WILSON BANK HOLDING CO - Quarter Report: 2022 September (Form 10-Q)

wbhc20220930_10q.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the quarterly period ended September 30, 2022

☐

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

For the transition period from to

Commission File Number 0-20402

WILSON BANK HOLDING COMPANY

(Exact name of registrant as specified in its charter)

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

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

(615) 444-2265

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

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

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

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

Common stock outstanding: 11,461,087 shares at November 9, 2022

Table of Contents

*Part I:*	*FINANCIAL INFORMATION*	3

Item 1.	Financial Statements.	3

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

	Consolidated Balance Sheets — September 30, 2022 and December 31, 2021.	3

	Consolidated Statements of Earnings — For the three and nine months ended September 30, 2022 and 2021.	4

	Consolidated Statements of Comprehensive Earnings — For the three and nine months ended September 30, 2022 and 2021.	5

	Consolidated Statements of Changes in Stockholders' Equity — For the three and nine months ended September 30, 2022 and 2021.	6

	Consolidated Statements of Cash Flows — For the nine months ended September 30, 2022 and 2021.	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	47

	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.	47

*Part II:*	*OTHER INFORMATION*	48

Item 1.	Legal Proceedings.	48

Item 1A.	Risk Factors.	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	48

Item 3.	Defaults Upon Senior Securities.	48

Item 4.	Mine Safety Disclosures.	48

Item 5.	Other Information.	48

Item 6.	Exhibits.	48

Signatures		49

EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO
EX-101.INS
EX-101.SCH
EX-101.CAL
EX-101.DEF
EX-101.LAB
EX-101.PRE

EX-104

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

WILSON BANK HOLDING COMPANY

Consolidated Balance Sheets

September 30, 2022 and December 31, 2021

	(Unaudited)			(Audited)
	September 30, 2022			December 31, 2021
	(Dollars in Thousands Except Share Amounts)
Assets
Loans	$	2,991,325		$	2,483,914
Less: Allowance for credit losses		(37,580	)		(39,632	)
Net loans		2,953,745			2,444,282
Securities available-for-sale, at market (amortized cost $995,115 and $906,135, respectively)		839,152			897,585
Loans held for sale		3,555			11,843
Interest bearing deposits		78,713			400,940
Restricted equity securities		4,357			5,089
Federal funds sold		—			27,055
Total earning assets		3,879,522			3,786,794
Cash and due from banks		16,859			25,423
Bank premises and equipment, net		60,074			62,846
Accrued interest receivable		9,868			7,641
Deferred income tax asset		52,874			12,792
Bank owned life insurance		57,619			46,206
Other assets		48,765			43,089
Goodwill		4,805			4,805
Total assets	$	4,130,386		$	3,989,596
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	436,287		$	433,500
Interest bearing		1,097,905			1,030,743
Savings and money market accounts		1,611,120			1,497,669
Time		600,344			593,159
Total Deposits		3,745,656			3,555,071
Accrued interest payable and other liabilities		42,167			20,808
Total liabilities		3,787,823			3,575,879
Stockholders’ equity:
Common stock, $2.00 par value; authorized 50,000,000 shares, issued and outstanding 11,460,587 and 11,201,504 shares, respectively		22,921			22,403
Additional paid-in capital		121,526			105,177
Retained earnings		313,287			292,452
Noncontrolling interest in consolidated subsidiary		32			—
Accumulated other comprehensive losses, net of taxes of $40,760 and $2,235 respectively		(115,203	)		(6,315	)
Total stockholders’ equity		342,563			413,717
Total liabilities and stockholders’ equity	$	4,130,386		$	3,989,596

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Consolidated Statements of Earnings

Three Months and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
	(Dollars in Thousands Except Per Share Amounts)						(Dollars in Thousands Except Per Share Amounts)
Interest income:
Interest and fees on loans	$	36,566		$	30,773		$	98,474		$	88,211
Interest and dividends on securities:
Taxable securities		4,374			2,372			11,548			6,167
Exempt from federal income taxes		351			329			1,030			905
Interest on loans held for sale		64			80			232			340
Interest on federal funds sold		29			4			95			9
Interest on balances held at depository institutions		585			128			1,126			315
Interest and dividends on restricted securities		55			33			115			84
Total interest income		42,024			33,719			112,620			96,031
Interest expense:
Interest on negotiable order of withdrawal accounts		522			475			1,444			1,383
Interest on money market and savings accounts		1,942			482			3,060			1,587
Interest on time deposits		1,406			1,884			3,717			6,027
Interest on Federal Home Loan Bank advances		—			—			—			133
Interest on Federal funds purchased		7			—			7			—
Interest on finance leases		17			—			50			—
Total interest expense		3,894			2,841			8,278			9,130
Net interest income before provision for credit losses		38,130			30,878			104,342			86,901
Provision for credit losses		2,543			130			6,060			1,012
Net interest income after provision for credit losses		35,587			30,748			98,282			85,889
Non-interest income:
Service charges on deposit accounts		1,974			1,682			5,470			4,418
Brokerage income		1,919			1,586			5,348			4,665
Debit and credit card interchange income		3,259			3,012			9,870			8,894
Other fees and commissions		376			439			1,144			1,064
Income on BOLI and annuity contracts		357			315			1,074			946
Gain (loss) on sale of loans		(56	)		2,275			2,669			7,929
Mortgage servicing income		40			—			63			—
Gain (loss) on sale of securities		(281	)		28			(281	)		28
Gain (loss) on sale of fixed assets		232			(6	)		260			(29	)
Loss on sale of other real estate		—			(4	)		—			(15	)
Gain on sale of other assets		—			1			8			2
Other income		47			20			39			20
Total non-interest income		7,867			9,348			25,664			27,922
Non-interest expense:
Salaries and employee benefits		14,443			13,456			43,353			40,778
Occupancy expenses, net		1,422			1,436			4,167			4,067
Advertising & public relations expense		886			736			2,233			1,830
Furniture and equipment expense		838			846			2,547			2,508
Data processing expense		1,908			1,509			5,533			4,419
ATM & interchange expense		1,363			1,218			3,806			3,522
Directors’ fees		146			179			447			463
Audit, legal & consulting expenses		217			323			635			684
Provision expense (benefit) for credit losses on unfunded commitments		(515	)		84			(298	)		221
Other operating expenses		3,040			2,904			8,789			8,673
Total non-interest expense		23,748			22,691			71,212			67,165
Earnings before income taxes		19,706			17,405			52,734			46,646
Income taxes		4,523			4,063			12,037			11,021
Net earnings	$	15,183		$	13,342		$	40,697		$	35,625
Net loss attributable to noncontrolling interest		7			—			5			—
Net earnings attributable to Wilson Bank Holding Company	$	15,190		$	13,342		$	40,702		$	35,625
Weighted average number of common shares outstanding-basic		11,429,027			11,165,313			11,348,628			11,110,006
Weighted average number of common shares outstanding-diluted		11,460,943			11,197,410			11,380,255			11,140,586
Basic earnings per common share	$	1.33		$	1.19		$	3.59		$	3.21
Diluted earnings per common share	$	1.33		$	1.19		$	3.58		$	3.20
Dividends per common share	$	0.75		$	0.75		$	1.85		$	1.35

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Consolidated Statements of Comprehensive Earnings (Losses)

Three Months and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
	(In Thousands)
Net earnings	$	15,183		$	13,342		$	40,697		$	35,625
Other comprehensive earnings (losses):
Unrealized losses on available-for-sale securities		(46,767	)		(3,840	)		(147,694	)		(11,521	)
Reclassification adjustment for net losses (gains) included in net earnings		281			(28	)		281			(28	)
Tax effect		12,148			1,011			38,525			3,019
Other comprehensive earnings (losses):		(34,338	)		(2,857	)		(108,888	)		(8,530	)
Comprehensive earnings (losses)	$	(19,155	)	$	10,485		$	(68,191	)	$	27,095
Comprehensive (earnings) losses attributable to noncontrolling interest		7			—			5			—
Comprehensive earnings (losses) attributable to Wilson Bank Holding Company	$	(19,148	)	$	10,485		$	(68,186	)	$	27,095

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Consolidated Statements of Changes in Stockholders’ Equity

Three Months and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

	*Dollars In Thousands*
	*Common Stock*		*Additional Paid-In Capital*		*Retained Earnings*			*Noncontrolling Interest*			*Accumulated Other Comprehensive Earnings (Loss)*			*Total*
Three months ended:
September 30, 2022
Balance at beginning of period	$	22,717		114,943		306,615			39			(80,865	)		363,449
Cash dividends declared, $.75 per share		—		—		(8,518	)		—			—			(8,518	)
Issuance of 99,224 shares of common stock pursuant to dividend reinvestment plan		199		6,305		—			—			—			6,504
Issuance of 2,839 shares of common stock pursuant to exercise of stock options, net		5		63		—			—			—			68
Share based compensation expense		—		215		—			—			—			215
Net change in fair value of available-for-sale securities during the period, net of tax benefit of $12,148		—		—		—			—			(34,338	)		(34,338	)
Net earnings (loss) for the quarter		—		—		15,190			(7	)		—			15,183
Balance at end of period	$	22,921		121,526		313,287			32			(115,203	)		342,563

September 30, 2021
Balance at beginning of period	$	22,170		98,321		273,622			—			1,492			395,605
Cash dividends declared, $.75 per share		—		—		(8,314	)		—			—			(8,314	)
Issuance of 103,141 shares of common stock pursuant to dividend reinvestment plan		206		6,080		—			—			—			6,286
Issuance of 6,182 shares of common stock pursuant to exercise of stock options, net		13		239		—			—			—			252
Share based compensation expense		—		115		—			—			—			115
Net change in fair value of available-for-sale securities during the period, net of tax benefit of $1,011		—		—		—			—			(2,857	)		(2,857	)
Net earnings for the quarter		—		—		13,342			—			—			13,342
Balance at end of period	$	22,389		104,755		278,650			—			(1,365	)		404,429

	*Dollars In Thousands*
	*Common Stock*		*Additional Paid-In Capital*		*Retained Earnings*			*Noncontrolling Interest*			*Accumulated Other Comprehensive Earnings (Loss)*			*Total*
Nine Months Ended:
September 30, 2022
Balance at beginning of period	$	22,403		105,177		292,452			—			(6,315	)		413,717
Cash dividends declared, $1.85 per share		—		—		(20,878	)		—			—			(20,878	)
Issuance of 250,329 shares of common stock pursuant to dividend reinvestment plan		501		15,616		—			—			—			16,117
Issuance of 8,754 shares of common stock pursuant to exercise of stock options, net		17		147		—			—			—			164
Share based compensation expense		—		586		—			—			—			586
Net change in fair value of available-for-sale securities during the period, net of tax benefit of $38,525		—		—		—			—			(108,888	)		(108,888	)
Cumulative effect of change in accounting principle from the adoption of ASC 326		—		—		1,011			—			—			1,011
Noncontrolling interest contribution		—		—		—			37			—			37
Net earnings (loss) for the period		—		—		40,702			(5	)		—			40,697
Balance at end of period	$	22,921		121,526		313,287			32			(115,203	)		342,563

September 30, 2021
Balance at beginning of period	$	21,987		93,034		257,935			—			7,165			380,121
Cash dividends declared, $1.35 per share		—		—		(14,910	)		—			—			(14,910	)
Issuance of 186,583 shares of common stock pursuant to dividend reinvestment plan		373		10,815		—			—			—			11,188
Issuance of 14,333 shares of common stock pursuant to exercise of stock options, net		29		544		—			—			—			573
Share based compensation expense		—		362		—			—			—			362
Net change in fair value of available-for-sale securities during the period, net of tax benefit of $3,019		—		—		—			—			(8,530	)		(8,530	)
Net earnings for the period		—		—		35,625			—			—			35,625
Balance at end of period	$	22,389		104,755		278,650			—			(1,365	)		404,429

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2022 and 2021

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

	Nine Months Ended September 30,
	2022			2021
	(In Thousands)
OPERATING ACTIVITIES
Net earnings	$	40,697		$	35,625
Adjustments to reconcile consolidated net income to net cash provided (used) by operating activities
Provision for credit losses		6,060			1,012
Deferred income taxes benefit		(1,915	)		(1,056	)
Depreciation and amortization of premises and equipment		3,346			3,180
Loss (gain) on disposal of premises and equipment		(260	)		29
Net amortization of securities		3,181			3,999
Net realized losses (gains) on sales of securities		281			(28	)
Gains on mortgage loans sold, net		(2,669	)		(7,929	)
Share-based compensation expense		1,410			986
Loss on other real estate		—			15
Gain on sale of other assets		(8	)		(2	)
Increase in value of life insurance and annuity contracts		(1,074	)		(766	)
Mortgage loans originated for resale		(94,149	)		(167,429	)
Proceeds from sale of mortgage loans		105,106			184,296
Right of use asset amortization		293			1,299
Change in
Accrued interest receivable		(2,227	)		(681	)
Other assets		249			(4,598	)
Accrued interest payable		94			(860	)
Other liabilities		3,633			5,917
TOTAL ADJUSTMENTS		21,351			17,384
NET CASH PROVIDED BY OPERATING ACTIVITIES		62,048			53,009
INVESTING ACTIVITIES
Activities in available for sale securities
Purchases		(175,289	)		(403,894	)
Sales		12,073			39,652
Maturities, prepayments and calls		70,774			120,378
Redemptions (purchases) of restricted equity securities		732			—
Net increase in loans		(511,575	)		(94,979	)
Purchase of buildings, leasehold improvements, and equipment		(505	)		(7,671	)
Proceeds from sale of premises and equipment		260			—
Proceeds from sale of other assets		34			83
Proceeds from sale of other real estate		—			167
Purchase of life insurance and annuity contracts		(10,729	)		(15,000	)
Increase in other investments		—			(2,000	)
NET CASH USED IN INVESTING ACTIVITIES		(614,225	)		(363,264	)
FINANCING ACTIVITIES
Net change in deposits - non-maturing		183,400			421,953
Net change in deposits - time		7,185			(8,052	)
Net change in Federal Home Loan Bank Advances		—			(3,638	)
Change in escrow balances		8,326			(2,148	)
Repayment of finance lease obligation		(20	)		—
Noncontrolling interest contributions		37			—
Issuance of common stock related to exercise of stock options		164			573
Issuance of common stock pursuant to dividend reinvestment plan		16,117			11,188
Cash dividends paid on common stock		(20,878	)		(14,910	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		194,331			404,966
NET CHANGE IN CASH AND CASH EQUIVALENTS		(357,846	)		94,711
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		453,418			338,856
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	95,572		$	433,567

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows, Continued

Nine Months Ended September 30, 2022 and 2021

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

	Nine Months Ended September 30,
	2022			2021
	(In Thousands)
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest	$	8,184		$	9,259
Taxes	$	15,346		$	13,327
Non-cash investing and financing activities:
Change in fair value of securities available-for-sale, net of tax benefit of $38,525 and $3,019 for the nine months ended September 30, 2022 and 2021, respectively	$	(108,888	)	$	(8,530	)
Non-cash transfers from loans to other real estate	$	—		$	182
Non-cash transfers from loans to other assets	$	—		$	81

See accompanying notes to consolidated financial statements (unaudited)

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WILSON BANK HOLDING COMPANY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

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

Basis of Presentation — The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements and related notes appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for credit losses, the valuation of deferred tax assets, determination of any impairment of goodwill or other intangibles, the valuation of other real estate (if any), and the fair value of financial instruments. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 other than the adoption of ASC 326 as described in Note 1. Summary of Significant Accounting Policies - Accounting Changes, Reclassifications and Restatements and in Note 2 - Loans and Allowance for Credit Losses.

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

We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, we recognized an after-tax cumulative effect increase to retained earnings totaling $1.0 million. Operating results for periods after January 1, 2022 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2021 Form 10-K.

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

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

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

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

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

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

Recently Issued Accounting Pronouncements

Information about certain recently issued accounting standards updates is presented below. Also refer to Note 1 - Accounting Standards Updates in our 2021 Form 10-K for additional information related to previously issued accounting standards updates.

ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In March 2020, the FASB issued this ASU and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has implemented a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company has discontinued originating LIBOR-based loans during 2022 and has begun negotiating loans primarily using its preferred replacement index, the Secured Overnight Financing Rate ("SOFR"). For the Company’s currently outstanding LIBOR-based loans, the timing and manner in which each customer's contract transitions to SOFR will vary on a case-by-case basis. The Company expects to complete all transitions by August 2023.

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

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

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

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

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Note 2. Loans and Allowance for Credit Losses

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

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

The following schedule details the loans of the Company at September 30, 2022 and December 31, 2021:

	(In Thousands)
	September 30, 2022			December 31, 2021

Residential 1-4 family real estate	$	812,433		$	689,579
Commercial and multi-family real estate		993,647			908,673
Construction, land development and farmland		853,326			612,659
Commercial, industrial and agricultural		124,115			118,155
1-4 family equity lines of credit		142,043			92,229
Consumer and other		79,720			74,643
Total loans before net deferred loan fees		3,005,284			2,495,938
Net deferred loan fees		(13,959	)		(12,024	)
Total loans		2,991,325			2,483,914
Less: Allowance for credit losses		(37,580	)		(39,632	)
Net loans	$	2,953,745		$	2,444,282

Risk characteristics relevant to each portfolio segment are as follows:

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

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

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

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

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

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Commercial, industrial, and agricultural: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Also included in this category are PPP loans guaranteed by the SBA, which totaled $169,000 at September 30, 2022 and $5.0 million at December 31, 2021. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower, if any. The cash flows of borrowers, however, may not be as expected and any collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In accordance with CECL, losses are estimated over the remaining contractual terms of loans, adjusted for prepayments and curtailment. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation at the reporting date that a TDR will be executed or such renewals, extensions or modifications are included in the original loan agreement and are not unconditionally cancellable by the Company.

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

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

Allowance for Loan Losses (allowance) - Prior to the Adoption of FASB ASC 326 on January 1, 2022, which introduced the CECL methodology for credit losses, the allowance for loan losses was composed of the result of two independent analyses pursuant to the provisions of ASC 450-20, Loss Contingencies and ASC 310-10-35, Receivables. The ASC 450-20 analysis was intended to quantify the inherent risks in the performing loan portfolio. The ASC 310-10-35 analysis included a loan-by-loan analysis of impaired loans, primarily consisting of loans reported as nonaccrual or troubled-debt restructurings.

The allowance allocation began with a process of estimating the probable losses in each of the twelve loan segments. The estimates for these loans were based on our historical loss data for that category over twenty quarters. Each segment was then analyzed such that an allocation of the allowance was estimated for each loan segment.

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

We then tested the resulting allowance by comparing the balance in the allowance to industry and peer information. Our management then evaluated the result of the procedures performed, including the result of our testing, and concluded on the appropriateness of the balance of the allowance in its entirety. The board of directors reviewed and approved the assessment prior to the filing of quarterly and annual financial information.

A loan was impaired when, based on current information and events, it was probable that we would 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 would be collected as scheduled in the loan agreement.

An impairment allowance was recognized if the fair value of the loan was less than the recorded investment in the loan (recorded investment in the loan was the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment was recognized through the allowance. Loans that were impaired were recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan was collateral dependent, impairment measurement was based on the fair value of the collateral, less estimated disposal costs. If the measure of the impaired loan was less than the recorded investment in the loan, the Company recognized 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 followed appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans.

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

Transactions in the allowance for credit losses for the nine months ended September 30, 2022 and allowance for loan losses for the nine months ended September 30, 2021 are summarized as follows:

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

	(In Thousands)
	Residential 1-4 Family Real Estate		Commercial and Multi-family Real Estate			Construction, Land Development and Farmland			Commercial, Industrial and Agricultural			1-4 family Equity Lines of Credit		Consumer and Other			Total
September 30, 2021
Allowance for loan losses:
Beginning balance January 1,	$	8,203		18,343			8,090			1,391			997		1,515			38,539
Provision		620		(1,378	)		1,741			(120	)		53		96			1,012
Charge-offs		—		—			(23	)		(3	)		—		(690	)		(716	)
Recoveries		58		—			47			5			—		366			476
Ending balance	$	8,881		16,965			9,855			1,273			1,050		1,287			39,311

Transactions in the allowance for credit losses for the three months ended September 30, 2022 and allowance for loan losses for the three months ended September 30, 2021 are summarized as follows:

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

	(In Thousands)
	Residential 1-4 Family Real Estate		Commercial and Multi-family Real Estate			Construction, Land Development and Farmland		Commercial, Industrial and Agricultural			1-4 family Equity Lines of Credit		Consumer and Other			Total
September 30, 2021
Allowance for loan losses:
Beginning balance July 1,	$	8,540		17,583			9,353		1,294			1,048		1,496			39,314
Provision		331		(618	)		484		(22	)		2		(47	)		130
Charge-offs		—		—			—		—			—		(276	)		(276	)
Recoveries		10		—			18		1			—		114			143
Ending balance	$	8,881		16,965			9,855		1,273			1,050		1,287			39,311

The following table details the allowance for loan losses and recorded investment in loans by loan classification and by impairment evaluation method as of December 31, 2021, as determined in accordance with ASC 310 prior to the adoption of ASC 326:

	(In Thousands)
	Residential 1-4 Family Real Estate		Commercial and Multi-family Real Estate		Construction, Land Development and Farmland		Commercial, Industrial and Agricultural		1-4 family Equity Lines of Credit		Consumer and Other		Total
December 31, 2021
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	—		—		—		—		—		—		—
Ending balance collectively evaluated for impairment	$	9,242		16,846		9,757		1,329		1,098		1,360		39,632
Loans:
Ending balance	$	689,579		908,673		612,659		118,155		92,229		74,643		2,495,938
Ending balance individually evaluated for impairment	$	134		531		—		—		—		—		665
Ending balance collectively evaluated for impairment	$	689,445		908,142		612,659		118,155		92,229		74,643		2,495,273

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

	In Thousands
	Real Estate		Other		Total
September 30, 2022
Residential 1-4 family real estate	$	131		—		131
Commercial and multi-family real estate		512		—		512
Construction, land development and farmland		—		—		—
Commercial, industrial and agricultural		—		—		—
1-4 family equity lines of credit		—		—		—
Consumer and other		—		—		—
	$	643		—		643

The following table presents impaired loans at December 31, 2021 as determined under ASC 310 prior to the adoption of ASC 326. Impaired loans generally include nonaccrual loans, troubled debt restructurings, and other loans deemed to be impaired but that continue to accrue interest. Presented are the recorded investment, unpaid principal balance and related allowance of impaired loans at December 31, 2021 by loan classification:

	December 31, 2021
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	In Thousands
With no related allowance recorded:
Residential 1-4 family real estate	$	136		134		—
Commercial and multi-family real estate		532		531		—
Construction, land development and farmland		—		—		—
Commercial, industrial and agricultural		—		—		—
1-4 family equity lines of credit		—		—		—
Consumer and other		—		—		—
	$	668		665		—
With related allowance recorded:
Residential 1-4 family real estate	$	—		—		—
Commercial and multi-family real estate		—		—		—
Construction, land development and farmland		—		—		—
Commercial, industrial and agricultural		—		—		—
1-4 family equity lines of credit		—		—		—
Consumer and other		—		—		—
	$	—		—		—
Total:
Residential 1-4 family real estate	$	136		134		—
Commercial and multi-family real estate		532		531		—
Construction, land development and farmland		—		—		—
Commercial, industrial and agricultural		—		—		—
1-4 family equity lines of credit		—		—		—
Consumer and other		—		—		—
	$	668		665		—

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The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the nine months ended September 30, 2021, respectively, of impaired loans by loan classification as determined under ASC 310 prior to the adoption of ASC 326:

	September 30, 2021
	Average Recorded Investment		Interest Income Recognized
	In Thousands
With no related allowance recorded:
Residential 1-4 family real estate	$	870		6
Commercial and multi-family real estate		248		11
Construction, land development and farmland		—		—
Commercial, industrial and agricultural		—		—
1-4 family equity lines of credit		—		—
Consumer and other		—		—
	$	1,118		17
With related allowance recorded:
Residential 1-4 family real estate	$	912		—
Commercial and multi-family real estate		508		7
Construction, land development and farmland		—		—
Commercial, industrial and agricultural		—		—
1-4 family equity lines of credit		—		—
Consumer and other		—		—
	$	1,420		7
Total:
Residential 1-4 family real estate	$	1,782		6
Commercial and multi-family real estate		756		18
Construction, land development and farmland		—		—
Commercial, industrial and agricultural		—		—
1-4 family equity lines of credit		—		—
Consumer and other		—		—
	$	2,538		24

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

The following tables present the Company’s nonaccrual loans and past due loans as of September 30, 2022 and December 31, 2021.

Loans on Nonaccrual Status

	In Thousands
	September 30,		December 31,
	2022		2021
Residential 1-4 family real estate	$	—	$	—
Commercial and multi-family real estate		—		—
Construction, land development and farmland		—		—
Commercial, industrial and agricultural		—		—
1-4 family equity lines of credit		—		—
Consumer and other		—		—
Total	$	—	$	—

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Past Due Loans

	(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		Non Accrual and Greater Than 90 Days Past Due		Total Non Accrual and Past Due		Current		Total Loans		Recorded Investment Greater Than 90 Days Past Due and Accruing
September 30, 2022
Residential 1-4 family real estate	$	1,053		842		386		2,281		810,152		812,433	$	386
Commercial and multi-family real estate		133		91		—		224		993,423		993,647		—
Construction, land development and farmland		—		48		—		48		853,278		853,326		—
Commercial, industrial and agricultural		76		74		—		150		123,965		124,115		—
1-4 family equity lines of credit		244		213		57		514		141,529		142,043	$	57
Consumer and other		694		104		98		896		78,824		79,720		98
Total	$	2,200		1,372		541		4,113		3,001,171		3,005,284	$	541
December 31, 2021
Residential 1-4 family real estate	$	2,072		169		357		2,598		686,981		689,579	$	357
Commercial and multi-family real estate		—		—		—		—		908,673		908,673		—
Construction, land development and farmland		1,154		215		—		1,369		611,290		612,659		—
Commercial, industrial and agricultural		59		81		—		140		118,015		118,155		—
1-4 family equity lines of credit		170		—		9		179		92,050		92,229		9
Consumer and other		287		99		23		409		74,234		74,643		23
Total	$	3,742		564		389		4,695		2,491,243		2,495,938	$	389

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

The following table summarizes the carrying balances of TDRs at September 30, 2022 and December 31, 2021.

	September 30, 2022		December 31, 2021
	(In thousands)
Performing TDRs	$	846	$	876
Nonperforming TDRs		114		165
Total TDRS	$	960	$	1,041

The following table outlines the amount of each troubled debt restructuring, categorized by loan classification, made during the nine months ended September 30, 2022 and the nine months ended September 30, 2021 (in thousands, except for number of contracts):

September 30, 2022

September 30, 2021

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 real estate

—

Commercial and multi-family real estate

—

Construction, land development and farmland

—

Commercial, industrial and agricultural

—

1-4 family equity lines of credit

—

Consumer and other

—

Total

—

As of September 30, 2022 and September 30, 2021 the Company had no loan relationships that had been previously classified as a TDR subsequently default within twelve months of restructuring.

As of September 30, 2022 there were no consumer mortgage loans in the process of foreclosure. As of December 31, 2021, the Company's recorded investment in consumer mortgage loans in the process of foreclosure totaled $262,000.

Potential problem loans, which include nonperforming loans, amounted to approximately $5.7 million at September 30, 2022 and $7.7 million at December 31, 2021. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.

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

	•	Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.
	•	Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
	•	Doubtful loans have all the characteristics of substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Bank considers all doubtful loans to be collateral dependent and places such loans on nonaccrual status.

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The table below presents loan balances classified within each risk rating category by primary loan type and based on year of origination as of September 30, 2022:

	*In Thousands*
													*Revolving*
	*2022*		*2021*		*2020*		*2019*		*2018*		*Prior*		*Loans*		*Total*
September 30, 2022
Residential 1-4 family real estate
Pass	$	234,604		259,368		111,245		63,610		30,948		86,292		21,489		807,556
Special mention		—		—		901		—		116		2,005		349		3,371
Substandard		—		—		37		131		—		1,338		—		1,506
Total Residential 1-4 family real estate	$	234,604		259,368		112,183		63,741		31,064		89,635		21,838		812,433
Commercial and multi-family real estate
Pass	$	198,521		228,852		163,568		109,657		75,934		187,572		29,249		993,353
Special mention		—		—		163		—		—		40		—		203
Substandard		—		—		—		—		—		91		—		91
Total Commercial and multi-family real estate	$	198,521		228,852		163,731		109,657		75,934		187,703		29,249		993,647
Construction, land development and farmland
Pass	$	300,954		279,972		88,983		10,153		5,551		10,074		157,560		853,247
Special mention		—		—		—		—		—		61		—		61
Substandard		—		—		—		—		—		18		—		18
Total Construction, land development and farmland	$	300,954		279,972		88,983		10,153		5,551		10,153		157,560		853,326
Commercial, industrial and agricultural
Pass	$	25,034		13,332		28,612		20,980		5,581		5,060		25,421		124,020
Special mention		—		21		19		—		—		55		—		95
Substandard		—		—		—		—		—		—		—		—
Total Commercial, industrial and agricultural	$	25,034		13,353		28,631		20,980		5,581		5,115		25,421		124,115
1-4 family equity lines of credit
Pass	$	—		—		—		—		—		—		141,915		141,915
Special mention		—		—		—		—		—		—		11		11
Substandard		—		—		—		—		—		—		117		117
Total 1-4 family equity lines of credit	$	—		—		—		—		—		—		142,043		142,043
Consumer and other
Pass	$	23,251		13,365		7,409		6,404		486		6,932		21,672		79,519
Special mention		19		51		10		3		—		—		—		83
Substandard		74		14		14		1		14		1		—		118
Total Consumer and other	$	23,344		13,430		7,433		6,408		500		6,933		21,672		79,720

The table below presents loan balances classified within each risk rating category based on year of origination as of September 30, 2022:

	*In Thousands*
	*2022*		*2021*		*2020*		*2019*		*2018*		*Prior*		*Revolving Loans*		*Total*
September 30, 2022
Pass	$	782,364		794,889		399,817		210,804		118,500		295,930		397,306		2,999,610
Special mention		19		72		1,093		3		116		2,161		360		3,824
Substandard		74		14		51		132		14		1,448		117		1,850
Total	$	782,457		794,975		400,961		210,939		118,630		299,539		397,783		3,005,284

The following table outlines the risk category of loans as of December 31, 2021:

	*In Thousands*

	Residential 1-4 Family Real Estate		Commercial and Multi-family Real Estate		Construction, Land Development and Farmland		Commercial, Industrial and Agricultural		1-4 Family Equity Lines of Credit		Consumer and Other		Total
Credit Risk Profile by Internally Assigned Grade
December 31, 2021
Pass	$	682,527		908,409		612,537		118,058		92,208		74,513		2,488,252
Special mention		5,566		—		93		96		11		89		5,855
Substandard		1,486		264		29		1		10		41		1,831
Total	$	689,579		908,673		612,659		118,155		92,229		74,643		2,495,938

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Note 3. Debt and Equity Securities

Debt and equity securities have been classified in the consolidated balance sheet according to management’s intent. Debt and equity securities at September 30, 2022 and December 31, 2021 are summarized as follows:

	September 30, 2022
	Securities Available-For-Sale
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
U.S. Treasury and other U.S. government agencies	$	14,658		—		1,180		13,478
U.S. Government-sponsored enterprises (GSEs)		180,264		—		31,410		148,854
Mortgage-backed securities		531,472		5		78,069		453,408
Asset-backed securities		41,256		—		1,526		39,730
Corporate bonds		2,500		—		121		2,379
Obligations of states and political subdivisions		224,965		—		43,662		181,303
	$	995,115		5		155,968		839,152

	December 31, 2021
	Securities Available-For-Sale
	In Thousands
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
U.S. Treasury and other U.S. government agencies	$	7,320		—		99		7,221
U.S. Government-sponsored enterprises (GSEs)		163,700		20		4,490		159,230
Mortgage-backed securities		465,588		2,726		6,537		461,777
Asset-backed securities		46,583		213		83		46,713
Corporate bonds		2,500		75		—		2,575
Obligations of states and political subdivisions		220,444		2,611		2,986		220,069
	$	906,135		5,645		14,195		897,585

Included in mortgage-backed securities are collateralized mortgage obligations totaling $147,779,000 (fair value of $126,143,000) and $130,594,000 (fair value of $128,281,000) at September 30, 2022 and December 31, 2021, respectively.

Securities carried on the balance sheet of approximately $417,122,000 (approximate market value of $352,371,000) and $368,718,000 (approximate market value of $364,893,000) were pledged to secure public deposits and for other purposes as required by law at September 30, 2022 and December 31, 2021, respectively.

The amortized cost and estimated market value of debt securities at September 30, 2022 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-For-Sale
	In Thousands
	Amortized Cost		Estimated Market Value
Due in one year or less	$	5,455	$	5,277
Due after one year through five years		85,654		78,157
Due after five years through ten years		271,526		226,693
Due after ten years		632,480		529,025
	$	995,115	$	839,152

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The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2022 and December 31, 2021.

	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
September 30, 2022	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Available-for-Sale Securities:
U.S. Treasury and other U.S. government agencies	$	7,061	$	252		2	$	6,417	$	928		3	$	13,478	$	1,180
U.S. Government-sponsored enterprises (GSEs)		27,129		4,477		9		121,725		26,933		49		148,854		31,410
Mortgage-backed securities		229,613		30,715		152		222,875		47,354		98		452,488		78,069
Asset-backed securities		34,357		1,346		25		5,373		180		4		39,730		1,526
Corporate bonds		2,379		121		1		—		—		—		2,379		121
Obligations of states and political subdivisions		102,539		20,465		133		78,764		23,197		94		181,303		43,662
	$	403,078	$	57,376		322	$	435,154	$	98,592		248	$	838,232	$	155,968

	In Thousands, Except Number of Securities
	Less than 12 Months						12 Months or More						Total
December 31, 2021	Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses		Number of Securities Included		Fair Value		Unrealized Losses
Available-for-Sale Securities:
U.S. Treasury and other U.S. government agencies	$	7,221	$	99		3	$	—	$	—		—	$	7,221	$	99
U.S. Government-sponsored enterprises (GSEs)		110,981		2,466		33		45,725		2,024		19		156,706		4,490
Mortgage-backed securities		317,211		4,644		96		54,692		1,893		33		371,903		6,537
Asset-backed securities		17,945		67		9		484		16		1		18,429		83
Corporate bonds		—		—		—		—		—		—		—		—
Obligations of states and political subdivisions		83,510		1,460		74		36,225		1,526		32		119,735		2,986
	$	536,868	$	8,736		215	$	137,126	$	5,459		85	$	673,994	$	14,195

For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because the Company currently does not intend to sell those securities that have an unrealized loss at September 30, 2022, and it is not more-likely-than-not that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company has determined that no write-down is necessary. In addition, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration, which would require the recognition of an allowance for credit losses. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. The unrealized losses associated with securities at September 30, 2022 are driven by changes in interest rates and are not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at September 30, 2022. These securities will continue to be monitored as a part of the Company's ongoing evaluation of credit quality. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. The Company did not have any securities classified as held-to-maturity at September 30, 2022 or December 31, 2021.

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Note 4. Derivatives

Derivatives Designated as Fair Value Hedges

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

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

A summary of the Company's fair value hedge relationships as of September 30, 2022 and December 31, 2021 are as follows (in thousands):

September 30, 2022

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Interest rate swap agreements - loans

Other assets

7.67

0.65

1 month LIBOR

30,000

4,826

December 31, 2021

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Interest rate swap agreements - loans

Other assets

8.42

0.65

1 month LIBOR

30,000

1,192

The effects of fair value hedge relationships reported in interest income on loans on the consolidated statements of income for the nine months ended September 30, 2022 and 2021 were as follows (in thousands):

	*Nine Months Ended September 30,*
Gain (loss) on fair value hedging relationship	*2022*			*2021*
Interest rate swap agreements - loans:
Hedged items	$	(3,616	)		(986	)
Derivative designated as hedging instruments		3,634			1,053

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at September 30, 2022 and December 31, 2021 (in thousands):

	*Carrying Amount of the Hedged Assets*				*Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets*
Line item on the balance sheet	*September 30, 2022*		*December 31, 2021*		*September 30, 2022*			*December 31, 2021*
Loans	$	25,101		28,717		(4,899	)		(1,283	)

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Mortgage Banking Derivatives

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors under the Bank's mandatory delivery program are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in an effort to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. At September 30, 2022 and December 31, 2021, the Company had approximately $13,487,000 and $20,340,000, respectively, of interest rate lock commitments and approximately $12,250,000 and $20,500,000, respectively, of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative liability of $147,000 and a derivative asset of $657,000 at September 30, 2022 and December 31, 2021, respectively, and a derivative asset of $320,000 and $6,000 at September 30, 2022 and December 31, 2021, respectively. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sale of loans.

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

	*In Thousands*
	*September 30, 2022*			*September 30, 2021*
Interest rate contracts for customers	$	(804	)		87
Forward contracts related to mortgage loans held for sale and interest rate contracts		314			247

The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as of September 30, 2022 and December 31, 2021 (in thousands):

	*In Thousands*
	*September 30, 2022*					*December 31, 2021*
	*Notional Amount*		*Fair Value*			*Notional Amount*		*Fair Value*
Included in other assets (liabilities):
Interest rate contracts for customers	$	13,487		(147	)		20,340		657
Forward contracts related to mortgage loans held-for-sale		12,250		320			20,500		6

Note 5. Mortgage Servicing Rights

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

	*In Thousands*
September 30,	*2022*
Mortgage loan portfolios serviced for:
FHLMC	$	80,675

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

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

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

	*September 30, 2022*
Prepayment speed		6.91	%
Weighted-average life (in years)		9.12
Weighted-average note rate		4.21	%
Weighted-average discount rate		9.00	%

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Note 6. Equity Incentive Plans

In April 2009, the Company’s shareholders approved the Wilson Bank Holding Company 2009 Stock Option Plan (the “2009 Stock Option Plan”). The 2009 Stock Option Plan was effective as of April 14, 2009. Under the 2009 Stock Option Plan, awards could be in the form of options to acquire common stock of the Company. Subject to adjustment as provided by the terms of the 2009 Stock Option Plan, the maximum number of shares of common stock with respect to which awards could be granted under the 2009 Stock Option Plan was 100,000 shares. The 2009 Stock Option Plan terminated on April 13, 2019, and no additional awards may be issued under the 2009 Stock Option Plan. The awards granted under the 2009 Stock Option Plan prior to the plan's expiration will remain outstanding until exercised or otherwise terminated. As of September 30, 2022, the Company had outstanding 5,987 options under the 2009 Stock Option Plan with a weighted average exercise price of $35.31.

During the second quarter of 2016, the Company’s shareholders approved the Wilson Bank Holding Company 2016 Equity Incentive Plan, which authorizes awards of up to 750,000 shares of common stock. The 2016 Equity Incentive Plan was approved by the Board of Directors and effective as of January 25, 2016 and approved by the Company’s shareholders on April 12, 2016. On September 26, 2016, the Board of Directors approved an amendment and restatement of the 2016 Equity Incentive Plan (as amended and restated the “2016 Equity Incentive Plan”). Except for certain limitations, awards can be in the form of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares and restricted share units, performance awards and other stock-based awards. As of September 30, 2022, the Company had 195,476 shares remaining available for issuance under the 2016 Equity Incentive Plan. As of September 30, 2022, the Company had outstanding 248,834 options with a weighted average exercise price of $55.67 and 181,090 cash-settled stock appreciation rights with a weighted average exercise price of $53.48 under the 2016 Equity Incentive Plan.

As of September 30, 2022, the Company had outstanding 254,821 stock options with a weighted average exercise price of $55.19 and 181,090 cash-settled stock appreciation rights each with a weighted average exercise price of $53.48.

The following table summarizes information about stock options and cash-settled SARs for the nine months ended September 30, 2022 and 2021:

	*September 30, 2022*					*September 30, 2021*
	*Shares*			*Weighted Average Exercise Price*		*Shares*			*Weighted Average Exercise Price*
Options and SARs outstanding at beginning of period		357,254		$	50.18		284,591		$	43.71
Granted		114,332			64.06		24,999			59.02
Exercised		(34,508	)		41.95		(38,883	)		40.75
Forfeited or expired		(1,167	)		46.81		(100	)		31.31
Outstanding at end of period		435,911		$	54.48		270,607		$	45.55
Options and SARs exercisable at September 30		168,017		$	43.67		164,544		$	41.91

As of September 30, 2022, there was $5,024,000 of total unrecognized cost related to non-vested share-based compensation arrangements granted under the Company's equity incentive plans. The cost is expected to be recognized over a weighted-average period of 3.92 years.

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Note 7. Regulatory Capital

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of September 30, 2022, the Bank and the Company meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is classified as adequately capitalized or lower, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is growth and expansion, and capital restoration plans are required. As of September 30, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Company’s and Wilson Bank’s actual capital amounts and ratios as of September 30, 2022 and December 31, 2021 are presented in the following tables. The capital conservation buffer of 2.5% is not included in the required minimum ratios of the tables presented below.

	*Actual*					*Minimum Capital Adequacy*					*For Classification Under Corrective Action Plan as Well Capitalized*
	*Amount*		*Ratio*			*Amount*		*Ratio*			*Amount*		*Ratio*
	*(dollars in thousands)*
September 30, 2022
Total capital to risk weighted assets:
Consolidated	$	497,360		13.5	%	$	294,682		8.0	%	$	368,352		10.0	%
Wilson Bank		494,996		13.4			294,680		8.0			368,350		10.0
Tier 1 capital to risk weighted assets:
Consolidated		452,928		12.3			221,011		6.0			294,681		8.0
Wilson Bank		450,564		12.2			221,011		6.0			294,681		8.0
Common equity Tier 1 capital to risk weighted assets:
Consolidated		452,928		12.3			165,758		4.5			N/A		N/A
Wilson Bank		450,564		12.2			165,758		4.5			239,429		6.5
Tier 1 capital to average assets:
Consolidated		452,928		11.0			165,284		4.0			N/A		N/A
Wilson Bank		450,564		10.9			165,229		4.0			206,537		5.0

	Actual					Minimum Capital Adequacy					For Classification Under Corrective Action Plan as Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	*(dollars in thousands)*
December 31, 2021
Total capital to risk weighted assets:
Consolidated	$	455,813		13.9	%	$	261,404		8.0	%	$	326,755		10.0	%
Wilson Bank		452,130		13.8			261,317		8.0			326,646		10.0
Tier 1 capital to risk weighted assets:
Consolidated		415,226		12.7			196,052		6.0			261,403		8.0
Wilson Bank		411,543		12.6			195,987		6.0			261,316		8.0
Common equity Tier 1 capital to risk weighted assets:
Consolidated		415,226		12.7			147,039		4.5			N/A		N/A
Wilson Bank		411,543		12.6			146,990		4.5			212,319		6.5
Tier 1 capital to average assets:
Consolidated		415,226		10.8			154,280		4.0			N/A		N/A
Wilson Bank		411,543		10.7			154,230		4.0			192,787		5.0

Dividend Restrictions

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

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Note 8. Fair Value Measurements

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

Valuation Hierarchy

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

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

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

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

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

Assets

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

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

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

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

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

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

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

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The following tables present the financial instruments carried at fair value as of September 30, 2022 and December 31, 2021, by caption on the consolidated balance sheet and by FASB ASC 820 valuation hierarchy (as described above):

	Assets and Liabilities Measured at Fair Value on a Recurring Basis
	(In Thousands)
	Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)
September 30, 2022
Hedged Loans	$	25,101		—		25,101		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agencies		13,478		13,478		—		—
U.S. Government sponsored enterprises		148,854		—		148,854		—
Mortgage-backed securities		453,408		—		453,408		—
Asset-backed securities		39,730		—		39,730		—
Corporate bonds		2,379		—		2,379		—
State and municipal securities		181,303		—		181,303		—
Total investment securities available-for-sale		839,152		13,478		825,674		—
Mortgage loans held for sale		3,555		—		3,555		—
Derivative instruments		5,146		—		5,146		—
Other investments		2,073		—		—		2,073
Total assets	$	875,027		13,478		859,476		2,073

Derivative instruments	$	147		—		147		—
Total liabilities	$	147		—		147		—


December 31, 2021
Hedged Loans	$	28,717		—		28,717		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agencies		7,221		7,221		—		—
U.S. Government sponsored enterprises		159,230		—		159,230		—
Mortgage-backed securities		461,777		—		461,777		—
Asset-backed securities		46,713		—		46,713		—
Corporate bonds		2,575		—		2,575		—
State and municipal securities		220,069		—		220,069		—
Total investment securities available-for-sale		897,585		7,221		890,364		—
Mortgage loans held for sale		11,843		—		11,843		—
Derivative instruments		1,855		—		1,855		—
Other investments		2,034		—		—		2,034
Total assets	$	942,034		7,221		932,779		2,034

Derivative instruments	$	—		—		—		—
Total liabilities	$	—		—		—		—

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	Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
	(In Thousands)
	Total Carrying Value in the Consolidated Balance Sheet		Quoted Market Prices in an Active Market (Level 1)		Models with Significant Observable Market Parameters (Level 2)		Models with Significant Unobservable Market Parameters (Level 3)
September 30, 2022
Other real estate owned	$	—		—		—		—
Collateral dependent loans (¹)		643		—		—		643
Total	$	643		—		—		643
December 31, 2021
Other real estate owned	$	—		—		—		—
Impaired loans, net (¹)		668		—		—		668
Total	$	668		—		—		668

⁽¹⁾	As of September 30, 2022 no valuation allowance was recorded on collateral dependent loans. As of December 31, 2021* no valuation allowance was recorded on impaired loans.*

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at September 30, 2022 and December 31, 2021:

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

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

In the case of its investment securities portfolio, the Company monitors the valuation technique utilized by various pricing agencies to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the nine months ended September 30, 2022, there were no transfers between Levels 1, 2 or 3.

The table below includes a rollforward of the balance sheet amounts for the three and nine months ended September 30, 2022 and 2021 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):

	*For the Three Months Ended September 30,*
	*2022*				*2021*
	Other Assets		Other Liabilities		Other Assets		Other Liabilities
Fair value, July 1	$	2,026		—	$	—		—
Total realized gains (losses) included in income		47		—		20		—
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at September 30		—		—		—		—
Purchases, issuances and settlements, net		—		—		2,000		—
Transfers out of Level 3		—		—		—		—
Fair value, September 30	$	2,073		—	$	2,020		—
Total realized gains (losses) included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30	$	47		—	$	20		—

	*For the Nine Months Ended September 30,*
	*2022*				*2021*
	Other Assets		Other Liabilities		Other Assets		Other Liabilities
Fair value, January 1	$	2,034		—	$	—		—
Total realized gains (losses) included in income		39		—		20		—
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at September 30		—		—		—		—
Purchases, issuances and settlements, net		—		—		2,000		—
Transfers out of Level 3		—		—		—		—
Fair value, September 30	$	2,073		—	$	2,020		—
Total realized gains (losses) included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30	$	39		—	$	20		—

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The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices or observable components are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2022 and December 31, 2021. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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

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

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

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

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

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

The following table presents the carrying amounts, estimated fair value and placement in the fair valuation hierarchy of the Company’s financial instruments at September 30, 2022 and December 31, 2021. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.

	Carrying/ Notional		Estimated		Quote Market Prices in an Active Market		Models with Significant Observable Market Parameters		Models with Significant Unobservable Market Parameters
(in Thousands)	Amount		Fair Value (¹)		(Level 1)		(Level 2)		(Level 3)
September 30, 2022
Financial assets:
Cash and cash equivalents	$	95,572		95,572		95,572		—		—
Loans, net		2,928,644		2,862,636		—		—		2,862,636
Mortgage servicing rights		1,016		1,194		—		1,194		—
Financial liabilities:
Deposits		3,745,656		3,021,826		—		—		3,021,826

December 31, 2021
Financial assets:
Cash and cash equivalents	$	453,418		453,418		453,418		—		—
Loans, net		2,444,282		2,439,539		—		—		2,439,539
Financial liabilities:
Deposits		3,555,071		3,227,520		—		—		3,227,520

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

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Note 9. Income Taxes

Accounting Standards Codification (“ASC”) 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods. As of September 30, 2022, the Company had no unrecognized tax benefits related to Federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to September 30, 2022.

The Company’s effective tax rate for the three and nine months ended September 30, 2022 was 22.95% and 22.83%, respectively compared to 23.34% and 23.63% for the same periods in 2021. The difference between the effective tax rate and the federal and state income tax statutory rate of 26.14% at September 30, 2022 and 2021 is primarily due to investments in bank qualified municipal securities, participation in the Tennessee Community Investment Tax Credit (CITC) program, and tax benefits associated with share-based compensation, and bank-owned life insurance, offset in part by the limitation on deductibility of meals and entertainment expense and non-deductible executive compensation.

As of and for the nine months ended September 30, 2022, the Company has not accrued or recognized interest or penalties related to uncertain tax positions. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

The Company and the Bank file consolidated U.S. Federal and State of Tennessee income tax returns. The Company is currently open to audit under the statute of limitations by the State of Tennessee for the years ended December 31, 2018 through 2021 and the IRS for the years ended December 31, 2019 through 2021.

Note 10. Earnings Per Share

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

The following is a summary of components comprising basic and diluted earnings per share (“EPS”) for the three and nine months ended September 30, 2022 and 2021:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(Dollars in Thousands Except Share and Per Share Amounts)				(Dollars in Thousands Except Share and Per Share Amounts)
Basic EPS Computation:
Numerator – Earnings available to common stockholders	$	15,190	$	13,342	$	40,702	$	35,625
Denominator – Weighted average number of common shares outstanding		11,429,027		11,165,313		11,348,628		11,110,006
Basic earnings per common share	$	1.33	$	1.19	$	3.59	$	3.21
Diluted EPS Computation:
Numerator – Earnings available to common stockholders	$	15,190	$	13,342	$	40,702	$	35,625
Denominator – Weighted average number of common shares outstanding		11,429,027		11,165,313		11,348,628		11,110,006
Dilutive effect of stock options		31,916		32,097		31,627		30,580
Weighted average diluted common shares outstanding		11,460,943		11,197,410		11,380,255		11,140,586
Diluted earnings per common share	$	1.33	$	1.19	$	3.58	$	3.20

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Note 11. Commitments and Contingent Liabilities

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

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

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

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

A summary of the Company’s total contractual amount for all off-balance sheet commitments at September 30, 2022 is as follows:

Commitments to extend credit		$	1,274,381,000
Standby letters of credit		$	79,404,000

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

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

The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures for the nine months ended September 30, 2022 and 2021.

	(In Thousands)
	*2022*			*2021*
Beginning balance, January 1	$	955			693
Impact of adopting ASC 326		6,195			—
Credit loss expense (benefit)		(298	)		221
Ending balance, September 30,	$	6,852			914

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

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

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

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

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these claims outstanding at September 30, 2022 will not have a material impact on the Company’s consolidated financial statements.

Note 12. Subsequent Events

ASC 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Wilson Bank Holding Company evaluated all events or transactions that occurred after September 30, 2022, through the date of the issued financial statements.

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

The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its bank subsidiary, Wilson Bank (the "Bank") and Encompass Home Loan Lending, LLC ("Encompass"), a company offering mortgage banking services that is 51% owned by the Bank and 49% owned by two home builders operating in the Bank's market areas. The results of Encompass, which commenced operations on June 1, 2022, are consolidated in the Company's financial statements included elsewhere in this Quarterly Report. This discussion should be read in conjunction with the Company's consolidated financial statements appearing elsewhere in this report. Reference should also be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for a more complete discussion of factors that impact the Company's liquidity, capital and results of operations.

Forward-Looking Statements

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

The Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks and uncertainties, including, but not limited to those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and also include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in credit losses and provisions for these losses, (ii) deterioration in the real estate market conditions in the Company’s market areas including demand for residential real estate loans as a result of rising rates on residential real estate mortgage loans, (iii) the impact of increased competition with other financial institutions, including pricing pressures on loans and deposits, and the resulting impact on the Company's results, including as a result of compression to net interest margin, (iv) adverse conditions in local or national economies, including the economy in the Company’s market areas, including as a result of inflationary pressures on our customers and on their businesses (v) fluctuations or differences in interest rates on earning assets and interest bearing liabilities from those that the Company is modeling or anticipating, including as a result of the Bank's inability to maintain deposit rates or defer increases to those rates in a rising rate environment in connection with the changes in the short-term rate environment, or that affect the yield curve, (vi) the ability to grow and retain low-cost core deposits, (vii) significant downturns in the business of one or more large customers, (viii) the inability of the Company to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies, required capital maintenance levels, or regulatory requests or directives, (ix) 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, (x) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, (xi) inadequate allowance for credit losses, (xii) the effectiveness of the Company’s activities in improving, resolving or liquidating lower quality assets, (xiii) results of regulatory examinations, (xiv) the vulnerability of the Company's network and online banking portals, and the systems of parties with whom the Company contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches, (xv) the possibility of additional increases to compliance costs or other operational expenses as a result of increased regulatory oversight, (xvi) loss of key personnel, (xvii) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future litigation, examinations or other legal and/or regulatory actions, (xviii) the effects of new outbreaks of COVID-19, including actions taken by governmental officials to curb the spread of the virus, and the resulting impact on general economic and financial market conditions and on the Company's and its customers' business, results of operations, asset quality and financial condition, and (xix) the efficacy of vaccines against the COVID-19 virus, including new variants. These risks and uncertainties may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. The Company’s future operating results depend on a number of factors which were derived utilizing numerous assumptions that could cause actual results to differ materially from those projected in forward-looking statements.

Impact of COVID-19

Information regarding the impact of the COVID-19 pandemic on our financial condition and results of operations as of and for the three and nine months ended September 30, 2022 and comparable prior year periods is noted throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q.

Application of Critical Accounting Policies and Accounting Estimates

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

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

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Accounting policies related to the allowance for credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. As discussed in Note 1 - Summary of Significant Accounting Policies, our policies related to allowances for credit losses changed on January 1, 2022 in connection with the adoption of a new accounting standard update as codified in Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Loans and Allowance for Credit Losses in the notes to consolidated financial statements contained elsewhere in this Quarterly Report.

Non-GAAP Financial Measures

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

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

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Selected Financial Information

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

	*As of or For the Three Months Ended September 30,*									*As of or For the Nine Months Ended September 30,*
	*2022*			*2021*			*2022 - 2021 Percent Increase (Decrease)*			*2022*			*2021*			*2022 - 2021 Percent Increase (Decrease)*
PER SHARE DATA:
Basic earnings per common share (GAAP)	$	1.33		$	1.19			11.76	%	$	3.59		$	3.21			11.84	%
Pre-tax pre-provision basic earnings per share ⁽¹⁾	$	1.90		$	1.58			20.55	%	$	5.15		$	4.31			19.49	%
Diluted earnings per common share (GAAP)	$	1.33		$	1.19			11.76	%	$	3.58		$	3.20			11.88	%
Cash dividends per common share	$	0.75		$	0.75			—	%	$	1.85		$	1.35			37.04	%
Dividends declared per common share as a percentage of basic earnings per common share		56.39	%		63.03	%		(10.53	)%		51.53	%		42.06	%		22.53	%

	*As of or For the Three Months Ended September 30,*									*As of or For the Nine Months Ended September 30,*
	*2022*			*2021*			*2022 - 2021 Percent Increase (Decrease)*			*2022*			*2021*			*2022 - 2021 Percent Increase (Decrease)*
PERFORMANCE RATIOS:
Annualized return on average stockholders' equity (GAAP) ⁽¹⁾		16.67	%		13.10	%		27.25	%		14.58	%		12.13	%		20.20	%
Pre-tax pre-provision annualized return on average stockholders' equity ⁽²⁾		23.86	%		17.30	%		37.92	%		20.96	%		16.31	%		28.51	%
Annualized return on average assets (GAAP) ⁽³⁾		1.46	%		1.42	%		2.82	%		1.33	%		1.33	%		—	%
Pre-tax pre-provision annualized return on average assets ⁽²⁾		2.09	%		1.87	%		11.76	%		1.91	%		1.79	%		6.70	%
Efficiency ratio ⁽⁴⁾		51.63	%		56.41	%		(8.47	)%		54.78	%		58.49	%		(6.34	)%

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

(2) Excludes income tax expense, and for 2022 provision for credit losses and provision for credit losses on unfunded commitments. For 2021 excludes income tax expense, provision for loan losses, and provision for unfunded commitments.

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

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

	*September 30, 2022*			*December 31, 2021*			*2022 - 2021 Percent Increase (Decrease)*
BALANCE SHEET RATIOS:
Total capital to assets ratio		8.29	%		10.37	%		(20.06	)%
Equity to asset ratio (Average equity divided by average total assets)		9.13	%		10.86	%		(15.93	)%
Tier 1 capital to average assets		10.96	%		10.77	%		1.76	%
Non-performing asset ratio		0.02	%		0.01	%		100.00	%
Book value per common share	$	29.89		$	36.93			(19.06	)%

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Reconciliation of Non-GAAP Financial Measures

	Three Months Ended						Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Pre-tax pre-provision income:
Net income attributable to common stockholders (GAAP)	$	15,190		$	13,342		$	40,702		$	35,625
Add: provision for credit losses		2,543			130			6,060			1,012
Add: provision expense (benefit) for credit losses on unfunded commitments		(515	)		84			(298	)		221
Add: income tax expense		4,523			4,063			12,037			11,021
Pre-tax pre-provision income	$	21,741		$	17,619		$	58,501		$	47,879

Pre-tax pre-provision basic earnings per share:
Pre-tax pre-provision income	$	21,741		$	17,619		$	58,501		$	47,879
Weighted average shares		11,429,027			11,165,313			11,348,628			11,110,006

Basic earnings per common share (GAAP)	$	1.33		$	1.19		$	3.59		$	3.21
Provision for credit losses	$	0.22		$	0.01		$	0.53		$	0.09
Provision expense (benefit) for credit losses on unfunded commitments	$	(0.05	)	$	0.01		$	(0.03	)	$	0.02
Income tax expense	$	0.40		$	0.37		$	1.06		$	0.99
Pre-tax pre-provision basic earnings per common share	$	1.90		$	1.58		$	5.15		$	4.31
								.
Pre-tax pre-provision annualized return on average assets:
Pre-tax pre-provision income	$	21,741		$	17,619		$	58,501		$	47,879
Average assets		4,135,538			3,732,561			4,086,409			3,583,758

Annualized return on average assets (GAAP)		1.46	%		1.42	%		1.33	%		1.33	%
Provision for credit losses		0.24	%		0.01	%		0.20	%		0.04	%
Provision expense (benefit) for credit losses on unfunded commitments		(0.05	)%		0.01	%		(0.01	)%		0.01	%
Income tax expense		0.44	%		0.43	%		0.39	%		0.41	%
Pre-tax pre-provision annualized return on average assets		2.09	%		1.87	%		1.91	%		1.79	%

Pre-tax pre-provision annualized return on average stockholders' equity:
Pre-tax pre-provision income	$	21,741		$	17,619		$	58,501		$	47,879
Average total stockholders' equity		361,549			404,134			373,238			392,580

Annualized return on average stockholders' equity (GAAP)		16.67	%		13.10	%		14.58	%		12.13	%
Provision for credit losses		2.79	%		0.13	%		2.17	%		0.34	%
Provision expense (benefit) for credit losses on unfunded commitments		(0.57	)%		0.08	%		(0.11	)%		0.08	%
Income tax expense		4.97	%		3.99	%		4.32	%		3.76	%
Pre-tax pre-provision annualized return on average stockholders' equity		23.86	%		17.30	%		20.96	%		16.31	%

Results of Operations

Net earnings of the Company increased $5,077,000, or 14.25%, to $40,702,000 for the nine months ended September 30, 2022, from $35,625,000 in the first nine months of 2021. Net earnings of the Company were $15,190,000 for the quarter ended September 30, 2022, an increase of $1,848,000, or 13.85%, from $13,342,000 for the three months ended September 30, 2021 and an increase of $1,051,000, or 7.43%, over the quarter ended June 30, 2022. The increase in net earnings during the three and nine months ended September 30, 2022 as compared to the prior year comparable period was primarily due to an increase in net interest income, partially offset by an increase in provision for credit losses, a decrease in non-interest income, and an increase in non-interest expense. The increase in net interest income for the three months ended September 30, 2022 compared to the comparable period in 2021 is due to an increase in average interest earning asset balances between the relevant periods, partially offset by decreased yield on loans and an increase in cost of funds. The increase in net interest income for the nine months ended September 30, 2022 compared to the comparable period in 2021 is due to an increase in average interest earning asset balances between the relevant periods and a decrease in cost of funds, partially offset by decreased yield on loans. The decrease in yield on loans was primarily due to decreased PPP loan fees during the three and nine months ended September 30, 2022 from the comparable periods in 2021, though such decline was partially offset by rising interest rates. The increase in cost of funds for the three months ended September 30, 2022 when compared to the comparable period in 2021 occurred as we increased the rates we are paying on our deposit products as a result of competitive pressures in our markets and the impact of the rising rate environment. The decrease in non-interest income for the three and nine months ended September 30, 2022 compared to the comparable periods in 2021 primarily resulted from a decrease in the gain on sale of loans which resulted from a decrease in the volume of refinancing and purchase money transactions for residential real estate loans due to rising mortgage interest rates. The increase in non-interest expense for the three and nine months ended September 30, 2022 compared to the comparable periods in 2021 resulted from the Company's continued growth.

Return on average assets (ROA) and return on average stockholders' equity (ROE) are common benchmarks for bank profitability and are calculated by taking our annualized net earnings for the relevant period and dividing by the average assets and average equity for the relevant periods, respectively. ROA and ROE measure a company’s return on investment in a format that is easily comparable to other financial institutions. ROA is particularly important to the Company as it serves as the basis for certain executive and employee bonuses. The ROA for the nine month periods ended September 30, 2022 and 2021 was 1.33%. The ROA for the three month periods ended September 30, 2022 and 2021 was 1.46% and 1.42%, respectively. The ROE for the nine month periods ended September 30, 2022 and 2021 was 14.58% and 12.13%, respectively. The ROE for the three month periods ended September 30, 2022 and 2021 was 16.67% and 13.10%, respectively.

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Net Interest Income

The average balances, interest, and average rates of our assets and liabilities for the three and nine-month periods ended September 30, 2022 and September 30, 2021 are presented in the following table (dollars in thousands):

	Three Months Ended								Three Months Ended								Net Change Three Months Ended
	September 30, 2022								September 30, 2021								September 30, 2022 versus September 30, 2021
	Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Loans, net of unearned interest ^{(1) (2)}	$	2,889,178			5.10	%	$	36,566	$	2,394,042			5.19	%	$	30,773	$	9,242		$	(3,449	)	$	5,793
Investment securities—taxable		834,871			2.08			4,374		686,671			1.37			2,372		590			1,412			2,002
Investment securities—tax exempt		72,159			1.93			351		80,146			1.63			329		(161	)		183			22
Taxable equivalent adjustment ⁽³⁾		—			0.51			93		—			0.43			87		(43	)		49			6
Total tax-exempt investment securities		72,159			2.44			444		80,146			2.06			416		(204	)		232			28
Total investment securities		907,030			2.11			4,818		766,817			1.44			2,788		386			1,644			2,030
Loans held for sale		4,177			6.08			64		13,293			2.39			80		(307	)		291			(16	)
Federal funds sold		5,971			1.93			29		35,227			0.05			4		(25	)		50			25
Accounts with depository institutions		123,519			1.88			585		374,536			0.14			128		(624	)		1,081			457
Restricted equity securities		4,548			4.80			55		5,089			2.57			33		(22	)		44			22
Total earning assets		3,934,423			4.30			42,117		3,589,004			3.80			33,806		8,650			(339	)		8,311			24.58	%
Cash and due from banks		24,934								23,450
Allowance for credit losses		(35,166	)							(39,316	)
Bank premises and equipment		61,493								60,621
Other assets		149,854								98,802
Total assets	$	4,135,538							$	3,732,561

	Three Months Ended							Three Months Ended							Net Change Three Months Ended
	September 30, 2022							September 30, 2021							September 30, 2022 versus September 30, 2021
	Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Deposits:
Negotiable order of withdrawal accounts	$	1,095,614		0.19	%	$	522	$	935,771		0.20	%	$	475	$	205		$	(158	)	$	47
Money market demand accounts		1,272,022		0.51			1,643		1,103,871		0.13			364		63			1,216			1,279
Time Deposits		580,352		0.96			1,406		607,838		1.23			1,884		(82	)		(396	)		(478	)
Other savings		346,317		0.34			299		266,825		0.18			118		43			138			181
Total interest-bearing deposits		3,294,305		0.47			3,870		2,914,305		0.39			2,841		229			800			1,029
Finance leases		2,291		2.94			17		—		—			—		—			17			17
Fed funds purchased		364		7.44			7		—		—			—		—			7			7
Total interest-bearing liabilities		3,296,960		0.47			3,894		2,914,305		0.39			2,841		229			824			1,053			37.06	%
Non-interest bearing deposits		433,421							392,455
Other liabilities		43,608							21,667
Stockholders’ equity		361,549							404,134
Total liabilities and stockholders’ equity	$	4,135,538						$	3,732,561
Net interest income, on a tax equivalent basis						$	38,223						$	30,965	$	8,421		$	(1,163	)	$	7,258			23.44	%
Net interest margin ⁽⁴⁾				3.91	%						3.48	%
Net interest spread ⁽⁵⁾				3.83	%						3.41	%

Notes:

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

(2) Loan fees of $3.9 million are included in interest income in 2022, inclusive of $10,000 in 2022 in SBA fees related to PPP loans. Loan fees of $4.8 million are included in interest income in 2021, inclusive of $926,000 in 2021 in SBA fees related to PPP loans.

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

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

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

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	Nine Months Ended								Nine Months Ended								Net Change Nine Months Ended
	September 30, 2022								September 30, 2021								September 30, 2022 versus September 30, 2021
	Average Balance			Interest Rate			Income/ Expense		Average Balance			Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Loans, net of unearned interest (1) (2)	$	2,708,354			4.95	%	$	98,474	$	2,352,977			5.10	%	$	88,211	$	14,661		$	(4,398	)	$	10,263
Investment securities—taxable		833,037			1.85			11,548		601,697			1.37			6,167		2,807			2,574			5,381
Investment securities—tax exempt		74,528			1.85			1,030		79,338			1.53			905		(86	)		211			125
Taxable equivalent adjustment (3)		—			0.49			274		—			0.41			241		(23	)		56			33
Total tax-exempt investment securities		74,528			2.34			1,304		79,338			1.94			1,146		(109	)		267			158
Total investment securities		907,565			1.89			12,852		681,035			1.44			7,313		2,698			2,841			5,539
Loans held for sale		8,513			3.64			232		18,002			2.53			340		(278	)		170			(108	)
Federal funds sold		20,118			0.63			95		32,448			0.04			9		(8	)		94			86
Accounts with depository institutions		252,697			0.60			1,126		351,906			0.12			315		(168	)		979			811
Restricted equity securities		4,906			3.13			115		5,089			2.21			84		(5	)		36			31
Total earning assets		3,902,153			3.93			112,894		3,441,457			3.80			96,272		16,900			(278	)		16,622			17.27	%
Cash and due from banks		24,608								34,384
Allowance for credit losses		(36,102	)							(39,072	)
Bank premises and equipment		62,212								58,782
Other assets		133,538								88,207
Total assets	$	4,086,409							$	3,583,758

	Nine Months Ended							Nine Months Ended							Net Change Nine Months Ended
	September 30, 2022							September 30, 2021							September 30, 2022 versus September 30, 2021
	Average Balance		Interest Rate			Income/ Expense		Average Balance		Interest Rate			Income/ Expense		Due to Volume			Due to Rate			Net Change			Percent Change
Deposits:
Negotiable order of withdrawal accounts	$	1,083,667		0.18	%	$	1,444	$	885,129		0.21	%	$	1,383	$	365		$	(304	)	$	61
Money market demand accounts		1,250,454		0.27			2,546		1,057,663		0.15			1,216		254			1,076			1,330
Time Deposits		574,958		0.86			3,717		609,602		1.32			6,027		(326	)		(1,984	)		(2,310	)
Other savings		329,618		0.21			514		243,435		0.20			371		135			8			143
Total interest-bearing deposits		3,238,697		0.34			8,221		2,795,829		0.43			8,997		428			(1,204	)		(776	)
Federal Home Loan Bank advances		—		—			—		1,147		15.50			133		(66	)		(67	)		(133	)
Finance leases		1,807		3.70			50		—		—			—		—			50			50
Fed funds purchased		126		1.06			7		—		—			—		—			7			7
Total interest-bearing liabilities		3,240,630		0.34			8,278		2,796,976		0.44			9,130		362			(1,214	)		(852	)		(9.33	%)
Non-interest bearing deposits		435,279							373,817
Other liabilities		37,262							20,385
Stockholders’ equity		373,238							392,580
Total liabilities and stockholders’ equity	$	4,086,409						$	3,583,758
Net interest income, on a tax equivalent basis						$	104,616						$	87,142	$	16,538		$	936		$	17,474			20.05	%
Net interest margin (4)				3.64	%						3.45	%
Net interest spread (5)				3.59	%						3.36	%

Notes:

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

(2) Loan fees of $10.4 million are included in interest income in 2022, inclusive of $129,000 in 2022 in SBA fees related to PPP loans. Loan fees of $12.3 million are included in interest income in 2021, inclusive of $3.2 million in 2021 in SBA fees related to PPP loans.

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

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

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

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The components of our loan yield, a key driver to our net interest margin for the three and nine months ended September 30, 2022 and 2021, were as follows:

	Three Months Ended September 30,
	2022					2021
	Interest Income		Average Yield			Interest Income		Average Yield
Loan yield components:
Contractual interest rates		32,716		4.49	%		25,977		4.31	%
Origination and other fee income		3,840		0.53	%		3,870		0.64	%
PPP loan fee income		10		—	%		926		0.15	%
Loan tax credits		570		0.08	%		529		0.09	%
Total	$	37,136		5.10	%	$	31,302		5.19	%

	Nine Months Ended September 30,
	2022					2021
	Interest Income		Average Yield			Interest Income		Average Yield
Loan yield components:
Contractual interest rates		88,073		4.35	%		75,950		4.32	%
Origination and other fee income		10,272		0.51	%		9,050		0.51	%
PPP loan fee income		129		0.01	%		3,211		0.18	%
Loan tax credits		1,710		0.08	%		1,588		0.09	%
Total	$	100,184		4.95	%	$	89,799		5.10	%

Net interest margin for the nine months ended September 30, 2022 and 2021 was 3.64% and 3.45%, respectively, and 3.91% and 3.48% for the quarter ended September 30, 2022 and 2021, respectively. The increase in net interest margin for the nine months ended September 30, 2022 was due to an increase in the yield earned on our earning assets, with the exception of loans, and a decrease in rates paid on our interest-bearing liabilities. The increase in net interest margin for the three months ended September 30, 2022 was due to an increase in the yield earned on our earning assets, other than loans, partially offset by an increase in rates paid on our interest bearing liabilities. The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, increased 300 basis points in the nine months ended September 30, 2022, as the Federal Reserve sought to address high levels of inflation. The direction and speed with which short-term interest rates move has an impact on our net interest income. At present, we believe the Federal Reserve plans to raise short-term rates to 4.50% as long as inflation remains elevated. On November 2, 2022 the Federal Reserve Open Market Committee raised short-term interest rates by an additional 75 basis points to a target of 4.00%. If short term interest rates continue to increase and we continue to experience loan growth that outpaces our deposit growth, then our net interest income should increase during the remainder of 2022 and into 2023, though, as noted below, the rates we pay on our deposits may increase as well and such increases to the extent they outpace increases in our loan yields could cause compression to our net interest margin. Similarly, if loan growth slows as we believe is possible, increases in our rates we pay on deposits would similarly cause compression in our net interest margin. The yield on loans decreased during the three and nine months ended September 30, 2022 when compared to the comparable periods in 2021 due to a decrease in loan fees related to PPP loans. Loan fees related to PPP loans for the nine months ended September 30, 2022 and 2021 accounted for 1 basis point versus 18 basis points, respectively, of our loan yields. Loan fees related to PPP loans for the quarter ended September 30, 2022 and 2021 accounted for no basis points versus 15 basis points, respectively, of our loan yields. The yield on securities increased due to management's decision to utilize the Company's excess liquidity to purchase additional higher yielding securities. The net interest spread was 3.59% and 3.36% for the nine months ended September 30, 2022 and September 30, 2021, respectively, and 3.83% and 3.41% for the quarter ended September 30, 2022 and 2021, respectively. The rates we pay on our deposits decreased in the nine months ended September 30, 2022 when compared to the comparable period in 2021, as higher paying time deposits repriced at lower rates throughout 2021 and some of those deposits have yet to reprice again, though this decrease was partially offset by an increase in rates we paid on other deposits in 2022. The rate we pay on our deposits increased in the three months ended September 30, 2022 when compared to the comparable period in 2021, as we increased the rates we paid on several of our deposit products as a result of competitive pressures in our markets and increases in short-term rates. We expect deposit costs to continue to increase during the remainder of 2022 and into 2023 due to those same reasons and the expected repricing of a portion of those time deposits that repriced in 2021.

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Net interest income, excluding tax equivalent adjustments relating to tax exempt securities and loans, for the three and nine months ended September 30, 2022 totaled $38,130,000 and $104,342,000, respectively compared to $30,878,000 and $86,901,000 for the same periods in 2021, an increase of $7,252,000 and $17,441,000 between respective periods.

The increase in interest income for the three and nine months ended September 30, 2022 when compared to the three and nine months ended September 30, 2021 was primarily attributable to an increase in interest and fees earned on loans as well as as increase in interest and dividends earned on securities. The increase in interest and fees earned on loans resulted from an overall increase in average loans, partially offset by the decreased yield discussed above. The increase in interest and dividends earned on securities resulted from an overall increase in the average balance of securities, due to management's decision to purchase additional securities to utilize excess liquidity, and an increase in rates. The ratio of average earning assets to total average assets for the three and nine months ended September 30, 2022 was 95.1% and 95.5%, respectively, compared to 96.2% and 96.0% for the same periods in 2021.

The increase in interest expense for the three months ended September 30, 2022 as compared to the prior year's comparable period was primarily due to an increase in the rate and volume of average interest bearing deposits (other than time deposits), reflecting a rising interest rate environment and competitive pressures in our markets. The decrease in interest expense for the nine months ended September 30, 2022 as compared to the prior year's comparable period was primarily due to a decrease in the rates of average time deposit renewal rates, reflecting the low rate environment that we were experiencing prior to the first quarter of 2022. The decrease in rates was partially offset by an overall increase in the volume of average interest-bearing deposits. Should our liquidity decrease, including as a result of loan growth that outpaces deposit growth and continued interest rate increases by the Federal Reserve, the rates we pay on our deposits may increase at levels that exceed those levels we experienced in the first half of 2022. In addition, if interest rates remain elevated when those time deposits that were priced in 2021 mature in 2023, our interest expense will likely increase if such deposits are renewed.

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Provision for Credit Losses and Allowance for Credit Losses

On January 1, 2022, we adopted FASB ASU 2016-13, which introduces the current expected credit losses (CECL) methodology and requires us to estimate all expected credit losses over the remaining life of our loan portfolio. The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management’s evaluation, is adequate to provide coverage for all expected credit losses. The provision for credit losses for the nine months ended September 30, 2022 was $6,060,000 calculated under the CECL methodology, compared to $1,012,000 incurred in the first nine months of 2021 under the incurred loss methodology. The provision for credit losses for the three months ended September 30, 2022 was $2,543,000 calculated under the CECL methodology, compared to $130,000 recorded in the three months ended September 30, 2021 under the incurred loss methodology. The increase in provision expense for the three and nine months ended September 30, 2022 from the comparable periods in 2021 is primarily attributable to an increase in the volume of loans originated during the period.

Upon and subsequent to adoption of CECL, for available-for-sale debt securities in an unrealized loss position, we evaluate the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized through the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via provision for credit loss. At January 1, 2022 and September 30, 2022, we determined that available-for-sale securities that experienced a decline in fair value below the amortized cost basis were due to noncredit-related factors, principally the result of the rising interest rate environment we have been experiencing. Therefore, there was no provision for credit loss recognized during the three or nine months ended September 30, 2022 with respect to our available-for-sale securities.

The Bank’s charge-off policy for collateral dependent loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when a determination is made that the loan is uncollectible. The volume of net loans charged off for the first nine months of 2022 totaled approximately $548,000 compared to approximately $240,000 in net loans charged off during the first nine months of 2021. The volume of net loans charged off for the third quarter of September 30, 2022 totaled approximately $201,000 compared to approximately $133,000 in net charge offs during the third quarter of 2021. The increase in net loans charged off for the three and nine months ended September 30, 2022 was primarily attributable to an increase in overdrafts.

Our allowance for credit losses at September 30, 2022 reflects an amount deemed appropriate to adequately cover all expected future losses as of the date the allowance is determined based on our allowance for credit losses assessment methodology. The allowance for credit losses (net of charge-offs and recoveries) was $37,580,000 at September 30, 2022, a decrease of $2,052,000 or 5.18%, from an allowance for loan losses of $39,632,000 at December 31, 2021 and a decrease of $1,731,000, or 4.40%, from an allowance for loan losses of $39,311,000 at September 30, 2021. The decrease in the allowance for credit losses is the result of the implementation of CECL on January 1, 2022, which resulted in a downward adjustment to the opening balance of the allowance for credit losses of $7.6 million; offset by increased provisioning during the nine months ended September 30, 2022 largely due to an increase in loan growth. The allowance for credit losses was 1.26% of total loans outstanding at September 30, 2022, compared to an allowance for loan losses of 1.60% of total loans at December 31, 2021 and 1.63% at September 30, 2021. The internally classified loans as a percentage of the allowance for credit losses and allowance for loan losses, as applicable, were 15.1%, 19.4%, and 21.5% respectively, at September 30, 2022, December 31, 2021, and September 30, 2021.

The level of the allowance and the amount of the provision for credit losses involve evaluation of uncertainties and matters of judgment. The Company maintains an allowance for credit losses which management believes is adequate to absorb losses in the loan portfolio. A formal calculation is prepared quarterly by the Company's Chief Financial Officer and provided to the Board of Directors to determine the adequacy of the allowance for credit losses. The calculation includes an evaluation of historical default and loss experience, current and forecasted economic conditions, an evaluation of qualitative factors, industry and peer bank loan quality indicators and other factors. See the discussion above under “Application of Critical Accounting Policies and Accounting Estimates” for more information. Management believes the allowance for credit losses at September 30, 2022 to be adequate, but if forecasted economic conditions deteriorate beyond management’s current expectations the allowance for credit losses may require an increase through additional provision for credit loss expense which would negatively impact earnings.

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Non-Interest Income

Our non-interest income is composed of several components, some of which vary significantly between quarterly and annual periods. The following is a summary of our non-interest income for the three and nine months ended September 30, 2022 and 2021 (in thousands):

	Three Months Ended September 30,												Nine Months Ended September 30,
	2022			2021			$ Increase (Decrease)			% Increase (Decrease)			2022			2021			$ Increase (Decrease)			% Increase (Decrease)
Service charges on deposit accounts	$	1,974		$	1,682		$	292			17.36	%	$	5,470		$	4,418		$	1,052			23.81	%
Brokerage income		1,919			1,586			333			21.00			5,348			4,665			683			14.64
Debit and credit card interchange income		3,259			3,012			247			8.20			9,870			8,894			976			10.97
Other fees and commissions		376			439			(63	)		(14.35	)		1,144			1,064			80			7.52
Income on BOLI and annuity contracts		357			315			42			13.33			1,074			946			128			13.53
Gain (loss) on sale of loans		(56	)		2,275			(2,331	)		(102.46	)		2,669			7,929			(5,260	)		(66.34	)
Mortgage servicing income		40			—			40			100.00			63			—			63			100.00
Gain (loss) on sale of securities		(281	)		28			(309	)		(1,103.57	)		(281	)		28			(309	)		(1,103.57	)
Gain (loss) on sale of fixed assets		232			(6	)		238			3,966.67			260			(29	)		289			996.55
Loss on sale of other real estate		—			(4	)		4			100.00			—			(15	)		15			100.00
Gain on sale of other assets		—			1			(1	)		(100.00	)		8			2			6			300.00
Other income		47			20			27			135.00			39			20			19			95.00
Total non-interest income	$	7,867		$	9,348		$	(1,481	)		(15.84	%)	$	25,664		$	27,922		$	(2,258	)		(8.09	%)

The decrease in non-interest income for the three and nine months ended September 30, 2022 when compared to the comparable periods in 2021 is primarily attributable to a decrease in gain on sale of loans and sale of securities, partially offset by an increase in service charges on deposit accounts, an increase in debit and credit card interchange income, an increase in brokerage income, and gain on sale of fixed assets.

The loss on sale of loans for the three months ended September 30, 2022 resulted from the rise in interest rates in the mortgage market that negatively impacted the fair value of our interest rate lock commitments, loans held for sale as of the reporting date and loans that were sold during the three months ended September 30, 2022 offset in part by gains in our mortgage hedging activities. The decrease in gain on sale of loans for the nine months ended September 30, 2022 was due to the rising rate environment which contributed to weakened demand for purchase money mortgage loans and refinancing transactions that also negatively impacted the fair value of our the interest rate lock commitments, offset in part by mortgage hedging activities mentioned above. In addition, inflation has increased home prices which has contributed to a decrease in the volume of home purchases. The volume of mortgage loans originated for the nine months ended September 30, 2022 was $94,149,000 compared to $167,429,000 for the nine months ended September 30, 2021. The mortgage industry expects volume to continue to decrease throughout the remainder of 2022. In anticipation of the slowing of mortgage origination volume due to the rising rate environment, the Company began to retain servicing rights on some of the loans it originates during the first quarter of 2022. We expect Encompass to contribute additional income through gain on sale of loans and operating fees paid to the Bank which should increase as the volume of mortgages made by Encompass increases.

The loss on sale of securities was due to management's decision to sell these securities to provide additional liquidity. Management is evaluating the possibility of selling additional available-for-sale securities in the fourth quarter in an effort to restructure a portion of the securities portfolio into higher yielding securities in an effort to mitigate some of the pressure on the Company's net interest margin that would be experienced if rates continue to rise. Doing so would likely involve the sale of securities that are currently in a loss position which would trigger the Company recognizing those losses in the quarter where those securities are sold.

The increase in service charges on deposit accounts for the three and nine months ended September 30, 2022 primarily was due to an increase in service charges earned on overdraft fees and fees for paper statements. The increase in fees for paper statements resulted from an account conversion that placed new qualifications on certain account types.

The increase in debit and credit card interchange income for the three and nine months ended September 30, 2022 was due to an increase in the number and volume of debit and credit card holders and transactions as well as the introduction of a new type of business debit card.

The increase in brokerage income for the three and nine months ended September 30, 2022 was primarily due to an increase in the opening of new investment accounts during the last twelve months. In addition, the increase in interest rates has increased customers' interest in opportunities to capitalize on products and services provided.

The gain on sale of fixed assets was attributable to the sale of a lot which was originally purchased for a future branch location.

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Non-Interest Expense

Non-interest expense consists primarily of employee costs, occupancy expenses, furniture and equipment expenses, advertising and public relations expenses, data processing expenses, ATM and interchange expenses, director’s fees, audit, legal and consulting fees, and other operating expenses. The following is a summary of our non-interest expense for the three and nine months ended September 30, 2022 and 2021 (in thousands):

	Three Months Ended September 30,											Nine Months Ended September 30,
	2022			2021		$ Increase (Decrease)			% Increase (Decrease)			2022			2021		$ Increase (Decrease)			% Increase (Decrease)
Salaries and employee benefits	$	14,443		$	13,456	$	987			7.34	%	$	43,353		$	40,778	$	2,575			6.31	%
Occupancy expenses, net		1,422			1,436		(14	)		(0.97	)		4,167			4,067		100			2.46
Advertising & public relations expense		886			736		150			20.38			2,233			1,830		403			22.02
Furniture and equipment expense		838			846		(8	)		(0.95	)		2,547			2,508		39			1.56
Data processing expense		1,908			1,509		399			26.44			5,533			4,419		1,114			25.21
ATM & interchange expense		1,363			1,218		145			11.90			3,806			3,522		284			8.06
Directors’ fees		146			179		(33	)		(18.44	)		447			463		(16	)		(3.46	)
Audit, legal & consulting expenses		217			323		(106	)		(32.82	)		635			684		(49	)		(7.16	)
Provision expense (benefit) for credit losses on unfunded commitments		(515	)		84		(599	)		(713.10	)		(298	)		221		(519	)		(234.84	)
Other operating expenses		3,040			2,904		136			4.68			8,789			8,673		116			1.34
Total non-interest expense	$	23,748		$	22,691	$	1,057			4.66	%	$	71,212		$	67,165	$	4,047			6.03	%

The increase in non-interest expense for the three and nine months ended September 30, 2022 when compared to the comparable periods in 2021 is primarily attributable to an increase in salaries and employee benefits, an increase in data processing expense, an increase in advertising expense, and an increase in ATM & interchange expense for the nine months ended September 30, 2022, partially offset by a decrease in provision for credit losses on unfunded commitments.

Salaries and employee benefits increased for the three and nine months ended September 30, 2022 primarily due to an increase in the number of employees necessary to support the Company’s growth in operations and branch count as well as an increase in incentives and temporary salaries, offset by a decrease in commission salaries. The increase in occupancy expense for the nine months ended September 30, 2022 is primarily attributable to an increase in lease expense due to an increase in leased branches, an increase in depreciation expense resulting from the opening of a new branch, and an increase in utilities due to an increase in cost of energy, offset by a decrease in building maintenance and repairs due to the elimination of COVID-19 related cleaning expenses as well as parking lot repairs that occurred in 2021. The Company anticipates that salaries and employee benefits expense and occupancy expense will continue to increase as the Company's operations and facilities continue to grow and competition to retain and attract associates is becoming more intense.

Data processing expense increased for the three and nine months ended September 30, 2022 primarily due to an increase in computer maintenance, computer license expense, and call center expense. The computer maintenance and license expenses included movement of in-house systems to cloud servers, additional investments in digital banking solutions, and an increase in information security expenses. The increase in call center expense resulted from an increase in call volume due to the call center extending their operating hours. The Company anticipates that data processing expenses will continue to increase as the Company's operations grow and the focus by the Company on the acceleration of digital product offerings increases.

Advertising and public relations expense increased for the three and nine months ended September 30, 2022 partially due to the opening of a new branch which included targeted marketing efforts to drive traffic and awareness for the new location, as well as additional targeted marketing efforts to help increase market share in our growth areas. We also saw an increase in expenses related to the return of in-person events, both bank hosted and those hosted by our community partners, as COVID-19 restrictions continued to loosen. The Company was also the sole sponsor for a Habitat for Humanity home build.

ATM and interchange expense increased for the three and nine months ended September 30, 2022 primarily due to an increase in debit card interchange fee expense due to the volume of transactions, and an increase in economic activity.

Provision for credit losses on unfunded commitments decreased for the three and nine months ended September 30, 2022 due primarily to an adjustment to our economic qualitative factor in the construction segment in our CECL model and a decrease in non-cancellable unfunded commitments.

The efficiency ratio is a common and comparable KPI used in the banking industry. The Company uses this metric to monitor how effective management is at using our internal resources. It is calculated by dividing our non-interest expense by our net interest income plus non-interest income. Our efficiency ratio for the three months ended September 30, 2022 and 2021 was 51.63% and 56.41%, respectively. Our efficiency ratio for the nine months ended September 30, 2022 and 2021 was 54.78% and 58.49%, respectively. The improvement in the efficiency ratio for the three and nine months ended September 30, 2022 was due to increased levels of interest income, partially offset by a decrease in the gain on sale of loans due to the rising rate environment.

Income Taxes

The Company’s income tax expense was $12,037,000 for the nine months ended September 30, 2022, an increase of $1,016,000 over the comparable period in 2021. Income tax expense was $4,523,000 for the quarter ended September 30, 2022, an increase of $460,000 over the same period in 2021. The percentage of income tax expense to net income before taxes was 22.83% and 23.63% for the nine months ended September 30, 2022 and 2021, respectively, and 22.95% and 23.34% for the quarters ended September 30, 2022 and 2021, respectively. Our effective tax rate represents our blended federal and state rate of 26.14% affected by the impact of anticipated favorable permanent differences between our book and taxable income such as bank-owned life insurance, income earned on tax-exempt securities and loans, and certain federal and state tax credits.

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Financial Condition

Balance Sheet Summary

The Company’s total assets increased $140,790,000, or 3.53%, to $4,130,386,000 at September 30, 2022 from $3,989,596,000 at December 31, 2021. Total assets increased $19,245,000, or 0.47%, at September 30, 2022 from June 30, 2022. Loans, net of allowance for credit losses, totaled $2,953,745,000 at September 30, 2022, a 20.84% increase compared to $2,444,282,000 at December 31, 2021, and a 7.92% increase compared to $2,737,002,000 at June 30, 2022. In 2021, management targeted owner-occupied commercial real estate, residential real estate lending and consumer lending as areas of focus on growing our loan portfolio. In 2022, management is targeting owner-occupied commercial real estate, residential real estate lending and small business lending as areas of focus.

The following details the loans of the Company at September 30, 2022 and December 31, 2021:

	September 30, 2022					December 31, 2021
	Balance		% of Portfolio			Balance		% of Portfolio			Balance $ Increase (Decrease)		Balance % Increase (Decrease)
Residential 1-4 family real estate	$	812,433		27.03	%	$	689,579		27.63	%	$	122,854		17.82	%
Commercial and multi-family real estate		993,647		33.07			908,673		36.41			84,974		9.35
Construction, land development and farmland		853,326		28.39			612,659		24.55			240,667		39.28
Commercial, industrial and agricultural		124,115		4.13			118,155		4.73			5,960		5.04
1-4 family equity lines of credit		142,043		4.73			92,229		3.69			49,814		54.01
Consumer and other		79,720		2.65			74,643		2.99			5,077		6.80
Total loans before net deferred loan fees	$	3,005,284		100.00	%	$	2,495,938		100.00	%	$	509,346		20.41	%

Overall, the Bank's loan demand and related new loan production has continued to be strong, though loan demand weakened in the third quarter of 2022 when compared to the second quarter of 2022. The net loan growth of 20.84% from December 31, 2021, reflects the strong production, partially offset by several large loan payoffs. The demand is supported by the continued population growth and corporate relocations in the Bank's primary market areas, the opening of new branches, and increased marketing efforts. The increase in residential 1-4 family real estate loans is attributable to the Bank being able to grow its residential portfolio through marketing efforts directed at those building houses, and the developing investor sector of 1-4 family. The increase in construction, land development and farmland loans, commercial and multi-family real estate, and 1-4 family equity lines of credit is primarily attributable to the addition of several large loan relationships. Although the Company has continued to grow loans in 2022, the Company expects to experience a decline in demand for loans as interest rates continue to rise and the economy worsens, including as a result of persistent high inflation.

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

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

Securities decreased $58,433,000, or 6.51%, to $839,152,000 at September 30, 2022 from $897,585,000 at December 31, 2021, and decreased $76,955,000, or 8.40%, from June 30, 2022 primarily due to an increase in interest rates that caused the fair market value of our securities portfolio to decline, partially offset by the purchase of new securities. The average yield, excluding tax equivalent adjustment, of the securities portfolio at September 30, 2022 was 1.99% with a weighted average life of 8.17 years, as compared to an average yield of 1.59% and a weighted average life of 8.17 years at December 31, 2021. The weighted average lives on mortgage-backed securities reflect the repayment rate used for book value calculations.

Premises and equipment decreased$2,772,000, or 4.41%, from December 31, 2021 to September 30, 2022. The primary reason for the decrease was due to current year depreciation of $3,346,000 and the sale of a property which was originally purchased for a new branch location. This was partially offset by an increase in leasehold improvements and an increase in furniture, fixtures and equipment from the opening of a new branch, the remodel of five branches, as well as an increase in equipment that was primarily attributable to the purchase of new debit card printers for several branches and security cameras, an increase in computer hardware and software, and the purchase of a company vehicle.

The increase in deposits in the first nine months of 2022, which is described below, was outpaced by loan growth during the period, causing interest bearing deposits with other financial institutions to decrease. Interest bearing deposits with other financial institutions decreased to $78,713,000 at September 30, 2022 from $400,940,000 at December 31, 2021.

Total liabilities increased by 5.93% to $3,787,823,000 at September 30, 2022 compared to $3,575,879,000 at December 31, 2021. Total liabilities increased $40,131,000, or 1.07%, at September 30, 2022 from the quarter ended June 30, 2022. The increase in total liabilities since December 31, 2021 was composed of a $190,585,000, or 5.36% increase in total deposits and a $21,359,000, or 102.65%, increase in accrued interest and other liabilities. The increase in total deposits since December 31, 2021 was primarily attributable to growth in market share which resulted in the opening of new deposit accounts. The increase in accrued interest and other liabilities since December 31, 2021 was attributable to an increase in reserve for unfunded commitments due to the adoption of CECL on January 1, 2022, which resulted in an adjustment to the opening balance of the reserve for unfunded commitments of $6,195,000. This increase was also attributable to an increase in escrow payable, an increase in finance lease payable due to the opening of a branch in January 2022, and an increase in employee bonus payable, partially offset by a decrease in reserve for income taxes. We expect to see a slight downward trend in deposit balances as inflation has caused consumers to spend more money and as consumers seek to move deposits from liquid funds to other higher earning investments.

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Non-Performing Assets

Non-performing loans, which included nonaccrual loans and loans 90 days past due, at September 30, 2022 totaled $541,000, an increase from $389,000 at December 31, 2021. The increase in non-performing loans during the nine months ended September 30, 2022 of $152,000 is due primarily to the addition of three residential 1-4 family real estate loan relationships, one 1-4 family equity line of credit relationship, and one consumer loan relationship that were not 90 days past due at December 31, 2021, partially offset by three residential 1-4 family real estate loan relationships that are no longer 90 days past due. Management believes that it is probable that it will incur losses on its non-performing loans but believes that these losses should not exceed the amount in the allowance for credit losses already allocated to these loans, unless there is unanticipated deterioration of local real estate values.

The net non-performing asset ratio (NPA) is used as a measure of the overall quality of the Company's assets. Our NPA ratio is calculated by taking the total of our loans greater than 90 days past due and accruing interest, nonaccrual loans, non-performing TDRs and other real estate owned and dividing that sum by our total assets outstanding. Our NPA ratio for the periods ended September 30, 2022 and December 31, 2021 was 0.02% and 0.01%, respectively.

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

At September 30, 2022 the Company had a recorded investment in collateral dependent loans totaling $643,000, down from a recorded investment in impaired loans totaling $668,000 at December 31, 2021. The decrease during the nine months ended September 30, 2022 as compared to December 31, 2021 is primarily due to the paydown of three collateral dependent relationships. The allowance for credit losses related to collateral dependent 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 the loan is uncollectible. Net charge-offs for the nine months ended September 30, 2022 were $548,000 as compared to $240,000 in net charge-offs for the same period in 2021. The increase in net charge-offs during the nine months ended September 30, 2022 as compared to the same time period in 2021 was primarily attributable to an increase in net charge-offs for overdraft accounts. Overall, the Bank has experienced minimal charge-offs during 2022. It is expected that charge-offs will be modest for the remainder of 2022; however, a deterioration in local economic conditions may negatively impact charge-offs in the future.

At September 30, 2022, our internally classified loans decreased $2,012,000, or 26.18%, to $5,674,000 from $7,686,000 at December 31, 2021 primarily due to the payoff of three internally classified loan relationships. Classified loan balances have remained relatively consistent due to the stable markets in which we operate; however, if short-term rates continue to rise and economic conditions worsen, our classified loan balances could increase. Loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement.

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Liquidity and Asset Management

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

Liquid assets include cash, due from banks, interest bearing deposits in other financial institutions and unpledged investment securities that will mature within one year. The Company’s primary source of liquidity is a stable core deposit base. In addition, Federal funds purchased, FHLB advances, and brokered deposits provide a secondary source. These sources of liquidity are generally short-term in nature and are used to fund asset growth and meet other short-term liquidity needs. Liquidity needs can also be met from loan payments and investment security sales or maturities. At September 30, 2022, the Company’s liquid assets totaled $582.5 million down from $985.9 million at December 31, 2021, though a portion of these liquid assets include available-for-sale securities that are in an unrealized loss position. If the Company was required to sell any of these securities while they are in an unrealized loss position the Company would be required to recognize the loss on those securities through the income statement when they are sold. Additionally, as of September 30, 2022, the Company had available approximately $123.8 million in unused federal funds lines of credit with regional banks and, subject to certain restrictions and collateral requirements, approximately $482.4 million of borrowing capacity with the Federal Home Loan Bank of Cincinnati to meet short term funding needs. The Company maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management as management seeks to maintain stability in net interest margin under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines and competitive market conditions.

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

The Company also uses simulation modeling to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. The Company's Asset Liability Committee meets quarterly to analyze the interest rate shock simulation. The interest rate shock simulation model is based on a number of assumptions. These assumptions include, but are not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows and balance sheet management strategies. We model instantaneous change in interest rates using a growth in the balance sheet as well as a flat balance sheet to understand the impact to earnings and capital. Based on the Company's IRR simulation, the Company had a neutral interest-rate risk position as of September 30, 2022. The Company’s net interest margin and earnings could be negatively impacted if short-term rates continue to rise and competitive pressures in the Company's market areas force the Company to increase deposit rates faster than it is able to increase yields on loans. As discussed elsewhere herein, the Bank anticipates that its net interest margin is likely to contract during the remainder of 2022 because of the Company's current balance sheet position and the rising rate environment we are currently experiencing and expect to continue in the near term. The Company also uses Economic Value of Equity (“EVE”) sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest rate scenarios. The EVE is a longer term view of interest rate risk because it measures the present value of the future cash flows. Presented below is the estimated impact on the Bank’s net interest income and EVE as of September 30, 2022, assuming an immediate shift in interest rates:

	% Change from Base Case for Immediate Parallel Changes in Rates
	-300 BP			-200 BP			-100 BP			+100 BP			+200 BP			+300 BP
Net interest income		(9.91	)%		(5.73	)%		(2.33	)%		(1.17	)%		(2.50	)%		(4.03	)%
EVE		(18.20	)%		(8.18	)%		(2.31	)%		(0.97	)%		(2.66	)%		(4.83	)%

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

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

The Company’s securities portfolio consists of earning assets that provide interest income. Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, or the need to fund loan demand. At September 30, 2022, securities totaling appro ximately $34,609,000 mature or will be subject to rate adjustments within the next twelve months.

A secondary source of liquidity is the Company’s loan portfolio. At September 30, 2022 , loans totaling appr oximately $943,397,000 either will become du e or will be subject to rate adjustments within twelve months from that date.

As for liabilities, at September 30, 2022 , certificates of deposit of $250,000 or greater totaling approxi mately $100,644,000 will beco me due or reprice during the next twelve months. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit accounts and regular savings accounts. Management anticipates that there will be no significant withdrawals from these accounts in the future.

Management believes that with present maturities, borrowing capacity with the Federal Home Loan Bank of Cincinnati and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future.

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Off Balance Sheet Arrangements

At September 30, 2022, we had unfunded loan commitments outstanding of $1,274,381,000 and outstanding standby letters of credit of $79,404,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. Additionally, the Bank could sell participations in these or other loans to correspondent banks. As mentioned above, the Bank has been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments, investment security maturities and short-term borrowings.

Capital Position and Dividends

At September 30, 2022, total stockholders’ equity was $342,563,000, or 8.29% of total assets, which compares with $413,717,000, or 10.37% of total assets, at December 31, 2021. The dollar decrease in stockholders’ equity during the nine months ended September 30, 2022 is the result of the net effect of a $108,888,000 unrealized loss on investment securities (described elsewhere in this report) net of applicable income tax benefit of $38,525,000, cash dividends declared of $20,878,000, net of $16,117,000 reinvested under the Company’s dividend reinvestment plan, $586,000 related to stock option compensation, $1,011,000 related to the cumulative effect of change in accounting principle for the adoption of CECL, the Company’s net income of $40,702,000 and proceeds from the issuance of common stock related to exercise of stock options of $164,000. Also included was $5,000 of net loss related to minority interest and $37,000 in non-controlling contributions related to Encompass.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

There have been no material changes in reported market risks during the nine months ended September 30, 2022.

Item 4. Controls and Procedures

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

Overall, there were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Not applicable

Item 1A. RISK FACTORS

There were no material changes to the Company’s risk factors as previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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

(a) None

(b) Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

(a) None

(b) Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS

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

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

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

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

101.INS		Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH		Inline XBRL Taxonomy Extension Schema Document.

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*		Management compensatory plan or contract.

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SIGNATURES

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



		WILSON BANK HOLDING COMPANY
		(Registrant)

DATE: November 9, 2022		/s/ John C. McDearman III
		John C. McDearman III
		President and Chief Executive Officer

DATE: November 9, 2022		/s/ Lisa Pominski
		Lisa Pominski
		Executive Vice President & Chief Financial Officer