Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 20202023

or

 

☐ 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 0-12820

 

AMERICAN NATIONAL BANKSHARES INC.

(Exact name of registrant as specified in its charter)

 

Virginia

 

54-1284688

(State of incorporation)

 

(I.R.S. Employer Identification No.)

628 Main Street, Danville, VA

 

24541

(Address of principal executive offices)

 

(Zip Code)

434-792-5111

Registrant's telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common Stock, $1 par value

 

AMNB

 

Nasdaq Global Select Market

 

Securities registered pursuant to section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

☐ Yes   ☑  No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

☐ Yes   ☑  No

 

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.

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Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (12 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)

☐ Yes   ☑  No

 

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The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2020,2023, based on the closing price, was $259,004,000.$321,204,000.

 

The number of shares of the registrant's common stock outstanding on February 26, 2021on March 8, 2024 was 10,965,502.10,630,679.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 18, 2021, are incorporatedThe information required by reference into Part III of this report.Form 10-K is incorporated herein by reference from the registrant's amendment to this Form 10-K to be filed on Form 10-K/A within 120 days after the end of the fiscal year covered by this Form 10-K.

 

2

 

 

CROSS REFERENCE INDEX

 

 

 

PART I

 

PAGE

ITEM 1

Business

4

ITEM 1A

Risk Factors

1413

ITEM 1B

Unresolved Staff Comments

None21

ITEM 1CCybersecurity22

ITEM 2

Properties

23

ITEM 3

Legal Proceedings

23

ITEM 4

Mine Safety Disclosures

23

 

 

PART II

 

 

ITEM 5

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24

ITEM 6

Selected Financial Data[Reserved]

2624

ITEM 7

Management's Discussion and Analysis of Financial Condition and Results of Operations

2725

ITEM 7A

Quantitative and Qualitative Disclosures About Market Risk

4941

ITEM 8

Financial Statements and Supplementary Data

5042

 

Reports of Independent Registered Public Accounting Firm

5242

 

Consolidated Balance Sheets as of December 31, 20202023 and 20192022

5545

 

Consolidated Statements of Income for the years ended December 31, 2020, 2019,2023, 2022, and 20182021

5646

 

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019,2023, 2022, and 20182021

5747

 

Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2020, 2019,2023, 2022, and 20182021

5848

 

Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019,2023, 2022, and 20182021

5949

 

Notes to Consolidated Financial Statements

6050

ITEM 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None81

ITEM 9A

Controls and Procedures

10281

ITEM 9B

Other Information

None81

ITEM 9CDisclosure Regarding Foreign Jurisdictions that Prevent Inspections81

 

 

PART III

 

 

ITEM 10

Directors, Executive Officers and Corporate Governance

*82

ITEM 11

Executive Compensation

*82

ITEM 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

*82

ITEM 13

Certain Relationships and Related Transactions, and Director Independence

*82

ITEM 14

Principal Accountant Fees and Services

*82

 

 

PART IV

 

 

ITEM 15

Exhibits and Financial Statement Schedules

10383

ITEM 16

Form 10-K Summary

None84

*Certain information required by Item 10 is incorporated herein by reference to the information that appears under the headings "Election of Directors," "Election of Directors – Board Members Serving on Other Publicly Traded Company Boards of Directors," "Election of Directors – Board of Directors and Committees," "Report of the Audit Committee," and "Code of Conduct" in the Registrant's Proxy Statement for the 2021 Annual Meeting of Shareholders. The information required by Item 401 of Regulation S-K on executive officers is disclosed herein.

The information required by Item 11 is incorporated herein by reference to the information that appears under the headings "Compensation Discussion and Analysis," "Compensation Committee Interlocks and Insider Participation," and "Compensation Committee Report" in the Registrant's Proxy Statement for the 2021 Annual Meeting of Shareholders.

The information required by Item 12 is incorporated herein by reference to the information that appears under the heading "Security Ownership" in the Registrant's Proxy Statement for the 2021 Annual Meeting of Shareholders. 

The information required by Item 13 is incorporated herein by reference to the information that appears under the headings "Related Party Transactions" and "Election of Directors – Board Independence" in the Registrant's Proxy Statement for the 2021 Annual Meeting of Shareholders.

The information required by Item 14 is incorporated herein by reference to the information that appears under the heading "Independent Registered Public Accounting Firm" in the Registrant's Proxy Statement for the 2021 Annual Meeting of Shareholders.

 

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PART I

 

Forward-Looking Statements

 

This report contains forward-lookingCertain statements with respect to the financial condition, results of operations and businessin this Form 10-K of American National Bankshares, Inc. (the "Company") may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements regarding anticipated changes in the interest rate environment, future economic conditions and its wholly owned subsidiary, American National Bankthe impacts of current economic uncertainties, and Trust Company (the "Bank"). Theseprojections, predictions, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact. Such forward-looking statements involveare based on certain assumptions as of the time they are made, and are inherently subject to known and unknown risks and uncertainties, and are based on the beliefs and assumptionssome of management of the Company and on information available to management at the time these statements and disclosures were prepared. Forward-looking statements are subject to numerous assumptions, estimates, risks, and uncertaintieswhich cannot be predicted or quantified, that couldmay cause actual conditions, events,results, performance or resultsachievements to differbe materially different from those statedexpressed or implied by such forward-looking statements.

A Such statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," "intend," "will," "may," "view," "seek to," "opportunity," "potential," "continue," "confidence" or words of similar meaning, or other statements concerning opinions or judgment of our management about future events. Although we believe that our expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of our existing knowledge of our business and operations, there can be no assurance that actual future results, performance, or achievements of, or trends affecting, us will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, some of which are discussed in more detail in Item 1A – Risk Factors, may affect the operations, performance, business strategy, and results of the Company. Those factors includeincluding, but are not limited to, the following:effects of or changes in:

 

the impactbusinesses of the ongoing COVID-19 pandemicCompany and Atlantic Union Bankshares Corporation ("Atlantic Union") may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected;

the associated effortsexpected growth opportunities or cost savings from the merger with Atlantic Union may not be fully realized or may take longer to limitrealize than expected;

deposit attrition, operating costs, customer losses and business disruption prior to and following the spreadmerger with Atlantic Union, including adverse effects on relationships with employees and customers, may be greater than expected;

the level of the virus;inflation;

financial market volatility including the level of interest rates, could affect the values of financial instruments and the amount of net interest income earned;

the adequacy of the level ofability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company's allowance for loan losses, the amount of loan loss provisions required in future periods, and the failure of assumptions underlying the allowance for loan losses;or banking industry's reputation becomes damaged;

general economic or business conditions, either nationally or in the market areas in which the Company does business, may be less favorable than expected, resulting in deteriorating credit quality, reduced demand for credit, or a weakened ability to generate deposits;

competition among financial institutions may increase, and competitors may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than the Company;

businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards and tax laws;

the ability to recruit and retain key personnel;

cybersecurity threats or attacks, the implementation of new technologies, and the ability to develop and maintain reliable and secure electronic systems; and

the effects of climate change, natural disasters, and extreme weather events;

geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts of threats or terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad;

the impact of health emergencies, epidemics or pandemics;

risks related to environmental, social and governance practices; and

risks associated with mergers, acquisitions, and other expansion activities.

More information on risk factors that could affect our forward-looking statements is included under the section entitled "Risk Factors" set forth herein. All risk factors and uncertainties described herein should be considered in evaluating forward-looking statements, all forward- looking statements made in this Form 10-K are expressly qualified by the cautionary statements contained in this Form 10-K, and undue reliance should not be placed on such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on our businesses or operations. Forward-looking statements speak only as of the date they are made. We do not intend or assume any obligation to update, revise or clarify any forward- looking statements that may be made from time to time by or on behalf of the Company, whether as a result of new information, future events or otherwise.

 

ITEM 1 – BUSINESS

 

Overview

American National Bankshares Inc. is a one-bank holding company organized under the laws of the Commonwealth of Virginia in 1984. On September 1, 1984, the Company acquired all of the outstanding capital stock of American National Bank and Trust Company (the "Bank"), a national banking association chartered in 1909 under the laws of the United States. American National Bank and Trust Company is the only banking subsidiary of the Company.

 

4

As of December 31, 2020,2023, the operations of the Company arewere conducted at twenty-six26 banking offices in south central Virginia and one loan production office in Roanoke, Virginia.north central North Carolina. Through these offices, the Company serves its primary market area of south central Virginia, the New River Valley and Roanoke, Virginia, and north central North Carolina. The Bank provides a full array of financial products and services, including commercial, mortgage, and consumer banking; trust and investment services; and insurance. Services are also provided through thirty-seven34 Automated Teller Machines ("ATMs"), "Online Banking," and "Telephone Banking."

 

On April 1, 2019, the Company completed the acquisition of Roanoke-based HomeTown Bankshares Corporation ("HomeTown"). The acquisition of HomeTown deepened the Company's footprint in the Roanoke, Virginia metropolitan area and created a presence in the New River Valley with an office in Christiansburg, Virginia.

The Company has two reportable segments, (i) community banking and (ii) trust and investment services.wealth management. For more financial data and other information about each of the Company's operating segments, refer to "Note 2421 - Segment and Related Information" of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

Agreement and Plan of Merger

On July 24, 2023, the Company entered into an Agreement and Plan of Merger with Atlantic Union Bankshares Corporation. The merger agreement provides that the Company will merge with and into Atlantic Union, with Atlantic Union continuing as the surviving entity. Immediately following the merger of the Company and Atlantic Union, the Bank will merge with and into Atlantic Union's wholly owned bank subsidiary, Atlantic Union Bank, with Atlantic Union Bank continuing as the surviving bank. The merger agreement was approved by the Board of Directors of each of the Company and Atlantic Union. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of common stock of the Company will be converted into the right to receive 1.35 shares of common stock of Atlantic Union, with cash to be paid in lieu of any fractional shares. The merger is expected to close on April 1, 2024, subject to satisfaction of customary closing conditions.

Human Capital Resources

 

Competition and MarketsProfile

 

At December 31, 2023, the Company employed 334 full-time persons and 40 part-time persons. None of our employees are represented by a union or covered under a collective bargaining agreement. In the opinion of the management of the Company, relations with employees of the Company and the Bank are good.

As a holding company for a community bank, the Company is a relationship-driven organization. A key aspect of the Company's business strategy is for its senior officers to have primary contact with current and potential customers. The Company's growth and development are in large part a result of these personalized relationships with the customer base. The success of the Company also often depends on its ability to hire and retain qualified banking officers. The Company's senior officers have considerable experience in the banking industry and related financial services and are extremely valuable.

Corporate Culture 

The Company believes that as a regional community bank it is only as strong as the communities it serves, and has established core values to guide the organization. We are relationship focused establishing trust by respecting others and doing the right thing. We work together as a team and value diverse perspectives that help move us forward together. We fulfill commitments through responsive communication and service to and with our employees, shareholders and customers. We strive to embrace change as it comes and to continually work to be better. We work to be genuine in both words and actions. The Company has worked to utilize technology to allow for more digital transactions for our customers and more options for remote work and virtual meetings. We work with local organizations to provide financial education to the communities we serve and support various not-for-profit organizations. During the pandemic, we were ardent participants in the Paycheck Protection Program ("PPP"), assisting small businesses, their employees and their communities. 

Compensation and Benefits

The Company's senior officer compensation programs are designed to attract, retain and motivate bankers with the ability to generate strong business results and ensure the long-term success of the Company. The compensation committee of the Company's board of directors has established compensation programs that reflect and support the Company's strategic and financial performance goals, the primary goal being the creation of long-term value for the shareholders of the Company, while protecting the interests of the depositors of the Bank. In addition to competitive base and incentive compensation, the Company offers competitive benefits including paid vacation and sick leave, a 401(k) plan, health, dental, and vision plans, life and disability coverage, and a wellness plan. The Company has also entered into employment contracts with certain of its senior officers, and purchased key man life insurance policies to mitigate the risk of an unforeseen departure or death of certain of the senior officers.

 100% of our employees were eligible for an incentive opportunity in 2023. Incentive plans include a mix of individual and corporate goals that are measurable and defined.

Diversity, Equity and Inclusion

We are committed to hiring diverse talent and fostering, cultivating and preserving a culture of a diversity, equity and inclusion. We believe that the collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities, and talent that our teammates invest in their work represents a significant part of not only our culture, but our reputation and achievement. We strive to foster a culture and workplace that, among other things, is inclusive and welcoming, treats everyone with respect and dignity, promotes people on their merits, and promotes diversity of thoughts, ideas, perspective and values. Our Board believes that diversity contributes to the overall effectiveness of the Board and generally conceptualizes diversity expansively to include, without limitation, concepts such as race, gender, ethnicity, sexual orientation, education, age, work experience, professional skills, geographic location and other qualities or attributes that support diversity. We have a Diversity, Equity and Inclusion Committee which includes a cross-functional group of teammates from diverse backgrounds, that manages our efforts to create a more diverse, equitable, and inclusive workplace.

5

Competition and Markets​​​​​​

Vigorous competition exists in the Company's service areas. The Company competes not only with national, regional, and community banks, but also with other types of financial institutions including finance companies, mutual and money market fund providers, financial technology companies, brokerage firms, wealth management firms, insurance companies, credit unions, and mortgage companies.

 

In addition, nonbank competitors are increasingly offering products and services that traditionally were only offered by banks. Many of these nonbank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks, which may allow them to offer greater lending limits and certain products and services that we do not provide.

The Company's primary market area is south central Virginia and north central North Carolina. The Company also has a significant presence in Roanoke, Virginia that increased substantially in connection with the acquisition of HomeTown.HomeTown Bankshares Corporation ("HomeTown") in 2019. The Company's Virginia banking offices are located in the cities of Danville, Lynchburg, Martinsville, Roanoke, and Salem and in the counties of Campbell, Franklin, Halifax, Henry, Montgomery, Pittsylvania and Roanoke. In North Carolina, the Company's banking offices are located in the cities of Burlington, Graham, Greensboro, Mebane, Raleigh, Winston-Salem, and Yanceyville, which are within the counties of Alamance, Caswell, Forsyth, Guilford, and Wake. 

4

The Company has the largest deposit market share in the City of Danville, Virginia. The Company had a deposit market share in the Danville Micropolitan Statistical Area of 35.5% at June 30, 2020 based on Federal Deposit Insurance Corporation ("FDIC") data. The Company has the second largest deposit market share in Pittsylvania County, Virginia. The Company had a deposit market share in the County of 27.0% at June 30, 2020, based on FDIC data.

 

Unemployment levels in each Virginia market the Company serves have remained low for the past twelve months. Based on Virginia Employment Commission data, the state's seasonally-adjusted unemployment rate was 3.0% as of December 31, 2023 and December 31, 2022 and continued to improve from their COVID-19 related highs in earlybe below the national rate of 3.7% at December 31, 2023. North Carolina's unemployment rate was 3.5% as of December 31, 2023, compared to mid 2020.  3.9% at December 31, 2022 and slightly below the national rate of 3.7% at December 31, 2023.

Service sectors, financials, medical, manufacturing, construction, timber management and production, and technology related businesses have remained strong while hospitality, restaurants, travel & tourism, meeting spaces, and fitness facilities continue to suffer from the COVID-19 restrictions.strong. Other important business industries include farming, tobacco and hemp processing and sales, and food processing. New businesses continue to move into the Company's Virginia footprint,and North Carolina footprints, which has been positive for economic growth.

 

The Company's market area in North Carolina hasincludes larger metropolitan areas characterized by strong competition in attracting deposits and making loans. Its most direct competition for deposits comes from commercial banks and credit unions located in the market area, including large financial institutions that have greater financialmany regional and marketing resources available to them.national banks. The Company had acompany has experienced strong loan growth in these markets, but has been more challenged in growing deposit market share in Alamance County of 14.7% at June 30, 2020, based on FDIC data, which was the third largest of any FDIC-insured institution.share.

 

Supervision and Regulation

 

The Company and the Bank are extensively regulated under federal and state law. The following information describesdescription briefly addresses certain aspectsprovisions of that regulation applicable tofederal and state laws and regulations, and their potential effects on the Company and the Bank and does not purport to be complete.Bank. Proposals to change the laws, regulations, and policies governing the banking industry are frequently raised in U.S. Congress, in state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Company and the Bank are impossible to determine with any certainty. A change in applicable laws, regulations or policies, or a change in the way such laws, regulations or policies are interpreted by regulatory agencies or courts, may have a material impact on the business, operations, and earnings of the Company and the Bank.

 

American National Bankshares Inc.

 

American National Bankshares Inc. is qualified as a bank holding company ("BHC") within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Board of Governors of the Federal Reserve System (the "FRB"). As a bank holding company, the Company is subject to supervision, regulation and examination by the FRB and is required to file various reports and additional information with the FRB. The Company is also registered under the bank holding company laws of Virginia and is subject to supervision, regulation and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the "SCC").

Under the Gramm-Leach-Bliley Act, a BHC may elect to become a financial holding company and thereby engage in a broader range of financial and other activities than are permissible for traditional BHC's. In order to qualify for the election, all of the depository institution subsidiaries of the BHC must be well capitalized, well managed, and have achieved a rating of "satisfactory" or better under the Community Reinvestment Act (the "CRA"). Financial holding companies are permitted to engage in activities that are "financial in nature" or incidental or complementary thereto as determined by the FRB. The Gramm-Leach-Bliley Act identifies several activities as "financial in nature," including insurance underwriting and sales, investment advisory services, merchant banking and underwriting, and dealing or making a market in securities. The Company has not elected to become a financial holding company, and has no plans to become a financial holding company.

 

American National Bank and Trust Company

 

American National Bank and Trust Company is a federally chartered national bank and is a member of the Federal Reserve System. As a national bank, the Bank is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC") and is required to file various reports and additional information with the OCC. The OCC has primary supervisory and regulatory authority over the operations of the Bank. Because the Bank accepts insured deposits from the public, it is also subject to examination by the FDIC.Federal Deposit Insurance Corporation ("FDIC").

 

Depository institutions, including the Bank, are subject to extensive federal and state regulations that significantly affect their business and activities. Regulatory bodies have broad authority to implement standards and initiate proceedings designed to prohibit depository institutions from engaging in unsafe and unsound banking practices. The standards relate generally to operations and management, asset quality, interest rate exposure, and capital. The bank regulatory agencies are authorized to take action against institutions that fail to meet such standards.

 

As with other financial institutions, the earnings of the Bank are affected by general economic conditions and by the monetary policies of the FRB. The FRB exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, setting the reserve requirements of member banks, and establishing the discount rate on member bank borrowings. The policies of the FRB have a direct impact on loan and deposit growth and the interest rates charged and paid thereon. They also impact the source, cost of funds, and the rates of return on investments. Changes in the FRB's monetary policies have had a significant impact on the operating results of the Bank and other financial institutions and are expected to continue to do so in the future; however, the exact impact of such conditions and policies upon the future business and earnings cannot accurately be predicted.

 

56

 

The Dodd-Frank ActDeposit Insurance

 

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The Dodd-Frank Act significantly restructured the financial regulatory regime in the United States and has had a broad impact on the financial services industry as a result of the significant regulatory and compliance changes required under the act. A summary of certain provisions of the Dodd-Frank Act is set forth below:

Increased Capital Standards. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. See "Capital Requirements" below. Among other things, the Dodd-Frank Act provides for stronger capital standards.

Deposit Insurance. The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act ("FDIA") also revised the assessment base against which an insured depository institution's deposit insurance premiums paid to the Deposit Insurance Fund (the "DIF") are calculated. Under the amendments, the assessment base is the institution's average consolidated total assets less its average tangible equity during the assessment period. Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act also provides that depository institutions may pay interest on demand deposits.

The Consumer Financial Protection Bureau ("CFPB"). The Dodd-Frank Act created the CFPB. The CFPB is charged with establishing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services.

Compensation Practices. The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or bank that provides an insider or other employee with "excessive compensation" or could lead to a material financial loss to such firm. In June 2010, prior to the Dodd-Frank Act, the federal bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behavior. See "Incentive Compensation" below.

Recent Amendments to the Dodd-Frank Act. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, which was signed into law on May 24, 2018 (the "EGRRCPA"), amended the Dodd-Frank Act to provide regulatory relief for certain smaller and regional financial institutions. The EGRRCPA, among other things, provides financial institutions with less than $10 billion in assets with relief from certain capital requirements and exempts banks with less than $250 billion in total consolidated assets from the enhanced prudential standards and the company-run and supervisory stress tests required under the Dodd-Frank Act.

The Dodd-Frank Act has had, and may in the future have, a material impact on the Company's operations, particularly through increased compliance costs resulting from new and possible future consumer and fair lending regulations. The future changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business practices, impose more stringent regulatory requirements or otherwise adversely affect the business and financial condition of the Company and the Bank. These changes may also require the Company to invest significant management attention and resources to evaluate and make necessary changes to comply with new statutory and regulatory requirements.

Deposit Insurance

The deposits of the Bank are insured up to applicable limits by the DIF and are subject to deposit insurance assessments to maintain the DIF. The deposit insurance assessment base of the Bank is based on its average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Act.Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The FDIC uses a "financial ratios method" based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets, such as the Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk ("CAMELS"). CAMELS composite ratings set a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions.

 

The FDIC's "reserve ratio" of the DIF to total industry deposits reached its 1.15% target effective June 30, 2016. On In March 15, 2016, the FDIC implemented by final rule certain Dodd-Frank Act provisions by raising the DIF's minimum reserve ratio from 1.15% to 1.35%. The FDIC imposed a 4.5 basis point annual surcharge on insured depository institutions with total consolidated assets of $10 billion or more. The new rule granted credits to smaller banks, such as the Bank, for the portion of their regular assessments that contributed to increasing the reserve ratio from 1.15% to 1.35%, to be applied when the reserve ratio reached at least 1.38%The 1.35% target was achieved in the third quarter of 2018, resulting in the termination of the surcharge. The reserve ratio reached 1.40% as of June 30, 2019, andIn October 2022, the FDIC first applied small bank credits onadopted a final rule to increase the assessment for the second quarter of 2019, which was invoiced September 30, 2019. The FDIC continued to apply the balance of small bank credits as a reserve ratio of at least 1.35% was sustained,base rate schedules uniformly by two basis points beginning with the lastfirst quarterly assessment period of the Company's credits being applied to the assessment for the first quarter of 2020, which was invoiced June 30, 2020.2023. In 20202023 and 2019,2022, the Company recorded expense of $639,000$1.4 million and $119,000,$903 thousand, respectively, for FDIC insurance premiums.

 

In addition, all FDIC insured institutions were required to pay assessments to the FDIC at an annual rate of approximately one basis point of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments continued until the Financing Corporation bonds matured in 2019.

6

Capital Requirements

 

The FRB, the OCC and the FDIC have issued substantially similar capital guidelines applicable to all banks and bank holding companies. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.

 

Effective January 1, 2015, the Company and the Bank became subject to rules implementing the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision (the "Basel Committee") and certain provisions of the Dodd-Frank Act (the "Basel III Capital Rules"). The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets ("CET1") of at least 4.5%, plus a 2.5% "capital conservation buffer" (effectively resulting in a minimum CET1 ratio of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of the capital conservation buffer, requirement began onwhich was phased in ratably over a four year period beginning January 1, 2016, at 0.625%is designed to absorb losses during periods of risk-weighted assets, increasing byeconomic stress. Institutions with a CET1 ratio above the sameminimum (4.5%) but below the minimum plus the conservation buffer (7.0%) will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount each year until it was fully implemented at 2.5% on January 1, 2019.of the shortfall. 

 

With respect to the Bank, the "prompt corrective action" regulations pursuant to Section 38 of the FDIAFederal Deposit Insurance Act (the "FDIA") were also revised, effective as of January 1, 2015, to incorporate a CET1 ratio and to increase certain other capital ratios. To be well capitalized under the revised regulations, a bank must have the following minimum capital ratios: (i) a CET1 ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%. See "The Federal Deposit Insurance Corporation Improvement Act""Prompt Corrective Action" below.

 

The Tier 1 and total capital to risk-weighted asset ratios of the Company were 13.78%12.81% and 15.18%13.82%, respectively, as of December 31, 2020,2023, thus exceeding the minimum requirements. The CET 1 ratio of the Company was 12.36%11.70% and the Bank was 12.86%12.61% as of December 31, 2020.2023. The Tier 1 and total capital to risk-weighted asset ratios of the Bank were 12.86%12.61% and 13.97%13.62%, respectively, as of December 31, 2020,2023, also exceeding the minimum requirements.

 

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. In July 2019, the federal banking agencies adopted final rules (the "Capital Simplification Rules") that, among other things, revised these deductions and adjustments. Following the adoption of the Capital Simplification Rules, certain deferred tax assets and significant investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category exceeds 25% of CET1. Prior to the adoption of the Capital Simplification Rules, amounts were deducted from CET1 to the extent that any one such category exceeded 10% of CET1 or all such items, in the aggregate, exceeded 15% of CET1. The Capital Simplification Rules took effect for the Company as of January 1, 2020. These limitations did not impact regulatory capital during any of the reported periods.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures (and higher percentages for certain other types of interests), and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.

 

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as "Basel IV"). Among other things, these standards revise the Basel Committee's standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the proposed framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing-in through January 1, 2027. Under the current capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulatory agencies.

On August 28, 2018, the FRB issued an interim final rule required by the EGRRCPA that expands the applicability of the FRB's small bank holding company policy statement (the "SBHC Policy Statement") to bank holding companies with total consolidated assets of less than $3 billion (up from the prior $1 billion threshold). Under the SBHC Policy Statement, qualifying bank holding companies have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules (subsidiary depository institutions of qualifying bank holding companies are still subject to capital requirements). The Company currently had less than $3 billion in total consolidated assets at June 30, 2020 and would likely qualify under the revised SBHC Policy Statement. However, the Company does not currently intend to issue a material amount of debt or take any other action that would cause its capital ratios to fall below the minimum ratios required by the Basel III Capital Rules.

On September 17, 2019, the federal banking agencies jointly issued a final rule required by the EGRRCPAEconomic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the "EGRRCPA") that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to be subject to a 9% leverage ratio (commonly referred to as the community bank leverage ratio or "CBLR"). Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and are deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework has a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. These CBLR rules were modified in response to the COVID-19 pandemic.  See "Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021"below. The Company and the Bank do not currently expect to opt into the CBLR framework.

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Dividends

 

The Company's principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank's payment of dividends to the Company. As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years. A depository institution may not pay any dividend if payment would cause the institution to become "undercapitalized" or if it already is "undercapitalized." The OCC may prevent the payment of a dividend if it determines that the payment would be an unsafe and unsound banking practice. The OCC also has advised that a national bank should generally pay dividends only out of current operating earnings.

7

 

Permitted Activities

 

As a bank holding company, the permitted activities of the Company isare limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the FRB determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the FRB must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition, and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. Despite prior approval, the FRB may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the FRB has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity.

 

Banking Acquisitions; Changes in Control

 

The BHC Act requires,and related regulations require, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless it already owns a majority of such voting shares), (ii) acquire all or substantially all of the assets of another bank or bank holding company, or (iii) merge or consolidate with any other bank holding company. In determining whether to approve a proposed bank acquisition, the FRB will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, any outstanding regulatory compliance issues of any institution that is a party to the transaction, the projected capital ratios and levels on a post-acquisition basis, the financial condition of each institution that is a party to the transaction and of the combined institution after the transaction, the parties' managerial resources and risk management and governance processes and systems, the parties' compliance with the Bank Secrecy Act and anti-money laundering requirements, and the acquiring institution's performance under the CRACommunity Reinvestment Act of 1977, as amended (the "CRA"), and its compliance with fair housing and other consumer protection laws.

 

Subject to certain exceptions, the BHC Act and the Change in Bank Control Act, together with the applicable regulations, require FRB approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered its securities with the Securities and Exchange Commission (the "SEC") under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. The Company's common stock is registered under Section 12 of the Exchange Act.

 

In addition, Virginia law requires the prior approval of the SCC for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares of a Virginia bank or any holding company that controls a Virginia bank, or (ii) the acquisition by a Virginia bank holding company of a bank or its holding company domiciled outside Virginia.

 

Source of Strength

 

FRB policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

8

 

Safety and Soundness

 

There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event of a depository institution insolvency, receivership or default. For example, under the Federal Deposit Insurance Corporation Improvement Act of 1991, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

 

Under the FDIA, the federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to capital management, internal controls and information systems, internal audit systems, data security, loan documentation, credit underwriting, interest rate exposure, risk management, vendor management, corporate governance, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines.

8

 

The Federal Deposit Insurance Corporation Improvement ActPrompt Corrective Action

 

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), theThe federal bank regulatory agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," as defined by the law. "Well capitalized" institutions may generally operate without additional supervisory restriction. With respect to "adequately capitalized" institutions, such banks cannot normally pay dividends or make any capital contributions that would leave the bank undercapitalized; they cannot pay a management fee to a controlling person if after paying the fee, it would be undercapitalized; and they cannot accept, renew, or rollover any brokered deposit unless the bank has applied for and been granted a waiver by the FDIC.

 

Reflecting changes underImmediately upon becoming "undercapitalized," a depository institution becomes subject to the new Basel IIIprovisions of Section 38 of the FDIA, which: (i) restrict payment of capital requirements,distributions and management fees; (ii) require that the relevantappropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital measures that became effective on January 1, 2015restoration plan; (iv) restrict the growth of the institution's assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for prompt corrective action are the total capital ratio, the common equity Tier 1 capital ratio, the Tier 1 capital ratio and the leverage ratio. A bank will be (i) "well capitalized"an undercapitalized institution also may take any number of discretionary supervisory actions if the institution has a total risk-based capital ratioagency determines that any of 10.0% or greater, a common equity Tier 1 capital ratiothese actions is necessary to resolve the problems of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any capital directive order; (ii) "adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is not "well capitalized"; (iii) "undercapitalized" ifat the least possible long-term cost to the DIF, subject in certain cases to specified procedures. These discretionary supervisory actions include: (i) requiring the institution has a total risk-based capital ratio that is less than 8.0%, a common equity Tier 1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratioto raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of less than 6.0% or a leverage ratio of less than 4.0%; (iv) "significantly undercapitalized" if the institution hasor the sale of the institution to a total risk-based capital ratio of less than 6.0%, a common equity Tier 1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%;willing purchaser; and (v) "critically undercapitalized" if(iv) any other supervisory action that the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institutionagency deems appropriate. These and additional mandatory and permissive supervisory actions may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination ratingtaken with respect to certain matters. A bank's capital category is determined solely for the purpose of applying prompt corrective action regulations,significantly undercapitalized and the capital category may not constitute an accurate representation of the bank's overall financial condition or prospects for other purposes.critically undercapitalized institutions. Management believes, as of December 31, 20202023 and 2019,2022, the Bank met the requirements for being classified as "well capitalized."

As described above, on September 17, 2019, the federal banking agencies jointly issued a final rule required by the EGRRCPA that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to opt into the CBLR framework. Banks opting into the CBLR framework and maintaining a CBLR of greater than 9% are deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework has a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. These CBLR rules were modified in response to the COVID-19 pandemic.  See "Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021" below. The Company and the Bank do not currently expect to opt into the CBLR framework.

As required by FDICIA, the federal bank regulatory agencies also have adopted guidelines prescribing safety and soundness standards relating to, among other things, internal controls and information systems, internal audit systems, loan documentation, credit underwriting, and interest rate exposure. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. In addition, the agencies adopted regulations that authorize, but do not require, an institution which has been notified that it is not in compliance with safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the prompt corrective action provisions described above.

 

BranchingTransactions with Affiliates

 

Pursuant to the Dodd-Frank Act, national and state-chartered banks may open an initial branch in a state other than its home state (e.g., a host state) by establishing a de novo branch at any location in such host state at which a bank chartered in such host state could establish a branch. Applications to establish such branches must still be filed with the appropriate primary federal bank regulatory agency and state bank regulatory authorities may require applications or notices.

9

Transactions with Affiliates

Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or "affiliates" or to make loans to insiders is limited. Loan transactions with an affiliate generally must be collateralized and certain transactions between the Bank and its affiliates, including the sale of assets, the payment of money, or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions. In addition, the Bank generally may not purchase securities issued or underwritten by affiliates.

 

Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank, (a "10% Shareholders"), are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives (which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank's unimpaired capital and unimpaired surplus. Section 22(g) of the Federal Reserve Act identifies limited circumstances in which the Bank is permitted to extend credit to executive officers.

 

Consumer Financial Protection

 

The Company is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. If the Company fails to comply with these laws and regulations, it may be subject to various penalties. Failure to comply with consumer protection requirements may also result in failure to obtain any required bank regulatory approval for merger or acquisition transactions the Company may wish to pursue or being prohibited from engaging in such transactions even if approval is not required.

 

The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the CFPB,Consumer Financial Protection Bureau (the "CFPB"), and giving it responsibility for implementing, examining, and enforcing compliance with federal consumer protection laws. The CFPB focuses on (i) risks to consumers and compliance with the federal consumer financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in those markets, (iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv) non-depository companies that offer one or more consumer financial products or services.

9

The CFPB has broad rule makingrulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit "unfair, deceptive or abusive" acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer's ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer's (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer's interests. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. Further regulatory positions taken by the CFPB may influence how other regulatory agencies may apply the subject consumer financial protection laws and regulations.

 

Community Reinvestment Act

 

The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. Furthermore, such assessment is also required of banks that have applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch. In the case of a BHC applying for approval to acquire a bank or BHC, the record of each subsidiary bank of the applicant BHC is subject to assessment in considering the application. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The Bank was rated "satisfactory" in its most recent CRA evaluation.
 

On June 5, 2020,October 24, 2023, the OCC publishedfederal bank regulatory agencies issued a final rule effective October 1, 2020, to modernize their respective CRA regulations. The revised rules substantially alter the agency's regulations undermethodology for assessing compliance with the CRA.CRA, with material aspects taking effect January 1, 2026 and revised data reporting requirements taking effect January 1, 2027. Among other things, the revised rules evaluate lending outside traditional assessment areas generated by the growth of non-branch delivery systems, such as online and mobile banking, apply a metrics-based benchmarking approach to assessment, and clarify eligible CRA activities. The rule (i) clarifies which activities qualifyfinal rules are likely to make it more challenging and/or costly for CRA credit and (ii) requires banksthe Bank to identify an additional assessment area based on where they receive a significant portionrating of their domestic retail products, thus creating two assessment areas: a deposit-based assessment area and a facility-based assessment area. Further, on November 24, 2020, the OCC issued a proposed rule to establish the agency's proposed approach to determine the CRA evaluation measure benchmarks, retail lending distribution test thresholds, and community development minimums under the general performance standards set forth in the June 2020 final rule.  The Company is evaluating what impact this new rule will haveat least "satisfactory" on its operations.CRA evaluation.

10

 

Anti-Money Laundering Legislation

 

The Company is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities ("AML laws"). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020.

 

The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.

 

Office of Foreign Assets Control

 

The U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") is responsible for administering and enforcing economic and trade sanctions against specified foreign parties, including countries and regimes, foreign individuals and other foreign organizations and entities. OFAC publishes lists of prohibited parties that are regularly consulted by the Company in the conduct of its business in order to assure compliance. The Company is responsible for, among other things, blocking accounts of, and transactions with, prohibited parties identified by OFAC, avoiding unlicensed trade and financial transactions with such parties and reporting blocked transactions after their occurrence. Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for the Company.

 

Privacy Legislation

 

Several recent laws, including the Right to Financial Privacy Act, and related regulations issued by the federal bank regulatory agencies, also provide new protections against the transfer and use of customer information by financial institutions. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers' personal information. Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy provisions generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated parties without prior notice and approval from the customer.

 

In October 2023, the CFPB proposed a new rule that would require a provider of payment accounts or products, such as the Bank, to make certain data available to consumers upon request regarding the products or services they obtain from the provider. The proposed rule is intended to give consumers control over their financial data, including with whom it is shared, and encourage competition in the provision of consumer financial products and services. For banks with over $850 million and less than $50 billion in total assets, such as the Bank, compliance would be required approximately two and one-half years after adoption of the final rule.

10

Incentive Compensation

 

In June 2010, the federal bank regulatory agencies issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. TheInteragency Guidance on Sound Incentive Compensation Policies, which covers all employees that have the ability to materially affect the risk profile of a financial institutions, either individually or as part of a group, is based upon the key principles that a financial institution's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the financial institution's board of directors.

Section 956 of the Dodd-Frank Act requires the federal banking agencies and the Securities and Exchange CommissionSEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets, that encourage inappropriate risk-takingrisks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. TheIn 2016, the SEC and the federal banking agencies issued such proposed rules in March 2011that prohibit covered financial institutions (including bank holding companies and issued a revised proposed rule in June 2016 implementing the requirements and prohibitions set forth in Section 956. The revised proposed rule would apply to all banks, among other institutions, with at least $1 billion in average total consolidated assets, like the Bank, for which it would go beyond the existing Interagency Guidance on Sound Incentive Compensation Policies to (i) prohibit certain types and features ofbanks) from establishing or maintaining incentive-based compensation arrangements forthat encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers (ii) requireand significant risk takers, as defined in the rules) with excessive compensation, fees, or benefits that could lead to material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that incentive-based compensation arrangements must meet to adherebe considered to certain basic principlesnot encourage inappropriate risks and to avoid a presumption of encouraging inappropriateappropriately balance risk (iii) require appropriate board or committee oversight, (iv) establish minimum recordkeeping, and (v) mandate disclosures to the appropriate federal banking agency.reward. The proposed rules havealso impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements. The comment period for these proposed rules has closed, and a final rule has not yet been finalized.published. If the rules are adopted as proposed, they will restrict the manner in which executive compensation is structured.

 

The FRB will review, as partNasdaq Stock Market, LLC, the exchange on which our common stock is listed, enacted a rule that became effective in 2023 requiring listed companies to adopt policies mandating the recovery or "clawback" of the regular, risk-focused examination process, theexcess incentive compensation arrangements of financial institutions, such asearned by a current or former executive officer during the Company, that are not "large, complex banking organizations." These reviews will be tailoredthree fiscal years preceding the date the listed company is required to each financial institution based on the scope and complexity of the institution's activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution's supervisory ratings, which can affect the institution's ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution's safety and soundness and the financial institution is not taking prompt and effective measuresprepare an accounting restatement, including to correct an error that would result in a material misstatement if the deficiencies. At December 31, 2020,error were corrected in the Company had not been made awarecurrent period or left uncorrected in the current period. The company has adopted a clawback policy compliant with such rule, a copy of any instances of non-compliance with the final guidance.which is attached as Exhibit 97 to this From 10-K.

11

 

Ability-to-Repay and Qualified Mortgage RuleBanking Regulation

 

PursuantIn connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the Dodd-Frank Act,reasonable value of the CFPB has issued a final rule amendingservices rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank's mortgage origination activities are subject to the FRB's Regulation Z, as implemented bywhich implements the Truth in Lending Act, requiring mortgage lendersAct. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine consumers' ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) the monthly payment on the covered transaction; (iv) the monthly payment on any simultaneous loan; (v) the monthly payment for mortgage-related obligations; (vi) current debt obligations, alimony, and child support; (vii) the monthly debt-to-income ratio or residual income; and (viii) credit history. Alternatively, the mortgage lender can originate "qualified mortgages," which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a "qualified mortgage" is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Qualified mortgages that are "higher-priced" (e.g. subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not "higher-priced" (e.g. prime loans) are given a safe harbor of compliance. The Company is predominantly an originator of compliant qualified mortgages.

 

Cybersecurity

 

In March 2015,The federal regulators issued twobank regulatory agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution's board of directors. These guidelines, along with related statements regarding cybersecurity. One statement indicates thatregulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal bank regulatory agencies expect financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of theand also expect financial institution. The other statement indicates that a financial institution's management is expectedinstitutions to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution's operations after a cyber-attack involving destructive malware. A financial institution is also expectedcyberattack. If we fail to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data ifmeet the institution or its critical service providers fall victim toexpectations set forth in this type of cyber-attack. If the Company fails to observe the regulatory guidance, itwe could be subject to various regulatory sanctions, including financial penalties.actions and any remediation efforts may require us to devote significant resources

 

In December 2020,On November 18, 2021, the federal bankingbank regulatory agencies issued a notice of proposed rulemaking that would require banking organizationsfinal rule, effective April 1, 2022, imposing new notification requirements for cybersecurity incidents. The rule requires financial institutions to notify their primary federal regulator withinas soon as possible and no later than 36 hours after the institution determines that a cybersecurity incident has occurred that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the institution's: (i) ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of becoming awareits customer base, in the ordinary course of business, (ii) business line(s), including associated operations, services, functions, and support, that upon failure would result in a "computer-security incident"material loss of revenue, profit, or franchise value, or (iii) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a "notification incident." The proposed rule also would require specific and immediate notifications by bank service providers that become awarethreat to the financial stability of similar incidents.the United States.

 

In July 2023, the SEC issued a final rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies that are subject to the reporting requirements of the Exchange Act. Specifically, the final rule requires current reporting about material cybersecurity incidents, periodic disclosures about a registrant's policies and procedures to identify and manage cybersecurity risk, management's role in implementing cybersecurity policies and procedures, and the board of directors' cybersecurity expertise, if any, and its oversight of cybersecurity risk. See Item 1C. Cybersecurity of this Form 10-K for a discussion of the Company's cybersecurity risk management, strategy and governance.

To date, the Company has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but its systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers.

Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 ("Appropriations Act") was signed into law on December 27, 2020.  Among other things, the CARES Act and Appropriations Act include the following provisions impacting financial institutions:

Community Bank Leverage Ratio.  The CARES Act directed federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020.  In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive.  One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework.  It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater.  The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement.  It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

Temporary Troubled Debt Restructurings Relief.  The CARES Act allowed banks to elect to suspend requirements under U.S. generally accepted accounting principles ("GAAP") for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a troubled debt restructuring ("TDR"), including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020.  Federal banking agencies are required to defer to the determination of the banks making such suspension.  The Appropriations Act extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022.

Small Business Administration Paycheck Protection Program.  The CARES Act created the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") and it was extended by the Appropriations Act.  Under the PPP, money was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt.  The loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans.

 

1211

 

Future Legislation and Regulation

 

Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impactaffect the regulatory structure under which the Company and the Bank operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material adverse effect on the business, financial condition and results of operations of the Company and the Bank.

 

Effect of Governmental Monetary Policies

 

The Company's operations are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates to influence general economic conditions. These policies have a significant impact on overall growth and distribution of loans, investments and deposits; they affect interest rates charged on loans or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future. As a result, it is difficult for the Company to predict the potential effects of possible changes in monetary policies upon its future operating results.

 

Tax Reform

As a result of the enactment of the CARES Act in 2020, the Company recognized a tax benefit for the net operating loss ("NOL") five-year carryback provision for the NOL acquired in the HomeTown merger.

Employees

At December 31, 2020, the Company employed 342 full-time equivalent persons. In the opinion of the management of the Company, the relationship with employees of the Company and the Bank is good.

Internet Access to Company Documents

 

The Company provides access to its Securities and Exchange Commission (the "SEC")SEC filings through a link on the Investor Relations page of the Company's website at www.amnb.com. Reports available at no cost include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with the SEC. The information on the Company's website is not incorporated into this Annual Report on Form 10-K or any other filing the Company makes with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

 

Executive Officers of the Company

 

The following table lists as of December 31, 2020, the executive officers of the Company, their ages, and their positions:

 

Name

 

Age

 

Position

Jeffrey V. Haley

 

6063

 

President and Chief Executive Officer of the Company and the Bank since January 2013. President of the Company and Chief Executive Officer of the Bank since January 2012. Executive Vice President of the Company from June 2010 to December 2011. Senior Vice President of the Company from July 2008 to May 2010. President of the Bank since June 2010. Executive Vice President of the Bank, as well as President of Trust and Financial Services from July 2008 to May 2010. Executive Vice President and Chief Operating Officer of the Bank from November 2005 to June 2007. 

Jeffrey W. Farrar

 

6063

 

Jeffrey W. Farrar, also known as Jeff, among other names, joined the bank on August 1, 2019 and serves as Senior Executive Vice President, Chief Operating and Chief Financial Officer, Treasurer and SecretaryOfficer. Mr. Farrar has more than twenty-eight years of the Company since October 2019.executive-level experience in community banking. Prior to his current role, he was Executive Vice President and Chief Operating Officer for the Bank since August 2019. Senior Vice President/Finance and Chief Financial Officer ofat Old Point Financial Corporation from June 2017for two years and prior to August 2019. Director of Wealth Management, Mortgage and Insurance for Union Bankshares Corporation (nowthat served in several executive capacities with Atlantic Union Bankshares Corporation) from January 2014 to June 2017. Chief Financial Officer of StellarOne Corporation and its predecessor companiescompanies. Mr. Farrar is a certified public accountant and a graduate of Virginia Tech with a B.S. in Accounting and a recipient of a Master's in Business Administration from January 1996 to June 2017.Virginia Commonwealth University.

H. Gregg Strader

62

Executive Vice President and Chief Banking Officer of the Company since January 2015. Executive Vice President and Chief Banking Officer of the Bank since January 2014. Executive Vice President of the Bank from June 2013 until December 2013. Executive Vice President and Chief Credit Officer of IBERIABANK Corporation from 2009 to June 2013.

Edward C. Martin

47

50

Senior Executive Vice President and Chief Administrative Officer of the Company and the Bank and President of Virginia Banking since August 2020. Executive Vice President and Chief Credit Officer of the Company from December 2019 until August 2020. Executive Vice President and Chief Credit Officer of the Bank from March 2017 until August 2020. Senior Credit Officer of the Bank from September 2016 until March 2017. Regional Credit Officer of Bank of North Carolina from July 2015 to September 2016. Chief Credit Officer of Valley Bank from June 2007 to June 2015.

John H. Settle, Jr.Rhonda P. Joyce

60

62

Executive Vice President and Co-Head of Banking: Commercial of the Bank since November 2021. Executive Vice President and Regional President of the Bank from September 2016 until November 2021. Senior Vice President and Market President since joining the Bank in connection with the MidCarolina Financial Corporation merger in July 2011.
Alexander Jung

55Executive Vice President and Co-Head of Banking: Consumer & Financial Services of the Bank since November 2021. Senior Vice President and President of the North Carolina Market, Blue Ridge Bank, N.A. from September 2020 to October 2021. Various leadership roles in commercial, retail and mortgage banking at Branch Banking and Trust and Investment Services since October 2016. Senior Vice President and Senior Fiduciary Advisory Specialist with Wells Fargo Private BankCompany from March 20121993 to October 2016. Prior thereto, Managing Director with SunTrust Private Wealth Management.

December 2018.

12

ITEM 1A – RISK FACTORS

RISK RELATED TO THE PROPOSED MERGER WITH ATLANTIC UNION

Combining Atlantic Union and the Company may be more difficult, costly or time-consuming than expected.

The success of the merger will depend, in part, on Atlantic Union's ability to realize the anticipated benefits and cost savings from combining the businesses of Atlantic Union and the Company and to combine the businesses of Atlantic Union and the Company in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of the Company or decreasing revenues due to loss of customers. If the parties are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings and anticipated benefits of the merger could be less than anticipated, and integration may result in additional unforeseen expenses.

Atlantic Union and the Company have operated, and, until the completion of the merger, will continue to operate, independently. To realize the full extent of the anticipated benefits of the merger, after the completion of the merger, Atlantic Union expects to integrate the Company's business into its own. The integration process in the merger could result in the loss of key employees, the disruption of each party's ongoing business, inconsistencies in standards, controls, procedures and policies that affect adversely either party's ability to maintain relationships with customers and employees or achieve the anticipated benefits of the merger. The loss of key employees could adversely affect Atlantic Union's ability to successfully conduct its business in the markets in which the Company now operates, which could have an adverse effect on Atlantic Union's financial results and the value of its common stock. If Atlantic Union experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be disruptions that cause Atlantic Union and the Company to lose customers or cause customers to withdraw their deposits from the Company's or Atlantic Union's banking subsidiaries, or other unintended consequences that could have a material adverse effect on Atlantic Union's or the Company's results of operations or financial condition after the merger. These integration matters could have an adverse effect on the Company during this transition period and on the combined company for an undetermined period after consummation of the merger.

Because the exchange ratio is fixed and the market price of Atlantic Union common stock will fluctuate, the value of the consideration to be received by the Company's shareholders in the merger may change.

Pursuant to the merger agreement, upon completion of the merger, each share of the Company's common stock, except for certain shares of the Company's common stock owned by the Company or Atlantic Union, that is issued and outstanding immediately prior to the effective time of the merger will be converted automatically into the right to receive 1.35 shares of common stock of Atlantic Union. The closing price of Atlantic Union common stock on the date that the merger is completed may vary from the closing price of Atlantic Union common stock on the date the Company and Atlantic Union announced the signing of the merger agreement. Because the merger consideration is determined by a fixed exchange ratio, the Company's shareholders will not know or be able to calculate the exact value of the shares of Atlantic Union common stock they will receive until completion of the merger. Any change in the market price of Atlantic Union common stock prior to completion of the merger will affect the value of the merger consideration that the Company's shareholders will receive upon completion of the merger. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the companies' respective businesses, operations and prospects, changes in estimates or recommendations by securities analysis or ratings agencies, and regulatory considerations, among other things. Many of these factors are beyond the control of the Company and Atlantic Union.

The merger may distract management of the Company from its other responsibilities.

The merger could cause the management of the Company to focus its time and energies on matters related to the merger that otherwise would be directed to its business and operations. Any such distraction on the part of the Company's management, if significant, could affect its ability to service existing business and develop new business and may adversely affect the business and earnings of the Company before the merger, or the business and earnings of the combined company after the merger.

Termination of the merger agreement with Atlantic Union could negatively impact the Company.

Each of the Company's and Atlantic Union's obligation to consummate the merger remains subject to a number of conditions which must be fulfilled to consummate the merger, and there can be no assurance that all of the conditions will be satisfied, or that the merger will be completed on the proposed terms, within the expected timeframe, or at all. Any delay in completing the merger could cause the Company not to realize some or all of the benefits that the Company expects to achieve if the merger is successfully completed within its expected timeframe. If the merger agreement is terminated, the Company's business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of the Company's common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be beneficial and will be completed. Atlantic Union and/or the Company may be subject to litigation related to any failure to complete the merger or to proceedings commenced against either company to perform obligations under the merger agreement. If the merger agreement is terminated under certain circumstances, the Company may be required to pay to Atlantic Union a termination fee of approximately $17.2 million.

In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the merger is not completed, the Company would have to recognize these expenses and would have committed substantial time and resources by management, without realizing the expected benefits of the merger. In addition, failure to consummate the merger also may result in negative reactions from the financial markets or from the Company's customers, vendors and employees.

 

 

COVID-19 Impact and Response

In March 2020,The merger agreement with Atlantic Union limits the outbreak of COVID-19 was recognized as a global pandemic. The spreadability of the virus has createdCompany to pursue alternatives to the merger.

The merger agreement contains customary "no-shop" provisions that, subject to limited exceptions, limit the ability of the Company to discuss, facilitate or commit to competing third-party proposals to acquire all or a global health crisissignificant part of the Company. In addition, under certain circumstances, if the merger agreement is terminated and the Company consummates a similar transaction with a party other than Atlantic Union, the Company must pay to Atlantic Union a fee of approximately $17.2 million. These provisions might discourage a potential competing acquirer that has resultedmight have an interest in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activityacquiring all or a significant part of the Company from considering or proposing the acquisition even if it were prepared to pay consideration, with respect to the Company, with a higher per share market price than that proposed in the United States and globally. Governmental responses have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by all parties, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted supply chains, market downturns and volatility, changes in consumer behavior, related emergency response legislation and an expectation that the FRB will maintain a low interest rate environment for the foreseeable future.

merger.

 

In response to the outbreak, the Company implemented a business continuity plan and protocols to continue to maintain a high level of care for its employees, customers and communities. 

The Company also transitionedwill be subject to a majority of its non-branch employees working remotelybusiness uncertainties and assisting customers by appointment only in branches or directing them to drive-thrus or ATMs. It cancelled all business travel, and it holds all Company meetings through virtual platforms.

contractual restrictions while the merger is pending.

 

In March 2020 (revised in April 2020), the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of

Uncertainty about the effects of COVID-19. The guidance explainsthe merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company's ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that in consultationdeal with the Financial Accounting Standards Board ("FASB") staff,Company to seek to change existing business relationships with the federal banking agencies have concluded that short-term modifications (e.g. six months) made onCompany. Retention of certain employees by the Company may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the Company or the combined company following the merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a good faith basisdesire not to borrowers who were current asremain with the Company or the combined company following the merger, the Company's business, or the business of the implementation datecombined company following the merger, could be harmed. In addition, the Company has agreed to operate its business in the ordinary course prior to the closing of a relief program are not TDRs. The CARES Act was passedthe merger and from taking certain specified actions without the consent of Atlantic Union. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger.

Shareholder litigation could prevent or delay the completion of the merger or otherwise negatively impact the Company's business, financial condition and results of operations.

Shareholders of the Company and/or Atlantic Union may file lawsuits against the Company, Atlantic Union and/or the directors and officers of either company in connection with the merger. One of the conditions to the closing is that no law, order, injunction or decree issued by any court or governmental entity of competent jurisdiction that would prevent, prohibit or make illegal the completion of the merger, the bank merger or any of the other transactions contemplated by the U.S. Congress on March 27, 2020. Section 4013merger agreement be in effect. If any plaintiff were successful in obtaining an injunction prohibiting the Company or Atlantic Union from completing the merger, the bank merger or any of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 were not TDRs. The Bank implemented a Disaster Assistance Program ("DAP") to provide relief to its borrowers under this guidance. The Bank provided assistance to customers with loan balances of $405.1 million duringother transactions contemplated by the year ended December 31, 2020. The balance of loans remaining in this program at December 31, 2020 was $30.0 million,merger agreement, then such injunction may delay or 1.5%prevent the effectiveness of the total portfolio,merger and could result in significant costs to the Company, including any cost associated with $18.2 millionthe indemnification of the $30.0 millionCompany's directors and officers. The Company may incur costs in total deferralsconnection with the resultdefense or settlement of second and third request interest deferrals. At February 28, 2021,any shareholder lawsuits filed in connection with the balancemerger. Shareholder lawsuits may divert management attention from management of loans remaining in this program was $25.2 million,each company's business or 1.2% of the total portfolio, with $16.7 million of the $25.2 million in total deferrals the result of second request interest deferrals. The majority of remaining modifications involved three-month deferments of interest. This interagency guidance has not had a material impactoperations. Such litigation could have an adverse effect on the Company's financialsbusiness, financial condition and is not expected to have a material impact on ongoing operations; however, this impact cannot be quantified at this time.

The CARES Act included an initial first round allocationresults of $659.0 billion for loans to be issued by financial institutions throughoperations and could prevent or delay the SBA's PPP. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirementscompletion of the PPP. The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which was passed by Congress on December 21, 2020 and then signed into law on December 27, 2020 as part of the Appropriations Act, allocated an additional $284.4 billion. These loans carry a fixed rate of 1.00% and a term of two years for the majority of the initial loans and for five years on the second round, if not forgiven, in whole or in part. Payments were deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA paid the Bank a processing fee based on the size of the loan. The SBA has approved over 2,700 applications as of  February 28, 2021 totaling $340.9 million in loans. The Company had outstanding net PPP loans of $211.3 million at December 31, 2020 and $226.4 million at February 28, 2021. The Bank has received processing fees of $11.2 million on the PPP loans and incurred direct origination costs of $1.8 million. The Company had net unaccreted PPP loan origination fees of $4.4 million at December 31, 2020 and $5.0 at February 28, 2021. From a funding perspective, the Bank utilized core funding sources for these loans. At December 31, 2020 and February 28, 2021, respectively, the SBA had forgiven $56.4 million and $105.8 million of PPP loans.

merger

ITEM 1A – RISK FACTORS
 

CREDIT RISK

 

The Company's credit standards and its on-going credit assessment processes might not protect it from significant credit losses.

 

The Company takes credit risk by virtue of making loans and extending loan commitments and letters of credit. The Company manages credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going process of assessment of the quality of the credit already extended. The Company's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Company's credit administration function employs risk management techniques to help ensure that problem loans are promptly identified. While these procedures are designed to provide the Company with the information needed to implement policy adjustments where necessary and to take appropriate corrective actions, and have proven to be reasonably effective to date, there can be no assurance that such measures will be effective in avoiding future undue credit risk.

 

The Company's focus on lending to small to mid-sized community-based businesses may increase its credit risk.

 

Most of the Company's commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. Additionally, these loans may increase concentration risk as to industry or collateral securing the loans. If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company's results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by the Company in recent years, and the borrowers may not have experienced a complete business or economic cycle. The deterioration of the borrowers' businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on the Company's financial condition and results of operations.

The Company depends on the accuracy and completeness of information about clients and counterparties, and its financial condition could be adversely affected if it relies on misleading information.

 

In deciding whether to extend credit or to enter into other transactions with clients and counterparties, the Company may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information, which the Company does not independently verify. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, the Company may assume that a customer's audited financial statements conform with GAAPaccounting principles generally accepted in the United States of America ("GAAP") and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. The Company's financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading.

 

The allowance for loancredit losses ("ACL") may not be adequate to cover actual losses.

 

In accordance with GAAP, an allowance for loancredit losses is maintained by the Company to provide for loan losses.credit losses on loans. The allowance for loancredit losses may not be adequate to cover actual credit losses, and future provisions for credit losses could materially and adversely affect operating results. The allowance for loancredit losses is based on prior experience, reasonable and supportable forecasts of economic conditions, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating, and other outside forces and conditions, including changes in interest rates, all of which are beyond the Company's control; and these losses may exceed current estimates. Federal bank regulatory agencies, as a part of their examination process, review the Company's loans and allowance for loancredit losses. While management believes that the allowance for loancredit losses is adequate to cover current losses, it cannot make assurances that it will not further increase the allowance for loancredit losses or that regulators will not require it to increase this allowance. Either of these occurrences could adversely affect earnings.

 

In addition, the adoption of Accounting Standards Update ("ASU") 2016-13, as amended, could result in an increasea change in the amount of the allowance for loancredit losses as a result of changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Asportfolio and a smaller reporting company atlook forward of economic forecasts. The measure of the one-time evaluation date,Company's ACL is dependent on the Company has elected to defer adoption and interpretation of the new standard. The new standard may create more volatility. ASU 2016-13 untilwas adopted on January 1, 2023. Refer to Note 1 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.

 

Nonperforming assets take significant time to resolve and adversely affect the Company's results of operations and financial condition.

 

The Company's nonperforming assets adversely affect its net income in various ways. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases credit administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related asset to the then fair market value of the collateral less estimated selling costs, which may, and often does, result in a loss. An increase in the level of nonperforming assets also increases the Company's risk profile and may impact the capital levels regulators believe are appropriate in light of such risks. The Company utilizes various techniques such as workouts, restructurings, and loan sales to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers' performance or financial condition, could adversely affect the Company's business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including generation of new loans. There can be no assurance that the Company will avoid increases in nonperforming loans in the future.

A downturn in the local real estate market could materially and negatively affect the Company's business.

 

The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity lines of credit, consumer and other loans. Many of these loans are secured by real estate (both residential and commercial) located in the Company's market area. A downturn in the real estate market in the areas in which the Company conducts its operations could negatively affect the Company's business because significant portions of its loans are secured by real estate. At December 31, 2020,2023, the Company had approximately $2.0$2.3 billion in loans, of which approximately $1.5$2.2 billion (75.2%(95.8%) were secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral could then be diminished and the Company would be more likely to suffer losses.

Substantially all Some degree of instability in the commercial real estate markets is expected in the coming quarters as loans are refinanced in markets with higher vacancy rates under current economic conditions. The outlook for commercial real estate remains dependent on the broader economic environment and, specifically, how major subsectors respond to a higher interest rate environment and higher prices for commodities, goods and services. A downturn in the real estate market in the areas in which the Company conducts its operations could negatively affect the Company's real property collateral is located in its market area. If there is a decline in real estate values, especially in the Company's market area, the collateral for loans would deteriorate and provide significantly less security.business.

 

The Company relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if the Company is forced to foreclose upon such loans.

 

A significant portion of the Company's loan portfolio consists of loans secured by real estate. The Company relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of the Company's loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan and will suffer a loss.

 

MARKET RISK
 
The Company's business is subject to interest rate risk, and variations in interest rates and inadequate management of interest rate risk may negatively affect financial performance.

 

Changes in the interest rate environment may reduce the Company's profits. It is expected that the Company will continue to realize income from the spread between the interest earned on loans, securities, and other interest earning assets, and interest paid on deposits, borrowings and other interest bearinginterest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest earning assets and interest bearinginterest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and the current interest rate environment encourages extremethere is extensive competition for new loan originations from qualified borrowers. Management cannot ensure that it can minimize the Company's

Our interest-earning assets and interest-bearing liabilities may react in different degrees to changes in market interest rate risk.

If therates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, paidwhile rates on depositsother types may lag behind. The result of these changes to rates may cause differing spreads on interest-earning assets and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company's net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.interest-bearing liabilities. Any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on the Company's financial condition and results of operations.
 

The Bank may be required to transition from the use of the London Interbank Offered Rate ("LIBOR") index in the future.

In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one week and two month LIBOR offered rates will cease after December 31, 2021; but, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, federal bank regulators have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.

Regulators, industry groups, and others have, among other things, published recommended replacement language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate), and proposed implementations of the recommended alternatives in floating rate instruments. There is not yet any consensus on what recommendations and proposals will be broadly accepted.

The Company has a significant number of loans, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change the Company's market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with customers could adversely impact the Company's reputation. Although the Company is currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on the Company'sour business, financial condition, and results of operations. While we take measures, such as hedging our mortgage loans held for sale, intended to manage risks from changes in market interest rates, we cannot control or accurately predict changes in the rates of interest or be sure our protective measures are adequate.

 

 

LIQUIDITY RISKPART II

ITEM 5

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24

ITEM 6

[Reserved]

24

ITEM 7

Management's Discussion and Analysis of Financial Condition and Results of Operations

25

ITEM 7A

Quantitative and Qualitative Disclosures About Market Risk

41

ITEM 8

Financial Statements and Supplementary Data

42

Reports of Independent Registered Public Accounting Firm

42

Consolidated Balance Sheets as of December 31, 2023 and 2022

45

Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021

46

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2023, 2022, and 2021

47

Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2023, 2022, and 2021

48

Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021

49

Notes to Consolidated Financial Statements

50

ITEM 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

81

ITEM 9A

Controls and Procedures

81

ITEM 9B

Other Information

81

ITEM 9CDisclosure Regarding Foreign Jurisdictions that Prevent Inspections81

PART III

ITEM 10

Directors, Executive Officers and Corporate Governance

82

ITEM 11

Executive Compensation

82

ITEM 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

82

ITEM 13

Certain Relationships and Related Transactions, and Director Independence

82

ITEM 14

Principal Accountant Fees and Services

82

PART IV

ITEM 15

Exhibits and Financial Statement Schedules

83

ITEM 16

Form 10-K Summary

84

3

PART I

Forward-Looking Statements

Certain statements in this Form 10-K of American National Bankshares, Inc. (the "Company") may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements regarding anticipated changes in the interest rate environment, future economic conditions and the impacts of current economic uncertainties, and projections, predictions, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact. Such forward-looking statements are based on certain assumptions as of the time they are made, and are inherently subject to known and unknown risks and uncertainties, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Such statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," "intend," "will," "may," "view," "seek to," "opportunity," "potential," "continue," "confidence" or words of similar meaning, or other statements concerning opinions or judgment of our management about future events. Although we believe that our expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of our existing knowledge of our business and operations, there can be no assurance that actual future results, performance, or achievements of, or trends affecting, us will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of or changes in:

 

The

the businesses of the Company and Atlantic Union Bankshares Corporation ("Atlantic Union") may neednot be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to raise additional capital in accomplish than expected;

the futureexpected growth opportunities or cost savings from the merger with Atlantic Union may not be fully realized or may take longer to continuerealize than expected;

deposit attrition, operating costs, customer losses and business disruption prior to grow, butand following the merger with Atlantic Union, including adverse effects on relationships with employees and customers, may be unable to obtain additional capital on favorable terms or at all.greater than expected;

Federalthe level of inflation;

financial market volatility including the level of interest rates, could affect the values of financial instruments and state banking regulators and safe and sound banking practices require the Companyamount of net interest income earned;

the ability to maintain adequate levels of capital to support its operations. Theliquidity by retaining deposit customers and secondary funding sources, especially if the Company's or banking industry's reputation becomes damaged;

general economic or business strategy calls for it to continue to grow in its existing banking markets (internally and through additional offices) and to expand into new markets as appropriate opportunities arise. Continued growthconditions, either nationally or in the Company's earning assets,market areas in which may result from internal expansion and new branch offices, at rates in excess of the rate at which its capital is increased through retained earnings, will reduce the Company's capital ratios. If the Company's capital ratios fell below "well capitalized" levels, the FDIC deposit insurance assessment rate would increase until capital was restored and maintained at a "well capitalized" level. A higher assessment rate would cause an increase in the assessments the Company paysdoes business, may be less favorable than expected, resulting in deteriorating credit quality, reduced demand for federal deposit insurance, which would have an adverse effect on the Company's operating results.

Management of the Company believes that its current and projected capital position is sufficient to maintain capital ratios significantly in excess of regulatory requirements for the next several years and allow the Company flexibility in the timing of any possible future efforts to raise additional capital. However, if, in the future, the Company needs to increase its capital to fund additional growthcredit, or satisfy regulatory requirements, itsa weakened ability to raisegenerate deposits;

competition among financial institutions may increase, and competitors may have greater financial resources and develop products and technology that additional capital will depend on conditions at that time inenable those competitors to compete more successfully than the capital markets, economic conditions, the Company's financial performance and condition, and other factors, many of which are outside its control. There is no assuranceCompany;

businesses that the Company will be able to raise additional capital on terms favorable to it or at all. Any future inability to raise additional capital on terms acceptable to the Company may have a material adverse effect on its ability to expand operations, and on its financial condition, results of operations and future prospects.

TECHNOLOGY RISK

The Company's operationsis engaged in may be adversely affected by cybersecurity risks.

The Company relies heavily on communications and information systems to conduct business. Any failure, interruption,legislative or breach in security of these systems could result in failures or disruptions in the Company's internet banking, deposit, loan, and other systems. While the Company has policies and procedures designed to prevent or limit the effect of such failure, interruption, or security breach of the Company's information systems, there can be no assurance that they will not occur or, if they do occur, that they will be adequately addressed. Further, to access the Company's products and services, its customers may use computers and mobile devices that are beyond the Company's security control systems. The occurrence of any failure, interruption or security breach of the Company's communications and information systems could damage the Company's reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability. Additionally, the Company outsources its data processing to a third party. If the Company's third party provider encounters difficulties or if the Company has difficulty in communicating with such third party, it will significantly affect the Company's ability to adequately process and account for customer transactions, which would significantly affect its business operations.

In the ordinary course of business, the Company collects and stores sensitive data,changes, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and the Company's business strategy. The Company has invested in accepted technologies, and annually reviews processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company's computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems, and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company's reputation, which could adversely affect the Company's business. Furthermore, as cyberattacks continue to evolve and increase, the Company may be required to expend significant additional resources to modify or enhance its protective measures, or to investigate and remediate any identified information security vulnerabilities.

Multiple major U.S. retailers, financial institutions, government agencies and departments have experienced data systems incursions reportedly resulting in the thefts of credit and debit card information, online account information, and other financial data of tens of millions of individuals and customers. Retailer incursions affect cards issued and deposit accounts maintained by many financial institutions, including the Bank. Although neither the Company's nor the Bank's systems are breached in government or retailer incursions, these events can cause the Bank to reissue a significant number of cards and take other costly steps to avoid significant theft loss to the Bank and its customers. In some cases, the Bank may be required to reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within the Company's nor the Bank's control include internet service providers, electronic mail portal providers, social media portals, distant-server (so called "cloud") service providers, electronic data security providers, personal computers and mobile phones, telecommunications companies, and mobile phone manufacturers.

Consumers may increasingly decide not to use the Bank to complete their financial transactions because of technological and other changes which would have a material adverse impact on the Company's financial condition and operations.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. In particular, the activity of fintech companies has grown significantly over recent years and is expected to continue to grow. Fintech companies have and may continue to offer bank or bank-like products and some fintech companies have applied for bank charters. In addition, other fintech companies have partnered with existing banks to allow them to offer deposit products to their customers. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as "disintermediation," could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on the Company's financial condition and results of operations.

OPERATIONAL RISK

The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Company's operations and prospects.

The Company is a relationship-driven organization. A key aspect of the Company's business strategy is for its senior officers to have primary contact with current and potential customers. The Company's growth and development are in large part a result of these personalized relationships with the customer base. The success of the Company also often depends on its ability to hire and retain qualified banking officers.

The Company's senior officers have considerable experience in the banking industry and related financial services and are extremely valuable and would be difficult to replace. The loss of the services of these officers could have a material adverse effect upon future prospects. Although the Company has entered into employment contracts with certain of its senior executive officers, and purchased key man life insurance policies to mitigate the risk of an unforeseen departure or death of certain of the senior executive officers, it cannot offer any assurance that they and other key employees will remain employed by the Company. The unexpected loss of services of one or more of these key employees could have a material adverse effect on operations and possibly result in reduced revenues.

Failure to maintain effective systems of internal and disclosure control could have a material adverse effect on the Company's results of operation and financial condition.

Effective internal and disclosure controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company's ongoing monitoring of internal control, it may discover material weaknesses or significant deficiencies in its internal control that require remediation. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.

The Company has in the past discovered, and may in the future discover, areas of its internal controls that need improvement. Even so, the Company is continuing to work to improve its internal controls. The Company cannot be certain that these measures will ensure that it implements and maintains adequate controls over its financial processes and reporting in the future. Any failure to maintain effective controls or to timely effect any necessary improvement of the Company's internal and disclosure controls could, among other things, result in losses from fraud or error, harm the Company's reputation or cause investors to lose confidence in the Company's reported financial information, all of which could have a material adverse effect on the Company's results of operation and financial condition.

The carrying value of goodwill may be adversely impacted.

When the Company completes an acquisition, generally goodwill is recorded on the date of acquisition as an asset. Current accounting guidance requires for goodwill to be tested for impairment, which the Company performs an impairment analysis at least annually, rather than amortizing it over a period of time. A significant adverse change in expected future cash flows or sustained adverse change in the Company's common stock could require the asset to become impaired. If impaired, the Company would incur a non-cash charge to earnings that would have a significant impact on the results of operations. The carrying value of goodwill was approximately $85.0 million at December 31, 2020.

The Company relies on other companies to provide key components of the Company's business infrastructure.

Third parties provide key components of the Company's business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. While the Company has selected these third party vendors carefully, it does not control their actions. Any problem caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cybersecurity breaches, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect the Company's ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficulties of a third party vendor could also hurt the Company's operations if those difficulties interface with the vendor's ability to serve the Company. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to the Company's business operations.

LEGAL, REGULATORY AND COMPLIANCE RISK

The Company is subject to extensive regulation which could adversely affect its business.

The Company's operations as a publicly traded corporation, a bank holding company, and a parent company to an insured depository institution are subject to extensive regulation by federal, state, and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of the Company's operations. Because the Company's business is highly regulated, the laws, rules, and regulations applicable to it are subject to frequent and sometimes extensive change. Such changes could include higher capital requirements, increased insurance premiums, increased compliance costs, reductions of non-interest income and limitations on services that can be provided. Actions by regulatory agencies or significant litigation against the Company could cause it to devote significant time and resources to defend itself and may lead to liability or penalties that materially affect the Company and its shareholders. Any future changes in the laws, rules or regulations applicable to the Company may negatively affect the Company's business and results of operations.

Regulatory capital standards may have an adverse effect on the Company's profitability, lending, and ability to pay dividends on the Company's securities.

The Company is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that the Company and the Bank must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. If the Company fails to meet these minimum capital guidelines and/or other regulatory requirements, its financial condition would be materially and adversely affected. The Basel III Capital Rules require bank holding companies and their subsidiaries to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. While the Company is exempt from these capital requirements under the Federal Reserve's SBHC Policy Statement, the Bank is not exempt and must comply. The Bank must also comply with the capital requirements set forth in the "prompt corrective action" regulations pursuant to Section 38 of the FDIA. Satisfying capital requirements may require the Company to limit its banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect its business, financial condition and results of operations.

Regulations issued by the CFPB could adversely impact earnings due to, among other things, increased compliance costs or costs due to noncompliance.

The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. For example, the CFPB has issued a final rule requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate "qualified mortgages" that meet specific requirements with respect to terms, pricing and fees. The rule also contains additional disclosure requirements at mortgage loan origination and in monthly statements. The requirements under the CFPB's regulations and policies could limit the Company's ability to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact the Company's profitability.

Changes in accounting standards could impact reported earnings.

From time to time, with increasing frequency, there are changes in the financial accounting and reporting standards that govern the preparation of the Company's financial statements. These changes can materially impact how the Company records and reports its financial condition and results of operations. In some instances, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Refer to Note 1 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.tax laws;

Current and proposed regulation addressing consumer privacy and data use and security could increase the Company's costs and impact its reputation.

The Company is subject to a number of laws concerning consumer privacy and data use and security, including information safeguard rules under the Gramm-Leach-Bliley Act. These rules require that financial institutions develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution's size and complexity, the nature and scope of the financial institution's activities, and the sensitivity of any customer information at issue. The United States has experienced a heightened legislative and regulatory focus on privacy and data security, including requiring consumer notification in the event of a data breach. In addition, most states have enacted security breach legislation requiring varying levels of consumer notification in the event of certain types of security breaches. New regulations in these areas may increase the Company's compliance costs, which could negatively impact earnings. In addition, failure to comply with the privacy and data use and security laws and regulations to which the Company is subject, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions, penalties or other adverse consequences and loss of consumer confidence, which could materially adversely affect the Company's results of operations, overall business, and reputation.

The Company is subject to claims and litigation pertaining to fiduciary responsibility.

From time to time, customers make claims and take legal action pertaining to the performance of the Company's fiduciary responsibilities. Whether customer claims and legal action related to the performance of the Company's fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services, as well as impact 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 the Company's financial condition and results of operations.

STRATEGIC RISK

The Company faces strong competition from financial services companies and other companies that offer banking and other financial services, which could negatively affect the Company's business.

The Company encounters substantial competition from other financial institutions in its market area. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that the Company offers. These competitors include national, regional, and community banks. The Company also faces competition from many other types of financial institutions, including finance companies, mutual and money market fund providers, financial technology ("fintech") companies, brokerage firms, insurance companies, credit unions, financial subsidiaries of certain industrial corporations, and mortgage companies. In particular, competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns. Increased competition may result in reduced business for the Company.

Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. These institutions also may have differing pricing and underwriting standards, which may adversely affect the Company through the loss of business or causing a misalignment in the Company's risk-return relationship. Areas of competition include interest rates for loans and deposits, efforts to obtain loans and deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic financial services markets as technological advances enable more companies to provide financial services. If the Company is unable to attract and retain banking customers, it may be unable to continue to grow loan and deposit portfolios and its results of operations and financial condition may be adversely affected.

The inability of the Company to successfully manage its growth or implement its growth strategy may adversely affect the Company's results of operations and financial condition.

The Company may not be able to successfully implement its growth strategy if it is unable to identify attractive markets, locations or opportunities to expand in the future. In addition, the ability to manage growth successfully depends on whetherrecruit and retain key personnel;

cybersecurity threats or attacks, the Company can maintain adequate capital levels, cost controls and asset quality, and successfully integrate any businesses acquired into the Company.

As the Company continues to implement its growth strategy by opening new branches or acquiring branches or banks, it expects to incur increased personnel, occupancy and other operating expenses. In the caseimplementation of new branches, the Company must absorb those higher expenses while it begins to generate new deposits; there is also further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. The Company's plans to expand could depress earnings in the short run, even if it efficiently executes a growth strategy leading to long-term financial benefits.

Difficulties in combining the operations of acquired entities with the Company's own operations may prevent the Company from achieving the expected benefits from acquisitions.

The Company may not be able to achieve fully the strategic objectives and operating efficiencies expected in an acquisition. Inherent uncertainties exist in integrating the operations of an acquired entity. In addition, the markets and industries in which the Company and its potential acquisition targets operate are highly competitive. The Company may lose customers or the customers of acquired entities as a result of an acquisition; the Company may lose key personnel, either from the acquired entity or from itself; and the Company may not be able to control the incremental increase in noninterest expense arising from an acquisition in a manner that improves its overall operating efficiencies. These factors could contribute to the Company not achieving the expected benefits from its acquisitions within desired time frames, if at all. Future business acquisitions could be material to the Company and it may issue additional shares of common stock to pay for those acquisitions, which would dilute current shareholders' ownership interests. Acquisitions also could require the Company to use substantial cash or other liquid assets or to incur debt; the Company could therefore become more susceptible to economic downturns and competitive pressures.

GENERAL RISK

The COVID-19 pandemic could adversely affect the Company and the adverse impacts on its business, financial position, and operations could be significant.  The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.

The COVID-19 pandemic has created global economic disruptions and disruptions to the lives of people around the world.  Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief.  While the scope, duration, and full effects are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.  If these effects continue for a prolonged time period or result in sustained economic stress or recession, such effects could have a material adverse impact on it in terms of credit quality, collateral values, ability of customers to repay loans, product demand, funding, operations, interest rate risk and human capital.

Measures enacted to contain the virus, including business shutdowns and shelter-in-place orders along with actions taken by individuals to ensure their safety, have resulted in significant changes to the corporate risk profile.  These actions have led to loss of revenues for the Company's business customers, extreme increases in national and state unemployment, disrupted global supply chains, market downturns and volatility, disruptions in consumer behavior and emergency response legislation, and an expectation that FRB policy will maintain a low interest rate environment for the foreseeable future.  These changes have a significant adverse effect on the markets in which the Company operates and the demand for its products and services.

The Company has taken comprehensive steps to protect the health of its employees and customers by implementing business continuity plan protocols.  For its customers, it has closed branch lobbies but remains open to meet with customers by appointment only and maintained banking hours at branches throughout its footprint.  It has continued to provide financial support to the communities it serves.  For its employees, the Company has cancelled all business travel, enabled approximately 65% of the workforce to work remotely and implemented safety protocols at each location for employees whose role requires they come into the office. These steps have not materially impacted the ability to serve its customers, conduct business or support its employees.  There is no guarantee these actions will be sufficient to successfully mitigate the risks presented by the COVID-19 pandemic and additional actions may be required.  Future actions deemed necessary by local, state or national leaders could hinder its ability to operate going forward.  Its business operations may be disrupted if key personnel or significant portions of the Company's employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.  The Company's ability to serve its customers could be impacted if actions taken by vendors or business partners are unable to continue providing services the Company depends on.

COVID-19 continues to be a threat to the world.  The extent, severity and duration of the current and future actions are unprecedented and, until normal economic conditions resume, the Company is unable to accurately predict or measure the effects.  For this reason, the extent to which the COVID-19 pandemic affects its business, operations and financial conditions, as well as its regulatory capital and liquidity ratios is highly uncertain and unpredictable and depends on, among other things, new information that may emerge from the actions discussed above to combat the threats posed by the virus. If the pandemic is prolonged, the adverse impact on the markets served and on its business, operations and financial condition could deepen.

Changes in economic conditions could materially and negatively affect the Company's business.

The Company's business is directly impacted by economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond the Company's control. A deterioration in economic conditions, whether caused by global, national or local events, especially within the Company's market area, could result in potentially negative material consequences such as the following, among others: loan delinquencies increasing; problem assets and foreclosures increasing; demand for products and services decreasing; low cost or noninterest bearing deposits decreasing; and collateral for loans, especially real estate, declining in value, in turn reducing customers' borrowing power, and reducing the value of assets and collateral associated with existing loans. Each of these consequences may have a material adverse effect on the Company's financial condition and results of operations.

Trust division income is a major source of non-interest income for the Company. Trust and brokerage fee revenue is largely dependent on the fair market value of assets under management and on trading volumes in the brokerage business. General economic conditions and their subsequent effect on the securities markets tend to act in correlation. When general economic conditions deteriorate, securities markets generally decline in value, and the Company's trust and brokerage fee revenue is negatively impacted as asset values and trading volumes decrease.

The Company's exposure to operational, technological and organizational risk may adversely affect the Company.

The Company is exposed to many types of operational risks, including reputation, legal, and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, clerical or record-keeping errors, and errors resulting from faulty or disabled computer or telecommunications systems.

Negative public opinion can result from the actual or alleged conduct in any number of activities, including lending practices, corporate governance, and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect the Company's ability to attract and retain customers and can expose it to litigation and regulatory action.

Certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company's necessary dependence upon automated systems to record and process its transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is the Company) and to the risk that the Company's (or its vendors') business continuity and data security systems prove to be inadequate.

The Company's risk-management framework may not be effective in mitigating risk and loss.

The Company maintains an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These risks include, but are not limited to: strategic, interest-rate, credit, liquidity, operations, pricing, reputation, compliance, litigation and cybersecurity. While the Company assesses and improves this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Company's risk-management program, or if its controls break down, the Company's results of operations and financial condition may be adversely affected.

Negative perception of the Company through media may adversely affect the Company's reputation and business.

The Company's reputation is critical to the success of its business. The Company believes that its brand image has been well received by customers, reflecting the fact that the brand image, like the Company’s business, is based in part on trust and confidence. The Company’s reputation and brand image could be negatively affected by rapid and widespread distribution of publicity through social and traditional media channels. The Company’s reputation could also be affected by the Company’s association with clients affected negatively through social and traditional media distribution, or other third parties, or by circumstances outside of the Company’s control. Negative publicity, whether deserved or undeserved, could affect the Company’s ability to attract or retain customers, or cause the Company to incur additional liabilities or costs, or result in additional regulatory scrutiny.

Severe weather, natural disasters, acts of war or terrorism, public health issues, and other external events could significantly impact the Company's business.

Severe weather, natural disasters, acts of war or terrorism, public health issues, and other adverse external events could have a significant impact on the Company's ability to conduct business. In addition, such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on its financial condition and results of operations.

RISKS RELATING TO OUR SECURITIES

While the Company's common stock is currently traded on the Nasdaq Global Select Market, it has less liquidity than stocks for larger companies quoted on a national securities exchange.

The trading volume in the Company's common stock on the Nasdaq Global Select Market has been relatively low when compared with larger companies listed on the Nasdaq Global Select Market or other stock exchanges. There is no assurance that a more active and liquid trading market for the common stock will exist in the future. Consequently, shareholders may not be able to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares. In addition, the Company cannot predict the effect, if any, that future sales of the Company's common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of the common stock.

Economic and other conditions may cause volatility in the price of the Company's common stock.

In the current economic environment, the prices of publicly traded stocks in the financial services sector have been volatile. However, even in a more stable economic environment the price of the Company's common stock can be affected by a variety of factors such as expected or actual results of operations, changes in analysts' recommendations or projections, announcements of developments related to its businesses, operating and stock performance of other companies deemed to be peers, news or expectations based on the performance of others in the financial services industry, and expected impacts of a changing regulatory environment. These factors not only impact the price of the Company's common stock but could also affect the liquidity of the stock given the Company's size, geographical footprint, and industry. The price for shares of the Company's common stock may fluctuate significantly in the future, and these fluctuations may be unrelated to the Company's performance. General market price declines or market volatility in the future could adversely affect the price for shares of the Company's common stock, and the current market price of such shares may not be indicative of future market prices.

Future issuances of the Company's common stock could adversely affect the market price of the common stock and could be dilutive.

The Company is not restricted from issuing additional shares of common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, shares of common stock. Issuances of a substantial number of shares of common stock, or the expectation that such issuances might occur, including in connection with acquisitions by the Company, could materially adversely affect the market price of the shares of the common stock and could be dilutive to shareholders. Because the Company's decision to issue common stock in the future will depend on market conditions and other factors, it cannot predict or estimate the amount, timing or nature of possible future issuances of its common stock. Accordingly, the Company's shareholders bear the risk that future issuances will reduce the market price of the common stock and dilute their stock holdings in the Company.

The primary source of the Company's income from which it pays cash dividends is the receipt of dividends from its subsidiary bank.

The availability of dividends from the Company is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event the Bank was unable to pay dividends to the Company, or be limited in the payment of such dividends, the Company would likely have to reduce or stop paying common stock dividends. The Company's reduction, limitation. or failure to pay such dividends on its common stock could have a material adverse effect on the market price of the common stock.

The Company's governing documents and Virginia law contain anti-takeover provisions that could negatively impact its shareholders.

The Company's Articles of Incorporation and Bylaws and the Virginia Stock Corporation Act contain certain provisions designed to enhance the ability of the Company's Board of Directors to deal with attempts to acquire control of the Company. These provisionstechnologies, and the ability to set develop and maintain reliable and secure electronic systems;

the voting rights, preferenceseffects of climate change, natural disasters, and extreme weather events;

geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts of threats or terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad;

the impact of health emergencies, epidemics or pandemics;

risks related to environmental, social and governance practices; and

risks associated with mergers, acquisitions, and other terms of any series of preferred stock that may be issued, may be deemed to have an anti-takeover effect and may discourage takeovers (which certain shareholders may deem to be in their best interest). To the extent that such takeover attempts are discouraged, temporary fluctuations in the market price of the Company's common stock resulting from actual or rumored takeover attempts may be inhibited. These provisions also could discourage or make more difficult a merger, tender offer, or proxy contest, even though such transactions may be favorable to the interests of shareholders, and could potentially adversely affect the market price of the Company's common stock.expansion activities.

ITEM 2 – PROPERTIES

As of December 31, 2020, the Company maintained twenty-six banking offices. The Company's Virginia banking offices are located in the cities of Danville, Lynchburg, Martinsville, Roanoke, and Salem and in the counties of Campbell, Franklin, Halifax, Henry, Montgomery, Pittsylvania and Roanoke. In North Carolina, the Company's banking offices are located in the cities of Burlington, Graham, Greensboro, Mebane, Raleigh, Winston-Salem, and Yanceyville, which are within the counties of Alamance, Caswell, Forsyth, Guilford, and Wake. The Company also operates one loan production office.

The principal executive offices of the Company are located at 628 Main Street in the business district of Danville, Virginia. This building, owned by the Company, has three floors totaling approximately 27,000 square feet.

The Company owns a building located at 103 Tower Drive in Danville, Virginia. This three-story facility serves as an operations center.

The Company has an office at 445 Mount Cross Road in Danville, Virginia, where it consolidated two banking offices in January 2009 and gained additional administrative space.

The Company leases certain space located at 202 S. Jefferson Street, Roanoke, Virginia as a result of the merger with HomeTown. This office serves as the Virginia banking headquarters and the center for its corporate credit function.

The Company leases an office at 703 Green Valley Road in Greensboro, North Carolina. This building serves as the head office for the Company's North Carolina banking headquarters.

The Company owns twenty other offices for a total of twenty-three owned buildings. There are no mortgages or liens against any of the properties owned by the Company. The Company operates thirty-seven ATMs on owned or leased facilities.  The Company leases five other offices for a total of seven leased office locations and leases one storage warehouse.

ITEM 3 – LEGAL PROCEEDINGS

In the ordinary course of operations, the Company and the Bank are parties to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

More information on risk factors that could affect our forward-looking statements is included under the section entitled "Risk Factors" set forth herein. All risk factors and uncertainties described herein should be considered in evaluating forward-looking statements, all forward- looking statements made in this Form 10-K are expressly qualified by the cautionary statements contained in this Form 10-K, and undue reliance should not be placed on such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on our businesses or operations. Forward-looking statements speak only as of the date they are made. We do not intend or assume any obligation to update, revise or clarify any forward- looking statements that may be made from time to time by or on behalf of the Company, whether as a result of new information, future events or otherwise.

 

ITEM 1 – BUSINESS

Overview

American National Bankshares Inc. is a one-bank holding company organized under the laws of the Commonwealth of Virginia in 1984. On September 1, 1984, the Company acquired all of the outstanding capital stock of American National Bank and Trust Company (the "Bank"), a national banking association chartered in 1909 under the laws of the United States. American National Bank and Trust Company is the only banking subsidiary of the Company.

4 – MINE SAFETY DISCLOSURES

None.

 

As of December 31, 2023, the operations of the Company were conducted at 26 banking offices in south central Virginia and north central North Carolina. Through these offices, the Company serves its primary market area of south central Virginia, the New River Valley and Roanoke, Virginia, and north central North Carolina. The Bank provides a full array of financial products and services, including commercial, mortgage, and consumer banking; trust and investment services; and insurance. Services are also provided through 34 Automated Teller Machines ("ATMs"), "Online Banking," and "Telephone Banking."

The Company has two reportable segments, (i) community banking and (ii) wealth management. For more financial data and other information about each of the Company's operating segments, refer to "Note 21 - Segment and Related Information" of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

Agreement and Plan of Merger

On July 24, 2023, the Company entered into an Agreement and Plan of Merger with Atlantic Union Bankshares Corporation. The merger agreement provides that the Company will merge with and into Atlantic Union, with Atlantic Union continuing as the surviving entity. Immediately following the merger of the Company and Atlantic Union, the Bank will merge with and into Atlantic Union's wholly owned bank subsidiary, Atlantic Union Bank, with Atlantic Union Bank continuing as the surviving bank. The merger agreement was approved by the Board of Directors of each of the Company and Atlantic Union. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of common stock of the Company will be converted into the right to receive 1.35 shares of common stock of Atlantic Union, with cash to be paid in lieu of any fractional shares. The merger is expected to close on April 1, 2024, subject to satisfaction of customary closing conditions.

Human Capital Resources

Profile

At December 31, 2023, the Company employed 334 full-time persons and 40 part-time persons. None of our employees are represented by a union or covered under a collective bargaining agreement. In the opinion of the management of the Company, relations with employees of the Company and the Bank are good.

As a holding company for a community bank, the Company is a relationship-driven organization. A key aspect of the Company's business strategy is for its senior officers to have primary contact with current and potential customers. The Company's growth and development are in large part a result of these personalized relationships with the customer base. The success of the Company also often depends on its ability to hire and retain qualified banking officers. The Company's senior officers have considerable experience in the banking industry and related financial services and are extremely valuable.

Corporate Culture 

The Company believes that as a regional community bank it is only as strong as the communities it serves, and has established core values to guide the organization. We are relationship focused establishing trust by respecting others and doing the right thing. We work together as a team and value diverse perspectives that help move us forward together. We fulfill commitments through responsive communication and service to and with our employees, shareholders and customers. We strive to embrace change as it comes and to continually work to be better. We work to be genuine in both words and actions. The Company has worked to utilize technology to allow for more digital transactions for our customers and more options for remote work and virtual meetings. We work with local organizations to provide financial education to the communities we serve and support various not-for-profit organizations. During the pandemic, we were ardent participants in the Paycheck Protection Program ("PPP"), assisting small businesses, their employees and their communities. 

Compensation and Benefits

The Company's senior officer compensation programs are designed to attract, retain and motivate bankers with the ability to generate strong business results and ensure the long-term success of the Company. The compensation committee of the Company's board of directors has established compensation programs that reflect and support the Company's strategic and financial performance goals, the primary goal being the creation of long-term value for the shareholders of the Company, while protecting the interests of the depositors of the Bank. In addition to competitive base and incentive compensation, the Company offers competitive benefits including paid vacation and sick leave, a 401(k) plan, health, dental, and vision plans, life and disability coverage, and a wellness plan. The Company has also entered into employment contracts with certain of its senior officers, and purchased key man life insurance policies to mitigate the risk of an unforeseen departure or death of certain of the senior officers.

 100% of our employees were eligible for an incentive opportunity in 2023. Incentive plans include a mix of individual and corporate goals that are measurable and defined.

Diversity, Equity and Inclusion

We are committed to hiring diverse talent and fostering, cultivating and preserving a culture of a diversity, equity and inclusion. We believe that the collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities, and talent that our teammates invest in their work represents a significant part of not only our culture, but our reputation and achievement. We strive to foster a culture and workplace that, among other things, is inclusive and welcoming, treats everyone with respect and dignity, promotes people on their merits, and promotes diversity of thoughts, ideas, perspective and values. Our Board believes that diversity contributes to the overall effectiveness of the Board and generally conceptualizes diversity expansively to include, without limitation, concepts such as race, gender, ethnicity, sexual orientation, education, age, work experience, professional skills, geographic location and other qualities or attributes that support diversity. We have a Diversity, Equity and Inclusion Committee which includes a cross-functional group of teammates from diverse backgrounds, that manages our efforts to create a more diverse, equitable, and inclusive workplace.

Competition and Markets​​​​​​

Vigorous competition exists in the Company's service areas. The Company competes not only with national, regional, and community banks, but also with other types of financial institutions including finance companies, mutual and money market fund providers, financial technology companies, brokerage firms, wealth management firms, insurance companies, credit unions, and mortgage companies.

In addition, nonbank competitors are increasingly offering products and services that traditionally were only offered by banks. Many of these nonbank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks, which may allow them to offer greater lending limits and certain products and services that we do not provide.

The Company's primary market area is south central Virginia and north central North Carolina. The Company also has a significant presence in Roanoke, Virginia that increased substantially in connection with the acquisition of HomeTown Bankshares Corporation ("HomeTown") in 2019. The Company's Virginia banking offices are located in the cities of Danville, Lynchburg, Martinsville, Roanoke, and Salem and in the counties of Campbell, Franklin, Halifax, Henry, Montgomery, Pittsylvania and Roanoke. In North Carolina, the Company's banking offices are located in the cities of Burlington, Graham, Greensboro, Mebane, Raleigh, Winston-Salem, and Yanceyville, which are within the counties of Alamance, Caswell, Forsyth, Guilford, and Wake. 

Unemployment levels in each Virginia market the Company serves have remained low for the past twelve months. Based on Virginia Employment Commission data, the state's seasonally-adjusted unemployment rate was 3.0% as of December 31, 2023 and December 31, 2022 and continued to be below the national rate of 3.7% at December 31, 2023. North Carolina's unemployment rate was 3.5% as of December 31, 2023, compared to 3.9% at December 31, 2022 and slightly below the national rate of 3.7% at December 31, 2023.

Service sectors, financials, medical, manufacturing, construction, timber management and production, and technology related businesses have remained strong. Other important business industries include farming, tobacco and hemp processing and sales, and food processing. New businesses continue to move into the Company's Virginia and North Carolina footprints, which has been positive for economic growth.

The Company's market area in North Carolina includes larger metropolitan areas characterized by strong competition in attracting deposits and making loans. Its most direct competition for deposits comes from commercial banks and credit unions located in the market area, including many regional and national banks. The company has experienced strong loan growth in these markets, but has been more challenged in growing deposit market share.

Supervision and Regulation

The Company and the Bank are extensively regulated under federal and state law. The following description briefly addresses certain provisions of federal and state laws and regulations, and their potential effects on the Company and the Bank. Proposals to change the laws, regulations, and policies governing the banking industry are frequently raised in U.S. Congress, in state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Company and the Bank are impossible to determine with any certainty. A change in applicable laws, regulations or policies, or a change in the way such laws, regulations or policies are interpreted by regulatory agencies or courts, may have a material impact on the business, operations, and earnings of the Company and the Bank.

American National Bankshares Inc.

American National Bankshares Inc. is qualified as a bank holding company ("BHC") within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Board of Governors of the Federal Reserve System (the "FRB"). As a bank holding company, the Company is subject to supervision, regulation and examination by the FRB and is required to file various reports and additional information with the FRB. The Company is also registered under the bank holding company laws of Virginia and is subject to supervision, regulation and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the "SCC").

American National Bank and Trust Company

American National Bank and Trust Company is a federally chartered national bank and is a member of the Federal Reserve System. As a national bank, the Bank is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC") and is required to file various reports and additional information with the OCC. The OCC has primary supervisory and regulatory authority over the operations of the Bank. Because the Bank accepts insured deposits from the public, it is also subject to examination by the Federal Deposit Insurance Corporation ("FDIC").

Depository institutions, including the Bank, are subject to extensive federal and state regulations that significantly affect their business and activities. Regulatory bodies have broad authority to implement standards and initiate proceedings designed to prohibit depository institutions from engaging in unsafe and unsound banking practices. The standards relate generally to operations and management, asset quality, interest rate exposure, and capital. The bank regulatory agencies are authorized to take action against institutions that fail to meet such standards.

As with other financial institutions, the earnings of the Bank are affected by general economic conditions and by the monetary policies of the FRB. The FRB exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, setting the reserve requirements of member banks, and establishing the discount rate on member bank borrowings. The policies of the FRB have a direct impact on loan and deposit growth and the interest rates charged and paid thereon. They also impact the source, cost of funds, and the rates of return on investments. Changes in the FRB's monetary policies have had a significant impact on the operating results of the Bank and other financial institutions and are expected to continue to do so in the future; however, the exact impact of such conditions and policies upon the future business and earnings cannot accurately be predicted.

Deposit Insurance

The deposits of the Bank are insured up to applicable limits by the DIF and are subject to deposit insurance assessments to maintain the DIF. The deposit insurance assessment base of the Bank is based on its average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The FDIC uses a "financial ratios method" based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets, such as the Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk ("CAMELS"). CAMELS composite ratings set a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions.

 In March 2016, the FDIC implemented by final rule certain Dodd-Frank Act provisions by raising the DIF's minimum reserve ratio from 1.15% to 1.35%. The FDIC imposed a 4.5 basis point annual surcharge on insured depository institutions with total consolidated assets of $10 billion or more. The rule granted credits to smaller banks, such as the Bank, for the portion of their regular assessments that contributed to increasing the reserve ratio from 1.15% to 1.35%. In October 2022, the FDIC adopted a final rule to increase the assessment base rate schedules uniformly by two basis points beginning with the first quarterly assessment period of 2023. In 2023 and 2022, the Company recorded expense of $1.4 million and $903 thousand, respectively, for FDIC insurance premiums.

Capital Requirements

The FRB, the OCC and the FDIC have issued substantially similar capital guidelines applicable to all banks and bank holding companies. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.

Effective January 1, 2015, the Company and the Bank became subject to rules implementing the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision (the "Basel Committee") and certain provisions of the Dodd-Frank Act (the "Basel III Capital Rules"). The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets ("CET1") of at least 4.5%, plus a 2.5% "capital conservation buffer" (effectively resulting in a minimum CET1 ratio of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer, which was phased in ratably over a four year period beginning January 1, 2016, is designed to absorb losses during periods of economic stress. Institutions with a CET1 ratio above the minimum (4.5%) but below the minimum plus the conservation buffer (7.0%) will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. 

With respect to the Bank, the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act (the "FDIA") were also revised, effective as of January 1, 2015, to incorporate a CET1 ratio and to increase certain other capital ratios. To be well capitalized under the revised regulations, a bank must have the following minimum capital ratios: (i) a CET1 ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%. See "Prompt Corrective Action" below.

The Tier 1 and total capital to risk-weighted asset ratios of the Company were 12.81% and 13.82%, respectively, as of December 31, 2023, thus exceeding the minimum requirements. The CET 1 ratio of the Company was 11.70% and the Bank was 12.61% as of December 31, 2023. The Tier 1 and total capital to risk-weighted asset ratios of the Bank were 12.61% and 13.62%, respectively, as of December 31, 2023, also exceeding the minimum requirements.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures (and higher percentages for certain other types of interests), and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.

On September 17, 2019, the federal banking agencies jointly issued a final rule required by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the "EGRRCPA") that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to be subject to a 9% leverage ratio (commonly referred to as the community bank leverage ratio or "CBLR"). Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and are deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework has a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. The Company and the Bank do not currently expect to opt into the CBLR framework.

Dividends

The Company's principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank's payment of dividends to the Company. As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years. A depository institution may not pay any dividend if payment would cause the institution to become "undercapitalized" or if it already is "undercapitalized." The OCC may prevent the payment of a dividend if it determines that the payment would be an unsafe and unsound banking practice. The OCC also has advised that a national bank should generally pay dividends only out of current operating earnings.

Permitted Activities

As a bank holding company, the permitted activities of the Company are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the FRB determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the FRB must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition, and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. Despite prior approval, the FRB may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the FRB has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity.

Banking Acquisitions; Changes in Control

The BHC Act and related regulations require, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless it already owns a majority of such voting shares), (ii) acquire all or substantially all of the assets of another bank or bank holding company, or (iii) merge or consolidate with any other bank holding company. In determining whether to approve a proposed bank acquisition, the FRB will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, any outstanding regulatory compliance issues of any institution that is a party to the transaction, the projected capital ratios and levels on a post-acquisition basis, the financial condition of each institution that is a party to the transaction and of the combined institution after the transaction, the parties' managerial resources and risk management and governance processes and systems, the parties' compliance with the Bank Secrecy Act and anti-money laundering requirements, and the acquiring institution's performance under the Community Reinvestment Act of 1977, as amended (the "CRA"), and compliance with fair housing and other consumer protection laws.

Subject to certain exceptions, the BHC Act and the Change in Bank Control Act, together with the applicable regulations, require FRB approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered its securities with the Securities and Exchange Commission (the "SEC") under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. The Company's common stock is registered under Section 12 of the Exchange Act.

In addition, Virginia law requires the prior approval of the SCC for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares of a Virginia bank or any holding company that controls a Virginia bank, or (ii) the acquisition by a Virginia bank holding company of a bank or its holding company domiciled outside Virginia.

Source of Strength

FRB policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Safety and Soundness

There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event of a depository institution insolvency, receivership or default. For example, under the Federal Deposit Insurance Corporation Improvement Act of 1991, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

Under the FDIA, the federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to capital management, internal controls and information systems, internal audit systems, data security, loan documentation, credit underwriting, interest rate exposure, risk management, vendor management, corporate governance, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines.

Prompt Corrective Action

The federal bank regulatory agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," as defined by the law. "Well capitalized" institutions may generally operate without additional supervisory restriction. With respect to "adequately capitalized" institutions, such banks cannot normally pay dividends or make any capital contributions that would leave the bank undercapitalized; they cannot pay a management fee to a controlling person if after paying the fee, it would be undercapitalized; and they cannot accept, renew, or rollover any brokered deposit unless the bank has applied for and been granted a waiver by the FDIC.

Immediately upon becoming "undercapitalized," a depository institution becomes subject to the provisions of Section 38 of the FDIA, which: (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution's assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the DIF, subject in certain cases to specified procedures. These discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of the institution or the sale of the institution to a willing purchaser; and (iv) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. Management believes, as of December 31, 2023 and 2022, the Bank met the requirements for being classified as "well capitalized."

Transactions with Affiliates

Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or "affiliates" or to make loans to insiders is limited. Loan transactions with an affiliate generally must be collateralized and certain transactions between the Bank and its affiliates, including the sale of assets, the payment of money, or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions. In addition, the Bank generally may not purchase securities issued or underwritten by affiliates.

Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank, are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives (which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank's unimpaired capital and unimpaired surplus. Section 22(g) of the Federal Reserve Act identifies limited circumstances in which the Bank is permitted to extend credit to executive officers.

Consumer Financial Protection

The Company is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. If the Company fails to comply with these laws and regulations, it may be subject to various penalties. Failure to comply with consumer protection requirements may also result in failure to obtain any required bank regulatory approval for merger or acquisition transactions the Company may wish to pursue or being prohibited from engaging in such transactions even if approval is not required.

The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the "CFPB"), and giving it responsibility for implementing, examining, and enforcing compliance with federal consumer protection laws. The CFPB focuses on (i) risks to consumers and compliance with the federal consumer financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in those markets, (iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv) non-depository companies that offer one or more consumer financial products or services.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit "unfair, deceptive or abusive" acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer's ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer's (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer's interests. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. Further regulatory positions taken by the CFPB may influence how other regulatory agencies may apply the subject consumer financial protection laws and regulations.

Community Reinvestment Act

The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. Furthermore, such assessment is also required of banks that have applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch. In the case of a BHC applying for approval to acquire a bank or BHC, the record of each subsidiary bank of the applicant BHC is subject to assessment in considering the application. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The Bank was rated "satisfactory" in its most recent CRA evaluation.
 

On October 24, 2023, the federal bank regulatory agencies issued a final rule to modernize their respective CRA regulations. The revised rules substantially alter the methodology for assessing compliance with the CRA, with material aspects taking effect January 1, 2026 and revised data reporting requirements taking effect January 1, 2027. Among other things, the revised rules evaluate lending outside traditional assessment areas generated by the growth of non-branch delivery systems, such as online and mobile banking, apply a metrics-based benchmarking approach to assessment, and clarify eligible CRA activities. The final rules are likely to make it more challenging and/or costly for the Bank to receive a rating of at least "satisfactory" on its CRA evaluation.

Anti-Money Laundering Legislation

The Company is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities ("AML laws"). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020.

The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.

Office of Foreign Assets Control

The U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") is responsible for administering and enforcing economic and trade sanctions against specified foreign parties, including countries and regimes, foreign individuals and other foreign organizations and entities. OFAC publishes lists of prohibited parties that are regularly consulted by the Company in the conduct of its business in order to assure compliance. The Company is responsible for, among other things, blocking accounts of, and transactions with, prohibited parties identified by OFAC, avoiding unlicensed trade and financial transactions with such parties and reporting blocked transactions after their occurrence. Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for the Company.

Privacy Legislation

Several recent laws, including the Right to Financial Privacy Act, and related regulations issued by the federal bank regulatory agencies, also provide new protections against the transfer and use of customer information by financial institutions. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers' personal information. Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy provisions generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated parties without prior notice and approval from the customer.

In October 2023, the CFPB proposed a new rule that would require a provider of payment accounts or products, such as the Bank, to make certain data available to consumers upon request regarding the products or services they obtain from the provider. The proposed rule is intended to give consumers control over their financial data, including with whom it is shared, and encourage competition in the provision of consumer financial products and services. For banks with over $850 million and less than $50 billion in total assets, such as the Bank, compliance would be required approximately two and one-half years after adoption of the final rule.

Incentive Compensation

The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets, that encourage inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. In 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees, or benefits that could lead to material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately balance risk and reward. The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements. The comment period for these proposed rules has closed, and a final rule has not yet been published. If the rules are adopted as proposed, they will restrict the manner in which executive compensation is structured.

The Nasdaq Stock Market, LLC, the exchange on which our common stock is listed, enacted a rule that became effective in 2023 requiring listed companies to adopt policies mandating the recovery or "clawback" of excess incentive compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. The company has adopted a clawback policy compliant with such rule, a copy of which is attached as Exhibit 97 to this From 10-K.

Mortgage Banking Regulation

In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank's mortgage origination activities are subject to the FRB's Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.

Cybersecurity

The federal bank regulatory agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution's board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal bank regulatory agencies expect financial institutions to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution's operations after a cyberattack. If we fail to meet the expectations set forth in this regulatory guidance, we could be subject to various regulatory actions and any remediation efforts may require us to devote significant resources

On November 18, 2021, the federal bank regulatory agencies issued a final rule, effective April 1, 2022, imposing new notification requirements for cybersecurity incidents. The rule requires financial institutions to notify their primary federal regulator as soon as possible and no later than 36 hours after the institution determines that a cybersecurity incident has occurred that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the institution's: (i) ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business, (ii) business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value, or (iii) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.

In July 2023, the SEC issued a final rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies that are subject to the reporting requirements of the Exchange Act. Specifically, the final rule requires current reporting about material cybersecurity incidents, periodic disclosures about a registrant's policies and procedures to identify and manage cybersecurity risk, management's role in implementing cybersecurity policies and procedures, and the board of directors' cybersecurity expertise, if any, and its oversight of cybersecurity risk. See Item 1C. Cybersecurity of this Form 10-K for a discussion of the Company's cybersecurity risk management, strategy and governance.

To date, the Company has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but its systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers.

Future Legislation and Regulation

Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could affect the regulatory structure under which the Company and the Bank operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material adverse effect on the business, financial condition and results of operations of the Company and the Bank.

Effect of Governmental Monetary Policies

The Company's operations are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates to influence general economic conditions. These policies have a significant impact on overall growth and distribution of loans, investments and deposits; they affect interest rates charged on loans or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future. As a result, it is difficult for the Company to predict the potential effects of possible changes in monetary policies upon its future operating results.

Internet Access to Company Documents

The Company provides access to its SEC filings through a link on the Investor Relations page of the Company's website at www.amnb.com. Reports available at no cost include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with the SEC. The information on the Company's website is not incorporated into this Annual Report on Form 10-K or any other filing the Company makes with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

Executive Officers of the Company

The following table lists the executive officers of the Company, their ages, and their positions:

Name

Age

Position

Jeffrey V. Haley

63

President and Chief Executive Officer of the Company and the Bank since January 2013. President of the Company and Chief Executive Officer of the Bank since January 2012. Executive Vice President of the Company from June 2010 to December 2011. Senior Vice President of the Company from July 2008 to May 2010. President of the Bank since June 2010. Executive Vice President of the Bank, as well as President of Trust and Financial Services from July 2008 to May 2010. Executive Vice President and Chief Operating Officer of the Bank from November 2005 to June 2007. 

Jeffrey W. Farrar

63

Jeffrey W. Farrar, also known as Jeff, among other names, joined the bank on August 1, 2019 and serves as Senior Executive Vice President, Chief Operating and Chief Financial Officer. Mr. Farrar has more than twenty-eight years of executive-level experience in community banking. Prior to his current role, he was Executive Vice President and Chief Financial Officer at Old Point Financial Corporation for two years and prior to that served in several executive capacities with Atlantic Union Bankshares Corporation and its predecessor companies. Mr. Farrar is a certified public accountant and a graduate of Virginia Tech with a B.S. in Accounting and a recipient of a Master's in Business Administration from Virginia Commonwealth University.

Edward C. Martin50Senior Executive Vice President and Chief Administrative Officer of the Company and the Bank and President of Virginia Banking since August 2020. Executive Vice President and Chief Credit Officer of the Company from December 2019 until August 2020. Executive Vice President and Chief Credit Officer of the Bank from March 2017 until August 2020. Senior Credit Officer of the Bank from September 2016 until March 2017. Regional Credit Officer of Bank of North Carolina from July 2015 to September 2016. Chief Credit Officer of Valley Bank from June 2007 to June 2015.

Rhonda P. Joyce

60

Executive Vice President and Co-Head of Banking: Commercial of the Bank since November 2021. Executive Vice President and Regional President of the Bank from September 2016 until November 2021. Senior Vice President and Market President since joining the Bank in connection with the MidCarolina Financial Corporation merger in July 2011.
Alexander Jung55Executive Vice President and Co-Head of Banking: Consumer & Financial Services of the Bank since November 2021. Senior Vice President and President of the North Carolina Market, Blue Ridge Bank, N.A. from September 2020 to October 2021. Various leadership roles in commercial, retail and mortgage banking at Branch Banking and Trust Company from March 1993 to December 2018.

ITEM 1A – RISK FACTORS

RISK RELATED TO THE PROPOSED MERGER WITH ATLANTIC UNION

Combining Atlantic Union and the Company may be more difficult, costly or time-consuming than expected.

The success of the merger will depend, in part, on Atlantic Union's ability to realize the anticipated benefits and cost savings from combining the businesses of Atlantic Union and the Company and to combine the businesses of Atlantic Union and the Company in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of the Company or decreasing revenues due to loss of customers. If the parties are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings and anticipated benefits of the merger could be less than anticipated, and integration may result in additional unforeseen expenses.

Atlantic Union and the Company have operated, and, until the completion of the merger, will continue to operate, independently. To realize the full extent of the anticipated benefits of the merger, after the completion of the merger, Atlantic Union expects to integrate the Company's business into its own. The integration process in the merger could result in the loss of key employees, the disruption of each party's ongoing business, inconsistencies in standards, controls, procedures and policies that affect adversely either party's ability to maintain relationships with customers and employees or achieve the anticipated benefits of the merger. The loss of key employees could adversely affect Atlantic Union's ability to successfully conduct its business in the markets in which the Company now operates, which could have an adverse effect on Atlantic Union's financial results and the value of its common stock. If Atlantic Union experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be disruptions that cause Atlantic Union and the Company to lose customers or cause customers to withdraw their deposits from the Company's or Atlantic Union's banking subsidiaries, or other unintended consequences that could have a material adverse effect on Atlantic Union's or the Company's results of operations or financial condition after the merger. These integration matters could have an adverse effect on the Company during this transition period and on the combined company for an undetermined period after consummation of the merger.

Because the exchange ratio is fixed and the market price of Atlantic Union common stock will fluctuate, the value of the consideration to be received by the Company's shareholders in the merger may change.

Pursuant to the merger agreement, upon completion of the merger, each share of the Company's common stock, except for certain shares of the Company's common stock owned by the Company or Atlantic Union, that is issued and outstanding immediately prior to the effective time of the merger will be converted automatically into the right to receive 1.35 shares of common stock of Atlantic Union. The closing price of Atlantic Union common stock on the date that the merger is completed may vary from the closing price of Atlantic Union common stock on the date the Company and Atlantic Union announced the signing of the merger agreement. Because the merger consideration is determined by a fixed exchange ratio, the Company's shareholders will not know or be able to calculate the exact value of the shares of Atlantic Union common stock they will receive until completion of the merger. Any change in the market price of Atlantic Union common stock prior to completion of the merger will affect the value of the merger consideration that the Company's shareholders will receive upon completion of the merger. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the companies' respective businesses, operations and prospects, changes in estimates or recommendations by securities analysis or ratings agencies, and regulatory considerations, among other things. Many of these factors are beyond the control of the Company and Atlantic Union.

The merger may distract management of the Company from its other responsibilities.

The merger could cause the management of the Company to focus its time and energies on matters related to the merger that otherwise would be directed to its business and operations. Any such distraction on the part of the Company's management, if significant, could affect its ability to service existing business and develop new business and may adversely affect the business and earnings of the Company before the merger, or the business and earnings of the combined company after the merger.

Termination of the merger agreement with Atlantic Union could negatively impact the Company.

Each of the Company's and Atlantic Union's obligation to consummate the merger remains subject to a number of conditions which must be fulfilled to consummate the merger, and there can be no assurance that all of the conditions will be satisfied, or that the merger will be completed on the proposed terms, within the expected timeframe, or at all. Any delay in completing the merger could cause the Company not to realize some or all of the benefits that the Company expects to achieve if the merger is successfully completed within its expected timeframe. If the merger agreement is terminated, the Company's business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of the Company's common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be beneficial and will be completed. Atlantic Union and/or the Company may be subject to litigation related to any failure to complete the merger or to proceedings commenced against either company to perform obligations under the merger agreement. If the merger agreement is terminated under certain circumstances, the Company may be required to pay to Atlantic Union a termination fee of approximately $17.2 million.

In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the merger is not completed, the Company would have to recognize these expenses and would have committed substantial time and resources by management, without realizing the expected benefits of the merger. In addition, failure to consummate the merger also may result in negative reactions from the financial markets or from the Company's customers, vendors and employees.

The merger agreement with Atlantic Union limits the ability of the Company to pursue alternatives to the merger.

The merger agreement contains customary "no-shop" provisions that, subject to limited exceptions, limit the ability of the Company to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of the Company. In addition, under certain circumstances, if the merger agreement is terminated and the Company consummates a similar transaction with a party other than Atlantic Union, the Company must pay to Atlantic Union a fee of approximately $17.2 million. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing the acquisition even if it were prepared to pay consideration, with respect to the Company, with a higher per share market price than that proposed in the merger.

The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effects of the merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company's ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees by the Company may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the Company or the combined company following the merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company or the combined company following the merger, the Company's business, or the business of the combined company following the merger, could be harmed. In addition, the Company has agreed to operate its business in the ordinary course prior to the closing of the merger and from taking certain specified actions without the consent of Atlantic Union. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger.

Shareholder litigation could prevent or delay the completion of the merger or otherwise negatively impact the Company's business, financial condition and results of operations.

Shareholders of the Company and/or Atlantic Union may file lawsuits against the Company, Atlantic Union and/or the directors and officers of either company in connection with the merger. One of the conditions to the closing is that no law, order, injunction or decree issued by any court or governmental entity of competent jurisdiction that would prevent, prohibit or make illegal the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement be in effect. If any plaintiff were successful in obtaining an injunction prohibiting the Company or Atlantic Union from completing the merger, the bank merger or any of the other transactions contemplated by the merger agreement, then such injunction may delay or prevent the effectiveness of the merger and could result in significant costs to the Company, including any cost associated with the indemnification of the Company's directors and officers. The Company may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the merger. Shareholder lawsuits may divert management attention from management of each company's business or operations. Such litigation could have an adverse effect on the Company's business, financial condition and results of operations and could prevent or delay the completion of the merger

CREDIT RISK

The Company's credit standards and its on-going credit assessment processes might not protect it from significant credit losses.

The Company takes credit risk by virtue of making loans and extending loan commitments and letters of credit. The Company manages credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going process of assessment of the quality of the credit already extended. The Company's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Company's credit administration function employs risk management techniques to help ensure that problem loans are promptly identified. While these procedures are designed to provide the Company with the information needed to implement policy adjustments where necessary and to take appropriate corrective actions, and have proven to be reasonably effective to date, there can be no assurance that such measures will be effective in avoiding future undue credit risk.

The Company's focus on lending to small to mid-sized community-based businesses may increase its credit risk.

Most of the Company's commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. Additionally, these loans may increase concentration risk as to industry or collateral securing the loans. If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company's results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by the Company in recent years, and the borrowers may not have experienced a complete business or economic cycle. The deterioration of the borrowers' businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on the Company's financial condition and results of operations.

The Company depends on the accuracy and completeness of information about clients and counterparties, and its financial condition could be adversely affected if it relies on misleading information.

In deciding whether to extend credit or to enter into other transactions with clients and counterparties, the Company may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information, which the Company does not independently verify. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, the Company may assume that a customer's audited financial statements conform with accounting principles generally accepted in the United States of America ("GAAP") and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. The Company's financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading.

The allowance for credit losses ("ACL") may not be adequate to cover actual losses.

In accordance with GAAP, an allowance for credit losses is maintained by the Company to provide for credit losses on loans. The allowance for credit losses may not be adequate to cover actual credit losses, and future provisions for credit losses could materially and adversely affect operating results. The allowance for credit losses is based on prior experience, reasonable and supportable forecasts of economic conditions, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating, and other outside forces and conditions, including changes in interest rates, all of which are beyond the Company's control; and these losses may exceed current estimates. Federal bank regulatory agencies, as a part of their examination process, review the Company's loans and allowance for credit losses. While management believes that the allowance for credit losses is adequate to cover current losses, it cannot make assurances that it will not further increase the allowance for credit losses or that regulators will not require it to increase this allowance. Either of these occurrences could adversely affect earnings.

In addition, the adoption of Accounting Standards Update ("ASU") 2016-13, as amended, could result in a change in the amount of the allowance for credit losses as a result of changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model, which encompasses allowances for losses expected to be incurred over the life of the portfolio and a look forward of economic forecasts. The measure of the Company's ACL is dependent on the adoption and interpretation of the new standard. The new standard may create more volatility. ASU 2016-13 was adopted on January 1, 2023. Refer to Note 1 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.

Nonperforming assets take significant time to resolve and adversely affect the Company's results of operations and financial condition.

The Company's nonperforming assets adversely affect its net income in various ways. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases credit administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related asset to the then fair market value of the collateral less estimated selling costs, which may, and often does, result in a loss. An increase in the level of nonperforming assets also increases the Company's risk profile and may impact the capital levels regulators believe are appropriate in light of such risks. The Company utilizes various techniques such as workouts, restructurings, and loan sales to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers' performance or financial condition, could adversely affect the Company's business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including generation of new loans. There can be no assurance that the Company will avoid increases in nonperforming loans in the future.

A downturn in the local real estate market could materially and negatively affect the Company's business.

The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity lines of credit, consumer and other loans. Many of these loans are secured by real estate (both residential and commercial) located in the Company's market area. At December 31, 2023, the Company had approximately $2.3 billion in loans, of which approximately $2.2 billion (95.8%) were secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral could then be diminished and the Company would be more likely to suffer losses. Some degree of instability in the commercial real estate markets is expected in the coming quarters as loans are refinanced in markets with higher vacancy rates under current economic conditions. The outlook for commercial real estate remains dependent on the broader economic environment and, specifically, how major subsectors respond to a higher interest rate environment and higher prices for commodities, goods and services. A downturn in the real estate market in the areas in which the Company conducts its operations could negatively affect the Company's business.

The Company relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if the Company is forced to foreclose upon such loans.

A significant portion of the Company's loan portfolio consists of loans secured by real estate. The Company relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of the Company's loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan and will suffer a loss.

MARKET RISK
The Company's business is subject to interest rate risk, and variations in interest rates and inadequate management of interest rate risk may negatively affect financial performance.

Changes in the interest rate environment may reduce the Company's profits. It is expected that the Company will continue to realize income from the spread between the interest earned on loans, securities, and other interest earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and there is extensive competition for new loan originations from qualified borrowers. 

Our interest-earning assets and interest-bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types may lag behind. The result of these changes to rates may cause differing spreads on interest-earning assets and interest-bearing liabilities. Any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on our business, financial condition, and results of operations. While we take measures, such as hedging our mortgage loans held for sale, intended to manage risks from changes in market interest rates, we cannot control or accurately predict changes in the rates of interest or be sure our protective measures are adequate.

PART II

 

ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24

ITEM 6

[Reserved]

24

ITEM 7

Management's Discussion and Analysis of Financial Condition and Results of Operations

25

ITEM 7A

Quantitative and Qualitative Disclosures About Market Risk

41

ITEM 8

Financial Statements and Supplementary Data

42

Reports of Independent Registered Public Accounting Firm

42

Consolidated Balance Sheets as of December 31, 2023 and 2022

45

Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021

46

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2023, 2022, and 2021

47

Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2023, 2022, and 2021

48

Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021

49

Notes to Consolidated Financial Statements

50

ITEM 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

81

ITEM 9A

Controls and Procedures

81

ITEM 9B

Other Information

81

ITEM 9CDisclosure Regarding Foreign Jurisdictions that Prevent Inspections81

PART III

ITEM 10

Directors, Executive Officers and Corporate Governance

82

ITEM 11

Executive Compensation

82

ITEM 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

82

ITEM 13

Certain Relationships and Related Transactions, and Director Independence

82

ITEM 14

Principal Accountant Fees and Services

82

PART IV

ITEM 15

Exhibits and Financial Statement Schedules

83

ITEM 16

Form 10-K Summary

84

PART I

Forward-Looking Statements

Certain statements in this Form 10-K of American National Bankshares, Inc. (the "Company") may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements regarding anticipated changes in the interest rate environment, future economic conditions and the impacts of current economic uncertainties, and projections, predictions, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact. Such forward-looking statements are based on certain assumptions as of the time they are made, and are inherently subject to known and unknown risks and uncertainties, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Such statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," "intend," "will," "may," "view," "seek to," "opportunity," "potential," "continue," "confidence" or words of similar meaning, or other statements concerning opinions or judgment of our management about future events. Although we believe that our expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of our existing knowledge of our business and operations, there can be no assurance that actual future results, performance, or achievements of, or trends affecting, us will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of or changes in:

 

Market

the businesses of the Company and Dividend InformationAtlantic Union Bankshares Corporation ("Atlantic Union") may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected;

the expected growth opportunities or cost savings from the merger with Atlantic Union may not be fully realized or may take longer to realize than expected;

deposit attrition, operating costs, customer losses and business disruption prior to and following the merger with Atlantic Union, including adverse effects on relationships with employees and customers, may be greater than expected;

the level of inflation;

financial market volatility including the level of interest rates, could affect the values of financial instruments and the amount of net interest income earned;

the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company's or banking industry's reputation becomes damaged;

general economic or business conditions, either nationally or in the market areas in which the Company does business, may be less favorable than expected, resulting in deteriorating credit quality, reduced demand for credit, or a weakened ability to generate deposits;

competition among financial institutions may increase, and competitors may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than the Company;

businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards and tax laws;

the ability to recruit and retain key personnel;

cybersecurity threats or attacks, the implementation of new technologies, and the ability to develop and maintain reliable and secure electronic systems;

the effects of climate change, natural disasters, and extreme weather events;

geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts of threats or terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad;

the impact of health emergencies, epidemics or pandemics;

risks related to environmental, social and governance practices; and

risks associated with mergers, acquisitions, and other expansion activities.

More information on risk factors that could affect our forward-looking statements is included under the section entitled "Risk Factors" set forth herein. All risk factors and uncertainties described herein should be considered in evaluating forward-looking statements, all forward- looking statements made in this Form 10-K are expressly qualified by the cautionary statements contained in this Form 10-K, and undue reliance should not be placed on such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on our businesses or operations. Forward-looking statements speak only as of the date they are made. We do not intend or assume any obligation to update, revise or clarify any forward- looking statements that may be made from time to time by or on behalf of the Company, whether as a result of new information, future events or otherwise.

ITEM 1 – BUSINESS

Overview

American National Bankshares Inc. is a one-bank holding company organized under the laws of the Commonwealth of Virginia in 1984. On September 1, 1984, the Company acquired all of the outstanding capital stock of American National Bank and Trust Company (the "Bank"), a national banking association chartered in 1909 under the laws of the United States. American National Bank and Trust Company is the only banking subsidiary of the Company.

As of December 31, 2023, the operations of the Company were conducted at 26 banking offices in south central Virginia and north central North Carolina. Through these offices, the Company serves its primary market area of south central Virginia, the New River Valley and Roanoke, Virginia, and north central North Carolina. The Bank provides a full array of financial products and services, including commercial, mortgage, and consumer banking; trust and investment services; and insurance. Services are also provided through 34 Automated Teller Machines ("ATMs"), "Online Banking," and "Telephone Banking."

The Company has two reportable segments, (i) community banking and (ii) wealth management. For more financial data and other information about each of the Company's operating segments, refer to "Note 21 - Segment and Related Information" of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

Agreement and Plan of Merger

On July 24, 2023, the Company entered into an Agreement and Plan of Merger with Atlantic Union Bankshares Corporation. The merger agreement provides that the Company will merge with and into Atlantic Union, with Atlantic Union continuing as the surviving entity. Immediately following the merger of the Company and Atlantic Union, the Bank will merge with and into Atlantic Union's wholly owned bank subsidiary, Atlantic Union Bank, with Atlantic Union Bank continuing as the surviving bank. The merger agreement was approved by the Board of Directors of each of the Company and Atlantic Union. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of common stock of the Company will be converted into the right to receive 1.35 shares of common stock of Atlantic Union, with cash to be paid in lieu of any fractional shares. The merger is expected to close on April 1, 2024, subject to satisfaction of customary closing conditions.

Human Capital Resources

Profile

At December 31, 2023, the Company employed 334 full-time persons and 40 part-time persons. None of our employees are represented by a union or covered under a collective bargaining agreement. In the opinion of the management of the Company, relations with employees of the Company and the Bank are good.

As a holding company for a community bank, the Company is a relationship-driven organization. A key aspect of the Company's business strategy is for its senior officers to have primary contact with current and potential customers. The Company's growth and development are in large part a result of these personalized relationships with the customer base. The success of the Company also often depends on its ability to hire and retain qualified banking officers. The Company's senior officers have considerable experience in the banking industry and related financial services and are extremely valuable.

Corporate Culture 

The Company believes that as a regional community bank it is only as strong as the communities it serves, and has established core values to guide the organization. We are relationship focused establishing trust by respecting others and doing the right thing. We work together as a team and value diverse perspectives that help move us forward together. We fulfill commitments through responsive communication and service to and with our employees, shareholders and customers. We strive to embrace change as it comes and to continually work to be better. We work to be genuine in both words and actions. The Company has worked to utilize technology to allow for more digital transactions for our customers and more options for remote work and virtual meetings. We work with local organizations to provide financial education to the communities we serve and support various not-for-profit organizations. During the pandemic, we were ardent participants in the Paycheck Protection Program ("PPP"), assisting small businesses, their employees and their communities. 

Compensation and Benefits

The Company's senior officer compensation programs are designed to attract, retain and motivate bankers with the ability to generate strong business results and ensure the long-term success of the Company. The compensation committee of the Company's board of directors has established compensation programs that reflect and support the Company's strategic and financial performance goals, the primary goal being the creation of long-term value for the shareholders of the Company, while protecting the interests of the depositors of the Bank. In addition to competitive base and incentive compensation, the Company offers competitive benefits including paid vacation and sick leave, a 401(k) plan, health, dental, and vision plans, life and disability coverage, and a wellness plan. The Company has also entered into employment contracts with certain of its senior officers, and purchased key man life insurance policies to mitigate the risk of an unforeseen departure or death of certain of the senior officers.

 100% of our employees were eligible for an incentive opportunity in 2023. Incentive plans include a mix of individual and corporate goals that are measurable and defined.

Diversity, Equity and Inclusion

We are committed to hiring diverse talent and fostering, cultivating and preserving a culture of a diversity, equity and inclusion. We believe that the collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities, and talent that our teammates invest in their work represents a significant part of not only our culture, but our reputation and achievement. We strive to foster a culture and workplace that, among other things, is inclusive and welcoming, treats everyone with respect and dignity, promotes people on their merits, and promotes diversity of thoughts, ideas, perspective and values. Our Board believes that diversity contributes to the overall effectiveness of the Board and generally conceptualizes diversity expansively to include, without limitation, concepts such as race, gender, ethnicity, sexual orientation, education, age, work experience, professional skills, geographic location and other qualities or attributes that support diversity. We have a Diversity, Equity and Inclusion Committee which includes a cross-functional group of teammates from diverse backgrounds, that manages our efforts to create a more diverse, equitable, and inclusive workplace.

Competition and Markets​​​​​​

Vigorous competition exists in the Company's service areas. The Company competes not only with national, regional, and community banks, but also with other types of financial institutions including finance companies, mutual and money market fund providers, financial technology companies, brokerage firms, wealth management firms, insurance companies, credit unions, and mortgage companies.

In addition, nonbank competitors are increasingly offering products and services that traditionally were only offered by banks. Many of these nonbank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks, which may allow them to offer greater lending limits and certain products and services that we do not provide.

The Company's primary market area is south central Virginia and north central North Carolina. The Company also has a significant presence in Roanoke, Virginia that increased substantially in connection with the acquisition of HomeTown Bankshares Corporation ("HomeTown") in 2019. The Company's Virginia banking offices are located in the cities of Danville, Lynchburg, Martinsville, Roanoke, and Salem and in the counties of Campbell, Franklin, Halifax, Henry, Montgomery, Pittsylvania and Roanoke. In North Carolina, the Company's banking offices are located in the cities of Burlington, Graham, Greensboro, Mebane, Raleigh, Winston-Salem, and Yanceyville, which are within the counties of Alamance, Caswell, Forsyth, Guilford, and Wake. 

Unemployment levels in each Virginia market the Company serves have remained low for the past twelve months. Based on Virginia Employment Commission data, the state's seasonally-adjusted unemployment rate was 3.0% as of December 31, 2023 and December 31, 2022 and continued to be below the national rate of 3.7% at December 31, 2023. North Carolina's unemployment rate was 3.5% as of December 31, 2023, compared to 3.9% at December 31, 2022 and slightly below the national rate of 3.7% at December 31, 2023.

Service sectors, financials, medical, manufacturing, construction, timber management and production, and technology related businesses have remained strong. Other important business industries include farming, tobacco and hemp processing and sales, and food processing. New businesses continue to move into the Company's Virginia and North Carolina footprints, which has been positive for economic growth.

The Company's market area in North Carolina includes larger metropolitan areas characterized by strong competition in attracting deposits and making loans. Its most direct competition for deposits comes from commercial banks and credit unions located in the market area, including many regional and national banks. The company has experienced strong loan growth in these markets, but has been more challenged in growing deposit market share.

Supervision and Regulation

The Company and the Bank are extensively regulated under federal and state law. The following description briefly addresses certain provisions of federal and state laws and regulations, and their potential effects on the Company and the Bank. Proposals to change the laws, regulations, and policies governing the banking industry are frequently raised in U.S. Congress, in state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Company and the Bank are impossible to determine with any certainty. A change in applicable laws, regulations or policies, or a change in the way such laws, regulations or policies are interpreted by regulatory agencies or courts, may have a material impact on the business, operations, and earnings of the Company and the Bank.

American National Bankshares Inc.

American National Bankshares Inc. is qualified as a bank holding company ("BHC") within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Board of Governors of the Federal Reserve System (the "FRB"). As a bank holding company, the Company is subject to supervision, regulation and examination by the FRB and is required to file various reports and additional information with the FRB. The Company is also registered under the bank holding company laws of Virginia and is subject to supervision, regulation and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the "SCC").

American National Bank and Trust Company

American National Bank and Trust Company is a federally chartered national bank and is a member of the Federal Reserve System. As a national bank, the Bank is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC") and is required to file various reports and additional information with the OCC. The OCC has primary supervisory and regulatory authority over the operations of the Bank. Because the Bank accepts insured deposits from the public, it is also subject to examination by the Federal Deposit Insurance Corporation ("FDIC").

Depository institutions, including the Bank, are subject to extensive federal and state regulations that significantly affect their business and activities. Regulatory bodies have broad authority to implement standards and initiate proceedings designed to prohibit depository institutions from engaging in unsafe and unsound banking practices. The standards relate generally to operations and management, asset quality, interest rate exposure, and capital. The bank regulatory agencies are authorized to take action against institutions that fail to meet such standards.

As with other financial institutions, the earnings of the Bank are affected by general economic conditions and by the monetary policies of the FRB. The FRB exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, setting the reserve requirements of member banks, and establishing the discount rate on member bank borrowings. The policies of the FRB have a direct impact on loan and deposit growth and the interest rates charged and paid thereon. They also impact the source, cost of funds, and the rates of return on investments. Changes in the FRB's monetary policies have had a significant impact on the operating results of the Bank and other financial institutions and are expected to continue to do so in the future; however, the exact impact of such conditions and policies upon the future business and earnings cannot accurately be predicted.

Deposit Insurance

The deposits of the Bank are insured up to applicable limits by the DIF and are subject to deposit insurance assessments to maintain the DIF. The deposit insurance assessment base of the Bank is based on its average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The FDIC uses a "financial ratios method" based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets, such as the Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk ("CAMELS"). CAMELS composite ratings set a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions.

 In March 2016, the FDIC implemented by final rule certain Dodd-Frank Act provisions by raising the DIF's minimum reserve ratio from 1.15% to 1.35%. The FDIC imposed a 4.5 basis point annual surcharge on insured depository institutions with total consolidated assets of $10 billion or more. The rule granted credits to smaller banks, such as the Bank, for the portion of their regular assessments that contributed to increasing the reserve ratio from 1.15% to 1.35%. In October 2022, the FDIC adopted a final rule to increase the assessment base rate schedules uniformly by two basis points beginning with the first quarterly assessment period of 2023. In 2023 and 2022, the Company recorded expense of $1.4 million and $903 thousand, respectively, for FDIC insurance premiums.

Capital Requirements

The FRB, the OCC and the FDIC have issued substantially similar capital guidelines applicable to all banks and bank holding companies. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.

Effective January 1, 2015, the Company and the Bank became subject to rules implementing the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision (the "Basel Committee") and certain provisions of the Dodd-Frank Act (the "Basel III Capital Rules"). The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets ("CET1") of at least 4.5%, plus a 2.5% "capital conservation buffer" (effectively resulting in a minimum CET1 ratio of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer, which was phased in ratably over a four year period beginning January 1, 2016, is designed to absorb losses during periods of economic stress. Institutions with a CET1 ratio above the minimum (4.5%) but below the minimum plus the conservation buffer (7.0%) will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. 

With respect to the Bank, the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act (the "FDIA") were also revised, effective as of January 1, 2015, to incorporate a CET1 ratio and to increase certain other capital ratios. To be well capitalized under the revised regulations, a bank must have the following minimum capital ratios: (i) a CET1 ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%. See "Prompt Corrective Action" below.

The Tier 1 and total capital to risk-weighted asset ratios of the Company were 12.81% and 13.82%, respectively, as of December 31, 2023, thus exceeding the minimum requirements. The CET 1 ratio of the Company was 11.70% and the Bank was 12.61% as of December 31, 2023. The Tier 1 and total capital to risk-weighted asset ratios of the Bank were 12.61% and 13.62%, respectively, as of December 31, 2023, also exceeding the minimum requirements.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures (and higher percentages for certain other types of interests), and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.

On September 17, 2019, the federal banking agencies jointly issued a final rule required by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the "EGRRCPA") that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to be subject to a 9% leverage ratio (commonly referred to as the community bank leverage ratio or "CBLR"). Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and are deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework has a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. The Company and the Bank do not currently expect to opt into the CBLR framework.

Dividends

The Company's principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank's payment of dividends to the Company. As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years. A depository institution may not pay any dividend if payment would cause the institution to become "undercapitalized" or if it already is "undercapitalized." The OCC may prevent the payment of a dividend if it determines that the payment would be an unsafe and unsound banking practice. The OCC also has advised that a national bank should generally pay dividends only out of current operating earnings.

Permitted Activities

As a bank holding company, the permitted activities of the Company are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the FRB determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the FRB must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition, and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. Despite prior approval, the FRB may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the FRB has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity.

Banking Acquisitions; Changes in Control

The BHC Act and related regulations require, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless it already owns a majority of such voting shares), (ii) acquire all or substantially all of the assets of another bank or bank holding company, or (iii) merge or consolidate with any other bank holding company. In determining whether to approve a proposed bank acquisition, the FRB will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, any outstanding regulatory compliance issues of any institution that is a party to the transaction, the projected capital ratios and levels on a post-acquisition basis, the financial condition of each institution that is a party to the transaction and of the combined institution after the transaction, the parties' managerial resources and risk management and governance processes and systems, the parties' compliance with the Bank Secrecy Act and anti-money laundering requirements, and the acquiring institution's performance under the Community Reinvestment Act of 1977, as amended (the "CRA"), and compliance with fair housing and other consumer protection laws.

Subject to certain exceptions, the BHC Act and the Change in Bank Control Act, together with the applicable regulations, require FRB approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered its securities with the Securities and Exchange Commission (the "SEC") under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. The Company's common stock is registered under Section 12 of the Exchange Act.

In addition, Virginia law requires the prior approval of the SCC for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares of a Virginia bank or any holding company that controls a Virginia bank, or (ii) the acquisition by a Virginia bank holding company of a bank or its holding company domiciled outside Virginia.

Source of Strength

FRB policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Safety and Soundness

There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event of a depository institution insolvency, receivership or default. For example, under the Federal Deposit Insurance Corporation Improvement Act of 1991, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

Under the FDIA, the federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to capital management, internal controls and information systems, internal audit systems, data security, loan documentation, credit underwriting, interest rate exposure, risk management, vendor management, corporate governance, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines.

Prompt Corrective Action

The federal bank regulatory agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," as defined by the law. "Well capitalized" institutions may generally operate without additional supervisory restriction. With respect to "adequately capitalized" institutions, such banks cannot normally pay dividends or make any capital contributions that would leave the bank undercapitalized; they cannot pay a management fee to a controlling person if after paying the fee, it would be undercapitalized; and they cannot accept, renew, or rollover any brokered deposit unless the bank has applied for and been granted a waiver by the FDIC.

Immediately upon becoming "undercapitalized," a depository institution becomes subject to the provisions of Section 38 of the FDIA, which: (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution's assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the DIF, subject in certain cases to specified procedures. These discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of the institution or the sale of the institution to a willing purchaser; and (iv) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. Management believes, as of December 31, 2023 and 2022, the Bank met the requirements for being classified as "well capitalized."

Transactions with Affiliates

Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or "affiliates" or to make loans to insiders is limited. Loan transactions with an affiliate generally must be collateralized and certain transactions between the Bank and its affiliates, including the sale of assets, the payment of money, or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions. In addition, the Bank generally may not purchase securities issued or underwritten by affiliates.

Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank, are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives (which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank's unimpaired capital and unimpaired surplus. Section 22(g) of the Federal Reserve Act identifies limited circumstances in which the Bank is permitted to extend credit to executive officers.

Consumer Financial Protection

The Company is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. If the Company fails to comply with these laws and regulations, it may be subject to various penalties. Failure to comply with consumer protection requirements may also result in failure to obtain any required bank regulatory approval for merger or acquisition transactions the Company may wish to pursue or being prohibited from engaging in such transactions even if approval is not required.

The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the "CFPB"), and giving it responsibility for implementing, examining, and enforcing compliance with federal consumer protection laws. The CFPB focuses on (i) risks to consumers and compliance with the federal consumer financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in those markets, (iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv) non-depository companies that offer one or more consumer financial products or services.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit "unfair, deceptive or abusive" acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer's ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer's (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer's interests. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. Further regulatory positions taken by the CFPB may influence how other regulatory agencies may apply the subject consumer financial protection laws and regulations.

Community Reinvestment Act

The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. Furthermore, such assessment is also required of banks that have applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch. In the case of a BHC applying for approval to acquire a bank or BHC, the record of each subsidiary bank of the applicant BHC is subject to assessment in considering the application. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The Bank was rated "satisfactory" in its most recent CRA evaluation.
 

On October 24, 2023, the federal bank regulatory agencies issued a final rule to modernize their respective CRA regulations. The revised rules substantially alter the methodology for assessing compliance with the CRA, with material aspects taking effect January 1, 2026 and revised data reporting requirements taking effect January 1, 2027. Among other things, the revised rules evaluate lending outside traditional assessment areas generated by the growth of non-branch delivery systems, such as online and mobile banking, apply a metrics-based benchmarking approach to assessment, and clarify eligible CRA activities. The final rules are likely to make it more challenging and/or costly for the Bank to receive a rating of at least "satisfactory" on its CRA evaluation.

Anti-Money Laundering Legislation

The Company is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities ("AML laws"). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020.

The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.

Office of Foreign Assets Control

The U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") is responsible for administering and enforcing economic and trade sanctions against specified foreign parties, including countries and regimes, foreign individuals and other foreign organizations and entities. OFAC publishes lists of prohibited parties that are regularly consulted by the Company in the conduct of its business in order to assure compliance. The Company is responsible for, among other things, blocking accounts of, and transactions with, prohibited parties identified by OFAC, avoiding unlicensed trade and financial transactions with such parties and reporting blocked transactions after their occurrence. Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for the Company.

Privacy Legislation

Several recent laws, including the Right to Financial Privacy Act, and related regulations issued by the federal bank regulatory agencies, also provide new protections against the transfer and use of customer information by financial institutions. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers' personal information. Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy provisions generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated parties without prior notice and approval from the customer.

In October 2023, the CFPB proposed a new rule that would require a provider of payment accounts or products, such as the Bank, to make certain data available to consumers upon request regarding the products or services they obtain from the provider. The proposed rule is intended to give consumers control over their financial data, including with whom it is shared, and encourage competition in the provision of consumer financial products and services. For banks with over $850 million and less than $50 billion in total assets, such as the Bank, compliance would be required approximately two and one-half years after adoption of the final rule.

Incentive Compensation

The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets, that encourage inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. In 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees, or benefits that could lead to material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately balance risk and reward. The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements. The comment period for these proposed rules has closed, and a final rule has not yet been published. If the rules are adopted as proposed, they will restrict the manner in which executive compensation is structured.

The Nasdaq Stock Market, LLC, the exchange on which our common stock is listed, enacted a rule that became effective in 2023 requiring listed companies to adopt policies mandating the recovery or "clawback" of excess incentive compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. The company has adopted a clawback policy compliant with such rule, a copy of which is attached as Exhibit 97 to this From 10-K.

Mortgage Banking Regulation

In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank's mortgage origination activities are subject to the FRB's Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.

Cybersecurity

The federal bank regulatory agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution's board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal bank regulatory agencies expect financial institutions to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution's operations after a cyberattack. If we fail to meet the expectations set forth in this regulatory guidance, we could be subject to various regulatory actions and any remediation efforts may require us to devote significant resources

On November 18, 2021, the federal bank regulatory agencies issued a final rule, effective April 1, 2022, imposing new notification requirements for cybersecurity incidents. The rule requires financial institutions to notify their primary federal regulator as soon as possible and no later than 36 hours after the institution determines that a cybersecurity incident has occurred that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the institution's: (i) ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business, (ii) business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value, or (iii) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.

In July 2023, the SEC issued a final rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies that are subject to the reporting requirements of the Exchange Act. Specifically, the final rule requires current reporting about material cybersecurity incidents, periodic disclosures about a registrant's policies and procedures to identify and manage cybersecurity risk, management's role in implementing cybersecurity policies and procedures, and the board of directors' cybersecurity expertise, if any, and its oversight of cybersecurity risk. See Item 1C. Cybersecurity of this Form 10-K for a discussion of the Company's cybersecurity risk management, strategy and governance.

To date, the Company has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but its systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers.

Future Legislation and Regulation

Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could affect the regulatory structure under which the Company and the Bank operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material adverse effect on the business, financial condition and results of operations of the Company and the Bank.

Effect of Governmental Monetary Policies

The Company's operations are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates to influence general economic conditions. These policies have a significant impact on overall growth and distribution of loans, investments and deposits; they affect interest rates charged on loans or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future. As a result, it is difficult for the Company to predict the potential effects of possible changes in monetary policies upon its future operating results.

Internet Access to Company Documents

The Company provides access to its SEC filings through a link on the Investor Relations page of the Company's website at www.amnb.com. Reports available at no cost include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with the SEC. The information on the Company's website is not incorporated into this Annual Report on Form 10-K or any other filing the Company makes with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

Executive Officers of the Company

The following table lists the executive officers of the Company, their ages, and their positions:

 

The Company's common stock is traded on the Nasdaq Global Select Market under the symbol "AMNB." At December 31, 2020,Name

Age

Position

Jeffrey V. Haley

63

President and Chief Executive Officer of the Company had 3,857 shareholders of record. 

The Company paid quarterly cash dividends of $0.27 per share for each quarter of 2020. The Company's future dividend policy is subject toand the discretionBank since January 2013. President of the BoardsCompany and Chief Executive Officer of Directorsthe Bank since January 2012. Executive Vice President of the Company from June 2010 to December 2011. Senior Vice President of the Company from July 2008 to May 2010. President of the Bank since June 2010. Executive Vice President of the Bank, as well as President of Trust and Financial Services from July 2008 to May 2010. Executive Vice President and Chief Operating Officer of the Bank from November 2005 to June 2007. 

Jeffrey W. Farrar

63

Jeffrey W. Farrar, also known as Jeff, among other names, joined the bank on August 1, 2019 and serves as Senior Executive Vice President, Chief Operating and Chief Financial Officer. Mr. Farrar has more than twenty-eight years of executive-level experience in community banking. Prior to his current role, he was Executive Vice President and Chief Financial Officer at Old Point Financial Corporation for two years and prior to that served in several executive capacities with Atlantic Union Bankshares Corporation and its predecessor companies. Mr. Farrar is a certified public accountant and a graduate of Virginia Tech with a B.S. in Accounting and a recipient of a Master's in Business Administration from Virginia Commonwealth University.

Edward C. Martin50Senior Executive Vice President and Chief Administrative Officer of the Company and the Bank and will depend upon a numberPresident of factors, including future earnings, financial condition, cash requirementsVirginia Banking since August 2020. Executive Vice President and general business conditions. The Company and the Bank are also subject to certain restrictions imposed by the reserve and capital requirements of federal and state statutes and regulations. See "Part I, Item 1. Business - Supervision and Regulation - Dividends," for information on regulatory restrictions on dividends.

Stock Compensation Plans

The Company's 2018 Stock Incentive Plan (the "2018 Plan") was adopted by the Board of DirectorsChief Credit Officer of the Company on February 20, 2018from December 2019 until August 2020. Executive Vice President and approved by shareholders on May 15, 2018 at the Company's 2018 Annual Meeting of Shareholders. The 2018 Plan replaced the Company's 2008 Stock Incentive Plan, the term of which expired in 2018. The plans and stock compensation in general are discussed in Note 16Chief Credit Officer of the ConsolidatedBank from March 2017 until August 2020. Senior Credit Officer of the Bank from September 2016 until March 2017. Regional Credit Officer of Bank of North Carolina from July 2015 to September 2016. Chief Credit Officer of Valley Bank from June 2007 to June 2015.

Rhonda P. Joyce

60

Executive Vice President and Co-Head of Banking: Commercial of the Bank since November 2021. Executive Vice President and Regional President of the Bank from September 2016 until November 2021. Senior Vice President and Market President since joining the Bank in connection with the MidCarolina Financial Statements containedCorporation merger in Item 8July 2011.
Alexander Jung55Executive Vice President and Co-Head of this Form 10-K.Banking: Consumer & Financial Services of the Bank since November 2021. Senior Vice President and President of the North Carolina Market, Blue Ridge Bank, N.A. from September 2020 to October 2021. Various leadership roles in commercial, retail and mortgage banking at Branch Banking and Trust Company from March 1993 to December 2018.

ITEM 1A – RISK FACTORS

RISK RELATED TO THE PROPOSED MERGER WITH ATLANTIC UNION

Combining Atlantic Union and the Company may be more difficult, costly or time-consuming than expected.

The success of the merger will depend, in part, on Atlantic Union's ability to realize the anticipated benefits and cost savings from combining the businesses of Atlantic Union and the Company and to combine the businesses of Atlantic Union and the Company in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of the Company or decreasing revenues due to loss of customers. If the parties are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings and anticipated benefits of the merger could be less than anticipated, and integration may result in additional unforeseen expenses.

Atlantic Union and the Company have operated, and, until the completion of the merger, will continue to operate, independently. To realize the full extent of the anticipated benefits of the merger, after the completion of the merger, Atlantic Union expects to integrate the Company's business into its own. The integration process in the merger could result in the loss of key employees, the disruption of each party's ongoing business, inconsistencies in standards, controls, procedures and policies that affect adversely either party's ability to maintain relationships with customers and employees or achieve the anticipated benefits of the merger. The loss of key employees could adversely affect Atlantic Union's ability to successfully conduct its business in the markets in which the Company now operates, which could have an adverse effect on Atlantic Union's financial results and the value of its common stock. If Atlantic Union experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be disruptions that cause Atlantic Union and the Company to lose customers or cause customers to withdraw their deposits from the Company's or Atlantic Union's banking subsidiaries, or other unintended consequences that could have a material adverse effect on Atlantic Union's or the Company's results of operations or financial condition after the merger. These integration matters could have an adverse effect on the Company during this transition period and on the combined company for an undetermined period after consummation of the merger.

Because the exchange ratio is fixed and the market price of Atlantic Union common stock will fluctuate, the value of the consideration to be received by the Company's shareholders in the merger may change.

Pursuant to the merger agreement, upon completion of the merger, each share of the Company's common stock, except for certain shares of the Company's common stock owned by the Company or Atlantic Union, that is issued and outstanding immediately prior to the effective time of the merger will be converted automatically into the right to receive 1.35 shares of common stock of Atlantic Union. The closing price of Atlantic Union common stock on the date that the merger is completed may vary from the closing price of Atlantic Union common stock on the date the Company and Atlantic Union announced the signing of the merger agreement. Because the merger consideration is determined by a fixed exchange ratio, the Company's shareholders will not know or be able to calculate the exact value of the shares of Atlantic Union common stock they will receive until completion of the merger. Any change in the market price of Atlantic Union common stock prior to completion of the merger will affect the value of the merger consideration that the Company's shareholders will receive upon completion of the merger. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the companies' respective businesses, operations and prospects, changes in estimates or recommendations by securities analysis or ratings agencies, and regulatory considerations, among other things. Many of these factors are beyond the control of the Company and Atlantic Union.

The merger may distract management of the Company from its other responsibilities.

The merger could cause the management of the Company to focus its time and energies on matters related to the merger that otherwise would be directed to its business and operations. Any such distraction on the part of the Company's management, if significant, could affect its ability to service existing business and develop new business and may adversely affect the business and earnings of the Company before the merger, or the business and earnings of the combined company after the merger.

Termination of the merger agreement with Atlantic Union could negatively impact the Company.

Each of the Company's and Atlantic Union's obligation to consummate the merger remains subject to a number of conditions which must be fulfilled to consummate the merger, and there can be no assurance that all of the conditions will be satisfied, or that the merger will be completed on the proposed terms, within the expected timeframe, or at all. Any delay in completing the merger could cause the Company not to realize some or all of the benefits that the Company expects to achieve if the merger is successfully completed within its expected timeframe. If the merger agreement is terminated, the Company's business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of the Company's common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be beneficial and will be completed. Atlantic Union and/or the Company may be subject to litigation related to any failure to complete the merger or to proceedings commenced against either company to perform obligations under the merger agreement. If the merger agreement is terminated under certain circumstances, the Company may be required to pay to Atlantic Union a termination fee of approximately $17.2 million.

In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the merger is not completed, the Company would have to recognize these expenses and would have committed substantial time and resources by management, without realizing the expected benefits of the merger. In addition, failure to consummate the merger also may result in negative reactions from the financial markets or from the Company's customers, vendors and employees.

The merger agreement with Atlantic Union limits the ability of the Company to pursue alternatives to the merger.

The merger agreement contains customary "no-shop" provisions that, subject to limited exceptions, limit the ability of the Company to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of the Company. In addition, under certain circumstances, if the merger agreement is terminated and the Company consummates a similar transaction with a party other than Atlantic Union, the Company must pay to Atlantic Union a fee of approximately $17.2 million. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing the acquisition even if it were prepared to pay consideration, with respect to the Company, with a higher per share market price than that proposed in the merger.

The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effects of the merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company's ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees by the Company may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the Company or the combined company following the merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company or the combined company following the merger, the Company's business, or the business of the combined company following the merger, could be harmed. In addition, the Company has agreed to operate its business in the ordinary course prior to the closing of the merger and from taking certain specified actions without the consent of Atlantic Union. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger.

Shareholder litigation could prevent or delay the completion of the merger or otherwise negatively impact the Company's business, financial condition and results of operations.

Shareholders of the Company and/or Atlantic Union may file lawsuits against the Company, Atlantic Union and/or the directors and officers of either company in connection with the merger. One of the conditions to the closing is that no law, order, injunction or decree issued by any court or governmental entity of competent jurisdiction that would prevent, prohibit or make illegal the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement be in effect. If any plaintiff were successful in obtaining an injunction prohibiting the Company or Atlantic Union from completing the merger, the bank merger or any of the other transactions contemplated by the merger agreement, then such injunction may delay or prevent the effectiveness of the merger and could result in significant costs to the Company, including any cost associated with the indemnification of the Company's directors and officers. The Company may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the merger. Shareholder lawsuits may divert management attention from management of each company's business or operations. Such litigation could have an adverse effect on the Company's business, financial condition and results of operations and could prevent or delay the completion of the merger

CREDIT RISK

The Company's credit standards and its on-going credit assessment processes might not protect it from significant credit losses.

The Company takes credit risk by virtue of making loans and extending loan commitments and letters of credit. The Company manages credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going process of assessment of the quality of the credit already extended. The Company's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Company's credit administration function employs risk management techniques to help ensure that problem loans are promptly identified. While these procedures are designed to provide the Company with the information needed to implement policy adjustments where necessary and to take appropriate corrective actions, and have proven to be reasonably effective to date, there can be no assurance that such measures will be effective in avoiding future undue credit risk.

The Company's focus on lending to small to mid-sized community-based businesses may increase its credit risk.

Most of the Company's commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. Additionally, these loans may increase concentration risk as to industry or collateral securing the loans. If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company's results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by the Company in recent years, and the borrowers may not have experienced a complete business or economic cycle. The deterioration of the borrowers' businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on the Company's financial condition and results of operations.

The Company depends on the accuracy and completeness of information about clients and counterparties, and its financial condition could be adversely affected if it relies on misleading information.

In deciding whether to extend credit or to enter into other transactions with clients and counterparties, the Company may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information, which the Company does not independently verify. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, the Company may assume that a customer's audited financial statements conform with accounting principles generally accepted in the United States of America ("GAAP") and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. The Company's financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading.

The allowance for credit losses ("ACL") may not be adequate to cover actual losses.

In accordance with GAAP, an allowance for credit losses is maintained by the Company to provide for credit losses on loans. The allowance for credit losses may not be adequate to cover actual credit losses, and future provisions for credit losses could materially and adversely affect operating results. The allowance for credit losses is based on prior experience, reasonable and supportable forecasts of economic conditions, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating, and other outside forces and conditions, including changes in interest rates, all of which are beyond the Company's control; and these losses may exceed current estimates. Federal bank regulatory agencies, as a part of their examination process, review the Company's loans and allowance for credit losses. While management believes that the allowance for credit losses is adequate to cover current losses, it cannot make assurances that it will not further increase the allowance for credit losses or that regulators will not require it to increase this allowance. Either of these occurrences could adversely affect earnings.

In addition, the adoption of Accounting Standards Update ("ASU") 2016-13, as amended, could result in a change in the amount of the allowance for credit losses as a result of changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model, which encompasses allowances for losses expected to be incurred over the life of the portfolio and a look forward of economic forecasts. The measure of the Company's ACL is dependent on the adoption and interpretation of the new standard. The new standard may create more volatility. ASU 2016-13 was adopted on January 1, 2023. Refer to Note 1 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.

Nonperforming assets take significant time to resolve and adversely affect the Company's results of operations and financial condition.

The Company's nonperforming assets adversely affect its net income in various ways. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases credit administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related asset to the then fair market value of the collateral less estimated selling costs, which may, and often does, result in a loss. An increase in the level of nonperforming assets also increases the Company's risk profile and may impact the capital levels regulators believe are appropriate in light of such risks. The Company utilizes various techniques such as workouts, restructurings, and loan sales to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers' performance or financial condition, could adversely affect the Company's business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including generation of new loans. There can be no assurance that the Company will avoid increases in nonperforming loans in the future.

A downturn in the local real estate market could materially and negatively affect the Company's business.

The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity lines of credit, consumer and other loans. Many of these loans are secured by real estate (both residential and commercial) located in the Company's market area. At December 31, 2023, the Company had approximately $2.3 billion in loans, of which approximately $2.2 billion (95.8%) were secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral could then be diminished and the Company would be more likely to suffer losses. Some degree of instability in the commercial real estate markets is expected in the coming quarters as loans are refinanced in markets with higher vacancy rates under current economic conditions. The outlook for commercial real estate remains dependent on the broader economic environment and, specifically, how major subsectors respond to a higher interest rate environment and higher prices for commodities, goods and services. A downturn in the real estate market in the areas in which the Company conducts its operations could negatively affect the Company's business.

The Company relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if the Company is forced to foreclose upon such loans.

A significant portion of the Company's loan portfolio consists of loans secured by real estate. The Company relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of the Company's loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan and will suffer a loss.

MARKET RISK
The Company's business is subject to interest rate risk, and variations in interest rates and inadequate management of interest rate risk may negatively affect financial performance.

Changes in the interest rate environment may reduce the Company's profits. It is expected that the Company will continue to realize income from the spread between the interest earned on loans, securities, and other interest earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and there is extensive competition for new loan originations from qualified borrowers. 

Our interest-earning assets and interest-bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types may lag behind. The result of these changes to rates may cause differing spreads on interest-earning assets and interest-bearing liabilities. Any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on our business, financial condition, and results of operations. While we take measures, such as hedging our mortgage loans held for sale, intended to manage risks from changes in market interest rates, we cannot control or accurately predict changes in the rates of interest or be sure our protective measures are adequate.

LIQUIDITY RISK

Liquidity could be impaired by an inability to access the capital markets or an unforeseen outflow of cash.

Liquidity is essential to our business. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could reduce our access to liquidity sources include a downturn in the economy, difficult credit markets or the liquidity needs of our depositors. A substantial majority of our liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days' notice, while a substantial portion of our assets are loans, which cannot be called or sold in the same time frame. We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason. Our access to deposits may be negatively impacted by, among other factors, changes in interest rates which could promote increased competition for deposits, including from new financial technology competitors, or provide customers with alternative investment options. Additionally, negative news about us or the banking industry in general could negatively impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits. Furthermore, as many regional banking organizations experienced in 2023, the failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to fail" or remove deposits from the banking system entirely. As of December 31, 2023, approximately 40.5% of our deposits were uninsured and we rely on these deposits for liquidity. A failure to maintain adequate liquidity could have a material adverse effect on our business, financial condition and results of operations.

Unrealized losses in our securities portfolio could affect liquidity.

As market interest rates have increased, we have experienced significant unrealized losses on our available for sale securities portfolio. Unrealized losses related to available for sale securities are reflected in accumulated other comprehensive loss in our consolidated balance sheets and reduce the level of our book capital and tangible common equity. However, such unrealized losses do not affect our regulatory capital ratios. We actively monitor our available for securities portfolio and we do not currently anticipate the need to realize material losses from the sale of securities for liquidity purposes. Furthermore, we believe it is unlikely that we would be required to sell any such securities before recovery of their amortized cost bases, which may be at maturity. Nonetheless, our access to liquidity sources could be affected by unrealized losses if securities must be sold at a loss; tangible capital ratios continue to decline from an increase in unrealized losses or realized credit losses; the Federal Home Loan Bank of Atlanta or other funding sources reduce capacity; or bank regulators impose restrictions on us that impact the level of interest rates we may pay on deposits or our ability to access brokered deposits. Additionally, significant unrealized losses could negatively impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits.

Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.

The closures of Silicon Valley Bank and Signature Bank in March 2023, and First Republic Bank in May 2023, and concerns about similar future events, have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. More recently, concerns about commercial real estate concentrations at regional and community banks have exacerbated this volatility. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company's liquidity, loan funding capacity, net interest margin, capital and results of operations. While federal bank regulators took action to ensure that depositors of the failed banks had access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly. Furthermore, there is no guarantee that regional bank failures or bank runs similar to the ones that occurred in 2023 will not occur in the future and, if they were to occur, they may have a material and adverse impact on customer and investor confidence in regional banks negatively impacting the Company's liquidity, capital, results of operations and stock price.

TECHNOLOGY RISK

The Company's operations may be adversely affected by cybersecurity risks.

The Company relies heavily on communications and information systems to conduct business. Our computer systems and network infrastructure and those of third parties, on which we are highly dependent, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, social engineering attacks targeting our employees and customers, malware intrusion or data corruption attempts, terrorist activities or identity theft. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in the Company's internet banking, deposit, loan, and other systems. While the Company has policies and procedures designed to prevent or limit the effect of such failure, interruption, or security breach of the Company's information systems, there can be no assurance that they will not occur or, if they do occur, that they will be adequately addressed. Further, to access the Company's products and services, its customers may use computers and mobile devices that are beyond the Company's security control systems. The occurrence of any failure, interruption or security breach of the Company's communications and information systems could damage the Company's reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability. Additionally, the Company outsources its data processing to a third-party. If the Company's third party provider encounters difficulties or if the Company has difficulty in communicating with such third party, it will significantly affect the Company's ability to adequately process and account for customer transactions, which would significantly affect its business operations.

In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and the Company's business strategy. The Company has invested in accepted technologies, and annually reviews processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company's computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems, and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company's reputation, which could adversely affect the Company's business. Furthermore, as cyberattacks continue to evolve and increase, the Company may be required to expend significant additional resources to modify or enhance its protective measures, or to investigate and remediate any identified information security vulnerabilities.

Multiple major U.S. retailers, financial institutions, government agencies and departments have experienced data systems incursions reportedly resulting in the thefts of credit and debit card information, online account information, and other financial data of tens of millions of individuals and customers. Retailer incursions affect cards issued and deposit accounts maintained by many financial institutions, including the Bank. Although neither the Company's nor the Bank's systems are breached in government or retailer incursions, these events can cause the Bank to reissue a significant number of cards and take other costly steps to avoid significant theft loss to the Bank and its customers. In some cases, the Bank may be required to reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within the Company's nor the Bank's control include internet service providers, electronic mail portal providers, social media portals, distant-server (so called "cloud") service providers, electronic data security providers, personal computers and mobile phones, telecommunications companies, and mobile phone manufacturers.

Consumers may increasingly decide not to use the Bank to complete their financial transactions because of technological and other changes, which would have a material adverse impact on the Company's financial condition and operations.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. In particular, the activity of fintech companies has grown significantly over recent years and is expected to continue to grow. Fintech companies have and may continue to offer bank or bank-like products and some fintech companies have applied for bank charters. In addition, other fintech companies have partnered with existing banks to allow them to offer deposit products to their customers. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as "disintermediation," could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on the Company's financial condition and results of operations.

OPERATIONAL RISK

The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Company's operations and prospects.

The Company is a relationship-driven organization. A key aspect of the Company's business strategy is for its senior officers to have primary contact with current and potential customers. The Company's growth and development are in large part a result of these personalized relationships with the customer base. The success of the Company also often depends on its ability to hire and retain qualified banking officers.

The Company's senior officers have considerable experience in the banking industry and related financial services and are extremely valuable and would be difficult to replace. The loss of the services of these officers could have a material adverse effect upon future prospects. Although the Company has entered into employment contracts with certain of its senior executive officers, and purchased key man life insurance policies to mitigate the risk of an unforeseen departure or death of certain of the senior executive officers, it cannot offer any assurance that they and other key employees will remain employed by the Company. The unexpected loss of services of one or more of these key employees could have a material adverse effect on operations and possibly result in reduced revenues.

Failure to maintain effective systems of internal and disclosure control could have a material adverse effect on the Company's results of operation and financial condition.

Effective internal and disclosure controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company's ongoing monitoring of internal control, it may discover material weaknesses or significant deficiencies in its internal control that require remediation. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.

The Company has in the past discovered, and may in the future discover, areas of its internal controls that need improvement. Even so, the Company is continuing to work to improve its internal controls. The Company cannot be certain that these measures will ensure that it implements and maintains adequate controls over its financial processes and reporting in the future. Any failure to maintain effective controls or to timely effect any necessary improvement of the Company's internal and disclosure controls could, among other things, result in losses from fraud or error, harm the Company's reputation or cause investors to lose confidence in the Company's reported financial information, all of which could have a material adverse effect on the Company's results of operation and financial condition.

The carrying value of goodwill may be adversely impacted.

When the Company completes an acquisition, generally goodwill is recorded on the date of acquisition as an asset. Current accounting guidance requires for goodwill to be tested for impairment, which the Company performs an impairment analysis at least annually, rather than amortizing it over a period of time. A significant adverse change in expected future cash flows or sustained adverse change in the Company's common stock could require the asset to become impaired. If impaired, the Company would incur a non-cash charge to earnings that would have a significant impact on the results of operations. The carrying value of goodwill was approximately $85.0 million at December 31, 2023.

The Company relies on other companies to provide key components of the Company's business infrastructure.

Third parties provide key components of the Company's business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. While the Company has selected these third-party vendors carefully, it does not control their actions. Any problem caused by these third-parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cybersecurity breaches, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect the Company's ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficulties of a third-party vendor could also hurt the Company's operations if those difficulties interface with the vendor's ability to serve the Company. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to the Company's business operations.

LEGAL, REGULATORY AND COMPLIANCE RISK

The Company is subject to extensive regulation which could adversely affect its business.

The Company's operations as a publicly traded corporation, a bank holding company, and a parent company to an insured depository institution are subject to extensive regulation by federal, state, and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of the Company's operations. Because the Company's business is highly regulated, the laws, rules, and regulations applicable to it are subject to frequent and sometimes extensive change. Such changes could include higher capital requirements, increased insurance premiums, increased compliance costs, reductions of non-interest income and limitations on services that can be provided. Actions by regulatory agencies or significant litigation against the Company could cause it to devote significant time and resources to defend itself and may lead to liability or penalties that materially affect the Company and its shareholders. Any future changes in the laws, rules or regulations applicable to the Company may negatively affect the Company's business and results of operations.

Regulatory capital standards may have an adverse effect on the Company's profitability, lending, and ability to pay dividends on the Company's securities.

The Company is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that the Company and the Bank must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. If the Company fails to meet these minimum capital guidelines and/or other regulatory requirements, its financial condition would be materially and adversely affected. The Basel III Capital Rules require bank holding companies and their subsidiaries to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. The Bank must also comply with the capital requirements set forth in the "prompt corrective action" regulations pursuant to Section 38 of the FDIA. Satisfying capital requirements may require the Company to limit its banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect its business, financial condition and results of operations.

Regulations issued by the CFPB could adversely impact earnings due to, among other things, increased compliance costs or costs due to noncompliance.

The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. As an independent bureau within the Federal Reserve System, the CFPB may impose requirements more severe than the previous bank regulatory agencies. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The CFPB has recently pursued a more aggressive enforcement policy with respect to a range of regulatory compliance matters, specifically including fair lending, loan servicing, financial institution sales and marketing practices, and financial institution consumer fee and account management practices. For example, in 2023, the CFPB brought enforcement actions against a number of financial institutions for overdraft practices that the CFPB alleged to be unlawful and ordered each of these institutions to pay a substantial civil money penalty in addition to customer restitution. Despite our ongoing compliance efforts, we may become subject to regulatory enforcement actions with respect to our programs and practices. The costs and limitations related to this additional regulatory scrutiny with respect to consumer product offerings and services may adversely affect the Company's profitability.

Changes in accounting standards could impact reported earnings.

From time to time, with increasing frequency, there are changes in the financial accounting and reporting standards that govern the preparation of the Company's financial statements. These changes can materially impact how the Company records and reports its financial condition and results of operations. In some instances, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Refer to Note 1 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.

Current and proposed regulation addressing consumer privacy and data use and security could increase the Company's costs and impact its reputation.

The Company is subject to a number of laws concerning consumer privacy and data use and security, including information safeguard rules under the Gramm-Leach-Bliley Act. These rules require that financial institutions develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution's size and complexity, the nature and scope of the financial institution's activities, and the sensitivity of any customer information at issue. The United States has experienced a heightened legislative and regulatory focus on privacy and data security, including requiring consumer notification in the event of a data breach. In addition, most states have enacted security breach legislation requiring varying levels of consumer notification in the event of certain types of security breaches. New regulations in these areas may increase the Company's compliance costs, which could negatively impact earnings. In addition, failure to comply with the privacy and data use and security laws and regulations to which the Company is subject, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions, penalties or other adverse consequences and loss of consumer confidence, which could materially adversely affect the Company's results of operations, overall business, and reputation.

The Company is subject to claims and litigation pertaining to fiduciary responsibility.

From time to time, customers make claims and take legal action pertaining to the performance of the Company's fiduciary responsibilities. Whether customer claims and legal action related to the performance of the Company's fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services, as well as impact 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 the Company's financial condition and results of operations.

Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to ESG practices may impose additional costs on the Company or expose it to new or additional risks.

Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of the work force, and racial and social justice issues. Increased ESG related compliance costs could result in increases to the Company's overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact the Company's reputation, ability to do business with certain partners, and the Company's stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.

STRATEGIC RISK

The Company faces strong competition from financial services companies and other companies that offer banking and other financial services, which could negatively affect the Company's business.

The Company encounters substantial competition from other financial institutions in its market area. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that the Company offers. These competitors include national, regional, and community banks. The Company also faces competition from many other types of financial institutions, including finance companies, mutual and money market fund providers, financial technology ("fintech") companies, brokerage firms, insurance companies, credit unions, financial subsidiaries of certain industrial corporations, and mortgage companies. In particular, competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns. Increased competition may result in reduced business for the Company.

Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. These institutions also may have differing pricing and underwriting standards, which may adversely affect the Company through the loss of business or causing a misalignment in the Company's risk-return relationship. Areas of competition include interest rates for loans and deposits, efforts to obtain loans and deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic financial services markets as technological advances enable more companies to provide financial services. If the Company is unable to attract and retain banking customers, it may be unable to continue to grow loan and deposit portfolios and its results of operations and financial condition may be adversely affected.

RISKS RELATING TO OUR SECURITIES

While the Company's common stock is currently traded on the Nasdaq Global Select Market, it has less liquidity than stocks for larger companies quoted on a national securities exchange.

The trading volume in the Company's common stock on the Nasdaq Global Select Market has been relatively low when compared with larger companies listed on the Nasdaq Global Select Market or other stock exchanges. There is no assurance that a more active and liquid trading market for the common stock will exist in the future. Consequently, shareholders may not be able to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares. In addition, the Company cannot predict the effect, if any, that future sales of the Company's common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of the common stock.

Economic and other conditions may cause volatility in the price of the Company's common stock.

In the current economic environment, the prices of publicly traded stocks in the financial services sector have been volatile. However, even in a more stable economic environment the price of the Company's common stock can be affected by a variety of factors such as expected or actual results of operations, changes in analysts' recommendations or projections, announcements of developments related to its businesses, operating and stock performance of other companies deemed to be peers, news or expectations based on the performance of others in the financial services industry, and expected impacts of a changing regulatory environment. These factors not only impact the price of the Company's common stock but could also affect the liquidity of the stock given the Company's size, geographical footprint, and industry. The price for shares of the Company's common stock may fluctuate significantly in the future, and these fluctuations may be unrelated to the Company's performance. General market price declines or market volatility in the future could adversely affect the price for shares of the Company's common stock, and the current market price of such shares may not be indicative of future market prices.

Future issuances of the Company's common stock could adversely affect the market price of the common stock and could be dilutive.

The Company is not restricted from issuing additional shares of common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, shares of common stock. Issuances of a substantial number of shares of common stock, or the expectation that such issuances might occur could materially adversely affect the market price of the shares of the common stock and could be dilutive to shareholders. Because the Company's decision to issue common stock in the future will depend on market conditions and other factors, it cannot predict or estimate the amount, timing or nature of possible future issuances of its common stock. Accordingly, the Company's shareholders bear the risk that future issuances will reduce the market price of the common stock and dilute their stock holdings in the Company.

The primary source of the Company's income from which it pays cash dividends is the receipt of dividends from its subsidiary bank.

The availability of dividends from the Company is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event the Bank was unable to pay dividends to the Company, or be limited in the payment of such dividends, the Company would likely have to reduce or stop paying common stock dividends. The Company's reduction, limitation or failure to pay such dividends on its common stock could have a material adverse effect on the market price of the common stock.

The Company's governing documents and Virginia law contain anti-takeover provisions that could negatively impact its shareholders.

The Company's Articles of Incorporation and Bylaws and the Virginia Stock Corporation Act contain certain provisions designed to enhance the ability of the Company's Board of Directors to deal with attempts to acquire control of the Company. These provisions and the ability to set the voting rights, preferences and other terms of any series of preferred stock that may be issued, may be deemed to have an anti-takeover effect and may discourage takeovers (which certain shareholders may deem to be in their best interest). To the extent that such takeover attempts are discouraged, temporary fluctuations in the market price of the Company's common stock resulting from actual or rumored takeover attempts may be inhibited. These provisions also could discourage or make more difficult a merger, tender offer, or proxy contest, even though such transactions may be favorable to the interests of shareholders, and could potentially adversely affect the market price of the Company's common stock.

GENERAL RISK

Changes in economic conditions could materially and negatively affect the Company's business.

The Company's business is directly impacted by economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond the Company's control. A deterioration in economic conditions, whether caused by global, national or local events (including inflation, the COVID-19 pandemic, rising wages in a tight labor market, geopolitical instability and supply chain complications), especially within the Company's market area, could result in potentially negative material consequences such as the following, among others: loan delinquencies increasing; problem assets and foreclosures increasing; demand for products and services decreasing; low cost or noninterest bearing deposits decreasing; and collateral for loans, especially real estate, declining in value, in turn reducing customers' borrowing power, and reducing the value of assets and collateral associated with existing loans. Each of these consequences may have a material adverse effect on the Company's financial condition and results of operations.

Wealth management income is a major source of non-interest income for the Company. Trust and brokerage fee revenue is largely dependent on the fair market value of assets under management and on trading volumes in the brokerage business. General economic conditions and their subsequent effect on the securities markets tend to act in correlation. When general economic conditions deteriorate, securities markets generally decline in value, and the Company's trust and brokerage fee revenue is negatively impacted as asset values and trading volumes decrease.

The Company's exposure to operational, technological and organizational risk may adversely affect the Company.

The Company is exposed to many types of operational risks, including reputation, legal, and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, clerical or record-keeping errors, and errors resulting from faulty or disabled computer or telecommunications systems.

Negative public opinion can result from the actual or alleged conduct in any number of activities, including lending practices, corporate governance, and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect the Company's ability to attract and retain customers and can expose it to litigation and regulatory action.

Certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company's necessary dependence upon automated systems to record and process its transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is the Company) and to the risk that the Company's (or its vendors') business continuity and data security systems prove to be inadequate.

The Company's risk-management framework may not be effective in mitigating risk and loss.

The Company maintains an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These risks include, but are not limited to: strategic, interest-rate, credit, liquidity, operations, pricing, reputation, compliance, litigation and cybersecurity. While the Company assesses and improves this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Company's risk-management program, or if its controls break down, the Company's results of operations and financial condition may be adversely affected.

Negative perception of the Company through media may adversely affect the Company's reputation and business.

The Company's reputation is critical to the success of its business. The Company believes that its brand image has been well received by customers, reflecting the fact that the brand image, like the Company's business, is based in part on trust and confidence. The Company's reputation and brand image could be negatively affected by rapid and widespread distribution of publicity through social and traditional media channels. The Company's reputation could also be affected by the Company's association with clients affected negatively through social and traditional media distribution, or other third parties, or by circumstances outside of the Company's control. Negative publicity, whether deserved or undeserved, could affect the Company's ability to attract or retain customers, or cause the Company to incur additional liabilities or costs, or result in additional regulatory scrutiny.

Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact the Company's business.

The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. Federal and state legislatures and regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. The federal banking agencies, including the OCC, have emphasized that climate-related risks are faced by banking organizations of all types and sizes and are in the process of enhancing supervisory expectations regarding banks' risk management practices. In December 2021, the OCC published proposed principles for climate risk management by banking organizations with more than $100 billion in assets. The OCC also has appointed its first ever Climate Change Risk Officer and established an internal climate risk implementation committee in order to assist with these initiatives and to support the agency's efforts to enhance its supervision of climate change risk management. Similar and even more expansive initiatives are expected, including potentially increasing supervisory expectations with respect to banks' risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. To the extent that these initiatives lead to the promulgation of new regulations or supervisory guidance applicable to the Company, the Company would likely experience increased compliance costs and other compliance-related risks.

The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact the Company's financial condition and results of operations; however, the physical effects of climate change may also directly impact the Company. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in the Bank's loan portfolio. Additionally, if insurance obtained by borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to borrowers, the collateral securing loans may be negatively impacted by climate change, which could impact the Company's financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on customers and impact the communities in which the Company operates. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on the Company's financial condition and results of operations.

Severe weather, natural disasters, acts of war or terrorism, geopolitical instability, public health issues, and other external events could significantly impact the Company's business.

Severe weather, natural disasters, acts of war or terrorism, geopolitical instability, public health issues, and other adverse external events could have a significant impact on the Company's ability to conduct business. In addition, such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on its financial condition and results of operations.

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 1C. CYBERSECURITY

Overview

The cybersecurity threat environment is volatile and dynamic, requiring a robust and dynamic framework to reduce and mitigate cybersecurity risk. Cybersecurity risk includes exposure to failures or interruptions of service or security breaches resulting from malicious technological attacks that impact the confidentiality, integrity, or availability of our or third parties' operations, systems, or data. We seek to mitigate cybersecurity risk and associated reputational and compliance risk by, among other things:

 

The following table summarizes

maintaining privacy policies, management oversight, accountability structures, and technology design processes to protect private and personal data;

actively monitoring and mitigating cybersecurity threats and risks with a three lines of defense structure to provide oversight, governance, challenge, and testing;

using a third-party cybersecurity oversight program;

​maintaining oversight of our information security program by senior management, our board-level Technology and Information Security Subcommittee that reports to our board-level Risk and Compliance Committee and our Board of Directors; and

​maintaining an incident response program intended to enable us to mitigate the impact of, and recover from, any cyberattacks, and facilitate communication to internal and external stakeholders, as of December 31, 2020,needed.

We had no material cybersecurity incidents in 2023.

 ​

Risk Management and Strategy

Our cybersecurity risk management strategy is integrated into our risk management practices and is embedded in each of our three lines of defense, as detailed below. We use a combination of management expertise and Board oversight, as discussed below, as well as outside consultants to assist us in overseeing our cybersecurity risk management program. We deploy safeguards designed to protect customer information and our own corporate information and technology. We have programs and processes in place designed to mitigate known attacks, and we use both internal and external resources to scan for vulnerabilities in our applications, systems, and platforms. We implement backup and recovery systems and require the same of our third-party service providers.

We use independent third-party service providers to perform penetration testing of our infrastructure to help us better understand the effectiveness of our controls, improve our defenses, and conduct assessments of our program for compliance with regulatory requirements and industry guidelines. We also engage with outside risk experts and industry groups to help us evaluate potential future threats and trends, particularly with respect to emerging information security and fraud risks. We generally have agreements in place with our service providers that include requirements related to cybersecurity and data privacy. We cannot guarantee, however, that such agreements will prevent a cyber incident from impacting our systems or information. Additionally, we may not be able to obtain adequate or any reimbursement from our service providers in the event we should suffer any such incidents. Due to applicable laws and regulations or contractual obligations, we may be held responsible for cyber incidents attributed to our service providers in relation to any data that we share with them.

While to date, we have not experienced a significant compromise, attack, or loss of data related to cybersecurity attacks, due to the nature of our business, we are under constant threat of an attack and could experience a significant cybersecurity event in the future. Potential risks we could face from a cybersecurity event are discussed in "Risk Factors" above.

Governance

Through established governance structures, including our problem and incident management process and cyber incident response plan, we have processes and procedures to help facilitate appropriate and effective oversight of cybersecurity risk. These processes and procedures enable our three lines of defense and management to review and manage cybersecurity risks, monitor threats, and provide for further escalation to executive management, our board-level Technology and Information Security Subcommittee reporting to our board-level Risk and Compliance Committee, or to the full Board, as appropriate.

Role of the Board of Directors

Our Board of Directors plays a critical role in the oversight of risk, including risks from cybersecurity threats, and has established a risk oversight structure that seeks to ensure that cybersecurity risks are identified, monitored, assessed, and mitigated appropriately. In that regard, our Board is actively engaged in the oversight of our cyber risk profile, which includes risks from cybersecurity threats, enterprise cyber strategy, and key cyber initiatives. Our Board regularly receives reports on such matters from our Chief Information Officer, Chief Information Security Officer, and other relevant personnel. Our Board also meets with our internal and external auditors, and federal and state regulators to review and discuss reports on risk, examination, and regulatory compliance matters.

Our board-level Risk Committee is responsible for assisting the Board in its oversight of risk, including cybersecurity threats, and for overseeing our enterprise risk management framework. The Risk Committee actively engages with our risk group and other members of management to discuss major risk exposures, establish risk management principles, and determine our risk appetite, and regularly reports on its activities, and makes recommendations to, the full Board. The Risk Committee receives a quarterly summary analysis of cybersecurity risks, threats, and incidents. In addition, the Risk Committee is engaged, as needed, in accordance with our Cybersecurity Incident Response Plan.

Role of Management

Our cybersecurity risk management program is built on three lines of defense, which collectively are designed to assess, identify, assess, and manage our material risks from cybersecurity threats.

Our Information Security department, which is our first line of defense, operates under our Chief Information Security Officer, who manages preventative and detective controls to protect against cybersecurity risks and responds to cyber incidents and data breaches. At least annually, the first line conducts mandatory teammate training on information security and provides ongoing information security education and awareness for teammates, such as online training classes, mock phishing attacks and information security awareness materials. Our cybersecurity risk management program is designed to maintain and challenge our information security defense system, as well as monitor, respond, evaluate, and escalate cyber threats.

The second line of defense independently evaluates, monitors, and challenges our risk mitigation efforts to proactively identify cybersecurity risks, including early-stage engagement and risk management with emerging threats. Second line teammates provide effective challenge to the cybersecurity risk management efforts of the first line through ongoing engagement in problem incidents, regular reviews of cybersecurity risk reporting, and inquiries into the sufficiency of risk management activities. Our second line of defense is led by our management-level Enterprise Risk Committee which governs our technology and operational risk tolerances, including cybersecurity and third and/or fourth party provider risks. This committee includes the Information Security Officer and is co-sponsored by the Chief Information Officer and the Chief Operating Officer. These individuals have relevant financial, technical, and business degrees, hold relevant certifications, and each have over 20 years of experience in their respective areas of expertise, with a minimum of 10 years in leadership roles, including multiple years at financial institutions. The Committee is responsible for escalating key risks to our Management Risk Committee, which includes all members of our Executive Leadership Team.

Internal Audit serves as the third line of defense and provides independent assurance on how effectively we are mitigating, managing, and challenging our cybersecurity risks.

ITEM 2 – PROPERTIES

As of December 31, 2023, the Company maintained 26 banking offices that are used in the normal course of business. The principal executive offices of the Company are located at 628 Main Street in the business district of Danville, Virginia. This building is owned by the Company. The Company leases certain space located at 202 S. Jefferson Street, Roanoke, Virginia as a result of the merger with HomeTown. This office serves as the Virginia banking headquarters. The Company leases an office at 703 Green Valley Road in Greensboro, North Carolina. This building serves as the head office for the Company's North Carolina banking headquarters. 

The Company owns 22 other offices for a total of 23 owned buildings. There are no mortgages or liens against any of the properties owned by the Company. The Company operates 34 ATMs on owned or leased facilities. The Company leases five other offices for a total of seven leased office locations and leases one storage warehouse. Management believes that upon expiration of each of the Company's leases it will be able to extend the lease on satisfactory terms or relocate to another acceptable location.

ITEM 3 – LEGAL PROCEEDINGS

In the ordinary course of operations, the Company and the Bank are parties to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market and Dividend Information

The Company's common stock is traded on the Nasdaq Global Select Market under the symbol "AMNB." At December 31, 2023, the Company had 3,686 shareholders of record. 

The Company's future dividend policy is subject to the discretion of the Boards of Directors of the Company and the Bank and will depend upon a number of factors, including future earnings, financial condition, cash requirements and general business conditions. The Company and the Bank are also subject to certain restrictions imposed by the reserve and capital requirements of federal and state statutes and regulations. See "Part I, Item 1. Business - Supervision and Regulation - Dividends," for information on regulatory restrictions on dividends.

Stock Compensation Plans

The Company's 2018 Stock Incentive Plan was adopted by the Board of Directors of the Company on February 20, 2018 and approved by shareholders on May 15, 2018 at the Company's 2018 Annual Meeting of Shareholders. The plan and stock compensation in general are discussed in Note 13 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

The following table summarizes information, as of December 31, 2023, relating to the Company's equity based compensation plans, pursuant to which grants of options to acquire shares of common stock have been and may be granted from time to time.

 

  

December 31, 2020

 
  Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights  Weighted-Average Per Share Exercise Price of Outstanding Options, Warrants and Rights  Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans 

Equity compensation plans approved by shareholders

  10,541  $16.63   571,460 

Equity compensation plans not approved by shareholders

         

Total

  10,541  $16.63   571,460 

Stock Repurchase Program

On December 19, 2019, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of a stock repurchase program that authorized the repurchase of up to 400,000 shares of the Company's common stock through December 31, 2020. The Company suspended the program in the second quarter2023

Number of 2020 in an effortShares to conserve capital due to COVID-19. In 2020, the Company repurchased 140,526 shares at an average costbe Issued Upon Exercise of $35.44 per shareOutstanding Options, Warrants and RightsWeighted-Average Per Share Exercise Price of Outstanding Options, Warrants and RightsNumber of Shares Remaining Available for a total cost of $4,981,000.
On January 12, 2021, the Company filed a Form 8-K with the SEC to announce the approvalFuture Issuance Under Equity Compensation Plans

Equity compensation plans approved by its Board of Directors of a stock repurchase program that authorizes the repurchase of up to 350,000 shares of the Company's common stock through December 31, 2021.shareholders

$423,148

Comparative Stock Performance

The following graph compares the Company's cumulative total return to its shareholders with the returns of two indexes for the five-year period ended December 31, 2020. The cumulative total return was calculated taking into consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2015. The indexes are the Nasdaq Composite Index and the SNL Bank $1 Billion - $5 Billion Index, which includes bank holding companies with assets of $1 billion to $5 billion and is publishedEquity compensation plans not approved by SNL Financial, LC.shareholders

Total

$423,148

Stock Repurchase Program

 

American National Bankshares Inc.

trpgraph.jpg

  

Period Ending

 

Index

 

12/31/2015

  

12/31/2016

  

12/31/2017

  

12/31/2018

  

12/31/2019

  

12/31/2020

 

American National Bankshares Inc.

 $100.00  $140.67  $158.91  $124.88  $173.57  $119.86 

Nasdaq Composite

  100.00   108.87   141.13   137.12   187.44   271.64 

SNL Bank $1B-$5B

  100.00   143.87   153.37   134.37   163.35   138.81 

ITEM 6 - SELECTED FINANCIAL DATA

The following table sets forth selected financial data for the Company for the last five years:

(Amounts in thousands, except share and per share information and ratios)

                    
  

December 31,

 
  

2020

  

2019

  

2018

  

2017

  

2016

 

Results of Operations:

                    

Interest income

 $95,840  $92,855  $68,768  $63,038  $56,170 

Interest expense

  12,020   15,728   9,674   7,291   6,316 

Net interest income

  83,820   77,127   59,094   55,747   49,854 

Provision for (recovery of) loan losses

  8,916   456   (103)  1,016   250 

Noninterest income

  16,843   15,170   13,274   14,227   13,505 

Noninterest expense

  54,565   66,074   44,246   42,883   39,801 

Income before income tax provision

  37,182   25,767   28,225   26,075   23,308 

Income tax provision

  7,137   4,861   5,646   10,826   7,007 

Net income

 $30,045  $20,906  $22,579  $15,249  $16,301 
                     

Financial Condition:

                    

Assets

 $3,050,010  $2,478,550  $1,862,866  $1,816,078  $1,678,638 

Loans, net of unearned income

  2,015,056   1,830,815   1,357,476   1,336,125   1,164,821 

Securities

  474,806   387,825   339,730   327,447   352,726 

Deposits

  2,611,330   2,060,547   1,566,227   1,534,726   1,370,640 

Shareholders' equity

  337,894   320,258   222,542   208,717   201,380 

Shareholders' equity, tangible (1)

  246,755   228,528   177,744   163,654   155,789 
                     

Per Share Information:

                    

Earnings per share, basic

 $2.74  $1.99  $2.60  $1.76  $1.89 

Earnings per share, diluted

  2.73   1.98   2.59   1.76   1.89 

Cash dividends paid

  1.08   1.04   1.00   0.97   0.96 

Book value

  30.77   28.93   25.52   24.13   23.37 

Book value, tangible (1)

  22.47   20.64   20.38   18.92   18.08 

Average common shares outstanding - basic

  10,981,623   10,531,572   8,698,014   8,641,717   8,611,507 

Average common shares outstanding - diluted

  10,985,790   10,541,337   8,708,462   8,660,628   8,621,241 
                     

Selected Ratios:

                    

Return on average assets

  1.08%  0.91%  1.24%  0.87%  1.02%

Return on average common equity (2)

  9.12%  7.16%  10.56%  7.34%  8.07%

Return on average tangible common equity (1)(3)

  13.19%  10.43%  13.49%  9.59%  10.85%

Dividend payout ratio

  39.41%  52.45%  38.54%  54.98%  50.71%

Efficiency ratio (1)(4)

  52.80%  57.25%  59.20%  60.14%  59.97%

Net interest margin

  3.30%  3.68%  3.49%  3.50%  3.52%
                     

Asset Quality Ratios:

                    

Allowance for loan losses to period end loans

  1.06%  0.72%  0.94%  1.02%  1.10%

Allowance for loan losses to period end nonperforming loans

  793.88%  570.59%  1,101.98%  531.37%  360.39%

Nonperforming assets to total assets

  0.12%  0.15%  0.11%  0.21%  0.29%

Net charge-offs to average loans

  0.03%  0.01%  0.05%  0.02%  0.00%
                     

Capital Ratios:

                    

Total risk-based capital ratio

  15.18%  14.04%  15.35%  14.39%  14.81%

Common equity tier 1 capital ratio

  12.36%  11.56%  12.55%  11.50%  11.77%

Tier 1 capital ratio

  13.78%  12.98%  14.46%  13.42%  13.83%

Tier 1 leverage ratio

  9.48%  10.75%  11.62%  10.95%  11.67%

Tangible common equity to tangible assets ratio (1)(5)

  8.34%  9.57%  9.78%  9.24%  9.54%
On January 26, 2023, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of a stock repurchase program that authorized the repurchase of up to $10.0 million of the Company's common stock through December 31, 2023.There were no shares repurchased during the three months ended December 31, 2023. In 2023, the Company repurchased 34,131 shares at an average cost of $30.58 for a total cost of $1.0 million.

Comparative Stock Performance

The following graph compares the Company's cumulative total return to its shareholders with the returns of two indexes for the five-year period ended December 31, 2023. The cumulative total return was calculated taking into consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2018. The indexes are the Nasdaq Composite Index and the SNL Bank $1 Billion - $5 Billion Index, which includes bank holding companies with assets of $1 billion to $5 billion and is published by SNL Financial, LC.

stockperformancechart2.jpg

  

Period Ending

 

Index

 

12/31/2018

  

12/31/2019

  

12/31/2020

  

12/31/2021

  

12/31/2022

  

12/31/2023

 

American National Bankshares Inc.

 $100.00  $139.05  $95.92  $142.30  $143.94  $196.69 

Nasdaq Composite

  100.00   136.69   198.10   242.03   163.28   236.17 

SNL Bank $1B-$5B

  100.00   125.46   113.94   158.62   139.85   140.55 

ITEM 6 - RESERVED

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The main purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the past three years. The discussion and analysis are intended to supplement and highlight information contained in the accompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K.

RECLASSIFICATION

In certain circumstances, reclassifications have been made to prior period information to conform to the 2023 presentation. There were no material reclassifications.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies followed by the Company conform with GAAP and to general practices within the banking industry. The Company's critical accounting policies, which are summarized below, relate to (1) the allowance for credit losses, and (2) goodwill and intangible assets. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements.

The financial information contained within the Company's financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method.

Allowance for Credit Losses ("ACL") - Loans

The purpose of the ACL is to provide for probable expected losses inherent in the loan portfolio. The allowance is increased by the provision for credit losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.

The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ACL and the provision for or recovery of credit loss expense.

The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan officers, (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production (the Loan Review function consists of a co-sourced arrangement using both internal personnel and external vendors to provide the Company with a more robust review function of the loan portfolio), (6) regular meetings of the Credit Committee to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans.

Risk grades are assigned as part of the loan origination process. From time to time, risk grades may be modified as warranted by the facts and circumstances surrounding the credit.

Calculation and analysis of the ACL is prepared quarterly by the Finance Department with input from the Credit Department. The Company's Credit Committee, Risk and Compliance Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.

The Company's ACL consists of quantitative and qualitative allowances and an allowance for loans that are individually assessed for credit losses. Each of these components is determined based upon estimates and judgments. The quantitative allowance uses historical default and loss experience as well as estimates for weighted average lives to calculate lifetime expected losses, along with various qualitative factors, including the effects of changes in risk selection, underwriting standards, and lending policies; expected economic conditions throughout a reasonable and supportable period of 24 months; experience of lending staff; quality of the loan review system; and changes in the regulatory, legal, and competitive environment and an assessment of peer loss experience. The Company considers economic forecasts from highly recognized third-parties for the model inputs. Loans are segmented based on the type of loan and internal risk ratings. The Company utilizes two calculation methodologies to estimate the collective quantitative allowance: the vintage method and the non-discounted cash flow method. Allowance estimates for residential real estate loans are determined by a vintage method which pools loans by date of origination and applies historical average loss rates based on the age of the loans. Allowance estimates for all other loan types are determined by a non-discounted cash flow method which applies historical probabilities of default and loss given default rates to model expected cash flows for each loan through its life and forecast future expected losses.

Loans that do not share risk characteristics are evaluated on an individual basis. The individual reserve component relates to loans that have shown substantial credit deterioration as measured by risk rating and/or delinquency status. In addition, the Company has elected the practical expedient that would include loans for individual assessment consideration if the repayment of the loan is expected substantially through the operation or sale of collateral because the borrower is experiencing financial difficulty. Where the source of repayment is the sale of collateral, the ACL is based on the fair value of the underlying collateral, less selling costs, compared to the amortized cost basis of the loan. If the ACL is based on the operation of the collateral, the reserve is calculated based on the fair value of the collateral calculated as the present value of expected cash flows from the operation of the collateral, compared to the amortized cost basis. If the Company determines that the value of a collateral dependent loan is less than the recorded investment in the loan, the Company charges off the deficiency if it is determined that such amount is deemed to be a confirmed loss.

No single statistic, formula, or measurement determines the adequacy of the allowance. Management makes subjective and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans. However, the entire allowance is used to absorb credit losses inherent in the loan portfolio, including identified and unidentified losses.

The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period as facts and circumstances evolve. Furthermore, management cannot provide assurance that in any particular period the Bank will not have sizable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factors at the time.

On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new accounting standard replaced the incurred loss model used for the calculations for the years ended December 31, 2022 and 2021.

Goodwill and Intangible Assets

The Company follows Accounting Standards Codification ("ASC") 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company records as goodwill the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. The Company performs its annual analysis on June 30 of each fiscal year. No indicators of impairment were noted for the years ended December 31, 2023, 2022, and 2021. Intangible assets with definite useful lives are amortizing over their estimated useful lives of 5 to 10 years. Goodwill is the only intangible asset with an indefinite life on the Company's consolidated balance sheets.

NON-GAAP PRESENTATIONS

Non-GAAP presentations are provided because the Company believes these may be valuable to investors. These include (1) the calculation of the efficiency ratio, (2) the analysis of net interest income presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, (3) return on average tangible common equity, (4) tangible common equity to tangible assets ratio, and (5) tangible book value per share. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance but cautions that such information not be viewed as a substitute for GAAP information. In addition, the Company's non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company, in referring to its net income, is referring to income under GAAP.

The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of other real estate owned ("OREO"), and (2) core deposit intangible amortization, and (3) merger related expenses by net interest income including tax equivalent income on nontaxable loans and securities and noninterest income and excluding gains or losses on securities and gains or losses on sale or disposal of premises and equipment. The efficiency ratio for 2023, 2022, and 2021 was 62.31%, 57.37%, and 51.05%, respectively. The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands):

  

Year Ended December 31,

 
  

2023

  

2022

  

2021

 

Efficiency Ratio

            

Noninterest expense

 $68,050  $64,086  $59,008 

Add/subtract: gain/loss on sale OREO, net of writedowns

  13   2   (111)

Subtract: core deposit intangible amortization

  (1,069)  (1,260)  (1,464)

Subtract: merger related expenses

  (2,577)      

Adjusted noninterest expense

 $64,417  $62,828  $57,433 
             

Net interest income

 $84,582  $90,238  $90,391 

Tax equivalent adjustment

  236   244   241 

Noninterest income

  18,336   18,807   21,031 

Add/subtract: loss/(gain) on securities

  68      (35)

Add/subtract: loss/(gain) on sale of fixed assets

  155   228   885 

Adjusted revenues

 $103,377  $109,517  $112,513 
             

Efficiency ratio

  62.31%  57.37%  51.05%

 

 

(1)

Non-GAAP financial measure. See the Non-GAAP Presentations section of Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for reconciliation.

(2)

Return on average common equity is calculated by dividing net income available to common shareholders by average common equity.

(3)

Return on average tangible common equity is calculated by dividing net income available to common shareholders plus amortization of intangibles tax effected by average common equity less average intangibles.

(4)

The efficiency ratio is calculated by dividing noninterest expense excluding (i) gains or losses on the sale of other real estate owned, (ii) core deposit intangible amortization, and (iii) merger related expenses by net interest income including tax equivalent income on nontaxable loans and securities and noninterest income excluding (x) gains or losses on securities and (y) gains or losses on sale or disposal of premises and equipment.

(5)

Tangible common equity to tangible assets ratio is calculated by dividing period-end common equity less period-end intangibles by period-end assets less period-end intangibles.

Net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 21% for 2023, 2022, and 2021. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (in thousands):

  

Year Ended December 31,

 
  

2023

  

2022

  

2021

 

Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income

            

Non-GAAP measures:

            

Interest income - loans

 $106,670  $82,708  $87,181 

Interest income - investments and other

  13,795   13,540   8,856 

Interest expense - deposits

  (28,843)  (3,553)  (3,645)

Interest expense - customer repurchase agreements

  (2,980)  (26)  (22)

Interest expense - other short-term borrowings

  (2,212)  (633)   

Interest expense - long-term borrowings

  (1,612)  (1,554)  (1,738)

Total net interest income

 $84,818  $90,482  $90,632 

Less non-GAAP measures:

            

Tax benefit realized on nontaxable interest income - loans

  (199)  (139)  (141)

Tax benefit realized on nontaxable interest income - municipal securities

  (37)  (105)  (100)

GAAP measures net interest income

 $84,582  $90,238  $90,391 

Return on average tangible common equity is calculated by dividing net income available to common shareholders by average common equity.

  

Year Ended December 31,

 
  

2023

  

2022

  

2021

 

Return on Average Tangible Common Equity

            

Return on average common equity (GAAP basis)

  7.94%  10.36%  12.50%

Impact of excluding average goodwill and other intangibles

  3.24%  4.20%  4.84%

Return on average tangible common equity (non-GAAP)

  11.18%  14.56%  17.34%

Tangible common equity to tangible assets ratio is calculated by dividing period-end common equity less period-end intangibles by period-end assets less period-end intangibles.

  

As of December 31,

 
  

2023

  

2022

 

Tangible Common Equity to Tangible Assets

        

Common equity to assets ratio (GAAP basis)

  11.10%  10.48%

Impact of excluding goodwill and other intangibles

  (2.58)%  (2.66)%

Tangible common equity to tangible assets ratio (non-GAAP)

  8.52%  7.82%

The Company presents book value per share (period-end shareholders' equity divided by period-end common shares outstanding) and tangible book value per share. In calculating tangible book value, the Company excludes goodwill and other intangible assets.

  

As of December 31,

 
  

2023

  

2022

 

Tangible Book Value Per Share

        

Book value per share (GAAP basis)

 $32.27  $30.27 

Impact of excluding goodwill and other intangibles

  (8.21)  (8.33)

Tangible book value per share (non-GAAP)

 $24.06  $21.94 

 

 

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

The Company's 2023 financial highlights include the following: 

 

The purpose of this discussion is

Net income available to focus on significant changes incommon shareholders was $26.2 million and diluted earnings per share was $2.46 for the financial condition and results of operations of the Company during the past three years. The discussion and analysis are intended to supplement and highlight information contained in the accompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K.

RECLASSIFICATION

In certain circumstances, reclassifications have been made to prior period information to conform to the 2020 presentation. There were no material reclassifications.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies followed by the Company conform with GAAP and to general practices within the banking industry. The Company's critical accounting policies, which are summarized below, relate to (1) the allowance for loan losses, (2) mergers and acquisitions, (3) acquired loans with specific credit-related deterioration, (4) goodwill and intangible assets, (5) deferred tax assets and liabilities, and (6) other-than-temporary impairment of securities. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements.

The financial information contained within the Company's financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method.

Allowance for Loan Losses

The purpose of the allowance for loan losses ("ALLL") is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.

The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ALLL and the provision for loan loss expense.

The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan officers, (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production (the Loan Review function consists of a co-sourced arrangement using both internal personnel and external vendors to provide the Company with a more robust review function of the loan portfolio), (6) regular meetings of the Credit Committee to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans.

Risk grades are assigned as part of the loan origination process. From time to time, risk grades may be modified as warranted by the facts and circumstances surrounding the credit.

Calculation and analysis of the ALLL is prepared quarterly by the Finance Department with input from the Credit Department. The Company's Credit Committee, Risk and Compliance Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.

The Company's ALLL has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates and judgments.

The formula allowance uses historical loss experience as an indicator of future losses, along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries, trends in volume and terms of loans, effects of changes in underwriting standards, experience of lending staff, economic conditions, portfolio concentrations, regulatory, legal, competition, quality of loan review system, and value of underlying collateral. In the formula allowance for commercial and commercial real estate loans, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The period-end balances for each loan risk-grade category are multiplied by the adjusted loss factor. Allowance calculations for residential real estate and consumer loans are calculated based on historical losses for each product category without regard to risk grade. This loss rate is combined with qualitative factors resulting in an adjusted loss factor for each product category.

The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. These include:

The present value of expected future cash flows discounted at the loan's effective interest rate. The effective interest rate on a loan is the rate of return implicit in the loan (that is, the contractual interest rate adjusted for any net deferred loan fees or costs and any premium or discount existing at the origination or acquisition of the loan);

The loan's observable market price; or

The fair value of the collateral, net of estimated costs to dispose, if the loan is collateral dependent.

The use of these computed values is inherently subjective and actual losses could be greater or less than the estimates.

No single statistic, formula, or measurement determines the adequacy of the allowance. Management makes subjective and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans. However, the entire allowance is used to absorb credit losses inherent in the loan portfolio, including identified and unidentified losses.

The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period as facts and circumstances evolve. Furthermore, management cannot provide assurance that in any particular period the Bank will not have sizable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factors at the time.

Mergers and Acquisitions

Business combinations are accounted for under the FASB Accounting Standards Codification ("ASC") 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions.

Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning, consultants, and advertising costs. The Company will account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities will be recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expense caption.

Acquired Loans with Specific Credit-Related Deterioration

Acquired loans with specific credit deterioration are accounted for by the Company in accordance with FASB ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. Certain acquired loans, those for which specific credit-related deterioration since origination is identified, are recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected.

Goodwill and Intangible Assets

The Company follows ASC 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected June 30 as the date to perform the annual impairment test.  Due to the COVID-19 pandemic market conditions, the Company determined a triggering event occurred during the first quarter of 2020 and performed a qualitative assessment at March 31, 2020. As the pandemic continued, the Company performed qualitative assessments at June 30 and September 30 and a quantitative assessment at year ended December 31, 2020. The assessments determined the fair value exceeded the carrying value2023, compared to net income of $34.4 million and did not indicate impairment. The impactdiluted earnings per share of COVID-19 on market conditions and other changes in the economic environment, operations, or other adverse events could result in future impairment charges which could have a material adverse impact on the Company's operating results. No indicators of impairment were identified during$3.23 for the year ended December 31, 2019.  Intangible assets with definite useful lives are amortizing over their estimated useful lives of 10 years. Goodwill is the only intangible asset with an indefinite life on the Company's consolidated balance sheets.

Deferred Tax Assets and Liabilities

The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed.

Other-than-temporary Impairment of Securities

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (1) the Company intends to sell the security or (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that it will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.

RECENT ACQUISITION

On April 1, 2019, the Company completed its acquisition of HomeTown. The combination deepened the Company's footprint in the Roanoke, Virginia metropolitan area and created a presence in the New River Valley with an office in Christiansburg, Virginia. After the merger and with two office consolidations, the Company has eight offices in the combined Roanoke/New River Valley market area. As a result of the merger, the holders of shares of HomeTown common stock received 0.4150 shares of the Company's common stock for each share of HomeTown common stock held immediately prior to the effective date of the merger. Following completion of the merger, HomeTown's subsidiary bank, HomeTown Bank, was merged with and into the Bank.

NON-GAAP PRESENTATIONS

Non-GAAP presentations are provided because the Company believes these may be valuable to investors. These include (1) the calculation of the efficiency ratio, (2) the analysis of net interest income presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, (3) return on average tangible common equity, (4) tangible common equity to tangible assets ratio, and (5) tangible book value per share.

The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of other real estate owned ("OREO"), (2) core deposit intangible amortization and (3) merger related expense by net interest income including tax equivalent income on nontaxable loans and securities and noninterest income and excluding (x) gains or losses on securities and (y) gains or losses on sale or disposal of premises and equipment. The efficiency ratio for 2020, 2019, and 2018 was 52.80%, 57.25%, and 59.20%, respectively. The Company expects this ratio to increase in 2021 as the benefits of PPP related items decrease. The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance but cautions that such information not be viewed as a substitute for GAAP information. In addition, the Company's non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands):

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 

Efficiency Ratio

            

Noninterest expense

 $54,565  $66,074  $44,246 

Add/subtract: gain/loss on sale OREO, net of writedowns

  4   52   (44)

Subtract: core deposit intangible amortization

  (1,637)  (1,398)  (265)

Subtract: merger related expenses

     (11,782)  (872)
  $52,932  $52,946  $43,065 
             

Net interest income

 $83,820  $77,127  $59,094 

Tax equivalent adjustment

  288   369   556 

Noninterest income

  16,843   15,170   13,274 

Subtract: gain on securities

  (814)  (607)  (123)

Add/subtract: loss/gain on sale of fixed assets

  110   427   (60)
  $100,247  $92,486  $72,741 
             

Efficiency ratio

  52.80%  57.25%  59.20%

Net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 21% for 2020, 2019, and 2018. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (in thousands):

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 

Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income

            

Non-GAAP measures:

            

Interest income - loans

 $87,881  $82,869  $60,159 

Interest income - investments and other

  8,247   10,355   9,165 

Interest expense - deposits

  (9,729)  (13,143)  (8,086)

Interest expense - customer repurchase agreements

  (259)  (596)  (164)

Interest expense - other short-term borrowings

     (54)  (22)

Interest expense - long-term borrowings

  (2,032)  (1,935)  (1,402)

Total net interest income

 $84,108  $77,496  $59,650 

Less non-GAAP measures:

            

Tax benefit realized on nontaxable interest income - loans

  (181)  (185)  (192)

Tax benefit realized on nontaxable interest income - municipal securities

  (107)  (184)  (364)

GAAP measures net interest income

 $83,820  $77,127  $59,094 

Return on average tangible common equity is calculated by dividing net income available to common shareholders by average common equity.

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 

Return on Average Tangible Common Equity

            

Return on average common equity (GAAP basis)

  9.12%  7.16%  10.56%

Impact of excluding average goodwill and other intangibles

  4.07%  3.27%  2.93%

Return on average tangible common equity (non-GAAP)

  13.19%  10.43%  13.49%

Tangible common equity to tangible assets ratio is calculated by dividing period-end common equity less period-end intangibles by period-end assets less period-end intangibles.

  

As of December 31,

 
  

2020

  

2019

 

Tangible Common Equity to Tangible Assets

        

Common equity to assets ratio (GAAP basis)

  11.08%  12.92%

Impact of excluding goodwill and other intangibles

  (2.74)%  (3.35)%

Tangible common equity to tangible assets ratio (non-GAAP)

  8.34%  9.57%

The Company presents book value per share (period-end shareholders' equity divided by period-end common shares outstanding) and tangible book value per share. In calculating tangible book value, the Company excludes goodwill and other intangible assets.

  

As of December 31,

 
  

2020

  

2019

 

Tangible Book Value Per Share

        

Book value per share (GAAP basis)

 $30.77  $28.93 

Impact of excluding goodwill and other intangibles

  (8.30)  (8.29)

Tangible book value per share (non-GAAP)

 $22.47  $20.64 

RESULTS OF OPERATIONS

Executive Overview

The Company's 2020 financial highlights include the following:

Earnings produced a return on average tangible common equity of 13.19% for 2020, compared to 10.43% for 2019.*2022.

Average deposits grew 22.3% in 2020 over 2019.

Net interest margin was 3.30% for 2020, down from 3.68% for 2019.*   

Noninterest revenues increased $1.7 million, or 11.0%, when compared to the previous year.

Noninterest expense decreased $11.5 million, or 17.4%, when compared to 2019, primarily due to $11.8 million in one-time merger expenses associated with the HomeTown acquisition in 2019.

The 2020 provision for loan losses totaled $8.9 million, which compares to a provision of $456 thousand in the prior year. The allowance for loan losses as a percentage of loans held for investment increased to 1.06% at year-end 2020, compared to 0.72% at year-end 2019.

Nonperforming assets as a percentage of total assets were 0.12% at December 31, 2020, down from 0.15% at December 31, 2019.

Net charge-offs were 0.03% for 2020, up from 0.01% for 2019.

As a result of the Company's participation in the SBA's PPP under the CARES Act, it had outstanding net PPP loans of $211.3 million at December 31, 2020. The Company had net unamortized PPP loan origination fees with a balance of $4.4 million at December 31, 2020.

*Refer to the Non-GAAP Financial Measures section within this section for further information on these non-GAAP financial measurements.

Net Income

Net income for 2020 was $30,045,000 compared to $20,906,000 for 2019, an increase of $9,139,000, or 43.7%. Basic earnings per share were $2.74 for 2020 compared to $1.99 for 2019. Diluted earnings per share were $2.73 for 2020 compared to $1.98 for 2019. This net incomeEarnings produced for 2020 a return on average assets of 1.08%, a return on average common equity of 9.12%, and a return on average tangible common equity of 13.19%11.18% for 2023, compared to 14.56% for 2022.*

Period end net loans grew $101.9 million or 4.7% in 2023 as compared to 2022.

Period-end deposits increased $10.2 million or less than one percent as compared to 2022.

The 2023 provision for credit losses totaled $495 thousand, compared to $1.6 million in the prior year. 

Nonperforming assets as a percentage of total assets were 0.19% at December 31, 2023, up from 0.05% at December 31, 2022.

Net charge-offs to total average loans were 0.00% for 2023, compared to 0.04% for 2022.

*Refer to the Non-GAAP Financial Measures section within this section for further information on these non-GAAP financial measurements.

Net Income

Net income for 2023 was $26.2 million compared to $34.4 million for 2022, a decrease of $8.2 million or 24.0%. Basic and diluted earnings per share were $2.46 for 2023 compared to $3.23 for 2022. This net income produced for 2023 a return on average assets of 0.85%, a return on average common equity of 7.94%, and a return on average tangible common equity of 11.18%.

Net income for 2022 was $34.4 million compared to $43.5 million for 2021, decrease of $9.1 million or 20.9%. Basic earnings per share were $3.23 per share for 2022 compared to $4.00 for 2021. This net income produced for 2022 a return on average assets of 1.07%, a return on average common equity of 10.36%, and a return on average tangible common equity of 14.56%.

The decrease in earnings in 2023 was primarily caused by the increased cost of deposits net of increased interest income in a significantly higher rate environment in 2023 compared to 2022 and merger related expenses in 2023.

 

The increase in earnings in 2020 was primarily related to the April 1, 2019 merger with HomeTown as the Company realized a full year of operations from the combined entities and 2019 earnings were impacted adversely by $11,782,000 in one-time merger expenses. 

Net income for 2019 was $20,906,000 compared to $22,579,000 for 2018, a decrease of $1,673,000, or 7.4%. Basic earnings per share were $1.99 for 2019 compared to $2.60 for 2018. Diluted earnings per share were $1.98 for 2019 compared to $2.59 for 2018. This net income produced for 2019 a return on average assets of 0.91%, a return on average common equity of 7.16%, and a return on average tangible common equity of 10.43%.

The decrease in earnings in 2019 was primarily related to the April 1, 2019 merger with HomeTown, as earnings were impacted adversely by $11,782,000 in one-time merger expenses. Partially offsetting this impact were increases in net interest income associated with higher loan yields and greater loan volume also associated with the HomeTown acquisition augmented by organic growth throughout the rest of the Company's franchise.

Net Interest Income

 

Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearinginterest-bearing liabilities, primarily deposits and borrowings. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. Mergers including the most recent 2019 acquisition of HomeTown impacted net interest income positively for 2020, 2019, and 2018 through increased earning assets.

 

The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities. A tax rate of 21% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis for 2020, 2019,2023, 2022, and 2018.2021. Net interest income divided by average earning assets is referred to as the net interest margin. The net interest spread represents the difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities. All references in this section relate to average yields and rates and average asset and liability balances during the periods discussed.

 

Net interest income on a taxable equivalent basis increased $6,612,000,decreased $5.7 million, or 8.5%6.3%, in 20202023 from 2019,2022, following a $17,846,000,decrease of $150 thousand, or 29.9%, increaseless than one percent, in 20192022 from 2018.2021. The increasedecrease in net interest income in 20202023 was primarily duethe net result of higher deposit and borrowing costs and increased interest income compared to increased volume of earning assets.2022. Average loaninterest-bearing deposit balances for 20202023 were up $310,962,000down $67.9 million, or 18.2%3.8%, over 2019, primarily due to PPP lending. These loans had a net balance of $211,275,000 at December 31, 2020, earn 1% interest and generated fee income that is being accreted over the life of the loans. The fee accretion contributed to the yield on the PPP portfolio, but the much lower effective rate contributed to decreased loan yields for 2020. PPP yield may be positively impacted in future periods due to forgiveness and recognition of net fees. Net interest margin benefited from $6.1 million in interest earned on these loans, net of deferred fees and costs. Loan yields overall for 2020 were 50 basis points lower than 2019, reflecting a much lower rate environment during the period and the effect of PPP lending.2022. 

 

Yields on loans were 4.36%4.72% in 20202023 compared to 4.86%4.02% in 2019.2022. Cost of fundsinterest-bearing deposits was 0.72%1.70% in 20202023 compared to 1.08%0.20% in 2019.2022. Between 20202023 and 2019,2022, deposit rates for demand, accounts decreased to 0.09% from 0.12%, money market and savings accounts, decreased to 0.46% from 1.18%, and time deposits decreased to 1.52% from 1.58%.increased by 56, 177, and 230 basis points, respectively. The net interest margin was 3.30%2.86% for 2020,2022, compared to 3.68%2.97% for 2019.2022. The decrease in net interest margin was driven by decliningincreasing interest rates and the impacton both sides of the lower rate on the PPP lending.balance sheet.

 

In 2020, the FOMC, in response to the COVID-19 crisis, reduced the target federal funds rate by 0.50% on March 3 and by another 1.00% on March 15, taking the federal funds target rate down to 0.25% where it remained for the rest

 

Net interest income on a taxable equivalent basis increased $17,846,000, or 29.9%, in 2019 from 2018, following a $2,564,000, or 4.5%, increase in 2018 from 2017. The increase in net interest income in 2019 was primarily due to increased volumes of earning assets and higher loan yields related to the acquisition of HomeTown coupled with organic growth in the legacy bank.

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the last three years. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans, if recognized, is recorded on a cash basis or when the loan returns to accrual status.

 

Net Interest Income Analysis

(dollars in thousands, except yields and rates)thousands)

 

 

Average Balance

  

Interest Income/Expense(1)

  

Average Yield/Rate

  

Average Balance

  

Interest Income/Expense(1)

  

Average Yield/Rate

 
 

2020

  

2019

  

2018

  

2020

  

2019

  

2018

  

2020

  

2019

  

2018

  

2023

  

2022

  

2021

  

2023

  

2022

  

2021

  

2023

  

2022

  

2021

 

Loans:

                   

Commercial

 $475,068  $306,065  $264,241  $17,768  $14,125  $10,579  3.74% 4.62% 4.00%

Real estate

 1,531,195  1,388,188  1,063,950  69,525  68,050  49,275  4.54  4.90  4.63 

Consumer

  8,998   10,046   4,676   588   694   305   6.53   6.91   6.52 

Total loans(2)

  2,015,261   1,704,299   1,332,867   87,881   82,869   60,159   4.36   4.86   4.51 
 

Total loans (2)

 $2,234,583  $2,055,393  $1,964,378  $106,670  $82,708  $87,181   4.72%  4.02%  4.44%
                    

Securities:

                    
U.S. Treasury 9,010   51   0.57   

Federal agencies and GSEs

 72,112  132,916  121,923  1,423  3,191  2,708  1.97  2.40  2.22 

Mortgage-backed and CMOs

 200,612  134,458  109,048  4,060  3,350  2,467  2.02  2.49  2.26 

State and municipal

 45,836  58,293  85,061  1,175  1,650  2,399  2.56  2.83  2.82 

Other securities

  20,382   16,552   14,950   1,098   903   718   5.39   5.46   4.80 

Taxable

 640,322  700,660  530,506  11,034  10,538  7,774  1.72  1.50  1.47 

Tax exempt

  6,336   19,341   19,048   176   511   484   2.78   2.66   2.54 

Total securities

 347,952  342,219  330,982  7,807  9,094  8,292  2.24  2.66  2.51   646,658   720,001   549,554   11,210   11,049   8,258   1.73   1.53   1.50 
                    

Deposits in other banks

  188,700   60,651   45,434   440   1,261   873   0.23   2.08   1.92   47,755   267,381   453,867   2,585   2,491   598   5.41   0.93   0.13 
                    

Total interest earning assets

 2,551,913  2,107,169  1,709,283   96,128   93,224   69,324   3.77   4.42   4.06  2,928,996  3,042,775  2,967,799   120,465   96,248   96,037   4.07   3.16   3.24 
                    

Nonearning assets

  221,094   196,455   118,375                148,356   168,893   208,765              
                    

Total assets

 $2,773,007  $2,303,624  $1,827,658               $3,077,352  $3,211,668  $3,176,564              
                    

Deposits:

                    

Demand

 $386,790  $307,329  $234,857  344  370  49  0.09  0.12  0.02  $483,573  $522,043  $476,710  2,892  202  152  0.60  0.04  0.03 

Money market

 574,510  445,505  393,321  2,634  5,246  3,505  0.46  1.18  0.89 

Savings

 198,313  166,842  132,182  117  284  40  0.06  0.17  0.03 

Savings and money market

 888,355  962,419  954,071  17,285  1,750  784  1.95  0.18  0.08 

Time

  436,081   457,746   374,152   6,634   7,243   4,492   1.52   1.58   1.20   325,322   280,672   366,604   8,666   1,601   2,709   2.67   0.57   0.74 

Total deposits

 1,595,694  1,377,422  1,134,512  9,729  13,143  8,086  0.61  0.95  0.71 

Total interest bearing deposits

 1,697,250  1,765,134  1,797,385  28,843  3,553  3,645  1.70  0.20  0.20 
                    

Customer repurchase agreements

 42,937  39,134  18,401  259  596  164  0.60  1.52  0.89  48,409  24,005  37,632  2,980  26  22  4.57  0.11  0.06 

Other short-term borrowings

 1  2,694  1,149    54  22  0.55  2.00  1.91  58,072  15,629    2,212  633    5.06  4.05  0.00 

Long-term borrowings

  35,586   33,644   27,874   2,032   1,935   1,402   5.71   5.75   5.03   28,381   28,280   31,878   1,612   1,554   1,738   5.60   5.50   5.45 

Total interest bearing liabilities

 1,674,218  1,452,894  1,181,936   12,020   15,728   9,674   0.72   1.08   0.82  1,832,112  1,833,048  1,866,895   35,647   5,766   5,405   1.94   0.31   0.29 
                    

Noninterest bearing demand deposits

 746,659  537,775  421,527               897,199  1,028,871  939,186              

Other liabilities

 22,777  20,933  10,374               18,702  17,393  22,325              

Shareholders' equity

  329,353   292,022   213,821                329,339   332,356   348,158              

Total liabilities and shareholders' equity

 $2,773,007  $2,303,624  $1,827,658               $3,077,352  $3,211,668  $3,176,564              
                    

Interest rate spread

               3.05%  3.34%  3.24%               2.13%  2.85%  2.95%

Net interest margin

               3.30%  3.68%  3.49%               2.86%  2.97%  3.05%
                    

Net interest income (taxable equivalent basis)

        84,108  77,496  59,650                84,818  90,482  90,632        

Less: Taxable equivalent adjustment(3)

         288   369   556        

Less: Taxable equivalent adjustment(3)

         236   244   241        

Net interest income

        $83,820  $77,127  $59,094                $84,582  $90,238  $90,391        

____________________________________________

(1) Interest income includes net accretion/amortization of acquired loan fair value adjustments and the net accretion/amortization of deferred loan fees/costs.

(2) Nonaccrual loans are included in the average balances.

(3) A tax rate of 21% in 2020, 2019,2023, 2022, and 20182021 was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis.

 

 

The following table presents the dollar amount of changes in interest income and interest expense, and distinguishes between changes resulting from fluctuations in average balances of interest earning assets and interest bearing liabilities (volume) and changes resulting from fluctuations in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately (dollars in thousands):

 

Changes in Net Interest Income (Rate / Volume Analysis)

 

 

2023 vs. 2022

  

2022 vs. 2021

 
 

2020 vs. 2019

  

2019 vs. 2018

     

Change

    

Change

 
    

Change

    

Change

  

Increase

  

Attributable to

  

Increase

  

Attributable to

 
 

Increase

  

Attributable to

  

Increase

  

Attributable to

   (Decrease)   Rate   Volume   (Decrease)   Rate   Volume 

Interest income

 

(Decrease)

  

Rate

  

Volume

  

(Decrease)

  

Rate

  

Volume

  

Loans:

             

Commercial

 $3,643  $(3,056) $6,699  $3,546  $1,741  $1,805 

Real estate

 1,475  (5,234) 6,709  18,775  3,022  15,753 

Consumer

  (106)  (36)  (70)  389   19   370 

Total loans

  5,012   (8,326)  13,338   22,710   4,782   17,928   23,962   16,323   7,639   (4,473)  (7,915)  3,442 

Securities:

              
U.S. Treasury 51  51    

Federal agencies and GSEs

 (1,768) (495) (1,273) 483  228  255 

Mortgage-backed and CMOs

 710  (714) 1,424  883  268  615 

State and municipal

 (475) (145) (330) (749) 9  (758)

Other securities

  195   (11)  206   185   103   82 

Taxable

 496  1,453  (957) 2,764  433  2,331 

Tax exempt

 (335) 25  (360) 27  21  6 

Total securities

 (1,287) (1,365) 78  802  608  194  161  1,478  (1,317) 2,791  454  2,337 

Deposits in other banks

  (821)  (1,819)  998   388   76   312   94   3,576   (3,482)  1,893   2,233   (340)

Total interest income

  2,904   (11,510)  14,414   23,900   5,466   18,434   24,217   21,377   2,840   211   (5,228)  5,439 
  

Interest expense

              

Deposits:

              

Demand

 (26) (109) 83  321  301  20  2,690  2,706  (16) 50  35  15 

Money market

 (2,612) (3,833) 1,221  1,741  1,232  509 

Savings

 (167) (213) 46  244  231  13 

Savings and money market

 15,535  15,680  (145) 966  987  (21)

Time

  (609)  (273)  (336)  2,751   1,616   1,135   7,065   6,771   294   (1,108)  (546)  (562)

Total deposits

 (3,414) (4,428) 1,014  5,057  3,380  1,677  25,290  25,157  133  (92) 476  (568)

Customer repurchase agreements

 (337) (390) 53  432  166  266  2,954  2,901  53  4  14  (10)
Other short-term borrowings (54) (27) (27) 32 1 31  1,579  (40) 1,619  633    633 

Long-term borrowings

  97   (14)  111   533   218   315   58   52   6   (184)  14   (198)

Total interest expense

  (3,708)  (4,859)  1,151   6,054   3,765   2,289   29,881   28,070   1,811   361   504   (143)

Net interest income

 $6,612  $(6,651) $13,263  $17,846  $1,701  $16,145  $(5,664) $(6,693) $1,029  $(150) $(5,732) $5,582 

 

Fair Value Impact to Net Interest Margin

 

The Company's fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. The impact of net accretion for 2018, 2019,2021, 2022, and 20202023 and the remaining estimated net accretion are reflected in the following table (dollars in thousands):

 

  

Loans Accretion

  

Deposit Accretion

  

Borrowings Amortization

  

Total

 

For the year ended December 31, 2018

 $1,390  $  $(102) $1,288 

For the year ended December 31, 2019

  3,101   375   (89)  3,387 

For the year ended December 31, 2020

  4,516   181   (85)  4,612 

For the years ending (estimated):

                

2021

  1,854   78   (102)  1,830 

2022

  1,198   50   (102)  1,146 

2023

  718   30   (102)  646 

2024

  485   5   (102)  388 

2025

  381   2   (102)  281 

Thereafter (estimated)

  1,696   3   (743)  956 
  

Loans Accretion

  

Deposit Accretion

  

Borrowings Amortization

  

Total

 

For the year ended December 31, 2021

 $5,259  $78  $(101) $5,236 

For the year ended December 31, 2022

  1,648   51   (102)  1,597 

For the year ended December 31, 2023

  1,968   31   (102)  1,897 

For the years ending (estimated):

                

2024

  845   4   (101)  748 

2025

  629      (101)  528 

2026

  549      (101)  448 

2027

  368      (101)  267 

2028

  152      (101)  51 

Thereafter (estimated)

  827      (444)  383 

 

 

Noninterest Income

 

For the year ended December 31, 2020,2023, noninterest income increased $1,673,000,decreased $471 thousand, or 11.0%2.5%, compared to the year ended December 31, 2019.2022.

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 
 

2020

  

2019

  

$ Change

  

% Change

  

2023

  

2022

  

$ Change

  

% Change

 

Noninterest income:

                

Trust fees

 $4,044  $3,847  $197  5.1%

Wealth management income

 $6,751  $6,521  $230  3.5%

Service charges on deposit accounts

 2,557  2,866  (309) (10.8) 2,216  2,676  (460) (17.2)

Interchange fees

 4,775 4,107 668 16.3 

Other fees and commissions

 3,925  3,693  232  6.3  650  906  (256) (28.3)

Mortgage banking income

 3,514  2,439  1,075  44.1  824  1,666  (842) (50.5)

Securities gains, net

 814  607  207  34.1 

Brokerage fees

 745  721  24  3.3 

Securities losses, net

 (68)  (68)  

Income from Small Business Investment Companies

 270  211  59  28.0  932  1,409  (477) (33.9)

Income from insurance investments

 764 747 17 2.3 

Losses on premises and equipment, net

 (110) (427) 317  74.2  (155) (228) 73  32.0 

Other

  1,084   1,213   (129)  (10.6)  1,647   1,003   644  64.2 

Total noninterest income

 $16,843  $15,170  $1,673   11.0% $18,336  $18,807  $(471) (2.5)%

 

A substantial portion of trust fees are earned basedService charges on account fair values, so changesdeposit accounts decreased by $460 thousand in the equity markets may have a large and potentially volatile impact on revenue. Trust2023 compared to 2022 while interchange fees increased $197,000 for 2020 compared to 2019. Other fees and commissions increased $232,000 in 2020 compared to 2019, while service charges decreased $309,000. Due to the actions taken to combat COVID-19, such as stay-at-home orders and restaurant and retail changes, debit card income decreased as consumers did not spend at the same levels in 2020 as 2019. The Company saw decreases in overdraft and related fees, another component of service charge income, caused by consumer spending decreases during the same period.$668 thousand. Mortgage banking income decreased by $842 thousand reflecting decreased demand for new home purchases and refinancing in a higher rate environment in 2023 than 2022. Income from small business investment companies decreased by $477 thousand in 2023. This income is based on the funds' net income and is difficult to predict. Other income increased $1,075,000 for 2020by $644 thousand in 2023 compared to 2019.2022 primarily due to the sale of other investments which are included in other assets on the consolidated balance sheets.

  

Year Ended December 31,

 
  

(Dollars in thousands)

 
  

2022

  

2021

  

$ Change

  

% Change

 

Noninterest income:

                

Wealth management income

 $6,521  $6,019  $502   8.3%

Service charges on deposit accounts

  2,676   2,611   65   2.5 

Interchange fees

  4,107   4,152   (45)  (1.1)

Other fees and commissions

  906   801   105   13.1 

Mortgage banking income

  1,666   4,195   (2,529)  (60.3)

Securities gains, net

     35   (35)  (100.0)

Income from Small Business Investment Companies

  1,409   1,972   (563)  (28.5)

Income from insurance investments

  747   1,199   (452)  (37.7)

Losses on premises and equipment, net

  (228)  (885)  657   (74.2)

Other

  1,003   932   71   7.6 

Total noninterest income

 $18,807  $21,031  $(2,224)  (10.6)%

Wealth management income increased $502 thousand for 2022 compared to 2021 primarily caused by growth in clients. Mortgage banking income decreased $2.5 million for 2022 compared to 2021. The increasedecrease in 2020 is a2022 was the result of historically low rates in 2020 resulting in increased applicationdecreased volume for new purchases and refinancing of existing loans. Net securities gainsloans as interest rates were increased $207,000seven times in 2020 compared to 2019, while income2022. Income from Small Business Investment Companies ("SBICs") investments increased $59,000.decreased $563 thousand as rising interest rates impacted the market valuation of their portfolios. Income from insurance investments decreased $452 thousand in 2022 compared to 2021. The year ended December 31, 2020 benefitted from reduced2022 reflected lower losses on premises and equipment. Other noninterest income for 2020 was reduced byequipment, net compared to 2021. The 2022 year reflected a losswrite-down of $146 thousand on a building acquired in the HomeTown acquisition while the 2021 year reflected losses of $588 thousand from the sale of repossessed assets of $139,000.

  

Year Ended December 31,

 
  

(Dollars in thousands)

 
  

2019

  

2018

  

$ Change

  

% Change

 

Noninterest income:

                

Trust fees

 $3,847  $3,783  $64   1.7%

Service charges on deposit accounts

  2,866   2,455   411   16.7 

Other fees and commissions

  3,693   2,637   1,056   40.0 

Mortgage banking income

  2,439   1,862   577   31.0 

Securities gains, net

  607   123   484   393.5 

Brokerage fees

  721   795   (74)  (9.3)

Income from Small Business Investment Companies

  211   637   (426)  (66.9)

Gains (losses) on premises and equipment, net

  (427)  60   (487)  (811.7)

Other

  1,213   922   291   31.6 

Total noninterest income

 $15,170  $13,274  $1,896   14.3%

Trust fees remained stable while service charges increased $411,000 for 2019 compared to 2018, primarily due totwo buildings and the HomeTown acquisition. Other fees and commissions increased $1,056,000 in 2019 compared to 2018, mostly as a result of the acquisition but also from the strength of increased debit card fee revenue. As a result of increased volume, mortgage banking income increased $577,000 in 2019 over 2018. Net securities gains were up $484,000, or 393.5%. Income from SBICs investments decreased $426,000 or 66.9% for 2019 compared to 2018. Net gains (losses) on premises and equipment were a loss of $427,000 for 2019 compared to a gain of $60,000 in 2018. The loss was primarily due to a write-down of carrying value$218 thousand on existing equipment in connection with an ATM replacement initiative.additional property from that acquisition.

 

 

Noninterest Expense

 

For the year ended December 31, 2020,2023, noninterest expense decreased $11,509,000,increased $4.0 million, or 17.4%6.2%, as compared to the year ended December 31, 2019.2022.

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 
 

2020

  

2019

  

$ Change

  

% Change

  

2023

  

2022

  

$ Change

  

% Change

 

Noninterest expense:

                        

Salaries and employee benefits

 $29,765  $30,015  $(250) (0.8)% $36,356  $36,382  $(26) (0.1)%

Occupancy and equipment

 5,586  5,417  169  3.1  6,219  6,075  144  2.4 

FDIC assessment

 639  119  520  437.0  1,404  903  501  55.5 

Bank franchise tax

 1,702  1,644  58  3.5  2,052  1,953  99  5.1 

Core deposit intangible amortization

 1,637  1,398  239  17.1 

Amortization of intangible assets

 1,069  1,260  (191) (15.2)

Data processing

 3,017  2,567  450  17.5  3,565  3,310  255  7.7 

Software

 1,454  1,295  159  12.3  1,829  1,505  324  21.5 

Other real estate owned, net

 60  31  29  93.5  (10) 3  (13) (433.3)

Merger related expenses

   11,782  (11,782) (100.0) 2,577  2,577 - 

Other

  10,705   11,806   (1,101)  (9.3)  12,989   12,695   294  2.3 

Total noninterest expense

 $54,565  $66,074  $(11,509)  (17.4)% $68,050  $64,086  $3,964  6.2%

 

Salaries and employee benefits decreased $250,000The year ended December 31, 2023 reflected an increase of $501 thousand in 2020 asFDIC insurance expense compared to 2019. Total full-time equivalent employees ("FTEs") were 342 at end of 2020, down from 355 at2022 due to an increase in the end of 2019; however, 2020 was impacted by pension and salarybase assessment rate. The year ended December 31, 2023 included $2.6 million in merger related expenses resulting from voluntary early retirement package costs. Contributing to the decrease was a reduction in salary expenses of $1.7 million for the deferral of loan costs related to PPP originations. The FDIC assessment expense in 2020 and 2019 was positively impacted by the Small Bank Assessment Credit, which reduced insurance expense $75,000 in 2020 and $492,000 in 2019. Core deposit intangible amortization increased $239,000 in 2020 compared to 2019 due to the HomeTown acquisition. Merger related expenses, which are related to the HomeTown acquisition and are nonrecurring in nature, totaled $11,782,000 during 2019. The increased expense for data processing in 2020 compared to 2019 of $450,000 was attributable to the increased costs as a result of a larger customer base after the HomeTown merger. The decrease in other noninterest expense in 2020 compared to 2019 was primarily due to reduced travel due to the COVID-19 pandemic and increased synergies from the HomeTown acquisition.merger with Atlantic Union. 

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 
 

2019

  

2018

  

$ Change

  

% Change

  

2022

  

2021

  

$ Change

  

% Change

 

Noninterest expense:

                        

Salaries and employee benefits

 $30,015  $24,879  $5,136  20.6% $36,382  $32,342  $4,040  12.5%

Occupancy and equipment

 5,417  4,378  1,039  23.7  6,075  6,032  43  0.7 

FDIC assessment

 119  537  (418) (77.8) 903  864  39  4.5 

Bank franchise tax

 1,644  1,054  590  56.0  1,953  1,767  186  10.5 

Core deposit intangible amortization

 1,398  265  1,133  427.5  1,260  1,464  (204) (13.9)

Data processing

 2,567  1,691  876  51.8  3,310  2,958  352  11.9 

Software

 1,295  1,279  16  1.3  1,505  1,368  137  10.0 

Other real estate owned, net

 31  122  (91) (74.6) 3  131  (128) (97.7)

Merger related expenses

 11,782  872  10,910  1,251.1 

Other

  11,806   9,169   2,637   28.8   12,695   12,082   613  5.1 

Total noninterest expense

 $66,074  $44,246  $21,828   49.3% $64,086  $59,008  $5,078  8.6%

 

Salaries and employee benefits increased $5,136,000, or 20.6%,$4.0 million in 20192022 as compared to 2018. Total FTEs were 355 at the end2021. The year ended December 31, 2022 reflected additional incentive expenses based on measurement to goals. Data processing costs increased by $352 thousand due to increased volume of 2019, up from 305 at the end of 2018, for an increase of 50 FTEs primarily associated with the HomeTown acquisition. Occupancytransactions and equipment expensevendor price increases. Other expenses increased $1,039,000$613 thousand in 20192022 compared to 2018, primarily due to the acquisition. The FDIC assessment expense in 2019 was positively impacted by the Small Bank Assessment Credit, which reduced insurance expense $492,000. Core deposit intangible amortization increased $1,133,000 in 2019 compared to 2018, and data processing expense increased $876,000 in 2019 compared to 2018, again2021 as a result of the merger. Merger related expenses, which are related to the HomeTown acquisitionvendor price increases and are nonrecurringinvestments in nature, totaled $11,782,000 during 2019 compared to $872,000 in 2018.technology.

 

Income Taxes

 

Income taxes on 20202023 earnings amounted to $7,137,000,$8.2 million, resulting in an effective tax rate of 19.2%23.9%, compared to 18.9%20.6% in 20192022 and 20.0%21.2% in 2018. As a result of the enactment of the CARES Act, the Company recognized2021. The increase in the first quarterrate in 2023 compared to 2022 was primarily due to the non-deductibility of 2020 amerger related expenses for tax benefit forpurposes. Excluding merger related expenses, the net operating loss ("NOL") five-year carryback provision for the NOL acquired in the HomeTown merger. The rate increased as the Company recognized less tax exempt income in 2020. An income tax benefit was realized for the difference between the current corporate income tax rate of 21% and the higher federal corporate tax rate of 35% prior to 2018.

The effective tax rate is lowered by income that is not taxable for federal incomefluctuations are attributable to changes in pre-tax earnings and the levels of permanent tax purposes. The primary nontaxable income is from state and municipal securities and loans.differences.

 

Impact of Inflation and Changing Prices

 

The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The most significant effect of inflation is on noninterest expenses that tend to rise during periods of inflation. Changes in interest rates have a greater impact on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management practices, the Company has the ability to react to those changes and measure and monitor its interest rate and liquidity risk.

Market Risk Management

 

Market Risk Management

Effectively managing market risk is essential to achieving the Company's financial objectives. Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. The Company is generally not subject to currency exchange risk or commodity price risk. The Company's primary market risk exposure is interest rate risk; however, market risk also includes liquidity risk. Both are discussed in the following sections.

 

Interest Rate Risk Management

 

Interest rate risk and its impact on net interest income is a primary market risk exposure. The Company manages its exposure to fluctuations in interest rates through policies approved by its Asset Liability Committee ("ALCO") and Board of Directors, both of which receive and review periodic reports of the Company's interest rate risk position.

 

The Company uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates numerous assumptions including growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.

 

A balance sheet is considered asset sensitive when its earning assets (loans and securities) reprice faster or to a greater extent than its liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively more net interest income when interest rates rise and less net interest income when they decline. Based on the Company's simulation analysis, management believes the Company's interest sensitivity position at December 31, 20202023 is asset sensitive. 

 

Earnings Simulation

 

The table below shows the estimated impact of changes in interest rates on net interest income as of December 31, 20202023 (dollars in thousands), assuming instantaneous and parallel changes in interest rates, and consistent levels of assets and liabilities. Net interest income for the following twelve months is projected to increase when interest rates are higher than current rates.

 

Estimated Changes in Net Interest Income

 

  

December 31, 2020

 
  

Change in net interest income

 

Change in interest rates

 

Amount

  

Percent

 
         

Up 4.0%

 $10,976   13.8%

Up 3.0%

  8,247   10.4 

Up 2.0%

  5,446   6.8 

Up 1.0%

  2,676   3.4 

Flat

      

Down 0.25%

  (448)  (0.6)

Down 1.00% (1)

  (1,133)  (1.4)

__________________________

(1) This scenario is deemed invalid at this time due to the current low interest rate environment.

  

December 31, 2023

 
  

Change in net interest income

 

Change in interest rates

 

Amount

  

Percent

 
         

Up 4.0%

 $3,855   2.1%

Up 3.0%

  2,803   1.6 

Up 2.0%

  1,952   1.1 

Up 1.0%

  1,036   0.6 

Flat

      

Down 1.0%

  (1,563)  (0.9)

Down 2.0%

  (4,541)  (2.5)

Down 3.0%

  (9,114)  (5.1)

Down 4.0%

  (12,423)  (6.9)

 

Management cannot predict future interest rates or their exact effect on net interest income. Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.

 

Changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect the Company's interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt.

 

Economic Value Simulation

 

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.

 

The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the period ended December 31, 20202023 (dollars in thousands):

 

Estimated Changes in Economic Value of Equity

 

  

December 31, 2020

 

Change in interest rates

 

Amount

  

$ Change

  

% Change

 
             

Up 4.0%

 $414,016  $192,052   86.5%

Up 3.0%

  379,029   157,065   70.8 

Up 2.0%

  337,336   115,372   52.0 

Up 1.0%

  284,837   62,873   28.3 

Flat

  221,964       

Down 0.25%

  198,836   (23,128)  (10.4)

Down 1.00% (1)

  111,512   (110,452)  (49.8)

__________________________

(1) This scenario is deemed invalid at this time due to the current low interest rate environment.

  

December 31, 2023

 

Change in interest rates

 

Amount

  

$ Change

  

% Change

 
             

Up 4.0%

 $383,325  $(10,545)  (2.7)%

Up 3.0%

  398,250   4,380   1.1 

Up 2.0%

  408,498   14,628   3.7 

Up 1.0%

  408,205   14,335   3.6 

Flat

  393,870       

Down 1.0%

  367,483   (26,387)  (6.7)

Down 2.0%

  318,723   (75,147)  (19.1)

Down 3.0%

  253,575   (140,295)  (35.6)

Down 4.0%

  169,068   (224,802)  (57.1)

 

Liquidity Risk Management

 

Liquidity is the ability of the Company in a timely manner to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company's ability to meet the daily cash flow requirements of its customers, whether they are borrowers requiring funds or depositors desiring to withdraw funds. Additionally, the Company requires cash for various operating needs including dividends to shareholders, the servicing of debt, and the payment of general corporate expenses. The Company manages its exposure to fluctuations in interest rates and liquidity needs through policies approved by the ALCO and Board of Directors, both of which receive periodic reports of the Company's interest rate risk and liquidity position. The Company uses a computer simulation model to assist in the management of the future liquidity needs of the Company.

 

Liquidity sources include on balance sheet and off balance sheet sources.

 

Balance sheet liquidity sources include cash, amounts due from banks, loan repayments, bond maturities and calls, and increases in deposits. Further, the Company maintains a large, high quality, very liquid bond portfolio, which is generally 50%0% to 60%50% unpledged and would, accordingly, be available for sale if necessary.

 

Off balance sheet sources include lines of credit from the Federal Home Loan Bank of Atlanta ("FHLB"), federal funds lines of credit, and access to the Federal Reserve Bank of Richmond's discount window.

 

The Company has a line of credit with the FHLB, equal to 30% of the Company's assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, home equity lines of credit, commercial real estate loans and commercial construction loans. In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB. At December 31, 20202023 and 2019,2022, there were no$35.0 million and $100.5 million, respectively, in principal advance obligations to the FHLB. The Company had $210 million in outstanding $245,000,000 in FHLB letters of credit at December 31, 20202023 compared to $170,000,000$170 million in letters of credit at December 31, 2019.2022. The letters of credit provide the Bank with additional collateral for securing public entity deposits above FDIC insurance levels, thereby providing less need for collateral pledging from the securities portfolio and accordingly increasing the Company's balance sheet liquidity.

 

Short-term borrowing is discussed in Note 1110 and long-term borrowing is discussed in Note 1211 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

 

The Company has federal funds lines of credit established with correspondent banks in the amount of $60,000,000$60 million and has access to the Federal Reserve Bank of Richmond's discount window. There were no amounts outstanding under these facilities at December 31, 2020. The Company, through its subsidiary bank, has a relationship with Promontory Network, the sponsoring entity for the Certificate of Deposit Account Registry Service® ("CDARS"). Through CDARS, the Company is able to provide deposit customers with access to aggregate FDIC insurance in amounts far exceeding $250,000. This gives the Company the ability, as and when needed, to attract and retain large deposits from insurance sensitive customers. Under the EGRRCPA signed into law on May 24, 2018, a well-capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits. With CDARS, the Company has the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Company can use CDARS to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. Thus, CDARS serves as a deposit-gathering tool and an additional liquidity management tool. Deposits through the CDARS program as of December 31, 2020 and 2019 were $4,342,000 and $14,864,000, respectively.2023. 

 

The Bank also participates with the Promontory Network usingIntraFi Insured Cash Sweep,®, a product which provides the Bank the capability of providing additional deposit insurance to customers in the context of a money market account arrangement. The product is analogous to the CDARS product discussed above.

 

COVID-19 and the participation in the PPP and the DAP programs could significantly impact the Company's liquidity. Average deposits grew 22.3% in 2020 compared to 2019, partially due to customer deposits

 

 

BALANCE SHEET ANALYSIS

 

Securities

 

The securities portfolio generates income, plays a strategic role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements. The securities portfolio consists of high quality investments, mostly federal agency, mortgage-backed, and state and municipal securities.

 

The Company is cognizant of the continuing historically low and currently steadycurrent rising interest rate environment and has elected to executeexecuted an asset liability strategy of purchasing high quality taxable securities with relatively low optionality and short and overall balanced duration.

The following table presents information on the maturities and taxable equivalent yields of available for sale securities:

  

As of December 31,

 
  

2023

  

2022

 
  

Taxable

  

Taxable

 
  

Equivalent

  

Equivalent

 
  

Yield

  

Yield

 

U. S. Treasury

        

Within 1 year

  1.36

%

  0.72

%

1 to 5 years

  1.30   0.90 

5 to 10 years

     1.32 

Over 10 years

      

Total

  1.32   0.92 
         

Federal Agencies:

        

Within 1 year

  2.26   0.45 

1 to 5 years

  2.35   1.29 

5 to 10 years

  3.17   2.36 

Over 10 years

  2.75   3.81 

Total

  2.51   1.60 
         

Mortgage-backed:

        

Within 1 year

  2.31   2.58 

1 to 5 years

  2.02   3.25 

5 to 10 years

  2.23   2.02 

Over 10 years

  2.26   1.56 

Total

  2.24   1.76 
         

State and Municipal:

        

Within 1 year

  2.69   2.45 

1 to 5 years

  2.94   1.80 

5 to 10 years

  4.05   2.07 

Over 10 years

  3.65   4.10 

Total

  3.14   2.15 
         

Corporate Securities:

        

Within 1 year

     2.41 

1 to 5 years

  6.50    

5 to 10 years

  2.84   4.95 

Over 10 years

      

Total

  2.87   4.91 
         

Total portfolio

  2.17

%

  1.73

%

The Company had no equity securities at December 31, 2023 and 2022

 

 

The following table presents information on the amortized cost, maturities, and taxable equivalent yields of available for sale securities at the end of the last three years (dollars in thousands):

  

As of December 31,

 
  

2020

  

2019

  

2018

 
      

Taxable

      

Taxable

      

Taxable

 
  

Amortized

  

Equivalent

  

Amortized

  

Equivalent

  

Amortized

  

Equivalent

 
  

Cost

  

Yield

  

Cost

  

Yield

  

Cost

  

Yield

 

U. S. Treasury

                        

Within 1 year

 $34,997   0.08% $14,992   1.52% $   %

1 to 5 years

                  

5 to 10 years

                  

Over 10 years

                  

Total

  34,997   0.08   14,992   1.52       
        ��                

Federal Agencies:

                        

Within 1 year

  86   2.68   24,987   1.52       

1 to 5 years

  65,553   0.62   24,920   2.28   68,786   2.27 

5 to 10 years

  24,742   1.99   46,946   2.71   55,797   2.66 

Over 10 years

  13,711   2.18   29,976   2.32   12,487   2.05 

Total

  104,092   1.15   126,829   2.30   137,070   2.40 
                         

Mortgage-backed:

                        

Within 1 year

  30   2.42   73   3.26   72   3.14 

1 to 5 years

  6,368   1.41   2,794   2.84   2,946   2.62 

5 to 10 years

  92,590   1.40   38,993   2.27   36,241   2.44 

Over 10 years

  147,782   1.61   140,872   2.46   74,624   2.54 

Total

  246,770   1.53   182,732   2.42   113,883   2.51 
                         

State and Municipal:

                        

Within 1 year

  2,998   2.47   1,255   3.85   6,872   2.25 

1 to 5 years

  30,852   2.13   25,619   2.72   46,287   2.93 

5 to 10 years

  15,371   2.02   9,086   2.82   20,199   2.82 

Over 10 years

  7,901   2.93   5,467   3.50   6,664   2.71 

Total

  57,122   2.23   41,427   2.88   80,022   2.82 
                         

Corporate Securities:

                        

Within 1 year

                  

1 to 5 years

  500   2.42   500   2.42   500   2.42 

5 to 10 years

  12,511   5.11   505   5.28       

Over 10 years

        8,509   5.56   6,299   5.41 

Total

  13,011   5.01   9,514   5.38   6,799   4.70 
                         

Total portfolio

 $455,992   1.52% $375,494   2.47% $337,774   2.59%

The Company adopted ASU 2016-01 effective January 1, 2018 and had no equity securities at December 31, 2020 and 2019. The Company recognized in income $333,000 of unrealized holding gains during 2019. During the year ended December 31, 2019, the Company sold $445,000 in equity securities at fair value.

Loans

 

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. 

Average loans increased $179.2 million, or 8.7%, from 2022 to 2023. Average loans increased $91.0 million or 4.6%, from 2021 to 2022.

At December 31, 2020, the commercial real estate portfolio included concentrations of $75,235,000, $44,738,000 and $190,840,000 in hotel, restaurants, and retail, respectively. The concentrations total 15.5% of total loans, excluding loans in process.

Average loans increased $310,962,000, or 18.2%2023, from 2019 to 2020, primarily related to PPP lending. Average loans increased $371,432,000, or 27.9%, from 2018 to 2019, mostly impacted by the HomeTown merger.

At December 31, 2020, total loans, net of deferred fees and costs, were $2,015,056,000,$2.3 billion, an increase of $184,241,000,$101.9 million, or 10.1%4.7%, from the prior year. Excluding PPP loans of $211,275,000 at December 31, 2020, loans held for investment were slightly lower year over year.

 

Loans held for sale and associated with secondary mortgage activity totaled $15,591,000$1.3 million at December 31, 20202023 and $2,027,000$1.1 million at December 31, 2019.2022. Loan production volume was $165,755,000$82.0 million and $102,708,000$61.0 million for 20202023 and 2019,2022, respectively. These loans were approximately 40%67% purchase, 60%33% refinancing for the yearyears ended December 31, 2020 compared to approximately 60% purchase, 40% refinancing for the year ended December 31, 2019.2023 and 2022.

 

Management of the loan portfolio is organized around portfolio segments. Each segment is comprised of various loan types that are reflective of operational and regulatory reporting requirements. The following table presents the Company's portfolio maturities as of the dates indicated by segment (dollars in thousands): 

 

Loans

 

 

As of December 31,

  

As of December 31, 2023

 
 

2020

  

2019

  

2018

  

2017

  

2016

  

Maturing within one year

  

Maturing after one but within five years

  

Maturing after five but within fifteen years

  

Maturing after fifteen years

  

Total

 

Real estate:

            

Construction and land development

 $140,071  $137,920  $97,240  $123,147  $114,258  $39,494  $178,989  $51,373  $4,179  $274,035 

Commercial real estate - owner occupied

 373,680  360,991  255,863  234,922  224,364  47,355  272,954  92,439  1,573  414,321 
Commercial real estate - non-owner occupied 627,569 538,208 399,937 402,779 286,596  77,703  542,986  172,041  37,925  830,655 

Residential real estate

 269,137  324,315  209,438  209,326  215,104  16,906  174,871  147,857  30,258  369,892 

Home equity

  104,881   119,423   103,933   109,857   110,751   3,566   24,577   52,237   9,918   90,298 

Total real estate

 1,515,338  1,480,857  1,066,411  1,080,031  951,073  185,024  1,194,377  515,947  83,853  1,979,201 
  

Commercial and industrial

 491,256  339,077  285,972  251,666  208,717  62,508  139,234  91,481  9,082  302,305 

Consumer

  8,462   10,881   5,093   4,428   5,031   910   3,860   579   1,465   6,814 
  

Total loans, net of deferred fees and costs

 $2,015,056  $1,830,815  $1,357,476  $1,336,125  $1,164,821  $248,442  $1,337,471  $608,007  $94,400  $2,288,320 
 

Interest rate sensitivity:

 

Fixed interest rates

 $203,590 $1,196,059 $482,194 $29,212 $1,911,055 

Floating or adjustable rates

  44,852   141,412   125,813   65,188   377,265 
 

Total loans, gross

 $248,442  $1,337,471  $608,007  $94,400  $2,288,320 

 

The following table provides loan balance information by geographic regions. In some circumstances, loans may be originated in one region for borrowers located in other regions (dollars in thousands):

Loans by Geographic Region

  

December 31, 2020

  

Percentage Change in Balance Since

 
      

Percentage

  

December 31,

 
  

Balance

  

of Portfolio

  

2019

 

Danville region

 $250,653   12.4%  13.6%

Central region

  127,487   6.3   (7.5)

Southside region

  82,443   4.1   19.1 

Eastern region

  104,474   5.2   11.6 

Franklin region

  136,587   6.8   13.7 

Roanoke region

  429,553   21.3   1.3 

New River Valley region

  131,021   6.5   15.7 

Alamance region

  274,912   13.7   (3.9)

Guilford region

  312,736   15.5   13.4 

Winston-Salem region

  116,186   5.8   28.9 
Triangle region  49,004   2.4   100.0 
             

Total loans, net of deferred fees and costs

 $2,015,056   100.0%  10.1%

The Danville region consists of offices in Danville, Virginia and Yanceyville, North Carolina. The Central region consists of offices in Lynchburg, and Campbell County, Virginia. The Southside region consists of offices in Martinsville and Henry County, Virginia. The Eastern region consists of offices in South Boston and the counties of Halifax and Pittsylvania, Virginia. The Franklin region consists of offices in Rocky Mount and Hardy, Virginia. The Roanoke region consists of offices in Roanoke, Salem, and Roanoke County, Virginia. The New River Valley region consists of an office in Christiansburg, Virginia. The Alamance region consists of offices in Burlington, Graham, and Mebane, North Carolina. The Guilford region consists of offices in Greensboro, North Carolina. The Winston-Salem region consists of an office in Winston-Salem, North Carolina. The Triangle region consists of an office in Raleigh, North Carolina.

The Company does not participate in or have any highly leveraged lending transactions, as defined by bank regulations. The Company has no foreign loans. There were no concentrations of loans to any individual, group of individuals, business, or industry that exceeded 10% of total loans at December 31, 20202023 or 2019.2022.

 

The following table presents the maturity schedule of selected loan types (dollars in thousands):Provision for Credit Losses - Loans

 

Maturities of Selected Loan Types

December 31, 2020

  

Commercial

  

Construction

     
  

and

  

and Land

     
  

Industrial (1)

  

Development

  

Total

 

1 year or less

 $63,796  $24,745  $88,541 

1 to 5 years (2)

  353,258   102,974   456,232 

After 5 years (2)

  74,202   12,352   86,554 

Total

 $491,256  $140,071  $631,327 

__________________________

(1)

Includes agricultural loans.

(2)

Of the loans due after one year, $459,488 have predetermined interest rates and $83,298 have floating or adjustable interest rates.

Provision for Loan Losses

The Company had a provision for loancredit losses on loans of $8,916,000$433 thousand for the year ended December 31, 2020,2023 compared to a provision$1.6 million for loan losses of $456,000the year ended December 31, 2022, and a negative provision for loan losses of $103,000($2.8) million for the yearsyear ended December 31, 2019 and 2018, respectively.2021.

 

The larger provision for 2020 reflects an increase in allowance requirements in response to the declining and uncertain economic landscape caused by the COVID-19 pandemic during the period. The increase in 2020 can be attributed to a measurable increase in qualitative factors related to significant contractions in economic data for both national and local economies and a significant increase in unemployment rates. The provision for 20192023 and 2022 was primarily related to a $156,000 increase in the impairedresult of loan reserve and loan growth during the fourth quarter of 2019.growth. The negative provision for 2018 relatedin 2021 was the result of improved economic data supporting changes to favorable adjustments on the purchased credit impaired loan loss allowance. qualitative factors. 

 

Allowance for LoanCredit Losses

 

The purpose of the ALLLACL - loans is to provide for probable expected losses inherent in the loan portfolio. The allowance is increased by the provision for loancredit losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.

On January 1, 2023, the Company adopted the current expected credit losses ("CECL") standard for estimating credit losses, which resulted in an increase of $5.2 million in the ACL. The Company's ACL consists of quantitative and qualitative allowances and an allowance for loans that are individually assessed for credit losses. Each of these components is determined based upon estimates and judgments. The quantitative allowance uses historical default and loss experience as well as estimates for prepayments to calculate lifetime expected losses, along with various qualitative factors, including the effects of changes in risk selection, underwriting standards, and lending policies; expected economic conditions throughout a reasonable and supportable period of 24 months; experience of lending staff; quality of the loan review system; and changes in the regulatory, legal, and competitive environment and consideration of peer loss experience. The Company considers economic forecasts from highly recognized third-parties for the model inputs. Loans are segmented based on the type of loan and internal risk ratings. The Company utilizes two calculation methodologies to estimate the collective quantitative allowance: the vintage method and the non-discounted cash flow method. Allowance estimates for residential real estate loans are determined by a vintage method which pools loans by date of origination and applies historical average loss rates based on the age of the loans. Allowance estimates for all other loan types are determined by a non-discounted cash flow method which applies historical probabilities of default and loss given default rates to model expected cash flows for each loan through its life and forecast future expected losses.

 

The ALLLACL was $21,403,000, $13,152,000,$25.3 million, $19.6 million, and $12,805,000$18.7 million at December 31, 2020, 2019,2023, 2022, and 2018,2021, respectively. The ALLLACL as a percentage of loans at each of those dates was 1.06%1.10%, 0.72%0.89%, and 0.94%0.96%, respectively. Excluding PPP loans, the allowance as a percentage of loans increased to 1.19% at December 31, 2020.

 

The increase in the allowance as a percentage of loans during 2020 as compared to 2019 was primarily duePrior to the economic effectsadoption of the COVID-19 pandemic. The decrease in the allowance as a percentage of loans during 2019 as compared to 2018 was primarily due to the acquired loan portfolio of HomeTown recorded at fair value with no continuing allowance and the continued high asset quality, low charge-offs, and improvement in various qualitative factors, notably economic, used in the determination of the allowance.

In an effort to better evaluate the adequacy of its ALLL,ASC 326, the Company computescomputed its ASC 450Contingencies, loan balance by reducing total loans by acquired loans and loans that were evaluated for impairment individually or smaller balance nonaccrual loans evaluated for impairment in homogeneous pools. It also adjusts its ASC 450 loan loss reserve balance total by removing allowances associated with these other pools of loans.

individually. The general allowance ASC 450 (FAS 5) reserves to ASC 450 loans, was 1.16% at December 31, 2020, compared to 0.87% at December 31, 2019.2022 was 0.94%. On a dollar basis, the reserve was $20,534,000 at December 31, 2020, compared to $12,684,000 at December 31, 2019. The percentage of the reserve to total loans has increased due to economic uncertainty resulting from the COVID-19 pandemic.$19.5 million. This segment of the allowance representsrepresented by far the largest portion of the loan portfolio and the largest aggregate risk. There was no allowance for performing acquired loans in accordance with GAAP. The Financial Accounting Standards Board ASC 450 loan loss reserve balance is the total allowance for loan and lease losses reduced by allowances associated with these other pools of loans. The was no specific reserves related to impaired loans at December 31, 2022. The reserve related to the acquired loans with deteriorated credit quality was $93 thousand at December 31, 2022. This was the only portion of the reserve related to acquired loans as of that date.

The following table presents the Company's credit loss and recovery experience for the years ended December 31, 2023 and 2022 (dollars in thousands):

  

Commercial

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential Real Estate

  

Home Equity

  

Consumer

  

Total

 
                                 

Balance at December 31, 2022

 $2,874  $1,796  $3,785  $7,184  $3,077  $790  $49  $19,555 

Day 1 impact of CECL adoption

  883   272   1,078   2,069   653   190   47   5,192 

Provision for (recovery of) credit losses

  390   769   (317)  (355)  40   (69)  (25)  433 

Charge-offs

  (894)           (6)  (9)  (93)  (1,002)

Recoveries

  492   10   37   213   164   57   122   1,095 

Balance at December 31, 2023

 $3,745  $2,847  $4,583  $9,111  $3,928  $959  $100  $25,273 
                                 

Average Loans

 $239,822  $251,054  $429,139  $860,363  $353,533  $92,085  $6,799  $2,232,795 

Ratio of net (recoveries) charge-offs to average loans

  0.17%  (0.00)%  (0.01)%  (0.02)%  (0.04)%  (0.05)%  (0.43)%  (0.00)%

  

Commercial

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential Real Estate

  

Consumer

  

Total

 
                             

Balance at December 31, 2021

 $2,668  $1,397  $3,964  $7,141  $3,458  $50  $18,678 

Recovery of provision for credit losses

  442   399   (199)  476   373   106   1,597 

Charge-offs

  (357)        (436)  (5)  (221)  (1,019)

Recoveries

  121      20   3   41   114   299 

Balance at December 31, 2022

 $2,874  $1,796  $3,785  $7,184  $3,867  $49  $19,555 
                             

Average Loans

 $237,213  $177,718  $411,744  $814,440  $404,465  $6,578  $2,052,158 

Ratio of net (recoveries) charge-offs to average loans

  0.10%  0.00%  (0.00)%  0.05%  (0.01)%  1.63%  0.04%

 

 

The specific allowance, ASC 310-40 (FAS 114) reserves to ASC 310-40 loans, was 1.06% at December 31, 2020, compared to 10.51% at December 31, 2019. On a dollar basis, the reserve was $30,000 at December 31, 2020, compared to $230,000 at December 31, 2019. There is ongoing turnover in the composition of the impaired loan population, which increased $660,000 from December 31, 2019. The decrease in the specific allowance from the prior year is primarily due to the write-off of the specific reserves on two loans for which we have received a commitment to purchase.

The specific allowance does not include reserves related to acquired loans with deteriorated credit quality. This reserve was $839,000 at December 31, 2020, compared to $238,000 at December 31, 2019. This is the only portion of the reserve related to acquired loans. Cash flow expectations for these loans are reviewed on a quarterly basis and unfavorable changes in those estimates relative to the initial estimates can result in the need for specific loan loss provisions.

The following table presents the Company's loan loss and recovery experience for the past five years (dollars in thousands):

Summary of Loan Loss Experience

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

  

2017

  

2016

 

Balance at beginning of period

 $13,152  $12,805  $13,603  $12,801  $12,601 
                     

Charge-offs:

                    

Construction and land development

           35    

Commercial real estate - owner occupied

  17   6   11   55    
Commercial real estate - non-owner occupied  165         3   10 

Residential real estate

  90   20      159   21 

Home equity

  27   50   86   13   66 

Total real estate

  299   76   97   265   97 

Commercial and industrial

  505   12   787   282   40 

Consumer

  202   245   136   143   189 

Total charge-offs

  1,006   333   1,020   690   326 
                     

Recoveries:

                    

Construction and land development

  2      4   43   11 

Commercial real estate - owner occupied

  12   9   6   3   3 
Commercial real estate - non-owner occupied  50         14   18 

Residential real estate

  63   40   45   45   53 

Home equity

  22   18   104   40   15 

Total real estate

  149   67   159   145   100 

Commercial and industrial

  65   13   69   223   40 

Consumer

  127   144   97   108   136 

Total recoveries

  341   224   325   476   276 
                     

Net charge-offs

  665   109   695   214   50 

Provision for (recovery of) loan losses

  8,916   456   (103)  1,016   250 

Balance at end of period

 $21,403  $13,152  $12,805  $13,603  $12,801 

The following table summarizes the allocation of the allowance for loan losses by major portfolio segments for the past five years (dollars in thousands):

Allocation of Allowance for Loan Losses

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

  

2017

  

2016

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 
                                         

Commercial

 $3,373   24.4% $2,657   18.5% $2,537   21.0% $2,413   18.8% $2,095   17.9%
                                         
Construction and land development  1,927   7.0   1,161   7.6   1,059   7.2   1,401   9.2   1,378   9.8 
                                         

Commercial real estate - owner occupied

  4,340   18.5   2,474   19.7   2,420   18.8   2,668   17.6   2,537   19.3 
                                         
Commercial real estate - non-owner occupied  7,626   31.1   3,781   29.4   3,767   29.5   4,252   30.2   3,440   24.6 
                                         

Residential real estate

  4,067   18.6   3,023   24.2   2,977   23.1   2,825   23.9   3,303   28.0 
                                         

Consumer

  70   0.4   56   0.6   45   0.4   44   0.3   48   0.4 
                                         

Total

 $21,403   100.0% $13,152   100.0% $12,805   100.0% $13,603   100.0% $12,801   100.0%

__________________________

% - represents the percentage of loans in each category to total loans.

Asset Quality Indicators

 

The following table provides certain qualitative indicators relevant to the Company's loan portfolio for the past fivethree years.

 

Asset Quality Ratios

 

 

As of or for the Year Ended December 31,

  

As of or For the Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2017

  

2016

  

2023

  

2022

  

2021

 

Allowance to loans (1)

 1.06% 0.72% 0.94% 1.02% 1.10% 1.10% 0.89% 0.96%

ASC 450/general allowance (2)

 1.16  0.87  0.94  1.04  1.17 

Net charge-offs to year-end allowance

 3.11  0.83  5.43  1.57  0.39 

Net charge-offs to average loans

 0.03  0.01  0.05  0.02  0.00 

Net recoveries/charge-offs to allowance

 0.00  3.68  (0.54)

Net recoveries/charge-offs to average loans

 0.00  0.04  (0.01)

Nonperforming assets to total assets

 0.12  0.15  0.11  0.21  0.29  0.19  0.05  0.07 

Nonperforming loans to loans

 0.13  0.13  0.09  0.19  0.30  0.25  0.06  0.11 

Provision to net charge-offs (recoveries)

 1,340.75  418.35  (14.82) 474.77  500.00 

Provision to net recoveries/charge-offs

 (532.25) 221.81  2,825.00 

Provision to average loans

 0.44  0.03  (0.01) 0.08  0.02  0.02  0.08  (0.14)

Allowance to nonperforming loans

 793.88  570.59  1,101.98  531.37  360.39  434.69  1,478.08  840.59 

__________________________

(1) Excluding PPP loans, 1.19%

 (2) Excluding PPP loans, 1.32%

 

Nonperforming Assets (Loans and Other Real Estate Owned)

 

Nonperforming loans include loans on which interest is no longer accrued and accruing loans that are contractually past due 90 days or more. Nonperforming loans include loans originated and loans acquired exclusive of purchased credit impaired loans.

 

Nonperforming loans to total loans were 0.13%0.25% at both December 31, 20202023 and 0.06% at December 31, 2019.2022. The increase in nonperforming loans during 20202023 was $391,000.$4.5 million compared to 2022.

 

Nonperforming assets include nonperforming loans, and foreclosed real estate.estate and repossessions. Nonperforming assets represented 0.12% at December 31, 2020 compared to 0.15%0.19% of total assets at December 31, 2019. The Company continues2023 compared to monitor the significant impact to its borrowers caused by COVID-19 and anticipates increases in nonperforming0.05% of total assets as a result, but the total cannot be determined at this time.December 31, 2022.

 

In most cases, it is the policy of the Company that any loan that becomes 90 days past due will automatically be placed on nonaccrual loan status, accrued interest reversed out of income, and further interest accrual ceased. Any payments received on such loans will be credited to principal. In some cases, a loan in process of renewal may become 90 days past due. In these instances, the loan may still be accruing because of a delayed renewal process in which the customer has not been billed. In accounting for acquired impaired loans, such loans are not classified as nonaccrual when they become 90 days past due. They are considered to be accruing because their interest income relates to the accretable yield and not to contractual interest payments.

 

Loans will only be restored to full accrual status after six consecutive months of payments that were each less than 30 days delinquent. The Company strictly adheres with this policy before restoring a loan to normal accrual status.

 

The following table presents the Company's nonperforming asset history, including acquired impaired loans as of the dates indicated (dollars in thousands):

Nonperforming Assets

  

As of December 31,

 
  

2020

  

2019

  

2018

  

2017

  

2016

 

Nonaccrual loans:

                    

Real estate

 $2,328  $1,083  $1,007  $2,111  $2,928 

Commercial

  100   857   83   90   19 

Consumer

  6   4         18 

Total nonaccrual loans

  2,434   1,944   1,090   2,201   2,965 
                     

Loans past due 90 days and accruing interest:

                    

Real estate

  262   309   72   359   587 

Commercial

     52          

Consumer

               

Total past due loans

  262   361   72   359   587 
                     

Total nonperforming loans

  2,696   2,305   1,162   2,560   3,552 
                     

Other real estate owned, net

  958   1,308   869   1,225   1,328 
                     

Total nonperforming assets

 $3,654  $3,613  $2,031  $3,785  $4,880 

ImpairedIndividually Assessed Loans

 

A loan is considered impairedindividually assessed when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The following table showsTotal individually assessed loans thatat December 31, 2023 were considered impaired,$5.6 million. Impaired loans, exclusive of purchased credit impaired loans, as of the dates indicated (dollars in thousands):were $5.1 million at December 31, 2022.

 

Impaired Loans

  

As of December 31,

 
  

2020

  

2019

  

2018

  

2017

  

2016

 

Accruing

 $758  $969  $848  $1,016  $2,059 

On nonaccrual status

  2,094   1,223   486   2,201   2,785 

Total impaired loans

 $2,852  $2,192  $1,334  $3,217  $4,844 

Troubled Debt Restructurings

TDRs exist whenever the Company makes a concession to a customer based on the customer's financial distress that would not have otherwise been made in the normal course of business.Other Real Estate Owned

 

There were $1,976,000 in TDRs at December 31, 2020 compared to $1,058,000 at December 31, 2019.

In March 2020 (revised in April 2020), the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance explains that, in consultation with the FASB staff, the federal banking agencies have concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDR. The CARES Act was passed by the U.S. Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were currentno OREO as of December 31, 2019 were not TDRs. The Bank implemented a DAP2023 compared to provide relief to its borrowers under this guidance. The Bank provided assistance to customers with loan balances of $405.1 million during the year ended$27 thousand at December 31, 2020. 

Other Real Estate Owned

2022. OREO is carried on the consolidated balance sheets at $958,000 and $1,308,000 as of December 31, 2020 and 2019, respectively. Foreclosed assets are initially recorded at fair value, less estimated costs to sell at the date of foreclosure. Loan losses resulting from foreclosure are charged against the ALLLACL at that time. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value, less estimated costs to sell with any additional write-downs charged against earnings. For significant assets, these valuations are typically outside annual appraisals.

Deposits

 

The following table shows OREO as of the dates indicated (dollars in thousands):

  

As of December 31,

 
  

2020

  

2019

  

2018

  

2017

  

2016

 

Construction and land development

 $443  $600  $78  $318  $139 

Commercial real estate - owner occupied

  230   390      173   375 
Commercial real estate - non-owner occupied     33   72   105   161 

Residential real estate

  237   285   719   629   250 
Home equity  48            403 

Total OREO

 $958  $1,308  $869  $1,225  $1,328 

Deposits

The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Average

Period-end total deposits increased $427,156,000,$10.2 million, or 22.3%3.9%, in 2020, mostly a result of continued higher than average cash balances being maintained by customersduring 2023. Customers have become more rate sensitive as market rates have moved up during the uncertaintycourse of the pandemic continues and isyear. This has been a trend that is consistent for all commercial banks. Average deposits increased $359,158,000, or 23.1%, from 2018 to 2019, mostly impacted by the HomeTown merger.

Period-end total deposits increased $550,783,000, or 26.7%, during 2020. Customers have continued to maintain higher cash balances as future liquidity needs remain uncertain. The Company has only a relatively small portion of its time deposits provided by wholesale sources. These include timeTotal average deposits through the CDARS program, which at year end totaled $4,342,000decreased $199.6 million or 7.1% for 2020, $14,864,000 for 2019, and $22,431,000 for 2018. Management considers the CDARS deposits the functional equivalent of core deposits because they relate2023 compared to balances derived from customers with long standing relationships with the Company.2022. 

 

Average deposits and rates for the years indicated (dollars in thousands):

 

Deposits

 

  

Year Ended December 31,

 
  

2020

  

2019

  

2018

 
  

Average

      

Average

      

Average

     
  

Balance

  

Rate

  

Balance

  

Rate

  

Balance

  

Rate

 

Noninterest bearing deposits

 $746,659   % $537,775   % $421,527   %

Interest bearing accounts:

                        

NOW accounts

 $386,790   0.09% $307,329   0.12% $234,857   0.02%

Money market

  574,510   0.46   445,505   1.18   393,321   0.89 

Savings

  198,313   0.06   166,842   0.17   132,182   0.03 

Time

  436,081   1.52   457,746   1.58   374,152   1.20 

Total interest bearing deposits

 $1,595,694   0.61% $1,377,422   0.95% $1,134,512   0.71%

Average total deposits

 $2,342,353   0.42% $1,915,197   0.68% $1,556,039   0.52%

  

Year Ended December 31,

 
  

2023

  

2022

 
  

Average

      

Average

     
  

Balance

  

Rate

  

Balance

  

Rate

 

Noninterest bearing deposits

 $897,199   % $1,028,871   %

Interest bearing accounts:

                

NOW accounts

 $483,573   0.60% $522,043   0.04%

Money market

  655,300   2.60   688,631   0.24 

Savings

  233,055   0.10   273,788   0.04 

Time

  325,322   2.66   280,672   0.57 

Total interest bearing deposits

 $1,697,250   1.70% $1,765,134   0.20%

Average total deposits

 $2,594,449   1.11% $2,794,005   0.13%

  

Certificates of Deposit of $100,000 or Moreover $250,000 

 

CertificatesAt December 31, 2023, certificates of deposit that meet or exceed the FDIC insurance limit held by the Company were $138.5 million. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit at December 31, 2020 in amounts2023. Amounts of $100,000$250 thousand or more were classified by maturity as follows (dollars in thousands):

 

 

December 31, 2020

  

December 31, 2023

 

3 months or less

 $94,282  $71,076 

Over 3 through 6 months

 35,823  28,114 

Over 6 through 12 months

 67,352  35,209 

Over 12 months

  75,344   4,101 

Total

 $272,801  $138,500 

 

CertificatesThe Company's total uninsured deposits, which are the amounts of Deposit of $250,000 or More

Certificates of deposit accounts that exceed the FDIC insurance limit, currently $250 thousand, were approximately $1.0 billion and $1.2 billion at December 31, 2020 in2023 and 2022, respectively. These amounts of $250,000 or more were classified by maturity as follows (dollars in thousands):

  

December 31, 2020

 

3 months or less

 $68,319 

Over 3 through 6 months

  21,037 

Over 6 through 12 months

  47,859 

Over 12 months

  32,874 

Total

 $170,089 

Borrowed Fundsestimated based on the same methodologies and assumptions used for regulatory reporting purposes.

 

Borrowed Funds

In addition to internal deposit generation, the Company also relies on borrowed funds as a supplemental source of funding. Borrowed funds consist of customer repurchase agreements, overnight borrowings from the FHLB and longer-term FHLB advances, subordinated debt acquired in the HomeTown merger, and trust preferred capital notes. Additionally, on August 21, 2019, the Company secured a $3,000,000 line of credit with a regional commercial bank at 0.25% under Prime that matured August 21, 2020. Customer repurchase agreements are borrowings collateralized by securities of the U.S. Government, its agencies, or Government Sponsored Enterprises ("GSEs") and generally mature daily. The Company considers these accounts to be a stable and low cost source of funds. The securities underlying these agreements remain under the Company's control. Refer to Notes 12, 13Note 10 and 14Note 11 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of short-term and long-term debt. At December 31, 2023 and 2022, the Company had short-term debt of $35.0 million and $100.5 million, respectively. 

 

The following table presents information pertaining to the Company's short-term borrowed funds as of the dates indicated (dollars in thousands):

Short-Term Borrowings

  

As of December 31,

 
  

2020

  

2019

 
         

Customer repurchase agreements

 $42,551  $40,475 
         

Weighted interest rate

  0.13%  1.40%
         

Average for the year ended:

        

Outstanding

 $42,938  $41,890 

Interest rate

  0.60%  1.54%
         

Maximum month-end outstanding

 $47,402  $42,986 

In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At December 31, 2020,2023, the Bank's public deposits totaled $326,774,000. $283.8 million. The Company is legally required to provide collateral to secure the deposits that exceed the insurance coverage provided by the FDIC. This collateral can be provided in the form of certain types of government agency bonds or letters of credit from the FHLB. At year-end 2020,2023, the Company had $245,000,000$210.0 million in letters of credit with the FHLB outstanding to supplement collateral for such deposits.

 

 

Shareholders' Equity

 

The Company's goal with capital management is to comply with all regulatory capital requirements and to support growth, while generating acceptable returns on equity and paying a high rate of dividends.

 

Shareholders' equity was $337,894,000$343.2 million at December 31, 20202023 and $320,258,000$321.2 million at December 31, 2019.2022.

 

The Company declared and paid quarterly dividends totaling $1.08$1.20 per share for 2020, $1.042023, $1.14 per share for 2019,2022, and $1.00$1.09 per share for 2018.2021. Cash dividends in 20202023 totaled $11,842,000$12.8 million and represented a 39.4%48.8% payout of 20202023 net income, compared to a 52.4%35.3% payout in 2019,2022, and a 38.5%27.2% payout in 2018.2021.

 

Effective January 1, 2015, theThe Company and the Bank became subject to the Basel III Capital Rules. The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus athe 2.5% "capitalcapital conservation buffer"buffer (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. In addition, to be well capitalized under the "prompt corrective action" regulations pursuant to Section 38 of the FDIA, the Bank must have the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

 

On August 28, 2018, the FRB issued an interim final rule required by the EGRRCPA that expands the applicability of the FRB's SBHC Policy Statement to bank holding companies with total consolidated assets of less than $3 billion (up from the prior $1 billion threshold). Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules. However, the Company does not currently intend to issue a material amount of debt or take any other action that would cause its capital ratios to fall below the minimum ratios required by the Basel III Capital Rules. The SBHC Policy Statement does not apply to the Bank, and the Bank must comply with the Basel III Capital Rules.

On September 17, 2019, the federal banking agencies jointly issued a final rule required by the EGRRCPA that will permit qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to opt into the CBLR framework. Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and will be deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports.

On April 6, 2020, the federal bank regulatory agencies announced the issuance of two interim final rules that make changes to the CBLR framework and implement Section 4012 of the CARES Act. One interim final rule provides that, as of the second quarter of 2020, a banking organization with a leverage ratio of 8% or greater (and that meets the other existing qualifying criteria) could elect to use the CBLR framework. This rule also establishes a two-quarter grace period for a qualifying community banking organization whose leverage ratio fell below 8% so long as the banking organization maintained a leverage ratio of 7% or greater. The second interim final rule provides a transition back to the leverage ratio requirement of 9%. Under this rule, the required leverage ratio was 8% beginning in the second quarter and for the remainder of calendar year 2020 and will be 8.5% for calendar year 2021 and 9% thereafter. This rule also maintains a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable ratio. This transition will allow community banking organizations to focus on supporting lending to creditworthy households and businesses given the recent strains on the U.S. economy caused by COVID-19. The Company and the Bank dohave not currently expect to optopted into the CBLR framework.

 

The following table represents the major regulatory capital ratios for the Company as of the dates indicated:

 

 

As of December 31,

  

As of December 31,

 
 

2020

  

2019

  

2018

  

2017

  

2016

  

2023

  

2022

 

Risk-Based Capital Ratios:

                   

Common equity tier 1 capital ratio

 12.36% 11.56% 12.55% 11.50% 11.77% 11.70% 11.70%

Tier 1 capital ratio

 13.78% 12.98% 14.46% 13.42% 13.83% 12.81% 12.86%

Total capital ratio

 15.18% 14.04% 15.35% 14.39% 14.81% 13.82% 13.67%
  

Leverage Capital Ratios:

                   

Tier 1 leverage ratio

 9.48% 10.75% 11.62% 10.95% 11.67% 10.61% 10.36%

 

Management believes the Company is in compliance with all regulatory capital requirements applicable to it, and the Bank meets the requirements to be considered "well capitalized" under the prompt corrective action framework as of December 31, 20202023 and 2019.2022.

 

Stock Repurchase Programs

 

On December 19, 2019, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of a stock repurchase program. The program authorized the repurchase of up to 400,000 shares of the Company's common stock through December 31, 2020. The program was suspended since in second quarter of 2020 in an effort to conserve capital due to COVID-19.

In 2020, the Company repurchased 140,526 shares at an average cost of $35.44 per share for a total cost of $4,981,000. In 2019, the Company repurchased 85,868 shares at an average cost of $36.64 per share, for a total cost of $3,146,000. The Company did not repurchase any shares in 2018.

On January 12, 2021,26, 2023, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of another stock repurchase program. The program authorizes the repurchase of up to 350,000 shares$10 million of the Company's common stock through December 31, 2021.2023.The Company repurchased 34,131 shares at an average of $30.58 for a total cost of $1.0 million during the year ended December 31, 2023.

 

In 2022, the Company repurchased 206,978 shares at an average cost of $36.26 per share for a total cost of $7.5 million. In 2021, the Company repurchased 265,939 shares at an average cost of $33.08 per share for a total cost of $8.8 million.

CONTRACTUAL OBLIGATIONS

 

The following items are contractual obligations of the Company as of December 31, 20202023 (dollars in thousands):

 

 

Payments Due By Period

  

Payments Due By Period

 
 

Total

  

Under 1 Year

  

1-3 Years

  

3-5 Years

  

More than 5 years

  

Total

  

Under 1 Year

  

1-3 Years

  

3-5 Years

  

More than 5 years

 
  

Time deposits

 $396,426  $271,868  $90,030  $29,494  $5,034  $372,066  $325,529  $30,432  $11,838  $4,267 

Repurchase agreements

 42,551  42,551        59,348  59,348       

Operating leases

 5,575  1,048  1,989  989  1,549  7,641  1,204  2,146  1,744  2,547 

Subordinated debt

 7,500      7,500   

Junior subordinated debt

 28,130        28,130  28,435        28,435 

 

OFF-BALANCE SHEET ACTIVITIES

 

The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. Other than AMNB Statutory Trust I, formed in 2006 to issue trust preferred securities, and MidCarolina Trust I and MidCarolina Trust II, the Company does not have any off-balance sheet subsidiaries. Refer to Note 1411 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of junior subordinated debt. Off-balance sheet transactions were as follows as of the dates indicated (dollars in thousands):

 

 

December 31,

  

December 31,

 

Off-Balance Sheet Commitments

 

2020

  

2019

  

2023

  

2022

 
  

Commitments to extend credit

 $503,272  $557,364  $614,705  $635,851 

Standby letters of credit

 17,355  13,611  17,228  12,897 

Mortgage loan rate-lock commitments

 26,883  10,791  1,822  1,920 

 

Commitments to extend credit to customers represent legally binding agreements with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future funding requirements. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements.

 

 

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This information is incorporated herein by reference from Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.

 

 

 

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Quarterly Financial Results

(in thousands, except per share amounts)

  

First

  

Second

  

Third

  

Fourth

     

2020

 

Quarter

  

Quarter

  

Quarter

  

Quarter

  

Total

 
                     

Interest income

 $23,866  $23,297  $24,179  $24,498  $95,840 

Interest expense

  3,947   3,037   2,684   2,352   12,020 
                     

Net interest income

  19,919   20,260   21,495   22,146   83,820 

Provision for loan losses

  953   4,759   2,619   585   8,916 

Net interest income after provision for loan losses

  18,966   15,501   18,876   21,561   74,904 
                     

Noninterest income

  4,495   3,835   4,292   4,221   16,843 

Noninterest expense

  13,334   12,432   14,140   14,659   54,565 
                     

Income before income taxes

  10,127   6,904   9,028   11,123   37,182 

Income taxes

  1,585   1,422   1,801   2,329   7,137 

Net income

 $8,542  $5,482  $7,227  $8,794  $30,045 
                     

Per common share:

                    

Net income - basic

 $0.77  $0.50  $0.66  $0.80  $2.74 

Net income - diluted

  0.77   0.50   0.66   0.80   2.73 

Cash dividends

  0.27   0.27   0.27   0.27   1.08 

  

First

  

Second

  

Third

  

Fourth

     

2019

 

Quarter

  

Quarter

  

Quarter

  

Quarter

  

Total

 
                     

Interest income

 $18,096  $25,211  $24,958  $24,590  $92,855 

Interest expense

  3,028   4,222   4,336   4,142   15,728 
                     

Net interest income

  15,068   20,989   20,622   20,448   77,127 

Provision for (recovery of) loan losses

  16   (10)  (12)  462   456 

Net interest income after provision for (recovery of) loan losses

  15,052   20,999   20,634   19,986   76,671 
                     

Noninterest income

  3,451   3,682   4,171   3,866   15,170 

Noninterest expense

  10,929   26,316   13,792   15,037   66,074 
                     

Income before income taxes

  7,574   (1,635)  11,013   8,815   25,767 

Income taxes

  1,571   (405)  2,321   1,374   4,861 

Net income

 $6,003  $(1,230) $8,692  $7,441  $20,906 
                     

Per common share:

                    

Net income - basic

 $0.69  $(0.11) $0.78  $0.67  $1.99 

Net income - diluted

  0.69   (0.11)  0.78   0.67   1.98 

Cash dividends

  0.25   0.25   0.27   0.27   1.04 

  

First

  

Second

  

Third

  

Fourth

     

2018

 

Quarter

  

Quarter

  

Quarter

  

Quarter

  

Total

 
                     

Interest income

 $16,668  $16,992  $17,217  $17,891  $68,768 

Interest expense

  2,125   2,204   2,466   2,879   9,674 
                     

Net interest income

  14,543   14,788   14,751   15,012   59,094 

Provision for (recovery of) loan losses

  (44)  (30)  (23)  (6)  (103)

Net interest income after provision for (recovery of) loan losses

  14,587   14,818   14,774   15,018   59,197 
                     

Noninterest income

  3,333   3,563   3,380   2,998   13,274 

Noninterest expense

  10,702   11,002   10,904   11,638   44,246 
                     

Income before income taxes

  7,218   7,379   7,250   6,378   28,225 

Income taxes

  1,406   1,399   1,465   1,376   5,646 

Net income

 $5,812  $5,980  $5,785  $5,002  $22,579 
                     

Per common share:

                    

Net income - basic

 $0.67  $0.69  $0.66  $0.57  $2.60 

Net income - diluted

  0.67   0.69   0.66   0.57   2.59 

Cash dividends

  0.25   0.25   0.25   0.25   1.00 

 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders

American National Bankshares Inc.

Danville, Virginia

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of American National Bankshares Inc. and its Subsidiary (the Company) as of December 31, 20202023 and 2019,2022, the related consolidated statements of income, comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020,2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202023 and 2019,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020,2023, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 8, 202115, 2024 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

 

Adoption of New Accounting Standard

As discussed in Notes 1 and 5 to the financial statements, the Company changed its method of accounting for credit losses in 2023 due to the adoption of Accounting Standards Update 2016-13, Financial Instruments Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, including all related amendments.

Basis for Opinion

These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for Loan Losses Loans Collectively Evaluated for Impairment Qualitative Factors

Description of the Matter

As described in Note 1 (Summary of Significant Accounting Policies) and Note 65 (Allowance for LoanCredit Losses - Loans and Reserve for Unfunded Lending Commitments) to the consolidated financial statements, the Company maintains an allowance for loancredit losses on loans (“ACLL”) to provide for probableabsorb expected losses inherent in the Company’s loan portfolio. The Company'sACLL consists of quantitative and qualitative allowances for loans collectively assessed for credit losses and an allowance for loan losses has two basic components, the formula allowance and the specific allowance. At December 31, 2020, the formula allowance represented $20,534,000 of the total allowance for loan losses of $21,403,000. For loans that are not specifically identifiedindividually assessed for impairment, the formulacredit losses.

The quantitative allowance usesis applied to loan balances pooled by loan type and credit risk indicator using historical default and loss experience alongas well as estimates for prepayments to calculate lifetime expected losses, with various qualitative factors to develop adjustedthe exception of certain residential real estate loans that use a vintage loss factors for each loan segment.estimation methodology which pools loans by date of origination and applies historical average loss rates based on the age of the loans. The qualitative adjustments to the historical loss experience are established by applying a loss percentage to the loan segments identified by management based on their assessment of shared risk characteristics within groups of similar loans. Qualitativeadjustment factors are determined based on management'smanagement’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio. Management evaluates qualitative factors primarily by considering national, regionalcurrent and localexpected economic trends and conditions; concentrations of credit; trends in delinquencies, nonaccrual loans, and loss rates; trends in volume and terms of loans;conditions; effects of changes in risk selection, underwriting standards, and lending policies; experience, ability and depth of lending officers, other lending staffpersonnel; changes in the quality of its loan review system; regulatory, legal, and loan review;competitive factors; and legal, regulatory and collateral factors.an assessment of the Company’s loss experience in comparison to peer group averages.

 

Management exercised significant judgment when assessing the qualitative factors in estimating the allowancemeasuring loans collectively assessed for loancredit losses. We identified the assessmentmeasurement of the qualitative factorsACLL as a critical audit matter as auditing the qualitative factorsestimate involved especially complex and subjective auditor judgment in evaluating management'sand testing management’s assessment of thean inherently subjective estimates.complex accounting estimate and process that requires significant management judgment.

 

How We Addressed the Matter in Our Audit

The primary audit procedures we performed to address this critical audit matter included:

TestingObtaining an understanding and testing the design and operating effectiveness of the Company’s ACLL internal controls, overand management review controls related to collectively evaluated loans, including the evaluationprocess for selection, implementation, and ongoing maintenance of:

o

The underlying methodologies of qualitativethe expected loss models, including identification of loan pools, model validation, monitoring, and the completeness and accuracy of key data inputs and assumptions.

o

Qualitative factors, including management's development and review of the data inputs used as the basis for the allocation factorsallocations and management'smanagement’s review and approval of the reasonableness of the assumptions used to develop the qualitative adjustments.

Substantively testing management's process, including evaluating their judgmentsadjustments, sources of reasonable and assumptions for developing the qualitative factors, which included:supportable economic forecasts and other key inputs.

o

Governance and management review processes.

Substantively testing management’s process for measuring the ACLL related to collectively evaluated loans, including:

o

Evaluating the conceptual soundness of the model and significant assumptions, including the identification of loan pools.

o

Testing of key data inputs used in the model.

o

Evaluating the methodology’s qualitative factors, including:

The completeness and accuracy of the data inputs used as a basis for the qualitative factors.

 

Evaluating the

The reasonableness of management'smanagement’s judgments related to the determination of the qualitative factors.

 

Evaluating the qualitative factors for

The directional consistency and for reasonableness.reasonableness of the qualitative factor adjustments.

 

o

Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.calculation.

 

/s/ YOUNT, HYDE & BARBOUR, P.C.

 

We have served as the Company's auditor since 2002.

 

Winchester,Richmond, Virginia

March 8, 202115, 2024

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders

American National Bankshares Inc.

Danville, Virginia

 

Opinion on the Internal Control over Financial Reporting

We have audited American National Bankshares Inc. and Subsidiary'sits Subsidiary’s (the Company) internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 20202023 and 2019,2022, the related consolidated statements of income, comprehensive income (loss), changes in shareholders'shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020,2023, and the related notes to the consolidated financial statements of the Company and our report dated March 8, 202115, 2024 expressed an unqualified opinion.

 

Basis for Opinion

The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management'sManagements Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ YOUNT, HYDE & BARBOUR, P.C.

 

Winchester,Richmond, Virginia

March 8, 202115, 2024

 

 

 

American National Bankshares Inc.

Consolidated Balance Sheets

As of December 31, 20202023 and 20192022

(Dollars in thousands, except per share data)

 

 

2020

  

2019

  

2023

  

2022

 

ASSETS

            

Cash and due from banks

 $30,767  $32,505  $31,500  $32,207 

Interest-bearing deposits in other banks

 343,603  47,077  35,219  41,133 

Securities available for sale, at fair value

 466,091  379,195  521,519  608,062 

Restricted stock, at cost

 8,715  8,630  10,614  12,651 

Loans held for sale

 15,591  2,027  1,279  1,061 

Loans, net of deferred fees and costs

 2,015,056  1,830,815  2,288,320  2,186,449 

Less allowance for loan losses

  (21,403)  (13,152)

Less allowance for credit losses

  (25,273)  (19,555)

Net loans

  1,993,653   1,817,663   2,263,047   2,166,894 

Premises and equipment, net

 39,723  39,848  31,809  32,900 

Assets held-for-sale

 1,131 1,382 

Other real estate owned, net of valuation allowance

 958  1,308    27 

Goodwill

 85,048  84,002  85,048  85,048 

Core deposit intangibles, net

 6,091  7,728  2,298  3,367 

Bank owned life insurance

 28,482  27,817  30,409  29,692 

Other assets

  31,288   30,750   76,844   51,478 

Total assets

 $3,050,010  $2,478,550  $3,090,717  $3,065,902 
  

LIABILITIES and SHAREHOLDERS' EQUITY

            

Liabilities:

          

Noninterest-bearing deposits

 $830,094  $578,606  $805,584  $1,010,602 

Interest-bearing deposits

  1,781,236   1,481,941   1,800,929   1,585,726 

Total deposits

  2,611,330   2,060,547   2,606,513   2,596,328 

Customer repurchase agreements

 42,551  40,475  59,348  370 
Subordinated debt 7,500 7,517 

Other short-term borrowings

 35,000 100,531 

Junior subordinated debt

 28,130  28,029  28,435  28,334 

Other liabilities

  22,605   21,724   18,253   19,165 

Total liabilities

  2,712,116   2,158,292   2,747,549   2,744,728 
  

Commitments and contingencies

               
  

Shareholders' equity:

          

Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding

 0  0     

Common stock, $1 par value, 20,000,000 shares authorized, 10,982,367 shares outstanding at December 31, 2020 and 11,071,540 shares outstanding at December 31, 2019

 10,926  11,019 

Common stock, $1 par value, 20,000,000 shares authorized, 10,633,409 shares outstanding at December 31, 2023 and 10,608,781 shares outstanding at December 31, 2022

 10,551  10,538 

Capital in excess of par value

 154,850  158,244  142,834  141,948 

Retained earnings

 169,681  151,478  232,847  223,664 

Accumulated other comprehensive income (loss), net

  2,437   (483)

Accumulated other comprehensive loss, net

  (43,064)  (54,976)

Total shareholders' equity

  337,894   320,258   343,168   321,174 

Total liabilities and shareholders' equity

 $3,050,010  $2,478,550  $3,090,717  $3,065,902 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

American National Bankshares Inc.

Consolidated Statements of Income

For the Years Ended December 31, 2020, 2019,2023, 2022, and 20182021

(Dollars in thousands, except per share data)

 

 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Interest and Dividend Income:

                  

Interest and fees on loans

 $87,700  $82,684  $59,966  $106,471  $82,568  $87,040 

Interest and dividends on securities:

              

Taxable

 6,764  7,682  6,106  10,358  10,065  7,309 

Tax-exempt

 433  777  1,502  139  407  385 

Dividends

 503  451  321  676  473  464 

Other interest income

  440   1,261   873   2,585   2,491   598 

Total interest and dividend income

  95,840   92,855   68,768   120,229   96,004   95,796 

Interest Expense:

                  

Interest on deposits

 9,729  13,143  8,086  28,843  3,553  3,645 

Interest on short-term borrowings

 259  650  186  5,192  659  22 
Interest on subordinated debt 489 367 0    203 
Interest on junior subordinated debt 1,543 1,554 1,402   1,612  1,554  1,535 

Interest on long-term borrowings

  0   14   0 

Total interest expense

  12,020   15,728   9,674   35,647   5,766   5,405 

Net Interest Income

 83,820  77,127  59,094  84,582  90,238  90,391 

Provision for (recovery of) loan losses

  8,916   456   (103)

Net Interest Income after Provision for (Recovery of) Loan Losses

  74,904   76,671   59,197 

Provision for (recovery of) credit losses

  495   1,597   (2,825)

Net Interest Income after Provision for (Recovery of) Credit Losses

  84,087   88,641   93,216 

Noninterest Income:

                  

Trust fees

 4,044  3,847  3,783 

Wealth management income

 6,751  6,521  6,019 

Service charges on deposit accounts

 2,557  2,866  2,455  2,216  2,676  2,611 

Interchange fees

 4,775  4,107  4,152 

Other fees and commissions

 3,925  3,693  2,637  650  906  801 

Mortgage banking income

 3,514  2,439  1,862  824  1,666  4,195 

Securities gains, net

 814  607  123 

Brokerage fees

 745  721  795 

Securities (losses) gains, net

 (68)   35 

Income from Small Business Investment Companies

 270  211  637  932  1,409  1,972 

Gains (losses) on premises and equipment, net

 (110) (427) 60 

Income from insurance investments

 764 747 1,199 

Losses on premises and equipment, net

 (155) (228) (885)

Other

  1,084   1,213   922   1,647   1,003   932 

Total noninterest income

  16,843   15,170   13,274   18,336   18,807   21,031 

Noninterest Expense:

                  

Salaries and employee benefits

 29,765  30,015  24,879  36,356  36,382  32,342 

Occupancy and equipment

 5,586  5,417  4,378  6,219  6,075  6,032 

FDIC assessment

 639  119  537  1,404  903  864 

Bank franchise tax

 1,702  1,644  1,054  2,052  1,953  1,767 

Core deposit intangible amortization

 1,637  1,398  265 

Amortization of intangible assets

 1,069  1,260  1,464 

Data processing

 3,017  2,567  1,691  3,565  3,310  2,958 

Software

 1,454  1,295  1,279  1,829  1,505  1,368 

Other real estate owned, net

 60  31  122  (10) 3  131 

Merger related expenses

 0  11,782  872  2,577   

Other

  10,705   11,806   9,169   12,989   12,695   12,082 

Total noninterest expense

  54,565   66,074   44,246   68,050   64,086   59,008 

Income Before Income Taxes

 37,182  25,767  28,225  34,373  43,362  55,239 

Income Taxes

  7,137   4,861   5,646   8,214   8,934   11,713 

Net Income

 $30,045  $20,906  $22,579  $26,159  $34,428  $43,526 

Net Income Per Common Share:

                  

Basic

 $2.74  $1.99  $2.60  $2.46  $3.23  $4.00 

Diluted

 $2.73  $1.98  $2.59  $2.46  $3.23  $4.00 

Weighted Average Common Shares Outstanding:

                  

Basic

 10,981,623  10,531,572  8,698,014   10,627,709   10,672,314   10,873,817 

Diluted

 10,985,790  10,541,337  8,708,462   10,628,559   10,674,613   10,877,231 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

American National Bankshares Inc.

Consolidated Statements of Comprehensive Income (Loss)

For the Years Ended December 31, 2020, 2019,2023, 2022, and 20182021

(Dollars in thousands)

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Net income

 $30,045  $20,906  $22,579  $26,159  $34,428  $43,526 
  

Other comprehensive income (loss):

              
  

Unrealized gains (losses) on securities available for sale

 7,213  9,095  (3,209) 14,709 (68,877) (12,236)

Tax effect

 (1,557) (2,005) 745  (3,168) 14,868 2,643 
  

Reclassification adjustment for gains on sale or call of securities

 (814) (274) (81)

Reclassification adjustment for losses (gains) on sale or call of securities

 68  (35)

Tax effect

 176  59  18  (14)  7 
  

Unrealized losses on cash flow hedges

 (2,210) (1,854) (804)

Unrealized gains on cash flow hedges

 795 4,125 2,068 

Tax effect

 448  394  180  (387) (866) (434)
  

Change in unfunded pension liability

 (413) (64) 1,291  (112) 1,082 590 

Tax effect

 77  1  (249)  21   (233)  (115)
        

Other comprehensive income (loss)

  2,920   5,352   (2,109)  11,912   (49,901)  (7,512)
  

Comprehensive income

 $32,965  $26,258  $20,470 

Comprehensive income (loss)

 $38,071  $(15,473) $36,014 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

For the Years Ended December 31, 2020, 2019,2023, 2022, and 20182021

(Dollars in thousands, except per share data)

 

              

Accumulated

     
      

Capital in

      

Other

  

Total

 
  

Common

  

Excess of

  

Retained

  

Comprehensive

  

Shareholders'

 
  

Stock

  

Par Value

  

Earnings

  

Income (Loss)

  

Equity

 

Balance, December 31, 2017

 $8,604  $76,179  $127,010  $(3,076) $208,717 
                     

Net income

  0   0   22,579   0   22,579 

Other comprehensive loss

  0   0   0   (2,109)  (2,109)

Reclassification for ASU 2016-01 adoption

  0   0   650   (650)  0 

Stock options exercised (35,310 shares)

  35   826   0   0   861 

Vesting of restricted stock (12,712 shares)

  13   (13)  0   0   0 

Equity based compensation (34,480 shares)

  16   1,180   0   0   1,196 

Cash dividends paid, $1.00 per share

  0   0   (8,702)  0   (8,702)
                     

Balance, December 31, 2018

  8,668   78,172   141,537   (5,835)  222,542 
                     

Net income

  0   0   20,906   0   20,906 

Other comprehensive income

  0   0   0   5,352   5,352 

Issuance of common stock for acquisition (2,361,686 shares)

  2,362   80,108   0   0   82,470 

Issuance of replacement options/restricted stock

  0   870   0   0   870 

Stock repurchased (85,868 shares)

  (86)  (3,060)  0   0   (3,146)

Stock options exercised (37,104 shares)

  37   651   0   0   688 

Vesting of restricted stock (21,747 shares)

  22   (22)  0   0   0 

Equity based compensation (38,281 shares)

  16   1,525   0   0   1,541 

Cash dividends paid, $1.04 per share

  0   0   (10,965)  0   (10,965)
                     

Balance, December 31, 2019

  11,019   158,244   151,478   (483)  320,258 
                     

Net income

  0   0   30,045   0   30,045 

Other comprehensive income

  0   0   0   2,920   2,920 

Stock repurchased (140,526 shares)

  (141)  (4,840)  0   0   (4,981)

Stock options exercised (2,573 shares)

  3   40   0   0   43 

Vesting of restricted stock (18,487 shares)

  18   (18)  0   0   0 

Equity based compensation (48,780 shares)

  27   1,424   0   0   1,451 

Cash dividends paid, $1.08 per share

  0   0   (11,842)  0   (11,842)

Balance, December 31, 2020

 $10,926  $154,850  $169,681  $2,437  $337,894 
              

Accumulated

     
      

Capital in

      

Other

  

Total

 
  

Common

  

Excess of

  

Retained

  

Comprehensive

  

Shareholders'

 
  

Stock

  

Par Value

  

Earnings

  

Income (Loss)

  

Equity

 

Balance, December 31, 2020

 $10,926  $154,850  $169,681  $2,437  $337,894 
                     

Net income

        43,526      43,526 

Other comprehensive loss

           (7,512)  (7,512)

Stock repurchased (265,939 shares)

  (266)  (8,544)        (8,810)

Stock options exercised (5,346 shares)

  5   84         89 

Vesting of restricted stock (23,968 shares)

  24   (24)         

Equity based compensation (45,193 shares)

  21   1,411         1,432 

Cash dividends paid, $1.09 per share

        (11,827)     (11,827)
                     

Balance, December 31, 2021

  10,710   147,777   201,380   (5,075)  354,792 
                     

Net income

        34,428      34,428 

Other comprehensive loss

           (49,901)  (49,901)

Stock repurchased (206,978 shares)

  (207)  (7,298)        (7,505)

Stock options exercised (713 shares)

  1   11         12 

Vesting of restricted stock (17,583 shares)

  18   (18)         

Equity based compensation (16,462 shares)

  16   1,476         1,492 

Cash dividends paid, $1.14 per share

        (12,144)     (12,144)
                     

Balance, December 31, 2022

  10,538   141,948   223,664   (54,976)  321,174 
                     

Net income

        26,159      26,159 

Other comprehensive income

           11,912   11,912 

Stock repurchased (34,131 shares)

  (34)  (1,010)        (1,044)

Stock options exercised (4,150 shares)

  4   65         69 

Vesting of restricted stock (19,264 shares)

  19   (19)         

Equity based compensation (23,934 shares)

  24   1,850         1,874 

Impact of adoption of CECL

        (4,221)     (4,221)

Cash dividends paid, $1.20 per share

        (12,755)     (12,755)
                     

Balance, December 31, 2023

 $10,551  $142,834  $232,847  $(43,064) $343,168 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

American National Bankshares Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2020, 2019,2023, 2022, and 20182021

(Dollars in thousands)

 

 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Cash Flows from Operating Activities:

                  

Net income

 $30,045  $20,906  $22,579  $26,159  $34,428  $43,526 

Adjustments to reconcile net income to net cash provided by operating activities:

       

Provision for (recovery of) loan losses

 8,916  456  (103)

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

       

Provision for (recovery of) credit losses

 495  1,597  (2,825)

Depreciation

 2,188  2,064  1,775  2,094  2,246  2,243 

Net accretion of acquisition accounting adjustments

 (3,812) (3,387) (1,288) (1,897) (1,597) (5,236)

Core deposit intangible amortization

 1,637  1,398  265  1,069  1,260  1,464 

Net amortization of securities

 1,186  1,100  1,617  1,038  1,646  1,846 

Net gain on sale or call of securities available for sale

 (814) (274) (81)

Net change in fair value of equity securities

 0  (333) (42)

Net loss (gain) on sale or call of securities available for sale

 68    (35)

Gain on sale of loans held for sale

 (3,514) (2,439) (1,862) (824) (1,666) (4,195)

Proceeds from sales of loans held for sale

 155,705  103,760  80,600  82,535  70,059  154,041 

Originations of loans held for sale

 (165,755) (102,708) (77,739) (81,929) (60,973) (142,736)

Net (gain) loss on other real estate owned

 (4) (120) 14  (13) (2) 111 

Valuation allowance on other real estate owned

 0  68  30 

Net (gain) loss on sale or disposal of premises and equipment

 110  427  (60)

Net loss on sale, write-down or disposal of premises and equipment

 42  228  885 

Net loss on sale of assets held-for-sale

 113   

Equity based compensation expense

 1,451  1,541  1,196  1,874  1,492  1,432 

Earnings on bank owned life insurance

 (665) (630) (481) (717) (585) (625)

Deferred income tax expense

 (640) 1,068  556 

Deferred income tax expense (benefit)

 1,273  (385) 808 

Net change in other assets

 29  11,137  (318) (11,197) (2,484) 245 

Net change in other liabilities

  (2,387)  (1,354)  844   (1,217)  2,677   146 

Net cash provided by operating activities

  23,676   32,680   27,502 

Net cash (used in) provided by operating activities

  18,966   47,941   51,095 
  

Cash Flows from Investing Activities:

                  

Proceeds from sales of equity securities

 0  445  431 

Proceeds from sales of securities available for sale

 5,811  29,878  57,607  13,180    561 

Proceeds from maturities, calls and paydowns of securities available for sale

 208,429  123,915  30,607  66,622  120,052  192,672 

Purchases of securities available for sale

 (295,109) (155,746) (106,575)   (106,170) (433,690)

Net change in restricted stock

 (85) (795) 863  2,037  (4,595) 659 

Proceeds from sales of purchased credit impaired loans

 4,939  0  0 

Net increase in loans

 (186,635) (26,257) (21,256)

Net (increase) decrease in loans

 (99,872) (238,993) 73,836 

Net change in collateral with other financial institutions

 850  3,200  1,700 

Proceeds from sale of other investments

 493   

Proceeds from swap terminations

 2,037   

Proceeds from sale of premises and equipment

 1  0  234  44  4  2,031 

Purchases of premises and equipment

 (2,694) (3,555) (2,723) (1,538) (1,196) (1,000)

Proceeds from sales of other real estate owned

 195  1,289  911  40  118  704 

Cash paid in bank acquisition

 0  (27) 0 

Cash acquired in bank acquisition

  0   26,283   0 

Net cash used in investing activities

  (265,148)  (4,570)  (39,901)

Proceeds from the sale of assets held-for-sale

  587       

Net cash provided by (used in) used in investing activities

  (15,520)  (227,580)  (162,527)
  

Cash Flows from Financing Activities:

                  

Net change in noninterest-bearing deposits

 251,488  23,310  41,484  (205,018) 1,521  178,987 

Net change in interest-bearing deposits

 299,476  (12,241) (9,983) 215,234  (295,496) 100,114 

Net change in customer repurchase agreements

 2,076  5,232  24,517  58,978  (40,758) (1,423)

Net change in other short-term borrowings

 0  (14,883) (24,000)

Net change in long-term borrowings

 0  (778) 0 

Net change in short-term borrowings

 (65,531) 100,531  

Net change in junior subordinated debt

     (7,500)

Common stock dividends paid

 (11,842) (10,965) (8,702) (12,755) (12,144) (11,827)

Repurchase of common stock

 (4,981) (3,146) 0  (1,044) (7,505) (8,810)

Proceeds from exercise of stock options

  43   688   861   69   12   89 

Net cash provided by (used in) financing activities

  536,260   (12,783)  24,177 

Net cash (used in) provided by financing activities

  (10,067)  (253,839)  249,630 
  

Net Increase in Cash and Cash Equivalents

 294,788  15,327  11,778 

Net (Decrease) Increase in Cash and Cash Equivalents

 (6,621) (433,478) 138,198 
  

Cash and Cash Equivalents at Beginning of Period

  79,582   64,255   52,477   73,340   506,818   368,620 
  

Cash and Cash Equivalents at End of Period

 $374,370  $79,582  $64,255  $66,719  $73,340  $506,818 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

American National Bankshares Inc.

Notes to Consolidated Financial Statements

December 31, 2020, 2019,2023, 2022, and 20182021

 

 

Note 1Summary of Significant Accounting Policies

 

Nature of Operations and Consolidation

 

The consolidated financial statements include the accounts of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank"). The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements 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 relate to the determination of the allowance for loancredit losses, goodwill and intangible assets, other-than-temporary impairment of securities, accounting for merger and acquisition activity, accounting for acquired loans with specific credit-related deterioration, and the valuation of deferred tax assets and liabilities.

COVID-19 spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. On March 13, 2020, the United States President declared a national emergency in the face of a growing public health and economic crisis due to the COVID-19 global pandemic. The government and private sector responses to contain its spread began to significantly affect the Company's operations beginning in March and will likely continue to adversely affect its operations through 2021, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic will most likely affect future earnings, cash flows and overall financial condition of the Company. These uncertainties include the nature and duration of the financial effects felt by its customers impacting their ability to perform in accordance with their underlying loan agreements, the Company's ability to generate demand for non-loan related products and services, as well as potential declines in real estate values resulting from the market disruption which may impair the recorded values of collateral-dependent loans and other real estate owned. Further, these factors, in addition to those pervasive to the industry and overall U.S. economy, may necessitate an overall valuation of the Company's franchise in such a way an impairment charge to the carrying value of goodwill would be required. Accordingly, significant estimates used in the preparation of the Company's financial statements including those associated with the evaluation of the allowance for loan losses as well as other valuation-based estimates may be subject to significant adjustments in future periods. The greater the duration and severity of the pandemic, the more likely that estimates will be materially impacted by its effects.assets.

 

The Coronavirus Aid, Relief,accompanying consolidated financial statements include financial information related to the Company and Economic Security Act ("CARES Act")its majority-owned subsidiaries and those variable interest entities where the Company is the primary beneficiary, if any. In preparing the consolidated financial statements, all significant inter-company accounts and transactions have been eliminated. Assets held in an agency or fiduciary capacity are not included an initial first round allocationin the consolidated financial statements. Accounting guidance states that if a business enterprise is the primary beneficiary of $659.0 billion for loansa variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. An entity is deemed to be issued by financial institutions through the Small Business Administration ("SBA")primary beneficiary of a variable interest entity if that entity has both the power to direct the activities that most significantly impact its economic performance; and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the variable interest entity. This program is known as the Paycheck Protection Program ("PPP"). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which was passed by Congress on December 21, 2020 and then signed into law on December 27, 2020 as part of the Consolidated Appropriations Act, 2021 ("Appropriations Act"), allocated an additional $284.4 billion. These loans carry a fixed rate of 1.00% and a term of two years for the majority of the initial loans and for five years on the second round, if not forgiven, in whole or in part. Payments were deferred for the firstsix months of the loan. The loans are 100% guaranteed by the SBA. The SBA paid the Bank a processing fee based on the size of the loan. The SBA has approved over 2,700 applications as of  February 28, 2021 totaling $340.9 million in loans. The Company had outstanding net PPP loans of $211.3 million at December 31, 2020 and $226.4 million at February 28, 2021. The Bank has received processing fees of $11.2 million on the PPP loans and incurred direct origination costs of $1.8 million. The Company had net unaccreted PPP loan origination fees of $4.4 million at December 31, 2020 and $5.0 at February 28, 2021. From a funding perspective, the Bank utilized core funding sources for these loans. At December 31, 2020 and February 28, 2021, respectively, the SBA had forgiven $56.4 million and $105.8 million of PPP loans.

In April 2006, AMNB Statutory Trust I, a Delaware statutory trust (the "AMNB Trust") and an unconsolidated wholly owned subsidiary of the Company, was formed for the purpose of issuing preferred securities (the "Trust Preferred Securities") in a private placement pursuant to an applicable exemption from registration. Proceeds from the securities were used to fund the acquisition of Community First Financial Corporation ("Community First") which occurred in April 2006.

In July 2011, and in connection with its acquisition of MidCarolina Financial Corporation ("MidCarolina"), the Company assumed liabilities of MidCarolina Trust I and MidCarolina Trust II, two separate unconsolidated Delaware statutory trusts (the "MidCarolina Trusts"), which were also formed for the purpose of issuing preferred securities. Refer to Note 1411 for further details concerning thesevariable interest entities.

 

All significant inter-company transactions

Agreement and accounts are eliminated in consolidation,Plan of Merger

On July 24, 2023, the Company entered into an Agreement and Plan of Merger with Atlantic Union Bankshares Corporation ("Atlantic Union"). The merger agreement provides that the exceptionCompany will merge with and into Atlantic Union, with Atlantic Union continuing as the surviving entity. Immediately following the merger of the AMNB TrustCompany and Atlantic Union, the MidCarolina Trusts,Bank will merge with and into Atlantic Union's wholly owned bank subsidiary, Atlantic Union Bank, with Atlantic Union Bank continuing as detailedthe surviving bank. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of common stock of the Company will be converted into the right to receive 1.35 shares of common stock of Atlantic Union, with cash to be paid in Notelieu of any fractional shares. The merger is expected to close on 14.April 1, 2024,

subject to satisfaction of customary closing conditions.

 

Cash and Cash Equivalents

 

Cash includes cash on hand, cash with correspondent banks, and cash on deposit at the Federal Reserve Bank of Richmond. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash with original maturities of three months or less and are subject to an insignificant risk of change in value. Cash and cash equivalents are carried at cost.

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Interest-bearing Deposits in Other Banks

 

Interest-bearing deposits in other banks mature within one year and are carried at cost.

 

Securities

 

Certain debtFor available-for-sale ("AFS") securities, that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Trading securities are recorded atCompany evaluates the fair value withand credit quality of its AFS securities on at least a quarterly basis. In the event the fair value of a security falls below its amortized cost basis, the security will be evaluated to determine whether the decline in value was caused by changes in market interest rates or security credit quality. The primary indicators of credit quality for the Company's AFS portfolio are security type and credit rating, which is influenced by a number of security-specific factors that may include obligor cash flow, geography, seniority, and others. There is currently no allowance for credit losses ("ACL") recorded against any securities in the Company's AFS securities portfolio at December 31, 2023. See Note 3 - "Securities" for additional information on the Company's ACL analysis. If unrealized losses are related to credit quality, the Company estimates the credit related loss by evaluating the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security and a credit loss exists, an ACL shall be recorded for the credit loss, limited by the amount that the fair value included in earnings. Debt securities not classified as held to maturity or trading are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.is less than amortized cost basis.

 

The Company does not currently have any securities in held to maturity or trading and has no plans to add any to either category. Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and, (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

 

Equity securities with readily determinable fair values that are not held for trading are carried at fair value with the unrealized gains and losseschanges in fair value included in noninterest income.

 

Due to the nature and restrictions placed on the Company's investment in common stock of the Federal Home Loan Bank of Atlanta ("FHLB") and the Federal Reserve Bank of Richmond, these securities have been classified as restricted equity securities and carried at cost.

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Loans Held for Sale

 

Secondary market mortgage loans are designated as held for sale at the time of their origination. These loans are pre-sold with servicing released and the Company does not retain any interest after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government-sponsored enterprises (conforming loans). In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at fair value. Gains on sales of loans are recognized at the loan closing date and are included in noninterest income.

Derivative Loan Commitments

 

The Company enters into mortgage loan commitments whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheets with net changes in their fair values recorded in other expenses. 

 

The period of time between issuance of a loan commitment and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery contracts, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed the interest rate risk on the loan. As a result, the Company is not generally exposed to significant losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.

 

The fair value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the estimated value of the underlying assets while taking into consideration the probability that the loanloans will be funded.

Loans Held for Investment

 

The Company makes mortgage, commercial, and consumer loans. A substantial portion of the loan portfolio is secured by real estate. The ability of the Company's debtors to honor their contracts is dependent upon the real estate market and general economic conditions in the Company's market area.

 

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Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balance adjusted for the allowance for loancredit losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Loans are typically charged off when the loan is 120 days past due, unless secured and in process of collection. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

 

Interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

A loan is considered past due when a payment of principal or interest or both is due but not paid. Management closely monitors past due loans in timeframes of 30-59 days, 60-89 days, and 90 or more days past due.

 

These policies apply to all loan portfolio classes and segments.

 

Substandard and doubtful risk graded commercial, commercial real estate, and construction loans are reviewed for impairment. All troubled debt restructurings ("TDRs"), regardless of dollar amount, are also evaluated for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment and establishing a specific allowance include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate, and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Generally, large groups of smaller balance homogeneous loans (residential real estate and consumer loans) are collectively evaluated for impairment. The Company's policy for recognizing interest income on impaired loans is consistent with its nonaccrual policy.

The Company's loan portfolio is organized by major segment. These include: commercial, commercial real estate, residential real estate and consumer loans. Each segment has particular risk characteristics that are specific to the borrower and the generic category of credit. Commercial loan repayments are highly dependent on cash flows associated with the underlying business and its profitability. They can also be impacted by changes in collateral values. Commercial real estate loans share the same general risk characteristics as commercial loans but are often more dependent on the value of the underlying real estate collateral and, when construction is involved, the ultimate completion of and sale of the project. Residential real estate loans are generally dependent on the value of collateral and the credit worthiness of the underlying borrower. Consumer loans are very similar in risk characteristics to residential real estate.

 

In connection with mergers, certain loans were acquired which exhibited deteriorated

Allowance for Credit Losses ("ACL") - Loans

The provision for credit quality since origination and for whichlosses charged to operations is an amount sufficient to bring the Company does not expectallowance to collect all contractual payments. These purchased credit impaired loans are accounted for in accordance with Accounting Standards Codification ("ASC") 310-30,Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, and are recorded at the amount paid, suchan estimated balance that there is no carryover of the seller's allowance for loan losses. After acquisition,management considers adequate to absorb expected losses are recognized by an increase in the Company's loan portfolio. The ACL is a valuation allowance forthat is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Amortized cost is the principal balance outstanding, net of any purchase premiums and discounts and net of any deferred loan losses.

Such purchasedfees and costs. The ACL represents management's estimate of credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest incomelosses over the remaining life of the loan or pool (accretable yield). The excess ofportfolio. Loans are charged off against the loan's or pool's contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life ofACL when management believes the loan or pool, expected cash flows continue to be estimated. If the present valuebalance is no longer collectible. Subsequent recoveries of expected cash flows is less than the carrying amount, a loss ispreviously charged off amounts are recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower's financial condition, management may grant a concessionincreases to the borrower that it would not otherwise consider, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. The Company had $1,976,000 in loans classified as TDRs as of December 31,2020 and $1,058,000 as of December 31,2019.ACL.

 

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In March 2020 (revised in April 2020), the federal banking agencies issuedThe Company's ACL consists of quantitative and qualitative allowances and an "Interagency Statement on Loan Modifications and Reportingallowance for Financial Institutions Working with Customers Affected by the Coronavirus." This was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance explains that, in consultation with the Financial Accounting Standards Board ("FASB") staff, the federal banking agencies have concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. The CARES Act was passed by the U.S. Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 were not TDRs. The Bank implemented a Disaster Assistance Program ("DAP") to provide relief to its borrowers under this guidance. The Bank provided assistance to customers with loan balances of $405.1 million during the year ended December 31, 2020. The balance of loans remaining in this program at December 31, 2020 was $30.0 million, or 1.5% of the total portfolio, with $18.2 million of the $30.0 million in total deferrals the result of second and third request interest deferrals. At February 28, 2021, the balance of loans remaining in this program was $25.2 million, or 1.2% of the total portfolio, with $16.7 million of the $25.2 million in total deferrals the result of second request interest deferrals. The majority of remaining modifications involved three-month deferments of interest. This interagency guidance has not had a material impact on the Company's financials and is not expected to have a material impact on ongoing operations; however, this impact cannot be quantified at this time.

Allowanceare individually assessed for Loan Losses

The purpose of the allowance for loan losses ("ALLL") is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.

The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ALLL and the provision for loan loss expense.

The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan officers, (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production (the Loan Review function consists of a co-sourced arrangement using both internal personnel and external vendors to provide the Company with a more robust review function of the loan portfolio), (6) regular meetings of the Credit Committees to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans.

Risk grades are assigned as part of the loan origination process. From time to time risk grades may be modified as warranted by the facts and circumstances surrounding the credit.

Calculation and analysis of the allowance for loan losses is prepared quarterly by the Finance Department. The Company's Credit Committee, Risk and Compliance Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.

The Company's allowance for loan losses has two basic components: the formula allowance and the specific allowance.losses. Each of these components is determined based upon estimates and judgments.

The formulaquantitative allowance uses historical default and loss experience as an indicator of futurewell as estimates for prepayments to calculate lifetime expected losses, along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries, trends in volume and terms of loans,the effects of changes in risk selection, underwriting standards, and lending policies; expected economic conditions throughout a reasonable and supportable period of 24 months; experience of lending staff,staff; quality of the loan review system; and changes in the regulatory, legal, and competitive environment and consideration of peer loss experience. The Company considers economic conditions,forecasts from highly recognized third-parties for the model inputs. Loans are segmented based on the type of loan and portfolio concentrations. Ininternal risk ratings. The Company utilizes two calculation methodologies to estimate the formula allowancecollective quantitative allowance: the vintage method and the non-discounted cash flow method. Allowance estimates for commercial and commercialresidential real estate loans are determined by a vintage method which pools loans by date of origination and applies historical average loss rates based on the age of the loans. Allowance estimates for all other loan types are determined by a non-discounted cash flow method which applies historical probabilities of default and loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The period-end balancesgiven default rates to model expected cash flows for each loan risk-grade categorythrough its life and forecast future expected losses.

Loans that do not share risk characteristics are multipliedevaluated on an individual basis. The individual reserve component relates to loans that have shown substantial credit deterioration as measured by risk rating and/or delinquency status. In addition, the adjusted loss factor. Allowance calculationsCompany has elected the practical expedient that would include loans for consumer loans areindividual assessment consideration if the repayment of the loan is expected substantially through the operation or sale of collateral because the borrower is experiencing financial difficulty. Where the source of repayment is the sale of collateral, the ACL is based on the fair value of the underlying collateral, less selling costs, compared to the amortized cost basis of the loan. If the ACL is based on the operation of the collateral, the reserve is calculated based on historical lossesthe fair value of the collateral calculated as the present value of expected cash flows from the operation of the collateral, compared to the amortized cost basis. If the Company determines that the value of a collateral dependent loan is less than the recorded investment in the loan, the Company charges off the deficiency if it is determined that such amount is deemed to be a confirmed loss.

Allowance for each product category without regard to risk grade. This loss rate is combined with qualitative factors resulting in an adjusted loss factor for each product category.Unfunded Commitments

 

The specificCompany estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The reserve for unfunded commitments is adjusted through the provision for credit losses. The calculation of the allowance uses various techniques to arrive atis consistent with the loss rate calculations for the loan portfolio described above. The estimate includes consideration of the likelihood that funding will occur and an estimate of loss for specifically identified impaired loans. These include:

The present value of expected future cash flows discounted at the loan's effective interest rate. The effective interest rate on a loan is the rate of return implicit in the loan (that is, the contractual interest rate adjusted for any net deferred loan fees or costs and any premium or discount existing at the origination or acquisition of the loan);

The loan's observable market price, or

The fair value of the collateral, net of estimated costs to dispose, if the loan is collateral dependent.

The use of these computed values is inherently subjective and actual losses could be greater or less than the estimates. No single statistic, formula, or measurement determines the adequacy of the allowance. Management makes subjective and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans. However, the entire allowance is used to absorb credit losses inherenton commitments expected to be funded and the provision is recorded in ACL and the loan portfolio, including identified and unidentified losses.reserve is in "Other Liabilities" within the Company's Consolidated Balance Sheets.

 

The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period as facts and circumstances evolve. Furthermore, management cannot provide assurance that in any particular period the Company will not have sizeable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factors at the time.

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Premises and Equipment

 

Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Premises and equipment are depreciated over their estimated useful lives ranging from three years to thirty-nine years; leasehold improvements are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever is less. Software is generally amortized over three years. Depreciation and amortization are recorded on the straight-line method.

 

Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate. Gains and losses on routine dispositions are reflected in current operations.

Goodwill and Intangible Assets

 

Goodwill is subject to at least an annual assessment for impairment. Additionally, acquired intangible assets (such as core deposit intangibles) are separately recognized ifrepresents the benefitexcess of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. The cost of purchased deposit relationships, based on independent valuation, are being amortized over their estimated lives of ten years.

The Company records as goodwill the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree,an acquired entity over the fair value of the identifiable net assets acquired and liabilities assumed as of the acquisition date. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. On January 1, 2020, theacquired. The Company adoptedfollows Accounting Standards UpdateCodification ("ASU"ASC") 2017350, Intangibles -04, Goodwill and Other, which simplifiesprescribes the accounting for goodwill impairment for all entities by requiring impairment chargesand intangible assets subsequent to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount.initial recognition. The Company performs its annual analysis as of June 30 each fiscal year. DueGoodwill is not amortized, but is subject to the COVID-19 pandemic market conditions, the Company determined a triggering event occurred during the first quarter of 2020at least an annual assessment for impairment. Other acquired intangible assets with finite lives (such as core deposit intangibles) are initially recorded at estimated fair value and performed a qualitative assessment at March 31, 2020 and as the pandemic continued performed qualitative assessments at June 30 and September 30 and a quantitative assessment at December 31, 2020 and determined no impairment was indicated. The impact of COVID-19 on market conditionsare amortized over their useful lives. Core deposit and other changesintangible assets are generally amortized using accelerated methods over their useful lives of five to ten years.

Leases

The Company determines if an arrangement is a lease at inception. All of the Company's leases are currently classified as operating leases and are included in the economic environment, operations, or other adverse events could result in future impairment charges which could have a material adverse impactassets and other liabilities on the Company's Consolidated Balance Sheets. Periodic operating results. NaN indicatorslease costs are recorded in occupancy expenses of impairment were identified duringpremises on the years ended December 31,2019 or 2018.

Company's Consolidated Statements of Income.

 

Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease arrangements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of the expected future lease payments over the remaining lease term. In determining the present value of future lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The operating ROU assets are adjusted for any lease payments made at or before the lease commencement date, initial direct costs, any lease incentives received and, for acquired leases, any favorable or unfavorable fair value adjustments. The present value of the lease liability may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options provided in the lease terms. Lease expense is recognized on a straight-line basis over the expected lease term. Lease agreements that include lease and non-lease components, such as common area maintenance charges, are accounted for separately.

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TrustWealth Management Assets

 

Securities and other property held by the trust and investment serviceswealth management segment in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements.

Other Real Estate Owned ("OREO")

 

OREO represents real estate that has been acquired through loan foreclosures or deeds received in lieu of loan payments. Generally, such properties are appraised at the time acquired and are recorded at fair value less estimated selling costs. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in noninterest expense.

Bank Owned Life Insurance

 

In connection with mergers, the Company has acquired bank owned life insurance ("BOLI"). The asset is reflected as the cash surrender value of the policies as provided by the insurer on a monthly basis.

Transfers of Financial Assets

 

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

 

The Company uses the balance sheet method to account for deferred income tax assets and liabilities. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

 

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When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company had no liability for unrecognized tax benefits as of December 31, 20202023 and 2019.2022

 

Stock-Based Compensation

 

Stock compensation accounting guidance ASC 718, Compensation - Stock Compensation, requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

 

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees' service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for restricted stock awards.

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Earnings Per Common Share

 

Basic earnings per common share represent income available to common shareholders divided by the average number of common shares outstanding during the period. Diluted earnings per common share reflect the impact of additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company consist solely of outstanding stock options and are determined using the treasury method. Nonvested shares of restricted stock are included in the computation of basic earnings per share because the holder has voting rights and shares in non-forfeitable dividends during the vesting period.

Comprehensive Income

 

Comprehensive income is shown in a two statement approach; the first statement presents total net income and its components followed by a second statement that presents all the components of other comprehensive income which include unrealized gains and losses on available for sale securities, unrealized gains and losses on cash flow hedges, and changes in the funded status of the defined benefit postretirement plan.

Advertising and Marketing Costs

 

Advertising and marketing costs are expensed as incurred, and were $453,000, $473,000, and $365,000 in 2020,2019, and 2018, respectively.

incurred.

 

Mergers and Acquisitions

 

Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions. Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities is recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expense caption.

Merger related expenses were $2.6 million for the year ended December 31, 2023. There were no such acquisition related costs for the years ended December 31, 2022, or 2021.

 

Derivative Financial Instruments

 

The Company uses derivatives primarily to manage risk associated with changing interest rates. The Company's derivative financial instruments consistconsisted of interest rate swaps that qualify as cash flow hedges of the Company's trust preferred capital notes. The Company recognizesrecognized derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheets. The effective portion of the gain or loss on the Company's cash flow hedges iswas reported as a component of other comprehensive income, net of deferred income taxes, and iswas reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.

The company terminated the interest rate swaps in October 2023. See Note 12 - "Derivative Financial Instruments and Hedging Activities" for additional information.

 

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Reclassifications

 

Certain reclassifications have been made in prior yearsyears' financial statements to conform to classifications used in the current year. There were no material reclassifications.

Accounting Standards Adopted in 2023

 

Recently AdoptedOn January 1, 2023, the Company adopted Accounting Developments

InStandards Update ("ASU") January 2017, the FASB issued ASU 20172016-04,13, "Intangibles - Goodwill and Other"Financial Instruments – Credit Losses (Topic 350326): SimplifyingMeasurement of Credit Losses on Financial Instruments." This standard replaced the Testincurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. CECL requires an estimate of credit losses from the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for Goodwill Impairment." ASU 2017-04 simplifiescredit losses. In addition, CECL required changes to the accounting for goodwill impairmentavailable for all entities by requiring impairment chargessale debt securities. One such change is to require impairments deemed to be basedpermanent in nature as credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities. The adjustments recorded at adoption were increases to the allowance for credit losses on loans of $5.2 million, $305 thousand to the reserve for unfunded loan commitments and $1.2 million to deferred tax assets. The adjustment to retained earnings was a decrease of $4.2 million.

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The Company adopted ASC 326 stepusing the prospective transition approach for purchased credit deteriorated ("PCD") assets that were previously classified as purchased credit impaired ("PCI") under ASC 310-30. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards ("Incurred Loss Model"). The Company adopted ASC 326 using the prospective transition approach for debt securities. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan is 90 days past due, or earlier if the Company believes the collection of interest is doubtful.

In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by FASB as part of its post-implementation review of the credit losses standard that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings ("TDRs") by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the previousvintage disclosures. The Company adopted the provision in ASU two2022-step impairment test. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited-02 related to the amountrecognition and measurement of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculateTDRs on a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Companyprospective basis on January 1, 2020.2023. The TDR classification is no longer applicable subsequent to December 31, 2022. The adoption of ASU 20172022-0402 did not have a material effect on the Company's consolidated financial statements. See Note 4 - "Loans" for discussion.

 

Information contained within the report prior to adoption of ASU 2022-02 and ASU 2016-13 for the year ended December 31, 2022 and 2021, respectively, reflects prior GAAP.

In August 2018,December 2022, the FASB issued ASU 20182022-13,06, "Fair Value Measurement"Reference Rate Reform (Topic 820848): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieuDeferral of the weighted average ifSunset Date of Topic 848." ASU 2022-06 extends the entity determines that other quantitative information would be a more reasonable and rational method to reflectperiod of time preparers can utilize the distribution of unobservable inputs used to develop Level 3 fair value measurements. Certain disclosure requirementsreference rate reform relief guidance in Topic 820848. were also removed or modified.The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate ("LIBOR") would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023. To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 2018848- from 13December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU was effective for all entities upon issuance. The Company adopted ASU 2022-06 in the Company onyear ended January 1, 2020.December 31, 2023. The adoption of ASU 2018-13 did not have a material effect on the Company's consolidated financial statements.

In March 2020 (revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System ("FRB") and the Federal Deposit Insurance Corporation, ("FDIC") issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus."  The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, "Receivables – Troubled Debt Restructurings by Creditors," a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In August 2020, a joint statement on additional loan modifications was issued. Among other things, the Interagency Statement addresses accounting and regulatory reporting considerations for loan modifications, including those accounted for under Section 4013 of the CARES Act. The CARES Act  was signed into law on March 27, 2020 to help support individuals and businesses through loans, grants, tax changes and other types of relief. The most significant impacts of the CARES Act related to accounting for loan modifications and establishment of the PPP. On December 21, 2020, the Appropriations Act was passed. The Appropriations Act extends or modifies many of the relief programs first created by the CARES Act, including the PPP and treatment of certain loan modifications related to the COVID-19 pandemic. This interagency guidance is not expected to have a material impact on the Company's financial statements; however, this impact cannot be quantified at this time.

 

Recent Accounting Pronouncements and Other Authoritative Accounting Guidance

 

In June 2016,December 2023, the FASB issued ASU 20162023-13,09, "Financial Instruments - Credit Losses"Income Taxes (Topic 326740): Measurement of Credit Losses on Financial Instruments.Improvements to Income Tax Disclosures." The amendments in this ASU among other things, require an entity to disclose specific categories in the measurement of all expected credit lossesrate reconciliation and provide additional information for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Manyreconciling items that meet a quantitative threshold, which is greater than five percent of the loss estimation techniques applied today will still be permitted, althoughamount computed by multiplying pretax income by the inputsentity's applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to those techniques will change to reflectdisclose the full amount of expected credit losses. In addition,income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU amends the accountingrequire an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU's 2019-04,2019-05,2019-10,2019-11,2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission ("SEC") and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interimannual periods within those years, beginning after December 15, 2022. At the one-time evaluation date, the Company qualified as a smaller reporting company and elected to defer the adoption of the standard. The Company will continue to validate its models that will be used upon future adoption of the standard. The implementation of this ASU will likely result in increases to the Company's reserves when implemented. 

In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: the projected benefit obligation ("PBO") and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation ("ABO") and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020.2024. Early adoption is permitted. The Company is currently assessing the impact that ASU 2018-14 will have on its consolidated financial statements.

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Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin ("SAB") 119. SAB 119 updated portions of SEC interpretative guidance to align with ASC 326, "Financial Instruments - Credit Losses." It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers' application of certain income tax-related guidance. This ASU is part of the FASB's simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815." The ASU is basedshould be applied on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, such as the Company, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoptionprospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 20202023-0109 to have a material impact on its consolidated financial statements.

 

In March 2020,November 2023, the FASBFinancial Accounting Standards Board (FASB) issued ASU 20202023-04,07, "Reference Rate Reform"Segment Reporting (Topic 848280): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.Improvements to Reportable Segment Disclosures." The amendments in this ASU provide 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 the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. It isare 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 improve reportable segment disclosure requirements primarily through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01 "Reference Rate Reform (Topic 848): Scope."enhanced disclosures about significant segment expenses. This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivativesrequires disclosure of significant segment expenses that are affectedregularly provided to the chief operating decision mark ("CODM"), an amount for other segment items by the discounting transition. Thereportable segment and a description of its composition, all annual disclosures required by FASB ASU also amends the expedients and exceptions in Topic 848280 to capturein interim periods as well, and the incremental consequencestitle and position of the scope clarificationCODM and to tailorhow the existing guidance to derivative instruments affected byCODM uses the discounting transition. An entityreported measures. Additionally, this ASU requires that at least may oneelect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim periodreported segment profit and loss measures should be the measure that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is assessing ASU 2020-04 and its impact on the Company's transition away from LIBOR for its loan and other financial instruments.

On March 12, 2020, the SEC finalized amendments to the definitions of its "accelerated filer" and "large accelerated filer" definitions. The amendments increase the threshold criteria for meeting these filer classifications and were effective on April 27, 2020. Any changes in filer status are to be applied beginningmost consistent with the filer's first annual report filed with the SEC subsequent to the effective date. The rule change revises the definition of "accelerated filers" to exclude entities with public float of less than $700 million and less than $100 millionmeasurement principles used in annual revenues. If an entity's annual revenues exceed $100 million, its category will change back to "accelerated filer." A public company that is classified as an "accelerated filer" or "large accelerated filer" must obtain an auditor attestation concerning the effectiveness of internal control over financial reporting ("ICFR") and include the opinion on ICFR in its annual report on Form 10-K. Non-accelerated filers also have additional time to file quarterly and annualconsolidated financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management's assertion on effectiveness of ICFR, but the external auditor attestation of ICFR is not required for non-accelerated filers. The Company's annual revenues exceeded $100 million in the previous year, and the Company expects its annual revenues to exceed $100 million in future years and to remain an "accelerated filer." Therefore,Lastly, this change is not expected to have a significant impact on the Company's annual reporting and audit requirements.

In August 2020, the FASB issued ASU 2020-06, "Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity." The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. Forrequires public business entities excluding smaller reporting companies, thewith a single reportable segment to provide all disclosures required by these amendments in thethis ASU are effective for fiscal years beginning afterand all existing segment disclosures in Topic December 15, 2021, 280.and interim periods within those fiscal years.  For all other entities, the standard will be This ASU is effective for fiscal years beginning after December 15, 2023, includingand interim periods within those fiscal years. years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively. The Company does not expect the adoption of ASU 20202023-07 to have a material impact on its consolidated financial statements.

In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative." This ASU incorporates certain U.S. Securities and Exchange Commission ("SEC") disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC's regulations. For entities subject to the SEC's existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs." This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is not permitted. All entities should apply ASU 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

 

Note 2 - Acquisitions

On April 1, 2019, the Company completed its acquisition of Roanoke-based HomeTown Bankshares Corporation ("HomeTown") and its wholly-owned subsidiary bank, HomeTown Bank. Pursuant and subject to the terms of the merger agreement, as a result of the merger, the holders of shares of HomeTown common stock received 0.4150 shares of the Company's common stock for each share of HomeTown common stock held immediately prior to the effective date of the merger.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other.

The following table provides detail of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in thousands):

Consideration Paid:

    

Common shares issued (2,361,686)

 $82,470 

Issuance of replacement stock options/restricted stock

  753 

Cash paid in lieu of fractional shares

  27 

Value of consideration

  83,250 
     

Assets acquired:

    

Cash and cash equivalents

  26,283 

Investment securities

  34,876 

Restricted stock

  2,588 

Loans

  444,324 

Premises and equipment

  12,034 

Deferred income taxes

  2,960 

Core deposit intangible

  8,200 

Other real estate owned

  1,188 

Banked owned life insurance

  8,246 

Other assets

  14,244 

Total assets

  554,943 
     

Liabilities assumed:

    

Deposits

  483,626 

Short-term FHLB advances

  14,883 

Long-term FHLB advances

  778 

Subordinated debt

  7,530 

Other liabilities

  6,052 

Total liabilities

  512,869 

Net assets acquired

  42,074 

Goodwill resulting from merger with HomeTown

 $41,176 

The following table details the changes in fair value of net assets acquired and liabilities assumed from the amounts reported in the Form 10-K for the year ended December 31, 2019 (dollars in thousands):

Goodwill at December 31, 2019

 $40,130 
Effect of adjustments to:    

Premises and equipment

  520 
Other real estate owned  254 
Other liabilities  272 

Goodwill at December 31, 2020

 $41,176 

The increase in goodwill made during the first quarter of 2020 was due to adjustments to the valuations of several acquired buildings and OREO obtained on the date of merger. Also in the first quarter of 2020, the goodwill adjustment for other liabilities related to a reassessment of the interest rate prevailing for supplemental early retirement plan obligations at the merger date.

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The acquired loans were recorded at fair value at the acquisition date without carryover of HomeTown's previously established allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and leases and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). Fair values determined at the acquisition date were preliminary and subject to refinement during the one-year measurement period as additional information was obtained regarding facts and circumstances about expected cash flows that existed as of the acquisition date.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality (purchased credit impaired), and loans that do not meet these criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs (purchased performing).

The following table presents the purchased credit impaired loans receivable at the acquisition date (dollars in thousands):

Contractually required principal and interest at acquisition

 $45,551 

Contractual cash flows not expected to be collected (nonaccretable difference)

  8,296 

Expected cash flows at acquisition

  37,255 

Interest component of expected cash flows (accretable yield)

  4,410 

Fair value of acquired loans accounted for under FASB ASC 310-30

 $32,845 

Direct costs related to the HomeTown acquisition were expensed as incurred. There were 0 merger related expenses during 2020 compared to $11,782,000 during 2019 and $872,000 during 2018.

The following table presents unaudited pro forma information as if the acquisition of HomeTown had occurred on January 1,2018 (dollars in thousands, except per share data). These results combine the historical results of HomeTown in the Company's consolidated statements of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of HomeTown's provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. Pro forma adjustments below include the net impact of accretion for 2018 and the elimination of merger-related costs for 2019 and 2018.

  

Pro forma Year Ended December 31,

 
  

2019

  

2018

 

Total revenues (1)

 $95,178  $98,232 

Net income

 $29,841  $27,974 

Earnings per share

 $2.70  $2.52 

__________________________

(1) Includes net interest income and noninterest income.

 

Note 32 – Restrictions on Cash

The Company is a member of the Federal Reserve System and is required to maintain certain levels of its cash and cash equivalents as reserves based on regulatory requirements. The gross reserve requirement with the Federal Reserve Bank of Richmond was zero and $14.4 million at December 31,2020 and 2019, respectively. The required balance to be maintained with the Federal Reserve Bank of Richmond was zero and $2.6 million at December 31,2020 and December 31,2019, respectively.

 

The Company maintains cash accounts in other commercial banks. The amount on deposit with correspondent institutions at December 31,2020 2023 exceeded the insurance limits of the FDIC by $2,610,000$2.8 million..

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Note 43 - Securities

 

The amortized cost and estimated fair value of investments in securities at December 31, 20202023 and 20192022 were as follows (dollars in thousands):

 

 

December 31, 2020

  

December 31, 2023

 
 

Amortized

 

Unrealized

 

Unrealized

     

Amortized

 

Unrealized

 

Unrealized

   
 

Cost

  

Gains

  

Losses

  

Fair Value

  

Cost

  

Gains

  

Losses

  

Fair Value

 

Securities available for sale:

                  

U.S. Treasury

 $34,997  $1  $0  $34,998  $131,731 $ $7,964 $123,767 

Federal agencies and GSEs

 104,092  1,976  45  106,023  76,702 3 4,472 72,233 

Mortgage-backed and CMOs

 246,770  6,117  105  252,782  292,590 1 35,827 256,764 

State and municipal

 57,122  1,979  2  59,099  45,999  3,577 42,422 

Corporate

  13,011   188   10   13,189   30,812      4,479   26,333 

Total securities available for sale

 $455,992  $10,261  $162  $466,091  $577,834  $4  $56,319  $521,519 

 

The Company adopted ASUhad 2016no-01 effective January 1, 2018 and had no equity securities at December 31, 2020 2023and or December 31, 202231,2019 and recognized in income $333,000 of unrealized holding gains during 2019. During the year ended December 31,2019, the Company sold $445,000 in equity securities at fair value..

 

(Dollars in thousands) December 31, 2019        December 31, 2022 
 

Amortized

 

Unrealized

 

Unrealized

     

Amortized

 

Unrealized

 

Unrealized

   
 

Cost

  

Gains

  

Losses

  

Fair Value

  

Cost

  

Gains

  

Losses

  

Fair Value

 

Securities available for sale:

                  
U.S. Treasury $14,992  $0  $5  $14,987  $152,033  $  $12,606  $139,427 

Federal agencies and GSEs

 126,829  1,504  219  128,114  90,363  4  7,019  83,348 

Mortgage-backed and CMOs

 182,732  1,901  393  184,240  336,393  1  42,301  294,093 

State and municipal

 41,427  769  42  42,154  69,023  12  5,312  63,723 

Corporate

  9,514   186   0   9,700   31,299      3,828   27,471 

Total securities available for sale

 $375,494  $4,360  $659  $379,195  $679,111  $17  $71,066  $608,062 

 

The amortized cost and estimated fair value of investments in debt securities at December 31, 202331,2020,, by contractual maturity, are shown in the following table. 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. Because mortgage-backed securities have both known principal repayment terms as well as unknown principal repayments due to potential borrower pre-payments, it is difficult to accurately predict the final maturity of these investments. Mortgage-backed securities are shown separately (dollars in thousands):

 

 

Available for Sale

  

Available for Sale

 
 

Amortized

     

Amortized

   
 

Cost

  

Fair Value

  

Cost

  

Fair Value

 

Due in one year or less

 $38,081  $38,120  $66,221  $64,528 

Due after one year through five years

 96,905  98,651  155,815  144,776 

Due after five years through ten years

 52,624  54,465  52,229  45,302 

Due after ten years

 21,612  22,073  10,979  10,148 

Mortgage-backed and CMOs

  246,770   252,782   292,590   256,765 
 $455,992  $466,091  $577,834  $521,519 

 

Gross realized gains and losses on, and the proceeds from the sale of, securities available for sale were as follows (dollars in thousands):

 

 

For the Year Ended December 31,

  

For the Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Gross realized gains

 $814  $328  $342  $55  $  $35 

Gross realized losses

 0  (54) (261) (123)    

Proceeds from sales of securities

 5,811  29,878  57,607  13,180    561 

 

Securities with a carrying value of approximately $189,791,000$202.0 million and $179,852,000$118.9 million at December 31, 202331,2020 and 2019,2022, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. FHLBFHLB letters of credit were used as additional collateral in the amounts of $245,000,000$210.0 million at December 31, 2023 and $170.0 million at December 31, 20202022 and $170,000,000 at December 31,2019..

 

7056

 

Temporarily ImpairedUnrealized Losses on Securities

 

The following table shows estimated fair value and gross unrealized losses for which an ACL has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2023. 31,2020.The reference point for determining when securities are in an unrealized loss position is month-end.month end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.

 

Available for saleAFS securities that have been in a continuous unrealized loss position, areat December 31, 2023, were as follows (dollars(dollars in thousands):

 

 

Total

  

Less than 12 Months

  

12 Months or More

  

Total

  

Less than 12 Months

  

12 Months or More

 
 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

  

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 
 

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

 

U.S. Treasury

 $123,767 $7,964 $ $ $123,767 $7,964 

Federal agencies and GSEs

 $21,237  $45  $19,974  $26  $1,263  $19  71,975 4,472 210  71,765 4,472 

Mortgage-backed and CMOs

 46,640  105  46,640  105  0  0  256,615 35,827 111 2 256,504 35,825 

State and municipal

 3,456  2  3,456  2  0  0  42,377 3,577 1,621 15 40,756 3,562 

Corporate

  5,990   10   5,990   10   0   0   26,333   4,479   1,506   194   24,827   4,285 

Total

 $77,323  $162  $76,060  $143  $1,263  $19  $521,067  $56,319  $3,448  $211  $517,619  $56,108 

 

Federal agencies and GSEs:U.S. Treasury: The unrealized losses on the Company's investment in 14 government sponsored entities ("GSEs")19 U.S. Treasury securities were caused by normal market fluctuations. ElevenNineteen of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company concluded there were no credit related losses at December 31, 2023.

Federal agencies and GSEs: The unrealized losses on the Company's investment in 38 government sponsored entities ("GSEs") were caused by normal market fluctuations. Thirty-seven of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not consider thoseintend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be other-than-temporarily impairedmaturity, the Company concluded there were no credit related losses at December 31, 202331,2020..

 

Mortgage-backed securities: The unrealized losses on the Company's investment in six131 GSE mortgage-backed securities were caused by normal market fluctuations. NoneOne hundred twenty-one of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impairedconcluded there were no credit related losses at December 31, 202331,2020..

 

Collateralized Mortgage Obligations: The unrealized losses associated with five private53 GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. NoneAll of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost bases, which may be maturity, the Company does not consider the investments to be other-than-temporarily impairedconcluded there were no credit related losses at December 31, 202331,2020..

 

State and municipal securities: The unrealized losses on two59 state and municipal securities were caused by normal market fluctuations. Fifty-seven of these securities were in an unrealized loss position for 12 months or more. These securities are of high credit quality (rated A- or higher), and principal and interest payments have been made timely. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impairedconcluded there were no credit related losses at December 31, 202331,2020..

 

Corporate securities: The unrealized losses on two12 corporate securities were caused by normal market fluctuations and not credit deterioration. All of these securities were in an unrealized loss position for 12 months or more. These securities remain investment grade,are not rated, but the Company conducted thorough internal credit reviews prior to purchase and conducts ongoing quarterly reviews of these companies as well, and the Company's analysis did not indicate the existence of credit loss. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impairedconcluded there were no credit related losses at December 31, 2020.2023.

 

57

Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond and FHLB, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classification requirements and are included as a separate line item on the Company's consolidated balance sheet. The FHLB requires the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank's total assets. The Federal Reserve Bank of Richmond requires the Bank to maintain stock with a par value equal to 3.0% of its outstanding capital and an additional 3.0% is on call. Restricted equity securities consist of Federal Reserve Bank of Richmond stock in the amount of $6,458,000$6.6 million and $6,415,000$6.5 million as of December 31,2020 2023 and 2019,2022 respectively, and FHLB stock in the amount of $2,257,000$4.0 million and $2,215,000$6.1 million as ofDecember 31, 2023 and 2022, respectively.

Allowance for Credit Losses-Available for Sale Securities

As of December 31, 2023 and 2022, there were no allowances for credit losses-securities available for sale. The Company does not believe that the AFS debt securities that were in an unrealized loss position as of December 31, 2023, which were comprised of 312 individual securities, represent a credit loss impairment. As of December 31, 2023 and 2022, the gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk free," and have a long history of zero credit losses. Total gross unrealized losses were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

Realized Gains and Losses

Net proceeds from sales of AFS securities for the year ended December 31, 20202023 totaled $13.2 million. Gross realized gains on these sales were $55 thousand, while gross realized losses were $123 thousand, which resulted in a net realized loss of $68 thousand. The Company did not have any sales of AFS securities during the year ended December 31, 2022 and recorded realized gains of $35 thousand for the year ended 2019,December 31, 2021. respectively.

 

71

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 20192022 (dollars in thousands):

 

  

Total

  

Less than 12 Months

  

12 Months or More

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

 

U.S. Treasury

 $14,987  $5  $14,987  $5  $0  $0 

Federal agencies and GSEs

  69,095   219   31,779   44   37,316   175 

Mortgage-backed and CMOs

  89,391   393   66,324   266   23,067   127 

State and municipal

  4,262   42   3,108   37   1,154   5 

Total

 $177,735  $659  $116,198  $352  $61,537  $307 

Other-Than-Temporary-Impaired Securities

As of December 31,2020 and 2019, there were no securities classified as other-than-temporary impaired.

  

Total

  

Less than 12 Months

  

12 Months or More

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

 

U.S. Treasury

 $139,427  $12,606  $10,824  $915  $128,603  $11,691 

Federal agencies and GSEs

  82,958   7,019   29,204   1,920   53,754   5,099 

Mortgage-backed and CMOs

  293,929   42,301   96,758   7,245   197,171   35,056 

State and municipal

  60,629   5,312   31,866   980   28,763   4,332 

Corporate

  27,471   3,828   18,991   2,556   8,480   1,272 

Total

 $604,414  $71,066  $187,643  $13,616  $416,771  $57,450 

 

 

Note 54 – Loans

 

Loans, excluding loans held for sale at December 31, 20202023 and 20192022 were comprised of the following (dollars in thousands):

 

 

December 31,

  

December 31,

 
 

2020

  

2019

  

2023

  

2022

 

Commercial

 $491,256  $339,077  $302,305  $304,247 

Commercial real estate:

          

Construction and land development

 140,071  137,920  274,035  197,525 

Commercial real estate - owner occupied

 373,680  360,991  414,321  418,462 
Commercial real estate - non-owner occupied 627,569  538,208  830,655  827,728 

Residential real estate:

          

Residential

 269,137  324,315  369,892  338,132 

Home equity

 104,881  119,423  90,298  93,740 

Consumer

  8,462   10,881   6,814   6,615 

Total loans, net of deferred fees and costs

 $2,015,056  $1,830,815  $2,288,320  $2,186,449 

 

Net deferred loan (fees) costs included in the above loan categories are $(3,021,000)$255 thousand for 20202023 and $1,197,000$202 thousand for 2019.2022 The balance at December 31, 2020 includes $(4,439,000) in unamortized net PPP fees.all other categories.

 

Overdraft deposits were reclassified to consumer loans in the amount of $59,000$132 thousand and $134,000$70 thousand for 20202023 and 2019,2022, respectively.

 

Acquired Loans

 

The following information as of and for the year ended December 31, 2022 was in accordance with the guidance in effect prior to the adoption of ASC 326.The outstanding principal balance and the carrying amount of these loans, including ASC 310-30 loans, included in the consolidated balance sheets at December 31,20202022 and 2019 arewere as follows (dollars in thousands):

 

 

2020

  

2019

  

2022

 

Outstanding principal balance

 $251,730  $393,618  $125,856 

Carrying amount

 241,008  377,130  120,432 

 

58

The outstanding principal balance and related carrying amount of purchased credit impaired loans, for which the Company applies ASC 310-30 to account for interest earned, at December 31,2020 and 20192022 are as follows (dollars in thousands):

 

 

2020

  

2019

  

2022

 

Outstanding principal balance

 $37,417  $53,600  $17,788 

Carrying amount

 30,201  43,028  13,541 

 

72

The following table presents changes in the accretable yield on purchased credit impaired loans, for which the Company applies ASC 310-30, for the yearsyear ended December 31, 2020,20222019, and 2018 (dollars,(dollars in thousands):

 

 

2020

  

2019

  

2018

  

2022

 

Balance at January 1

 $7,893  $4,633  $4,890  $4,902 

Additions from merger with HomeTown

 0  4,410  0 

Accretion

 (3,553) (3,304) (2,362) (2,186)

Reclassification from nonaccretable difference

 2,233  736  956  986 

Other changes, net (1)

  (60)  1,418   1,149   (172)

Balance at December 31

 $6,513  $7,893  $4,633  $3,530 

___________________________________________________

(1)  This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate acquired impaired loans, and discounted payoffs that occurred in the period.

 

Past Due Loans

 

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 20202023 (dollars in thousands):

 

       

90 Days +

                   

90 Days +

            
       

Past Due

 

Non-

 

Total

             

Past Due

 

Non-

 

Total

      
 

30- 59 Days

 

60-89 Days

 

and Still

 

Accrual

 

Past

    

Total

  

30- 59 Days

 

60-89 Days

 

and Still

 

Accrual

 

Past

    

Total

 
 

Past Due

  

Past Due

  

Accruing

  

Loans

  

Due

  

Current

  

Loans

  

Past Due

  

Past Due

  

Accruing

  

Loans

  

Due

  

Current

  

Loans

 

Commercial

 $153  $9  $0  $100  $262  $490,994  $491,256  $1,642  $  $  $  $1,642  $300,663  $302,305 

Commercial real estate:

                              

Construction and land development

 168  0  0  5  173  139,898  140,071  326        326  273,709  274,035 

Commercial real estate - owner occupied

 62  0  209  304  575  373,105  373,680  269      2,911  3,180  411,141  414,321 
Commercial real estate - non-owner occupied 0  0  0  1,158  1,158  626,411  627,569  597      2,327  2,924  827,731  830,655 

Residential:

                              

Residential

 711  211  53  792  1,767  267,370  269,137  614  208    390  1,212  368,680  369,892 

Home equity

 0  0  0  69  69  104,812  104,881  121  25    171  317  89,981  90,298 

Consumer

  49   14   0   6   69   8,393   8,462   1   3      15   19   6,795   6,814 

Total

 $1,143  $234  $262  $2,434  $4,073  $2,010,983  $2,015,056  $3,570  $236  $  $5,814  $9,620  $2,278,700  $2,288,320 

 

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 20192022 (dollars in thousands):

 

         

90 Days +

                       

90 Days +

            
         

Past Due

 

Non-

 

Total

               

Past Due

 

Non-

 

Total

      
 

30- 59 Days

 

60-89 Days

 

and Still

 

Accrual

 

Past

     

Total

  

30- 59 Days

 

60-89 Days

 

and Still

 

Accrual

 

Past

    

Total

 
 

Past Due

  

Past Due

  

Accruing

  

Loans

  

Due

  

Current

  

Loans

  

Past Due

  

Past Due

  

Accruing

  

Loans

  

Due

  

Current

  

Loans

 

Commercial

 $325  $163  $52  $857  $1,397  $337,680  $339,077  $161  $  $  $4  $165  $304,082  $304,247 

Commercial real estate:

                              

Construction and land development

 58  0  0  11  69  137,851  137,920            197,525  197,525 

Commercial real estate - owner occupied

 217  434  0  274  925  360,066  360,991  724  268      992  417,470  418,462 
Commercial real estate - non-owner occupied 0  0  0  0  0  538,208  538,208  319      301  620  827,108  827,728 

Residential:

                              

Residential

 639  260  282  685  1,866  322,449  324,315  664  90    797  1,551  336,581  338,132 

Home equity

 49  90  27  113  279  119,144  119,423  104      205  309  93,431  93,740 

Consumer

  73   13   0   4   90   10,791   10,881         16      16   6,599   6,615 

Total

 $1,361  $960  $361  $1,944  $4,626  $1,826,189  $1,830,815  $1,972  $358  $16  $1,307  $3,653  $2,182,796  $2,186,449 

 

7359

 

Impaired LoansThe following table is a summary of nonaccrual loans by major categories for the dates indicated (dollars in thousands). All payments received while on nonaccrual status are applied against the principal balance of the loan. The Company does not recognize interest income while loans are on nonaccrual status.

  

CECL

  

Incurred Loss

 
  

December 31, 2023

  

December 31, 2022

 
  

Nonaccrual Loans

  

Nonaccrual Loans

  

Total

     
  

with No Allowance

  

with an Allowance

  

Nonaccrual Loans

  

Nonaccrual Loans

 

Commercial

 $-  $-  $-  $4 

Commercial real estate:

                

Construction and land development

  -   -   -   - 

Commercial real estate-owner occupied

  2,911   -   2,911   - 

Commercial real estate-non-owner occupied

  2,327   -   2,327   301 

Residential:

                

Residential

  340   50   390   797 

Home equity

  -   171   171   205 

Consumer

  -   15   15   - 

Total

 $5,578  $236  $5,814  $1,307 

The following table represents the accrued interest receivables written off by reversing interest during the twelve months ended December 31, 2023 (dollars in thousands).

  

For the Twelve Months Ended December 31, 2023

 

Commercial

 $2 

Commercial real estate:

    

Construction and land development

  - 

Commercial real estate-owner occupied

  10 

Commercial real estate-non-owner occupied

  15 

Residential:

    

Residential

  3 

Home equity

  1 

Consumer

  - 

Total accrued interest reversed

 $31 

The following table presents a nonaccrual loan analysis of collateral dependent loans as of December 31, 2023. Only loans over the Company's threshold are assessed (dollars in thousands).

  

Residential

  

Business

      

Commercial

  

Owner

  

Total

 
  

Properties

  

Assets

  

Land

  

Property

  

Occupied

  

Loans

 
                         

Commercial real estate:

 $-  $-  $-  $2,327  $2,911  $5,238 

Residential:

                        

Residential

  340   -   -   -   -   340 

Home equity

  -   -   -   -   -   - 

Total collateral dependent loans

 $340  $-  $-  $2,327  $2,911  $5,578 

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

60

The following table shows the amortized cost basis of  loans modified to borrowers experiencing financial difficulty during the year ended December 31, 2023. All loans shown in the table below are in nonaccrual status except for the residential real estate loan. All loans shown below are paying in agreement with the terms and are not past due. There have been no defaults in the years ended December 31, 2023 or 2022. It is shown by class of loan and type of concession granted and describes the financial effect of the modification made to the borrower experiencing financial difficulty (dollars in thousands):

  

Type of Modification

  

Amortized Cost Basis

  

% of Total Loan Type

  

Financial Effect

           

Commercial real estate-owner occupied

 $2,315   0.56% 

Term extension.

Commercial real estate-nonowner occupied

  2,517   0.30  

Interest rate reduction and term extension.

Residential real estate

  8   -  

Term extension.

Commercial real estate-owner occupied

  454   0.11  

Term extension.

 

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 20202022 (dollars in thousands):

 

    

Unpaid

    

Average

 

Interest

     

Unpaid

    

Average

 

Interest

 
 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

  

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 
 

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

  

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 

With no related allowance recorded:

  

Commercial

 $18  $18  $  $23  $6  $  $  $  $  $ 

Commercial real estate:

  

Construction and land development

 0  0    0  0           

Commercial real estate - owner occupied

 286  283    357  27  2,420  2,420    1,454  108 
Commercial real estate - non-owner occupied 1,148  1,147    766  75  1,360  1,359    1,186  40 

Residential:

  

Residential

 1,096  1,103    912  62  1,149  1,156    935  21 

Home equity

 6  6    31  3  165  165    93   

Consumer

  0   0      0   0                
 $2,554  $2,557  $  $2,089  $173  $5,094  $5,100  $  $3,668  $169 

With a related allowance recorded:

  

Commercial

 $39  $33  $29  $382  $15  $  $  $  $139  $ 

Commercial real estate:

  

Construction and land development

 0  0  0  0  0           

Commercial real estate - owner occupied

 0  0  0  0  0           
Commercial real estate - non-owner occupied 122  122  0  180  15           

Residential

 

Residential:

 

Residential

 137  137  1  256  9        41   

Home equity

 0  0  0  0  0           

Consumer

  0   0   0   0   0            38    
 $298  $292  $30  $818  $39  $  $  $  $218  $ 

Total:

  

Commercial

 $57  $51  $29  $405  $21  $  $  $  $139  $ 

Commercial real estate:

  

Construction and land development

 0  0  0  0  0           

Commercial real estate - owner occupied

 286  283  0  357  27  2,420  2,420    1,454  108 
Commercial real estate - non-owner occupied 1,270  1,269  0  946  90  1,360  1,359    1,186  40 

Residential:

  

Residential

 1,233  1,240  1  1,168  71  1,149  1,156    976  21 

Home equity

 6  6  0  31  3  165  165    93   

Consumer

  0   0   0   0   0            38    
 $2,852  $2,849  $30  $2,907  $212  $5,094  $5,100  $  $3,886  $169 

 

In the table above, recorded investment may exceedbe different than unpaid principal balance due to acquired loans with a premium or discount and loans with unearned costs that exceedor unearned fees.

 

74

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31,2019 (dollars in thousands):

      

Unpaid

      

Average

  

Interest

 
  

Recorded

  

Principal

  

Related

  

Recorded

  

Income

 
  

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 

With no related allowance recorded:

                    

Commercial

 $49  $49  $  $16  $5 

Commercial real estate:

                    

Construction and land development

  0   0      0   0 

Commercial real estate - owner occupied

  343   341      250   26 
Commercial real estate - non-owner occupied  159   159      174   13 

Residential:

                    

Residential

  611   612      652   38 

Home equity

  41   41      45   6 

Consumer

  0   0      0   0 
  $1,203  $1,202  $  $1,137  $88 

With a related allowance recorded:

                    

Commercial

 $735  $730  $204  $191  $41 

Commercial real estate:

                    

Construction and land development

  0   0   0   0   0 

Commercial real estate - owner occupied

  0   0   0   0   0 
Commercial real estate - non-owner occupied  0   0   0   0   0 

Residential:

                    

Residential

  254   254   26   225   16 

Home equity

  0   0   0   0   0 

Consumer

  0   0   0   0   0 
  $989  $984  $230  $416  $57 

Total:

                    

Commercial

 $784  $779  $204  $207  $46 

Commercial real estate:

                    

Construction and land development

  0   0   0   0   0 

Commercial real estate - owner occupied

  343   341   0   250   26 
Commercial real estate - non-owner occupied  159   159      174   13 

Residential:

                    

Residential

  865   866   26   877   54 

Home equity

  41   41   0   45   6 

Consumer

  0   0   0   0   0 
  $2,192  $2,186  $230  $1,553  $145 

In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans with unearned costs that exceed unearned fees.Foreclosure

 

75

The following table shows the detail of loans modified as TDRs during the year ended December 31,2020,2019, and 2018, included in the impaired loan balances (dollars in thousands):

  

Loans Modified as TDRs for the Year Ended December 31, 2020

 
      

Pre-Modification

  

Post-Modification

 
  

Number of

  

Outstanding Recorded

  

Outstanding Recorded

 
  

Contracts

  

Investment

  

Investment

 

Commercial

  1  $106  $106 

Commercial real estate - owner occupied

  0   0   0 

Commercial real estate - non-owner occupied

  2   1,311   1,311 

Residential real estate

  1   82   82 

Home equity

  1   6   6 

Consumer

  0   0   0 

Total

  5  $1,505  $1,505 

  

Loans Modified as TDRs for the Year Ended December 31, 2019

 
      

Pre-Modification

  

Post-Modification

 
  

Number of

  

Outstanding Recorded

  

Outstanding Recorded

 
  

Contracts

  

Investment

  

Investment

 

Commercial

  0  $0  $0 

Commercial real estate - owner occupied

  0   0   0 

Commercial real estate - non-owner occupied

            

Residential real estate

  1   207   207 

Home equity

  0   0   0 

Consumer

  0   0   0 

Total

  1  $207  $207 

  

Loans Modified as TDRs for the Year Ended December 31, 2018

 
      

Pre-Modification

  

Post-Modification

 
  

Number of

  

Outstanding Recorded

  

Outstanding Recorded

 
  

Contracts

  

Investment

  

Investment

 

Commercial

  0  $0  $0 

Commercial real estate - owner occupied

  0   0   0 

Commercial real estate - non-owner occupied

  0   0   0 

Residential real estate

  1   11   11 

Home equity

  0   0   0 

Consumer

  0   0   0 

Total

  1  $11  $11 

All loans modified as TDRs during the years ended December 31,2020,2019, and 2018 were structure modifications. The impact on the allowance for loan losses for the commercial loan modified as a TDR in 2020 was $88,000. The impact on the allowance for loan losses for one of the commercial real estate - non-owner occupied loans modified as a TDR in 2020 was $138,000; there was no impact on the allowance for loan losses for the other commercial real estate - non-owner occupied loan. There was no impact on the allowance for loan losses for the residential real estate loan and the home equity loan modified as TDRs in 2020. For the year ended December 31, 2020, the impact on the allowance was due to specific reserves that were charged-off prior to year end. The impact on the allowance for loan losses for the residential real estate loan modified as a TDR in 2019 was $24,000. There was no impact on the allowance for loan losses for the residential real estate loan modified as a TDR in 2018.

During the year ended December 31, 2020, the Company had one commercial real estate - non-owner occupied loan with a recorded investment of $1,052,000 that subsequently defaulted within 12 months of modification. During the years ended December 31,2019 and 2018, the Company had no loans that subsequently defaulted within twelve months of modification. The Company defines default as one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure subsequent to modification. Any charge-offs resulting in default were adjusted through the allowance for loan losses.

76

In March 2020 (revised in April 2020), the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance explains that, in consultation with the FASB staff, the federal banking agencies have concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. The CARES Act was passed by the U.S. Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 were not TDRs. The Bank implemented a DAP to provide relief to its borrowers under this guidance. The Bank provided assistance to customers with loan balances of $405.1 million during the year ended December 31, 2020. The balance of loans remaining in this program at December 31, 2020 was $30.0 million, or 1.5% of the total portfolio, with $18.2 million of the $30.0 million in total deferrals the result of second and third request interest deferrals. At February 28, 2021, the balance of loans remaining in this program was $25.2 million, or 1.2% of the total portfolio, with $16.7 million of the $25.2 million in total deferrals the result of second request interest deferrals. The majority of remaining modifications involved three-month deferments of interest. This interagency guidance has not had a material impact on the Company's financials and is not expected to have a material impact on ongoing operations; however, this impact cannot be quantified at this time.

The CARES Act included an initial first round allocation of $659.0 billion for loans to be issued by financial institutions through the SBA's PPP. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which was passed by Congress on December 21, 2020 and then signed into law on December 27, 2020 as part of the Appropriations Act, allocated an additional $284.4 billion. These loans carry a fixed rate of 1.00% and a term of two years for the majority of the initial loans and for five years on the second round, if not forgiven, in whole or in part. Payments were deferred for the firstsix months of the loan. The loans are 100% guaranteed by the SBA. The SBA paid the Bank a processing fee based on the size of the loan. The SBA has approved over 2,700 applications as of  February 28, 2021 totaling $340.9 million in loans. The Company had outstanding net PPP loans of $211.3 million at December 31, 2020 $23 thousand and $226.4 million at February 28, 2021. The Bank has received processing fees of $11.2 million on the PPP loans and incurred direct origination costs of $1.8 million. The Company had net unaccreted PPP loan origination fees of $4.4 million at December 31, 2020 and $5.0 at February 28, 2021. From a funding perspective, the Bank utilized core funding sources for these loans. At December 31, 2020 and February 28, 2021, respectively, the SBA had forgiven $56.4 million and $105.8 million of PPP loans. These PPP loans are guaranteed by the SBA and, therefore, do not have a related allowance.

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. At December 31, 2020, the commercial real estate portfolio included concentrations of $75,235,000, $44,738,000 and $190,840,000 in hotel, restaurants, and retail, respectively. The concentrations total 15.5% of total loans, excluding loans in process.

The Company had $387,000 and $161,000$715 thousand in residential real estate loans in the process of foreclosure at December 31, 20202023 and December 31, 2019,2022 respectively, and, respectively. The Company had $285,000 inno residential OREO at both December 31, 20202023 and December 31, 2019.2022.

 

Risk RatingsGrades

The following tables show the Company's loan portfolio broken down by internal risk grading as of December 31,2020 (dollars in thousands):

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

  

Commercial

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential Real Estate

  

Home Equity

 

Pass

 $479,416  $131,770  $350,376  $612,688  $262,677  $104,608 

Special Mention

  10,956   2,505   14,621   9,196   3,665   0 

Substandard

  865   5,796   8,474   5,563   2,795   273 

Doubtful

  19   0   209   122   0   0 

Total

 $491,256  $140,071  $373,680  $627,569  $269,137  $104,881 

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

  

Consumer

 

Performing

 $8,456 

Nonperforming

  6 

Total

 $8,462 

 

Loans classified in the Pass category typically are fundamentally sound, and risk factors are reasonable and acceptable.

 

77

Loans classified in the Special Mention category typically have been criticized internally, by loan review or the loan officer, or by external regulators under the current credit policy regarding risk grades.

 

61

Loans classified in the Substandard category typically have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are typically characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

Loans classified in the Doubtful category typically have all the weaknesses inherent in loans classified as substandard, plus the added characteristic the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur that may salvage the debt.

 

ConsumerThe following table shows the Company's recorded investment in loans are classifiedby credit quality indicators further disaggregated by year of origination as performing or nonperforming. A loan is nonperforming when payments of interest and principal are past due 90December 31, 2023 ( days or more.dollars in thousands):

 

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

  

Term Loans by Year of Origination

         
  

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Revolving

  

Total

 

Commercial

                                

Pass

 $38,996  $37,024  $53,730  $18,292  $8,886  $24,380  $109,050  $290,358 

Special Mention

  1,311   1,071   2,054   61   386   65   1,801   6,749 

Substandard

  -   134   16   -   324   2,390   2,334   5,198 

Total commercial

 $40,307  $38,229  $55,800  $18,353  $9,596  $26,835  $113,185  $302,305 

Current period gross write-offs

 $-  $-  $(359) $-  $-  $-  $(535) $(894)
                                 

Construction and land development

                                

Pass

 $51,120  $83,122  $100,392  $7,462  $5,296  $16,116  $6,063  $269,571 

Special Mention

  -   -   4,364   -   -   -   -   4,364 

Substandard

  -   -   -   -   -   100   -   100 

Total construction and land development

 $51,120  $83,122  $104,756  $7,462  $5,296  $16,216  $6,063  $274,035 

Current period gross write-offs

 $-  $-  $-  $-  $-  $-  $-  $- 
                                 

Commercial real estate - owner occupied

                                

Pass

 $32,233  $60,890  $98,415  $42,971  $23,733  $138,802  $5,208  $402,252 

Special Mention

  -   -   1,329   -   -   788   4,529   6,646 

Substandard

  -   -   -   2,315   -   2,654   454   5,423 

Total commercial real estate - owner occupied

 $32,233  $60,890  $99,744  $45,286  $23,733  $142,244  $10,191  $414,321 

Current period gross write-offs

 $-  $-  $-  $-  $-  $-  $-  $- 
                                 

Commercial real estate - non-owner occupied

                                

Pass

 $47,264  $144,118  $219,493  $129,747  $56,852  $209,351  $6,336  $813,161 

Special Mention

  -   -   -   121   1,034   6,960   -   8,115 

Substandard

  3,073   -   1,330   1,458   1,866   1,652   -   9,379 

Total commercial real estate - non-owner occupied

 $50,337  $144,118  $220,823  $131,326  $59,752  $217,963  $6,336  $830,655 

Current period gross write-offs

 $-  $-  $-  $-  $-  $-  $-  $- 
                                 

Residential

                                

Pass

 $74,488  $93,929  $83,377  $23,637  $14,226  $63,336  $14,381  $367,374 

Special Mention

  -   256   199   -   -   757   -   1,212 

Substandard

  -   -   259   229   -   818   -   1,306 

Total residential

 $74,488  $94,185  $83,835  $23,866  $14,226  $64,911  $14,381  $369,892 

Current period gross write-offs

 $-  $-  $-  $-  $-  $(6) $-  $(6)
                                 

Home equity

                                

Pass

 $-  $-  $-  $-  $-  $-  $89,872  $89,872 

Special Mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   426   426 

Total home equity

 $-  $-  $-  $-  $-  $-  $90,298  $90,298 

Current period gross write-offs

 $-  $-  $-  $-  $-  $-  $(9) $(9)
                                 

Consumer

                                

Pass

 $2,452  $1,276  $477  $225  $141  $1,717  $509  $6,797 

Special Mention

  -   -   -   -   -   -   -   - 

Substandard

  -   2   -   -   -   15   -   17 

Total consumer

 $2,452  $1,278  $477  $225  $141  $1,732  $509  $6,814 

Current period gross write-offs

 $(3) $(2) $(7) $-  $-  $(78) $(3) $(93)

62

The following tables show the Company's loan portfolio broken down by internal risk grading as of December 31, 20192022 (dollars in thousands):

 

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

 

Commercial

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential Real Estate

  

Home Equity

  

Commercial

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential Real Estate

  

Home Equity

 

Pass

 $328,488  $130,694  $340,696  $519,919  $316,454  $118,960  $288,041  $197,331  $405,223  $826,844  $333,124  $93,062 

Special Mention

 8,710  4,133  13,094  9,023  4,370  0  10,657    2,388  239  1,577   

Substandard

 1,144  3,093  7,200  9,267  3,491  463  5,548  194  10,851  645  3,431  678 

Doubtful

  735   0   0   0   0   0   1                

Total

 $339,077  $137,920  $360,990  $538,209  $324,315  $119,423  $304,247  $197,525  $418,462  $827,728  $338,132  $93,740 

 

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

 

 

Consumer

  

Consumer

 

Performing

 $10,877  $6,599 

Nonperforming

  4   16 

Total

 $10,881  $6,615 

 

 

Note 65 – Allowance for LoanCredit Losses - Loans and Reserve for Unfunded Lending Commitments

 

Changes in the allowance for loancredit losses and the reserve for unfunded lending commitments (included in other liabilities) for each of the years in the three-year period ended December 31, 2020,2023, are presented below (dollars in thousands):

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Allowance for Loan Losses

            

Allowance for Credit Losses

         

Balance, beginning of year

 $13,152  $12,805  $13,603  $19,555  $18,678  $21,403 

Provision for (recovery of) loan losses

 8,916  456  (103)

Day 1 impact of CECL adoption

 5,192   

Provision for (recovery of) credit losses

 433  1,597  (2,825)

Charge-offs

 (1,006) (333) (1,020) (1,002) (1,019) (146)

Recoveries

  341   224   325   1,095   299   246 

Balance, end of year

 $21,403  $13,152  $12,805  $25,273  $19,555  $18,678 

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Reserve for Unfunded Lending Commitments

                     

Balance, beginning of year

 $329  $217  $206  $377  $386  $304 

Day 1 impact of CECL adoption

 305  - 

Provision for (recovery of) unfunded commitments

 (25) 112  11   63   (9)  82 

Charge-offs

  0   0   0 

Balance, end of year

 $304  $329  $217  $745  $377  $386 

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted through the provision for credit losses. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans, and are discussed in Note 1. The allowance for unfunded loan commitments is included in other liabilities on the Company's consolidated balance sheets.

 

7863

 

The reserve for unfunded loan commitments is included in other liabilities, and the provision for unfunded commitments is included in noninterest expense. The following table presents the Company's allowance for loancredit losses by portfolio segment at and the related loan balance total by segment for the year ended December 31, 20202023 (dollars in thousands):

 

  

Commercial (1)

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential Real Estate

  

Consumer

  

Total

 

Allowance for Loan Losses

                            

Balance at December 31, 2019

 $2,657  $1,161  $2,474  $3,781  $3,023  $56  $13,152 

Charge-offs

  (505)  0   (17)  (165)  (117)  (202)  (1,006)

Recoveries

  65   2   12   50   85   127   341 

Provision

  1,156   764   1,871   3,960   1,076   89   8,916 

Balance at December 31, 2020

 $3,373  $1,927  $4,340  $7,626  $4,067  $70  $21,403 
                             

Balance at December 31, 2020:

                            
                             

Allowance for Loan Losses

                            

Individually evaluated for impairment

 $29  $0  $0  $0  $1  $0  $30 

Collectively evaluated for impairment

  3,318   1,927   4,138   7,185   3,896   70   20,534 

Purchased credit impaired loans

  26   0   202   441   170   0   839 

Total

 $3,373  $1,927  $4,340  $7,626  $4,067  $70  $21,403 
                             

Loans

                            

Individually evaluated for impairment

 $57  $0  $286  $1,270  $1,239  $0  $2,852 

Collectively evaluated for impairment

  490,736   139,833   360,579   616,498   365,967   8,390   1,982,003 

Purchased credit impaired loans

  463   238   12,815   9,801   6,812   72   30,201 

Total

 $491,256  $140,071  $373,680  $627,569  $374,018  $8,462  $2,015,056 

__________________________

(1) Includes PPP loans, which are guaranteed by the SBA and have 0 related allowance.

  

Commercial

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential Real Estate

  

Home Equity

  

Consumer

  

Total

 

Allowance for Credit Losses

                                

Balance at December 31, 2022

 $2,874  $1,796  $3,785  $7,184  $3,077  $790  $49  $19,555 

Day 1 impact of CECL adoption

  883   272   1,078   2,069   653   190   47   5,192 

Charge-offs

  (894)           (6)  (9)  (93)  (1,002)

Recoveries

  492   10   37   213   164   57   122   1,095 

Provision/(recovery)

  390   769   (317)  (355)  40   (69)  (25)  433 

Balance at December 31, 2023

 $3,745  $2,847  $4,583  $9,111  $3,928  $959  $100  $25,273 

 

The following table presents the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment for the year ended December 31, 20192022 (dollars in thousands):

 

 

Commercial

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential Real Estate

  

Consumer

  

Total

  

Commercial (1)

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential Real Estate

  

Consumer

  

Total

 

Allowance for Loan Losses

                                                 

Balance at December 31, 2018

 $2,537  $1,059  $2,420  $3,767  $2,977  $45  $12,805 

Balance at December 31, 2021

 $2,668  $1,397  $3,964  $7,141  $3,458  $50  $18,678 

Charge-offs

 (12) 0  (6) 0  (70) (245) (333) (357)     (436) (5) (221) (1,019)

Recoveries

 13  0  9  0  58  144  224  121    20  3  41  114  299 

Provision

  119   102   51   14   58   112   456 

Balance at December 31, 2019

 $2,657  $1,161  $2,474  $3,781  $3,023  $56  $13,152 

Provision/(recovery)

  442   399   (199)  476   373   106   1,597 

Balance at December 31, 2022

 $2,874  $1,796  $3,785  $7,184  $3,867  $49  $19,555 
  

Balance at December 31, 2019:

               

Balance at December 31, 2022:

               
  

Allowance for Loan Losses

                                                 

Individually evaluated for impairment

 $204  $0  $0  $0  $26  $0  $230  $  $  $  $  $  $  $ 

Collectively evaluated for impairment

 2,448  1,161  2,444  3,781  2,794  56  12,684  2,873  1,772  3,762  7,184  3,822  49  19,462 

Purchased credit impaired loans

  5   0   30   0   203   0   238   1   24   23      45      93 

Total

 $2,657  $1,161  $2,474  $3,781  $3,023  $56  $13,152  $2,874  $1,796  $3,785  $7,184  $3,867  $49  $19,555 
  

Loans

                                                 

Individually evaluated for impairment

 $784  $0  $0  $502  $906  $0  $2,192  $  $  $2,420  $1,360  $1,314  $  $5,094 

Collectively evaluated for impairment

 337,312  137,522  346,233  520,541  433,121  10,866  1,785,595  304,240  196,357  408,656  824,153  427,809  6,599  2,167,814 

Purchased credit impaired loans

  981   398   14,758   17,165   9,711   15   43,028   7   1,168   7,386   2,215   2,749   16   13,541 

Total

 $339,077  $137,920  $360,991  $538,208  $443,738  $10,881  $1,830,815  $304,247  $197,525  $418,462  $827,728  $431,872  $6,615  $2,186,449 

 

(791


) Includes PPP loans, which are guaranteed by the SBA and have no related allowance.

The allowance for loancredit losses - loans is allocated to loan segments based upon historical default and loss factors,experience, prepayment estimates, risk grades on individual loans, portfolio analysis of smaller balance, homogenous loans, and qualitative factors. Qualitative factors include trends in delinquencies, nonaccrual loans, and loss rates; trends in volume and terms of loans, effects of changes in risk selection, underwriting standards, and lending policies; expected economic conditions throughout a reasonable and supportable forecast period; experience of lending officers, other lending staffstaff; quality of loan review system; and loan review; national, regional,changes in the regulatory, legal, and local economic trends and conditions; legal, regulatory and collateral factors; and concentrations of credit.competitive environment.

 

The provision for loan lossesexpense recorded of $433 thousand for the year ended 2020December 31, period reflects an increase in2023 was necessitated by loan growth. For the allowance based onyear ended December 31, 2022, the Company recorded a qualitative assessmentprovision expense of the declining and uncertain economic landscape in the wake of the COVID-19 pandemic. Sharp declines in employment, gross national product, housing and auto sales, housing starts and business activity in general indicate a higher risk of probable losses in the Bank's portfolio. The Bank has been actively working with borrowers at risk who were impacted$1.6 million necessitated by the stay-at-home orders, utilizing its DAP to include short-term deferments of principal and interest and short-term acceptance of interest-only payments. Many of the Bank's customers have applied for and received PPP loans.loan growth. Management will continue to evaluate the adequacy of the Company's allowance for loancredit losses as more economic data becomes available and as changes within the Company's loan portfolio are known. The effects of the pandemicChanges in economic conditions may require further changes in the level of allowance.

 

64

 

Note 76 – Premises and Equipment

 

Major classifications of premises and equipment at December 31, 20202023 and 20192022 are summarized as follows (dollars in thousands):

 

 

December 31,

  

December 31,

 
 

2020

  

2019

  

2023

  

2022

 

Land

 $10,267  $10,421  $8,859  $9,308 

Buildings

 36,173  36,247  32,538  32,515 

Leasehold improvements

 1,160  1,469  1,615  1,536 

Furniture and equipment

  19,424   17,695   17,216   19,379 
 67,024  65,832  60,228  62,738 

Accumulated depreciation

  (27,301)  (25,984)  (28,419)  (29,838)

Premises and equipment, net

 $39,723  $39,848  $31,809  $32,900 

 

Depreciation expense was $2.1 million for the yearsyear ended December 31, 2020,2023 and $2.2 million in 2019,2022 and 20182021 was $2,188,000, $2,064,000, and $1,775,000, respectively.

 

 

Note 87 – Goodwill and Other Intangible Assets

 

The Company records as goodwill the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. On January 1, 2020, In testing goodwill for impairment, the Company adopted ASU 2017-04, which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on themust first step indecide if circumstances lead to a determination that it is not more likely than not that the previous two-step impairment test. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill witha reporting unit is less than its carrying amount.value. If, after assessing, it concludes that it is not more likely than not that the fair value of a reporting unit is greater than its carrying value, then no further testing is required and the goodwill is not impaired. The Company performsperformed its annual analysis as of June 30 each fiscal year. Due to the COVID-19 pandemic market conditions, the Company determined a triggering event occurred during the first quarter of 2020 and performed a qualitative assessment at March 31, 2020 and as the pandemic continued performed qualitative assessments at June 30 and September 30 and a quantitative assessment at December 31, 2020 and determined no impairment was indicated. The impact of COVID-19 on market conditions and other changes in the economic environment, operations, or other adverse events could result in future impairment charges which could have a material adverse impact on the Company's operating results. No indicators of impairment were identified duringfor the years ended December 31, 31,2023 and 20192022 or 2018., respectively, and no indications of impairment were noted.

 

Core deposit intangibles resulting from the MidCarolina acquisition in July 2011 were $6,556,000 and became fully amortized at June 30, 2020. Core deposit intangibles resulting from the MainStreet Bankshares, Inc. acquisition in January 2015 were $1,839,000$1.8 million and are being amortized on an accelerated basis over 120 months. Core deposit intangibles resulting from the acquisition of HomeTown Bankshares Corporation ("Hometown") in April 2019 were $8,200,000$8.2 million and are being amortized on an accelerated basis over 120 months.

 

The changes in the carrying amount of goodwill and intangibles for the twelve months ended December 31, 2020,2023, are as follows (dollars in thousands):

 

  

Goodwill

  

Intangibles

 

Balance at December 31, 2019

 $84,002  $7,728 

Measurement period adjustments

  1,046   0 

Amortization

     (1,637)

Balance at December 31, 2020

 $85,048  $6,091 
  

Goodwill

  

Intangibles

 

Balance at December 31, 2022

 $85,048  $3,367 

Amortization

     (1,069)

Balance at December 31, 2023

 $85,048  $2,298 

 

80

Goodwill and intangible assets at December 31, 20202023 and 20192022 arewere as follows (dollars in thousands):

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

  

Gross Carrying

 

Accumulated

 

Net Carrying

 
 

Value

  

Amortization

  

Value

  

Value

  

Amortization

  

Value

 

December 31, 2020

       

December 31, 2023

       

Core deposit intangibles

 $19,708  $(13,617) $6,091  $19,708  $(17,410) $2,298 

Goodwill

 85,048    85,048  85,048    85,048 
  

December 31, 2019

       

December 31, 2022

       

Core deposit intangibles

 $19,708  $(11,980) $7,728  $19,708  $(16,341) $3,367 

Goodwill

 84,002    84,002  85,048    85,048 

 

Amortization expense of core deposit intangibles for the years ended December 31, 2020,2023, 2019,2022, and 20182021 was $1,637,000, $1,398,000,$1.1 million, $1.3 million, and $265,000,$1.5 million, respectively. As of December 31, 2020,2023, the estimated future amortization expense of core deposit intangibles is as follows (dollars in thousands):

 

Year

 

Amount

  

Amount

 

2021

 $1,464 

2022

 1,260 

2023

 1,069 

2024

 800  $800 

2025

 617  617 

2026 and after

  881 

2026

  454 

2027

 291 

2028

  136 

Total

 $6,091  $2,298 

 

65

 

Note 98 – Leases

 

On January 1, 2019, The right-of-use assets and lease liabilities relate to banking offices and other space occupied by the Company adopted ASU No.2016-02 "Leases (Topic 842)" and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and, consistent with such elections, did not reassess whether any expired or existing contracts are or contain leases, did not reassess theunder noncancelable operating lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. The implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $4.4 million at the date of adoption, which is related to the Company's lease of premises used in operations. In connection with the HomeTown merger in 2019, the Company added $1.8 million to the right-of-use asset and lease liability.agreements. The aggregate right-of-use assetassets and lease liabilityliabilities are included in other assets and other liabilities, respectively, in the Company's consolidated balance sheets.

Lease liabilities represent the Company's obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company's incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company's right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

 

The Company's long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

 

The following tables present information about the Company's leases as of December 31, 2023 and 2022and for the years ended December 31, 20202023, 2022, and December 31, 2019 (2021dollars (dollars in thousands):

 

 

December 31, 2020

  

December 31, 2019

  

December 31, 2023

  

December 31, 2022

 

Lease liabilities

 $4,940  $5,369  $6,541  $3,318 

Right-of-use assets

 $4,878  $5,340  $6,460  $3,245 

Weighted average remaining lease term (in years)

 7.33  8.17  7.49  6.77 

Weighted average discount rate

 3.03% 3.21% 4.12% 3.16%

 

81

 
  

Year Ended December 31, 2020

  

Year Ended December 31, 2019

 

Lease cost

        

Operating lease cost

 $993  $1,040 

Short-term lease cost

  3   3 

Total lease cost

 $996  $1,043 
         

Cash paid for amounts included in the measurement of lease liabilities

 $959  $1,013 
  Year Ended  Year Ended  Year Ended 
  

December 31, 2023

  

December 31, 2022

  

December 31, 2021

 

Lease cost

            

Operating lease cost

 $1,255  $1,072  $1,069 

Short-term lease cost

         

Total lease cost

 $1,255  $1,072  $1,069 
             

Cash paid for amounts included in the measurement of lease liabilities

 $1,243  $1,083  $1,047 

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):

 

Lease payments due

 

As of December 31, 2020

  

As of December 31, 2023

 

2021

 $1,048 

2022

 1,044 

2023

 945 

2024

 516  $1,204 

2025

 473  1,182 

2026 and after

  1,549 

2026

  964 

2027

 913 

2028

 831 

2029 and after

  2,547 

Total undiscounted cash flows

 $5,575  $7,641 

Discount

  (635)  (1,100)

Lease liabilities

 $4,940  $6,541 

 

Lease expense, a component of occupancy and equipment expense, for the years ended December 31, 2020,2023 totaled $1.4 million and $1.2 million for the years ended 2019,December 31, 2022 and 20182021 was $1,158,000, $1,187,000, and $919,000, respectively.. The amounts recognized in lease expense include insurance, property taxes, and common area maintenance.

 

 

Note 109 - Deposits

 

The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 20202023 and 20192022 was $170,089,000was $138.5 million and $200,712,000,$89.8 million, respectively.

 

At December 31, 2020,2023, the scheduled maturities and amounts of certificates of deposits (included in interest-bearing deposits on the consolidated balance sheets) were as follows (dollars in thousands):

 

Year

 

Amount

  

Amount

 

2021

 $271,868 

2022

 58,544 

2023

 31,486 

2024

 15,596  $325,529 

2025

 13,898  17,422 

2026 and after

  5,034 

2026

  13,010 

2027

 6,736 

2028

 5,102 

2029 and after

  4,267 

Total

 $396,426  $372,066 

 

There were no brokered time deposits at December 31, 20202023 or December 31, 2019.2022 Time deposits through the Certificate of Deposit Account Registry Service ("CDARS") program totaled $4,342,000 at December 31,2020 compared to $14,864,000 at December 31,2019. Deposits through the CDARS program are generated from major customers with substantial relationships with the Bank..

 

 

Note 1110 – Short-term Borrowings

 

Short-term borrowings consist of customer repurchase agreements, overnight borrowings from the FHLB, and federal funds purchased. The Company has federal funds lines of credit established with correspondent banks in the amount of $60,000,000$110 million and has access to the Federal Reserve Bank of Richmond's discount window. The Company has $215.5 million in collateral pledged to the Federal reserve discount window. Customer repurchase agreements are collateralized by securities of the U.S. Government, its agencies or GSEs. They mature daily. The interest rates are generally fixed but may be changed at the discretion of the Company. The securities underlying these agreements remain under the Company's control. FHLB overnight borrowings contain floating interest rates that may change daily at the discretion of the FHLB. Short-term borrowings consisted solely of the following at December 31, 20202023 and 20192022 (dollars in thousands):

 

  

December 31, 2020

  

December 31, 2019

 
  

Amount

  Weighted Average Rate  

Amount

  Weighted Average Rate 

Customer repurchase agreements

 $42,551   0.13% $40,475   1.40%
  

December 31, 2023

  

December 31, 2022

 
  

Amount

  Weighted Average Rate  

Amount

  Weighted Average Rate 

Customer repurchase agreements

 $59,348   4.75% $370   0.10%

FHLB borrowings

  35,000   5.57   100,531   4.42 

Total short-term borrowings

 $94,348   5.05% $100,901   4.40%

 

82

 

Note 1211 – Long-term Borrowings

 

Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in the FHLB and deposits with the FHLB. The Company has a line of credit with the FHLB equal to 30% of the Company's assets, subject to the amount of collateral pledged. As of December 31, 202331,2020,$897,979,000, $1.1 billion in eligibleeligible collateral was pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings.

There were no long-term borrowings as of FHLB availability based on pledged collateral at December 31, 202331,2020 or 2019. was $408.3 million, with $245.0 million remaining collateral eligible to be pledged.

 

In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At December 31, 2020,2023, the Bank's public deposits totaled $326,774,000.$283.8 million. The Company is required to provide collateral to secure the deposits that exceed the insurance coverage provided by the FDIC. This collateral can be provided in the form of certain types of government or agency bonds or letters of credit from the FHLB. At December 31, 2020,2023, the Company had $245,000,000$210.0 million in letters of credit with the FHLB outstanding as well as $136,213,000$132.3 million in agency, state, and municipal securities to provide collateral for such deposits.

 

67

Note 13 – Subordinated Debt

On April 1, 2019, in connection with the HomeTown merger, the Company assumed $7,500,000 in aggregate principal amount


The indebtedness evidenced by the notes, including principal and interest, is unsecured and subordinate and junior in right of the Company's payments to general and secured creditors and depositors of the Bank. The notes are redeemable, without penalty, on or after December 30, 2020 and were redeemable in certain limited circumstances prior to that date. The notes limit the Company from declaring or paying any dividend, or making any distribution on capital stock or other equity securities of any kind of the Company if the Company is not "well capitalized" for regulatory purposes, immediately prior to the declaration of such dividend or distribution, except for dividends payable solely in shares of common stock of the Company.

The carrying value of the subordinated debt included a fair value adjustment of $17,000 at December 31,2019. The original fair value adjustment of $30,000 was recorded as a result of the acquisition of HomeTown on April 1, 2019, and was amortized into interest expense through December 30, 2020.

Note 14Junior Subordinated Debt

 

On April 7, 2006, AMNB Statutory Trust I, a Delaware statutory trust and a wholly owned subsidiary of the Company, issued $20,000,000$20 million of preferred securities (the "Trust Preferred Securities") in a private placement pursuant to an applicable exemption from registration. The Trust Preferred Securities mature on June 30, 2036, but may be redeemed at the Company's option beginning on September 30, 2011. Initially, the securities required quarterly distributions by the trust to the holder of the Trust Preferred Securities at a fixed rate of 6.66%. Effective September 30, 2011, the rate resets quarterly at the three-month LIBOR plus 1.35%. Effective July 2023, the rate resets quarterly at the three-month SOFR plus 1.35%. Distributions are cumulative and accrue from the date of original issuance but may be deferred by the Company from time to time for up to 20 consecutive quarterly periods. The Company has guaranteed the payment of all required distributions on the Trust Preferred Securities. The proceeds of the Trust Preferred Securities received by the trust, along with proceeds of $619,000$619 thousand received by the trust from the issuance of common securities by the trust to the Company, were used to purchase $20,619,000$20.6 million of the Company's junior subordinated debt securities (the "Trust Preferred Capital Notes"), issued pursuant to a junior subordinated debenture entered into between the Company and Wilmington Trust Company, as trustee. The proceeds of the Trust Preferred Securities were used to fund the cash portion of the merger consideration to the former shareholders of Community First in connection with the Company's acquisition of that company, and for general corporate purposes.

 

On July 1, 2011, in connection with the MidCarolina merger, theThe Company assumed $8,764,000also has outstanding $8.8 million in junior subordinated debentures to the MidCarolina Trusts,Trust I and MidCarolina Trust II, two separate unconsolidated Delaware statutory trusts (the "MidCarolina Trusts"), to fully and unconditionally guarantee the preferred securities issued by the MidCarolina Trusts. These long-term obligations, which currently qualify as Tier 1 capital, constitute a full and unconditional guarantee by the Company of the MidCarolina Trusts' obligations. The MidCarolina Trusts are not consolidated in the Company's financial statements.

 

83

In accordance with ASC 810-10-15-14, Consolidation - Overall - Scope and Scope Exceptions, the Company did not eliminate through consolidation the Company's $619,000$619 thousand equity investment in AMNB Statutory Trust I or the $264,000$264 thousand equity investment in the MidCarolina Trusts. Instead, the Company reflected these equity investments in other assets in the Company's consolidated balance sheets. .

 

A description of the junior subordinated debt securities outstanding payable to the trusts is shown below (dollars in thousands):

 

 

Principal Amount

   

Principal Amount

 
 

As of December 31,

   

As of December 31,

 

Issuing Entity

Date Issued

Interest Rate

Maturity Date

 

2020

  

2019

 

Date Issued

Interest Rate

Maturity Date

 

2023

  

2022

 

AMNB Trust I

4/7/2006

Libor plus 1.35%

6/30/2036

 $20,619  $20,619 

4/7/2006

SOFR plus 1.35%

6/30/2036

 $20,619  $20,619 

MidCarolina Trust I

10/29/2002

Libor plus 3.45%

11/7/2032

 4,489  4,433 

10/29/2002

SOFR plus 3.45%

11/7/2032

 4,657  4,601 

MidCarolina Trust II

12/3/2003

Libor plus 2.95%

10/7/2033

  3,022   2,977 

12/3/2003

SOFR plus 2.95%

10/7/2033

  3,159   3,114 
  $28,130  $28,029   $28,435  $28,334 

 

The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $666,000$498 thousand and $587,000$449 thousand at December 31, 2020 2023and $722,000$554 thousand and $632,000$495 thousand at December 31, 2019, 2022, respectively. The original fair value adjustments of $1,197,000$1.2 million and $1,021,000$1.0 million were recorded as a result of the acquisition of MidCarolina on July 1, 2011, and are being amortized into interest expense over the remaining lives of the respective borrowings.

 

 

Note 1512 - Derivative Financial Instruments and Hedging Activities

 

The Company uses derivative financial instruments ("derivatives") primarily to manage risks associated with changing interest rates. The Company's derivatives arewere hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge).

 

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company's Trust Preferred Capital Notes. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging variable-rate interest payments on a notional amount equal to the principal amount of the borrowings for fixed-rate interest payments, with such interest rates set based on benchmarked interest rates.

 

All interest rate swaps were entered into with counterparties that met the Company's credit standards and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in these derivative contracts iswas not significant.

 

Terms and conditions of the interest rate swaps vary and amounts receivable or payable are recognized as accrued under the terms of the agreements. The Company assesses the effectiveness of each hedging relationship on a periodic basis. In accordance with ASC 815, Derivatives and Hedging, the effective portions of the derivatives' unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company's assessment, its cash flow hedges are highly effective, but to the extent that any ineffectiveness exists in the hedge relationships, the amounts would be recorded in the Company's consolidated statements of income.

 

(Dollars in thousands)

 

December 31, 2020

 
  

Notional Amount

  

Positions

  

Assets

  

Liabilities

  

Cash Collateral Pledged

 

Cash flow hedges:

                    

Interest rate swaps:

                    

Variable-rate to fixed-rate swaps with counterparty

 $28,500  $3  $0  $4,868  $5,750 
68

The Company terminated the swap agreements on October 16, 2023, earlier than their maturity of June 2028. Net proceeds from the termination was $2.0 million for settlement of deferred gains and interest and $850 thousand cash collateral returned. The other comprehensive income component remained on the balance sheet and will accrete from the time of execution to the end of the hedge term since the swaps were terminated early.

 

(Dollars in thousands)

 

December 31, 2019

  

December 31, 2022

 
 

Notional Amount

  

Positions

  

Assets

  

Liabilities

  

Cash Collateral Pledged

  

Notional Amount

  

Positions

  

Assets

  

Liabilities

  

Cash Collateral Pledged

 

Cash flow hedges:

                                   

Interest rate swaps:

                      

Variable-rate to fixed-rate swaps with counterparty

 $28,500  $3  $0  $2,658  $3,450  $28,500  $3  $1,325  $  $850 

 

In addition, the Company has commitments to fund certain mortgage loans (interest rate lock commitments) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors which are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of change in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships.

 

 

Note 1613 – Stock-Based Compensation

 

The Company's 2018 Stock Incentive Plan (the "2018 Plan") was adopted by the Board of Directors of the Company on February 20, 2018 and approved by shareholders on May 15, 2018 at the Company's 2018 Annual Meeting of Shareholders. The 2018 Plan provides for the granting of restricted stock awards, incentive and non-statutory options, and other equity-based awards to employees and directors at the discretion of the Compensation Committee of the Board of Directors. The 2018 Plan authorizes the issuance of up to 675,000 shares of common stock. The 2018 Plan replaced the Company's stock incentive plan that was approved by the shareholders at the 2008 Annual Meeting that expired in February 2018.

 

Stock Options

 

Accounting guidance requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued.

A summary of stock option transactions for During the year ended December 31, 2023, 31,2020 is as follows:

          

Weighted

     
      

Weighted

  

Average

  

Aggregate

 
      

Average

  

Remaining

  

Intrinsic

 
  

Option

  

Exercise

  

Contractual Term

  

Value

 
  

Shares

  

Price

  

(In Years)

  ($000) 

Outstanding at December 31, 2019

  13,944  $16.63         

Granted

  0   0         

Exercised

  (2,573)  16.63         

Forfeited

  (830)  16.63         

Expired

  0   0         

Outstanding at December 31, 2020

  10,541  $16.63   3.97  $101 

Exercisable at December 31, 2020

  10,541  $16.63   3.97  $101 

The aggregate intrinsic value of4,150 stock options inwere exercised at the table above represents the total pre-tax intrinsic value (the amount by which the current fair value of the underlying stock exceeds the exercisegranted price of the option) that would have been received by the$16.63. The Company had no outstanding stock option holders had all option holders exercised theirawards at December 31, 2023. There was no recognized or unrecognized stock compensation expense attributable to outstanding stock options onat December 31, 31,2023 or 2020.2022 This amount changes based on changes. No stock options were granted in the fair value of the Company's common stock.2023, 2022, and 2021.

 

The total proceeds of the in-the-money options exercised during the years ended December 31, 2020,2023, 2019,2022, and 20182021 were $43,000, $688,000,$69 thousand, $12 thousand, and $861,000,$89 thousand, respectively. Total intrinsic value (the amount by which the current fair value of the underlying stock exceeds the exercise price) of options exercised during the years ended December 31, 2020,2023, 2019,2022, and 20182021 was $42,000, $616,000,$0, $16 thousand, and $732,000,$96 thousand, respectively.

 

In connection with the HomeTown acquisition, there was $147,000 in recognized stock compensation expense attributable to outstanding stock options in the year ended December 31,2019. There was 0 recognized stock compensation expense attributable to outstanding stock options in 2020 and 2018. As of December 31,2020,2019, and 2018, there was 0 unrecognized compensation expense attributable to the outstanding stock options.

The following table summarizes information related to stock options outstanding on December 31,2020:

Options Outstanding and Exercisable

 
      

Weighted-Average

     
  

Number of

  

Remaining

     

Range of

 

Outstanding

  

Contractual Life

  

Weighted-Average

 

Exercise Prices

 

Options

  

(In Years)

  

Exercise Price

 

$15.00 to $20.00

  10,541   3.97  $16.63 

NaN stock options were granted in 2020,2019 and 2018.

85

Restricted Stock

 

The Company from time-to-time grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company's common stock. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. RestrictedAll restricted stock granted in 2020grants cliff vestsvest at the end of a 36-month period beginning on the date of grant. Nonvested restricted stock activity for the year ended December 31, 20202023 is summarized in the following table:

 

   Weighted    Weighted 
    

Average Grant

     

Average Grant

 
 

Shares

  

Date Value Per Share

  

Shares

  

Date Value Per Share

 

Nonvested at December 31, 2019

 57,271  $34.84 

Nonvested at December 31, 2022

 71,707  $33.39 

Granted

 26,010  34.42  32,554  35.78 

Vested

 (19,526) 34.50  (19,805) 33.73 

Forfeited

  (5,216) 34.29   (1,878) 34.16 

Nonvested at December 31, 2020

  58,539  34.81 

Nonvested at December 31, 2023

  82,578  34.21 

 

As of December 31, 2020,2023, 2019,2022, and 2018,2021, there was $797,000, $751,000,$1.2 million, $1.1 million, and $647,000,$782 thousand, respectively, in unrecognized compensation cost related to nonvested restricted stock granted under the 20182018 Plan. This cost is expected to be recognized over the next 12 to 36 months. The share basedshare-based compensation expense for nonvested restricted stock was $672,000, $915,000,$1.1 million, $889 thousand, and $610,000$749 thousand during 2020,2023, 2019,2022, and 2018,2021 respectively. The expense for 2019 included $257,000 of accelerated compensation expense as a result of the HomeTown merger.

Starting in 2010, the Company began offering its outside directors alternatives with respect to director compensation. For 2020, the regular quarterly board retainer could be received in the form of shares of immediately vested but restricted stock with a market value of $10,000. Monthly meeting fees could be received as $800 per meeting in cash or $1,000 in immediately vested but restricted stock. For 2019, the regular monthly board retainer could be received quarterly in the form of immediately vested but restricted stock with a market value of $7,500. Monthly meeting fees could be received as $725 per meeting in cash or $900 in immediately vested but restricted stock. Only outside directors receive board fees. The Company issued 27,986, 17,373 and 15,471 shares and recognized share based compensation expense of $779,000, $626,000, and $586,000 during 2020,2019 and 2018,, respectively.

 

69

 

Note 1714 – Income Taxes

 

The Company files income tax returns in the U.S. federal jurisdiction and the states of Virginia and North Carolina. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years prior to 2017.2020.

 

The components of the Company's net deferred tax assets were as follows (dollars in thousands):

 

 

December 31,

  

December 31,

 
 

2020

  

2019

  

2023

  

2022

 

Deferred tax assets:

          

Allowance for loan losses

 $4,636  $2,841 

Allowance for credit losses

 $5,476  $4,226 

Nonaccrual loan interest

 507  490  222  229 

Other real estate owned valuation allowance

 124  120    12 

Deferred compensation

 159  1,184  1,182  1,277 

Acquisition accounting adjustments

 3,404  3,670 

Acquisition accounting

 732  1,174 

Lease liability, net of right of use asset

 13  0  18  16 

Accrued pension liability

 447  50  108  86 

NOL Carryforward

 0  456 

Net unrealized loss on cash flow hedges

 1,022  573  387   

Net unrealized loss on securities available for sale

 12,161 15,339 

Other

  318   601   535   374 

Total deferred tax assets

  10,630   9,985   20,821   22,733 
  

Deferred tax liabilities:

          

Depreciation

 1,352  1,079  979  1,044 

Core deposit intangibles

 1,315  1,669  498  728 

Accrued pension liability

 213  0 
Deferred loan origination costs, net 533 258  55 42 

Net unrealized gain on securities available for sale

 2,180  541 

Net unrealized gain on cash flow hedges

  278 

Prepaid merger expenses

 1,240  

Other

  32   574   185   179 

Total deferred tax liabilities

  5,625   4,121   2,957   2,271 

Net deferred tax assets

 $5,005  $5,864  $17,864  $20,462 

 

86

The provision for income taxes consists of the following (dollars in thousands):

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Current tax expense

 $7,777  $3,793  $5,090  $6,941  $9,319  $10,905 

Deferred tax expense

  (640)  1,068   556 

Deferred tax expense (benefit)

  1,273   (385)  808 

Total income tax expense

 $7,137  $4,861  $5,646  $8,214  $8,934  $11,713 

 

A reconcilement of the "expected" federal income tax expense to reported income tax expense is as follows (dollars in thousands):

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Expected federal tax expense

 $7,808  $5,411  $5,927  $7,218  $9,106  $11,600 

Nondeductible merger related expense

 313   

Nondeductible interest expense

 31  67  69  75 10 8 

Tax-exempt interest

 (259) (478) (504) (186) (202) (198)

State income taxes

 207  149  337  261 308 326 

Other, net

  (650)  (288)  (183)  533   (288)  (23)

Total income tax expense

 $7,137  $4,861  $5,646  $8,214  $8,934  $11,713 

 

70

 

Note 1815 – Earnings Per Common Share

 

The following shows the weighted average number of shares used in computing earnings per common share and the effect on the weighted average number of shares of potentially dilutive common stock. Potentially dilutive common stock had no effect on income available to common shareholders. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period including voting rights and sharing in nonforfeitable dividends.

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 
     

Per Share

     

Per Share

     

Per Share

     

Per Share

    

Per Share

    

Per Share

 
 

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

 

Basic earnings per share

 10,981,623  $2.74  10,531,572  $1.99  8,698,014  $2.60  10,627,709  $2.46  10,672,314  $3.23  10,873,817  $4.00 

Effect of dilutive securities - stock options

  4,167   (0.01)  9,765   (0.01)  10,448   (0.01)  850      2,299      3,414    

Diluted earnings per share

  10,985,790  $2.73   10,541,337  $1.98   8,708,462  $2.59   10,628,559  $2.46   10,674,613  $3.23   10,877,231  $4.00 

 

OutstandingThere were no outstanding stock options on common stock, whichthat were not included in computingexcluded from the calculation of diluted earnings per share in 2020,2019, and 2018 because their effects were anti-dilutive were zero shares forin 2020,2023, 2019,2022, and 2018.2021.

 

 

Note 1916 – Off-Balance Sheet Activities

 

The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if applicable, is based on management's credit evaluation of the customer.

 

The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

 

The following off-balance sheet financial instruments whose contract amounts represent credit risk were outstanding at December 31, 20202023 and 20192022 (dollars in thousands):

 

 

December 31,

  

December 31,

 
 

2020

  

2019

  

2023

  

2022

 

Commitments to extend credit

 $503,272  $557,364  $614,705  $635,851 

Standby letters of credit

 17,355  13,611  17,228  12,897 

Mortgage loan rate lock commitments

 26,883  10,791  1,822  1,920 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally consist of unused portions of lines of credit issued to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

 

At December 31, 2020,2023, the Company had locked-rate commitments to originate mortgage loans amounting to approximately $26,883,000$1.8 million and loans held for sale of $15,591,000.$1.3 million. Risks arise from the possible inability of counterparties to meet the terms of their contracts, though the Company has never experienced a failure of one of its counterparties to perform. If a loan becomes past due 90 days within 180 days of sale, the Company would be required to repurchase the loan.

 

 

Note 2017 – Related Party Transactions

 

In the ordinary course of business, loans are granted to executive officers, directors, and their related entities. Management believes that all such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to similar, unrelated borrowers, and do not involve more than a normal risk of collectibilitycollectability or present other unfavorable features. As of December 31, 20202023 and 2019,2022, none of these loans was restructured, past due, or on nonaccrual status.

 

An analysis of these loans for 20202023 is as follows (dollars in thousands):

 

Balance at December 31, 2019

 $9,594 

Additions

  3,751 

Repayments

  (4,760)

Reclassifications(1)

  (63)

Balance at December 31, 2020

 $8,522 

__________________________

Balance at December 31, 2022

 $24,476 

Additions

  7,332 

Repayments

  (4,372)

Reclassifications(1)

  9,494 

Balance at December 31, 2023

 $36,930 

(1) IncludesReclassifications consist of loans to personsfor notwo longer affiliated withBoard of Directors who joined the Company and thereforein notMay 2023. considered related party loans as of period end.

 

Related party deposits totaled $16,436,000$10.6 million at December 31, 20202023 and $14,741,000$9.5 million at December 31, 2019.2022.

 

8871

 
 

Note 2118 – Employee Benefit Plans

 

Defined Benefit Plan

 

The Company previously maintained a non-contributory defined benefit pension plan which covered substantially all employees who were 21 years of age or older and who had at least one year of service. The Company froze its pension plan to new participants and converted its pension plan to a cash balance plan effective December 31, 2009. Each year, existing participants will receive, with some adjustments, income based on the yield of the 10 year U.S. Treasury Note in December of the preceding year. The Plan notified participants of the intent to apply for Internal Revenue Service approval to terminate the Pension Plan. Final determination can take 12-24 months for the projected benefit payments. Total projected payments of $3.5 million are estimated to be disbursed in 2024.Information pertaining to the activity in the plan is as follows (dollars in thousands):

 

 

As of and for the Year Ended December 31,

  

As of and for the Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Change in Benefit Obligation:

                  

Projected benefit obligation at beginning of year

 $6,262  $5,812  $8,313  $3,270  $5,013  $5,821 

Service cost

 0  0  0       

Interest cost

 152  209  235  166  107  91 

Actuarial (gain) loss

 814  489  (782) 185  (1,403) (259)

Settlement gain (loss)

 44  (12) (120)   (10) 6 

Benefits paid

  (1,451)  (236)  (1,834)  (78)  (437)  (646)

Projected benefit obligation at end of year

  5,821   6,262   5,812   3,543   3,270   5,013 
  

Change in Plan Assets:

                  

Fair value of plan assets at beginning of year

 5,915  5,653  7,556  4,264  5,045  4,701 

Actual return (loss) on plan assets

 237  498  (69)

Actual return on plan assets

 158  (344) 190 

Employer contributions

   800 

Benefits paid

  (1,451)  (236)  (1,834)  (78)  (437)  (646)

Fair value of plan assets at end of year

  4,701   5,915   5,653   4,344   4,264   5,045 
  

Funded Status at End of Year

 $(1,120) $(347) $(159) $801  $994  $32 
  

Amounts Recognized in the Consolidated Balance Sheets

                  

Other liabilities

 $(1,120) $(347) $(159)

Other assets

 $801  $994  $32 
  

Amounts Recognized in Accumulated Other Comprehensive Loss

       ��          

Net actuarial loss

 $2,071  $1,658  $1,594  $512  $400  $1,481 

Deferred income taxes

  (435)  (358)  (357)  (110)  (86)  (320)

Amount recognized

 $1,636  $1,300  $1,237  $402  $314  $1,161 

 

 

As of and for the Year Ended December 31,

  

As of and for the Year Ended December 31,

 
 

2020

  

2019

  

2018

  

2023

  

2022

  

2021

 

Components of Net Periodic Benefit Cost

                     

Service cost

 $0  $0  $0  $  $  $ 

Interest cost

 152  209  235  166  107  91 

Expected return on plan assets

 (285) (269) (353) (85) (245) (230)

Recognized net loss due to settlement

 352  52  540    112  195 

Recognized net actuarial loss

  140   133   272      145   182 

Net periodic benefit cost

 $359  $125  $694  $81  $119  $238 
  

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income) Loss

            

Net actuarial (gain) loss

 $413  $64  $(1,291)

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss (Income)

         

Net actuarial loss (gain)

 $112  $(1,082) $(590)

Amortization of prior service cost

  0   0   0          

Total recognized in other comprehensive (income) loss

 $413  $64  $(1,291)

Total recognized in other comprehensive loss

 $112  $(1,082) $(590)
  

Total Recognized in Net Periodic Benefit Cost and Other Comprehensive (Income) Loss

 $772  $189  $(597)

Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Loss (Income)

 $193  $(963) $(352)

 

8972

 

The accumulated benefit obligation as of December 31, 2020,2023, 2019,2022, and 20182021 was $5,821,000, $6,262,000,$3.5 million, $3.3 million, and $5,812,000,$5.0 million, respectively. The rate of compensation increase is no longer applicable since the defined benefit plan was frozen and converted to a cash balance plan.

 

The plan sponsor selected the expected long-term rate-of-return-on-assets assumption in consultation with their investment advisors and actuary. This rate was intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.

 

Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate during the period in which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).

 

Below is a description of the plan's assets. The plan's weighted-average asset allocations by asset category are as follows as of December 31, 20202023 and 2019:2022:

 

Asset Category

 

December 31,

  

December 31,

 
 

2020

  

2019

  

2023

  

2022

 

Fixed Income

 65.6% 61.8% 54.4% 71.4%

Equity

 31.5% 27.5%

Cash and Accrued Income

  2.9%  10.7%  45.6%  28.6%

Total

  100.0%  100.0%  100.0%  100.0%

 

The investment policy and strategy for plan assets can best be described as a growth and income strategy. Diversification is accomplished by limiting the holding of any one equity issuer to no more than 5% of total equities. Exchange traded funds are used to provide diversified exposure to the small capitalization and international equity markets. All fixed income investments are rated as investment grade, with the majority of these assets invested in corporate issues. The assets are managed by the Company's Trust and Investment Services Division. No derivatives are used to manage the assets. Equity securities do not include holdings in the Company.

 

The fair value of the Company's pension plan assets at December 31, 20202023 and 2019,2022, by asset category are as follows (dollars in thousands):

 

    

Fair Value Measurements at December 31, 2020 Using

     

Fair Value Measurements at December 31, 2023 Using

 
    

Quoted Prices

 

Significant

       

Quoted Prices

 

Significant

   
    

in Active

 

Other

 

Significant

     

in Active

 

Other

 

Significant

 
 

Balance as of

 

Markets for

 

Observable

 

Unobservable

  

Balance as of

 

Markets for

 

Observable

 

Unobservable

 
 

December 31,

  

Identical Assets

  

Inputs

  

Inputs

  

December 31,

  

Identical Assets

  

Inputs

  

Inputs

 

Asset Category

 

2020

  

Level 1

  

Level 2

  

Level 3

  

2023

  

Level 1

  

Level 2

  

Level 3

 

Cash

 $138  $138  $0  $0  $1,961  $1,961  $  $ 

Fixed income securities

                  

Government sponsored entities

 444  0  444  0  1,267    1,267   

Municipal bonds and notes

 2,147  0  2,147  0  733    733   

Corporate bonds and notes

 491  0  491  0   383      383    

Equity securities

         

U.S. companies

 1,259  1,259  0  0 

Foreign companies

  222   222   0   0 
 $4,701  $1,619  $3,082  $0  $4,344  $1,961  $2,383  $ 

      

Fair Value Measurements at December 31, 2022 Using

 
      

Quoted Prices

  

Significant

     
      

in Active

  

Other

  

Significant

 
  

Balance as of

  

Markets for

  

Observable

  

Unobservable

 
  

December 31,

  

Identical Assets

  

Inputs

  

Inputs

 

Asset Category

 

2022

  

Level 1

  

Level 2

  

Level 3

 

Cash

 $1,218  $1,218  $  $ 

Fixed income securities

                

Government sponsored entities

  1,532      1,532    

Municipal bonds and notes

  1,154      1,154    

Corporate bonds and notes

  360      360    
  $4,264  $1,218  $3,046  $ 

 

9073

 
      

Fair Value Measurements at December 31, 2019 Using

 
      

Quoted Prices

  

Significant

     
      

in Active

  

Other

  

Significant

 
  

Balance as of

  

Markets for

  

Observable

  

Unobservable

 
  

December 31,

  

Identical Assets

  

Inputs

  

Inputs

 

Asset Category

 

2019

  

Level 1

  

Level 2

  

Level 3

 

Cash

 $636  $636  $0  $0 

Fixed income securities

                

Government sponsored entities

  1,648   0   1,648   0 

Municipal bonds and notes

  1,792   0   1,792   0 

Corporate bonds and notes

  212   0   212   0 

Equity securities

                

U.S. companies

  1,385   1,385   0   0 

Foreign companies

  242   242   0   0 
  $5,915  $2,263  $3,652  $0 

Projected benefit payments for the years 2021 to 2030 are as follows (dollars in thousands):

Year

  

Amount

 

2021

  $629 

2022

   381 

2023

   910 

2024

   252 

2025

   1,204 
2026 - 2030   2,390 

401(k) Plan

 

The Company maintains a 401(k) plan that covers substantially all full-time employees of the Company. The Company matches a portion of the contribution made by employee participants after at least one year of service. The Company contributed $1,038,000, $932,000,$1.4 million, $1.2 million, and $778,000$1.1 million to the 401(k) plan in 2020,2023, 2019,2022, and 2018,2021, respectively. These amounts are included in employee benefits expense for the respective years.

 

Deferred Compensation Arrangements

 

Prior to 2015, the Company maintained deferred compensation agreements with former employees providing for annual payments to each ranging from $25,000 to $50,000 per year for ten10 years upon their retirement. The liabilities under these agreements are beingwere accrued over the officers' remaining periods of employment so that, on the date of their retirement, the then-present value of the annual payments would havehad been accrued. As of December 31, 2020,2023, the Company only had one remaining agreement under which payments are being made to a former officer. The liabilities were $200,000$50 thousand and $250,000$100 thousand at December 31, 20202023 and 2019,2022, respectively. There was 0no expense for these agreementsthis agreement for the years ended December 31, 2020,2023, 2019,2022, and 2018.2021. As a result of acquisitions, the Company has various agreements with current and former employees and executives with balances of $5,585,000$4.8 million and $5,235,000$5.4 million at December 31, 20202023 and 2019,2022, respectively that accrue through eligibility and are payable upon retirement. The Company recognized income of $143 thousand for the year ended December 31, 2023, due to the effect of rising interest rates on the actuarial liability. The Company recognized expenses of $159 thousand and $430 thousand for the years ended December 31, 2022 and 2021, respectively.

 

Beginning in 2015, certainCertain named executive officers becameare eligible to participate in a voluntary, nonqualified deferred compensation plan pursuant to which the officers may defer any portion of their annual cash incentive payments. In addition, the Company may make discretionary cash bonus contributions to the deferred compensation plan. Such contributions, if any, are made on an annual basis after the Committee assesses the performance of each of the named executive officers and the Company during the most recently completed fiscal year. The contributions charged to salary expense were $0, $158,000$90 thousand, $86 thousand and $141,000$184 for the years ended December 31, 2020,2023, 20192022, and 2018,2021, respectively.

 

Incentive Arrangements

 

The Company maintains a cash incentive compensation plan for officers based on the Company's performance and individual officer goals. The total amount charged to salary expense for this plan was $1,214,000, $1,217,000$3.3 million, $5.1 million, and $1,643,000$3.1 million for the years ended December 31, 2020,2023, 2019,2022, and 2018,2021, respectively.

91

 

 

Note 2219 – Fair Value Measurements

 

Determination of Fair Value

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the fair value measurements and disclosures topic of FASB ASC 825, Financial Instruments, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

Fair Value Hierarchy

 

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

Level 1

Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

74

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

 

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

 

Loans held for sale: Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of mortgage banking income on the Company's consolidated statements of income.

 

Derivative asset (liability) - cash flow hedges: Cash flow hedges are recorded at fair value on a recurring basis. Cash flow hedges are valued by a third party using significant assumptions that are observable in the market and can be corroborated by market data. All of the Company's cash flow hedges are classified as Level 2.

 

92

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis during the period (dollars in thousands):

 

    

Fair Value Measurements at December 31, 2020 Using

     

Fair Value Measurements at December 31, 2023 Using

 
    

Quoted Prices

 

Significant

       

Quoted Prices

 

Significant

   
    

in Active

 

Other

 

Significant

     

in Active

 

Other

 

Significant

 
 

Balance as of

 

Markets for

 

Observable

 

Unobservable

  

Balance as of

 

Markets for

 

Observable

 

Unobservable

 
 

December 31,

  

Identical Assets

  

Inputs

  

Inputs

  

December 31,

  

Identical Assets

  

Inputs

  

Inputs

 

Description

 

2020

  

Level 1

  

Level 2

  

Level 3

  

2023

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                  

Securities available for sale:

                  

U.S. Treasury

 $34,998  $0  $34,998  $0  $123,767  $  $123,767  $ 

Federal agencies and GSEs

 106,023  0  106,023  0  72,233    72,233   

Mortgage-backed and CMOs

 252,782  0  252,782  0  256,764    256,764   

State and municipal

 59,099  0  59,099  0  42,422    42,422   

Corporate

  13,189   0   13,189   0   26,333      26,333    

Total securities available for sale

 $466,091  $0  $466,091  $0  $521,519  $  $521,519  $ 
Loans held for sale $15,591 $0 $15,591 $0  $1,279  $  $1,279  $ 

Liabilities:

             

Derivative - cash flow hedges

 $4,868  $0  $4,868  $0 

 

    

Fair Value Measurements at December 31, 2019 Using

     

Fair Value Measurements at December 31, 2022 Using

 
    

Quoted Prices

 

Significant

       

Quoted Prices

 

Significant

   
    

in Active

 

Other

 

Significant

     

in Active

 

Other

 

Significant

 
 

Balance as of

 

Markets for

 

Observable

 

Unobservable

  

Balance as of

 

Markets for

 

Observable

 

Unobservable

 
 

December 31,

  

Identical Assets

  

Inputs

  

Inputs

  

December 31,

  

Identical Assets

  

Inputs

  

Inputs

 

Description

 

2019

  

Level 1

  

Level 2

  

Level 3

  

2022

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                  

Securities available for sale:

                  

U.S. Treasury

 $14,987  $0  $14,987  $0  $139,427  $  $139,427  $ 

Federal agencies and GSEs

 128,114  0  128,114  0  83,348    83,348   

Mortgage-backed and CMOs

 184,240  0  184,240  0  294,093    294,093   

State and municipal

 42,154  0  42,154  0  63,723    63,723   

Corporate

  9,700   0   9,700   0   27,471      27,471    

Total securities available for sale

 $379,195  $0  $379,195  $0  $608,062  $  $608,062  $ 
Loans held for sale $2,027 $0 $2,027 $0  $1,061  $  $1,061  $ 

Liabilities:

             

Derivative - cash flow hedges

 $2,658  $0  $2,658  $0  $1,325  $  $1,325  $ 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

 

Impaired loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company's collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business's financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

93

Other real estate owned:  Measurement for fair values for other real estate owned are the same as impaired loans. Any fair value adjustments are recorded in the period incurred as a valuation allowance against OREO with the associated expense included in OREO expense, net on the consolidated statements of income.

 

75

TheThere were no Company assets measured at fair value on a nonrecurring basis at December 31, 2023.The following table summarizes the Company's assets that were measured at fair value on a nonrecurring basis during the period (dollarsended December 31, 2022 (dollars in thousands):

 

      

Fair Value Measurements at December 31, 2020 Using

 
      

Quoted Prices

  

Significant

     
      

in Active

  

Other

  

Significant

 
  

Balance as of

  

Markets for

  

Observable

  

Unobservable

 
  

December 31,

  

Identical Assets

  

Inputs

  

Inputs

 

Description

 

2020

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                

Impaired loans, net of valuation allowance

 $268  $0  $0  $268 

Other real estate owned, net

  958   0   0   958 

      

Fair Value Measurements at December 31, 2019 Using

 
      

Quoted Prices

  

Significant

     
      

in Active

  

Other

  

Significant

 
  

Balance as of

  

Markets for

  

Observable

  

Unobservable

 
  

December 31,

  

Identical Assets

  

Inputs

  

Inputs

 

Description

 

2019

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                

Impaired loans, net of valuation allowance

 $759  $0  $0  $759 

Other real estate owned, net

  1,308   0   0   1,308 

Quantitative Information About Level 3 Fair Value Measurements as of December 31,2020 and 2019:

Assets

Valuation Technique

Unobservable Input

Range; Weighted Average (1)

Impaired loans

Discounted appraised value

Selling cost

8.00%

Discounted cash flow analysis

Market rate for borrower (discount rate)

4.13% - 7.20%; 5.19%

Other real estate owned

Discounted appraised value

Selling cost

8.00%

__________________________

(1) Unobservable inputs were weighted by the relative fair value of the impaired loans.

      

Fair Value Measurements at December 31, 2022 Using

 
      

Quoted Prices

  

Significant

     
      

in Active

  

Other

  

Significant

 
  

Balance as of

  

Markets for

  

Observable

  

Unobservable

 
  

December 31,

  

Identical Assets

  

Inputs

  

Inputs

 

Description

 

2022

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                

Other real estate owned, net

 $27  $  $  $27 

 

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with ASU 2016-01, which the Company adopted January 1, 2018 on a prospective basis, theThe Company uses the exit price notion, rather than the entry price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

 

94

The carrying values and estimated fair values of the Company's financial instruments at December 31, 20202023 are as follows (dollars in thousands):

 

 

Fair Value Measurements at December 31, 2020 Using

  

Fair Value Measurements at December 31, 2023 Using

 
     Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 

Fair Value

      Quoted Prices in Active Markets for Identical Assets  Significant Other Observable Inputs  Significant Unobservable Inputs  

Fair Value

 
 

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Balance

  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Balance

 

Financial Assets:

                    
Cash and cash equivalents $374,370  $374,370  $0  $0  $374,370  $66,719  $66,719  $  $  $66,719 

Securities available for sale

 466,091  0  466,091  0  466,091  521,519    521,519    521,519 

Restricted stock

 8,715  0  8,715  0  8,715  10,614    10,614    10,614 

Loans held for sale

 15,591  0  15,591  0  15,591  1,279    1,279    1,279 

Loans, net of allowance

 1,993,653  0  0  1,992,326  1,992,326  2,263,047      2,161,793  2,161,793 

Bank owned life insurance

 28,482  0  28,482  0  28,482  30,409    30,409    30,409 

Accrued interest receivable

 7,193  0  7,193  0  7,193  8,161    8,161    8,161 
  

Financial Liabilities:

                    

Deposits

 $2,611,330  $0  $2,615,157  $0  $2,615,157  $2,606,513  $  $2,602,453  $  $2,602,453 

Repurchase agreements

 42,551  0  42,551  0  42,551  59,348    59,348    59,348 

Subordinated debt

 7,500  0  7,522  0  7,522 

Other short-term borrowings

 35,000  35,000  35,000 

Junior subordinated debt

 28,130  0  0  21,696  21,696  28,435      22,985  22,985 

Accrued interest payable

 778  0  778  0  778  2,386    2,386    2,386 

Derivative - cash flow hedges

 4,868  0  4,868  0  4,868 

 

The carrying values and estimated fair values of the Company's financial instruments at December 31, 20192022 are as follows (dollars in thousands):

 

 

Fair Value Measurements at December 31, 2019 Using

  

Fair Value Measurements at December 31, 2022 Using

 
     

Quoted Prices in Active Markets for Identical Assets

 

Significant Other

Observable Inputs

 

Significant

Unobservable Inputs

 

Fair Value

      

Quoted Prices in Active Markets for Identical Assets

  Significant Other Observable Inputs  Significant Unobservable Inputs  

Fair Value

 
 

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Balance

  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Balance

 

Financial Assets:

                                   
Cash and cash equivalents $79,582  $79,582  $0  $0  $79,582  $73,340  $73,340  $  $  $73,340 

Securities available for sale

 379,195  0  379,195  0  379,195  608,062    608,062    608,062 

Restricted stock

 8,630  0  8,630  0  8,630  12,651    12,651    12,651 

Loans held for sale

 2,027  0  2,027  0  2,027  1,061    1,061    1,061 

Loans, net of allowance

 1,817,663  0  0  1,818,655  1,818,655  2,166,894      2,096,480  2,096,480 

Bank owned life insurance

 27,817  0  27,817  0  27,817  29,692    29,692    29,692 

Derivative - cash flow hedges

 1,325    1,325    1,325 

Accrued interest receivable

 6,625  0  6,625  0  6,625  7,255    7,255    7,255 
  

Financial Liabilities:

                                   

Deposits

 $2,060,547  $0  $2,062,823  $0  $2,062,823  $2,596,328  $  $2,595,713  $  $2,595,713 

Repurchase agreements

 40,475  0  40,475  0  40,475  370    370    370 

Subordinated debt

 7,517  0  8,525  0  8,525 

Other short-term borrowings

 100,531  100,531  100,531 

Junior subordinated debt

 28,029  0  0  22,697  22,697  28,334      24,479  24,479 

Accrued interest payable

 1,213  0  1,213  0  1,213  799    799    799 

Derivative - cash flow hedges

 2,658  0  2,658  0  2,658 

 

9576

 

 

Note 2320 – Dividend Restrictions and Regulatory Capital

 

The approval of the Office of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's retained net income, as defined, for that year combined with its retained net income for the preceding two calendar years. Under this formula, the Bank can distribute as dividends to the Company, without the approval of the Office of the Comptroller of the Currency, up to $18,628,000 $65.1 million as of December 31, 2020.2023. Dividends paid by the Bank to the Company are the only significant source of funding for dividends paid by the Company to its shareholders.

 

Federal bank regulators have issued substantially similar guidelines requiring banks and bank holding companies to maintain capital at certain levels. In addition, regulators may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Failure to meet minimum capital requirements can trigger certain mandatory and discretionary actions by regulators that could have a direct material effect on the Company's financial condition and results of operations.

 

The FRB and Office of the Comptroller of the Currency have adopted rules to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Basel III Capital Rules"). The Basel III Capital Rules require banks and bank holding companies to comply with certain minimum capital ratios, plus a "capital conservation buffer," as set forth in the table below. The capital conservation buffer requirement was phased in beginning on January 1, 2016, at 0.625% of risk-weighted assets, and increased by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and is applicable to all ratios except the leverage capital ratio.

The Company meets the eligibility criteria of a small bank holding company in accordance with the FRB's Small Bank Holding Company Policy Statement (the "SBHC Policy Statement"). Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules. However, the Company does not currently intend to issue a material amount of debt or take any other action that would cause its capital ratios to fall below the minimum ratios required by the Basel III Capital Rules. The SBHC Policy Statement does not apply to the Bank, and the Bank must comply with the Basel III Capital Rules. The Bank must also comply with the capital requirements set forth in the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act. The minimum capital ratios for the Bank to be considered "well capitalized" are set forth in the table below.

Management believes that as of December 31, 2020,2023, the Company and Bank meetmet all capital adequacy requirements to which they are subject. At year-end 20202023 and 2019,2022, 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 Bank's category.

 

On September 17, 2019, the federal banking agencies jointly issued a final rule required by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to be subject to a 9% leverage ratio (commonly referred to as the community bank leverage ratio or "CBLR"). Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and are deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework has a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. 

On April 6, 2020, the federal bank regulatory agencies announced the issuance of two interim final rules that make changes to the CBLR framework and implement Section 4012 of the CARES Act. One interim final rule provides that, as of the second quarter of 2020, a banking organization with a leverage ratio of 8% or greater (and that meets the other existing qualifying criteria) could elect to use the CBLR framework. This rule also establishes a two-quarter grace period for a qualifying community banking organization whose leverage ratio fell below 8% so long as the banking organization maintained a leverage ratio of 7% or greater. The second interim final rule provides a transition back to the leverage ratio requirement of 9%. Under this rule, the required leverage ratio was 8% beginning in the second quarter and for the remainder of calendar year 2020 and will be 8.5% for calendar year 2021 and 9% thereafter. This rule also maintains a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable ratio. This transition will allow community banking organizations to focus on supporting lending to creditworthy households and businesses given the recent strains on the U.S. economy caused by COVID-19. The Company and the Bank do not currently expect to opt into the CBLR framework.

96

Actual and required capital amounts (in thousands) and ratios are presented below at year-end:year-end. 

 

             

To Be Well

              

To Be Well

 
             

Capitalized Under

              

Capitalized Under

 
             

Prompt Corrective

              

Prompt Corrective

 
 

Actual

  

Required for Capital Adequacy Purposes

  

Action Provisions

  

Actual

  

Required for Capital Adequacy Purposes*

  

Action Provisions

 
 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

December 31, 2020

                  

December 31, 2023

                  

Common Equity Tier 1

                          
Company $244,318 12.36% $88,967 >4.50% N/A N/A  $298,885 11.70% $178,891 >7.00% N/A N/A 

Bank

 252,748  12.86  137,530  >7.00  $127,706  >6.50%  322,168  12.61  178,826  >7.00  $166,053  >6.50% 
                          

Tier 1 Capital

                          
Company 272,448 13.78 118,623 >6.00 N/A N/A  327,320 12.81 217,225 >8.50 N/A N/A 

Bank

 252,748  12.86  167,001  >8.50  157,177  >8.00  322,168  12.61  217,146  >8.50  204,372  >8.00 
                          

Total Capital

                          
Company 300,155 15.18 158,164 >8.00 N/A N/A  353,180 13.82 268,337 >10.50 N/A N/A 

Bank

 274,455  13.97  206,295  >10.50  196,471  >10.00  348,028  13.62  268,239  >10.50  255,465  >10.00 
                          

Leverage Capital

                          
Company 272,448 9.48 114,902 >4.00 N/A N/A  327,320 10.61 123,359 >4.00 N/A N/A 

Bank

 252,748  8.85  114,247  >4.00  142,809  >5.00  322,168  10.46  123,238  >4.00  154,048  >5.00 
                          

December 31, 2019

                  

December 31, 2022

                  

Common Equity Tier 1

                          
Company $228,554 11.56% $88,968 >4.50% N/A N/A  $287,735 11.70% $172,098 >7.00% N/A N/A 

Bank

 243,449  12.38  137,698  >7.00  $127,862  >6.50%  308,690  12.57  171,962  >7.00  $159,679  >6.50% 
                          

Tier 1 Capital

                          
Company 256,583 12.98 118,624 >6.00 N/A N/A  316,069 12.86 208,977 >8.50 N/A N/A 

Bank

 243,449  12.38  167,205  >8.50  157,369  >8.00  308,690  12.57  208,811  >8.50  196,528  >8.00 
                          

Total Capital

                          
Company 277,581 14.04 158,166 >8.00 N/A N/A  336,001 13.67 258,147 >10.50 N/A N/A 

Bank

 256,930  13.06  206,547  >10.50  196,712  >10.00  328,622  13.38  257,942  >10.50  245,660  >10.00 
                          

Leverage Capital

                          
Company 256,583 10.75 95,514 >4.00 N/A N/A  316,069 10.36 122,086 >4.00 N/A N/A 

Bank

 243,449  10.25  94,972  >4.00  118,715  >5.00  308,690  10.12  121,990  >4.00  152,488  >5.00 

 

*Ratios include the conservation buffer.

77

 

Note 2421 – Segment and Related Information

 

The Company has two reportable segments, community banking and trust and investment services.wealth management.

 

Community banking involves making loans to and generating deposits from individuals and businesses. All assets and liabilities of the Company are allocated to community banking. Investment income from securities is also allocated to the community banking segment. Loan fee income, service charges from deposit accounts, and non-deposit fees such as automated teller machine fees and insurance commissions generate additional income for the community banking segment.

 

Trust and investment services includeWealth management includes estate planning, trust account administration, investment management, and retail brokerage. Investment management services include purchasing equity, fixed income, and mutual fund investments for customer accounts. The trust and investment serviceswealth management segment receives fees for investment and administrative services.

 

97

Segment information as of and for the years ended December 31, 2020,2023, 2019,2022, and 2018,2021, is shown in the following table (dollars in thousands):

 

 

2020

  

2023

 
 

Community Banking

  

Trust and Investment Services

  

Total

  

Community Banking

  

Wealth Management

  

Total

 

Interest income

 $95,840  $0  $95,840  $120,229  $  $120,229 

Interest expense

 12,020  0  12,020  35,647    35,647 

Noninterest income

 12,054  4,789  16,843  11,585  6,751  18,336 

Noninterest expense

 52,245  2,320  54,565  65,008  3,042  68,050 

Incomebefore income taxes

 34,714  2,468  37,182 

Income before income taxes

 30,664  3,709  34,373 

Net income

 28,052  1,993  30,045  23,229  2,930  26,159 

Depreciation and amortization

 3,815  10  3,825  3,157  5  3,162 

Total assets

 3,049,779  231  3,050,010  3,090,502  215  3,090,717 

Goodwill

 85,048  0  85,048  85,048    85,048 

Capital expenditures

 2,690  4  2,694  1,538    1,538 

 

 

2019

  

2022

 
 

Community Banking

  

Trust and Investment Services

  

Total

  

Community Banking

  

Wealth Management

  

Total

 

Interest income

 $92,855  $0  $92,855  $96,004  $  $96,004 

Interest expense

 15,728  0  15,728  5,766    5,766 

Noninterest income

 10,602  4,568  15,170  12,286  6,521  18,807 

Noninterest expense

 63,794  2,280  66,074  61,173  2,913  64,086 

Incomebefore income taxes

 23,479  2,288  25,767 

Income before income taxes

 39,754  3,608  43,362 

Net income

 19,050  1,856  20,906  31,578  2,850  34,428 

Depreciation and amortization

 3,454  8  3,462  3,496  10  3,506 

Total assets

 2,478,478  72  2,478,550  3,065,611  291  3,065,902 

Goodwill

 84,002  0  84,002  85,048    85,048 

Capital expenditures

 3,534  21  3,555  1,196    1,196 

 

 

2018

  

2021

 
 

Community Banking

  

Trust and Investment Services

  

Total

  

Community Banking

  

Wealth Management

  

Total

 

Interest income

 $68,768  $0  $68,768  $95,796  $  $95,796 

Interest expense

 9,674  0  9,674  5,405    5,405 

Noninterest income

 8,695  4,579  13,274  15,012  6,019  21,031 

Noninterest expense

 41,832  2,414  44,246  56,251  2,757  59,008 

Incomebefore income taxes

 26,060  2,165  28,225 

Income before income taxes

 51,977  3,262  55,239 

Net income

 20,848  1,731  22,579  40,949  2,577  43,526 

Depreciation and amortization

 2,030  10  2,040  3,697  10  3,707 

Total assets

 1,862,849  17  1,862,866  3,334,347  250  3,334,597 

Goodwill

 43,872  0  43,872  85,018    85,018 

Capital expenditures

 2,723  0  2,723  1,000    1,000 

 

9878

 

 

Note 2522 – Parent Company Financial Information

 

Condensed Parent Company financial information is as follows (dollars in thousands):

 

 

December 31,

  

December 31,

 

Condensed Balance Sheets

 

2020

  

2019

 

Parent Company Condensed Balance Sheets

 

2023

  

2022

 

Cash

 $17,759  $11,127  $4,343  $3,906 

Securities available for sale, at fair value

 8,534  8,683  1,506  1,639 

Investment in subsidiaries

 351,033  337,983  366,032  342,013 

Due from subsidiaries

 143  134  264  152 

Other assets

  1,062   674      2,222 

Total Assets

 $378,531  $358,601  $372,145  $349,932 
  

Subordinated debt

 $7,500  $7,517 

Junior subordinated debt

 28,130  28,029  $28,435  $28,334 

Other liabilities

 5,007  2,797  542  424 

Shareholders' equity

  337,894   320,258   343,168   321,174 

Total Liabilities and Shareholders' Equity

 $378,531  $358,601  $372,145  $349,932 

 

 

Year Ended December 31,

  

Year Ended December 31,

 

Condensed Statements of Income

 

2020

  

2019

  

2018

 

Parent Company Condensed Statements of Income

 

2023

  

2022

  

2021

 

Dividends from subsidiary

 $25,500  $25,000  $11,000  $16,000  $16,000  $16,000 

Other income

 512  823  456  198  146  411 

Expenses

 3,369  4,232  2,396  5,627  2,994  3,057 

Income tax benefit

  (600)  (601)  (407)  (832)  (598)  (556)

Income before equity in undistributed earnings of subsidiary

 23,243  22,192  9,467  11,403  13,750  13,910 

Equity in undistributed (distributed) earnings of subsidiary

  6,802   (1,286)  13,112 

Equity in undistributed earnings of subsidiary

  14,756   20,678   29,616 

Net Income

 $30,045  $20,906  $22,579  $26,159  $34,428  $43,526 

 

 

Year Ended December 31,

  

Year Ended December 31,

 

Condensed Statements of Cash Flows

 

2020

  

2019

  

2018

 

Parent Company Condensed Statements of Cash Flows

 

2023

  

2022

  

2021

 

Cash Flows from Operating Activities:

              

Net income

 $30,045  $20,906  $22,579  $26,159  $34,428  $43,526 

Adjustments to reconcile net income to net cash provided by operating activities:

              

Equity in (undistributed) distributions of subsidiary

 (6,802) 1,286  (13,112)

(Equity in undistributed earnings) of subsidiary

 (14,756) (20,678) (29,616)

Net amortization of securities

   10 

Net change in other assets

 84  (382) (194) 2,545  (876) 27 

Net change in other liabilities

  85   (35)  136   219   109   102 

Net cash provided by operating activities

  23,412   21,775   9,409   14,167   12,983   14,049 

Cash Flows from Investing Activities:

              

Purchases of securities available for sale

 0  (2,220) 0 

Sales of equity securities

 0  445  431 

Cash paid in bank acquisition

 0  (27) 0 

Cash acquired in bank acquisition

  0   981   0 

Net cash provided by (used in) investing activities

  0   (821)  431 

Sales, calls and maturities of equity securities

        6,800 

Net cash provided by investing activities

        6,800 

Cash Flows from Financing Activities:

              

Common stock dividends paid

 (11,842) (10,965) (8,702) (12,755) (12,144) (11,827)

Repurchase of common stock

 (4,981) (3,146) 0  (1,044) (7,505) (8,810)

Proceeds from exercise of stock options

  43   688   861  69  12  89 

Net change in subordinated debt

        (7,500)

Net cash used in financing activities

  (16,780)  (13,423)  (7,841)  (13,730)  (19,637)  (28,048)

Net increase in cash and cash equivalents

 6,632  7,531  1,999 

Net increase (decrease) in cash and cash equivalents

 437  (6,654) (7,199)

Cash and cash equivalents at beginning of period

  11,127   3,596   1,597   3,906   10,560   17,759 

Cash and cash equivalents at end of period

 $17,759  $11,127  $3,596  $4,343  $3,906  $10,560 

 

9979

 
 

Note 26 – Concentrations of Credit Risk

Substantially all of the Company's loans are made within its market area, which includes Southern and Central Virginia and the northern portion of Central North Carolina. The ultimate collectibility of the Company's loan portfolio and the ability to realize the value of any underlying collateral, if necessary, are impacted by the economic conditions and real estate values of the market area.

Loans secured by real estate were $1,515,338,000, or 75.2% of the loan portfolio at December 31,2020, and $1,480,857,000, or 80.9% of the loan portfolio at December 31,2019. Loans secured by commercial real estate represented the largest portion of loans at $1,001,249,000 at December 31,2020 and $899,199,000 at December 31,2019, 49.7% and 49.1%, respectively, of total loans. There were no concentrations of loans to any individual, group of individuals, business, or industry that exceeded 10% of total loans at December 31,2020 or 2019.

Note 2723 – Supplemental Cash Flow Information

 

(dollars in thousands)

 

As of or for the Year Ended December 31,

 
  

2020

  

2019

  

2018

 

Supplemental Schedule of Cash and Cash Equivalents:

            

Cash and due from banks

 $30,767  $32,505  $29,587 

Interest-bearing deposits in other banks

  343,603   47,077   34,668 
  $374,370  $79,582  $64,255 
             

Supplemental Disclosure of Cash Flow Information:

            

Cash paid for:

            

Interest on deposits and borrowed funds

 $12,455  $15,310  $9,553 

Income taxes

  7,609   4,698   5,056 

Noncash investing and financing activities:

            

Transfer of loans to other real estate owned

  95   234   599 
Transfer of loans to repossessions  411   0   0 

Transfer from premises and equipment to other assets

  0   445   0 

Increase in operating lease right-of-use asset

  371   4,453   0 

Increase in operating lease liability

  371   4,453   0 

Unrealized gains (losses) on securities available for sale

  6,399   8,821   (3,290)

Unrealized losses on cash flow hedges

  (2,210)  (1,854)  (804)

Change in unfunded pension liability

  (413)  (64)  1,291 
             

Non-cash transactions related to acquisitions:

            
             

Assets acquired:

            

Investment securities

  0   34,876   0 

Restricted stock

  0   2,588   0 

Loans

  0   444,324   0 

Premises and equipment

  0   12,554   0 

Deferred income taxes

  0   2,960   0 

Core deposit intangible

  0   8,200   0 

Other real estate owned

  0   1,442   0 

Bank owned life insurance

  0   8,246   0 

Other assets

  0   14,244   0 
             

Liabilities assumed:

            

Deposits

  0   483,626   0 

Short-term FHLB advances

  0   14,883   0 

Long-term FHLB advances

  0   778   0 

Subordinated debt

  0   7,530   0 

Other liabilities

  0   5,780   0 
             

Consideration:

            

Issuance of common stock

  0   82,470   0 

Fair value of replacement stock options/restricted stock

  0   753   0 

100

(dollars in thousands)

 

As of or for the Year Ended December 31,

 
  

2023

  

2022

  

2021

 

Supplemental Schedule of Cash and Cash Equivalents:

            

Cash and due from banks

 $31,500  $32,207  $23,095 

Interest-bearing deposits in other banks

  35,219   41,133   483,723 
  $66,719  $73,340  $506,818 
             

Supplemental Disclosure of Cash Flow Information:

            

Cash paid for:

            

Interest on deposits and borrowed funds

 $34,029  $5,308  $5,791 

Income taxes

  8,228   8,472   3,102 

Noncash investing and financing activities:

            

       Unsettled securities transactions

  20,369       

Transfer of loans to repossessions

     53    

Transfer from premises and equipment to other assets held for sale

  449      1,316 

Increase (decrease) in operating lease right-of-use asset

  2,425   240   (21)

Increase (decrease) in operating lease liabilities

  2,425   240   (21)

Unrealized gains (losses) on securities available for sale

  14,709   (68,877)  (12,271)

Unrealized gains on cash flow hedges

     4,125   2,068 

Change in unfunded pension liability

  (112)  1082   590 
             

 

 

Note 2824 – Accumulated Other Comprehensive Income (Loss)Loss

 

Changes in each component of accumulated other comprehensive income (loss)loss were as follows (dollars in thousands):

 

      

Unrealized

  

Adjustments

  

Accumulated

 
  

Net Unrealized

  

Losses on

  

Related to

  

Other

 
  

Gains (Losses)

  

Cash Flow

  

Pension

  

Comprehensive

 
  

on Securities

  

Hedges

  

Benefits

  

Income (Loss)

 

Balance at Balance at December 31, 2017

 $(796) $0  $(2,280) $(3,076)

Net unrealized losses on securities available for sale, net of tax, $(745)

  (2,464)  0   0   (2,464)

Reclassification adjustment for realized gains on securities, net of tax, $(18)

  (63)  0   0   (63)

Net unrealized losses on cash flow hedges, net of tax, $(180)

  0   (624)  0   (624)

Change in unfunded pension liability, net of tax, $249

  0   0   1,042   1,042 

Reclassification for ASU 2016-01 adoption

  (650)  0   0   (650)

Balance at December 31, 2018

  (3,973)  (624)  (1,238)  (5,835)

Net unrealized gains on securities available for sale, net of tax, $2,005

  7,090   0   0   7,090 

Reclassification adjustment for realized gains on securities, net of tax, $(59)

  (215)  0   0   (215)

Net unrealized losses on cash flow hedges, net of tax, $(394)

  0   (1,460)  0   (1,460)

Change in unfunded pension liability, net of tax, $(1)

  0   0   (63)  (63)

Balance at December 31, 2019

  2,902   (2,084)  (1,301)  (483)

Net unrealized gains on securities available for sale, net of tax, $1,557

  5,656   0   0   5,656 

Reclassification adjustment for realized gains on securities, net of tax, $(176)

  (638)  0   0   (638)

Net unrealized losses on cash flow hedges, net of tax, $(448)

  0   (1,762)  0   (1,762)

Change in unfunded pension liability, net of tax, $(77)

  0   0   (336)  (336)

Balance at December 31, 2020

  7,920   (3,846)  (1,637) $2,437 
      

Unrealized

  

Adjustments

  

Accumulated

 
  

Net Unrealized

  

Gains (Losses)

  

Related to

  

Other

 
  

Gains/Losses

  

on Cash Flow

  

Pension

  

Comprehensive

 
  

on Securities

  

Hedges

  

Benefits

  

Loss

 

Balance at Balance at December 31, 2020

 $7,920  $(3,846) $(1,637) $2,437 

Net unrealized losses on securities available for sale, net of tax, $(2,643)

  (9,593)        (9,593)

Reclassification adjustment for realized losses on securities, net of tax, $(7)

  (28)        (28)

Net unrealized gains on cash flow hedges, net of tax, $434

     1,634      1,634 

Change in unfunded pension liability, net of tax, $115

        475   475 

Balance at December 31, 2021

  (1,701)  (2,212)  (1,162)  (5,075)

Net unrealized losses on securities available for sale, net of tax, $(14,868)

  (54,009)        (54,009)

Net unrealized gains on cash flow hedges, net of tax, $866

     3,259      3,259 

Change in unfunded pension liability, net of tax, $233

        849   849 

Balance at December 31, 2022

  (55,710)  1,047   (313)  (54,976)

Net unrealized gains on securities available for sale, net of tax, $3,168

  11,541         11,541 

Reclassification adjustment for realized losses on securities, net of tax, $14

  54         54 

Net unrealized losses on cash flow hedges, net of tax, $387

     408      408 

Change in unfunded pension liability, net of tax, $(21)

        (91)  (91)

Balance at December 31, 2023

 $(44,115) $1,455  $(404) $(43,064)

 

The following table provides information regarding reclassifications out of accumulated other comprehensive income (loss)loss (dollars in thousands):

 

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)Loss

For the Three Years EndingEnded December 31, 20202023

 

Details about AOCI Components

 

Amount Reclassified from AOCI

 

Affected Line Item in the Statement of Where Net Income is Presented

  

Year Ended December 31,

  
  

2020

  

2019

  

2018

  

Available for sale securities:

             

Realized gain on sale of securities

 $814  $274  $81 

Securities gains, net

   (176)  (59)  (18)

Income taxes

  $638  $215  $63 

Net of tax

Reclassification for ASU-2016-01 adoption

  0   0   650 

(1)

Total reclassifications

 $638  $215  $713  

______________________

(1) Reclassification from AOCI to retained earnings for unrealized holding gains on equity securities due to adoption of ASU 2016-01.

Details about AOCI Components

 

Amount Reclassified from AOCI

 

Affected Line Item in the Statement of Where Net Income is Presented

  

Year Ended December 31,

  
  

2023

  

2022

  

2021

  

Available for sale securities:

             

Realized (losses) gains on sale of securities

 $(68) $  $35 

Securities (losses)gains, net

Tax effect

  14      (7)

Income taxes

  $(54) $  $28 

Net of tax

 

10180

 
 

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A – CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of December 31, 2020.2023. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the 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 SEC rules and forms. There were no significant changes in the Company's internal controls over financial reporting that occurred during the quarteryear ended December 31, 20202023 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

 

Management's Annual Report on Internal Control over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management regularly monitors its internal control over financial reporting, and actions are taken to correct deficiencies as they are identified.

 

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting. This assessment was based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation under the framework in Internal Control – Integrated Framework, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020,2023, as such term is defined in Exchange Act Rule 13a-15(f).

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, because of changes in conditions, internal control effectiveness may vary over time.

 

The Company's independent registered public accounting firm, Yount, Hyde and Barbour, P.C., has audited the Company's internal control over financial reporting as of December 31, 2020,2023, as stated in their report included herein.in Item 8 of this Form 10-K. Yount, Hyde and Barbour, P.C. also audited the Company's consolidated financial statements as of and for the year ended December 31, 2020.2023.

 

/s/ Jeffrey V. Haley

 

Jeffrey V. Haley

 

President and Chief Executive Officer

 

 

 

/s/ Jeffrey W. Farrar

 

Jeffrey W. Farrar

 

Executive Vice President,

 

Chief Operating Officer and Chief Financial Officer

 

 

 

March 8, 202115, 2024

 

ITEM 9B OTHER INFORMATION

(a) None.

(b) During the quarter ended December 31, 2023, no director or Section 16 officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangements.

ITEM 9C DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable

 

Part III

Item 10 - Directors, Executive Officers and Corporate Governance

Information as to Item 10 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.

Item 11 - Executive Compensation

Information as to Item 11 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.

Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information as to Item 12 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.

Item 13 - Certain Relationships and Related Transactions, and Director Independence

Information as to Item 13 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.

Item 14 - Principal Accountant Fees and Services

Information as to Item 14 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.

 

PART IV

 

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1)

Financial Statements.Statements and Reports of Independent Registered Public Accounting Firm (PCAOB ID 613).  See Item 8 for reference.

(a)(2)

Financial Statement Schedules.  All applicable financial statement schedules required under Regulation S-X have been included in the Notes to the Consolidated Financial Statements.

(a)(3)

Exhibits.  The exhibits required by Item 601 of Regulation S-K are listed below.

 

 

EXHIBIT INDEX

 

Exhibit No.

Description

Location

 

 

 

2.1

Agreement and Plan of Reorganization, dated October 1, 2018, between American National Bankshares Inc. and HomeTown Bankshares Corporation

Exhibit 2.1 on Form 8-K filed October 5, 2018

 

 

 

2.2Agreement and Plan of Merger by and between Atlantic Union Bankshares Corporation and American National Bankshares Inc. dated July 24, 2023Exhibit 2.1 on Form 8-K filed July 25, 2023

3.1

Articles of Incorporation, as amended

Exhibit 3.1 on Form 8-K filed July 5, 2011May 19, 2023

 

 

 

3.2

Bylaws, as amended

Exhibit 3.2 on Form 8-K filed May 21, 202019, 2023

 

 

 

4.1

Description of American National Bankshares Inc.’s's Securities

Filed herewith

 

 

 

10.1

Deferred CompensationAmended and Restated Employment Agreement, betweendated March 1, 2022, by and among American National Bankshares Inc., American National Bank and Trust Company, and Charles H. Majors dated December 31, 2008Jeffrey V. Haley

Exhibit 10.1 on Form 10-K8-K filed March 16, 20097, 2022

 

 

 

10.2

Amended and Restated Employment Agreement, betweendated March 1, 2022, by and among American National Bankshares Inc., American National Bank and Trust Company, and Jeffrey V. Haley dated March 2, 2015W. Farrar

Exhibit 10.110.2 on Form 8-K filed March 4, 20157, 2022

 

 

 

10.3

Amended and Restated Employment Agreement, betweendated March 1, 2022, by and among American National Bankshares Inc., American National Bank and Jeffrey W. Farrar dated August 5, 2019Trust Company, and Edward C. Martin

Exhibit 10.110.3 on Form 8-K filed August 5, 2019March 7, 2022

 

 

 

10.4

Employment Agreement between American National Bankshares Inc. and H. Gregg Strader dated March 2, 2015

Exhibit 10.3 on Form 10-Q filed May 11, 2015

10.5Amendment to Employment Agreement between American National Bankshares Inc. and H. Gregg Strader, dated January 21, 2021Exhibit 10.1 on Form 8-K filed January 26, 2021

10.6Employment Agreement between American National Bank and Trust Company, and Charles T. Canaday, Jr., dated March 27, 2014

Filed herewith

10.7

Executive Severance Agreement between American National Bankshares Inc., American National Bank and Trust Company, and Charles T. Canaday, Jr. dated December 15, 2010, as amended March 27, 2014

Filed herewith
10.8Employment Agreement between American National Bank and Trust Company and Edward C. Martin dated September 21, 2016Exhibit 10.1 on Form 8-K filed December 29, 2016

10.9

Employment Agreement between American National Bank and Trust Company and John H. Settle, Jr. dated February 8, 2017

Exhibit 10.8 on Form 10-K filed March 8, 2019

EXHIBIT INDEX

Exhibit No.

Description

Location

 

 

 

10.10

10.5

Amended and Restated Employment Agreement, dated January 1, 2022, by and between American National Bank and Trust Company and Susan K. Still dated February 5, 2019Rhonda P. Joyce

Exhibit 10.110.5 on Pre-Effective Amendment No.Form 10-K filed March 14, 2022

10.6Employment Agreement, dated January 1, to2022, by and between American National Bank and Trust Company and Alexander JungExhibit 10.6 on Form S-410-K filed February 6, 2019

March 14, 2022
10.7Amended and Restated Employment Agreement, dated January 1, 2022, by and between American National Bank and Trust Company and Charles T. Canaday, Jr.Exhibit 10.7 on Form 10-K filed March 14, 2022

10.1110.8

American National Bankshares Inc. 2008 Stock Incentive Plan

Appendix A of the Proxy Statement for the Annual Meeting of Shareholders held on April 22, 2008, filed on March 14, 2008

 

 

 

10.1210.9

American National Bankshares Inc. 2018 Equity Compensation Plan

Appendix A of the Proxy Statement for the Annual Meeting of Shareholders held on May 15, 2018, filed on April 12, 2018

EXHIBIT INDEX

Exhibit No.

Description

Location

 

 

 

10.1310.10

HomeTown Bank 2005 Stock Option Plan

Exhibit 4.0 on Post-Effective Amendment No. 1 on Form S-8 to Form S-4 filed April 1, 2019

 

 

 

10.14

10.11

AdoptionDeferred Compensation Agreement forbetween American National Bank and Trust Company, and Charles H. Majors dated December 31, 2008

Exhibit 10.1 on Form 10-K filed March 16, 2009
10.12Restated Virginia Bankers Association Non-Qualified Deferred Compensation Plan for Executives of American National Bank and Trust Company, as restated effective January 1, 2017

Exhibit 10.1110.12 on Form 10-K filed March 15, 201614, 2022

10.13162(m) Amendment to the Restated Virginia Bankers Association Non-Qualified Deferred Compensation Plan for Executives of American National Bank and Trust Company, as restated effective January 1, 2018Exhibit 10.13 on Form 10-K filed March 14, 2022

10.14

Adoption Agreement for the Restated Virginia Bankers Association Non-Qualified Deferred Compensation Plan for Executives of American National Bank and Trust Company, effective January 1, 2020

Exhibit 10.14 on Form 10-K filed March 14, 2022
10.15Form of Amendment to Employment Agreement for certain executive officersExhibit 10.1 on Form 10-K filed December 22, 2023

 

 

 

21.1

Subsidiaries of the registrant

Filed herewith

 

 

 

23.1

Consent of Yount, Hyde & Barbour, P.C.

Filed herewith

 

 

 

31.1

Section 302 Certification of Jeffrey V. Haley, President and Chief Executive Officer

Filed herewith

 

 

 

31.2

Section 302 Certification of Jeffrey W. Farrar, Executive Vice President, Chief Operating Officer and Chief Financial Officer

Filed herewith

 

 

 

32.1

Section 906 Certification of Jeffrey V. Haley, President and Chief Executive Officer

Filed herewith

 

 

 

32.2

Section 906 Certification of Jeffrey W. Farrar, Executive Vice President, Chief Operating Officer and Chief Financial Officer

Filed herewith

 

 

 

97Clawback PolicyFiled herewith

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

 

104The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2020,2023, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101). 

 

ITEM 16 – FORM 10-K SUMMARY

 

The registrant has not selected the option to provide the summary information of the Form 10-K.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

Date: March 8, 202115, 2024

 

AMERICAN NATIONAL BANKSHARES INC.

 

 

 

 

By:

/s/  Jeffrey V. Haley

 

 

President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 8, 2021.15, 2024.

 

/s/  Jeffrey V. Haley

 

Director, President and

 

 

 

 

Jeffrey V. Haley

 

Chief Executive Officer

(principal executive officer)

 

 

 

 

 

 

 

 

 

 

 

/s/  Charles H. Majors

 

Director and Chairman

 

 

 

 

Charles H. Majors

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/  Nancy H. Agee

 

Director

 

/s/  John H. LoveF. D. Hornaday, III

 

Director

Nancy H. Agee

 

 

 

John H. LoveF. D. Hornaday, III

 

 

 

 

 

 

 

 

 

/s/  Kenneth S. Bowling

J. Nathan Duggins, III

Director/s/  John H. LoveDirector
J. Nathan Duggins, IIIJohn H. Love
/s/  William J. Farrell, II

Director

 

/s/  Ronda M. Penn

 

Director

Kenneth S. Bowling

William J. Farrell, II

 

Ronda M. Penn

 

 

 

 

 

 

 

 

 

/s/  Tammy M. Finley

 

Director

 

/s/  Dan M. Pleasant

 

Director

Tammy M. Finley

 

 

 

Dan M. Pleasant

 

 

 

 

 

 

 

 

 

/s/  Michael P. Haley

 

Director

 

/s/  Joel R. Shepherd

 

Director

Michael P. Haley

 

 

 

Joel R. Shepherd

 

 

 

/s/  Charles S. Harris

Director

/s/  Susan K. Still

Director

Charles S. Harris

Susan K. Still

/s/  F. D. Hornaday, III

Director

F. D. Hornaday, III

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/  Cathy W. Liles

 

Senior Vice President and

 

/s/  Jeffrey W. Farrar

 

Executive Vice President,

Cathy W. Liles

 

Chief Accounting Officer
(principal accounting officer)

 

Jeffrey W. Farrar

 

Chief Operating Officer and Chief Financial Officer

(principal financial officer)

 

10585