WILSON BANK HOLDING CO (Form: 10-Q, Received: 11/09/2020 10:29:21)

0000885275 WILSON BANK HOLDING CO false --12-31 Q3 2020 565,109 420,207 2.00 2.00 50,000,000 50,000,000 10,984,000 10,984,000 10,792,999 10,792,999 2,586 245 6 231 2,452 2,653 0 11 111 70 0.60 88,953 509 6 0.55 87,712 919 220 1.20 180,424 10,577 2,341 1.10 179,199 12,428 2,723 31,774 2,341 2,723 0 0 1 5 0 0 9 0 0 2016 2017 2018 2019 2017 2018 2019 2 The Community Bank Leverage Ratio will revert to 9% at the earlier of December 31, 2020 and 60 days following the end of the national emergency declared with respect to COVID-19. 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. mount is net of a valuation allowance of $768,000 at September 30, 2020 and $1,136,000 at December 31, 2019 as required by ASC 310, “Receivables.” Estimated fair values are consistent with an exit-price concept. 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Table of Contents

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, 2020

☐

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

For the transition period from to

Commission File Number 0-20402

WILSON BANK HOLDING COMPANY

(Exact name of registrant as specified in its charter)

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

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

(615) 444-2265

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

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

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

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

Common stock outstanding: 10,984,050 shares at November 9, 2020

Table of Contents

*Part I:*	*FINANCIAL INFORMATION*	3

Item 1.	Financial Statements.	3

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

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

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

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

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

	Consolidated Statements of Cash Flows — For the nine months ended September 30, 2020 and 2019.	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	46

	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.	46

*Part II:*	*OTHER INFORMATION*	47

Item 1.	Legal Proceedings.	47

Item 1A.	Risk Factors.	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	49

Item 3.	Defaults Upon Senior Securities.	49

Item 4.	Mine Safety Disclosures.	49

Item 5.	Other Information.	49

Item 6.	Exhibits.	49

Signatures		50

EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO
EX-101.INS
EX-101.SCH
EX-101.CAL
EX-101.DEF
EX-101.LAB
EX-101.PRE

EX-104

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

WILSON BANK HOLDING COMPANY

Consolidated Balance Sheets

September 30, 2020 and December 31, 2019

	(Unaudited)			(Audited)
	September 30, 2020			December 31, 2019
	(Dollars in Thousands Except Share Amounts)
Assets
Loans	$	2,288,195		$	2,085,901
Less: Allowance for loan losses		(35,441	)		(28,726	)
Net loans		2,252,754			2,057,175
Available-for-sale, at market (amortized cost $565,109 and $420,207, respectively)		575,003			421,145
Loans held for sale		36,606			18,179
Interest bearing deposits		220,311			126,827
Restricted equity securities		5,089			4,680
Federal funds sold		675			20,000
Total earning assets		3,090,438			2,648,006
Cash and due from banks		24,871			12,943
Bank premises and equipment, net		58,870			60,295
Accrued interest receivable		7,985			5,945
Deferred income tax asset		4,697			6,136
Other real estate		1,030			697
Bank owned life insurance		34,979			31,762
Other assets		28,959			23,620
Goodwill		4,805			4,805
Total assets	$	3,256,634		$	2,794,209
Liabilities and Stockholders’ Equity
Deposits	$	2,833,582		$	2,417,605
Federal Home Loan Bank advances		17,183			23,613
Accrued interest and other liabilities		34,978			16,007
Total liabilities		2,885,743			2,457,225
Stockholders’ equity:
Common stock, $2.00 par value; authorized 50,000,000 shares, issued and outstanding 10,984,000 and 10,792,999 shares, respectively		21,968			21,586
Additional paid-in capital		92,582			82,249
Retained earnings		249,033			232,456
Net unrealized gains on available-for-sale securities, net of income taxes of $2,586 and $245, respectively		7,308			693
Total stockholders’ equity		370,891			336,984
Total liabilities and stockholders’ equity	$	3,256,634		$	2,794,209

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Earnings

Three Months and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
	(Dollars in Thousands Except Per Share Amounts)						(Dollars in Thousands Except Per Share Amounts)
Interest income:
Interest and fees on loans	$	28,590		$	27,035		$	85,120		$	79,020
Interest and dividends on securities:
Taxable securities		1,739			2,318			5,609			6,428
Exempt from federal income taxes		346			217			859			535
Interest on loans held for sale		166			85			392			230
Interest on federal funds sold		—			113			56			171
Interest on balances held at depository institutions		91			517			485			1,652
Interest and dividends on restricted securities		29			44			96			144
Total interest income		30,961			30,329			92,617			88,180
Interest expense:
Interest on negotiable order of withdrawal accounts		294			619			1,064			1,807
Interest on money market and savings accounts		1,009			1,807			3,431			5,338
Interest on time deposits		2,685			3,371			8,509			9,566
Interest on federal funds purchased		—			4			—			4
Interest on Federal Home Loan Bank advances		124			190			410			410
Total interest expense		4,112			5,991			13,414			17,125
Net interest income before provision for loan losses		26,849			24,338			79,203			71,055
Provision for loan losses		1,038			167			6,631			1,354
Net interest income after provision for loan losses		25,811			24,171			72,572			69,701
Non-interest income:
Service charges on deposit accounts		1,391			1,756			4,159			5,114
Other fees and commissions		4,063			3,765			11,468			10,660
Income on BOLI and annuity contracts		214			204			609			608
Gain on sale of loans		3,775			1,870			6,808			5,131
Loss on the sale of fixed assets		(4	)		(1	)		(4	)		(2	)
Gain (loss) on sale of other real estate		(8	)		(35	)		652			(48	)
Gain (loss) on sale of securities		—			41			425			(268	)
Gain (loss) on sale of other assets		2			(3	)		2			(3	)
Other income		61			—			61			—
Total non-interest income		9,494			7,597			24,180			21,192
Non-interest expense:
Salaries and employee benefits		11,956			10,440			34,573			31,101
Occupancy expenses, net		1,406			1,242			3,879			3,567
Advertising & public relations expense		702			540			1,790			1,638
Furniture and equipment expense		849			784			2,417			2,337
Data processing expense		1,298			1,161			3,715			3,136
ATM & interchange expense		1,054			867			2,805			2,529
Directors’ fees		142			142			439			404
Audit, legal & consulting expenses		233			372			620			1,096
Other operating expenses		2,996			2,664			9,175			8,196
Total non-interest expense		20,636			18,212			59,413			54,004
Earnings before income taxes		14,669			13,556			37,339			36,889
Income taxes		3,137			3,290			7,749			8,817
Net earnings	$	11,532		$	10,266		$	29,590		$	28,072
Weighted average number of common shares outstanding-basic		10,963,411			10,766,738			10,907,251			10,729,065
Weighted average number of common shares outstanding-diluted		10,991,167			10,786,752			10,932,925			10,746,130
Basic earnings per common share	$	1.05		$	0.95		$	2.71		$	2.62
Diluted earnings per common share	$	1.05		$	0.95		$	2.71		$	2.61
Dividends per common share	$	0.60		$	0.55		$	1.20		$	1.10

See accompanying notes to consolidated financial statements (unaudited)

Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Comprehensive Earnings

Three Months and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020		2019			2020			2019
	(In Thousands)
Net earnings	$	11,532	$	10,266		$	29,590		$	28,072
Other comprehensive earnings , net of tax:
Unrealized gains on available-for-sale securities arising during period, net of taxes of $6, $231, $2,452, and $2,653, respectively		16		655			6,929			7,499
Reclassification adjustment for net losses (gains) on the sale of securities included in net earnings, net of taxes of $0, $11, $111, and $70, respectively		—		(30	)		(314	)		198
Other comprehensive earnings		16		625			6,615			7,697
Comprehensive earnings	$	11,548	$	10,891		$	36,205		$	35,769

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Consolidated Statements of Changes in Stockholders’ Equity

Three Months and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

	*Dollars In Thousands*
	*Common Stock*		*Additional Paid-In Capital*		*Retained Earnings*			*Net Unrealized Gain (Loss) On Available-For-Sale Securities*			*Total*
Three months ended:
September 30, 2020
Balance at beginning of period	$	21,789		87,592		244,038			7,292			360,711
Cash dividends declared, $.60 per share		—		—		(6,537	)		—			(6,537	)
Issuance of 88,953 shares of common stock pursuant to dividend reinvestment plan		178		4,870		—			—			5,048
Issuance of 509 shares of common stock pursuant to exercise of stock options, net		1		21		—			—			22
Share based compensation expense		—		99		—			—			99
Net change in fair value of available-for-sale securities during the period, net of taxes of $6		—		—		—			16			16
Net earnings for the quarter		—		—		11,532			—			11,532
Balance at end of period	$	21,968		92,582		249,033			7,308			370,891

September 30, 2019
Balance at beginning of period	$	21,390		77,331		220,100			(633	)		318,188
Cash dividends declared, $.55 per share		—		—		(5,882	)		—			(5,882	)
Issuance of 87,712 shares of common stock pursuant to the dividend reinvestment plan		175		4,408		—			—			4,583
Issuance of 919 shares of common stock pursuant to exercise of stock options		2		26		—			—			28
Share based compensation expense		—		83		—			—			83
Net change in fair value of available-for-sale securities during the period, net of taxes of $220		—		—		—			625			625
Net earnings for the quarter		—		—		10,266			—			10,266
Balance at end of period	$	21,567		81,848		224,484			(8	)		327,891

	*Dollars In Thousands*
	*Common Stock*			*Additional Paid-In Capital*			*Retained Earnings*			*Net Unrealized Gain (Loss) On Available-For-Sale Securities*			*Total*
Nine Months Ended:
September 30, 2020
Balance at beginning of period	$	21,586			82,249			232,456			693			336,984
Cash dividends declared, $1.20 per share		—			—			(13,013	)		—			(13,013	)
Issuance of 180,424 shares of common stock pursuant to dividend reinvestment plan		361			9,695			—			—			10,056
Issuance of 10,577 shares of common stock pursuant to exercise of stock options, net		21			326			—			—			347
Share based compensation expense		—			312			—			—			312
Net change in fair value of available-for-sale securities during the period, net of taxes of $2,341		—			—			—			6,615			6,615
Net earnings for the period		—			—			29,590			—			29,590
Balance at end of period	$	21,968			92,582			249,033			7,308			370,891

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

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2020 and 2019

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

	Nine Months Ended September 30,
	2020			2019
	(In Thousands)
Cash flows from operating activities:
Interest received	$	93,855		$	89,856
Fees and commissions received		15,690			15,774
Proceeds from sale of loans held for sale		151,014			114,385
Origination of loans held for sale		(162,633	)		(112,553	)
Interest paid		(13,968	)		(16,104	)
Cash paid to suppliers and employees		(49,250	)		(48,143	)
Income taxes paid		(10,290	)		(8,915	)
Net cash provided by operating activities		24,418			34,300
Cash flows from investing activities:
Proceeds from maturities, calls, and principal payments of available-for-sale securities		152,591			53,211
Proceeds from the sale of available-for-sale securities		24,028			37,325
Purchase of available-for-sale securities		(324,197	)		(233,765	)
Loans made to customers, net of repayments		(202,994	)		59,366
Purchase of restricted equity securities		(409	)		(1,668	)
Purchase of bank owned life insurance and annuities		(4,662	)		—
Purchase of premises and equipment		(1,734	)		(3,229	)
Proceeds from sale of other real estate		1,311			767
Proceeds from sale of other assets		4			14
Net cash used in investing activities		(356,062	)		(87,979	)
Cash flows from financing activities:
Net increase in non-interest bearing, savings and NOW deposit accounts		429,271			118,383
Net increase (decrease) in time deposits		(13,294	)		26,628
Net increase (decrease) in Federal Home Loan Bank advances		(6,430	)		26,413
Escrow payable, net		10,794			1,606
Common stock dividends paid		(13,013	)		(11,725	)
Proceeds from sale of common stock pursuant to dividend reinvestment plan		10,056			9,134
Repurchase of common stock		—			(1,629	)
Proceeds from exercise of stock options		347			437
Net cash provided by financing activities		417,731			169,247
Net increase in cash and cash equivalents		86,087			115,568
Cash and cash equivalents at beginning of period		159,770			99,191
Cash and cash equivalents at end of period	$	245,857		$	214,759

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows, Continued

Nine Months Ended September 30, 2020 and 2019

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

	Nine Months Ended September 30,
	2020			2019
	(In Thousands)
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings	$	29,590		$	28,072
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization, and accretion		6,256			4,642
Provision for loan losses		6,631			1,354
Loss (gain) on sale of other real estate		(652	)		48
Loss (gain) on sale of securities		(425	)		268
Share-based compensation expense		312			265
Loss (gain) on the sale of other assets		(2	)		3
Loss on the sale of bank premises and equipment		4			2
Increase in derivative liability, net		177			—
Increase in loans held for sale		(18,427	)		(3,299	)
Deferred tax benefit		(902	)		(1,017	)
Increase in other assets, bank owned life insurance and annuity contract earnings, net		(3,891	)		(3,379	)
Decrease (increase) in interest receivable		(2,040	)		20
Increase in other liabilities		9,980			5,381
Increase (decrease) in taxes payable		(1,639	)		919
Increase (decrease) in interest payable		(554	)		1,021
Total adjustments		(5,172	)		6,228
Net cash provided by operating activities	$	24,418		$	34,300

Supplemental schedule of non-cash activities:
Unrealized gain in value of securities available-for-sale, net of taxes of $2,341 and $2,723 for the nine months ended September 30, 2020 and 2019, respectively	$	6,615		$	7,697
Non-cash transfers from loans to other real estate	$	992		$	847
Non-cash transfers from other real estate to loans	$	-		$	544
Non-cash transfers from loans to other assets	$	5		$	2

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

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

Basis of Presentation — The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements and related notes appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

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

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, the valuation of deferred tax assets, determination of any impairment of goodwill or other intangibles, other-than-temporary impairment of securities, the valuation of other real estate, 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, 2019. 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, 2019.

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

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

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

All loans that are placed on nonaccrual are further analyzed to determine if they should be classified as impaired loans. At December 31, 2019 and September 30, 2020, there were no loans classified as nonaccrual that were not also deemed to be impaired except for those loans not individually evaluated for impairment as described below. A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan. This determination is made using one or more of a variety of techniques, which include a review of the borrower’s financial condition, debt-service coverage ratios, global cash flow analysis, guarantor support, other loan file information, meetings with borrowers, inspection or reappraisal of collateral and/or consultation with legal counsel as well as results of reviews of other similar industry credits (e.g. builder loans, development loans, church loans, etc). Loans with an identified weakness and principal balance of $500,000 or more are subject to individual identification for impairment. Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a specific valuation allowance is established as a component of the allowance for loan losses or, in the case of collateral dependent loans, the excess may be charged off. Changes to the valuation allowance are recorded as a component of the provision for loan losses. Any subsequent adjustments to present value calculations for impaired loan valuations as a result of the passage of time, such as changes in the anticipated payback period for repayment, are recorded as a component of the provision for loan losses. For loans less than $500,000, the Company assigns a valuation allowance to these loans utilizing an allocation rate equal to the allocation rate calculated for non-impaired loans of a similar type.

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

In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, independent loan reviewers, and reviews that may have been conducted by third-party reviewers. We incorporate relevant loan review results in the loan impairment determination. In addition, regulatory agencies, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to record adjustments to the allowance based on their judgment about information available to them at the time of their examinations.

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Recently Issued Accounting Pronouncements

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

ASU 2016-13 was originally to become effective for us on January 1, 2020. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security ("CARES") Act. The law contains several provisions, among them, it gives lenders, including the Company, the option to defer the implementation of ASU 2016-13, which is known as the Current Expected Credit Losses (CECL) standard, until 60 days after the declaration of the end of the public health emergency related to the COVID-19 pandemic or December 31, 2020, whichever comes first. In addition, the Securities and Exchange Commission (SEC) staff has stated that opting to delay the implementation of CECL shall be considered to be in accordance with generally accepted accounting principles. As a result, the Company has elected to delay implementation of CECL.

We currently believe the adoption of ASU 2016-13 would have resulted in an approximately 4 - 6% increase in our allowance for loan losses as of January 1, 2020. That expected increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As of September 30, 2020, we currently believe the adoption of ASU 2016-13 would have resulted in an approximately 4 - 6% increase in our allowance for loan losses over the level recorded at September 30, 2020. Although our current CECL calculation came out to be about the same as our calculation under the incurred loss model, under CECL we would have added an additional reserve related to economic forecasts in light of COVID-19, thus causing the estimated 4 - 6% increase.

Prior to the CARES Act being signed and the Company’s decision to delay the implementation of CECL, the Company was completing its CECL implementation plan with a cross-functional working group, under the direction of the Chief Credit Officer along with our Chief Financial Officer. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. The Company’s implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. The Company contracted with a third-party vendor to assist it in the implementation of CECL. As we are currently finalizing the execution of our implementation controls and processes, the ultimate impact of the adoption of ASU 2016-13 could differ from our current expectation. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for available-for-sale securities and other financial assets and it also applies to off-balance sheet credit exposure like loan commitments and other investments; however, we do not expect these allowances to be significant. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios. During the quarter ended September 30, 2020, the Company continued its implementation efforts related to CECL.

ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 became effective for us on January 1, 2020, and did not have a significant impact on our financial statements.

ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 became effective for us on January 1, 2020 and did not have a significant impact on our financial statements.

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

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Note 2. Loans and Allowance for Loan Losses

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

The following schedule details the loans of the Company at September 30, 2020 and December 31, 2019:

	(In Thousands)
	September 30, 2020			December 31, 2019
Mortgage loans on real estate:
Residential 1-4 family	$	531,485		$	511,250
Multifamily		123,650			97,104
Commercial		846,521			793,379
Construction and land development		430,599			425,185
Farmland		16,422			19,268
Second mortgages		9,239			10,760
Equity lines of credit		77,492			72,379
Total mortgage loans on real estate		2,035,408			1,929,325
Commercial loans		189,655			98,265
Agricultural loans		1,318			1,569
Consumer installment loans
Personal		57,170			50,532
Credit cards		4,079			4,302
Total consumer installment loans		61,249			54,834
Other loans		9,474			9,049
Total loans before net deferred loan fees		2,297,104			2,093,042
Net deferred loan fees		(8,909	)		(7,141	)
Total loans		2,288,195			2,085,901
Less: Allowance for loan losses		(35,441	)		(28,726	)
Net loans	$	2,252,754		$	2,057,175

Risk characteristics relevant to each portfolio segment are as follows:

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

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

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

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

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

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Also included in this category are PPP loans guaranteed by the SBA, which totaled $84.7 million at September 30, 2020. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower, if any. The cash flows of borrowers, however, may not be as expected and any collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

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

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, current and anticipated economic conditions, historical loss experience, industry and peer bank loan quality indicators and other pertinent factors, including regulatory recommendations.

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Transactions in the allowance for loan losses for the nine months ended September 30, 2020 and 2019 and year ended December 31, 2019 are summarized as follows:

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

	Residential 1-4 Family			Multifamily			Commercial Real Estate			Construction			Farmland			Second Mortgages		Equity Lines of Credit		Commercial			Agricultural, Installment and Other			Total
December 31, 2019
Allowance for loan losses:
Beginning balance	$	6,297			1,481			9,753			7,084			221			118		731		622			867			27,174
Provision		838			(364	)		1,484			(1,510	)		(34	)		5		158		422			1,041			2,040
Charge-offs		(15	)		—			(173	)		—			—			—		—		(15	)		(1,160	)		(1,363	)
Recoveries		24			—			50			423			—			—		—		15			363			875
Ending balance	$	7,144			1,117			11,114			5,997			187			123		889		1,044			1,111			28,726
Ending balance individually evaluated for impairment	$	795			—			341			—			—			—		—		—			—			1,136
Ending balance collectively evaluated for impairment	$	6,349			1,117			10,773			5,997			187			123		889		1,044			1,111			27,590
Loans:
Ending balance	$	511,250			97,104			793,379			425,185			19,268			10,760		72,379		98,265			65,452			2,093,042
Ending balance individually evaluated for impairment	$	2,569			—			2,471			—			—			—		—		—			—			5,040
Ending balance collectively evaluated for impairment	$	508,681			97,104			790,908			425,185			19,268			10,760		72,379		98,265			65,452			2,088,002

	Residential 1-4 Family			Multifamily			Commercial Real Estate		Construction			Farmland			Second Mortgages		Equity Lines of Credit		Commercial			Agricultural, Installment and Other			Total
September 30, 2019
Allowance for loan losses:
Beginning balance	$	6,297			1,481			9,753		7,084			221			118		731		622			867			27,174
Provision		285			(261	)		1,632		(1,564	)		(23	)		11		123		338			813			1,354
Charge-offs		(14	)		—			—		—			—			—		—		(15	)		(824	)		(853	)
Recoveries		20			—			—		408			—			—		—		15			267			710
Ending balance	$	6,588			1,220			11,385		5,928			198			129		854		960			1,123			28,385
Ending balance individually evaluated for impairment	$	789			—			915		—			—			—		—		—			—			1,704
Ending balance collectively evaluated for impairment	$	5,799			1,220			10,470		5,928			198			129		854		960			1,123			26,681
Loans:
Ending balance	$	468,772			106,072			745,080		410,494			20,425			11,204		69,666		90,450			67,602			1,989,765
Ending balance individually evaluated for impairment	$	2,648			—			3,195		—			—			—		—		—			—			5,843
Ending balance collectively evaluated for impairment	$	466,124			106,072			741,885		410,494			20,425			11,204		69,666		90,450			67,602			1,983,922

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Impaired Loans

At September 30, 2020, the Company had certain impaired loans of $311,000 which were on non-accruing interest status. At December 31, 2019, the Company had certain impaired loans of $2.6 million which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The rest of the Company's impaired loans as of such dates remained on accruing status. The following table presents the Company’s impaired loans at September 30, 2020 and December 31, 2019.

	In Thousands
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2020
With no related allowance recorded:
Residential 1-4 family	$	139		138		—		377		6
Multifamily		—		—		—		—		—
Commercial real estate		311		311		—		471		—
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	450		449		—		848		6
With related allowance recorded:
Residential 1-4 family	$	1,267		1,265		612		1,335		49
Multifamily		—		—		—		—		—
Commercial real estate		672		668		156		891		24
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	1,939		1,933		768		2,226		73
Total
Residential 1-4 family	$	1,406		1,403		612		1,712		55
Multifamily		—		—		—		—		—
Commercial real estate		983		979		156		1,362		24
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	2,389		2,382		768		3,074		79

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	In Thousands
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2019
With no related allowance recorded:
Residential 1-4 family	$	1,090		1,464		—		1,090		99
Multifamily		—		—		—		—		—
Commercial real estate		951		1,124		—		910		17
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	2,041		2,588		—		2,000		116
With related allowance recorded:
Residential 1-4 family	$	1,489		1,480		795		1,590		83
Multifamily		—		—		—		—		—
Commercial real estate		1,522		1,520		341		2,015		17
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	3,011		3,000		1,136		3,605		100
Total:
Residential 1-4 family	$	2,579		2,944		795		2,680		182
Multifamily		—		—		—		—		—
Commercial real estate		2,473		2,644		341		2,925		34
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	5,052		5,588		1,136		5,605		216

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

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Troubled Debt Restructuring

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

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

	September 30, 2020		December 31, 2019
	(In thousands)
Performing TDRs	$	2,168	$	3,080
Nonperforming TDRs		638		1,467
Total TDRS	$	2,806	$	4,547

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

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

As of September 30, 2020 and September 30, 2019 the Company had no loan relationships that had been previously classified as a TDR subsequently default within twelve months of restructuring.

In response to the COVID-19 pandemic and its economic impact to the Bank’s customers, the Bank proactively began providing relief to its customers in the middle of March 2020 through a 90 day interest only payment option or a full 90 day payment deferral option. Following the passage of the CARES Act the Bank expanded this program to provide a six-month interest only payment option in an effort to provide flexibility to its customers as they navigate these uncertain times. Pursuant to interagency regulatory guidance and the CARES Act, the Bank may elect to not classify loans as troubled debt restructurings for which these deferrals are granted between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. As of September 30, 2020, the Bank had 48 loans, totaling $79.1 million in aggregate principal amount for which principal or both principal and interest were being deferred.

As of September 30, 2020, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to approximately $134,000. As of December 31, 2019, the Company did not have any consumer mortgage loans in the process of foreclosure.

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Potential problem loans, which include nonperforming loans, amounted to approximately $8.5 million at September 30, 2020 and $10.7 million at December 31, 2019. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.

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

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

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

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

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

	(In Thousands)
	Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction		Farmland		Second Mortgages		Equity Lines of Credit		Commercial		Agricultural, installment and other		Total
September 30, 2020
Credit Risk Profile by Internally Assigned Rating
Pass	$	524,750		123,650		845,927		430,537		16,288		8,951		77,086		189,615		71,827		2,288,631
Special Mention		3,929		—		—		32		80		170		311		—		126		4,648
Substandard		2,806		—		594		30		54		118		95		40		88		3,825
Doubtful		—		—		—		—		—		—		—		—		—		—
Total	$	531,485		123,650		846,521		430,599		16,422		9,239		77,492		189,655		72,041		2,297,104
December 31, 2019
Credit Risk Profile by Internally Assigned Rating
Pass	$	503,861		97,104		791,610		424,517		19,106		10,458		72,237		98,243		65,255		2,082,391
Special Mention		2,923		—		—		635		103		174		—		—		101		3,936
Substandard		4,466		—		1,769		33		59		128		142		22		96		6,715
Doubtful		—		—		—		—		—		—		—		—		—		—
Total	$	511,250		97,104		793,379		425,185		19,268		10,760		72,379		98,265		65,452		2,093,042

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Note 3. Leases

Lessee Accounting

The majority of leases in which the Company is the lessee are comprised of real estate property for branches and office space and are recorded as operating leases with terms extending through 2022.

The following table represents lease assets and lease liabilities as of September 30, 2020 and December 31, 2019.

Lease right-of-use assets	Classification		September 30, 2020				December 31, 2019
Operating lease right-of-use assets	Other Assets		$	3,922				2,573

Lease liabilities	Classification		September 30, 2020				December 31, 2019
Operating lease liabilities	Other Liabilities		$	4,040				2,614

Note 4. 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, 2020 and December 31, 2019 are summarized as follows:

	September 30, 2020
	Securities Available-For-Sale
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
U.S. Government-sponsored enterprises (GSEs)	$	116,457	$	429	$	78	$	116,808
Mortgage-backed securities		296,845		6,877		607		303,115
Asset-backed securities		26,717		495		133		27,079
Corporate bonds		2,500		11		—		2,511
Obligations of states and political subdivisions		122,590		3,253		353		125,490
	$	565,109	$	11,065	$	1,171	$	575,003

	December 31, 2019
	Securities Available-For-Sale
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
U.S. Government-sponsored enterprises (GSEs)	$	59,735	$	48	$	204	$	59,579
Mortgage-backed securities		265,648		2,300		635		267,313
Asset-backed securities		27,531		1		303		27,229
Corporate bonds		—		—		—		—
Obligations of states and political subdivisions		67,293		559		828		67,024
	$	420,207	$	2,908	$	1,970	$	421,145

Included in mortgage-backed securities are collateralized mortgage obligations totaling $89,532,000 (fair value of $90,546,000) and $46,994,000 (fair value of $47,442,000) at September 30, 2020 and December 31, 2019, respectively.

The amortized cost and estimated market value of debt securities at September 30, 2020 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-For-Sale
	In Thousands
	Amortized Cost		Estimated Market Value
Due in one year or less	$	1,662	$	1,663
Due after one year through five years		42,049		42,662
Due after five years through ten years		125,488		127,325
Due after ten years		395,910		403,353
	$	565,109	$	575,003

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

	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
September 30, 2020	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Available-for-Sale Securities:
GSEs	$	37,470	$	78		14	$	—	$	—		—	$	37,470	$	78
Mortgage-backed securities		66,980		586		23		2,096		21		11		69,076		607
Asset-backed securities		564		6		1		8,792		127		1		9,356		133
Corporate bonds		—		—		—		—		—		—		—		—
Obligations of states and political subdivisions		30,180		335		18		697		18		1		30,877		353
	$	135,194	$	1,005		56	$	11,585	$	166		13	$	146,779	$	1,171

	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
December 31, 2019	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Available-for-Sale Securities:
GSEs	$	16,507	$	114		5	$	24,658	$	90		9	$	41,165	$	204
Mortgage-backed securities		45,862		182		21		56,917		453		52		102,779		635
Asset-backed securities		17,807		161		10		7,317		142		4		25,124		303
Corporate bonds		—		—		—		—		—		—		—		—
Obligations of states and political subdivisions		30,423		783		26		3,858		45		10		34,281		828
	$	110,599	$	1,240		62	$	92,750	$	730		75	$	203,349	$	1,970

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

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

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Note 5. Derivatives

Derivatives Designated as Fair Value Hedges

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

During the 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 equal to 1 month LIBOR. The derivative transaction is designated as a fair value hedge.

A summary of the Company's fair value hedge relationships as of September 30, 2020 and December 31, 2019 are as follows (in thousands):

September 30, 2020

December 31, 2019

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

Liability derivative

Interest rate swap agreements - loans

Other liabilities

9.67

0.65

1 month LIBOR

30,000

(390

)

—

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, 2020 and 2019 were as follows (in thousands):

	*Nine Months Ended September 30,*
Gain (loss) on fair value hedging relationship	*2020*			*2019*
Interest rate swap agreements - loans:
Hedged items	$	213			—
Derivative designated as hedging instruments		(390	)		—

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at September 30, 2020 and December 31, 2019 (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, 2020

December 31, 2019

September 30, 2020

December 31, 2019

Loans

30,000

—

213

—

Mortgage Banking Derivatives

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors under the Bank's mandatory delivery program are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. At September 30, 2020 and December 31, 2019, the Company had approximately $24,420,000 and $10,307,000, respectively, of interest rate lock commitments and approximately $34,750,000 and $14,000,000, respectively, of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by derivative assets of $979,000 and $328,000 and derivative liabilities of $113,000 and $23,000, respectively, at September 30, 2020 and December 31, 2019. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sale of loans.

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

	*In Thousands*
	*September 30, 2020*			*September 30, 2019*
Forward contracts related to mortgage loans held for sale and interest rate contracts	$	(90	)		78
Interest rate contracts for customers		651			178

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

	*In Thousands*
	*September 30, 2020*					*December 31, 2019*
	*Notional Amount*		*Fair Value*			*Notional Amount*		*Fair Value*
Included in other assets (liabilities):
Interest rate contracts for customers	$	24,420		979			10,307		328
Forward contracts related to mortgage loans held-for-sale		34,750		(113	)		14,000		(23	)

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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, 2020, the Company had outstanding 13,813 options under the 2009 Stock Option Plan with a weighted average exercise price of $33.80.

During the second quarter of 2016, the Company’s shareholders approved the Wilson Bank Holding Company 2016 Equity Incentive Plan, which authorizes awards of up to 750,000 shares of common stock. The 2016 Equity Incentive Plan was approved by the Board of Directors and effective as of January 25, 2016 and approved by the Company’s shareholders on April 12, 2016. On September 26, 2016, the Board of Directors approved an amendment and restatement of the 2016 Equity Incentive Plan (as amended and restated the “2016 Equity Incentive Plan”) to make clear that directors who are not also employees of the Company may be awarded stock appreciation rights. The primary purpose of the 2016 Equity Incentive Plan is to promote the interest of the Company and its shareholders by, among other things, (i) attracting and retaining key officers, employees and directors of, and consultants to, the Company and its subsidiaries and affiliates, (ii) motivating those individuals by means of performance-related incentives to achieve long-range performance goals, (iii) enabling such individuals to participate in the long-term growth and financial success of the Company, (iv) encouraging ownership of stock in the Company by such individuals, and (v) linking their compensation to the long-term interests of the Company and its shareholders. Except for certain limitations, awards can be in the form of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares and restricted share units, performance awards and other stock-based awards. As of September 30, 2020, the Company had 428,071 shares remaining available for issuance under the 2016 Equity Incentive Plan. As of September 30, 2020, the Company had outstanding 149,534 options with a weighted average exercise price of $45.14 and 132,848 cash-settled stock appreciation rights with a weighted average exercise price of $42.86 under the 2016 Equity Incentive Plan.

As of September 30, 2020, the Company had outstanding 163,347 stock options with a weighted average exercise price of $44.18 and 132,848 cash-settled stock appreciation rights each with a weighted average exercise price of $42.86.

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

	*September 30, 2020*				*September 30, 2019*
	*Shares*		*Weighted Average Exercise Price*		*Shares*		*Weighted Average Exercise Price*
Options and SARs outstanding at beginning of period		273,039	$	41.19		277,820	$	40.11
Granted		43,833		55.72		17,833		51.16
Exercised		15,477		36.90		13,278		35.51
Forfeited or expired		5,200		39.69		—		—
Outstanding at end of period		296,195	$	43.59		282,375	$	41.02
Options and SARs exercisable at September 30		156,700	$	40.81		126,201	$	39.88

As of September 30, 2020, there was $1,653,000 of total unrecognized cost related to non-vested share-based compensation arrangements granted under the Company's equity incentive plans. The cost is expected to be recognized over a weighted-average period of 2.84 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 final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.

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

The Company’s and Wilson Bank’s actual capital amounts and ratios as of December 31, 2019 are presented in the following table:

	*Actual*					*Regulatory Minimum Capital Requirement with Basel III Capital Conservation Buffer*
	*Amount*		*Ratio*			*Amount*		*Ratio*
	*(dollars in thousands)*
December 31, 2019
Total capital to risk weighted assets:
Consolidated	$	360,645		15.0	%	$	253,215		10.5	%
Wilson Bank		359,576		14.9			252,675		10.5
Tier 1 capital to risk weighted assets:
Consolidated		331,485		13.7			204,984		8.5
Wilson Bank		330,416		13.7			204,547		8.5
Common equity Tier 1 capital to risk weighted assets:
Consolidated		331,485		13.7			168,810		7.0
Wilson Bank		330,416		13.7			168,451		7.0
Tier 1 capital to average assets:
Consolidated		331,485		12.4			106,565		4.0
Wilson Bank		330,416		11.9			110,764		4.0

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

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

Pursuant to the CARES Act, the required Community Bank Leverage Ratio was lowered to 7% until the earlier of December 31, 2020 and 60 days following the end of the national emergency declared with respect to COVID-19.

The Company opted to take advantage of this rule effective January 1, 2020. As a result, the capital conservation buffer applicable under the Basel III capital guidelines is not applicable to the Company or the Bank.

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

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

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

The Company’s and Wilson Bank’s Community Bank Leverage Ratio as of September 30, 2020 are presented in the following table:

	Actual					Regulatory Minimum Capital Requirement Community Bank Leverage Ratio
	Amount		Ratio			Amount		Ratio
	(dollars in thousands)
September 30, 2020
Community Bank Leverage Ratio:
Consolidated	$	358,777		11.2	%	$	224,647		7.0	%⁽¹⁾
Wilson Bank		355,832		11.1			224,376		7.0	⁽¹⁾

(1) The Community Bank Leverage Ratio will revert to 9% at the earlier of December 31, 2020 and 60 days following the end of the national emergency declared with respect to COVID-19.

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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.

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.

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

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

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

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

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

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

	Assets and Liabilities Measured at Fair Value on a Recurring Basis
	(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, 2020
Hedged Loans	$	30,160		—		30,160		—
Investment securities available-for-sale:
U.S. Government sponsored enterprises		116,808		—		116,808		—
Mortgage-backed securities		303,115		—		303,115		—
Asset-backed securities		27,079		—		27,079		—
Corporate bonds		2,511		—		2,511		—
State and municipal securities		125,490		—		125,490		—
Total investment securities available-for-sale		575,003		—		575,003		—
Mortgage loans held for sale		36,606		—		36,606		—
Derivatives		979		—		979		—
Bank owned life insurance		34,979		—		—		34,979
Total assets	$	677,727		—		642,748		34,979

Derivatives	$	503		—		503		—
Total liabilities	$	503		—		503		—

December 31, 2019
Hedged Loans	$	—		—		—		—
Investment securities available-for-sale:
U.S. Government sponsored enterprises		59,579		—		59,579		—
Mortgage-backed securities		267,313		—		267,313		—
Corporate bonds		—		—		—		—
Asset-backed securities		27,229		—		27,229		—
State and municipal securities		67,024		—		67,024		—
Total investment securities available-for-sale		421,145		—		421,145		—
Mortgage loans held for sale		18,179		—		18,179		—
Derivatives		328		—		328		—
Bank owned life insurance		31,762		—		—		31,762
Total assets	$	471,414		—		439,652		31,762

Derivatives	$	23		—		23		—
Total liabilities	$	23		—		23		—

	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, 2020
Other real estate owned	$	1,030		—		—		1,030
Impaired loans, net (¹)		1,621		—		—		1,621
Total	$	2,651		—		—		2,651
December 31, 2019
Other real estate owned	$	697		—		—		697
Impaired loans, net (¹)		3,916		—		—		3,916
Total	$	4,613		—		—		4,613

⁽¹⁾	Amount is net of a valuation allowance of $768,000 at September 30, 2020* and $1,136,000 at December 31, 2019 as required by ASC 310, “Receivables.”*

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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, 2020 and December 31, 2019:

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

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

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

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

	*For the Nine Months Ended September 30,*
	*2020*				*2019*
	Other Assets		Other Liabilities		Other Assets		Other Liabilities
Fair value, January 1	$	31,762		—	$	30,952		—
Total realized gains included in income		609		—		608		—
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at September 30		—		—		—		—
Purchases, issuances and settlements, net		2,608		—		—		—
Transfers out of Level 3		—		—		—		—
Fair value, September 30	$	34,979		—	$	31,560		—
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30	$	609		—	$	608		—

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, 2020 and December 31, 2019. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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

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

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

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

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

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

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

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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, 2020 and December 31, 2019. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.

	Carrying/ Notional		Estimated		Quote Market Prices in an Active Market		Models with Significant Observable Market Parameters		Models with Significant Unobservable Market Parameters
(in Thousands)	Amount		Fair Value (¹)		(Level 1)		(Level 2)		(Level 3)
September 30, 2020
Financial assets:
Cash and cash equivalents	$	245,857		245,857		245,857		—		—
Loans, net		2,252,754		2,245,706		—		—		2,245,706
Restricted equity securities		5,089		NA		NA		NA		NA
Accrued interest receivable		7,985		7,985		1		1,988		5,996
Financial liabilities:
Deposits		2,833,582		2,711,573		—		—		2,711,573
Federal Home Loan Bank borrowings		17,183		17,765		—		—		17,765
Accrued interest payable		3,260		3,260		—		—		3,260

December 31, 2019
Financial assets:
Cash and cash equivalents	$	159,770		159,770		159,770		—		—
Loans, net		2,057,175		2,053,212		—		—		2,053,212
Restricted equity securities		4,680		NA		NA		NA		NA
Accrued interest receivable		5,945		5,945		5		1,647		4,293
Financial liabilities:
Deposits		2,417,605		2,210,038		—		—		2,210,038
Federal Home Loan Bank borrowings		23,613		23,860		—		—		23,860
Accrued interest payable		3,814		3,814		—		—		3,814

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

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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, 2020, 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, 2020.

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

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

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.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(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	$	11,532	$	10,266	$	29,590	$	28,072
Denominator – Weighted average number of common shares outstanding		10,963,411		10,766,738		10,907,251		10,729,065
Basic earnings per common share		1.05	$	0.95		2.71	$	2.62
Diluted EPS Computation:
Numerator – Earnings available to common stockholders	$	11,532	$	10,266	$	29,590	$	28,072
Denominator – Weighted average number of common shares outstanding		10,963,411		10,766,738		10,907,251		10,729,065
Dilutive effect of stock options		27,756		20,014		25,674		17,065
Weighted average diluted common shares outstanding		10,991,167		10,786,752		10,932,925		10,746,130
Diluted earnings per common share		1.05	$	0.95		2.71	$	2.61

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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.

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, 2020 is as follows:

Commitments to extend credit		$	755,018,000
Standby letters of credit		$	78,023,000

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

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

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

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

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

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Note 12. Pandemic Impact (COVID-19)

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

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

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

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

Forward-Looking Statements

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

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

Impact of COVID-19

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

To combat the spread of COVID-19, federal, state and local governments, including the Governor of the State of Tennessee and mayors and county executives of the communities in which we operate, have taken a variety of actions that have materially and adversely affected the businesses and lives of our customers. In March 2020, these actions included orders or directives closing non-essential businesses and restricting movement of individuals through the issuance of shelter-in-place or safer-at-home orders and other guidance encouraging individuals to observe strict social distancing measures. Starting in late May 2020, the governor of Tennessee and mayors and county executives of the communities in which we operate issued procedures to begin a phased reopening for nonessential businesses. As a part of this reopening, our bank has transitioned branch operations back to normal operating procedures.

At times, the actions being taken by these governmental authorities are not always coordinated or consistent across the state of Tennessee and the impact of those actions across our markets may be uneven, including pausing or reverting to more restrictive phases in the course of reopening economies. These actions, together with the independent actions of individuals and businesses aimed at slowing the spread of the virus, have resulted in extensive economic disruption and rapid declines in consumer and commercial activity.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program ("PPP"), a nearly $659 billion program designed to aid small and medium-sized businesses through federally guaranteed loans distributed through banks. These loans were intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. The Company funded $85.6 million of PPP loans to our small business and other eligible customers, $84.7 million of which remained outstanding as of September 30, 2020.

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

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As of September 30, 2020, the Bank had 48 loans, totaling $79.1 million in aggregate principal amount for which principal or both principal and interest were being deferred, compared to 739 loans totaling $540.3 million on deferral at June 30, 2020. Under the applicable guidance, none of these deferrals required a troubled debt restructuring designation as of September 30, 2020.

In connection with our response to COVID-19 we have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including maintaining increased liquidity and reserves supported by a strong capital position. Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue for the remainder of 2020 and into 2021.

Critical Accounting Estimates

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

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

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

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

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

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

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

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

We then test the resulting allowance by comparing the balance in the allowance to industry and peer information. Our management then evaluates the result of the procedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the allowance in its entirety. The board of directors reviews and approves the assessment prior to the filing of quarterly and annual financial information.

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

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Impairment of Goodwill. Goodwill is evaluated for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired. ASC 350, Intangibles — Goodwill and Other, provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity does a qualitative assessment and determines it is necessary, or if a qualitative assessment is not performed, it is required to perform a goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). The results of our quantitative assessment as of December 31, 2019, our annual assessment date, indicated that the fair value of our reporting unit was more than its carrying value.

Should our common stock experience a sustained price decline or other impairment indicators become known, additional impairment testing of goodwill may be required. Should it be determined in a future period that the goodwill has become impaired, then a charge to earnings will be recorded in the period such determination is made.

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

Selected Financial Information

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

	*As of or For the Three Months Ended September 30,*									*As of or For the Nine Months Ended September 30,*
	*2020*			*2019*			*2020 - 2019 Percent Increase (Decrease)*			*2020*			*2019*			*2020 - 2019 Percent Increase (Decrease)*
PER SHARE DATA:
Basic earnings per common share	$	1.05		$	0.95			10.53	%	$	2.71		$	2.62			3.44	%
Diluted earnings per common share	$	1.05		$	0.95			10.53	%	$	2.71		$	2.61			3.83	%
Cash dividends	$	0.60		$	0.55			9.09	%	$	1.20		$	1.10			9.09	%
Dividends declared per share as a percentage of basic earnings per share		57.14	%		57.89	%		(1.29	)%		44.28	%		41.98	%		5.48	%


	*As of or For the Three Months Ended September 30,*									*As of or For the Nine Months Ended September 30,*
	*2020*			*2019*			*2020 - 2019 Percent Increase (Decrease)*			*2020*			*2019*			*2020 - 2019 Percent Increase (Decrease)*
PERFORMANCE RATIOS:
Return on average stockholders' equity		12.46	%		12.53	%		(0.56	)%		11.09	%		11.97	%		(7.35	)%
Return on average assets		1.43	%		1.51	%		(5.30	)%		1.31	%		1.42	%		(7.75	)%
Efficiency ratio		56.78	%		57.03	%		(0.44	)%		57.47	%		58.54	%		(1.83	)%



		*September 30, 2020*			*December 31, 2019*		*2020 - 2019 Percent Increase (Decrease)*
BALANCE SHEET RATIOS:
Total capital to assets		11.39	%		12.06	%		(5.56	)%
Non-performing asset ratio		0.08	%		0.26	%		(69.23	)%
Book value	$	33.77		$	31.22			8.17	%

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Results of Operations

Net earnings increased $1,518,000, or 5.41%, to $29,590,000 for the nine months ended September 30, 2020 , from $28,072,000 in the first nine months of 2019. Net earnings were $11,532,000 for the quarter ended September 30, 2020, an increase of $1,266,000, or 12.33%, from $10,266,000 for the three months ended September 30, 2019 and an increase of $2,505,000, or 27.75%, over the quarter ended June 30, 2020. The increase i n net earnings during the three and nine months ended September 30, 2020 as compared to the prior year comparable period was primarily due to an increase in net interest income and an increase in non-interest income, partially offset by an increase in non-interest expense. The increase in net interest income is due to an increase in average interest earning asset balances between the relevant periods, including as a result of loans originated pursuant to the PPP, partially offset by a decrease in rates and increased provision for loan losses. The increase in non-interest expense resulted from the Company's continued growth.

Return on average assets (ROA) is the most common benchmark for bank profitability and is calculated by taking our annualized net earnings and dividing by the average assets for the relevant period. ROA measures a company’s return on investment in a format that is easily comparable to other financial institutions. It is particularly important to the Company as is it serves as the basis for certain executive and employee bonuses. The ROA for the periods ended September 30, 2020 and 2019 were 1.31% and 1.42%, respectively. The ROA for the three months ended September 30, 2020 and 2019 were 1.43% and 1.51%, respectively. The decrease in ROA for the three and nine months ended September 30, 2020 compared to the prior year comparable periods was primarily attributable to a decrease in the yield earned on all earning assets that outpaced the decrease in rates paid on our interest-bearing liabilities which resulted from a decrease in rates enacted by the Federal Reserve. The influx of deposit money that resulted from the Federal stimulus package also contributed to the decrease in ROA as deposits increased faster than loans, causing a corresponding increase in investment securities and low interest-bearing deposit accounts with other financial institutions.

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Net Interest Income

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

	Three Months Ended								Three Months Ended								Net Change Three Months Ended
	September 30, 2020								September 30, 2019								September 30, 2020 versus September 30, 2019
	Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Loans, net of unearned interest ^{(2) (3)}	$	2,269,394			5.11	%	$	28,590	$	2,004,578			5.41	%	$	27,035	$	9,722		$	(8,167	)	$	1,555
Investment securities—taxable		464,827			1.49			1,739		386,017			2.38			2,318		2,228			(2,807	)		(579	)
Investment securities—tax exempt		77,630			1.77			346		43,797			1.97			217		264			(135	)		129
Taxable equivalent adjustment ⁽¹⁾		—			0.47			92		—			0.52			57		67			(32	)		35
Total tax-exempt investment securities		77,630			2.24			438		43,797			2.49			274		331			(167	)		164
Total investment securities		542,457			1.60			2,177		429,814			2.39			2,592		2,559			(2,974	)		(415	)
Loans held for sale		29,586			2.23			166		9,525			3.54			85		281			(200	)		81
Federal funds sold		1,878			—			—		21,865			2.05			113		(54	)		(59	)		(113	)
Accounts with depository institutions		243,848			0.15			91		110,373			1.86			517		1,901			(2,327	)		(426	)
Restricted equity securities		5,089			2.27			29		4,680			3.73			44		22			(37	)		(15	)
Total earning assets		3,092,252			4.06			31,053		2,580,835			4.72			30,386		14,431			(13,764	)		667			2.20	%
Cash and due from banks		17,489								10,911
Allowance for loan losses		(34,467	)							(28,260	)
Bank premises and equipment		59,195								58,573
Other assets		76,077								71,760
Total assets	$	3,210,546							$	2,693,819

	Three Months Ended							Three Months Ended							Net Change Three Months Ended
	September 30, 2020							September 30, 2019							September 30, 2020 versus September 30, 2019
	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	$	708,485		0.17	%	$	294	$	527,077		0.47	%	$	619	$	990		$	(1,315	)	$	(325	)
Money market demand accounts		899,993		0.37			829		742,352		0.85			1,592		1,746			(2,509	)		(763	)
Time Deposits		621,118		1.72			2,685		640,845		2.09			3,371		(102	)		(584	)		(686	)
Other savings		181,578		0.39			180		136,378		0.63			215		282			(317	)		(35	)
Total interest-bearing deposits		2,411,174		0.66			3,988		2,046,652		1.12			5,797		2,916			(4,725	)		(1,809	)
Federal Home Loan Bank advances		18,374		2.68			124		28,237		2.67			190		(73	)		7			(66	)
Federal funds purchased		—		—			—		2,369		0.67			4		(2	)		(2	)		(4	)
Total interest-bearing liabilities		2,429,548		0.67			4,112		2,077,258		1.14			5,991		2,841			(4,720	)		(1,879	)		(31.36	%)
Non-interest bearing deposits		385,232							273,944
Other liabilities		27,615							17,568
Stockholders’ equity		368,151							325,049
Total liabilities and stockholders’ equity	$	3,210,546						$	2,693,819
Net interest income, on a tax equivalent basis						$	26,941						$	24,395	$	11,590		$	(9,044	)	$	2,546			10.44	%
Net yield on earning assets ⁽⁴⁾				3.54	%						3.80	%
Net interest spread ⁽⁵⁾				3.39	%						3.58	%

Notes:

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

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

(3) Loan fees of $3.4 million and $2.1 million are included in interest income in 2020 and 2019, respectively, inclusive, in 2020, of $700,000 in SBA fees related to PPP loans.

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

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

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	Nine Months Ended								Nine Months Ended								Net Change Nine Months Ended
	September 30, 2020								September 30, 2019								September 30, 2020 versus September 30, 2019
	Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Loans, net of unearned interest ^{(2) (3)}	$	2,214,227			5.23	%	$	85,120	$	2,026,406			5.28	%	$	79,020	$	7,255		$	(1,155	)	$	6,100
Investment securities—taxable		406,277			1.84			5,609		335,524			2.56			6,428		1,716			(2,535	)		(819	)
Investment securities—tax exempt		64,074			1.79			859		35,429			2.02			535		426			(102	)		324
Taxable equivalent adjustment ⁽¹⁾		—			0.48			228		—			0.53			142		113			(27	)		86
Total tax-exempt investment securities		64,074			2.27			1,087		35,429			2.55			677		539			(129	)		410
Total investment securities		470,351			1.90			6,696		370,953			2.56			7,105		2,255			(2,664	)		(409	)
Loans held for sale		20,701			2.53			392		8,512			3.61			230		286			(124	)		162
Federal funds sold		9,371			0.80			56		10,872			2.10			171		(21	)		(94	)		(115	)
Accounts with depository institutions		188,295			0.34			485		115,422			1.91			1,652		1,068			(2,235	)		(1,167	)
Restricted equity securities		4,889			2.62			96		4,092			4.70			144		37			(85	)		(48	)
Total earning assets		2,907,834			4.34			92,845		2,536,257			4.71			88,322		10,880			(6,357	)		4,523			5.12	%
Cash and due from banks		16,335								10,054
Allowance for loan losses		(31,267	)							(27,947	)
Bank premises and equipment		59,595								58,283
Other assets		73,179								72,950
Total assets	$	3,025,676							$	2,649,597

	Nine Months Ended							Nine Months Ended							Net Change Nine Months Ended
	September 30, 2020							September 30, 2019							September 30, 2020 versus September 30, 2019
	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	$	642,125		0.22	%	$	1,064	$	518,857		0.47	%	$	1,807	$	559		$	(1,302	)	$	(743	)
Money market demand accounts		860,824		0.45			2,898		740,923		0.85			4,699		1,051			(2,852	)		(1,801	)
Time Deposits		621,367		1.83			8,509		640,472		2.00			9,566		(277	)		(780	)		(1,057	)
Other savings		164,284		0.43			533		136,145		0.63			639		169			(275	)		(106	)
Total interest-bearing deposits		2,288,600		0.76			13,004		2,036,397		1.10			16,711		1,502			(5,209	)		(3,707	)
Federal Home Loan Bank advances		20,389		2.69			410		20,456		2.68			410		(1	)		1			—
Federal funds purchased		—		—			—		798		0.67			4		(2	)		(2	)		(4	)
Total interest-bearing liabilities		2,308,989		0.78			13,414		2,057,651		1.11			17,125		1,499			(5,210	)		(3,711	)		(21.67	%)
Non-interest bearing deposits		336,119							264,520
Other liabilities		24,193							13,994
Stockholders’ equity		356,375							313,432
Total liabilities and stockholders’ equity	$	3,025,676						$	2,649,597
Net interest income, on a tax equivalent basis						$	79,431						$	71,197	$	9,381		$	(1,147	)	$	8,234			11.57	%
Net yield on earning assets ⁽⁴⁾				3.72	%						3.80	%
Net interest spread ⁽⁵⁾				3.56	%						3.60	%

Notes:

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

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

(3) Loan fees of $9.2 million and $5.8 million are included in interest income in 2020 and 2019, respectively, inclusive, in 2020, of $2.8 million in SBA fees related to PPP loans.

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

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

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Net yield on earning assets for the nine months ended September 30, 2020 and 2019 was 3.72% and 3.80%, respectively, and 3.54% and 3.80% for the quarter ended September 30, 2020 and 2019, respectively. The decrease in net yield on earning assets was due to a decrease in the yield earned on all earning assets that outpaced the decrease in rates paid on our interest-bearing liabilities. The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, decreased 150 basis points late in the first quarter of 2020, decreased 50 basis points during the third quarter of 2019, and decreased 25 basis points during the fourth quarter of 2019 as a result of reductions in the federal funds rate by the Federal Reserve. In the third quarter of 2020 the Fed announced it did not expect to raise rates until the end of 2023 at the earliest. The yield on loans decreased due to the declining rate environment discussed above, which was partially offset by an increase in loans qualified to receive state income tax credit and the impact of fees we were entitled to receive in connection with the origination of SBA PPP loans. The yield on securities decreased due to the declining rate environment discussed above, in which higher yielding securities were called and were replaced with securities yielding lower market rates. The net interest spread was 3.56% and 3.60% for the nine months ended September 30, 2020 and September 30, 2019, respectively, and 3.39% and 3.58% for the quarter ended September 30, 2020 and 2019, respectively. The rate we pay on our deposits decreased in the three and nine months ended September 30, 2020 when compared to the comparable periods in 2019, as we decreased the rates on several of our deposit products in response to decreases in short-term rates throughout 2019 and the first quarter of 2020. As a result of the significant reduction in short-term rates and the tremendous uncertainty resulting from COVID-19, our net yield on earning assets could continue to decline during the remainder of 2020 and into 2021 as could our net interest spread as the impact of the declining rate environment will more quickly impact our earning assets than our interest-bearing liabilities, and competitive pressures in our markets may limit our ability to reduce the rates we pay on our interest bearing liabilities. Efforts to maintain elevated levels of on-balance sheet liquidity will also likely negatively impact our net yield on earning assets.

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Net interest income, excluding tax equivalent adjustments relating to tax exempt securities and loans, for the three and nine months ended September 30, 2020 totaled $26,849,000 and $79,203,000, respectively, compared to $24,338,000 and $71,055,000 for the same periods in 2019, an increase of $2,511,000 and $8,148,000, between respective periods.

The increase in interest income for the three and nine months ended September 30, 2020 when compared to the three and nine months ended September 30, 2019 was primarily attributable to an overall increase in average loans, and the resulting increase in the net interest and fees earned on loans, which included SBA fees earned on PPP loans totaling $2,800,000. The ratio of average earning assets to total average assets for the three and nine months ended September 30, 2020 was 96.3% and 96.1%, respectively, compared to 95.8% and 95.7% for the same periods in 2019.

The decrease in interest expense for the three and nine months ended September 30, 2020 as compared to the prior year's comparable periods was primarily due to a decrease in the rates of average interest bearing deposits, reflecting the declining rate environment that we experienced throughout 2019 and the first quarter of 2020.

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Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. The provision for loan losses for the nine months ended September 30, 2020 was $6,631,000, an increase of $5,277,000 from the provision of $1,354,000 incurred in the first nine months of 2019. The provision for loan losses for the quarter ended September 30, 2020 was $1,038,000, up $871,000 from the provision of $167,000 incurred in the third quarter of 2019 and down $3,086,000 from the $4,124,000 incurred in the second quarter of 2020. The increase in provision expense for the three and nine months ended September 30, 2020 from the comparable periods in 2019 is primarily attributable to increasing our allowance for loans losses as a result of growth in the loan portfolio and in response to the current economic disruption related to COVID-19. The decrease in provision expense for the third quarter of 2020 when compared to the second quarter of 2020 is in response to the lack of charge-offs, decrease in classified loans, non-performing loans and impaired loans, and management's evaluation of the overall credit quality of the loan portfolio. The provision for loan losses is based on past loan experience and other factors which, in management’s judgment, deserve current recognition in estimating loan losses. Such factors include changes in the amount and composition of the loan portfolio, review of specific problem loans, past due and nonperforming loans, change in lending staff, the recommendations of the Company’s regulators, and current economic conditions that may affect the borrowers’ ability to repay.

The Bank’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when a determination is made that the loan is uncollectible. The volume of net loans recovered for the first nine months of 2020 totaled approximately $84,000 compared to approximately $143,000 in net charge-offs during the first nine months of 2019. The volume of net loans charged off for the third quarter of September 30, 2020 totaled approximately $63,000 compared to approximately $52,000 in net charge-offs during the third quarter of 2019. Though tremendous uncertainty remains regarding the length and severity of COVID-19's impact, we believe it is probable net charge-offs will increase over the remainder of 2020 and 2021.

The allowance for loan losses (net of charge-offs and recoveries) was $35,441,000 at September 30, 2020, an increase of $6,715,000 or 23.38%, from $28,726,000 at December 31, 2019, and of $7,056,000, or 24.86%, from $28,385,000 at September 30, 2019. The allowance for loan losses was 1.55% of total loans outstanding at September 30, 2020, compared to 1.38% at December 31, 2019 and 1.43% at September 30, 2019. As a percentage of nonperforming loans at September 30, 2020, December 31, 2019, and September 30, 2019, the allowance for loan losses represented 2,767%, 359% and 579%, respectively. The internally classified loans as a percentage of the allowance for loan losses were 23.9% and 42.6%, respectively, at September 30, 2020 and 2019.

The level of the allowance and the amount of the provision involve evaluation of uncertainties and matters of judgment. The Company maintains an allowance for loan losses which management believes is adequate to absorb losses inherent in the loan portfolio. A formal review is prepared quarterly by the Chief Financial Officer and provided to the Board of Directors to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. The review includes analysis of historical performance, the level of non-performing and adversely rated loans, specific analysis of certain problem loans, loan activity since the previous assessment, reports prepared by the Company's independent Loan Review Department, consideration of current economic conditions and other pertinent information. The level of the allowance to net loans outstanding will vary depending on the overall results of this quarterly assessment. See the discussion above under “Critical Accounting Estimates” for more information. While the severity of the impact of the COVID-19 pandemic for individuals, small businesses and corporations is still not fully known, leading economic indicators suggest that deteriorated economic conditions are likely to continue at least for the remainder of 2020 and into 2021. In an effort to recognize an appropriate allowance for loan losses, management incorporated qualitative factors into our quarterly assessment during the three and nine months ended September 30, 2020, including current economic conditions and value of collateral considerations, to increase the Company's reserve for the potential impact of the COVID-19 pandemic. Of the $1,038,000 total provision for loan loss that was recorded in the third quarter of 2020, a significant portion was attributable to management's estimates of the continued impact of the COVID-19 pandemic on our loan portfolio. Management believes the allowance for loan losses at September 30, 2020 to be adequate, but if economic conditions deteriorate beyond management’s current expectations and additional charge-offs are incurred in excess of the amount included in such expectations, the allowance for loan losses may require an increase through additional provision for loan losses expense which would negatively impact earnings. Moreover, though we have deferred the implementation of CECL at this time pursuant to relief offered by the CARES Act, when we become obligated to adopt CECL we are likely to have to increase our allowance for loan losses. As of September 30, 2020, we currently believe the adoption of ASU 2016-13 would have resulted in an approximately 4 - 6% increase in our allowance for loan losses over the level recorded at September 30, 2020. Although our current CECL calculation came out to be about the same as our calculation under the incurred loss model, under CECL we would have added an additional reserve related to COVID-19, thus causing the estimated 4 - 6% increase.

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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, 2020 and 2019 (in thousands):

	Three Months Ended September 30,												Nine Months Ended September 30,
	2020			2019			$ Increase (Decrease)			% Increase (Decrease)			2020			2019			$ Increase (Decrease)			% Increase (Decrease)
Service charges on deposit accounts	$	1,391		$	1,756		$	(365	)		(20.79	%)	$	4,159		$	5,114		$	(955	)		(18.67	%)
Other fees and commissions		4,063			3,765			298			7.92			11,468			10,660			808			7.58
Income on BOLI and annuity contracts		214			204			10			4.90			609			608			1			0.16
Gain on sale of loans		3,775			1,870			1,905			101.87			6,808			5,131			1,677			32.68
Loss on the sale of fixed assets		(4	)		(1	)		(3	)		300.00			(4	)		(2	)		(2	)		100.00
Gain (loss) on sale of other real estate		(8	)		(35	)		27			(77.14	)		652			(48	)		700			(1,458.33	)
Gain (loss) on sale of securities		—			41			(41	)		(100.00	)		425			(268	)		693			(258.58	)
Gain (loss) on sale of other assets		2			(3	)		5			(166.67	)		2			(3	)		5			(166.67	)
Other Income		61			—			61			100.00			61			—			61			100.00
Total non-interest income	$	9,494		$	7,597		$	1,897			24.97	%	$	24,180		$	21,192		$	2,988			14.10	%

The increase in non-interest income for the three months ended September 30, 2020 when compared to the comparable period in 2019 is primarily attributable to an increase in gain on sale of loans and an increase in other fees and commissions, partially offset by a decrease in service charges on deposit accounts. The increase in non-interest income for the nine months ended September 30, 2020 when compared to the comparable period in 2019 is primarily attributable to an increase in gain on sale of loans, an increase in other fees and commissions, an increase in gain on sale of other real estate, and an increase in the gain on sale of securities, partially offset by a decrease in service charges on deposit accounts.

Gain on sale of loans increased during the three and nine months ended September 30, 2020 compared to the same periods in 2019, as a result of the mortgage industry experiencing heightened demand in 2020. This increased demand was due to mortgage rates hitting all-time lows as a result of quantitative easing and the government's purchase of mortgage backed securities, as well as strong demand and related housing starts in Wilson County and the surrounding counties in which we serve. We currently expect mortgage demand to remain elevated through the fourth quarter of 2020.

Other fees and commissions increased during the three and nine months ended September 30, 2020 compared to the same periods in 2019. The increase for the three months ended September 30, 2020 is primarily due to an increase in debit card interchange fee income. The increase for the nine months ended September 30, 2020 is primarily due to an increase in debit card interchange fee income, credit card interchange fee income, and an increase in brokerage income. Debit card interchange fee income and credit card interchange fee income increased due to an increase in the number and volume of card holders and transactions. Brokerage income increased due to client acquisition and the opening of new investment accounts. Brokerage income was also aided by the strong recovery in the stock market from first quarter lows resulting from the COVID-19 pandemic.

Gain on sale of securities increased from a loss on sale of securities for the nine months ended September 30, 2020 compared to the same period in 2019. The loss on sale of securities in 2019 was due to management's decision to sell securities for a loss and reinvest the proceeds in higher yielding assets. The gain on sale of securities in 2020 was due to management's opportunistic trading to recognize additional income.

Service charges on deposit accounts decreased during the three and nine months ended September 30, 2020 compared to the same periods in 2019, primarily due to a decrease in service charges earned on insufficient income that resulted from the economic stimulus payments received by our customers and corresponding increases in deposit account balances and less consumer spending as a result of COVID-19.

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Non-Interest Expense

Non-interest expense consists primarily of employee costs, occupancy expenses, furniture and equipment expenses, advertising and public relations expenses, data processing expenses, ATM and interchange expenses, director’s fees, audit, legal and consulting fees, and other operating expenses. The following is a summary of our non-interest expense for the three and nine months ended September 30, 2020 and 2019 (in thousands):

	Three Months Ended September 30,										Nine Months Ended September 30,
	2020		2019		$ Increase (Decrease)			% Increase (Decrease)			2020		2019		$ Increase (Decrease)			% Increase (Decrease)
Salaries and employee benefits	$	11,956	$	10,440	$	1,516			14.52	%	$	34,573	$	31,101	$	3,472			11.16	%
Occupancy expenses, net		1,406		1,242		164			13.20			3,879		3,567		312			8.75
Advertising & public relations expense		702		540		162			30.00			1,790		1,638		152			9.28
Furniture and equipment expense		849		784		65			8.29			2,417		2,337		80			3.42
Data processing expense		1,298		1,161		137			11.80			3,715		3,136		579			18.46
ATM & interchange expense		1,054		867		187			21.57			2,805		2,529		276			10.91
Directors’ fees		142		142		—			—			439		404		35			8.66
Audit, legal & consulting expenses		233		372		(139	)		(37.37	)		620		1,096		(476	)		(43.43	)
Other operating expenses		2,996		2,664		332			12.46			9,175		8,196		979			11.94
Total non-interest expense	$	20,636	$	18,212	$	2,424			13.31	%	$	59,413	$	54,004	$	5,409			10.02	%

The increase in non-interest expense for the three months ended September 30, 2020 when compared to the comparable period in 2019 is primarily attributable to an increase in salaries and employee benefits, an increase in other operating expenses, an increase in ATM & interchange expense, and an increase in occupancy expenses. The increase in non-interest expense for the nine months ended September 30, 2020 when compared to the comparable period in 2019 is primarily attributable to an increase in salaries and employee benefits, an increase in other operating expenses, an increase in data processing expenses, an increase in ATM & interchange expense, and an increase in occupancy expenses, partially offset by a decrease in audit, legal and consulting expenses.

Salaries and employee benefits increased primarily due to an increase in the number of employees necessary to support the Company’s growth in operations. The Company anticipates that salaries and employee benefits expense and occupancy expense will continue to increase as the Company's operations and facilities continue to grow though the growth rate may slow as a result of COVID-19's likely impact on our hiring plans.

Other operating expenses increased primarily due to an increase in professional fees related to PPP loans.

Data processing expenses increased primarily due to an increase in computer maintenance and computer licenses. These expenses included upgrades of our current systems as well as additional investments in computer software, an increase in I.T. consulting expense and an increase in computer home banking expense resulting from the evolution of our new mobile application. The mobile banking expense is now incurred on a per user basis as opposed to an overall flat fee.

Occupancy expenses increased primarily due to an increase in maintenance and repairs on buildings, an increase in deprecation expense on buildings resulting from improvements, an increase in lease agreements, and an increase in sanitation supplies and protective facial masks related to COVID-19.

ATM & interchange expense increased primarily due to an increase in debit card interchange fee expense as well as an increase in ATM expenses resulting from the purchase of new ATMs for all existing locations.

Audit, legal and consulting expenses decreased primarily due to a decrease in legal and professional fees associated with the Company's general operations.

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

The efficiency ratio is a common and comparable KPI used in the banking industry. The Company uses this metric to monitor how effective management is at using our internal resources. It is calculated by taking our non-interest expense divided by our net interest income plus non-interest income. Our efficiency ratio for the nine months ended September 30, 2020 and 2019 were 57.47% and 58.54%, respectively.

Income Taxes

The Company’s income tax expense was $7,749,000 for the nine months ended September 30, 2020, a decrease of $1,068,000 over the comparable period in 2019. Income tax expense was $3,137,000 for the quarter ended September 30, 2020, a decrease of $153,000 over the same period in 2019. The percentage of income tax expense to net income before taxes was 20.75% and 23.90% for the nine months ended September 30, 2020 and September 30, 2019, respectively, and 21.39% and 24.27% for the quarters ended September 30, 2020 and 2019, respectively. The decrease in the percentage of income tax expense to earnings before taxes is primarily due to additional state tax credits that lowered our effective tax rate. Our effective tax rate represents our blended federal and state rate of 26.135% affected by the impact of anticipated favorable permanent differences between our book and taxable income such as bank-owned life insurance, income earned on tax-exempt securities and certain federal and state tax credits.

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Financial Condition

Balance Sheet Summary

The Company’s total assets increased $462,425,000, or 16.55%, to $3,256,634,000 at September 30, 2020 from $2,794,209,000 at December 31, 2019. Total assets increased $93,024,000, or 2.94%, at September 30, 2020 from June 30, 2020. Loans, net of allowance for loan losses, totaled $2,252,754,000 at September 30, 2020, a 9.51% increase compared to $2,057,175,000 at December 31, 2019. Net loans increased $10,343,000, or 0.46%, from June 30, 2020 to September 30, 2020. In the first half of 2019 management made a strategic decision to begin focusing loan growth in the commercial and industrial and residential 1-4 family segments of our loan portfolio, which have historically grown at slower rates than the other segments of the portfolio. As a result, loan growth slowed in 2019. In the first nine months of 2020 loan growth increased in the commercial and industrial segment, the commercial real estate segment, the multifamily segment, and the residential 1-4 family segment of our portfolio. Commercial and industrial loans increased 93.00% and 109.68%, respectively, from December 31, 2019 and September 30, 2019 to September 30, 2020, and comprised 8.26% of the Company's loan portfolio at September 30, 2020, compared to 4.69% at December 31, 2019 and 4.55% at September 30, 2019. This increase was largely attributable to the demand for PPP loans by small businesses and individuals as a result of the COVID-19 pandemic. The Company funded $85.6 million of PPP loans to our small business and other eligible customers, $84.7 million of which remained outstanding as of September 30, 2020. Commercial real estate loans increased 6.70% and 13.61%, respectively, from December 31, 2019 and September 30, 2019 to September 30, 2020, and comprised 36.85% of the Company’s loan portfolio at September 30, 2020, compared to 37.91% at December 31, 2019 and 37.45% at September 30, 2019. The increase in commercial real estate loans is a result of an increase in demand for such loans in the overall economy and the Company’s markets prior to the onset of COVID-19 as well as the completion of some construction projects converting to permanent financing. Multifamily loans increased 27.34% and 16.57%, respectively, from December 31, 2019 and September 30, 2019 to September 30, 2020, and comprised 5.38% of the Company's loan portfolio at September 30, 2020, compared to 4.64% at December 31, 2019 and 5.33% at September 30, 2019. This increase was largely attributable to the completion of a large project which transitioned to permanent financing. Residential 1-4 family loans increased 3.96% and 13.38%, respectively, from December 31, 2019 and September 30, 2019 to September 30, 2020, and comprised 23.14% of the Company's loan portfolio at September 30, 2020, compared to 24.43% at December 31, 2019 and 23.56% at September 30, 2019. The increase in residential 1-4 family real estate loans is a result of an increase in demand for such loans due to, among other things, favorable interest rates resulting from the declining rate environment experienced in the third quarter of 2019 and the first quarter of 2020.

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

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

Securities increased $153,858,000, or 36.53%, to $575,003,000 at September 30, 2020 from $421,145,000 at December 31, 2019 and increased $78,697,000, or 15.86%, from June 30, 2020 due to deposit growth that has outpaced loan growth. The current rate environment also caused the fair market value on the securities portfolio to increase from December 31, 2019 to September 30, 2020. The average yield, excluding tax equivalent adjustment, of the securities portfolio at September 30, 2020 was 1.75% with a weighted average life of 7.75 years, as compared to an average yield of 2.42% and a weighted average life of 7.08 years at December 31, 2019. The weighted average lives on mortgage-backed securities reflect the repayment rate used for book value calculations.

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. There were no debt and equity securities classified as held-to-maturity or trading securities at September 30, 2020 or December 31, 2019.

Premises and equipment decreased $1,425,000, or 2.36%, from December 31, 2019 to September 30, 2020. The primary reason for the decrease was due to current year depreciation of $3,155,000, offset by the purchase of new ATMs for all existing locations.

The increase in deposits, including those resulting from funded PPP loans and stimulus checks, outpaced loan growth causing interest bearing deposits with other financial institutions to increase to $220,311,000 at September 30, 2020 from $126,827,000 at December 31, 2019. At June 30, 2020, these deposits totaled $240,927,000. The decrease in interest bearing deposits of $20,616,000 from the second quarter of 2020 to the third quarter of 2020 was due to the purchase of additional securities.

Total liabilities increased by 17.44% to $2,885,743,000 at September 30, 2020 compared to $2,457,225,000 at December 31, 2019. Total liabilities increased $82,844,000, or 2.96%, at September 30, 2020 from the quarter ended June 30, 2020. The increase in total liabilities since December 31, 2019 was composed of a $415,977,000, or 17.21%, increase in total deposits, and a $18,971,000, or 118.52%, increase in accrued interest and other liabilities, partially offset by a $6,430,000, or 27.23%, decrease, in Federal Home Loan Bank advances. The increase in total deposits since December 31, 2019 was primarily attributable to management's strategic decision to grow market share through targeted marketing strategies in our newer markets that resulted in the opening of new accounts and the government issued economic stimulus relief attributable to COVID-19. Deposit growth was also the result of PPP loan proceeds being deposited in the Bank pending use of the funds by the borrower and reduced consumer spending as a result of the pandemic. The increase in accrued interest and other liabilities since December 31, 2019 was primarily attributable to an increase in employee bonus payable, lease payable, and escrow payable. The decrease in Federal Home Loan Bank advances was due to scheduled principal payments that reduced the outstanding balance. At September 30, 2020, our borrowing capacity with the Federal Home Loan Bank of Cincinnati totaled $306,666,000. The Bank pledges substantially all of its 1-4 family residential real estate loans to secure its borrowings from the Federal Home Loan Bank of Cincinnati.

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Non Performing Assets

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

Loans on Nonaccrual Status

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

Past Due Loans

	(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		Non Accrual and Greater Than 90 Days		Total Non Accrual and Past Due		Current		Total Loans		Recorded Investment Greater Than 90 Days Past Due and Accruing
September 30, 2020
Residential 1-4 family	$	374		71		400		845		530,640		531,485	$	400
Multifamily		—		—		—		—		123,650		123,650		—
Commercial real estate		149		—		361		510		846,011		846,521		50
Construction		102		—		79		181		430,418		430,599		79
Farmland		—		—		5		5		16,417		16,422		5
Second mortgages		—		—		—		—		9,239		9,239		—
Equity lines of credit		31		32		97		160		77,332		77,492		97
Commercial		22		—		—		22		189,633		189,655		—
Agricultural, installment and other		211		58		12		281		71,760		72,041		12
Total	$	889		161		954		2,004		2,295,100		2,297,104	$	643
December 31, 2019
Residential 1-4 family	$	4,760		799		2,336		7,895		503,355		511,250	$	1,387
Multifamily		—		—		—		—		97,104		97,104		—
Commercial real estate		500		—		1,661		2,161		791,218		793,379		—
Construction		1,535		147		594		2,276		422,909		425,185		594
Farmland		57		—		8		65		19,203		19,268		8
Second mortgages		—		—		100		100		10,660		10,760		100
Equity lines of credit		143		—		372		515		71,864		72,379		372
Commercial		71		30		—		101		98,164		98,265		—
Agricultural, installment and other		517		116		46		679		64,773		65,452		46
Total	$	7,583		1,092		5,117		13,792		2,079,250		2,093,042	$	2,507

Generally, at the time a loan is placed on nonaccrual status, all interest accrued on the loan in the current fiscal year is reversed from income, and all interest accrued and uncollected from the prior year is charged off against the allowance for loan losses. Thereafter, interest on nonaccrual loans is recognized as interest income only to the extent that cash is received and future collection of principal is not in doubt. A nonaccrual loan may be restored to accruing status when principal and interest are no longer past due and unpaid and future collection of principal and interest on a timely basis is not in doubt. Management has assessed the loans that are 90 days past due and determined that all are well-collateralized and in the process of collection, thus accrual of interest is appropriate.

Non-performing loans, which included non-accrual loans and loans 90 days past due, at September 30, 2020 totaled $954,000, a decrease from $5,117,000 at December 31, 2019. The decrease in non-performing loans during the nine months ended September 30, 2020 of $4,163,000 is due primarily to the payoff of three large loan relationships and the pay-down of one large loan relationship. Management believes that it is probable that it will incur losses on its non-performing loans but believes that these losses should not exceed the amount in the allowance for loan losses already allocated to these loans, unless there is unanticipated deterioration of local real estate values or further, or greater than anticipated, economic disruption resulting from COVID-19. Although deterioration of the real estate market is not currently apparent, the prolonged coronavirus outbreak could have a material adverse impact on economic and market conditions and could potentially cause a negative impact on the value of real estate being held as collateral. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact to the value of real estate; however, the pandemic presents continued uncertainty and risk with respect to the Company, its performance, and its financial results.

The net non-performing asset ratio (NPA) is used as a measure of the overall quality of the Company's assets. Our NPA ratio is calculated by taking the total of our loans greater than 90 days past due and accruing interest, non-accrual loans and other real estate owned divided by our total assets outstanding. Our NPA ratio for the periods ended September 30, 2020 and December 31, 2019 were 0.06% and 0.21%, respectively. The NPA ratio was favorably impacted by the payment deferrals we offered customers under the CARES Act.

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

At September 30, 2020 the Company had impaired loans of $2,389,000 down from $5,052,000 at December 31, 2019. The decrease in impaired loans during the nine months ended September 30, 2020 as compared to December 31, 2019 is due to the removal of one impaired loan relationship, the pay-down of one large loan relationship, and the payoff of two large loan relationships. Overall, prior to the onset of the COVID-19 pandemic the Company’s market areas had seen continued strengthening in the residential real estate market in recent years while the commercial real estate market had remained steady. The allowance for loan losses related to collateral dependent impaired loans was measured based upon the estimated fair value of related collateral.

The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic or other concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. The concessions typically result from the Company’s loss mitigation activities and could include reduction in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. Total TDRs decreased $1,741,000 to $2,806,000 from December 31, 2019 to September 30, 2020 due to the pay-down of one large loan relationship and the payoff of two large loan relationships that were classified as TDRs at December 31, 2019. The CARES Act and interagency guidance provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for those loans which have been granted deferrals due to the effects of COVID-19. If the pandemic continues for an extended period of time and the economy continues to be negatively impacted, the Company anticipates an increase in TDRs and the financial condition of the Company could be negatively impacted. The extent to which the COVID-19 outbreak will impact our financial results and asset quality remains uncertain. For more information regarding the deferrals we have offered to our customers see “Impact of COVID-19” above.

Loans are charged-off in the month when the determination is made that the loan is uncollectible. Net recoveries for the nine months ended September 30, 2020 were $84,000 as compared to $143,000 in net charge-offs for the same period in 2019. Overall, the Bank has experienced minimal charge-offs during 2020; however if the COVID-19 pandemic continues for an extended period of time and the economy continues to be negatively impacted, the Company anticipates an increase in charge-offs and the financial condition of the Company could be negatively impacted. The extent to which the COVID-19 outbreak will impact financial results remains uncertain.

At September 30, 2020, our internally classified loans had decreased $2,178,000, or 20.45%, to $8,473,000 from $10,651,000 at December 31, 2019 primarily due to the pay-down of one internally classified loan relationship and payoffs of several internally classified loan relationships. Classified loan balances have remained relatively consistent due to favorable economic conditions prior to the onset of the COVID-19 pandemic. Loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement. As with other asset quality measures, prolonged economic disruption as a result of the ongoing COVID-19 pandemic will likely result in increased levels of classified loans.

The largest categories of internally graded loans at September 30, 2020 were residential real estate mortgage loans and commercial real estate. Included within the residential real estate category are residential real estate construction and development loans, including loans to home builders and developers of land, as well as 1-4 family mortgage loans. Residential real estate loans, including construction and land development loans that are internally classified totaled $7,625,000 and $8,663,000 at September 30, 2020 and December 31, 2019, respectively. Commercial real estate loans that are internally classified totaled $594,000 and $1,769,000 at September 30, 2020 and December 31, 2019, respectively. These loans have been graded accordingly due to bankruptcies, inadequate cash flows and/or delinquencies. The $1,038,000 decrease in internally graded residential real estate loans since December 31, 2019 was due to the payoff of several internally classified loan relationships. The $1,175,000 decrease in internally graded commercial real estate loans since December 31, 2019 was due to the payoff of one large loan relationship and pay-down of one large loan relationship. As of September 30, 2020, the Bank has experienced a stabilization in internally graded loans as the cash flows from home builders, land developers, and commercial real estate borrowers have stabilized. The COVID-19 pandemic has had a notable impact on general economic conditions and there are many unknowns surrounding this situation. If the pandemic continues for an extended period of time and the economy continues to be negatively impacted, the Company anticipates an increase in internally graded loans and the financial condition of the Company could be negatively impacted.

Many of the Bank's customers have been negatively impacted by the COVID-19 pandemic either through supply chain shortages, government mandated closures, job loss, furloughs, salary decreases, reduced consumer spending and a reduced workforce, among many other factors. In an effort to provide relief to those customers, the Bank proactively began providing relief to our customers in mid March 2020 through a 90 day interest only payment option or a full 90 day payment deferral option. The first week of April 2020, the Bank expanded its efforts to provide a six-month interest only payment option in an effort to provide flexibility to our customers as they navigate these uncertain economic times. As of September 30, 2020, the Bank had 48 loans, totaling $79.1 million in aggregate principal amount for which principal or both principal and interest were being deferred, compared to 739 loans totaling $540.3 million on deferral at June 30, 2020. The Bank is monitoring its loan portfolio on a weekly basis to identify the segments that are utilizing the COVID relief efforts and the overall percentage of the loan portfolio that has taken advantage of the relief. These reports are being reviewed by executive management and appropriately communicated to the Board of Directors.

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Liquidity and Asset Management

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

Liquid assets include cash, due from banks, interest bearing deposits in other financial institutions and unpledged investment securities that will mature within one year. At September 30, 2020, the Company’s liquid assets totaled $545.1 million. Additionally, as of September 30, 2020, the Company had available approximately $95.2 million in unused federal funds lines of credit with regional banks and, subject to certain restrictions and collateral requirements, approximately $306.7 million of borrowing capacity with the Federal Home Loan Bank of Cincinnati to meet short term funding needs. The Company maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management in maintaining stability in net yield on earning assets under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.

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

The Company’s primary source of liquidity is a stable core deposit base. In addition, short-term borrowings, loan payments and investment security maturities provide a secondary source. At September 30, 2020, the Company had a liability sensitive position (a negative gap). Liability sensitivity means that more of the Company’s liabilities are capable of re-pricing over certain time frames than its assets, and in a rising rate environment liability sensitivity could cause net yield on earning assets to experience compression which would negatively impact net interest income. The interest rates associated with these liabilities may not actually change over this period but are capable of changing. Liability sensitivity generally should lead to an expansion in net yield on earning assets in a declining rate environment, as we are currently experiencing, but for that to occur the Bank will need to reprice its deposits more quickly than it reprices rates it earns on loans. As discussed elsewhere herein, the Bank anticipates that its net yield on earning assets is likely to contract for the remainder of 2020 and into 2021 because of competitive pressures in its markets and the impacts of the COVID-19 pandemic.

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

	% Change from Base Case for Immediate Parallel Changes in Rates
	-200 BP(1)			-100 BP(1)			+100 BP			+200 BP			+300 BP
Net interest income		(5.13	)%		(3.58	)%		(1.43	)%		2.28	%		3.25	%
EVE		(7.79	)%		(10.58	)%		3.98	%		6.94	%		7.82	%

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

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

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

The Company’s securities portfolio consists of earning assets that provide interest income. Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, the need or desire to increase capital and similar economic factors. At September 30, 2020, securities totaling approxim ately $16,907,000 matur e or will be subject to rate adjustments within the next twelve months.

A secondary source of liquidity is the Company’s loan portfolio. At September 30, 2020 , loans totaling approximately $706,696,000 either will becom e due or will be subject to rate adjustments within twelve months from that date.

As for liabilities, at September 30, 2020 , certificates of deposit of $250,000 or greater totaling approximately $63,354,000 wil l become due or reprice during the next twelve months. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit accounts and regular savings accounts. Management anticipates that there will be no significant withdrawals from these accounts in the future.

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At September 30, 2020, the scheduled maturities of the Federal Home Loan Bank advances and interest rates were as follows (scheduled maturities will differ from scheduled repayments):

(in thousands)
Scheduled Maturities	Amount	Weighted Average Rates
2020	$ —	—%
2021	1,000	2.67
2022	1,500	2.68
2023	1,875	2.68
2024	12,808	2.67
Thereafter	—	—
	$ 17,183	2.67%

Management believes that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future. The COVID-19 pandemic has presented overall uncertainty in the financial markets and the Bank has seen an increase in deposits as some customers have shifted funds from market based products to more stable FDIC insured options. In addition, the CARES Act includes an economic stimulus package for individuals who meet the federal income qualifications in the form of a direct payment. Further stimulus checks may have the effect of further increasing the Bank's deposit accounts, thus increasing liquidity. At the present time, management does not believe that the COVID-19 pandemic will result in the Company’s liquidity changing in a materially adverse way.

Off Balance Sheet Arrangements

At September 30, 2020, we had unfunded loan commitments outstanding of $755,018,000 and outstanding standby letters of credit of $78,023,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. Additionally, the Bank could sell participations in these or other loans to correspondent banks. As mentioned above, the Bank has been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments, investment security maturities and short-term borrowings.

Capital Position and Dividends

At September 30, 2020, total stockholders’ equity was $370,891,000, or 11.39% of total assets, which compares with $336,984,000, or 12.06% of total assets, at December 31, 2019. The dollar increase in stockholders’ equity during the nine months ended September 30, 2020 results from the Company’s net income of $29,590,000, proceeds from the issuance of common stock related to exercise of stock options of $347,000, the net effect of a $8,956,000 unrealized gain on investment securities net of applicable income tax expense of $2,341,000, cash dividends declared of $13,013,000 of which $10,056,000 was reinvested under the Company’s dividend reinvestment plan, and $312,000 related to stock option compensation.

Impact of Inflation

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

The COVID-19 pandemic and the government response to such pandemic has materially changed the reported market risks during the nine months ended September 30, 2020. Since March 3, 2020, the Federal Reserve has lowered the Fed Funds benchmark rate by a full 1.5 percentage points to a target range of 0 percent to 0.25 percent. In the third quarter of 2020 the Fed announced they would not likely be moving rates until the end of 2023 at the earliest. The Fed also announced it would purchase more Treasury securities to encourage lending to try to offset the impact of the coronavirus outbreak. This was an emergency response as the coronavirus escalated sharply in the United States, with stay-at-home orders and directives in nearly all states, mandatory business closures and mandatory work-from-home policies. Because economic indicators suggested that a recession was impending, the Federal Reserve stepped in with a broad array of monetary policy actions including direct lending to banks and corporations, expanding the scope of repurchase agreements, lowering the reserve requirements for banks at the federal reserve and supporting small and mid size businesses. As discussed in the Management's Discussion and Analysis section above, the Bank has experienced some compression to its net yield on earning assets due to the rate cuts enacted by the Federal Reserve. The extent to which the COVID-19 pandemic and the response by federal, state and local governments will ultimately impact the financial performance of the Bank is uncertain and management continues to actively monitor and adopt to the rapid market changes.

Item 4. Controls and Procedures

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

Overall, there were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 30, 2020 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, 2019 except as set forth below.

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

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

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

In March 2020, the Federal Reserve reduced the target federal funds rate by 150 basis points and for a portion of March 2020 the 10-year treasury bond rate fell to below 1.00% for the first time in history. These actions, and other actions being taken by governmental and regulatory agencies affecting monetary policy in response to the unprecedented challenges resulting from the spread of COVID-19, have negatively impacted our assets and our results and are likely to negatively impact our net yield on earning assets and our results throughout the remainder of 2020 and into 2021. The fair values of certain of our investments are also likely to remain depressed or further decline as a result of COVID-19.

As a result of COVID-19 many of our borrowers, including owners of commercial real estate properties, are experiencing varying degrees of financial distress, which is expected to continue, and may possibly increase, over the coming months. As a result, these borrowers may have difficulty paying, on a timely basis, interest and principal payments on their loans and the value of collateral securing these obligations may be adversely impacted as well. Though we have offered these borrowers, and others, the ability to defer interest and principal payments for 90 days with the possibility to extend the deferral of interest for an additional 90 days, these borrowers may still be experiencing distress.

The ability of states and municipalities to fund shortfalls could have an affect on their ability to sustain debt maintenance, which would consequently impact the value of our municipal bond portfolio if we hold bonds issued by those states or municipalities.

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

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

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

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Our participation in the PPP may expose us to financial liability, credit losses, compliance costs or reputational damage.

Under the CARES Act, Congress created the PPP and authorized the Treasury to implement rules regarding the program. Banks, like us, and non-bank lenders facilitated funding under the program on behalf of the SBA for borrowers that were eligible participants. Since the roll out of the PPP, Treasury has issued rules and other interpretive guidance seeking to address uncertainty surrounding the program and its eligibility and other criteria. This constantly changing guidance caused challenges for us and other lenders under the program in finalizing and submitting applications. We are beginning to receive and process requests from our customers for forgiveness of their obligations under their PPP loans and again guidance is lacking from the Treasury and SBA on how to process these requests. As a result, we, and other lenders under the PPP, may face criticism from customers or others that are seeking forgiveness. This criticism could cause reputational damage to us and there is a possibility that customers or others may threaten and pursue legal action against banks and other lenders like us under the program.

Among other regulatory requirements, PPP loans are subject to forbearance of loan payments for a ten-month period to the extent that loans are not eligible for forgiveness. If PPP borrowers fail to qualify for loan forgiveness, including by failing to use the funds appropriately in order to qualify for forgiveness under the program, we have a greater risk of holding these loans at unfavorable interest rates. In addition, because of the short time period between the passing of the CARES Act and the implementation of the PPP, there is ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. There is risk that the SBA or another governmental entity could conclude there is a deficiency in the manner in which we originated, funded, or serviced PPP loans, which may or may not be related to the ambiguity in the CARES Act or the rules and guidance promulgated by the SBA and the Treasury regarding the operation of the PPP. In the event of such deficiency, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from us.

Since the commencement of the PPP, several banks have been subject to litigation regarding the process and procedures that such banks followed in accepting and processing applications for the PPP. We may be exposed to the risk of similar litigation, from both customers and non-customers that contacted us regarding obtaining PPP loans with respect to the processes and procedures we used in processing applications for the PPP. Litigation risk also exists with respect to claims from accountants, law firms and other advisors seeking to share in a portion of the fees received by us in connection with our origination of loans under the PPP. Litigation related to our participation in the PPP, if not resolved in a manner that is favorable to us, may result in significant financial liability to us or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs, or reputational damage caused by PPP-related litigation could have a material adverse impact on our reputation, business, financial condition, and results of operations.

In addition, we may be subject to regulatory scrutiny regarding our processing of PPP applications or forgiveness requests or our origination or servicing of PPP loans. While the SBA has said that in many instances, banks may rely on the certifications of borrowers regarding their eligibility for PPP loans, we do have several obligations under the PPP, and if the SBA found that we did not meet those obligations, the remedies the SBA may seek against us are unknown but may include not guarantying the PPP loans resulting in credit exposure to borrowers who may be unable to repay their loans. The PPP may also attract significant interest from federal and state enforcement authorities, oversight agencies, regulators, and Congressional committees. State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling us to rely on borrower certifications, and take more aggressive action against us for alleged violations of the provisions governing our participation in the PPP.

Our hedging strategy may not be effective, including in the event that interest rates move in unanticipated manners.

We have entered into certain hedging transactions including interest rate swaps, which are designed to lessen elements of our interest rate exposure. This hedging strategy converts the fixed interest rates on certain of our outstanding loans to LIBOR-based variable interest rates. In the event that interest rates do not change in the manner that we anticipate at the times we institute our hedging strategies or at the pace that we anticipated, such transactions may materially and adversely affect our results of operations.

Hedging creates certain risks for us, including the risk that the other party to the hedge transaction will fail to perform (counterparty risk, which is a type of credit risk), and the risk that the hedge will not fully protect us from loss as intended (hedge failure risk). Unexpected counterparty failure or hedge failure could have a significant adverse effect on our liquidity and earnings.

Table of Contents

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

(a) None

(b) Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

(a) None

(b) Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS

10.1		First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by and between Wilson Bank and Trust and John McDearman.*

10.2		Second Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by and between Wilson Bank and Trust and Clark Oakley.*

10.3		First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by and between Wilson Bank and Trust and Lisa Pominski.*

10.4		First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by and between Wilson Bank and Trust and Gary Whitaker.*

10.5		First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by and between Wilson Bank and Trust and John Foster.*

10.6		First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by and between Wilson Bank and Trust and John McDearman.*

10.7		Second Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by and between Wilson Bank and Trust and Clark Oakley.*

10.8		First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by and between Wilson Bank and Trust and Lisa Pominski.*

10.9		First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement dated October 26, 2020, by and between Wilson Bank and Trust and Gary Whitaker.*

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.

Table of Contents

SIGNATURES

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



		WILSON BANK HOLDING COMPANY
		(Registrant)

DATE: November 9, 2020		/s/ John C. McDearman III
		John C. McDearman III
		President and Chief Executive Officer

DATE: November 9, 2020		/s/ Lisa Pominski
		Lisa Pominski
		Executive Vice President & Chief Financial Officer

Exhibit 10.1

FIRST AMENDMENT TO THE

WILSON BANK AND TRUST

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

IMPLEMENTED NOVEMBER 23, 2012

WHEREAS, Wilson Bank and Trust (the "Bank") and John McDearman, (the "Executive") previously entered into the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement (the "Agreement"), originally effective as of November 23, 2012; and

WHEREAS, the Agreement is designed to provide retirement benefits (the "Benefits") to the Executive upon certain enumerated events, payable out of the Bank's general assets; and

WHEREAS, the Bank and the Executive have agreed to amend the Agreement to clarify benefit payments in the event of a Disability.

NOW, THEREFORE, effective October 26, 2020, the Bank and the Executive hereby amend the Agreement as follows:

Paragraph 3.4(a) is hereby added as a sub-paragraph under paragraph 3.4 as follows:

Notwithstanding any other provision of this Agreement, if Disability Benefits are payable under this paragraph 3.4, in no event shall the Executive receive a total annual Disability Benefit from the Bank that is greater than sixty percent (60%) of the Executive's annual base salary and bonus at the time of the Disability, including from any and all other disability benefits, plans or arrangements that the Bank may provide. The Bank reserves the right to reduce the amount of the Disability Benefit , but not the time or form of payment, in order to limit the amount of the payment as described herein, to the extent permitted and in accordance with 1.409A-3(i)(1)(ii) of the Treasury Regulations.

IN WITNESS WHEREOF, both parties hereto acknowledge that each has carefully read and considered this Amendment and consent to the changes contained herein. Both parties have caused this First Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement to be executed this October 26, 2020, effective October 26, 2020.

WILSON BANK AND TRUST

EXECUTIVE

By:

/s/ John Foster

/s/ John C. McDearman III

Its:

President

Exhibit 10.2

SECOND AMENDMENT TO THE

WILSON BANK AND TRUST

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

IMPLEMENTED NOVEMBER 23, 2012

WHEREAS, Wilson Bank and Trust (the "Bank") and Clark Oakley, (the "Executive") previously entered into the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement (the "Agreement"), originally effective as of November 23, 2012; and

WHEREAS, the Agreement is designed to provide retirement benefits (the "Benefits") to the Executive upon certain enumerated events, payable out of the Bank's general assets; and

WHEREAS, the Bank and the Executive have agreed to amend the Agreement to clarify benefit payments in the event of a Disability.

NOW, THEREFORE, effective October 26, 2020, the Bank and the Executive hereby amend the Agreement as follows:

Paragraph 3.4(a) is hereby added as a sub-paragraph under paragraph 3.4 as follows:

IN WITNESS WHEREOF, both parties hereto acknowledge that each has carefully read and considered this Amendment and consent to the changes contained herein. Both parties have caused this Second Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement to be executed this October 26, 2020, effective October 26, 2020.

WILSON BANK AND TRUST

EXECUTIVE

By:

/s/ John C. McDearman III

/s/ Clark Oakley

Its:

Chief Executive Officer

Exhibit 10.3

FIRST AMENDMENT TO THE

WILSON BANK AND TRUST

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

IMPLEMENTED NOVEMBER 23, 2012

WHEREAS, Wilson Bank and Trust (the "Bank") and Lisa Pominski, (the "Executive") previously entered into the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement (the "Agreement"), originally effective as of November 23, 2012; and

WHEREAS, the Agreement is designed to provide retirement benefits (the "Benefits") to the Executive upon certain enumerated events, payable out of the Bank's general assets; and

WHEREAS, the Bank and the Executive have agreed to amend the Agreement to clarify benefit payments in the event of a Disability.

NOW, THEREFORE, effective October 26, 2020, the Bank and the Executive hereby amend the Agreement as follows:

Paragraph 3.4(a) is hereby added as a sub-paragraph under paragraph 3.4 as follows:

WILSON BANK AND TRUST

EXECUTIVE

By:

/s/ John C. McDearman III

/s/ Lisa Pominski

Its:

Chief Executive Officer

Exhibit 10.4

FIRST AMENDMENT TO THE

WILSON BANK AND TRUST

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

IMPLEMENTED NOVEMBER 23, 2012

WHEREAS, Wilson Bank and Trust (the "Bank") and Gary Whitaker, (the "Executive") previously entered into the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement (the "Agreement"), originally effective as of November 23, 2012; and

WHEREAS, the Agreement is designed to provide retirement benefits (the "Benefits") to the Executive upon certain enumerated events, payable out of the Bank's general assets; and

WHEREAS, the Bank and the Executive have agreed to amend the Agreement to clarify benefit payments in the event of a Disability.

NOW, THEREFORE, effective October 26, 2020, the Bank and the Executive hereby amend the Agreement as follows:

Paragraph 3.4(a) is hereby added as a sub-paragraph under paragraph 3.4 as follows:

WILSON BANK AND TRUST

EXECUTIVE

By:

/s/ John C. McDearman III

/s/ Gary Whitaker

Its:

Chief Executive Officer

Exhibit 10.5

FIRST AMENDMENT TO THE

WILSON BANK AND TRUST

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

IMPLEMENTED MAY 22, 2015

WHEREAS, Wilson Bank and Trust (the "Bank") and John Foster, (the "Executive") previously entered into the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement (the "Agreement"), originally effective as of May 22^nd, 2015; and

WHEREAS, the Agreement is designed to provide retirement benefits (the "Benefits") to the Executive upon certain enumerated events, payable out of the Bank's general assets; and

WHEREAS, the Bank and the Executive have agreed to amend the Agreement to clarify benefit payments in the event of a Disability.

NOW, THEREFORE, effective October 26, 2020, the Bank and the Executive hereby amend the Agreement as follows:

Paragraph 3.3(a) is hereby added as a sub-paragraph under paragraph 3.3 as follows:

Notwithstanding any other provision of this Agreement, if Disability Benefits are payable under this paragraph 3.3, in no event shall the Executive receive a total annual Disability Benefit from the Bank that is greater than sixty percent (60%) of the Executive's annual base salary and bonus at the time of the Disability, including from any and all other disability benefits, plans or arrangements that the Bank may provide. The Bank reserves the right to reduce the amount of the Disability Benefit , but not the time or form of payment, in order to limit the amount of the payment as described herein, to the extent permitted and in accordance with 1.409A-3(i)(1)(ii) of the Treasury Regulations.

WILSON BANK AND TRUST

EXECUTIVE

By:

/s/ John C. McDearman III

/s/ John Foster

Its:

Chief Executive Officer

Exhibit 10.6

FIRST AMENDMENT TO THE

WILSON BANK AND TRUST

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

IMPLEMENTED MAY 22, 2015

WHEREAS, the Agreement is designed to provide retirement benefits (the "Benefits") to the Executive upon certain enumerated events, payable out of the Bank's general assets; and

WHEREAS, the Bank and the Executive have agreed to amend the Agreement to clarify benefit payments in the event of a Disability.

NOW, THEREFORE, effective October 26, 2020, the Bank and the Executive hereby amend the Agreement as follows:

Paragraph 3.3(a) is hereby added as a sub-paragraph under paragraph 3.3 as follows:

WILSON BANK AND TRUST

EXECUTIVE

By:

/s/ John Foster

/s/ John C. McDearman III

Its:

President

Exhibit 10.7

SECOND AMENDMENT TO THE

WILSON BANK AND TRUST

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

IMPLEMENTED MAY 22, 2015

WHEREAS, the Agreement is designed to provide retirement benefits (the "Benefits") to the Executive upon certain enumerated events, payable out of the Bank's general assets; and

WHEREAS, the Bank and the Executive have agreed to amend the Agreement to clarify benefit payments in the event of a Disability.

NOW, THEREFORE, effective October 26, 2020, the Bank and the Executive hereby amend the Agreement as follows:

Paragraph 3.3(a) is hereby added as a sub-paragraph under paragraph 3.3 as follows:

IN WITNESS WHEREOF, both parties hereto acknowledge that each has carefully read and considered this Amendment and consent to the changes contained herein. Both parties have caused this Second Amendment to the Wilson Bank and Trust Supplemental Executive Retirement Plan Agreement to be executed this October 26, 2020, effective October 26, 2020.

WILSON BANK AND TRUST

EXECUTIVE

By:

/s/ John C. McDearman III

/s/ Clark Oakley

Its:

Chief Executive Officer

Exhibit 10.8

FIRST AMENDMENT TO THE

WILSON BANK AND TRUST

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

IMPLEMENTED MAY 22, 2015

WHEREAS, the Agreement is designed to provide retirement benefits (the "Benefits") to the Executive upon certain enumerated events, payable out of the Bank's general assets; and

WHEREAS, the Bank and the Executive have agreed to amend the Agreement to clarify benefit payments in the event of a Disability.

NOW, THEREFORE, effective October 26, 2020, the Bank and the Executive hereby amend the Agreement as follows:

Paragraph 3.3(a) is hereby added as a sub-paragraph under paragraph 3.3 as follows:

WILSON BANK AND TRUST

EXECUTIVE

By:

/s/ John C. McDearman III

/s/ Lisa Pominski

Its:

Chief Executive Officer

Exhibit 10.9

FIRST AMENDMENT TO THE

WILSON BANK AND TRUST

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

IMPLEMENTED MAY 22, 2015

WHEREAS, the Agreement is designed to provide retirement benefits (the "Benefits") to the Executive upon certain enumerated events, payable out of the Bank's general assets; and

WHEREAS, the Bank and the Executive have agreed to amend the Agreement to clarify benefit payments in the event of a Disability.

NOW, THEREFORE, effective October 26, 2020, the Bank and the Executive hereby amend the Agreement as follows:

Paragraph 3.3(a) is hereby added as a sub-paragraph under paragraph 3.3 as follows:

WILSON BANK AND TRUST

EXECUTIVE

By:

/s/ John C. McDearman III

/s/ Gary Whitaker

Its:

Chief Executive Officer

Exhibit 31.1

CERTIFICATIONS

I, John C. McDearman III, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Wilson Bank Holding Company;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	(a)	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



DATE: November 9, 2020

		/s/ John C. McDearman III
		John C. McDearman III, President and Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS

I, Lisa Pominski, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Wilson Bank Holding Company;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	(a)	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



DATE: November 9, 2020

		/s/ Lisa Pominski
		Lisa Pominski, Executive Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Wilson Bank Holding Company (the “Company”) on Form 10-Q for the quarter ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John C. McDearman III, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to Wilson Bank Holding Company and will be retained by Wilson Bank Holding Company and furnished to the Securities and Exchange Commission or its staff upon request.



DATE: November 9, 2020

		/s/ John C. McDearman III
		John C. McDearman III, President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Wilson Bank Holding Company (the “Company”) on Form 10-Q for the quarter ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lisa Pominski, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



DATE: November 9, 2020

		/s/ Lisa Pominski
		Lisa Pominski, Executive Vice President and Chief Financial Officer