AMERICAN NATIONAL BANKSHARES INC. - Quarter Report: 2021 September (Form 10-Q)

americannb20210930_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, 2021

☐	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, 2021, the Company had 10,778,728 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, 2021 (unaudited) and December 31, 2020	3

		Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020 (unaudited)	4

		Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 (unaudited)	5

		Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2021 and 2020 (unaudited)	6

		Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (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	52

	Item 4.	Controls and Procedures	53

Part II.		OTHER INFORMATION

	Item 1.	Legal Proceedings	54

	Item 1A.	Risk Factors	54

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

	Item 3.	Defaults Upon Senior Securities	55

	Item 4.	Mine Safety Disclosures	55


	Item 5.	Other Information	55

	Item 6.	Exhibits	56

SIGNATURES			57

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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, 2021*			*(Audited) December 31, 2020*
Assets
Cash and due from banks	$	38,349		$	30,767
Interest-bearing deposits in other banks		480,052			343,603
Securities available for sale, at fair value		643,949			466,091
Restricted stock, at cost		8,046			8,715
Loans held for sale		9,518			15,591
Loans, net of deferred fees and costs		1,940,332			2,015,056
Less allowance for loan losses		(20,630	)		(21,403	)
Net loans		1,919,702			1,993,653
Premises and equipment, net		37,021			39,723
Other real estate owned, net of valuation allowance		213			958
Goodwill		85,048			85,048
Core deposit intangibles, net		4,978			6,091
Bank owned life insurance		28,950			28,482
Other assets		33,237			31,288
Total assets	$	3,289,063		$	3,050,010

Liabilities
Noninterest-bearing deposits	$	980,985		$	830,094
Interest-bearing deposits		1,881,096			1,781,236
Total deposits		2,862,081			2,611,330
Customer repurchase agreements		26,595			42,551
Long-term borrowings		28,207			35,630
Other liabilities		21,793			22,605
Total liabilities		2,938,676			2,712,116

Shareholders' equity
Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding		—			—
Common stock, $1 par value, 20,000,000 shares authorized, 10,778,562 shares outstanding at September 30, 2021 and 10,982,367 shares outstanding at December 31, 2020		10,715			10,926
Capital in excess of par value		148,069			154,850
Retained earnings		193,107			169,681
Accumulated other comprehensive (loss) income, net		(1,504	)		2,437
Total shareholders' equity		350,387			337,894
Total liabilities and shareholders' equity	$	3,289,063		$	3,050,010

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,*
	*2021*			*2020*			*2021*			*2020*
Interest and Dividend Income:
Interest and fees on loans	$	21,974		$	22,346		$	65,334		$	65,046
Interest and dividends on securities:
Taxable		1,896			1,545			5,297			5,228
Tax-exempt		94			107			293			330
Dividends		112			122			349			382
Other interest income		201			59			375			356
Total interest and dividend income		24,277			24,179			71,648			71,342
Interest Expense:
Interest on deposits		781			2,118			2,990			7,908
Interest on short-term borrowings		3			42			19			237
Interest on long-term borrowings		400			524			1,352			1,523
Total interest expense		1,184			2,684			4,361			9,668
Net Interest Income		23,093			21,495			67,287			61,674
(Recovery of) Provision for loan losses		482			2,619			(870	)		8,331
Net Interest Income After (Recovery of) Provision for Loan Losses		22,611			18,876			68,157			53,343
Noninterest Income:
Trust fees		1,311			1,054			3,757			3,019
Service charges on deposit accounts		664			618			1,916			1,880
Other fees and commissions		1,147			996			3,644			2,888
Mortgage banking income		989			1,030			3,449			2,472
Securities gains, net		—			—			—			814
Brokerage fees		265			170			733			553
Income from Small Business Investment Companies		491			98			1,510			34
Income from insurance investments		132			108			1,062			271
Losses on premises and equipment, net		(107	)		(15	)		(588	)		(97	)
Other		231			233			704			788
Total noninterest income		5,123			4,292			16,187			12,622
Noninterest Expense:
Salaries and employee benefits		8,185			7,989			23,881			21,540
Occupancy and equipment		1,513			1,423			4,548			4,116
FDIC assessment		194			162			644			433
Bank franchise tax		440			426			1,321			1,277
Core deposit intangible amortization		361			402			1,113			1,246
Data processing		748			705			2,224			2,253
Software		344			353			1,011			1,112
Other real estate owned, net		21			28			148			34
Other		3,037			2,652			8,655			7,895
Total noninterest expense		14,843			14,140			43,545			39,906
Income Before Income Taxes		12,891			9,028			40,799			26,059
Income Taxes		2,713			1,801			8,566			4,808
Net Income	$	10,178		$	7,227		$	32,233		$	21,251
Net Income Per Common Share:
Basic	$	0.94		$	0.66		$	2.96		$	1.93
Diluted	$	0.94		$	0.66		$	2.95		$	1.93
Weighted Average Common Shares Outstanding:
Basic		10,833,875			10,966,645			10,907,721			10,983,729
Diluted		10,836,293			10,969,901			10,911,372			10,988,090

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,*
	*2021*			*2020*
Net income	$	10,178		$	7,227

Other comprehensive loss:

Unrealized losses on securities available for sale		(2,191	)		(245	)
Tax effect		474			53

Unrealized gains on cash flow hedges		230			243
Tax effect		(49	)		(53	)

Other comprehensive loss		(1,536	)		(2	)

Comprehensive income	$	8,642		$	7,225

	*Nine Months Ended September 30,*
	*2021*			*2020*
Net income	$	32,233		$	21,251

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale		(6,657	)		7,603
Tax effect		1,450			(1,641	)

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

Unrealized gains (losses) on cash flow hedges		1,603			(2,715	)
Tax effect		(337	)		586

Other comprehensive income (loss)		(3,941	)		3,195

Comprehensive income	$	28,292		$	24,446

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, 2021 and 2020

(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, 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

Balance, June 30, 2021	$	10,811		$	150,947		$	185,843		$	32		$	347,633

Net income		—			—			10,178			—			10,178

Other comprehensive loss		—			—			—			(1,536	)		(1,536	)

Stock repurchased (100,764 shares)		(101	)		(3,212	)		—			—			(3,313	)

Vesting of restricted stock (517 shares)		1			1			—			—			2

Equity based compensation (4,615 shares)		4			333			—			—			337

Cash dividends paid, $0.27 per share		—			—			(2,914	)		—			(2,914	)

Balance, September 30, 2021	$	10,715		$	148,069		$	193,107		$	(1,504	)	$	350,387

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, 2021 and 2020

(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, 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

Balance, December 31, 2020	$	10,926		$	154,850		$	169,681		$	2,437		$	337,894

Net income		—			—			32,233			—			32,233

Other comprehensive (loss)		—			—			—			(3,941	)		(3,941	)

Stock repurchased (247,999 shares)		(248	)		(7,895	)		—			—			(8,143	)

Stock options exercised (5,180 shares)		5			81			—			—			86

Vesting of restricted stock (15,832 shares)		16			(16	)		—			—			—

Equity based compensation (41,079 shares)		16			1,049			—			—			1,065

Cash dividends paid, $0.81 per share		—			—			(8,807	)		—			(8,807	)

Balance, September 30, 2021	$	10,715		$	148,069		$	193,107		$	(1,504	)	$	350,387

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,*
	*2021*			*2020*
Cash Flows from Operating Activities:
Net income	$	32,233		$	21,251
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses		(870	)		8,331
Depreciation		1,694			1,598
Net accretion of acquisition accounting adjustments		(3,148	)		(2,620	)
Core deposit intangible amortization		1,113			1,246
Net amortization of securities		1,275			842
Net gain on sale or call of securities available for sale		—			(814	)
Gain on sale of loans held for sale		(3,449	)		(2,472	)
Proceeds from sales of loans held for sale		123,193			113,781
Originations of loans held for sale		(113,671	)		(116,071	)
Net loss (gain) on other real estate owned		111			(12	)
Net loss on sale or disposal of premises and equipment		588			97
Equity based compensation expense		1,065			1,102
Earnings on bank owned life insurance		(468	)		(461	)
Deferred income tax benefit		(63	)		(164	)
Net change in other assets		(836	)		(2,806	)
Net change in other liabilities		793			(1,603	)
Net cash provided by operating activities		39,560			21,225

Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale		—			5,811
Proceeds from maturities, calls and paydowns of securities available for sale		137,511			177,469
Purchases of securities available for sale		(323,302	)		(155,817	)
Net change in restricted stock		669			(77	)
Net decrease (increase) in loans		77,984			(253,650	)
Proceeds from sale of premises and equipment		1,316			1
Purchases of premises and equipment		(833	)		(2,347	)
Proceeds from sales of other real estate owned		634			162
Net cash used in investing activities		(106,021	)		(228,448	)

Cash Flows from Financing Activities:
Net change in noninterest-bearing deposits		150,891			241,778
Net change in interest-bearing deposits		99,921			168,528
Net change in customer repurchase agreements		(15,956	)		1,431
Net change in subordinated debt		(7,500	)		—
Common stock dividends paid		(8,807	)		(8,874	)
Repurchase of common stock		(8,143	)		(4,981	)
Proceeds from exercise of stock options		86			30
Net cash provided by financing activities		210,492			397,912
Net Increase in Cash and Cash Equivalents		144,031			190,689
Cash and Cash Equivalents at Beginning of Period		374,370			79,582
Cash and Cash Equivalents at End of Period	$	518,401		$	270,271

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 26 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.

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 2020 and will likely continue to adversely affect its operations through 2021, 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. We have seen significant improvement in the severity of the pandemic, however, as it continues to affect economies around the world and in the United States, it could impact estimates in future periods.

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, 2020. Certain prior period balances have been reclassified to conform to the current period presentation.

Recently Adopted Accounting Developments

In December 2020, the Consolidated Appropriations Act of 2021 ("CAA") was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, including the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") and treatment of certain loan modifications related to the COVID-19 pandemic.

The Company utilized a Disaster Assistance Program for borrowers in accordance with Section 4013 of the CARES Act throughout the pandemic. The Company assisted borrowers with modifications to outstanding loan balances of $347.0 million in the aggregate since the beginning of the pandemic in March 2020. At September 30, 2021, all modifications had expired compared to outstanding loan balances of $2.3 million at June 30, 2021.

The Company processed a total of $364.2 million in PPP loans with $66.9 million forgiven in the third quarter of 2021 compared to $80.0 million in the second quarter of 2021. The loans are 100% guaranteed by the SBA and therefore do not have a related allowance. The SBA paid the Bank a processing fee based on the size of the loan which is amortized to income over the life of the loan or until the loan is forgiven. Total outstanding net PPP loans were $37.2 million and $211.3 million at September 30, 2021 and December 31, 2020, respectively.

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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") 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. At the one-time evaluation date, the Company qualified as a smaller reporting company and elected to defer the adoption of the standard. The Company is refining the data in the model that will be used upon future adoption of the standard and expects to run concurrent models in the fourth quarter of 2021 and each quarter of 2022 until adoption. The implementation of this ASU will likely result in an adjustment to the Company's reserves when implemented.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin ("SAB") 119. SAB 119 updated portions of SEC interpretative guidance to align with 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 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 the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

Note 2 – Securities

The amortized cost and fair value of investments in securities available for sale at September 30, 2021 were as follows (dollars in thousands):

	*September 30, 2021*
	*Amortized Cost*		*Unrealized Gains*		*Unrealized Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	110,154	$	92	$	205	$	110,041
Federal agencies and GSEs		89,680		1,298		482		90,496
Mortgage-backed and CMOs		358,910		3,933		2,436		360,407
State and municipal		62,813		1,336		282		63,867
Corporate		18,950		248		60		19,138
Total securities available for sale	$	640,507	$	6,907	$	3,465	$	643,949

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The amortized cost and fair value of investments in securities available for sale at December 31, 2020 were as follows (dollars in thousands):

	*December 31, 2020*
	*Amortized Cost*		*Unrealized Gains*		*Unrealized Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	34,997	$	1	$	—	$	34,998
Federal agencies and GSEs		104,092		1,976		45		106,023
Mortgage-backed and CMOs		246,770		6,117		105		252,782
State and municipal		57,122		1,979		2		59,099
Corporate		13,011		188		10		13,189
Total securities available for sale	$	455,992	$	10,261	$	162	$	466,091

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 3.75% of outstanding borrowings and a specific percentage of the Bank's total assets. The cost of restricted stock at September 30, 2021 and December 31, 2020 was as follows (dollars in thousands):

	*September 30, 2021*		*December 31, 2020*
FRB stock	$	6,490	$	6,458
FHLB stock		1,556		2,257
Total restricted stock	$	8,046	$	8,715

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, 2021. 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, 2021, were 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*
U.S. Treasury	$	75,384	$	205	$	75,384	$	205	$	—	$	—
Federal agencies and GSEs		54,053		482		48,140		302		5,913		180
Mortgage-backed and CMOs		208,634		2,436		202,455		2,302		6,179		134
State and municipal		17,869		282		15,440		166		2,429		116
Corporate		7,690		60		7,690		60		—		—
Total	$	363,630	$	3,465	$	349,109	$	3,035	$	14,521	$	430

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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, 2020 (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	$	21,237	$	45	$	19,974	$	26	$	1,263	$	19
Mortgage-backed and CMOs		46,640		105		46,640		105		—		—
State and municipal		3,456		2		3,456		2		—		—
Corporate		5,990		10		5,990		10		—		—
Total	$	77,323	$	162	$	76,060	$	143	$	1,263	$	19

U.S. Treasury securities: The unrealized losses on the Company's investment in eight U.S. Treasury securities were caused by normal market fluctuations. None 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, 2021.

Federal agencies and GSEs: The unrealized losses on the Company's investment in 23 government sponsored entities ("GSE") securities were caused by normal market fluctuations. Eleven 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, 2021.

Mortgage-backed securities: The unrealized losses on the Company's investment in 16 GSE mortgage-backed securities were caused by normal market fluctuations. One of these securities was 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, 2021.

Collateralized Mortgage Obligations: The unrealized losses associated with 23 GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. One of these securities was 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, 2021.

State and municipal securities: The unrealized losses on 26 state and municipal securities were caused by normal market fluctuations. One of these securities was in an unrealized loss position for 12 months or more. These securities are of high credit quality (rated AA- 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, 2021.

Corporate securities: The unrealized losses on three corporate securities were caused by normal market fluctuations and not credit deterioration. These securities are not rated, but the Company conducted thorough internal credit reviews prior to purchase earlier this year, which determined the investment risk to be acceptable due to the issuers' experienced management teams, strong asset quality, and ample levels of capital and liquidity. The Company conducts ongoing quarterly reviews of these companies as well. The contractual terms of these investment do not permit the issuer to settle the security at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.

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, 2021, and no impairment has been recognized.

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Other-Than-Temporarily-Impaired Securities

As of September 30, 2021 and December 31, 2020, 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, 2021 and 2020 (dollars in thousands):

	*Three Months Ended September 30, 2021*		*Nine Months Ended September 30, 2021*
Realized gains:
Gross realized gains	$	—	$	—
Gross realized losses		—		—
Net realized gains	$	—	$	—
Proceeds from sales of securities	$	—	$	—

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

Note 3 – Loans

Loans, net of deferred fees and costs and excluding loans held for sale, at September 30, 2021 and December 31, 2020, were comprised of the following (dollars in thousands):

	*September 30, 2021*		*December 31, 2020*
Commercial	$	320,278	$	491,256
Commercial real estate:
Construction and land development		120,193		140,071
Commercial real estate - owner occupied		404,029		373,680
Commercial real estate - non-owner occupied		713,339		627,569
Residential real estate:
Residential		280,351		269,137
Home equity		95,317		104,881
Consumer		6,825		8,462
Total loans, net of deferred fees and costs	$	1,940,332	$	2,015,056

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, 2021 and December 31, 2020 are as follows (dollars in thousands):

	*September 30, 2021*		*December 31, 2020*
Outstanding principal balance	$	182,125	$	251,730
Carrying amount		174,184		241,008

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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, 2021*		*December 31, 2020*
Outstanding principal balance	$	29,073	$	37,417
Carrying amount		23,072		30,201

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, 2021 and the year ended December 31, 2020 (dollars in thousands):

	*September 30, 2021*			*December 31, 2020*
Balance at January 1	$	6,513		$	7,893
Accretion		(2,948	)		(3,553	)
Reclassification from nonaccretable difference		1,432			2,233
Other changes, net (1)		(433	)		(60	)
	$	4,564		$	6,513

__________________________

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

Past Due Loans

The following table shows an analysis by portfolio segment of the Company's past due loans at September 30, 2021 (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	$	51	$	—	$	—	$	32	$	83	$	320,195	$	320,278
Commercial real estate:
Construction and land development		—		—		—		1		1		120,192		120,193
Commercial real estate - owner occupied		—		—		—		23		23		404,006		404,029
Commercial real estate - non-owner occupied		—		—		—		926		926		712,413		713,339
Residential:
Residential		409		—		—		827		1,236		279,115		280,351
Home equity		81		55		—		81		217		95,100		95,317
Consumer		1		13		—		13		27		6,798		6,825
Total	$	542	$	68	$	—	$	1,903	$	2,513	$	1,937,819	$	1,940,332

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 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	$	153	$	9	$	—	$	100	$	262	$	490,994	$	491,256
Commercial real estate:
Construction and land development		168		—		—		5		173		139,898		140,071
Commercial real estate - owner occupied		62		—		209		304		575		373,105		373,680
Commercial real estate - non-owner occupied		—		—		—		1,158		1,158		626,411		627,569
Residential:
Residential		711		211		53		792		1,767		267,370		269,137
Home equity		—		—		—		69		69		104,812		104,881
Consumer		49		14		—		6		69		8,393		8,462
Total	$	1,143	$	234	$	262	$	2,434	$	4,073	$	2,010,983	$	2,015,056

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Impaired Loans

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at September 30, 2021 (dollars in thousands):

	*Recorded Investment*		*Unpaid Principal Balance*		*Related Allowance*		*Average Recorded Investment*		*Interest Income Recognized*
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	5	$	—
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		14		11		—		87		1
Commercial real estate - non-owner occupied		1,027		1,026		—		1,087		22
Residential:
Residential		1,139		1,146		—		1,265		31
Home equity		5		5		—		5		—
Consumer		—		—		—		—		—
	$	2,185	$	2,188	$	—	$	2,449	$	54
With a related allowance recorded:
Commercial	$	16	$	9	$	9	$	28	$	1
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—
Commercial real estate - non-owner occupied		—		—		—		31		—
Residential
Residential		16		16		1		76		2
Home equity		—		—		—		—		—
Consumer		—		—		—		—		—
	$	32	$	25	$	10	$	135	$	3
Total:
Commercial	$	16	$	9	$	9	$	33	$	1
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		14		11		—		87		1
Commercial real estate - non-owner occupied		1,027		1,026		—		1,118		22
Residential:
Residential		1,155		1,162		1		1,341		33
Home equity		5		5		—		5		—
Consumer		—		—		—		—		—
	$	2,217	$	2,213	$	10	$	2,584	$	57

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, 2020 (dollars in thousands):

	*Recorded Investment*		*Unpaid Principal Balance*		*Related Allowance*		*Average Recorded Investment*		*Interest Income Recognized*
With no related allowance recorded:
Commercial	$	18	$	18	$	—	$	23	$	6
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		286		283		—		357		27
Commercial real estate - non-owner occupied		1,148		1,147		—		766		75
Residential:
Residential		1,096		1,103		—		912		62
Home equity		6		6		—		31		3
Consumer		—		—		—		—		—
	$	2,554	$	2,557	$	—	$	2,089	$	173
With a related allowance recorded:
Commercial	$	39	$	33	$	29	$	382	$	15
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—
Commercial real estate - non-owner occupied (1)		122		122		—		180		15
Residential:
Residential		137		137		1		256		9
Home equity		—		—		—		—		—
Consumer		—		—		—		—		—
	$	298	$	292	$	30	$	818	$	39
Total:
Commercial	$	57	$	51	$	29	$	405	$	21
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		286		283		—		357		27
Commercial real estate - non-owner occupied		1,270		1,269		—		946		90
Residential:
Residential		1,233		1,240		1		1,168		71
Home equity		6		6		—		31		3
Consumer		—		—		—		—		—
	$	2,852	$	2,849	$	30	$	2,907	$	212

__________________________

(1) Allowance is reported as zero in the table due to presentation in thousands and rounding.

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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During the three and nine months ended September 30, 2021 there were no loans modified as troubled debt restructurings ("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 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.

During the nine months ended September 30, 2021, the Company had one commercial real estate - non-owner occupied loan with a recorded investment of $259,000 at restructure and one commercial loan with a recorded investment of $106,000 at restructure that subsequently defaulted within 12 months of modification. During the nine months ended September 30, 2020, the Company had one commercial real estate loan with a recorded investment of $1,052,000 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. There were no defaults during the three months ended September 30, 2021 and the three and nine months ended September 30, 2020.

The Company processed a total of $364.2 million in PPP loans under the CARES Act. Of the total processed, $66.9 million was forgiven in the three months and $254.3 million in the nine months ended September 30, 2021. Total outstanding net PPP loans were $37.2 million and $211.3 million at September 30, 2021 and December 31, 2020, respectively.

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, 2021, the commercial real estate portfolio included concentrations of $83,540,000, $44,127,000 and $199,571,000 in hotel, restaurants, and retail loans, respectively. These concentrations total 4.3%, 2.3%, and 10.3% of total loans, respectively, excluding loans in process.

Residential Real Estate in Process of Foreclosure

The Company had $5,000 in residential loans in process of foreclosure at September 30, 2021 and $387,000 in process of foreclosure at December 31, 2020, respectively. The Company had no residential other real estate owned ("OREO") at September 30, 2021 and had $285,000 in residential OREO at December 31, 2020.

Risk Grades

The following tables show the Company's loan portfolio broken down by internal risk grading as of September 30, 2021 (dollars in thousands):

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	*Commercial*		*Construction and Land Development*		*Commercial Real Estate - Owner Occupied*		*Commercial Real Estate - Non-owner Occupied*		*Residential*		*Home Equity*
Pass	$	311,207	$	115,975	$	383,787	$	697,632	$	275,172	$	94,941
Special Mention		8,466		2,933		11,840		8,880		2,375		—
Substandard		605		1,285		8,402		6,827		2,804		376
Doubtful		—		—		—		—		—		—
Total	$	320,278	$	120,193	$	404,029	$	713,339	$	280,351	$	95,317

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	*Consumer*
Performing	$	6,824
Nonperforming		1
Total	$	6,825

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The following tables show the Company's loan portfolio broken down by internal risk grading as of December 31, 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	$	479,416	$	131,770	$	350,376	$	612,688	$	262,677	$	104,608
Special Mention		10,956		2,505		14,621		9,196		3,665		—
Substandard		865		5,796		8,474		5,563		2,795		273
Doubtful		19		—		209		122		—		—
Total	$	491,256	$	140,071	$	373,680	$	627,569	$	269,137	$	104,881

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	*Consumer*
Performing	$	8,456
Nonperforming		6
Total	$	8,462

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 4 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

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

	*Nine Months Ended September 30, 2021*			*Year Ended December 31, 2020*			*Nine Months Ended September 30, 2020*
Allowance for Loan Losses
Balance, beginning of period	$	21,403		$	13,152		$	13,152
Provision for (recovery of) loan losses		(870	)		8,916			8,331
Charge-offs		(70	)		(1,006	)		(675	)
Recoveries		167			341			280
Balance, end of period	$	20,630		$	21,403		$	21,088

Reserve for Unfunded Lending Commitments
Balance, beginning of period	$	304		$	329		$	329
Provision for (recovery of) unfunded commitments		23			(25	)		10
Balance, end of period	$	327		$	304		$	339

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

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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 nine months ended September 30, 2021 (dollars in thousands):

	*Commercial (1)*			*Construction and Land Development*			*Commercial Real Estate - Owner Occupied*			*Commercial Real Estate - Non-owner Occupied*		*Residential Real Estate*			*Consumer*			*Total*
Allowance for Loan Losses
Balance at December 31, 2020	$	3,373		$	1,927		$	4,340		$	7,626	$	4,067		$	70		$	21,403
Provision for (recovery of) loan losses		(440	)		(551	)		166			259		(281	)		(23	)		(870	)
Charge-offs		—			—			(3	)		—		(17	)		(50	)		(70	)
Recoveries		27			—			6			6		71			57			167
Balance at September 30, 2021	$	2,960		$	1,376		$	4,509		$	7,891	$	3,840		$	54		$	20,630

Balance at September 30, 2021:

Allowance for Loan Losses
Individually evaluated for impairment	$	9		$	—		$	—		$	—	$	1		$	—		$	10
Collectively evaluated for impairment		2,930			1,376			4,311			7,465		3,760			54			19,896
Purchased credit impaired loans		21			—			198			426		79			—			724
Total	$	2,960		$	1,376		$	4,509		$	7,891	$	3,840		$	54		$	20,630

Loans
Individually evaluated for impairment	$	16		$	—		$	14		$	1,027	$	1,160		$	—		$	2,217
Collectively evaluated for impairment		319,837			119,967			394,875			704,158		369,394			6,812			1,915,043
Purchased credit impaired loans		425			226			9,140			8,154		5,114			13			23,072
Total	$	320,278		$	120,193		$	404,029		$	713,339	$	375,668		$	6,825		$	1,940,332

__________________________

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

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, 2020 (dollars in thousands):

	*Commercial (1)*			*Construction and Land Development*		*Commercial Real Estate - Owner Occupied*			*Commercial Real Estate - Non-owner Occupied*			*Residential Real Estate*			*Consumer*			*Total*
Allowance for Loan Losses
Balance at December 31, 2019	$	2,657		$	1,161	$	2,474		$	3,781		$	3,023		$	56		$	13,152
Provision for loan losses		1,156			764		1,871			3,960			1,076			89			8,916
Charge-offs		(505	)		—		(17	)		(165	)		(117	)		(202	)		(1,006	)
Recoveries		65			2		12			50			85			127			341
Balance at December 31, 2020	$	3,373		$	1,927	$	4,340		$	7,626		$	4,067		$	70		$	21,403

Balance at December 31, 2020:

Allowance for Loan Losses
Individually evaluated for impairment	$	29		$	—	$	—		$	—		$	1		$	—		$	30
Collectively evaluated for impairment		3,318			1,927		4,138			7,185			3,896			70			20,534
Purchased credit impaired loans		26			—		202			441			170			—			839
Total	$	3,373		$	1,927	$	4,340		$	7,626		$	4,067		$	70		$	21,403

Loans
Individually evaluated for impairment	$	57		$	—	$	286		$	1,270		$	1,239		$	—		$	2,852
Collectively evaluated for impairment		490,736			139,833		360,579			616,498			365,967			8,390			1,982,003
Purchased credit impaired loans		463			238		12,815			9,801			6,812			72			30,201
Total	$	491,256		$	140,071	$	373,680		$	627,569		$	374,018		$	8,462		$	2,015,056

__________________________

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

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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 levels and trends in delinquencies, nonaccrual loans, and charge-offs and recoveries; trends in volume and terms of loans; effects of changes in risk selection, underwriting standards, and lending policies; experience of lending staff; national, regional, and local economic trends and conditions; portfolio concentrations; regulatory and legal factors; competition; quality of loan review system; and value of underlying collateral.

There was a provision expense of $482,000 in the third quarter of 2021 compared to a recovery of provision expense of $1.4 million in the second quarter of 2021 and an expense of $2.6 million for the third quarter of the previous year. The expense in the third quarter of 2021 was the net result of the required provision resulting from significant loan growth netted against a negative provision from the adjustment of qualitative factors around continued improvement in economic conditions. Ongoing low charge-off and delinquency rates and overall strong asset quality metrics also contributed to the adjustments to the factors reducing the provision expense in the third quarter and also resulted in a negative provision in the second quarter of 2021. The expense in the third quarter of 2020 was the result of adjustments to the qualitative factors for the declining and uncertain economic landscape in the wake of the COVID-19 pandemic. Sharp declines in employment, GDP, housing starts and business activity in general indicated a higher risk of probable future losses in the Bank's portfolio at the time.

Note 5 – Goodwill and Other Intangible Assets

The Company's goodwill was recognized in connection with past business combinations and is reported at the community banking segment. The Company reviews the carrying value of the goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill, which was the annual evaluation at June 30, 2021, the Company concluded that no impairment existed. No indicators of impairment were identified during the nine months ended September 30, 2021 or 2020.

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 Bankshares Corporation ("HomeTown") in April 2019 were $10,039,000 in the aggregate 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, 2021, are as follows (dollars in thousands):

	*Goodwill*		*Intangibles*
Balance at December 31, 2020	$	85,048	$	6,091
Amortization		—		(1,113	)
Balance at September 30, 2021	$	85,048	$	4,978

Note 6 – Leases

The Company's leases are recorded under ASC 842, Leases. 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 aggregate right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Company's consolidated balance sheets.

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, 2021*			*December 31, 2020*
Lease liabilities	$	4,119		$	4,940
Right-of-use assets	$	4,040		$	4,878
Weighted average remaining lease term (years)		7.12			7.33
Weighted average discount rate		3.15	%		3.03	%

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	*Three Months Ended September 30, 2021*		*Three Months Ended September 30, 2020*
Lease cost
Operating lease cost	$	267	$	243
Short-term lease cost		—		1
Total lease cost	$	267	$	244

Cash paid for amounts included in the measurement of lease liabilities	$	265	$	237

	*Nine Months Ended September 30, 2021*		*Nine Months Ended September 30, 2020*
Lease cost
Operating lease cost	$	804	$	742
Short-term lease cost		—		2
Total lease cost	$	804	$	744

Cash paid for amounts included in the measurement of lease liabilities	$	781	$	722

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, 2021*
Three months ending December 31, 2021	$	266
Twelve months ending December 31, 2022		1,037
Twelve months ending December 31, 2023		938
Twelve months ending December 31, 2024		509
Twelve months ending December 31, 2025		471
Twelve months ending December 31, 2026		260
Thereafter		1,167
Total undiscounted cash flows		4,648
Discount		(529	)
Lease liabilities	$	4,119

Note 7 – 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 correspondent banks in the amount of $60,000,000 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, 2021 and December 31, 2020 (dollars in thousands):

		*September 30, 2021*				*December 31, 2020*
Customer repurchase agreements		$	26,595			$	42,551

Note 8 – 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, 2021, $959,095,000 in eligible collateral was pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings.

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There were no long-term borrowings with FHLB as of September 30, 2021 or December 31, 2020.

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, 2021, the Bank's public deposits totaled $309,407,000. 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, 2021, the Company had $275,000,000 in letters of credit with the FHLB outstanding, as well as $84,412,000 in agency, state, and municipal securities, pledged to provide collateral for such deposits.

Subordinated Debt

On April 1, 2019, in connection with the HomeTown merger, the Company assumed had $7,500,000 in aggregate principal amount of fixed-to-floating rate subordinated notes issued to various institutional accredited investors. A fair value adjustment of $30,000 was recorded on the subordinated debt as a result of the acquisition of HomeTown on April 1, 2019, and was amortized into interest expense through December 30, 2020. The notes had a maturity date of December 30, 2025 and had an annual fixed interest rate of 6.75% until December 30, 2020. Thereafter, the notes had a floating interest rate based on LIBOR. Interest was paid semi-annually, in arrears, on June 30 and December 30 of each year during the fixed interest rate period. Interest was paid quarterly, in arrears, on March 30, June 30, September 30 and December 30 throughout the floating interest rate period or earlier redemption date. This debt was paid in full and the notes were redeemed on June 30, 2021.

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 other assets in the consolidated balance sheets.

A description of the junior subordinated debt securities outstanding payable to the trusts is shown below as of September 30, 2021 and December 31, 2020 (dollars in thousands):

Principal Amount

Issuing Entity

Date Issued

Interest Rate

Maturity Date

September 30, 2021

December 31, 2020

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

4,531

4,489

MidCarolina Trust II

12/3/2003

LIBOR plus 2.95%

10/7/2033

3,057

3,022

28,207

28,130

The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $624,000 and $552,000 at September 30, 2021 and $666,000 and $587,000 at December 31, 2020, 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.

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Note 9 - 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, 2021 and December 31, 2020 (dollars in thousands):

	*September 30, 2021*
	*Notional Amount*		*Positions*		*Assets*		*Liabilities*		*Cash Collateral Pledged*
Cash flow hedges:
Interest rate swaps:
Variable-rate to fixed-rate swaps with counterparty	$	28,500		3	$	—	$	3,265	$	4,050

	*December 31, 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	$	—	$	4,868	$	5,750

Note 10 – 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.

Stock Options

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

A summary of stock option transactions for the nine months ended September 30, 2021 is as follows:

	*Option Shares*			*Weighted Average Exercise Price*		*Weighted Average Remaining Contractual Term (years)*		*Aggregate Intrinsic Value ($000)*
Outstanding at December 31, 2020		10,541		$	16.63
Granted		—			—
Exercised		(5,180	)		16.63
Forfeited		(332	)		16.63
Expired		—			—
Outstanding and exercisable at September 30, 2021		5,029		$	16.63		3.22	$	83

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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, 2021, 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, 2021 is summarized in the following table.

	*Shares*			*Weighted Average Grant Date Value Per Share*
Nonvested at December 31, 2020		58,539		$	34.81
Granted		24,709			28.26
Vested		(16,661	)		38.63
Forfeited		(2,065	)		30.72
Nonvested at September 30, 2021		64,522		$	31.45

As of September 30, 2021 and December 31, 2020, there was $910,000 and $797,000 respectively, in unrecognized compensation cost related to nonvested restricted stock granted under the 2018 Plan. The weighted average period over which this cost is expected to be recognized is 1.46 years. The share based compensation expense for nonvested restricted stock was $534,000 and $504,000 during the first nine months of 2021 and 2020, respectively.

The Company offers its outside directors alternatives with respect to director compensation. For 2021, 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. Board policy requires the directors to maintain ownership of a minimum aggregate market value of $250,000 with respect to shares received for service on the Board. Only outside directors receive board fees. The Company issued 16,370 and 21,697 shares and recognized share based compensation expense of $531,000 and $598,000 during the first nine months of 2021 and 2020, respectively.

Note 11 – 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, 2021 and 2020:

	*Three Months Ended September 30,*
	*2021*				*2020*
	*Shares*		*Per Share Amount*		*Shares*		*Per Share Amount*
Basic earnings per share		10,833,875	$	0.94		10,966,645	$	0.66
Effect of dilutive securities - stock options		2,418		—		3,256		—
Diluted earnings per share		10,836,293	$	0.94		10,969,901	$	0.66

	*Nine Months Ended September 30,*
	*2021*					*2020*
	*Shares*		*Per Share Amount*			*Shares*		*Per Share Amount*
Basic earnings per share		10,907,721	$	2.96			10,983,729	$	1.93
Effect of dilutive securities - stock options		3,651		(0.01	)		4,361		—
Diluted earnings per share		10,911,372	$	2.95			10,988,090	$	1.93

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 or nine months ended September 30, 2021 and 2020.

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Note 12 – 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, 2021 or December 31, 2020.

Loans held for sale: Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data, which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of mortgage banking income on the Company's consolidated statements of income.

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, 2021 Using*
	*Balance at September 30,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2021*		*Level 1*		*Level 2*		*Level 3*
Assets:
Securities available for sale:
U.S. Treasury	$	110,041	$	—	$	110,041	$	—
Federal agencies and GSEs		90,496		—		90,496		—
Mortgage-backed and CMOs		360,408		—		360,408		—
State and municipal		63,866		—		63,866		—
Corporate		19,138		—		19,138		—
Total securities available for sale	$	643,949	$	—	$	643,949	$	—
Loans held for sale	$	9,518	$	—	$	9,518	$	—
Liabilities:
Derivative - cash flow hedges	$	3,265	$	—	$	3,265	$	—

	*Fair Value Measurements at December 31, 2020 Using*
	*Balance at December 31,*		*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	$	34,998	$	—	$	34,998	$	—
Federal agencies and GSEs		106,023		—		106,023		—
Mortgage-backed and CMOs		252,782		—		252,782		—
State and municipal		59,099		—		59,099		—
Corporate		13,189		—		13,189		—
Total securities available for sale	$	466,091	$	—	$	466,091	$	—
Loans held for sale	$	15,591	$	—	$	15,591	$	—
Liabilities:
Derivative - cash flow hedges	$	4,868	$	—	$	4,868	$	—

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.

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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.

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.

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, 2021 Using*
	*Balance at September 30,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2021*		*Level 1*		*Level 2*		*Level 3*
Assets:
Impaired loans, net of valuation allowance	$	22	$	—	$	—	$	22
Other real estate owned, net		213		—		—		213

	*Fair Value Measurements at December 31, 2020 Using*
	*Balance at December 31,*		*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	$	268	$	—	$	—	$	268
Other real estate owned, net		958		—		—		958

Quantitative Information about Level 3 Fair Value Measurements as of September 30, 2021 and December 31, 2020:

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)	4.13% - 7.20%; 5.21%

Other real estate owned, net	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, 2021 are as follows (dollars in thousands):

	*Fair Value Measurements at September 30, 2021 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	$	518,401	$	518,401	$	—	$	—	$	518,401
Securities available for sale		643,949		—		643,949		—		643,949
Restricted stock		8,046		—		8,046		—		8,046
Loans held for sale		9,518		—		9,518		—		9,518
Loans, net of allowance		1,919,702		—		—		1,904,320		1,904,320
Bank owned life insurance		28,950		—		28,950		—		28,950
Accrued interest receivable		5,829		—		5,829		—		5,829

Financial Liabilities:
Deposits	$	2,862,081	$	—	$	2,864,242	$	—	$	2,864,242
Repurchase agreements		26,595		—		26,595		—		26,595
Junior subordinated debt		28,207		—		—		26,037		26,037
Accrued interest payable		424		—		424		—		424
Derivative - cash flow hedges		3,265		—		3,265		—		3,265

The carrying values and the exit pricing concept fair values of the Company's financial instruments at December 31, 2020 are as follows (dollars in thousands):

	*Fair Value Measurements at December 31, 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	$	374,370	$	374,370	$	—	$	—	$	374,370
Securities available for sale		466,091		—		466,091		—		466,091
Restricted stock		8,715		—		8,715		—		8,715
Loans held for sale		15,591		—		15,591		—		15,591
Loans, net of allowance		1,993,653		—		—		1,992,326		1,992,326
Bank owned life insurance		28,482		—		28,482		—		28,482
Accrued interest receivable		7,193		—		7,193		—		7,193

Financial Liabilities:
Deposits	$	2,611,330	$	—	$	2,615,157	$	—	$	2,615,157
Repurchase agreements		42,551		—		42,551		—		42,551
Subordinated debt		7,500		—		7,522		—		7,522
Junior subordinated debt		28,130		—		—		21,696		21,696
Accrued interest payable		778		—		778		—		778
Derivative - cash flow hedges		4,868		—		4,868		—		4,868

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Note 13 – 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.

Segment information as of and for the three and nine months ended September 30, 2021 and 2020 is shown in the following tables (dollars in thousands):

	*As of and For the Three Months Ended September 30, 2021*
	*Community Banking*		*Trust and Investment Services*		*Total*
Interest income	$	24,277	$	—	$	24,277
Interest expense		1,184		—		1,184
Noninterest income		3,547		1,576		5,123
Noninterest expense		14,164		679		14,843
Income before income taxes		12,080		811		12,891
Net income		9,537		641		10,178
Depreciation and amortization		929		3		932
Total assets		3,288,849		214		3,289,063
Goodwill		85,048		—		85,048
Capital expenditures		454		—		454

	*As of and For the 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		2,716		1,576		4,292
Noninterest expense		13,598		542		14,140
Income before income taxes		8,445		583		9,028
Net income		6,764		463		7,227
Depreciation and amortization		938		3		941
Total assets		2,864,361		178		2,864,539
Goodwill		85,048		—		85,048
Capital expenditures		463		—		463

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	*As of and For the Nine Months Ended September 30, 2021*
	*Community Banking*		*Trust and Investment Services*		*Total*
Interest income	$	71,648	$	—	$	71,648
Interest expense		4,361		—		4,361
Noninterest income		11,697		4,490		16,187
Noninterest expense		41,529		2,016		43,545
Income before income taxes		38,326		2,473		40,799
Net income		30,278		1,955		32,233
Depreciation and amortization		2,798		9		2,807
Total assets		3,288,849		214		3,289,063
Goodwill		85,048		—		85,048
Capital expenditures		833		—		833

	*As of and For the 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		38,751		1,155		39,906
Income before income taxes		24,866		1,193		26,059
Net income		20,273		978		21,251
Depreciation and amortization		2,838		6		2,844
Total assets		2,864,361		178		2,864,539
Goodwill		85,048		—		85,048
Capital expenditures		2,343		4		2,347

Note 14 – Supplemental Cash Flow Information

Supplemental cash flow information as of and for the nine months ended September 30, 2021 and 2020 is shown in the following table (dollars in thousands):

	*2021*			*2020*
Supplemental Schedule of Cash and Cash Equivalents:
Cash and due from banks	$	38,349		$	35,633
Interest-bearing deposits in other banks		480,052			234,638
Cash and Cash Equivalents	$	518,401		$	270,271

Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest on deposits and borrowed funds	$	4,715		$	9,860
Income taxes		2,312			5,885
Noncash investing and financing activities:
Transfer of loans to other real estate owned		—			95
Transfer of loans to repossessions		—			411
Net unrealized gains (losses) on securities available for sale		(6,657	)		6,789
Net unrealized gains (losses) on cash flow hedges		1,602			(2,715	)

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Note 15 – 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, 2021 and 2020 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, 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

Balance at June 30, 2021	$	4,430		$	(2,761	)	$	(1,637	)	$	32

Net unrealized losses on securities available for sale, net of tax, $(474)		(1,717	)		—			—			(1,717	)

Net unrealized gains on cash flow hedges, net of tax, $49		—			181			—			181

Balance at September 30, 2021	$	2,713		$	(2,580	)	$	(1,637	)	$	(1,504	)

For the Nine 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 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

Balance at December 31, 2020	$	7,920		$	(3,846	)	$	(1,637	)	$	2,437

Net unrealized losses on securities available for sale, net of tax, $(1,450)		(5,207	)		—			—			(5,207	)

Net unrealized gains on cash flow hedges, net of tax, $337		—			1,266			—			1,266

Balance at September 30, 2021	$	2,713		$	(2,580	)	$	(1,637	)	$	(1,504	)

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Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2021 and 2020

(dollars in thousands)

For the Three Months Ended September 30, 2021	*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, 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 Nine Months Ended September 30, 2021	*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 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

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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, 2020, 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 the Company's allowance for loan losses, the amount of loan loss provisions required in future periods, and the failure of assumptions underlying the allowance for loan losses;

•

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

•

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

•

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

•

the ability to recruit and retain key personnel;

•

cybersecurity threats or attacks, the implementation of new technologies, and the ability to develop and maintain reliable and secure electronic systems; 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 created a global health crisis that 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 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 many parties, resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that 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. In 2020, the Company implemented a business continuity plan and protocols to continue to maintain a high level of care for its employees, customers and communities. The Company 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. In April 2021, the majority of remaining remote workers returned to the office, and the Company fully opened branch lobbies to customers with prudent safety protocols. The Company remains focused on supporting and protecting its employees, customers, and communities while creating shareholder value.

The Bank assisted borrowers through its Disaster Assistance Program ("DAP") adopted in March 2020 in response to the federal banking agencies issuance of the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This issuance was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encouraged 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 explained 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"). At September 30, 2021, all modifications had expired compared to outstanding modified loan balances of $30.0 million at December 31, 2020.

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The Company continued to participate in the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act into the third quarter of 2021. The loans are 100% guaranteed by the SBA and therefore do not have a related allowance. The SBA paid the Bank a processing fee based on the size of the loan which is amortized to income over the life of the loan or until the loan is forgiven or otherwise repaid. During the third quarter of 2021, the SBA forgave $66.9 million of loans compared to $80.0 million in the second quarter of 2021. Total outstanding net PPP loans were $37.2 million and $211.3 million at September 30, 2021 and December 31, 2020, respectively.

Reclassification

In certain circumstances, reclassifications have been made to prior period information to conform to the 2021 presentation. There were no material reclassifications.

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, 2020.

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 with review and input from Credit Administration. 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, and charge-offs and recoveries; trends in volume and terms of loans; effects of changes in risk selection, underwriting standards, and lending policies; experience of lending staff; national, regional, and local economic trends and conditions; portfolio concentrations; regulatory and legal factors; 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.

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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.

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's goodwill was recognized in connection with past business combinations and is reported at the community banking segment. The Company reviews the carrying value of the goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill, which was the annual evaluation at June 30, 2021, the Company concluded that no impairment existed. No indicators of impairment were identified during the nine months ended September 30, 2021 or 2020.

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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.

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RESULTS OF OPERATIONS

Executive Overview

Third quarter 2021 financial highlights include the following:

•

Net loans held for investment, excluding PPP loans, grew $92.9 million, or 5.1%, during the third quarter compared to $15.4 million, or 0.9%, in the second quarter of this year and $83.0 million, or 4.6%, in the third quarter of the prior year.

•

Average deposits grew 3.4% during the quarter and 13.7% over the same quarter of 2020; the cost of interest-bearing deposits decreased to 0.17% in the third quarter, compared to 0.21% in the previous quarter and 0.52% in the same quarter of the prior year.

•

Fully taxable equivalent net interest margin was 3.09% for the quarter, up from 3.00% in the previous quarter and down from 3.26% in the same quarter of the prior year.*

•

Noninterest revenues decreased $19 thousand, or 0.4%, when compared to the previous quarter, and increased $831 thousand, or 19.4%, compared to the same quarter in the prior year.

•

Noninterest expense increased $206 thousand, or 1.4%, when compared to the previous quarter, and increased $703 thousand, or 5.0%, when compared to the same quarter in the prior year.

•

The Company recorded a provision for loan losses in the third quarter of 2021 of $482 thousand compared to a negative provision in the second quarter of $1.4 million and a provision expense of $2.6 million in the third quarter in the prior year. Annualized net charge-offs (recoveries) as a percentage of average loans outstanding were (0.01%) for the third and second quarters of 2021 and 0.01% for the third quarter of 2020.

•

Nonperforming assets as a percentage of total assets were 0.06% at September 30, 2021, down from 0.07% at June 30, 2021 and 0.16% at September 30, 2020.

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

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, 2021 and 2020

Net interest income on a taxable equivalent basis was $23.1 million, an increase of $1.6 million, or 7.4%, for the third quarter of 2021 compared to $21.5 million for the same quarter of 2020. The increase in net interest income from the same quarter in the prior year was attributable to an increase in earning assets and fee recognition associated with PPP loans, additional accretion income and reduced deposit costs from a significantly lower rate environment. Average loan balances for the 2021 quarter were down $179,074,000, or 8.5%, over the 2020 quarter, primarily due to PPP forgiveness. PPP loans had a net balance of $37,200,000 at September 30, 2021, earn 1% interest, and generate fee income that is being accreted over the life of the loans or at forgiveness. The interest income from the total PPP portfolio generated $169,000 in revenues for the third quarter of 2021. Total net PPP fees recognized in net interest income during the third quarter of 2021 were $2,436,000, enhanced by the accelerated amortization of fees and costs on the forgiveness of $66,900,000 in PPP loans. Loan yields for the quarter were 31 basis points higher than the 2020 quarter.

For the third quarter of 2021, the Company's yield on interest-earning assets was 3.25%, compared to 3.66% for the third quarter of 2020. The cost of interest-bearing liabilities was 0.25% for the 2021 period compared to 0.63% for the 2020 period. The interest rate spread was 3.00% for the 2021 period compared to 3.03% for the 2020 period. The net interest margin, on a fully taxable equivalent basis, was 3.09% for the 2021 period compared to 3.26%, for the 2020 period, a decrease of 17 basis points. The decrease in net interest margin was driven by declining interest rates partially offset by PPP fee income earned.

Table of Contents

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the three months ended September 30, 2021 and 2020. 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.

Net Interest Income Analysis (dollars in thousands)

	Three Months Ended September 30,
	2021		2020		2021		2020		2021			2020
	Average Balance				Income/Expense				Yield/Rate
Loans:
Commercial	$	325,692	$	544,712	$	5,185	$	4,495		6.32	%		3.28	%
Real estate		1,590,858		1,549,078		16,702		17,755		4.20			4.58
Consumer		6,731		8,565		125		144		7.37			6.69
Total loans		1,923,281		2,102,355		22,012		22,394		4.57			4.26

Securities:
U.S. Treasury		53,347		10,541		139		3		1.04			0.11
Federal agencies and GSEs		90,876		61,405		265		287		1.17			1.87
Mortgage-backed and CMOs		335,940		194,585		1,091		942		1.30			1.94
State and municipal		62,883		46,432		320		294		2.04			2.53
Other securities		26,462		20,815		311		275		4.70			5.28
Total securities		569,508		333,778		2,126		1,801		1.49			2.16

Deposits in other banks		496,872		212,857		201		59		0.16			0.11

Total interest-earning assets		2,989,661		2,648,990		24,339		24,254		3.25			3.66

Non-earning assets		209,853		221,223

Total assets	$	3,199,514	$	2,870,213

Deposits:
Demand	$	481,032	$	410,228		38		56		0.03			0.05
Money market		713,846		580,200		166		475		0.09			0.33
Savings		247,536		206,493		6		24		0.01			0.05
Time		375,181		423,039		571		1,563		0.60			1.47
Total deposits		1,817,595		1,619,960		781		2,118		0.17			0.52

Customer repurchase agreements		29,681		45,689		3		42		0.04			0.37
Long-term borrowings		28,192		35,597		400		524		5.68			5.89
Total interest-bearing liabilities		1,875,468		1,701,246		1,184		2,684		0.25			0.63

Noninterest-bearing demand deposits		950,673		814,685
Other liabilities		21,727		24,244
Shareholders' equity		351,646		330,038
Total liabilities and shareholders' equity	$	3,199,514	$	2,870,213

Interest rate spread										3.00	%		3.03	%
Net interest margin										3.09	%		3.26	%

Net interest income (taxable equivalent basis)						23,155		21,570
Less: Taxable equivalent adjustment						62		75
Net interest income					$	23,093	$	21,495

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

	Three Months Ended September 30,
	2021 vs. 2020
				Change
	Increase			Attributable to
	(Decrease)			Rate			Volume
Interest income
Loans:
Commercial	$	690		$	3,005		$	(2,315	)
Real estate		(1,053	)		(1,522	)		469
Consumer		(19	)		14			(33	)
Total loans		(382	)		1,497			(1,879	)
Securities:
U.S. Treasury		136			91			45
Federal agencies and GSEs		(22	)		(131	)		109
Mortgage-backed and CMOs		149			(380	)		529
State and municipal		26			(65	)		91
Other securities		36			(33	)		69
Total securities		325			(518	)		843
Deposits in other banks		142			36			106
Total interest income		85			1,015			(930	)

Interest expense
Deposits:
Demand		(18	)		(26	)		8
Money market		(309	)		(399	)		90
Savings		(18	)		(22	)		4
Time		(992	)		(832	)		(160	)
Total deposits		(1,337	)		(1,279	)		(58	)
Customer repurchase agreements		(39	)		(28	)		(11	)
Long-term borrowings		(124	)		(18	)		(106	)
Total interest expense		(1,500	)		(1,325	)		(175	)
Net interest income (taxable equivalent basis)	$	1,585		$	2,340		$	(755	)

Nine months ended September 30, 2021 and 2020

Net interest income on a taxable equivalent basis was $67.5 million for the nine months ended September 30, 2021, an increase of $5,575,000, or 9.0%, compared to $61.9 million in the same period of 2020. The increase in net interest income from the same period in the prior year was attributable to an increase in earning assets and fee recognition associated with PPP, accretion income and reduced deposit costs from a significantly lower rate environment. Average loan balances for the 2021 period were down $27,446,000, or 1.4%, over the 2020 period, primarily due to PPP forgiveness. These loans had a net balance of $37,200,000 at September 30, 2021, earn 1% interest, and generate fee income that is being accreted over the life of the loans or until forgiveness where the fee income is fully accreted into income. The interest income from the total PPP portfolio generated $1,054,000 in revenues for the nine months of 2021. Total net PPP fees recognized in net interest income during the period of 2021 were $7,073,000, enhanced by the accelerated amortization of fees and costs on the forgiveness of $252,000,000 in PPP loans. Loan yields for the 2021 period were 7 basis points higher than the 2020 period.

For the nine months ended September 30, 2021, the Company's yield on interest-earning assets was 3.30%, compared to 3.84% for the prior year period. The cost of interest-bearing liabilities was 0.32% for the 2021 period compared to 0.79% for the 2020 period. The interest rate spread was 2.98% for the 2021 period compared to 3.05% for the 2020 period. The net interest margin, on a fully taxable equivalent basis, was 3.10% in the 2021 period compared to 3.32% in the 2020 period, a decrease of 22 basis points. The decrease in net interest margin was driven by declining interest rates partially offset by PPP fee income earned.

Table of Contents

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the nine months ended September 30, 2021 and 2020. 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.

Net Interest Income Analysis (dollars in thousands)

	Nine Months Ended September 30,
	2021		2020		2021		2020		2021			2020
	Average Balance				Income/Expense				Yield/Rate
Loans:
Commercial	$	393,571	$	464,094	$	15,433	$	12,414		5.24	%		3.57	%
Real estate		1,568,055		1,522,803		49,642		52,319		4.22			4.58
Consumer		7,139		9,314		364		451		6.82			6.47
Total loans		1,968,765		1,996,211		65,439		65,184		4.43			4.36

Securities:
U.S. Treasury		36,969		7,292		265		47		0.96			0.86
Federal agencies and GSEs		99,595		70,604		867		1,147		1.16			2.17
Mortgage-backed and CMOs		292,207		198,528		3,025		3,144		1.38			2.11
State and municipal		61,210		43,345		958		871		2.09			2.68
Other securities		24,175		19,932		900		812		4.96			5.43
Total securities		514,156		339,701		6,015		6,021		1.56			2.36

Deposits in other banks		422,111		147,996		375		356		0.12			0.32

Total interest-earning assets		2,905,032		2,483,908		71,829		71,561		3.30			3.84

Non-earning assets		210,651		222,451

Total assets	$	3,115,683	$	2,706,359

Deposits:
Demand	$	466,999	$	371,155		116		294		0.03			0.11
Money market		700,027		550,063		657		2,254		0.13			0.55
Savings		238,349		192,632		19		101		0.01			0.07
Time		367,979		446,354		2,198		5,259		0.80			1.57
Total deposits		1,773,354		1,560,204		2,990		7,908		0.23			0.68

Customer repurchase agreements		36,954		43,649		19		237		0.07			0.73
Other short-term borrowings		—		1		—		—		—			0.50
Long-term borrowings		33,111		35,575		1,352		1,523		5.44			5.71
Total interest-bearing liabilities		1,843,419		1,639,429		4,361		9,668		0.32			0.79

Noninterest-bearing demand deposits		903,296		717,007
Other liabilities		22,238		22,692
Shareholders' equity		346,730		327,231
Total liabilities and shareholders' equity	$	3,115,683	$	2,706,359

Interest rate spread										2.98	%		3.05	%
Net interest margin										3.10	%		3.32	%

Net interest income (taxable equivalent basis)						67,468		61,893
Less: Taxable equivalent adjustment						181		219
Net interest income					$	67,287	$	61,674

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

	Nine Months Ended September 30,
	2021 vs. 2020
				Change
	Increase			Attributable to
	(Decrease)			Rate			Volume
Interest income
Loans:
Commercial	$	3,019		$	5,122		$	(2,103	)
Real estate		(2,677	)		(4,198	)		1,521
Consumer		(87	)		23			(110	)
Total loans		255			947			(692	)
Securities:
U.S. Treasury		218			6			212
Federal agencies and GSEs		(280	)		(648	)		368
Mortgage-backed and CMOs		(119	)		(1,306	)		1,187
State and municipal		87			(220	)		307
Other securities		88			(74	)		162
Total securities		(6	)		(2,242	)		2,236
Deposits in other banks		19			(330	)		349
Total interest income		268			(1,625	)		1,893

Interest expense
Deposits:
Demand		(178	)		(240	)		62
Money market		(1,597	)		(2,088	)		491
Savings		(82	)		(102	)		20
Time		(3,061	)		(2,257	)		(804	)
Total deposits		(4,918	)		(4,687	)		(231	)
Customer repurchase agreements		(218	)		(186	)		(32	)
Long-term borrowings		(171	)		(68	)		(103	)
Total interest expense		(5,307	)		(4,941	)		(366	)
Net interest income (taxable equivalent basis)	$	5,575		$	3,316		$	2,259

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Noninterest Income

Three months ended September 30, 2021 and 2020

For the quarter ended September 30, 2021, noninterest income increased $831,000, or 19.4%, compared to the comparable 2020 quarter. Details of individual accounts are shown in the table below.

	Three Months Ended September 30,
	(Dollars in thousands)
	2021			2020			$ Change			% Change
Noninterest income:
Trust fees	$	1,311		$	1,054		$	257			24.4	%
Service charges on deposit accounts		664			618			46			7.4
Other fees and commissions		1,147			996			151			15.2
Mortgage banking income		989			1,030			(41	)		(4.0	)
Brokerage fees		265			170			95			55.9
Income from Small Business Investment Companies		491			98			393			(401.0	)
Income from insurance investments		132			108			24			22.2
Losses on premises and equipment, net		(107	)		(15	)		(92	)		(613.3	)
Other		231			233			(2	)		(0.9	)
Total noninterest income	$	5,123		$	4,292		$	831			19.4

Trust fees increased $257,000 for the three months ended September 30, 2021 compared to the same quarter in 2020 as a result of growth in clients and growth in market value. Other fees and commissions increased $151,000 in the 2021 quarter compared to the 2020 quarter due to increased usage of debit cards. Income from Small Business Investment Companies increased $393,000, primarily the result of additional income distributions during the three months ended September 30, 2021 compared to the same quarter in 2020. During the third quarter of 2021, the Company recognized a loss on premises and equipment, net of $105,000 from the sale of buildings acquired in the HomeTown Bankshares Corporation acquisition compared to no losses in the 2020 quarter related to these transactions.

Nine months ended September 30, 2021 and 2020

For the nine months ended September 30, 2021, noninterest income increased $3,565,000, or 28.2%, compared to the comparable 2020 period. Details of individual accounts are shown in the table below.

	Nine Months Ended September 30,
	(Dollars in thousands)
	2021			2020			$ Change			% Change
Noninterest income:
Trust fees	$	3,757		$	3,019		$	738			24.4	%
Service charges on deposit accounts		1,916			1,880			36			1.9
Other fees and commissions		3,644			2,888			756			26.2
Mortgage banking income		3,449			2,472			977			39.5
Securities gains, net		—			814			(814	)		(100.0	)
Brokerage fees		733			553			180			32.5
Income from Small Business Investment Companies		1,510			34			1,476			(4,341.2	)
Income from insurance investments		1,062			271			791			291.9
Losses on premises and equipment, net		(588	)		(97	)		(491	)		506.2
Other		704			788			(84	)		(10.7	)
Total noninterest income	$	16,187		$	12,622		$	3,565			28.2

Trust fees increased $738,000 for the nine months ended September 30, 2021 compared to the same period in 2020 as a result of growth in clients and growth in market value. Other fees and commissions increased $756,000 in the 2021 period compared to the 2020 period due to increased usage of debit cards. Mortgage banking income increased $977,000 in the 2021 period compared to the 2020 period, primarily due to increased volume of applications for purchases and refinancing. There were no net securities gains in the 2021 period compared to $814,000 in the same period in 2020. Income from Small Business Investment Companies and income from insurance investments increased $1,476,000 and $791,000, respectively, during the nine months ended September 30, 2021 compared to the same period in 2020. The increase in income from insurance investments was primarily the result of an additional bonus distribution received in 2021. Losses on premises and equipment, net increased $491,000 from the 2020 period, primarily from the loss of $543,000 recognized in the 2021 period on the sale of buildings acquired in the HomeTown Bankshares Corporation acquisition.

Table of Contents

Noninterest Expense

Three months ended September 30, 2021 and 2020

For the three months ended September 30, 2021, noninterest expense increased $703,000, or 5.0%, compared to the same quarter of 2020. Details of individual accounts are shown in the table below.

	Three Months Ended September 30,
	(Dollars in thousands)
	2021		2020		$ Change			% Change
Noninterest Expense
Salaries and employee benefits	$	8,185	$	7,989	$	196			2.5	%
Occupancy and equipment		1,513		1,423		90			6.3
FDIC assessment		194		162		32			19.8
Bank franchise tax		440		426		14			3.3
Core deposit intangible amortization		361		402		(41	)		(10.2	)
Data processing		748		705		43			6.1
Software		344		353		(9	)		(2.5	)
Other real estate owned, net		21		28		(7	)		(25.0	)
Other		3,037		2,652		385			14.5
Total noninterest expense	$	14,843	$	14,140	$	703			5.0

Salaries and employee benefits increased $196,000 in the 2021 quarter as compared to the 2020 quarter primarily the result of additional salary expenses related to mortgage production. The increase in occupancy and equipment expense in the third quarter of 2021 compared to the third quarter of 2020 reflects additional expenses related to the opening of the Triangle (North Carolina) banking office and enhancements in technology. Other expenses increased $385,000 compared to the same quarter of 2020 as a result of increased loan related expenses and normal expense seasonality.

Nine months ended September 30, 2021 and 2020

For the nine months ended September 30, 2021, noninterest expense increased $3,639,000, or 9.1%, compared to the same period of 2020. Details of individual accounts are shown in the table below.

	Nine Months Ended September 30,
	(Dollars in thousands)
	2021		2020		$ Change			% Change
Noninterest Expense
Salaries and employee benefits	$	23,881	$	21,540	$	2,341			10.9	%
Occupancy and equipment		4,548		4,116		432			10.5
FDIC assessment		644		433		211			48.7
Bank franchise tax		1,321		1,277		44			3.4
Core deposit intangible amortization		1,113		1,246		(133	)		(10.7	)
Data processing		2,224		2,253		(29	)		(1.3	)
Software		1,011		1,112		(101	)		(9.1	)
Other real estate owned, net		148		34		114			335.3
Other		8,655		7,895		760			9.6
Total noninterest expense	$	43,545	$	39,906	$	3,639			9.1

Salaries and employee benefits increased $2,341,000 in the 2021 period as compared to the 2020 period. Salaries and employee benefits expenses increased in the 2021 period due to incentive accrual adjustments and the reduced deferral of salary costs from the PPP program than was recorded in the 2020 period. The nine months ended September 30, 2021 also included increased mortgage commissions due to increased loan production. The increase in occupancy and equipment expense in the period of 2021 compared to the period of 2020 reflects expenses related to the opening of the Triangle banking office and enhancements in technology. Other real estate owned ("OREO"), net expense was $148,000 in the nine months ended September 30, 2021 compared $34,000 in the same period in 2020; the result of a loss on the sale of OREO of $111,000 during the 2021 period. Other expenses increased $760,000 compared to the same quarter of 2020 primarily from increased loan related expenses, investment related expenses, investments in technology and normal expense seasonality.

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Non-GAAP Financial Measures

The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of 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 2021 quarter was 51.03% compared to 53.00% for the 2020 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,
	2021			2020			2021			2020
Efficiency Ratio
Noninterest expense	$	14,843		$	14,140		$	43,545		$	39,906
Add/subtract: gain/loss on sale of OREO, net of write-downs		—			(23	)		(111	)		35
Subtract: core deposit intangible amortization		(361	)		(402	)		(1,113	)		(1,246	)
	$	14,482		$	13,715		$	42,321		$	38,695

Net interest income	$	23,093		$	21,495		$	67,287		$	61,674
Tax equivalent adjustment		62			75			181			144
Noninterest income		5,123			4,292			16,187			12,622
Subtract: gain on securities		—			—			—			(814	)
Add: loss on fixed assets		107			15			588			97
	$	28,385		$	25,877		$	84,243		$	73,723

Efficiency ratio		51.02	%		53.00	%		50.24	%		52.49	%

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 2021 and 2020 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,
	2021			2020			2021			2020
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income
Non-GAAP measures:
Interest income - loans	$	22,012		$	22,394		$	65,439		$	65,184
Interest income - investments and other		2,327			1,860			6,390			6,377
Interest expense - deposits		(781	)		(2,118	)		(2,990	)		(7,908	)
Interest expense - customer repurchase agreements		(3	)		(42	)		(19	)		(237	)
Interest expense - long-term borrowings		(400	)		(524	)		(1,352	)		(1,523	)
Total net interest income	$	23,155		$	21,570		$	67,468		$	61,893
Less non-GAAP measures:
Tax benefit realized on non-taxable interest income - loans	$	(38	)	$	(48	)	$	(105	)	$	(138	)
Tax benefit realized on non-taxable interest income - municipal securities		(24	)		(27	)		(76	)		(81	)
GAAP measures net interest income	$	23,093		$	21,495		$	67,287		$	61,674

Income Taxes

The effective tax rate for the third quarter of 2021 was 21.05% compared to 21.00% for the third quarter of 2020. The effective rates for the nine months ended September 30, 2021 and 2020, respectively, were 20.99% and 18.45%. 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 vesting of restricted stock. However, it can be more than the statutory rate due to the presence of state taxes.

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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, 2021 and 2020, 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, 2021	$	1,332	$	18	$	(25	)	$	1,325
For the three months ended September 30, 2020		1,649		33		(21	)		1,661

For the nine months ended September 30, 2021		3,163		61		(76	)		3,148
For the nine months ended September 30, 2020		2,530		153		(63	)		2,620

For the remaining three months of 2021 (estimated)		405		17		(27	)		395
For the years ending (estimated):
2022		1,330		50		(102	)		1,278
2023		782		30		(102	)		710
2024		547		5		(102	)		450
2025		424		2		(102	)		324
2026		295		1		(102	)		194
Thereafter (estimated)		1,004		2		(640	)		366

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 $643,949,000 at September 30, 2021, compared to $466,091,000 at December 31, 2020, an increase of $177,858,000, or 38.2%. At September 30, 2021, the available for sale portfolio had an amortized cost of $640,507,000, resulting in a net unrealized gain of $3,442,000. At December 31, 2020, the available for sale portfolio had an amortized cost of $455,992,000, resulting in a net unrealized gain of $10,099,000.

During the nine months ended September 30, 2021, the Company did not sell any securities. This compares to the nine months ended September 30, 2020, when the Company sold $5,000,000 in par value bonds and realized a net gain of $814,000.

The Company is cognizant of the continuing historically low and steady rate environment and has elected to execute an asset liability strategy of purchasing high quality taxable securities with relatively low optionality and moderate 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, 2021, the commercial real estate portfolio included concentrations of $83,540,000, $44,127,000 and $199,571,000 in hotel, restaurants, and retail loans, respectively. These concentrations total 16.9% of total loans, excluding loans in process.

Total loans were $1,940,332,000 at September 30, 2021, compared to $2,015,056,000 at December 31, 2020, a decrease of $74,724,000, or 3.7%. At September 30, 2021, net PPP loans, which are in the commercial loan category, totaled $37,200,000, compared to $211,275,000 at December 31, 2020.

Average loans were $1,923,281,000 for the third quarter of 2021, compared to $2,105,355,000 for the third quarter of 2020, a decrease of $179,074,000, or 8.5%, primarily related to PPP forgiveness.

Loans held for sale totaled $9,518,000 at September 30, 2021 and $15,591,000 at December 31, 2020. Secondary loan production volume was $113,671,000 for the nine month period ended September 30, 2021 and $116,071,000 for the same period of 2020. These loans were approximately 35% purchase and 65% refinancing for the quarter ended September 30, 2021, and for the year ended December 31, 2020.

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, 2021 and December 31, 2020 (dollars in thousands):

	September 30, 2021		December 31, 2020
Commercial	$	320,278	$	491,256
Commercial real estate:
Construction and land development		120,193		140,071
Commercial real estate - owner occupied		404,029		373,680
Commercial real estate - non-owner occupied		713,339		627,569
Residential real estate:
Residential		280,351		269,137
Home equity		95,317		104,881
Consumer		6,825		8,462
Total loans, net of deferred fees and costs	$	1,940,332	$	2,015,056

Provision for Loan Losses

The Company had a provision for loan losses of $482,000 for the third quarter of 2021, as compared to a negative provision of $1,352,000 for the second quarter of 2021, and $2,619,000 for the third quarter of 2020. The third quarter of 2021 provision expense was required due to the significant loan growth during the quarter but offset by reductions in the qualitative factors related to both national and local economic conditions, particularly declining levels of unemployment rates and jobless claims. Ongoing low charge-off and delinquency rates and overall strong asset quality metrics also contributed to the negative provision related to these qualitative factors. Net recoveries for the three months ended September 30, 2021 were $51,000 compared to $38,000 for the same 2020 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, 2021, the ALLL was $20,630,000, compared to $21,403,000 at December 31, 2020. The ALLL as a percentage of total loans at such dates was 1.06%. The ALLL as a percentage of loans without PPP loans at September 30, 2021 was 1.08% compared to 1.19% at December 31, 2020. PPP loans are 100% guaranteed by the SBA so there is no allowance associated with the loans in the program.

The Company recognized provision expense of $482,000 in the third quarter of 2021 and a recovery of provision expense in the second quarter of 2021 of $1.4 million, accounting for the change from December 31, 2021 in the ALLL. The expense in the third quarter was the net result of the required provision resulting from significant loan growth during the quarter netted against a negative provision from the adjustment of qualitative factors around continued improvement in economic conditions. The improvement in the qualitative factors discussed justified the negative provision recognized in the second quarter where loan growth was minimal. Ongoing low charge-off and delinquency rates and overall strong asset quality metrics also contributed to the qualitative factor adjustments.

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 1.13% at September 30, 2021, compared to 1.16% at December 31, 2020. On a dollar basis, the reserve was $19,896,000 at September 30, 2021, compared to $20,534,000 at December 31, 2020. 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 0.44% at September 30, 2021, compared to 1.06% at December 31, 2020. On a dollar basis, the reserve was $9,800 at September 30, 2021, compared to $30,000 at December 31, 2020. There is ongoing turnover in the composition of the impaired loan population, which decreased by a net $635,000 over December 31, 2020.

The specific allowance does not include reserves related to acquired loans with deteriorated credit quality. This reserve was $724,000 at September 30, 2021 compared to $839,000 at December 31, 2020. 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, 2021			Year Ended December 31, 2020
Balance at beginning of period	$	21,403		$	13,152

Charge-offs:
Construction and land development		—			—
Commercial real estate - owner occupied		3			17
Commercial real estate - non-owner occupied		—			165
Residential real estate		17			90
Home equity		—			27
Total real estate		20			299
Commercial and industrial		—			505
Consumer		50			202
Total charge-offs		70			1,006

Recoveries:
Construction and land development		—			2
Commercial real estate - owner occupied		6			12
Commercial real estate - non-owner occupied		6			50
Residential real estate		41			63
Home equity		30			22
Total real estate		83			149
Commercial and industrial		27			65
Consumer		57			127
Total recoveries		167			341

Net charge-offs (recoveries)		(97	)		665
(Recovery of) Provision for loan losses		(870	)		8,916
Balance at end of period	$	20,630		$	21,403

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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, 2021			December 31, 2020
Allowance to loans ⁽¹⁾		1.06	%		1.06	%
ASC 450 (FAS 5) ALLL to ASC 450 loans ⁽²⁾		1.13			1.16
Net charge-offs (recoveries) to allowance ⁽³⁾		(0.63	)		3.11
Net charge-offs to average loans ⁽³⁾		(0.01	)		0.03
Nonperforming assets to total assets		0.06			0.12
Nonperforming loans to loans		0.10			0.13
Provision to net charge-offs (recoveries) ⁽³⁾		(896.91	)		1,340.75
Provision (recovery) to average loans ⁽³⁾		(0.06	)		0.44
Allowance to nonperforming loans		1,084.08			793.88

__________________________

(1) - Excluding PPP loans, 1.08% at September 30, 2021 and 1.19% at December 31, 2020

(2) - Excluding PPP loans, 1.15% at September 30, 2021 and 1.32% at December 31, 2020

(3) - Annualized

Nonperforming Assets (Loans and Other Real Estate Owned)

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

Nonperforming loans to total loans were 0.10% at September 30, 2021 and 0.13% at December 31, 2020.

Nonperforming assets include nonperforming loans, OREO and repossessions. Nonperforming assets represented 0.06% and 0.13% of total assets at September 30, 2021 and December 31, 2020, respectively.

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, 2021 and December 31, 2020 (dollars in thousands):

Nonperforming Assets

	September 30, 2021		December 31, 2020
Nonaccrual loans:
Real estate	$	1,858	$	2,328
Commercial		32		100
Consumer		13		6
Total nonaccrual loans		1,903		2,434

Loans past due 90 days and accruing interest:
Real estate		—		262

Total nonperforming loans		1,903		2,696

Other real estate owned		213		958

Total nonperforming assets	$	2,116	$	3,654

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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, 2021 and December 31, 2020 (dollars in thousands):

Impaired Loans

	September 30, 2021		December 31, 2020
Accruing	$	677	$	758
Nonaccruing		1,540		2,094
Total impaired loans	$	2,217	$	2,852

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 $1,850,000 in TDRs at September 30, 2021 compared to $1,976,000 at December 31, 2020. These loans are included in the impaired loan table above.

During the third quarter, the remaining $2.3 million loans in the DAP program outstanding at the end of the second quarter of 2021 expired. At December 31, 2020the balance of outstanding loans in the program was $30.0 million, or 1.5%.

Other Real Estate Owned

OREO was $213,000 and $958,000 as of September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020 (dollars in thousands):

Other Real Estate Owned

	September 30, 2021		December 31, 2020
Construction and land development	$	213	$	443
Commercial real estate - owner occupied		—		230
Residential real estate		—		237
Home equity		—		48
Total other real estate owned	$	213	$	958

Deposits

The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Total deposits were $2,862,081,000 at September 30, 2021 compared to $2,611,330,000 at December 31, 2020, an increase of $250,751,000, or 9.6%. The growth during the nine months ended September 30, 2021 is a result of continued higher than average cash balances being maintained by customers as elevated savings rates and liquidity patterns continue. This pattern has been prevalent since the second quarter of 2020 and is consistent with trends at other commercial banks.

Average interest-bearing deposits were $1,817,595,000 for the third quarter of 2021, compared to $1,619,960,000 for the third quarter of 2020, an increase of $197,635,000, or 12.2%. Average noninterest-bearing deposits for the 2021 quarter were $950,673,000, compared to $814,685,000 for the 2020 quarter, an increase of $135,988,000 or 16.7%.

The Company's primary focus on the liability side of the balance sheet is growing core deposits and their affiliated relationships. The Company's cost of interest-bearing deposits for the third quarter of 2021 was 0.17%, down from 0.52% for the third quarter of 2020.

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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.

Shareholders' equity was $350,387,000 at September 30, 2021 compared to $337,894,000 at December 31, 2020, an increase of $12,493,000, or 3.7%.

The Company paid cash dividends of $0.81 per share during the nine months of 2021 while the aggregate diluted earnings per share for the same period was $2.95.

On September 17, 2019, the federal banking agencies jointly issued a final rule required by the Economic Growth, Regulatory Relief, and Consumer Protection Act ("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. 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. The first lowered the required leverage ratio to 8% for the remainder of 2020 while the second provides a transition back to the 9% requirement. 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 CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. The Company and the Bank do not currently expect to opt into the CBLR framework.

The following table provides information on the regulatory capital ratios for the Company and the Bank at September 30, 2021 and December 31, 2020. Management believes, as of September 30, 2021, that the Company and the Bank more than satisfy all capital adequacy requirements to which they are subject.

	Percentage At September 30, 2021						Percentage At December 31, 2020
Risk-Based Capital Ratios:	Company			Bank			Company			Bank

Common equity tier 1 capital ratio		12.44	%		13.21	%		12.36	%		12.86	%
Tier 1 capital ratio		13.78			13.21			13.78			12.86
Total capital ratio		14.78			14.21			15.18			13.97

Leverage Capital Ratio:

Tier 1 leverage ratio		9.34			8.95			9.48			8.85

Stock Repurchase Program

The Company has an approved one year stock repurchase plan that authorizes the repurchase of up to 350,000 shares of the Company's common stock through December 31, 2021.

The Company repurchased 100,764 shares at an average cost of $32.87 per share, for a total of $3,313,000, in the third quarter of 2021. During the nine month period ended September 30, 2021, the Company repurchased 247,999 shares at an average cost of $32.84 per share, for a total cost of $8,143,000. 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.

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.

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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 $275,000,000 and $245,000,000 outstanding in letters of credit at September 30, 2021 and December 31, 2020, respectively. 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 7 and long-term borrowings are discussed in Note 8 in the Consolidated Financial Statements included in this report.

The Company has federal funds lines of credit established with correspondent banks in the amount of $60,000,000 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 EGRRCPA, a well-capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits. Deposits through the CDARS program as of September 30, 2021 and December 31, 2020, were $550,000 and $4,342,000, respectively.

COVID-19 and the participation in the PPP and the DAP programs could significantly impact the Company's liquidity. Average deposits grew 13.7% in the third quarter of 2021 compared to the same quarter of 2020. Customers have continued to maintain higher cash balances through the third quarter of 2021 as future liquidity needs remain uncertain. This buildup of cash reserves primarily accounts for the significant increase over the same period of 2020. Management believes that the resources available to the Company will provide sufficient and timely liquidity, both on and off the balance sheet, to support its 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, 2021 and at December 31, 2020 were as follows (dollars in thousands):

	September 30, 2021		December 31, 2020
Commitments to extend credit	$	556,151	$	503,272
Standby letters of credit		12,402		17,355
Mortgage loan rate-lock commitments		14,976		26,883

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, 2021 is asset sensitive. Management expects that the general direction of short-term market interest rates will be stable, but the outlook is less certain for longer-term rates during the remainder of 2021.

Earnings Simulation

The following table shows the estimated impact of changes in interest rates on net interest income as of September 30, 2021 (dollars in thousands), assuming instantaneous and parallel changes in interest rates, and expected 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, 2021
	Change in Net Interest Income
Change in interest rates	Amount			Percent
Up 4.00%	$	21,456			26.5	%
Up 3.00%		16,030			19.8
Up 2.00%		10,572			13.1
Up 1.00%		5,155			6.4
Flat		—			—
Down 0.25%		(1,016	)		(1.3	)
Down 1.00% (1)		(3,193	)		(3.9	)

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(1) This scenario is deemed highly improbable at this time due to the current near zero interest rate environment.

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 current rate environment have been projected in the model simulation.

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Economic Value Simulation

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

The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly period ended September 30, 2021 (dollars in thousands):

Estimated Changes in Economic Value of Equity

	September 30, 2021
Change in interest rates	Amount		$ Change			% Change
Up 4.00%	$	504,852	$	206,761			69.4	%
Up 3.00%		466,328		168,237			56.4
Up 2.00%		421,744		123,653			41.5
Up 1.00%		365,793		67,702			22.7
Flat		298,091		—			—
Down 0.25%		274,611		(23,480	)		(7.9	)
Down 1.00% (1)		188,290		(109,801	)		(36.8	)

__________________________

(1) This scenario is deemed highly improbable at this time due to the current zero interest rate environment.

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, 2021. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, as of such date, 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, 2021 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

There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 8, 2021.

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

The Company has an approved one year stock repurchase plan that authorizes the repurchase of up to 350,000 shares of the Company's common stock through December 31, 2021. 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.

Shares of the Company's common stock were repurchased during the three months ended September 30, 2021 as detailed below. Under the stock repurchase program, the Company has the remaining authority to repurchase up to 102,001 shares of the Company's common stock as of September 30, 2021.

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

July 31, 2021		6,618	$	31.60		6,618		196,147
August 31, 2021		66,253		32.91		66,253		129,894
September 30, 2021		27,893		33.08		27,893		102,001
Total		100,764	$	32.87		100,764

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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, 2021, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

Table of Contents

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 9, 2021		(principal executive officer)

	By:	/s/ Jeffrey W. Farrar
		Jeffrey W. Farrar
		Executive Vice President,
		Chief Operating Officer and
		Chief Financial Officer
Date - November 9, 2021		(principal financial officer)

	By:	/s/ Cathy W. Liles
		Cathy W. Liles
		Senior Vice President and
		Chief Accounting Officer
Date - November 9, 2021		(principal accounting officer)