UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-12820 AMERICAN NATIONAL BANKSHARES INC. (Exact name of registrant as specified in its charter) Virginia 54-1284688 (State of incorporation) (I.R.S ...

DANVILLE, Va., Jan. 23, 2024 (GLOBE NEWSWIRE) -- American National Bankshares Inc. (NASDAQ:AMNB) ("American National" or the "Company") today reported fourth quarter 2023 earnings of $4.0 million, or $0.38 per diluted common share. Those results compare to earnings of $8.0 million, or $0.76 per diluted common share, during the same quarter in the prior year, and earnings of $5.8 million, or $0.54 per diluted common share, for the third quarter of 2023. Earnings for the twelve months ended December 31, 2023, ...

PART I. FINANCIAL INFORMATION [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for the period ended September 30, 2023 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Total Assets | $3,091,258 | $3,065,902 | | Net Loans | $2,248,331 | $2,166,894 | | Securities Available for Sale | $543,915 | $608,062 | | Noninterest-bearing Deposits | $848,017 | $1,010,602 | | Interest-bearing Deposits | $1,723,227 | $1,585,726 | | Total Shareholders' Equity | $327,278 | $321,174 | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Consolidated Statements of Income Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total Interest & Dividend Income | $31,060 | $25,151 | $88,793 | $69,088 | | Total Interest Expense | $10,397 | $1,144 | $23,759 | $3,138 | | Net Interest Income | $20,663 | $24,007 | $65,034 | $65,950 | | Provision for (recovery of) Credit Losses | $(538) | $615 | $59 | $438 | | Total Noninterest Income | $4,774 | $4,760 | $13,501 | $15,197 | | Total Noninterest Expense | $18,343 | $16,448 | $50,174 | $47,252 | | Net Income | $5,788 | $9,256 | $22,084 | $26,395 | | Basic EPS | $0.54 | $0.87 | $2.08 | $2.47 | - Merger related expenses totaled **$1,702 thousand** for both the three and nine months ended September 30, 2023[10](index=10&type=chunk) [Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Income | $5,788 | $9,256 | $22,084 | $26,395 | | Other Comprehensive Loss | $(3,858) | $(18,633) | $(2,644) | $(52,576) | | Comprehensive Income (Loss) | $1,930 | $(9,377) | $19,440 | $(26,181) | - Unrealized losses on securities available for sale (net of tax) **significantly decreased** from $(25,234) thousand in Q3 2022 to $(5,388) thousand in Q3 2023, and from $(71,381) thousand in 9M 2022 to $(4,087) thousand in 9M 2023[12](index=12&type=chunk)[15](index=15&type=chunk) [Consolidated Statements of Changes in Shareholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Shareholders' Equity Changes (in thousands) | Metric | Balance at Dec 31, 2022 | Net Income (9M 2023) | Other Comprehensive Loss (9M 2023) | Cash Dividends Paid (9M 2023) | Equity Based Compensation (9M 2023) | Impact of CECL Adoption | Balance at Sep 30, 2023 | | :-------------------------- | :---------------------- | :------------------- | :--------------------------------- | :---------------------------- | :---------------------------------- | :---------------------- | :---------------------- | | Common Stock | $10,538 | — | — | — | $19 | — | $10,544 | | Capital in Excess of Par Value | $141,948 | — | — | — | $1,406 | — | $142,392 | | Retained Earnings | $223,664 | $22,084 | — | $(9,565) | — | $(4,221) | $231,962 | | Accumulated Other Comprehensive Loss | $(54,976) | — | $(2,644) | — | — | — | $(57,620) | | **Total Shareholders' Equity** | **$321,174** | **$22,084** | **$(2,644)** | **$(9,565)** | **$1,425** | **$(4,221)** | **$327,278** | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $20,101 | $31,891 | | Net cash used in investing activities | $(26,707) | $(191,500) | | Net cash provided by (used in) financing activities | $8,534 | $(256,281) | | Net Increase (Decrease) in Cash and Cash Equivalents | $1,928 | $(415,890) | | Cash and Cash Equivalents at End of Period | $75,268 | $94,978 | - Financing activities shifted from a significant net cash outflow of **$(256,281) thousand** in 9M 2022 to a net cash inflow of **$8,534 thousand** in 9M 2023, primarily due to changes in deposits and borrowings[22](index=22&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [Note 1 – Accounting Policies](index=9&type=section&id=Note%201%20%E2%80%93%20Accounting%20Policies) - On January 1, 2023, the Company adopted the **Current Expected Credit Loss (CECL) methodology**, replacing the incurred loss methodology[28](index=28&type=chunk) - The Company adopted ASU 2022-02, eliminating accounting guidance for **troubled debt restructurings (TDRs)** for CECL adopters, with no material effect on financial statements[30](index=30&type=chunk) - On July 24, 2023, the Company entered into an Agreement and Plan of Merger with **Atlantic Union Bankshares Corporation**, with the merger expected to close in the first quarter of 2024[42](index=42&type=chunk) [Note 2 – Securities](index=12&type=section&id=Note%202%20%E2%80%93%20Securities) Securities Available for Sale (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Amortized Cost | $618,981 | $679,111 | | Fair Value | $543,915 | $608,062 | | Gross Unrealized Losses | $75,069 | $71,066 | - Unrealized losses on AFS securities are primarily due to normal market fluctuations and changes in interest rates, **not credit quality deterioration**[51](index=51&type=chunk)[57](index=57&type=chunk) Restricted Stock (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | FRB stock | $6,585 | $6,545 | | FHLB stock | $6,351 | $6,106 | | Total Restricted Stock | $12,936 | $12,651 | - Net proceeds from sales of AFS securities for the nine months ended September 30, 2023, totaled **$13.2 million**, resulting in a net realized loss of **$68 thousand**[58](index=58&type=chunk) [Note 3 – Loans](index=16&type=section&id=Note%203%20%E2%80%93%20Loans) Loan Portfolio Composition (in thousands) | Loan Type | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Commercial | $322,209 | $304,247 | | Commercial Real Estate: Construction and Land Development | $269,840 | $197,525 | | Commercial Real Estate: Owner Occupied | $413,151 | $418,462 | | Commercial Real Estate: Non-owner Occupied | $803,440 | $827,728 | | Residential Real Estate: Residential | $366,557 | $338,132 | | Residential Real Estate: Home Equity | $91,393 | $93,740 | | Consumer | $6,865 | $6,615 | | **Total Loans, net of deferred fees and costs** | **$2,273,455** | **$2,186,449** | Past Due Loans (in thousands) | Category | 30-59 Days Past Due | 60-89 Days Past Due | 90+ Days Past Due and Still Accruing | Non Accrual Loans | Total Past Due | | :-------------------------------- | :------------------ | :------------------ | :----------------------------------- | :---------------- | :------------- | | **Sep 30, 2023** | | | | | | | Commercial | $0 | $0 | $0 | $0 | $0 | | Commercial real estate: Construction and land development | $0 | $0 | $0 | $0 | $0 | | Commercial real estate: Owner occupied | $46 | $84 | $0 | $2,932 | $3,062 | | Commercial real estate: Non-owner occupied | $597 | $0 | $0 | $89 | $686 | | Residential: Residential | $171 | $306 | $0 | $494 | $971 | | Home equity | $76 | $50 | $0 | $209 | $335 | | Consumer | $3 | $3 | $0 | $16 | $22 | | **Total** | **$893** | **$443** | **$0** | **$3,740** | **$5,076** | | **Dec 31, 2022** | | | | | | | Commercial | $161 | $0 | $0 | $4 | $165 | | Commercial real estate: Construction and land development | $0 | $0 | $0 | $0 | $0 | | Commercial real estate: Owner occupied | $724 | $268 | $0 | $0 | $992 | | Commercial real estate: Non-owner occupied | $319 | $0 | $0 | $301 | $620 | | Residential: Residential | $664 | $90 | $0 | $797 | $1,551 | | Home equity | $104 | $0 | $0 | $205 | $309 | | Consumer | $0 | $0 | $16 | $0 | $16 | | **Total** | **$1,972** | **$358** | **$16** | **$1,307** | **$3,653** | - Total nonaccrual loans increased to **$3,740 thousand** at September 30, 2023, from $1,307 thousand at December 31, 2022[66](index=66&type=chunk) - Three loans were modified to borrowers experiencing financial difficulty during the three months ended September 30, 2023, and four loans during the nine months ended September 30, 2023, primarily involving term extensions and interest rate reductions[72](index=72&type=chunk)[73](index=73&type=chunk) - Residential loans in process of foreclosure decreased significantly to **$23 thousand** at September 30, 2023, from $715 thousand at December 31, 2022[76](index=76&type=chunk) [Note 4 – Allowance for Credit Losses - Loans and Reserve for Unfunded Lending Commitments](index=24&type=section&id=Note%204%20%E2%80%93%20Allowance%20for%20Credit%20Losses%20-%20Loans%20and%20Reserve%20for%20Unfunded%20Lending%20Commitments) Changes in Allowance for Credit Losses - Loans (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Year Ended Dec 31, 2022 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :----------------------------- | :---------------------- | :----------------------------- | | Balance, beginning of period | $19,555 | $18,678 | $18,678 | | Day 1 impact of CECL adoption | $5,192 | - | - | | Provision for credit losses | $15 | $1,597 | $438 | | Charge-offs | $(429) | $(1,019) | $(185) | | Recoveries | $791 | $299 | $258 | | Balance, end of period | $25,124 | $19,555 | $19,189 | Changes in Reserve for Unfunded Lending Commitments (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Year Ended Dec 31, 2022 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :----------------------------- | :---------------------- | :----------------------------- | | Balance, beginning of period | $377 | $386 | $386 | | Day 1 impact of CECL adoption | $305 | - | - | | Provision for (recovery of) unfunded commitments | $44 | $(9) | $(8) | | Balance, end of period | $726 | $377 | $378 | - The Company recorded a **recovery of credit losses of $538 thousand** for the third quarter of 2023, compared to a provision of $615 thousand in the third quarter of 2022[96](index=96&type=chunk) [Note 5 – Goodwill and Other Intangible Assets](index=27&type=section&id=Note%205%20%E2%80%93%20Goodwill%20and%20Other%20Intangible%20Assets) - Goodwill remained stable at **$85,048 thousand** at September 30, 2023, with no impairment identified in the qualitative assessment at June 30, 2023[98](index=98&type=chunk)[100](index=100&type=chunk) - Core deposit intangibles, net, decreased to **$2,550 thousand** at September 30, 2023, from $3,367 thousand at December 31, 2022, due to $817 thousand in amortization[100](index=100&type=chunk) [Note 6 – Leases](index=27&type=section&id=Note%206%20%E2%80%93%20Leases) Lease Information (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Lease Liabilities | $5,261 | $3,318 | | Right-of-Use Assets | $5,191 | $3,245 | | Weighted Average Remaining Lease Term (years) | 8.38 | 6.77 | | Weighted Average Discount Rate | 3.88% | 3.16% | | Operating Lease Cost (3M) | $351 | $268 | | Operating Lease Cost (9M) | $913 | $803 | [Note 7 – Short-term Borrowings](index=29&type=section&id=Note%207%20%E2%80%93%20Short-term%20Borrowings) Short-term Borrowings (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Customer Repurchase Agreements | $60,035 | $370 | | Other Short-term Borrowings | $85,000 | $100,531 | | Total Short-term Borrowings | $145,035 | $100,901 | [Note 8 – Long-term Borrowings](index=29&type=section&id=Note%208%20%E2%80%93%20Long-term%20Borrowings) Junior Subordinated Debt (in thousands) | Issuing Entity | Sep 30, 2023 Principal Amount | Dec 31, 2022 Principal Amount | | :-------------------------- | :------------------------------ | :------------------------------ | | AMNB Statutory Trust I | $20,619 | $20,619 | | MidCarolina Trust I | $4,643 | $4,601 | | MidCarolina Trust II | $3,148 | $3,114 | | **Total Junior Subordinated Debt** | **$28,410** | **$28,334** | - The Company had **$921.5 million** in eligible collateral pledged with the FHLB at September 30, 2023, with **$446.5 million** of additional borrowing capacity[109](index=109&type=chunk) - The Company had **$170.0 million** in FHLB letters of credit outstanding and **$170.3 million** in securities pledged to secure public deposits at September 30, 2023[110](index=110&type=chunk) [Note 9 – Derivative Financial Instruments and Hedging Activities](index=31&type=section&id=Note%209%20%E2%80%93%20Derivative%20Financial%20Instruments%20and%20Hedging%20Activities) Derivative Financial Instruments (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Notional Amount (Interest Rate Swaps) | $28,500 | $28,500 | | Assets (Fair Value) | $1,966 | $1,325 | | Cash Collateral Pledged | $850 | $850 | - The Company uses interest rate swaps as cash flow hedges to manage exposure to variability in cash flows on variable rate borrowings; these swaps were terminated in October 2023[116](index=116&type=chunk)[117](index=117&type=chunk) [Note 10 – Stock Based Compensation](index=32&type=section&id=Note%2010%20%E2%80%93%20Stock%20Based%20Compensation) Nonvested Restricted Stock Activity | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Shares Nonvested | 85,212 | 71,676 | | Unrecognized Compensation Cost | $1.4 million | $1.1 million | - Share-based compensation expense for nonvested restricted stock was **$800 thousand** for the nine months ended September 30, 2023, up from $665 thousand in the prior year[125](index=125&type=chunk) - All stock options related to the HomeTown acquisition in 2019 had been exercised as of September 30, 2023[123](index=123&type=chunk) [Note 11 – Earnings Per Common Share](index=33&type=section&id=Note%2011%20%E2%80%93%20Earnings%20Per%20Common%20Share) Earnings Per Common Share | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic EPS | $0.54 | $0.87 | $2.08 | $2.47 | | Diluted EPS | $0.54 | $0.87 | $2.08 | $2.47 | [Note 12 – Fair Value Measurements](index=33&type=section&id=Note%2012%20%E2%80%93%20Fair%20Value%20Measurements) - The Company classifies financial assets and liabilities into a **three-level hierarchy** based on the observability of inputs used in fair value measurements[130](index=130&type=chunk) Recurring Fair Value Measurements (Sep 30, 2023, in thousands) | Description | Balance | Level 1 | Level 2 | Level 3 | | :-------------------------- | :-------- | :------ | :------ | :------ | | Securities available for sale | $543,915 | $0 | $543,915 | $0 | | Loans held for sale | $1,981 | $0 | $1,981 | $0 | | Derivatives - cash flow hedges | $1,966 | $0 | $1,966 | $0 | Nonrecurring Fair Value Measurements (Sep 30, 2023, in thousands) | Description | Balance | Level 1 | Level 2 | Level 3 | | :-------------------------- | :-------- | :------ | :------ | :------ | | Individually assessed loans, net of valuation allowance | $742 | $0 | $0 | $742 | | Other real estate owned, net | $0 | $0 | $0 | $0 | - **Level 3 valuations** for individually assessed loans use discounted appraised value, with selling cost (8.00% - 15%) as an unobservable input[139](index=139&type=chunk) [Note 13 – Segment and Related Information](index=37&type=section&id=Note%2013%20%E2%80%93%20Segment%20and%20Related%20Information) - The Company operates in two reportable segments: **community banking and wealth management**, with community banking being the primary segment[143](index=143&type=chunk) Q3 2023 Segment Performance (in thousands) | Metric | Community Banking | Wealth Management | Total | | :-------------------------- | :---------------- | :---------------- | :---- | | Interest Income | $31,060 | $0 | $31,060 | | Noninterest Income | $3,038 | $1,736 | $4,774 | | Income before Income Taxes | $6,583 | $1,049 | $7,632 | | Net Income | $4,992 | $796 | $5,788 | | Total Assets | $3,091,004 | $254 | $3,091,258 | 9M 2023 Segment Performance (in thousands) | Metric | Community Banking | Wealth Management | Total | | :-------------------------- | :---------------- | :---------------- | :---- | | Interest Income | $88,793 | $0 | $88,793 | | Noninterest Income | $8,470 | $5,031 | $13,501 | | Income before Income Taxes | $25,535 | $2,767 | $28,302 | | Net Income | $19,925 | $2,159 | $22,084 | | Total Assets | $3,091,004 | $254 | $3,091,258 | [Note 14 – Supplemental Cash Flow Information](index=38&type=section&id=Note%2014%20%E2%80%93%20Supplemental%20Cash%20Flow%20Information) Supplemental Cash Flow Information (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Cash and Cash Equivalents | $75,268 | $94,978 | | Cash Paid for Interest | $22,511 | $3,160 | | Cash Paid for Income Taxes | $6,809 | $1,482 | | Net Unrealized Losses on Securities Available for Sale (Noncash) | $(4,019) | $(71,381) | | Net Unrealized Gains on Cash Flow Hedges (Noncash) | $642 | $4,298 | [Note 15 – Accumulated Other Comprehensive Loss](index=39&type=section&id=Note%2015%20%E2%80%93%20Accumulated%20Other%20Comprehensive%20Loss) Accumulated Other Comprehensive Loss (AOCI) (in thousands) | Component | Balance at Dec 31, 2022 | 9M 2023 Change | Balance at Sep 30, 2023 | | :-------------------------------- | :---------------------- | :------------- | :---------------------- | | Net Unrealized Losses on Securities | $(55,710) | $(3,205) | $(58,861) | | Unrealized Gains on Cash Flow Hedges | $1,047 | $507 | $1,554 | | Adjustments Related to Pension Benefits | $(313) | $0 | $(313) | | **Total AOCI** | **$(54,976)** | **$(2,644)** | **$(57,620)** | [Note 16 – Subsequent Events - Swap Terminations](index=39&type=section&id=Note%2016%20%E2%80%93%20Subsequent%20Events%20-%20Swap%20Terminations) - On October 16, 2023, the Company **terminated its three interest rate swaps** designated as cash flow hedges related to its trust preferred capital notes[153](index=153&type=chunk) - Prior to termination, these swaps had recorded **$1.6 million** in other assets and **$413 thousand** as a component of other comprehensive income[153](index=153&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=41&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes financial performance, condition, key trends, critical accounting policies, and the pending merger [Forward-Looking Statements](index=41&type=section&id=Forward-Looking%20Statements) - The report contains forward-looking statements subject to risks including challenges in combining businesses with Atlantic Union, market volatility, and regulatory changes[156](index=156&type=chunk) [Reclassification](index=43&type=section&id=Reclassification) - Certain prior period information has been reclassified to conform to the 2023 presentation[160](index=160&type=chunk) [Agreement and Plan of Merger](index=43&type=section&id=Agreement%20and%20Plan%20of%20Merger) - On July 24, 2023, the Company entered into a merger agreement with **Atlantic Union Bankshares Corporation**, with each Company common stock share converting into 1.35 shares of Atlantic Union common stock[161](index=161&type=chunk) - The merger is expected to close in the **first quarter of 2024**, subject to regulatory and shareholder approvals[161](index=161&type=chunk) [Critical Accounting Policies](index=43&type=section&id=Critical%20Accounting%20Policies) - The Company's critical accounting policies include the **Allowance for Credit Losses (ACL)** and **Goodwill and Intangible Assets**[162](index=162&type=chunk) - The ACL is determined using quantitative and qualitative factors, including historical experience, economic forecasts, and underwriting standards[166](index=166&type=chunk) - Goodwill is reviewed annually for impairment, with a qualitative assessment at June 30, 2023, concluding **no impairment**[171](index=171&type=chunk) [Results of Operations](index=46&type=section&id=Results%20of%20Operations) [Executive Overview](index=46&type=section&id=Executive%20Overview) - Net income for Q3 2023 was **$5.8 million** ($0.54 diluted EPS), down from $9.3 million ($0.87 diluted EPS) in Q3 2022[175](index=175&type=chunk) - Average deposits grew **$51.5 million** (8.0% annualized) during Q3 2023 but decreased **$144.0 million** (5.2%) from Q3 2022[175](index=175&type=chunk) - Loans grew **$29.0 million** (5.2% annualized) during Q3 2023 and increased **$154.0 million** (7.3%) from Q3 2022[175](index=175&type=chunk) - Fully taxable equivalent net interest margin was **2.76%** for Q3 2023, down from 3.20% in Q3 2022[175](index=175&type=chunk) - Nonperforming assets as a percentage of total assets increased to **0.12%** at September 30, 2023, from 0.05% at September 30, 2022[176](index=176&type=chunk) [Net Interest Income](index=46&type=section&id=Net%20Interest%20Income) - Net interest income on a taxable equivalent basis decreased by **$3.4 million (13.9%)** to $20.7 million for Q3 2023 compared to Q3 2022, due to a 195 basis point rise in liability costs[178](index=178&type=chunk)[179](index=179&type=chunk) - The net interest margin (taxable equivalent basis) contracted by **44 basis points** to 2.76% in Q3 2023 from 3.20% in Q3 2022[179](index=179&type=chunk) - For the nine months ended September 30, 2023, net interest income (taxable equivalent basis) decreased by **$925 thousand (1.4%)** to $65.2 million compared to the same period in 2022[186](index=186&type=chunk) - The net interest margin (taxable equivalent basis) for the nine months ended September 30, 2023, increased by **8 basis points** to 2.94% from 2.86% in the prior year[187](index=187&type=chunk) [Noninterest Income](index=50&type=section&id=Noninterest%20Income) - Total noninterest income for Q3 2023 increased marginally by **$14 thousand (0.3%)** to $4,774 thousand compared to Q3 2022[193](index=193&type=chunk)[194](index=194&type=chunk) - Wealth management income increased by **$133 thousand (8.3%)** and interchange fees increased by **$149 thousand (14.7%)** in Q3 2023 YoY[194](index=194&type=chunk) - Mortgage banking income decreased by **$95 thousand (24.5%)** and service charges on deposit accounts decreased by **$116 thousand (17.0%)** in Q3 2023 YoY[194](index=194&type=chunk) - For the nine months ended September 30, 2023, total noninterest income decreased by **$1.7 million (11.2%)** to $13,501 thousand compared to the same period in 2022[196](index=196&type=chunk)[197](index=197&type=chunk) - Mortgage banking income declined by **$856 thousand (57.4%)** and income from Small Business Investment Companies declined by **$784 thousand (46.9%)** for 9M 2023 YoY[197](index=197&type=chunk) [Noninterest Expense](index=51&type=section&id=Noninterest%20Expense) - Total noninterest expense for Q3 2023 increased by **$1.9 million (11.5%)** to $18,343 thousand compared to Q3 2022, primarily due to **$1.7 million in merger-related expenses**[198](index=198&type=chunk)[199](index=199&type=chunk) - FDIC assessment increased by **$127 thousand (55.9%)** in Q3 2023 YoY due to an increased base assessment rate[199](index=199&type=chunk) - For the nine months ended September 30, 2023, total noninterest expense increased by **$2.9 million (6.2%)** to $50,174 thousand, also driven by **$1.7 million in merger-related expenses**[201](index=201&type=chunk)[202](index=202&type=chunk) - Software expense increased by **$303 thousand (27.8%)** for 9M 2023 due to ATM and other product upgrades[202](index=202&type=chunk) [Non-GAAP Financial Measures](index=52&type=section&id=Non-GAAP%20Financial%20Measures) Efficiency Ratio | Period | Efficiency Ratio | | :-------------------------- | :--------------- | | Three Months Ended Sep 30, 2023 | 64.31% | | Three Months Ended Sep 30, 2022 | 55.98% | | Nine Months Ended Sep 30, 2023 | 60.43% | | Nine Months Ended Sep 30, 2022 | 56.87% | - The efficiency ratio increased for both the three and nine-month periods, indicating a **decrease in operational efficiency**[203](index=203&type=chunk)[204](index=204&type=chunk) [Income Taxes](index=53&type=section&id=Income%20Taxes) Effective Tax Rate | Period | Effective Tax Rate | | :-------------------------- | :----------------- | | Three Months Ended Sep 30, 2023 | 24.16% | | Three Months Ended Sep 30, 2022 | 20.92% | | Nine Months Ended Sep 30, 2023 | 21.97% | | Nine Months Ended Sep 30, 2022 | 21.11% | - The increase in the effective tax rate for 2023 is primarily due to the **non-deductibility of the majority of the $1.7 million in merger-related expenses**[207](index=207&type=chunk) [Impact of Inflation and Changing Prices](index=53&type=section&id=Impact%20of%20Inflation%20and%20Changing%20Prices) - Inflation, while moderating in 2023, remains significantly elevated and primarily impacts noninterest expenses[208](index=208&type=chunk) [Changes in Financial Position](index=53&type=section&id=Changes%20in%20Financial%20Position) [Securities](index=53&type=section&id=Securities) - The available for sale securities portfolio decreased by **$64.1 million (10.5%)** to $543.9 million at September 30, 2023, from $608.1 million at December 31, 2022[210](index=210&type=chunk) - The net unrealized loss on the AFS portfolio deteriorated slightly to **$75.1 million** at September 30, 2023, from $71.1 million at December 31, 2022, due to an increase in market rates[210](index=210&type=chunk) - The Company sold **$12.8 million** par value of AFS securities, realizing a net loss of **$68 thousand**, during the nine months ended September 30, 2023[211](index=211&type=chunk) [Loans](index=54&type=section&id=Loans) - Total loans increased by **$87.0 million (4.0%)** to $2.3 billion at September 30, 2023, from December 31, 2022[212](index=212&type=chunk) - Average loans increased by **$183.2 million (8.9%)** for Q3 2023 compared to Q3 2022[212](index=212&type=chunk) - Secondary loan production volume was **$64.2 million** for the nine months ended September 30, 2023, up from $55.8 million in the prior year[212](index=212&type=chunk) Loan Portfolio by Interest Rate Sensitivity (Sep 30, 2023, in thousands) | Interest Rate Type | Total Loans | | :-------------------------- | :---------- | | Fixed interest rates | $1,865,348 | | Floating or adjustable rates | $408,107 | [Allowance for Credit Losses](index=55&type=section&id=Allowance%20for%20Credit%20Losses) - The Allowance for Credit Losses (ACL) on loans increased to **$25.1 million** at September 30, 2023, from $19.6 million at December 31, 2022, largely due to the **$5.2 million Day 1 impact of CECL adoption**[220](index=220&type=chunk)[224](index=224&type=chunk) - The ACL as a percentage of total loans was **1.11%** at September 30, 2023, compared to 0.91% at December 31, 2022[220](index=220&type=chunk) - The Company recorded a **recovery of credit losses of $538 thousand** for Q3 2023, contrasting with a provision of $615 thousand in Q3 2022[221](index=221&type=chunk) [Asset Quality Indicators](index=57&type=section&id=Asset%20Quality%20Indicators) Asset Quality Ratios | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Allowance to loans | 1.11% | 0.91% | | Nonperforming assets to total assets | 0.12% | 0.05% | | Nonperforming loans to loans | 0.16% | 0.06% | | Allowance to nonperforming loans | 671.76% | 1,478.08% | [Nonperforming Assets (Loans and Other Real Estate Owned)](index=57&type=section&id=Nonperforming%20Assets%20(Loans%20and%20Other%20Real%20Estate%20Owned)) - Nonperforming loans to total loans increased to **0.16%** at September 30, 2023, from 0.06% at December 31, 2022[229](index=229&type=chunk) - Nonperforming assets represented **0.12%** of total assets at September 30, 2023, up from 0.05% at December 31, 2022, primarily due to a **$2.4 million increase in nonperforming loans**[229](index=229&type=chunk) [Individually Assessed Loans](index=57&type=section&id=Individually%20Assessed%20Loans) - Total individually assessed loans were **$3.5 million** at September 30, 2023[231](index=231&type=chunk) - Impaired loans, exclusive of purchased credit impaired loans, were **$5.1 million** at December 31, 2022[231](index=231&type=chunk) [Other Real Estate Owned](index=57&type=section&id=Other%20Real%20Estate%20Owned) - There was **no Other Real Estate Owned (OREO)** at September 30, 2023, compared to $27 thousand at December 31, 2022[232](index=232&type=chunk) [Deposits](index=57&type=section&id=Deposits) - Total deposits remained stable at **$2.6 billion** at both September 30, 2023, and December 31, 2022[233](index=233&type=chunk) - Average interest-bearing deposits for Q3 2023 increased by **$35.1 million (2.0%)** YoY, while average noninterest-bearing deposits decreased by **$179.1 million (17.0%)** YoY[233](index=233&type=chunk) - The cost of interest-bearing deposits for Q3 2023 was **2.04%**, significantly up from 0.17% for Q3 2022[233](index=233&type=chunk) [Certificates of Deposit over $250,000](index=59&type=section&id=Certificates%20of%20Deposit%20over%20$250,000) - Certificates of deposit exceeding the FDIC insurance limit increased to **$133.4 million** at September 30, 2023, from $87.6 million at December 31, 2022[235](index=235&type=chunk) Maturity Distribution of Time Deposits > $250,000 (Sep 30, 2023, in thousands) | Maturity | Amount | | :-------------------------- | :------- | | 3 months or less | $34,118 | | Over 3 through 6 months | $67,892 | | Over 6 through 12 months | $25,459 | | Over 12 months | $5,966 | | **Total** | **$133,435** | - Total uninsured deposits were approximately **$1.0 billion** at September 30, 2023, up from $974.0 million at December 31, 2022[236](index=236&type=chunk) [Shareholders' Equity](index=59&type=section&id=Shareholders'%20Equity) - Shareholders' equity increased by **$6.1 million (1.9%)** to $327.3 million at September 30, 2023, from $321.2 million at December 31, 2022[237](index=237&type=chunk) Company Regulatory Capital Ratios (Sep 30, 2023) | Ratio | Percentage | | :-------------------------- | :--------- | | Common equity tier 1 capital ratio | 11.77% | | Tier 1 capital ratio | 12.89% | | Total capital ratio | 13.91% | | Tier 1 leverage ratio | 10.61% | - Management believes the Company and the Bank **satisfy all capital adequacy requirements** to which they are subject[238](index=238&type=chunk) [Stock Repurchase Program](index=59&type=section&id=Stock%20Repurchase%20Program) - The Company has an approved stock repurchase plan authorizing up to **$10 million** in repurchases through December 31, 2023[238](index=238&type=chunk) - **No shares were repurchased** during the three months ended September 30, 2023[264](index=264&type=chunk) - Under the merger agreement with Atlantic Union, the Company **may not repurchase shares** without prior approval from Atlantic Union[239](index=239&type=chunk)[264](index=264&type=chunk) [Liquidity](index=60&type=section&id=Liquidity) - The Company manages liquidity through on-balance sheet sources and off-balance sheet sources like FHLB lines of credit and the IntraFi Network[242](index=242&type=chunk)[244](index=244&type=chunk)[245](index=245&type=chunk) - FHLB credit availability was **$677.6 million** at September 30, 2023, with **$446.5 million** accessible without pledging additional collateral[243](index=243&type=chunk) - The Company had **$85.9 million** in deposits through IntraFi's program at September 30, 2023, providing flexible funding options[245](index=245&type=chunk) [Off-Balance Sheet Activities](index=60&type=section&id=Off-Balance%20Sheet%20Activities) Off-Balance Sheet Transactions (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Commitments to extend credit | $619,096 | $635,851 | | Standby letters of credit | $11,826 | $12,897 | | Mortgage loan rate-lock commitments | $2,917 | $1,920 | [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=62&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section details market risk management strategies, focusing on interest rate risk and balance sheet sensitivity [Market Risk Management](index=62&type=section&id=Market%20Risk%20Management) - The Company's primary market risk exposure is **interest rate risk**, which is managed through policies approved by the Asset Liability Committee (ALCO) and Board of Directors[250](index=250&type=chunk)[251](index=251&type=chunk) [Interest Rate Risk Management](index=62&type=section&id=Interest%20Rate%20Risk%20Management) - The Company's interest sensitivity position at September 30, 2023, is considered somewhat **asset sensitive**[252](index=252&type=chunk) - Management aims to maintain a relatively **neutral interest rate risk profile** to minimize exposure to market rate fluctuations[252](index=252&type=chunk) [Earnings Simulation](index=62&type=section&id=Earnings%20Simulation) Estimated Impact on Net Interest Income (12 months, Sep 30, 2023, in thousands) | Change in Interest Rates | Amount Change | Percent Change | | :----------------------- | :------------ | :------------- | | Up 4.00% | $(178) | -0.2% | | Up 3.00% | $(159) | (0.2)% | | Up 2.00% | $(82) | (1.0)% | | Up 1.00% | $(35) | (0.0)% | | Flat | $0 | 0% | | Down 1.00% | $(1,015) | (1.2)% | | Down 2.00% | $(2,562) | (3.0)% | | Down 3.00% | $(5,041) | (5.9)% | | Down 4.00% | $(7,252) | (8.5)% | - Net interest income is projected to increase marginally with higher interest rates but **decrease more significantly with lower rates**[253](index=253&type=chunk) [Economic Value Simulation](index=63&type=section&id=Economic%20Value%20Simulation) Estimated Changes in Economic Value of Equity (Sep 30, 2023, in thousands) | Change in Interest Rates | Amount | $ Change | % Change | | :----------------------- | :----- | :------- | :------- | | Up 4.00% | $386,579 | $(23,895) | -5.8% | | Up 3.00% | $403,921 | $(6,553) | (1.6)% | | Up 2.00% | $417,248 | $6,774 | 1.7% | | Up 1.00% | $420,739 | $10,265 | 2.5% | | Flat | $410,474 | $0 | 0% | | Down 1.00% | $388,112 | $(22,362) | (5.5)% | | Down 2.00% | $343,351 | $(67,123) | (16.4)% | | Down 3.00% | $279,069 | $(131,405) | (32.0)% | | Down 4.00% | $199,858 | $(210,616) | (51.3)% | - The economic value of equity is more sensitive to declining interest rates, showing a **substantial decrease in value** under significant downward rate shifts[259](index=259&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=63&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls [Disclosure Controls and Procedures](index=63&type=section&id=Disclosure%20Controls%20and%20Procedures) - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were **effective** as of September 30, 2023[260](index=260&type=chunk) - **No changes** in the Company's internal control over financial reporting occurred during the quarter ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[261](index=261&type=chunk) PART II. OTHER INFORMATION [ITEM 1. LEGAL PROCEEDINGS](index=64&type=section&id=Item%201.%20Legal%20Proceedings) The Company is involved in routine legal proceedings not expected to have a material adverse effect - The Company is involved in various legal proceedings incidental to the normal conduct of business[262](index=262&type=chunk) - Management believes these proceedings will **not have a material adverse effect** on the consolidated financial position or results of operations[262](index=262&type=chunk) [ITEM 1A. RISK FACTORS](index=64&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to previously disclosed risk factors - No material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for 2022 and Quarterly Report on Form 10-Q for Q2 2023[263](index=263&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES](index=64&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities,%20Use%20of%20Proceeds,%20and%20Issuer%20Purchases%20of%20Equity%20Securities) No shares were repurchased in Q3 2023, and future repurchases are subject to merger agreement consent [Stock Repurchase Program](index=64&type=section&id=Stock%20Repurchase%20Program) - The Company has an approved one-year stock repurchase plan authorizing repurchases of up to **$10 million** of common stock through December 31, 2023[263](index=263&type=chunk) - **No shares** of common stock were repurchased during the three months ended September 30, 2023[264](index=264&type=chunk) - As of September 30, 2023, the Company had remaining authority to repurchase up to **$9.0 million** of common stock[264](index=264&type=chunk) - Under the terms of the merger agreement with Atlantic Union, the Company **may not repurchase shares** without Atlantic Union's prior consent[264](index=264&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=64&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities were reported by the Company - No defaults upon senior securities were reported[264](index=264&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=64&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the Company's operations - This item is not applicable[264](index=264&type=chunk) [ITEM 5. OTHER INFORMATION](index=64&type=section&id=Item%205.%20Other%20Information) No other information requiring disclosure under this item was reported - No required 8-K disclosures, changes in nominating process, or trading arrangements were reported[265](index=265&type=chunk) [ITEM 6. EXHIBITS](index=65&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed, including officer certifications and interactive data files - Includes Section 302 and 906 Certifications from Jeffrey V. Haley (President and CEO) and Jeffrey W. Farrar (Senior Executive Vice President, COO and CFO)[266](index=266&type=chunk) - Interactive data files formatted in Inline eXtensible Business Reporting Language (XBRL) for the quarter ended September 30, 2023, are provided[266](index=266&type=chunk) [SIGNATURES](index=66&type=section&id=SIGNATURES) The report is officially signed by the Company's principal executive, financial, and accounting officers - The report is signed by Jeffrey V. Haley (President and Chief Executive Officer), Jeffrey W. Farrar (Senior Executive Vice President, Chief Operating Officer and Chief Financial Officer), and Cathy W. Liles (Senior Vice President and Chief Accounting Officer)[270](index=270&type=chunk)

Part I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the company's unaudited consolidated financial statements and related notes for periods ending June 30, 2023, and December 31, 2022 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at specific dates | Metric | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :-------------------------------- | :--------------------- | :---------------------- | | **Assets** | | | | Cash and due from banks | 54,782 | 32,207 | | Loans, net | 2,219,122 | 2,166,894 | | Allowance for credit losses - loans | (25,342) | (19,555) | | **Liabilities** | | | | Noninterest-bearing deposits | 885,237 | 1,010,602 | | Interest-bearing deposits | 1,766,679 | 1,585,726 | | Total deposits | 2,651,916 | 2,596,328 | | **Shareholders' Equity** | | | | Total shareholders' equity | 328,090 | 321,174 | - As of June 30, 2023, the company's total assets increased to **$3,113,163 thousand dollars** from **$3,065,902 thousand dollars** as of December 31, 2022[8](index=8&type=chunk) [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) This section details the company's revenues, expenses, and net income over specific three and six-month periods | Metric | Three Months Ended June 30, 2023 (thousand dollars) | Three Months Ended June 30, 2022 (thousand dollars) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Interest and fees on loans | 26,052 | 19,076 | | Interest expense on deposits | 6,607 | 646 | | Net interest income | 21,148 | 21,490 | | Provision for credit losses | 268 | 581 | | Total noninterest income | 4,355 | 4,837 | | Total noninterest expense | 16,182 | 15,455 | | Net income | 7,140 | 8,140 | | Basic net income per common share | 0.67 | 0.76 | | Metric | Six Months Ended June 30, 2023 (thousand dollars) | Six Months Ended June 30, 2022 (thousand dollars) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Interest and fees on loans | 50,964 | 37,864 | | Interest expense on deposits | 10,093 | 1,215 | | Net interest income | 44,372 | 41,943 | | Provision for credit losses | 597 | (177) | | Total noninterest income | 8,727 | 10,437 | | Total noninterest expense | 31,830 | 30,804 | | Net income | 16,297 | 17,139 | | Basic net income per common share | 1.53 | 1.60 | [Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This section presents the company's net income and other comprehensive income (loss) components, leading to total comprehensive income (loss) for specific periods | Metric | Three Months Ended June 30, 2023 (thousand dollars) | Three Months Ended June 30, 2022 (thousand dollars) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Net income | 7,140 | 8,140 | | Unrealized loss on available-for-sale securities | (7,300) | (15,286) | | Unrealized gain on cash flow hedges | 733 | 953 | | Other comprehensive loss | (5,145) | (11,233) | | Comprehensive income (loss) | 1,995 | (3,093) | | Metric | Six Months Ended June 30, 2023 (thousand dollars) | Six Months Ended June 30, 2022 (thousand dollars) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Net income | 16,297 | 17,139 | | Unrealized gain (loss) on available-for-sale securities | 1,303 | (46,147) | | Unrealized gain on cash flow hedges | 177 | 2,838 | | Other comprehensive income (loss) | 1,214 | (33,943) | | Comprehensive income (loss) | 17,511 | (16,804) | [Consolidated Statements of Changes in Shareholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) This section outlines the changes in the company's shareholders' equity, including net income, other comprehensive income, stock repurchases, and dividends paid | Metric | Three Months Ended June 30, 2023 (thousand dollars) | Three Months Ended June 30, 2022 (thousand dollars) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Net income | 7,140 | 8,140 | | Other comprehensive loss | (5,145) | (11,233) | | Stock repurchases | (370) | (1,931) | | Cash dividends paid | (3,186) | (2,989) | | Total shareholders' equity at period end | 328,090 | 327,431 | | Metric | Six Months Ended June 30, 2023 (thousand dollars) | Six Months Ended June 30, 2022 (thousand dollars) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Net income | 16,297 | 17,139 | | Other comprehensive income (loss) | 1,214 | (33,943) | | Stock repurchases | (1,044) | (5,327) | | Impact of CECL adoption | (4,221) | — | | Cash dividends paid | (6,377) | (5,995) | | Total shareholders' equity at period end | 328,090 | 327,431 | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section summarizes the cash inflows and outflows from operating, investing, and financing activities over specific six-month periods | Metric | Six Months Ended June 30, 2023 (thousand dollars) | Six Months Ended June 30, 2022 (thousand dollars) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Net cash provided by operating activities | 10,275 | 15,538 | | Net cash used in investing activities | (5,798) | (104,455) | | Net cash provided by (used in) financing activities | 35,237 | (80,378) | | Net increase (decrease) in cash and cash equivalents | 39,714 | (169,295) | | Cash and cash equivalents at end of period | 113,054 | 341,573 | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the consolidated financial statements [Note 1 – Accounting Policies](index=9&type=section&id=Note%201%20%E2%80%93%20Accounting%20Policies) This note outlines the company's significant accounting policies, including consolidation and the use of estimates, highlighting the adoption of new accounting standards for credit losses and troubled debt restructurings in 2023 - The company adopted ASU 2016-13 (CECL) on January 1, 2023, replacing the incurred loss model with an expected loss model for financial instruments[29](index=29&type=chunk) - CECL adoption resulted in a **$5.2 million increase** in the allowance for credit losses on loans, a **$0.305 million increase** in the reserve for unfunded lending commitments, a **$1.2 million increase** in deferred tax assets, and a **$4.2 million decrease** in retained earnings[29](index=29&type=chunk) - The company adopted ASU 2022-02, eliminating accounting guidance for Troubled Debt Restructurings (TDRs) by creditors and enhancing disclosure requirements for loan refinancings and restructurings to borrowers experiencing financial difficulty[31](index=31&type=chunk) [Note 2 – Securities](index=12&type=section&id=Note%202%20%E2%80%93%20Securities) This note details the company's securities investment portfolio, primarily available-for-sale (AFS) securities and their fair value, noting a decline in total fair value and net unrealized loss position due to market interest rate fluctuations | Metric | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :---------------------- | | Total available-for-sale securities (fair value) | 560,707 | 608,062 | | Unrealized gains | 3 | 17 | | Unrealized losses | 69,681 | 71,066 | - As of June 30, 2023, no allowance for credit losses was recorded for the available-for-sale securities portfolio, as unrealized losses were attributed to interest rate changes rather than credit quality[44](index=44&type=chunk)[56](index=56&type=chunk) - For the six months ended June 30, 2023, the company realized a net loss of **$68 thousand dollars** from the sale of available-for-sale securities[57](index=57&type=chunk) [Note 3 – Loans](index=15&type=section&id=Note%203%20%E2%80%93%20Loans) This note details the company's loan portfolio, including commercial, real estate, and consumer loans, analyzing delinquency and nonaccrual trends, and the impact of CECL adoption on acquired loans and modifications to borrowers experiencing financial difficulty | Loan Type | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :--------------------------------- | :--------------------- | :---------------------- | | Commercial | 301,778 | 304,247 | | Commercial real estate - construction and land development | 240,934 | 197,525 | | Commercial real estate - owner-occupied | 416,397 | 418,462 | | Commercial real estate - non-owner occupied | 833,084 | 827,728 | | Residential real estate | 351,855 | 338,132 | | Home equity | 93,594 | 93,740 | | Consumer | 6,822 | 6,615 | | **Total loans (net of deferred fees and costs)** | **2,244,464** | **2,186,449** | | Delinquency Status | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :---------------------- | | 30-59 days past due | 554 | 1,972 | | 60-89 days past due | 128 | 358 | | 90 days or more past due and still accruing | — | 16 | | Nonaccrual loans | 1,024 | 1,307 | | **Total delinquent loans** | **1,706** | **3,653** | - As of June 30, 2023, total nonaccrual loans were **$1,024 thousand dollars**, a **21.7% decrease** from **$1,307 thousand dollars** as of December 31, 2022[65](index=65&type=chunk) [Note 4 – Allowance for Credit Losses - Loans and Reserve for Unfunded Lending Commitments](index=23&type=section&id=Note%204%20%E2%80%93%20Allowance%20for%20Credit%20Losses%20-%20Loans%20and%20Reserve%20for%20Unfunded%20Lending%20Commitments) This note details changes in the allowance for credit losses (ACL) on loans and the reserve for unfunded lending commitments, noting a significant increase in loan ACL due to CECL adoption and lower credit loss provision in Q2 2023 | Metric | Six Months Ended June 30, 2023 (thousand dollars) | Year Ended December 31, 2022 (thousand dollars) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Allowance for credit losses - loans, beginning balance | 19,555 | 18,678 | | Day 1 impact of CECL adoption | 5,192 | — | | Provision for (recovery of) credit losses | 548 | 1,597 | | Charge-offs | (410) | (1,019) | | Recoveries | 457 | 299 | | **Allowance for credit losses - loans, ending balance** | **25,342** | **19,555** | | Metric | Six Months Ended June 30, 2023 (thousand dollars) | Year Ended December 31, 2022 (thousand dollars) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Reserve for unfunded lending commitments, beginning balance | 377 | 386 | | Day 1 impact of CECL adoption | 305 | — | | Provision for (recovery of) unfunded commitments | 49 | (9) | | **Reserve for unfunded lending commitments, ending balance** | **731** | **377** | - The provision for credit losses on loans for the second quarter of 2023 was **$268 thousand dollars**, lower than the **$581 thousand dollars** in the second quarter of 2022, driven by loan growth and net recovery activity during the period[94](index=94&type=chunk) [Note 5 – Goodwill and Other Intangible Assets](index=26&type=section&id=Note%205%20%E2%80%93%20Goodwill%20and%20Other%20Intangible%20Assets) This note reports the company's goodwill and core deposit intangible assets, with goodwill remaining stable at **$85 million dollars** and no impairment found in the qualitative assessment as of June 30, 2023, while core deposit intangibles decreased due to amortization | Metric | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :---------------------- | | Goodwill | 85,048 | 85,048 | | Intangible assets | 2,812 | 3,367 | - The company performed a qualitative assessment of goodwill as of June 30, 2023, and found no impairment[96](index=96&type=chunk) [Note 6 – Leases](index=26&type=section&id=Note%206%20%E2%80%93%20Leases) This note details the company's operating lease liabilities and right-of-use assets recorded under ASC 842, showing increases in both and corresponding operating lease costs from December 2022 to June 2023 | Metric | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :---------------------- | | Lease liabilities | 5,556 | 3,318 | | Right-of-use assets | 5,491 | 3,245 | | Weighted-average remaining lease term (years) | 8.36 | 6.77 | | Weighted-average discount rate | 3.83% | 3.16% | | Metric | Three Months Ended June 30, 2023 (thousand dollars) | Three Months Ended June 30, 2022 (thousand dollars) | | :----------------------- | :--------------------------------- | :--------------------------------- | | Operating lease cost | 295 | 178 | [Note 7 – Short-term Borrowings](index=28&type=section&id=Note%207%20%E2%80%93%20Short-term%20Borrowings) This note outlines the company's short-term borrowing activities, including customer repurchase agreements and other short-term borrowings, showing a decrease in total short-term borrowings primarily due to a significant reduction in other short-term borrowings | Metric | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :---------------------- | | Customer repurchase agreements | 62,886 | 370 | | Other short-term borrowings | 25,000 | 100,531 | | **Total short-term borrowings** | **87,886** | **100,901** | [Note 8 – Long-term Borrowings](index=28&type=section&id=Note%208%20%E2%80%93%20Long-term%20Borrowings) This note details the company's long-term borrowings, primarily subordinated debt, which remained relatively stable, and describes collateral agreements with FHLB and for public deposits | Borrowing Type | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :---------------------- | | Subordinated debt | 28,384 | 28,334 | - As of June 30, 2023, the FHLB had **$726.5 million dollars** in available credit based on collateral, with **$495.1 million dollars** available for immediate draw without additional collateral[107](index=107&type=chunk) - As of June 30, 2023, the company had **$170 million dollars** in FHLB letters of credit and **$190.1 million dollars** in agency, state, and municipal securities pledged as collateral for public deposits[108](index=108&type=chunk) [Note 9 - Derivative Financial Instruments and Hedging Activities](index=30&type=section&id=Note%209%20-%20Derivative%20Financial%20Instruments%20and%20Hedging%20Activities) This note explains the company's use of derivative financial instruments, specifically interest rate swaps, to manage interest rate risk, which are designated as highly effective cash flow hedges and recorded as assets at fair value - The company uses interest rate swaps as cash flow hedges to manage the risk of variability in cash flows from variable-rate borrowings[114](index=114&type=chunk) | Metric | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :---------------------- | | Interest rate swap notional amount | 28,500 | 28,500 | | Derivative assets (cash flow hedges) | 1,502 | 1,325 | [Note 10 – Stock Based Compensation](index=32&type=section&id=Note%2010%20%E2%80%93%20Stock%20Based%20Compensation) This note details the company's stock-based compensation plans, including restricted stock awards, noting no stock options granted since 2009 and an increase in unrecognized compensation cost for unvested restricted stock from December 2022 to June 2023 - As of June 30, 2023, there were **89,695 shares** of unvested restricted stock outstanding with an average grant-date fair value of **$33.98 per share**[122](index=122&type=chunk) | Metric | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :---------------------- | | Unrecognized compensation cost (unvested restricted stock) | 1,700 | 1,100 | | Metric | Six Months Ended June 30, 2023 (thousand dollars) | Six Months Ended June 30, 2022 (thousand dollars) | | :----------------------- | :--------------------------------- | :--------------------------------- | | Stock-based compensation expense for unvested restricted stock | 566 | 433 | [Note 11 – Earnings Per Common Share](index=33&type=section&id=Note%2011%20%E2%80%93%20Earnings%20Per%20Common%20Share) This note provides the calculation of basic and diluted earnings per common share, showing a decrease in EPS for both the three and six-month periods ended June 30, 2023, compared to the prior year | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :----------------------- | :----------------------- | :----------------------- | | Basic earnings per share | $0.67 | $0.76 | | Diluted earnings per share | $0.67 | $0.76 | | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------- | :----------------------- | :----------------------- | | Basic earnings per share | $1.53 | $1.60 | | Diluted earnings per share | $1.53 | $1.60 | [Note 12 – Fair Value Measurements](index=33&type=section&id=Note%2012%20%E2%80%93%20Fair%20Value%20Measurements) This note describes the company's fair value measurement methodologies, classifying financial instruments into Level 1, 2, or 3 based on observable inputs, with most recurring measurements using Level 2 inputs and non-recurring measurements primarily using Level 3 inputs - Fair value measurements for available-for-sale securities and derivative instruments are primarily based on **Level 2 inputs** (observable market data)[130](index=130&type=chunk)[131](index=131&type=chunk)[133](index=133&type=chunk) - Individually evaluated loans and Other Real Estate Owned (OREO) are measured at fair value on a non-recurring basis, primarily using **Level 3 inputs** (e.g., discounted appraised values and costs to sell)[136](index=136&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk) [Note 13 – Segment and Related Information](index=39&type=section&id=Note%2013%20%E2%80%93%20Segment%20and%20Related%20Information) This note provides financial information for the company's two reporting segments, Community Banking and Wealth Management, illustrating Community Banking as the primary driver of interest income and expense, while Wealth Management contributes significantly to noninterest income - The company has two reporting segments: Community Banking and Wealth Management[143](index=143&type=chunk) | Metric | Community Banking (thousand dollars) | Wealth Management (thousand dollars) | Total (thousand dollars) | | :----------------------- | :---------------- | :---------------- | :-------------- | | Three Months Ended June 30, 2023 | | | | | Interest income | 29,431 | — | 29,431 | | Noninterest income | 2,629 | 1,726 | 4,355 | | Net income | 6,441 | 699 | 7,140 | | As of June 30, 2023 | | | | | Total assets | 3,112,848 | 315 | 3,113,163 | [Note 14 – Supplemental Cash Flow Information](index=40&type=section&id=Note%2014%20%E2%80%93%20Supplemental%20Cash%20Flow%20Information) This note provides supplemental cash flow details, including the composition of cash and cash equivalents, interest and income taxes paid, and non-cash investing and financing activities such as unrealized gains/losses on securities and hedges | Metric | 2023 (thousand dollars) | 2022 (thousand dollars) | | :----------------------- | :-------------- | :-------------- | | Cash and cash equivalents | 113,054 | 341,573 | | Interest paid (deposits and borrowings) | 12,629 | 2,028 | | Income taxes paid | 4,824 | 4,654 | | Net unrealized gain/(loss) on available-for-sale securities | (1,371) | (46,147) | | Net unrealized gain on cash flow hedges | 177 | 2,838 | [Note 15 – Accumulated Other Comprehensive Income (Loss)](index=41&type=section&id=Note%2015%20%E2%80%93%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)) This note details changes in the components of Accumulated Other Comprehensive Income (Loss) (AOCI), showing an improvement from a significant loss position in Q2 2022 to a smaller loss in Q2 2023, primarily due to reduced net unrealized losses on available-for-sale securities | Metric | June 30, 2023 (thousand dollars) | June 30, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :--------------------- | | Accumulated other comprehensive loss | (53,762) | (39,018) | | Net unrealized loss on available-for-sale securities (after-tax) | (5,724) | (11,986) | | Net unrealized gain on cash flow hedges (after-tax) | 579 | 753 | [Note 16 – Subsequent Events - Agreement of Merger](index=42&type=section&id=Note%2016%20%E2%80%93%20Subsequent%20Events%20-%20Agreement%20of%20Merger) This note discloses a significant subsequent event: the company entered into a merger agreement with Atlantic Union Bankshares Corporation on July 24, 2023, with the merger expected to close in Q1 2024, subject to regulatory and shareholder approvals - The company entered into a merger agreement with Atlantic Union Bankshares Corporation on July 24, 2023[153](index=153&type=chunk) - Each share of the company's common stock will be converted into **1.35 shares** of Atlantic Union common stock[154](index=154&type=chunk) - The merger is expected to close in the first quarter of 2024, subject to customary closing conditions, including regulatory and shareholder approvals[154](index=154&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses the company's financial condition and operating results for the three and six months ended June 30, 2023, highlighting net income decline, deposit and loan growth, rising net interest margin, and improved asset quality, along with key accounting policies, non-GAAP metrics, inflation impacts, and merger-related risks [Forward-Looking Statements](index=43&type=section&id=Forward-Looking%20Statements) This section cautions that forward-looking statements are subject to known and unknown risks and uncertainties, including those related to interest rates, economic conditions, liquidity, credit losses, competition, regulatory changes, cybersecurity, and the pending merger - Forward-looking statements are subject to known and unknown risks and uncertainties, including changes in the interest rate environment, economic conditions, liquidity, credit losses, competition, regulatory changes, and cybersecurity threats[157](index=157&type=chunk) - Specific risks related to the pending merger with Atlantic Union Bankshares Corporation include difficulties in business integration, potential loss of key employees or customers, higher-than-expected deposit attrition or operating costs, delays or failure to obtain regulatory approvals, and the company's shareholders potentially not approving the merger[157](index=157&type=chunk) [Critical Accounting Policies](index=45&type=section&id=Critical%20Accounting%20Policies) This section identifies the company's critical accounting policies, focusing on the allowance for credit losses (ACL) and goodwill and other intangible assets - Critical accounting policies involve the allowance for credit losses (ACL) and goodwill and other intangible assets[162](index=162&type=chunk) - The ACL is determined using quantitative and qualitative reserves, incorporating historical default/loss experience, weighted average life, economic forecasts (24 months), and risk factors[166](index=166&type=chunk) - Goodwill is reviewed annually for impairment through a qualitative assessment, with no impairment identified as of June 30, 2023[170](index=170&type=chunk) [RESULTS OF OPERATIONS](index=47&type=section&id=RESULTS%20OF%20OPERATIONS) This section provides an overview of the company's financial performance, including net interest income, noninterest income and expense, and the impact of income taxes and inflation [Executive Overview](index=47&type=section&id=Executive%20Overview) This section provides a high-level summary of the company's financial performance for the second quarter of 2023, highlighting key metrics such as net income, EPS, deposit and loan growth, net interest margin, and asset quality | Metric | Q2 2023 | Q2 2022 | | :----------------------- | :------------- | :------------- | | Net income (million dollars) | 7.1 | 8.1 | | Diluted earnings per share | $0.67 | $0.76 | | Deposit growth (quarterly) | 1.5% | — | | Loan growth (quarterly) | 2.0% | — | | Fully taxable net interest margin | 2.88% | 2.76% | | Nonperforming assets as a percentage of total assets | 0.04% | 0.05% | - Deposits grew by **$39.7 million dollars (1.5%)** in the second quarter of 2023, but decreased by **$178.4 million dollars (6.3%)** compared to the same period in 2022[173](index=173&type=chunk) - Loans grew by **$44.9 million dollars (2.0%)** in the second quarter of 2023, and by **$213.6 million dollars (10.5%)** compared to the same period in 2022[173](index=173&type=chunk) [Net Interest Income](index=48&type=section&id=Net%20Interest%20Income) This section analyzes the company's net interest income, interest-earning assets, and interest-bearing liabilities, detailing the impact of interest rate changes on yields, costs, and net interest margin | Metric | Three Months Ended June 30, 2023 (thousand dollars) | Three Months Ended June 30, 2022 (thousand dollars) | | :----------------------- | :--------------------------------- | :--------------------------------- | | Taxable equivalent net interest income | 21,199 | 21,548 | | Yield on interest-earning assets | 4.02% | 2.90% | | Cost of interest-bearing deposits | 1.59% | 0.14% | | Net interest spread | 2.18% | 2.68% | | Net interest margin (fully taxable equivalent) | 2.88% | 2.76% | | Metric | Six Months Ended June 30, 2023 (thousand dollars) | Six Months Ended June 30, 2022 (thousand dollars) | | :----------------------- | :--------------------------------- | :--------------------------------- | | Taxable equivalent net interest income | 44,485 | 42,059 | | Yield on interest-earning assets | 3.96% | 2.82% | | Cost of interest-bearing deposits | 1.51% | 0.21% | | Net interest spread | 2.45% | 2.61% | | Net interest margin (fully taxable equivalent) | 3.04% | 2.70% | - Taxable equivalent net interest income for the second quarter of 2023 was **$21.2 million dollars**, a **1.6% decrease** from **$21.5 million dollars** in the second quarter of 2022[177](index=177&type=chunk) [Noninterest Income](index=53&type=section&id=Noninterest%20Income) This section details the company's noninterest income components, including wealth management, deposit account service charges, interchange fees, mortgage banking, and small business investment company income, analyzing changes over specific periods | Noninterest Income Item | Three Months Ended June 30, 2023 (thousand dollars) | Three Months Ended June 30, 2022 (thousand dollars) | Change (thousand dollars) | Change Percentage | | :--------------------------------- | :--------------------------------- | :--------------------------------- | :------------ | :----------- | | Wealth management income | 1,726 | 1,587 | 139 | 8.8% | | Deposit account service charges | 564 | 709 | (145) | (20.5)% | | Interchange fees | 1,187 | 996 | 191 | 19.2% | | Mortgage banking income | 197 | 429 | (232) | (54.1)% | | Small business investment company income | 108 | 678 | (570) | (84.1)% | | **Total noninterest income** | **4,355** | **4,837** | **(482)** | **(10.0)%** | | Noninterest Income Item | Six Months Ended June 30, 2023 (thousand dollars) | Six Months Ended June 30, 2022 (thousand dollars) | Change (thousand dollars) | Change Percentage | | :--------------------------------- | :--------------------------------- | :--------------------------------- | :------------ | :----------- | | Wealth management income | 3,294 | 3,396 | (102) | (3.0)% | | Deposit account service charges | 1,120 | 1,398 | (278) | (19.9)% | | Interchange fees | 2,297 | 1,977 | 320 | 16.2% | | Mortgage banking income | 341 | 1,102 | (761) | (69.1)% | | Small business investment company income | 435 | 1,171 | (736) | (62.9)% | | **Total noninterest income** | **8,727** | **10,437** | **(1,710)** | **(16.4)%** | [Noninterest Expense](index=54&type=section&id=Noninterest%20Expense) This section details the company's noninterest expense components, including salaries and employee benefits, FDIC assessments, data processing, and software, analyzing changes over specific periods | Noninterest Expense Item | Three Months Ended June 30, 2023 (thousand dollars) | Three Months Ended June 30, 2022 (thousand dollars) | Change (thousand dollars) | Change Percentage | | :--------------------------------- | :--------------------------------- | :--------------------------------- | :------------ | :----------- | | Salaries and employee benefits | 8,300 | 8,720 | (420) | (4.8)% | | FDIC assessments | 492 | 228 | 264 | 115.8% | | Data processing | 939 | 781 | 158 | 20.2% | | Software | 476 | 363 | 113 | 31.1% | | **Total noninterest expense** | **16,182** | **15,455** | **727** | **4.7%** | | Noninterest Expense Item | Six Months Ended June 30, 2023 (thousand dollars) | Six Months Ended June 30, 2022 (thousand dollars) | Change (thousand dollars) | Change Percentage | | :--------------------------------- | :--------------------------------- | :--------------------------------- | :------------ | :----------- | | Salaries and employee benefits | 17,472 | 17,318 | 154 | 0.9% | | FDIC assessments | 699 | 467 | 232 | 49.7% | | Data processing | 1,790 | 1,628 | 162 | 10.0% | | Software | 920 | 726 | 194 | 26.7% | | **Total noninterest expense** | **31,830** | **30,804** | **1,026** | **3.3%** | [Non-GAAP Financial Measures](index=55&type=section&id=Non-GAAP%20Financial%20Measures) This section presents non-GAAP financial measures, specifically the efficiency ratio and taxable equivalent net interest income, providing additional insights into the company's operational efficiency and core earnings | Metric | Q2 2023 | Q2 2022 | | :----------------------- | :------------- | :------------- | | Efficiency ratio | 62.24% | 57.18% | | Taxable equivalent net interest income | $21,199 | $21,548 | | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------- | :----------------------- | :----------------------- | | Efficiency ratio | 58.58% | 57.35% | | Taxable equivalent net interest income | $44,485 | $42,059 | [Income Taxes](index=56&type=section&id=Income%20Taxes) This section provides the company's effective tax rates for the three and six-month periods ended June 30, 2023, and 2022 | Metric | Q2 2023 | Q2 2022 | | :----------------------- | :------------- | :------------- | | Effective tax rate | 21.13% | 20.90% | | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------- | :----------------------- | :----------------------- | | Effective tax rate | 21.16% | 21.21% | [Impact of Inflation and Changing Prices](index=56&type=section&id=Impact%20of%20Inflation%20and%20Changing%20Prices) This section discusses the impact of inflation on the company's operations, noting a moderation in inflation but continued vigilance over noninterest expenses to implement cost mitigation measures - Inflation has moderated in 2023 but remains well above recent historical levels[206](index=206&type=chunk) - The most significant impact of inflation on financial institutions is on noninterest expense[206](index=206&type=chunk) - Management is closely monitoring noninterest expenses to implement cost mitigation measures[206](index=206&type=chunk) [CHANGES IN FINANCIAL POSITION](index=56&type=section&id=CHANGES%20IN%20FINANCIAL%20POSITION) This section analyzes changes in the company's financial position, including securities, loans, credit loss allowance, nonperforming assets, deposits, shareholders' equity, liquidity, and off-balance sheet activities [Securities](index=56&type=section&id=Securities) This section details the company's securities portfolio, primarily available-for-sale securities, noting a decrease in fair value and net unrealized losses, along with available borrowing capacity | Metric | June 30, 2023 (million dollars) | December 31, 2022 (million dollars) | | :----------------------- | :--------------------- | :---------------------- | | Available-for-sale securities portfolio (fair value) | 560.7 | 608.1 | | Net unrealized losses | 69.7 | 71.1 | - For the six months ended June 30, 2023, the company realized a net loss of **$68 thousand dollars** from the sale of available-for-sale securities[209](index=209&type=chunk) - The company has **$495.1 million dollars** in additional FHLB borrowing capacity (without additional collateral) and a **$110 million dollars** federal funds line of credit[209](index=209&type=chunk) [Loans](index=58&type=section&id=Loans) This section analyzes the company's loan portfolio, highlighting total loan balances, average loan growth, and net charge-offs as a percentage of average loans - As of June 30, 2023, total loans were **$2.2 billion dollars**, an increase of **$58 million dollars (2.7%)** from December 31, 2022[211](index=211&type=chunk) - Average loans (including held for sale) for the second quarter of 2023 were **$2.2 billion dollars**, a **10.4% increase** from the second quarter of 2022[211](index=211&type=chunk) | Metric | Six Months Ended June 30, 2023 | | :----------------------- | :----------------------- | | Net (recoveries) charge-offs as a percentage of average loans (annualized) | (0.00)% | [Allowance for Credit Losses](index=58&type=section&id=Allowance%20for%20Credit%20Losses) This section details the company's allowance for credit losses (ACL) on loans, including the impact of CECL adoption and the provision for credit losses, and the ACL as a percentage of total loans | Metric | June 30, 2023 (million dollars) | December 31, 2022 (million dollars) | | :----------------------- | :--------------------- | :---------------------- | | Allowance for credit losses - loans | 25.3 | 19.6 | | Allowance for credit losses - loans as a percentage of total loans | 1.13% | 0.91% | - The day one impact of CECL adoption resulted in a **$5.2 million dollar increase** in the allowance for credit losses on loans[213](index=213&type=chunk) - The provision for credit losses on loans for the second quarter of 2023 was **$219 thousand dollars**, lower than the **$581 thousand dollars** in the second quarter of 2022[214](index=214&type=chunk) [Nonperforming Assets](index=62&type=section&id=Nonperforming%20Assets) This section analyzes the company's nonperforming assets, including nonperforming loans and nonperforming assets as a percentage of total assets, noting a decrease due to reduced nonperforming loans | Metric | June 30, 2023 | December 31, 2022 | | :----------------------- | :------------ | :------------- | | Nonperforming loans as a percentage of total loans | 0.05% | 0.06% | | Nonperforming assets as a percentage of total assets | 0.04% | 0.05% | - The decrease in nonperforming assets was due to a **$299 thousand dollar reduction** in nonperforming loans[231](index=231&type=chunk) - As of June 30, 2023, total individually evaluated loans were **$742 thousand dollars**[233](index=233&type=chunk) [Deposits](index=62&type=section&id=Deposits) This section analyzes the company's deposit base, including total deposits, average interest-bearing deposits, and the cost of interest-bearing deposits, along with uninsured deposit balances - As of June 30, 2023, total deposits were **$2.7 billion dollars**, an increase from **$2.6 billion dollars** as of December 31, 2022[236](index=236&type=chunk) - Average interest-bearing deposits for the second quarter of 2023 were **$1.7 billion dollars**, a **9.8% decrease** from the second quarter of 2022[235](index=235&type=chunk) - The cost of interest-bearing deposits for the second quarter of 2023 was **1.59%**, compared to **0.14%** in the second quarter of 2022[235](index=235&type=chunk) | Metric | June 30, 2023 (million dollars) | December 31, 2022 (million dollars) | | :----------------------- | :--------------------- | :---------------------- | | Total uninsured deposits | 1,100 | 974.0 | | Certificates of deposit over $250,000 | 115.2 | 87.6 | [Shareholders' Equity](index=64&type=section&id=Shareholders'%20Equity) This section details the company's shareholders' equity, including total equity, common equity tier 1 capital ratio, and tier 1 leverage ratio, noting an increase in equity and stock repurchases | Metric | June 30, 2023 (million dollars) | December 31, 2022 (million dollars) | | :----------------------- | :--------------------- | :---------------------- | | Shareholders' equity | 328.1 | 321.2 | | Common equity tier 1 capital ratio (company) | 11.68% | 11.70% | | Tier 1 leverage ratio (company) | 10.60% | 10.36% | - As of June 30, 2023, shareholders' equity was **$328.1 million dollars**, an increase of **$6.9 million dollars (2.2%)** from December 31, 2022[239](index=239&type=chunk) - For the six months ended June 30, 2023, the company repurchased **34,131 shares** of stock at a total cost of **$1.0 million dollars**[241](index=241&type=chunk) [Liquidity](index=64&type=section&id=Liquidity) This section describes the company's liquidity management strategies, including on-balance sheet and off-balance sheet sources such as a highly liquid securities portfolio, FHLB credit lines, federal funds lines, and the IntraFi Network - The company actively manages liquidity through on-balance sheet and off-balance sheet sources, including a highly liquid securities portfolio, FHLB credit lines, federal funds lines, and the IntraFi Network[243](index=243&type=chunk)[245](index=245&type=chunk)[246](index=246&type=chunk)[247](index=247&type=chunk) - As of June 30, 2023, the FHLB had **$726.5 million dollars** in remaining credit availability, with **$495.1 million dollars** available for immediate draw without additional collateral[245](index=245&type=chunk) - The company partners with the IntraFi Network, with **$90.4 million dollars** in deposits through the program as of June 30, 2023[247](index=247&type=chunk) [Off-Balance Sheet Activities](index=65&type=section&id=Off-Balance%20Sheet%20Activities) This section details the company's off-balance sheet activities, including commitments to extend credit, standby letters of credit, and mortgage loan interest rate lock commitments | Metric | June 30, 2023 (thousand dollars) | December 31, 2022 (thousand dollars) | | :----------------------- | :--------------------- | :---------------------- | | Commitments to extend credit | 610,454 | 635,851 | | Standby letters of credit | 12,440 | 12,897 | | Mortgage loan interest rate lock commitments | 5,882 | 1,920 | [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=66&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discloses the company's quantitative and qualitative information regarding market risk, primarily focusing on interest rate risk, which is managed through the Asset/Liability Management Committee (ALCO) and board-approved policies using computer simulation analysis [Market Risk Management](index=66&type=section&id=Market%20Risk%20Management) This section explains that the company's primary market risk is interest rate risk, and it generally does not face foreign currency exchange rate or commodity price risks - The company's primary risk exposure is interest rate risk, and it generally does not face foreign currency exchange rate risk or commodity price risk[252](index=252&type=chunk) - Market risk management is governed by the Asset/Liability Management Committee (ALCO) and board-approved policies[253](index=253&type=chunk) [Interest Rate Risk Management](index=66&type=section&id=Interest%20Rate%20Risk%20Management) This section describes the company's approach to managing interest rate risk, utilizing computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates - The company uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates[253](index=253&type=chunk) - As of June 30, 2023, the company's interest rate sensitivity position was asset sensitive, meaning net interest income would relatively increase if interest rates rose[254](index=254&type=chunk) [Earnings Simulation](index=66&type=section&id=Earnings%20Simulation) This section presents the results of earnings simulations, showing the projected change in net interest income under various interest rate scenarios | Interest Rate Change | Change in Net Interest Income (thousand dollars) | Percentage Change in Net Interest Income | | :----------- | :-------------------------- | :------------------- | | Up 4.00% | 2,597 | 3.0% | | Up 3.00% | 1,910 | 2.2% | | Up 2.00% | 1,267 | 1.5% | | Up 1.00% | 614 | 0.7% | | Flat | — | — | | Down 1.00% | (1,502) | (1.7)% | | Down 2.00% | (3,955) | (4.6)% | | Down 3.00% | (7,423) | (8.6)% | | Down 4.00% | (10,473) | (12.1)% | [Economic Value Simulation](index=67&type=section&id=Economic%20Value%20Simulation) This section presents the results of economic value simulations, showing the projected economic value and its percentage change under various interest rate scenarios | Interest Rate Change | Economic Value (thousand dollars) | Percentage Change in Economic Value | | :----------- | :------------------ | :----------------- | | Up 4.00% | 376,151 | 1.3% | | Up 3.00% | 388,312 | 4.6% | | Up 2.00% | 394,981 | 6.4% | | Up 1.00% | 390,546 | 5.2% | | Flat | 371,329 | — | | Down 1.00% | 339,591 | (8.5)% | | Down 2.00% | 283,897 | (23.5)% | | Down 3.00% | 208,194 | (43.9)% | | Down 4.00% | 119,520 | (67.8)% | [Item 4. Controls and Procedures](index=67&type=section&id=Item%204.%20Controls%20and%20Procedures) The company's management, including the Chief Executive Officer and Chief Financial Officer, has evaluated and determined that the disclosure controls and procedures were effective as of June 30, 2023, with no significant changes in internal control over financial reporting during the quarter - As of June 30, 2023, the company's disclosure controls and procedures were determined to be effective[261](index=261&type=chunk) - There were no significant changes in the company's internal control over financial reporting during the quarter ended June 30, 2023[262](index=262&type=chunk) Part II. OTHER INFORMATION [Item 1. Legal Proceedings](index=68&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings incidental to its normal course of business, which management believes will not have a material adverse effect on its consolidated financial condition or results of operations - The company is involved in legal proceedings incidental to its normal course of business[264](index=264&type=chunk) - Management believes these proceedings will not have a material adverse effect on the company's consolidated financial condition or results of operations[264](index=264&type=chunk) [Item 1A. Risk Factors](index=68&type=section&id=Item%201A.%20Risk%20Factors) This section updates previously disclosed risk factors, focusing on those related to the pending merger with Atlantic Union Bankshares Corporation, including integration difficulties, potential loss of key personnel and customers, fluctuations in merger consideration value, management distraction, and the possibility of the merger not being completed or imposing burdensome conditions - Risks associated with the Atlantic Union merger include difficulties in business integration, potential loss of key employees and customers, and unexpected expenses[266](index=266&type=chunk)[267](index=267&type=chunk) - Due to the fixed exchange ratio (1.35 shares of Atlantic Union common stock for each company share), the value of the merger consideration received by shareholders may fluctuate with Atlantic Union's stock price[268](index=268&type=chunk)[269](index=269&type=chunk) - Termination of the merger agreement could negatively impact the company and, in certain circumstances, may require payment of a termination fee of approximately **$17.2 million dollars**[272](index=272&type=chunk) - Regulatory approvals for the merger may be delayed, not obtained, or subject to unexpected conditions[276](index=276&type=chunk)[277](index=277&type=chunk) - Shareholder lawsuits could prevent or delay the completion of the merger and result in significant costs[281](index=281&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=72&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on the company's stock repurchase program, noting the repurchase of **13,688 shares** in May 2023 and **$9.0 million dollars** remaining under the authorized plan as of December 31, 2023 - The company has an approved stock repurchase program authorizing the repurchase of up to **$10 million dollars** of its common stock through December 31, 2023[282](index=282&type=chunk) - In May 2023, **13,688 shares** were repurchased at an average cost of **$26.99 per share**[284](index=284&type=chunk) - As of June 30, 2023, **$8.957 million dollars** remained available under the repurchase authorization[284](index=284&type=chunk) [Item 3. Defaults Upon Senior Securities](index=72&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This report does not disclose any defaults upon senior securities [Item 4. Mine Safety Disclosures](index=72&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This disclosure is not applicable to the company - Not applicable[284](index=284&type=chunk) [Item 5. Other Information](index=72&type=section&id=Item%205.%20Other%20Information) This report does not disclose any required 8-K information or changes in the nomination process - No required 8-K information is disclosed[284](index=284&type=chunk) - No changes in the nomination process are disclosed[284](index=284&type=chunk) [Item 6. Exhibits](index=74&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with Form 10-Q, including the Agreement and Plan of Merger with Atlantic Union Bankshares Corporation, Section 302 and 906 certifications, and interactive data files - Exhibit 2.1: Agreement and Plan of Merger with Atlantic Union Bankshares Corporation, dated July 24, 2023[286](index=286&type=chunk) - Includes Section 302 and 906 certifications from the Chief Executive Officer and Chief Financial Officer[286](index=286&type=chunk) - Includes interactive data files (XBRL) for the financial statements[286](index=286&type=chunk) [SIGNATURES](index=75&type=section&id=SIGNATURES) This report was formally signed on August 9, 2023, by the President and Chief Executive Officer, Senior Executive Vice President, Chief Operating Officer and Chief Financial Officer, and Senior Vice President and Chief Accounting Officer - The report was signed on August 9, 2023, by Jeffrey V. Haley (President and Chief Executive Officer), Jeffrey W. Farrar (Senior Executive Vice President, Chief Operating Officer and Chief Financial Officer), and Cathy W. Liles (Senior Vice President and Chief Accounting Officer)[291](index=291&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-12820 AMERICAN NATIONAL BANKSHARES INC. (Exact name of registrant as specified in its charter) (State or other jurisdiction o ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-12820 AMERICAN NATIONAL BANKSHARES INC. (Exact name of registrant as specified in its charter) Virginia 54-1284688 | --- | --- | --- | |---------- ...

[Part I. FINANCIAL INFORMATION](index=4&type=section&id=Part%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The company's financial position weakened with decreased assets, net income, and shareholders' equity due to unrealized securities losses [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | **Total Assets** | **$3,049,320** | **$3,334,597** | | Net Loans | $2,100,226 | $1,927,902 | | Securities Available for Sale | $641,884 | $692,467 | | Interest-bearing deposits in other banks | $59,541 | $487,773 | | **Total Liabilities** | **$2,735,930** | **$2,979,805** | | Total Deposits | $2,690,870 | $2,890,353 | | **Total Shareholders' Equity** | **$313,390** | **$354,792** | | Accumulated other comprehensive loss, net | ($57,651) | ($5,075) | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $24,007 | $23,093 | $65,950 | $67,287 | | Provision for loan losses | $615 | $482 | $438 | ($870) | | Noninterest Income | $4,760 | $5,123 | $15,197 | $16,187 | | Noninterest Expense | $16,448 | $14,843 | $47,252 | $43,545 | | **Net Income** | **$9,256** | **$10,178** | **$26,395** | **$32,233** | | **Diluted EPS** | **$0.87** | **$0.94** | **$2.47** | **$2.95** | [Consolidated Statements of Comprehensive (Loss) Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20(Loss)%20Income) - The company experienced a significant shift from comprehensive income to comprehensive loss, primarily due to **large unrealized losses on available-for-sale securities**[12](index=12&type=chunk)[14](index=14&type=chunk) Comprehensive (Loss) Income (in thousands) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $9,256 | $10,178 | $26,395 | $32,233 | | Other comprehensive loss | ($18,633) | ($1,536) | ($52,576) | ($3,941) | | **Comprehensive (Loss) Income** | **($9,377)** | **$8,642** | **($26,181)** | **$28,292** | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) - The significant decrease in cash and cash equivalents in 2022 was driven by a **net increase in loans and a net decrease in deposits**, contrasting with 2021 where a large increase in deposits provided substantial cash[22](index=22&type=chunk) Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $31,891 | $37,860 | | Net cash used in investing activities | ($191,500) | ($104,321) | | Net cash (used in) provided by financing activities | ($256,281) | $210,492 | | **Net (Decrease) Increase in Cash** | **($415,890)** | **$144,031** | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) - The company is a multi-state bank holding company with **26 banking offices** in Virginia and North Carolina, offering traditional banking, trust, and investment services[25](index=25&type=chunk) - The company plans to adopt ASU 2016-13 (CECL model) for measuring credit losses, with an effective date after December 15, 2022[29](index=29&type=chunk) - Subsequent to the quarter end, on October 18, 2022, the Board of Directors approved the **termination of its defined benefit pension plan**, effective December 31, 2022[144](index=144&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=44&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Rising interest rates boosted net interest margin but hurt noninterest income, while loan growth contrasted with declining deposits [Results of Operations](index=49&type=section&id=Results%20of%20Operations) - Q3 2022 net interest income increased by 4.0% YoY to $24.0 million, and the **net interest margin expanded to 3.20%** from 3.09% in Q3 2021[168](index=168&type=chunk)[171](index=171&type=chunk)[172](index=172&type=chunk) - Noninterest income for Q3 2022 decreased by 7.1% YoY, primarily due to a **$601 thousand (60.8%) drop in mortgage banking income**[184](index=184&type=chunk)[185](index=185&type=chunk) - Noninterest expense for Q3 2022 rose by 10.8% YoY, largely due to a **$1.4 million (17.5%) increase in salaries and employee benefits**[189](index=189&type=chunk)[190](index=190&type=chunk) - The **efficiency ratio deteriorated to 55.98%** in Q3 2022 from 51.02% in Q3 2021[194](index=194&type=chunk)[195](index=195&type=chunk) [Changes in Financial Position](index=59&type=section&id=Changes%20in%20Financial%20Position) - The available-for-sale securities portfolio decreased by 7.3% to $641.9 million, with the **net unrealized loss growing significantly to $73.5 million** from $2.2 million at year-end 2021[205](index=205&type=chunk) - **Total loans grew by $172.8 million, or 8.9%**, to $2.1 billion at September 30, 2022, from December 31, 2021[207](index=207&type=chunk) - Asset quality remains strong, with **nonperforming assets at 0.05% of total assets**, down from 0.07% at year-end 2021[169](index=169&type=chunk)[219](index=219&type=chunk) - **Shareholders' equity decreased by 11.7%** to $313 million since year-end 2021, primarily due to a $71.4 million increase in net unrealized losses in the available-for-sale portfolio[227](index=227&type=chunk) [Liquidity and Capital Resources](index=67&type=section&id=Liquidity%20and%20Capital%20Resources) - The company maintains multiple liquidity sources, including on-balance sheet cash and securities, and off-balance sheet sources like a **line of credit with the FHLB**[233](index=233&type=chunk)[234](index=234&type=chunk)[235](index=235&type=chunk) - The company and its bank subsidiary **remain well-capitalized**, exceeding all regulatory capital adequacy requirements as of September 30, 2022[228](index=228&type=chunk) Regulatory Capital Ratios | Ratio | Company (Sep 30, 2022) | Bank (Sep 30, 2022) | | :--- | :--- | :--- | | Common equity tier 1 capital ratio | 11.80% | 12.69% | | Tier 1 capital ratio | 12.98% | 12.69% | | Total capital ratio | 13.80% | 13.51% | | Tier 1 leverage ratio | 9.92% | 9.70% | [Quantitative and Qualitative Disclosures about Market Risk](index=69&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is interest rate risk, with an asset-sensitive balance sheet poised to benefit from rising rates - The company's balance sheet is considered **asset sensitive**, meaning it is positioned to benefit from rising interest rates[243](index=243&type=chunk) Estimated Change in Net Interest Income (Next 12 Months) | Change in Interest Rates | Change in NII (Amount) | Change in NII (Percent) | | :--- | :--- | :--- | | Up 2.00% | $2,375 thousand | 2.4% | | Up 1.00% | $1,270 thousand | 1.3% | | Down 1.00% | ($3,619) thousand | (3.6)% | Estimated Change in Economic Value of Equity | Change in Interest Rates | Change in EVE (Amount) | Change in EVE (Percent) | | :--- | :--- | :--- | | Up 2.00% | $87,878 thousand | 18.3% | | Up 1.00% | $48,186 thousand | 10.0% | | Down 1.00% | ($69,915) thousand | (14.6)% | [Controls and Procedures](index=70&type=section&id=Item%204.%20Controls%20and%20Procedures) Executive management confirmed the effectiveness of disclosure controls and procedures with no significant internal control changes - Management, including the CEO and CFO, concluded that the company's **disclosure controls and procedures were effective** as of September 30, 2022[251](index=251&type=chunk) [Part II. OTHER INFORMATION](index=71&type=section&id=Part%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=71&type=section&id=Item%201.%20Legal%20Proceedings) The company faces routine legal proceedings not expected to have a material adverse financial impact - The company is involved in routine litigation incidental to its business, which is **not expected to have a material adverse effect** on its financial condition[253](index=253&type=chunk) [Risk Factors](index=71&type=section&id=Item%201A.%20Risk%20Factors) No material changes were reported to the risk factors disclosed in the 2021 Annual Report on Form 10-K - **No material changes** have been made to the risk factors disclosed in the company's 2021 Form 10-K[254](index=254&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=71&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company continued its stock repurchase program in Q3 2022, with $5.6 million remaining available for buybacks - The company has a stock repurchase plan authorizing up to **$13 million in share buybacks**, valid through December 31, 2022[255](index=255&type=chunk) Q3 2022 Share Repurchases | Month (2022) | Shares Purchased | Average Price Paid | Remaining Authority (in thousands) | | :--- | :--- | :--- | :--- | | July | 5,400 | $35.21 | $7,482 | | August | 30,201 | $35.15 | $6,366 | | September | 24,503 | $32.95 | $5,613 | | **Total Q3** | **60,104** | **$34.26** | **$5,613** |

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Commission file number: 0-12820 628 Main Street, Danville, Virginia 24541 (Address of principal executive offices) (Zip Code) (434) 792-5111 (Registrant's telephone number, including area code) (Not applicable) Virginia 54-1284688 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) (Former name, former address and former fiscal year, if changed since last report ...