Executive Summary / Key Takeaways

• Wilson Bank Holding Company (WBHC) operates as a community-focused bank in Middle Tennessee, leveraging local relationships and a growing market to drive asset and earnings growth, positioning itself as a key regional player despite competition from larger institutions.
• Recent financial performance for Q1 2025 demonstrates strong momentum, with net earnings increasing by 28.38% year-over-year, driven by robust net interest income growth (up 25.35%) and a significant rise in non-interest income (up 12.18%), leading to improved profitability metrics like ROA (1.23%) and ROE (13.35%).
• Loan growth remains a key driver, increasing by 2.18% in Q1 2025, fueled by population influx, corporate relocations, and targeted marketing, although managing credit risk, particularly in commercial real estate and classified loans, requires ongoing vigilance and enhanced monitoring.
• While lacking explicitly detailed proprietary technology differentiators, WBHC is strategically investing in digital capabilities, information security, and mobile banking to meet evolving customer demands and counter the efficiency advantages of larger, tech-forward competitors, contributing to rising data processing expenses.
• The Company maintains a strong capital position, well exceeding regulatory requirements, providing a solid foundation for continued growth initiatives like branch expansion and strategic acquisitions, while managing liquidity and interest rate sensitivity in a dynamic rate environment.

Setting the Scene: Community Banking in a Dynamic Market

Wilson Bank Holding Company, operating primarily through its wholly-owned subsidiary Wilson Bank & Trust, stands as a cornerstone of community banking across its core markets in Middle Tennessee. Headquartered in Lebanon, the bank has cultivated a strong local presence across Wilson, Davidson, Rutherford, Trousdale, Sumner, Dekalb, Putnam, Smith, Hamilton, and Williamson Counties. This geographic focus and relationship-based model define WBHC's strategic positioning, differentiating it from larger regional and national competitors like First Horizon Corp (FHN), Regions Bank (RF), Wells Fargo (WFC), and Bank of America (BAC).

WBHC's business model is comprehensive, offering a full suite of banking services including traditional deposits, consumer, commercial, and real estate lending, and investment advisory services. A notable operational structure is its 51% ownership in Encompass Home Lending LLC, a joint venture providing residential mortgage banking services, which integrates the bank's offerings with local home builders. This structure allows WBHC to capture mortgage opportunities directly within its growth markets.

The competitive landscape in Middle Tennessee is robust, featuring a mix of large national banks, significant regional players like FHN and Regions, and other strong community banks such as Pinnacle Financial Partners (PNFP). While larger institutions benefit from economies of scale, extensive branch networks, and often more advanced technological infrastructures, WBHC leverages its deep community ties, local market expertise, and personalized service to build customer loyalty and capture market share. For instance, while national banks like Wells Fargo and Bank of America command larger overall market shares and exhibit higher net profit margins (WFC TTM Net Margin: 16%, BAC TTM Net Margin: 27%) compared to WBHC's TTM Net Margin of 20.38%, WBHC's focus on relationship banking can translate into higher customer retention rates in its specific niche markets. Similarly, regional peers like FHN (TTM Net Margin: 16%) and Regions (TTM Net Margin: 20%) compete directly, often with greater technological efficiency in transaction processing.

WBHC's strategic response to this environment involves targeted growth initiatives, enhancing its service delivery, and investing in capabilities that support its local model. The recent conversion of a loan production office to a full-service branch in Chattanooga and the acquisition of a branch in Cookeville, Tennessee, exemplify this strategy of deepening physical presence in key growth areas.

Strategic Pillars and Operational Execution

WBHC's strategy is anchored in leveraging the economic vitality of its Middle Tennessee markets. The region has benefited from continued population growth and corporate relocations, providing a fertile ground for loan and deposit expansion. Management has specifically targeted owner-occupied commercial real estate, residential real estate lending, and consumer lending as key areas for growth in 2025.

Operational execution in the first quarter of 2025 demonstrated success in these areas, with total loans, net of deferred fees, increasing by $89.57 million, a significant acceleration compared to the $21.53 million growth in the same period of 2024. This growth was attributed to increased marketing efforts, particularly towards homebuilders and the 1-4 family investor segment, alongside the broader economic expansion supporting commercial and multi-family real estate and home equity lines of credit.

Managing the risks associated with a growing loan portfolio, particularly in construction and commercial real estate, is a critical operational focus. Recognizing that construction loans represent a meaningful portion of the portfolio and carry inherent risks tied to project success and market conditions, the Bank has implemented an additional layer of monitoring. This involves a dedicated Credit Administration Department, independent of the lending function, responsible for overseeing percentage of completion and fund distribution, aiming to mitigate the risk of advancing funds beyond the collateral's present value. This operational enhancement is a direct response to portfolio risk characteristics and aims to strengthen asset quality management.

On the deposit side, growth in market share and concerted marketing efforts contributed to a 2.71% increase in total deposits in Q1 2025. Maintaining a stable, low-cost core deposit base is vital for funding asset growth and managing interest expense, especially in a fluctuating rate environment. The Bank's offering of CDARS and ICS Products is a strategic tool to attract and retain larger depositors by providing extended FDIC insurance coverage, enhancing deposit stability.

While the company appears to lack explicitly detailed proprietary, differentiated technology with quantifiable performance metrics in the same way a manufacturing or software company might, it highlights strategic investments in technology crucial for a modern bank. Rising data processing expenses are explicitly linked to the implementation of additional information security solutions, mobile banking pricing changes, and an increase in the overall number of customers demanding digital products and services. This indicates a strategic imperative to enhance digital capabilities and cybersecurity defenses. In the competitive landscape, larger rivals often possess more sophisticated and efficient digital platforms, enabling lower operating costs per transaction. WBHC's investments in information security and mobile banking are necessary steps to meet customer expectations, protect against the growing cyber threat environment, and improve operational efficiency, although the specific quantifiable benefits relative to competitors are not detailed in the filing. These investments are essential for WBHC to remain competitive and support its growth trajectory in an increasingly digital banking world.

Recent Financial Performance

The first quarter of 2025 marked a period of strong financial performance for WBHC, reflecting the success of its growth strategies and operational execution. Net earnings attributable to Wilson Bank Holding Company increased by a substantial 28.38%, rising from $12.77 million in Q1 2024 to $16.39 million in Q1 2025. This improvement translated into higher profitability ratios, with annualized Return on Average Assets (ROA) increasing from 1.05% to 1.23% and annualized Return on Average Shareholders' Equity (ROE) climbing from 11.91% to 13.35%.

The primary driver of this earnings growth was a significant increase in net interest income, which rose from $35.56 million in Q1 2024 to $44.58 million in Q1 2025, a 25.35% increase. This was a result of both an increase in average interest-earning assets and an expansion of the net interest margin, which improved from 3.14% to 3.53%. The yield on loans increased, reflecting the origination of new loans at rates higher than the existing portfolio average, contributing significantly to interest income growth.

Non-interest income also contributed positively, increasing by 12.18% to $8.10 million in Q1 2025 from $7.22 million in Q1 2024. This growth was primarily fueled by increases in brokerage income, driven by client acquisitions, new advisors, and positive market performance, and higher income from bank-owned life insurance and annuity contracts due to additional policy purchases. A reduced loss on the sale of fixed assets also contributed to the year-over-year improvement.

However, non-interest expenses also rose, increasing by 12.04% to $29.26 million in Q1 2025 from $26.11 million in Q1 2024. This increase was attributed to higher salaries and employee benefits supporting operational growth, increased incentives tied to loan volumes, higher occupancy expenses related to new and renovated offices, and increased data processing costs reflecting investments in security and digital services. Despite the rise in expenses, the faster growth in revenue led to an improvement in the efficiency ratio, which decreased from 61.04% in Q1 2024 to 55.54% in Q1 2025, indicating better operational leverage.

The provision for credit losses on loans increased significantly, from no provision in Q1 2024 to $2.23 million in Q1 2025. This increase was primarily a result of the strong loan growth during the quarter and the credit deterioration of a single commercial real estate borrower.

Asset Quality and Risk Management

Maintaining strong asset quality is paramount for a bank's stability and profitability. WBHC's asset quality metrics showed some shifts in the first quarter of 2025. Non-performing loans decreased slightly to $4.97 million at March 31, 2025, from $5.55 million at December 31, 2024. The non-performing asset ratio also improved marginally, from 0.10% to 0.09%.

However, internally classified loans, which represent loans with identified weaknesses that raise concerns about repayment ability, increased by 8.81% to $52.23 million at March 31, 2025, from $48.01 million at December 31, 2024. This increase was attributed to the credit downgrades and payment performance deterioration of a few large borrowers. Management is actively working with these borrowers through performance improvement plans and believes the loans are well collateralized. Nevertheless, this remains an area to monitor, as further economic uncertainty or unsuccessful remediation efforts could lead to additional increases in classified loans.

The Allowance for Credit Losses (ACL) for loans increased to $51.48 million at March 31, 2025, from $49.50 million at December 31, 2024. As a percentage of total loans outstanding, the ACL increased from 1.21% to 1.23%. This increase reflects the impact of loan growth, the specific credit deterioration noted, and a management-assessed worsening economic outlook incorporated into the CECL model. The ACL methodology relies on historical experience, current conditions, and reasonable and supportable forecasts of macroeconomic variables (such as GDP growth, unemployment rate, and real estate price indices). Economic forecasts incorporated into the company's Q1 2025 model include annualized quarterly GDP growth rates in the range of 1.50% to 2.10%, a U.S. unemployment rate between 4.00% and 4.40%, Home Price Index growth of 0.70% to 2.80%, and CRE Price Index growth between -8.30% and -2.20%. These forecasts, particularly the negative outlook for CRE prices, contribute to the need for a higher ACL. Management believes the current ACL is adequate based on its assessment methodology, but acknowledges that deviations from forecasted economic conditions could necessitate further increases, impacting future earnings.

Net charge-offs remained modest at $0.25 million for Q1 2025, resulting in a low annualized net charge-off ratio of 0.01%. While management expects charge-offs to remain modest for the remainder of 2025, this is contingent on local economic conditions not deteriorating significantly.

Balance Sheet Strength and Liquidity

WBHC maintains a solid balance sheet, with total assets reaching $5.53 billion at March 31, 2025, up 3.22% from $5.36 billion at December 31, 2024. This growth was primarily driven by the expansion of the loan portfolio.

Deposits are the primary funding source, totaling $4.96 billion at March 31, 2025, up 2.71% from year-end 2024. The weighted average interest rate paid on total deposits decreased slightly to 2.66% in Q1 2025 from 2.84% in Q4 2024, reflecting the impact of the Federal Reserve's rate cuts in late 2024, which allowed the bank to lower rates on some deposit products. However, management expects interest expense to continue increasing due to overall deposit balance growth, and competitive pressures or a lack of further rate cuts could necessitate maintaining or increasing deposit rates, potentially pressuring net interest margin.

Liquidity remains adequate, with liquid assets totaling $621.40 million at March 31, 2025. The liquidity ratio, calculated as liquid assets divided by total assets, was 11.24%, an increase from 10.80% at year-end 2024. This improvement was mainly due to an increase in liquid assets. The Company also has significant contingent liquidity sources, including approximately $119.20 million in unused federal funds lines of credit and $565.30 million in borrowing capacity with the Federal Home Loan Bank of Cincinnati.

The securities portfolio, totaling $832.55 million, represents a key component of earning assets and a potential source of liquidity. However, a significant portion of the portfolio remains in an unrealized loss position ($102.30 million at March 31, 2025), primarily due to changes in interest rates. While management does not intend to sell these securities and does not expect to be required to sell them before recovery of their amortized cost, a forced sale for liquidity needs would result in recognized losses, negatively impacting regulatory capital.

Capital Position and Shareholder Returns

WBHC maintains a strong capital position, comfortably exceeding all regulatory requirements for being considered "well capitalized." As of March 31, 2025, the Bank's Common Equity Tier 1 capital ratio was 13.3%, Tier 1 capital ratio was 13.3%, Total capital ratio was 14.6%, and Tier 1 leverage ratio was 10.4%, all well above the minimums required for well-capitalized status (6.5%, 8.0%, 10.0%, and 5.0% respectively, including the capital conservation buffer). This robust capital base provides a buffer against potential credit losses and supports future balance sheet growth.

Total shareholders' equity increased to $506.36 million at March 31, 2025, or 9.15% of total assets, up from $479.70 million (8.95% of total assets) at December 31, 2024. This increase was driven by net earnings, stock-based compensation, stock option exercises, and a decrease in unrealized losses on investment securities, partially offset by cash dividends.

The Company continues to return value to shareholders through dividends. Dividends declared per common share were $1.00 for Q1 2025, up from $0.75 in Q1 2024.

Additionally, the Board authorized an $8.0 million share repurchase program in January 2025, effective through March 31, 2026, signaling a commitment to enhancing shareholder value, although no shares had been repurchased under this program as of the filing date.

Outlook and Key Considerations

Management's outlook for 2025 anticipates steady loan growth, supported by the favorable economic conditions and strategic initiatives in its market areas. The expectation is for modest charge-offs to continue, provided local economic conditions do not deteriorate.

The interest rate environment remains a key factor influencing future performance. While recent rate cuts have allowed some reduction in deposit costs, the ability to maintain or further reduce these costs will depend on competitive dynamics and future Federal Reserve actions. Management believes short-term rates will remain near current levels throughout 2025, and net interest margin expansion will hinge on the bank's ability to manage deposit pricing relative to loan yields, particularly given the variable-rate nature of much of its loan portfolio. An inability to lower deposit rates as quickly as loan yields might decline in a falling rate environment, or the need to raise deposit rates due to competition or funding needs, could negatively impact net interest margin.

Operational expenses, particularly data processing costs, are expected to continue increasing as the company invests in technology to support growth, meet customer demand for digital services, and enhance cybersecurity.

Overall, the outlook suggests continued growth, albeit with potential pressure on net interest margin depending on interest rate movements and competitive responses in deposit pricing. Managing credit risk, especially within the classified loan portfolio and the construction segment, remains a critical focus.

Conclusion

Wilson Bank Holding Company presents a compelling investment thesis rooted in its strong community banking model and presence in economically vibrant Middle Tennessee markets. The company's recent financial performance underscores its ability to generate robust earnings growth through strategic loan expansion and effective management of its balance sheet. Key profitability metrics have improved, reflecting operational leverage gained despite rising expenses tied to growth and necessary technology investments.

While lacking a distinct, proprietary technology moat, WBHC is strategically investing in digital capabilities and security, essential steps to remain competitive against larger, more technologically advanced rivals and meet evolving customer expectations. The company's deep local relationships and targeted market strategy provide a valuable competitive advantage, fostering customer loyalty that can partially offset the scale and efficiency benefits of national and large regional banks. The strong capital position provides a solid foundation for future initiatives, including further organic growth and potential strategic acquisitions. Investors should monitor the company's ability to manage interest rate sensitivity and credit quality in a dynamic economic environment, particularly within its commercial real estate and classified loan portfolios, as these factors will be crucial determinants of future performance and the sustainability of its growth trajectory. WBHC's story is one of a well-managed community bank capitalizing on its regional strengths while prudently navigating the broader challenges of the banking landscape.