AMERICAN NATIONAL BANKSHARES INC. - Quarter Report: 2020 September (Form 10-Q)

americannb20200331_10q.htm

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 September 30, 2020

☐	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 or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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)

(Former name, former address and former fiscal year, if changed since last report)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	AMNB	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes

☐

☒

At October 29, 2020, the Company had 10,971,193 shares of Common Stock outstanding, $1 par value.

Table of Contents

AMERICAN NATIONAL BANKSHARES INC.


Index			Page

Part I.		FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	3

		Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)	4

		Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)	5

		Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)	6

		Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)	8

		Notes to Consolidated Financial Statements (unaudited)	9

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

	Item 4.	Controls and Procedures	51

Part II.		OTHER INFORMATION

	Item 1.	Legal Proceedings	52

	Item 1A.	Risk Factors	52

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

	Item 3.	Defaults Upon Senior Securities	53

	Item 4.	Mine Safety Disclosures	53


	Item 5.	Other Information	53

	Item 6.	Exhibits	54

SIGNATURES			55

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

American National Bankshares Inc.
Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	*(Unaudited) September 30, 2020*			*(Audited) December 31, 2019*
Assets
Cash and due from banks	$	35,633		$	32,505
Interest-bearing deposits in other banks		234,638			47,077
Securities available for sale, at fair value		358,493			379,195
Restricted stock, at cost		8,707			8,630
Loans held for sale		6,789			2,027
Loans, net of deferred fees and costs		2,086,094			1,830,815
Less allowance for loan losses		(21,088	)		(13,152	)
Net loans		2,065,006			1,817,663
Premises and equipment, net		39,979			39,848
Other real estate owned, net of valuation allowance		999			1,308
Goodwill		85,048			84,002
Core deposit intangibles, net		6,482			7,728
Bank owned life insurance		28,278			27,817
Other assets		33,252			30,750
Total assets	$	2,903,304		$	2,478,550

Liabilities
Noninterest-bearing deposits	$	820,384		$	578,606
Interest-bearing deposits		1,650,316			1,481,941
Total deposits		2,470,700			2,060,547
Customer repurchase agreements		41,906			40,475
Long-term borrowings		35,609			35,546
Other liabilities		23,108			21,724
Total liabilities		2,571,323			2,158,292

Shareholders' equity
Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding		—			—
Common stock, $1 par value, 20,000,000 shares authorized, 10,969,756 shares outstanding at September 30, 2020 and 11,071,540 shares outstanding at December 31, 2019		10,919			11,019
Capital in excess of par value		154,495			158,244
Retained earnings		163,855			151,478
Accumulated other comprehensive income (loss), net		2,712			(483	)
Total shareholders' equity		331,981			320,258
Total liabilities and shareholders' equity	$	2,903,304		$	2,478,550

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

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American National Bankshares Inc.

Consolidated Statements of Income

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

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2020*			*2019*			*2020*			*2019*
Interest and Dividend Income:
Interest and fees on loans	$	22,346		$	22,470		$	65,046		$	60,737
Interest and dividends on securities:
Taxable		1,545			1,890			5,228			5,691
Tax-exempt		107			134			330			660
Dividends		122			135			382			324
Other interest income		59			329			356			853
Total interest and dividend income		24,179			24,958			71,342			68,265
Interest Expense:
Interest on deposits		2,118			3,655			7,908			9,647
Interest on short-term borrowings		42			166			237			516
Interest on long-term borrowings		524			515			1,523			1,423
Total interest expense		2,684			4,336			9,668			11,586
Net Interest Income		21,495			20,622			61,674			56,679
Provision for (recovery of) loan losses		2,619			(12	)		8,331			(6	)
Net Interest Income After Provision for (Recovery of) Loan Losses		18,876			20,634			53,343			56,685
Noninterest Income:
Trust fees		1,054			979			3,019			2,826
Service charges on deposit accounts		618			783			1,880			2,101
Other fees and commissions		996			1,003			2,888			2,726
Mortgage banking income		1,030			710			2,472			1,702
Securities gains, net		—			105			814			575
Brokerage fees		170			183			553			516
Income from Small Business Investment Companies		98			143			34			174
Losses on premises and equipment, net		(15	)		(2	)		(97	)		(89	)
Other		341			267			1,059			773
Total noninterest income		4,292			4,171			12,622			11,304
Noninterest Expense:
Salaries and employee benefits		7,989			7,662			21,540			22,029
Occupancy and equipment		1,423			1,448			4,116			3,963
FDIC assessment (credit)		162			(175	)		433			119
Bank franchise tax		426			411			1,277			1,113
Core deposit intangible amortization		402			448			1,246			961
Data processing		705			589			2,253			1,838
Software		353			287			1,112			932
Other real estate owned, net		28			47			34			16
Merger related expenses		—			—			—			11,322
Other		2,652			3,075			7,895			8,744
Total noninterest expense		14,140			13,792			39,906			51,037
Income Before Income Taxes		9,028			11,013			26,059			16,952
Income Taxes		1,801			2,321			4,808			3,487
Net Income	$	7,227		$	8,692		$	21,251		$	13,465
Net Income Per Common Share:
Basic	$	0.66		$	0.78		$	1.93		$	1.30
Diluted	$	0.66		$	0.78		$	1.93		$	1.30
Weighted Average Common Shares Outstanding:
Basic		10,966,645			11,127,603			10,983,729			10,341,919
Diluted		10,969,901			11,138,008			10,988,090			10,351,753

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

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American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands) (Unaudited)

	*Three Months Ended September 30,*
	*2020*			*2019*
Net income	$	7,227		$	8,692

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale		(245	)		1,536
Tax effect		53			(344	)

Reclassification adjustment for gains on sales or calls of securities available for sale		—			(102	)
Tax effect		—			22

Unrealized gains (losses) on cash flow hedges		243			(862	)
Tax effect		(53	)		194

Other comprehensive income (loss)		(2	)		444

Comprehensive income	$	7,225		$	9,136

	*Nine Months Ended September 30,*
	*2020*			*2019*
Net income	$	21,251		$	13,465

Other comprehensive income:

Unrealized gains on securities available for sale		7,603			9,611
Tax effect		(1,641	)		(2,153	)

Reclassification adjustment for gains on sales or calls of securities available for sale		(814	)		(242	)
Tax effect		176			54

Unrealized losses on cash flow hedges		(2,715	)		(2,673	)
Tax effect		586			599

Other comprehensive income		3,195			5,196

Comprehensive income	$	24,446		$	18,661

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

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American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended September 30, 2020 and 2019

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

	*Common Stock*			*Capital in Excess of Par Value*			*Retained Earnings*			*Accumulated Other Comprehensive Income (Loss)*			*Total Shareholders' Equity*
Balance, June 30, 2019	$	11,089		$	160,572		$	141,339		$	(1,083	)	$	311,917

Net income		—			—			8,692			—			8,692

Other comprehensive income		—			—			—			444			444

Stock repurchased (32,165)		(32	)		(1,106	)		—			—			(1,138	)

Stock options exercised (1,826 shares)		2			29			—			—			31

Vesting of restricted stock (617 shares)		1			(1	)		—			—			—

Equity based compensation (5,234 shares)		3			298			—			—			301

Cash dividends paid, $0.27 per share		—			—			(3,001	)		—			(3,001	)

Balance, September 30, 2019	$	11,063		$	159,792		$	147,030		$	(639	)	$	317,246

Balance, June 30, 2020	$	10,911		$	154,222		$	159,586		$	2,714		$	327,433

Net income		—			—			7,227			—			7,227

Other comprehensive loss		—			—			—			(2	)		(2	)

Vesting of restricted stock (466 shares)		—			—			—			—			—

Equity based compensation (5,436 shares)		8			273			—			—			281

Cash dividends paid, $0.27 per share		—			—			(2,958	)		—			(2,958	)

Balance, September 30, 2020	$	10,919		$	154,495		$	163,855		$	2,712		$	331,981

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

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American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2020 and 2019

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

	*Common Stock*			*Capital in Excess of Par Value*			*Retained Earnings*			*Accumulated Other Comprehensive Income (Loss)*			*Total Shareholders' Equity*
Balance, December 31, 2018	$	8,668		$	78,172		$	141,537		$	(5,835	)	$	222,542

Net income		—			—			13,465			—			13,465

Other comprehensive income		—			—			—			5,196			5,196

Issuance of common stock for acquisition (2,361,686 shares)		2,362			80,108			—			—			82,470

Issuance of replacement options/restricted stock		—			870			—			—			870

Stock repurchased (32,165 shares)		(32	)		(1,106	)		—			—			(1,138	)

Stock options exercised (32,356 shares)		32			577			—			—			609

Vesting of restricted stock (20,902 shares)		21			(21	)		—			—			—

Equity based compensation (34,036 shares)		12			1,192			—			—			1,204

Cash dividends paid, $0.77 per share		—			—			(7,972	)		—			(7,972	)

Balance, September 30, 2019	$	11,063		$	159,792		$	147,030		$	(639	)	$	317,246

Balance, December 31, 2019	$	11,019		$	158,244		$	151,478		$	(483	)	$	320,258

Net income		—			—			21,251			—			21,251

Other comprehensive income		—			—			—			3,195			3,195

Stock repurchased (140,526 shares)		(141	)		(4,840	)		—			—			(4,981	)

Stock options exercised (1,793 shares)		2			28			—			—			30

Vesting of restricted stock (18,007 shares)		18			(18	)		—			—			—

Equity based compensation (36,949 shares)		21			1,081			—			—			1,102

Cash dividends paid, $0.81 per share		—			—			(8,874	)		—			(8,874	)

Balance, September 30, 2020	$	10,919		$	154,495		$	163,855		$	2,712		$	331,981

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

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American National Bankshares Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)

	*Nine Months Ended September 30,*
	*2020*			*2019*
Cash Flows from Operating Activities:
Net income	$	21,251		$	13,465
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses		8,331			(6	)
Depreciation		1,598			1,504
Net accretion of acquisition accounting adjustments		(2,620	)		(2,321	)
Core deposit intangible amortization		1,246			961
Net amortization of securities		842			845
Net gain on sale or call of securities available for sale		(814	)		(242	)
Net change in fair value of equity securities		—			(333	)
Net change in loans held for sale		(4,762	)		(5,006	)
Net gain on other real estate owned		(12	)		(124	)
Valuation allowance on other real estate owned		—			68
Net loss on sale or disposal of premises and equipment		97			89
Equity based compensation expense		1,102			1,204
Earnings on bank owned life insurance		(461	)		(425	)
Deferred income tax expense (benefit)		(164	)		205
Net change in other assets		(2,806	)		5,690
Net change in other liabilities		(1,603	)		(2,823	)
Net cash provided by operating activities		21,225			12,751

Cash Flows from Investing Activities:
Proceeds from sales of equity securities		—			445
Proceeds from sales of securities available for sale		5,811			29,878
Proceeds from maturities, calls and paydowns of securities available for sale		177,469			76,162
Purchases of securities available for sale		(155,817	)		(36,517	)
Net change in restricted stock		(77	)		(786	)
Proceeds from sales of purchased credit impaired loans		4,939			—
Net increase in loans		(258,589	)		(805	)
Proceeds from sale of premises and equipment		1			—
Purchases of premises and equipment		(2,347	)		(2,070	)
Proceeds from sales of other real estate owned		162			1,248
Cash paid in bank acquisition		—			(27	)
Cash acquired in bank acquisition		—			26,283
Net cash provided by (used in) investing activities		(228,448	)		93,811

Cash Flows from Financing Activities:
Net change in noninterest-bearing deposits		241,778			49,202
Net change in interest-bearing deposits		168,528			(56,921	)
Net change in customer repurchase agreements		1,431			3,681
Net change in other short-term borrowings		—			(14,883	)
Net change in long-term borrowings		—			(778	)
Common stock dividends paid		(8,874	)		(7,972	)
Repurchase of common stock		(4,981	)		(1,138	)
Proceeds from exercise of stock options		30			609
Net cash provided by (used in) financing activities		397,912			(28,200	)
Net Increase in Cash and Cash Equivalents		190,689			78,362
Cash and Cash Equivalents at Beginning of Period		79,582			64,255
Cash and Cash Equivalents at End of Period	$	270,271		$	142,617

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

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AMERICAN NATIONAL BANKSHARES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Accounting Policies

The consolidated financial statements include the accounts of American National Bankshares Inc. (NASDAQ: AMNB) (the "Company") and its wholly-owned subsidiary, American National Bank and Trust Company (the "Bank"). The Company is a multi-state bank holding company headquartered in Danville, Virginia. The Bank is a community bank organization serving Virginia and North Carolina with 25 banking offices. In addition to traditional retail, commercial and mortgage offerings, the Bank also provides trust and investment services through its Trust and Investment Services Division.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, other-than-temporary impairment of securities, accounting for merger and acquisition activity, accounting for acquired loans with specific credit-related deterioration, and the valuation of deferred tax assets and liabilities.

The novel coronavirus ("COVID-19") spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. On March 13, 2020, the United States President declared a national emergency in the face of a growing public health and economic crisis due to the COVID-19 global pandemic. The government and private sector responses to contain its spread began to significantly affect the Company's operations beginning in March and will likely adversely affect its operations through the fourth quarter, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic will most likely affect future earnings, cash flows and overall financial condition of the Company. These uncertainties include the nature and duration of the financial effects felt by its customers impacting their ability to perform in accordance with their underlying loan agreements, the Company’s ability to generate demand for non-loan related products and services, as well as potential declines in real estate values resulting from the market disruption which may impair the recorded values of collateral-dependent loans and other real estate owned. Further, these factors, in addition to those pervasive to the industry and overall U.S. economy, may necessitate an overall valuation of the Company's franchise in such a way an impairment charge to the carrying value of goodwill would be required. Accordingly, significant estimates used in the preparation of the Company's financial statements including those associated with the evaluation of the allowance for loan losses as well as other valuation-based estimates may be subject to significant adjustments in future periods. The greater the duration and severity of the pandemic, the more likely that estimates will be materially impacted by its effects.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may occur for any other period. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Certain prior period adjustments have been reclassified to conform to the current period presentation.

Recently Adopted Accounting Developments

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Company on January 1, 2020. The adoption of ASU 2017-04 did not have a material effect on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. Certain disclosure requirements in Topic 820 were also removed or modified. ASU 2018-13 was effective for the Company on January 1, 2020. The adoption of ASU 2018-13 did not have a material effect on the Company's consolidated financial statements.

In March 2020 (revised in April 2020), the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance explains that, in consultation with the FASB staff, the federal banking agencies have concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings ("TDRs"). The Coronavirus Aid, Relief and Economic Security ("CARES") Act was passed by the U.S. Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Bank implemented a Disaster Assistance Program ("DAP") to provide relief to its borrowers under this guidance. On September 30, 2020, the balance of loans remaining in this program was $135.0 million or 6.5% of the total portfolio as of that date. The majority of remaining modifications involved three-month deferments of interest. On October 23, 2020, the balance of loans remaining in this program was $63.9 million with only $6.6 million in second deferrals. This interagency guidance is not expected to have a material impact on the Company's financial statements; however, this impact cannot be quantified at this time.

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The CARES Act included an allocation of $659.0 billion for loans to be issued by financial institutions through the Small Business Administration ("SBA"). This program is known as the Paycheck Protection Program ("PPP"). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years for all but $2 million which have a five year maturity, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the Bank a processing fee ranging from 1% to 5%, based on the size of the loan. The SBA began accepting submissions for these loans on April 3, 2020. During the third quarter of 2020, the Company continued to participate in the PPP until the program's expiration in August 2020. The Company had outstanding net PPP loans of $266.0 million at September 30, 2020, which compares to $264.0 million at June 30, 2020. The Bank received origination fees of $10.2 million on the PPP loans and incurred direct origination costs of $1.7 million. The Company had net unaccreted PPP loan origination fees of $6.8 million at September 30, 2020, which compares to $7.8 million at June 30, 2020. From a funding perspective, the Bank utilized core funding sources for these loans.

Recent Accounting Pronouncements and other Authoritative Accounting Guidance

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission ("SEC"), including the Company, and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company will continue to validate its models that will be used upon future adoption of the standard. The implementation of this ASU will likely result in increases to the Company's reserves when implemented.

In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: the projected benefit obligation ("PBO") and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation ("ABO") and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact that ASU 2018-14 will have on its consolidated financial statements.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin ("SAB") 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB Accounting Standards Codification ("ASC") 326, "Financial Instruments - Credit Losses." It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers' application of certain income tax-related guidance. This ASU is part of the FASB's simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815." The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, such as the Company, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this ASU provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

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On March 12, 2020, the SEC finalized amendments to the definitions of its "accelerated filer" and "large accelerated filer" definitions. The amendments increase the threshold criteria for meeting these filer classifications and were effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. The Company is still required to comply with section 404(b) of the Sarbanes-Oxley Act. The rule change revises the definition of "accelerated filers" to exclude entities with public float of less than $700 million and less than $100 million in annual revenues. If an entity’s annual revenues exceed $100 million, its category will change back to "accelerated filer". The classifications of "accelerated filer" and "large accelerated filer" require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting ("ICFR") and include the opinion on ICFR in its annual report on Form 10-K. Non-accelerated filers also have additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of ICFR, but the external auditor attestation of ICFR is not required for non-accelerated filers. The Company's annual revenues exceeded $100 million in the previous year, and the Company expects its annual revenues to exceed $100 million in future years and to remain an "accelerated filer." Therefore, this change is not expected to have a significant impact on the Company’s annual reporting and audit requirements.

In August 2020, the FASB issued ASU 2020-06, "Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity." The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs." This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

Note 2 - Acquisitions

On April 1, 2019, the Company completed its acquisition of Roanoke-based HomeTown Bankshares Corporation ("HomeTown") and its wholly owned subsidiary bank, HomeTown Bank. Pursuant and subject to the terms of the merger agreement, as a result of the merger, the holders of shares of HomeTown common stock received 0.4150 shares of the Company's common stock for each share of HomeTown common stock held immediately prior to the effective date of the merger.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other. The following table provides an assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in thousands):

Consideration Paid:
Common shares issued (2,361,686)	$	82,470
Issuance of replacement stock options/restricted stock		753
Cash paid in lieu of fractional shares		27
Value of consideration		83,250

Assets acquired:
Cash and cash equivalents		26,283
Investment securities		34,876
Restricted stock		2,588
Loans		444,324
Premises and equipment		12,034
Deferred income taxes		2,960
Core deposit intangible		8,200
Other real estate owned		1,188
Bank owned life insurance		8,246
Other assets		14,244
Total assets		554,943

Liabilities assumed:
Deposits		483,626
Short-term FHLB advances		14,883
Long-term FHLB advances		778
Subordinated debt		7,530
Other liabilities		6,052
Total liabilities		512,869
Net assets acquired		42,074
Goodwill resulting from merger with HomeTown	$	41,176

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The following table details the changes in fair value of net assets acquired and liabilities assumed from the amounts reported in the Form 10-K for the year ended December 31, 2019 (dollars in thousands):

Goodwill at December 31, 2019	$	40,130
Effect of adjustments to:
Premises and equipment		520
Other real estate owned		254
Other liabilities		272
Goodwill at September 30, 2020	$	41,176

The increase in goodwill made during the first quarter of 2020 was due to adjustments to the valuations of several acquired buildings and other real estate owned ("OREO") obtained on the date of merger. The additional goodwill adjustment for other liabilities related to a reassessment of the interest rate prevailing for supplemental early retirement plan obligations at the merger date.

The acquired loans were recorded at fair value at the acquisition date without carryover of HomeTown's previously established allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and leases and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). Fair values determined at the acquisition date were preliminary and subject to refinement during the one-year measurement period as additional information was obtained regarding facts and circumstances about expected cash flows that existed as of the acquisition date.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality (purchased credit impaired), and loans that do not meet these criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs (purchased performing).

The following table presents the purchased credit impaired loans receivable at the acquisition date (dollars in thousands):

Contractually required principal and interest at acquisition	$	45,551
Contractual cash flows not expected to be collected (nonaccretable difference)		8,296
Expected cash flows at acquisition		37,255
Interest component of expected cash flows (accretable yield)		4,410
Fair value of acquired loans accounted for under FASB ASC 310-30	$	32,845

Direct costs related to the HomeTown acquisition were expensed as incurred. There were no merger related expenses during the nine months ended September 30, 2020 compared to $11.3 million of merger expenses recorded during the nine months ended September 30, 2019.

The following table presents unaudited pro forma information as if the acquisition of HomeTown had occurred on January 1, 2018 (dollars in thousands) . These results combine the historical results of HomeTown in the Company's Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of HomeTown's provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. Pro forma adjustments below include the elimination of merger-related costs for 2019.

	*Unaudited Pro forma Three Months Ended*
	*September 30, 2019*
Total revenues ⁽¹⁾	$	24,636
Net income		8,608

	*Unaudited Pro forma Nine Months Ended*
	*September 30, 2019*
Total revenues ⁽¹⁾	$	70,404
Net income		21,996

__________________________

(1) Includes net interest income and noninterest income.

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Note 3 – Securities

The amortized cost and fair value of investments in debt securities at September 30, 2020 were as follows (dollars in thousands):

	*September 30, 2020*
	*Amortized Cost*		*Unrealized Gains*		*Unrealized Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	19,994	$	1	$	—	$	19,995
Federal agencies and GSEs		67,864		2,055		42		69,877
Mortgage-backed and CMOs		197,132		6,567		60		203,639
State and municipal		50,001		1,905		5		51,901
Corporate		13,012		105		36		13,081
Total securities available for sale	$	348,003	$	10,633	$	143	$	358,493

The Company had no equity securities at September 30, 2020. The Company recognized in income a $333,000 change in the fair value of equity securities during the first nine months of 2019. During the 2019 nine-month period, the Company sold $445,000 in equity securities at fair value and had no remaining equity securities at September 30, 2019.

The amortized cost and fair value of investments in debt securities at December 31, 2019 were as follows (dollars in thousands):

	*December 31, 2019*
	*Amortized Cost*		*Unrealized Gains*		*Unrealized Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	14,992	$	—	$	5	$	14,987
Federal agencies and GSEs		126,829		1,504		219		128,114
Mortgage-backed and CMOs		182,732		1,901		393		184,240
State and municipal		41,427		769		42		42,154
Corporate		9,514		186		—		9,700
Total securities available for sale	$	375,494	$	4,360	$	659	$	379,195

Restricted Stock

Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond ("FRB") and Federal Home Loan Bank of Atlanta ("FHLB"), these securities have been classified as restricted equity securities and carried at cost. The restricted securities are not subject to the investment security classification requirements and are included as a separate line item on the Company's consolidated balance sheets. The FRB requires the Bank to maintain stock with a par value equal to 3.00% of its outstanding capital and an additional 3.00% is on call. The FHLB requires the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank's total assets. The cost of restricted stock at September 30, 2020 and December 31, 2019 was as follows (dollars in thousands):

	*September 30, 2020*		*December 31, 2019*
FRB stock	$	6,450	$	6,415
FHLB stock		2,257		2,215
Total restricted stock	$	8,707	$	8,630

Temporarily Impaired Securities

The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2020. The reference point for determining when securities are in an unrealized loss position is month end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.

Available for sale securities that have been in a continuous unrealized loss position, at September 30, 2020, are as follows (dollars in thousands):

	Total				Less than 12 Months				12 Months or More
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Federal agencies and GSEs	$	11,347	$	42	$	9,980	$	20	$	1,367	$	22
Mortgage-backed and CMOs		30,342		60		30,342		60		—		—
State and municipal		3,722		5		3,722		5		—		—
Corporate		8,463		36		1,985		15		6,478		21
Total	$	53,874	$	143	$	46,029	$	100	$	7,845	$	43

Federal agencies and GSEs: The unrealized losses on the Company's investment in 14 government sponsored entities ("GSE") securities were caused by normal market fluctuations. Twelve of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.

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Mortgage-backed securities: The unrealized losses on the Company's investment in four GSE mortgage-backed securities were caused by normal market fluctuations. None of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.

Collateralized Mortgage Obligations: The unrealized losses associated with four private GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. None of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.

State and municipal securities: The unrealized losses on four state and municipal securities were caused by normal market fluctuations. These securities are of high credit quality (rated A- or higher), and principal and interest payments have been made timely. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.

Corporate securities: The unrealized losses on four corporate securities were caused by normal market fluctuations and not credit deterioration. These securities remain investment grade, and the Company’s analysis did not indicate the existence of credit loss. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.

Restricted stock: When evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider restricted stock to be other-than-temporarily impaired at September 30, 2020, and no impairment has been recognized.

The table below shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2019 (dollars in thousands):

	*Total*				*Less than 12 Months*				*12 Months or More*
	*Fair Value*		*Unrealized Loss*		*Fair Value*		*Unrealized Loss*		*Fair Value*		*Unrealized Loss*
U.S. Treasury	$	14,987	$	5	$	14,987	$	5	$	—	$	—
Federal agencies and GSEs		69,095		219		31,779		44		37,316		175
Mortgage-backed and CMOs		89,391		393		66,324		266		23,067		127
State and municipal		4,262		42		3,108		37		1,154		5
Total	$	177,735	$	659	$	116,198	$	352	$	61,537	$	307

Other-Than-Temporarily-Impaired Securities

As of September 30, 2020 and December 31, 2019, there were no securities classified as other-than-temporarily impaired.

Realized Gains and Losses

The following table presents the gross realized gains and losses on, and the proceeds from the sale of, securities available for sale during the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

	*Three Months Ended September 30, 2020*		*Nine Months Ended September 30, 2020*
Realized gains (losses):
Gross realized gains	$	—	$	814
Gross realized losses		—		—
Net realized gains	$	—	$	814
Proceeds from sales of securities	$	—	$	5,811

	*Three Months Ended September 30, 2019*		*Nine Months Ended September 30, 2019*
Realized gains (losses):
Gross realized gains	$	—	$	296
Gross realized losses		—		(54	)
Net realized gains	$	—	$	242
Proceeds from sales of securities	$	—	$	29,878

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Note 4 – Loans

Loans, net of deferred fees and costs and excluding loans held for sale, at September 30, 2020 and December 31, 2019, were comprised of the following (dollars in thousands):

	*September 30, 2020*		*December 31, 2019*
Commercial	$	543,746	$	339,077
Commercial real estate:
Construction and land development		151,613		137,920
Commercial real estate - owner occupied		382,121		360,991
Commercial real estate - non-owner occupied		608,954		538,208
Residential real estate:
Residential		279,815		324,315
Home equity		111,448		119,423
Consumer		8,397		10,881
Total loans	$	2,086,094	$	1,830,815

Acquired Loans

The outstanding principal balance and the carrying amount of these loans, including loans accounted for under ASC 310-30, included in the consolidated balance sheets at September 30, 2020 and December 31, 2019 are as follows (dollars in thousands):

	*September 30, 2020*		*December 31, 2019*
Outstanding principal balance	$	285,695	$	393,618
Carrying amount		273,885		377,130

The outstanding principal balance and related carrying amount of purchased credit impaired loans, for which the Company applies ASC 310-30 to account for interest earned, as of the indicated dates are as follows (dollars in thousands):

	*September 30, 2020*		*December 31, 2019*
Outstanding principal balance	$	39,997	$	53,600
Carrying amount		32,399		43,028

The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies ASC 310-30, for the nine months ended September 30, 2020 and the year ended December 31, 2019 (dollars in thousands):

	*September 30, 2020*			*December 31, 2019*
Balance at January 1	$	7,893		$	4,633
Additions from merger with HomeTown		—			4,410
Accretion		(2,573	)		(3,304	)
Reclassification from nonaccretable difference		1,831			736
Other changes, net*		(150	)		1,418
	$	7,001		$	7,893

* This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate acquired impaired loans, and discounted payoffs that occurred in the period.

Past Due Loans

The following table shows an analysis by portfolio segment of the Company's past due loans at September 30, 2020 (dollars in thousands):

	*30- 59 Days Past Due*		*60-89 Days Past Due*		*90 Days + Past Due and Still Accruing*		*Non Accrual Loans*		*Total Past Due*		*Current*		*Total Loans*
Commercial	$	3	$	2	$	—	$	193	$	198	$	543,548	$	543,746
Commercial real estate:
Construction and land development		—		—		—		6		6		151,607		151,613
Commercial real estate - owner occupied		256		—		206		336		798		381,323		382,121
Commercial real estate - non-owner occupied		214		—		—		1,404		1,618		607,336		608,954
Residential:
Residential		384		1		59		1,057		1,501		278,314		279,815
Home equity		97		—		20		83		200		111,248		111,448
Consumer		19		3		—		9		31		8,366		8,397
Total	$	973	$	6	$	285	$	3,088	$	4,352	$	2,081,742	$	2,086,094

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The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2019 (dollars in thousands):

	*30- 59 Days Past Due*		*60-89 Days Past Due*		*90 Days + Past Due and Still Accruing*		*Non Accrual Loans*		*Total Past Due*		*Current*		*Total Loans*
Commercial	$	325	$	163	$	52	$	857	$	1,397	$	337,680	$	339,077
Commercial real estate:
Construction and land development		58		—		—		11		69		137,851		137,920
Commercial real estate - owner occupied		217		434		—		274		925		360,066		360,991
Commercial real estate - non-owner occupied		—		—		—		—		—		538,208		538,208
Residential:
Residential		639		260		282		685		1,866		322,449		324,315
Home equity		49		90		27		113		279		119,144		119,423
Consumer		73		13		—		4		90		10,791		10,881
Total	$	1,361	$	960	$	361	$	1,944	$	4,626	$	1,826,189	$	1,830,815

Impaired Loans

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at September 30, 2020 (dollars in thousands):

	*Recorded Investment*		*Unpaid Principal Balance*		*Related Allowance*		*Average Recorded Investment*		*Interest Income Recognized*
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	24	$	1
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		408		405		—		375		22
Commercial real estate - non-owner occupied		1,177		1,177		—		671		56
Residential:
Residential		1,002		1,009		—		866		39
Home equity		23		23		—		37		3
Consumer		—		—		—		—		—
	$	2,610	$	2,614	$	—	$	1,973	$	121
With a related allowance recorded:
Commercial	$	147	$	141	$	119	$	468	$	15
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—
Commercial real estate - non-owner occupied		259		259		138		194		12
Residential
Residential		392		392		97		286		14
Home equity		—		—		—		—		—
Consumer		—		—		—		—		—
	$	798	$	792	$	354	$	948	$	41
Total:
Commercial	$	147	$	141	$	119	$	492	$	16
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		408		405		—		375		22
Commercial real estate - non-owner occupied		1,436		1,436		138		865		68
Residential:
Residential		1,394		1,401		97		1,152		53
Home equity		23		23		—		37		3
Consumer		—		—		—		—		—
	$	3,408	$	3,406	$	354	$	2,921	$	162

In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans with unearned costs that exceed unearned fees.

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The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2019 (dollars in thousands):

	*Recorded Investment*		*Unpaid Principal Balance*		*Related Allowance*		*Average Recorded Investment*		*Interest Income Recognized*
With no related allowance recorded:
Commercial	$	49	$	49	$	—	$	16	$	5
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		343		341		—		250		26
Commercial real estate - non-owner occupied		159		159		—		174		13
Residential:
Residential		611		612		—		652		38
Home equity		41		41		—		45		6
Consumer		—		—		—		—		—
	$	1,203	$	1,202	$	—	$	1,137	$	88
With a related allowance recorded:
Commercial	$	735	$	730	$	204	$	191	$	41
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—
Commercial real estate - non-owner occupied
Residential:
Residential		254		254		26		225		16
Home equity		—		—		—		—		—
Consumer		—		—		—		—		—
	$	989	$	984	$	230	$	416	$	57
Total:
Commercial	$	784	$	779	$	204	$	207	$	46
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		343		341		—		250		26
Commercial real estate - non-owner occupied		159		159		—		174		13
Residential:
Residential		865		866		26		877		54
Home equity		41		41		—		45		6
Consumer		—		—		—		—		—
	$	2,192	$	2,186	$	230	$	1,553	$	145

In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans with unearned costs that exceed unearned fees.

During the three months ended September 30, 2020 and 2019, there were no loans modified as TDRs. During the nine months ended September 30, 2020, there were five loans modified as TDRs. One was a commercial loan, two were commercial real estate - non-owner occupied loans, one was a residential real estate loan, and one was a home equity loan, all included in the impaired loan balances. The commercial loan was a payment deferral with a pre- and post-modification outstanding recorded investment of $106,000. The two commercial real estate - non-owner occupied loans were payment deferrals with an aggregate pre- and post-modification outstanding recorded investment of $1,311,000. The residential real estate loan was a payment deferral with a pre- and post-modification outstanding recorded investment of $82,000. The home equity loan was an extension of maturity with a pre- and post-modification outstanding recorded investment of $6,000. There was one residential real estate loan modified as a TDR during the nine months ended September 30, 2019. This TDR was included in the impaired loan balances and was an extension of the loan maturity with a pre- and post- modification outstanding recorded investment of $207,000.

During the nine months ended September 30, 2020, the Company had one commercial real estate - non-owner occupied loan with a recorded investment of $1,052,000 that subsequently defaulted within 12 months of modification. During the nine months ended September 30, 2019, the Company had no loans that subsequently defaulted within 12 months of modification. The Company defines defaults as one or more payments that occur more than 90 days past the due date, charge-off or foreclosure subsequent to modification.

On March 20, 2020 (updated April 2020), the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The Bank implemented a DAP to provide relief to its borrowers under this guidance. The guidance explains that in consultation with the FASB staff, the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. The CARES Act was passed by Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. On September 30, 2020, the balance of loans remaining in this program was $135.0 million or 6.5% of the total portfolio as of that date. The majority of remaining modifications involved three-month deferments of interest. On October 23, 2020, the balance of loans remaining in this program was $63.9 million with only $6.6 million in second deferrals.

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The CARES Act included an allocation of $659 billion for loans to be issued by financial institutions through the PPP. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years for all but $2 million which have a five year maturity, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the Bank a processing fee ranging from 1% to 5%, based on the size of the loan. The SBA began accepting submissions for these loans on April 3, 2020. During the third quarter of 2020, the Company continued to participate in the PPP until the program's expiration in August 2020. The Company had outstanding net PPP loans of $266.0 million at September 30, 2020, which compares to $264.0 million at June 30, 2020. The Bank received processing fees of $10.2 million on the PPP loans and incurred direct origination costs of $1.7 million. The Company had net unaccreted PPP loan origination fees of $6.8 million at September 30, 2020, which compares to $7.8 million at June 30, 2020. From a funding perspective, the Bank utilized core funding sources for these loans.

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. At September 30, 2020, the commercial real estate portfolio included concentrations of $74 million, $45 million and $180 million in hotel, restaurants, and retail loans, respectively. These concentrations total 14.4% of total loans, excluding loans in process.

Residential Real Estate in Process of Foreclosure

The Company had $533,000 and $161,000 in residential real estate loans in the process of foreclosure at September 30, 2020 and December 31, 2019, respectively. The Company had $285,000 in residential OREO at September 30, 2020 and December 31, 2019.

Risk Grades

The following tables show the Company's loan portfolio broken down by internal risk grading as of September 30, 2020 (dollars in thousands):

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	*Commercial*		*Construction and Land Development*		*Commercial Real Estate - Owner Occupied*		*Commercial Real Estate - Non-owner Occupied*		*Residential*		*Home Equity*
Pass	$	537,472	$	145,203	$	364,109	$	595,502	$	272,002	$	111,078
Special Mention		5,342		3,533		7,563		10,315		4,599		—
Substandard		826		2,877		10,243		2,878		3,214		370
Doubtful		106		—		206		259		—		—
Total	$	543,746	$	151,613	$	382,121	$	608,954	$	279,815	$	111,448

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	*Consumer*
Performing	$	8,388
Nonperforming		9
Total	$	8,397

The following tables show the Company's loan portfolio broken down by internal risk grading as of December 31, 2019 (dollars in thousands):

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	Commercial		Construction and Land Development		Commercial Real Estate -Owner Occupied		Commercial Real Estate - Non-owner Occupied		Residential		Home Equity
Pass	$	328,488	$	130,694	$	340,696	$	519,919	$	316,454	$	118,960
Special Mention		8,710		4,133		13,094		9,023		4,370		—
Substandard		1,144		3,093		7,200		9,267		3,491		463
Doubtful		735		—		—		—		—		—
Total	$	339,077	$	137,920	$	360,990	$	538,209	$	324,315	$	119,423

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Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	*Consumer*
Performing	$	10,877
Nonperforming		4
Total	$	10,881

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

Loans classified in the Special Mention category typically have been criticized internally, by loan review or the loan officer, or by external regulators under the current credit policy regarding risk grades.

Loans classified in the Substandard category typically have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are typically characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Loans classified in the Doubtful category typically have all the weaknesses inherent in loans classified as substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur that may salvage the debt.

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

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

Changes in the allowance for loan losses and the reserve for unfunded lending commitments at and for the indicated dates and periods are presented below (dollars in thousands):

	*Nine Months Ended September 30, 2020*			*Year Ended December 31, 2019*			*Nine Months Ended September 30, 2019*
Allowance for Loan Losses
Balance, beginning of period	$	13,152		$	12,805		$	12,805
Provision for loan losses		8,331			456			(6	)
Charge-offs		(675	)		(333	)		(189	)
Recoveries		280			224			148
Balance, end of period	$	21,088		$	13,152		$	12,758

Reserve for Unfunded Lending Commitments
Balance, beginning of period	$	329		$	217		$	217
Provision for unfunded commitments		10			112			90
Balance, end of period	$	339		$	329		$	307

The reserve for unfunded loan commitments is included in other liabilities.

The following table presents changes in the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at and for the nine months ended September 30, 2020 (dollars in thousands):

	*Commercial*			*Construction and Land Development*		*Commercial Real Estate - Owner Occupied*		*Commercial Real Estate - Non-owner Occupied*			*Residential Real Estate*			*Consumer*			*Total*
Allowance for Loan Losses
Balance at December 31, 2019	$	2,657		$	1,161	$	2,474	$	3,781		$	3,023		$	56		$	13,152
Provision for loan losses		983			698		1,658		3,635			1,290			67			8,331
Charge-offs		(417	)		—		—		(28	)		(68	)		(162	)		(675	)
Recoveries		41			2		8		50			74			105			280
Balance at September 30, 2020	$	3,264		$	1,861	$	4,140	$	7,438		$	4,319		$	66		$	21,088

Balance at September 30, 2020:
Allowance for Loan Losses
Individually evaluated for impairment	$	119		$	—	$	—	$	138		$	97		$	—		$	354
Collectively evaluated for impairment		3,119			1,861		3,938		6,859			4,017			66			19,860
Acquired impaired loans		26			—		202		441			205			—			874
Total	$	3,264		$	1,861	$	4,140	$	7,438		$	4,319		$	66		$	21,088

Loans
Individually evaluated for impairment	$	147		$	—	$	408	$	1,436		$	1,417		$	—		$	3,408
Collectively evaluated for impairment		543,017			151,360		368,102		597,502			381,924			8,382			2,050,287
Acquired impaired loans		582			253		13,611		10,016			7,922			15			32,399
Total	$	543,746		$	151,613	$	382,121	$	608,954		$	391,263		$	8,397		$	2,086,094

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The following table presents changes in the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at and for the year ended December 31, 2019 (dollars in thousands):

	Commercial			Construction and Land Development		Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-owner Occupied		Residential Real Estate			Consumer			Total
Allowance for Loan Losses
Balance at December 31, 2018	$	2,537		$	1,059	$	2,420		$	3,767	$	2,977		$	45		$	12,805
Provision for loan losses		119			102		51			14		58			112			456
Charge-offs		(12	)		—		(6	)		—		(70	)		(245	)		(333	)
Recoveries		13			—		9			—		58			144			224
Balance at December 31, 2019	$	2,657		$	1,161	$	2,474		$	3,781	$	3,023		$	56		$	13,152

Balance at December 31, 2019:

Allowance for Loan Losses
Individually evaluated for impairment	$	204		$	—	$	—		$	—	$	26		$	—		$	230
Collectively evaluated for impairment		2,448			1,161		2,444			3,781		2,794			56			12,684
Acquired impaired loans		5			—		30			—		203			—			238
Total	$	2,657		$	1,161	$	2,474		$	3,781	$	3,023		$	56		$	13,152

Loans
Individually evaluated for impairment	$	784		$	—	$	—		$	502	$	906		$	—		$	2,192
Collectively evaluated for impairment		337,312			137,522		346,233			520,541		433,121			10,866			1,785,595
Acquired impaired loans		981			398		14,758			17,165		9,711			15			43,028
Total	$	339,077		$	137,920	$	360,991		$	538,208	$	443,738		$	10,881		$	1,830,815

The allowance for loan losses is allocated to loan segments based upon historical loss factors, risk grades on individual loans, and qualitative factors. Qualitative factors include trends in delinquencies, nonaccrual loans, and loss rates; trends in volume and terms of loans, effects of changes in risk selection, underwriting standards, and lending policies; experience of lending officers, other lending staff and loan review; national, regional, and local economic trends and conditions; legal, regulatory and collateral factors; and concentrations of credit.

The provision for loan losses for the 2020 period reflects an increase in the allowance based on a qualitative assessment of the declining and uncertain economic landscape in the wake of the COVID-19 pandemic. Sharp declines in employment, gross national product, housing and auto sales, housing starts and business activity in general indicates a higher risk of probable losses in the Bank's portfolio. The Bank has been actively working with borrowers at risk who were impacted by the stay-at-home orders, utilizing its DAP to include short-term deferments of principal and interest and short-term acceptance of interest-only payments. Many of the Bank's customers have applied for and received PPP loans. Management will continue to evaluate the adequacy of the Company's allowance for loan losses as more economic data becomes available and as changes within the Company's portfolio are known. The effects of the pandemic may require the Company to fund additional increases in the allowance for loan losses in future periods.

Note 6 – Goodwill and Other Intangible Assets

The Company records as goodwill the excess of the purchase price over the fair value of the identifiable net assets acquired. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. The Company performs its annual analysis as of June 30 each fiscal year. Recently adopted ASU 2017-04 simplifies the accounting for goodwill impairment by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. No indicators of impairment were identified as of June 30, 2020. Due to the COVID-19 pandemic market conditions, the Company determined a triggering event occurred during the first quarter of 2020 and performed a qualitative assessment. The assessment determined the fair value exceeded the carrying value and did not indicate an impairment. As the pandemic has continued, the Company performed a qualitative assessment of goodwill at June 30 and September 30, 2020 and determined no impairment was indicated. The impact of COVID-19 on market conditions and other changes in the economic environment, operations, or other adverse events could result in future impairment charges which could have a material adverse impact on the Company's operating results.

Core deposit intangibles resulting from the acquisition of MidCarolina Financial Corporation ("MidCarolina") in July 2011 were $6,556,000 and were amortized on an accelerated basis over 108 months ending June 2020. Core deposit intangibles resulting from the acquisitions of MainStreet BankShares, Inc. in January 2015 and HomeTown in April 2019 were $10,039,000 and are being amortized on an accelerated basis over 120 months.

The changes in the carrying amount of goodwill and intangibles for the nine months ended September 30, 2020, are as follows (dollars in thousands):

	*Goodwill*		*Intangibles*
Balance at December 31, 2019	$	84,002	$	7,728
Measurement period adjustments		1,046		—
Amortization		—		(1,246	)
Impairment		—		—
Balance at September 30, 2020	$	85,048	$	6,482

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Note 7 – Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 "Leases (Topic 842)" and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and, consistent with such elections, did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. The implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $4,413,000 at the date of adoption, which is related to the Company's lease of premises used in operations. In connection with the HomeTown merger, the Company added $1,816,000 to the right-of-use asset and $1,736,000 to the lease liability. The aggregate right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Company's consolidated balance sheets.

Lease liabilities represent the Company's obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company's incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company's right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

The Company's long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations

The following tables present information about the Company's leases, as of and for the periods indicated (dollars in thousands):

	*September 30, 2020*			*December 31, 2019*
Lease liabilities	$	4,768		$	5,369
Right-of-use assets	$	4,719		$	5,340
Weighted average remaining lease term (years)		7.75			8.17
Weighted average discount rate		3.23	%		3.21	%

	*Three Months Ended September 30, 2020*		*Three Months Ended September 30, 2019*
Lease cost
Operating lease cost	$	243	$	283
Short-term lease cost		1		1
Total lease cost	$	244	$	284

Cash paid for amounts included in the measurement of lease liabilities	$	237	$	274

	*Nine Months Ended September 30, 2020*		*Nine Months Ended September 30, 2019*
Lease cost
Operating lease cost	$	742	$	777
Short-term lease cost		2		2
Total lease cost	$	744	$	779

Cash paid for amounts included in the measurement of lease liabilities	$	722	$	757

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):

Lease payments due	*As of September 30, 2020*
Three months ending December 31, 2020	$	236
Twelve months ending December 31, 2021		943
Twelve months ending December 31, 2022		920
Twelve months ending December 31, 2023		817
Twelve months ending December 31, 2024		499
Twelve months ending December 31, 2025		473
Thereafter		1,549
Total undiscounted cash flows		5,437
Discount		(669	)
Lease liabilities	$	4,768

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Note 8 – Short-term Borrowings

Short-term borrowings may consist of customer repurchase agreements, overnight borrowings from the FHLB, and federal funds purchased. The Company has federal funds lines of credit established with one correspondent bank in the amount of $50,000,000 and another correspondent bank in the amount of $10,000,000, and has access to the FRB's discount window. Customer repurchase agreements are collateralized by securities of the U.S. Government or GSEs. They mature daily. The interest rates may be changed at the discretion of the Company. The securities underlying these agreements remain under the Company's control. FHLB overnight borrowings contain floating interest rates that may change daily at the discretion of the FHLB. Federal funds purchased are unsecured overnight borrowings from other financial institutions. Short-term borrowings consisted of the following at September 30, 2020 and December 31, 2019 (dollars in thousands):

		*September 30, 2020*				*December 31, 2019*
Customer repurchase agreements		$	41,906			$	40,475

Note 9 – Long-term Borrowings

Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in the FHLB and deposits with the FHLB. The Company has a line of credit with the FHLB equal to 30% of the Company's assets, subject to the amount of collateral pledged. As of September 30, 2020, $887,805,000 in eligible collateral was pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings.

There were no long-term borrowings with FHLB as of September 30, 2020 or December 31, 2019.

In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At September 30, 2020, the Bank's public deposits totaled $250,623,000. The Company is required to provide collateral to secure the deposits that exceed the insurance coverage provided by the Federal Deposit Insurance Corporation. This collateral can be provided in the form of certain types of government or agency bonds or letters of credit from the FHLB. At September 30, 2020, the Company had $205,000,000 in letters of credit with the FHLB outstanding, as well as $77,972,000 in agency, state, and municipal securities, pledged to provide collateral for such deposits.

Note 10 – Subordinated Debt

On April 1, 2019, in connection with the HomeTown merger, the Company assumed $7,500,000 in aggregate principal amount of fixed-to-floating rate subordinated notes issued to various institutional accredited investors. The notes have a maturity date of December 30, 2025 and have an annual fixed interest rate of 6.75% until December 30, 2020. Thereafter, the notes will have a floating interest rate based on LIBOR. Interest will be paid semi-annually, in arrears, on June 30 and December 30 of each year during the time that the notes remain outstanding through the fixed interest rate period or earlier redemption date. Interest will be paid quarterly, in arrears, on March 30, June 30, September 30 and December 30 throughout the floating interest rate period or earlier redemption date.

The indebtedness evidenced by the notes, including principal and interest, is unsecured and subordinate and junior in right of the Company's payments to general and secured creditors and depositors of the bank. The notes are redeemable, without penalty, on or after December 30, 2020 and, in certain limited circumstances, prior to that date. The notes limit the Company from declaring or paying any dividend, or making any distribution on capital stock or other equity securities of any kind of the Company if the Company is not "well capitalized" for regulatory purposes, immediately prior to the declaration of such dividend or distribution, except for dividends payable solely in shares of common stock of the Company.

The carrying value of the subordinated debt includes a fair value adjustment of $4,000 at September 30, 2020. The original fair value adjustment of $30,000 was recorded as a result of the acquisition of HomeTown on April 1, 2019, and is being amortized into interest expense through the redeemable date.

Note 11 – Junior Subordinated Debt

On April 7, 2006, AMNB Statutory Trust I, a Delaware statutory trust and a wholly owned unconsolidated subsidiary of the Company, issued $20,000,000 of preferred securities (the "Trust Preferred Securities") in a private placement pursuant to an applicable exemption from registration. The Trust Preferred Securities mature on June 30, 2036, but may be redeemed at the Company's option beginning on September 30, 2011. Distributions are cumulative and will accrue from the date of original issuance, but may be deferred by the Company from time to time for up to 20 consecutive quarterly periods. The Company has guaranteed the payment of all required distributions on the Trust Preferred Securities. The proceeds of the Trust Preferred Securities received by the trust, along with proceeds of $619,000 received by the trust from the issuance of common securities by the trust to the Company, were used to purchase $20,619,000 of the Company's junior subordinated debt securities (the "Junior Subordinated Debt"), issued pursuant to junior subordinated debentures entered into between the Company and Wilmington Trust Company, as trustee. The proceeds of the Junior Subordinated Debt were used to fund the cash portion of the merger consideration to the former shareholders of Community First Financial Corporation in connection with the Company's acquisition of that company in 2006, and for general corporate purposes.

On July 1, 2011, in connection with the MidCarolina merger, the Company assumed $8,764,000 in junior subordinated debt to MidCarolina Trust I and MidCarolina Trust II, two separate Delaware statutory trusts (the "MidCarolina Trusts"), to fully and unconditionally guarantee the preferred securities issued by the MidCarolina Trusts. These long-term obligations, which currently qualify as Tier 1 capital, constitute a full and unconditional guarantee by the Company of the MidCarolina Trusts' obligations. The MidCarolina Trusts were not consolidated in the Company's financial statements.

In accordance with ASC 810-10-15-14, Consolidation – Overall – Scope and Scope Exceptions, the Company did not eliminate through consolidation the Company's $619,000 equity investment in AMNB Statutory Trust I or the $264,000 equity investment in the MidCarolina Trusts. Instead, the Company reflected these equity investments in the "Other assets" line item in the consolidated balance sheets.

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A description of the junior subordinated debt securities outstanding payable to the trusts is shown below as of September 30, 2020 and December 31, 2019 (dollars in thousands):

Principal Amount

Issuing Entity

Date Issued

Interest Rate

Maturity Date

September 30, 2020

December 31, 2019

AMNB Statutory Trust I

4/7/2006

LIBOR plus 1.35%

6/30/2036

20,619

MidCarolina Trust I

10/29/2002

LIBOR plus 3.45%

11/7/2032

4,475

4,433

MidCarolina Trust II

12/3/2003

LIBOR plus 2.95%

10/7/2033

3,011

2,977

28,105

28,029

The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $680,000 and $598,000 at September 30, 2020 and $722,000 and $632,000 at December 31, 2019, respectively. The original fair value adjustments of $1,197,000 and $1,021,000 were recorded as a result of the acquisition of MidCarolina on July 1, 2011, and are being amortized into interest expense over the remaining lives of the respective borrowings.

Note 12 - Derivative Financial Instruments and Hedging Activities

The Company uses derivative financial instruments ("derivatives") primarily to manage risks to the Company associated with changing interest rates. The Company's derivatives are hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge).

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company's trust preferred capital notes. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging variable-rate interest payments on a notional amount equal to the principal amount of the borrowings for fixed-rate interest payments, with such interest rates set based on benchmarked interest rates.

All interest rate swaps were entered into with counterparties that met the Company's credit standards and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in these derivative contracts is not significant.

Terms and conditions of the interest rate swaps vary and amounts receivable or payable are recognized as accrued under the terms of the agreements. The Company assesses the effectiveness of each hedging relationship on a periodic basis. In accordance with ASC 815, Derivatives and Hedging, the effective portions of the derivatives' unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company's assessment, its cash flow hedges are highly effective, but to the extent that any ineffectiveness exists in the hedge relationships, the amounts would be recorded in interest income and interest expense in the Company's consolidated statements of income.

The following tables present information on the Company's derivative financial instruments as of September 30, 2020 and December 31, 2019 (dollars in thousands):

	*September 30, 2020*
	*Notional Amount*		*Positions*		*Assets*		*Liabilities*		*Cash Collateral Pledged*
Cash flow hedges:
Interest rate swaps:
Variable-rate to fixed-rate swaps with counterparty	$	28,500		3	$	—	$	5,373	$	5,750

	*December 31, 2019*
	*Notional Amount*		*Positions*		*Assets*		*Liabilities*		*Cash Collateral Pledged*
Cash flow hedges:
Interest rate swaps:
Variable-rate to fixed-rate swaps with counterparty	$	28,500		3	$	—	$	2,658	$	3,450

Note 13 – Stock Based Compensation

The Company's 2018 Equity Compensation Plan (the "2018 Plan") was adopted by the Board of Directors of the Company on February 20, 2018, and approved by shareholders on May 15, 2018, at the Company's 2018 Annual Meeting of Shareholders. The 2018 Plan provides for the granting of restricted stock awards, incentive and non-statutory options, and other equity-based awards to employees and directors at the discretion of the Compensation Committee of the Board of Directors. The 2018 Plan authorizes the issuance of up to 675,000 shares of common stock. The 2018 Plan replaced the Company's stock incentive plan that was approved by the shareholders at the 2008 Annual Meeting that expired in February 2018 (the "2008 Plan").

Stock Options

Accounting guidance requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued.

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A summary of stock option transactions for the nine months ended September 30, 2020 is as follows:

	*Option Shares*			*Weighted Average Exercise Price*		*Weighted Average Remaining Contractual Term (years)*		*Aggregate Intrinsic Value ($000)*
Outstanding at December 31, 2019		13,944		$	16.63
Granted		—			—
Exercised		(1,793	)		16.63
Forfeited		(830	)		16.63
Expired		—			—
Outstanding and exercisable at September 30, 2020		11,321		$	16.63		4.22	$	49

The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model and expensed over the options' vesting period. No stock options have been granted since 2009. Replacement stock option awards representing 40,753 shares of the Company's common stock were issued in conjunction with the HomeTown acquisition in 2019. As of September 30, 2020, there were no nonvested stock option grants and no unrecognized compensation expense. The outstanding options have a remaining final maturity date of December 2024.

Restricted Stock

The Company from time to time grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company's common stock. The value of the stock awarded is established as the fair value of the Company's common stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. The majority of the restricted stock granted cliff vests at the end of a 36-month period beginning on the date of the grant. The remainder vests one-third each year beginning on the date of the grant. Nonvested restricted stock activity for the nine months ended September 30, 2020 is summarized in the following table.

Restricted Stock	*Shares*			*Weighted Average Grant Date Value Per Share*
Nonvested at December 31, 2019		57,271		$	34.84
Granted		20,468			36.40
Vested		(19,046	)		34.49
Forfeited		(5,216	)		34.29
Nonvested at September 30, 2020		53,477		$	35.61

As of September 30, 2020 and December 31, 2019, there was $816,000 and $751,000 respectively, in unrecognized compensation cost related to nonvested restricted stock granted under the 2008 Plan and the 2018 Plan. The weighted average period over which this cost is expected to be recognized is 1.37 years. The share based compensation expense for nonvested restricted stock was $504,000 and $737,000 during the first nine months of 2020 and 2019, respectively. The expense for the nine months of 2019 included $257,000 of accelerated compensation expense as a result of the HomeTown merger.

The Company offers its outside directors alternatives with respect to director compensation. For 2020, the regular quarterly board retainer will be received in the form of shares of immediately vested, but restricted stock with a market value of $10,000. Monthly meeting fees can be received as $800 per meeting in cash or $1,000 in immediately vested, but restricted stock. Only outside directors receive board fees. The Company issued 21,697 and 13,128 shares and recognized share based compensation expense of $598,000 and $467,000 during the first nine months of 2020 and 2019, respectively.

Note 14 – Earnings Per Common Share

The following shows the weighted average number of shares used in computing earnings per common share and the effect on the weighted average number of shares of potentially dilutive common stock. Potentially dilutive common stock had no effect on income available to common shareholders. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period including voting rights and sharing in nonforfeitable dividends. The following table presents basic and diluted earnings per share for the three and nine month periods ended September 30, 2020 and 2019.

	*Three Months Ended September 30,*
	*2020*				*2019*
	*Shares*		*Per Share Amount*		*Shares*		*Per Share Amount*
Basic earnings per share		10,966,645	$	0.66		11,127,603	$	0.78
Effect of dilutive securities - stock options		3,256		—		10,405		—
Diluted earnings per share		10,969,901	$	0.66		11,138,008	$	0.78

	*Nine Months Ended September 30,*
	*2020*				*2019*
	*Shares*		*Per Share Amount*		*Shares*		*Per Share Amount*
Basic earnings per share		10,983,729	$	1.93		10,341,919	$	1.30
Effect of dilutive securities - stock options		4,361		—		9,834		—
Diluted earnings per share		10,988,090	$	1.93		10,351,753	$	1.30

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Outstanding stock options on common stock whose effects are anti-dilutive are not included in computing diluted earnings per share. There were no anti-dilutive stock options for the three and nine month periods ended September 30, 2020 and 2019.

Note 15 – Employee Benefit Plans

The following information for the nine months ended September 30, 2020 and 2019 pertains to the Company's non-contributory defined benefit pension plan which was frozen in 2009. If lump sum payments exceed the service cost plus interest cost, an additional settlement charge will apply (dollars in thousands):

Components of Net Periodic Benefit Cost	*Nine Months Ended September 30,*
	*2020*			*2019*
Service cost	$	—		$	—
Interest cost		114			61
Expected return on plan assets		(214	)		(68	)
Recognized loss due to settlement		241			19
Recognized net actuarial loss		105			65
Net periodic cost	$	246		$	77

Note 16 – Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the fair value measurements and disclosures topic of ASC 820, Fair Value Measurement, fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 –	Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –	Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –	Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and financial liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). If no observable market data is available, valuations are based upon third party model based techniques (Level 3). There were no securities recorded with a Level 3 valuation at September 30, 2020 or December 31, 2019.

Derivative asset (liability) - cash flow hedges: Cash flow hedges are recorded at fair value on a recurring basis. Cash flow hedges are valued by a third party using significant assumptions that are observable in the market and can be corroborated by market data. All of the Company's cash flow hedges are classified as Level 2.

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The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at the dates indicated (dollars in thousands):

	*Fair Value Measurements at September 30, 2020 Using*
	*Balance at September 30,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2020*		*Level 1*		*Level 2*		*Level 3*
Assets:
Securities available for sale:
U.S. Treasury	$	19,995	$	—	$	19,995	$	—
Federal agencies and GSEs		69,877		—		69,877		—
Mortgage-backed and CMOs		203,639		—		203,639		—
State and municipal		51,901		—		51,901		—
Corporate		13,081		—		13,081		—
Total securities available for sale	$	358,493	$	—	$	358,493	$	—
Liabilities:
Derivative - cash flow hedges	$	5,373	$	—	$	5,373	$	—

	*Fair Value Measurements at December 31, 2019 Using*
	*Balance at December 31,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2019*		*Level 1*		*Level 2*		*Level 3*
Assets:
Securities available for sale:
U.S. Treasury	$	14,987	$	—	$	14,987	$	—
Federal agencies and GSEs		128,114		—		128,114		—
Mortgage-backed and CMOs		184,240		—		184,240		—
State and municipal		42,154		—		42,154		—
Corporate		9,700		—		9,700		—
Total securities available for sale	$	379,195	$	—	$	379,195	$	—
Liabilities:
Derivative - cash flow hedges	$	2,658	$	—	$	2,658	$	—

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected when due. The measurement of the loss associated with impaired loans can be based on either the observable market price of the loan, the present value of projected cash flows or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company's collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company's judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a TDR. However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business's financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

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Other real estate owned: Measurement for fair values for OREO are the same as impaired loans. Any fair value adjustments are recorded in the period incurred as a valuation allowance against OREO with the associated expense included in OREO expense, net on the consolidated statements of income.

Repossessions: Measurement for fair values for repossessions are the same as impaired loans. Any fair value adjustments are recorded in the period incurred as a valuation allowance against repossessions with the associated expense included in repossessions expense, net on the consolidated statements of income.

The following table summarizes the Company's assets that were measured at fair value on a nonrecurring basis at the dates indicated (dollars in thousands):

	*Fair Value Measurements at September 30, 2020 Using*
	*Balance at September 30,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2020*		*Level 1*		*Level 2*		*Level 3*
Assets:
Impaired loans, net of valuation allowance	$	444	$	—	$	—	$	444
Other real estate owned, net		999		—		—		999
Repossessions		211		—		—		211

	*Fair Value Measurements at December 31, 2019 Using*
	*Balance at December 31,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2019*		*Level 1*		*Level 2*		*Level 3*
Assets:
Impaired loans, net of valuation allowance	$	759	$	—	$	—	$	759
Other real estate owned, net		1,308		—		—		1,308

Quantitative Information About Level 3 Fair Value Measurements as of September 30, 2020 and December 31, 2019:

Assets	*Valuation Technique*	*Unobservable Input*	*Range; Weighted Average (1)*

Impaired loans	Discounted appraised value	Selling cost	8.00%
	Discounted cash flow analysis	Market rate for borrower (discount rate)	3.50% - 7.20%; 5.10%

Other real estate owned, net	Discounted appraised value	Selling cost	8.00%

Repossessions	Discounted appraised value	Selling cost	8.00%

__________________________

(1) Unobservable inputs were weighted by the relative fair value of the impaired loans.

ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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The carrying values and the exit pricing concept fair values of the Company's financial instruments at September 30, 2020 are as follows (dollars in thousands):

	*Fair Value Measurements at September 30, 2020 Using*
	*Carrying*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*		*Fair Value*
	Value		Level 1		Level 2		Level 3		Balance
Financial Assets:
Cash and cash equivalents	$	270,271	$	270,271	$	—	$	—	$	270,271
Securities available for sale		358,493		—		358,493		—		358,493
Restricted stock		8,707		—		8,707		—		8,707
Loans held for sale		6,789		—		6,789		—		6,789
Loans, net of allowance		2,065,006		—		—		2,066,775		2,066,775
Bank owned life insurance		28,278		—		28,278		—		28,278
Accrued interest receivable		8,206		—		8,206		—		8,206

Financial Liabilities:
Deposits	$	2,470,700	$	—	$	2,475,312	$	—	$	2,475,312
Repurchase agreements		41,906		—		41,906		—		41,906
Subordinated debt		7,504		—		7,540		—		7,540
Junior subordinated debt		28,105		—		—		20,720		20,720
Accrued interest payable		1,021		—		1,021		—		1,021
Derivative - cash flow hedges		5,373		—		5,373		—		5,373

The carrying values and the exit pricing concept fair values of the Company's financial instruments at December 31, 2019 are as follows (dollars in thousands):

	*Fair Value Measurements at December 31, 2019 Using*
	*Carrying*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*		*Fair Value*
	Value		Level 1		Level 2		Level 3		Balance
Financial Assets:
Cash and cash equivalents	$	79,582	$	79,582	$	—	$	—	$	79,582
Securities available for sale		379,195		—		379,195		—		379,195
Restricted stock		8,630		—		8,630		—		8,630
Loans held for sale		2,027		—		2,027		—		2,027
Loans, net of allowance		1,817,663		—		—		1,818,655		1,818,655
Bank owned life insurance		27,817		—		27,817		—		27,817
Accrued interest receivable		6,625		—		6,625		—		6,625

Financial Liabilities:
Deposits	$	2,060,547	$	—	$	2,062,823	$	—	$	2,062,823
Repurchase agreements		40,475		—		40,475		—		40,475
Subordinated debt		7,517		—		8,525		—		8,525
Junior subordinated debt		28,029		—		—		22,697		22,697
Accrued interest payable		1,213		—		1,213		—		1,213
Derivative - cash flow hedges		2,658		—		2,658		—		2,658

Note 17 – Segment and Related Information

The Company has two reportable segments, community banking and trust and investment services.

Community banking involves making loans to and generating deposits from individuals and businesses. Investment income from securities is also allocated to the community banking segment. Loan fee income, service charges from deposit accounts, and non-deposit fees such as automated teller machine fees and insurance commissions generate additional income for the community banking segment.

Trust and investment services include estate planning, trust account administration, investment management, and retail brokerage. Investment management services include purchasing equity, fixed income, and mutual fund investments for customer accounts. The trust and investment services segment receives fees for investment and administrative services.

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Segment information as of and for the three and nine months ended September 30, 2020 and 2019 is shown in the following tables (dollars in thousands):

	*Three Months Ended September 30, 2020*
	*Community Banking*		*Trust and Investment Services*		*Total*
Interest income	$	24,179	$	—	$	24,179
Interest expense		2,684		—		2,684
Noninterest income		3,068		1,224		4,292
Noninterest expense		13,570		570		14,140
Income before income taxes		8,374		654		9,028
Net income		6,703		524		7,227
Depreciation and amortization		953		2		955
Total assets		2,903,059		245		2,903,304
Goodwill		85,048		—		85,048
Capital expenditures		977		—		977

	*Three Months Ended September 30, 2019*
	*Community Banking*		*Trust and Investment Services*		*Total*
Interest income	$	24,958	$	—	$	24,958
Interest expense		4,336		—		4,336
Noninterest income		3,009		1,162		4,171
Noninterest expense		13,219		573		13,792
Income before income taxes		10,424		589		11,013
Net income		8,234		458		8,692
Depreciation and amortization		992		2		994
Total assets		2,454,505		24		2,454,529
Goodwill		84,633		—		84,633
Capital expenditures		771		—		771

	*Nine Months Ended September 30, 2020*
	*Community Banking*		*Trust and Investment Services*		*Total*
Interest income	$	71,342	$	—	$	71,342
Interest expense		9,668		—		9,668
Noninterest income		9,050		3,572		12,622
Noninterest expense		38,181		1,725		39,906
Income before income taxes		24,212		1,847		26,059
Net income		19,749		1,502		21,251
Depreciation and amortization		2,836		8		2,844
Total assets		2,903,059		245		2,903,304
Goodwill		85,048		—		85,048
Capital expenditures		2,343		4		2,347

	*Nine Months Ended September 30, 2019*
	*Community Banking*		*Trust and Investment Services*		*Total*
Interest income	$	68,265	$	—	$	68,265
Interest expense		11,586		—		11,586
Noninterest income		7,962		3,342		11,304
Noninterest expense		49,323		1,714		51,037
Income before income taxes		15,324		1,628		16,952
Net income		12,172		1,293		13,465
Depreciation and amortization		2,459		6		2,465
Total assets		2,454,505		24		2,454,529
Goodwill		84,633		—		84,633
Capital expenditures		2,063		7		2,070

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Note 18 – Supplemental Cash Flow Information

Supplemental cash flow information as of and for the nine months ended September 30, 2020 and 2019 is shown in the following table (dollars in thousands):

	*2020*			*2019*
Supplemental Schedule of Cash and Cash Equivalents:
Cash and due from banks	$	35,633		$	47,025
Interest-bearing deposits in other banks		234,638			95,592
Cash and Cash Equivalents	$	270,271		$	142,617

Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest on deposits and borrowed funds	$	9,860		$	10,983
Income taxes		5,885			3,577
Noncash investing and financing activities:
Transfer of loans to other real estate owned		95			234
Transfer of loans to repossessions		411			—
Transfer from premises and equipment to other assets		—			445
Increase in operating lease right-of-use asset		—			4,413
Increase in operating lease liability		—			4,413
Net unrealized gains on securities available for sale		6,789			9,369
Net unrealized losses on cash flow hedges		(2,715	)		(2,673	)

Non-cash transactions related to acquisitions:

Assets acquired:
Investment securities		—			34,876
Restricted stock		—			2,588
Loans		—			444,324
Premises and equipment		—			12,554
Deferred income taxes		—			2,329
Core deposit intangible		—			8,200
Other real estate owned		—			1,442
Bank owned life insurance		—			8,246
Other assets		—			14,244

Liabilities assumed:
Deposits		—			483,626
Short-term FHLB advances		—			14,883
Long-term FHLB advances		—			778
Subordinated debt		—			7,530
Other liabilities		—			5,780

Consideration:
Issuance of common stock		—			82,470
Fair value of replacement stock options/restricted stock		—			753

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Note 19 – Accumulated Other Comprehensive Income (Loss)

Changes in each component of accumulated other comprehensive income (loss) ("AOCI") for the three and nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands):

For the Three Months Ended	*Net Unrealized Gains (Losses) on Securities*			*Unrealized Gains (Losses) on Cash Flow Hedges*			*Adjustments Related to Pension Benefits*			*Accumulated Other Comprehensive Income (Loss)*

Balance at June 30, 2019	$	2,185		$	(2,030	)	$	(1,238	)	$	(1,083	)

Net unrealized gains on securities available for sale, net of tax, $344		1,192			—			—			1,192

Reclassification adjustment for realized gains on securities, net of tax, $(22)		(80	)		—			—			(80	)

Net unrealized losses on cash flow hedges, net of tax, $(194)		—			(668	)		—			(668	)

Balance at September 30, 2019	$	3,297		$	(2,698	)	$	(1,238	)	$	(639	)

Balance at June 30, 2020	$	8,418		$	(4,403	)	$	(1,301	)	$	2,714

Net unrealized losses on securities available for sale, net of tax, $(53)		(192	)		—			—			(192	)

Net unrealized gains on cash flow hedges, net of tax, $53		—			190			—			190

Balance at September 30, 2020	$	8,226		$	(4,213	)	$	(1,301	)	$	2,712

For the Nine Months Ended	*Net Unrealized Gains (Losses) on Securities*			*Unrealized Losses on Cash Flow Hedges*			*Adjustments Related to Pension Benefits*			*Accumulated Other Comprehensive Income (Loss)*

Balance at December 31, 2018	$	(3,973	)	$	(624	)	$	(1,238	)	$	(5,835	)

Net unrealized gains on securities available for sale, net of tax, $2,153		7,458			—			—			7,458

Reclassification adjustment for realized gains on securities, net of tax, $(54)		(188	)		—			—			(188	)

Net unrealized losses on cash flow hedges, net of tax, $(599)		—			(2,074	)		—			(2,074	)

Balance at September 30, 2019	$	3,297		$	(2,698	)	$	(1,238	)	$	(639	)

Balance at December 31, 2019	$	2,902		$	(2,084	)	$	(1,301	)	$	(483	)

Net unrealized gains on securities available for sale, net of tax, $1,641		5,962			—			—			5,962

Reclassification adjustment for realized gains on securities, net of tax, $(176)		(638	)		—			—			(638	)

Net unrealized losses on cash flow hedges, net of tax, $(586)		—			(2,129	)		—			(2,129	)

Balance at September 30, 2020	$	8,226		$	(4,213	)	$	(1,301	)	$	2,712

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Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2020 and 2019

(dollars in thousands)

For the Three Months Ended September 30, 2020	*Amount Reclassified from AOCI*		*Affected Line Item in the Statement of Where Net Income is Presented*
Details about AOCI Components
Available for sale securities:
Realized gains on sales and calls of securities	$	—	Securities gains, net
		—	Income taxes
Total reclassifications	$	—	Net of tax

For the Three Months Ended September 30, 2019	*Amount Reclassified from AOCI*			*Affected Line Item in the Statement of Where Net Income is Presented*
Details about AOCI Components
Available for sale securities:
Realized gains on sales and calls of securities	$	102		Securities gains, net
		(22	)	Income taxes
Total reclassifications	$	80		Net of tax

For the Nine Months Ended September 30, 2020	*Amount Reclassified from AOCI*			*Affected Line Item in the Statement of Where Net Income is Presented*
Details about AOCI Components
Available for sale securities:
Realized gains on sales and calls of securities	$	814		Securities gains, net
		(176	)	Income taxes
Total reclassifications	$	638		Net of tax

For the Nine Months Ended September 30, 2019	*Amount Reclassified from AOCI*			*Affected Line Item in the Statement of Where Net Income is Presented*
Details about AOCI Components
Available for sale securities:
Realized gains on sales and calls of securities	$	242		Securities gains, net
		(54	)	Income taxes
Total reclassifications	$	188		Net of tax

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion is to focus on important factors affecting the financial condition and results of operations of the Company. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements.

Forward-Looking Statements

This report contains forward-looking statements with respect to the financial condition, results of operations and business of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank"). These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available to management at the time these statements and disclosures were prepared. Forward-looking statements are subject to numerous assumptions, estimates, risks, and uncertainties that could cause actual conditions, events, or results to differ materially from those stated or implied by such forward-looking statements.

A variety of factors, some of which are discussed in more detail in Item 1A – Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, may affect the operations, performance, business strategy, and results of the Company. Those factors include, but are not limited to, the following:

	•	the impact of the ongoing COVID-19 pandemic and the associated efforts to limit the spread of the virus;
	•	financial market volatility, including the level of interest rates, could affect the values of financial instruments and the amount of net interest income earned;
	•	the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

•

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

•

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

•

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

•

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

•

the ability to retain key personnel;

•

the failure of assumptions underlying the allowance for loan losses; and

•

risks associated with mergers and acquisitions and other expansion activities.

COVID-19 Impact and Response

In March 2020, the outbreak of COVID-19 was recognized as a global pandemic. The spread of the virus has created a global health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. Governmental responses have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by all parties, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted supply chains, market downturns and volatility, changes in consumer behavior, related emergency response legislation and an expectation that the Board of Governors of the Federal Reserve System ("Federal Reserve") will maintain a low interest rate environment for the foreseeable future.

The Company has implemented a business continuity plan and protocols to continue to maintain a high level of care for its employees, customers and communities. The Company has transitioned to a majority of its non-branch employees working remotely and assisting customers by appointment only in branches or directing them to drive-thrus or ATMs. It has cancelled all business travel, and it now holds all Company meetings through virtual platforms.

In March 2020 (revised in April 2020), the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance explains that, in consultation with the Financial Accounting Standards Board ("FASB") staff, the federal banking agencies have concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings ("TDRs"). The Coronavirus Aid, Relief and Economic Security ("CARES") Act was passed by the U.S. Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Bank implemented a Disaster Assistance Program ("DAP") to provide relief to its borrowers under this guidance. On September 30, 2020, the balance of loans remaining in this program was $135.0 million or 6.5% of the total portfolio as of that date. The majority of remaining modifications involved three-month deferments of interest. On October 23, 2020, the balance of loans remaining in this program was $63.9 million with only $6.6 million in second deferrals. This interagency guidance is not expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

The CARES Act included an allocation of $659.0 billion for loans to be issued by financial institutions through the Small Business Administration ("SBA"). This program is known as the Paycheck Protection Program ("PPP"). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years for all but $2 million which have a five year maturity, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the Bank a processing fee ranging from 1% to 5%, based on the size of the loan. The SBA began accepting submissions for these loans on April 3, 2020. During the third quarter of 2020, the Company continued to participate in the PPP until the program's expiration in August 2020. The Company had outstanding net PPP loans of $266.0 million at September 30, 2020, which compares to $264.0 million at June 30, 2020. The Bank received processing fees of $10.2 million on the PPP loans and incurred direct origination costs of $1.7 million. The Company had net unaccreted PPP loan origination fees of $6.8 million at September 30, 2020, which compares to $7.8 million at June 30, 2020. From a funding perspective, the Bank utilized core funding sources for these loans.

Reclassification

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

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CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies followed by the Company conform with U.S. generally accepted accounting principles ("GAAP") and they conform to general practices within the banking industry. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company's critical accounting policies and estimates with the Audit Committee of the Board of Directors. The Company's critical accounting policies, which are summarized below, relate to (1) the allowance for loan losses, (2) mergers and acquisitions, (3) acquired loans with specific credit-related deterioration, (4) goodwill and intangible assets, (5) deferred tax assets and liabilities, and (6) other-than-temporary impairment of securities. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K for the year ended December 31, 2019.

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

Allowance for Loan Losses

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

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

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

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

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

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

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

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

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

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

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

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

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Mergers and Acquisitions

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

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

Acquired Loans with Specific Credit-Related Deterioration

Acquired loans with specific credit deterioration are accounted for by the Company in accordance with ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. Certain acquired loans, those for which specific credit-related deterioration, since origination, is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. In accounting for purchased credit impaired loans, such loans are not classified as nonaccrual when they become 90 days past due. They are considered to be accruing because their interest income relates to the accretable yield and not to contractual interest payments.

Goodwill and Intangible Assets

The Company performs its annual analysis as of June 30 each fiscal year. Recently adopted ASU 2017-04 simplifies the accounting for goodwill impairment by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. No indicators of impairment were identified during the nine months ended September 30, 2020 or 2019.

Deferred Tax Assets and Liabilities

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

Other-than-temporary Impairment of Securities

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

Non-GAAP Presentations

Non-GAAP presentations are provided because the Company believes these may be valuable to investors. These include (1) the analysis of net interest income presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets and (2) the calculation of the efficiency ratio.

Internet Access to Corporate Documents

The Company provides access to its Securities and Exchange Commission ("SEC") filings through a link on the Investor Relations page of the Company's website at www.amnb.com. Reports available include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with the SEC. The information on the Company's website is not incorporated into this report or any other filing the Company makes with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

Completed Acquisition

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

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RESULTS OF OPERATIONS

Executive Overview

Third quarter 2020 financial highlights include the following:

•

Earnings produced a return on average assets of 1.01% for the third quarter of 2020, compared to 0.80% in the previous quarter and 1.43% for the same quarter in the prior year.

•

Average deposits grew 4.7% during the quarter and 21.0% over the same quarter of 2019; the cost of deposits decreased to 0.52% in the third quarter, compared to 0.64% in the previous quarter and 1.00% in the same quarter of prior year.

•

Net interest margin was 3.26% for the quarter, up from 3.22% in the second quarter of 2020 and down from 3.75% in the same quarter of the prior year.*

•

Noninterest revenues increased $457 thousand, or 11.9%, when compared to the previous quarter, and increased $121 thousand, or 2.9%, compared to the same quarter in the prior year.

•

Noninterest expense increased $1.7 million, or 13.7%, when compared to the previous quarter, and increased $348 thousand, or 2.5% when compared to the same quarter in the prior year.

•

The third quarter provision for loan losses totaled $2.6 million, which compares to a provision of $4.8 million for the previous quarter, and a recovery of $12 thousand in the same quarter in the prior year. The allowance for loan losses as a percentage of loans held for investment increased to 1.01% at period end. Excluding PPP loans, the allowance as a percentage of loans increased to 1.16% at period end.

•

Nonperforming assets as a percentage of total assets remained stable at 0.16% at September 30, 2020 and at June 30, 2020, and up from 0.15% at September 30, 2019.

•

Annualized net charge-offs were 0.01% for the third quarter of 2020, compared to zero for the corresponding quarter in the prior year and down from 0.06% for the second quarter of 2020.

•

During the third quarter of 2020 through the program's expiration in August, the Company continued to participate in the SBA’s PPP under the CARES Act, which was intended to provide economic relief to small businesses that have been adversely impacted by the COVID-19 global pandemic. The Company had outstanding net PPP loans of $266.0 million at September 30, 2020, which compares to $264.0 million at June 30, 2020. The Company had net unamortized PPP loan origination fees with a balance of $6.8 million at September 30, 2020, which compares to $7.8 million at June 30, 2020.

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

Net Interest Income

Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest-bearing liabilities, primarily deposits and other funding sources. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest-bearing liabilities can materially impact net interest income. The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities. A tax rate of 21% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis. Net interest income divided by average earning assets is referred to as the net interest margin. The net interest spread represents the difference between the weighted rate earned on average earning assets and the weighted rate paid on average interest-bearing liabilities

Three months ended September 30, 2020 and 2019

Net interest income on a taxable equivalent basis increased $873,000 or 4.2% for the third quarter of 2020 compared to the same quarter of 2019. Accretion income for the third quarter of 2020 was $1.6 million compared to $841,000 for the same quarter of 2019. The third quarter of 2020 included $800,000 in cash basis accretion income related to the collection of a loan charged off by MidCarolina Financial Corporation in connection with acquisition by the Company. Average loan balances for the 2020 quarter were up $280,719,000 or 15.4% over the 2019 quarter, primarily due to PPP lending. These loans had a net balance of $266 million at September 30, 2020, earn 1% interest and generated fee income that is being accreted over the life of the loans. The accretion attributed to the yield on the PPP portfolio but the increased average loan volume earning a much lower rate decreased yields for the third quarter of 2020. PPP yield may be positively impacted in future periods due to forgiveness and recognition of net fees. Net interest margin benefited from $1.6 million in interest earned on these loans, net of deferred fees and costs. Loan yields for the quarter were 68 basis points lower than the 2019 quarter.

For the third quarter of 2020, the Company's yield on interest-earning assets was 3.66%, compared to 4.53% for the third quarter of 2019. The cost of interest-bearing liabilities was 0.63% compared to 1.13%. The interest rate spread was 3.03% compared to 3.40%. The net interest margin, on a fully taxable equivalent basis, was 3.26% compared to 3.75%, a decrease of 49 basis points. The decrease in net interest margin was driven by declining interest rates and the impact of lower rates on the PPP lending.

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the three months ended September 30, 2020 and 2019. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans is only recognized when the loan returns to accrual status or at full payment of principal.

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Net Interest Income Analysis (dollars in thousands)

	Three Months Ended September 30,

	Average Balance				Income/Expense				Yield/Rate
	2020		2019		2020		2019		2020			2019
Loans:
Commercial	$	544,712	$	320,802	$	4,495	$	3,820		3.28	%		4.72	%
Real estate		1,549,078		1,489,155		17,755		18,487		4.58			4.97
Consumer		8,565		11,679		144		209		6.69			7.10
Total loans		2,102,355		1,821,636		22,394		22,516		4.26			4.94

Securities:
U.S. Treasury		10,541		—		3		—		0.11			—
Federal agencies and GSEs		61,405		127,956		287		767		1.87			2.40
Mortgage-backed and CMOs		194,585		133,121		942		851		1.94			2.56
State and municipal		46,432		45,830		294		330		2.53			2.88
Other securities		20,815		16,295		275		242		5.28			5.94
Total securities		333,778		323,202		1,801		2,190		2.16			2.71

Deposits in other banks		212,857		63,097		59		329		0.11			2.07

Total interest-earning assets		2,648,990		2,207,935		24,254		25,035		3.66			4.53

Non-earning assets		221,223		218,743

Total assets	$	2,870,213	$	2,426,678

Deposits:
Demand	$	410,228	$	324,058		56		119		0.05			0.15
Money market		580,200		453,873		475		1,415		0.33			1.24
Savings		206,493		176,673		24		94		0.05			0.21
Time		423,039		489,343		1,563		2,027		1.47			1.64
Total deposits		1,619,960		1,443,947		2,118		3,655		0.52			1.00

Customer repurchase agreements		45,689		39,470		42		150		0.37			1.51
Other short-term borrowings		—		1,986		—		16		—			2.42
Long-term borrowings		35,597		35,806		524		515		5.89			5.80
Total interest-bearing liabilities		1,701,246		1,521,209		2,684		4,336		0.63			1.13

Noninterest-bearing demand deposits		814,685		568,706
Other liabilities		24,244		21,783
Shareholders' equity		330,038		314,980
Total liabilities and shareholders' equity	$	2,870,213	$	2,426,678

Interest rate spread										3.03	%		3.40	%
Net interest margin										3.26	%		3.75	%

Net interest income (taxable equivalent basis)						21,570		20,699
Less: Taxable equivalent adjustment						75		77
Net interest income					$	21,495	$	20,622

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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)

	Three Months Ended September 30,
	2020 vs. 2019
				Change
	Increase			Attributable to
	(Decrease)			Rate			Volume
Interest income
Loans:
Commercial	$	675		$	(1,423	)	$	2,098
Real estate		(732	)		(1,456	)		724
Consumer		(65	)		(12	)		(53	)
Total loans		(122	)		(2,891	)		2,769
Securities:
U.S. Treasury		3			—			3
Federal agencies and GSEs		(480	)		(143	)		(337	)
Mortgage-backed and CMOs		91			(239	)		330
State and municipal		(36	)		(40	)		4
Other securities		33			(29	)		62
Total securities		(389	)		(451	)		62
Deposits in other banks		(270	)		(522	)		252
Total interest income		(781	)		(3,864	)		3,083

Interest expense
Deposits:
Demand		(63	)		(89	)		26
Money market		(940	)		(1,254	)		314
Savings		(70	)		(84	)		14
Time		(464	)		(206	)		(258	)
Total deposits		(1,537	)		(1,633	)		96
Customer repurchase agreements		(108	)		(129	)		21
Other short-term borrowings		(12	)		12			(24	)
Long-term borrowings		5			8			(3	)
Total interest expense		(1,652	)		(1,742	)		90
Net interest income (taxable equivalent basis)	$	871		$	(2,122	)	$	2,993

Nine months ended September 30, 2020 and 2019

Net interest income on a taxable equivalent basis increased $4,921,000 or 8.6% for the nine months ended September 30, 2020 compared to the same period in 2019. This improvement in net interest income was primarily related to an increase in earning asset balances for the 2020 period compared to the 2019 period. Average loan balances for the 2020 period were up $329,465,000 or 19.8% over the 2019 period, primarily due to PPP lending and the HomeTown acquisition. Loan yields for thenine months ended September 30, 2020 were 51 basis points lower than the 2019 period. The impact of PPP loans earning 1% further compounded the downward pressure imposed by the Federal Reserve's interest rate cuts during the twelve months ended September 30, 2020.

For the nine months ended September 30, 2020, the Company's yield on interest-earning assets was 3.84%, compared to 4.45% for the prior year period. The cost of interest-bearing liabilities was 0.79% compared to 1.09%. The interest rate spread was 3.05% compared to 3.36%. The net interest margin, on a fully taxable equivalent basis, was 3.32% compared to 3.70%, a decrease of 38 basis points. The decrease in net interest margin was driven by declining interest rates and the impact of lower rates on the PPP lending.

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the nine months ended September 30, 2020 and 2019. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans is only recognized when the loan returns to accrual status or at full payment of principal.

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Net Interest Income Analysis (dollars in thousands)

	Nine Months Ended September 30,

	Average Balance				Income/Expense				Yield/Rate
	2020		2019		2020		2019		2020			2019
Loans:
Commercial	$	464,094	$	302,750	$	12,414	$	10,609		3.57	%		4.69	%
Real estate		1,522,803		1,354,358		52,319		49,782		4.58			4.90
Consumer		9,314		9,638		451		485		6.47			6.73
Total loans		1,996,211		1,666,746		65,184		60,876		4.36			4.87

Securities:
U.S. Treasury		7,292		—		47		—		0.86			—
Federal agencies and GSEs		70,604		135,937		1,147		2,475		2.17			2.43
Mortgage-backed and CMOs		198,528		124,258		3,144		2,353		2.11			2.52
State and municipal		43,345		64,084		871		1,348		2.68			2.80
Other securities		19,932		16,160		812		653		5.43			5.39
Total securities		339,701		340,439		6,021		6,829		2.36			2.67

Deposits in other banks		147,996		46,902		356		853		0.32			2.43

Total interest-earning assets		2,483,908		2,054,087		71,561		68,558		3.84			4.45

Non-earning assets		222,451		189,256

Total assets	$	2,706,359	$	2,243,343

Deposits:
Demand	$	371,155	$	299,769		294		245		0.11			0.11
Money market		550,063		432,980		2,254		3,962		0.55			1.22
Savings		192,632		163,525		101		201		0.07			0.16
Time		446,354		451,258		5,259		5,239		1.57			1.55
Total deposits		1,560,204		1,347,532		7,908		9,647		0.68			0.96

Customer repurchase agreements		43,649		39,265		237		461		0.73			1.57
Other short-term borrowings		1		3,502		—		55		0.50			1.94
Long-term borrowings		35,575		33,107		1,523		1,423		5.71			5.75
Total interest-bearing liabilities		1,639,429		1,423,406		9,668		11,586		0.79			1.09

Noninterest-bearing demand deposits		717,007		516,698
Other liabilities		22,692		20,595
Shareholders' equity		327,231		282,644
Total liabilities and shareholders' equity	$	2,706,359	$	2,243,343

Interest rate spread										3.05	%		3.36	%
Net interest margin										3.32	%		3.70	%

Net interest income (taxable equivalent basis)						61,893		56,972
Less: Taxable equivalent adjustment						219		293
Net interest income					$	61,674	$	56,679

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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)

	Nine Months Ended September 30,
	2020 vs. 2019
				Change
	Increase			Attributable to
	(Decrease)			Rate			Volume
Interest income
Loans:
Commercial	$	1,805		$	(2,922	)	$	4,727
Real estate		2,537			(3,389	)		5,926
Consumer		(34	)		(18	)		(16	)
Total loans		4,308			(6,329	)		10,637
Securities:
U.S. Treasury		47			—			47
Federal agencies and GSEs		(1,328	)		(243	)		(1,085	)
Mortgage-backed and CMOs		791			(435	)		1,226
State and municipal		(477	)		(58	)		(419	)
Other securities		159			5			154
Total securities		(808	)		(731	)		(77	)
Deposits in other banks		(497	)		(1,198	)		701
Total interest income		3,003			(8,258	)		11,261

Interest expense
Deposits:
Demand		49			(8	)		57
Money market		(1,708	)		(2,585	)		877
Savings		(100	)		(131	)		31
Time		20			77			(57	)
Total deposits		(1,739	)		(2,647	)		908
Customer repurchase agreements		(224	)		(271	)		47
Other short-term borrowings		(51	)		(25	)		(26	)
Long-term borrowings		96			(10	)		106
Total interest expense		(1,918	)		(2,953	)		1,035
Net interest income (taxable equivalent basis)	$	4,921		$	(5,305	)	$	10,226

Noninterest Income

Three months ended September 30, 2020 and 2019

For the quarter ended September 30, 2020, noninterest income increased $121,000 or 2.9% compared to the comparable 2019 quarter. Details of individual accounts are shown in the table below.

	Three Months Ended September 30,
	(Dollars in thousands)
	2020			2019			$ Change			% Change
Noninterest income:
Trust fees	$	1,054		$	979		$	75			7.7	%
Service charges on deposit accounts		618			783			(165	)		(21.1	)
Other fees and commissions		996			1,003			(7	)		(0.7	)
Mortgage banking income		1,030			710			320			45.1
Securities gains, net		—			105			(105	)		(100.0	)
Brokerage fees		170			183			(13	)		(7.1	)
Income from SBICs		98			143			(45	)		(31.5	)
Losses on premises and equipment, net		(15	)		(2	)		(13	)		650.0
Other		341			267			74			27.7
Total noninterest income	$	4,292		$	4,171		$	121			2.9

Service charge income decreased $165,000 in the third quarter of 2020 compared to the third quarter of 2019. Due to the actions taken to combat COVID-19 such as stay-at-home orders and restaurant and retail changes, debit card income decreased as consumers did not spend at the same levels in the third quarter of 2020 as 2019. The Company saw decreases in overdraft and related fees, another component of service charge income, caused by consumer spending decreases during the same period. Mortgage banking income increased $320,000 in the 2020 quarter compared to the 2019 quarter, primarily due to increased volume of applications for purchases and refinancing as rates hit historical lows in 2020. Net securities gains decreased $105,000 in the 2020 quarter compared to the same quarter in 2019.

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Nine months ended September 30, 2020 and 2019

For the nine months ended September 30, 2020, noninterest income increased $1,318,000 or 11.7% compared to the comparable 2019 period. Details of individual accounts are shown in the table below.

	Nine Months Ended September 30,
	(Dollars in thousands)
	2020			2019			$ Change			% Change
Noninterest income:
Trust fees	$	3,019		$	2,826		$	193			6.8	%
Service charges on deposit accounts		1,880			2,101			(221	)		(10.5	)
Other fees and commissions		2,888			2,726			162			5.9
Mortgage banking income		2,472			1,702			770			45.2
Securities gains, net		814			575			239			41.6
Brokerage fees		553			516			37			7.2
Income from SBICs		34			174			(140	)		(80.5	)
Losses on premises and equipment, net		(97	)		(89	)		(8	)		9.0
Other		1,059			773			286			37.0
Total noninterest income	$	12,622		$	11,304		$	1,318			11.7

Trust fees increased $193,000 for the nine months ended September 30, 2020 compared to the same period in 2019. Other fees and commissions increased $162,000 in the 2020 period compared to the 2019 period, while service charges decreased $221,000. Due to the actions taken to combat COVID-19 such as stay-at-home orders and restaurant and retail changes, debit card income decreased as consumers did not spend at the same levels in the third quarter of 2020 as 2019. The Company saw decreases in overdraft and related fees, another component of service charge income, caused by consumer spending decreases during the same period. Mortgage banking income increased $770,000 for the nine months ended September 30, 2020 compared to the 2019 period. The increase in 2020 is a result of historically low rates in the first nine months of 2020 resulting in increased application volume for new purchases and refinancing of existing loans. Net securities gains increased $239,000 in the 2020 period compared to the same period in 2019, while income from Small Business Investment Companies ("SBICs") decreased $140,000.

Noninterest Expense

Three months ended September 30, 2020 and 2019

For the three months ended September 30, 2020, noninterest expense increased $348,000 or 2.5%. Details of individual accounts are shown in the table below.

	Three Months Ended September 30,
	(Dollars in thousands)
	2020		2019			$ Change			% Change
Noninterest Expense
Salaries and employee benefits	$	7,989	$	7,662		$	327			4.3	%
Occupancy and equipment		1,423		1,448			(25	)		(1.7	)
FDIC assessment (credit)		162		(175	)		337			(192.6	)
Bank franchise tax		426		411			15			3.6
Core deposit intangible amortization		402		448			(46	)		(10.3	)
Data processing		705		589			116			19.7
Software		353		287			66			23.0
Other real estate owned, net		28		47			(19	)		(40.4	)
Other		2,652		3,075			(423	)		(13.8	)
Total noninterest expense	$	14,140	$	13,792		$	348			2.5

Salaries and employee benefits increased $327,000 in the 2020 quarter as compared to the 2019 quarter. Total full-time equivalent employees ("FTEs") were 341 at end of the third quarter of 2020, down from 365 at the end of the same quarter of 2019. However, salaries and employee benefits expenses increased for severance, pension accruals for upcoming retirements and increased commissions due to the uptick in mortgage banking resulting from the low rate environment in 2020. The Federal Deposit Insurance Corporation ("FDIC") assessment expense in the 2019 quarter was positively impacted by the Small Bank Assessment Credit, which reduced insurance expense $330,000. Core deposit intangible amortization decreased in the third quarter of 2020 compared to the same quarter of 2019 as the amortization from the MidCarolina acquisition completed in June 2020. The decrease in other noninterest expense in the 2020 quarter compared to the 2019 quarter was primarily due to reduced travel due to the COVID-19 pandemic and increased synergies from the HomeTown acquisition.

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Nine months ended September 30, 2020 and 2019

For the nine months ended September 30, 2020, noninterest expense decreased $11,131,000 or 21.8%. Details of individual accounts are shown in the table below.

	Nine Months Ended September 30,
	(Dollars in thousands)
	2020		2019		$ Change			% Change
Noninterest Expense
Salaries and employee benefits	$	21,540	$	22,029	$	(489	)		(2.2	)%
Occupancy and equipment		4,116		3,963		153			3.9
FDIC assessment		433		119		314			263.9
Bank franchise tax		1,277		1,113		164			14.7
Core deposit intangible amortization		1,246		961		285			29.7
Data processing		2,253		1,838		415			22.6
Software		1,112		932		180			19.3
Other real estate owned, net		34		16		18			112.5
Merger related expenses		—		11,322		(11,322	)		(100.0	)
Other		7,895		8,744		(849	)		(9.7	)
Total noninterest expense	$	39,906	$	51,037	$	(11,131	)		(21.8	)

Salaries and employee benefits decreased $489,000 for the nine months ended September 30, 2020 compared to the 2019 period. Total FTEs were 341 at the end of the third quarter of 2020, down from 365 at the end of the third quarter of 2019, for a decrease of 24 FTEs. Contributing to the decrease was a reduction in salary expenses of $1.7 million for the deferral of loan costs related to PPP originations in the second quarter of 2020 The costs are being amortized over the remaining lives of the loans, which for the majority of PPP loans was 24 months at origination date. The decrease was partially offset by the increased commissions due to the uptick in mortgage banking resulting from the low rate environment in 2020. Occupancy and equipment expense increased $153,000 for the nine months ended September 30, 2020 compared to the 2019 period, primarily due to the HomeTown acquisition in the second quarter of 2019. The FDIC assessment expense in the 2019 period was positively impacted by the Small Bank Assessment Credit, which reduced insurance expense $330,000. Core deposit intangible amortization increased $285,000 in the 2020 period compared to the same period in 2019 due to the HomeTown acquisition. Merger related expenses, which are related to the HomeTown acquisition and are nonrecurring in nature, totaled $11,322,000 during the 2019 period. The decrease in other noninterest expense in the 2020 period compared to the 2019 period was primarily due to reduced travel due to the COVID-19 pandemic and increased synergies from the HomeTown acquisition.

Non-GAAP Financial Measures

The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of other real estate owned ("OREO"), (2) core deposit intangible amortization and (3) merger related expense by net interest income including tax equivalent income on nontaxable loans and securities and noninterest income and excluding (a) gains or losses on securities and (b) gains or losses on sale or disposal of premises and equipment. The efficiency ratio for the 2020 quarter was 53.00% compared to 53.79% for the 2019 quarter. The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance but cautions that such information not be viewed as a substitute for GAAP information. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Efficiency Ratio
Noninterest expense	$	14,140		$	13,792		$	39,906		$	51,037
Add/subtract: gain/loss on sale of OREO, net of write-downs		(23	)		(22	)		12			56
Subtract: core deposit intangible amortization		(402	)		(448	)		(1,246	)		(961	)
Subtract: merger related expense		—			—			—			(11,322	)
	$	13,715		$	13,322		$	38,672		$	38,810

Net interest income	$	21,495		$	20,622		$	61,674		$	56,679
Tax equivalent adjustment		75			77			219			293
Noninterest income		4,292			4,171			12,622			11,304
Subtract: gain on securities		—			(105	)		(814	)		(575	)
Add: loss on fixed assets		15			2			97			89
	$	25,877		$	24,767		$	73,798		$	67,790

Efficiency ratio		53.00	%		53.79	%		52.40	%		57.25	%

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income
Non-GAAP measures:
Interest income - loans	$	22,394		$	22,516		$	65,184		$	60,876
Interest income - investments and other		1,860			2,519			6,377			7,682
Interest expense - deposits		(2,118	)		(3,655	)		(7,908	)		(9,647	)
Interest expense - customer repurchase agreements		(42	)		(150	)		(237	)		(461	)
Interest expense - other short-term borrowings		—			(16	)		—			(55	)
Interest expense - long-term borrowings		(524	)		(515	)		(1,523	)		(1,423	)
Total net interest income	$	21,570		$	20,699		$	61,893		$	56,972
Less non-GAAP measures:
Tax benefit realized on non-taxable interest income - loans	$	(48	)	$	(46	)	$	(138	)	$	(139	)
Tax benefit realized on non-taxable interest income - municipal securities		(27	)		(31	)		(81	)		(154	)
GAAP measures	$	21,495		$	20,622		$	61,674		$	56,679

Income Taxes

The effective tax rate for the third quarter of 2020 was 19.95% compared to 21.08% for the third quarter of 2019. The effective tax rate for the nine months ended September 30, 2020 and 2019 was 18.45% and 20.57%, respectively. The decreased rate for the nine-month 2020 period compared to the rate for the 2019 period is a result of tax benefits recognized. As a result of the enactment of the CARES Act in the first quarter of 2020, the Company recognized a tax benefit for the net operating loss ("NOL") five-year carryback provision for the NOL acquired in the HomeTown merger. An income tax benefit was realized for the difference between the current corporate income tax rate of 21% and the higher federal corporate tax rate of 35% prior to 2018.

The effective tax rate is ordinarily lower than the statutory rate of 21% due to the benefit of tax-exempt interest, tax-exempt changes in the cash surrender value of bank owned life insurance and excess tax benefits recognized on the exercise of stock options and the vesting of restricted stock.

Fair Value Impact to Net Interest Margin

The Company's fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. The net accretion impact for the three and nine months ended September 30, 2020 and 2019, as well as the remaining estimated net accretion impact are reflected in the following table (dollars in thousands):

	Loan		Deposit		Borrowings
	Accretion		Accretion		Amortization			Total
For the three months ended September 30, 2020	$	1,649	$	33	$	(21	)	$	1,661
For the three months ended September 30, 2019		841		128		(21	)		948

For the nine months ended September 30, 2020		3,330		153		(63	)		3,420
For the nine months ended September 30, 2019		2,117		272		(68	)		2,321

For the remaining three months of 2020 (estimated)		523		28		(21	)		530
For the years ending (estimated):
2021		1,874		78		(102	)		1,850
2022		1,191		50		(102	)		1,139
2023		769		30		(102	)		697
2024		464		5		(102	)		367
2025		366		2		(102	)		266
Thereafter (estimated)		1,718		3		(743	)		978

The third quarter of 2020 included $800,000 in cash basis accretion income related to the collection of a purchased loan previously charged off in connection with the Company's acquistion of MidCarolina Financial Corporation.

Impact of Inflation and Changing Prices

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

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CHANGES IN FINANCIAL POSITION

BALANCE SHEET ANALYSIS

Securities

The securities portfolio generates income, plays a major role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements. The securities portfolio consists primarily of high credit quality investments, mostly federal agency, mortgage-backed, and state and municipal securities.

The available for sale securities portfolio was $358,493,000 at September 30, 2020, compared to $379,195,000 at December 31, 2019, a decrease of $20,702,000 or 5.5%. At September 30, 2020, the available for sale portfolio had an amortized cost of $348,003,000, resulting in a net unrealized gain of $10,490,000. At December 31, 2019, the available for sale portfolio had an amortized cost of $375,494,000, resulting in a net unrealized gain of $3,701,000. The Company had no remaining equity securities at September 30, 2020. During the nine months ended September 30, 2019, the Company recognized a $333,000 change in the fair value of equity securities.

During the nine months ended September 30, 2020, the Company sold $5,000,000 in par value bonds and realized a net gain of $814,000. This compares to the nine months ended September 30, 2019, when the Company sold $29,485,000 in par value bonds and realized a net gain of $242,000. The Company had no remaining equity securities at September 30, 2020. During the nine months ended September 30, 2019, the Company sold $445,000 in equity securities at fair value.

The Company is cognizant of the continuing historically low and currently steady rate environment and has elected to execute an asset liability strategy of purchasing high quality taxable securities with relatively low optionality and short and overall balanced duration.

Loans

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. At September 30, 2020, the commercial real estate portfolio included concentrations of $73,526,000, $45,444,000 and $180,487,000 in hotel, restaurants, and retail, respectively. These concentrations total 14.4% of total loans, excluding loans in process.

Total loans were $2,086,094,000 at September 30, 2020, compared to $1,830,815,000 at December 31, 2019, an increase of $255,279,000 or 13.9%. At September 30, 2020, net PPP loans, which are in the commercial loan category, totaled $265,941,000. Declines in other categories offset some of the total loan growth during the period.

Average loans were $2,102,355,000 for the third quarter of 2020, compared to $1,821,636,000 for the third quarter of 2019, an increase of $280,719,000 or 15.4%, primarily related to PPP lending.

Loans held for sale totaled $6,789,000 at September 30, 2020 and $2,027,000 at December 31, 2019. Secondary loan production volume was $116,071,000 for the nine month period ended September 30, 2020 and $75,756,000 for the same period of 2019. These loans were approximately 40% purchase and 60% refinancing.

Management of the loan portfolio is organized around portfolio segments. Each segment is comprised of various loan types that are reflective of operational and regulatory reporting requirements. The following table presents the Company's loan portfolio by segment as of September 30, 2020 and December 31, 2019 (dollars in thousands):

	September 30, 2020		December 31, 2019
Commercial	$	543,746	$	339,077
Commercial real estate:
Construction and land development		151,613		137,920
Commercial real estate - owner occupied		382,121		360,991
Commercial real estate - non-owner occupied		608,954		538,208
Residential real estate:
Residential		279,815		324,315
Home equity		111,448		119,423
Consumer		8,397		10,881
Total loans	$	2,086,094	$	1,830,815

Provision for Loan Losses

The provision for loan losses was $2.6 million for the third quarter of 2020, as compared to $4.8 million for the previous quarter and a recovery of $12 thousand for the same period in the previous year. A smaller provision was needed in the third quarter compared to the second as economic factors stabilized; however, the bank continues to see stress in certain industry segments, has an active Disaster Assistance Program, and recorded higher specific reserves during the period. The Company had a provision for loan losses of $8,331,000 for the nine month period ended September 30, 2020, compared to a recovery of $6,000 for the same period ended September 30, 2019. The increase over the prior year period reflects an increase in allowance requirements in response to the declining and uncertain economic landscape caused by the COVID-19 pandemic. Net charge-offs for the nine months ended September 30, 2020 were $395,000 compared to $41,000 for the 2019 period.

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Allowance for Loan Losses

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

At September 30, 2020, the ALLL was $21,088,000, compared to $13,152,000 at December 31, 2019. The ALLL as a percentage of total loans at such dates was 1.01% and 0.72%, respectively. Management will continue to evaluate the adequacy of the Company's allowance for loan losses as more economic data becomes available and as changes within the Company's portfolio are known. The effects of the pandemic may require the Company to fund additional increases in the allowance for loan losses in future periods.

As part of the Company's methodology to evaluate the adequacy of its ALLL, the Company computed its ASC 450 loan balance by reducing total loans by acquired loans and loans that were evaluated for impairment individually. The FASB ASC 450 loan loss reserve balance is the total ALLL reduced by allowances associated with these other pools of loans.

The general allowance, ASC 450 (FAS 5) reserves to FASB ASC 450 loans, was 1.10% at September 30, 2020, compared to 0.87% at December 31, 2019. On a dollar basis, the reserve was $19,860,000 at September 30, 2020, compared to $12,684,000 at December 31, 2019. This segment of the allowance represents by far the largest portion of the loan portfolio and the largest aggregate risk.

The specific allowance, ASC 310-40 (FAS 114) reserves to FASB ASC 310-40 loans, was 10.38% at September 30, 2020, compared to 10.51% at December 31, 2019. On a dollar basis, the reserve was $354,000 at September 30, 2020, compared to $230,000 at December 31, 2019. There is ongoing turnover in the composition of the impaired loan population, which increased by a net $1,216,171 over December 31, 2019.

The specific allowance does not include reserves related to acquired loans with deteriorated credit quality. This reserve was $874,000 at September 30, 2020 compared to $238,000 at December 31, 2019. This is the only portion of the reserve related to purchased credit impaired loans. Cash flow expectations for these loans are reviewed on a quarterly basis and unfavorable changes in those estimates relative to the initial estimates can result in the need for additional loan loss provision. The following table presents the Company's loan loss and recovery experience for the periods indicated (dollars in thousands):

	Nine Months Ended September 30, 2020		Year Ended December 31, 2019
Balance at beginning of period	$	13,152	$	12,805

Charge-offs:
Construction and land development		—		—
Commercial real estate - owner occupied		—		6
Commercial real estate - non-owner occupied		28		—
Residential real estate		61		20
Home equity		7		50
Total real estate		96		76
Commercial and industrial		417		12
Consumer		162		245
Total charge-offs		675		333

Recoveries:
Construction and land development		2		—
Commercial real estate - owner occupied		8		9
Commercial real estate - non-owner occupied		50		—
Residential real estate		61		40
Home equity		13		18
Total real estate		134		67
Commercial and industrial		41		13
Consumer		105		144
Total recoveries		280		224

Net charge-offs		395		109
Provision for loan losses		8,331		456
Balance at end of period	$	21,088	$	13,152

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Asset Quality Indicators

The following table provides qualitative indicators relevant to the Company's loan portfolio for the nine month period and year indicated below.

Asset Quality Ratios

	September 30, 2020			December 31, 2019
Allowance to loans ⁽¹⁾		1.01	%		0.72	%
ASC 450 (FAS 5) ALLL to ASC 450 loans ⁽²⁾		1.10			0.87
Net charge-offs to allowance ⁽³⁾		2.50			0.83
Net charge-offs to average loans ⁽³⁾		0.03			0.01
Nonperforming assets to total assets		0.16			0.15
Nonperforming loans to loans		0.16			0.13
Provision to net charge-offs ⁽³⁾		2,109.11			418.35
Provision to average loans ⁽³⁾		0.56			0.03
Allowance to nonperforming loans		625.20			570.59

__________________________

(1) - Excluding PPP loans, 1.16%

(2) - Excluding PPP loans, 1.29%

(3) - Annualized.

Nonperforming Assets (Loans and Other Real Estate Owned and Repossessions)

Nonperforming loans include loans on which interest is no longer accrued and accruing loans that are contractually past due 90 days or more. Nonperforming loans include loans originated and loans acquired exclusive of PCI loans.

Nonperforming loans to total loans were 0.16% at September 30, 2020 and 0.13% at December 31, 2019.

Nonperforming assets include nonperforming loans, OREO and repossessions. Nonperforming assets represented 0.16% and 0.15% of total assets at September 30, 2020 and December 31, 2019, respectively. The Company continues to monitor the significant impact to its borrowers caused by COVID-19 and anticipates increases in nonperforming assets as a result, but the total cannot be determined at this time.

In most cases, it is the policy of the Company that any loan that becomes 90 days past due will automatically be placed on nonaccrual loan status, accrued interest reversed out of income, and further interest accrual ceased. Any payments received on such loans will be credited to principal. In some cases a loan in process of renewal may become 90 days past due. In these instances the loan may still be accruing because of a delayed renewal process in which the customer has not been billed. In accounting for acquired impaired loans, such loans are not classified as nonaccrual when they become 90 days past due. They are considered to be accruing because their interest income relates to the accretable yield and not to contractual interest payments.

Loans will only be restored to full accrual status after six consecutive months of payments that were each less than 30 days delinquent. The Company strictly adheres with this policy before restoring a loan to normal accrual status.

The following table presents the Company's nonperforming assets as of September 30, 2020 and December 31, 2019 (dollars in thousands):

Nonperforming Assets

	September 30, 2020		December 31, 2019
Nonaccrual loans:
Real estate	$	2,886	$	1,083
Commercial		193		857
Consumer		9		4
Total nonaccrual loans		3,088		1,944

Loans past due 90 days and accruing interest:
Real estate		285		309
Commercial		—		52
Total past due 90 days and accruing interest		285		361

Total nonperforming loans		3,373		2,305

Other real estate owned		999		1,308

Repossessions (included in other assets)		211		—

Total nonperforming assets	$	4,583	$	3,613

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Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The following table shows loans that were considered impaired, exclusive of purchased credit impaired loans, as of September 30, 2020 and December 31, 2019 (dollars in thousands):

Impaired Loans

	September 30, 2020		December 31, 2019
Accruing	$	890	$	969
Nonaccruing		2,518		1,223
Total impaired loans	$	3,408	$	2,192

Troubled Debt Restructurings

TDRs exist whenever the Company makes a concession to a customer based on the customer's financial distress that would not have otherwise been made in the normal course of business.

There were $2,359,000 in TDRs at September 30, 2020 compared to $1,058,000 at December 31, 2019. These loans are included in the impaired loan table above.

In March 2020 (revised in April 2020), the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance explains that, in consultation with the FASB staff, the federal banking agencies have concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. The CARES Act was passed by the U.S. Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Bank implemented a DAP to provide relief to its borrowers under this guidance. On September 30, 2020, the balance of loans remaining in this program was $135 million or 6.5% of the total portfolio as of that date. The majority of remaining modifications involved three-month deferments of interest. On October 23, 2020, the balance of loans remaining in this program was $63.9 million with only $6.6 million in second deferrals. This interagency guidance is not expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

Other Real Estate Owned

Other real estate owned was $999,000 and $1,308,000 as of September 30, 2020 and December 31, 2019, respectively. OREO is initially recorded at fair value, less estimated costs to sell, at the date of foreclosure. Loan losses resulting from foreclosure are charged against the ALLL at that time. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value, less estimated costs to sell with any additional write-downs charged against earnings. For significant assets, these valuations are typically outside annual appraisals. The following table shows the Company's OREO as of September 30, 2020 and December 31, 2019 (dollars in thousands):

Other Real Estate Owned

	September 30, 2020		December 31, 2019
Construction and land development	$	484	$	600
1-4 family residential		285		285
Commercial real estate		230		423
	$	999	$	1,308

Deposits

The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Total deposits were $2,470,700,000 at September 30, 2020 compared to $2,060,547,000 at December 31, 2019, an increase of $410,153,000 or 19.9%. Customer deposits of loan proceeds from the PPP that remained at September 30, 2020 partially accounted for the increase. Customers have continued to maintain higher cash balances throughout the second and third quarters of 2020 as future liquidity needs remain uncertain. This buildup of cash reserves primarily accounts for the significant increase over the same period of 2019.

Average interest-bearing deposits were $1,619,960,000 for the third quarter of 2020, compared to $1,443,947,000 for the third quarter of 2019, an increase of $176,013,000 or 12.2%. Average noninterest-bearing deposits for the 2020 quarter were $814,685,000, compared to $568,706,000 for the 2019 quarter, an increase of $245,979,000 or 43.3%.

The Company's primary focus on the liability side of the balance sheet is growing core deposits and their affiliated relationships. The challenge is to fund the Bank in a cost effective and competitive manner. The Company's cost of interest-bearing deposits for the third quarter of 2020 was 0.52%, down from 1.00% for the third quarter of 2019.

Shareholders' Equity

The Company's capital management strategy is to be classified as "well capitalized" under regulatory capital ratios and provide as high as possible total return to shareholders. The Company's capital strategy has not changed in response to COVID-19 except to suspend the stock repurchase program for the near term.

Shareholders' equity was $331,981,000 at September 30, 2020 compared to $320,258,000 at December 31, 2019, an increase of $11,723,000 or 3.7%.

The Company paid cash dividends of $0.81 per share during the first nine months of 2020 while the aggregate basic and diluted earnings per share for the same period was $1.93.

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Effective January 1, 2015, the Company and the Bank became subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Basel III Capital Rules"). The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. In addition, to be well capitalized under the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act, the Bank must have the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

On August 28, 2018, the Federal Reserve issued an interim final rule required by the Economic Growth, Regulatory Relief, and Consumer Protection Act ("EGRRCPA") that expands the applicability of the Federal Reserve’s Small Bank Holding Company Policy Statement ("SBHC Policy Statement") to bank holding companies with total consolidated assets of less than $3 billion (up from the prior $1 billion threshold). Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules. However, the Company does not currently intend to issue a material amount of debt or take any other action that would cause its capital ratios to fall below the minimum ratios required by the Basel III Capital Rules. The SBHC Policy Statement does not apply to the Bank, and the Bank must comply with the Basel III Capital Rules.

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

On April 6, 2020, the federal bank regulatory agencies announced the issuance of two interim final rules that make changes to the CBLR framework and implement Section 4012 of the CARES Act. One interim final rule provides that, as of the second quarter of 2020, a banking organization with a leverage ratio of 8% or greater (and that meets the other existing qualifying criteria) may elect to use the CBLR framework. This rule also establishes a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls below 8% so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition back to the leverage ratio requirement of 9%. Under this rule, the required leverage ratio will be 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. This rule also maintains a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable ratio. This transition will allow community banking organizations to focus on supporting lending to creditworthy households and businesses given the recent strains on the U.S. economy caused by COVID-19. The Company and the Bank do not currently expect to opt into the CBLR framework.

The following table provides information on the regulatory capital ratios for the Company and the Bank at September 30, 2020 and December 31, 2019. Management believes, as of September 30, 2020, that the Company and the Bank more than satisfy all capital adequacy requirements to which they are subject.

	Percentage At September 30, 2020						Percentage At December 31, 2019
Risk-Based Capital Ratios:	Company			Bank			Company			Bank

Common equity tier 1 capital ratio		11.94	%		12.85	%		11.56	%		12.38	%
Tier 1 capital ratio		13.36			12.85			12.98			12.38
Total capital ratio		14.81			13.94			14.04			13.06

Leverage Capital Ratio:

Tier 1 leverage ratio		9.60			9.23			10.75			10.25

Stock Repurchase Program

On January 19, 2018, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of a stock repurchase program. The program authorized the repurchase of up to 300,000 shares of the Company's common stock over a two-year period that ended on December 31, 2019.

No shares of the Company's common stock were repurchased during the three months ended September 30, 2020. In the nine month period ended September 30, 2020, the Company repurchased 140,526 shares at an average cost of $35.44 per share, for a total cost of $4,981,000. In the nine month period ended September 30, 2019, the Company repurchased 32,165 shares at an average cost of $35.38 per share, for a total cost of $1,138,000. This program has been suspended since the second quarter of 2020 in an effort to conserve capital in response to COVID-19.

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Liquidity

Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities in a timely manner. Liquidity management involves maintaining the Company's ability to meet the daily cash flow requirements of its customers, whether they are borrowers requiring funds or depositors desiring to withdraw funds. Additionally, the Company requires cash for various operating needs including dividends to shareholders, the servicing of debt, and the payment of general corporate expenses. The Company manages its exposure to fluctuations in interest rates through policies approved by the Asset Liability Committee ("ALCO") and Board of Directors, both of which receive periodic reports of the Company's interest rate risk and liquidity position. The Company uses a computer simulation model to assist in the management of the future liquidity needs of the Company.

Liquidity sources include on balance sheet and off balance sheet sources.

Balance sheet liquidity sources include cash, amounts due from banks, loan repayments, and increases in deposits. The Company also maintains a large, high quality, very liquid bond portfolio, which is generally 50% to 60% unpledged and would, accordingly, be available for sale if necessary.

Off balance sheet sources include lines of credit from the Federal Home Loan Bank of Atlanta ("FHLB"), federal funds lines of credit, and access to the Federal Reserve Bank of Richmond's discount window.

The Company has a line of credit with the FHLB, equal to 30% of the Bank's assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB. The Company had $205,000,000 outstanding in letters of credit at September 30, 2020 and $170,000,000 outstanding at December 31, 2019. These letters of credit provide the Bank with alternate collateral for securing public entity deposits above FDIC insurance levels, thereby providing less need for collateral pledging from the securities portfolio, and thereby maximizing on balance sheet liquidity.

Short-term borrowings are discussed in Note 8 and long-term borrowings are discussed in Note 9 in the Consolidated Financial Statements included in this report.

The Company has federal funds lines of credit established with one correspondent bank in the amount of $50,000,000 and another correspondent bank in the amount of $10,000,000, and has access to the Federal Reserve Bank of Richmond's discount window.

The Company has a relationship with Promontory Network, the sponsoring entity for the Certificate of Deposit Account Registry Service® ("CDARS"). Through CDARS, the Company is able to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives the Company the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With CDARS, the Company has the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use CDARS to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, CDARS can provide the Company with another funding option. Thus, CDARS serves as a deposit-gathering tool and an additional liquidity management tool. Under the EGRRCPA signed into law on May 24, 2018, a well-capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20 percent of its total liabilities or $5 billion without those deposits being treated as brokered deposits. Deposits through the CDARS program as of September 30, 2020 and December 31, 2019, were $4,332,000 and $14,864,000, respectively.

COVID-19 and the participation in the PPP and the DAP programs could significantly impact the Company's liquidity. Average deposits grew 21.0% in the third quarter of 2020 compared to the same quarter in 2019, partially due to customer deposits of loan proceeds from participation in the PPP program. Customers have continued to maintain higher cash balances throughout the second and third quarters of 2020 as future liquidity needs remain uncertain. This buildup of cash reserves primarily accounts for the significant increase over the same period of 2019. Management believes that the resources available to the Company will provide sufficient and timely liquidity, both on and off the balance sheet to support the programs and operations.

Off-Balance Sheet Activities

The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. Other than subsidiaries to issue trust preferred securities, the Company does not have any off-balance sheet subsidiaries. Off-balance sheet transactions at September 30, 2020 and at December 31, 2019 were as follows (dollars in thousands):

	September 30, 2020		December 31, 2019
Commitments to extend credit	$	558,343	$	557,364
Standby letters of credit		15,679		13,611
Mortgage loan rate-lock commitments		36,520		10,791

Commitments to extend credit to customers represent legally binding agreements with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future funding requirements. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

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

Interest Rate Risk Management

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

The Company uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account current balance sheet volumes and the scheduled repricing dates instrument level optionality, and maturities of assets and liabilities. It incorporates numerous assumptions including growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.

A balance sheet is considered asset sensitive when its earning assets (loans and securities) reprice faster or to a greater extent than its liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively more net interest income when interest rates rise and less net interest income when they decline. Based on the Company's simulation analysis, management believes the Company's interest sensitivity position at September 30, 2020 is asset sensitive. Management expects that the general direction of market interest rates will be stable to decreasing for the remainder of 2020.

Earnings Simulation

The following table shows the estimated impact of changes in interest rates on net interest income as of September 30, 2020 (dollars in thousands), assuming gradual and parallel changes in interest rates, and consistent levels of assets and liabilities. Net interest income for the following twelve months is projected to increase when interest rates are higher than current rates.

Estimated Changes in Net Interest Income

	September 30, 2020
	Change in Net Interest Income
Change in interest rates	Amount			Percent
Up 4.00%	$	5,375			6.9	%
Up 3.00%		4,018			5.2
Up 2.00%		2,593			3.3
Up 1.00%		1,212			1.6
Flat		—			—
Down 0.25%		(338	)		(0.4	)
Down 1.00%		(1,366	)		(1.8	)

Management cannot predict future interest rates or their exact effect on net interest income. Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.

Any changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect the Company's interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt. Decrease in yields due to the economic downturn in the wake of the COVID-19 pandemic have been projected in the model simulation.

Economic Value Simulation

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.

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The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly period ended September 30, 2020 (dollars in thousands):

Estimated Changes in Economic Value of Equity

	September 30, 2020
Change in interest rates	Amount		$ Change			% Change
Up 4.00%	$	429,755	$	256,057			147.4	%
Up 3.00%		379,874		206,176			118.7
Up 2.00%		323,515		149,817			86.3
Up 1.00%		254,316		80,618			46.4
Flat		173,698		—			—
Down 0.25%		147,114		(26,584	)		(15.3	)
Down 1.00%		48,162		(125,536	)		(72.3	)

Due to the historically low interest rate environment, no measurement was considered necessary for a further decline in interest rates. Due to the significant drop in short-term interest rates as a result of the economic impact of the COVID-19 pandemic, the valuation of the deposit portfolio decreased significantly in addition to the earning asset portfolio.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 2020. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no significant changes in the Company's internal controls over financial reporting that occurred during the quarter ended September 30, 2020, that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The nature of the business of the Company ordinarily results in a certain amount of litigation. The Company is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Company.

ITEM 1A. RISK FACTORS

The Company has previously described the primary risk factors in Item 1A. Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 9, 2020. It updates these risks as circumstances change and the discussion below supplements the previous disclosures.

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

The COVID-19 pandemic has created global economic disruptions and disruptions to the lives of people around the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged time period or result in sustained economic stress or recession, many of the risk factors identified in the Company's December 31, 2019 Form 10-K could be exacerbated, and such effects could have a material adverse impact on it in terms of credit quality, collateral values, ability of customers to repay loans, product demand, funding, operations, interest rate risk and human capital.

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

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

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Sales of Unregistered Securities - None

(b) Use of Proceeds - Not applicable

Stock Repurchase Program; Other

On December 19, 2019, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of another stock repurchase program. The program authorizes the repurchase of up to 400,000 shares of the Company's common stock through December 31, 2020. Repurchases may be made through open market purchases or in privately negotiated transactions, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The actual timing, number, and value of shares repurchased under the program will be determined by management.

No shares of the Company's common stock were repurchased during the three months ended September 30, 2020. Under the share repurchase program, the Company has the remaining authority to repurchase up to 259,474 shares of the Company's common stock as of September 30, 2020. However, this program has been suspended since the second quarter of 2020 in an effort to conserve capital due to COVID-19.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

(a) Required 8-K disclosures

None

(b) Changes in Nominating Process

None

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ITEM 6. EXHIBITS

	31.1	Section 302 Certification of Jeffrey V. Haley, President and Chief Executive Officer.
	31.2	Section 302 Certification of Jeffrey W. Farrar, Executive Vice President, Chief Operating Officer and Chief Financial Officer.
	32.1	Section 906 Certification of Jeffrey V. Haley, President and Chief Executive Officer.
	32.2	Section 906 Certification of Jeffrey W. Farrar, Executive Vice President, Chief Operating Officer and Chief Financial Officer.
	101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
	101.SCH	Inline XBRL Taxonomy Extension Schema Document
	101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
	101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
	104	The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AMERICAN NATIONAL BANKSHARES INC.




	By:	/s/ Jeffrey V. Haley
		Jeffrey V. Haley
		President and Chief Executive Officer
Date - November 5, 2020		(principal executive officer)

	By:	/s/ Jeffrey W. Farrar
		Jeffrey W. Farrar
		Executive Vice President,
		Chief Operating Officer and
		Chief Financial Officer
Date - November 5, 2020		(principal financial officer)

	By:	/s/ Cathy W. Liles
		Cathy W. Liles
		Senior Vice President and
		Chief Accounting Officer
Date - November 5, 2020		(principal accounting officer)