits totaling $238,226,000 were deposited with five commercial banks at December 31, 2020. Included in interest bearing depositsis $1,200,000 of collateral deposits related to our fixed rate loan hedging program deposited with one commercial bank. In addition, the Bank has fundsdeposited with the Federal Home Loan Bank (FHLB) in the amount of $313,000. Funds deposited with the FHLB are not insured by the FDIC.
Federal funds sold in the amount of $675,000 were deposited with one commercial bank at December 31, 2020.
(15) Employee Benefit Plan
Wilson Bank has in effect a 401(k) plan (the “401(k) Plan”) which covers eligible employees. To be eligible an employee must have obtained the age of 18.The provisions of the 401(k) Plan provide for both employee and employer contributions. For the years ended December 31, 2020, 2019 and 2018, WilsonBank contributed $2,926,000, $2,540,000 and $2,383,000, respectively, to the 401(k) Plan.
(16) Dividend Reinvestment Plan
Under the terms of the Company’s dividend reinvestment plan (the “DRIP”) holders of common stock may elect to automatically reinvest cash dividends inadditional shares of common stock. The Company may elect to sell original issue shares or to purchase shares in the open market for the account ofparticipants. Original issue shares of 180,424 in 2020, 179,199 in 2019 and 161,514 in 2018 were sold to participants under the terms of the DRIP.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(17) Regulatory Matters and Restrictions on Dividends
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelinesand, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet itemscalculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meetcapital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S.Banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.
Under the Basel III rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments toexecutive officers, a banking organization must hold a capital conservation buffer composed of Common Equity Tier 1 Capital above its minimum risk-based capital requirements. The buffer is measured relative to risk weighted assets. Phase-in of the capital conservation buffer requirements began onJanuary 1, 2016 and the requirements were fully phased in on January 1, 2019. The capital conservation buffer threshold for 2019 and 2020 was 2.5%. Abanking organization with a buffer greater than 2.5% will not be subject to limits on capital distributions or discretionary bonus payments; however, abanking organization with a buffer of less than 2.5% will be subject to increasingly stringent limitations as the buffer approaches zero. The rule also prohibitsa banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in thatquarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The eligible retained income of a banking organization isdefined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization's quarterly regulatory reports, net ofany distributions and associated tax effects not already reflected in net income. The minimum capital requirements plus the capital conservation buffer nowexceed the prompt corrective action ("PCA") well-capitalized thresholds. PCA regulations provide five classifications: well capitalized, adequatelycapitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financialcondition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as isasset growth and expansion, and capital restoration plans are required. At December 31, 2019, the most recent regulatory notifications categorized the Bankas well capitalized under the regulatory framework for prompt corrective action.
The Company's and Wilson Bank's actual capital amounts and ratios as of December 31, 2019 are presented in the following table:
Actual
Regulatory Minimum CapitalRequirement with Basel IIICapital Conservation Buffer
Amount Ratio Amount Ratio (dollars in thousands) December 31, 2019 Total capital to risk weighted assets:
Consolidated $ 360,645 15.0% $ 253,215 10.5%Wilson Bank 359,576 14.9 252,675 10.5
Tier 1 capital to risk weighted assets: Consolidated 331,485 13.7 204,984 8.5 Wilson Bank 330,416 13.7 204,547 8.5
Common equity Tier 1 capital to risk weighted assets: Consolidated 331,485 13.7 168,810 7.0 Wilson Bank 330,416 13.7 168,451 7.0
Tier 1 capital to average assets: Consolidated 331,485 12.4 106,565 4.0 Wilson Bank 330,416 11.9 110,764 4.0
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
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 withtotal 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 regimefocused 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 Actimplementing 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 companythat have Community Bank Leverage Ratios, calculated as Tier 1 capital over average total consolidated assets (the "Community Bank Leverage Ratio"), ofgreater than 9 percent from the risk-based capital requirements of the capital rules issued under the Dodd-Frank Act. A qualifying community bankingorganization and its holding company that have chosen the proposed framework are not required to calculate the existing risk-based and leverage capitalrequirements. Such a bank would also be considered to have met the capital ratio requirements to be well capitalized for the agencies' prompt correctiveaction rules provided it has a Community Bank Leverage Ratio greater than 9 percent. Tier 1 capital for purposes of calculating the Community BankLeverage Ratio is defined as total equity less accumulated other comprehensive income, less goodwill, less all other intangible assets, less deferred tax assetsthat arise from net operating loss and tax carryforwards, net of any related valuation allowances. Institutions seeking to utilize the Community BankLeverage 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 sheetexposures include, among other items, unused portions of commitments, securities lent or borrowed, credit enhancements and financial standby letters ofcredit. The federal regulators when establishing the Community Bank Leverage Ratio also established a grace period of two fiscal quarters during which aqualifying financial institution that temporarily failed to meet any of the qualifying criteria for use of the Community Bank Leverage Ratio wouldnonetheless be considered well capitalized so long as the institution maintained a Community Bank Leverage Ratio of greater than 7%. 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 followingthe end of the national emergency declared with respect to COVID-19. A banking organization that temporarily failed to meet this, or any other requirementnecessary to qualify to utilize the Community Bank Leverage Ratio, would still be considered well capitalized so long as it maintained a Community BankLeverage Ratio of at least 7%.
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 capitalguidelines was not applicable to the Company or the Bank as of December 31, 2020.
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 and8% thereafter.
The Company and the Bank may subsequently opt out of utilizing the Community Bank Leverage Ratio and again calculate their capital ratios under thoseratios 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 bankinginstitution to a variety of enforcement remedies available to federal regulatory authorities, including issuance of a capital directive, the termination of depositinsurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on itsdeposits, and other restrictions on its business.
The Company's and Wilson Bank's Community Bank Leverage Ratio as of December 31, 2020 are presented in the following table:
Regulatory MinimumCapital Requirement
Actual Community Bank Leverage
Ratio Amount Ratio Amount Ratio (dollars in thousands) December 31, 2020 Community Bank Leverage Ratio: Consolidated $ 368,150 11.2% $ 230,993 7.0%Wilson Bank 364,976 11.1 230,929 7.0
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(18) Salary Deferral Plans
The Company provides some of its officers certain non-qualified pension benefits through an Executive Salary Continuation Plan ("the Plan") andSupplemental Executive Retirement Plan (SERP) Agreements ("SERP Agreements"). The Plan and SERP agreements were established by the Board ofDirectors to reward executive management for past performance and to provide additional incentive to retain the service of executive management. The Planand SERP Agreements generally provide executives with benefits of a portion of their salary beginning at retirement through life. As a result, the Companyhas accrued a liability for future obligations under the Plan and SERP Agreements. At December 31, 2020 and 2019, the liability related to the Plan totaled$1,742,000 and $1,786,000, respectively. At December 31, 2020 and 2019 the liability related to the SERP Agreements totaled $3,052,000 and $2,778,000,respectively.
The Company has purchased life insurance policies to provide the benefits related to the Plan, which at December 31, 2020 and 2019 had an aggregate cashsurrender value of $5,547,000 and $4,657,000, respectively, and an aggregate face value of insurance policies in force of $15,499,000 and $13,526,000,respectively. The life insurance policies remain the sole property of the Company and are payable to the Company.
The Company has also purchased bank owned life insurance policies on some of its officers. The insurance policies remain the sole property of the Companyand are payable to the Company. The cash surrender value of the life insurance contracts totaled $29,650,000 and $27,105,000 and the face amount of theinsurance policies in force approximated $68,827,000 and $61,067,000 at December 31, 2020 and 2019, respectively.
The Company has also purchased Flexible Premium Indexed Deferred Annuity Contracts (“Annuity Contracts”) to provide benefits related to the SERPAgreements. The Annuity Contracts remain the sole property of the Company and are payable to the Company. Included in other assets at December 31,2020 and 2019 are the Annuity Contracts with an aggregate value of $18,682,000 and $14,471,000, respectively.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(19) Equity Incentive Plan
In April 2009, the Company’s shareholders approved the Wilson Bank Holding Company 2009 Stock Option Plan (the “2009 Stock Option Plan”). The 2009Stock 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 ofthe Company. Subject to adjustment as provided by the terms of the 2009 Stock Option Plan, the maximum number of shares of common stock with respectto 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 noadditional 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 willremain outstanding until exercised or otherwise terminated. As of December 31, 2020, the Company had outstanding 12,436 options under the 2009Stock Option Plan with a weighted average exercise price of $33.99. During the second quarter of 2016, the Company’s shareholders approved the Wilson Bank Holding Company 2016 Equity Incentive Plan, which authorizesawards 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 andrestatement of the 2016 Equity Incentive Plan (as amended and restated the “2016 Equity Incentive Plan”) to make clear that directors who are not alsoemployees of the Company may be awarded stock appreciation rights. The primary purpose of the 2016 Equity Incentive Plan is to promote the interest ofthe Company and its shareholders by, among other things, (i) attracting and retaining key officers, employees and directors of, and consultants to, theCompany and its subsidiaries and affiliates, (ii) motivating those individuals by means of performance-related incentives to achieve long-range performancegoals, (iii) enabling such individuals to participate in the long-term growth and financial success of the Company, (iv) encouraging ownership of stock in theCompany by such individuals, and (v) linking their compensation to the long-term interests of the Company and its shareholders. Except for certainlimitations, awards can be in the form of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restrictedshares and restricted share units, performance awards and other stock-based awards. As of December 31, 2020, the Company had 430,271 shares remainingavailable for issuance under the 2016 Equity Incentive Plan. As of December 31, 2020, the Company had outstanding 141,007 stock options with a weightedaverage exercise price of $45.41 and 131,148 cash-settled stock appreciation rights with a weighted average exercise price of $42.80. As of December 31, 2020 the Company had outstanding 153,443 stock options with a weighted average exercise price of $44.49 and 131,148 cash-settledstock appreciation rights with a weighted average exercise price of $42.80. Included in other liabilities at December 31, 2020 and 2019 were $2,303,000 and$1,587,000 in accrued stock appreciation rights, respectively. The fair value of each stock option and cash-settled SAR grant is estimated on the date of grant using the Black-Scholes option-pricing model with thefollowing weighted average assumptions used for grants in 2020, 2019 and 2018:
2020 2019 2018 Expected dividends 1.56% 1.60% 1.22%Expected term (in years) 7.38 7.14 9.35 Expected stock price volatility 31% 25% 24%Risk-free rate 0.52% 1.90% 2.83%
The expected stock price volatility is based on historical volatility adjusted for consideration of other relevant factors. The risk-free interest rates for periodswithin the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield and forfeiture rateassumptions are based on the Company’s history and expectation of dividend payouts and forfeitures.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
A summary of the stock option and cash-settled SAR activity for 2020, 2019 and 2018 is as follows:
2020 2019 2018
WeightedAverage
WeightedAverage
WeightedAverage
Shares Exercise Price Shares Exercise
Price Shares Exercise
Price Outstanding at beginning of year 273,039 $ 41.19 277,820 $ 40.11 285,780 $ 39.31 Granted 43,833 55.72 17,833 51.16 21,666 46.59 Exercised (24,881) 37.84 (22,614) 35.78 (22,460) 37.07 Forfeited or expired (7,400) 41.70 — — (7,166) 37.53 Outstanding at end of year 284,591 $ 43.71 273,039 $ 41.19 277,820 $ 40.11 Options and cash-settled SARsexercisable at year end 151,695 $ 40.89 122,932 $ 40.19 94,951 $ 39.14
The weighted average fair value at the grant date of options and cash-settled SARs granted during the years 2020, 2019 and 2018 was $14.92, $13.43 and$14.41, respectively. The total intrinsic value of options and cash-settled SARs exercised during the years 2020, 2019 and 2018 was $463,000, $369,000 and$200,000, respectively. The following table summarizes information about outstanding and exercisable stock options and cash-settled SARs at December 31, 2020:
Options and Cash-Settled SARs Outstanding Options and Cash-Settled SARs Exercisable
Range of Exercise Prices
NumberOutstandingat 12/31/20
WeightedAverageExercise
Price
WeightedAverage
RemainingContractual
Term (InYears)
NumberOutstandingat 12/31/20
WeightedAverageExercise
Price
WeightedAverage
RemainingContractual
Term (InYears)
$29.81 - $44.75 205,692 $ 40.26 4.96 141,195 $ 40.34 4.64 $46.00 - $69.00 78,899 $ 52.68 8.67 10,500 $ 48.32 7.53 284,591 151,695 Aggregate intrinsic value (inthousands) $ 4,281 $ 2,709
As of December 31, 2020, there was $1,477,000 of total unrecognized cost related to non-vested share-based compensation arrangements granted under theCompany’s equity incentive plans. The cost is expected to be recognized over a weighted-average period of 2.70 years.
(20) Earnings Per Share
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation ofdiluted earnings per share for the Company begins with the basic earnings per share plus the effect of common shares contingently issuable from stockoptions.
The following is a summary of the components comprising basic and diluted earnings per share (“EPS”):
Years Ended December 31, 2020 2019 2018 Basic EPS Computation:
Numerator – Earnings available to common stockholders $ 38,492 36,044 32,594 Denominator – Weighted average number of common shares outstanding 10,927,065 10,743,269 10,564,172
Basic earnings per common share $ 3.52 3.36 3.09 Diluted EPS Computation:
Numerator – Earnings available to common stockholders $ 38,492 36,044 32,594 Denominator – Weighted average number of common shares outstanding 10,927,065 10,743,269 10,564,172 Dilutive effect of stock options 26,681 18,198 8,049
10,953,746 10,761,467 10,572,221 Diluted earnings per common share $ 3.51 3.35 3.08
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(21) 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 orgain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument ispresented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair valuehedges 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 toLIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time priorto the maturity dates of the hedged loans. During the second quarter of 2020, the Company entered into one swap transaction with a notional amount of $30,000,000 pursuant to which the Companypays 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 valuehedge. A summary of the Company's fair value hedge relationships as of December 31, 2020 and December 31, 2019 are as follows (in thousands):
December 31, 2020 December 31, 2019
BalanceSheet
Location
WeightedAverage
RemainingMaturity(In Years)
WeightedAveragePay Rate
ReceiveRate
NotionalAmount
EstimatedFair Value
NotionalAmount
EstimatedFair Value
Liability derivative Interest rate swapagreements - loans
Otherliabilities 9.42 0.65%
1 monthLIBOR $ 29,575 (51) — —
The effects of fair value hedge relationships reported in interest income on loans on the consolidated statements of income for the twelve months endedDecember 31, 2020 and 2019 were as follows (in thousands):
Twelve Months Ended December31,
Gain (loss) on fair value hedging relationship 2020 2019 Interest rate swap agreements - loans: Hedged items $ (158) — Derivative designated as hedging instruments (51) —
The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at December 31, 2020 andDecember 31, 2019 (in thousands):
Carrying Amount of the Hedged
Assets
Cumulative Amount of Fair ValueHedging Adjustment Included in
the Carrying Amount of theHedged Assets
Line item on the balance sheet December 31,
2020 December 31,
2019 December 31,
2020 December 31,
2019 Loans $ 29,575 — (158) —
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
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 ofmortgage loans to third party investors are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery ofresidential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest ratesresulting from its commitments to fund the loans. At December 31, 2020 and December 31, 2019 , the Company had approximately$20,981,000 and $10,307,000, respectively, of interest rate lock commitments and approximately $21,250,000 and $14,000,000, respectively, of forwardcommitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by derivative assets of$714,000 and $328,000 and derivative liabilities of $157,000 and $23,000, respectively, at December 31, 2020 and December 31, 2019. Changes in the fairvalues 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 2020 2019 Interest rate contracts for customers $ 386 (7)Forward contracts related to mortgage loans held for sale and interest ratecontracts (134) 65
The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as of December 31, 2020and December 31, 2019 (in thousands):
In Thousands 2020 2019
Notional Amount Fair Value NotionalAmount Fair Value
Included in other assets (liabilities): Interest rate contracts for customers $ 20,981 714 10,307 328 Forward contracts related to mortgage loansheld-for-sale 21,250 (157) 14,000 (23)
(22) Disclosures About Fair Value of Financial Instruments
Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), 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 tosell 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 thatwould 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-basedmeasurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that marketparticipants 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 thetransparency 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 all 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 that 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 suchassets and liabilities pursuant to the valuation hierarchy.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
Asset
Securities available-for-sale - Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of thevaluation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are notavailable, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and areclassified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation andmore complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy. From time to time, wewill validate prices supplied by our third party vendor by comparison to prices obtained from third parties.
Hedged Loans - The fair value of our hedged loan portfolio is intended to approximate the fair value that a market participant would realize in a hypotheticalorderly 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 inaccordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected payments using the loan’soriginal 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 collateraldependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component ofthe allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy due to theunobservable 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 oracquired in lieu of foreclosure. Upon acquisition, the property is recorded at the lower of cost or fair value, based on appraised value, less selling costsestimated as of the date acquired with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequentvaluation downward adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holdingcosts. Any gains or losses realized at the time of disposal are also reflected in noninterest income. OREO is included in Level 3 of the valuation hierarchydue to the lack of observable market inputs into the determination of fair value. Appraisal values are property-specific and sensitive to the changes in theoverall economic environment.
Bank Owned Life Insurance - The cash surrender value of bank owned life insurance policies is carried at fair value. The Company uses financialinformation received from insurance carriers indicating the performance of the insurance policies and cash surrender values in determining the carrying valueof life insurance. The Company reflects these assets within Level 3 of the valuation hierarchy due to the unobservable inputs included in the valuation ofthese 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. The fair value of mortgage loans held for sale is determined usingquoted prices for similar assets, adjusted for specific attributes of that loan and mortgage loans held for sale are included in Level 2 of the valuationhierarchy.
Derivatives - The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
The following tables present the financial instruments carried at fair value as of December 31, 2020 and December 31, 2019, by caption on the consolidatedbalance sheet and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):
Measured on a Recurring Basis
Total CarryingValue in theConsolidatedBalance Sheet
QuotedMarket Pricesin an Active
Market (Level1)
Models withSignificantObservable
MarketParameters
(Level 2)
Models withSignificant
UnobservableMarket
Parameters(Level 3)
December 31, 2020 Hedged Loans $ 29,417 — 29,417 — Investment securities available-for-sale:
U.S. Government sponsored enterprises 125,905 — 125,905 — Mortgage-backed securities 263,790 — 263,790 — Asset-backed securities 36,957 — 36,957 —
Corporate bonds 2,600 — 2,600 — State and municipal securities 151,291 — 151,291 —
Total investment securities available-for-sale 580,543 — 580,543 — Mortgage loans held for sale 19,474 — 19,474 — Derivatives 714 — 714 — Bank owned life insurance 35,197 — — 35,197 Total assets $ 665,345 --- 630,148 35,197 Derivatives $ 208 — 208 — Total liabilities $ 208 — 208 —
Measured on a Recurring Basis
Total CarryingValue in theConsolidatedBalance Sheet
QuotedMarket Pricesin an Active
Market (Level1)
Models withSignificantObservable
MarketParameters
(Level 2)
Models withSignificant
UnobservableMarket
Parameters(Level 3)
December 31, 2019 Hedged Loans $ — — — — Investment securities available-for-sale:
U.S. Government sponsored enterprises 59,579 — 59,579 — Mortgage-backed securities 267,313 — 267,313 — Asset-backed securities 27,229 — 27,229 —
Corporate bonds — — — — State and municipal securities 67,024 — 67,024 —
Total investment securities available-for-sale 421,145 — 421,145 — Mortgage loans held for sale 18,179 — 18,179 — Derivatives 328 — 328 — Bank owned life insurance 31,762 — — 31,762 Total assets $ 471,414 --- 439,652 31,762 Derivatives $ 23 — 23 — Total liabilities $ 23 — 23 —
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
Measured on a Non-Recurring Basis
TotalCarrying
Value in theConsolidated
BalanceSheet
QuotedMarket
Prices in anActiveMarket
(Level 1)
Models withSignificantObservable
MarketParameters
(Level 2)
Models withSignificant
UnobservableMarket
Parameters(Level 3)
December 31, 2020 Other real estate owned $ — — — — Impaired loans, net (¹) 2,635 — — 2,635 Total $ 2,635 — — 2,635 December 31, 2019 Other real estate owned $ 697 — — 697 Impaired loans, net (¹) 3,916 — — 3,916 Total $ 4,613 — — 4,613
(1) Amount is net of a valuation allowance of $742,000 at December 31, 2020 and $1,136,000 at December 31, 2019 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 utilizedLevel 3 inputs to determine fair value at December 31, 2020 and 2019:
Valuation Techniques (2) Significant Unobservable Inputs Range (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 3inputs 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 whentransfers 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 berare. For the twelve months ended December 31, 2020, there were no transfers between Levels 1, 2 or 3.
The table below includes a rollforward of the balance sheet amounts for the year ended December 31, 2020 and 2019 (including the change in fair value) forfinancial 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 ofthe unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to theunobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), thegains 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 Year Ended December 31, 2020 2019 Other Assets Other Assets Fair value, January 1 $ 31,762 $ 30,952 Total realized gains included in income 823 810 Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held atDecember 31 — — Purchases, issuances and settlements, net 2,612 — Transfers out of Level 3 — — Fair value, December 31 $ 35,197 $ 31,762 Total realized gains included in income related to financial assets and liabilities still on the consolidated balancesheet at December 31 $ 823 $ 810
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments that are not measured atfair value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models aresignificantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair valueestimates presented herein are based on pertinent information available to management as of December 31, 2020 and December 31, 2019. Such amountshave not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differsignificantly from the amounts presented herein.
Cash and cash equivalents - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
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 isintended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. Our loan portfolio is initially fair valuedusing a segmented approach. We divide our loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The resultsare 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 impairedloans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated usingdiscounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The valuesderived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk to determine the exitprice.
Deposits and Federal Home Loan Bank advances - Fair values for deposits are estimated using discounted cash flow models, using current market interestrates 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 restrictionsplaced 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 3classification 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 similaragreements. However, commitments to extend credit do not represent a significant value to the Company until such commitments are funded.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
The following table presents the carrying amounts, estimated fair value and placement in the fair value hierarchy of the Company’s financial instruments at December 31, 2020 and December 31, 2019. This table excludes financial instruments for which the carrying amount approximates fair value. For short-termfinancial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between theorigination of the instrument and its expected realization.
(in Thousands) Carrying/Notional
Amount Estimated Fair
Value (¹)
QuotedMarket Pricesin an Active
Market (Level1)
Models withSignificantObservable
MarketParameters
(Level 2)
Models withSignificant
UnobservableMarket
Parameters(Level 3)
December 31, 2020 Financial assets:
Cash and cash equivalents $ 338,856 338,856 338,856 — — Loans, net 2,282,766 2,302,530 — — 2,302,530 Restricted equity securities 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 — — 2,796,339 Federal Home Loan Bank borrowings 3,638 3,755 — — 3,755 Accrued interest payable 3,051 3,051 — — 3,051
December 31, 2019 Financial assets:
Cash and cash equivalents $ 159,770 159,770 159,770 — — Loans, net 2,057,175 2,053,212 — — 2,053,212 Restricted equity securities 4,680 NA NA NA NA Accrued interest receivable 5,945 5,945 5 1,647 4,293
Financial liabilities: Deposits 2,417,605 2,210,038 — — 2,210,038 Federal Home Loan Bank borrowings 23,613 23,860 — — 23,860 Accrued interest payable 3,814 3,814 — — 3,814
(1) Estimated fair values are consistent with an exit-price concept. The assumptions used to estimate the fair values are intended to approximate those that a
market-participant would realize in a hypothetical orderly transaction.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(23) Pandemic Impact (COVID-19)
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spreadthroughout the United States. On April 2, 2020 the Governor of Tennessee declared a health emergency and issued an order to close all nonessentialbusinesses until further notice. As a financial institution, Wilson Bank was deemed to be an essential business and accordingly, our operations weresustained. Nonetheless, out of concerns for our employees and customers and pursuant to government orders, branch operations were temporarily limited todrive through access and in-person appointments only. To the extent possible, a portion of our staff was moved to remote working locations and video andteleconferencing practices were established. Starting in late May 2020, the governor of Tennessee and mayors and county executives of the communities inwhich we operate issued procedures to begin a phased reopening for nonessential businesses. As a part of this reopening our bank transitionedbranch operations back to normal procedures. To date, the operations of our company and the services offered to our customers have not been adverselyaffected in a material manner. The extent to which COVID-19 impacts our future operations will depend on further developments, which remain highlyuncertain and cannot be predicted with confidence, including the duration and severity of the outbreak and the actions that may be required to containCOVID-19 or treat its impact, including potential new shutdowns or strict social distancing measures, and the speed with which vaccines can be widelydistributed, those vaccines' efficacy against the virus and public acceptance of the vaccines. The coronavirus outbreak and government responses are creatingdisruption in global supply chains and adversely impacting many industries. The outbreak has had and may continue to have a material adverse impact oneconomic and market conditions and trigger a prolonged period of global economic slowdown. While the Company believes this matter could negativelyimpact its results of operations, cash flows and financial position, the related impact cannot be reasonably estimated at this time. Nevertheless, theoutbreak continues to present uncertainty and risk with respect to the Company, its performance and its financial results. Management's ongoing evaluationof the events and conditions as well as management's plans to continue to mitigate these matters are described in the Management's Discussion and Analysissection elsewhere in this report. As a result of the pandemic, many states and municipalities are facing a strain on resources and a reduction in tax collections. As a result, certain states andmunicipalities have asked for potential assistance from the Federal government to cover the cost of resource depletion and tax shortfalls. The ability of statesand municipalities to fund shortfalls could have an effect on their ability to sustain debt maintenance, which would consequently impact the value of ourmunicipal bond portfolio.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(24) Wilson Bank Holding Company -
Parent Company Financial Information
WILSON BANK HOLDING COMPANY
(Parent Company Only)Balance Sheets
December 31, 2020 and 2019
Dollars In Thousands 2020 2019
ASSETS Cash $ 4,381 * 1,899 * Investment in wholly-owned commercial bank subsidiary 376,947 335,915 Deferred income taxes 854 625 Refundable income taxes 242 132
Total assets $ 382,424 338,571 LIABILITIES AND STOCKHOLDERS’ EQUITY
Stock appreciation rights payable $ 2,303 1,587 Total liabilities 2,303 1,587
Stockholders’ equity:
Common stock, par value $2.00 per share, authorized 50,000,000 shares, 10,993,404 and 10,792,999shares issued and outstanding, respectively 21,987 21,586 Additional paid-in capital 93,034 82,249 Retained earnings 257,935 232,456 Net unrealized gains on available-for-sale securities, net of income taxes of $2,536 and $245,respectively 7,165 693
Total stockholders’ equity 380,121 336,984 Total liabilities and stockholders’ equity $ 382,424 338,571
* Eliminated in consolidation.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
WILSON BANK HOLDING COMPANY(Parent Company Only)Statements of Earnings
Three Years Ended December 31, 2020
Dollars In Thousands 2020 2019 2018 Income:
Dividends from commercial bank subsidiary $ 5,000 2,800 3,000 Other income 61 — —
5,061 2,800 3,000 Expenses:
Directors’ fees 335 283 254 Other 1,264 885 1,351
1,599 1,168 1,605 Income before Federal income tax benefits and equity in undistributed earningsof commercial bank subsidiary 3,462 1,632 1,395
Federal income tax benefits 471 287 468 3,933 1,919 1,863 Equity in undistributed earnings of commercial bank subsidiary 34,559 * 34,125 * 30,731 *
Net earnings $ 38,492 36,044 32,594 * Eliminated in consolidation.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
WILSON BANK HOLDING COMPANY(Parent Company Only)
Statements of Cash FlowsThree Years Ended December 31, 2020
Increase (Decrease) in Cash and Cash Equivalents
Dollars In Thousands 2020 2019 2018 Cash flows from operating activities:
Other income received $ 61 — — Cash paid to suppliers and other (418) (383) (367)Tax benefits received 131 177 181
Net cash used in operating activities (226) (206) (186)Cash flows from investing activities:
Dividends received from commercial bank subsidiary 5,000 2,800 3,000 Net cash provided by investing activities 5,000 2,800 3,000
Cash flows from financing activities: Payments made to stock appreciation rights holders (53) (9) (61)Dividends paid (13,013) (11,725) (9,447)Proceeds from sale of stock pursuant to dividend reinvestment plan 10,056 9,134 7,470 Proceeds from exercise of common shares 718 775 394 Repurchase of stock options — (1,629) —
Net cash used in financing activities (2,292) (3,454) (1,644)Net increase (decrease) in cash and cash equivalents 2,482 (860) 1,170 Cash and cash equivalents at beginning of year 1,899 2,759 1,589 Cash and cash equivalents at end of year $ 4,381 1,899 2,759
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
WILSON BANK HOLDING COMPANY(Parent Company Only)
Statements of Cash Flows, ContinuedThree Years Ended December 31, 2020
Increase (Decrease) in Cash and Cash Equivalents
Dollars in Thousands 2020 2019 2018 Reconciliation of net earnings to net cash used in operating activities:
Net earnings $ 38,492 36,044 32,594 Adjustments to reconcile net earnings to net cash used in operating activities:
Equity in earnings of commercial bank subsidiary (39,559) (36,925) (33,731)Decrease (increase) in refundable income taxes (110) 45 5 Increase in deferred taxes (229) (156) (291)Share based compensation expense 1,180 786 1,237
Total adjustments (38,718) (36,250) (32,780)Net cash used in operating activities $ (226) (206) (186)
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(25) Quarterly Financial Data (Unaudited)
Selected quarterly results of operations for the four quarters ended December 31 are as follows: (In Thousands, except per share data) 2020 2019 2018 Fourth Third Second First Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Interest income $ 30,351 30,961 31,569 30,087 $ 29,897 30,329 29,567 28,284 $ 27,585 26,298 25,548 24,094 Interest expense 3,969 4,112 4,308 4,994 5,522 5,991 5,923 5,211 4,606 3,656 3,097 2,659 Net interest income 26,382 26,849 27,261 25,093 24,375 24,338 23,644 23,073 22,979 22,642 22,451 21,435 Provision for loan losses 3,065 1,038 4,124 1,469 686 167 154 1,033 1,097 1,088 1,090 1,023 Earnings before incometaxes 10,771 14,669 11,313 11,357 10,222 13,556 12,451 10,882 10,708 10,718 9,798 10,153
Net earnings 8,902 11,532 9,027 9,031 7,972 10,266 9,516 8,290 9,833 7,972 7,309 7,480 Basic earnings percommon share 0.81 1.05 0.83 0.83 0.74 0.95 0.89 0.77 0.93 0.75 0.69 0.71
Diluted earnings percommon share 0.81 1.05 0.83 0.83 0.74 0.95 0.89 0.77 0.92 0.75 0.69 0.71
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, ContinuedDecember 31, 2020, 2019 and 2018
(26) Subsequent Events
ASC Topic 855, Subsequent Events, as amended by ASU No. 2010-90, establishes general standards of accounting for and disclosure of events that occurafter the balance sheet date but before financial statements are issued. The Company evaluated all events or transactions that occurred after December 31,2020, through the date of the issued financial statements. During this period there were no material recognizable subsequent events that required recognitionin the disclosures to the Company's December 31, 2020 financial statements.
This financial information has not been reviewed for accuracy or relevance by the FDIC.
EXHIBIT 21.1
SUBSIDIARIES OF THE ISSUER
The Company has a wholly-owned subsidiary, Wilson Bank and Trust, a state chartered bank incorporated under the laws of the State of Tennessee and doingbusiness under the same name.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports, dated February 12, 2021, with respect to the consolidated financial statements included in the Annual Report of Wilson BankHolding Company on Form 10-K for the year ended December 31, 2020. We consent to the incorporation by reference of said reports in thefollowing Registration Statements of Wilson Bank Holding Company:
● Registration Statement (Form S-8, No. 333-158621) pertaining to the Wilson Bank Holding Company 2009 Stock Option Plan ● Registration Statement (Form S-8, No. 333-210927) pertaining to the Wilson Bank Holding Company 2016 Equity Incentive Plan
● Registration Statement (Form S-3, No. 333-235739) pertaining to the Amended and Restated Wilson Bank Holding Company Dividend ReinvestmentPlan
/s/ Maggart & Associates, P.C. Maggart & Associates, P.C. Nashville, TennesseeFebruary 12, 2021
EXHIBIT 31.1CERTIFICATIONS
I, John C. McDearman III, certify that: 1. I have reviewed this annual report on Form 10-K of Wilson Bank Holding Company;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.
Date: March 12, 2021
By:/s/ John C. McDearman III
Name: John C. McDearman President and Chief Executive Officer
EXHIBIT 31.2CERTIFICATIONS
I, Lisa Pominski , certify that: 1. I have reviewed this annual report on Form 10-K of Wilson Bank Holding Company;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.
Date: March 12, 2021
By:/s/ Lisa Pominski
Name: Lisa Pominski Executive Vice President and Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Wilson Bank Holding Company (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, John C. McDearman, III, President and Chief Executive Officer of the Company, certify,pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John C. McDearman III John C McDearman III President and Chief Executive Officer Date: March 12, 2021
EXHIBIT 32.2
CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Wilson Bank Holding Company (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Lisa Pominski, Executive Vice President and Chief Financial Officer of the Company,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Lisa Pominski Lisa Pominski, Executive Vice President and Chief Financial Officer Date: March 12, 2021