AMERICAN NATIONAL BANKSHARES INC. - Quarter Report: 2022 September (Form 10-Q)

americannb20220930_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, 2022

☐	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 November 1, 2022, the Company had10,610,763 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, 2022 (unaudited) and December 31, 2021	3

		Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)	4

		Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)	5

		Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)	6

		Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)	8

		Notes to Consolidated Financial Statements (unaudited)	9

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47

	Item 4.	Controls and Procedures	48

Part II.		OTHER INFORMATION

	Item 1.	Legal Proceedings	49

	Item 1A.	Risk Factors	49

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

	Item 3.	Defaults Upon Senior Securities	50

	Item 4.	Mine Safety Disclosures	50


	Item 5.	Other Information	50

	Item 6.	Exhibits	51

SIGNATURES			52

Table of Contents

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, 2022*			*December 31, 2021*
Assets					*
Cash and due from banks	$	35,437		$	23,095
Interest-bearing deposits in other banks		59,541			487,773
Securities available for sale, at fair value		641,884			692,467
Restricted stock, at cost		8,383			8,056
Loans held for sale		2,852			8,481
Loans, net of deferred fees and costs		2,119,415			1,946,580
Less allowance for loan losses		(19,189	)		(18,678	)
Net loans		2,100,226			1,927,902
Premises and equipment, net		34,686			35,564
Other real estate owned, net of valuation allowance		143			143
Goodwill		85,048			85,048
Core deposit intangibles, net		3,667			4,627
Bank owned life insurance		29,480			29,107
Other assets		47,973			32,334
Total assets	$	3,049,320		$	3,334,597

Liabilities
Noninterest-bearing deposits	$	1,044,803		$	1,009,081
Interest-bearing deposits		1,646,067			1,881,272
Total deposits		2,690,870			2,890,353
Customer repurchase agreements		625			41,128
Long-term borrowings		28,308			28,232
Other liabilities		16,127			20,092
Total liabilities		2,735,930			2,979,805

Shareholders' equity
Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding		—			—
Common stock, $1 par value, 20,000,000 shares authorized, 10,608,750 shares outstanding at September 30, 2022 and 10,766,967 shares outstanding at December 31, 2021		10,533			10,710
Capital in excess of par value		141,694			147,777
Retained earnings		218,814			201,380
Accumulated other comprehensive loss, net		(57,651	)		(5,075	)
Total shareholders' equity		313,390			354,792
Total liabilities and shareholders' equity	$	3,049,320		$	3,334,597

*	Derived from audited consolidated financial statements

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

Table of Contents

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,*
	*2022*			*2021*			*2022*			*2021*
Interest and Dividend Income:
Interest and fees on loans	$	21,160		$	21,974		$	59,024		$	65,334
Interest and dividends on securities:
Taxable		2,664			1,896			7,344			5,297
Tax-exempt		110			94			297			293
Dividends		118			112			347			349
Other interest income		1,099			201			2,076			375
Total interest and dividend income		25,151			24,277			69,088			71,648
Interest Expense:
Interest on deposits		741			781			1,956			2,990
Interest on short-term borrowings		11			3			26			19
Interest on long-term borrowings		392			400			1,156			1,352
Total interest expense		1,144			1,184			3,138			4,361
Net Interest Income		24,007			23,093			65,950			67,287
Provision for (recovery of) loan losses		615			482			438			(870	)
Net Interest Income After Provision for (Recovery of) Loan Losses		23,392			22,611			65,512			68,157
Noninterest Income:
Wealth management income		1,603			1,576			4,999			4,490
Service charges on deposit accounts		681			664			2,079			1,916
Interchange fees		1,013			958			2,990			3,025
Other fees and commissions		233			189			699			619
Mortgage banking income		388			989			1,490			3,449
Income from Small Business Investment Companies		501			491			1,672			1,510
Income from insurance investments		100			132			644			1,062
Losses on premises and equipment, net		(2	)		(107	)		(82	)		(588	)
Other		243			231			706			704
Total noninterest income		4,760			5,123			15,197			16,187
Noninterest Expense:
Salaries and employee benefits		9,618			8,185			26,936			23,881
Occupancy and equipment		1,514			1,513			4,576			4,548
FDIC assessment		227			194			694			644
Bank franchise tax		488			440			1,452			1,321
Core deposit intangible amortization		310			361			960			1,113
Data processing		818			748			2,446			2,224
Software		362			344			1,088			1,011
Other real estate owned, net		3			21			4			148
Other		3,108			3,037			9,096			8,655
Total noninterest expense		16,448			14,843			47,252			43,545
Income Before Income Taxes		11,704			12,891			33,457			40,799
Income Taxes		2,448			2,713			7,062			8,566
Net Income	$	9,256		$	10,178		$	26,395		$	32,233
Net Income Per Common Share:
Basic	$	0.87		$	0.94		$	2.47		$	2.96
Diluted	$	0.87		$	0.94		$	2.47		$	2.95
Weighted Average Common Shares Outstanding:
Basic		10,640,952			10,833,875			10,694,096			10,907,721
Diluted		10,643,073			10,836,293			10,696,409			10,911,372

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

Table of Contents

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

	*Three Months Ended September 30,*
	*2022*			*2021*
Net income	$	9,256		$	10,178

Other comprehensive loss:

Unrealized losses on securities available for sale		(25,234	)		(2,191	)
Tax effect		5,448			474

Unrealized gains on cash flow hedges		1,459			230
Tax effect		(306	)		(49	)

Other comprehensive loss		(18,633	)		(1,536	)

Comprehensive (loss) income	$	(9,377	)	$	8,642

	*Nine Months Ended September 30,*
	*2022*			*2021*
Net income	$	26,395		$	32,233

Other comprehensive loss:

Unrealized losses on securities available for sale		(71,381	)		(6,657	)
Tax effect		15,410			1,450

Unrealized gains on cash flow hedges		4,298			1,603
Tax effect		(903	)		(337	)

Other comprehensive loss		(52,576	)		(3,941	)

Comprehensive (loss) income:	$	(26,181	)	$	28,292

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

Table of Contents

American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended September 30, 2022 and 2021

(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, 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	)		—			—			—

Equity based compensation (4,615 shares)		4			335			—			—			339

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

Balance, June 30, 2022	$	10,588		$	143,337		$	212,524		$	(39,018	)	$	327,431

Net income		—			—			9,256			—			9,256

Other comprehensive loss		—			—			—			(18,633	)		(18,633	)

Stock repurchased (60,104 shares)		(60	)		(1,999	)		—			—			(2,059	)

Vesting of restricted stock (496 shares)		1			(1	)		—			—			—

Equity based compensation (3,752 shares)		4			357			—			—			361

Cash dividends paid, $0.28 per share		—			—			(2,966	)		—			(2,966	)

Balance, September 30, 2022	$	10,533		$	141,694		$	218,814		$	(57,651	)	$	313,390

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

Table of Contents

American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2022 and 2021

(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, 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

Balance, December 31, 2021	$	10,710		$	147,777		$	201,380		$	(5,075	)	$	354,792

Net income		—			—			26,395			—			26,395

Other comprehensive loss		—			—			—			(52,576	)		(52,576	)

Stock repurchased (203,709 shares)		(204	)		(7,182	)		—			—			(7,386	)

Stock options exercised (713 shares)		1			11			—			—			12

Vesting of restricted stock (14,390 shares)		14			(14	)		—			—			—

Equity based compensation (12,543 shares)		12			1,102			—			—			1,114

Cash dividends paid, $0.84 per share		—			—			(8,961	)		—			(8,961	)

Balance, September 30, 2022	$	10,533		$	141,694		$	218,814		$	(57,651	)	$	313,390

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

Table of Contents

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

	*Nine Months Ended September 30,*
	*2022*			*2021*
Cash Flows from Operating Activities:
Net income	$	26,395		$	32,233
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses		438			(870	)
Depreciation		1,687			1,694
Net accretion of acquisition accounting adjustments		(1,345	)		(3,148	)
Core deposit intangible amortization		960			1,113
Net amortization of securities		1,304			1,275
Gain on sale of loans held for sale		(1,490	)		(3,449	)
Proceeds from sales of loans held for sale		62,910			123,193
Originations of loans held for sale		(55,791	)		(113,671	)
Net loss on other real estate owned		—			111
Net loss on sale or disposal of premises and equipment		82			588
Equity based compensation expense		1,114			1,065
Net change in bank owned life insurance		(373	)		(468	)
Deferred income tax expense (benefit)		720			(63	)
Net change in other assets		(5,051	)		(2,536	)
Net change in other liabilities		331			793
Net cash provided by operating activities		31,891			37,860

Cash Flows from Investing Activities:
Proceeds from maturities, calls and paydowns of securities available for sale		83,015			137,511
Purchases of securities available for sale		(105,117	)		(323,302	)
Net change in restricted stock		(327	)		669
Net (increase) decrease in loans		(171,381	)		77,984
Net change in collateral with other financial institutions		3,200			1,700
Proceeds from sale of premises and equipment		4			1,316
Purchases of premises and equipment		(894	)		(833	)
Proceeds from sales of other real estate owned		—			634
Net cash used in investing activities		(191,500	)		(104,321	)

Cash Flows from Financing Activities:
Net change in noninterest-bearing deposits		35,722			150,891
Net change in interest-bearing deposits		(235,165	)		99,921
Net change in customer repurchase agreements		(40,503	)		(15,956	)
Net change in long-term borrowings		—			(7,500	)
Common stock dividends paid		(8,961	)		(8,807	)
Repurchase of common stock		(7,386	)		(8,143	)
Proceeds from exercise of stock options		12			86
Net cash (used in) provided by financing activities		(256,281	)		210,492
Net (Decrease) Increase in Cash and Cash Equivalents		(415,890	)		144,031
Cash and Cash Equivalents at Beginning of Period		510,868			370,320
Cash and Cash Equivalents at End of Period	$	94,978		$	514,351

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

Table of Contents

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, and accounting for acquired loans with specific credit-related deterioration.

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, 2021. Certain prior period balances have been reclassified to conform to the current period presentation.

Recently Adopted Accounting Developments

In May 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-04, "Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)." The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. Early adoption is permitted. ASU 2021-04 was effective for the Company on January 1, 2022. The adoption did not have a material impact to the consolidated financial statements.

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 running parallel models and an independent data validation is in process to support assumptions and methodologies. Management continues to refine the model to calculate an adjustment to reserves upon adoption.

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

In June 2022, the FASB issued ASU 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.

In March 2022, FASB issued Accounting Standards Update ASU No. 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the Current Expected Credit Losses ("CECL") model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of Troubled Debt Restructurings ("TDR,"), an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements in conjunction with its CECL implementation in 2023.

Table of Contents

Note 2 – Securities

The amortized cost and fair value of investments in securities available for sale at September 30, 2022 were as follows (dollars in thousands):

	*September 30, 2022*
	*Amortized Cost*		*Unrealized Gains*		*Unrealized Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	152,109	$	—	$	13,572	$	138,537
Federal agencies and GSEs		111,958		5		7,298		104,665
Mortgage-backed and CMOs		349,703		2		43,640		306,065
State and municipal		70,373		1		5,767		64,607
Corporate		31,294		—		3,284		28,010
Total securities available for sale	$	715,437	$	8	$	73,561	$	641,884

The amortized cost and fair value of investments in securities available for sale at December 31, 2021 were as follows (dollars in thousands):

	*December 31, 2021*
	*Amortized Cost*		*Unrealized Gains*		*Unrealized Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	150,751	$	—	$	1,174	$	149,577
Federal agencies and GSEs		104,518		993		931		104,580
Mortgage-backed and CMOs		357,981		2,854		4,525		356,310
State and municipal		65,939		1,021		488		66,472
Corporate		15,450		218		140		15,528
Total securities available for sale	$	694,639	$	5,086	$	7,258	$	692,467

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, 2022 and December 31, 2021 was as follows (dollars in thousands):

	*September 30, 2022*		*December 31, 2021*
FRB stock	$	6,534	$	6,500
FHLB stock		1,849		1,556
Total restricted stock	$	8,383	$	8,056

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, 2022. 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, 2022, 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	$	138,537	$	13,572	$	48,059	$	3,670	$	90,478	$	9,902
Federal agencies and GSEs		103,981		7,298		44,539		2,898		59,442		4,400
Mortgage-backed and CMOs		305,858		43,640		124,623		11,396		181,235		32,244
State and municipal		63,634		5,767		46,860		2,953		16,774		2,814
Corporate		28,010		3,284		21,134		2,410		6,875		874
Total	$	640,020	$	73,561	$	285,215	$	23,327	$	354,804	$	50,234

Table of Contents

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, 2021 (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	$	149,577	$	1,174	$	149,577	$	1,174	$	—	$	—
Federal agencies and GSEs		73,640		931		63,042		512		10,598		419
Mortgage-backed and CMOs		253,444		4,525		213,292		3,014		40,152		1,511
State and municipal		26,646		488		23,341		354		3,305		134
Corporate		7,611		140		7,611		140		—		—
Total	$	510,918	$	7,258	$	456,863	$	5,194	$	54,055	$	2,064

U.S. Treasury securities: The unrealized losses on the Company's investment in 22 U.S. Treasury securities were caused by normal market fluctuations. Thirteen 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, 2022.

Federal agencies and GSEs: The unrealized losses on the Company's investment in 45 government sponsored entities ("GSE") securities were caused by normal market fluctuations. Twenty 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, 2022.

Mortgage-backed securities: The unrealized losses on the Company's investment in 142 GSE mortgage-backed securities were caused by normal market fluctuations. Seventeen of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2022.

Collateralized Mortgage Obligations: The unrealized losses associated with 56 GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. Twenty-seven of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2022.

State and municipal securities: The unrealized losses on 85 state and municipal securities were caused by normal market fluctuations. Twenty-nine of these securities were 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, 2022.

Corporate securities: The unrealized losses on 13 corporate securities were caused by normal market fluctuations and not credit deterioration. Three of these securities were in an unrealized loss position for 12 months or more. One of these securities is rated Aaa by Moody's, and another is rated Baa2. The remaining eleven securities are not rated, but the Company conducted thorough internal credit reviews prior to the purchase of each 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 investments 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, 2022.

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, 2022, and no impairment has been recognized.

Table of Contents

Other-Than-Temporarily-Impaired Securities

As of September 30, 2022 and December 31, 2021, there were no securities classified as other-than-temporarily impaired.

Realized Gains and Losses

The Company did not have any realized gains or losses on, or proceeds from the sale of securities available for sale during the three and nine months ended September 30, 2022 and 2021.

Note 3 – Loans

Loans, net of deferred fees and costs and excluding loans held for sale, at September 30, 2022 and December 31, 2021, were comprised of the following (dollars in thousands):

	*September 30, 2022*		*December 31, 2021*
Commercial	$	295,541	$	299,773
Commercial real estate:
Construction and land development		210,500		134,221
Commercial real estate - owner occupied		423,678		391,517
Commercial real estate - non-owner occupied		764,963		731,034
Residential real estate:
Residential		324,468		289,757
Home equity		93,659		93,203
Consumer		6,606		7,075
Total loans, net of deferred fees and costs	$	2,119,415	$	1,946,580

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, 2022 and December 31, 2021 are as follows (dollars in thousands):

	*September 30, 2022*		*December 31, 2021*
Outstanding principal balance	$	131,959	$	163,574
Carrying amount		126,636		156,975

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, 2022*		*December 31, 2021*
Outstanding principal balance	$	19,946	$	24,696
Carrying amount		15,846		19,802

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, 2022 and the year ended December 31, 2021 (dollars in thousands):

	*September 30, 2022*			*December 31, 2021*
Balance at January 1	$	4,902		$	6,513
Accretion		(1,808	)		(5,292	)
Reclassification from nonaccretable difference		835			2,780
Other changes, net (1)		(273	)		901
	$	3,656		$	4,902

__________________________

(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.

Table of Contents

Past Due Loans

The following table shows an analysis by portfolio segment of the Company's past due loans at September 30, 2022 (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	$	161	$	—	$	—	$	288	$	449	$	295,092	$	295,541
Commercial real estate:
Construction and land development		—		—		—		—		—		210,500		210,500
Commercial real estate - owner occupied		—		—		—		—		—		423,678		423,678
Commercial real estate - non-owner occupied		—		—		—		—		—		764,963		764,963
Residential:
Residential		382		7		—		457		846		323,622		324,468
Home equity		16		—		—		314		330		93,329		93,659
Consumer		—		83		18		112		213		6,393		6,606
Total	$	559	$	90	$	18	$	1,171	$	1,838	$	2,117,577	$	2,119,415

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 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	$	120	$	—	$	—	$	26	$	146	$	299,627	$	299,773
Commercial real estate:
Construction and land development		—		—		—		—		—		134,221		134,221
Commercial real estate - owner occupied		—		—		—		12		12		391,505		391,517
Commercial real estate - non-owner occupied		—		—		—		1,093		1,093		729,941		731,034
Residential:
Residential		670		20		154		792		1,636		288,121		289,757
Home equity		12		30		47		80		169		93,034		93,203
Consumer		6		—		15		3		24		7,051		7,075
Total	$	808	$	50	$	216	$	2,006	$	3,080	$	1,943,500	$	1,946,580

Table of Contents

Impaired Loans

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at September 30, 2022 (dollars in thousands):

	*Recorded Investment*		*Unpaid Principal Balance*		*Related Allowance*		*Average Recorded Investment*		*Interest Income Recognized*
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		2,421		2,420		—		1,212		81
Commercial real estate - non-owner occupied		1,068		1,069		—		1,143		31
Residential:
Residential		817		825		—		881		17
Home equity		165		165		—		76		—
Consumer		—		—		—		—		—
	$	4,471	$	4,479	$	—	$	3,312	$	129
With a related allowance recorded:
Commercial	$	283	$	279	$	169	$	174	$	—
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—
Commercial real estate - non-owner occupied		—		—		—		—		—
Residential
Residential		—		—		—		51		—
Home equity		—		—		—		—		—
Consumer		95		95		48		48		—
	$	378	$	374	$	217	$	273	$	—
Total:
Commercial	$	283	$	279	$	169	$	174	$	—
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		2,421		2,420		—		1,212		81
Commercial real estate - non-owner occupied		1,068		1,069		—		1,143		31
Residential:
Residential		817		825		—		932		17
Home equity		165		165		—		76		—
Consumer		95		95		48		48		—
	$	4,849	$	4,853	$	217	$	3,585	$	129

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.

Table of Contents

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2021 (dollars in thousands):

	*Recorded Investment*		*Unpaid Principal Balance*		*Related Allowance*		*Average Recorded Investment*		*Interest Income Recognized*
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	4	$	—
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		8		5		—		71		1
Commercial real estate - non-owner occupied		1,185		1,186		—		1,107		23
Residential:
Residential		1,021		1,031		—		1,217		41
Home equity		4		4		—		5		1
Consumer		—		—		—		—		—
	$	2,218	$	2,226	$	—	$	2,404	$	66
With a related allowance recorded:
Commercial	$	14	$	7	$	7	$	25	$	1
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—
Commercial real estate - non-owner occupied (1)		—		—		—		30		—
Residential:
Residential (1)		—		—		—		61		2
Home equity		—		—		—		—		—
Consumer		—		—		—		—		—
	$	14	$	7	$	7	$	116	$	3
Total:
Commercial	$	14	$	7	$	7	$	29	$	1
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		8		5		—		71		1
Commercial real estate - non-owner occupied		1,185		1,186		—		1,137		23
Residential:
Residential		1,021		1,031		—		1,278		43
Home equity		4		4		—		5		1
Consumer		—		—		—		—		—
	$	2,232	$	2,233	$	7	$	2,520	$	69

__________________________

(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.

During the three months ended September 30, 2022, there were no new loans modified as TDRs. There was one commercial real estate non-owner occupied loan with a recorded investment of $81 thousand that fully paid off during the quarter.

During the three months ended September 30, 2022, there were no loans modified as TDRs and one loan modified as a TDR during the nine months ended September 30, 2022. A commercial real estate-owner occupied loan was modified in the second quarter of 2022. The commercial real estate-owner occupied loan was an extension of maturity with a pre- and post- modification outstanding investment of $2.4 million. A commercial real estate-non-owner occupied TDR loan was returned to accruing in the second quarter of 2022. During the three and nine months ended September 30, 2022, the Company had no restructures that had 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 loans modified as TDRs during the three or nine months ended September 30, 2021.

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 thousand at restructure and one commercial loan with a recorded investment of $106 thousand at restructure that subsequently defaulted with 12 months of modification.

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, 2022, the commercial real estate portfolio included concentrations of $87 million, $52 million and $212 million in hotel, restaurants, and retail loans, respectively. These concentrations total 4.1%, 2.5%, and 10.0% of total loans, respectively, excluding loans in process.

Table of Contents

Residential Real Estate in Process of Foreclosure

The Company had $212 thousand in residential loans in process of foreclosure at September 30, 2022 and $103 thousand in process of foreclosure at December 31, 2021, respectively. The Company had no residential other real estate owned ("OREO") at September 30, 2022 or at December 31, 2021.

Risk Grades

The following tables show the Company's loan portfolio broken down by internal risk grading as of September 30, 2022 (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	$	289,058	$	209,667	$	412,458	$	762,254	$	320,467	$	93,090
Special Mention		5,756		—		4,811		397		1,658		—
Substandard		444		833		6,409		2,312		2,343		569
Doubtful		283		—		—		—		—		—
Total	$	295,541	$	210,500	$	423,678	$	764,963	$	324,468	$	93,659

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	*Consumer*
Performing	$	6,476
Nonperforming		130
Total	$	6,606

The following tables show the Company's loan portfolio broken down by internal risk grading as of December 31, 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	$	290,823	$	130,111	$	372,177	$	720,138	$	285,188	$	92,807
Special Mention		8,333		2,881		11,048		8,702		1,774		—
Substandard		617		1,229		8,292		2,194		2,795		396
Doubtful		—		—		—		—		—		—
Total	$	299,773	$	134,221	$	391,517	$	731,034	$	289,757	$	93,203

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	*Consumer*
Performing	$	7,057
Nonperforming		18
Total	$	7,075

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, and they are typically characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Table of Contents

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, 2022*			*Year Ended December 31, 2021*			*Nine Months Ended September 30, 2021*
Allowance for Loan Losses
Balance, beginning of period	$	18,678		$	21,403		$	21,403
Provision for (recovery of) loan losses		438			(2,825	)		(870	)
Charge-offs		(185	)		(146	)		(70	)
Recoveries		258			246			167
Balance, end of period	$	19,189		$	18,678		$	20,630

Reserve for Unfunded Lending Commitments
Balance, beginning of period	$	386		$	304		$	304
(Recovery of) provision for unfunded commitments		(8	)		82			23
Balance, end of period	$	378		$	386		$	327

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

The following table presents changes in the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at and for the nine months ended September 30, 2022 (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, 2021	$	2,668		$	1,397	$	3,964		$	7,141		$	3,458		$	50		$	18,678
Provision for (recovery of) loan losses		60			487		(313	)		(48	)		200			52			438
Charge-offs		(78	)		—		—			—			(5	)		(102	)		(185	)
Recoveries		103			—		19			3			37			96			258
Balance at September 30, 2022	$	2,753		$	1,884	$	3,670		$	7,096		$	3,690		$	96		$	19,189

Balance at September 30, 2022:

Allowance for Loan Losses
Individually evaluated for impairment	$	169		$	—	$	—		$	—		$	—		$	48		$	217
Collectively evaluated for impairment		2,584			1,856		3,647			6,580			3,641			48			18,356
Purchased credit impaired loans		—			28		23			516			49			—			616
Total	$	2,753		$	1,884	$	3,670		$	7,096		$	3,690		$	96		$	19,189

Loans
Individually evaluated for impairment	$	283		$	—	$	2,421		$	1,068		$	982		$	95		$	4,849
Collectively evaluated for impairment		295,167			209,306		413,810			759,606			414,338			6,493			2,098,720
Purchased credit impaired loans		91			1,194		7,447			4,289			2,807			18			15,846
Total	$	295,541		$	210,500	$	423,678		$	764,963		$	418,127		$	6,606		$	2,119,415

__________________________

(1) Includes Paycheck Protection Program ("PPP") loans, which are guaranteed by the Small Business Administration ("SBA") and have no related allowance.

Table of Contents

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, 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 loan losses		(745	)		(530	)		(380	)		(493	)		(655	)		(22	)		(2,825	)
Charge-offs		—			—			(3	)		—			(53	)		(90	)		(146	)
Recoveries		40			—			7			8			99			92			246
Balance at December 31, 2021	$	2,668		$	1,397		$	3,964		$	7,141		$	3,458		$	50		$	18,678

Balance at December 31, 2021:

Allowance for Loan Losses
Individually evaluated for impairment	$	7		$	—		$	—		$	—		$	—		$	—		$	7
Collectively evaluated for impairment		2,642			1,365			3,767			6,778			3,402			50			18,004
Purchased credit impaired loans		19			32			197			363			56			—			667
Total	$	2,668		$	1,397		$	3,964		$	7,141		$	3,458		$	50		$	18,678

Loans
Individually evaluated for impairment	$	14		$	—		$	8		$	1,185		$	1,025		$	—		$	2,232
Collectively evaluated for impairment		299,470			133,984			382,562			724,180			377,290			7,060			1,924,546
Purchased credit impaired loans		289			237			8,947			5,669			4,645			15			19,802
Total	$	299,773		$	134,221		$	391,517		$	731,034		$	382,960		$	7,075		$	1,946,580

__________________________

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

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.

The Company recorded a provision for loan losses for the third quarter of 2022 of $615 thousand compared to $482 thousand in the third quarter of the previous year. The provision expense for the third quarter of 2022 was a function of continued loan growth during the period. The provision expense in the third quarter of 2021 was the net of the provision for loan growth offset by positive adjustments in qualitative factors for improved economic conditions.

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 annually as of June 30 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, the Company concludes that it is not 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 the Company concludes 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, 2022, the Company concluded that no impairment existed. No indicators of impairment were identified during the nine months ended September 30, 2022 or 2021.

Core deposit intangibles resulting from the acquisitions of MainStreet BankShares, Inc. in January 2015 and HomeTown Bankshares Corporation ("HomeTown") in April 2019 were $10.0 million 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, 2022, are as follows (dollars in thousands):

	*Goodwill*		*Intangibles*
Balance at December 31, 2021	$	85,048	$	4,627
Amortization		—		(960	)
Balance at September 30, 2022	$	85,048	$	3,667

Table of Contents

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, 2022*			*December 31, 2021*
Lease liabilities	$	3,575		$	4,023
Right-of-use assets	$	3,497		$	3,939
Weighted average remaining lease term (years)		6.74			6.90
Weighted average discount rate		3.12	%		3.09	%

	*Three Months Ended September 30, 2022*		*Three Months Ended September 30, 2021*
Lease cost
Operating lease cost	$	268	$	267
Short-term lease cost		—		—
Total lease cost	$	268	$	267

Cash paid for amounts included in the measurement of lease liabilities	$	271	$	265

	*Nine Months Ended September 30, 2022*		*Nine Months Ended September 30, 2021*
Lease cost
Operating lease cost	$	803	$	804
Short-term lease cost		—		—
Total lease cost	$	803	$	804

Cash paid for amounts included in the measurement of lease liabilities	$	810	$	781

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, 2022*
Three months ending December 31, 2022	$	273
Twelve months ending December 31, 2023		1,008
Twelve months ending December 31, 2024		578
Twelve months ending December 31, 2025		516
Twelve months ending December 31, 2026		278
Twelve months ending December 31, 2027		208
Thereafter		1,143
Total undiscounted cash flows		4,004
Discount		(429	)
Lease liabilities	$	3,575

Table of Contents

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 $60.0 million 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, 2022 and December 31, 2021 (dollars in thousands):

		*September 30, 2022*				*December 31, 2021*
Customer repurchase agreements		$	625			$	41,128

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, 2022, $1.1 billion in eligible collateral was pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings.

There were no long-term borrowings with the FHLB as of September 30, 2022 or December 31, 2021.The Company had junior subordinated debt at September 30, 2022 and 2021, as noted below.

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, 2022, the Bank's public deposits totaled $205.0 million. 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, 2022, the Company had $170.0 million in letters of credit with the FHLB outstanding, as well as $91.2 million in agency, state, and municipal securities, pledged to provide collateral for such deposits.

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 $20.0 million 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 thousand received by the trust from the issuance of common securities by the trust to the Company, were used to purchase $20.6 million 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.

On July 1, 2011, in connection with the MidCarolina merger, the Company assumed $8.8 million 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 thousand 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.

Table of Contents

A description of the junior subordinated debt securities outstanding payable to the trusts is shown below as of September 30, 2022 and December 31, 2021 (dollars in thousands):

Principal Amount

Issuing Entity

Date Issued

Interest Rate

Maturity Date

September 30, 2022

December 31, 2021

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

4,587

4,545

MidCarolina Trust II

12/3/2003

LIBOR plus 2.95%

10/7/2033

3,102

3,068

28,308

28,232

The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $568 thousand and $507 thousand at September 30, 2022 and $610 thousand and $541 thousand at December 31, 2021, respectively. The original fair value adjustments of $1.2 million and $1.0 million were recorded as a result of the acquisition of MidCarolina on July 1, 2011, and are being amortized into interest expense over the remaining lives of the respective borrowings.

Note 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, 2022 and December 31, 2021 (dollars in thousands):

	*September 30, 2022*
	*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	$	1,498	$	—	$	850

	*December 31, 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	$	—	$	2,800	$	4,050

Table of Contents

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. 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. At September 30, 2022, the Company had 4,150 outstanding and exercisable stock options remaining at an exercise price of $16.63. The outstanding options have a remaining final maturity date of December 2024 and have an aggregate intrinsic value of $64 thousand. As of September 30, 2022, there were no nonvested stock option grants and no unrecognized compensation expense.

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 restricted stock granted cliff vests at the end of a 36-month period beginning on the date of the grant. Nonvested restricted stock activity for the nine months ended September 30, 2022 is summarized in the following table.

	*Shares*			*Weighted Average Grant Date Value Per Share*
Nonvested at December 31, 2021		58,461		$	31.91
Granted		33,073			36.10
Vested		(15,053	)		32.58
Forfeited		(747	)		33.15
Nonvested at September 30, 2022		75,734		$	33.59

As of September 30, 2022 and December 31, 2021, there was $1.4 million and $782 thousand, 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 1.55 years. The share-based compensation expense for nonvested restricted stock was $665 thousand and $534 thousand during the nine months of 2022 and 2021, respectively.

The Company offers its outside directors alternatives with respect to director compensation. For 2022, 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 thousand. 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 thousand with respect to shares received for service on the Board. Only outside directors receive board fees. The Company issued 12,453 and 16,370 shares and recognized share based compensation expense of $449 thousand and $531 thousand during the nine months of 2022 and 2021, respectively.

Table of Contents

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, 2022 and 2021:

	*Three Months Ended September 30,*
	*2022*				*2021*
	*Shares*		*Per Share Amount*		*Shares*		*Per Share Amount*
Basic earnings per share		10,640,952	$	0.87		10,833,875	$	0.94
Effect of dilutive securities - stock options		2,121		—		2,418		—
Diluted earnings per share		10,643,073	$	0.87		10,836,293	$	0.94

	*Nine Months Ended September 30,*
	*2022*				*2021*
	*Shares*		*Per Share Amount*		*Shares*		*Per Share Amount*
Basic earnings per share		10,694,096	$	2.47		10,907,721	$	2.96
Effect of dilutive securities - stock options		2,313		—		3,651		(0.01	)
Diluted earnings per share		10,696,409	$	2.47		10,911,372	$	2.95

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, 2022 and 2021.

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.

Table of Contents

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, 2022 or December 31, 2021.

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.

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, 2022 Using*
	*Balance at September 30,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2022*		*Level 1*		*Level 2*		*Level 3*
Assets:
Securities available for sale:
U.S. Treasury	$	138,537	$	—	$	138,537	$	—
Federal agencies and GSEs		104,665		—		104,665		—
Mortgage-backed and CMOs		306,065		—		306,065		—
State and municipal		64,607		—		64,607		—
Corporate		28,010		—		28,010		—
Total securities available for sale	$	641,884	$	—	$	641,884	$	—
Derivative - cash flow hedges	$	1,498	$	—	$	1,498	$	—
Loans held for sale	$	2,852	$	—	$	2,852	$	—

	*Fair Value Measurements at December 31, 2021 Using*
	*Balance at December 31,*		*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	$	149,577	$	—	$	149,577	$	—
Federal agencies and GSEs		104,580		—		104,580		—
Mortgage-backed and CMOs		356,310		—		356,310		—
State and municipal		66,472		—		66,472		—
Corporate		15,528		—		15,528		—
Total securities available for sale	$	692,467	$	—	$	692,467	$	—
Loans held for sale	$	8,481	$	—	$	8,481	$	—
Liabilities:
Derivative - cash flow hedges	$	2,800	$	—	$	2,800	$	—

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.

Table of Contents

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, 2022 Using*
	*Balance at September 30,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2022*		*Level 1*		*Level 2*		*Level 3*
Assets:
Impaired loans, net of valuation allowance	$	161	$	—	$	—	$	161
Other real estate owned, net		143		—		—		143

	*Fair Value Measurements at December 31, 2021 Using*
	*Balance at December 31,*		*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	$	7	$	—	$	—	$	7
Other real estate owned, net		143		—		—		143

Quantitative Information about Level 3 Fair Value Measurements as of September 30, 2022 and December 31, 2021:

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

Impaired loans	Discounted appraised value	Selling cost	8.00% - 15%

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.

Table of Contents

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.

The carrying values and the exit pricing concept fair values of the Company's financial instruments at September 30, 2022 are as follows (dollars in thousands):

	*Fair Value Measurements at September 30, 2022 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	$	94,978	$	94,978	$	—	$	—	$	94,978
Securities available for sale		641,884		—		641,884		—		641,884
Restricted stock		8,383		—		8,383		—		8,383
Loans held for sale		2,852		—		2,852		—		2,852
Loans, net of allowance		2,100,226		—		—		2,013,036		2,013,036
Derivative - cash flow hedges		1,498		—		1,498		—		1,498
Bank owned life insurance		29,480		—		29,480		—		29,480
Accrued interest receivable		6,241		—		6,241		—		6,241

Financial Liabilities:
Deposits	$	2,690,870	$	—	$	2,691,681	$	—	$	2,691,681
Repurchase agreements		625		—		625		—		625
Junior subordinated debt		28,308		—		—		24,112		24,112
Accrued interest payable		334		—		334		—		334

The carrying values and the exit pricing concept fair values of the Company's financial instruments at December 31, 2021 are as follows (dollars in thousands):

	*Fair Value Measurements at December 31, 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	$	510,868	$	510,868	$	—	$	—	$	510,868
Securities available for sale		692,467		—		692,467		—		692,467
Restricted stock		8,056		—		8,056		—		8,056
Loans held for sale		8,481		—		8,481		—		8,481
Loans, net of allowance		1,927,902		—		—		1,914,887		1,914,887
Bank owned life insurance		29,107		—		29,107		—		29,107
Accrued interest receivable		5,822		—		5,822		—		5,822

Financial Liabilities:
Deposits	$	2,890,353	$	—	$	2,892,487	$	—	$	2,892,487
Repurchase agreements		41,128		—		41,128		—		41,128
Junior subordinated debt		28,232		—		—		26,635		26,635
Accrued interest payable		392		—		392		—		392
Derivative - cash flow hedges		2,800		—		2,800		—		2,800

Table of Contents

Note 13 – Segment and Related Information

The Company has two reportable segments, community banking and wealth management.

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.

Wealth management includes 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 wealth management segment receives fees for investment and administrative services.

Segment information as of and for the three and nine months ended September 30, 2022 and 2021is shown in the following tables (dollars in thousands):

	*As of and For the Three Months Ended September 30, 2022*
	*Community Banking*		*Wealth Management*		*Total*
Interest income	$	25,151	$	—	$	25,151
Interest expense		1,144		—		1,144
Noninterest income		3,157		1,603		4,760
Noninterest expense		15,681		767		16,448
Income before income taxes		10,868		836		11,704
Net income		8,595		661		9,256
Depreciation and amortization		874		3		877
Total assets		3,049,079		241		3,049,320
Goodwill		85,048		—		85,048
Capital expenditures		894		—		894

	*As of and For the Three Months Ended September 30, 2021*
	*Community Banking*		*Wealth Management*		*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

Table of Contents

	*As of and For the Nine Months Ended September 30, 2022*
	*Community Banking*		*Trust and Investment Services*		*Total*
Interest income	$	69,088	$	—	$	69,088
Interest expense		3,138		—		3,138
Noninterest income		10,198		4,999		15,197
Noninterest expense		45,088		2,164		47,252
Income before income taxes		30,621		2,836		33,457
Net income		24,158		2,237		26,395
Depreciation and amortization		2,639		8		2,647
Total assets		3,049,079		241		3,049,320
Goodwill		85,048		—		85,048
Capital expenditures		894		—		894

	*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

Note 14 – Supplemental Cash Flow Information

Supplemental cash flow information as of and for the nine months ended September 30, 2022 and 2021 is shown in the following table (dollars in thousands):

	*2022*			*2021*
Supplemental Schedule of Cash and Cash Equivalents:
Cash and due from banks	$	35,437		$	38,349
Interest-bearing deposits in other banks		59,541			476,002
Cash and Cash Equivalents	$	94,978		$	514,351

Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest on deposits and borrowed funds	$	3,160		$	4,715
Income taxes		1,482			2,312
Noncash investing and financing activities:
Net unrealized losses on securities available for sale		(71,381	)		(6,657	)
Net unrealized gains on cash flow hedges		4,298			1,603

Table of Contents

Note 15 – Accumulated Other Comprehensive Income (Loss)

There were no re-classifications out of accumulated other comprehensive income ("AOCI") for the three and nine months ended September 30, 2022 or 2021. Changes in each component of AOCI for the three and nine months ended September 30, 2022 and 2021 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, 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	)

Balance at June 30, 2022	$	(37,886	)	$	30		$	(1,162	)	$	(39,018	)

Net unrealized losses on securities available for sale, net of tax, $(5,448)		(19,786	)		—			—			(19,786	)

Net unrealized gains on cash flow hedges, net of tax, $306		—			1,153			—			1,153

Balance at September 30, 2022	$	(57,672	)	$	1,183		$	(1,162	)	$	(57,651	)

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, 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	)

Balance at December 31, 2021	$	(1,701	)	$	(2,212	)	$	(1,162	)	$	(5,075	)

Net unrealized losses on securities available for sale, net of tax, $(15,410)		(55,971	)		—			—			(55,971	)

Net unrealized gains on cash flow hedges, net of tax, $902		—			3,395			—			3,395

Balance at September 30, 2022	$	(57,672	)	$	1,183		$	(1,162	)	$	(57,651	)

Note 16 – Subsequent Events

The Company previously maintained a non-contributory defined benefit pension plan which covered substantially all employees who were 21 years of age or older and who had at least one year of service. The Company froze its pension plan to new participants and converted it to a cash balance plan effective December 31, 2009. At the October 18, 2022 meeting of the Board of Directors, the Company approved the termination of its defined benefit pension plan effective December 31, 2022.

Table of Contents

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, 2021, 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 a resurgence of the COVID-19 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;

	•	geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts of threats or terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad; and
	•	risks associated with mergers and acquisitions and other expansion activities.

Reclassification

In certain circumstances, reclassifications have been made to prior period information to conform to the 2022 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) acquired loans with specific credit-related deterioration, and (3) goodwill and intangible assets. 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, 2021.

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 or recovery of loan loss expense.

Table of Contents

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.

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.

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 annually at June 30 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, the Company concludes that it is not 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 the Company concludes 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. The annual evaluation at June 30, 2022 concluded that no impairment existed. No indicators of impairment were identified during the nine months ended September 30, 2022 or 2021.

Intangible assets with definite useful lives are amortizing over their estimated useful lives of 5 to 10 years. Goodwill is the only intangible asset with an indefinite life on the Company's consolidated balance sheets.

Table of Contents

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.

Table of Contents

RESULTS OF OPERATIONS

Executive Overview

Third quarter 2022 financial highlights include the following:

•

Earnings produced a return on average assets (annualized) of 1.17% for the third quarter of 2022, compared to 0.99% in the previous quarter and 1.27% for the third quarter of 2021.

•

Net interest income increased $2.5 million, or 11.7%, when compared to the previous quarter, and increased $914 thousand, or 4.0%, when compared to the same quarter of 2021.

•

Fully taxable equivalent net interest margin was 3.20% for the quarter, up from 2.76% in the previous quarter and 3.09% in the same quarter of the prior year.*

•

Noninterest revenues decreased $77 thousand, or 1.6%, when compared to the previous quarter, and decreased $363 thousand, or 7.1%, compared to the same quarter in the prior year.

•

Noninterest expense increased $993 thousand, or 6.4%, when compared to the previous quarter, and increased $1.6 million, or 10.8%, when compared to the same quarter in the prior year.

•

The Company recognized a provision for loan losses in the third quarter of 2022 of $615 thousand compared to of $581 thousand in the second quarter of 2022 and $482 thousand in the third quarter of 2021. Annualized net charge-offs (recoveries) as a percentage of average loans outstanding were (0.01%) for the third quarter of 2022, compared to 0.01% in the previous quarter and (0.01%) in the same quarter in the prior year.

•

Nonperforming assets as a percentage of total assets were 0.05% at September 30, 2022, and at June 30, 2022, down from 0.06% at September 30, 2021.

*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, 2022 and 2021

Net interest income on a taxable equivalent basis was $24.0 million, an increase of $2.5 million, or 11.7%, from the second quarter of 2022 and an increase of $914 thousand compared to $23.1 million for the same quarter of 2021. The increase from the same quarter in 2021 is attributable to the higher rate environment and asset mix changes partially offset by substantially more PPP related income in 2021. PPP loans had a net balance of $95 thousand at September 30, 2022, compared to $37.2 million at September 30, 2021. Total net PPP fees recognized in net interest income during the third quarter of 2022 were less than $1 thousand, compared to $2.4 million for the same period of 2021. Average loan balances for the 2022 quarter were up $144.7 million, or 7.5%, over the 2021 quarter reflecting core loan growth in the 2022 quarter. Loan yields for the quarter were 48 basis points lower than the 2021 quarter.

For the third quarter of 2022, the Company's yield on interest-earning assets was 3.35%, compared to 3.25% for the third quarter of 2021. The cost of interest-bearing liabilities was 0.26% for the 2022 quarter compared to 0.25% for the 2021 quarter. The interest rate spread was 3.09% for the 2022 quarter compared to 3.00% for the 2021 quarter. The net interest margin, on a fully taxable equivalent basis, was 3.20% for the 2022 quarter compared to 3.09% for the 2021 quarter, an increase of 11 basis points. The increase in net interest margin in 2022 compared to the 2021 quarter was driven by the higher rate environment and asset mix changes in 2022 partially offset by substantially more PPP related income in the 2021 quarter.

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, 2022 and 2021. 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,
	2022		2021		2022		2021		2022			2021
	Average Balance				Income/Expense				Yield/Rate
Loans:
Commercial	$	287,785	$	325,692	$	2,877	$	5,185		3.97	%		6.32	%
Real estate		1,773,694		1,590,858		18,207		16,702		4.11			4.20
Consumer		6,524		6,731		107		125		6.51			7.37
Total loans		2,068,003		1,923,281		21,191		22,012		4.09			4.57

Securities:
U.S. Treasury		152,158		53,347		350		139		0.92			1.04
Federal agencies and GSEs		111,804		90,876		369		265		1.32			1.17
Mortgage-backed and CMOs		354,296		335,940		1,435		1,091		1.62			1.30
State and municipal		70,528		62,883		365		320		2.07			2.04
Other securities		39,749		26,462		401		311		4.04			4.70
Total securities		728,535		569,508		2,920		2,126		1.60			1.49

Deposits in other banks		208,754		496,872		1,099		201		2.09			0.16

Total interest-earning assets		3,005,292		2,989,661		25,210		24,339		3.35			3.25

Non-earning assets		165,036		209,853

Total assets	$	3,170,328	$	3,199,514

Deposits:
Demand	$	522,021	$	481,032		34		38		0.03			0.03
Money market		668,970		713,846		348		166		0.21			0.09
Savings		281,369		247,536		20		6		0.03			0.01
Time		251,571		375,181		339		571		0.53			0.60
Total deposits		1,723,931		1,817,595		741		781		0.17			0.17

Customer repurchase agreements		18,719		29,681		11		3		0.23			0.04
Long-term borrowings		28,293		28,192		392		400		5.54			5.68
Total interest-bearing liabilities		1,770,943		1,875,468		1,144		1,184		0.26			0.25

Noninterest-bearing demand deposits		1,051,585		950,673
Other liabilities		17,482		21,727
Shareholders' equity		330,318		351,646
Total liabilities and shareholders' equity	$	3,170,328	$	3,199,514

Interest rate spread										3.09	%		3.00	%
Net interest margin										3.20	%		3.09	%

Net interest income (taxable equivalent basis)						24,066		23,155
Less: Taxable equivalent adjustment						59		62
Net interest income					$	24,007	$	23,093

Table of Contents

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

	Three Months Ended September 30,
	2022 vs. 2021
				Change
	Increase			Attributable to
	(Decrease)			Rate			Volume
Interest income
Loans:
Commercial	$	(2,308	)	$	(1,758	)	$	(550	)
Real estate		1,505			(379	)		1,884
Consumer		(18	)		(14	)		(4	)
Total loans		(821	)		(2,151	)		1,330
Securities:
U.S. Treasury		211			(18	)		229
Federal agencies and GSEs		104			38			66
Mortgage-backed and CMOs		344			282			62
State and municipal		45			6			39
Other securities		90			(49	)		139
Total securities		794			259			535
Deposits in other banks		898			1,079			(181	)
Total interest income		871			(813	)		1,684

Interest expense
Deposits:
Demand		(4	)		(7	)		3
Money market		182			193			(11	)
Savings		14			13			1
Time		(232	)		(60	)		(172	)
Total deposits		(40	)		139			(179	)
Customer repurchase agreements		8			9			(1	)
Long-term borrowings		(8	)		(9	)		1
Total interest expense		(40	)		139			(179	)
Net interest income (taxable equivalent basis)	$	911		$	(952	)	$	1,863

Nine months ended September 30, 2022 and 2021

Net interest income on a taxable equivalent basis was $66.0 million, a decrease of $1.4 million, or 2.0%, for the nine months ended September 30, 2022 compared to $67.3 million for the same period of 2021. The decrease in net interest income from the same period in the prior year was attributable to decreased accretion and net fee income associated with PPP loans in 2021 partially offset by increased rates as a result of multiple rate increases in the 2022 period. Average loan balances for the 2022 period were up $48.1 million, or 2.5%, over the 2021 period. PPP loans had a net balance of $95 thousand at September 30, 2022, compared to $37.2 million at September 30, 2021. Total net PPP fees recognized in net interest income during the nine month period of 2022 was less than $1 thousand, compared to $2.4 million for the same period of 2021. Loan yields for the period were 52 basis points lower than the 2021 period.

For the nine months ended September 30, 2022, the Company's yield on interest-earning assets was 3.00%, compared to 3.30% for the prior year period. The cost of interest-bearing liabilities was 0.22% for the 2022 period compared to 0.32% for the 2021 period. The interest rate spread was 2.78% for the 2022 period compared to 2.98% for the 2021 period. The net interest margin, on a fully taxable equivalent basis, was 2.86% for the 2022 period compared to 3.10% for the 2021 period, a decrease of 24 basis points. The decrease in net interest margin was driven by decreased accretion income and PPP related income in 2021 partially offset by higher interest income due to rate increases in 2022.

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, 2022 and 2021. 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,
	2022		2021		2022		2021		2022			2021
	Average Balance				Income/Expense				Yield/Rate
Loans:
Commercial	$	288,968	$	393,571	$	7,982	$	15,433		3.69	%		5.24	%
Real estate		1,721,403		1,568,055		50,823		49,642		3.94			4.22
Consumer		6,532		7,139		317		364		6.49			6.82
Total loans		2,016,903		1,968,765		59,122		65,439		3.91			4.43

Securities:
U.S. Treasury		150,483		36,969		1,021		265		0.90			0.96
Federal agencies and GSEs		108,050		99,595		985		867		1.22			1.16
Mortgage-backed and CMOs		358,739		292,207		3,922		3,025		1.46			1.38
State and municipal		68,752		61,210		1,038		958		2.01			2.09
Other securities		36,001		24,175		1,100		900		4.07			4.96
Total securities		722,025		514,156		8,066		6,015		1.49			1.56

Deposits in other banks		344,887		422,111		2,076		375		0.80			0.12

Total interest-earning assets		3,083,815		2,905,032		69,264		71,829		3.00			3.30

Non-earning assets		176,821		210,651

Total assets	$	3,260,636	$	3,115,683

Deposits:
Demand	$	531,301	$	466,999		107		116		0.03			0.03
Money market		721,697		700,027		673		657		0.12			0.13
Savings		273,858		238,349		35		19		0.02			0.01
Time		290,725		367,979		1,141		2,198		0.52			0.80
Total deposits		1,817,581		1,773,354		1,956		2,990		0.14			0.23

Customer repurchase agreements		31,858		36,954		26		19		0.11			0.07
Long-term borrowings		28,268		33,111		1,156		1,352		5.45			5.44
Total interest-bearing liabilities		1,877,707		1,843,419		3,138		4,361		0.22			0.32

Noninterest-bearing demand deposits		1,027,942		903,296
Other liabilities		17,354		22,238
Shareholders' equity		337,633		346,730
Total liabilities and shareholders' equity	$	3,260,636	$	3,115,683

Interest rate spread										2.78	%		2.98	%
Net interest margin										2.86	%		3.10	%

Net interest income (taxable equivalent basis)						66,126		67,468
Less: Taxable equivalent adjustment						176		181
Net interest income					$	65,950	$	67,287

Table of Contents

Changes in Net Interest Income (Rate/Volume Analysis)

(in thousands)

	Nine Months Ended September 30,
	2022 vs. 2021
				Change
	Increase			Attributable to
	(Decrease)			Rate			Volume
Interest income
Loans:
Commercial	$	(7,451	)	$	(3,923	)	$	(3,528	)
Real estate		1,181			(3,480	)		4,661
Consumer		(47	)		(17	)		(30	)
Total loans		(6,317	)		(7,420	)		1,103
Securities:
U.S. Treasury		756			(15	)		771
Federal agencies and GSEs		118			42			76
Mortgage-backed and CMOs		897			177			720
State and municipal		80			(35	)		115
Other securities		200			(183	)		383
Total securities		2,051			(14	)		2,065
Deposits in other banks		1,701			1,782			(81	)
Total interest income		(2,565	)		(5,652	)		3,087

Interest expense
Deposits:
Demand		(9	)		(24	)		15
Money market		16			(4	)		20
Savings		16			13			3
Time		(1,057	)		(656	)		(401	)
Total deposits		(1,034	)		(671	)		(363	)
Customer repurchase agreements		7			10			(3	)
Long-term borrowings		(196	)		2			(198	)
Total interest expense		(1,223	)		(659	)		(564	)
Net interest income (taxable equivalent basis)	$	(1,342	)	$	(4,993	)	$	3,651

Table of Contents

Noninterest Income

Three months ended September 30, 2022 and 2021

For the quarter ended September 30, 2022, noninterest income decreased $363 thousand, or 7.1%, compared to the comparable 2021 quarter. Details of individual accounts are shown in the table below.

	Three Months Ended September 30,
	(Dollars in thousands)
	2022			2021			$ Change			% Change
Noninterest income:
Wealth management income	$	1,603		$	1,576		$	27			1.7	%
Service charges on deposit accounts		681			664			17			2.6
Interchange fees		1,013			958			55			5.7
Other fees and commissions		233			189			44			23.3
Mortgage banking income		388			989			(601	)		(60.8	)
Income from Small Business Investment Companies		501			491			10			2.0
Income from insurance investments		100			132			(32	)		(24.2	)
Losses on premises and equipment, net		(2	)		(107	)		105			98.1
Other		243			231			12			5.2
Total noninterest income	$	4,760		$	5,123		$	(363	)		(7.1	)

Mortgage banking income decreased $601 thousand in the 2022 quarter compared to the 2021 quarter reflecting decreased demand for new home purchases or refinancing in an increasing rate environment. Losses on premises and equipment, net decreased by $105 thousand in the 2022 quarter compared to the 2021 quarter. The Company recognized a loss of $105 thousand in the 2021 quarter from the sale of a building acquired in the HomeTown Bankshares Corporation ('HomeTown") acquisition.

Nine months ended September 30, 2022 and 2021

For the nine months ended September 30, 2022, noninterest income decreased $990 thousand, or 6.1%, compared to the comparable 2021 period. Details of individual accounts are shown in the table below.

	Nine Months Ended September 30,
	(Dollars in thousands)
	2022			2021			$ Change			% Change
Noninterest income:
Wealth management income	$	4,999		$	4,490		$	509			11.3	%
Service charges on deposit accounts		2,079			1,916			163			8.5
Interchange fees		2,990			3,025			(35	)		(1.2	)
Other fees and commissions		699			619			80			12.9
Mortgage banking income		1,490			3,449			(1,959	)		(56.8	)
Income from Small Business Investment Companies		1,672			1,510			162			10.7
Income from insurance investments		644			1,062			(418	)		(39.4	)
Losses on premises and equipment, net		(82	)		(588	)		506			86.1
Other		706			704			2			0.3
Total noninterest income	$	15,197		$	16,187		$	(990	)		(6.1	)

Wealth management income increased $509 thousand for the nine months ended September 30, 2022 compared to the same period in 2021 the result of growth in clients and a $200 thousand non-recurring estate settlement fee. Mortgage banking income decreased $2.0 million in the 2022 period compared to the 2021 period due to decreased demand in a significantly higher rate environment in 2022. Income from insurance investments decreased $418 thousand as the Company received lower distributions during the nine months ended September 30, 2022 compared to the same period in 2021. The 2021 period recorded a loss on the sale of property from the HomeTown acquisition of $543 thousand.

Table of Contents

Noninterest Expense

Three months ended September 30, 2022 and 2021

For the three months ended September 30, 2022, noninterest expense increased $1.6 million, or 10.8%, compared to the same quarter of 2021. Details of individual accounts are shown in the table below.

	Three Months Ended September 30,
	(Dollars in thousands)
	2022		2021		$ Change			% Change
Noninterest Expense
Salaries and employee benefits	$	9,618	$	8,185	$	1,433			17.5	%
Occupancy and equipment		1,514		1,513		1			0.1
FDIC assessment		227		194		33			17.0
Bank franchise tax		488		440		48			10.9
Core deposit intangible amortization		310		361		(51	)		(14.1	)
Data processing		818		748		70			9.4
Software		362		344		18			5.2
Other real estate owned, net		3		21		(18	)		(85.7	)
Other		3,108		3,037		71			2.3
Total noninterest expense	$	16,448	$	14,843	$	1,605			10.8

The increase in salary and employee benefits accounted for the majority of the change comparing the three months of 2022 to 2021, increasing $1.4 million in the 2022 quarter as compared to the 2021 quarter. The 2022 quarter reflected a lower staff vacancy rate, and increased incentive accruals.

Nine months ended September 30, 2022 and 2021

For the nine months ended September 30, 2022, noninterest expense increased $3.7 million, or 8.5%, compared to the same period of 2021. Details of individual accounts are shown in the table below.

	Nine Months Ended September 30,
	(Dollars in thousands)
	2022		2021		$ Change			% Change
Noninterest Expense
Salaries and employee benefits	$	26,936	$	23,881	$	3,055			12.8%
Occupancy and equipment		4,576		4,548		28		0.6
FDIC assessment		694		644		50		7.8
Bank franchise tax		1,452		1,321		131		9.9
Core deposit intangible amortization		960		1,113		(153	)	(13.7		)
Data processing		2,446		2,224		222		10.0
Software		1,088		1,011		77		7.6
Other real estate owned, net		4		148		(144	)	(97.3		)
Other		9,096		8,655		441		5.1
Total noninterest expense	$	47,252	$	43,545	$	3,707		8.5

Salaries and employee benefits increased $3.1 million in the 2022 period as compared to the 2021 period. The 2022 period reflected increases for reduced vacancy rates and increased accruals for incentives. Other real estate owned ("OREO"), net decreased $144 thousand from the same period of 2021, where a loss on the sale of OREO of $111 thousand was recognized. The increase in other expenses in the 2022 period compared to the 2021 period was primarily attributable to annual vendor price increases for operational expenses, data processing and additional costs associated with investments in technology.

Table of Contents

Non-GAAP Financial Measures

The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of OREO and (2) core deposit intangible amortization 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 2022 quarter was 55.98% compared to 51.02% for the 2021 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,
	2022			2021			2022			2021
Efficiency Ratio
Noninterest expense	$	16,448		$	14,843		$	47,252		$	43,545
Subtract: loss on sale of OREO, net of write-downs		—			—			—			(111	)
Subtract: core deposit intangible amortization		(310	)		(361	)		(960	)		(1,113	)
	$	16,138		$	14,482		$	46,292		$	42,321

Net interest income	$	24,007		$	23,093		$	65,950		$	67,287
Tax equivalent adjustment		59			62			176			181
Noninterest income		4,760			5,123			15,197			16,187
Add: loss on fixed assets		2			107			82			588
	$	28,828		$	28,385		$	81,405		$	84,243

Efficiency ratio		55.98	%		51.02	%		56.87	%		50.24	%

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 2022 and 2021 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,
	2022			2021			2022			2021
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income
Non-GAAP measures:
Interest income - loans	$	21,191		$	22,012		$	59,122		$	65,439
Interest income - investments and other		4,019			2,327			10,142			6,390
Interest expense - deposits		(741	)		(781	)		(1,956	)		(2,990	)
Interest expense - customer repurchase agreements		(11	)		(3	)		(26	)		(19	)
Interest expense - long-term borrowings		(392	)		(400	)		(1,156	)		(1,352	)
Total net interest income	$	24,066		$	23,155		$	66,126		$	67,468
Less non-GAAP measures:
Tax benefit realized on non-taxable interest income - loans	$	(31	)	$	(38	)	$	(98	)	$	(105	)
Tax benefit realized on non-taxable interest income - municipal securities		(28	)		(24	)		(78	)		(76	)
GAAP measures net interest income	$	24,007		$	23,093		$	65,950		$	67,287

Income Taxes

The effective tax rate for the third quarter of 2022 was 20.92% compared to 21.05% for the third quarter of 2021. 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, changes in pre-tax earnings and the levels of permanent tax differences.

Table of Contents

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, 2022 and 2021, 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, 2022	$	468	$	12	$	(26	)	$	454
For the three months ended September 30, 2021		1,332		18		(25	)		1,325

For the nine months ended September 30, 2022		1,381		40		(76	)		1,345
For the nine months ended September 30, 2021		3,163		61		(76	)		3,148

For the remaining three months of 2022 (estimated)		222		11		(25	)		208
For the years ending (estimated):
2023		815		31		(101	)		745
2024		550		5		(101	)		454
2025		419		2		(101	)		320
2026		314		2		(101	)		215
Thereafter (estimated)		893		2		(621	)		274

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 but has substantially increased during the nine months of 2022. Management is closely monitoring noninterest expenses as a result of current inflation trends to implement cost measures, as applicable.

Table of Contents

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 $641.9 million at September 30, 2022, compared to $692.5 million at December 31, 2021, a decrease of $50.6 million, or 7.3%. At September 30, 2022, the available for sale portfolio had an amortized cost of $715.4 million, resulting in a net unrealized loss of $73.5 million. At December 31, 2021, the available for sale portfolio had an amortized cost of $694.6 million, resulting in a net unrealized loss of $2.2 million. The increase in the net unrealized loss was the direct result of a substantial rise in market rates during the period. The yield on a 3-year U.S. Treasury Note, for instance, was 327 basis points higher at September 30, 2022 relative to December 31, 2021.

The Company did not sell any securities during the nine months ended September 30, 2022, or nine months ended September 30, 2021. The Company has other sources of liquidity and therefore intends to hold the available for sale securities until maturity. The Company has established a line of credit of $60 million with a correspondent bank, has access the federal reserve discount borrowing window, and $800 million to borrow against at the FHLB.

The Company is cognizant of the recent volatility in market interest rates and has elected to execute an asset liability strategy of purchasing high quality 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, 2022, the commercial real estate portfolio included concentrations of $87 million, $52 million and $212 million in hotel, restaurants, and retail loans, respectively. These concentrations total 16.6% of total loans, excluding loans in process.

Total loans were $2.1 billion at September 30, 2022, compared to $1.9 billion at December 31, 2021, an increase of $172.8 million, or 8.9%. At September 30, 2022, net PPP loans, which are in the commercial loan category, totaled $95 thousand compared to $12.2 million at December 31, 2021.

Average loans, including loans held for sale, were $2.1 billion and $1.9 billion for the third quarter of 2022 and 2021, respectively, an increase of $144.7 million, or 7.5%.

Loans held for sale totaled $2.9 million at September 30, 2022 and $8.5 million at December 31, 2021. Secondary loan production volume was $55.8 million for the nine month period ended September 30, 2022 and $113.7 million for the same period of 2021. These loans were approximately 75% purchase and 25% refinancing for the quarter ended September 30, 2022, and 35% purchase and 65% refinance for the year ended December 31, 2021.

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 (dollars in thousands):

	As of September 30, 2022
	Maturing within one year		Maturing after one but within five years		Maturing after five but within fifteen years		Maturing after fifteen years		Total
Real estate:
Construction and land development	$	15,861	$	160,644	$	27,493	$	6,502	$	210,500
Commercial real estate - owner occupied		39,863		232,503		149,575		1,737		423,678
Commercial real estate - non-owner occupied		42,859		464,658		219,941		37,505		764,963
Residential real estate		20,176		147,595		133,747		22,950		324,468
Home equity		4,452		27,470		61,737		—		93,659
Total real estate		123,211		1,032,870		592,493		68,694		1,817,268

Commercial and industrial		52,266		152,076		88,197		3,002		295,541
Consumer		583		3,743		351		1,929		6,606

Total loans, net of deferred fees and costs	$	176,060	$	1,188,689	$	681,041	$	73,625	$	2,119,415

Interest rate sensitivity:
Fixed interest rates	$	136,115	$	1,024,982	$	484,532	$	38,036	$	1,683,665
Floating or adjustable rates		40,206		163,706		196,509		35,329		435,750

Total loans, gross	$	176,321	$	1,188,688	$	681,041	$	73,365	$	2,119,415

Table of Contents

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, 2022, the ALLL was $19.2 million compared to $18.7 million at December 31, 2021. The ALLL as a percentage of total loans at such dates was 0.91% and 0.96%, respectively. Management will continue to evaluate the adequacy of the Company's ALLL.

The Company recognized a provision of $615 thousand in the third quarter of 2022 compared to $482 thousand in the same quarter of 2021. The provision expense for the third quarter of 2022 was a function of continued loan growth during the period. The increased provision expense as compared to the same quarter in 2021 was also associated with downward adjustments in qualitative factors during the previous period as the economy improved. Net recoveries for the three months ended September 30, 2022 were $69 thousand compared to $51 thousand for the same 2021 period.

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 0.92% at September 30, 2022, compared to 1.01% at December 31, 2021. On a dollar basis, the reserve was $18.4 million at September 30, 2022, compared to $18.0 million at December 31, 2021. 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 ASC 310-40 loans, was 4.48% at September 30, 2022, compared to 0.30% at December 31, 2021. On a dollar basis, the reserve was $217 thousand at September 30, 2022 compared to $7 thousand at December 31, 2021. The increase in the reserve was related to one loan relationship.

The specific allowance does not include reserves related to acquired loans with deteriorated credit quality. This reserve was $616 thousand at September 30, 2022 compared to $667 thousand at December 31, 2021. 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):

	Commercial			Construction and Land Development			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-owner Occupied			Residential Real Estate			Consumer			Total

Balance at December 31, 2021	$	2,668		$	1,397		$	3,964		$	7,141		$	3,458		$	50		$	18,678
Provision for (recovery of) loan losses		60			487			(313	)		(48	)		200			52			438
Charge-offs		(78	)		—			—			—			(5	)		(102	)		(185	)
Recoveries		103			—			19			3			37			96			258
Balance at September 30, 2022	$	2,753		$	1,884		$	3,670		$	7,096		$	3,690		$	96		$	19,189

Average Loans		235,415			171,548			428,382			773,457			397,571			6,532			2,012,905
Ratio of net (recoveries) charge-offs to average loans		(0.01	)%		0.00	%		(0.01	)%		(0.00	)%		(0.01	)%		0.12	%		(0.00	)%

	Commercial			Construction and Land Development			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-owner Occupied			Residential Real Estate			Consumer			Total

Balance at December 31, 2020	$	3,373		$	1,927		$	4,340		$	7,626		$	4,067		$	70		$	21,403
(Recovery of) provision for 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

Average Loans		354,711			143,764			390,718			689,838			370,282			7,139			1,956,452
Ratio of net (recoveries) charge-offs to average loans		(0.01	)%		0.00	%		(0.00	)%		(0.00	)%		(0.02	)%		(0.13	)%		(0.01	)%

Table of Contents

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, 2022			December 31, 2021
Allowance to loans ⁽¹⁾		0.91	%		0.96	%
ASC 450 (FAS 5) ALLL to ASC 450 loans		0.92			1.01
Net recoveries to allowance ⁽²⁾		(0.51	)		(0.54	)
Net recoveries to average loans ⁽²⁾		(0.00	)		(0.01	)
Nonperforming assets to total assets		0.05			0.07
Nonperforming loans to loans		0.06			0.11
Provision (recoveries) to net charge-offs ⁽²⁾		(600.00	)		2,825.00
Recovery of provision to average loans ⁽²⁾		0.03			(0.14	)
Allowance to nonperforming loans		1,614.00			841.00

__________________________

(1) - Excluding PPP loans, 0.91% at September 30, 2022 and 0.97% at December 31, 2021

(2) - 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 0.06% at September 30, 2022 and 0.11% at December 31, 2021. Nonperforming assets include nonperforming loans, OREO and repossessions. Nonperforming assets represented 0.05% and 0.07% of total assets at September 30, 2022 and December 31, 2021, respectively. The decrease in nonperforming assets resulted from a decrease of $835 thousand in nonperforming loans.

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.

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. Total impaired loans, exclusive of purchased credit impaired loans, at September 30, 2022 and December 31, 2021 were $4.8 million and $2.2 million, respectively.

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 $4.0 million in TDRs at September 30, 2022 and $1.7 million at December 31, 2021.

Other Real Estate Owned

OREO was $143 thousand at September 30, 2022 and December 31, 2021. 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.

Table of Contents

Deposits

The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Total deposits were $2.7 billion at September 30, 2022 and $2.9 billion at December 31, 2021.

Average interest-bearing deposits were $1.7 billion for the third quarter of 2022, compared to $1.8 billion for the third quarter of 2021, a decrease of $93.7 million, or 5.2%. Average noninterest-bearing deposits for the 2022 quarter were $1.1 billion, compared to $951 million for the 2021 quarter, an increase of $100.9 million, or 10.6%.

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 2022 and the third quarter of 2021 was 0.17%.

Certificates of Deposit over $250,000

At September 30, 2022, certificates of deposit that met or exceeded the Federal Deposit Insurance Corporation ("FDIC") insurance limit held by the Company were $65.9 million, and were $153.2 million at December 31, 2021. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limits at September 30, 2022 (dollars in thousands):

	September 30, 2022
3 months or less	$	15,148
Over 3 through 6 months		5,923
Over 6 through 12 months		13,246
Over 12 months		31,602
Total	$	65,919

The Company's total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.0 billion at September 30, 2022 and approximately $1.2 billion December 31, 2021. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

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 $313 million at September 30, 2022 compared to $355 million at December 31, 2021, a decrease of $41.4 million, or 11.7%. The Company's tangible common equity at September 30, 2022 was 7.59% compared to December 31, 2021 of 8.17%. This decrease is attributable to an increase in net unrealized losses in the available for sale portfolio which increased $71.4 million from December 31, 2021.

The Company paid cash dividends of $0.84 per share during the nine months of 2022 while the aggregate diluted earnings per share for the same period was $2.47.

The following table provides information on the regulatory capital ratios for the Company and the Bank at September 30, 2022 and December 31, 2021. Management believes, as of September 30, 2022, that the Company and the Bank more than satisfy all capital adequacy requirements to which they are subject.

	Percentage At September 30, 2022						Percentage At December 31, 2021
Risk-Based Capital Ratios:	Company			Bank			Company			Bank

Common equity tier 1 capital ratio		11.80	%		12.69	%		12.43	%		13.15	%
Tier 1 capital ratio		12.98			12.69			13.73			13.15
Total capital ratio		13.80			13.51			14.61			14.03

Leverage Capital Ratio:

Tier 1 leverage ratio		9.92			9.70			9.13			8.76

Stock Repurchase Program

The Company has an approved one year stock repurchase plan that authorizes repurchases of up to $13 million of the Company's common stock through December 31, 2022.

The Company repurchased 60,104 shares at an average cost of $34.26 per share, for a total of $2.1 million, in the third quarter of 2022. During the nine month period ended September 30, 2022, the Company repurchased 203,719 shares at an average cost of $36.26 per share, for a total cost of $7.4 million. In 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 $8.1 million.

Table of Contents

Liquidity

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

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

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

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

The Company has a line of credit with the FHLB, equal to 30% of the Bank's assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB. The Company had $170.0 million and $275.0 million outstanding in letters of credit at September 30, 2022 and December 31, 2021, 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 $60.0 million and has access to the Federal Reserve Bank of Richmond's discount window.

The Company has a relationship with IntraFi Promontory Network, allowing the Company to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250 thousand. This gives the Company the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, 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 IntraFi to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, IntraFi can provide the Company with another funding option. Thus, it 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 IntraFi's program as of September 30, 2022 and December 31, 2021, were $0 and $550 thousand, respectively.

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, 2022 and at December 31, 2021 were as follows (dollars in thousands):

	September 30, 2022		December 31, 2021
Commitments to extend credit	$	631,701	$	654,436
Standby letters of credit		12,577		10,201
Mortgage loan rate-lock commitments		4,099		10,891

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.

Table of Contents

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, 2022 is asset sensitive. Management expects that the general direction of short-term market interest rates will be increasing in the near term due to the anticipated continuation of monetary policy tightening actions of the Federal Reserve, but the outlook is less certain for longer-term rates during the remainder of 2022 and beyond.

Earnings Simulation

The following table shows the estimated impact of changes in interest rates on net interest income as of September 30, 2022 (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, 2022
	Change in Net Interest Income
Change in interest rates	Amount			Percent
Up 4.00%	$	4,644			4.6	%
Up 3.00%		3,491			3.5
Up 2.00%		2,375			2.4
Up 1.00%		1,270			1.3
Flat		—			—
Down 1.00%		(3,619	)		(3.6	)
Down 2.00%		(8,914	)		(8.8	)
Down 3.00%		(14,679	)		(14.6	)

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.

Table of Contents

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, 2022 (dollars in thousands):

Estimated Changes in Economic Value of Equity

	September 30, 2022
Change in interest rates	Amount		$ Change			% Change
Up 4.00%	$	628,324	$	148,202			30.9	%
Up 3.00%		600,772		120,650			25.1
Up 2.00%		568,000		87,878			18.3
Up 1.00%		528,308		48,186			10.0
Flat		480,122		—			—
Down 1.00%		410,207		(69,915	)		(14.6	)
Down 2.00%		323,799		(156,323	)		(32.6	)
Down 3.00%		233,178		(246,944	)		(51.4	)

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, 2022. 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, 2022 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

Table of Contents

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, 2021 filed with the SEC on March 14, 2022.

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

The Company has an approved one year stock repurchase plan that authorizes the repurchase of up to $13 million of the Company's common stock through December 31, 2022. 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, 2022 as detailed below. Under the stock repurchase program, the Company has the remaining authority to repurchase up to $5.6 million of the Company's common stock as of September 30, 2022.

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 Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs (in 000's)

July 31, 2022		5,400	$	35.21		5,400	$	7,482
August 31, 2022		30,201		35.15		30,201	$	6,366
September 30, 2022		24,503		32.95		24,503	$	5,613
Total		60,104	$	34.26		60,104

Table of Contents

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

Table of Contents

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, 2022, 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 8, 2022		(principal executive officer)

	By:	/s/ Jeffrey W. Farrar
		Jeffrey W. Farrar
		Executive Vice President,
		Chief Operating Officer and
		Chief Financial Officer
Date - November 8, 2022		(principal financial officer)

	By:	/s/ Cathy W. Liles
		Cathy W. Liles
		Senior Vice President and
		Chief Accounting Officer
Date - November 8, 2022		(principal accounting officer)