American National Bankshares (AMNB) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements for the period ended September 30, 2023 Consolidated Balance Sheets 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 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] Consolidated Statements of Comprehensive Income (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][15] Consolidated Statements of Changes in Shareholders' Equity 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 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] Notes to Consolidated Financial Statements Note 1 – Accounting Policies - On January 1, 2023, the Company adopted the Current Expected Credit Loss (CECL) methodology, replacing the incurred loss methodology[28] - 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] - 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] Note 2 – Securities 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][57] 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] Note 3 – Loans 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] - 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][73] - Residential loans in process of foreclosure decreased significantly to $23 thousand at September 30, 2023, from $715 thousand at December 31, 2022[76] Note 4 – Allowance for Credit Losses - Loans and Reserve for Unfunded Lending Commitments 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] Note 5 – Goodwill and Other Intangible Assets - Goodwill remained stable at $85,048 thousand at September 30, 2023, with no impairment identified in the qualitative assessment at June 30, 2023[98][100] - 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] Note 6 – Leases 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 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 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] - 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] Note 9 – Derivative Financial Instruments and Hedging Activities 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][117] Note 10 – Stock Based Compensation 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] - All stock options related to the HomeTown acquisition in 2019 had been exercised as of September 30, 2023[123] Note 11 – Earnings Per Common Share 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 - The Company classifies financial assets and liabilities into a three-level hierarchy based on the observability of inputs used in fair value measurements[130] 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] Note 13 – Segment and Related Information - The Company operates in two reportable segments: community banking and wealth management, with community banking being the primary segment[143] 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 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 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 - 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] - Prior to termination, these swaps had recorded $1.6 million in other assets and $413 thousand as a component of other comprehensive income[153] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes financial performance, condition, key trends, critical accounting policies, and the pending merger Forward-Looking Statements - The report contains forward-looking statements subject to risks including challenges in combining businesses with Atlantic Union, market volatility, and regulatory changes[156] Reclassification - Certain prior period information has been reclassified to conform to the 2023 presentation[160] Agreement and Plan of Merger - 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] - The merger is expected to close in the first quarter of 2024, subject to regulatory and shareholder approvals[161] Critical Accounting Policies - The Company's critical accounting policies include the Allowance for Credit Losses (ACL) and Goodwill and Intangible Assets[162] - The ACL is determined using quantitative and qualitative factors, including historical experience, economic forecasts, and underwriting standards[166] - Goodwill is reviewed annually for impairment, with a qualitative assessment at June 30, 2023, concluding no impairment[171] Results of Operations Executive Overview - 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] - Average deposits grew $51.5 million (8.0% annualized) during Q3 2023 but decreased $144.0 million (5.2%) from Q3 2022[175] - Loans grew $29.0 million (5.2% annualized) during Q3 2023 and increased $154.0 million (7.3%) from Q3 2022[175] - Fully taxable equivalent net interest margin was 2.76% for Q3 2023, down from 3.20% in Q3 2022[175] - Nonperforming assets as a percentage of total assets increased to 0.12% at September 30, 2023, from 0.05% at September 30, 2022[176] Net Interest Income - 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][179] - 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] - 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] - 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] Noninterest Income - Total noninterest income for Q3 2023 increased marginally by $14 thousand (0.3%) to $4,774 thousand compared to Q3 2022[193][194] - Wealth management income increased by $133 thousand (8.3%) and interchange fees increased by $149 thousand (14.7%) in Q3 2023 YoY[194] - 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] - 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][197] - 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] Noninterest Expense - 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][199] - FDIC assessment increased by $127 thousand (55.9%) in Q3 2023 YoY due to an increased base assessment rate[199] - 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][202] - Software expense increased by $303 thousand (27.8%) for 9M 2023 due to ATM and other product upgrades[202] Non-GAAP Financial Measures 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][204] Income Taxes 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] Impact of Inflation and Changing Prices - Inflation, while moderating in 2023, remains significantly elevated and primarily impacts noninterest expenses[208] Changes in Financial Position 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] - 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] - 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] Loans - Total loans increased by $87.0 million (4.0%) to $2.3 billion at September 30, 2023, from December 31, 2022[212] - Average loans increased by $183.2 million (8.9%) for Q3 2023 compared to Q3 2022[212] - 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] 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 - 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][224] - The ACL as a percentage of total loans was 1.11% at September 30, 2023, compared to 0.91% at December 31, 2022[220] - 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] Asset Quality Indicators 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) - Nonperforming loans to total loans increased to 0.16% at September 30, 2023, from 0.06% at December 31, 2022[229] - 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] Individually Assessed Loans - Total individually assessed loans were $3.5 million at September 30, 2023[231] - Impaired loans, exclusive of purchased credit impaired loans, were $5.1 million at December 31, 2022[231] Other Real Estate Owned - There was no Other Real Estate Owned (OREO) at September 30, 2023, compared to $27 thousand at December 31, 2022[232] Deposits - Total deposits remained stable at $2.6 billion at both September 30, 2023, and December 31, 2022[233] - 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] - The cost of interest-bearing deposits for Q3 2023 was 2.04%, significantly up from 0.17% for Q3 2022[233] Certificates of Deposit over $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] 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] Shareholders' Equity - 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] 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] Stock Repurchase Program - The Company has an approved stock repurchase plan authorizing up to $10 million in repurchases through December 31, 2023[238] - No shares were repurchased during the three months ended September 30, 2023[264] - Under the merger agreement with Atlantic Union, the Company may not repurchase shares without prior approval from Atlantic Union[239][264] 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][244][245] - FHLB credit availability was $677.6 million at September 30, 2023, with $446.5 million accessible without pledging additional collateral[243] - The Company had $85.9 million in deposits through IntraFi's program at September 30, 2023, providing flexible funding options[245] Off-Balance Sheet Activities 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 This section details market risk management strategies, focusing on interest rate risk and balance sheet sensitivity Market Risk Management - 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][251] Interest Rate Risk Management - The Company's interest sensitivity position at September 30, 2023, is considered somewhat asset sensitive[252] - Management aims to maintain a relatively neutral interest rate risk profile to minimize exposure to market rate fluctuations[252] Earnings Simulation 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] Economic Value Simulation 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] ITEM 4. CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls Disclosure Controls and Procedures - 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] - 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] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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] - Management believes these proceedings will not have a material adverse effect on the consolidated financial position or results of operations[262] ITEM 1A. RISK FACTORS 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] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES No shares were repurchased in Q3 2023, and future repurchases are subject to merger agreement consent Stock Repurchase Program - 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] - No shares of common stock were repurchased during the three months ended September 30, 2023[264] - As of September 30, 2023, the Company had remaining authority to repurchase up to $9.0 million of common stock[264] - Under the terms of the merger agreement with Atlantic Union, the Company may not repurchase shares without Atlantic Union's prior consent[264] ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities were reported by the Company - No defaults upon senior securities were reported[264] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the Company's operations - This item is not applicable[264] ITEM 5. OTHER INFORMATION 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] ITEM 6. EXHIBITS 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] - Interactive data files formatted in Inline eXtensible Business Reporting Language (XBRL) for the quarter ended September 30, 2023, are provided[266] 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]