American National Bankshares (AMNB) - 2023 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements 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 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] Consolidated Statements of Income 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) 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 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 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 This section provides detailed explanations and disclosures supporting the consolidated financial statements Note 1 – Accounting Policies 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] - 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] - 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] Note 2 – Securities 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][56] - 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] Note 3 – Loans 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] Note 4 – Allowance for Credit Losses - Loans and Reserve for Unfunded Lending Commitments 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] Note 5 – Goodwill and Other Intangible Assets 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] Note 6 – Leases 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 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 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] - 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] Note 9 - Derivative Financial Instruments and Hedging Activities 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] | 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 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] | 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 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 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][131][133] - 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][138][139] Note 13 – Segment and Related Information 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] | 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 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) 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 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] - Each share of the company's common stock will be converted into 1.35 shares of Atlantic Union common stock[154] - The merger is expected to close in the first quarter of 2024, subject to customary closing conditions, including regulatory and shareholder approvals[154] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] Critical Accounting Policies 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] - 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] - Goodwill is reviewed annually for impairment through a qualitative assessment, with no impairment identified as of June 30, 2023[170] RESULTS OF OPERATIONS 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 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] - 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] Net Interest Income 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] Noninterest Income 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 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 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 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 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] - The most significant impact of inflation on financial institutions is on noninterest expense[206] - Management is closely monitoring noninterest expenses to implement cost mitigation measures[206] CHANGES IN FINANCIAL POSITION 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 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] - 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] 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] - 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] | Metric | Six Months Ended June 30, 2023 | | :----------------------- | :----------------------- | | Net (recoveries) charge-offs as a percentage of average loans (annualized) | (0.00)% | Allowance for Credit Losses 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] - 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] Nonperforming Assets 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] - As of June 30, 2023, total individually evaluated loans were $742 thousand dollars[233] 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] - 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] - 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] | 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 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] - 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] 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][245][246][247] - 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] - The company partners with the IntraFi Network, with $90.4 million dollars in deposits through the program as of June 30, 2023[247] Off-Balance Sheet Activities 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 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 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] - Market risk management is governed by the Asset/Liability Management Committee (ALCO) and board-approved policies[253] Interest Rate Risk Management 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] - 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] Earnings Simulation 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 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 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] - There were no significant changes in the company's internal control over financial reporting during the quarter ended June 30, 2023[262] Part II. OTHER INFORMATION Item 1. Legal Proceedings 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] - Management believes these proceedings will not have a material adverse effect on the company's consolidated financial condition or results of operations[264] Item 1A. Risk Factors 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][267] - 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][269] - 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] - Regulatory approvals for the merger may be delayed, not obtained, or subject to unexpected conditions[276][277] - Shareholder lawsuits could prevent or delay the completion of the merger and result in significant costs[281] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - In May 2023, 13,688 shares were repurchased at an average cost of $26.99 per share[284] - As of June 30, 2023, $8.957 million dollars remained available under the repurchase authorization[284] Item 3. Defaults Upon Senior Securities This report does not disclose any defaults upon senior securities Item 4. Mine Safety Disclosures This disclosure is not applicable to the company - Not applicable[284] Item 5. Other Information This report does not disclose any required 8-K information or changes in the nomination process - No required 8-K information is disclosed[284] - No changes in the nomination process are disclosed[284] Item 6. Exhibits 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] - Includes Section 302 and 906 certifications from the Chief Executive Officer and Chief Financial Officer[286] - Includes interactive data files (XBRL) for the financial statements[286] 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]