WILSON BANK HOLDING CO - Quarter Report: 2013 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

¨	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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨

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

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: 7,496,877 shares at August 9, 2013.


*Part I:*	*FINANCIAL INFORMATION*

Item 1.	Financial Statements	3

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

	Consolidated Balance Sheets - June 30, 2013 and December 31, 2012	3

	Consolidated Statements of Earnings - For the three months and six months ended June 30, 2013 and 2012	4

	Consolidated Statements of Comprehensive Earnings - For the three months and six months ended June 30, 2013 and 2012	5

	Consolidated Statements of Cash Flows - For the six months ended June 30, 2013 and 2012	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

	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	43

*Part II:*	*OTHER INFORMATION*

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	46

Signatures		47
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	INTERACTIVE DATA FILE

Part I. Financial Information

Item 1. Financial Statements

WILSON BANK HOLDING COMPANY

Consolidated Balance Sheets

June 30, 2013 and December 31, 2012

(Unaudited)


	June 30, 2013			December 31, 2012
	(Dollars in Thousands)

Assets
Loans	$	1,232,486		$	1,167,608
Less: Allowance for loan losses		(25,841	)		(25,497	)

Net loans		1,206,645			1,142,111

Securities:
Held to maturity, at cost (market value $23,990 and $16,317, respectively)		24,234			15,508
Available-for-sale, at market (amortized cost $286,583 and $313,111, respectively)		282,714			317,278

Total securities		306,948			332,786


Loans held for sale		8,469			15,648
Federal funds sold		17,140			23,780
Restricted equity securities		3,012			3,012

Total earning assets		1,542,214			1,517,337
Cash and due from banks		81,331			82,884
Bank premises and equipment, net		35,926			35,853
Accrued interest receivable		5,477			5,426
Deferred income tax asset		11,304			8,243
Other real estate		13,706			15,307
Other assets		9,405			10,965
Goodwill		4,805			4,805


Total assets	$	1,704,168		$	1,680,820


Liabilities and Shareholders’ Equity
Deposits	$	1,511,089		$	1,493,922
Securities sold under repurchase agreements		10,248			10,584
Accrued interest and other liabilities		11,349			6,616

Total liabilities		1,532,686			1,511,122


Shareholders’ equity:
Common stock, $2.00 par value; authorized 15,000,000 shares, issued 7,460,267 and 7,419,204 shares, respectively		14,921			14,838
Additional paid-in capital		52,903			51,242
Retained earnings		106,046			101,046

Net unrealized (gains) losses on available-for-sale securities, net of income taxes of $1,482 and $1,595, respectively		(2,388	)		2,572

Total shareholders’ equity		171,482			169,698

Total liabilities and shareholders’ equity	$	1,704,168		$	1,680,820

See accompanying notes to consolidated financial statements (unaudited).

WILSON BANK HOLDING COMPANY

Consolidated Statements of Earnings

Three Months and Six Months Ended June 30, 2013 and 2012

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(Dollars in Thousands Except Per Share Amounts)
Interest income:
Interest and fees on loans	$	16,482	$	16,479	$	32,946	$	32,752
Interest and dividends on securities:
Taxable securities		975		1,428		2,034		2,786
Exempt from Federal income taxes		153		101		299		202
Interest on loans held for sale		52		93		123		191
Interest on Federal funds sold		55		30		99		63
Interest and dividends on restricted securities		32		35		68		77

Total interest income		17,749		18,166		35,569		36,071


Interest expense:
Interest on negotiable order of withdrawal accounts		397		508		793		1,014
Interest on money market and savings accounts		610		699		1,204		1,456
Interest on certificates of deposit		1,729		2,354		3,579		5,024
Interest on securities sold under repurchase agreements		12		14		25		28
Interest on Federal funds purchased		—		1		—		2

Total interest expense		2,748		3,576		5,601		7,524


Net interest income before provision for loan losses		15,001		14,590		29,968		28,547
Provision for loan losses		755		2,210		1,424		4,466

Net interest income after provision for loan losses		14,246		12,380		28,544		24,081


Non-interest income:
Service charges on deposit accounts		1,021		1,156		1,961		2,366
Other fees and commissions		1,969		1,970		3,749		3,803
Gain on sale of loans		988		813		1,810		1,434
Gain on sale of other assets		6		3		6		6
Gain on sale of securities		78		236		78		259
Other income		—		3		—		3

Total non-interest income		4,062		4,181		7,604		7,871

Non-interest expense:
Salaries and employee benefits		6,430		5,995		12,481		11,844
Occupancy expenses, net		663		644		1,281		1,269
Furniture and equipment expense		332		258		639		531
Data processing expense		488		405		896		714
Directors’ fees		162		171		364		373
Other operating expenses		3,077		3,164		8,219		5,884
Loss on sale of other assets		4		—		6		—
Loss on sale of other real estate		468		802		716		1,584

Total non-interest expense		11,624		11,439		24,602		22,199


Earnings before income taxes		6,684		5,122		11,546		9,753
Income taxes		2,437		1,973		4,321		3,779

Net earnings	$	4,247		3,149		7,225		5,974


Weighted average number of shares outstanding-basic		7,459,554		7,347,346		7,452,666		7,339,430

Weighted average number of shares outstanding-diluted		7,464,306		7,352,911		7,457,466		7,344,193


Basic earnings per common share	$	.57	$	.43	$	.97	$	.81

Diluted earnings per common share	$	.57	$	.43	$	.97	$	.81


Dividends per share	$	—	$	—	$	.30	$	.30

See accompanying notes to consolidated financial statements (unaudited).

WILSON BANK HOLDING COMPANY

Consolidated Statements of Comprehensive Earnings

Three Months and Six Months Ended June 30, 2013 and 2012

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(In Thousands)

Net earnings	$	4,247		$	3,149		$	7,225		$	5,974


Other comprehensive earnings, net of tax:
Unrealized gains on available-for-sale securities arising during period, net of taxes of $2,341, $558, $3,047 and $432, respectively		(3,776	)		897			(4,912	)		696

Reclassification adjustment for net gains included in net earnings, net of taxes of $30, $90, $30, and $99, respectively		(48	)		(146	)		(48	)		(160	)

Other comprehensive earnings		(3,824	)		751			(4,960	)		536


Comprehensive earnings	$	423		$	3,900		$	2,265		$	6,510

See accompanying notes to consolidated financial statements (unaudited).

WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2013 and 2012

(Unaudited)


	2013			2012
	(In Thousands)
Cash flows from operating activities:
Interest received	$	37,390		$	38,011
Fees and commissions received		5,710			6,169
Proceeds from sale of loans held for sale		116,742			61,424
Other income		—			3
Origination of loans held for sale		(107,753	)		(51,627	)
Interest paid		(6,270	)		(8,491	)
Cash paid to suppliers and employees		(15,423	)		(17,785	)
Income taxes paid		(4,985	)		(5,111	)

Net cash provided by operating activities		25,411			22,593


Cash flows from investing activities:
Proceeds from maturities, calls, and principal payments of held-to-maturity securities		1,952			730
Proceeds from maturities, calls, and principal payments of available-for-sale securities		50,349			37,353
Proceeds from the sale of available-for-sale securities		6,867			75,238
Purchase of held-to-maturity securities		(10,744	)		(1,728	)
Purchase of available-for-sale securities		(32,416	)		(148,027	)
Loans made to customers, net of repayments		(66,909	)		(20,590	)
Purchase of premises and equipment		(882	)		(728	)
Proceeds from sale of other real estate		1,816			5,144
Proceeds from sale of other assets		31			25


Net cash used in investing activities		(49,936	)		(52,583	)


Cash flows from financing activities:
Net increase in non-interest bearing, savings and NOW deposit accounts		38,826			69,833
Net decrease in time deposits		(21,659	)		(25,102	)
Increase (decrease) in securities sold under repurchase agreements		(336	)		955
Dividends paid		(2,226	)		(2,191	)
Proceeds from sale of common stock pursuant to dividend reinvestment		1,620			1,599
Proceeds from exercise of stock options		107			125

Net cash provided by financing activities		16,332			45,219


Net increase (decrease) in cash and cash equivalents		(8,193	)		15,229

Cash and cash equivalents at beginning of period		106,664			54,174


Cash and cash equivalents at end of period	$	98,471		$	69,403

See accompanying notes to consolidated financial statements (unaudited).

WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows, Continued

Six Months Ended June 30, 2013 and 2012

(Unaudited)


	2013			2012
	(In Thousands)

Reconciliation of net earnings to net cash provided by operating activities:
Net earnings	$	7,225		$	5,974
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization, and accretion		2,681			2,442
Provision for loan losses		1,424			4,466
Stock option compensation		16			14
Loss on sale of other real estate		716			1,584
Gain (loss) on sale of other assets		—			(6	)
Security gains		(78	)		(259	)
Decrease in loans held for sale		7,179			8,363
Decrease (increase) in interest receivable		(51	)		326
Increase in deferred tax assets		(27	)		(220	)
Decrease (increase) in other assets, net		1,549			(439	)
Decrease in taxes payable		(637	)		(1,112	)
Increase in other liabilities		6,083			2,427
Decrease in interest payable		(669	)		(967	)

Total adjustments		18,186			16,619


Net cash provided by operating activities	$	25,411		$	22,593


Supplemental schedule of non-cash activities:

Unrealized gain (loss) in values of securities available-for-sale, net of taxes of $3,077 and $333, for the six months ended June 30, 2013 and 2012, respectively	$	(4,960	)	$	536


Non-cash transfers from loans to other real estate	$	1,767		$	6,085


Non-cash transfers from other real estate to loans	$	836		$	218


Non-cash transfers from loans to other assets	$	20		$	22

See accompanying notes to consolidated financial statements (unaudited).

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

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, and Smith 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 financial statements and related notes appearing in the 2012 Annual Report previously filed on Form 10-K.

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. 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 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 Wilson Bank Holding Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There have been no significant changes to Wilson Bank Holding Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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 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

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

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, 2012 and at June 30, 2013, there were no loans classified as nonaccrual that were not also deemed to be impaired. 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 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.). Generally, loans with an identified weakness and principal balance of $100,000 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. 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 $100,000, the Company assigns a valuation allowance to these loans utilizing an allocation rate equal to the allocation rate calculated for loans of a similar type greater than $100,000.

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.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

Recently Adopted Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which provides guidance on reporting these reclassifications. The objective of this ASU is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this ASU seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The ASU is effective prospectively for annual and interim periods beginning after December 15, 2012. The ASU did not have any impact on our financial position or results of operations but has impacted our financial statement disclosure. As shown on the statement of other comprehensive income for the six months ended June 30, 2013 and 2012, the Company reclassified approximately $48,000 and $160,000, net of tax, out of accumulated other comprehensive income into net income related to net gains on sale of investment securities, respectively.

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

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 those utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).

The following schedule details the loans of the Company at June 30, 2013 and December 31, 2012:


	(In Thousands)
	June 30, 2013			December 31, 2012

Mortgage loans on real estate
Residential 1-4 family	$	340,530		$	341,977
Multifamily		15,665			16,140
Commercial		523,486			469,757
Construction and land development		209,893			190,356
Farmland		21,919			26,319
Second mortgages		12,160			12,477
Equity lines of credit		36,118			36,260


Total mortgage loans on real estate		1,159,771			1,093,286


Commercial loans		30,707			30,545


Agricultural loans		2,174			2,238


Consumer installment loans:
Personal		37,472			38,463
Credit cards		3,120			3,250

Total consumer installment loans		40,592			41,713


Other loans		2,490			2,738

		1,235,734			1,170,520


Net deferred loan fees		(3,248	)		(2,912	)


Total loans, net of deferred loan fees		1,232,486			1,167,608


Less: Allowance for loan losses		(25,841	)		(25,497	)


Net Loans	$	1,206,645		$	1,142,111

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

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, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

Transactions in the allowance for loan losses for the six months ended June 30, 2013 and year ended December 31, 2012 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

June 30, 2013

Allowance for loan losses:

Beginning balance	$	5,699			89			9,305			7,191			1,658			272			492			382			15			394			25,497
Provision		801			(3	)		690			78			49			(39	)		(88	)		(33	)		(5	)		(26	)		1,424
Charge-offs		(405	)		—			(235	)		(13	)		(500	)		(7	)		(79	)		(24	)		—			(138	)		(1,401	)
Recoveries		34			—			17			153			6			6			—			16			4			85			321

Ending balance	$	6,129			86			9,777			7,409			1,213			232			325			341			14			315			25,841


Ending balance individually evaluated for impairment	$	1,406			—			2,216			2,466			809			51			14			—			—			—			6,962


Ending balance collectively evaluated for impairment	$	4,723			86			7,561			4,943			404			181			311			341			14			315			18,879


Ending balance loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—			—			—			—			—


Loans:

Ending balance	$	340,530			15,665			523,486			209,893			21,919			12,160			36,118			30,707			2,174			43,082			1,235,734


Ending balance individually evaluated for impairment	$	9,573			—			16,138			9,630			2,303			875			174			104			—			—			38,797


Ending balance collectively evaluated for impairment	$	330,957			15,665			507,348			200,263			19,616			11,285			35,944			30,603			2,174			43,082			1,196,937


Ending balance loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—			—			—			—			—

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED


	(In Thousands)
	Residential 1-4 Family			Multifamily		Commercial Real Estate			Construction			Farmland			Second Mortgages			Equity Lines of Credit			Commercial			Agricultural			Installment and Other			Total

December 31, 2012

Allowance for loan losses:

Beginning balance	$	5,414			54		8,242			6,223			1,829			326			653			1,309			19			456			24,525
Provision		1,557			35		5,021			3,020			284			62			(65	)		(544	)		(4	)		162			9,528
Charge-offs		(1,331	)		—		(4,057	)		(2,226	)		(462	)		(120	)		(96	)		(454	)		—			(412	)		(9,158	)
Recoveries		59			—		99			174			7			4			—			71			—			188			602

Ending balance	$	5,699			89		9,305			7,191			1,658			272			492			382			15			394			25,497


Ending balance individually evaluated for impairment	$	1,318			—		2,319			2,014			1,160			47			3			—			—			—			6,861


Ending balance collectively evaluated for impairment	$	4,381			89		6,986			5,177			498			225			489			382			15			394			18,636


Ending balance loans acquired with deteriorated credit quality	$	—			—		—			—			-6			—			—			—			—			—			—


Loans:

Ending balance	$	341,977			16,140		469,757			190,356			26,319			12,477			36,260			30,545			2,238			44,451			1,170,520


Ending balance individually evaluated for impairment	$	9,368			—		16,943			10,915			2,826			762			172			—			—			—			40,986


Ending balance collectively evaluated for impairment	$	332,609			16,140		452,814			179,441			23,493			11,715			36,088			30,545			2,238			44,451			1,129,534


Ending balance loans acquired with deteriorated credit quality	$	—			—		—			—			—			—			—			—			—			—			—

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

At June 30, 2013, the Company had certain impaired loans of $12.4 million which were on non-accruing interest status. At December 31, 2012, the Company had certain impaired loans of $16.9 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 following table presents the Company’s impaired loans at June 30, 2013 and December 31, 2012.


	In Thousands
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

June 30, 2013

With no related allowance recorded:
Residential 1-4 family	$	3,782		3,678		—		3,725		104
Multifamily		—		—		—		—		—
Commercial real estate		4,820		4,705		—		3,258		115
Construction		1,440		1,422		—		1,735		18
Farmland		—		—		—		—		—
Second mortgages		720		720		—		663		4
Equity lines of credit		—		—		—		—		—
Commercial		104		104		—		52		3
Agricultural		—		—		—		—		—

	$	10,866		10,629		—		9,433		244


With allowance recorded:

Residential 1-4 family	$	6,057		6,030		1,406		6,480		162
Multifamily		—		—		—		—		—
Commercial real estate		11,651		12,125		2,216		12,981		218
Construction		8,269		10,258		2,466		10,017		61
Farmland		2,307		2,803		809		2,825		4
Second mortgages		160		155		51		158		5
Equity lines of credit		178		174		14		226		4
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—

	$	28,622		31,545		6,962		32,687		454


Total
Residential 1-4 family	$	9,839		9,708		1,406		10,205		266
Multifamily		—		—		—		—		—
Commercial real estate		16,471		16,830		2,216		16,239		333
Construction		9,709		11,680		2,466		11,752		79
Farmland		2,307		2,803		809		2,825		4
Second mortgages		880		875		51		821		9
Equity lines of credit		178		174		14		226		4
Commercial		104		104		—		52		3
Agricultural		—		—		—		—		—

	$	39,488		42,174		6,962		42,120		698

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED


	In Thousands
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

December 31, 2012

With no related allowance recorded:
Residential 1-4 family	$	3,418		3,418		—		4,134		215
Multifamily		—		—		—		103		—
Commercial real estate		4,439		5,439		—		5,371		66
Construction		1,952		4,252		—		6,166		74
Farmland		—		—		—		37		—
Second mortgages		606		606		—		667		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—

	$	10,415		13,715		—		16,478		355


With allowance recorded:
Residential 1-4 family	$	5,950		5,950		1,318		6,084		325
Multifamily		—		—		—		—		—
Commercial real estate		12,504		12,504		2,319		14,580		509
Construction		8,963		8,963		2,014		8,171		52
Farmland		2,826		2,826		1,160		3,155		57
Second mortgages		156		156		47		155		10
Equity lines of credit		172		172		3		223		9
Commercial		—		—		—		216		—
Agricultural		—		—		—		—		—

	$	30,571		30,571		6,861		32,584		962


Total
Residential 1-4 family	$	9,368		9,368		1,318		10,218		540
Multifamily		—		—		—		103		—
Commercial real estate		16,943		17,943		2,319		19,951		575
Construction		10,915		13,215		2,014		14,337		126
Farmland		2,826		2,826		1,160		3,192		57
Second mortgages		762		762		47		822		10
Equity lines of credit		172		172		3		223		9
Commercial		—		—		—		216		—
Agricultural		—		—		—		—		—

	$	40,986	$	44,286		6,861		49,062		1,317

Impaired loans also include loans that the Company 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 Company may have to 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 noted above. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the six months ended June 30, 2013 and the year ended December 31, 2012:


	June 30, 2013						December 31, 2012
	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		1	$	315	$	315		1	$	365	$	275
Multifamily		—		—		—		—		—		—
Commercial real estate		—		—		—		1		416		354
Construction		1		280		280		3		1,291		1,291
Farmland		—		—		—		1		1,445		595
Second mortgages		1		24		24		—		—		—
Equity lines of credit		1		21		21		—		—		—
Commercial		—		—		—		—		—		—
Agricultural, installment and other		2		24		24		2		17		17


Total		6	$	664	$	664		8	$	3,534	$	2,532

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

Potential problem loans, which include nonperforming loans, amounted to approximately $45.8 million at June 30, 2013 compared to $49.4 million at December 31, 2012. 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 Company’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.

The following table presents our 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 the loan on nonaccrual status.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

Impaired loans are evaluated separately from other loans in the Bank’s portfolio. Credit quality information related to impaired loans was presented above and is excluded from the tables below.


	(In Thousands)
	Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction		Farmland		Second Mortgages		Equity Lines of Credit		Commercial		Agricultural		Installment and Other		Total

June 30, 2013

Credit Risk Profile by Internally Assigned Grade

Pass	$	326,218		15,665		506,751		199,842		19,386		10,780		35,802		30,555		2,144		42,774		1,189,917
Special Mention		10,097		—		6,164		225		68		603		253		28		4		52		17,494
Substandard		4,215		—		10,571		9,826		2,465		777		63		124		26		256		28,323
Doubtful		—		—		—		—		—		—		—		—		—		—		—

Total	$	340,530		15,665		523,486		209,893		21,919		12,160		36,118		30,707		2,174		43,082		1,235,734


December 31, 2012

Credit Risk Profile by Internally Assigned Grade

Pass	$	326,648		16,087		452,350		179,114		23,253		11,123		35,756		30,499		2,215		44,057		1,121,102
Special Mention		9,969		53		5,699		282		71		477		295		32		5		98		16,981
Substandard		5,360		—		11,708		10,960		2,995		877		209		14		18		296		32,437
Doubtful		—		—		—		—		—		—		—		—		—		—		—

Total	$	341,977		16,140		469,757		190,356		26,319		12,477		36,260		30,545		2,238		44,451		1,170,520

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

Note 3. Debt and Equity Securities

Debt and equity securities have been classified in the consolidated balance sheet according to management’s intent. Debt and equity securities at June 30, 2013 and December 31, 2012 are summarized as follows:


	June 30, 2013 Securities Available-For-Sale
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value

U.S. Government-sponsored enterprises (GSEs)*	$	131,603	$	39	$	3,188	$	128,454
Mortgage-backed:
GSE residential		141,235		658		846		141,047
Obligations of states and political subdivisions		13,745		78		610		13,213


	$	286,583	$	775	$	4,644	$	282,714

*	Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Banks, Federal Farm Credit Banks, and Government National Mortgage Association.


	June 30, 2013 Securities Held-To-Maturity
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
Mortgage-backed:
GSE residential	$	8,029	$	62	$	386	$	7,705
Obligations of states and political subdivisions		16,205		404		324		16,285

	$	24,234	$	466	$	710	$	23,990

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED


	December 31, 2012 Securities Available-For-Sale
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss		Estimated Market Value
U.S. Government-sponsored enterprises (GSEs)*	$	122,110	$	643	$	55	$	122,698
Mortgage-backed:
GSE residential		177,787		3,373		32		181,128
Obligations of states and political subdivisions		13,214		267		29		13,452


	$	313,111	$	4,283	$	116	$	317,278

*	Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Banks, Federal Farm Credit Banks, and Government National Mortgage Association.


	December 31, 2012 Securities Held-To-Maturity
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss		Estimated Market Value
Mortgage-backed:
GSE residential	$	2,918	$	122	$	—	$	3,040
Obligations of states and political subdivisions		12,590		687		—		13,277


	$	15,508	$	809	$	—	$	16,317

The amortized cost and estimated market value of debt securities at June 30, 2013, 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.


	Held-to-Maturity				Available-for-Sale
	In Thousands
	Amortized Cost		Estimated Market Value		Amortized Cost		Estimated Market Value

Due in one year or less	$	1,072	$	1,083	$	2,005	$	2,006
Due after one year through five years		6,243		6,469		30,501		30,359
Due after five years through ten years		3,895		3,908		182,010		178,856
Due after ten years		13,024		12,530		72,067		71,493


	$	24,234	$	23,990	$	286,583	$	282,714

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012.


	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
June 30, 2013	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Held to Maturity Securities:
Mortgage-backed:
GSE residential	$	6,175	$	386		4	$	—	$	—		—	$	6,175	$	386
Obligations of states and political subdivisions		6,365		324		20		—		—		—		6,365		324


	$	12,540	$	710		24	$	—	$	—		—	$	12,540	$	710


Available-for-Sale Securities:
U.S. Government - Sponsored enterprises (GSEs)	$	117,269	$	3,188		38	$	—	$	—		—	$	117,269	$	3,188

Mortgage-backed:
GSE residential		71,730		799		26		2,034		47		2		73,764		846

Obligations of states and political subdivisions		11,615		610		32		—		—		—		11,615		610


	$	200,614	$	4,597		96	$	2,034	$	47		2	$	202,648	$	4,644


	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
December 31, 2012	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Held to Maturity Securities:
Mortgage-backed:
GSE residential	$	—	$	—		—	$	—	$	—		—	$	—	$	—

Obligations of states and political subdivisions		—		—		—		—		—		—		—		—

	$	—	$	—		—	$	—	$	—		—	$	—	$	—


Available-for-Sale Securities:
U.S. Government - Sponsored enterprises (GSEs)	$	22,159	$	55		9		—		—		—	$	22,159	$	55

Mortgage-backed:
GSE residential		7,244		32		3		—		—		—		7,244		32

Obligations of states and political subdivisions		3,398		29		10		—		—		—		3,398		29


	$	32,801	$	116		22	$	—	$	—		—	$	32,801	$	116

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

Because the Company does not intend to sell these securities and it is unlikely that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be at maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2013.

The carrying values of the Company’s investment securities could decline in the future if the financial condition of issuers deteriorate 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.

Note 4. Earnings Per Share

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share for the Company begins with the basic earnings per share plus 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 months and six months ended June 30, 2013 and 2012:


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(Dollars in Thousands Except Per Share Amounts)				(Dollars in Thousands Except Per Share Amounts)
Basic EPS Computation:
Numerator - Earnings available to common stockholders	$	4,247	$	3,149	$	7,225	$	5,974


Denominator - Weighted average number of common shares outstanding		7,459,554		7,347,346		7,452,666		7,339,430


Basic earnings per common share	$	.57	$	.43	$	.97	$	.81


Diluted EPS Computation:
Numerator - Earnings available to common stockholders	$	4,247	$	3,149	$	7,225	$	5,974


Denominator - Weighted average number of common shares outstanding		7,459,554		7,347,346		7,452,666		7,339,430
Dilutive effect of stock options		4,752		5,565		4,800		4,763

		7,464,306		7,352,911		7,457,466		7,344,193


Diluted earnings per common share	$	.57	$	.43	$	.97	$	.81

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

Note 5. Comprehensive Earnings

The following is a summary of the various components comprising comprehensive earnings and the reclassifications out of accumulated other comprehensive earnings for the six-month periods ended June 30, 2013 and 2012:


June 30, 2013	Unrealized Gains and Losses on Available- for-Sale Securities

Beginning Balance	$	2,572

Other comprehensive loss before reclassifications		(4,912	)
Amount reclassified from accumulated other Comprehensive income		(48	)

Net current-period other comprehensive earnings (loss)		(4,960	)

Ending balance	$	(2,388	)


June 30, 2012	Unrealized Gains and Losses on Available- for-Sale Securities

Beginning Balance	$	865

Other comprehensive loss before reclassifications		696
Amount reclassified from accumulated other Comprehensive earnings (loss)		(160	)

Net current-period other comprehensive earnings		536

Ending balance	$	1,401


June 30, 2013
Details about Accumulated Other Comprehensive Earnings Components	Amount Reclassified from Accumulated Other Comprehensive Earnings			Affected Line Item in the Statement where Net Earnings is Presented
Unrealized gains and losses on available-for-sale securities	$	78		Realized gain/(loss) on sale of securities

		78		Total before tax
		(30	)	Tax (expense) or benefit

		48		Net of tax


Total reclassifications for the periods	$	48


June 30, 2012
Details about Accumulated Other Comprehensive Earnings Components	Amount Reclassified from Accumulated Other Comprehensive Earnings			Affected Line Item in the Statement where Net Earnings is Presented
Unrealized gains and losses on available-for-sale securities	$	259		Realized gain/(loss) on sale of securities

		259		Total before tax
		(99	)	Tax (expense) or benefit

		160		Net of tax

Total reclassifications for the periods	$	160

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

Note 6. Income Taxes

Accounting Standards Codification (“ASC”) 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods. As of June 30, 2013, the Company had no unrecognized tax benefits related to Federal or State income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to June 30, 2013.

As of June 30, 2013, the Company has accrued no interest and no 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 its subsidiaries 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, 2010 through 2012 and the IRS for the years ended December 31, 2010 through 2012.

Note 7. Commitments and Contingent Liabilities

In the normal course of business, the Company 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 (our 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 beforehand 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 Company under certain prescribed circumstances. Subsequently, the Company would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

The Company 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, 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.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

A summary of the Company’s total contractual amount for all off-balance sheet commitments at June 30, 2013 is as follows:


Commitments to extend credit	$	213,656,000
Standby letters of credit		25,332,000

The Company 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 on a best efforts basis to investors that follow conventional government sponsored entities (GSE) and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines. Generally, loans held for sale are underwritten by the Company, including HUD/VA loans.

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

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

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

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these claims outstanding at June 30, 2013 will not have a material impact on the Company’s financial statements. See further discussion regarding these claims in Part II, Item 1, “Legal Proceedings”.

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. generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC 820 applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those 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.

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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 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 products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows 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, securities are classified within Level 3 of the valuation hierarchy.

Impaired loans — A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral 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 borrowers underlying financial condition.

Other real estate — Other real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is initially recorded at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the fair value are recorded as a component of foreclosed real estate expense. Other real estate 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.

Other assets — Included in other assets are certain assets carried at fair value, including the cash surrender value of bank owned life insurance policies. The carrying amount of the cash surrender value of

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bank owned life insurance is based on information received from the insurance carriers indicating the financial performance of the policies and the amount the Company would receive should the policies be surrendered. The Company reflects these assets within Level 3 of the valuation hierarchy due to unobservable inputs included in the valuation of these items.

The following tables present the financial instruments carried at fair value as of June 30, 2013 and December 31, 2012, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above).

Assets and Liabilities Measured at Fair Value on a Recurring Basis


	Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)

June 30, 2013
Investment securities available-for-sale:
U.S. Government sponsored enterprises	$	128,454		—		128,454		—
Mortgage-backed securities		141,047		—		141,047		—
State and municipal securities		13,213		—		13,213		—

Total investment securities available-for-sale		282,714		—		282,714		—
Other assets		6,326		—		—		6,326

Total assets at fair value	$	289,040		—		282,714		6,326


December 31, 2012
Investment securities available-for-sale:
U.S. Government sponsored enterprises	$	122,698		—		122,698		—
Mortgage-backed securities		181,128		—		181,128		—
State and municipal securities		13,452		—		13,452		—

Total investment securities available-for-sale		317,278		—		317,278		—
Other assets		6,315		—		—		6,315

Total assets at fair value	$	323,593		—		317,278		6,315

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


	Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)

June 30, 2013
Other real estate owned	$	13,706		—		—		13,706
Impaired loans, net (¹)		31,835		—		—		31,835

Total	$	45,541		—		—		45,541


December 31, 2012
Other real estate owned	$	15,307		—		—		15,307
Impaired loans, net (¹)		34,125		—		—		34,125

Total	$	49,432		—		—		49,432

(¹)	Amount is net of a valuation allowance of $7.0 and $6.9 million at June 30, 2013 and December 31, 2012 as required by ASC 310-10, “Receivables.”

In the case of the bond portfolio, the Company monitors the valuation technique utilized by various pricing agencies to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the six months ended June 30, 2013, there were no transfers between Levels 1, 2 or 3.

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FORM 10-Q, CONTINUED

The table below includes a rollforward of the balance sheet amounts for the six months ended June 30, 2013 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):


	For the Six Months Ended June 30,
	2013				2012
	Other Assets		Other Liabilities		Other Assets		Other Liabilities

Fair value, January 1	$	6,315		—		2,001		—
Total realized gains included in income		11		—		12		—
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at June 30		—		—		—		—
Purchases, issuances and settlements, net		—		—		263		—
Transfers out of Level 3		—		—		—		—

Fair value, June 30	$	6,326		—		2,276		—

Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at June 30	$	—		—		—		—

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices or observable components are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2013 and December 31, 2012. 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.

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

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

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

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Mortgage loans held-for-sale — Mortgage loans held-for-sale are carried at the lower of cost or fair value. The estimate of fair value is equal to the carrying value of these loans as they are usually sold within a few weeks of their origination.

Deposits and Securities sold under agreements to repurchase — The carrying amounts of demand deposits, savings deposits and securities sold under agreements to repurchase, approximate their fair values. Fair values for certificates of deposit are estimated using discounted cash flow models, using current market interest rates offered on certificates with similar remaining maturities.

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

The following table presents the carrying amounts, estimated fair value and placement in the fair valuation hierarchy of the Company’s financial instruments at June 30, 2013 and December 31, 2012. 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. For financial liabilities such as noninterest bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.


(in Thousands)	Carrying/ Notional Amount		Estimated Fair Value (¹)		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)

June 30, 2013
Financial assets:
Securities held-to-maturity	$	24,234		23,990		—		23,990		—
Loans, net		1,206,645		1,215,482		—		—		1,215,482
Mortgage loans held-for-sale		8,469		8,469		—		—		8,469

Financial liabilities:
Deposits and securities sold under agreements to repurchase		1,521,337		1,520,370		—		—		1,520,370

Off-balance sheet instruments:
Commitments to extend credit		—		—		—		—		—
Standby letters of credit		—		—		—		—		—

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(in Thousands)	Carrying/ Notional Amount		Estimated Fair Value (¹)		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)

December 31, 2012

Financial assets:

Securities held-to-maturity	$	15,508		16,317		—		16,317		—
Loans, net		1,142,111		1,166,664		—		—		1,166,664
Mortgage loans held-for-sale		15,648		15,648		—		—		15,648

Financial liabilities:

Deposits and securities sold under agreements to repurchase		1,504,506		1,506,186		—		—		1,506,186

Off-balance sheet instruments:
Commitments to extend credit		—		—		—		—		—
Standby letters of credit		—		—		—		—		—

(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.

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 consolidated financial statements and the notes included in this report. Reference should also be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 for a more complete discussion of factors that impact liquidity, capital and the results of operations.

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements 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.

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, 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, 2012, the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and below under Part II, Item IA “Risk Factors” and also include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for these losses, (ii) greater than anticipated deterioration in the real estate market conditions in the Company’s market areas, (iii) increased competition with other financial institutions, (iv) the deterioration of the economy in the Company’s market area, (v) continuation of the extremely low short-term interest rate environment or rapid fluctuations in short-term interest rates, (vi) significant downturns in the business of one or more

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large customers, (vii) the inability of the Company to comply with regulatory capital requirements, including those resulting from recently adopted changes to capital calculation methodologies and required capital maintenance levels; (viii) 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, (ix) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, (x) inadequate allowance for loan losses, (xi) the adequacy of the reserves established by the Company to satisfy the portion of any judgment in the lawsuits described below under Part II, Item 1, “Legal Proceedings” not covered by insurance, (xii) the effectiveness of the Company’s activities in improving, resolving or liquidating lower quality assets, (xiii) results of regulatory examinations, and (xiv) loss of key personnel. 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.

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 and the assessment of impairment of the intangibles resulting from our mergers with Dekalb Community Bank and Community Bank of Smith County in 2005 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, 2012 filed with the SEC on March 13, 2013.

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, economic conditions, 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

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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 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. Each segment is then analyzed such that an allocation of the allowance is estimated for each loan segment.

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 eight quarters.

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 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 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.

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

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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 it will be required to sell the security before maturity, then the security is not other-than-temporarily impaired and the shortfall is recorded as a component of equity.

Results of Operations

Net earnings increased 20.9% to $7,225,000 for the six months ended June 30, 2013 from $5,974,000 in the first six months of 2012. Net earnings were $4,247,000 for the quarter ended June 30, 2013, an increase of $1,098,000, or 34.9%, from $3,149,000 for the three months ended June 30, 2012 and an increase of $1,269,000, or 42.6%, over the quarter ended March 31, 2013. The increase in net earnings during the six months ended June 30, 2013 as compared to the prior year period was primarily due to a 5.0% increase in net interest income and a 68.1% decrease in the provision for loan loss, offset in part by a 10.8% increase in non-interest expense which includes $2,500,000 in litigation expense. Net yield on earning assets for the six months ended June 30, 2013 was 3.71% compared to 3.81% for the first six months of 2012, and the net interest spread was 3.6% and 3.7% for the six months ended June 30, 2013 and the six months ended June 30, 2012. The decrease in net interest yield for the six months ended June 30, 2013 reflects an increase in average earning assets and a decrease in net interest income.

The average balances, interest, and average rates for the six-month periods ended June 30, 2013 and June 30, 2012 are presented in the following table:


	June 30, 2013								June 30, 2012
	Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense

Loans, net of unearned interest	$	1,193,874			5.52	%		32,946	$	1,126,461			5.82	%		32,752

Investment securities - taxable		298,033			1.36			2,034		320,048			1.74			2,786

Investment securities - tax exempt		27,355			2.19			299		13,504			2.99			202

Taxable equivalent adjustment		—			1.67			154		—			1.54			104

Total tax-exempt investment securities		27,355			3.31			453		13,548			4.53			306


Total investment securities		325,388			1.53			2,487		333,552			1.85			3,092


Loans held for sale		8,443			2.91			123		10,929			3.50			191

Federal funds sold		93,601			.21			99		29,669			.43			63

Restricted equity securities		3,012			4.52			68		3,012			5.08			77


Total earning assets		1,624,318			4.40			35,723		1,503,623			4.81	%		36,175


Cash and due from banks		10,044								43,998

Allowance for loan losses		(26,571	)							(26,036	)

Bank premises and equipment		35,933								35,473

Other assets		44,247								46,154


Total assets	$	1,687,971							$	1,603,212

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	June 30, 2013							June 30, 2012
	Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense

Deposits:
Negotiable order of withdrawal accounts	$	306,378		.52	%		793	$	267,598		.76	%		1,014
Money market demand accounts		360,535		.51			919		314,740		.67			1,058
Individual retirement accounts		98,330		1.33			654		98,685		1.80			890
Other savings deposits		95,491		.60			285		95,620		.83			398
Certificates of deposit $100,000 and over		254,603		1.20			1,532		262,330		1.60			2,104
Certificates of deposit under $100,000		255,432		1.09			1,393		277,395		1.46			2,030

Total interest-bearing deposits		1,370,769		.81			5,576		1,316,368		1.14			7,494

Securities sold under repurchase agreements		9,562		.52			25		7,591		.73			28
Federal funds purchased		145		—			—		204		1.76			2
Advances from Federal Home Loan Bank		—		—			—		—		—			—

Total interest-bearing liabilities		1,380,476		.81			5,601		1,324,163		1.14			7,524


Demand deposits		127,625							112,804

Other liabilities		9,110							7,434

Stockholders’ equity		170,760							158,811

Total liabilities and stockholders’ equity	$	1,687,971						$	1,603,212


Net interest income						$	30,122						$	28,651


Net yield on earning assets (1)				3.71	%						3.81	%


Net interest spread (2)				3.59	%						3.67	%

(1)	Net interest income divided by average earning assets.

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

Net Interest Income

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Reflecting a reduction in loan yields that outpaced loan growth, the Company’s total interest income, excluding tax equivalent adjustments relating to tax exempt securities, decreased $502,000, or 1.4%, during the six months ended June 30, 2013 as compared to the same period in 2012. The decrease in total interest income was $417,000, or 2.3%, for the quarter ended June 30, 2013 as compared to the quarter ended June 30, 2012. Interest income for the second quarter of 2013 decreased $71,000, 0.4% over the first three months of 2013. The decrease in the first six months of 2013 was primarily attributable to the continuing impact of low interest rate policies initiated by the Federal Reserve Board. The ratio of average earning assets to total average assets was 96.2% and 93.8% for the six months ended June 30, 2013 and June 30, 2012, respectively.

Interest expense decreased $1,923,000, or 25.6%, for the six months ended June 30, 2013 as compared to the same period in 2012. The decrease was $28,000, or 23.2%, for the three months ended June 30, 2013 as compared to the same period in 2012. Interest expense decreased $105,000, or 3.7%, for the quarter ended June 30, 2013 over the first three months of 2013. The decrease for the six months ended June 30, 2013 and the quarter ended June 30, 2013 as compared to the prior year’s comparable

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periods was primarily due to a decrease in the rates paid on deposits, particularly time deposits, reflecting the low interest rate environment and a shift in the mix of deposits from certificates of deposits to transaction and money market accounts.

Interest expense declined more than interest income which resulted in an increase in net interest income, before the provision for loan losses, of $1,421,000 to $29,968,000 for the first six months of 2013 as compared to $28,547,000 for the same period in 2012. The increase was $411,000, or 2.8%, for the quarter ended June 30, 2013 compared to the quarter ended June 30, 2012. When compared to the first quarter of 2013, the Company experienced an increase of $34,000, or 0.2%, in net interest income.

Provision for Loan Losses

The allowance for loan losses totaled $25,841,000 as of June 30, 2013, compared to $25,497,000 as of December 31, 2012, and $25,267,000 as of June 30, 2012. An analytical model based on historical loss experience, current trends and economic conditions as well as reasonably foreseeable events is used to determine the amount of provision to be recognized and to test the adequacy of the loan loss allowance. The volume of net loans charged off for the first six months of 2013 totaled approximately $1,080,000, compared to approximately $3,724,000 and $3,336,000 for the first six months of 2012 and 2011, respectively. Overall, net charge offs were down for the three and six months periods ended June 30, 2013 when compared to the comparable periods in 2012 due to an overall improvement in the Bank’s loan portfolio and the Bank having partially charged down impaired loans in previous years. Although the Bank has experienced modest loan growth of 5.6% in the first six months and an overall stabilization in the loan portfolio, in accordance with the Bank’s quarterly allowance calculation management continues to fund the allowance for loan losses through general provisions. Reflecting the improving asset quality trends experienced by the Bank in the first six months of 2013, the provision for loan losses during the six months ended June 30, 2013 was $1,424,000, down $3,042,000 from the $4,466,000 incurred in the first six months of 2012. Provision expense for the three months ended June 30, 2013 was $755,000, down $1,455,000 from the $2,210,000 incurred in the second quarter of 2012.

The allowance 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 growth and composition of the loan portfolio, review of specific problem loans, review of updated appraisals and borrower financial information, the recommendations of the Company’s regulators, and current economic conditions that may affect the borrower’s ability to repay. Management has in place a system designed for monitoring its loan portfolio and identifying potential problem loans. The provision for loan losses raised the allowance for loan losses (net of charge-offs and recoveries) to $25,841,000, an increase of 1.4% from $25,497,000 at December 31, 2012 and an increase of $574,000, or 2.3%, from June 30, 2012. The allowance for loan losses was 2.10%, 2.18%, and 2.23% of total loans at June 30, 2013, December 31, 2012, and June 30, 2012, respectively.

Management believes the allowance for loan losses at June 30, 2013 to be adequate, but if economic conditions deteriorate beyond management’s current expectations and additional charge-offs are incurred, the allowance for loan losses may require an increase through additional provision for loan losses which would negatively impact earnings.

Non-Interest Income

The components of the Company’s non-interest income include service charges on deposit accounts, other fees and commissions and gain on sale of loans. Total non-interest income for the six months ended June 30, 2013 decreased 3.5% to $7,598,000 from $7,871,000 for the same period in 2012. Total non-interest income decreased $119,000, or 2.9%, during the quarter ended June 30, 2013 compared to the second quarter in 2012 and there was an increase of $520,000, or 14.7%, over the first three months

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

of 2013. The Company’s non-interest income in the first six months of 2013 decreased from the first six months of 2012 mostly due to a decrease in service charges on deposit accounts, partially offset by an increase in gain on sale of loans. Gain on sale of loans increased $376,000, or 26.2%, during the six months ended June 30, 2013 compared to the same period in 2012. The increase in gain on sale of loans during the first six months of 2013 related primarily to the increase in mortgage originations and refinancings which occurred during the first half of 2013 compared to the same period in 2012. Service charges on deposit accounts decreased $405,000, or 17.1%, during the six months ended June 30, 2013 compared to the same period in 2012 and decreased $135,000, or 11.7%, during the quarter ended June 30, 2013 compared to the second quarter of 2012 as a result of consumers continuing to slow their spending due to the continued challenging economic climate. Other fees and commissions decreased $54,000, or 1.4%, during the six months ended June 30, 2013 compared to the same period in 2012. The decrease was $1,000 during the quarter ended June 30, 2013 compared to the second quarter of 2012. Other fees and commissions include income on brokerage accounts, insurance policies sold, debit card interchange fee income, and various other fees.

Non-Interest Expenses

Non-interest expenses consist primarily of employee costs, occupancy expenses, furniture and equipment expenses, advertising and marketing expenses, FDIC premiums, data processing expenses, director’s fees, loss on sale of other assets, loss on sale of real estate and other operating expenses. Total non-interest expense increased $2,397,000, or 10.8%, during the first six months of 2013 compared to the same period in 2012. The increase for the quarter ended June 30, 2013 was $179,000, or 1.6%, as compared to the same quarter in 2012. The Company experienced a decrease of $1,360,000, or 10.5%, in non-interest expenses in the second quarter of 2013 as compared to the first three months of 2013. The increase in non-interest expenses for the six months ended June 30, 2013 when compared to the comparable period in 2012 is primarily attributable to an increase in litigation expense. The increase in litigation expense is primarily due to the Company establishing a litigation reserve in the quarter ended March 31, 2013 in the amount of $2,500,000 relating to damages awarded against the Bank by a jury during the first quarter of 2013. These verdicts, totaling $7,500,000, relate to a lawsuit filed against the Bank in 2009 by a former customer of the Bank. The Bank currently is in the process of reviewing its options with regard to the verdicts and currently anticipates that it will appeal the decisions to the Tennessee Court of Appeals. For more information regarding this lawsuit, see Part II, Item 1 “Legal Proceedings”. Loss on the sale of other real estate decreased $868,000 or 54.8% for the six months ended June 30, 2013 as compared to the same period in 2012 due to a lower volume of foreclosures as well as improved economic conditions and improved housing market.

Income Taxes

The Company’s income tax expense was $4,321,000 for the six months ended June 30, 2013, an increase of $542,000 over the comparable period in 2012. Income tax expense was $2,437,000 for the quarter ended June 30, 2013, an increase of $464,000 over the same period in 2012. The percentage of income tax expense to net income before taxes was 37.4% for the six months ended June 30, 2013 and 38.7% for the six months ended June 30, 2012, respectively, and 36.5% and 38.5% for the quarters ended June 30, 2013 and 2012, respectively. The percentage of income tax expense to net income before taxes was 38.8% for the first three months of 2013.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

Financial Condition

Balance Sheet Summary

The Company’s total assets increased 1.4% to $1,704,168,000 during the six months ended June 30, 2013 from $1,680,820,000 at December 31, 2012. Total assets decreased $2,844,000 during the three-month period ended June 30, 2013 and increased $26,192,000, or 1.6%, during the three-month period ended March 31, 2013. Loans, net of allowance for loan losses, totaled $1,206,645,000 at June 30, 2013, a 5.7% increase compared to $1,142,111,000 at December 31, 2012. Loans increased $40,209,000, or 3.5%, during the three months ended June 30, 2013. Securities decreased $25,838,000 or 7.8%, to $306,948,000 at June 30, 2013 from $332,786,000 at December 31, 2012. Securities decreased $15,091,000, or 4.7%, during the three months ended June 30, 2013. Federal funds sold decreased to $17,140,000 at June 30, 2013 from $23,780,000 at December 31, 2012, resulting from a growth in loans that exceeded deposit growth.

Total liabilities increased by 1.4% to $1,532,686,000 at June 30, 2013 compared to $1,511,122,000 at December 31, 2012. For the quarter ended June 30, 2013, total liabilities decreased $3,306,000, or 0.2%. The increase in total liabilities for the six months ended June 30, 2013, was comprised primarily of a $17,167,000, or 1.2%, increase in total deposits as well as an increase in accrued interest and other liabilities of $4,733,000 or 71.5%. Included in other liabilities is federal and state taxes payable, bonus payable, and a litigation reserve for the verdicts in the legal proceeding described in more detail in Part II, Item 1, “Legal Proceedings” below.

Non Performing Assets

The following tables present the Company’s non-accrual loans and past due loans as of June 30, 2013 and December 31, 2012.

Loans on Nonaccrual Status


	In Thousands
	2013		2012

Residential 1-4 family	$	909	$	930
Multifamily		—		—
Commercial real estate		3,648		4,445
Construction		6,010		9,626
Farmland		1,226		1,248
Second mortgages		606		606
Equity lines of credit		—		—
Commercial		—		—
Installment and other		—		—

Total	$	12,399	$	16,855

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED


	(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		Non Accrual and Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment Greater Than 90 Days and Accruing
June 30, 2013

Residential 1-4 family	$	2,983		1,387		2,193		6,563		333,967		340,530		1,284
Multifamily		—		—		—		—		15,665		15,665		—
Commercial real estate		392		—		4,375		4,767		518,719		523,486		727
Construction		72		355		6,289		6,716		203,177		209,893		279
Farmland		87		—		1,226		1,313		20,606		21,919		—
Second Mortgages		6		—		606		612		11,548		12,160		—
Equity Lines of Credit		85		—		54		139		35,979		36,118		54
Commercial		27		—		20		47		30,660		30,707		20
Agricultural		116		26		—		142		2,032		2,174		—
Installment and other		407		52		105		564		42,518		43,082		105

Total	$	4,175		1,820		14,868		20,863		1,214,871		1,235,734	$	2,469


December 31, 2012

Residential 1-4 family	$	5,297		1,448		1,524		8,269		333,708		341,977	$	594
Multifamily		—		—		—		—		16,140		16,140		—
Commercial real estate		1,599		710		4,470		6,779		462,978		469,757		25
Construction		796		72		9,650		10,518		179,838		190,356		24
Farmland		260		43		1,248		1,551		24,768		26,319		—
Second Mortgages		396		7		677		1,080		11,397		12,477		71
Equity Lines of Credit		186		173		46		405		35,855		36,260		46
Commercial		204		24		54		282		30,263		30,545		54
Agricultural
Installment and other		488		143		105		736		45,953		46,689		105

Total	$	9,226		2,620		17,774		29,620		1,140,900		1,170,520	$	919

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.

Non-performing loans, which included non-accrual loans and loans 90 days past due, at June 30, 2013 totaled $14,868,000, a decrease from $17,774,000 at December 31, 2012. The decrease in non-performing loans during the six months ended June 30, 2013 of $2,906,000 is due primarily to a decrease in non-performing construction loans of $3,361,000. The decrease in non-performing loans relates primarily to the transfer of two large loan relationships to ORE as well as some large principal payments. Management believes that it is probable that it will incur losses on these 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 further deterioration of local real estate values.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

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. 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.

The decrease in impaired loans in the six months ended June 30, 2013 was primarily due to the above-referenced foreclosure of two large properties along with multiple other loan principal payments. The Company’s market areas have seen an increase in the residential real estate market and the commercial real estate market remains steady. The allowance for loan loss related to impaired loans was measured based upon the estimated fair value of related collateral.

Loans are charged-off in the month when the determination is made that a loss will be incurred. Net charge-offs for the six months ended June 30, 2013 were $1,080,000 as compared to $3,724,000 for the same period in 2012 and $8,556,000 for year ended December 31, 2012. The Bank has experienced a decrease in past dues and nonaccruals over the past five quarters and is experiencing fewer foreclosures which has resulted in fewer charge offs.

The collateral values securing potential problem loans, including impaired loans, based on estimates received by management, total approximately $52,985,000. The internally classified loans have decreased $3,601,000, or 7.3%, from $49,418,000 at December 31, 2012. Loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement. The loan classifications do not represent or result from trends or uncertainties which management expects will materially impact future operating results, liquidity or capital resources.

The largest category of internally graded loans at June 30, 2013 was real estate mortgage loans. Included within this category are residential real estate construction and development loans, including loans to home builders and developers of land, as well as one to four family mortgage loans, and commercial real estate loans. Residential real estate loans, including construction and land development loans that are internally classified totaled $28,592,000 and $31,548,000 at June 30, 2013 and December 31, 2012, respectively. These loans have been graded accordingly due to bankruptcies, inadequate cash flows and delinquencies. Borrowers within the real estate related loans have continued to experience some stress during the current weak economic environment; however, the Bank has recently experienced an increase in demand for real estate loans. An extension of the challenging economic environment experienced since 2008 will likely cause the Company’s commercial real estate mortgage and land development loans to continue to underperform and may result in increased levels of internally graded loans which, if they continue to deteriorate, may negatively impact the Company’s results of operations. Management does not anticipate losses on these loans to exceed the amount already allocated to loan losses, unless there is further deterioration of local real estate values.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

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 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 and cash equivalents and investment securities and money market instruments that will mature within one year. At June 30, 2013, the Company’s liquid assets totaled $241,466,000. 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 the net interest margin under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.

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 can not 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, loan payments, investment security maturities and short-term borrowings provide a secondary source. At December 31, 2012, the Company had a liability sensitive position (a negative gap). Liability sensitivity means that more of the Company’s liabilities are capable of re-pricing over certain time frames than its assets. The interest rates associated with these liabilities may not actually change over this period but are capable of changing.

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 meets monthly to analyze its rate sensitivity position. These meetings focus 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. For those securities classified as held-to-maturity, the Company has the ability and intent to hold these securities to maturity or on a long-term basis. 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. Securities totaling approximately $3.1 million mature or will be subject to rate adjustments within the twelve months following June 30, 2013.

A secondary source of liquidity is the Company’s loan portfolio. At June 30, 2013, loans totaling approximately $305 million either will become due or will be subject to rate adjustments within twelve months from that date. Continued emphasis will be placed on structuring adjustable rate loans.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

As for liabilities, certificates of deposit of $100,000 or greater totaling approximately $167 million will become due or reprice during the twelve months following June 30, 2013. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit accounts and regular savings accounts. Management anticipates that there will be no significant withdrawals from these accounts in the future.

Management believes that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity changing in a materially adverse way.

Off Balance Sheet Arrangements

At June 30, 2013, we had unfunded loan commitments outstanding of $214 million and outstanding standby letters of credit of $25 million. 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 Company’s bank subsidiary has the ability to liquidate Federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase Federal funds from other financial institutions. Additionally, the Company’s bank subsidiary could sell participations in these or other loans to correspondent banks. As mentioned above, the Company’s bank subsidiary has been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments, its investment security maturities and short-term borrowings.

Capital Position and Dividends

At June 30, 2013, total stockholders’ equity was $171,482,000, or 10% of total assets, which compares with $169,698,000, or 10% of total assets, at December 31, 2012. The dollar increase in stockholders’ equity during the six months ended June 30, 2013 results from the Company’s net income of $7,225,000, proceeds from the issuance of common stock related to exercise of stock options of $107,000, the net effect of a $8,035,000 unrealized loss on investment securities net of applicable income taxes of $3,077,000, cash dividends declared of $2,226,000 of which $1,620,000 was reinvested under the Company’s dividend reinvestment plan, and $16,000 related to stock option compensation.

The Company’s and the Bank’s principal regulators have established minimum risk-based capital requirements and leverage capital requirements for the Company and the Bank. These guidelines classify capital into two categories of Tier I and Total risk-based capital. Total risk-based capital consists of Tier I (or core) capital (essentially common equity less intangible assets) and Tier II capital (essentially qualifying long-term debt, of which the Bank has none, and a part of the allowance for possible loan losses). In determining risk-based capital requirements, assets are assigned risk-weights of 0% to 100%, depending on regulatory assigned levels of credit risk associated with such assets. Under the Federal Reserve’s regulations, for a bank holding company, like the Company, to be considered “well capitalized” it must maintain a Total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and not be subject to a written agreement, order or directive to maintain a specific capital level. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide that a minimum ratio of Tier 1 capital to average assets, less goodwill and other specified intangible assets, of at least 4% should be maintained by most bank holding companies.

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

In July 2013, the Federal Reserve approved regulations concerning the capital requirements of financial institutions as a result of the publication of Risk-Based Capital Standards: Advanced Capital Adequacy Framework — Basel III; Establishment of a Risk-Based Capital Floor by the OCC, FDIC, and Federal Reserve. This rule amends (a) the advanced risk-based capital adequacy standards (advanced approaches rules) in a manner that is consistent with certain provisions of the Dodd-Frank Act and (b) the general risk-based capital rules to provide limited flexibility consistent with Section 171(b) of the Dodd-Frank Act for recognizing the relative risk of certain assets generally not held by depository institutions. Management has assessed the impact of the regulation and its impact on capital adequacy and determined that it will not have a significant negative impact on the Company.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). As of June 30, 2013 and December 31, 2012, the Company and the Bank are considered to be “well-capitalized” under regulatory definitions. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.

The Company’s and the Bank’s actual capital amounts and ratios as of June 30, 2013 and December 31, 2012, are also presented in the tables:


	Actual					Minimum Capital Requirements					Minimum To Be Well Capitalized Under Applicable Regulatory Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
June 30, 2013:
*Total capital to risk weighted assets:*
*Consolidated*	$	185,550		14.2	%		104,535		8.0	%		130,669		10.0	%
*Wilson Bank*		184,646		14.1			104,764		8.0			130,955		10.0

*Tier 1 capital to risk weighted assets:*
*Consolidated*		169,064		12.9			52,423		4.0			78,634		6.0
*Wilson Bank*		168,160		12.8			52,550		4.0			78,825		6.0

*Tier 1 capital to average assets:*
*Consolidated*		169,064		10.0			67,626		4.0			84,532		5.0
*Wilson Bank*		168,160		10.0			67,264		4.0			84,080		5.0

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED


	Actual					Minimum Capital Requirements					Minimum To Be Well Capitalized Under Applicable Regulatory Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)

December 31, 2012:
*Total capital to risk weighted assets:*
*Consolidated*	$	178,162		14.2	%	$	100,373		8.0	%	$	125,466		10.0	%
*Wilson Bank*		176,652		14.1			100,228		8.0			125,285		10.0

*Tier 1 capital to risk weighted assets:*
*Consolidated*		162,321		12.9			50,332		4.0			75,498		6.0
*Wilson Bank*		160,811		12.8			50,253		4.0			75,380		6.0

*Tier 1 capital to average assets:*
*Consolidated*		162,321		9.8			66,253		4.0			N/A		N/A
*Wilson Bank*		160,811		9.7			66,314		4.0			82,892		5.0

Impact of Inflation

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

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

There have been no material changes in reported market risks during the six months ended June 30, 2013.

Item 4.

Controls and Procedures

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designated 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

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, its Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

Various legal proceedings to which the Company and the Bank are a party arise from time to time in the normal course of business. Except as described below, as of the date hereof, there are no material pending legal proceedings to which the Company or the Bank is a party or by which their properties are subject.

On March 20, 2013 and March 21, 2013, a jury in a case styled Kendall S. Howell, and individual, and Stones River Homes, Inc., a Tennessee Corporation, Richmond’s Retreat, LLC, a Tennessee limited liability company; and Winfred Howell, an individual v. Wilson Bank & Trust, Case No. 09-0601CV, Rutherford County, Tennessee Chancery Court, awarded damages against the Bank of $7.5 million. The award, which consists of compensatory damages of $3.9 million and punitive damages of $3.6 million, relates to a lawsuit filed against the Bank in 2009 by a former customer of the Bank and entities affiliated with this customer. The plaintiffs in the lawsuit alleged that a former officer of the Bank had engaged in improper conduct related to certain lending transactions with the plaintiffs. The jury also has required the Bank to pay court costs and the plaintiffs’ attorney’s fees in amounts not yet determined. The judgments on the awarded damages have not yet been entered by the Chancellor.

The Bank is reviewing its options with respect to the verdicts and currently anticipates that it will appeal the decisions to the Tennessee Court of Appeals. The Bank also anticipates filing post-trial motions, including a motion seeking to set aside the judgments when they are entered notwithstanding the jury’s verdicts. The Company believes that the judgments in this case will be covered by insurance and the litigation reserve that was established as a result of the jury’s verdicts.

In the fourth quarter of 2012, the Bank was served with a complaint filed in the Circuit Court of Rutherford County, Tennessee in the matter Tony M. Hinson and Amanda H. Gallagher vs. Wilson Bank and Trust, et al. (Civil Action No. 65380). The complaint alleges violations of the Tennessee Consumer Protection Act, common law and statutory fraud, forgery, and unauthorized alteration, breach of contract, business libel and defamation and breach of fiduciary duty arising out of alleged improper conduct by a former employee of the Bank related to certain lending transactions with the plaintiffs. The plaintiffs are seeking, among other remedies, injunctive relief, compensatory and punitive damages in the amount of $10,000,000, treble damages and the recovery of attorney’s fees and costs. On November 21, 2012, the Bank filed a motion to dismiss the complaint and a hearing on the motion is scheduled for August 23, 2013. As a result of the jury’s verdicts in the Howell matter described above, the Company established a litigation reserve of $2.5 million in the quarter ended March 31, 2013 and added an additional $100,000 during the quarter ended June 30, 2013. The Company believes that this reserve, together with insurance

proceeds that the Company believes it will have available to it, will be sufficient to satisfy the judgments in the case, but to the extent that the payments to the plaintiffs in this case exceed such amounts, the Company may incur additional non-interest expense to satisfy such payments.

Item 1A.

RISK FACTORS

Except as set forth below, 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, 2012 and Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the first quarter ended March 31, 2013.

Recently adopted changes to capital requirements for bank holding companies and depository institutions may negatively impact the Company’s and the Bank’s results of operations.

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bank and the Company. The final rules implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

Under these recently adopted rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer requirement is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital levels fall below the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

The application of these more stringent capital requirements to the Company and the Bank could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if the Company or the Bank were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of the final rules regarding Basel III could result in the Company or the Bank having to lengthen the term of its funding, restructure their business models and/or increase their holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit the Company’s and the Bank’s ability to make distributions, including paying dividends or buying back shares.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

None

(b)

Not applicable.

(c)

None.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

(a)

None

(b)

Not applicable

Item 4.

MINE SAFETY DISCLOSURES

Not applicable

Item 5.

OTHER INFORMATION

None

Item 6.

EXHIBITS


Exhibits

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

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

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

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

101		Interactive Data File.

SIGNATURES

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


		WILSON BANK HOLDING COMPANY
		(Registrant)

DATE:	August 9, 2013	/s/ Randall Clemons
		Randall Clemons
		President and Chief Executive Officer

DATE:	August 9, 2013	/s/ Lisa Pominski
		Lisa Pominski
		Senior Vice President & Chief Financial Officer