As of December 31, 2022, 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 Human Resources 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 2022. 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 effectivenessCompensation Committee 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.

~~Table of Contents~~

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, 2022, compared to 3.3% at December 31, 2021 and continued to be below the national rate of 3.5% at December 31, 2022. North Carolina's unemployment rate was 3.9% as of December 31, 2022, compared to 4.1% at December 31, 2021 and slightly above the national rate of 3.5% at December 31, 2022.

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~~Directors (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.

~~Table of Contents~~

~~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 2022 and 2021, the Company recorded expense of $903,000 and $864,000, 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 12.86% and 13.67%, respectively, as of December 31, 2022, thus exceeding the minimum requirements. The CET 1 ratio of the Company was 11.70% and the Bank was 12.57% as of December 31, 2022. The Tier 1 and total capital to risk-weighted asset ratios of the Bank were 12.57% and 13.38%, respectively, as of December 31, 2022, 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 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.

~~Table of Contents~~

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.

~~Table of Contents~~

~~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, 2022 and 2021, 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.

~~Table of Contents~~

~~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.

In May 2022, the federal bank regulatory agencies jointly issued a proposed rule intended to strengthen and modernize the CRA regulatory framework. If implemented, the rule would, among other things, (i) expand access to credit, investment and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency and transparency in the application of the regulations and (iv) tailor performance standards to account for differences in bank size, business model, and local conditions.

~~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"~~"Committee") is responsible for ~~administering~~establishing 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~~approving the compensation 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.

~~Table of Contents~~

~~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.

~~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.

In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including The Nasdaq Stock Market, LLC, the exchange on which our common stock is listed, to implement listing standards that require 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. In February 2023, The Nasdaq Stock Market, LLC posted its initial rule filing with the SEC to implement this directive. The final rule will require us to adopt a clawback policy that is compliant with the new listing standard within 60 days after such standard becomes effective.

~~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.

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.

~~Table of Contents~~

~~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.

~~Tax Reform~~

As a result of the enactment of the Coronavirus Aid, Relief, and Economic Security Act ("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.

~~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,~~except for the compensation of the Chief Executive Officer, which is approved by the independent members of the Board of Directors. The Committee considers a variety of factors and ~~their positions:~~

criteria in arriving at its decisions and recommendations for compensation. The Committee's objective is to attract and retain a superb leadership team with market-competitive compensation and to align the team members' interests with those of the Company, its customers and its shareholders. Accordingly, a significant portion of the Company's executive officers' compensation is directly and materially linked to operating performance. Cash incentive payments and restricted stock awards are heavily dependent on meeting or exceeding Company financial performance goals as well as objective and subjective criteria related to the executive officer's area of responsibility.

~~The Company's credit standards~~Performance Compensation 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 loan losses ("ALLL") may not be adequate to cover actual losses.~~

In accordance with GAAP, an allowance for loan losses is maintained by the Company to provide for loan losses. The allowance for loan 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 loan losses is based on prior experience, 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 loan losses. While management believes that the allowance for loan losses is adequate to cover current losses, it cannot make assurances that it will not further increase the allowance for loan 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 loan 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 ALLL 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.

~~Table of Contents~~

~~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, 2022, the Company had approximately $2.2 billion in loans, of which approximately $1.9 billion (85.8%) 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 of 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.

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~~Bonus Program

~~The Company's business is subject~~Pursuant 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 the current interest rate environment encourages extreme competition for new loan originations from qualified borrowers.

~~Since the beginning of 2022, in response to elevated inflation, the Federal Open Market Committee ("FOMC")~~terms of the FRB has increased the target range for the federal funds rate by 425 basis points, to a range of 4.25% to 4.50% as of December 31, 2022, and further increased it to the current range of 4.50% to 4.75% in February 2023. As it seeks to control inflation without creating a recession, the FOMC has indicated further increases are to be expected in 2023. If the FOMC further increases the targeted federal funds rates, overall interest rates will likely continue to rise, which is expected to positively impact our net interest income modestly but may negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S. economy. In addition, inflationary pressures will increase our operating costs and could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans, which could negatively affect our financial performance.

If the interest rates paid on deposits 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. 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.

~~Table of Contents~~

~~Inflation may have a negative impact on earnings.~~

Inflation has increased at the highest rate since the 1980s. Increased inflation translates to increased cost of goods and services, and labor costs. We may have to pay higher than normal wages to attract and retain employees, and incur additional operating costs. The FRB has increased the target range for the federal funds rate seven times over the course of 2022 to reduce inflation. Increased interest rates decrease demand for loans, increase the chance our customers will have difficulty paying back loans and increase demand for higher rates on deposits.

~~Transition away from the London Interbank Offered Rate ("~~~~LIBOR"~~~~) to another benchmark rate could adversely affect our operations.~~

The administrator of LIBOR announced that the most commonly used U.S. dollar LIBOR settings would cease to be published or cease to be representative after June 30, 2023. Management cannot predict whether or when LIBOR will actually cease to be available or what impact such a transition may have on the Company’s business, financial condition and results of operations.

The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on the Secured Overnight Funding Rate ("SOFR") for contracts governed by U.S. law that have no or ineffective fallbacks. Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates, or the value of LIBOR-based securities will not be adversely affected. There continues to be substantial uncertainty as to the ultimate effects of the LIBOR transition, including with respect to the acceptance and use of SOFR and other benchmark rates.

We have an insignificant 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 our 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 our customers could adversely impact our reputation. Although we are 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 our business, financial condition and results of operations.

~~LIQUIDITY RISK~~

~~The Company may need to raise additional capital in the future to continue to grow, but may be unable to obtain additional capital on favorable terms or at all.~~

Federal and state banking regulators and safe and sound banking practices require the Company to maintain adequate levels of capital to support its operations. The Company's 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 growth in the Company's earning assets, 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 pays 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 growth or satisfy regulatory requirements, its ability to raise that additional capital will depend on conditions at that time in 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 assurance 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 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.

~~Table of Contents~~

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.

~~Table of Contents~~

~~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, 2022.

~~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. 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.

~~Table of Contents~~

~~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 fo~~r 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 securityincentive 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.

Governments, investors, customers, and the general public are increasingly focused on ESG practices and disclosures. For us and others in the financial services industry, this focus extends to the practices and disclosures of the customers, counterparties, and service providers with whom we choose to do business. In addition, certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have developed scores and ratings to evaluate companies based on ESG metrics. Currently, there are no universal standards for such scores or ratings, but the importance of ESG evaluations is becoming more broadly accepted by investors and shareholders. Views about ESG are diverse, dynamic, and rapidly changing, and if we were to fail to maintain appropriate ESG practices and disclosures or be subject to a low ESG score or rating, we could face potential negative ESG-related publicity in traditional and social media, including based on the identity of those we choose to do business with and the public’s view of those customers. If we or our relationships with customers, service providers and suppliers were to become the subject of such negative publicity or low ESG scores or ratings, our ability to attract and retain customers and employees may be negatively impacted and our stock price may also be adversely impacted. Additionally, new government regulations could result in new or more stringent forms of ESG oversight and expanded mandatory and voluntary reporting, diligence and disclosure. ESG-related costs, including with respect to compliance with any additional regulatory or disclosure requirements or expectations, could adversely impact our results of operations.

Investors also have begun to consider how corporations are addressing ESG matters when making investment decisions. For example, certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to climate change and other ESG matters as part of their investment theses. Any such negative publicity regarding ESG, low ESG scores or ratings, or shifts in investing priorities may result in adverse effects on the trading price of our common stock and/or our business, operations and earnings if investors, shareholders or other stakeholders determine that we have not adequately considered or addressed ESG matters.

~~Table of Contents~~

~~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 whether 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 case 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.

~~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.

~~Table of Contents~~

~~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 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.

~~Table of Contents~~

~~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.

~~Table of Contents~~

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.

~~The economic impact of the COVID-19 pandemic and measures intended to reduce the spread of the virus could adversely affect our business, financial condition, and operations.~~

Global health and economic concerns relating to the COVID-19 pandemic and government actions taken to reduce the spread of the virus have significantly disrupted the macroeconomic environment in the United States. Although the domestic and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains. The growth in economic activity and in the demand for goods and services, coupled with labor shortages and supply chain disruptions, has also contributed to rising inflationary pressures and the risk of recession. Further, the COVID-19 pandemic could have long-lasting impacts on consumer behavior and business practices, including on remote work and business travel. The COVID-19 pandemic and related adverse economic consequences could cause adverse effects on the Company due to a number of operational factors impacting it or its customers or business partners, including but not limited to:

●

~~loan losses resulting from financial stress experienced by our customers;~~

●

~~collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;~~

●

~~operational failures, disruptions, or inefficiencies due to changes in our normal business practices;~~

●

~~business disruptions experienced by our vendors and business partners in carrying out critical services that support our operations;~~

●

~~decreased demand for our products and services;~~

●

~~potential financial liability, loan losses, litigation costs, or reputational damage resulting from our origination of loans as a participating lender in the PPP; and~~

●

~~heightened levels of cybersecurity risks and payment fraud due to disruption brought about by the pandemic, remote work and increased online activity.~~

The extent to which the COVID-19 pandemic and related economic consequences impact our business, liquidity, financial condition, and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, if and when the virus can be fully controlled and abated and the extent of its lasting impacts on economic and operating conditions. The impact of the removal of most pandemic related economic stimulus programs is also unknown. To the extent any of the foregoing risks or other factors that develop as a result of COVID-19 and related economic consequences materialize, it could exacerbate the other risk factors discussed in this section, or otherwise materially and adversely affect our business, liquidity, financial condition, and results of operations.

~~ITEM 1B – UNRESOLVED STAFF COMMENTS~~

~~None.~~

~~Table of Contents~~

~~ITEM 2 – PROPERTIES~~

As of December 31, 2022, 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 and has three floors totaling approximately 27,000 square feet. 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~~named executive officers, the officers had the opportunity to earn incentive payments for ~~a total~~2023 performance, with the targeted payout for the Chief Executive Officer initially set at amount equal to 60% of 23 owned buildings. There are no mortgages or liens against any of the properties owned by the Company. The Company operates 37 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~~his base salary, 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.~~

~~Table of Contents~~

~~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, 2022, the Company had 4,029~~ ~~shareholders of record.~~

~~The Company paid quarterly cash dividends of $0.28 per share~~targeted payout for each of the ~~first three quarters~~other named executive officers initially set at an amount equal to 50% of ~~2022~~their respective base salaries. For 2023, for the Chief Executive Officer and ~~$0.30~~each of the other named executive officers targeted incentive payment was based primarily on the achievement of a singular corporate goal of core earnings per share ~~for~~("Core EPS"), defined as net income per diluted share, per generally accepted accounting principles, less the ~~fourth quarter~~impact of ~~2022.~~fair value and merger related adjustments. The ~~Company's future dividend policy is subject to~~achievement of certain individual non-financial operational goals was also considered. Incentive payments are normally made in a combination of cash and restricted stock grants, with the ~~discretion~~percentage mix established by the Committee in its sole discretion. The participants have the option of taking a larger percentage of the ~~Boards of Directors of~~bonus payment in restricted stock and less in cash.

During mid - 2023, given the ~~Company~~economic headwinds associated with rapidly increasing interest rates, inflation 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~~pending merger with Atlantic Union, the ~~Bank are also subject~~Committee elected 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 Consolida~~ted Financial Statements contained in Item 8 of this Form 10-K.~~

The following table summarizes information, as of December 31, 2022, 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, 2022

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
4,150 $ 16.63 477,691
Equity compensation plans not approved by shareholders
— — —
Total
4,150 $ 16.63 477,691

~~Stock Repurchase Program~~

On January 20, 2022, 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 $13.0 million of the Company's common stock through December 31, 2022. Shares of the Company's common stock were repurchased during the three months ended December 31, 2022, as detailed below.

Period Beginning on First Day of Month Ended

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs

October 31, 2022
602 $ 35.41 602 5,011
November 30, 2022
2,667 36.68 2,667 2,344
December 31, 2022
— — — —
Total
3,269 $ 37.14 3,269

~~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.~~

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.

~~Table of Contents~~

~~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, 2022. The cumulative total return was calculated taking into consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2017. 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.

Period Ending

Index

12/31/2017

12/31/2018

12/31/2019

12/31/2020

12/31/2021

12/31/2022

American National Bankshares Inc.
$ 100.00 $ 78.59 $ 109.28 $ 75.38 $ 111.84 $ 113.13
Nasdaq Composite
100.00 97.16 132.81 192.47 235.15 158.65
SNL Bank $1B-$5B
100.00 83.44 104.69 95.08 132.36 116.69

~~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~~reset both the financial ~~condition~~targets 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 2022 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 allowancepayout ratios for loan losses, (2) acquired loans with specific credit-related deterioration, and (3) 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.

~~Table of Contents~~

~~Allowance for Loan Losses~~

The purpose of the 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 or recovery of loan loss expense.~~

~~The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan~~then named executive 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.

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 methodology described above and reflected in the calculations for the years ended December 31, 2022, 2021, and 2020. The incurred loss model was replaced with the current expected credit losses model, a methodology that requires consideration of reasonable and supportable information to estimate losses over the life of the loan.

~~Table of Contents~~

~~Acquired Loans with Specific Credit-Related Deterioration~~

~~Acquired loans with specific credit deterioration are accounted for by the Company in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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~~revised forecast for 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~~remainder 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.year. 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 notedtargeted payout for the ~~years ended December 31, 2022, 2021 or 2020. Intangible assets with definite useful lives are amortizing over their estimated useful lives of 5~~Chief Executive Officer was reduced 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 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 2022, 2021, and 2020 was 57.37%, 51.05%, and 52.80%, respectively. This ratio increased in 2022 as the benefits of PPP related items decreased. 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,

2022

2021

2020

Efficiency Ratio

Noninterest expense
$ 64,086 $ 59,008 $ 54,565
Add/subtract: gain/loss on sale OREO, net of writedowns
2 (111 ) 4
Subtract: core deposit intangible amortization
(1,260 ) (1,464 ) (1,637 )
Adjusted noninterest expense
$ 62,828 $ 57,433 $ 52,932

Net interest income
$ 90,238 $ 90,391 $ 83,820
Tax equivalent adjustment
244 241 288
Noninterest income
18,807 21,031 16,843
Subtract: gain on securities
— (35 ) (814 )
Add/subtract: loss/gain on sale of fixed assets
228 885 110
Adjusted revenues
$ 109,517 $ 112,513 $ 100,247

Efficiency ratio
57.37 % 51.05 % 52.80 %

~~Table of Contents~~

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 2022, 2021, and 2020. 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,

2022

2021

2020

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

Non-GAAP measures:

Interest income - loans
$ 82,708 $ 87,181 $ 87,881
Interest income - investments and other
13,540 8,856 8,247
Interest expense - deposits
(3,553 ) (3,645 ) (9,729 )
Interest expense - customer repurchase agreements
(26 ) (22 ) (259 )
Interest expense - other short-term borrowings
(633 ) — —
Interest expense - long-term borrowings
(1,554 ) (1,738 ) (2,032 )
Total net interest income
$ 90,482 $ 90,632 $ 84,108
Less non-GAAP measures:

Tax benefit realized on nontaxable interest income - loans
(139 ) (141 ) (181 )
Tax benefit realized on nontaxable interest income - municipal securities
(105 ) (100 ) (107 )
GAAP measures net interest income
$ 90,238 $ 90,391 $ 83,820

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

Year Ended December 31,

2022

2021

2020

Return on Average Tangible Common Equity

Return on average common equity (GAAP basis)
10.36 % 12.50 % 9.12 %
Impact of excluding average goodwill and other intangibles
4.20 % 4.84 % 4.07 %
Return on average tangible common equity (non-GAAP)
14.56 % 17.34 % 13.19 %

~~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,

2022

2021

Tangible Common Equity to Tangible Assets

Common equity to assets ratio (GAAP basis)
10.48 % 10.64 %
Impact of excluding goodwill and other intangibles
(2.66 )% (2.47 )%
Tangible common equity to tangible assets ratio (non-GAAP)
7.82 % 8.17 %

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,

2022

2021

Tangible Book Value Per Share

Book value per share (GAAP basis)
$ 30.27 $ 32.95
Impact of excluding goodwill and other intangibles
(8.33 ) (8.33 )
Tangible book value per share (non-GAAP)
$ 21.94 $ 24.62

~~Table of Contents~~

~~RESULTS OF OPERATIONS~~

~~Executive Overview~~

~~The Company's 2022 financial highlights include the following:~~

•	Net income available to common shareholders was $34.4 million and diluted earnings per share was $3.23 for the year ended December 31, 2022, compared to net income of $43.5 million and diluted earnings per share of $4.00 for the year ended December 31, 2021.

•	Earnings produced a return on average tangible common equity of 14.56% for 2022, compared to 17.34% for 2021.*

•	~~Period end net loans grew $239.9 million or 12.3% in 2022 as compared to 2021.~~

•	~~Period-end deposits decreased $294.0 million or 10.2% as compared to 2021.~~

•	~~The 2022 provision for loan losses totaled $1.6 million, compared to a negative provision of ($2.8) million in the prior year.~~

•	~~Nonperforming assets as a percentage of total assets were 0.05% at December 31, 2022, down from 0.07% at December 31, 2021.~~

•	~~Net charge-offs to total average loans were 0.04% for 2022, compared to net recoveries to total net average loans of (0.01%) for 2021.~~

*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 2022 was $34.4 million compared to $43.5 million for 2021, a decrease of $9.1 million or 20.9%. Basic and diluted earnings per share were $3.23 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%.

Net income for 2021 was $43.5 million compared to $30.0 million for 2020, an increase of $13.5 million or 44.9%. Basic earnings per share were $4.00 per share for 2021 compared to $2.74 for 2020. Diluted earnings per share were $4.00 for 2021 compared to $2.73 for 2020. This net income produced for 2021 a return on average assets of 1.37%, a return on average common equity of 12.50%, and a return on average tangible common equity of 17.34%.

The decrease in earnings in 2022 was the net result of provision expense of $1.6 million compared to a recovery of provision in 2021 of $2.8 million, a decrease of $2.5 million in mortgage banking income, and increased salaries and employee benefits expenses in 2022 compared to 2021. The increase in earnings in 2021 was primarily the result of the recovery of provision of $2.8 million in 2021 compared to the $8.9 million provision expense in 2020, reduced costs of deposits year over year and an additional $2.0 million of PPP net fees recognized in 2021 over 2020.

~~Net Interest Income~~

Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest-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 2022, 2021, and 2020 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 2022, 2021, and 2020. 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 decreased $150 thousand, or less than one percent, in 2022 from 2021, following an increase of $6.5 million, or 7.8%, in 2021 from 2020. The decrease in net interest income in 2022 was the net result of less PPP fee income in 2022, and higher short-term borrowings costs compared to 2021. Average interest-bearing deposit balances for 2022 were down $32.3 million, or 1.8%, from 2021. The cost of interest-bearing deposits remained constant at 20 basis points because the change in mix of interest-bearing deposits offset the general rise in interest rates during 2022. Increased volume of higher cost short-term borrowings increased the total cost of interest bearing liabilities.

Yields on loans were 4.02% in 2022 compared to 4.44% in 2021. Cost of interest-bearing liabilities was 0.31% in 2022 compared to 0.29% in 2021. Between 2022 and 2021, deposit rates for demand, money market, and savings accounts increased by 1, 13, and 3 basis points, respectively, while time deposits decreased by 17 basis points. The net interest margin was 2.97% for 2022, compared to 3.05% for 2021~~. The decrease in net interest margin was driven by increasing interest rates on both sides of the balance sheet and significantly less loan discount accretion compounded by a changing liquidity mix.~~

In March 2020, the FOMC, in response to the COVID-19 crisis, reduced the target federal funds rate by 1.50% taking the federal funds target rate down to 0.25% where it remained until March 2022, when rates began to rise. By the end of 2022, the FOMC had raised rates seven times for a cumulative total of 4.25% in response to higher inflation.

~~Table of Contents~~

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)~~

Average Balance

Interest Income/Expense(1)

Average Yield/Rate

2022

2021

2020

2022

2021

2020

2022

2021

2020

Loans:

Commercial
$ 292,833 $ 372,538 $ 475,068 $ 11,448 $ 18,819 $ 17,768 3.91 % 5.05 % 3.74 %
Real estate
1,755,982 1,584,856 1,531,195 70,837 67,887 69,525 4.03 4.28 4.54
Consumer
6,578 6,984 8,998 423 475 588 6.43 6.80 6.53
Total loans(2)
2,055,393 1,964,378 2,015,261 82,708 87,181 87,881 4.02 4.44 4.36

Securities:

U.S. Treasury
150,886 57,048 9,010 1,372 507 51 0.91 0.89 0.57
Federal agencies and GSEs
107,311 97,943 72,112 1,348 1,132 1,423 1.26 1.16 1.97
Mortgage-backed and CMOs
355,331 308,158 200,612 5,420 4,142 4,060 1.53 1.34 2.02
State and municipal
68,928 61,698 45,836 1,399 1,272 1,175 2.03 2.06 2.56
Other securities
37,545 24,707 20,382 1,510 1,205 1,098 4.02 4.88 5.39
Total securities
720,001 549,554 347,952 11,049 8,258 7,807 1.53 1.50 2.24

Deposits in other banks
267,381 453,867 188,700 2,491 598 440 0.93 0.13 0.23

Total interest earning assets
3,042,775 2,967,799 2,551,913 96,248 96,037 96,128 3.16 3.24 3.77

Nonearning assets
168,893 208,765 221,094

Total assets
$ 3,211,668 $ 3,176,564 $ 2,773,007

Deposits:

Demand
$ 522,043 $ 476,710 $ 386,790 202 152 344 0.04 0.03 0.09
Money market
688,631 710,948 574,510 1,648 758 2,634 0.24 0.11 0.46
Savings
273,788 243,123 198,313 102 26 117 0.04 0.01 0.06
Time
280,672 366,604 436,081 1,601 2,709 6,634 0.57 0.74 1.52
Total interest bearing deposits
1,765,134 1,797,385 1,595,694 3,553 3,645 9,729 0.20 0.20 0.61

Customer repurchase agreements
24,005 37,632 42,937 26 22 259 0.11 0.06 0.60
Other short-term borrowings
15,629 — 1 633 — — 4.05 — 0.55
Long-term borrowings
28,280 31,878 35,586 1,554 1,738 2,032 5.50 5.45 5.71
Total interest bearing liabilities
1,833,048 1,866,895 1,674,218 5,766 5,405 12,020 0.31 0.29 0.72

Noninterest bearing demand deposits
1,028,871 939,186 746,659
Other liabilities
17,393 22,325 22,777
Shareholders' equity
332,356 348,158 329,353
Total liabilities and shareholders' equity
$ 3,211,668 $ 3,176,564 $ 2,773,007

Interest rate spread
2.85 % 2.95 % 3.05 %
Net interest margin
2.97 % 3.05 % 3.30 %

Net interest income (taxable equivalent basis)
90,482 90,632 84,108
Less: Taxable equivalent adjustment(3)
244 241 288
Net interest income
$ 90,238 $ 90,391 $ 83,820

~~______________________~~

~~(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 2022, 2021, and 2020 was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis.~~

~~Table of Contents~~

~~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)~~

2022 vs. 2021

2021 vs. 2020

Change

Change

Increase

Attributable to

Increase

Attributable to

Interest income

(Decrease)

Rate

Volume

(Decrease)

Rate

Volume

Loans:

Commercial
$ (7,371 ) $ (3,787 ) $ (3,584 ) $ 1,051 $ 5,398 $ (4,347 )
Real estate
2,950 (4,103 ) 7,053 (1,638 ) (4,022 ) 2,384
Consumer
(52 ) (25 ) (27 ) (113 ) 23 (136 )
Total loans
(4,473 ) (7,915 ) 3,442 (700 ) 1,399 (2,099 )
Securities:

U.S. Treasury
865 12 853 456 44 412
Federal agencies and GSEs
216 103 113 (291 ) (703 ) 412
Mortgage-backed and CMOs
1,278 598 680 82 (1,645 ) 1,727
State and municipal
127 (20 ) 147 97 (259 ) 356
Other securities
305 (239 ) 544 107 (111 ) 218
Total securities
2,791 454 2,337 451 (2,674 ) 3,125
Deposits in other banks
1,893 2,233 (340 ) 158 (255 ) 413
Total interest income
211 (5,228 ) 5,439 (91 ) (1,530 ) 1,439

Interest expense

Deposits:

Demand
50 35 15 (192 ) (258 ) 66
Money market
890 915 (25 ) (1,876 ) (2,388 ) 512
Savings
76 72 4 (91 ) (113 ) 22
Time
(1,108 ) (546 ) (562 ) (3,925 ) (2,997 ) (928 )
Total deposits
(92 ) 476 (568 ) (6,084 ) (5,756 ) (328 )
Customer repurchase agreements
4 14 (10 ) (237 ) (208 ) (29 )
Other short-term borrowings
633 — 633 — — —
Long-term borrowings
(184 ) 14 (198 ) (294 ) (89 ) (205 )
Total interest expense
361 504 (143 ) (6,615 ) (6,053 ) (562 )
Net interest income
$ (150 ) $ (5,732 ) $ 5,582 $ 6,524 $ 4,523 $ 2,001

~~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 2020, 2021, and 2022 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, 2020
$ 3,716 $ 181 $ (85 ) $ 3,812
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 years ending (estimated):

2023
744
2024
457
2025
324
2026
252
2027
116
Thereafter (estimated)
112

~~Table of Contents~~

~~Noninterest Income~~

~~For the year ended December 31, 2022, noninterest income decreased $2.2 million, or 10.6%, compared to the year ended December 31, 2021.~~

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 decrease in 2022 was the result of decreased volume for new purchases and refinancing of existing loans as interest rates were increased seven times in 2022. Income from Small Business Investment Companies ("SBICs") investments 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, 2022 reflected lower losses on premises and equipment, net compared to 2021. The 2022 year reflected a write-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 two buildings and the write-down of $218 thousand on an additional property from that acquisition.

Year Ended December 31,

(Dollars in thousands)

2021

2020

$ Change

% Change

Noninterest income:

Wealth management income
$ 6,019 $ 4,789 $ 1,230 25.7 %
Service charges on deposit accounts
2,611 2,557 54 2.1
Interchange fees
4,152 3,213 939 29.2
Other fees and commissions
801 712 89 12.5
Mortgage banking income
4,195 3,514 681 19.4
Securities gains, net
35 814 (779 ) (95.7 )
Income from Small Business Investment Companies
1,972 270 1,702 630.4
Income from insurance investments
1,199 321 878 273.5
Losses on premises and equipment, net
(885 ) (110 ) (775 ) 704.5
Other
932 763 169 22.1
Total noninterest income
$ 21,031 $ 16,843 $ 4,188 24.9 %

Wealth management income increased $1.2 million for 2021 compared to 2020 caused by growth in clients and growth and market value. Interchange fees increased $939 thousand year-over-year as consumers rely more heavily on debit cards for spending versus cash. Mortgage banking income increased $681 thousand for 2021 compared to 2020. The increase in 2021 was the result of continued historically low rates in 2021 resulting in increased application volume for new purchases and refinancing of existing loans. Net securities gains decreased $779 thousand in 2021 compared to 2020. Income from SBIC investments increased $1.7 million as the fund's investment companies improved their performance compared to 2020. The investments held by the SBICs were significantly impacted in 2020 from the pandemic. Income from insurance investments increased $878 thousand compared to 2020. The Company received an additional earnings distribution in 2021 not received in 2020. The year ended December 31, 2021 reflected losses on premises and equipment, net of $588 thousand from the sale of two buildings acquired in the HomeTown acquisition and the write-down of $218 thousand on an additional property based on a current valuation.

~~Table of Contents~~

~~Noninterest Expense~~

~~For the year ended December 31, 2022, noninterest expense increased $5.1 million, or 8.6%, as compared to the year ended December 31, 2021.~~

Year Ended December 31,

(Dollars in thousands)

2022

2021

$ Change

% Change

Noninterest expense:

Salaries and employee benefits
$ 36,382 $ 32,342 $ 4,040 12.5 %
Occupancy and equipment
6,075 6,032 43 0.7
FDIC assessment
903 864 39 4.5
Bank franchise tax
1,953 1,767 186 10.5
Core deposit intangible amortization
1,260 1,464 (204 ) (13.9 )
Data processing
3,310 2,958 352 11.9
Software
1,505 1,368 137 10.0
Other real estate owned, net
3 131 (128 ) (97.7 )
Other
12,695 12,082 613 5.1
Total noninterest expense
$ 64,086 $ 59,008 $ 5,078 8.6 %

Salaries and employee benefits increased $4.0 million in 2022 as compared to 2021. 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 transactions and vendor price increases. Other expenses increased $613 thousand in 2022 compared to 2021 as a result of vendor price increases and investments in technology.

Year Ended December 31,

(Dollars in thousands)

2021

2020

$ Change

% Change

Noninterest expense:

Salaries and employee benefits
$ 32,342 $ 29,765 $ 2,577 8.7 %
Occupancy and equipment
6,032 5,586 446 8.0
FDIC assessment
864 639 225 35.2
Bank franchise tax
1,767 1,702 65 3.8
Core deposit intangible amortization
1,464 1,637 (173 ) (10.6 )
Data processing
2,958 3,017 (59 ) (2.0 )
Software
1,368 1,454 (86 ) (5.9 )
Other real estate owned, net
131 60 71 118.3
Other
12,082 10,705 1,377 12.9
Total noninterest expense
$ 59,008 $ 54,565 $ 4,443 8.1 %

Salaries and employee benefits increased $2.6 million in 2021 as compared to 2020. The year ended December 31, 2021 reflected additional incentive expenses based on performance measurement to goals and increased commissions as the result of increased mortgage production. Occupancy expense increased $446 thousand in 2021 as compared to 2020 primarily related to the full-year costs of the Triangle (North Carolina) banking office in 2021, which opened in late 2020. FDIC assessment expense increased $225 thousand in 2021 compared to 2020 due to balance sheet growth and 2020 benefitted from the final installment of a $75 thousand credit for Small Bank Assessment Credits. Other expenses increased $1.4 million for loan related expenses, investment related expenses, investments in technology and normal expense seasonality.

~~Income Taxes~~

Income taxes on 2022 earnings amounted to $8.9 million, resulting in an effective tax rate of 20.6%, compared to 21.2% in 2021 and 19.2% in 2020. As a result of the enactment of the CARES Act, the Company recognized in the first quarter of 2020 a tax benefit for the net operating loss ("NOL") five-year carryback provision for the NOL acquired in the HomeTown merger. This NOL carryback tax benefit was the reason for the decreased rate in 2020 compared to 2021.

~~The effective tax rate is lowered by income that is not taxable for federal income tax purposes. The primary nontaxable income is from state and municipal securities and loans.~~

~~Table of Contents~~

~~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~~

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, 2022 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, 2022 (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, 2022

Change in net interest income

Change in interest rates

Amount

Percent

Up 4.0%
$ 1,665 1.6 %
Up 3.0%
1,183 1.1
Up 2.0%
751 0.7
Up 1.0%
335 0.3
Flat
— —
Down 1.0%
(2,349 ) (2.2 )
Down 2.0%
(6,725 ) (6.4 )
Down 3.0%
(11,458 ) (11.0 )

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.

~~Table of Contents~~

~~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, 2022 (dollars in thousands):

~~Estimated Changes in Economic Value of Equity~~

December 31, 2022

Change in interest rates

Amount

$ Change

% Change

Up 4.0%
$ 656,307 $ 120,084 22.4 %
Up 3.0%
634,192 97,969 18.3
Up 2.0%
608,096 71,873 13.4
Up 1.0%
575,960 39,737 7.4
Flat
536,223 — —
Down 1.0%
476,684 (59,539 ) (11.1 )
Down 2.0%
398,879 (137,344 ) (25.6 )
Down 3.0%
321,542 (214,681 ) (40.0 )

~~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 0% to 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, 2022 and 2021, there were $100.5 million and $0, respectively, in principal advance obligations to the FHLB. The Company had $170 million in outstanding FHLB letters of credit at December 31, 2022 compared to $275 million in letters of credit at December 31, 2021. 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 10 and long-term borrowing is discussed in Note 11 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 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, 2022.

The Bank also participates with the IntraFi 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.

~~Table of Contents~~

~~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 current rising interest rate environment and has executed 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,

2022

2021

Taxable

Taxable

Equivalent

Equivalent

Yield

Yield

U. S. Treasury

Within 1 year
0.72
%
-0.02
%
1 to 5 years
0.90 0.71
5 to 10 years
1.32 1.22
Over 10 years
— —
Total
0.92 0.69

Federal Agencies:

Within 1 year
0.45 0.29
1 to 5 years
1.29 1.09
5 to 10 years
2.36 1.68
Over 10 years
3.81 2.23
Total
1.60 1.12

Mortgage-backed:

Within 1 year
2.58 3.09
1 to 5 years
3.25 0.82
5 to 10 years
2.02 1.47
Over 10 years
1.56 1.61
Total
1.76 1.35

State and Municipal:

Within 1 year
2.45 2.02
1 to 5 years
1.80 1.91
5 to 10 years
2.07 1.87
Over 10 years
4.10 3.01
Total
2.15 2.01

Corporate Securities:

Within 1 year
2.41 —
1 to 5 years
— 2.42
5 to 10 years
4.95 3.67
Over 10 years
— —
Total
4.91 3.63

Total portfolio
1.73
%
1.29
%

~~The Company had no equity securities at December 31, 2022 and 2021.~~

~~Table of Contents~~

~~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 $91.0 million, or 4.6%, from 2021 to 2022. Average loans decreased $50.9 million or 2.5%, from 2020 to 2021, primarily due to PPP loan forgiveness.~~

~~At December 31, 2022, total loans, net of deferred fees and costs, were $2.2 billion, an increase of $239.9 million, or 12.3%, from the prior year.~~ ~~Excluding PPP loans of $74.0 thousand and $12.2 million at December 31, 2022 and 2021, respectively, loans held for investment increased $252.2 million or 13.0%.~~

~~Loans held for sale and associated with secondary mortgage activity totaled $1.1 million at December 31, 2022 and $8.5 million at December 31, 2021. Loan production volume was $61.0 million and~~ $142.8 million for 2022 and 2021, respectively. These loans were approximately 65% purchase, 35% refinancing for the year ended December 31, 2022 compared to approximately 35% purchase, 65% refinancing for the year ended December 31, 2021.

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, 2022

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
$ 25,395 $ 145,192 $ 26,023 $ 915 $ 197,525
Commercial real estate - owner occupied
42,891 231,270 142,602 1,699 418,462
Commercial real estate - non-owner occupied
39,746 503,210 246,862 37,910 827,728
Residential real estate
18,200 152,871 142,008 25,053 338,132
Home equity
4,915 27,819 61,006 — 93,740
Total real estate
131,147 1,060,362 618,501 65,577 1,875,587

Commercial and industrial
56,236 158,473 80,023 9,515 304,247
Consumer
916 3,837 284 1,578 6,615

Total loans, net of deferred fees and costs
$ 188,299 $ 1,222,672 $ 698,808 $ 76,670 $ 2,186,449

Interest rate sensitivity:

Fixed interest rates
$ 112,589 $ 1,018,439 $ 588,116 $ 26,416 $ 1,745,560
Floating or adjustable rates
75,710 204,233 110,692 50,254 440,889

Total loans, gross
$ 188,299 $ 1,222,672 $ 698,808 $ 76,670 $ 2,186,449

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, 2022 or 2021.

~~Provision for Loan Losses~~

The Company had a provision for loan losses of $1.6 million for the year ended December 31, 2022 compared to a negative provision for loan losses of ($2.8) million for the year ended December 31, 2021, and a provision for loan losses of $8.9 million for the year ended December 31, 2020.

The provision for 2022 was primarily the result of loan growth. The negative provision (recovery) in 2021 was the result of improved economic data supporting changes to the qualitative factors. The provision for 2020 reflects an increase in allowance requirements in response to the declining and uncertain economic landscape caused by the COVID-19 pandemic. 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.

~~Table of Contents~~

~~Allowance for Loan Losses~~

The ALLL was $19.6 million, $18.7 million, and $21.4 million at December 31, 2022, 2021, and 2020, respectively. The ALLL as a percentage of loans at each of those dates was 0.89%, 0.96%, and 1.06%, respectively.

The total amount of the allowance increased year over year as the result of loan growth. However, the allowance as a percent of total loans decreased primarily because of the decrease in the total sum of qualitative factors used in the calculation. The decrease in 2021 compared to 2020 was primarily due to improvements in various qualitative factors, notably economic, used in the determination of the allowance. The provision for 2020 reflected a declining and uncertain landscape caused by the COVID-19 pandemic.

~~In an effort to better evaluate the adequacy of its ALLL, the Company computes its ASC 450,~~ ~~Contingencies~~, 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.

~~The ge~~neral allowance, ASC 450 (FAS 5) reserves to ASC 450 loans, was 0.94% at December 31, 2022, compared to 1.01% at December 31, 2021. On a dollar basis, the reserve was $19.5 million at December 31, 2022, compared to $18.0 million at December 31, 2021. The percentage of the reserve to total loans has decreased due to improved qualitative factors~~. This segment of the allowance represents by far the largest portion of the loan portfolio~~his base salary, and the ~~largest aggregate risk. There is no allowance for performing acquired loans in accordance with generally accepted accounting principles.~~

The Company was considered a small reporting company at the one-time evaluation date for ASU 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments," and was not subject to adoption of this standard until January 1, 2023. Refer to "Note 1 - Summary of Significant Accounting Policies" of the consolidated financial statements for further information. ~~The Company adopted the standard January 1, 2023.~~

The specific allowance, ASC 310-40 (FAS 114) reserves to ASC 310-40 loans was $0 at December 31, 2022 and $7 thousand at December 31, 2021. The reserve related to acquired loans with deteriorated credit quality was $93 thousand at December 31, 2022, compared to $667 thousand at December 31, 2021. 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 years ended December 31, 2022 and 2021 (dollars in thousands):~~

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
Provision for (recovery of) loan 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 %

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, 2020
$ 3,373 $ 1,927 $ 4,340 $ 7,626 $ 4,067 $ 70 21,403
Recovery of provision for loan losses
(745 ) (530 ) (380 ) (493 ) (655 ) (22 ) (2,825 )
Charge-offs
— — (3 ) — (53 ) (90 ) (146 )
Recoveries
40 — 7 8 99 92 246
Balance at December 31, 2021
$ 2,668 $ 1,397 $ 3,964 $ 7,141 $ 3,458 $ 50 $ 18,678

Average Loans
329,893 138,902 385,262 719,355 372,725 6,984 1,953,121
Ratio of net (recoveries) charge-offs to average loans
(0.01 )% 0.00 % (0.00 )% (0.00 )% (0.01 )% (0.03 )% (0.01 )%

~~Table of Contents~~

~~Asset Quality Indicators~~

~~The following table provides certain qualitative indicators relevant to the Company's loan portfolio for the past three years.~~

~~Asset Quality Ratios~~

As of or For the Year Ended December 31,

2022

2021

2020

Allowance to loans (1)
0.89 % 0.96 % 1.06 %
ASC 450/general allowance
0.94 1.01 1.16
Net charge-offs (recoveries) to year-end allowance
3.68 (0.54 ) 3.11
Net charge-offs (recoveries) to average loans
0.04 (0.01 ) 0.03
Nonperforming assets to total assets
0.05 0.07 0.12
Nonperforming loans to loans
0.06 0.11 0.13
Provision to net charge-offs (recoveries)
221.81 2,825.00 1,340.75
Provision (recovery) to average loans
0.08 (0.14 ) 0.44
Allowance to nonperforming loans
1,478.08 840.59 793.88

~~__________________________~~

~~(1) Excluding PPP loans, 0.89%, 0.97%, and 1.19% at December 31, 2022, 2021, and 2020, respectively.~~

~~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 0.06% at December 31, 2022 and 0.11% at December 31, 2021. The decrease in nonperforming loans during 2022 was $699 thousand compared to 2021.~~

Nonperforming assets include nonperforming loans, foreclosed real estate and repossessions. Nonperforming assets represented 0.05% of total assets at December 31, 2022 compared to 0.07% of total assets at December 31, 2021.

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.

~~Impaired Loans~~

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. Total impaired loans, exclusive of purchased credit impaired loans, at December 31, 2022 and 2021 were $5.1 million and $2.2 million, respectively.

~~Troubled Debt Restructurings ("TDRs")~~

~~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.~~

~~There were $4.1 million in TDRs at December 31, 2022 compared to $1.7 million at December 31, 2021. The increase was related to the increase in impaired loans in 2022.~~

~~Table of Contents~~

~~Other Real Estate Owned~~

OREO is carried on the consolidated balance sheets at $27 thousand and $143 thousand as of December 31, 2022 and 2021, 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 ALLL 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 Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits.~~

Period-end total deposits decreased $294.0 million, or 10.2%, during 2022. Customers have utilized funds accumulated over the past two years during and after the pandemic, and have become more rate sensitive as market rates have moved up during the course of the year. This has been a trend for all commercial banks. The Company has only a relatively small portion of its time deposits provided by wholesale sources. Total average deposits increased $57.4 million or 2.1% for 2022 compared to 2021.

~~Average deposits and rates for the years indicated (dollars in thousands):~~

~~Deposits~~

Year Ended December 31,

2022

2021

Average

Average

Balance

Rate

Balance

Rate

Noninterest bearing deposits
$ 1,028,871 — % $ 939,186 — %
Interest bearing accounts:

NOW accounts
$ 522,043 0.04 % $ 476,710 0.03 %
Money market
688,631 0.24 710,948 0.11
Savings
273,788 0.04 243,123 0.01
Time
280,672 0.57 366,604 0.74
Total interest bearing deposits
$ 1,765,134 0.20 % $ 1,797,385 0.20 %
Average total deposits
$ 2,794,005 0.13 % $ 2,736,571 0.13 %

~~Certificates of Deposit over $250,000~~

At December 31, 2022, certificates of deposit that meet or exceed the FDIC insurance limit held by the Company were $87.6 million. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit at December 31, 2022. Amounts of $250 thousand or more were classified by maturity as follows (dollars in thousands):

December 31, 2022

3 months or less
$ 12,863
Over 3 through 6 months
24,250
Over 6 through 12 months
30,469
Over 12 months
19,976
Total
$ 87,558

The Company's total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250 thousand, were approximately $974.0 million and $1.2 billion at December 31, 2022 and 2021, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporti~~ng purposes.~~

~~Table of Contents~~

~~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. 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 Note 10 and Note 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, 2022 and 2021, the Company had short-term debt of $100.5 million and $0, respectively. During 2020 and 2021 as the pandemic continued and stimulus funds were distributed from the government, deposits increased substantially across financial institutions nationwide. Consumers were stockpiling funds as economic uncertainty increased leading into 2022 and the Company had excess liquidity as a result. During 2022, as inflation increased and the effects of the pandemic waned, customers utilized funds from existing accounts which resulted in the Company utilizing supplemental sources of funding.

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, 2022, the Bank's public deposits totaled ~~$220.9 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 2022, the Company had $170.0 mi~~llion 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 $321.2 million at December 31, 2022 and $354.8 million at December 31, 2021.~~

The Company declared and paid quarterly dividends totaling $1.14 per share for 2022, $1.09 per share for 2021, and $1.08 per share for 2020. Cash dividends in 2022 totaled $12.1 million and represented ~~a 35.3% payout of 2022 net income, compared to a 27.2%~~targeted payout ~~in 2021, and a 39.4% payout in 2020.~~

The 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 the 2.5% capital conservation 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. 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 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 regulator~~y reports. The Company and the Bank have not opted 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,

2022

2021

Risk-Based Capital Ratios:

Common equity tier 1 capital ratio
11.70 % 12.43 %
Tier 1 capital ratio
12.86 % 13.73 %
Total capital ratio
13.67 % 14.61 %

Leverage Capital Ratios:

Tier 1 leverage ratio
10.36 % 9.13 %

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, 2022 and 2021.

~~Table of Contents~~

~~Stock Repurchase Programs~~

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. In 2020, the Company repurchased 140,526 shares at an average cost of $35.44 per share for a total cost of $5.0 million.

On January 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 $10 million of the Company's common stock through December 31, 2023.

~~CONTRACTUAL OBLIGATIONS~~

~~The following items are contractual obligations of the Company as of December 31, 2022 (dollars in thousands):~~

Payments Due By Period

Total
Under 1 Year
1-3 Years
3-5 Years
More than 5 years

Time deposits
$ 257,933 $ 171,415 $ 41,758 $ 38,484 $ 6,276
Repurchase agreements
370 370 — — —
Operating leases
3,720 1,002 1,089 487 1,142
Junior subordinated debt
28,334 — — — 28,334

~~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 11 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,
Off-Balance Sheet Commitments
2022
2021

Commitments to extend credit
$ 635,851 $ 654,436
Standby letters of credit
12,897 10,201
Mortgage loan rate-lock commitments
1,920 10,891

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.~~

~~Table of Contents~~

~~ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~

~~Selected Financial Results (Unaudited)~~

~~(dollars in thousands, except per share amounts)~~

December 31,

2022

2021

2020

2019

2018

Results of Operations:

Interest income
$ 96,004 $ 95,796 $ 95,840 $ 92,855 $ 68,768
Interest expense
5,766 5,405 12,020 15,728 9,674
Net interest income
90,238 90,391 83,820 77,127 59,094
Provision for (recovery of) loan losses
1,597 (2,825 ) 8,916 456 (103 )
Noninterest income
18,807 21,031 16,843 15,170 13,274
Noninterest expense
64,086 59,008 54,565 66,074 44,246
Income before income tax provision
43,362 55,239 37,182 25,767 28,225
Income tax provision
8,934 11,713 7,137 4,861 5,646
Net income
$ 34,428 $ 43,526 $ 30,045 $ 20,906 $ 22,579

Financial Condition:

Assets
$ 3,065,902 $ 3,334,597 $ 3,050,010 $ 2,478,550 $ 1,862,866
Loans, net of unearned income
2,186,449 1,946,580 2,015,056 1,830,815 1,357,476
Securities
620,713 700,523 474,806 387,825 339,730
Deposits
2,596,328 2,890,353 2,611,330 2,060,547 1,566,227
Shareholders' equity
321,174 354,792 337,894 320,258 222,542

Per Share Information:

Earnings per share, basic
$ 3.23 $ 4.00 $ 2.74 $ 1.99 $ 2.60
Earnings per share, diluted
3.23 4.00 2.73 1.98 2.59
Cash dividends paid
1.14 1.09 1.08 1.04 1.00
Book value
30.27 32.95 30.77 28.93 25.52
Book value, tangible (1)
21.94 24.62 22.47 20.64 20.38
Average common shares outstanding - basic
10,672,314 10,873,817 10,981,623 10,531,572 8,698,014
Average common shares outstanding - diluted
10,674,613 10,877,231 10,985,790 10,541,337 8,708,462

Selected Ratios:

Return on average assets
1.07 % 1.37 % 1.08 % 0.91 % 1.24 %
Return on average common equity
10.36 % 12.50 % 9.12 % 7.16 % 10.56 %
Return on average tangible common equity (1)
14.56 % 17.34 % 13.19 % 10.43 % 13.49 %
Dividend payout ratio
35.27 % 27.17 % 39.41 % 52.45 % 38.54 %
Efficiency ratio (1)
57.37 % 51.05 % 52.80 % 57.25 % 59.20 %
Net interest margin
2.97 % 3.05 % 3.30 % 3.68 % 3.49 %

Asset Quality Ratios:

Allowance for loan losses to period end loans
0.89 % 0.96 % 1.06 % 0.72 % 0.94 %
Allowance for loan losses to period end nonperforming loans
1,478.08 % 840.59 % 793.88 % 570.59 % 1,101.98 %
Nonperforming assets to total assets
0.05 % 0.07 % 0.12 % 0.15 % 0.11 %
Net charge-offs (recoveries) to average loans
0.04 % (0.01 )% 0.03 % 0.01 % 0.05 %

Capital Ratios:

Total risk-based capital ratio
13.67 % 14.61 % 15.18 % 14.04 % 15.35 %
Common equity tier 1 capital ratio
11.70 % 12.43 % 12.36 % 11.56 % 12.55 %
Tier 1 capital ratio
12.86 % 13.73 % 13.78 % 12.98 % 14.46 %
Tier 1 leverage ratio
10.36 % 9.13 % 9.48 % 10.75 % 11.62 %

~~(1) Refer to Management's Discussion and Analysis Non-GAAP section for calculations.~~

~~Table of Contents~~

~~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 Subsidiary (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the ~~three years~~other named executive officers initially was reduced to an amount equal to 22.5% of their respective base salaries.

The financial target and thresholds to activate incentive compensation payments for 2023 performance are outlined below:

Corporate Performance Measure	Weighting		Threshold		Target		Maximum
Core EPS – Original Target		100%	$	3.37	$	3.50	$	3.63

Core EPS – Revised Target		100%	$	2.63	$	2.74	$	2.83

The actual calculated Core EPS for 2023 was $2.70 per share. The Committee elected to pay at the maximum threshold for 2023 in recognition of the ~~period ended December 31, 2022,~~team's efforts including the pending merger with Atlantic Union.

For the Chief Executive Officer, the revised targeted Core EPS of $2.74 would have resulted in eligibility for a $162,000 incentive compensation payment, in a combination of cash and restricted stock grants. The minimum threshold to receive an incentive payment (Core EPS of $2.63) would have resulted in a $80,871 payment eligibility, and the ~~related notes~~maximum threshold (Core EPS of $2.83) would have resulted in a $243,000 payment eligibility. As discussed above, the payout was approved at the maximum threshold, resulting in a total incentive payment to the ~~consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly,~~Chief Executive Officer of 40.5% of his base salary, or $243,000, paid in ~~all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for~~cash.

For each of the ~~three years~~named executive officers other than the Chief Executive Officer, the revised targeted Core EPS of $2.74 would have resulted in ~~the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.~~

~~We have also audited, in accordance with the standards~~a target incentive payment equal to 22.5% of the ~~Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in~~ ~~Internal Control~~ — ~~Integrated Framework~~ ~~issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013,~~respective base salaries for Messrs. Farrar, Martin Jung, and ~~our report dated March 14, 2023 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.~~

~~Basis for Opinion~~

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’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 errorMs. Joyce. The target payment would have decreased 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.

~~Table of Contents~~

~~Critical Audit Matters~~

~~The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that~~increased proportionately if Core EPS 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 5 (Allowance for Loan Losses and Reserve for Unfunded Lending Commitments) to the consolidated financial statements, the Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio. The Company’s allowance for loan losses has two basic components, the formula allowance and the specific allowance. For loans that are not specifically identified for impairment, the formula allowance uses historical loss experience along with various qualitative factors to develop adjusted loss factors for each loan segment. 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. Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio. Management evaluates qualitative factors, primarily considering national, regional and local economic trends and conditions; concentrations of credit; 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; experience of lending officers, other lending staff and loan review; and legal, regulatory and collateral factors.

Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

~~How We Addressed the Matter in Our Audit~~

~~The primary audit procedures we performed to address this critical audit matter included:~~

●

Testing the effectiveness of controls over the evaluation of qualitative factors, including management's development and review of the data inputs used as the basis for the allocation factors and management's review and approval of the reasonableness of the assumptions used to develop the qualitative adjustments

●	~~Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included:~~

●

~~Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.~~

●

~~Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors.~~

●

~~Evaluating the qualitative factors for directional consistency and for reasonableness.~~

●

~~Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.~~

~~/s/ YOUNT, HYDE & BARBOUR, P.C.~~

~~We have served as the Company's auditor since 2002.~~

~~Richmond, Virginia~~

~~March 14, 2023~~

~~Table of Contents~~

~~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’s (the Company) internal control over financial reporting as of December 31, 2022, 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, 2022, 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, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements of the Company and our report dated March 14, 2023 expressed an unqualified opinion.

~~Basis for Opinion~~

The Company’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~~’~~s Annual Report on Internal Control over Financial Reporting~~. Our responsibility is to express an opinion on the Company’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.~~

~~Richmond, Virginia~~

~~March 14, 2023~~

~~Table of Contents~~

~~American National Bankshares Inc.~~

~~Consolidated Balance Sheets~~

~~As of December 31, 2022 and 2021~~

~~(Dollars in thousands, except per share data)~~

2022

2021

ASSETS

Cash and due from banks
$ 32,207 $ 23,095
Interest-bearing deposits in other banks
41,133 483,723
Securities available for sale, at fair value
608,062 692,467
Restricted stock, at cost
12,651 8,056
Loans held for sale
1,061 8,481
Loans, net of deferred fees and costs
2,186,449 1,946,580
Less allowance for loan losses
(19,555 ) (18,678 )
Net loans
2,166,894 1,927,902
Premises and equipment, net
32,900 34,182
Assets held-for-sale
1,382 1,382
Other real estate owned, net of valuation allowance
27 143
Goodwill
85,048 85,048
Core deposit intangibles, net
3,367 4,627
Bank owned life insurance
29,692 29,107
Other assets
51,478 36,384
Total assets
$ 3,065,902 $ 3,334,597

LIABILITIES and SHAREHOLDERS' EQUITY

Liabilities:

Noninterest-bearing deposits
$ 1,010,602 $ 1,009,081
Interest-bearing deposits
1,585,726 1,881,272
Total deposits
2,596,328 2,890,353
Customer repurchase agreements
370 41,128
Other short-term borrowings
100,531 —
Junior subordinated debt
28,334 28,232
Other liabilities
19,165 20,092
Total liabilities
2,744,728 2,979,805

Commitments and contingencies

Shareholders' equity:

Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding
— —
Common stock, $1 par value, 20,000,000 shares authorized, 10,608,781 shares outstanding at December 31, 2022 and 10,766,967 shares outstanding at December 31, 2021
10,538 10,710
Capital in excess of par value
141,948 147,777
Retained earnings
223,664 201,380
Accumulated other comprehensive loss, net
(54,976 ) (5,075 )
Total shareholders' equity
321,174 354,792
Total liabilities and shareholders' equity
$ 3,065,902 $ 3,334,597

~~The accompanying notes are an integral part of the consolidated financial statements.~~

~~Table of Contents~~

~~American National Bankshares Inc.~~

~~Consolidated Statements of Income~~

~~For the Years Ended December 31, 2022, 2021, and 2020~~

~~(Dollars in thousands, except per share data)~~

2022

2021

2020

Interest and Dividend Income:

Interest and fees on loans
$ 82,568 $ 87,040 $ 87,700
Interest and dividends on securities:

Taxable
10,065 7,309 6,764
Tax-exempt
407 385 433
Dividends
473 464 503
Other interest income
2,491 598 440
Total interest and dividend income
96,004 95,796 95,840
Interest Expense:

Interest on deposits
3,553 3,645 9,729
Interest on short-term borrowings
659 22 259
Interest on subordinated debt
— 203 489
Interest on junior subordinated debt
1,554 1,535 1,543
Total interest expense
5,766 5,405 12,020
Net Interest Income
90,238 90,391 83,820
Provision for (recovery of) loan losses
1,597 (2,825 ) 8,916
Net Interest Income after Provision for (Recovery of) Loan Losses
88,641 93,216 74,904
Noninterest Income:

Wealth management income
6,521 6,019 4,789
Service charges on deposit accounts
2,676 2,611 2,557
Interchange fees
4,107 4,152 3,213
Other fees and commissions
906 801 712
Mortgage banking income
1,666 4,195 3,514
Securities gains, net
— 35 814
Income from Small Business Investment Companies
1,409 1,972 270
Income from insurance investments
747 1,199 321
Losses on premises and equipment, net
(228 ) (885 ) (110 )
Other
1,003 932 763
Total noninterest income
18,807 21,031 16,843
Noninterest Expense:

Salaries and employee benefits
36,382 32,342 29,765
Occupancy and equipment
6,075 6,032 5,586
FDIC assessment
903 864 639
Bank franchise tax
1,953 1,767 1,702
Amortization of intangible assets
1,260 1,464 1,637
Data processing
3,310 2,958 3,017
Software
1,505 1,368 1,454
Other real estate owned, net
3 131 60
Other
12,695 12,082 10,705
Total noninterest expense
64,086 59,008 54,565
Income Before Income Taxes
43,362 55,239 37,182
Income Taxes
8,934 11,713 7,137
Net Income
$ 34,428 $ 43,526 $ 30,045
Net Income Per Common Share:

Basic
$ 3.23 $ 4.00 $ 2.74
Diluted
$ 3.23 $ 4.00 $ 2.73
Weighted Average Common Shares Outstanding:

Basic
10,672,314 10,873,817 10,981,623
Diluted
10,674,613 10,877,231 10,985,790

~~The accompanying notes are an integral part of the consolidated financial statements.~~

~~Table of Contents~~

~~American National Bankshares Inc.~~

~~Consolidated Statements of Comprehensive Income (Loss)~~

~~For the Years Ended December 31, 2022, 2021, and 2020~~

~~(Dollars in thousands)~~

Year Ended December 31,

2022

2021

2020

Net income
$ 34,428 $ 43,526 $ 30,045

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale
(68,877 ) (12,236 ) 7,213
Tax effect
14,868 2,643 (1,557 )

Reclassification adjustment for gains on sale or call of securities
— (35 ) (814 )
Tax effect
— 7 176

Unrealized gains (losses) on cash flow hedges
4,125 2,068 (2,210 )
Tax effect
(866 ) (434 ) 448

Change in unfunded pension liability
1,082 590 (413 )
Tax effect
(233 ) (115 ) 77

Other comprehensive income (loss)
(49,901 ) (7,512 ) 2,920

Comprehensive income (loss)
$ (15,473 ) $ 36,014 $ 32,965

~~The accompanying notes are an integral part of the consolidated financial statements.~~

~~Table of Contents~~

~~American National Bankshares Inc.~~

~~Consolidated Statements of Changes in Shareholders' Equity~~

~~For the Years Ended December 31, 2022, 2021, and 2020~~

~~(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, 2019
$ 11,019 $ 158,244 $ 151,478 $ (483 ) $ 320,258

Net income
— — 30,045 — 30,045
Other comprehensive income
— — — 2,920 2,920
Stock repurchased (140,526 shares)
(141 ) (4,840 ) — — (4,981 )
Stock options exercised (2,573 shares)
3 40 — — 43
Vesting of restricted stock (18,487 shares)
18 (18 ) — — —
Equity based compensation (48,780 shares)
27 1,424 — — 1,451
Cash dividends paid, $1.08 per share
— — (11,842 ) — (11,842 )

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

~~The accompanying notes are an integral part of the consolidated financial statements.~~

~~Table of Contents~~

~~American National Bankshares Inc.~~

~~Consolidated Statements of Cash Flows~~

~~For the Years Ended December 31, 2022, 2021, and 2020~~

~~(Dollars in thousands)~~

2022

2021

2020

Cash Flows from Operating Activities:

Net income
$ 34,428 $ 43,526 $ 30,045
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for (recovery of) loan losses
1,597 (2,825 ) 8,916
Depreciation
2,246 2,243 2,188
Net accretion of acquisition accounting adjustments
(1,597 ) (5,236 ) (3,812 )
Core deposit intangible amortization
1,260 1,464 1,637
Net amortization of securities
1,646 1,846 1,186
Net gain on sale or call of securities available for sale
— (35 ) (814 )
Gain on sale of loans held for sale
(1,666 ) (4,195 ) (3,514 )
Proceeds from sales of loans held for sale
70,059 154,041 155,705
Originations of loans held for sale
(60,973 ) (142,736 ) (165,755 )
Net (gain) loss on other real estate owned
(2 ) 111 (4 )
Net loss on sale, write-down or disposal of premises and equipment
228 885 110
Equity based compensation expense
1,492 1,432 1,451
Earnings on bank owned life insurance
(585 ) (625 ) (665 )
Deferred income tax (benefit) expense
(385 ) 808 (640 )
Net change in other assets
(2,484 ) 245 (3,421 )
Net change in other liabilities
2,677 146 (2,387 )
Net cash provided by operating activities
47,941 51,095 20,226

Cash Flows from Investing Activities:

Proceeds from sales of securities available for sale
— 561 5,811
Proceeds from maturities, calls and paydowns of securities available for sale
120,052 192,672 208,429
Purchases of securities available for sale
(106,170 ) (433,690 ) (295,109 )
Net change in restricted stock
(4,595 ) 659 (85 )
Proceeds from sales of purchased credit impaired loans
— — 4,939
Net decrease (increase) in loans
(238,993 ) 73,836 (186,635 )
Net change in collateral with other financial institutions
3,200 1,700 (2,300 )
Proceeds from sale of premises and equipment
4 2,031 1
Purchases of premises and equipment
(1,196 ) (1,000 ) (2,694 )
Proceeds from sales of other real estate owned
118 704 195
Net cash used in investing activities
(227,580 ) (162,527 ) (267,448 )

Cash Flows from Financing Activities:

Net change in noninterest-bearing deposits
1,521 178,987 251,488
Net change in interest-bearing deposits
(295,496 ) 100,114 299,476
Net change in customer repurchase agreements
(40,758 ) (1,423 ) 2,076
Net change in short-term borrowings
100,531 — —
Net change in long-term borrowings
— (7,500 ) —
Common stock dividends paid
(12,144 ) (11,827 ) (11,842 )
Repurchase of common stock
(7,505 ) (8,810 ) (4,981 )
Proceeds from exercise of stock options
12 89 43
Net cash (used in) provided by financing activities
(253,839 ) 249,630 536,260

Net (Decrease) Increase in Cash and Cash Equivalents
(433,478 ) 138,198 289,038

Cash and Cash Equivalents at Beginning of Period
506,818 368,620 79,582

Cash and Cash Equivalents at End of Period
$ 73,340 $ 506,818 $ 368,620

~~The accompanying notes are an integral part of the consolidated financial statements.~~

~~Table of Contents~~

~~American National Bankshares Inc.~~

~~Notes to Consolidated Financial Statements~~

~~December 31, 2022, 2021, and 2020~~

~~Note~~ 1 – ~~Summary 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 loan losses, goodwill and intangible assets, and accounting for acquired loans with specific credit-related deterioration.

The accompanying consolidated financial statements include financial information related to the Company and 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 in the consolidated financial statements. Accounting guidance states that if a business enterprise is the primary beneficiary of a 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 the 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. ~~Refer to Note~~ 11 ~~for further details concerning variable interest entities.~~

~~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.~~

~~Interest-bearing Deposits in Other Banks~~

~~Interest-bearing deposits in other banks mature within~~ ~~one~~ ~~year and are carried at cost.~~

~~Securities~~

Certain debt 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 at fair value with changes in 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 or to the earliest call with premiums. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

~~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 are carried at fair value with changes 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.

~~Table of Contents~~

~~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 loans 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.

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 loan 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.

~~Table of Contents~~

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 credit quality since origination and for which the Company does~~ ~~not~~ ~~expect 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, such that there is~~ no ~~carryover of the seller's allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.~~

Such purchased 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 income over the remaining life of the loan or pool (accretable yield). The excess of the loan's or pool's contractual principal and interest over expected cash flows is ~~not~~ ~~recorded (nonaccretable difference).~~

~~Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is~~ less than the ~~carrying amount,~~target to a ~~loss is recorded as a provision for loan losses. If the present value~~minimum Core EPS of ~~expected cash flows is greater~~$2.63 or more 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~~target to a ~~borrower's financial condition, management~~ ~~may~~ ~~grant~~maximum of Core EPS of $2.83. The revised maximum incentive payment eligibility, in combination of cash and restricted stock grants, for 2023 was 33.75% of base salary for Messrs. Farrar, Martin, Jung, and Ms. Joyce.

As discussed above, the Committee approved a ~~concession 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.

~~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 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. 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, and portfolio concentrations. 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 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.

~~Table of Contents~~

~~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 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~~payout at the ~~time.~~

On ~~January 1, 2023,~~ maximum threshold for incentive payment eligibility under the ~~Company adopted Accounting Standards Update ("ASU")~~ ~~No.~~~~2016~~-~~13,~~ ~~"Financial Instruments - Credit Losses (Topic~~ ~~326~~~~): Measurement~~program. Accordingly, Messrs. Farrar, Martin, Jung, and Ms. Joyce received cash payments of ~~Credit Losses on Financial Instruments." The new accounting standard replaced the methodology described above~~$128,996, $118,058, $104,288, and ~~reflected in the calculations for the years ended~~ ~~December 31, 2022,~~ ~~2021,~~ ~~and~~ ~~2020.~~ The current expected credit losses ("CECL") model methodology requires consideration of reasonable and supportable information to estimate losses over the life of the loan. Management estimates the Day 1 ~~adjustment to be within a reasonable range of $4.0 to $6.0 million.~~

~~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 represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired. The Company follows~~ ~~ASC~~ ~~350,~~ ~~Intangibles - Goodwill and Other,~~ ~~which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The Company performs its annual analysis as of~~ ~~June 30~~ ~~each year. Goodwill is~~ ~~not~~ amortized, but is subject to at 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 are amortized over their useful lives. Core deposit and other intangible 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 other assets and other liabilities on the Company’s Consolidated Balance Sheets. Periodic operating lease costs are recorded in occupancy expenses of premises on the 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.

~~Wealth Management Assets~~

~~Securities and other property held by the wealth management segment in a fiduciary or agency capacity are~~ ~~not~~ ~~assets of the Company and are~~ ~~not~~ ~~included in the accompanying consolidated financial statements.~~

~~Table of Contents~~

~~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.

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,~~~~2022~~ ~~and~~ ~~2021.~~

~~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.

~~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.

~~Table of Contents~~

~~Advertising and Marketing Costs~~

~~Advertising and marketing costs are expensed as 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. There were no ~~such acquisition related costs for the years ended~~ ~~December 31, 2022,~~ ~~2021,~~ or ~~2020.~~

~~Derivative Financial Instruments~~

The Company uses derivatives primarily to manage risk associated with changing interest rates. The Company's derivative financial instruments consist of interest rate swaps that qualify as cash flow hedges of the Company's trust preferred capital notes. The Company recognizes 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 is reported as a component of other comprehensive income, net of deferred income taxes, and is reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.

~~Reclassifications~~

~~Certain reclassifications have been made in prior years' financial statements to conform to classifications used in the current year. There were~~ no ~~material reclassifications.~~

~~Recent Accounting Pronouncements~~

~~During~~ ~~June 2016,~~ ~~the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")~~ ~~2016~~-~~13,~~ ~~"Financial Instruments – Credit Losses (Topic~~ ~~326~~): Measurement of Credit Losses on Financial Instruments." The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. The Company adopted ASU ~~2016~~-13 ~~as of~~ ~~January 1, 2023~~ in accordance with the required implementation date. The final adjustment is estimated to be within a reasonable range of $4.0 million to $6.0 million and consists of an adjustment to retained earnings, net of deferred income taxes, and adjustments to the allowance for credit losses on loans as well as an adjustment to the Company’s reserve for unfunded loan commitments. Subsequent to adoption, the Company will record adjustments to its allowances for credit losses and reserves for unfunded commitments through the provision for credit losses in the consolidated statements of income.

~~The Company is utilizing a~~ ~~third~~~~-party model to tabulate its estimate of current expected credit losses. In accordance with ASC~~ ~~326,~~ the Company has segmented its loan portfolio based on similar risk characteristics. The Company primarily utilizes market data for its reasonable and supportable forecasting of current expected credit losses. To further adjust the allowance for credit losses for expected losses ~~not~~ ~~already included within the quantitative component of the calculation, the Company~~ ~~may~~ consider the following qualitative adjustment factors: risk selection and lending policies and procedures, economic trends, experience and depth of credit department management and staff, quality of loan review systems and changes in regulatory, legal and competition. The Company’s CECL implementation process was overseen by executive management and included an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience. During ~~2022,~~ ~~the Company calculated its current expected credit losses model parallel to its incurred loss model in order to further refine the methodology and model. In addition, the Company engaged a~~ ~~third~~~~-party to perform a comprehensive model validation.~~

~~Effective~~ ~~November 25, 2019,~~ ~~the SEC adopted Staff Accounting Bulletin (SAB)~~ ~~119.~~ ~~SAB~~ ~~119~~ ~~updated portions of SEC interpretative guidance to align with FASB 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.~~

~~Table of Contents~~

In ~~March 2020,~~ ~~FASB issued ASU~~ ~~2020~~-04 ~~"Reference Rate Reform (Topic~~ ~~848~~): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These amendments 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 LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of ~~March 12, 2020~~ ~~through~~ ~~December 31, 2022.~~ ~~Subsequently, in~~ ~~January 2021,~~ ~~the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)~~ ~~No.~~~~2021~~-01 ~~"Reference Rate Reform (Topic~~ ~~848~~~~): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic~~ ~~848~~ ~~for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic~~ ~~848~~ ~~to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity~~ ~~may~~ ~~elect to apply ASU~~ ~~No.~~~~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 period 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~~ ~~No.~~~~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 adopted ASU on~~ ~~January 1, 2022~~ ~~and identified and transitioned all loans directly or indirectly influenced by LIBOR as of~~ ~~December 31, 2022.~~ ~~The adoption of ASU~~ ~~2020~~-04 ~~did~~ ~~not~~ ~~have a material effect on the Company’s consolidated financial statements for the transition away from LIBOR for its loan and other financial instruments.~~

In ~~December 2022,~~ ~~the FASB issued ASU~~ ~~2022~~-~~06,~~ ~~"Reference Rate Reform (Topic~~ ~~848~~~~): Deferral of the Sunset Date of Topic~~ ~~848".~~ ~~ASU~~ ~~2022~~-06 ~~extends the period of time preparers can utilize the reference rate reform relief guidance in Topic~~ ~~848.~~ ~~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.~~ ~~The Company has assessed ASU~~ ~~2022~~-06 ~~and does~~ ~~not~~ ~~expect it to have a material impact to the Company's consolidated financial statements.~~

~~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~~ ~~848~~ ~~from~~ ~~December 31, 2022,~~ to ~~December 31, 2024,~~ ~~after which entities will~~ no ~~longer be permitted to apply the relief in Topic~~ ~~848.~~ ~~The ASU is effective for all entities upon issuance. The Company is assessing ASU~~ ~~2022~~-06 ~~and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.~~

In ~~March 2022,~~ ~~FASB issued Accounting Standards Update ASU~~ ~~No.~~~~2022~~-~~02,~~ ~~"Financial Instruments-Credit Losses (Topic~~ ~~326~~~~), Troubled Debt Restructurings and Vintage Disclosures." ASU~~ ~~2022~~-02 ~~addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU~~ ~~2016~~-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings 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 vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of Troubled Debt Restructurings ("TDRs"), an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU ~~2016~~-~~13,~~ ~~ASU~~ ~~2022~~-02 ~~is effective for fiscal years beginning after~~ ~~December 15, 2022,~~ ~~including interim periods within those fiscal years. For entities that have~~ ~~not~~ ~~yet adopted ASU~~ ~~2016~~-~~13,~~ ~~the effective dates for ASU~~ ~~2022~~-02 ~~are the same as the effective dates in ASU~~ ~~2016~~-~~13.~~ ~~Early adoption is permitted if an entity has adopted ASU~~ ~~2016~~-~~13.~~ ~~An entity~~ ~~may~~ ~~elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company adopted this standard on~~ ~~January 1, 2023.~~ ~~The adoption of ASU~~ ~~No.~~~~2022~~-02 ~~will~~ ~~not~~ ~~have a material affect on the Company's consolidated financial statements.~~

~~Note~~ 2 ~~– Restrictions on Cash~~

~~The Company is a member of the Federal Reserve System and prior to~~ ~~March 2020~~ ~~was required to maintain certain levels of its cash and cash equivalents as reserves based on regulatory requirements.~~ ~~The gross reserve requirement and the required balances with the Federal Reserve Bank of Richmond were~~ ~~zero~~ at ~~December 31, 2022~~ ~~and~~ ~~2021~~~~, respectively.~~

~~The Company maintains cash accounts in other commercial banks. The amount on deposit with correspondent institutions at~~ ~~December 31, 2022~~ ~~exceeded the insurance limits of the FDIC by$2.3 million.~~

~~Table of Contents~~

~~Note~~ 3 ~~- Securities~~

~~The amortized cost and estimated fair value of investments in securities at~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021~~ ~~were as follows (dollars in thousands):~~

December 31, 2022

Amortized

Unrealized

Unrealized

Cost

Gains

Losses

Fair Value

Securities available for sale:

U.S. Treasury
$ 152,033 $ — $ 12,606 $ 139,427
Federal agencies and GSEs
90,363 4 7,019 83,348
Mortgage-backed and CMOs
336,393 1 42,301 294,093
State and municipal
69,023 12 5,312 63,723
Corporate
31,299 — 3,828 27,471
Total securities available for sale
$ 679,111 $ 17 $ 71,066 $ 608,062

~~The Company had~~ no ~~equity securities at~~ ~~December 31, 2022~~ or ~~December 31, 2021~~.

(Dollars in thousands)
December 31, 2021

Amortized

Unrealized

Unrealized

Cost

Gains

Losses

Fair Value

Securities available for sale:

U.S. Treasury
$ 150,751 $ — $ 1,174 $ 149,577
Federal agencies and GSEs
104,518 993 931 104,580
Mortgage-backed and CMOs
357,981 2,854 4,525 356,310
State and municipal
65,939 1,021 488 66,472
Corporate
15,450 218 140 15,528
Total securities available for sale
$ 694,639 $ 5,086 $ 7,258 $ 692,467

~~The amortized cost and estimated fair value of investments in debt securities at~~ ~~December 31, 2022~~~~, 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

Amortized

Cost

Fair Value

Due in one year or less
$ 44,859 $ 43,579
Due after one year through five years
208,162 191,338
Due after five years through ten years
74,582 65,037
Due after ten years
15,114 14,015
Mortgage-backed and CMOs
336,394 294,093
$ 679,111 $ 608,062

~~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,

2022

2021

2020

Gross realized gains
$ — $ 35 $ 814
Gross realized losses
— — —
Proceeds from sales of securities
— 561 5,811

~~Securities with a carrying value of approximately $118.9 million~~ ~~and $150.4 million at~~ ~~December 31, 2022~~ ~~and~~ ~~2021,~~ respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. FHLB letters of credit were used as additional collateral in the amounts of $170.0 million at ~~December 31, 2022~~ ~~and $275.0 million at~~ ~~December~~ ~~31,~~~~2021.~~

~~Table of Contents~~

~~Temporarily Impaired Securities~~

The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at ~~December 31, 2022~~. The reference point for determining when securities are in an unrealized loss position is 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 sale securities that have been in a continuous unrealized loss position are as follows (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
$ 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

~~U.S. Treasury~~~~: The unrealized losses on the Company's investment in 22 U.S. Treasury securities were caused by normal market fluctuations.~~ ~~Nineteen~~ ~~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 does~~ ~~not~~ ~~consider those investments to be other-than-temporarily impaired at~~ ~~December 31, 2022~~.

~~Federal agencies and GSEs:~~ ~~The unrealized losses on the Company's investment in 43 government sponsored entities ("GSEs") were caused by normal market fluctuations. Twenty-one~~ ~~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 does~~ ~~not~~ ~~consider those investments to be other-than-temporarily impaired at~~ ~~December 31, 2022~~.

~~Mortgage-backed securities:~~ ~~The unrealized losses on the Company's investment in 138 GSE mortgage-backed securities were caused by normal market fluctuations. 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 impaired at~~ ~~December 31, 2022~~.

~~Collateralized Mortgage Obligations:~~ ~~The unrealized losses associated with 56 GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. Thirty-five~~ ~~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 impaired at~~ ~~December 31, 2022~~.

~~State and municipal securities~~~~: The unrealized losses on 81 state and municipal securities were caused by normal market fluctuations. Forty-six~~ ~~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 impaired at~~ ~~December 31, 2022~~.

~~Corporate securities~~~~: The unrealized losses on 13 corporate securities were caused by normal market fluctuations and~~ ~~not~~ ~~credit deterioration.~~ ~~Fourof these securities were in an unrealized loss position for~~ 12 ~~months or more.~~ ~~These securities 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 impaired at~~ ~~December 31, 2022~~.

~~Table of Contents~~

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. Restricted equity securities consist of Federal Reserve Bank of Richmond stock in the amount of ~~$6.5 million as of~~ ~~December 31, 2022~~ ~~and~~ ~~2021~~ ~~and FHLB stock in the amount of $6.1 million and $1.6 million as of~~ ~~December 31, 2022~~ ~~and~~ ~~2021,~~ ~~respectively.~~

~~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,~~~~2021~~ ~~(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
$ 149,577 $ 1,174 $ 149,577 $ 1,174 $ — $ —
Federal agencies and GSEs
73,640 931 63,042 512 10,598 419
Mortgage-backed and CMOs
253,444 4,525 213,292 3,014 40,152 1,511
State and municipal
26,646 488 23,341 354 3,305 134
Corporate
7,611 140 7,611 140 — —
Total
$ 510,918 $ 7,258 $ 456,863 $ 5,194 $ 54,055 $ 2,064

~~Other-Than-Temporary-Impaired Securities~~

~~As of~~ ~~December 31, 2022~~ ~~and~~ ~~2021,~~ ~~there were no securities classified as other-than-temporary impaired.~~

~~Note~~ 4 ~~– Loans~~

~~Loans, excluding loans held for sale, at~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021~~ ~~were comprised of the following (dollars in thousands):~~

December 31,

2022

2021

Commercial
$ 304,247 $ 299,773
Commercial real estate:

Construction and land development
197,525 134,221
Commercial real estate - owner occupied
418,462 391,517
Commercial real estate - non-owner occupied
827,728 731,034
Residential real estate:

Residential
338,132 289,757
Home equity
93,740 93,203
Consumer
6,615 7,075
Total loans, net of deferred fees and costs
$ 2,186,449 $ 1,946,580

~~Commercial includes approximately $74 thousand and $12.2 million in net PPP loans at~~ ~~December 31, 2022~~ ~~and~~ ~~2021,~~ ~~respectively. The PPP loan balances at~~ ~~December 31, 2022~~ ~~and~~ ~~2021~~ ~~included $5 thousand and $282 thousand,~~$115,172, respectively in ~~unamortized net PPP fees. Net deferred loan costs included~~cash payments.

Beginning in ~~the above loan categories are $202 thousand for~~ ~~2022~~ ~~and $616 thousand for~~ ~~2021~~ ~~in all other categories (excludes PPP fees and costs).~~

~~Overdraft deposits were reclassified to consumer loans in the amount of $70 thousand and $90 thousand for~~ ~~2022~~ ~~and~~ ~~2021,~~ ~~respectively.~~

~~Acquired Loans~~

~~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,~~~~2022~~ ~~and~~ ~~2021~~ ~~are as follows (dollars in thousands):~~

2022

2021

Outstanding principal balance
$ 125,856 $ 163,574
Carrying amount
120,432 156,975

~~Table of Contents~~

~~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,~~~~2022~~ ~~and~~ ~~2021~~ ~~are as follows (dollars in thousands):~~

2022

2021

Outstanding principal balance
$ 17,788 $ 24,696
Carrying amount
13,541 19,802

~~The following table presents changes in the accretable yield on purchased credit impaired loans, for which the Company applies ASC~~ ~~310~~-~~30,~~ ~~for the years ended~~ ~~December~~ ~~31,~~~~2022,~~~~2021,~~ ~~and~~ ~~2020~~ ~~(dollars in thousands):~~

2022

2021

2020

Balance at January 1
$ 4,902 $ 6,513 $ 7,893
Accretion
(2,186 ) (5,292 ) (3,553 )
Reclassification from nonaccretable difference
986 2,780 2,233
Other changes, net (1)
(172 ) 901 (60 )
Balance at December 31
$ 3,530 $ 4,902 $ 6,513

~~__________________________~~

(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,~~~~2022~~ ~~(dollars in thousands):~~

90 Days +

Past Due

Non-

Total

30- 59 Days

60-89 Days

and Still

Accrual

Past

Total

Past Due

Past Due

Accruing

Loans

Due

Current

Loans

Commercial
$ 161 $ — $ — $ 4 $ 165 $ 304,082 $ 304,247
Commercial real estate:

Construction and land development
— — — — — 197,525 197,525
Commercial real estate - owner occupied
724 268 — — 992 417,470 418,462
Commercial real estate - non-owner occupied
319 — — 301 620 827,108 827,728
Residential:

Residential
664 90 — 797 1,551 336,581 338,132
Home equity
104 — — 205 309 93,431 93,740
Consumer
— — 16 — 16 6,599 6,615
Total
$ 1,972 $ 358 $ 16 $ 1,307 $ 3,653 $ 2,182,796 $ 2,186,449

~~The following table shows an analysis by portfolio segment of the Company's past due loans at~~ ~~December~~ ~~31,~~~~2021~~ ~~(dollars in thousands):~~

90 Days +

Past Due

Non-

Total

30- 59 Days

60-89 Days

and Still

Accrual

Past

Total

Past Due

Past Due

Accruing

Loans

Due

Current

Loans

Commercial
$ 120 $ — $ — $ 26 $ 146 $ 299,627 $ 299,773
Commercial real estate:

Construction and land development
— — — — — 134,221 134,221
Commercial real estate - owner occupied
— — — 12 12 391,505 391,517
Commercial real estate - non-owner occupied
— — — 1,093 1,093 729,941 731,034
Residential:

Residential
670 20 154 792 1,636 288,121 289,757
Home equity
12 30 47 80 169 93,034 93,203
Consumer
6 — 15 3 24 7,051 7,075
Total
$ 808 $ 50 $ 216 $ 2,006 $ 3,080 $ 1,943,500 $ 1,946,580

~~Table of Contents~~

~~Impaired Loans~~

~~The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at~~ ~~December~~ ~~31,~~~~2022~~ ~~(dollars in thousands):~~

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

Investment

Balance

Allowance

Investment

Recognized

With no related allowance recorded:

Commercial
$ — $ — $ — $ — $ —
Commercial real estate:

Construction and land development
— — — — —
Commercial real estate - owner occupied
2,420 2,420 — 1,454 108
Commercial real estate - non-owner occupied
1,360 1,359 — 1,186 40
Residential:

Residential
1,149 1,156 — 935 21
Home equity
165 165 — 93 —
Consumer
— — — — —
$ 5,094 $ 5,100 $ — $ 3,668 $ 169
With a related allowance recorded:

Commercial
$ — $ — $ — $ 139 $ —
Commercial real estate:

Construction and land development
— — — — —
Commercial real estate - owner occupied
— — — — —
Commercial real estate - non-owner occupied
— — — — —
Residential

Residential
— — — 41 —
Home equity
— — — — —
Consumer
— — — 38 —
$ — $ — $ — $ 218 $ —
Total:

Commercial
$ — $ — $ — $ 139 $ —
Commercial real estate:

Construction and land development
— — — — —
Commercial real estate - owner occupied
2,420 2,420 — 1,454 108
Commercial real estate - non-owner occupied
1,360 1,359 — 1,186 40
Residential:

Residential
1,149 1,156 — 976 21
Home equity
165 165 — 93 —
Consumer
— — — 38 —
$ 5,094 $ 5,100 $ — $ 3,886 $ 169

~~In the table above, recorded investment~~ ~~may~~ ~~be different than unpaid principal balance due to acquired loans with a premium or discount and loans with unearned costs or unearned fees.~~

~~Table of Contents~~

~~The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at~~ ~~December~~ ~~31,~~~~2021~~ ~~(dollars in thousands):~~

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

Investment

Balance

Allowance

Investment

Recognized

With no related allowance recorded:

Commercial
$ — $ — $ — $ 4 $ —
Commercial real estate:

Construction and land development
— — — — —
Commercial real estate - owner occupied
8 5 — 71 1
Commercial real estate - non-owner occupied
1,185 1,186 — 1,107 23
Residential:

Residential
1,021 1,031 — 1,217 41
Home equity
4 4 — 5 1
Consumer
— — — — —
$ 2,218 $ 2,226 $ — $ 2,404 $ 66
With a related allowance recorded:

Commercial
$ 14 $ 7 $ 7 $ 25 $ 1
Commercial real estate:

Construction and land development
— — — — —
Commercial real estate - owner occupied
— — — — —
Commercial real estate - non-owner occupied
— — — 30 —
Residential:

Residential
— — — 61 2
Home equity
— — — — —
Consumer
— — — — —
$ 14 $ 7 $ 7 $ 116 $ 3
Total:

Commercial
$ 14 $ 7 $ 7 $ 29 $ 1
Commercial real estate:

Construction and land development
— — — — —
Commercial real estate - owner occupied
8 5 — 71 1
Commercial real estate - non-owner occupied
1,185 1,186 — 1,137 23
Residential:

Residential
1,021 1,031 — 1,278 43
Home equity
4 4 — 5 1
Consumer
— — — — —
$ 2,232 $ 2,233 $ 7 $ 2,520 $ 69

~~In the table above, recorded investment~~ ~~may~~ ~~be different than unpaid principal balance due to acquired loans with a premium or discount and loans with unearned costs or unearned fees.~~

~~Table of Contents~~

~~The following table shows the detail of loans modified as TDRs during the years ended~~ ~~December~~ ~~31,~~~~2022,~~~~2021,~~ ~~and~~ ~~2020,~~ ~~included in the impaired loan balances (dollars in thousands):~~

Loans Modified as TDRs for the Year Ended December 31, 2022

Pre-Modification

Post-Modification

Number of

Outstanding Recorded

Outstanding Recorded

Contracts

Investment

Investment

Commercial
— $ — $ —
Commercial real estate - owner occupied
1 2,420 2,420
Commercial real estate - non-owner occupied
— — —
Residential real estate
1 109 109
Home equity
— — —
Consumer
— — —
Total
2 $ 2,529 $ 2,529

Loans Modified as TDRs for the Year Ended December 31, 2021

Pre-Modification

Post-Modification

Number of

Outstanding Recorded

Outstanding Recorded

Contracts

Investment

Investment

Commercial
— $ — $ —
Commercial real estate - owner occupied
— — —
Commercial real estate - non-owner occupied
1 1,093 1,093
Residential real estate
— — —
Home equity
— — —
Consumer
— — —
Total
1 $ 1,093 $ 1,093

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
— — —
Commercial real estate - non-owner occupied
2 1,311 1,311
Residential real estate
1 82 82
Home equity
1 6 6
Consumer
— — —
Total
5 $ 1,505 $ 1,505

~~All loans modified as TDRs during the years ended~~ ~~December~~ ~~31,~~~~2022,~~~~2021,~~ ~~and~~ ~~2020~~ ~~were structure modifications. There was~~ no ~~impact to allowance for loan losses for the one real estate - owner-occupied TDR or the one residential real estate TDR in~~ ~~2022.~~ ~~There was~~ no ~~impact to the allowance for loan losses for the one commercial real estate - non-owner occupied TDR in~~ ~~2021.~~ ~~The impact on the allowance for loan losses for the commercial loan modified as a TDR in~~ ~~2020~~ ~~was $88 thousand. 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 thousand; 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.~~

~~During the year ended~~ ~~December~~ ~~31,~~~~2022,~~ ~~the Company had one residential real estate loan with a recorded investment of $109 thousand that subsequently defaulted within~~ 12 ~~months of modification. During the year ended~~ ~~December 31,~~ ~~2021,~~ ~~the Company had~~ no ~~loans that subsequently defaulted within~~ 12 ~~months of modification. During the year ended~~ ~~December 31, 2020,~~ ~~the Company had~~ ~~one~~ ~~commercial real estate - non-owner occupied loan with a recorded investment of $1.1 million that subsequently defaulted within~~ 12 ~~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.~~

~~Table of Contents~~

~~The Company had $715 thousand and $102 thousand in residential real estate loans in the process of foreclosure at~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~December~~ ~~31,~~~~2021,~~ ~~respectively, and had no residential OREO at~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~December~~ ~~31,~~~~2021,~~ ~~respectively.~~

~~Risk Ratings~~

~~The following tables show the Company's loan portfolio broken down by internal risk grading as of~~ ~~December~~ ~~31,~~~~2022~~ ~~(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
$ 288,041 $ 197,331 $ 405,223 $ 826,844 $ 333,124 $ 93,062
Special Mention
10,657 — 2,388 239 1,577 —
Substandard
5,548 194 10,851 645 3,431 678
Doubtful
1 — — — — —
Total
$ 304,247 $ 197,525 $ 418,462 $ 827,728 $ 338,132 $ 93,740

~~Consumer Credit Exposure~~

~~Credit Risk Profile Based on Payment Activity~~

Consumer

Performing
$ 6,599
Nonperforming
16
Total
$ 6,615

~~Loans classified in the Pass category typically are fundamentally sound, and risk factors are reasonable and acceptable.~~

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.

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~~2015, certain ~~events~~ ~~may~~ ~~occur that~~ ~~may~~ ~~salvage the debt.~~

~~Consumer loans are classified as performing or nonperforming. A loan is nonperforming when payments of interest and principal are past due~~ 90 ~~days or more.~~

~~Table of Contents~~

~~The following tables show the Company's loan portfolio broken down by internal risk grading as of~~ ~~December~~ ~~31,~~~~2021~~ ~~(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
$ 290,823 $ 130,111 $ 372,177 $ 720,138 $ 285,188 $ 92,807
Special Mention
8,333 2,881 11,048 8,702 1,774 —
Substandard
617 1,229 8,292 2,194 2,795 396
Doubtful
— — — — — —
Total
$ 299,773 $ 134,221 $ 391,517 $ 731,034 $ 289,757 $ 93,203

~~Consumer Credit Exposure~~

~~Credit Risk Profile Based on Payment Activity~~

Consumer

Performing
$ 7,057
Nonperforming
18
Total
$ 7,075

~~Note~~ 5 ~~– Allowance for Loan Losses and Reserve for Unfunded Lending Commitments~~

~~Changes in the allowance for loan 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,~~~~2022,~~ ~~are presented below (dollars in thousands):~~

Year Ended December 31,

2022

2021

2020

Allowance for Loan Losses

Balance, beginning of year
$ 18,678 $ 21,403 $ 13,152
Provision for (recovery of) loan losses
1,597 (2,825 ) 8,916
Charge-offs
(1,019 ) (146 ) (1,006 )
Recoveries
299 246 341
Balance, end of year
$ 19,555 $ 18,678 $ 21,403

Year Ended December 31,

2022

2021

2020

Reserve for Unfunded Lending Commitments

Balance, beginning of year
$ 386 $ 304 $ 329
Provision for (recovery of) unfunded commitments
(9 ) 82 (25 )
Charge-offs
— — —
Balance, end of year
$ 377 $ 386 $ 304

~~Table of Contents~~

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 loan losses by portfolio segment and the related loan balance total by segment for the year ended ~~December~~ ~~31,~~~~2022~~ ~~(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, 2021
$ 2,668 $ 1,397 $ 3,964 $ 7,141 $ 3,458 $ 50 $ 18,678
Charge-offs
(357 ) — — (436 ) (5 ) (221 ) (1,019 )
Recoveries
121 — 20 3 41 114 299
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, 2022:

Allowance for Loan Losses

Individually evaluated for impairment
$ — $ — $ — $ — $ — $ — $ —
Collectively evaluated for impairment
2,873 1,772 3,762 7,184 3,822 49 19,462
Purchased credit impaired loans
1 24 23 — 45 — 93
Total
$ 2,874 $ 1,796 $ 3,785 $ 7,184 $ 3,867 $ 49 $ 19,555

Loans

Individually evaluated for impairment
$ — $ — $ 2,420 $ 1,360 $ 1,314 $ — $ 5,094
Collectively evaluated for impairment
304,240 196,357 408,656 824,153 427,809 6,599 2,167,814
Purchased credit impaired loans
7 1,168 7,386 2,215 2,749 16 13,541
Total
$ 304,247 $ 197,525 $ 418,462 $ 827,728 $ 431,872 $ 6,615 $ 2,186,449

~~__________________________~~

(1~~) Includes PPP loans, which are guaranteed by the SBA and have no related allowance.~~

~~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,~~~~2021~~ ~~(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, 2020
$ 3,373 $ 1,927 $ 4,340 $ 7,626 $ 4,067 $ 70 $ 21,403
Charge-offs
— — (3 ) — (53 ) (90 ) (146 )
Recoveries
40 — 7 8 99 92 246
Provision/(recovery)
(745 ) (530 ) (380 ) (493 ) (655 ) (22 ) (2,825 )
Balance at December 31, 2021
$ 2,668 $ 1,397 $ 3,964 $ 7,141 $ 3,458 $ 50 $ 18,678

Balance at December 31, 2021:

Allowance for Loan Losses

Individually evaluated for impairment
$ 7 $ — $ — $ — $ — $ — $ 7
Collectively evaluated for impairment
2,642 1,365 3,767 6,778 3,402 50 18,004
Purchased credit impaired loans
19 32 197 363 56 — 667
Total
$ 2,668 $ 1,397 $ 3,964 $ 7,141 $ 3,458 $ 50 $ 18,678

Loans

Individually evaluated for impairment
$ 14 $ — $ 8 $ 1,185 $ 1,025 $ — $ 2,232
Collectively evaluated for impairment
299,470 133,984 382,562 724,180 377,290 7,060 1,924,546
Purchased credit impaired loans
289 237 8,947 5,669 4,645 15 19,802
Total
$ 299,773 $ 134,221 $ 391,517 $ 731,034 $ 382,960 $ 7,075 $ 1,946,580

(1~~) Includes PPP loans, which are guaranteed by the SBA and have no related allowance.~~

~~Table of Contents~~

The allowance for loan losses is allocated to loan segments based upon historical loss factors, 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; experience of lending officers, other lending staff and loan review; national, regional, and local economic trends and conditions; legal, regulatory and collateral factors; and concentrations of credit.

~~The provision expense recorded for the year ended~~ ~~December 31, 2022~~ ~~was necessitated in large part by loan growth. For the year ended~~ ~~December 31, 2021,~~ ~~the Company recorded a negative provision (recovery) as the credit issues anticipated in~~ ~~2020~~ ~~did~~ ~~not~~ materialize and the economic landscape improved substantially. Management will continue to evaluate the adequacy of the Company's allowance for loan losses as more economic data becomes available and as changes within the Company's loan portfolio are known. ~~Changes in economic conditions~~ ~~may~~ ~~require further changes in the level of allowance.~~

~~Note~~ 6 ~~– Premises and Equipment~~

~~Major classifications of premises and equipment at~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021~~ ~~are summarized as follows (dollars in thousands):~~

December 31,

2022

2021

Land
$ 9,308 $ 9,489
Buildings
32,515 32,475
Leasehold improvements
1,536 1,524
Furniture and equipment
19,379 18,494
62,738 61,982
Accumulated depreciation
(29,838 ) (27,800 )
Premises and equipment, net
$ 32,900 $ 34,182

~~Depreciation expense was $2.2 million for the years ended~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021~~ ~~and $2.0 million in~~ ~~2020.~~

~~Note~~ 7 ~~– 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. In testing goodwill for impairment, the Company must~~ ~~first~~ ~~decide if circumstances lead to a determination that it is~~ ~~not~~ ~~more likely than~~ ~~not~~ ~~that the fair value of a reporting unit is less than its carrying 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. In the wake of the COVID-~~19 ~~pandemic, the Company determined a triggering event had occurred and evaluated goodwill each of the~~ ~~four~~ ~~quarters of~~ ~~2020~~ ~~and~~ no ~~indicators of impairment were noted. The Company performed its annual analysis for the years ended~~ ~~December 31, 2022~~ ~~and~~ ~~2021,~~ ~~respectively, and no indications of impairment were noted.~~

~~Core deposit intangibles resulting from the MidCarolina Financial Corporation ("MidCarolina") acquisition in~~ ~~July 2011~~ ~~were $6.6 million and became fully amortized at~~ ~~June 30, 2020.~~ ~~Core deposit intangibles resulting from the MainStreet Bankshares, Inc. acquisition in~~ ~~January 2015~~ ~~were $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 $8.2 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,~~~~2022,~~ ~~are as follows (dollars in thousands):~~

Goodwill

Intangibles

Balance at December 31, 2021
$ 85,048 $ 4,627
Amortization
— (1,260 )
Balance at December 31, 2022
$ 85,048 $ 3,367

~~Table of Contents~~

~~Goodwill and intangible assets at~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021~~ ~~were as follows (dollars in thousands):~~

Gross Carrying

Accumulated

Net Carrying

Value

Amortization

Value

December 31, 2022

Core deposit intangibles
$ 19,708 $ (16,341 ) $ 3,367
Goodwill
85,048 — 85,048

December 31, 2021

Core deposit intangibles
$ 19,708 $ (15,081 ) $ 4,627
Goodwill
85,048 — 85,048

~~Amortization expense of core deposit intangibles for the years ended~~ ~~December~~ ~~31,~~~~2022,~~~~2021,~~ ~~and~~ ~~2020~~ ~~was $1.3 million, $1.5 million, and $1.6 million, respectively. As of~~ ~~December~~ ~~31,~~~~2022,~~ ~~the estimated future amortization expense of core deposit intangibles is as follows (dollars in thousands):~~

Year

Amount

2023
$ 1,069
2024
800
2025
617
2026
454
2027
427
Total
$ 3,367

~~Note~~ 8 ~~– Leases~~

The right-of-use assets and lease liabilities relate to banking offices and other space occupied by the Company under noncancelable operating lease agreements. The aggregate right-of-use assets and lease liabilities 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, 2022~~ ~~and~~ ~~2021~~ ~~and for the years ended~~ ~~December~~ ~~31,~~~~2022,~~~~2021~~ ~~and~~ ~~2020~~ ~~(dollars in thousands):~~

December 31, 2022

December 31, 2021

Lease liabilities
$ 3,318 $ 4,023
Right-of-use assets
$ 3,245 $ 3,939
Weighted average remaining lease term (in years)
6.77 6.92
Weighted average discount rate
3.16 % 3.09 %

Year Ended Year Ended Year Ended

December 31, 2022

December 31, 2021

December 31, 2020

Lease cost

Operating lease cost
$ 1,072 $ 1,069 $ 993
Short-term lease cost
— — 3
Total lease cost
$ 1,072 $ 1,069 $ 996

Cash paid for amounts included in the measurement of lease liabilities
$ 1,083 $ 1,047 $ 959

~~Table of Contents~~

~~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, 2022

2023
$ 1,002
2024
573
2025
516
2026
279
2027
208
2028 and after
1,142
Total undiscounted cash flows
$ 3,720
Discount
(402 )
Lease liabilities
$ 3,318

~~Lease expense, a component of occupancy and equipment expense, for the years ended~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021~~ ~~totaled $1.3 million and~~ ~~December 31, 2020~~ ~~totaled $1.2 million. The amounts recognized in lease expense include insurance, property taxes, and common area maintenance.~~

~~Note~~ 9 ~~- Deposits~~

~~The aggregate amount of time deposits in denominations of~~ ~~$250,000~~ ~~or more at~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021~~ wa~~s $89.8 million and~~ ~~$15~~~~9.8~~ ~~million, respectively.~~

At ~~December~~ ~~31,~~~~2022,~~ ~~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

2023
$ 171,415
2024
28,939
2025
12,819
2026
25,284
2027
13,200
2028 and after
6,276
Total
$ 257,933

~~There were~~ no ~~brokered time deposits at~~ ~~December~~ ~~31,~~~~2022~~ or ~~December~~ ~~31,~~~~2021.~~

~~Note~~ 10 ~~– 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 million and has access to the Federal Reserve Bank of Richmond's discount window. The Company has $220.8 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,~~~~2022~~ ~~and~~ ~~2021~~ ~~(dollars in thousands):~~

December 31, 2022

December 31, 2021

Amount
Weighted Average Rate
Amount
Weighted Average Rate
Customer repurchase agreements
$ 370 0.10 % $ 41,128 0.03 %
FHLB borrowings
100,531 4.42 — —
Total short-term borrowings
$ 100,901 4.40 % $ 41,128 0.03 %

~~Table of Contents~~

~~Note~~ 11 ~~– 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, 2022~~~~, $1.0 billion~~ ~~in eligible collateral was pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings. FHLB availability based on pledged collateral at~~ ~~December 31, 2022~~ ~~was $406.7 million, with $270.1 million remaining collateral eligible to be pledged.~~

~~The Company had Junior Subordinated debt at~~ ~~December 31, 2022~~ ~~and~~ ~~2021,~~ ~~as noted below.~~

~~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,~~~~2022,~~ the Bank's public deposits totaled $220.1 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,~~~~2022,~~ ~~the Company had $170.0 million in letters of credit with the FHLB outstanding as well as $88.2 million in agency, state, and municipal securities to provide collateral for such deposits.~~

~~Junior Subordinated Debt~~

On ~~April 7, 2006,~~ AMNB Statutory Trust I, a Delaware statutory trust and a wholly owned subsidiary of the Company, issued $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%. 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 thousand received by the trust from the issuance of common securities by the trust to the Company, were used to purchase $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 Financial Corporation 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, the Company assumed $8.8 million in junior subordinated debentures to MidCarolina 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.~~

~~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 thousand equity investment in AMNB Statutory Trust I or the $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.

~~Table of Contents~~

~~A description of the junior subordinated debt securities outstanding payable to the trusts is shown below (dollars in thousands):~~

Principal Amount

As of December 31,

Issuing Entity
Date Issued
Interest Rate
Maturity Date

2022

2021

AMNB Trust I
4/7/2006
Libor plus 1.35%
6/30/2036
$ 20,619 $ 20,619
MidCarolina Trust I
10/29/2002
Libor plus 3.45%
11/7/2032
4,601 4,545
MidCarolina Trust II
12/3/2003
Libor plus 2.95%
10/7/2033
3,114 3,068
$ 28,334 $ 28,232

~~The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $554 thousand and $495 thousand at~~ ~~December 31, 2022~~ ~~and $610 thousand and $541 thousand at~~ ~~December 31, 2021,~~ ~~respectively. The original fair value adjustments of $1.2 million and $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~~ 12 ~~- 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 are 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 is ~~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, 2022

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 $ 1,325 $ — $ 850

(Dollars in thousands)

December 31, 2021

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 $ — $ 2,800 $ 4,050

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.~~

~~Table of Contents~~

~~Note~~ 13 ~~– Stock-Based Compensation~~

~~The Company's~~ ~~2018~~ ~~Stock Incentive Plan (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.~~

~~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 the year ended~~ ~~December~~ ~~31,~~~~2022~~ ~~is as follows:~~

Weighted

Weighted

Average

Aggregate

Average

Remaining

Intrinsic

Option

Exercise

Contractual Term

Value

Shares

Price

(In Years)

($000)

Outstanding at December 31, 2021
4,863 $ 16.63
Granted
— —
Exercised
(713 ) 16.63
Expired
— —
Outstanding at December 31, 2022
4,150 $ 16.63 1.97 $ 84
Exercisable at December 31, 2022
4,150 $ 16.63 1.97 $ 84

The aggregate intrinsic value of stock options in the table above represents the total pre-tax intrinsic value (the amount by which the current fair value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on ~~December~~ ~~31,~~~~2022.~~ ~~This amount changes based on changes in the fair value of the Company's common stock.~~

~~The total proceeds of the in-the-money options exercised during the years ended~~ ~~December~~ ~~31,~~~~2022,~~~~2021,~~ ~~and~~ ~~2020~~ ~~were $12 thousand, $89 thousand, and $43 thousand, respectively. Total intrinsic value of options exercised during the years ended~~ ~~December~~ ~~31,~~~~2022,~~~~2021,~~ ~~and~~ ~~2020~~ ~~was $16 thousand, $96 thousand, and $42 thousand, respectively.~~

~~There was no recognized or unrecognized stock compensation expense attributable to outstanding stock options at~~ ~~December 31,~~ ~~2022~~ or ~~2021.~~

~~No stock options were granted in~~ ~~2022,~~~~2021~~ or ~~2020.~~

~~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. Restricted stock granted in ~~2022~~ ~~cliff vests at the end of a 36-month period beginning on the date of grant. Nonvested restricted stock activity for the year ended~~ ~~December~~ ~~31,~~~~2022~~ ~~is summarized in the following table:~~

Weighted

Average Grant

Shares

Date Value Per Share

Nonvested at December 31, 2021
58,461 $ 31.71
Granted
33,363 35.18
Vested
(18,370 ) 31.23
Forfeited
(1,747 ) 34.12
Nonvested at December 31, 2022
71,707 33.39

~~Table of Contents~~

~~As of~~ ~~December~~ ~~31,~~~~2022,~~~~2021,~~ ~~and~~ ~~2020,~~ ~~there was $1.1 million, $782 thousand, and $797 thousand, respectively, in unrecognized compensation cost related to nonvested restricted stock granted under the~~ ~~2018~~ Plan. This cost is expected to be recognized over the next 12 to 36 months. The share-based compensation expense for nonvested restricted stock was $889 thousand, $749 thousand, and $672 thousand during ~~2022,~~~~2021,~~ ~~and~~ ~~2020,~~ ~~respectively.~~

~~The Company offers its outside directors alternatives with respect to director compensation. For~~ ~~2022,~~~~2021,~~ ~~and~~ ~~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. Only outside directors receive board fees. The Company issued 16,474, 20,474 and 27,986 shares and recognized share-based compensation expense of $603 thousand, $683 thousand, and $779 thousand during ~~2022,~~~~2021~~ ~~and~~ ~~2020,~~ ~~respectively.~~

~~Note~~ 14 ~~– 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~~ ~~2019.~~

~~The components of the Company's net deferred tax assets were as follows (dollars in thousands):~~

December 31,

2022

2021

Deferred tax assets:

Allowance for loan losses
$ 4,226 $ 4,116
Nonaccrual loan interest
229 250
Other real estate owned valuation allowance
12 23
Deferred compensation
1,277 1,183
Acquisition accounting
1,174 1,258
Lease liability, net of right of use asset
16 18
Accrued pension liability
86 320
Net unrealized loss on cash flow hedges
— 588
Net unrealized loss on securities available for sale
15,339 469
Other
374 253
Total deferred tax assets
22,733 8,478

Deferred tax liabilities:

Depreciation
1,044 1,094
Core deposit intangibles
728 999
Deferred loan origination costs, net
42 72
Net unrealized gain on cash flow hedges
278 —
Other
179 6
Total deferred tax liabilities
2,271 2,171
Net deferred tax assets
$ 20,462 $ 6,307

~~The provision for income taxes consists of the following (dollars in thousands):~~

Year Ended December 31,

2022

2021

2020

Current tax expense
$ 9,319 $ 10,905 $ 7,777
Deferred tax (benefit) expense
(385 ) 808 (640 )
Total income tax expense
$ 8,934 $ 11,713 $ 7,137

~~Table of Contents~~

~~A reconcilement of the "expected" federal income tax expense to reported income tax expense is as follows (dollars in thousands):~~

Year Ended December 31,

2022

2021

2020

Expected federal tax expense
$ 9,106 $ 11,600 $ 7,808
Nondeductible interest expense
10 8 31
Tax-exempt interest
(202 ) (198 ) (259 )
State income taxes
308 326 207
Other, net
(288 ) (23 ) (650 )
Total income tax expense
$ 8,934 $ 11,713 $ 7,137

~~Note~~ 15 ~~– 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,

2022

2021

2020

Per Share

Per Share

Per Share

Shares

Amount

Shares

Amount

Shares

Amount

Basic earnings per share
10,672,314 $ 3.23 10,873,817 $ 4.00 10,981,623 $ 2.74
Effect of dilutive securities - stock options
2,299 — 3,414 — 4,167 (0.01 )
Diluted earnings per share
10,674,613 $ 3.23 10,877,231 $ 4.00 10,985,790 $ 2.73

~~There were~~ no ~~outstanding stock options that were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive in~~ ~~2022,~~~~2021,~~ ~~and~~ ~~2020.~~

~~Note~~ 16 ~~– 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,~~~~2022~~ ~~and~~ ~~2021~~ ~~(dollars in thousands):~~

December 31,

2022

2021

Commitments to extend credit
$ 635,851 $ 654,436
Standby letters of credit
12,897 10,201
Mortgage loan rate lock commitments
1,920 10,891

~~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.~~

~~Table of Contents~~

~~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,~~~~2022,~~ the Company had locked-rate commitments to originate mortgage loans amounting to approximately $1.9 million and loans held for sale of $1.1 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~~ 17 ~~– 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 collectability or present other unfavorable features. As of~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021,~~~~none~~ ~~of these loans was restructured, past due, or on nonaccrual status.~~

~~An analysis of these loans for~~ ~~2022~~ ~~is as follows (dollars in thousands):~~

Balance at December 31, 2021
$ 15,853
Additions
3,907
Repayments
(1,816 )
Reclassifications⁽¹⁾
6,532
Balance at December 31, 2022
$ 24,476

~~__________________________~~

(1~~) Includes loans to~~ ~~two~~ ~~new board members who joined the Company during the year.~~

~~Related party deposits totaled $9.5 million at~~ ~~December~~ ~~31,~~~~2022~~ ~~and $10.9 million at~~ ~~December~~ ~~31,~~~~2021.~~

~~Table of Contents~~

~~Note~~ 18 ~~– 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 $3.3 million are estimated to be disbursed in~~ ~~2023~~ or ~~2024.~~ ~~Information pertaining to the activity in the plan is as follows (dollars in thousands):~~

As of and for the Year Ended December 31,

2022

2021

2020

Change in Benefit Obligation:

Projected benefit obligation at beginning of year
$ 5,013 $ 5,821 $ 6,262
Service cost
— — —
Interest cost
107 91 152
Actuarial (gain) loss
(1,403 ) (259 ) 814
Settlement gain (loss)
(10 ) 6 44
Benefits paid
(437 ) (646 ) (1,451 )
Projected benefit obligation at end of year
3,270 5,013 5,821

Change in Plan Assets:

Fair value of plan assets at beginning of year
5,045 4,701 5,915
Actual return on plan assets
(344 ) 190 237
Employer contributions
— 800 —
Benefits paid
(437 ) (646 ) (1,451 )
Fair value of plan assets at end of year
4,264 5,045 4,701

Funded Status at End of Year
$ 994 $ 32 $ (1,120 )

Amounts Recognized in the Consolidated Balance Sheets

Other assets (liabilities)
$ 994 $ 32 $ (1,120 )

Amounts Recognized in Accumulated Other Comprehensive Loss

Net actuarial loss
$ 400 $ 1,481 $ 2,071
Deferred income taxes
(86 ) (320 ) (435 )
Amount recognized
$ 314 $ 1,161 $ 1,636

As of and for the Year Ended December 31,

2022

2021

2020

Components of Net Periodic Benefit Cost

Service cost
$ — $ — $ —
Interest cost
107 91 152
Expected return on plan assets
(245 ) (230 ) (285 )
Recognized net loss due to settlement
112 195 352
Recognized net actuarial loss
145 182 140
Net periodic benefit cost
$ 119 $ 238 $ 359

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income) Loss

Net actuarial (gain) loss
$ (1,082 ) $ (590 ) $ 413
Amortization of prior service cost
— — —
Total recognized in other comprehensive (income) loss
$ (1,082 ) $ (590 ) $ 413

Total Recognized in Net Periodic Benefit Cost and Other Comprehensive (Income) Loss
$ (963 ) $ (352 ) $ 772

~~Table of Contents~~

~~The accumulated benefit obligation as of~~ ~~December~~ ~~31,~~~~2022,~~~~2021,~~ ~~and~~ ~~2020~~ ~~was $3.3 million, $5.0 million, and $5.8 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,~~~~2022~~ ~~and~~ ~~2021:~~

Asset Category

December 31,

2022

2021

Fixed Income
71.4 % 56.5 %
Equity
0.0 % 22.9 %
Cash and Accrued Income
28.6 % 20.6 %
Total
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,~~~~2022~~ ~~and~~ ~~2021,~~ ~~by asset category are as follows (dollars in thousands):~~

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 $ —

~~Table of Contents~~

Fair Value Measurements at December 31, 2021 Using

Quoted Prices

Significant

in Active

Other

Significant

Balance as of

Markets for

Observable

Unobservable

December 31,

Identical Assets

Inputs

Inputs

Asset Category

2021

Level 1

Level 2

Level 3

Cash
$ 1,042 $ 1,042 $ — $ —
Fixed income securities

Government sponsored entities
469 — 469 —
Municipal bonds and notes
2,067 — 2,067 —
Corporate bonds and notes
312 — 312 —
Equity securities

U.S. companies
964 964 — —
Foreign companies
191 191 — —
$ 5,045 $ 2,197 $ 2,848 $ —

~~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 $1.2 million, $1.1 million, and $1.0 million to the~~ ~~401~~~~(k) plan in~~ ~~2022,~~~~2021,~~ ~~and~~ ~~2020,~~ ~~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~~ 10 years upon their retirement. The liabilities under these agreements were accrued over the officers' remaining periods of employment so that, on the date of their retirement, the then-present value of the annual payments had been accrued. As of ~~December~~ ~~31,~~~~2022,~~ ~~the Company only had~~ ~~one~~ ~~remaining agreement under which payments are being made to a former officer. The liabilities were $100 thousand and $150 thousand at~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021,~~ ~~respectively. There was no expense for this agreement for the years ended~~ ~~December~~ ~~31,~~~~2022,~~~~2021,~~ ~~and~~ ~~2020.~~ ~~As a result of acquisitions, the Company has various agreements with current and former employees and executives with balances of $5.4 million and $5.6 million at~~ ~~December~~ ~~31,~~~~2022~~ ~~and~~ ~~2021,~~ ~~respectively that accrue through eligibility and are payable upon retirement. The Company recognized expenses of $159 thousand, $430 thousand and $422 thousand for the years ended~~ ~~December 31, 2022,~~ ~~2021,~~ ~~and~~ ~~2020,~~ ~~respectively.~~

~~Certain~~ named executive officers ~~are~~became 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. The only eligible executive officer for 2023 was Mr. Jeffrey Haley. 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~~goal of the Committee is to ~~salary expense were $86 thousand, $184 thousand~~award such discretionary bonus payments commensurate with the officer's performance during such year.

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)

Title of Each Class		Trading Symbol(s)		Name of Each Exchange on Which Registered
Common Stock, $1 par value		AMNB		Nasdaq Global Select Market

CROSS REFERENCE INDEX

PART I III		~~PAGE~~
~~ITEM 1~~	~~Business~~	4
~~ITEM 1A~~	~~Risk Factors~~	13
~~ITEM 1B~~	~~Unresolved Staff Comments~~	23
~~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~~	~~[Reserved]~~	25
~~ITEM 7~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~	25
~~ITEM 7A~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	42
~~ITEM 8~~	~~Financial Statements and Supplementary Data~~	43
	~~Reports of Independent Registered Public Accounting Firm~~	44
	~~Consolidated Balance Sheets as of December 31, 2022 and 2021~~	47
	~~Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 2020~~	48
	~~Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022, 2021, and 2020~~	49
	~~Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2022, 2021, and 2020~~	50
	~~Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020~~	51
	~~Notes to Consolidated Financial Statements~~	52
~~ITEM 9~~	~~Changes in and Disagreements With Accountants on Accounting and Financial Disclosure~~	89
~~ITEM 9A~~	~~Controls and Procedures~~	89
~~ITEM 9B~~	~~Other Information~~	89
ITEM 9C10	~~Disclosure Regarding Foreign Jurisdictions that Prevent Inspections~~	89

~~PART III~~
~~ITEM 10~~	Directors, Executive Officers and Corporate Governance	* 5
ITEM 11	Executive Compensation	* 9
ITEM 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	* 29
ITEM 13	Certain Relationships and Related Transactions, and Director Independence	* 31
ITEM 14	Principal Accountant Fees and Services	* 31

PART IV
ITEM 15	Exhibits and Financial Statement Schedules	9033
~~ITEM 16~~	~~Form 10-K Summary~~	91

Name	Principal Occupation	Age	Director Since

Rickey J. Barker	President, Supply Resources, Inc. (tailor-made packaging provider), Danville, VA since 2007. Mr. Barker brings extensive experience from multiple industries. His entrepreneurial, construction, finance and real estate knowledge, as well as leadership and strategic planning skills, are expected to enhance the quality of the Board. He has been instrumental in economic development within the Danville, Virginia region. He also served on the Company's Virginia State Banking Board.	63	2023


Adrian T. Smith	President and Chief Executive Officer, Ice Management, Inc. (McDonald's franchises), Greensboro, NC since 2004. Mr. Smith brings a diverse perspective combining extensive operational and financial knowledge as well as strategic planning expertise from his experience as owner of a large restaurant organization. He also served on the Company's North Carolina State Banking Board.	51	2023


Dan M. Pleasant	Senior Consultant, The Dewberry Companies, Inc. (engineering, architectural and consulting), Fairfax, VA from April 2022 until April 2023. Managing Member of DMP Consulting PLLC (consulting to the engineering and architecture industry) beginning May 2023. Retired Chief Operating Officer, The Dewberry Companies, Inc. from April 2010 to March 2022. Mr. Pleasant brings significant experience as a professional engineer working in the Company's market areas in Virginia and North Carolina. In addition, until his retirement in 2022, he was the Chief Operating Officer of a large national architectural, engineering and consulting firm, leading the firm's merger and acquisition program. He is the immediate Past Chair of the Board of the Virginia Economic Development Partnership and served as director of the Virginia Chamber of Commerce.	73	2011

Nancy Howell Agee	President and Chief Executive Officer, Carilion Clinic (health care organization), Roanoke, VA. A former director of HomeTown, Ms. Agee brings to the Board her leadership abilities, many years of service in the Bank's Roanoke market area and significant knowledge and experience in finance and management as President and Chief Executive Officer of a large healthcare organization. She currently serves as director of two publicly traded companies and was formerly Chair of the American Hospital Association.	71	2019


Jeffrey V. Haley	Chairman of the Company and the Bank since 2023. President and Chief Executive Officer of the Company and the Bank since 2013. President of the Company and President and Chief Executive Officer of the Bank from 2012 to 2013. Executive Vice President of the Company and President of the Bank from 2010 to 2012. President of Trust and Financial Services and Executive Vice President of the Bank from 2008 to 2010. Mr. Jeffrey Haley brings expertise based on more than 21 years in community banking and 17 years in the retail industry. His varied operational and management responsibilities during his banking tenure enable him to contribute a uniquely relevant perspective to the Board's deliberations.	63	2012


John H. Love	President, Motor Carrier Insurance Educational Foundation, Fort Myers, FL since 2022. Co-founder and President, W.E. Love & Associates (insurance brokerage), Burlington, NC from 1993 to 2022. A former director of MidCarolina, Mr. Love brings an expert perspective on risk management, mitigation and governmental regulation based on his experience as President of a large commercial insurance brokerage firm.	64	2011


Ronda M. Penn	Chief Financial Officer, Plexus Capital, LLC (small business investments), Raleigh, NC since 2012. Partner, Dixon Hughes Goodman LLP (public accounting), Greensboro, NC from 2006 to 2012. Ms. Penn brings significant financial, accounting, internal control, investment and management expertise as a Chief Financial Officer, Certified Public Accountant and former partner with a national accounting firm. Her background helps her fill the role of financial expert on the Company's Audit Committee as well as chair of that Committee.	61	2015

J. Nathan Duggins III	Managing Partner of Tuggle Duggins (law firm), Greensboro, NC since 2015. Mr. Duggins brings an expert legal perspective as well as extensive experience in both real estate and privately-owned businesses. He has helped a large variety of clients with legal needs across a wide range of industries during his career as a practicing attorney in North Carolina since 1995. He served on the Company's North Carolina State Banking Board and has been active in numerous community organizations in Greensboro and beyond, including the Guilford Education Alliance and the Guilford Merchants Association.	54	2022


William J. Farrell II	President of Berglund Automotive Group, Roanoke, VA since 2006. Mr. Farrell is a veteran of the automotive industry and brings a keen business acumen. He is a former director of HomeTown Bank and HomeTown Bankshares Corporation (together, "HomeTown") (acquired by the Company in 2019) and subsequently served on the Company's Virginia State Banking Board. He is very involved in the Roanoke community, serving on the boards of the Virginia Western Educational Foundation, Visit Virginia's Blue Ridge and the Virginia Automobile Dealers Association.	57	2022


Tammy Moss Finley	Executive Vice President, General Counsel and Corporate Secretary, Advance Auto Parts, Inc. (automotive aftermarket parts provider), Roanoke, VA since 2016. Executive Vice President, Human Resources, General Counsel and Corporate Secretary, Advance Auto Parts, Inc. from 2015 to 2016. Senior Vice President, Human Resources, Advance Auto Parts, Inc. from 2013 to 2015. Vice President, Employment Counsel and Government Affairs, Advance Auto Parts, Inc. from 2010 to 2013. Ms. Finley brings significant legal, human resources, retail, risk management, and public company corporate governance expertise from her multiple leadership roles at Advance Auto Parts, as well as merger and acquisition experience. In addition, her close ties to the communities American National Bank & Trust Company (the "Bank") serves benefit the entire organization.	57	2017

Joel R. Shepherd	President, Virginia Home Furnishings, Inc. (furniture retailer) and 220 Self Storage, Inc. (self-storage provider), Rocky Mount, VA. A former Chair of Franklin Community Bank, N.A. and MainStreet BankShares, Inc. (acquired by the Company in 2015), Mr. Shepherd brings substantial entrepreneurial, construction, finance and management skills gained through his various enterprises. He also brings banking and investment experience. He was Vice President and Portfolio Manager in the Funds Management Division of Dominion Bankshares, Inc. (acquired by First Union Corporation, now part of Wells Fargo & Company) from 1986 to 1993. He serves as a financial expert on the Company's Audit Committee.	60	2015


Michael P. Haley	Retired Adviser, Fenway Partners, LLC (private equity investments), New York, NY. Retired Managing Director, Fenway Resources since 2015. Adviser to Fenway Partners, LLC from 2006 and Managing Director of its affiliate, Fenway Resources, from 2008, respectively, to 2015. Mr. Michael Haley brings high level financial expertise as a former Chief Executive Officer of a publicly traded manufacturing company and as a former adviser to a private equity firm. He also brings experience in operations and risk management and public company corporate governance. His background helps him fill the role of financial expert on the Company's Audit Committee as well as to serve as Lead Independent Director.	73	2002


F. D. Hornaday, III	President and Chief Executive Officer, Knit Wear Fabrics, Inc. (circular knit manufacturer), Burlington, NC. A former director and Vice Chair of MidCarolina Bank and MidCarolina Financial Corporation (together, "MidCarolina") (acquired by the Company in 2011), Mr. Hornaday brings his multifaceted experience as President of a textile company, adding to the Board's understanding of the challenges and opportunities facing manufacturing. In addition, his board service in the health industry and his former board service in the trust industry bring value to the Board.	74	2011

•	~~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 adequacy of the level of 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;
•	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, including the COVID-19 pandemic;~~
•	~~risks related to environmental, social and governance ("ESG") practices; and~~
•	~~risks associated with mergers, acquisitions, and other expansion activities.~~

	Respectfully submitted,

	Dan M. Pleasant, Chair William J. Farrell II Tammy Moss Finley John H. Love Adrian T. Smith

~~Name~~Named Executive Officers	Principal Position During 2023	Years of ~~Age~~Service		~~Position~~

Jeffrey V. Haley		62		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.~~	27

Jeffrey W. Farrar	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~~		62		Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Company since October 2019. Executive Vice President and Chief Operating Officer for the Bank since August 2019. Senior Vice President/Finance and Chief Financial Officer of ~~Old Point Financial Corporation from June 2017 to August 2019. Director of Wealth Management, Mortgage~~the Company and Insurance for Union Bankshares Corporation (now Atlantic Union Bankshares Corporation) from January 2014 to June 2017. Chief Financial Officer of StellarOne Corporation and its predecessor companies from January 1996 to June 2017. the Bank	5

Edward C. Martin		49		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.	8

Rhonda P. Joyce		59		Executive Vice President and Co-Head of ~~Banking:~~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.	13
~~Alexander Jung~~		54
Alexander Jung		Executive Vice President and Co-Head of ~~Banking:~~Banking – Consumer &and 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.	2

Institution Name	Ticker	State
Stock Yards Bancorp, Inc.	SYBT	KY
City Holding Co.	CHCO	WV
Community Trust Bancorp, Inc.	CTBI	KY
CNB Financial Corp.	CCNE	PA
Peoples Bancorp Inc.	PEBO	OH
SmartFinancial Inc.	SMBK	TN
HomeTrust Bancshares Inc.	HTBI	NC
Mid Penn Bancorp Inc.	MPB	PA
Primis Financial Corp.	FRST	VA
Summit Financial Group Inc.	SMMF	WV
Capstar Financial Holdings Inc.	CSTR	TN
First Community Bancshares, Inc.	FCBC	VA
Orrstown Financial Services	ORRF	PA
Southern First Bancshares, Inc.	SFST	SC
MetroCity Bankshares Inc.	MCBS	GA
Codorus Valley Bancorp Inc.	CVLY	PA
The Community Financial Corporation	TCFC	MD
C&F Financial Corporation	CFFI	VA

	December 31, 2022
	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		4,150	$	16.63		477,691
Equity compensation plans not approved by shareholders		—		—		—
Total		4,150	$	16.63		477,691

Period Beginning on First Day of Month Ended	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs

October 31, 2022		602	$	35.41		602		5,011
November 30, 2022		2,667		36.68		2,667		2,344
December 31, 2022		—		—		—		—
Total		3,269	$	37.14		3,269

	*Period Ending*
*Index*	12/31/2017		12/31/2018		12/31/2019		12/31/2020		12/31/2021		12/31/2022
American National Bankshares Inc.	$	100.00	$	78.59	$	109.28	$	75.38	$	111.84	$	113.13
Nasdaq Composite		100.00		97.16		132.81		192.47		235.15		158.65
SNL Bank $1B-$5B		100.00		83.44		104.69		95.08		132.36		116.69

	Year Ended December 31,
	2022			2021			2020
Efficiency Ratio
Noninterest expense	$	64,086		$	59,008		$	54,565
Add/subtract: gain/loss on sale OREO, net of writedowns		2			(111	)		4
Subtract: core deposit intangible amortization		(1,260	)		(1,464	)		(1,637	)
Adjusted noninterest expense	$	62,828		$	57,433		$	52,932

Net interest income	$	90,238		$	90,391		$	83,820
Tax equivalent adjustment		244			241			288
Noninterest income		18,807			21,031			16,843
Subtract: gain on securities		—			(35	)		(814	)
Add/subtract: loss/gain on sale of fixed assets		228			885			110
Adjusted revenues	$	109,517		$	112,513		$	100,247

Efficiency ratio		57.37	%		51.05	%		52.80	%

	As of December 31,
	2022			2021
Tangible Common Equity to Tangible Assets
Common equity to assets ratio (GAAP basis)		10.48	%		10.64	%
Impact of excluding goodwill and other intangibles		(2.66	)%		(2.47	)%
Tangible common equity to tangible assets ratio (non-GAAP)		7.82	%		8.17	%

	Average Balance						Interest Income/Expense(1)						Average Yield/Rate
	2022		2021		2020		2022		2021		2020		2022			2021			2020
Loans:
Commercial	$	292,833	$	372,538	$	475,068	$	11,448	$	18,819	$	17,768		3.91	%		5.05	%		3.74	%
Real estate		1,755,982		1,584,856		1,531,195		70,837		67,887		69,525		4.03			4.28			4.54
Consumer		6,578		6,984		8,998		423		475		588		6.43			6.80			6.53
Total loans(2)		2,055,393		1,964,378		2,015,261		82,708		87,181		87,881		4.02			4.44			4.36

Securities:
U.S. Treasury		150,886		57,048		9,010		1,372		507		51		0.91			0.89			0.57
Federal agencies and GSEs		107,311		97,943		72,112		1,348		1,132		1,423		1.26			1.16			1.97
Mortgage-backed and CMOs		355,331		308,158		200,612		5,420		4,142		4,060		1.53			1.34			2.02
State and municipal		68,928		61,698		45,836		1,399		1,272		1,175		2.03			2.06			2.56
Other securities		37,545		24,707		20,382		1,510		1,205		1,098		4.02			4.88			5.39
Total securities		720,001		549,554		347,952		11,049		8,258		7,807		1.53			1.50			2.24

Deposits in other banks		267,381		453,867		188,700		2,491		598		440		0.93			0.13			0.23

Total interest earning assets		3,042,775		2,967,799		2,551,913		96,248		96,037		96,128		3.16			3.24			3.77

Nonearning assets		168,893		208,765		221,094

Total assets	$	3,211,668	$	3,176,564	$	2,773,007

Deposits:
Demand	$	522,043	$	476,710	$	386,790		202		152		344		0.04			0.03			0.09
Money market		688,631		710,948		574,510		1,648		758		2,634		0.24			0.11			0.46
Savings		273,788		243,123		198,313		102		26		117		0.04			0.01			0.06
Time		280,672		366,604		436,081		1,601		2,709		6,634		0.57			0.74			1.52
Total interest bearing deposits		1,765,134		1,797,385		1,595,694		3,553		3,645		9,729		0.20			0.20			0.61

Customer repurchase agreements		24,005		37,632		42,937		26		22		259		0.11			0.06			0.60
Other short-term borrowings		15,629		—		1		633		—		—		4.05			—			0.55
Long-term borrowings		28,280		31,878		35,586		1,554		1,738		2,032		5.50			5.45			5.71
Total interest bearing liabilities		1,833,048		1,866,895		1,674,218		5,766		5,405		12,020		0.31			0.29			0.72

Noninterest bearing demand deposits		1,028,871		939,186		746,659
Other liabilities		17,393		22,325		22,777
Shareholders' equity		332,356		348,158		329,353
Total liabilities and shareholders' equity	$	3,211,668	$	3,176,564	$	2,773,007

Interest rate spread														2.85	%		2.95	%		3.05	%
Net interest margin														2.97	%		3.05	%		3.30	%

Net interest income (taxable equivalent basis)								90,482		90,632		84,108
Less: Taxable equivalent adjustment(3)								244		241		288
Net interest income							$	90,238	$	90,391	$	83,820

	2022 vs. 2021									2021 vs. 2020
				Change									Change
	Increase			Attributable to						Increase			Attributable to
Interest income	(Decrease)			Rate			Volume			(Decrease)			Rate			Volume
Loans:
Commercial	$	(7,371	)	$	(3,787	)	$	(3,584	)	$	1,051		$	5,398		$	(4,347	)
Real estate		2,950			(4,103	)		7,053			(1,638	)		(4,022	)		2,384
Consumer		(52	)		(25	)		(27	)		(113	)		23			(136	)
Total loans		(4,473	)		(7,915	)		3,442			(700	)		1,399			(2,099	)
Securities:
U.S. Treasury		865			12			853			456			44			412
Federal agencies and GSEs		216			103			113			(291	)		(703	)		412
Mortgage-backed and CMOs		1,278			598			680			82			(1,645	)		1,727
State and municipal		127			(20	)		147			97			(259	)		356
Other securities		305			(239	)		544			107			(111	)		218
Total securities		2,791			454			2,337			451			(2,674	)		3,125
Deposits in other banks		1,893			2,233			(340	)		158			(255	)		413
Total interest income		211			(5,228	)		5,439			(91	)		(1,530	)		1,439

Interest expense
Deposits:
Demand		50			35			15			(192	)		(258	)		66
Money market		890			915			(25	)		(1,876	)		(2,388	)		512
Savings		76			72			4			(91	)		(113	)		22
Time		(1,108	)		(546	)		(562	)		(3,925	)		(2,997	)		(928	)
Total deposits		(92	)		476			(568	)		(6,084	)		(5,756	)		(328	)
Customer repurchase agreements		4			14			(10	)		(237	)		(208	)		(29	)
Other short-term borrowings		633			—			633			—			—			—
Long-term borrowings		(184	)		14			(198	)		(294	)		(89	)		(205	)
Total interest expense		361			504			(143	)		(6,615	)		(6,053	)		(562	)
Net interest income	$	(150	)	$	(5,732	)	$	5,582		$	6,524		$	4,523		$	2,001

	Loans Accretion		Deposit Accretion		Borrowings Amortization			Total
For the year ended December 31, 2020	$	3,716	$	181	$	(85	)	$	3,812
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 years ending (estimated):
2023									744
2024									457
2025									324
2026									252
2027									116
Thereafter (estimated)									112

	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	)%

	December 31, 2022
	Change in net interest income
Change in interest rates	Amount			Percent

Up 4.0%	$	1,665			1.6	%
Up 3.0%		1,183			1.1
Up 2.0%		751			0.7
Up 1.0%		335			0.3
Flat		—			—
Down 1.0%		(2,349	)		(2.2	)
Down 2.0%		(6,725	)		(6.4	)
Down 3.0%		(11,458	)		(11.0	)

	As of December 31, 2022
	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	$	25,395	$	145,192	$	26,023	$	915	$	197,525
Commercial real estate - owner occupied		42,891		231,270		142,602		1,699		418,462
Commercial real estate - non-owner occupied		39,746		503,210		246,862		37,910		827,728
Residential real estate		18,200		152,871		142,008		25,053		338,132
Home equity		4,915		27,819		61,006		—		93,740
Total real estate		131,147		1,060,362		618,501		65,577		1,875,587

Commercial and industrial		56,236		158,473		80,023		9,515		304,247
Consumer		916		3,837		284		1,578		6,615

Total loans, net of deferred fees and costs	$	188,299	$	1,222,672	$	698,808	$	76,670	$	2,186,449

Interest rate sensitivity:
Fixed interest rates	$	112,589	$	1,018,439	$	588,116	$	26,416	$	1,745,560
Floating or adjustable rates		75,710		204,233		110,692		50,254		440,889

Total loans, gross	$	188,299	$	1,222,672	$	698,808	$	76,670	$	2,186,449

	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
Provision for (recovery of) loan 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	%

	December 31, 2022
3 months or less	$	12,863
Over 3 through 6 months		24,250
Over 6 through 12 months		30,469
Over 12 months		19,976
Total	$	87,558

	Payments Due By Period
	Total		Under 1 Year		1-3 Years		3-5 Years		More than 5 years

Time deposits	$	257,933	$	171,415	$	41,758	$	38,484	$	6,276
Repurchase agreements		370		370		—		—		—
Operating leases		3,720		1,002		1,089		487		1,142
Junior subordinated debt		28,334		—		—		—		28,334

	December 31,
Off-Balance Sheet Commitments	2022		2021

Commitments to extend credit	$	635,851	$	654,436
Standby letters of credit		12,897		10,201
Mortgage loan rate-lock commitments		1,920		10,891

	*2022*			*2021*
ASSETS
Cash and due from banks	$	32,207		$	23,095
Interest-bearing deposits in other banks		41,133			483,723
Securities available for sale, at fair value		608,062			692,467
Restricted stock, at cost		12,651			8,056
Loans held for sale		1,061			8,481
Loans, net of deferred fees and costs		2,186,449			1,946,580
Less allowance for loan losses		(19,555	)		(18,678	)
Net loans		2,166,894			1,927,902
Premises and equipment, net		32,900			34,182
Assets held-for-sale		1,382			1,382
Other real estate owned, net of valuation allowance		27			143
Goodwill		85,048			85,048
Core deposit intangibles, net		3,367			4,627
Bank owned life insurance		29,692			29,107
Other assets		51,478			36,384
Total assets	$	3,065,902		$	3,334,597

LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits	$	1,010,602		$	1,009,081
Interest-bearing deposits		1,585,726			1,881,272
Total deposits		2,596,328			2,890,353
Customer repurchase agreements		370			41,128
Other short-term borrowings		100,531			—
Junior subordinated debt		28,334			28,232
Other liabilities		19,165			20,092
Total liabilities		2,744,728			2,979,805

Commitments and contingencies

Shareholders' equity:
Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding		—			—
Common stock, $1 par value, 20,000,000 shares authorized, 10,608,781 shares outstanding at December 31, 2022 and 10,766,967 shares outstanding at December 31, 2021		10,538			10,710
Capital in excess of par value		141,948			147,777
Retained earnings		223,664			201,380
Accumulated other comprehensive loss, net		(54,976	)		(5,075	)
Total shareholders' equity		321,174			354,792
Total liabilities and shareholders' equity	$	3,065,902		$	3,334,597

	*2022*			*2021*			*2020*
Interest and Dividend Income:
Interest and fees on loans	$	82,568		$	87,040		$	87,700
Interest and dividends on securities:
Taxable		10,065			7,309			6,764
Tax-exempt		407			385			433
Dividends		473			464			503
Other interest income		2,491			598			440
Total interest and dividend income		96,004			95,796			95,840
Interest Expense:
Interest on deposits		3,553			3,645			9,729
Interest on short-term borrowings		659			22			259
Interest on subordinated debt		—			203			489
Interest on junior subordinated debt		1,554			1,535			1,543
Total interest expense		5,766			5,405			12,020
Net Interest Income		90,238			90,391			83,820
Provision for (recovery of) loan losses		1,597			(2,825	)		8,916
Net Interest Income after Provision for (Recovery of) Loan Losses		88,641			93,216			74,904
Noninterest Income:
Wealth management income		6,521			6,019			4,789
Service charges on deposit accounts		2,676			2,611			2,557
Interchange fees		4,107			4,152			3,213
Other fees and commissions		906			801			712
Mortgage banking income		1,666			4,195			3,514
Securities gains, net		—			35			814
Income from Small Business Investment Companies		1,409			1,972			270
Income from insurance investments		747			1,199			321
Losses on premises and equipment, net		(228	)		(885	)		(110	)
Other		1,003			932			763
Total noninterest income		18,807			21,031			16,843
Noninterest Expense:
Salaries and employee benefits		36,382			32,342			29,765
Occupancy and equipment		6,075			6,032			5,586
FDIC assessment		903			864			639
Bank franchise tax		1,953			1,767			1,702
Amortization of intangible assets		1,260			1,464			1,637
Data processing		3,310			2,958			3,017
Software		1,505			1,368			1,454
Other real estate owned, net		3			131			60
Other		12,695			12,082			10,705
Total noninterest expense		64,086			59,008			54,565
Income Before Income Taxes		43,362			55,239			37,182
Income Taxes		8,934			11,713			7,137
Net Income	$	34,428		$	43,526		$	30,045
Net Income Per Common Share:
Basic	$	3.23		$	4.00		$	2.74
Diluted	$	3.23		$	4.00		$	2.73
Weighted Average Common Shares Outstanding:
Basic		10,672,314			10,873,817			10,981,623
Diluted		10,674,613			10,877,231			10,985,790

	*Year Ended December 31,*
	*2022*			*2021*			*2020*
Net income	$	34,428		$	43,526		$	30,045

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale		(68,877	)		(12,236	)		7,213
Tax effect		14,868			2,643			(1,557	)

Reclassification adjustment for gains on sale or call of securities		—			(35	)		(814	)
Tax effect		—			7			176

Unrealized gains (losses) on cash flow hedges		4,125			2,068			(2,210	)
Tax effect		(866	)		(434	)		448

Change in unfunded pension liability		1,082			590			(413	)
Tax effect		(233	)		(115	)		77

Other comprehensive income (loss)		(49,901	)		(7,512	)		2,920

Comprehensive income (loss)	$	(15,473	)	$	36,014		$	32,965

										*Accumulated*
				*Capital in*						*Other*			*Total*
	*Common*			*Excess of*			*Retained*			*Comprehensive*			*Shareholders'*
	*Stock*			*Par Value*			*Earnings*			*Income (Loss)*			*Equity*
Balance, December 31, 2019	$	11,019		$	158,244		$	151,478		$	(483	)	$	320,258

Net income		—			—			30,045			—			30,045
Other comprehensive income		—			—			—			2,920			2,920
Stock repurchased (140,526 shares)		(141	)		(4,840	)		—			—			(4,981	)
Stock options exercised (2,573 shares)		3			40			—			—			43
Vesting of restricted stock (18,487 shares)		18			(18	)		—			—			—
Equity based compensation (48,780 shares)		27			1,424			—			—			1,451
Cash dividends paid, $1.08 per share		—			—			(11,842	)		—			(11,842	)

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

	*December 31, 2022*
	*Amortized*		*Unrealized*		*Unrealized*
	*Cost*		*Gains*		*Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	152,033	$	—	$	12,606	$	139,427
Federal agencies and GSEs		90,363		4		7,019		83,348
Mortgage-backed and CMOs		336,393		1		42,301		294,093
State and municipal		69,023		12		5,312		63,723
Corporate		31,299		—		3,828		27,471
Total securities available for sale	$	679,111	$	17	$	71,066	$	608,062

(Dollars in thousands)	*December 31, 2021*
	*Amortized*		*Unrealized*		*Unrealized*
	*Cost*		*Gains*		*Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	150,751	$	—	$	1,174	$	149,577
Federal agencies and GSEs		104,518		993		931		104,580
Mortgage-backed and CMOs		357,981		2,854		4,525		356,310
State and municipal		65,939		1,021		488		66,472
Corporate		15,450		218		140		15,528
Total securities available for sale	$	694,639	$	5,086	$	7,258	$	692,467

	*Available for Sale*
	*Amortized*
	*Cost*		*Fair Value*
Due in one year or less	$	44,859	$	43,579
Due after one year through five years		208,162		191,338
Due after five years through ten years		74,582		65,037
Due after ten years		15,114		14,015
Mortgage-backed and CMOs		336,394		294,093
	$	679,111	$	608,062

	*For the Year Ended December 31,*
	*2022*		*2021*		*2020*
Gross realized gains	$	—	$	35	$	814
Gross realized losses		—		—		—
Proceeds from sales of securities		—		561		5,811

	*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