UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

or

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

For the transition period from to ___________

Commission File Number 0-20402

WILSON BANK HOLDING COMPANY

(Exact name of registrant as specified in its charter)

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

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

(615) 444-2265

(Registrant’s telephone number, including area code)

Not Applicable

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

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

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

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

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

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

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

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

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

Common stock outstanding: 11,676,638 shares at November 8, 2023

Part I:	FINANCIAL INFORMATION	3
Item 1.	Financial Statements.	3
The unaudited consolidated financial statements of the Company and its subsidiary are as follows:
	Consolidated Balance Sheets — September 30, 2023 and December 31, 2022.	3
	Consolidated Statements of Earnings — For the three and nine months ended September 30, 2023 and 2022.	4
	Consolidated Statements of Comprehensive Earnings — For the three and nine months ended September 30, 2023 and 2022.	5
	Consolidated Statements of Changes in Stockholders' Equity — For the three and nine months ended September 30, 2023 and 2022.	6
	Consolidated Statements of Cash Flows — For the nine months ended September 30, 2023 and 2022.	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	58
	Disclosures required by Item 3 are incorporated by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 4.	Controls and Procedures.	58
Part II:	OTHER INFORMATION	59
Item 1.	Legal Proceedings.	59
Item 1A.	Risk Factors.	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	59
Item 3.	Defaults Upon Senior Securities.	59
Item 4.	Mine Safety Disclosures.	59
Item 5.	Other Information.	59
Item 6.	Exhibits.	60
Signatures		61
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO
EX-101.INS
EX-101.SCH
EX-101.CAL
EX-101.DEF
EX-101.LAB
EX-101.PRE
EX-104

Part I. Financial Information

Item 1. Financial Statements

WILSON BANK HOLDING COMPANY

Consolidated Balance Sheets

September 30, 2023 and December 31, 2022

	(Unaudited)			(Audited)
	September 30, 2023			December 31, 2022
	(Dollars in Thousands Except Share Amounts)
Assets
Loans	$	3,533,596		$	3,153,609
Less: Allowance for credit losses		(44,701	)		(39,813	)
Net loans		3,488,895			3,113,796
Securities available-for-sale, at market (amortized cost $918,905 and $972,315,    respectively)		755,779			822,812
Loans held for sale		5,530			3,355
Interest bearing deposits		98,941			78,948
Restricted equity securities		3,461			4,357
Federal funds sold		7,000			308
Total earning assets		4,359,606			4,023,576
Cash and due from banks		26,099			25,533
Bank premises and equipment, net		61,807			62,031
Accrued interest receivable		13,514			11,397
Deferred income tax asset		55,551			51,323
Bank owned life insurance		59,220			58,007
Other assets		44,538			48,978
Goodwill		4,805			4,805
Total assets	$	4,625,140		$	4,285,650
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	390,455		$	414,905
Interest bearing		961,145			1,070,628
Savings and money market accounts		1,373,215			1,640,312
Time		1,461,383			766,860
Total deposits		4,186,198			3,892,705
Accrued interest payable and other liabilities		53,844			32,493
Total liabilities		4,240,042			3,925,198
Shareholders’ equity:
Common stock, $2.00 par value; authorized 50,000,000 shares, issued and    outstanding 11,676,263 and 11,473,256 shares, respectively		23,352			22,946
Additional paid-in capital		136,145			122,296
Retained earnings		346,038			325,625
Noncontrolling interest in consolidated subsidiary		56			15
Accumulated other comprehensive losses, net of taxes of $42,633 and $39,073    respectively		(120,493	)		(110,430	)
Total shareholders’ equity		385,098			360,452
Total liabilities and shareholders’ equity	$	4,625,140		$	4,285,650

See accompanying notes to consolidated financial statements (unaudited)

3

WILSON BANK HOLDING COMPANY

Consolidated Statements of Earnings

three and nine months ended September 30, 2023 and 2022

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
	(Dollars in Thousands Except Per Share Amounts)						(Dollars in Thousands Except Per Share Amounts)
Interest income:
Interest and fees on loans	$	52,063		$	36,566		$	143,345		$	98,474
Interest and dividends on securities:
Taxable securities		4,300			4,374			13,179			11,548
Exempt from federal income taxes		395			351			1,178			1,030
Interest on loans held for sale		79			64			189			232
Interest on federal funds sold		124			29			329			95
Interest on balances held at depository institutions		819			585			2,331			1,126
Interest and dividends on restricted securities		77			55			223			115
Total interest income		57,857			42,024			160,774			112,620
Interest expense:
Interest on negotiable order of withdrawal accounts		1,580			522			4,229			1,444
Interest on money market and savings accounts		7,470			1,942			19,368			3,060
Interest on time deposits		14,629			1,406			33,453			3,717
Interest on Federal Home Loan Bank advances		—			—			2			—
Interest on Federal funds purchased		1			7			24			7
Interest on finance leases		17			17			55			50
Total interest expense		23,697			3,894			57,131			8,278
Net interest income before provision for credit losses		34,160			38,130			103,643			104,342
Provision for credit losses - loans		1,641			2,543			5,681			6,060
Provision for credit losses - off-balance sheet exposures		(677	)		(515	)		(2,975	)		(298	)
Net interest income after provision for credit losses		33,196			36,102			100,937			98,580
Non-interest income:
Service charges on deposit accounts		2,065			1,974			5,844			5,470
Brokerage income		1,738			1,919			4,962			5,348
Debit and credit card interchange income, net		2,018			2,046			6,476			6,413
Other fees and commissions		382			376			1,075			1,144
Income on BOLI and annuity contracts		426			357			1,372			1,074
Gain (loss) on sale of loans		628			(56	)		1,994			2,669
Mortgage servicing income, net		3			8			7			(19	)
Gain (loss) on sale of fixed assets		(7	)		232			(55	)		260
Gain (loss) on sale of securities		—			(281	)		3			(281	)
Gain (loss) on sale of other assets		(6	)		—			(7	)		8
Other income (loss)		(42	)		47			40			39
Total non-interest income		7,205			6,622			21,711			22,125
Non-interest expense:
Salaries and employee benefits		15,328			14,443			45,474			43,353
Occupancy expenses, net		1,532			1,422			4,475			4,167
Advertising & public relations expense		910			886			2,607			2,233
Furniture and equipment expense		795			838			2,443			2,547
Data processing expense		2,304			1,908			6,708			5,533
Directors’ fees		174			146			493			447
Audit, legal & consulting expenses		413			217			926			635
Other operating expenses		4,200			3,158			10,811			9,056
Total non-interest expense		25,656			23,018			73,937			67,971
Earnings before income taxes		14,745			19,706			48,711			52,734
Income taxes		3,266			4,523			10,954			12,037
Net earnings	$	11,479		$	15,183		$	37,757		$	40,697
Net loss (earnings) attributable to noncontrolling interest		7			7			(41	)		5
Net earnings attributable to Wilson Bank Holding Company	$	11,486		$	15,190		$	37,716		$	40,702
Weighted average number of common shares outstanding-basic		11,645,953			11,429,027			11,589,098			11,348,628
Weighted average number of common shares outstanding-diluted		11,676,176			11,460,943			11,618,841			11,380,255
Basic earnings per common share	$	0.99		$	1.33		$	3.25		$	3.59
Diluted earnings per common share	$	0.98		$	1.33		$	3.25		$	3.58
Dividends per common share	$	0.75		$	0.75		$	1.50		$	1.85

See accompanying notes to consolidated financial statements (unaudited)

4

WILSON BANK HOLDING COMPANY

Consolidated Statements of Comprehensive Earnings (Losses)

three and nine months ended September 30, 2023 and 2022

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
	(In Thousands)
Net earnings	$	11,479		$	15,183		$	37,757		$	40,697
Other comprehensive earnings (losses):
Unrealized gains (losses) on available-for-sale securities		(25,969	)		(46,767	)		(13,620	)		(147,694	)
Reclassification adjustment for net (gains) losses included in    net earnings		—			281			(3	)		281
Tax effect		6,787			12,148			3,560			38,525
Other comprehensive earnings (losses):		(19,182	)		(34,338	)		(10,063	)		(108,888	)
Comprehensive earnings (losses)	$	(7,703	)	$	(19,155	)	$	27,694		$	(68,191	)
Comprehensive losses (earnings) attributable to noncontrolling interest		7			7			(41	)		5
Comprehensive earnings (losses) attributable to Wilson Bank    Holding Company	$	(7,696	)	$	(19,148	)	$	27,653		$	(68,186	)

See accompanying notes to consolidated financial statements (unaudited)

5

WILSON BANK HOLDING COMPANY

Consolidated Statements of Changes in Shareholders’ Equity

three and nine months ended September 30, 2023 and 2022

(Unaudited)

	Dollars In Thousands
	Common Stock		Additional Paid-In Capital		Retained Earnings			Noncontrolling Interest			Accumulated Other Comprehensive Earnings (Loss)			Total
Three months ended:
September 30, 2023
Balance at beginning of period	$	23,159		129,526		343,250			63			(101,311	)		394,687
Cash dividends declared, $.75 per share		—		—		(8,698	)		—			—			(8,698	)
Issuance of 91,623 shares of common stock pursuant to    dividend reinvestment plan		183		6,229		—			—			—			6,412
Issuance of 4,944 shares of common stock pursuant to    exercise of stock options, net		10		136		—			—			—			331
Share based compensation expense		—		254		—			—			—			254
Net change in fair value of available-for-sale securities    during the period, net of tax benefit of $6,787		—		—		—			—			(19,182	)		(19,182	)
Net earnings (loss) for the quarter		—		—		11,486			(7	)		—			11,479
Balance at end of period	$	23,352		136,145		346,038			56			(120,493	)		385,098
September 30, 2022
Balance at beginning of period	$	22,717		114,943		306,615			39			(80,865	)		363,449
Cash dividends declared, $.75 per share		—		—		(8,518	)		—			—			(8,518	)
Issuance of 99,224 shares of common stock pursuant to    dividend reinvestment plan		199		6,305		—			—			—			6,504
Issuance of 2,839 shares of common stock pursuant to    exercise of stock options, net		5		63		—			—			—			68
Share based compensation expense		—		215		—			—			—			215
Net change in fair value of available-for-sale securities    during the period, net of tax benefit of $12,148		—		—		—			—			(34,338	)		(34,338	)
Net earnings (loss) for the quarter		—		—		15,190			(7	)		—			15,183
Balance at end of period	$	22,921		121,526		313,287			32			(115,203	)		342,563

	Dollars In Thousands
	Common Stock		Additional Paid-In Capital		Retained Earnings			Noncontrolling Interest			Accumulated Other Comprehensive Earnings (Loss)			Total
Nine Months Ended:
September 30, 2023
Balance at beginning of period	$	22,946		122,296		325,625			15			(110,430	)		360,452
Cash dividends declared, $1.50 per share		—		—		(17,303	)		—			—			(17,303	)
Issuance of 188,396 shares of common stock pursuant to    dividend reinvestment plan		377		12,601		—			—			—			12,978
Issuance of 14,611 shares of common stock pursuant to    exercise of stock options, net		29		521		—			—			—			550
Share based compensation expense		—		727		—			—			—			727
Net change in fair value of available-for-sale securities    during the period, net of tax benefit of $3,560		—		—		—			—			(10,063	)		(10,063	)
Net earnings for the period		—		—		37,716			41			—			37,757
Balance at end of period	$	23,352		136,145		346,038			56			(120,493	)		385,098
September 30, 2022
Balance at beginning of period	$	22,403		105,177		292,452			—			(6,315	)		413,717
Cash dividends declared, $1.85 per share		—		—		(20,878	)		—			—			(20,878	)
Issuance of 250,329 shares of common stock pursuant to    dividend reinvestment plan		501		15,616		—			—			—			16,117
Issuance of 8,754 shares of common stock pursuant to    exercise of stock options, net		17		147		—			—			—			164
Share based compensation expense		—		586		—			—			—			586
Net change in fair value of available-for-sale securities    during the period, net of tax benefit of $38,525		—		—		—			—			(108,888	)		(108,888	)
Cumulative effect of change in accounting principle from    the adoption of ASC 326		—		—		1,011			—			—			1,011
Noncontrolling interest contribution		—		—		—			37			—			37
Net earnings (loss) for the period		—		—		40,702			(5	)		—			40,697
Balance at end of period	$	22,921		121,526		313,287			32			(115,203	)		342,563

See accompanying notes to consolidated financial statements (unaudited)

6

WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows

nine months ended September 30, 2023 and 2022

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

	Nine Months Ended September 30,
	2023			2022
	(In Thousands)
OPERATING ACTIVITIES
Net earnings	$	37,757		$	40,697
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Provision for credit losses		2,706			5,762
Deferred income tax benefit		(668	)		(1,915	)
Depreciation and amortization of premises and equipment		3,263			3,346
Loss (gain) on disposal of premises and equipment		55			(260	)
Net amortization of securities		2,164			3,181
Net realized loss (gain) on sale of securities		(3	)		281
Gains on mortgage loans sold, net		(1,994	)		(2,669	)
Share-based compensation expense		1,222			1,410
Loss (gain) on sale of other assets		7			(8	)
Increase in value of life insurance and annuity contracts		(1,372	)		(1,074	)
Mortgage loans originated for resale		(65,269	)		(94,149	)
Proceeds from sale of mortgage loans		65,088			105,106
Right of use asset amortization		334			293
Change in
Accrued interest receivable		(2,117	)		(2,227	)
Other assets		3,818			249
Accrued interest payable		17,324			94
Other liabilities		4,954			3,931
TOTAL ADJUSTMENTS		29,512			21,351
NET CASH PROVIDED BY OPERATING ACTIVITIES		67,269			62,048
INVESTING ACTIVITIES
Activities in available for sale securities
Purchases		(4,314	)		(175,289	)
Sales		11,500			12,073
Maturities, prepayments and calls		44,063			70,774
Redemptions of restricted equity securities		896			732
Net increase in loans		(380,872	)		(511,575	)
Purchase of buildings, leasehold improvements, and equipment		(3,025	)		(505	)
Proceeds from sale of premises and equipment		—			260
Proceeds from sale of other assets		43			34
Purchase of life insurance and annuity contracts		—			(10,729	)
Redemption of annuity contracts		420			—
NET CASH USED IN INVESTING ACTIVITIES		(331,289	)		(614,225	)
FINANCING ACTIVITIES
Net change in deposits - non-maturing		(401,030	)		183,400
Net change in deposits - time		694,523			7,185
Change in escrow balances		1,576			8,326
Repayment of finance lease obligation		(23	)		(20	)
Net increase in noncontrolling interest contributions		—			37
Issuance of common stock related to exercise of stock options		550			164
Issuance of common stock pursuant to dividend reinvestment plan		12,978			16,117
Cash dividends paid on common stock		(17,303	)		(20,878	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		291,271			194,331
NET CHANGE IN CASH AND CASH EQUIVALENTS		27,251			(357,846	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		104,789			453,418
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	132,040		$	95,572

See accompanying notes to consolidated financial statements (unaudited)

7

WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows, Continued

nine months ended September 30, 2023 and 2022

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

	Nine Months Ended September 30,
	2023			2022
	(In Thousands)
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest	$	39,807		$	8,184
Taxes	$	13,211		$	15,346
Non-cash investing and financing activities:
Change in fair value of securities available-for-sale, net of tax benefit of $3,560 and $38,525 for the nine months ended September 30, 2023 and 2022, respectively	$	(10,063	)	$	(108,888	)
Non-cash transfers from loans to other real estate	$	—		$	—
Non-cash transfers from loans to other assets	$	50		$	—

See accompanying notes to consolidated financial statements (unaudited)

8

WILSON BANK HOLDING COMPANY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Nature of Business — Wilson Bank Holding Company (the “Company”) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Wilson Bank & Trust (the “Bank”). The Bank is a commercial bank headquartered in Lebanon, Tennessee. The Bank provides a full range of banking services in its primary market areas of Wilson, Davidson, Rutherford, Trousdale, Sumner, Dekalb, Putnam, Smith, Hamilton, and Williamson Counties, Tennessee. On June 1, 2022, the Bank began operations with a newly-formed joint venture, Encompass Home Lending LLC ("Encompass") of which the Bank owns 51% of the outstanding membership interests. Encompass offers residential mortgage banking services to customers of certain home builders in the Bank's markets as well as other mortgage customers.

Basis of Presentation — The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements and related notes appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for credit losses, the valuation of deferred tax assets, determination of any impairment of goodwill or other intangibles, the valuation of other real estate (if any), and the fair value of financial instruments. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Accounting Changes, Reclassifications and Restatements – Certain items in prior financial statements have been reclassified to conform to the current presentation. In addition, on January 1, 2022, we adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as subsequently updated for certain clarifications, targeted relief and codification improvements. Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaces the previous “incurred loss” model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The new current expected credit loss (“CECL”) model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance-sheet credit exposures based on historical experience, current conditions, and reasonable and supportable forecasts. ASC 326 also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASC 326 includes certain changes to the accounting for available-for-sale securities including the requirement to present credit losses as an allowance rather than as a direct write-down for available-for-sale securities management does not intend to sell or believes that it is more likely than not they will be required to sell before recovery of its amortized cost basis.

In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections. The revised accounting policies are described below.

Allowance For Credit Losses - Loans — The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present management's best estimate of the net amount expected to be collected. Loans are charged-off against the allowance when deemed uncollectible by management. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding our policies and methodology used to estimate the allowance for credit losses on loans is presented in Note 2 - Loans and Allowance for Credit Losses.

9

Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures — The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of non-interest expense. Further information regarding our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures is presented in Note 11 - Commitments and Contingent Liabilities.

Securities – Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them until maturity. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses (those for which no allowance for credit losses are recorded) reported as a component of other comprehensive earnings, net of tax. Securities held for resale in anticipation of short-term market movements are classified as trading and are carried at fair value, with changes in unrealized holding gains and losses included in income. Management determines the appropriate classification of securities at the time of purchase. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost.

Interest income on securities includes amortization of purchase premiums and discounts. Premiums and discounts on securities are generally amortized using the interest method with a constant effective yield without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable securities are amortized to their earliest call date. A security is placed on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more or (ii) full payment of principal and interest is not expected. Interest accrued but not received for a security placed on non-accrual status is reversed against interest income. Gains and losses on sales are recorded on the trade date and are derived from the amortized cost of the security sold.

Allowance for Credit Losses - Securities Available-for-Sale — For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through net income. If neither criteria is met, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. If the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income.

Newly Issued Not Yet Effective Standards

Information about certain recently issued accounting standards updates is presented below. Also refer to Note 1 - Accounting Standards Updates in our 2022 Form 10-K for additional information related to previously issued accounting standards updates.

Accounting Standards Update ("ASU") 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, in June 2022, the FASB issued this pronouncement which clarifies the guidance in ASC 820 when measuring the fair value of equity securities subject to contractual restrictions that prohibit the sale of an equity security. This update also requires specific disclosures related to these types of securities. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-03 prospectively once adopted. The Company is assessing ASU 2022-03 and its potential impact on its accounting and disclosures.

Recently Adopted Accounting Standards

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. As noted above, effective January 1, 2022 the Company adopted ASU 2016-13, which resulted in a $7.6 million decrease to the allowance for credit losses and a $6.2 million increase to the reserve for unfunded commitments, resulting in a $1.0 million increase in retained earnings (net of taxes). See Note 2 – Loans and Allowance for Credit Losses for additional information.

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the FASB issued this pronouncement and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain

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criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance was effective for all entities as of March 12, 2020 through December 31, 2022. In December 2022, the FASB issued an update to Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting with Accounting Standards Update 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which updated the effective date to be March 12, 2020 through December 31, 2024. The Company has implemented a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. The Company has moved the majority of its LIBOR-based loans to its preferred replacement index, a Secured Overnight Financing Rate ("SOFR") based index as of September 30, 2023. For the Company’s currently outstanding LIBOR-based loans, the timing and manner in which each customer's interest rate transitions to a replacement index will vary on a case-by-case basis and should occur at the next repricing date for these loans.

ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.” ASU 2022-01 was issued to expand the scope of assets eligible for portfolio layer method hedging to include all financial assets. The update also expands the current last-of-layer method that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. The last-of-layer method is renamed the portfolio layer method, because more than the last layer of a portfolio could be hedged. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The adoption of ASU 2022-01 did not have a significant impact on our financial statements.

ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 was issued to respond to feedback received from post-implementation review of Topic 326. The amendments eliminate the troubled debt restructuring (TDR) recognition and measurement guidance and now require that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosures and include new disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. To improve consistency for vintage disclosures, the ASU requires that public business entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The adoption of ASU 2022-02 did not have a significant impact on our financial statements.

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

Note 2. Loans and Allowance for Credit Losses

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

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

The following schedule details the loans of the Company at September 30, 2023 and December 31, 2022:

	(In Thousands)
	September 30, 2023			December 31, 2022
Residential 1-4 family real estate	$	936,759		$	854,970
Commercial and multi-family real estate		1,192,948			1,064,297
Construction, land development and farmland		1,001,200			879,528
Commercial, industrial and agricultural		126,262			124,603
1-4 family equity lines of credit		187,702			151,032
Consumer and other		102,020			93,332
Total loans before net deferred loan fees		3,546,891			3,167,762
Net deferred loan fees		(13,295	)		(14,153	)
Total loans		3,533,596			3,153,609
Less: Allowance for credit losses		(44,701	)		(39,813	)
Net loans	$	3,488,895		$	3,113,796

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Risk characteristics relevant to each portfolio segment are as follows:

Construction, land development and farmland: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). 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 generally rely on estimates of project costs and the anticipated value of the completed project, while the Company strives to ensure the accuracy of these estimates, it is possible for these estimates to be inaccurate. Construction loans often involve the disbursement of substantial funds with repayments substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

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

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

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

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

Commercial, industrial, and agricultural: 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. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower, if any. The cash flows of borrowers, however, may not be as expected and any collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

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

Allowance For Credit Losses ("ACL") - Loans. The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information from internal and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments when appropriate. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

The Company’s discounted cash flow methodology incorporates a probability of default and loss given default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. Together, the probability of default and loss given default model with the use of reasonable and supportable forecasts generate estimates for cash flows expected and not expected to be collected over the estimated life of a loan. Estimates of future expected cash flows ultimately reflect assumptions made concerning net credit losses over the life of a loan. The use of reasonable and supportable forecasts requires significant judgment. Management leverages economic projections from reputable and independent third parties to inform and provide its reasonable and supportable economic forecasts. The Company’s model reverts to a straight line basis for purposes of estimating cash flows beyond a period deemed reasonable and supportable. The Company forecasts probability of default and loss given default based on economic forecast scenarios over an eight quarter time period before reverting to a straight line basis for a four quarter time period. The duration of the forecast horizon, the period over which forecasts revert to a straight line basis, the economic forecasts that management utilizes, as well as additional internal and external indicators of economic forecasts that management considers, may change over time depending on the nature and composition of our loan portfolio. Changes in economic forecasts, in conjunction with changes in loan specific attributes, impact a loan’s probability of default and loss given default, which can drive changes in the determination of the ACL. Expectations of future cash flows are discounted at the loan’s effective interest rate. The resulting ACL represents the amount by which the loan’s amortized cost exceeds the net present value of a loan’s discounted cash flows expected to be collected. The ACL is recorded through a charge to provision for credit losses and is reduced by charge-offs, net of recoveries on loans previously charged-off. It is the Company’s policy to charge-off loan balances at the time they have been deemed uncollectible.

For segments where the discounted cash flow methodology is not used, a remaining life methodology is utilized. The remaining life method uses an average annual charge-off rate applied to the contractual term, further adjusted for estimated prepayments to determine the unadjusted historical charge-off rate for the remaining balance of assets.

The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon the following:

1.Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.

2.Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.

3.Changes in the nature and volume of the portfolio and in the terms of loans.

4.Changes in the experience, ability, and depth of lending management and other relevant staff.

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5.Changes in the volume and severity of past-due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans.

6.Changes in the quality of the Company's loan review system.

7.Changes in the value of underlying collateral for collateral-dependent loans.

8.The existence and effect of any concentrations of credit, and changes in the level of such concentrations.

9.The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s existing portfolio.

The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors.

Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. Individual evaluations are generally performed for loans greater than $500,000 which have experienced significant credit deterioration. Such loans are evaluated for credit losses based on the fair value of collateral. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral, less selling costs. For loans for which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral, the Company has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, with selling costs considered in the event sale of the collateral is expected. Loans greater than $100,000 for which terms have been modified either through principal forgiveness, payment delay, term extension, or interest rate reduction are evaluated using these same individual evaluation methods.

In assessing the adequacy of the allowance for credit losses, the Company considers the results of the Company's ongoing independent loan review process. The Company undertakes this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in its overall evaluation of the risk characteristics of the entire loan portfolio. Its loan review process includes the judgment of management, independent internal loan reviewers and reviews that may have been conducted by third-party reviewers including regulatory examiners. The Company incorporates relevant loan review results in the allowance.

In accordance with CECL, losses are estimated over the remaining contractual terms of loans, adjusted for prepayments and curtailment. The contractual term excludes expected extensions, renewals and modifications.

Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding and deferred loan fees and costs.

While management utilizes its best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

Loans are charged off when management believes that the full collectability of the loan is unlikely. As such, a loan may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

Transactions in the allowance for credit losses for the nine months ended September 30, 2023 and September 30, 2022 are summarized as follows:

	(In Thousands)
	Residential 1-4 Family Real Estate		Commercial and Multi-family Real Estate		Construction, Land Development and Farmland		Commercial, Industrial and Agricultural		1-4 family Equity Lines of Credit		Consumer and Other			Total
September 30, 2023
Allowance for credit losses - loans:
Beginning balance January 1,	$	7,310		15,299		13,305		1,437		1,170		1,292			39,813
Provision for credit losses		1,187		1,769		1,400		119		312		894			5,681
Charge-offs		—		—		—		—		—		(1,162	)		(1,162	)
Recoveries		19		—		17		1		—		332			369
Ending balance	$	8,516		17,068		14,722		1,557		1,482		1,356			44,701

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	(In Thousands)
	Residential 1-4 Family Real Estate			Commercial and Multi- family Real Estate			Construction, Land Development and Farmland			Commercial, Industrial and Agricultural			1-4 family Equity Lines of Credit			Consumer and Other			Total
September 30, 2022
Allowance for credit losses - loans:
Beginning balance January 1,	$	9,242			16,846			9,757			1,329			1,098			1,360			39,632
Impact of adopting ASC 326		(3,393	)		(3,433	)		(266	)		219			(324	)		(367	)		(7,564	)
Provision		1,048			1,155			2,504			106			312			935			6,060
Charge-offs		(8	)		—			—			(9	)		—			(1,038	)		(1,055	)
Recoveries		106			—			17			27			—			357			507
Ending balance	$	6,995			14,568			12,012			1,672			1,086			1,247			37,580

Transactions in the allowance for credit losses for the three months ended September 30, 2023 and 2022 are summarized as follows:

	(In Thousands)
	Residential 1-4 Family Real Estate		Commercial and Multi- family Real Estate		Construction, Land Development and Farmland		Commercial, Industrial and Agricultural			1-4 family Equity Lines of Credit		Consumer and Other			Total
September 30, 2023
Allowance for credit losses - loans:
Beginning balance July 1,	$	8,231		16,544		14,189		1,567			1,422		1,410			43,363
Provision for credit losses		276		524		523		(11	)		60		269			1,641
Charge-offs		—		—		—		—			—		(430	)		(430	)
Recoveries		9		—		10		1			—		107			127
Ending balance	$	8,516		17,068		14,722		1,557			1,482		1,356			44,701

	(In Thousands)
	Residential 1-4 Family Real Estate			Commercial and Multi- family Real Estate		Construction, Land Development and Farmland		Commercial, Industrial and Agricultural			1-4 family Equity Lines of Credit		Consumer and Other			Total
September 30, 2022
Allowance for credit losses - loans:
Beginning balance July 1,	$	6,291			13,609		11,696		1,542			916		1,184			35,238
Provision		616			959		305		119			170		374			2,543
Charge-offs		(8	)		—		—		(9	)		—		(445	)		(462	)
Recoveries		96			—		11		20			—		134			261
Ending balance	$	6,995			14,568		12,012		1,672			1,086		1,247			37,580

The following table presents the amortized cost basis of collateral dependent loans at September 30, 2023 and December 31, 2022 which are individually evaluated to determine expected credit losses:

	In Thousands
	Real Estate		Other		Total
September 30, 2023
Residential 1-4 family real estate	$	1,954		—		1,954
Commercial and multi-family real estate		2,912		—		2,912
Construction, land development and farmland		—		—		—
Commercial, industrial and agricultural		—		—		—
1-4 family equity lines of credit		—		—		—
Consumer and other		—		—		—
		4,866		—		4,866

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	In Thousands
	Real Estate		Other		Total
December 31, 2022
Residential 1-4 family real estate	$	130		—		130
Commercial and multi-family real estate		508		—		508
Construction, land development and farmland		—		—		—
Commercial, industrial and agricultural		—		—		—
1-4 family equity lines of credit		—		—		—
Consumer and other		—		—		—
	$	638		—		638

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

The following tables present the Company’s nonaccrual loans and past due loans as of September 30, 2023 and December 31, 2022.

Loans on Nonaccrual Status

	In Thousands
	September 30,		December 31,
	2023		2022
Residential 1-4 family real estate	$	—	$	—
Commercial and multi-family real estate		—		—
Construction, land development and farmland		—		—
Commercial, industrial and agricultural		—		—
1-4 family equity lines of credit		—		—
Consumer and other		—		—
Total	$	—	$	—

Past Due Loans

	(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		Non Accrual and Greater Than 89 Days Past Due		Total Non Accrual and Past Due		Current		Total Loans		Recorded Investment Greater Than 89 Days Past Due and Accruing
September 30, 2023
Residential 1-4 family real estate	$	2,790		121		326		3,237		933,522		936,759	$	326
Commercial and multi-family real estate		—		—		—		—		1,192,948		1,192,948		—
Construction, land development and    farmland		716		2,972		—		3,688		997,512		1,001,200		—
Commercial, industrial and agricultural		—		13		37		50		126,212		126,262		37
1-4 family equity lines of credit		364		27		102		493		187,209		187,702		102
Consumer and other		341		136		371		848		101,172		102,020		371
Total	$	4,211		3,269		836		8,316		3,538,575		3,546,891	$	836
December 31, 2022
Residential 1-4 family real estate	$	2,046		1,080		426		3,552		851,418		854,970	$	426
Commercial and multi-family real estate		397		1,626		400		2,423		1,061,874		1,064,297		400
Construction, land development and    farmland		591		—		—		591		878,937		879,528		—
Commercial, industrial and agricultural		49		62		—		111		124,492		124,603		—
1-4 family equity lines of credit		74		77		—		151		150,881		151,032		—
Consumer and other		403		184		43		630		92,702		93,332		43
Total	$	3,560		3,029		869		7,458		3,160,304		3,167,762	$	869

16

Loan Modifications to Borrowers Experiencing Financial Difficulty

Effective January 1, 2023, we adopted ASU 2022-02 which eliminated the accounting guidance for TDRs and requires disclosures for certain loan modifications when a borrower is experiencing financial difficulty.

Occasionally, the Company modifies loans to borrowers in financial distress by providing, principal forgiveness, term extension, an other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans included in the "combination" columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, an other-than-insignificant payment delay and/or an interest rate reduction.

The following table presents the amortized cost basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the nine months ended September 30, 2023, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.

	(In Thousands)
	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Principal Forgiveness		Combination Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
Residential 1-4 family real estate	$	—	$	947	$	—	$	—	$	—	$	—		0.10	%
Commercial and multi-family real estate		—		2,423		—		—		—		—		0.20	%
Construction, land development and    farmland		—		—		—		—		—		—		—	%
Commercial, industrial and agricultural		—		—		96		—		—		—		0.08	%
1-4 family equity lines of credit		—		—		—		—		—		—		—	%
Consumer and other		—		—		—		—		—		—		—	%
Total	$	—	$	3,370	$	96	$	—	$	—	$	—		0.10	%

The Company has not committed to lend additional amounts to the borrowers included in the previous table.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified within the last 12 months:

	In Thousands
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due
September 30, 2023
Residential 1-4 family real estate	$	—	$	—	$	—	$	—
Commercial and multi-family real estate		—		—		—		—
Construction, land development and    farmland		—		—		—		—
Commercial, industrial and agricultural		—		—		—		—
1-4 family equity lines of credit		—		—		—		—
Consumer and other		—		—		—		—
Total	$	—	$	—	$	—	$	—

As evidenced above, no such loans that have been modified within the last 12 months were thirty days or more past due at September 30, 2023.

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The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three and nine months ended September 30, 2023 (dollars in thousands):

Nine Months Ended September 30, 2023	Principal Forgiveness		Weighted-Average Interest Rate Reduction			Weighted-Average Months of Term Extension
Residential 1-4 family real estate	$	—		—	%		—
Commercial and multi-family real estate		—		—			—
Construction, land development and farmland		—		—			—
Commercial, industrial and agricultural		—		—			37
1-4 family equity lines of credit		—		—			—
Consumer and other		—		—			—
Total	$	—		—	%		37

Three Months Ended September 30, 2023	Principal Forgiveness		Weighted-Average Interest Rate Reduction			Weighted-Average Months of Term Extension
Residential 1-4 family real estate	$	—		—	%		—
Commercial and multi-family real estate		—		—			—
Construction, land development and    farmland		—		—			—
Commercial, industrial and agricultural		—		—			—
1-4 family equity lines of credit		—		—			—
Consumer and other		—		—			—
Total	$	—		—	%		—

There were no loan modifications with financial effect during the three months ended September 30, 2023.

The following table presents the amortized cost basis of loans that had a payment default during the three and nine months ended September 30, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty.

	In Thousands
Nine Months Ended September 30, 2023	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction
Residential 1-4 family real estate	$	—	$	—	$	—	$	—
Commercial and multi-family real estate		—		—		—		—
Construction, land development and    farmland		—		—		—		—
Commercial, industrial and agricultural		—		—		—		—
1-4 family equity lines of credit		—		—		—		—
Consumer and other		—		—		—		—
Total	$	—	$	—	$	—	$	—

	In Thousands
Three Months Ended September 30, 2023	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction
Residential 1-4 family real estate	$	—	$	—	$	—	$	—
Commercial and multi-family real estate		—		—		—		—
Construction, land development and    farmland		—		—		—		—
Commercial, industrial and agricultural		—		—		—		—
1-4 family equity lines of credit		—		—		—		—
Consumer and other		—		—		—		—
Total	$	—	$	—	$	—	$	—

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There were no payment defaults during the three and nine months ended September 30, 2023 on loans that had been modified in the twelve months prior to September 30, 2023.

Upon the Company's determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized costs basis of the loan is reduced by the amount deemed uncollectible and the allowance for credit losses is adjusted by the same amount.

TDR Disclosures Prior to Adoption of ASU 2022-02

Prior to the adoption of ASU 2022-02 the restructuring of a loan was considered a TDR if both (i) the borrower was experiencing financial difficulties and (ii) the creditor had granted a concession. Concessions may have included interest rate reductions or below market interest rates, principal forgiveness, extension of terms and other actions intended to minimize potential losses.

The Company did not modify any loan that was considered a TDR during the three and nine months ended September 30, 2022.

As of September 30, 2023 there was a total of $90,000 consumer mortgage loans in the process of foreclosure. As of December 31, 2022, the Company's recorded investment in consumer mortgage loans in the process of foreclosure totaled $11,000.

Potential problem loans, which include nonperforming loans, amounted to approximately $5.7 million at September 30, 2023 and $6.4 million at December 31, 2022. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.

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

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

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

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

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The table below presents loan balances classified within each risk rating category by primary loan type and based on year of origination as of September 30, 2023:

	In Thousands
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
September 30, 2023
Residential 1-4 family real estate
Pass	$	123,086		299,032		247,424		91,773		58,232		94,153		18,669		932,369
Special mention		76		690		—		879		138		1,582		—		3,365
Substandard		—		—		—		—		129		896		—		1,025
Total Residential 1-4 family real estate	$	123,162		299,722		247,424		92,652		58,499		96,631		18,669		936,759
Residential 1-4 family real estate:
Current-period gross charge-offs	$	—		—		—		—		—		—		—		—
Commercial and multi-family real estate
Pass	$	59,651		302,962		290,605		180,072		93,125		220,459		45,800		1,192,674
Special mention		—		—		—		157		—		34		—		191
Substandard		—		—		—		—		—		83		—		83
Total Commercial and multi-family real    estate	$	59,651		302,962		290,605		180,229		93,125		220,576		45,800		1,192,948
Commercial and multi-family real estate:
Current-period gross charge-offs	$	—		—		—		—		—		—		—		—
Construction, land development and    farmland
Pass	$	179,059		349,866		216,485		26,975		8,379		10,984		209,398		1,001,146
Special mention		—		—		—		—		—		54		—		54
Substandard		—		—		—		—		—		—		—		—
Total Construction, land development    and farmland	$	179,059		349,866		216,485		26,975		8,379		11,038		209,398		1,001,200
Construction, land development and    farmland:
Current-period gross charge-offs	$	—		—		—		—		—		—		—		—
Commercial, industrial and agricultural
Pass	$	19,830		34,745		8,150		13,010		17,383		8,010		24,976		126,104
Special mention		96		—		13		—		—		—		12		121
Substandard		—		37		—		—		—		—		—		37
Total Commercial, industrial and    agricultural	$	19,926		34,782		8,163		13,010		17,383		8,010		24,988		126,262
Commercial, industrial and agricultural:
Current-period gross charge-offs	$	—		—		—		—		—		—		—		—
1-4 family equity lines of credit
Pass	$	—		—		—		—		—		—		187,160		187,160
Special mention		—		—		—		—		—		—		402		402
Substandard		—		—		—		—		—		—		140		140
Total 1-4 family equity lines of credit	$	—		—		—		—		—		—		187,702		187,702
1-4 family equity lines of credit:
Current-period gross charge-offs	$	—		—		—		—		—		—		—		—
Consumer and other
Pass	$	25,998		17,704		6,390		15,334		4,990		6,511		24,780		101,707
Special mention		18		59		89		27		—		—		—		193
Substandard		7		98		1		12		—		2		—		120
Total Consumer and other	$	26,023		17,861		6,480		15,373		4,990		6,513		24,780		102,020
Consumer and other:
Current-period gross charge-offs	$	55		150		51		4		—		1		901		1,162

The table below presents loan balances classified within each risk rating category based on year of origination as of September 30, 2023:

	In Thousands
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
September 30, 2023
Pass	$	407,624		1,004,309		769,054		327,164		182,109		340,117		510,783		3,541,160
Special mention		190		749		102		1,063		138		1,670		414		4,326
Substandard		7		135		1		12		129		981		140		1,405
Total	$	407,821		1,005,193		769,157		328,239		182,376		342,768		511,337		3,546,891

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The table below presents loan balances classified within each risk rating category by primary loan type and based on year of origination as of December 31, 2022:

	In Thousands
	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
December 31, 2022
Residential 1-4 family real estate:
Pass	$	290,315		262,690		106,107		61,984		29,526		81,229		17,751		849,602
Special mention		245		300		885		62		115		1,955		349		3,911
Substandard		—		—		—		131		—		1,326		—		1,457
Total Residential 1-4 family real    estate	$	290,560		262,990		106,992		62,177		29,641		84,510		18,100		854,970
Commercial and multi-family real    estate:
Pass	$	271,403		246,265		161,326		107,908		74,494		166,267		36,342		1,064,005
Special mention		—		—		162		—		—		40		—		202
Substandard		—		—		—		—		—		90		—		90
Total Commercial and multi-    family real estate	$	271,403		246,265		161,488		107,908		74,494		166,397		36,342		1,064,297
Construction, land development    and farmland:
Pass	$	364,681		237,051		90,341		9,648		5,212		9,445		163,076		879,454
Special mention		—		—		—		—		—		60		—		60
Substandard		—		—		—		—		—		14		—		14
Total Construction, land    development and farmland	$	364,681		237,051		90,341		9,648		5,212		9,519		163,076		879,528
Commercial, industrial and    agricultural:
Pass	$	39,222		10,812		15,743		20,441		5,062		4,641		28,567		124,488
Special mention		7		44		17		—		—		47		—		115
Substandard		—		—		—		—		—		—		—		—
Total Commercial, industrial and    agricultural	$	39,229		10,856		15,760		20,441		5,062		4,688		28,567		124,603
1-4 family equity lines of credit:
Pass	$	—		—		—		—		—		—		150,849		150,849
Special mention		—		—		—		—		—		—		67		67
Substandard		—		—		—		—		—		—		116		116
Total 1-4 family equity lines of    credit	$	—		—		—		—		—		—		151,032		151,032
Consumer and other:
Pass	$	28,487		11,163		18,075		5,995		345		6,757		22,166		92,988
Special mention		74		130		20		2		—		—		—		226
Substandard		74		19		13		—		11		1		—		118
Total Consumer and other	$	28,635		11,312		18,108		5,997		356		6,758		22,166		93,332

The table below presents loan balances classified within each risk rating category based on year of origination as of December 31, 2022:

	In Thousands
	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
December 31, 2022
Pass	$	994,108		767,981		391,592		205,976		114,639		268,339		418,751		3,161,386
Special mention		326		474		1,084		64		115		2,102		416		4,581
Substandard		74		19		13		131		11		1,431		116		1,795
Total	$	994,508		768,474		392,689		206,171		114,765		271,872		419,283		3,167,762

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Note 3. Debt and Equity Securities

Debt and equity securities have been classified in the consolidated balance sheet according to management’s intent. Debt and equity securities at September 30, 2023 and December 31, 2022 are summarized as follows:

	September 30, 2023
	Securities Available-For-Sale
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
U.S. Treasury and other U.S. government    agencies	$	7,378		—		858		6,520
U.S. Government-sponsored enterprises    (GSEs)		172,243		—		30,899		141,344
Mortgage-backed securities		475,596		1		85,917		389,680
Asset-backed securities		42,763		46		1,803		41,006
Corporate bonds		2,500		—		97		2,403
Obligations of states and political    subdivisions		218,425		—		43,599		174,826
	$	918,905		47		163,173		755,779

	December 31, 2022
	Securities Available-For-Sale
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
U.S. Treasury and other U.S. government    agencies	$	7,353		—		856		6,497
U.S. Government-sponsored enterprises    (GSEs)		177,261		—		32,049		145,212
Mortgage-backed securities		518,727		1		74,290		444,438
Asset-backed securities		47,538		—		2,288		45,250
Corporate bonds		2,500		—		97		2,403
Obligations of states and political    subdivisions		218,936		—		39,924		179,012
	$	972,315		1		149,504		822,812

As of September 30, 2023, there was no allowance for credit losses on available-for-sale securities.

Included in mortgage-backed securities are collateralized mortgage obligations totaling $138,420,000 (fair value of $113,130,000) and $148,460,000 (fair value of $126,190,000) at September 30, 2023 and December 31, 2022, respectively.

Securities carried on the balance sheet of approximately $485,873,000 (approximate market value of $399,882,000) and $477,051,000 (approximate market value of $405,403,000) were pledged to secure public deposits and for other purposes as required by law at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, there were no holdings of securities of any one issuer, other than U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.

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The amortized cost and estimated market value of debt securities at September 30, 2023 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-For-Sale
	In Thousands
	Amortized Cost		Estimated Market Value
Due in one year or less	$	318	$	307
Due after one year through five years		115,247		101,585
Due after five years through ten years		254,596		209,175
Due after ten years		548,744		444,712
	$	918,905	$	755,779

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022.

	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
September 30, 2023	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Available-for-Sale Securities:
U.S. Treasury and other    U.S. government agencies	$	—	$	—		—	$	6,520	$	858		3	$	6,520	$	858
U.S. Government-sponsored    enterprises (GSEs)		—		—		—		141,344		30,899		57		141,344		30,899
Mortgage-backed securities		501		10		4		388,797		85,907		233		389,298		85,917
Asset-backed securities		8,752		648		4		27,242		1,155		24		35,994		1,803
Corporate bonds		—		—		—		2,403		97		1		2,403		97
Obligations of states and    political subdivisions		7,532		644		4		167,294		42,955		203		174,826		43,599
	$	16,785	$	1,302		12	$	733,600	$	161,871		521	$	750,385	$	163,173

	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
December 31, 2022	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Available-for-Sale Securities:
U.S. Treasury and other    U.S. government agencies	$	—	$	—		—	$	6,497	$	856		—		6,497	$	856
U.S. Government-sponsored    enterprises (GSEs)		9,747		872		4		135,465		31,177		54		145,212		32,049
Mortgage-backed securities		148,441		14,601		113		295,431		59,689		136		443,872		74,290
Asset-backed securities		35,276		1,607		21		9,974		681		11		45,250		2,288
Corporate bonds		2,403		97		1		—		—		—		2,403		97
Obligations of states and    political subdivisions		58,567		6,056		76		120,445		33,868		128		179,012		39,924
	$	254,434	$	23,233		215	$	567,812	$	126,271		332	$	822,246	$	149,504

The applicable date for determining when securities are in an unrealized loss position is September 30, 2023 and December 31, 2022. As such, it is possible that a security had a market value less than its amortized cost on other days during the nine months ended September 30, 2023 and the twelve-month period ended December 31, 2022, but is not in the "Investments with an Unrealized Loss of less than 12 months" category above.

As shown in the tables above, at September 30, 2023 and December 31, 2022, the Company had unrealized losses of $163.2 million and $149.5 million on $750.4 million and $822.2 million, respectively, of securities. As described in Note 1, Summary of Significant Accounting Policies, for any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether or not it intends to sell the security, or more-likely-than-not will be required to sell the security,

23

before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because the Company currently does not intend to sell those securities that have an unrealized loss at September 30, 2023, and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company has determined that no write-down is necessary. In addition, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration, which would require the recognition of an allowance for credit losses. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. The unrealized losses associated with securities at September 30, 2023 are driven by changes in interest rates and not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at September 30, 2023. These securities will continue to be monitored as a part of the Company's ongoing evaluation of credit quality.

Mortgage-Backed Securities

At September 30, 2023, approximately 98% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies. Because the decline in fair value is largely attributable to interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is not more likely than not that it will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired (OTTI) at September 30, 2023.

The Company's mortgage-backed securities portfolio includes non-agency collateralized mortgage obligations with a fair value of $9.0 million which had unrealized losses of approximately $2.0 million at September 30, 2023. These non-agency mortgage-backed securities were rated AAA at September 30, 2023. The Company monitors to ensure it has adequate credit support and as of September 30, 2023, the Company believes there is no OTTI and does not have the intent to sell these securities and it is not more likely than not that it will be required to sell the securities before their anticipated recovery. The issuers continue to make timely principal and interest payments on the bonds.

Obligations of States and Political Subdivisions

Unrealized losses on municipal bonds have not been recognized into income because the issuers' bonds are of high credit quality (rated A or higher) or the bonds have been refunded, management does not intend to sell the securities and it is not more likely than not that management will be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

Asset-Backed Securities

The Company's asset-backed securities portfolio includes agency and non-agency asset backed and other amortizing debt securities with a fair value of $41.0 million which had unrealized losses of approximately $1.8 million at September 30, 2023. The Company monitors these securities to ensure it has adequate credit support and as of September 30, 2023, the Company believes there is no OTTI and does not have the intent to sell these securities and it is not more likely than not that it will be required to sell the securities before their anticipated recovery. The issuers continue to make timely principal and interest payments on the bonds.

Corporate Bonds

The Company's lone corporate debt security with a fair value of $2.4 million had an unrealized loss of approximately $0.1 million at September 30, 2023. The Company monitors this security to ensure it has adequate credit support and as of September 30, 2023, the Company believes there is no OTTI and does not have the intent to sell this security and it is not more likely than not that it will be required to sell the security before its anticipated recovery. The issuer continues to make timely principal and interest payments on the bond.

Note 4. Derivatives

Derivatives Designated as Fair Value Hedges

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

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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 Company pays the counter-party a fixed interest rate and receives a floating rate, which until August 31, 2023 equaled 1 month LIBOR. On September 1, 2023, the Company began receiving a daily compounded SOFR rate plus a spread adjustment in lieu of 1 month LIBOR as part of the LIBOR transition event. The derivative transaction is designated as a fair value hedge.

A summary of the Company's fair value hedge relationships as of September 30, 2023 and December 31, 2022 are as follows (in thousands):

September 30, 2023	Balance Sheet Location	Weighted Average Remaining Maturity (In Years)		Weighted Average Pay Rate			Receive Rate	Notional Amount		Estimated Fair Value
Interest rate swap agreements - loans	Other assets		6.67		0.65	%	1 month SOFR	$	30,000	$	4,809

December 31, 2022	Balance Sheet Location	Weighted Average Remaining Maturity (In Years)		Weighted Average Pay Rate			Receive Rate	Notional Amount		Estimated Fair Value
Interest rate swap agreements - loans	Other assets		7.42		0.65	%	1 month LIBOR	$	30,000	$	4,520

The effects of fair value hedge relationships reported in interest income on loans on the consolidated statements of income for the nine months ended September 30, 2023 and 2022 were as follows (in thousands):

Gain (loss) on fair value hedging relationship	Nine Months Ended September 30,
	2023			2022
Interest rate swap agreements - loans:
Hedged items	$	(42	)		(3,616	)
Derivative designated as hedging instruments		289			3,634

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at September 30, 2023 and December 31, 2022 (in thousands):

	Carrying Amount of the Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
Line item on the balance sheet	September 30, 2023		December 31, 2022		September 30, 2023			December 31, 2022
Loans	$	25,410		25,452		(4,590	)		(4,548	)

Mortgage Banking Derivatives

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors under the Bank's mandatory delivery program are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in an effort to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. At September 30, 2023 and December 31, 2022, the Company had approximately $4,542,000 and $6,923,000, respectively, of interest rate lock commitments and approximately $4,250,000 and $6,250,000, respectively, of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $107,000 and $123,000 at September 30, 2023 and December 31, 2022, respectively, and a derivative asset of $7,000 and $62,000 at September 30, 2023 and December 31, 2022, respectively. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sale of loans.

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

	In Thousands
	September 30, 2023			September 30, 2022
Interest rate contracts for customers	$	(16	)		(804	)
Forward contracts related to mortgage loans held for sale    and interest rate contracts		(55	)		314

The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as of September 30, 2023 and December 31, 2022 (in thousands):

	In Thousands
	September 30, 2023				December 31, 2022
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets (liabilities):
Interest rate contracts for customers	$	4,542		107		6,923		123
Forward contracts related to mortgage loans    held-for-sale		4,250		7		6,250		62

Note 5. Mortgage Servicing Rights

During the first quarter of 2022, the Company began selling a portfolio of residential mortgage loans to a third party, while retaining the rights to service the loans. Mortgage loans serviced for others are not reported as assets. The principal balances of these loans as of September 30, 2023 and December 31, 2022 are as follows:

	In Thousands
	September 30, 2023		December 31, 2022
Mortgage loan portfolios serviced for:
FHLMC	$	99,571	$	85,742

For the nine months ended September 30, 2023 and 2022, the change in carrying value of the Company's mortgage servicing rights accounted for under the amortization method was as follows:

	In Thousands
	September 30, 2023			September 30, 2022
Balance at beginning of period	$	1,065			—
Servicing rights retained from loans sold		236			1,320
Amortization		(167	)		(304	)
Valuation Allowance Provision		—			—
Balance at end of period	$	1,134			1,016
Fair value, end of period	$	1,527			1,194

The key data and assumptions used in estimating the fair value of the Company's mortgage servicing rights as of September 30, 2023 and December 31, 2022 were as follows:

	September 30, 2023			December 31, 2022
Prepayment speed		7.00	%		7.18	%
Weighted-average life (in years)		9.08			8.98
Weighted-average note rate		4.70	%		4.34	%
Weighted-average discount rate		9.00	%		9.00	%

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Note 6. Equity Incentive Plans

In April 2009, the Company’s shareholders approved the Wilson Bank Holding Company 2009 Stock Option Plan (the “2009 Stock Option Plan”). The 2009 Stock Option Plan was effective as of April 14, 2009. Under the 2009 Stock Option Plan, awards could be in the form of options to acquire common stock of the Company. Subject to adjustment as provided by the terms of the 2009 Stock Option Plan, the maximum number of shares of common stock with respect to which awards could be granted under the 2009 Stock Option Plan was 100,000 shares. The 2009 Stock Option Plan terminated on April 13, 2019, and no additional awards may be issued under the 2009 Stock Option Plan. The awards granted under the 2009 Stock Option Plan prior to the plan's expiration will remain outstanding until exercised or otherwise terminated. As of September 30, 2023, the Company had outstanding 3,333 options under the 2009 Stock Option Plan with a weighted average exercise price of $35.52.

During the second quarter of 2016, the Company’s shareholders approved the Wilson Bank Holding Company 2016 Equity Incentive Plan, which authorizes awards of up to 750,000 shares of common stock. The 2016 Equity Incentive Plan was approved by the Board of Directors and effective as of January 25, 2016 and approved by the Company’s shareholders on April 12, 2016. On September 26, 2016, the Board of Directors approved an amendment and restatement of the 2016 Equity Incentive Plan (as amended and restated the “2016 Equity Incentive Plan”). Except for certain limitations, awards can be in the form of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares and restricted share units, performance awards and other stock-based awards. As of September 30, 2023, the Company had 175,295 shares remaining available for issuance under the 2016 Equity Incentive Plan. As of September 30, 2023, the Company had outstanding 221,991 options with a weighted average exercise price of $57.05, 161,195 cash-settled stock appreciation rights with a weighted average exercise price of $54.54 and 17,015 restricted share awards, restricted share unit awards, and performance share unit awards under the 2016 Equity Incentive Plan.

Stock Options and Stock Appreciation Rights

As of September 30, 2023, the Company had outstanding 225,324 stock options with a weighted average exercise price of $56.73 and 161,195 cash-settled stock appreciation rights with a weighted average exercise price of $54.54.

The following table summarizes information about stock options and cash-settled SARs activity for the nine months ended September 30, 2023 and 2022:

	September 30, 2023					September 30, 2022
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Options and SARs outstanding at beginning of period		414,778		$	55.13		357,254		$	50.18
Granted		5,000			69.00		114,332			64.06
Exercised		(28,092	)		47.23		(34,508	)		41.95
Forfeited or expired		(5,167	)		60.35		(1,167	)		46.81
Outstanding at end of period		386,519		$	55.82		435,911		$	54.48
Options and SARs exercisable at September 30		181,906		$	48.72		168,017		$	43.67

As of September 30, 2023, there was $3,805,000 of total unrecognized cost related to non-vested stock options and SARs granted under the Company's equity incentive plans. The cost is expected to be recognized over a weighted-average period of 3.11 years.

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Time-based Vesting Restricted Shares and Restricted Share Units

A summary of restricted share awards and restricted share unit awards activity for the nine months ended September 30, 2023 is as follows:

	Restricted Share Awards				Restricted Share Units
	Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
Outstanding at December 31, 2022		1,075	$	64.03		—	$	—
Granted		—		—		14,833		69.00
Vested		—		—		—		—
Forfeited		—		—		—		—
Outstanding at September 30, 2023		1,075	$	64.03		14,833	$	69.00

The restricted shares and restricted share units vest over various time periods. As of September 30, 2023, there was $26,000 of unrecognized compensation cost related to non-vested restricted share awards. The cost is expected to be expensed over a weighted-average period of 1.75 years. As of September 30, 2023, there was $859,000 of unrecognized compensation cost related to non-vested restricted share units, all of which were granted to employees of the Bank during the second quarter of 2023. The cost is expected to be expensed over a weighted-average period of 4.63 years.

Performance-Based Vesting Restricted Stock Units ("PSUs")

The Company awards performance-based restricted stock units to officers and employees of the Bank. Under the terms of the awards, the number of units that will be earned and thereafter settled in shares of common stock will be based on the employee's performance against certain performance metrics over a fixed three-year performance period. Compensation expense for PSUs is estimated each period based on the fair value of the Company's common stock at the grant date and the most probable outcome of the performance condition, adjusted for the passage of time within the performance period of the awards.

The following tables detail the PSUs outstanding at September 30, 2023.

	Performance Stock Units Outstanding		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2022		—	$	—
Granted		1,107		67.85
Vested		—		—
Forfeited or expired		—		—
Outstanding at September 30, 2023		1,107	$	67.85

Grant Year	Grant Price		Applicable Performance Period	Period in which units to be settled	PSUs Outstanding
2023	$	67.85	2023-2025	2024-2026		1,107

As of September 30, 2023, there was $54,000 of total unrecognized cost related to non-vested performance based restricted share units. The cost is expected to be expensed over a weighted-average period of 2.25 years.

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Note 7. Regulatory Capital

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of September 30, 2023, the Bank and the Company meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is classified as adequately capitalized or lower, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is growth and expansion, and capital restoration plans are required. As of September 30, 2023 and December 31, 2022, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Company’s and the Bank’s actual capital amounts and ratios as of September 30, 2023 and December 31, 2022 are presented in the following tables. The capital conservation buffer of 2.5% is not included in the required minimum ratios of the tables presented below.

	Actual					Minimum Capital Adequacy					For Classification Under Corrective Action Plan as Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
September 30, 2023
Total capital to risk weighted assets:
Consolidated	$	548,647		13.9	%	$	314,720		8.0	%	$	393,400		10.0	%
Wilson Bank		547,689		13.9			314,603		8.0			393,254		10.0
Tier 1 capital to risk weighted assets:
Consolidated		500,785		12.7			236,039		6.0			314,719		8.0
Wilson Bank		499,827		12.7			235,953		6.0			314,604		8.0
Common equity Tier 1 capital to risk weighted assets:
Consolidated		500,729		12.7			177,029		4.5		N/A		N/A
Wilson Bank		499,771		12.7			176,964		4.5			255,615		6.5
Tier 1 capital to average assets:
Consolidated		500,785		10.6			188,408		4.0		N/A		N/A
Wilson Bank		499,827		10.6			188,342		4.0			235,428		5.0

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	Actual					Minimum Capital Adequacy					For Classification Under Corrective Action Plan as Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
December 31, 2022
Total capital to risk weighted assets:
Consolidated	$	512,025		13.5	%	$	303,440		8.0	%	$	379,300		10.0	%
Wilson Bank		509,169		13.4			303,334		8.0			379,168		10.0
Tier 1 capital to risk weighted assets:
Consolidated		466,076		12.3			227,580		6.0			303,440		8.0
Wilson Bank		463,220		12.2			227,500		6.0			303,333		8.0
Common equity Tier 1 capital to risk weighted assets:
Consolidated		466,061		12.3			170,685		4.5		N/A		N/A
Wilson Bank		463,205		12.2			170,625		4.5			246,458		6.5
Tier 1 capital to average assets:
Consolidated		466,076		11.2			166,712		4.0		N/A		N/A
Wilson Bank		463,220		11.1			166,648		4.0			208,310		5.0

Dividend Restrictions

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

Note 8. Fair Value Measurements

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

Valuation Hierarchy

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

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

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

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

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

Assets

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

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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 hypothetical orderly transaction.

Collateral dependent loans – Collateral dependent loans are measured at the fair value of the collateral securing the loan less estimated selling costs. The fair value of real estate collateral is determined based on real estate appraisals which are generally based on recent sales of comparable properties which are then adjusted for property specific factors. Non-real estate collateral is valued based on various sources, including third party asset valuations and internally determined values based on cost adjusted for depreciation and other judgmentally determined discount factors. Collateral dependent loans are classified within Level 3 of the valuation hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's underlying financial condition.

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

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

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

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

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The following tables present the financial instruments carried at fair value as of September 30, 2023 and December 31, 2022, by caption on the consolidated balance sheet and by FASB ASC 820 valuation hierarchy (as described above):

	Assets and Liabilities Measured at Fair Value on a Recurring Basis
	(In Thousands)
	Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)
September 30, 2023
Hedged Loans	$	25,410		—		25,410		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government    agencies		6,520		6,520		—		—
U.S. Government sponsored enterprises		141,344		—		141,344		—
Mortgage-backed securities		389,680		—		389,680		—
Asset-backed securities		41,006		—		41,006		—
Corporate bonds		2,403		—		2,403		—
State and municipal securities		174,826		—		174,826		—
Total investment securities available-for-sale		755,779		6,520		749,259		—
Mortgage loans held for sale		5,530		—		5,530		—
Derivative instruments		4,923		—		4,923		—
Other investments		2,005		—		—		2,005
Total assets	$	793,647		6,520		785,122		2,005
Derivative instruments	$	—		—		—		—
Total liabilities	$	—		—		—		—
December 31, 2022
Hedged Loans	$	25,452		—		25,452		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government    agencies		6,497		6,497		—		—
U.S. Government sponsored enterprises		145,212		—		145,212		—
Mortgage-backed securities		444,438		—		444,438		—
Asset-backed securities		45,250		—		45,250		—
Corporate bonds		2,403		—		2,403		—
State and municipal securities		179,012		—		179,012		—
Total investment securities available-for-sale		822,812		6,497		816,315		—
Mortgage loans held for sale		3,355		—		3,355		—
Derivative instruments		4,705		—		4,705		—
Other investments		1,965		—	—			1,965
Total assets	$	858,289		6,497		849,827		1,965
Derivative instruments	$	—		—		—		—
Total liabilities	$	—		—		—		—

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	Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
	(In Thousands)
	Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)
September 30, 2023
Other real estate owned	$	—		—		—		—
Collateral dependent loans (¹)		4,866		—		—		4,866
Total	$	4,866		—		—		4,866
December 31, 2022
Other real estate owned	$	—		—		—		—
Collateral dependent loans (¹)		638		—		—		638
Total	$	638		—		—		638

(1)As of September 30, 2023 and December 31, 2022 no reserve was recorded on collateral dependent loans.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at September 30, 2023 and December 31, 2022:

	Valuation Techniques (1)	Significant Unobservable Inputs	Weighted Average
Collateral dependent loans	Appraisal	Estimated costs to sell	10%
Other real estate owned	Appraisal	Estimated costs to sell	10%

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

In the case of its investment securities portfolio, the Company monitors the valuation technique utilized by various pricing agencies to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the nine months ended September 30, 2023, there were no transfers between Levels 1, 2 or 3.

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The table below includes a rollforward of the balance sheet amounts for the nine months ended September 30, 2023 and 2022 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):

	For the Three Months Ended September 30,
	2023					2022
	Other Assets			Other Liabilities		Other Assets		Other Liabilities
Fair value, July 1	$	2,047			—	$	2,026		—
Total realized gains (losses) included in income		(42	)		—		47		—
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at September 30		—			—		—		—
Purchases, issuances and settlements, net		—			—		—		—
Transfers out of Level 3		—			—		—		—
Fair value, September 30	$	2,005			—	$	2,073		—
Total realized gains (losses) included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30	$	(42	)		—	$	47		—

	For the Nine Months Ended September 30,
	2023				2022
	Other Assets		Other Liabilities		Other Assets		Other Liabilities
Fair value, January 1	$	1,965		—	$	2,034		—
Total realized gains (losses) included in income		40		—		39		—
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at September 30		—		—		—		—
Purchases, issuances and settlements, net		—		—		—		—
Transfers out of Level 3		—		—		—		—
Fair value, September 30	$	2,005		—	$	2,073		—
Total realized gains (losses) included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30	$	40		—	$	39		—

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices or observable components are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2023 and December 31, 2022. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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

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

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for collateral dependent loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates

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offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk to determine the exit price.

Mortgage servicing rights — The fair value of servicing rights is based on the present value of estimated future cash flows of mortgages sold, stratified by rate and maturity date. Assumptions that are incorporated in the valuation of servicing rights include assumptions about prepayment speeds on mortgages and the cost to service loans.

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

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

The following table presents the carrying amounts, estimated fair value and placement in the fair valuation hierarchy of the Company’s financial instruments at September 30, 2023 and December 31, 2022. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.

	Carrying/ Notional		Estimated		Quote Market Prices in an Active Market		Models with Significant Observable Market Parameters		Models with Significant Unobservable Market Parameters
(in Thousands)	Amount		Fair Value (¹)		(Level 1)		(Level 2)		(Level 3)
September 30, 2023
Financial assets:
Cash and cash equivalents	$	132,040		132,040		132,040		—		—
Loans, net		3,463,485		3,318,630		—		—		3,318,630
Mortgage servicing rights		1,134		1,527		—		1,527		—
Financial liabilities:
Deposits		4,186,198		3,623,219		—		—		3,623,219
December 31, 2022
Financial assets:
Cash and cash equivalents	$	104,789		104,789		104,789		—		—
Loans, net		3,088,344		2,992,161		—		—		2,992,161
Mortgage servicing rights		1,065		1,252				1,252
Financial liabilities:
Deposits		3,892,705		3,210,581		—		—		3,210,581

(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.

Note 9. Income Taxes

Accounting Standards Codification (“ASC”) 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods. As of September 30, 2023, the Company had no unrecognized tax benefits related to Federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to September 30, 2023.

The Company's effective tax rate for the three and nine months ended September 30, 2023 was 22.15% and 22.49% compared to 22.95% and 22.83% for the same periods in 2022. The difference between the effective tax rate and the federal and state income tax statutory rate of 26.14% at September 30, 2023 and 2022 is primarily due to investments in bank qualified municipal securities, participation in the Tennessee Community Investment Tax Credit (CITC) program, and tax benefits associated with share-based compensation and bank-owned life insurance, offset in part by the limitation on deductibility of meals and entertainment expense and non-deductible executive compensation.

35

As of and for the nine months ended September 30, 2023, the Company has not accrued or recognized interest or penalties related to uncertain tax positions. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

The Company and the Bank file consolidated U.S. Federal and State of Tennessee income tax returns. The Company is currently open to audit under the statute of limitations by the State of Tennessee for the years ended December 31, 2019 through 2022 and the IRS for the years ended December 31, 2020 through 2022.

Note 10. Earnings Per Share

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

The following is a summary of components comprising basic and diluted earnings per share (“EPS”) for the three and nine months ended September 30, 2023 and 2022:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(Dollars in Thousands Except  Share and Per Share Amounts)				(Dollars in Thousands Except  Share and Per Share Amounts)
Basic EPS Computation:
Numerator – Earnings available to common stockholders	$	11,486	$	15,190	$	37,716	$	40,702
Denominator – Weighted average number of common    shares outstanding		11,645,953		11,429,027		11,589,098		11,348,628
Basic earnings per common share	$	0.99	$	1.33	$	3.25	$	3.59
Diluted EPS Computation:
Numerator – Earnings available to common stockholders	$	11,486	$	15,190	$	37,716	$	40,702
Denominator – Weighted average number of common    shares outstanding		11,645,953		11,429,027		11,589,098		11,348,628
Dilutive effect of stock options, RSUs and PSUs		30,223		31,916		29,743		31,627
Weighted average diluted common shares outstanding		11,676,176		11,460,943		11,618,841		11,380,255
Diluted earnings per common share	$	0.98	$	1.33	$	3.25	$	3.58

Note 11. Commitments and Contingent Liabilities

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

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

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

36

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

A summary of the Company’s total contractual amount for all off-balance sheet commitments at September 30, 2023 is as follows:

Commitments to extend credit	$	1,042,881,000
Standby letters of credit	$	103,349,000

Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures. The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment.

Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 2 - Loans and Allowance for Credit Losses as if such commitments were funded.

The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures for the nine months ended September 30, 2023 and 2022.

	(In Thousands)
	2023			2022
Beginning balance, January 1	$	6,136			955
Impact of adopting ASC 326		—			6,195
Credit loss expense (benefit)		(2,975	)		(298	)
Ending balance, September 30,	$	3,161			6,852

The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures for the three months ended September 30, 2023 and 2022.

	(In Thousands)
	2023			2022
Beginning balance, July 1	$	3,838			7,367
Impact of adopting ASC 326		—			—
Credit loss expense (benefit)		(677	)		(515	)
Ending balance, September 30,	$	3,161			6,852

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

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

37

has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan.

To date, repurchase activity pursuant to the terms of these representations and warranties or due to early payoffs or payment defaults has been insignificant and has resulted in insignificant losses to the Company.

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

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these claims outstanding at September 30, 2023 will not have a material impact on the Company’s consolidated financial statements.

Note 12. Subsequent Events

ASC 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Wilson Bank Holding Company evaluated all events or transactions that occurred after September 30, 2023, through the date of the issued financial statements.

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

The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its bank subsidiary, Wilson Bank & Trust (the "Bank") and Encompass Home Lending LLC ("Encompass"), a company offering mortgage banking services that is 51% owned by the Bank and 49% owned by two home builders operating in the Bank's market areas. The results of Encompass, which commenced operations on June 1, 2022, are consolidated in the Company's financial statements included elsewhere in this Quarterly Report. This discussion should be read in conjunction with the Company's consolidated financial statements appearing elsewhere in this report. Reference should also be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a more complete discussion of factors that impact the Company's liquidity, capital and results of operations.

Forward-Looking Statements

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

The Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks and uncertainties, including, but not limited to those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and also include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in credit losses and provisions for these losses, (ii) deterioration in the real estate market conditions in the Company’s market areas including demand for residential real estate loans as a result of persistent elevated rates on residential real estate mortgage loans, (iii) the impact of increased competition with other financial institutions, including pricing pressures on loans and deposits, and the resulting impact on the Company's results, including as a result of compression to net interest margin, (iv) adverse conditions in local or national economies, including the economy in the Company’s market areas, including as a result of inflationary pressures on our customers and on their businesses, (v) the sale of investment securities in a loss position before the value of the securities recovers, including as a result of asset liability management strategies or in response to liquidity needs, (vi) fluctuations or differences in interest rates on earning assets and interest bearing liabilities from those that the Company is modeling or anticipating, including as a result of the Bank's inability to maintain deposit rates or defer increases to those rates in a rising rate environment in connection with the changes in the short-term rate environment, or that affect the yield curve, (vii) the ability to grow and retain low-cost core deposits and retain large uninsured deposits, including during times when the Bank is seeking to limit the rates it pays on deposits or uncertainty exists in the financial services sector, (viii) significant downturns in the business of one or more large customers, (ix) the inability of the Company to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies, required capital maintenance levels, or regulatory requests or directives, (x) changes in state or Federal regulations, policies, or legislation applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act, (xi) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, (xii) inadequate allowance for credit losses, (xiii) the effectiveness of the Company’s activities in improving, resolving or liquidating lower quality assets, (xiv) results of regulatory examinations, (xv) the vulnerability of the Company's network and online banking portals, and the systems of parties with whom the Company contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches, (xvi) the possibility of additional increases to compliance costs or other operational expenses as a result of increased regulatory oversight, (xvii) loss of key personnel, and (xviii) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future litigation, examinations or other legal and/or regulatory actions. These risks and uncertainties may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. The Company’s future operating results depend on a number of factors which were derived utilizing numerous assumptions that could cause actual results to differ materially from those projected in forward-looking statements.

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Recent Developments

Difficult Market Conditions are Adversely Affecting the Banking Industry

Concerns of a potential recession remain as the Federal Reserve has continued to increase interest rates in 2023 in an effort to ease inflation. To date in 2023, the Federal Reserve has raised interest rates to a range between 5.25% and 5.50%, the highest level in over 20 years. The Federal Reserve once again reiterated in November 2023 that inflation remains elevated and that they are remaining highly attentive to inflation risks, suggesting that future rate hikes could be possible and that elevated rates may be in effect for a longer period of time than previously estimated. Future actions that may be taken by the Federal Reserve may continue to impact key macroeconomic variables.

The rise in short term interest rates during 2022 that has continued in 2023, the resulting industry-wide reduction in the fair value of securities portfolios, and the bank liquidity issues that led to the failures of multiple financial institutions in the first half of 2023, among other events, have resulted in a current state of volatility and uncertainty with respect to the health of the U.S. banking system, particularly around liquidity, uninsured deposits and customer concentrations, though the situation appears to have stabilized somewhat due in part to actions taken by federal regulators in attempts to restore confidence in the markets.

To date, these recent market events and activities have not materially and adversely impacted our financial condition, operations, customer base, liquidity, capital position or risk profile, though they have had some impact, particularly on our cost of funds which has contributed to compression in our net interest margin.

We continue to monitor macroeconomic variables related to increasing interest rates, inflation, the concerns of an economic downturn, and its effects on our business, customers, employees, communities and markets. The following challenges could have an impact on our business, consolidated financial condition or near- or longer-term consolidated results of operations:

•Slower loan growth and declining deposits;

•Difficulty retaining and attracting deposit relationships;

•Credit quality deterioration of our loan portfolio resulting in additional provision for credit losses and impairment charges;

•Margin pressure as we increase deposit rates in response to rate increases by the FOMC and our competitors and the mix of our deposits continues to shift into more interest-bearing accounts;

•Increases in other comprehensive loss from the unrealized losses on available-for-sale debt securities; and

•Liquidity stresses and increased costs to maintain sufficient levels of high-quality liquid assets and access to borrowing lines.

Application of Critical Accounting Policies and Accounting Estimates

We follow accounting and reporting policies that conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information, forecasted economic conditions, and other factors deemed to be relevant, actual results could differ from those estimates.

We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements.

Accounting policies related to the allowance for credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. As discussed in Note 1 - Summary of Significant Accounting Policies, our policies related to allowances for credit losses changed on January 1, 2022 in connection with the adoption of a new accounting standard update as codified in Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for

40

the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Loans and Allowance for Credit Losses in the notes to consolidated financial statements contained elsewhere in this Quarterly Report.

Non-GAAP Financial Measures

This Quarterly Report contains certain financial measures that are not measures recognized under U.S. GAAP and, therefore, are considered non-GAAP financial measures. Members of Company management use these non-GAAP financial measures in their analysis of the Company’s performance, financial condition, and efficiency of operations. Management of the Company believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods. Management of the Company also believes that investors find these non-GAAP financial measures useful as they assist investors in understanding underlying operating performance and identifying and analyzing ongoing operating trends. However, the non-GAAP financial measures discussed herein should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with U.S. GAAP. Moreover, the manner in which the non-GAAP financial measures discussed herein are calculated may differ from the manner in which measures with similar names are calculated by other companies. You should understand how other companies calculate their financial measures similar to, or with names similar to, the non-GAAP financial measures we have discussed herein when comparing such non-GAAP financial measures.

The non-GAAP measures in this Quarterly Report include “pre-tax pre-provision income,” “pre-tax pre-provision basic earnings per share,” “pre-tax pre-provision annualized return on average shareholders' equity,” and “pre-tax pre-provision annualized return on average assets.” A reconciliation of these measures to the comparable GAAP measures is included below.

Selected Financial Information

The executive management and Board of Directors of the Company evaluate key performance indicators (KPIs) on a continuing basis. These KPIs serve as benchmarks of Company performance and are used in making strategic decisions. The following table represents the KPIs that management presently has determined to be important in making decisions for the Bank:

	As of or For the Three Months Ended September 30,									As of or For the Nine Months Ended September 30,
	2023			2022			2023 - 2022 Percent Increase (Decrease)			2023			2022			2023 - 2022 Percent Increase (Decrease)
PER SHARE DATA:
Basic earnings per common share (GAAP)	$	0.99		$	1.33			(25.84	)%	$	3.25		$	3.59			(9.35	)%
Pre-tax pre-provision basic earnings per share (1)	$	1.35		$	1.90			(28.95	)%	$	4.43		$	5.15			(13.98	)%
Diluted earnings per common share (GAAP)	$	0.98		$	1.33			(26.04	)%	$	3.25		$	3.58			(9.33	)%
Cash dividends per common share	$	0.75		$	0.75			—	%	$	1.50		$	1.85			(18.92	)%
Dividends declared per common share as a percentage of basic    earnings per common share		76.04	%		56.39	%		34.85	%		46.09	%		51.53	%		(10.56	)%

(1)Excludes income tax expense, provision for credit losses-loans, provision for credit losses-available for sale securities, and provision for credit losses on off-balance sheet exposures.

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	As of or For the Three Months Ended September 30,									As of or For the Nine Months Ended September 30,
	2023			2022			2023 - 2022 Percent Increase (Decrease)			2023			2022			2023 - 2022 Percent Increase (Decrease)
PERFORMANCE RATIOS:
Annualized return on average shareholders' equity (GAAP) (1)		11.65	%		16.67	%		(30.11	)%		12.96	%		14.58	%		(11.11	)%
Pre-tax pre-provision annualized return on average shareholders'    equity (2)		15.94	%		23.86	%		(33.19	)%		17.65	%		20.96	%		(15.79	)%
Annualized return on average assets (GAAP) (3)		1.00	%		1.46	%		(31.51	)%		1.13	%		1.33	%		(15.04	)%
Pre-tax pre-provision annualized return on average assets (2)		1.36	%		2.09	%		(34.93	)%		1.54	%		1.91	%		(19.37	)%
Efficiency ratio (GAAP) (4)		62.02	%		51.43	%		20.59	%		58.98	%		53.75	%		9.73	%

(1)Annualized return on average shareholders' equity is the result of net income for the reported period on an annualized basis, divided by average shareholders' equity for the period.

(2)Excludes income tax expense, provision for credit losses-loans, provision for credit losses-available for sale securities, and provision for credit losses on off-balance sheet exposures.

(3)Annualized return on average assets is the result of net income for the reported period on an annualized basis, divided by average assets for the period.

(4)Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and non-interest income.

	September 30, 2023			December 31, 2022			2023 - 2022 Percent Increase (Decrease)
BALANCE SHEET RATIOS:
Total capital to assets ratio		8.33	%		8.41	%		(0.95	)%
Equity to asset ratio (Average equity divided by    average total assets)		8.72	%		8.99	%		(3.00	)%
Tier 1 capital to average assets		10.63	%		11.18	%		(4.92	)%
Non-performing asset ratio		0.02	%		0.02	%		—	%
Book value per common share	$	32.98		$	31.42			4.96	%

Reconciliation of Non-GAAP Financial Measures

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	Three Months Ended						Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
Pre-tax pre-provision income:
Net income attributable to common shareholders    (GAAP)	$	11,486		$	15,190		$	37,716		$	40,702
Add: provision for credit losses - loans		1,641			2,543			5,681			6,060
Add: provision expense (benefit) for credit    losses on off-balance sheet exposures		(677	)		(515	)		(2,975	)		(298	)
Add: provision for credit    losses - available-for-sale securities		—			—			—			—
Add: income tax expense		3,266			4,523			10,954			12,037
Pre-tax pre-provision income	$	15,716		$	21,741		$	51,376		$	58,501
Pre-tax pre-provision basic earnings per    share:
Pre-tax pre-provision income	$	15,716		$	21,741		$	51,376		$	58,501
Weighted average shares		11,645,953			11,429,027			11,589,098			11,348,628
Basic earnings per common share (GAAP)	$	0.99		$	1.33		$	3.25		$	3.59
Provision for credit losses - loans	$	0.14		$	0.22		$	0.49		$	0.53
Provision expense (benefit) for credit losses on    off-balance sheet exposures	$	(0.06	)	$	(0.05	)	$	(0.26	)	$	(0.03	)
Provision for credit losses - available-for-sale    securities	$	—		$	—		$	—		$	—
Income tax expense	$	0.28		$	0.40		$	0.95		$	1.06
Pre-tax pre-provision basic earnings per    common share	$	1.35		$	1.90		$	4.43		$	5.15
Pre-tax pre-provision annualized return on    average assets:
Pre-tax pre-provision income	$	15,716		$	21,741		$	51,376		$	58,501
Average assets		4,571,761			4,135,538			4,463,602			4,086,409
Annualized return on average assets (GAAP)		1.00	%		1.46	%		1.13	%		1.33	%
Provision for credit losses - loans		0.14	%		0.24	%		0.17	%		0.20	%
Provision expense (benefit) for credit losses on    off-balance sheet exposures		(0.06	)%		(0.05	)%		(0.09	)%		(0.01	)%
Provision for credit losses - available-for-sale    securities		—	%		—	%		—	%		—	%
Income tax expense		0.28	%		0.44	%		0.33	%		0.39	%
Pre-tax pre-provision annualized return on    average assets		1.36	%		2.09	%		1.54	%		1.91	%
Pre-tax pre-provision annualized return on    average shareholders' equity:
Pre-tax pre-provision income	$	15,716		$	21,741		$	51,376		$	58,501
Average total shareholders' equity		391,263			361,549			389,073			373,238
Annualized return on average shareholders'    equity (GAAP)		11.65	%		16.67	%		12.96	%		14.58	%
Provision for credit losses - loans		1.66	%		2.79	%		1.95	%		2.17	%
Provision expense (benefit) for credit losses on    off-balance sheet exposures		(0.69	)%		(0.57	)%		(1.02	)%		(0.11	)%
Provision for credit losses - available-for-sale    securities		—	%		—	%		—	%		—	%
Income tax expense		3.32	%		4.97	%		3.76	%		4.32	%
Pre-tax pre-provision annualized return on    average shareholders' equity		15.94	%		23.86	%		17.65	%		20.96	%

Results of Operations

Net earnings of the Company decreased $2,986,000, or 7.34%, to $37,716,000 for the nine months ended September 30, 2023, from $40,702,000 in the first nine months of 2022. Net earnings of the Company were $11,486,000 for the three months ended September

43

30, 2023, a decrease of $3,704,000 or 24.38%, from $15,190,000 for the three months ended September 30, 2022. The decrease in net earnings during the three and nine months ended September 30, 2023 as compared to the prior year comparable periods was primarily due to an increase in non-interest expense and a decrease in net interest income. The increase in non-interest expense is primarily due to an increase in salaries and benefits and an increase in FDIC assessment costs. The decrease in net interest income for the three and nine months ended September 30, 2023 compared to the comparable periods in 2022 is primarily due to an increase in cost of funds, partially offset by an increase in average interest earning asset balances and an increase in the yield earned on interest earning assets. The increase in cost of funds for the three and nine months ended September 30, 2023 when compared to the comparable periods in 2022 occurred as we increased the rates we are paying on our deposit products as a result of competitive pressures in our markets, the impact of the higher interest rate environment as depositors moved funds to higher rate earning accounts and the impact of the higher rates we are paying on increased levels of brokered deposits. In 2022, we were able to keep deposit costs down, despite the rise in short term interest rates, due to high levels of liquidity; however, in 2023, we have had to significantly increase the rates paid on deposits to maintain adequate liquidity given the competitive pressures in our markets.

Return on average assets (ROA) and return on average shareholders' equity (ROE) are common benchmarks for bank profitability and are calculated by taking our annualized net earnings for the relevant period and dividing that amount by the average assets and average equity for the relevant periods, respectively. ROA and ROE measure a company’s return on investment in a format that is easily comparable to other financial institutions. ROA is particularly important to the Company as it serves as the basis for certain executive and employee bonuses. The ROA for the three months ended September 30, 2023 and 2022 was 1.00% and 1.46%, respectively, and for the nine months ended September 30, 2023 and 2022 was 1.13% and 1.33%, respectively. The ROE for the three months ended September 30, 2023 and 2022 was 11.65% and 16.67%, respectively, and for the nine months ended September 30, 2023 and 2022 was 12.96% and 14.58%, respectively. The decrease in ROA and ROE is primarily attributable to an increase in non-interest expense and a decrease in net interest income.

Net Interest Income

The average balances, interest, and average rates of our assets and liabilities for the three and nine months ended September 30, 2023 and 2022 are presented in the following table (dollars in thousands):

	Three Months Ended			Three Months Ended			Net Change Three Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023 versus September 30, 2022
	Average Balance	Interest Rate	Income/ Expense	Average Balance	Interest Rate	Income/ Expense	Due to Volume	Due to Rate	Net Change	Percent Change
Loans, net of unearned interest (1) (2)	$3,470,019	6.03%	$52,063	$2,889,178	5.10%	$36,566	$8,129	$7,368	$15,497
Investment securities—taxable	721,506	2.36	4,300	834,871	2.08	4,374	(2,408)	2,334	(74)
Investment securities—tax exempt	66,586	2.35	395	72,159	1.93	351	(148)	192	44
Taxable equivalent adjustment (3)	—	0.63	105	—	0.51	93	(39)	51	12
Total tax-exempt investment securities	66,586	2.98	500	72,159	2.44	444	(187)	243	56
Total investment securities	788,092	2.42	4,800	907,030	2.11	4,818	(2,595)	2,577	(18)
Loans held for sale	6,194	5.06	79	4,177	6.08	64	75	(60)	15
Federal funds sold	9,015	5.46	124	5,971	1.93	29	21	74	95
Accounts with depository institutions	83,366	3.90	819	123,772	1.88	585	(1,109)	1,343	234
Restricted equity securities	3,461	8.83	77	4,548	4.80	55	(76)	98	22
Total earning assets	4,360,147	5.33	57,962	3,934,676	4.30	42,117	4,445	11,400	15,845	37.62%
Cash and due from banks	23,986			24,681
Allowance for credit losses	(43,263)			(35,166)
Bank premises and equipment	62,037			61,493
Other assets	168,854			149,854
Total assets	$4,571,761			$4,135,538

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	Three Months Ended			Three Months Ended			Net Change Three Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023 versus September 30, 2022
	Average Balance	Interest Rate	Income/ Expense	Average Balance	Interest Rate	Income/ Expense	Due to Volume	Due to Rate	Net Change	Percent Change
Deposits:
Negotiable order of withdrawal accounts	$962,195	0.65%	$1,580	$1,095,614	0.19%	$522	$(430)	$1,488	$1,058
Money market demand accounts	1,062,736	2.31	6,192	1,272,022	0.51	1,643	(1,844)	6,393	4,549
Time deposits	1,380,133	4.21	14,629	580,352	0.96	1,406	3,834	9,389	13,223
Other savings	317,958	1.59	1,278	346,317	0.34	299	(168)	1,147	979
Total interest-bearing deposits	3,723,022	2.52	23,679	3,294,305	0.47	3,870	1,392	18,417	19,809
Finance leases	2,263	2.98	17	2,291	2.94	17	(1)	1	—
Fed funds purchased	98	4.05	1	364	7.44	7	(4)	(2)	(6)
Total interest-bearing liabilities	3,725,383	2.52	23,697	3,296,960	0.47	3,894	1,387	18,416	19,803	508.55%
Non-interest bearing deposits	406,121			433,421
Other liabilities	48,994			43,608
Shareholders’ equity	391,263			361,549
Total liabilities and shareholders’    equity	$4,571,761			$4,135,538
Net interest income, on a tax equivalent basis			$34,265			$38,223	$3,058	$(7,016)	$(3,958)	(10.36)%
Net interest margin (4)		3.18%			3.91%
Net interest spread (5)		2.81%			3.83%

Notes:

(1)Yields on loans and total earning assets include the impact of State income tax credits related to incentive loans at below market rates and tax exempt loans to municipalities.

(2)Loan fees of $2.9 million are included in interest income for the period ended September 30, 2023. Loan fees of $3.9 million are included in interest income for the period ended September 30, 2022, inclusive of $10,000 in 2022 in SBA fees related to Paycheck Protection Program (PPP) loans.

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

(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.

	Nine Months Ended			Nine Months Ended			Net Change Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023 versus September 30, 2022
	Average Balance	Interest Rate	Income/ Expense	Average Balance	Interest Rate	Income/ Expense	Due to Volume	Due to Rate	Net Change	Percent Change
Loans, net of unearned interest (1) (2)	$3,341,007	5.82%	$143,345	$2,708,354	4.95%	$98,474	$25,589	$19,282	$44,871
Investment securities—taxable	744,008	2.37	13,179	833,037	1.85	11,548	(1,930)	3,561	1,631
Investment securities—tax exempt	67,528	2.33	1,178	74,528	1.85	1,030	(151)	299	148
Taxable equivalent adjustment (3)	—	0.62	313	—	0.49	274	(41)	80	39
Total tax-exempt investment securities	67,528	2.95	1,491	74,528	2.34	1,304	(192)	379	187
Total investment securities	811,536	2.42	14,670	907,565	1.89	12,852	(2,122)	3,940	1,818
Loans held for sale	5,033	5.02	189	8,513	3.64	232	(144)	101	(43)
Federal funds sold	8,557	5.14	329	20,118	0.63	95	(118)	352	234
Accounts with depository institutions	82,437	3.78	2,331	252,944	0.60	1,126	(1,668)	2,873	1,205
Restricted equity securities	3,584	8.32	223	4,906	3.13	115	(56)	164	108
Total earning assets	4,252,154	5.13	161,087	3,902,400	3.93	112,894	21,481	26,712	48,193	42.69%
Cash and due from banks	24,794			24,361
Allowance for credit losses	(41,448)			(36,102)
Bank premises and equipment	62,032			62,212
Other assets	166,070			133,538
Total assets	$4,463,602			$4,086,409

45

	Nine Months Ended			Nine Months Ended			Net Change Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023 versus September 30, 2022
	Average Balance	Interest Rate	Income/ Expense	Average Balance	Interest Rate	Income/ Expense	Due to Volume	Due to Rate	Net Change	Percent Change
Deposits:
Negotiable order of withdrawal accounts	$989,655	0.57%	$4,229	$1,083,667	0.18%	$1,444	$(216)	$3,001	$2,785
Money market demand accounts	1,134,803	1.89	16,070	1,250,454	0.27	2,546	(413)	13,937	13,524
Time deposits	1,185,058	3.77	33,453	574,958	0.86	3,717	7,126	22,610	29,736
Other savings	324,499	1.36	3,298	329,618	0.21	514	(14)	2,798	2,784
Total interest-bearing deposits	3,634,015	2.10	57,050	3,238,697	0.34	8,221	6,483	42,346	48,829
Federal Home Loan Bank advances	84	3.18	2	—	—	—	2	—	2
Finance leases	2,269	3.24	55	1,807	3.70	50	14	(9)	5
Fed funds purchased	724	4.43	24	126	1.06	7	23	(6)	17
Total interest-bearing liabilities	3,637,092	2.10	57,131	3,240,630	0.34	8,278	6,522	42,331	48,853	590.15%
Non-interest bearing deposits	402,033			435,279
Other liabilities	35,404			37,262
Shareholders’ equity	389,073			373,238
Total liabilities and shareholders’    equity	$4,463,602			$4,086,409
Net interest income, on a tax equivalent basis			$103,956			$104,616	$14,959	$(15,619)	$(660)	(0.63)%
Net interest margin (4)		3.33%			3.64%
Net interest spread (5)		3.03%			3.59%

Notes:

(1)Yields on loans and total earning assets include the impact of State income tax credits related to incentive loans at below market rates and tax exempt loans to municipalities.

(2)Loan fees of $8.9 million are included in interest income for the period ended September 30, 2023. Loan fees of $10.4 million are included in interest income for the period ended September 30, 2022, inclusive of $129,000 in 2022 in SBA fees related to PPP loans.

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

(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.

The components of our loan yield, a key driver to our net interest margin for the three and nine months ended September 30, 2023 and 2022, were as follows:

	Three Months Ended September 30,
	2023					2022
	Interest Income		Average Yield			Interest Income		Average Yield
Loan yield components:
Contractual interest rates		49,116		5.61	%		32,716		4.49	%
Origination and other fee income		2,947		0.34	%		3,840		0.53	%
PPP loan fee income		—		—	%		10		—	%
Loan tax credits		665		0.08	%		570		0.08	%
Total	$	52,728		6.02	%	$	37,136		5.10	%

	Nine Months Ended September 30,
	2023					2022
	Interest Income		Average Yield			Interest Income		Average Yield
Loan yield components:
Contractual interest rates		134,477		5.39	%		88,073		4.35	%
Origination and other fee income		8,868		0.35	%		10,272		0.51	%
PPP loan fee income		—		—	%		129		0.01	%
Loan tax credits		1,995		0.08	%		1,710		0.08	%
Total	$	145,340		5.82	%	$	100,184		4.95	%

Net interest margin for the nine months ended September 30, 2023 and 2022 was 3.33% and 3.64%, respectively. Net interest margin for the three months ended September 30, 2023 and 2022 was 3.18% and 3.91%, respectively. The decrease in net interest margin

46

for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily due to an increase in the cost of funds, partially offset by an increase in average interest earning asset balances and an increase in the yield earned on such assets. As discussed above, the increase in cost of funds was due to the Bank raising the rates paid on deposits due to competitive pressures, depositors transferring funds from lower rate earning or non-interest bearing accounts to higher rate earning accounts to take advantage of the higher rates, and increased balances of brokered deposits. The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, increased 525 basis points from the first quarter of 2022 through the third quarter of 2023 as the Federal Reserve sought to address high levels of inflation. The direction and speed with which short-term interest rates move has an impact on our net interest income. We anticipate that our net interest margin is likely to contract throughout the remainder of 2023 and possibly into 2024 because of the higher short-term interest rates and the impact of competitive pressures in our market, which pressure the Bank's deposit pricing and contribute to a compression in our margin. The increase in brokered deposits, which can carry higher rates than core deposits, that we experienced throughout 2023, is also likely to negatively impact our net interest margin. The yield on loans increased during the three and nine months ended September 30, 2023 when compared to the comparable periods in 2022 due to the higher rates charged on new loans and the repricing of a portion of the Bank's variable rate loan portfolio as well as an increase in average loan balances. The net interest spread was 3.03% and 3.59% for the nine months ended September 30, 2023 and 2022, respectively. The net interest spread was 2.81% and 3.83% for the three months ended September 30, 2023 and 2022, respectively.

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Net interest income, excluding tax equivalent adjustments relating to tax exempt securities and loans, for the three months ended September 30, 2023 totaled $34,160,000 compared to $38,130,000 for the same period in 2022, a decrease of $3,970,000, while the net interest income for the nine months ended September 30, 2023 totaled $103,643,000, a decrease of $699,000 compared to the same period in 2022.

The decrease in net interest income for the three and nine months ended September 30, 2023 compared to the comparable period in 2022 was primarily due to an increase in interest expense resulting from the increase in the cost of funds, as discussed above, offset in part by the increase in interest and fees on loans, as discussed above, as well as an increase in interest and dividends earned on securities.

The ratio of average earning assets to total average assets for the three and nine months ended September 30, 2023 was 95.4% and 95.3% compared to 95.1% and 95.5% for the same periods in 2022.

Interest expense increased in the three and nine months ended September 30, 2023 when compared to the comparable periods in 2022, as discussed above, competitive pressures in the rising short-term interest rate environment required the Bank to raise rates paid on deposits as well as the Bank's customers shifting deposits from transaction and money market accounts to time deposit accounts and the Bank utilizing increased levels of brokered deposits. We expect deposit costs to continue to increase during the remainder of 2023 and possibly into 2024 due to those same factors and the expected repricing of a portion of the Bank's time deposits that are currently below the current market rates.

Provision for Credit Losses

On January 1, 2022, we adopted FASB ASU 2016-13, which introduces the current expected credit losses (CECL) methodology and requires us to estimate all expected credit losses over the remaining life of our loan portfolio. The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation is adequate to provide coverage for all expected credit losses. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Refer to Note 1, "Summary of Significant Accounting Policies" in the notes to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for a detailed discussion regarding ACL methodology.

The provision for credit losses-loans was $5,681,000 and $6,060,000 for the nine months ended September 30, 2023 and 2022, respectively. The provision for credit losses-loans was $1,641,000 and $2,543,000 for the three months ended September 30, 2023 and 2022, respectively. The benefit for credit losses on off-balance sheet exposures was $2,975,000 compared to a benefit of $298,000 for the nine months ended September 30, 2023 and 2022, respectively. The benefit for credit losses on off-balance sheet exposures was $677,000 and $515,000 for the three months ended September 30, 2023 and 2022, respectively.

Our provision for credit losses-loans for the three and nine months ended September 30, 2023 decreased $902,000 and $379,000, respectively, compared to the three and nine months ended September 30, 2022. The decrease in provision for loan losses for loans was primarily due to a slow down in loan growth, partially offset by the macroeconomic forecast in our CECL model reflecting the potential for a recession.

47

As discussed below under Financial Condition-Loans, loan growth tapered for the three and nine months ended September 30, 2023 compared to the same periods for 2022. Loan growth for the three and nine months ended September 30, 2023 was $117,297,000 and $379,987,000, respectively, while loan growth for the three and nine months ended September 30, 2022 was $219,085,000 and $507,411,000, respectively.

The increase in the benefit for credit losses-off-balance sheet credit exposures for the three and nine months ended September 30, 2023 was the result of a decrease in our off-balance sheet commitments and an increase in our unconditionally cancellable commitments.

The following detail provides a breakdown of the provision for credit loss-loans expense and net (charge-offs) recoveries as of and for the nine months ended September 30, 2023 and 2022:

	In Thousands, Except Percentages
	Provision for Credit Loss - Loans Expense (Benefit)		Net (Charge-Offs) Recoveries			Average Loans		Ratio of Net (Charge-offs) Recoveries to Average Loans
September 30, 2023
Residential 1-4 family real estate	$	1,187	$	19		$	891,510		—	%
Commercial and multi-family real estate		1,769		—			1,123,136		—
Construction, land development and farmland		1,400		17			935,793		—
Commercial, industrial and agricultural		119		1			124,823		—
1-4 family equity lines of credit		312		—			168,544		—
Consumer and other		894		(830	)		97,201		(0.85	)
Total	$	5,681	$	(793	)	$	3,341,007		(0.02	)%
September 30, 2022
Residential 1-4 family real estate	$	1,048	$	98			739,468		0.01	%
Commercial and multi-family real estate		1,155		—			936,548		—
Construction, land development and farmland		2,504		17			721,732		—
Commercial, industrial and agricultural		106		18			119,274		0.02
1-4 family equity lines of credit		312		—			115,336		—
Consumer and other		935		(681	)		75,996		(0.90	)
Total	$	6,060	$	(548	)	$	2,708,354		(0.02	)%

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

There was no provision for credit losses on available-for-sale securities for the three and nine months ended September 30, 2023 and 2022, respectively.

Non-Interest Income

Our non-interest income is composed of several components, some of which vary significantly between quarterly and annual periods. The following is a summary of our non-interest income for the three and nine months ended September 30, 2023 and 2022 (in thousands):

48

	Three Months Ended September 30,												Nine Months Ended September 30,
	2023			2022			$ Increase (Decrease)			% Increase (Decrease)			2023			2022			$ Increase (Decrease)			% Increase (Decrease)
Service charges on deposit accounts	$	2,065		$	1,974		$	91			4.61	%	$	5,844		$	5,470		$	374			6.84	%
Brokerage income		1,738			1,919			(181	)		(9.43	)		4,962			5,348			(386	)		(7.22	)
Debit and credit card interchange income, net		2,018			2,046			(28	)		(1.37	)		6,476			6,413			63			0.98
Other fees and commissions		382			376			6			1.60			1,075			1,144			(69	)		(6.03	)
Income on BOLI and annuity contracts		426			357			69			19.33			1,372			1,074			298			27.75
Gain (loss) on sale of loans		628			(56	)		684			1,221.43			1,994			2,669			(675	)		(25.29	)
Mortgage servicing income, net		3			8			(5	)		(62.50	)		7			(19	)		26			136.84
Gain (loss) on sale of fixed assets		(7	)		232			(239	)		(103.02	)		(55	)		260			(315	)		(121.15	)
Gain (loss) on sale of securities		—			(281	)		281			100.00			3			(281	)		284			101.07
Gain (loss) on sale of other assets		(6	)		—			(6	)		(100.00	)		(7	)		8			(15	)		(187.50	)
Other income (loss)		(42	)		47			(89	)		(189.36	)		40			39			1			2.56
Total non-interest income	$	7,205		$	6,622		$	583			8.80	%	$	21,711		$	22,125		$	(414	)		(1.87	%)

The increase in noninterest income for the three months ended September 30, 2023 when compared to the comparable period in 2022 is primarily attributable to an increase in gain on sale of loans, an increase in service charges on deposit accounts, and no loss on the sale of securities, partially offset by decreases in gain on sale of fixed assets and brokerage income. The decrease in noninterest income for the nine months ended September 30, 2023 is primarily attributable to a decrease in gain on sale of loans, a decrease in gain on sale of fixed assets and a decrease in brokerage income, partially offset by an increase in service charges on deposit accounts, increase in gain on sale of securities, and income on BOLI and annuity contracts.

The decrease in gain on sale of loans for the nine months ended September 30, 2023 was due to the higher interest rate environment which contributed to weakened demand for purchase money mortgage loans and refinancing transactions. The volume of mortgage loans originated for the nine months ended September 30, 2023 was $65,269,000 compared to $94,149,000 for the nine months ended September 30, 2022. The mortgage industry expects volume to remain lower throughout the remainder of 2023. In anticipation of the slowing of mortgage origination volume due to the higher rate environment, the Company began to retain servicing rights on some of the loans it originates during the first quarter of 2022.

The increase in gain on sale of loans for the three months ended September 30, 2023 was due to higher mortgage volume compared to the three months ended September 30, 2022. The volume of mortgage loans originated for the three months ended September 30, 2023 and 2022 was $20,435,000 and $15,050,000, respectively. The loss on sale of loans for the three months ended September 30, 2022 resulted from the rise in interest rates in the mortgage market that negatively impacted the fair value of our interest rate lock commitments.

The increase in gain (loss) on sale of securities for the three months ended September 30, 2023 is due to the Company selling securities that were in an unrealized loss position to provide additional liquidity and to restructure the securities portfolio into higher yielding securities in the third quarter of 2022.

The decrease in brokerage income for the three and nine months ended September 30, 2023 is primarily due to overall market declines and the rising interest rate environment causing investors to turn to investment choices perceived as less risky than the stock market, such as CDs and money markets.

The loss on sale of fixed assets in the first nine months of 2023 was attributable to the sale of a company vehicle. The gain on sale of fixed assets for the first nine months of 2022 was primarily attributable to the sale of a lot that was originally purchased for a future branch location.

The increase in service charges on deposit accounts for the three and nine months ended September 30, 2023 primarily was due to an increase in non-sufficient funds charges.

The increase in income on BOLI and annuity contracts for the three and nine months was attributable to the purchase of an additional policy in the second half of 2022.

Non-Interest Expense

Non-interest expense consists primarily of employee costs, occupancy expenses, furniture and equipment expenses, advertising and public relations expenses, data processing expenses, director’s fees, audit, legal and consulting fees, and other operating expenses. The following is a summary of our non-interest expense for the three and nine months ended September 30, 2023 and 2022 (in thousands):

49

	Three Months Ended September 30,										Nine Months Ended September 30,
	2023		2022		$ Increase (Decrease)			% Increase (Decrease)			2023		2022		$ Increase (Decrease)			% Increase (Decrease)
Salaries and employee benefits	$	15,328	$	14,443	$	885			6.13	%	$	45,474	$	43,353	$	2,121			4.89	%
Occupancy expenses, net		1,532		1,422		110			7.74			4,475		4,167		308			7.39
Advertising & public relations expense		910		886		24			2.71			2,607		2,233		374			16.75
Furniture and equipment expense		795		838		(43	)		(5.13	)		2,443		2,547		(104	)		(4.08	)
Data processing expense		2,304		1,908		396			20.75			6,708		5,533		1,175			21.24
Directors’ fees		174		146		28			19.18			493		447		46			10.29
Audit, legal & consulting expenses		413		217		196			90.32			926		635		291			45.83
Other operating expenses		4,200		3,158		1,042			33.00			10,811		9,056		1,755			19.38
Total non-interest expense	$	25,656	$	23,018	$	2,638			11.46	%	$	73,937	$	67,971	$	5,966			8.78	%

The increase in non-interest expense for the three and nine months ended September 30, 2023 when compared to the comparable periods in 2022 is primarily attributable to increases in salaries and employee benefits, data processing expense, advertising expense, occupancy expense, and other operating expenses. Rising costs due to inflationary pressures have placed upward pressure on nearly all of our non-interest expenses categories.

Salaries and employee benefits increased for the three and nine months ended September 30, 2023 compared to the comparable period in 2022 primarily due to an increase in the number of employees necessary to support the Company’s growth in operations and branch count as well as an increase in recruiting costs.

The increase in occupancy expense for the three and nine months ended September 30, 2023 compared to the comparable periods in 2022 is primarily attributable to ongoing branch maintenance, repairs, and branch renovations.

Data processing expense increased for the three and nine months ended September 30, 2023 compared to the comparable periods in 2022 primarily due to an increase in computer maintenance, consumer and business online banking, and computer hardware/license expenses. The computer maintenance expenses increased as a result of, among other items, expenses associated with additional software applications and the number of open accounts. Enhanced business digital solutions, improved digital security for consumers, and an increase in number of customers using digital services accounted for other increases. The Company anticipates that data processing expenses will continue to increase as the Company’s operations grow and the demand for digital products and services from customers increases.

Advertising and public relations expense increased for the three and nine months ended September 30, 2023 due to an increase in customer acquisition costs, marketing expenses associated with the opening of two new branches, as well as an overall increase in the cost of marketing materials.

The increase in audit, legal, and consulting expenses is primarily due to consulting fees associated with the Company's engagement of additional consultants who are providing services in connection with the operation of the business.

The increase in other operating expenses is primarily due to an increase in FDIC assessment costs due to the Bank's growth in 2022.

The efficiency ratio is a common and comparable KPI used in the banking industry. The Company uses this metric to monitor how effective management is at using our internal resources. It is calculated by dividing our non-interest expense by our net interest income plus non-interest income. Our efficiency ratio for the three months ended September 30, 2023 and 2022 was 62.02% and 51.43%, respectively. The efficiency ratio for the nine months ended September 30, 2023 and 2022 was 58.98% and 53.75%, respectively. The increase in the efficiency ratio through the first nine months of 2023 is due to the increase in non-interest expense, as discussed above, outpacing the growth in net interest income and non-interest income.

Income Taxes

The Company’s income tax expense was $10,954,000 for the nine months ended September 30, 2023, a decrease of $1,083,000 over the comparable period in 2022. The percentage of income tax expense to net income before taxes was 22.49% and 22.83% for the nine months ended September 30, 2023 and 2022, respectively. The Company's income tax expense was $3,266,000 for the three months ended September 30, 2023, a decrease of $1,257,000 over the comparable period in 2022. The percentage of income tax expense to net income before taxes was 22.15% and 22.95% for the three months ended September 30, 2023 and 2022, respectively. Our effective tax rate represents our blended federal and state rate of 26.14% affected by the impact of anticipated favorable permanent differences between our book and taxable income such as bank-owned life insurance, income earned on tax-exempt securities and loans, and certain federal and state tax credits.

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Financial Condition

Balance Sheet Summary

The Company’s total assets increased $339,490,000, or 7.92%, to $4,625,140,000 at September 30, 2023 from $4,285,650,000 at December 31, 2022. Loans, net of allowance for credit losses, totaled $3,488,895,000 at September 30, 2023, a 12.05% increase compared to $3,113,796,000 at December 31, 2022. In 2023, management is targeting owner-occupied commercial real estate, residential real estate lending and small business lending as areas of focus. Total liabilities increased by 8.02% to $4,240,042,000 at September 30, 2023 compared to $3,925,198,000 at December 31, 2022.

Loans

The following details the loans of the Company at September 30, 2023 and December 31, 2022:

	September 30, 2023					December 31, 2022
	Balance		% of Portfolio			Balance		% of Portfolio			Balance $ Increase (Decrease)		Balance % Increase (Decrease)
Residential 1-4 family real estate	$	936,759		26.41	%	$	854,970		26.99	%	$	81,789		9.57	%
Commercial and multi-family real estate		1,192,948		33.63			1,064,297		33.60			128,651		12.09
Construction, land development and    farmland		1,001,200		28.23			879,528		27.76			121,672		13.83
Commercial, industrial and agricultural		126,262		3.56			124,603		3.93			1,659		1.33
1-4 family equity lines of credit		187,702		5.29			151,032		4.77			36,670		24.28
Consumer and other		102,020		2.88			93,332		2.95			8,688		9.31
Total loans before net deferred loan    fees	$	3,546,891		100.00	%	$	3,167,762		100.00	%	$	379,129		11.97	%

Overall, the Bank's loan demand and related new loan production has continued to be steady, though loan demand has slightly slowed so far in 2023. The net loan growth of 12.05% from December 31, 2022 reflects the continued emphasis of management on growing the loan portfolio. Contributing to the Company's loan growth through the third quarter of 2023 were the continued population growth and corporate relocations in the Bank's primary market areas, the opening of new branches, and increased marketing efforts. The increase in residential 1-4 family real estate loans is attributable to the Bank successfully growing its residential portfolio through enhanced marketing efforts directed at homebuilders in the Company's market areas, and the increase the Company is seeing in the investor sector of 1-4 family. The increase in construction, land development and farmland loans, commercial and multi-family real estate, and 1-4 family equity lines of credit is primarily attributable to continued economic growth and expansion in the Bank's primary market areas. Although the Company has continued to grow loans through September 30, 2023, the Company expects to experience a decline in demand for loans as interest rates continue to rise, particularly if the economy worsens as a result of persistent elevated levels of inflation and the recessionary environment some are predicting for 2023 and 2024. Although the Bank has grown its loan portfolio through the first three quarters of 2023, and expects to continue to grow the portfolio, it is also moderating the extent of lending to ensure adequate liquidity.

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

Allowance for Credit Losses

On January 1, 2022, we adopted FASB ASU 2016-13, which introduces the current expected credit losses (CECL) methodology and requires us to estimate all expected credit losses over the remaining life of our loan portfolio. The provision for credit losses for loans represents a charge to earnings necessary to establish an allowance for credit losses that, in management’s evaluation, is adequate to provide coverage for all expected credit losses on loans.

The allowance for credit losses for loans represents the portion of the loan's amortized cost basis that we do not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when we believe the

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uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses for loans is based on the loan's amortized cost basis, excluding accrued interest receivables, as we promptly charge off accrued interest receivable determined to be uncollectible. We determine the appropriateness of the allowance through quarterly discounted cash flow modeling of the loan portfolio which considers lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. In future quarters, we may update information and forecasts that may cause significant changes in the estimate in those future quarters.

Our allowance for credit losses for loans at September 30, 2023 reflects an amount deemed appropriate to adequately cover all expected future losses as of the date the allowance is determined based on our allowance for credit losses for loans assessment methodology. Provision for credit losses for loans in 2023 resulted in an increase of the allowance for credit losses for loans (net of charge-offs and recoveries) to $44,701,000 at September 30, 2023 from $39,813,000 at December 31, 2022. The allowance for credit losses for loans was 1.27% of total loans outstanding at September 30, 2023 compared to 1.26% at December 31, 2022. The internally classified loans as a percentage of the allowance for credit losses for loans were 12.8% and 16.0% respectively, at September 30, 2023 and December 31, 2022.

The following schedule provides an allocation of the allowance for credit losses for loans by portfolio segment for the Company as of September 30, 2023 and December 31, 2022:

	In Thousands, Except Percentages
	Amount of Allowance Allocated		Percent of Loans in Each Category to Total Loans			Total Loans			Ratio of Allowance Allocated to Loans in Each Category
September 30, 2023
Residential 1-4 family real estate	$	8,516		26.4	%	$	936,759			0.91	%
Commercial and multi-family real estate		17,068		33.6			1,192,948			1.43
Construction, land development and farmland		14,722		28.2			1,001,200			1.47
Commercial, industrial and agricultural		1,557		3.6			126,262			1.23
1-4 family equity lines of credit		1,482		5.3			187,702			0.79
Consumer and other		1,356		2.9			102,020			1.33
Total	$	44,701		100.0	%		3,546,891			1.26
Net deferred loan fees							(13,295	)
						$	3,533,596			1.27	%
December 31, 2022
Residential 1-4 family real estate	$	7,310		27.0	%	$	854,970			0.86	%
Commercial and multi-family real estate		15,299		33.6			1,064,297			1.44
Construction, land development and farmland		13,305		27.8			879,528			1.51
Commercial, industrial and agricultural		1,437		3.9			124,603			1.15
1-4 family equity lines of credit		1,170		4.8			151,032			0.77
Consumer and other		1,292		2.9			93,332			1.38
Total	$	39,813		100.0	%		3,167,762			1.26
Net deferred loan fees							(14,153	)
						$	3,153,609			1.26	%

The allowance for credit losses for loans is an amount that management believes will be adequate to absorb expected losses on existing loans that may become uncollectible. The allowance for credit losses for loans as a percentage of total loans outstanding at September 30, 2023, net of deferred fees, increased slightly from the year ended December 31, 2022. The increase is primarily due to the increase in our historical modeled loss rates during the first nine months of 2023 due to changes in our macroeconomic forecasts, which are discussed above, together with reductions in our qualitative adjustment relating to changes in international, national, regional, and local conditions over that same period due to the macroeconomic forecast capturing the potential for a recession, that was not captured in our previous forecasts.

We measure expected credit losses over the life of each loan utilizing two models. For residential 1-4 family, commercial and multi-family real estate, construction and land development, commercial and industrial, 1-4 family equity lines of credit, municipal, and certain other loan types, we use discounted cash flow models which measure probability of default and loss given default. For farmland, agricultural, credit cards, auto, and other consumer loans we use the remaining life method to estimate credit losses. The measurement of expected credit losses for loan segments utilizing discounted cash flow is impacted by certain macroeconomic variables. Models are adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.

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In estimating expected credit losses as of September 30, 2023, we utilized the Moody’s Analytics September 2023 Next-Cycle Recession Scenario (the “September N-CR Scenario”) to forecast the macroeconomic variables used in our models. The September N-CR Scenario was based on the review of a variety of surveys of forecasts of the U.S. economy. The September N-CR Scenario projections included, among other things, (i) U.S. Gross Domestic Product (“GDP”) annualized quarterly growth rates in the range of approximately (1.56)% to 1.81% during the next 12 months and (1.29)% to 3.02% in the following 12 months; (ii) a U.S. unemployment rate in the range of approximately 4.08% to 6.03% during the next 12 months and 4.80% to 5.67% in the following 12 months; and (iii) a Home Price Index annualized quarterly growth rates in the range of approximately (5.16)% to 1.26% during the next 12 months and (5.63)% to (1.79)% in the following 12 months. As a result of changes in our macroeconomic forecasts from those forecasted at December 31, 2022, we increased our historical modeled loss rate during the three and nine months ended September 30, 2023.

We adjust model results using qualitative factor ("Q-factor") adjustments. Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of major risk to improvement and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. We increased our historical modeled loss rates during the first nine months of 2023 due to changes in our macroeconomic forecasts, which are discussed above, and reduced our qualitative adjustment relating to changes in international, national, regional, and local conditions over that same period due to the macroeconomic forecast capturing the potential for a recession, that was not captured in our previous forecasts.

Our charge-off policy for collateral dependent loans is similar to our charge-off policy for all loans in that loans are charged-off in the month when a determination is made that the loan is uncollectible. Net charge-offs increased to $793,000 for the nine months ended September 30, 2023, compared to net charge-offs of $548,000 for the same period in 2022. The ratio of net charge-offs to average total outstanding loans was 0.02% for the nine months ended September 30, 2023 and the nine months ended September 30, 2022. Net charge-offs for the three months ended September 30, 2023 was $303,000, an increase from $201,000 for the three months ended September 30, 2022. Overall, the Bank experienced minimal charge-offs during the nine months ended September 30, 2023 and it is expected that charge-offs will be modest for the remainder of 2023; however, a deterioration in local economic conditions may negatively impact charge-offs in the future.

We also maintain an allowance for credit losses on off-balance sheet exposures, which decreased $2,975,000 from December 31, 2022 to $3,161,000 at September 30, 2023 as a result of a decrease in our off-balance sheet commitments and an increase in our unconditionally cancellable commitments.

The level of the allowance and the amount of the provision for credit losses involve evaluation of uncertainties and matters of judgment. The Company maintains an allowance for credit losses for loans which management believes is adequate to absorb losses in the loan portfolio. A formal calculation is prepared quarterly by the Company's Chief Financial Officer and provided to the Board of Directors to determine the adequacy of the allowance for credit losses. The calculation includes an evaluation of historical default and loss experience, current and forecasted economic conditions, an evaluation of qualitative factors, industry and peer bank loan quality indicators and other factors. See the discussion above under “Application of Critical Accounting Policies and Accounting Estimates” for more information. Management believes the allowance for credit losses at September 30, 2023 to be adequate, but if forecasted economic conditions do not meet management’s current expectations, the allowance for credit losses may require an increase through additional provision for credit loss expense which would negatively impact earnings.

For a detailed discussion regarding our allowance for credit losses, see “Provision for Credit Losses and Allowance for Credit Losses” above.

Securities

Securities decreased $67,033,000, or 8.15%, to $755,779,000 at September 30, 2023 from $822,812,000 at December 31, 2022, primarily due to the sale in the second quarter of 2023 of $11,500,000 in securities to increase our liquidity, the maturity of a $5 million security, and a deterioration in the underlying market conditions which caused unrealized losses on our available-for-sale securities to increase by $13,669,000. The average yield, excluding tax equivalent adjustment, of the securities portfolio at September 30, 2023 was 2.14% with a weighted average life of 8.17 years, as compared to an average yield of 2.15% and a weighted average life of 8.25 years at December 31, 2022. The weighted average lives on mortgage-backed securities reflect the repayment rate used for book value calculations.

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Premises and Equipment

Premises and equipment decreased $224,000, or 0.36%, from December 31, 2022 to September 30, 2023. The primary reason for the decrease was due to current year depreciation of $3,194,000, offset by the purchase of equipment and furniture and fixtures, the remodeling of several branches, and an increase in computer software.

Deposits and Other Liabilities

Deposits increased by $293,493,000 in the first nine months of 2023. Included in deposits at September 30, 2023 were $79,423,000 in brokered deposits, compared to $35,024,000 at December 31, 2022. The increase in brokered deposits from December 31, 2022 to September 30, 2023 was the result of management's decision to increase liquidity to fund anticipated loan growth during the remainder of 2023.

The average balance and weighted average interest rate paid for deposit types for the quarters ended September 30, 2023, December 31, 2022 and September 30, 2022 are detailed in the following schedule:

	September 30, 2023					December 31, 2022					September 30, 2022
	Average					Average					Average
	Balance					Balance					Balance
	In		Average			In		Average			In		Average
	Thousands		Rate			Thousands		Rate			Thousands		Rate
Non-interest bearing deposits	$	406,121		—	%	$	431,935		—	%	$	433,421		—	%
Interest-bearing deposits:
Negotiable order of withdrawal accounts		962,195		0.65			1,081,111		0.40			1,095,614		0.19
Money market demand accounts		1,062,736		2.31			1,252,302		1.06			1,272,022		0.51
Time deposits		1,380,133		4.21			679,526		1.62			580,352		0.96
Other savings		317,958		1.59			342,818		0.70			346,317		0.34
Total interest-bearing deposits		3,723,022		2.52	%		3,355,757		0.93	%		3,294,305		0.47	%
Total deposits	$	4,129,143		2.28	%	$	3,787,692		0.82	%	$	3,727,726		0.41	%

At September 30, 2023 and December 31, 2022, we estimate that we had approximately $1.2 billion in uninsured deposits, which are the portion of deposit amounts that exceed the FDIC insurance limit. Approximately 28% of our total deposits exceeded the FDIC deposit insurance limits at September 30, 2023. However, we offer large depositors access to the Certificate of Deposit Account Registry Service (“CDARS”) and the Insured Cash Sweep (“ICS Product”), which allows us to divide customers' deposits that exceed the FDIC insurance limits into smaller amounts, below the FDIC insurance limits, and place those excess deposits in other participating FDIC insured institutions with the convenience of managing all deposit accounts through our Bank. Our total deposits in CDARS and the ICS Products increased to $46,096,000, or 1.10% of total deposits, at September 30, 2023, compared to $4,730,000, or 0.12% of total deposits, at December 31, 2022.

Principal maturities of certificates of deposit and individual retirement accounts at September 30, 2023 are as follows:

	In Thousands
Maturity
2023	$	353,829
2024		912,277
2025		134,865
2026		28,588
2027		18,715
Thereafter		13,109
	$	1,461,383

The increase in total liabilities since December 31, 2022 was composed of a $293,493,000, or 7.54%, increase in total deposits and a $21,351,000, or 65.71%, increase in accrued interest and other liabilities. The increase in total deposits since December 31, 2022 was primarily attributable to growth in market share which resulted in the opening of new deposit accounts, a targeted effort to increase customer time deposits and the increase in brokered deposits mentioned above. The increase in accrued interest and other liabilities since December 31, 2022 was partially attributable to an increase in interest payable on CDs as customers moved from lower earning

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and non-interest earning accounts to take advantage of the higher rates. This increase was also attributable to an increase in employee bonus payable, partially offset by a decrease in reserve for off-balance sheet commitments.

Non-Performing Assets

Non-performing loans, which included nonaccrual loans and loans 90 days past due, at September 30, 2023 totaled $836,000, a decrease of $33,000 from $869,000 at December 31, 2022. Management believes that it is probable that it will incur losses on its non-performing loans but believes that these losses should not exceed the amount in the allowance for credit losses for loans already allocated to these loans, unless there is unanticipated deterioration of local real estate values.

The net non-performing asset ratio (NPA) is used as a measure of the overall quality of the Company's assets. Our NPA ratio is calculated by taking the total of our loans greater than 90 days past due and accruing interest, nonaccrual loans and other real estate owned and dividing that sum by our total assets outstanding. Our NPA ratio for the periods ended September 30, 2023 and December 31, 2022 was 0.02% and 0.02%, respectively.

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

At September 30, 2023 the Company had a recorded investment in collateral dependent loans totaling $4,866,000, an increase from a recorded investment in collateral dependent loans totaling $638,000 at December 31, 2022. The increase during the nine months ended September 30, 2023 as compared to December 31, 2022 is primarily due to the addition of two 1-4 family real estate relationships and the addition of two commercial real estate relationships. As of September 30, 2023 and December 31, 2022, no valuation allowance was recorded on collateral dependent loans. The allowance for credit losses for loans related to collateral dependent loans was measured based upon the estimated fair value of related collateral.

At September 30, 2023 as a result of payoffs and upgrades to certain loans to a pass rating, our internally classified loans decreased $645,000, or 10.12%, to $5,731,000 from $6,376,000 at December 31, 2022. Classified loan balances have remained relatively consistent due to the stable markets in which we operate; however, if short-term rates continue to rise or remain elevated for a significant period of time and economic conditions worsen, our classified loan balances could increase. Loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement.

Liquidity and Asset Liability Management

Liquidity

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 a measure of our ability to meet our cash flow requirements, including inflows and outflows of cash for depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs. Several factors influence our liquidity needs, including depositor and borrower activity, interest rate trends, changes in the economy, maturities, re-pricing and interest rate sensitivity of our debt securities, loan portfolio and deposits. We strive to maintain appropriate levels of liquidity. We calculate our liquidity ratio by taking cash and due from banks, interest bearing deposits, federal funds sold, and available-for-sale debt securities not pledged as collateral and dividing by total assets. Our total liquidity ratios were 10.54% at September 30, 2023 and 12.21% at December 31, 2022. The decline in our liquidity ratio is primarily attributable to a decrease in the amount of available-for-sale securities not pledged as collateral.

The Company’s primary source of liquidity is a stable core deposit base. In addition, Federal funds purchased, FHLB advances, and brokered deposits provide a secondary source. These sources of liquidity are generally short-term in nature and are used to fund asset growth and meet other short-term liquidity needs. Liquidity needs can also be met from loan payments and investment security sales or maturities. While maturities and scheduled amortization of loans and debt securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition. At September 30, 2023, the Company’s liquid assets totaled $487.3 million, a decrease from $522.7 million at December 31, 2022, though a portion of these liquid assets include available-for-sale securities that are in an unrealized loss position at September 30, 2023. If the Company was required to sell any of these securities, including to meet liquidity needs, while they are in an unrealized loss position the Company would be required to recognize the loss on those securities through the income statement when they are sold. Recognition of these losses would negatively impact the Bank's and the Company's regulatory capital levels. Additionally, as of September 30, 2023, the Company

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had available approximately $127.2 million in unused federal funds lines of credit with regional banks and, subject to certain restrictions and collateral requirements, approximately $519.3 million of borrowing capacity with the Federal Home Loan Bank of Cincinnati to meet short term funding needs. The Company maintains a formal asset and liability management process in an effort to quantify, monitor and control interest rate risk and to assist management as management seeks to maintain stability in net interest margin under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines and competitive market conditions.

Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, or the need to fund loan demand or other liquidity needs. At September 30, 2023, securities totaling approximately $35,598,000 mature or will be subject to rate adjustments within the next twelve months.

A secondary source of liquidity is the Company’s loan portfolio. At September 30, 2023, loans totaling approximately $1.2 billion either will become due or will be subject to rate adjustments within twelve months from that date.

As for liabilities, at September 30, 2023, certificates of deposit of $250,000 or greater totaling approximately $467.2 million will become due or reprice during the next twelve months. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit accounts and regular savings accounts. Management does not anticipate that there will be significant withdrawals from these accounts in the future.

Management believes that with present maturities, borrowing capacity with the Federal Home Loan Bank of Cincinnati and the efforts of management in its asset/liability management program, the Company should be able to meet its liquidity needs in the near term future.

Asset Liability Management

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

The Company also uses simulation modeling to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. The Company's Asset Liability Committee meets quarterly to analyze the interest rate shock simulation. The interest rate shock simulation model is based on a number of assumptions. These assumptions include, but are not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows and balance sheet management strategies. We model instantaneous change in interest rates using a growth in the balance sheet as well as a flat balance sheet to understand the impact to earnings and capital. Based on the Company's IRR simulation, the Company had a neutral interest-rate risk position as of September 30, 2023,though the Company’s net interest margin and earnings could be negatively impacted if short-term rates continue to rise and competitive pressures in the Company's market areas force the Company to increase deposit rates faster than it is able to increase yields on loans. As discussed elsewhere herein, the Bank anticipates that its net interest margin is likely to contract during the remainder of 2023 because of such competitive pressures, the elevated rate environment we are currently experiencing that is expected to continue in the near term and costs of increased brokered deposits. The Company also uses Economic Value of Equity (“EVE”) sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest rate scenarios. The EVE is a longer term view of interest rate risk because it measures the present value of the future cash flows. Presented below is the estimated impact on the Bank’s net interest income and EVE as of September 30, 2023, assuming an immediate shift in interest rates:

	% Change from Base Case for Immediate Parallel Changes in Rates
	-300 BP			-200 BP			-100 BP			+100 BP			+200 BP			+300 BP
Net interest income		(6.59	)%		(3.34	)%		(1.43	)%		(2.71	)%		(5.23	)%		(7.88	)%
EVE		(10.00	)%		(3.03	)%		0.18	%		(3.18	)%		(6.75	)%		(10.74	)%

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

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degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, hedging strategies that we may institute, and changing product spreads that could mitigate any potential adverse impact of changes in interest rates.

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

In addition to the ALCO, the Audit Committee as well as the Chief Risk Officer are all responsible for the “risk management framework” of the Company. The ALCO meets monthly and the Audit Committee meets quarterly, with the authority to convene additional meetings, as circumstances require.

Off Balance Sheet Arrangements

At September 30, 2023, we had unfunded loan commitments outstanding of $1,042,881,000 and outstanding standby letters of credit of $103,349,000, compared to $1,217,963,000 and $118,064,000, respectively, at December 31, 2022. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. Additionally, the Bank could sell participations in these or other loans to correspondent banks. As mentioned above, the Bank has historically been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments, investment security maturities and short-term borrowings.

Capital Position and Dividends

At September 30, 2023, total shareholders’ equity was $385,098,000, or 8.33% of total assets, which compares with $360,452,000, or 8.41% of total assets, at December 31, 2022. The dollar increase in shareholders’ equity during the nine months ended September 30, 2023 is the result of the net effect of $727,000 related to stock option compensation, restricted share awards, restricted share units, and performance share units, the Company’s net earnings of $37,716,000 and proceeds from the issuance of common stock related to exercise of stock options of $550,000. Also included was $41,000 of net earnings attributable to Encompass. The increase in shareholders' equity was partially offset by cash dividends declared of $17,303,000, net of $12,978,000 reinvested under the Company’s dividend reinvestment plan, and $10,063,000 of unrealized losses on investment securities (described elsewhere in this report), net of applicable income tax benefit of $3,560,000.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.

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

There have been no material changes in reported market risks during the nine months ended September 30, 2023.

Item 4. Controls and Procedures

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

Overall, there were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Not applicable

Item 1A. RISK FACTORS

There were no material changes to the Company’s risk factors as previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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

(a)None

(b)Not applicable.

(c)None

Item 3. DEFAULTS UPON SENIOR SECURITIES

(a)None

(b)Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable

Item 5. OTHER INFORMATION

During the quarter ended September 30, 2023, no officer or director of the Company adopted or terminated any "Rule 10b5-1 trading arrangement" or "non-rule 10b5-1 trading arrangement" as such terms are defined in Item 408(a) and (c) of Regulation S-K.

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Item 6. EXHIBITS

31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*	Management compensatory plan or contract.

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SIGNATURES

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

	WILSON BANK HOLDING COMPANY
	(Registrant)
DATE: November 8, 2023	/s/ John C. McDearman III
	John C. McDearman III
	President and Chief Executive Officer (Principal Executive Officer)
DATE: November 8, 2023	/s/ Lisa Pominski
	Lisa Pominski
	Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)

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