WILSON BANK HOLDING CO

Investing in the Company’s common stock involves various risks which are particular to the Company, its industry and its market areas. Several risk factors regarding investing in the Company’s common stock are discussed below. If any of the following risks were to occur, the Company may not be able to conduct its business as currently planned and its financial condition or operating results could be materially and negatively impacted. These matters could cause the value of the Company’s common stock to decline in future periods.

Summary Risk Factors

The Company’s business is subject to a number of risks, including risks that may prevent the Company from achieving its business objectives or may adversely affect its business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below and include, but are not limited to, risks related to:

Interest Rate Risks

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The Company’s net interest margin, and consequently its net earnings, are significantly affected by interest rate levels and movements in short-term rates as well as competitive pressures the Company faces.

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The Company’s hedging strategy may not be effective, including in the event that interest rates move in unanticipated manners.

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The performance of the Company’s investment securities portfolio is subject to fluctuation due to changes in interest rates and market conditions, including credit deterioration of the issuers of individual securities.

Credit and Lending Risks

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The Company’s loan portfolio includes a significant amount of real estate loans, including construction and development loans, which loans have a greater credit risk than residential mortgage loans.

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The Company has significant credit exposure to borrowers that are homebuilders and land developers and the Company also targets small businesses.

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An inadequate allowance for credit losses would negatively impact the Company’s results of operations and financial condition.

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The Company’s accounting estimates and risk management processes rely on analytical and forecasting models and tools.

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The Company could sustain losses if its asset quality declines.

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Environmental liability associated with commercial lending could result in losses.

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The Company depends on the accuracy and completeness of information about customers.

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The Company may be subject to claims and litigation asserting lender liability.

Liquidity and Capital Risks

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Liquidity risk could impair the Company’s ability to fund its operations and jeopardize its financial condition.

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Excess levels of liquidity could negatively impact the Company’s earnings.

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The ability to maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions.

Operational and Market Risks

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Negative developments in the U.S. and local economies in the Company’s market areas may adversely impact the Company’s results in the future.

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The Company is geographically concentrated in Wilson County, Tennessee and its surrounding counties and changes in local economic conditions could impact its profitability.

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The Company's business may suffer if there are significant declines in the value of real estate.

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The Company has sought to expand its franchise by developing new markets or expanding its operations in existing markets and may continue to do so in future years.

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The Company is dependent on its information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have an adverse effect on its financial condition.

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Competition from financial institutions and other financial service providers may adversely affect the Company’s profitability.

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The Company’s key management personnel may leave at any time.

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An ineffective risk management framework could have a material adverse effect on the Company’s strategic planning and its ability to mitigate risks and/or losses and could have adverse regulatory consequences.

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The Company’s selection of accounting policies and methods may affect its reported financial results.

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The Company currently invests in bank owned life insurance and may continue to do so in the future.

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The Company’s business reputation and relationships are important and any damage to them could have a material adverse effect on its business.

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The Company’s business is dependent on technology, and an inability to invest in technological improvements may adversely affect the Company’s results of operations and financial condition.

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The Company is subject to regulatory oversight and certain litigation, and its expenses related to this regulatory oversight and litigation may adversely affect its results.

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The soundness of other financial institutions, including those with whom the Company has engaged in transactions, could adversely affect the Company.

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Natural disasters and the effects of a changing climate may adversely affect the Company and its customers.

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The Company’s asset valuations may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to asset valuations that may materially and adversely affect its results of operations or financial condition.

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If the Company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately report its financial results.

Regulatory and Compliance Risks

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Federal or state legislation or regulation may increase the Company’s expenses and reduce earnings.

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The Company, as well as the Bank, operates in an increasingly highly regulated environment and each is supervised and examined by various federal and state regulatory agencies who may adversely affect their ability to conduct business.

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The Company and the Bank must maintain adequate regulatory capital to support their business objectives.

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The Company is required to act as a source of financial and managerial strength for the Bank in times of stress.

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Non-compliance with the USA Patriot Act, the Bank Secrecy Act or other laws and regulations, like those issued by OFAC, could result in fines or sanctions against the Company or the Bank.

Risks Relating to the Company’s Securities

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The Company’s common stock is thinly traded, and recent prices may not reflect the prices at which the stock would trade in an active trading market.

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The Company’s ability to declare and pay dividends is limited.

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Interest Rate Risks

The Company’s net interest margin, and consequently its net earnings, are significantly affected by interest rate levels and movements in short-term rates as well as competitive pressures the Company faces.

The Company’s profitability is dependent to a large extent on net interest income, which is the difference between interest income earned on loans and investment securities and other interest-earning assets and interest expense paid on deposits and other borrowings. The absolute level of interest rates as well as changes in interest rates or that affect the yield curve may affect the Company’s level of interest income, the primary component of its gross revenue, as well as the level of its interest expense. Interest rate fluctuations are caused by many factors which, for the most part, are not under the Company’s direct control. For example, national monetary policy has played a significant role in the determination of interest rates and we expect this trend to continue during 2024. Additionally, competition, including competitor pricing, and the resulting negotiations that occur with the Company’s customers also impact the rates the Company collects on loans and the rates it pays on deposits as does its liquidity position and then-current loan demand and its orientation toward loan growth.

Changes in the level of interest rates also may negatively affect the Company’s ability to originate real estate loans, the value of its assets (as is currently the case with the Company’s investment securities portfolio) and its ability to realize gains from the sale of its assets, all of which could ultimately affect the Company’s results of operations and financial condition. A decline in the market value of the Company’s assets may limit the Company’s ability to borrow funds or otherwise create issues for the Company should its liquidity levels decline. As a result, the Company could be required to sell some of its loans and investments under adverse market conditions, upon terms that are not favorable to the Company, in order to maintain its liquidity. If those sales are made at prices lower than the amortized costs of the investments, which is the case with a portion of the Company’s investment securities portfolio at this time, the Company will incur losses. Following changes in the general level of interest rates, the Company’s ability to maintain a positive net interest spread and to increase its net interest margin is dependent on its ability to increase (in a rising rate environment) or maintain or minimize the decline in (in a falling rate environment) its loan offering rates, minimize increases on its deposit rates in a rising rate environment or promptly reduce the rates it pays on deposits in a falling rate environment, and maintain an acceptable level and mix of funding. Although at times the Company has implemented strategies it believes will reduce the potential effects of changes in interest rates on its net interest income, these strategies may not always be successful. Accordingly, changes in levels of market interest rates could materially and adversely affect the Company’s net income, net interest income and net interest margin, asset quality, loan origination volume, liquidity, and overall profitability. The Company cannot assure you that it can minimize its interest rate risk.

As interest rates change, the Company expects that it will periodically experience “gaps” in the interest rate sensitivities of its assets and liabilities, meaning that either its interest-bearing liabilities (usually deposits and borrowings) will be more sensitive to changes in market interest rates than its interest-earning assets (usually loans and investment securities), or vice versa. In either event, if market interest rates should move contrary to the Company’s position, this “gap” may work against the Company, and its results of operations and financial condition may be negatively affected. The Company attempts to manage its risk from changes in market interest rates by adjusting the rates, maturity, repricing characteristics, and balances of the different types of interest-earning assets and interest-bearing liabilities. Interest rate risk management techniques are not exact. The Company employs the use of models and modeling techniques to quantify the levels of risk to net interest income, which inherently involve the use of assumptions, judgments, and estimates. While the Company strives to ensure the accuracy of its modeled interest rate risk profile, there are inherent limitations and imprecisions in this determination and actual results may differ.

Short-term interest rates rose significantly in 2022 and continued to be at elevated levels throughout 2023. Short-term interest rates are expected to stabilize during the first half of 2024 at current elevated levels, and potentially start to decline in the second half of 2024. In an elevated rate environment the Bank’s ability to maintain or increase the rates it charges on loans while limiting any further increase in, or potentially reducing, the rates it pays on deposits will be critical to maintaining or expanding the Company’s net interest margin. Elevated levels of interest rates, like those experienced in 2022 and 2023, can have a negative impact on the Company's business by reducing the amount of money its clients borrow or by adversely affecting their ability to repay outstanding loan balances that may increase due to adjustments in their variable rates. In addition, during the recent rising rate environment, the rates the Bank paid on its deposits increased, which had an increasingly negative impact on the Company’s net interest margin over the year. The Company expects deposit costs to continue to remain elevated during the first half of 2024 due to the expected persistence of heightened levels of short-term interest rates, increased levels of brokered deposits, the expected repricing of a portion of the Bank's time deposits that have been below the current market rates and competition in the Bank’s markets. In addition, many of the Bank’s variable rate loans have loan floors that limit the Bank’s ability to capture the full benefit of initial increases in short-term rates, though substantially all of these floors have been exceeded at this point.

While short-term interest rates are expected to stabilize through the first half of 2024, the Company believes that these rates may begin to fall during the second half of 2024. Were that to happen, the Company’s ability to lower the rates it pays on deposits will be critical to the Company’s ability to maintain or slow any potential decline in its net interest margin, as the Company anticipates that loan pricing in a falling rate environment would be competitive and existing loans that the Company has made may be refinanced at lower interest rates, particularly in the case of fixed rate loans with no prepayment penalties. The Company may also be limited in its ability to lower, in a timely manner, the rates it pays on its brokered deposits and other time deposits with stated maturities, the balances of which increased during 2023.

The Company attempts to manage its risk from changes in market interest rates by adjusting the rates, maturities, repricing characteristics, and balances of the different types of its interest-earning assets and interest-bearing liabilities and by utilizing hedging strategies to reduce the impact of changes in rates. Interest-rate risk management techniques are not exact. From time to time the Company has repositioned a portion of its investment securities portfolio in an effort to better position its balance sheet for potential changes in short-term rates. The Company employs the use of models and modeling techniques to quantify the levels of risks to net interest income, which inherently involve the use of assumptions, judgments, and estimates. While the Company strives to ensure the accuracy of its modeled interest rate risk profile, there are inherent limitations and imprecisions in this determination and actual results may differ.

The Company’s hedging strategy may not be effective, including in the event that interest rates move in unanticipated manners.

At times, the Company has entered into certain hedging transactions including interest rate swaps, which are designed to lessen elements of its interest rate exposure. During the second quarter of 2020, the Company entered into a hedge that converted the fixed interest rates on certain of the Bank’s outstanding loans to Secured Overnight Financing Rate (“SOFR”)-based variable interest rates (as a successor to LIBOR-based variable rates). The Company terminated this hedging transaction in 2023. In the event that short-term interest rates do not change in the manner that the Company anticipates at the times it institutes its hedging strategies or at the pace that the Company anticipated, including if interest rates were to increase further following the hedge termination in 2023, such transactions may materially and adversely affect its results of operations.

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

The performance of the Company’s investment securities portfolio is subject to fluctuation due to changes in interest rates and market conditions, including credit deterioration of the issuers of individual securities.

Changes in interest rates can negatively affect the performance of most of the Company’s investment securities. Interest rate volatility can reduce unrealized gains or increase unrealized losses in the Company’s portfolio, as was the case in 2022 and 2023 with the rising rate environment. Interest rates are highly sensitive to many factors including monetary policies, domestic and international economic, social and political conditions and issues, including trade disputes and global health pandemics, and other factors beyond the Company’s control. Fluctuations in interest rates can materially affect both the returns on and market value of the Company’s investment securities. Additionally, actual investment income and cash flows from investment securities that carry prepayment risk, such as mortgage-backed securities and callable securities, may materially differ from those anticipated at the time of investment or subsequently as a result of changes in interest rates and market conditions.

The Company’s investment securities portfolio consists of several securities whose trading markets are “not active.” As a result, the Company utilizes alternative methodologies for pricing these securities that include various estimates and assumptions. There can be no assurance that the Company can sell these investment securities at the price derived by these methodologies, or that it can sell these investment securities at all, which could have an adverse effect on the Company’s financial condition, results of operations and liquidity.

The Company monitors the financial position of the various issuers of investment securities in its portfolio, including each of the state and local governments and other political subdivisions where it has exposure. To the extent the Company has securities in its portfolio from issuers who have experienced a deterioration of financial condition, or who may experience future deterioration of financial condition, the value of such securities may decline and could result in an other-than-temporary impairment charge, which could have an adverse effect on the Company’s financial condition, results of operations and liquidity.

In addition, from time to time the Company may restructure portions of its investment securities portfolio as part of its asset liability management strategies or in response to liquidity needs, and it may incur losses, which may be material, in connection with any such restructuring. The Company currently has a significant amount of unrealized losses in its securities portfolio. These losses are largely the result of the rising interest rate environment the Company experienced in 2022 and 2023, and the continued elevated interest rate environment the Company is experiencing so far in 2024. If the Company were to sell any of these securities before their value recovers, including as a result of asset liability management strategies or in response to liquidity needs, the Company would be required to recognize these losses and the recognition of those losses could materially and adversely affect the Company’s results of operations, capital and financial condition.

Credit and Lending Risks

The Company’s loan portfolio includes a significant amount of real estate loans, including construction and development loans, which loans have a greater credit risk than residential mortgage loans.

As of December 31, 2023, approximately 94% of the Company’s loans held for investment were secured by real estate. Of this amount, approximately 39% were commercial and multi-family real estate loans, 34% were residential 1-4 family real estate loans and 1-4 family equity lines of credit and 27% were construction and development and farmland loans. In total these loans made up approximately 91% of the Company’s non-performing loans at December 31, 2023. Construction and development lending is generally considered to have relatively high credit risks because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and operation of the related real estate project. Real estate industry pricing dynamics in the geographical markets in which the Company operates can vary from year to year, and with respect to construction, can vary between project funding and project completion. Asset values to which the Company underwrites loans can fluctuate from year to year and impact collateral values and the ability of its borrowers to repay their loans.

Weakness in residential real estate market prices as well as demand could result in price reductions in home and land values adversely affecting the value of collateral securing some of the construction and development loans that the Company holds. Reduced demand for new residential mortgage loans, whether the result of higher mortgage interest rates, inflationary pressures on building costs, depressed inventory levels or other factors, could also continue to cause reduced demand for mortgage loans, which would reduce the Company’s net interest income and noninterest income levels. If economic and real estate market conditions further deteriorate in the Company’s markets, the Company may experience increases in non-performing loans and other real estate owned, increased losses and expenses from the management and disposition of non-performing assets, increased charge-offs from the disposition of non-performing assets, increases in provision for credit losses, and increases in operating expenses as a result of the allocation of management time and resources to the collection and work out of these loans, all of which would negatively impact the Company’s financial condition and results of operations.

The Company has significant credit exposure to borrowers that are homebuilders and land developers and the Company also targets small businesses.

At December 31, 2023, the Company had significant credit exposures to borrowers in certain businesses, including new home builders and land subdividers. If the challenging economic conditions currently being experienced as a result of inflation and elevated short-term interest rates extend deep into 2024 or beyond, or worsen (including as a result of increased geopolitical tensions around the world), and negatively impact real estate conditions in the Company’s markets more than has been the case thus far, these industry or other concentrations could result in higher than normal deterioration in credit quality, past dues, loan charge-offs and collateral value declines, all of which would negatively impact the Company’s financial condition and results of operations. Furthermore, any of the Company’s large credit exposures that deteriorate unexpectedly could cause the Company to have to make significant additional loan loss provisions, negatively impacting the Company’s financial condition and results of operations.

A substantial focus of the Company’s marketing and business strategy is to serve small businesses in its market areas. As a result, a relatively high percentage of the Company’s loan portfolio consists of commercial loans primarily to small businesses. Small businesses frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, or other operational challenges like those resulting from supply chain disruption, labor shortages or inflationary pressures on their costs, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small business often depends on the management skills, talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have an adverse impact on the business and its ability to repay its obligation to the Company. If general economic conditions negatively impact the markets in which the Company operates and small businesses are adversely affected or the Company’s borrowers are otherwise harmed by adverse business developments, the ability of such businesses to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact the Company’s results of operations and financial condition

An inadequate allowance for credit losses would negatively impact the Company’s results of operations and financial condition.

The Company maintains an allowance for credit losses on loans, securities and off-balance sheet exposures. The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. The Company’s management makes various assumptions and judgments about the expected losses in the Company’s loan portfolio, including the credit worthiness of the Company’s borrowers and the collateral securing the loans. Utilizing objective and subjective factors, the Company maintains an allowance for credit losses, established through a provision for credit losses charged to expense, to cover its estimate of the current expected credit losses in its loan and securities portfolios. In determining the size of this allowance, the Company utilizes estimates based on analyses of volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies, nonaccruals and charge-offs, loss experience of various loan categories, national and local economic conditions, including unemployment statistics, industry and peer bank loan quality indications, and other pertinent factors and information. Actual losses are difficult to forecast, especially if those losses stem from factors beyond the Company’s historical experience or are otherwise inconsistent with its credit quality assessments. If the Company’s assumptions are inaccurate, its current allowance may not be sufficient to cover potential credit losses, and additional provisions may be necessary which would negatively impact its results of operations and financial condition.

In addition, federal and state regulators periodically review the Company’s loan portfolio and may require it to increase its allowance for credit losses or recognize loan charge-offs. Their conclusions about the quality of the Company’s loan portfolio may be different than the Company’s. Any increase in the Company’s allowance for credit losses or loan charge-offs as required by these regulatory agencies could have a negative effect on the Company’s results of operations or financial condition. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions and forecasted conditions, new information regarding existing loans or borrowers, identification of additional problem loans and other factors, both within and outside of the Company’s management’s control. These additions may require increased provision expense which would negatively impact the Company’s results of operations.

The Company’s accounting estimates and risk management processes rely on analytical and forecasting models and tools.

The processes the Company uses to estimate expected credit losses, calculate its allowance for credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other measures of the Company’s financial condition and results of operations, depend upon the use of analytical and forecasting models and tools. These models and tools reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models and tools may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. Any such failure in the Company’s analytical or forecasting models and tools could have a material adverse effect on its business, financial condition and results of operations.

The Company could sustain losses if its asset quality declines.

The Company’s earnings are significantly affected by its ability to properly originate, underwrite and service loans. The Company could sustain losses if it incorrectly assesses the creditworthiness of its borrowers or fails to detect or respond to deterioration in asset quality in a timely manner. Problems with asset quality, particularly within the commercial real estate segment of the Company’s loan portfolio, could cause the Company’s interest income and net interest margin to decrease and its provisions for credit losses and non-interest expenses to increase, which could adversely affect its results of operations and financial condition.

Environmental liability associated with commercial lending could result in losses.

In the course of business, the Bank may acquire, through foreclosure, properties securing loans it has originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company, or the Bank, might be required to remove these substances from the affected properties at the Company’s sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company and the Bank may not have adequate remedies against the prior owner or other responsible parties, or those persons may not have sufficient resources to compensate the Company for its damages, and the Company could find it difficult or impossible to sell the affected properties. These events could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company has acquired a number of retail banking facilities and other real properties, any of which may contain hazardous or toxic substances. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability.

The Company depends on the accuracy and completeness of information about customers.

In deciding whether to extend credit or enter into certain transactions, the Company relies on information furnished by or on behalf of customers and other counterparties, including financial statements, credit reports, tax returns and other financial information. The Company may also rely on representations of those customers or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading personal information, financial statements, credit reports, tax returns or other financial information, including information falsely provided as a result of identity theft, could have an adverse effect on the Company’s business, financial condition and results of operations.

The Company may be subject to claims and litigation asserting lender liability.

From time to time, and particularly during periods of economic stress, customers, including real estate developers and consumer borrowers, may make claims or otherwise take legal action pertaining to performance of the Company’s responsibilities. These claims are often referred to as “lender liability” claims and are sometimes brought in an effort to produce or increase leverage against the Company in workout negotiations or debt collection proceedings. Lender liability claims frequently assert one or more of the following allegations: breach of fiduciary duties, fraud, economic duress, breach of contract, breach of the implied covenant of good faith and fair dealing, and similar claims. Whether customer claims and legal action related to the performance of the Company’s responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a favorable manner, they may result in significant financial liability and/or adversely affect the Company’s market reputation, products and services, as well as potentially affecting customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on its financial condition, results of operations and liquidity.

Liquidity and Capital Risks

Liquidity risk could impair the Company’s ability to fund its operations and jeopardize its financial condition.

Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors, borrowers and other creditors by either converting assets into cash or accessing new or existing sources of incremental funds. Liquidity risk arises from the possibility that the Company may be unable to satisfy current or future funding requirements and needs.

The objective of managing liquidity risk is to ensure that the Company’s cash flow requirements resulting from depositor, borrower and other creditor demands are met, as well as the Company’s operating cash needs, and that the Company’s cost of funding such requirements and needs is reasonable. The Company maintains an asset/liability and interest rate risk policy and a liquidity and funds management policy, including a contingency funding plan that, among other things, include procedures for managing and monitoring liquidity risk. Generally the Company relies on deposits, repayments of loans and cash flows from its investment securities as its primary sources of funds. The Company’s principal deposit sources include consumer, commercial and public funds customers in the Company’s markets. The Company has used these funds, together with wholesale deposit sources such as brokered deposits, federal funds purchased and other sources of short-term and long-term borrowings, including advances from the Federal Home Loan Bank of Cincinnati (“FHLB Cincinnati”), to make loans, acquire investment securities and other assets and to fund continuing operations.

An inability to maintain or raise funds in amounts necessary to meet the Company’s liquidity needs could have a substantial negative effect, individually or collectively, on the Company’s and the Bank’s liquidity. The Company’s access to funding sources in amounts adequate to finance its activities, including its loan growth, or on terms attractive to it, could be impaired by factors that affect the Company specifically or the financial services industry in general. For example, factors that could detrimentally impact the Company’s access to liquidity sources include a decrease in the level of its business activity due to a market downturn or adverse regulatory action against it or the Bank, a reduction in any then-published credit rating, any damage to its reputation or any other decrease in depositor or investor confidence in the Company’s creditworthiness and business. The Company’s access to liquidity could also be impaired by factors that are not specific to it, such as a decrease in the money supply as a result of actions by the Federal Reserve, severe volatility or disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Any such event or failure to manage the Company’s liquidity effectively could affect its competitive position, increase its borrowing costs and the interest rates it pays on deposits, limit its access to the capital markets, require it to sell investment securities when they are in a loss position, cause its regulators to criticize its operations and have a material adverse effect on its financial condition or results of operations.

The Company’s ability to grow its loan portfolio is dependent on its ability to fund loan grow, which the Company primarily seeks to do through growth in deposits. Deposit levels may be affected by a number of factors, including demands by customers, rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, general economic and market conditions and other factors, including a loss of confidence in the Company by its customers. Loan repayments are a relatively stable source of funds but are subject to the borrowers’ ability to repay loans, which can be adversely affected by a number of factors including changes in general economic and geopolitical conditions, adverse trends or events affecting business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters, prolonged government shutdowns and other factors. Furthermore, loans generally are not readily convertible to cash. Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet growth in loans, deposit withdrawal demands or otherwise fund operations. Such secondary sources include advances from the FHLB Cincinnati, brokered deposits, secured and unsecured federal funds lines of credit from correspondent banks, FRB borrowings, liquidating securities that the company owns in its investment securities portfolio and/or accessing the equity or debt capital markets. The Company increased its level of brokered deposits during 2023 to provide additional liquidity. These deposits can require the Company to pay higher rates of interest than the Company pays on deposits from its customers. The competition for deposits the Company is currently experiencing may limit its ability to grow deposits, which may result in the Company seeking alternative sources of funding, as it did in 2023, that are more expensive or limiting its loan growth, either of which could have a material adverse effect on its financial condition or results of operations.

The Company anticipates it will continue to rely primarily on deposits, loan repayments, interest-bearing deposits in other banks and cash flows from its investment securities to provide liquidity. Additionally, where necessary, the secondary sources of borrowed funds described above, like advances from the FHLB Cincinnati, which the Bank has accessed from time to time, will be used to augment the Company’s primary funding sources. If the Company is unable to access any of these secondary funding sources when needed, it might be required to convert illiquid assets, like its bank owned life insurance contracts, to cash, which could result in the payment of associated taxes and penalties, or be unable to meet its customers’ or creditors’ needs, which would adversely affect its financial condition, results of operations, and liquidity.

The Company’s and the Bank’s ability to maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions.

Federal and state bank regulators require the Company and the Bank to maintain adequate levels of capital to support operations. At December 31, 2023, the Company’s and the Bank’s regulatory capital ratios were at “well-capitalized” levels under regulatory guidelines. Growth in assets (either organically or as a result of acquisitions) at rates in excess of the rate at which the Bank’s capital is increased through retained earnings, or significant losses, including as a result of selling investment securities that are in a loss position at the time of sale, will reduce its capital ratios unless it continues to increase capital. Failure by the Bank to meet applicable capital guidelines or to satisfy certain other regulatory requirements could subject the Bank and the Company to a variety of enforcement remedies available to the federal regulatory authorities and would negatively impact the Company’s ability to pursue expansion opportunities, including through the opening of new branch locations.

The Company may need to raise additional capital (including through the issuance of common stock or additional Tier 2 capital instruments) in the future to provide the Company and the Bank with sufficient capital resources and liquidity to meet their commitments and business needs or in connection with growth or as a result of deterioration in asset quality. The Company’s and the Bank’s ability to maintain capital levels, sources of funding and liquidity could be impacted by negative perceptions of their businesses or prospects, changes in the capital markets and deteriorating economic and market conditions. The Bank is required to obtain regulatory approval in order to pay dividends to the Company unless the amount of such dividends does not exceed its net income for that calendar year plus retained net income for the preceding two years. Any restriction on the ability of the Bank to pay dividends to the Company could impact the Company’s ability to continue to pay dividends on its common stock or its ability to pay interest on its indebtedness.

In addition, the Company receives additional capital from the issuance of common stock under its dividend reinvestment plan. Any unexpected termination or suspension of the Company’s dividend reinvestment plan, or the related payment of its historical biannual cash dividend, could materially and adversely affect the Company’s capital levels.

Operational and Market Risks

Negative developments in the U.S. and local economies in the Company’s markets may adversely impact the Company’s results in the future.

The Company’s financial performance is highly dependent on the business environment in the markets where it operates and in the U.S. as a whole. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, investor or business confidence, consumer sentiment, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, natural disasters, international trade disputes and retaliatory tariffs, supply-chain disruptions, labor shortages, terrorist attacks, global pandemics, acts of war, or a combination of these or other factors. Inflation rose sharply at the end of 2021 and continued at heightened levels throughout 2023, and, while inflation started to ease at the end of 2023, prices are currently expected to remain elevated for many goods and services in the near term. The Company and its customers experienced an uncertain and volatile economic environment during 2023, and economic growth and activity began to show signs of decline in the second half of 2023 due to issues of national security, inflation, and the pressure of sustained high levels of short-term interest rates. The Company believes that it is possible it and its customers will continue to experience an uneven or declining economic environment in 2024 for many of the same reasons. A worsening of business and economic conditions (including as a result of escalating geopolitical tensions around the world, including hostilities in the Middle East), or persistent inflationary pressures, and actions taken by the Federal Reserve in response thereto, or supply chain disruptions or labor shortages, generally or specifically in the principal markets in which the Company conducts business could have adverse effects, including the following:

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a decrease in deposit balances or the demand for loans and other products and services the Company offers;

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an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to the Company, which could lead to higher levels of nonperforming assets, net charge-offs and provisions for credit losses;

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a decrease in net interest income from the Company’s lending and deposit gathering activities; and

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an increase in competition resulting from financial services companies.

There can be no assurance that economic conditions will improve in the near term or that conditions will not worsen. Such conditions could adversely affect the Company’s business, financial condition, and results of operations.

In addition, over the last several years, the federal government has shut down several times, in some cases for prolonged periods. It is possible that the federal government may shut down again in the future, particularly in light of the evenly divided United States Congress. If a prolonged government shutdown occurs, it could significantly impact business and economic conditions generally or specifically in the Company’s markets, which could have a material adverse effect on the Company’s results of operations and financial condition.

The Company is geographically concentrated in Wilson County, Tennessee and its surrounding counties and changes in local economic conditions could impact its profitability.

The Company operates primarily in Wilson, DeKalb, Trousdale, Smith, Rutherford, Putnam, Davidson, Williamson and Sumner counties in Tennessee and certain of the surrounding counties and substantially all of its loan customers and most of its deposit and other customers live or have operations in this same geographic area. Accordingly, the Company’s success significantly depends upon the growth in population, income levels, and deposits in these areas, along with the continued attraction of business ventures to the area and the area’s economic stability and strength of the housing market, and its profitability is impacted by the changes in general economic conditions in these markets. The Company cannot assure investors that economic conditions in its markets will not remain challenged during 2024 or thereafter, and continued volatile economic conditions in the Company’s markets could cause the Company to constrict its growth rate, affect the ability of its customers to repay their loans and negatively impact the Company’s financial condition and results of operations.

The Company is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, the Company cannot give any assurance that it will benefit from any market growth or return of more favorable economic conditions in its primary market areas if they do occur.

The Company’s business may suffer if there are significant declines in the value of real estate.

The market value of real estate can fluctuate significantly in a short period of time, including as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for the Company’s loan portfolio were to decline materially, a significant part of the Company’s loan portfolio could become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, the Company may not be able to realize the value of the security anticipated when it originated the loan, which in turn could have an adverse effect on the Company’s allowance and provision for credit losses and its financial condition, results of operations and liquidity..

Most of the Company’s foreclosed assets have historically been comprised of real estate properties. The Company carries these properties, if any, at their estimated fair values less estimated selling costs. While the Company believes the carrying values for such assets are reasonable and appropriately reflect current market conditions, there can be no assurance that the values of such assets will not further decline prior to sale or that the amount of proceeds realized upon disposition of foreclosed assets will approximate the carrying value of such assets. If the proceeds from any such dispositions are less than the carrying value of foreclosed assets, the Company will record a loss on the disposition of such assets, which in turn could have an adverse effect on the Company’s results of operations.

The Company has sought to expand its franchise by developing new markets or expanding its operations in existing markets and may continue to do so in future years.

Since 2014, the Company has opened branch locations in Putnam County, Rutherford County, Sumner County, Davidson County and Williamson County as it sought to expand its footprint beyond its historical markets. Expansion, whether by opening new branches or acquiring existing branches or whole banks, involves various risks, including:

Management of Growth. The Company may be unable to successfully:

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identify and expand into suitable markets;

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obtain regulatory and other approvals;

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identify and acquire suitable sites for new banking offices;

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avoid diversion or disruption of its existing operations or management as well as those of an acquired institution;

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maintain adequate management personnel and systems to oversee and support such growth;

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maintain adequate internal audit, loan review, risk management and compliance functions; and

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implement additional policies, procedures and operating systems required to support and monitor the risk associated with such growth.