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

americannb20220331_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 March 31, 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 May 2, 2022, the Company had 10,705,799 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 March 31, 2022 (unaudited) and December 31, 2021	3

		Consolidated Statements of Income for the three months ended March 31, 2022 and 2021 (unaudited)	4

		Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2022 and 2021 (unaudited)	5

		Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2022 and 2021 (unaudited)	6

		Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited)	7

		Notes to Consolidated Financial Statements (unaudited)	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41

	Item 4.	Controls and Procedures	42

Part II.		OTHER INFORMATION

	Item 1.	Legal Proceedings	43

	Item 1A.	Risk Factors	43

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

	Item 3.	Defaults Upon Senior Securities	44

	Item 4.	Mine Safety Disclosures	44


	Item 5.	Other Information	44

	Item 6.	Exhibits	45

SIGNATURES			46

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

American National Bankshares Inc.
Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	*(Unaudited) March 31, 2022*			*December 31, 2021*
Assets					*
Cash and due from banks	$	34,506		$	23,095
Interest-bearing deposits in other banks		452,562			487,773
Securities available for sale, at fair value		686,176			692,467
Restricted stock, at cost		8,484			8,056
Loans held for sale		2,524			8,481
Loans, net of deferred fees and costs		1,988,008			1,946,580
Less allowance for loan losses		(17,988	)		(18,678	)
Net loans		1,970,020			1,927,902
Premises and equipment, net		35,383			35,564
Other real estate owned, net of valuation allowance		143			143
Goodwill		85,048			85,048
Core deposit intangibles, net		4,297			4,627
Bank owned life insurance		29,159			29,107
Other assets		37,936			32,334
Total assets	$	3,346,238		$	3,334,597

Liabilities
Noninterest-bearing deposits	$	1,024,778		$	1,009,081
Interest-bearing deposits		1,901,429			1,881,272
Total deposits		2,926,207			2,890,353
Customer repurchase agreements		38,527			41,128
Long-term borrowings		28,257			28,232
Other liabilities		18,173			20,092
Total liabilities		3,011,164			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, 10,713,958 shares outstanding at March 31, 2022 and 10,766,967 shares outstanding at December 31, 2021		10,638			10,710
Capital in excess of par value		144,848			147,777
Retained earnings		207,373			201,380
Accumulated other comprehensive loss, net		(27,785	)		(5,075	)
Total shareholders' equity		335,074			354,792
Total liabilities and shareholders' equity	$	3,346,238		$	3,334,597

*	Derived from audited consolidated financial statements

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

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American National Bankshares Inc.

Consolidated Statements of Income

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

	*Three Months Ended March 31,*
	*2022*			*2021*
Interest and Dividend Income:
Interest and fees on loans	$	18,788		$	22,273
Interest and dividends on securities:
Taxable		2,239			1,632
Tax-exempt		90			103
Dividends		113			119
Other interest income		177			77
Total interest and dividend income		21,407			24,204
Interest Expense:
Interest on deposits		569			1,287
Interest on short-term borrowings		6			11
Interest on long-term borrowings		379			483
Total interest expense		954			1,781
Net Interest Income		20,453			22,423
Recovery of loan losses		(758	)		—
Net Interest Income After Recovery of Loan Losses		21,211			22,423
Noninterest Income:
Wealth management income		1,809			1,424
Service charges on deposit accounts		689			622
Interchange fees		981			889
Other fees and commissions		266			250
Mortgage banking income		673			1,318
Income from Small Business Investment Companies		493			428
Income from insurance investments		447			788
Gains (losses) on premises and equipment, net		4			(49	)
Other		238			252
Total noninterest income		5,600			5,922
Noninterest Expense:
Salaries and employee benefits		8,598			7,518
Occupancy and equipment		1,542			1,533
FDIC assessment		239			224
Bank franchise tax		476			438
Core deposit intangible amortization		330			381
Data processing		847			778
Software		363			329
Other real estate owned, net		(1	)		117
Other		2,955			2,747
Total noninterest expense		15,349			14,065
Income Before Income Taxes		11,462			14,280
Income Taxes		2,463			2,991
Net Income	$	8,999		$	11,289
Net Income Per Common Share:
Basic	$	0.84		$	1.03
Diluted	$	0.84		$	1.03
Weighted Average Common Shares Outstanding:
Basic		10,754,287			10,971,466
Diluted		10,756,902			10,976,177

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

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

	*Three Months Ended March 31,*
	*2022*			*2021*
Net income	$	8,999		$	11,289

Other comprehensive loss:

Unrealized losses on securities available for sale		(30,861	)		(5,882	)
Tax effect		6,662			1,271

Unrealized gains on cash flow hedges		1,885			1,781
Tax effect		(396	)		(374	)

Other comprehensive loss		(22,710	)		(3,204	)

Comprehensive (loss) income	$	(13,711	)	$	8,085

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

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American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended March 31, 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		—			—			11,289			—			11,289

Other comprehensive loss		—			—			—			(3,204	)		(3,204	)

Stock repurchased (54,023)		(54	)		(1,540	)		—			—			(1,594	)

Vesting of restricted stock (15,315 shares)		15			(15	)		—			—			—

Equity based compensation (29,827 shares)		7			356			—			—			363

Cash dividends paid, $0.27 per share		—			—			(2,955	)		—			(2,955	)

Balance, March 31, 2021	$	10,894		$	153,651		$	178,015		$	(767	)	$	341,793

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

Net income		—			—			8,999			—			8,999

Other comprehensive loss		—			—			—			(22,710	)		(22,710	)

Stock repurchased (88,929 shares)		(89	)		(3,306	)		—			—			(3,395	)

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

Vesting of restricted stock (11,912 shares)		12			(12	)		—			—			—

Equity based compensation (4,249 shares)		4			378			—			—			382

Cash dividends paid, $0.28 per share		—			—			(3,006	)		—			(3,006	)

Balance, March 31, 2022	$	10,638		$	144,848		$	207,373		$	(27,785	)	$	335,074

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

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

	*Three Months Ended March 31,*
	*2022*			*2021*
Cash Flows from Operating Activities:
Net income	$	8,999		$	11,289
Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery of) provision for loan losses		(758	)		—
Depreciation		547			580
Net accretion of acquisition accounting adjustments		(556	)		(948	)
Core deposit intangible amortization		330			381
Net amortization of securities		500			406
Gain on sale of loans held for sale		(673	)		(1,318	)
Proceeds from sales of loans held for sale		26,414			40,166
Originations of loans held for sale		(19,784	)		(41,186	)
Net loss on other real estate owned		—			111
Net gain (loss) on sale or disposal of premises and equipment		(4	)		49
Equity based compensation expense		382			363
Net change in bank owned life insurance		(52	)		(153	)
Deferred income tax expense		641			106
Net change in other assets		114			389
Net change in other liabilities		(34	)		3,420
Net cash provided by operating activities		16,066			13,655

Cash Flows from Investing Activities:
Proceeds from maturities, calls and paydowns of securities available for sale		42,594			55,825
Purchases of securities available for sale		(67,664	)		(78,165	)
Net change in restricted stock		(428	)		691
Net (increase) decrease in loans		(40,794	)		37,381
Proceeds from sale of premises and equipment		4			4
Purchases of premises and equipment		(366	)		(246	)
Proceeds from sales of other real estate owned		—			404
Net cash (used in) provided by investing activities		(66,654	)		15,894

Cash Flows from Financing Activities:
Net change in noninterest-bearing deposits		15,697			77,627
Net change in interest-bearing deposits		20,081			(56,401	)
Net change in customer repurchase agreements		(2,601	)		(3,346	)
Common stock dividends paid		(3,006	)		(2,955	)
Repurchase of common stock		(3,395	)		(1,594	)
Proceeds from exercise of stock options		12			—
Net cash provided by financing activities		26,788			13,331
Net (Decrease) Increase in Cash and Cash Equivalents		(23,800	)		42,880
Cash and Cash Equivalents at Beginning of Period		510,868			374,370
Cash and Cash Equivalents at End of Period	$	487,068		$	417,250

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

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AMERICAN NATIONAL BANKSHARES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Accounting Policies

The consolidated financial statements include the accounts of American National Bankshares Inc. (NASDAQ: AMNB) (the "Company") and its wholly-owned subsidiary, American National Bank and Trust Company (the "Bank"). The Company is a multi-state bank holding company headquartered in Danville, Virginia. The Bank is a community bank organization serving Virginia and North Carolina with 26 banking offices. In addition to traditional retail, commercial and mortgage offerings, the Bank also provides trust and investment services through its Trust and Investment Services Division.

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

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 FASB issued 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 Bank/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 has begun running parallel models to assess and refine assumptions and methodologies. Management will continue 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 ASC 326, Financial Instruments - Credit Losses. It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

In March 2022, the Financial Accounting Standards Board (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 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 TDRs, 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.

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Note 2 – Securities

The amortized cost and fair value of investments in securities available for sale at March 31, 2022 were as follows (dollars in thousands):

	*March 31, 2022*
	*Amortized Cost*		*Unrealized Gains*		*Unrealized Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	152,260	$	—	$	7,425	$	144,835
Federal agencies and GSEs		107,000		279		3,432		103,847
Mortgage-backed and CMOs		362,605		216		19,833		342,988
State and municipal		67,894		179		2,396		65,677
Corporate		29,450		100		721		28,829
Total securities available for sale	$	719,209	$	774	$	33,807	$	686,176

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

	*March 31, 2022*		*December 31, 2021*
FRB stock	$	6,511	$	6,500
FHLB stock		1,973		1,556
Total restricted stock	$	8,484	$	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 March 31, 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 March 31, 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	$	144,835	$	7,425	$	144,835	$	7,425	$	—	$	—
Federal agencies and GSEs		91,878		3,432		66,968		1,591		24,910		1,841
Mortgage-backed and CMOs		329,564		19,833		270,590		13,849		58,974		5,984
State and municipal		45,065		2,396		38,077		1,642		6,988		754
Corporate		21,029		721		21,029		721		—		—
Total	$	632,371	$	33,807	$	541,499	$	25,228	$	90,872	$	8,579

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The table below shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 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. None of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2022.

Federal agencies and GSEs: The unrealized losses on the Company's investment in 41 government sponsored entities ("GSE") securities were caused by normal market fluctuations. Fourteen 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 March 31, 2022.

Mortgage-backed securities: The unrealized losses on the Company's investment in 82 GSE mortgage-backed securities were caused by normal market fluctuations. Nine 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 March 31, 2022.

Collateralized Mortgage Obligations: The unrealized losses associated with 49 GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. Six 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 March 31, 2022.

State and municipal securities: The unrealized losses on 66 state and municipal securities were caused by normal market fluctuations. Eleven 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 March 31, 2022.

Corporate securities: The unrealized losses on six corporate securities were caused by normal market fluctuations and not credit deterioration. None of these securities were in an unrealized loss position for 12 months or more. Only one of these securities is rated (Baa2 by Moody's), 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 March 31, 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 March 31, 2022, and no impairment has been recognized.

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Other-Than-Temporarily-Impaired Securities

As of March 31, 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 months ended March 31, 2022 and 2021.

Note 3 – Loans

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

	*March 31, 2022*		*December 31, 2021*
Commercial	$	291,697	$	299,773
Commercial real estate:
Construction and land development		148,276		134,221
Commercial real estate - owner occupied		402,306		391,517
Commercial real estate - non-owner occupied		752,817		731,034
Residential real estate:
Residential		295,949		289,757
Home equity		89,593		93,203
Consumer		7,370		7,075
Total loans, net of deferred fees and costs	$	1,988,008	$	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 March 31, 2022 and December 31, 2021 are as follows (dollars in thousands):

	*March 31, 2022*		*December 31, 2021*
Outstanding principal balance	$	152,863	$	163,574
Carrying amount		146,863		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):

	*March 31, 2022*		*December 31, 2021*
Outstanding principal balance	$	22,174	$	24,696
Carrying amount		17,633		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 three months ended March 31, 2022 and the year ended December 31, 2021 (dollars in thousands):

	*March 31, 2022*			*December 31, 2021*
Balance at January 1	$	4,902		$	6,513
Accretion		(670	)		(5,292	)
Reclassification from nonaccretable difference		382			2,780
Other changes, net (1)		(253	)		901
	$	4,361		$	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.

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Past Due Loans

The following table shows an analysis by portfolio segment of the Company's past due loans at March 31, 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	$	—	$	—	$	—	$	17	$	17	$	291,680	$	291,697
Commercial real estate:
Construction and land development		—		—		—		—		—		148,276		148,276
Commercial real estate - owner occupied		—		—		—		4		4		402,302		402,306
Commercial real estate - non-owner occupied		—		240		—		1,073		1,313		751,504		752,817
Residential:
Residential		593		—		—		581		1,174		294,775		295,949
Home equity		24		—		50		87		161		89,432		89,593
Consumer		3		—		21		—		24		7,346		7,370
Total	$	620	$	240	$	71	$	1,762	$	2,693	$	1,985,315	$	1,988,008

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

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Impaired Loans

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at March 31, 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		—		—		—		8		—
Commercial real estate - non-owner occupied		1,159		1,160		—		1,172		1
Residential:
Residential		852		859		—		1,013		6
Home equity		4		4		—		4		—
Consumer		—		—		—		—		—
	$	2,015	$	2,023	$	—	$	2,197	$	7
With a related allowance recorded:
Commercial	$	10	$	2	$	2	$	12	$	—
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—
Commercial real estate - non-owner occupied		—		—		—		—		—
Residential
Residential		—		—		—		—		—
Home equity		—		—		—		—		—
Consumer		—		—		—		—		—
	$	10	$	2	$	2	$	12	$	—
Total:
Commercial	$	10	$	2	$	2	$	12	$	—
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		8		—
Commercial real estate - non-owner occupied		1,159		1,160		—		1,172		1
Residential:
Residential		852		859		—		1,013		6
Home equity		4		4		—		4		—
Consumer		—		—		—		—		—
	$	2,025	$	2,025	$	2	$	2,209	$	7

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

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The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 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		—		—		—		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 March 31, 2022 and 2021 there were no loans modified as troubled debt restructurings ("TDRs"). During the three months ended March 31, 2022, the Company had no restructures that subsequently defaulted within 12 months of modification. During the three months ended March 31, 2021, the Company had one commercial real estate - non-owner occupied loan with a recorded investment of $259,000 at restructure and one commercial loan with a recorded investment of $106,000 at restructure that subsequently defaulted within 12 months of modification. 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.

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 March 31, 2022, the commercial real estate portfolio included concentrations of $84 million, $46 million and $208 million in hotel, restaurants, and retail loans, respectively. These concentrations total 4.2%, 2.3%, and 10.5% of total loans, respectively, excluding loans in process.

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Residential Real Estate in Process of Foreclosure

The Company had $54 thousand in residential loans in process of foreclosure at March 31, 2022 and $103 thousand in process of foreclosure at December 31, 2021, respectively. The Company had no residential other real estate owned ("OREO") at March 31, 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 March 31, 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	$	285,407	$	147,153	$	385,250	$	744,789	$	292,447	$	89,220
Special Mention		5,792		—		10,429		4,355		973		—
Substandard		498		1,123		6,627		3,673		2,529		373
Doubtful		—		—		—		—		—		—
Total	$	291,697	$	148,276	$	402,306	$	752,817	$	295,949	$	89,593

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	*Consumer*
Performing	$	7,370
Nonperforming		—
Total	$	7,370

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

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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):

	*Three Months Ended March 31, 2022*			*Year Ended December 31, 2021*			*Three Months Ended March 31, 2021*
Allowance for Loan Losses
Balance, beginning of period	$	18,678		$	21,403		$	21,403
Recovery of loan losses		(758	)		(2,825	)		—
Charge-offs		(37	)		(146	)		(22	)
Recoveries		105			246			35
Balance, end of period	$	17,988		$	18,678		$	21,416

Reserve for Unfunded Lending Commitments
Balance, beginning of period	$	386		$	304		$	304
Provision for (recovery of) unfunded commitments		26			82			(1	)
Balance, end of period	$	412		$	386		$	303

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 three months ended March 31, 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
(Recovery of) provision for loan losses		(261	)		(16	)		(327	)		(17	)		(142	)		5			(758	)
Charge-offs		(3	)		—			—			—			(5	)		(29	)		(37	)
Recoveries		72			—			2			1			4			26			105
Balance at March 31, 2022	$	2,476		$	1,381		$	3,639		$	7,125		$	3,315		$	52		$	17,988

Balance at March 31, 2022:

Allowance for Loan Losses
Individually evaluated for impairment	$	2		$	—		$	—		$	—		$	—		$	—		$	2
Collectively evaluated for impairment		2,455			1,351			3,615			6,591			3,268			52			17,332
Purchased credit impaired loans		19			30			24			534			47			—			654
Total	$	2,476		$	1,381		$	3,639		$	7,125		$	3,315		$	52		$	17,988

Loans
Individually evaluated for impairment	$	10		$	—		$	—		$	1,159		$	856		$	—		$	2,025
Collectively evaluated for impairment		291,416			148,072			393,689			747,177			380,647			7,349			1,968,350
Purchased credit impaired loans		271			204			8,617			4,481			4,039			21			17,633
Total	$	291,697		$	148,276		$	402,306		$	752,817		$	385,542		$	7,370		$	1,988,008

__________________________

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

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The following table presents changes in the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at and for the year ended December 31, 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 negative provision (recovery) for loan losses of ($758) thousand for the first quarter of 2022, as compared to a negative provision (recovery) of ($2.8) million for the fourth quarter of 2021, and no provision expense or recovery for the first quarter of 2021. The first quarter of 2022 and fourth quarter of 2021 negative provisions were the result of continued improvement in economic conditions, ongoing low charge-off and delinquency rates, and overall strong asset quality metrics. The provision expense that would have been required in the first quarter of 2021 based on loan activity was offset by the adjustments to 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 at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is 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 we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill, which was the annual evaluation at June 30, 2021, the Company concluded that no impairment existed. No indicators of impairment were identified during the three months ended March 31, 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 three months ended March 31, 2022, are as follows (dollars in thousands):

	*Goodwill*		*Intangibles*
Balance at December 31, 2021	$	85,048	$	4,627
Amortization		—		(330	)
Balance at March 31, 2022	$	85,048	$	4,297

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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):

	*March 31, 2022*			*December 31, 2021*
Lease liabilities	$	3,928		$	4,023
Right-of-use assets	$	3,845		$	3,939
Weighted average remaining lease term (years)		6.92			6.90
Weighted average discount rate		3.07	%		3.09	%

	*Three Months Ended March 31, 2022*		*Three Months Ended March 31, 2021*
Lease cost
Operating lease cost	$	267	$	269
Short-term lease cost		—		1
Total lease cost	$	267	$	270

Cash paid for amounts included in the measurement of lease liabilities	$	269	$	251

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 March 31, 2022*
Nine months ending December 31, 2022	$	792
Twelve months ending December 31, 2023		963
Twelve months ending December 31, 2024		533
Twelve months ending December 31, 2025		490
Twelve months ending December 31, 2026		279
Twelve months ending December 31, 2027		208
Thereafter		1,143
Total undiscounted cash flows		4,408
Discount		(480	)
Lease liabilities	$	3,928

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

		*March 31, 2022*				*December 31, 2021*
Customer repurchase agreements		$	38,527			$	41,128

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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 March 31, 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 FHLB as of March 31, 2022 or December 31, 2021.The Company had junior subordinated debt at March 31, 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 March 31, 2022, the Bank's public deposits totaled $316.4 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 March 31, 2022, the Company had $270.0 million in letters of credit with the FHLB outstanding, as well as $114.1 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. The proceeds of the Junior Subordinated Debt were used to fund the cash portion of the merger consideration to the former shareholders of Community First Financial Corporation in connection with the Company's acquisition of that company in 2006, and for general corporate purposes.

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

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

Principal Amount

Issuing Entity

Date Issued

Interest Rate

Maturity Date

March 31, 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

4,559

4,545

MidCarolina Trust II

12/3/2003

LIBOR plus 2.95%

10/7/2033

3,079

3,068

28,257

28,232

The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $596 thousand and $530 thousand at March 31, 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.

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

	*March 31, 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	$	—	$	915	$	2,850

	*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

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 March 31, 2022, the Company had 4,150 outstanding and exercisable stock options remaining from the HomeTown acquisition at an exercise price of $16.63. The outstanding options have a remaining final maturity date of December 2024 and have an aggregate value of $87 thousand. As of March 31, 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 majority of the restricted stock granted cliff vests at the end of a 36-month period beginning on the date of the grant. The remainder vests one-third each year beginning on the date of the grant. Nonvested restricted stock activity for the three months ended March 31, 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		31,232			38.06
Vested		(12,575	)		32.06
Forfeited		(274	)		31.63
Nonvested at March 31, 2022		76,844		$	34.39

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As of March 31, 2022 and December 31, 2021, there was $1.7 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 1.96 years. The share based compensation expense for nonvested restricted stock was $219 thousand and $176 thousand during the first three 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 4,249 and 6,347 shares and recognized share based compensation expense of $163 thousand and $187 thousand during the first three months of 2022 and 2021, respectively.

Note 11 – Earnings Per Common Share

The following shows the weighted average number of shares used in computing earnings per common share and the effect on the weighted average number of shares of potentially dilutive common stock. Potentially dilutive common stock had no effect on income available to common shareholders. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period including voting rights and sharing in nonforfeitable dividends. The following table presents basic and diluted earnings per share for the three month periods ended March 31, 2022 and 2021:

	*Three Months Ended March 31,*
	*2022*				*2021*
	*Shares*		*Per Share Amount*		*Shares*		*Per Share Amount*
Basic earnings per share		10,754,287	$	0.84		10,971,466	$	1.03
Effect of dilutive securities - stock options		2,615		—		4,711		—
Diluted earnings per share		10,756,902	$	0.84		10,976,177	$	1.03

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 months ended March 31, 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.

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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 March 31, 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 March 31, 2022 Using*
	*Balance at March 31,*		*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	$	144,835	$	—	$	144,835	$	—
Federal agencies and GSEs		103,847		—		103,847		—
Mortgage-backed and CMOs		342,988		—		342,988		—
State and municipal		65,677		—		65,677		—
Corporate		28,829		—		28,829		—
Total securities available for sale	$	686,176	$	—	$	686,176	$	—
Loans held for sale	$	2,524	$	—	$	2,524	$	—
Liabilities:
Derivative - cash flow hedges	$	915	$	—	$	915	$	—

	*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.

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

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

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

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

	*Fair Value Measurements at March 31, 2022 Using*
	*Balance at March 31,*		*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	$	8	$	—	$	—	$	8
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 March 31, 2022 and December 31, 2021:

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

Impaired loans	Discounted appraised value	Selling cost	8.00%

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

__________________________

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

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

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The carrying values and the exit pricing concept fair values of the Company's financial instruments at March 31, 2022 are as follows (dollars in thousands):

	*Fair Value Measurements at March 31, 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	$	487,068	$	487,068	$	—	$	—	$	487,068
Securities available for sale		686,176		—		686,176		—		686,176
Restricted stock		8,484		—		8,484		—		8,484
Loans held for sale		2,524		—		2,524		—		2,524
Loans, net of allowance		1,970,020		—		—		1,956,996		1,956,996
Bank owned life insurance		29,159		—		29,159		—		29,159
Accrued interest receivable		5,731		—		5,731		—		5,731

Financial Liabilities:
Deposits	$	2,926,207	$	—	$	2,927,690	$	—	$	2,927,690
Repurchase agreements		38,527		—		38,527		—		38,527
Junior subordinated debt		28,257		—		—		28,029		28,029
Accrued interest payable		341		—		341		—		341
Derivative - cash flow hedges		915		—		915		—		915

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

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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 months ended March 31, 2022 and 2021 is shown in the following tables (dollars in thousands):

	*As of and For the Three Months Ended March 31, 2022*
	*Community Banking*		*Wealth Management*		*Total*
Interest income	$	21,407	$	—	$	21,407
Interest expense		954		—		954
Noninterest income		3,791		1,809		5,600
Noninterest expense		14,656		693		15,349
Income before income taxes		10,346		1,116		11,462
Net income		8,123		876		8,999
Depreciation and amortization		875		2		877
Total assets		3,345,962		276		3,346,238
Goodwill		85,048		—		85,048
Capital expenditures		366		—		366

	*As of and For the Three Months Ended March 31, 2021*
	*Community Banking*		*Wealth Management*		*Total*
Interest income	$	24,204	$	—	$	24,204
Interest expense		1,781		—		1,781
Noninterest income		4,498		1,424		5,922
Noninterest expense		13,401		664		14,065
Income before income taxes		13,520		760		14,280
Net income		10,688		601		11,289
Depreciation and amortization		958		3		961
Total assets		3,073,188		244		3,073,432
Goodwill		85,048		—		85,048
Capital expenditures		246		—		246

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Note 14 – Supplemental Cash Flow Information

Supplemental cash flow information as of and for the three months ended March 31, 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	$	34,506		$	33,266
Interest-bearing deposits in other banks		452,562			383,984
Cash and Cash Equivalents	$	487,068		$	417,250

Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest on deposits and borrowed funds	$	995		$	2,016
Income taxes		—			(1,205	)
Noncash investing and financing activities:
Net unrealized losses on securities available for sale		(30,861	)		(5,882	)
Net unrealized gains on cash flow hedges		1,885			1,781

Note 15 – Accumulated Other Comprehensive Income (Loss)

There were no re-classifications out of accumulated other comprehensive income ("AOCI") for the periods ended March 31, 2022 or 2021. Changes in each component of AOCI for the three months ended March 31, 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 December 31, 2020	$	7,920		$	(3,846	)	$	(1,637	)	$	2,437

Net unrealized losses on securities available for sale, net of tax, $(1,271)		(4,611	)		—			—			(4,611	)

Net unrealized gains on cash flow hedges, net of tax, $374		—			1,407			—			1,407

Balance at March 31, 2021	$	3,309		$	(2,439	)	$	(1,637	)	$	(767	)

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

Net unrealized losses on securities available for sale, net of tax, $(6,662)		(24,199	)		—			—			(24,199	)

Net unrealized gains on cash flow hedges, net of tax, $396		—			1,489			—			1,489

Balance at March 31, 2022	$	(25,900	)	$	(723	)	$	(1,162	)	$	(27,785	)

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

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

Forward-Looking Statements

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

A variety of factors, some of which are discussed in more detail in Item 1A – Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 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 the ongoing COVID-19 pandemic and the associated efforts to limit the spread of the virus;
	•	financial market volatility, including the level of interest rates, could affect the values of financial instruments and the amount of net interest income earned;
	•	the adequacy of the level of the Company's allowance for loan losses, the amount of loan loss provisions required in future periods, and the failure of assumptions underlying the allowance for loan losses;

•

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

•

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

•

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

•

the ability to recruit and retain key personnel;

•

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

	•	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) mergers and acquisitions, (3) acquired loans with specific credit-related deterioration, (4) goodwill and intangible assets, (5) deferred tax assets and liabilities, and (6) other-than-temporary impairment of securities. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K for the year ended December 31, 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.

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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.

Mergers and Acquisitions

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

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

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Acquired Loans with Specific Credit-Related Deterioration

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

Goodwill and Intangible Assets

The Company's goodwill was recognized in connection with past business combinations and is reported at the community banking segment. The Company reviews the carrying value of the goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is 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 we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill, which was the annual evaluation at June 30, 2021, the Company concluded that no impairment existed. No indicators of impairment were identified during the three months ended March 31, 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.

Deferred Tax Assets and Liabilities

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

Other-than-temporary Impairment of Securities

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

Non-GAAP Presentations

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

Internet Access to Corporate Documents

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

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RESULTS OF OPERATIONS

Executive Overview

First quarter 2022 financial highlights include the following:

•

Earnings produced a return on average assets (annualized) of 1.08% for the first quarter of 2022, compared to 1.35% in the previous quarter and 1.49% for the first quarter of 2021.

•

Average deposits declined 4.6% annualized during the first quarter but grew 11.6% over the same quarter of 2021; the cost of interest-bearing deposits decreased to 0.12% in the first quarter, compared to 0.14% in the previous quarter and 0.30% in the same quarter of the prior year.

•

Fully taxable equivalent net interest margin was 2.63% for the quarter, down from 2.93% in the previous quarter and down from 3.20% in the same quarter of the prior year.*

•

Noninterest revenues increased $756 thousand, or 15.6%, when compared to the previous quarter, and decreased $322 thousand, or 5.4%, compared to the same quarter in the prior year.

•

Noninterest expense decreased $114 thousand, or less than 1.0%, when compared to the previous quarter, and increased $1.3 million, or 9.1%, when compared to the same quarter in the prior year.

•

The Company recognized a negative provision for loan losses in the first quarter of 2022 of ($758) thousand compared to a negative provision of ($2.0) million in the fourth quarter of 2021 and no provision expense or recovery in the first quarter of 2021. Annualized net charge-offs (recoveries) as a percentage of average loans outstanding were (0.01%) for the first quarter of 2022, compared to none in the previous quarter or in the same quarter in the prior year.

•

Nonperforming assets as a percentage of total assets were 0.06% at March 31, 2022, down from 0.07% at December 31, 2021 and 0.10% at March 31, 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 March 31, 2022 and 2021

Net interest income on a taxable equivalent basis was $20.5 million, a decrease of $2.0 million, or 8.8%, for the first quarter of 2022 compared to $22.5 million for the same quarter of 2021. The decrease in net interest income from the same quarter in the prior year was attributable to decreased accretion and net fee income associated with Paycheck Protection Program ("PPP") loans partially offset by reduced deposit costs from a significantly lower rate environment in 2022. Average loan balances for the 2022 quarter were down $49.5 million or 2.5%, over the 2021 quarter, primarily due to PPP forgiveness. PPP loans had a net balance of $689 thousand at March 31, 2022, compared to $183.8 million at March 31, 2021. Total net PPP fees recognized in net interest income during the first quarter of 2022 were $273 thousand, compared to $3.4 million for the first quarter of 2021. Loan yields for the quarter were 60 basis points lower than the 2021quarter.

For the first quarter of 2022, the Company's yield on interest-earning assets was 2.75%, compared to 3.46% for the first quarter of 2021. The cost of interest-bearing liabilities was 0.20% for the 2022 period compared to 0.40% for the 2021 period. The interest rate spread was 2.55% for the 2022 period compared to 3.06% for the 2021 period. The net interest margin, on a fully taxable equivalent basis, was 2.63% for the 2022 period compared to 3.20% for the 2021 period, a decrease of 57 basis points. The decrease in net interest margin was driven by declining interest rates partially offset by PPP fee and accretion income earned.

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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 March 31, 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 March 31,
	2022		2021		2022		2021		2022			2021
	Average Balance				Income/Expense				Yield/Rate
Loans:
Commercial	$	290,051	$	464,677	$	2,632	$	5,790		3.68	%		5.05	%
Real estate		1,674,350		1,548,091		16,078		16,390		3.84			4.23
Consumer		6,509		7,635		112		127		6.98			6.75
Total loans		1,970,910		2,020,403		18,822		22,307		3.83			4.43

Securities:
U.S. Treasury		147,001		15,303		323		12		0.88			0.31
Federal agencies and GSEs		104,905		105,337		293		305		1.12			1.16
Mortgage-backed and CMOs		361,583		258,003		1,207		973		1.34			1.51
State and municipal		67,524		58,493		331		315		1.96			2.15
Other securities		29,860		21,624		312		275		4.18			5.09
Total securities		710,873		458,760		2,466		1,880		1.39			1.64

Deposits in other banks		444,778		335,128		177		77		0.16			0.09

Total interest-earning assets		3,126,561		2,814,291		21,465		24,264		2.75			3.46

Non-earning assets		193,753		212,661

Total assets	$	3,320,314	$	3,026,952

Deposits:
Demand	$	525,508	$	450,953		37		40		0.03			0.04
Money market		752,386		683,948		101		276		0.05			0.16
Savings		264,057		227,404		7		7		0.01			0.01
Time		338,922		378,113		424		964		0.51			1.03
Total deposits		1,880,873		1,740,418		569		1,287		0.12			0.30

Customer repurchase agreements		41,337		43,746		6		11		0.06			0.11
Long-term borrowings		28,241		35,640		379		483		5.37			5.41
Total interest-bearing liabilities		1,950,451		1,819,804		954		1,781		0.20			0.40

Noninterest-bearing demand deposits		1,000,020		842,121
Other liabilities		18,304		22,796
Shareholders' equity		351,539		342,231
Total liabilities and shareholders' equity	$	3,320,314	$	3,026,952

Interest rate spread										2.55	%		3.06	%
Net interest margin										2.63	%		3.20	%

Net interest income (taxable equivalent basis)						20,511		22,483
Less: Taxable equivalent adjustment						58		60
Net interest income					$	20,453	$	22,423

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

	Three Months Ended March 31,
	2022 vs. 2021
				Change
	Increase			Attributable to
	(Decrease)			Rate			Volume
Interest income
Loans:
Commercial	$	(3,158	)	$	(1,325	)	$	(1,833	)
Real estate		(312	)		(1,591	)		1,279
Consumer		(15	)		4			(19	)
Total loans		(3,485	)		(2,912	)		(573	)
Securities:
U.S. Treasury		311			54			257
Federal agencies and GSEs		(12	)		(11	)		(1	)
Mortgage-backed and CMOs		234			(122	)		356
State and municipal		16			(30	)		46
Other securities		37			(55	)		92
Total securities		586			(164	)		750
Deposits in other banks		100			69			31
Total interest income		(2,799	)		(3,007	)		208

Interest expense
Deposits:
Demand		(3	)		(9	)		6
Money market		(175	)		(200	)		25
Savings		—			(1	)		1
Time		(540	)		(449	)		(91	)
Total deposits		(718	)		(659	)		(59	)
Customer repurchase agreements		(5	)		(4	)		(1	)
Long-term borrowings		(104	)		(5	)		(99	)
Total interest expense		(827	)		(668	)		(159	)
Net interest income (taxable equivalent basis)	$	(1,972	)	$	(2,339	)	$	367

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Noninterest Income

Three months ended March 31, 2022 and 2021

For the quarter ended March 31, 2022, noninterest income decreased $322 thousand, or 5.4%, compared to the comparable 2021 quarter. Details of individual accounts are shown in the table below.

	Three Months Ended March 31,
	(Dollars in thousands)
	2022		2021			$ Change			% Change
Noninterest income:
Wealth management income	$	1,809	$	1,424		$	385			27.0	%
Service charges on deposit accounts		689		622			67			10.8
Interchange fees		981		889			92			10.3
Other fees and commissions		266		250			16			6.4
Mortgage banking income		673		1,318			(645	)		(48.9	)
Income from Small Business Investment Companies		493		428			65			(15.2	)
Income from insurance investments		447		788			(341	)		(43.3	)
Gains (losses) on premises and equipment, net		4		(49	)		53			108.2
Other		238		252			(14	)		(5.6	)
Total noninterest income	$	5,600	$	5,922		$	(322	)		(5.4	)

Wealth management income increased $385 thousand for the three months ended March 31, 2022 compared to the same quarter in 2021 the result of growth in clients, growth in market value and a $200 thousand non-recurring estate settlement fee. Mortgage banking income decreased $645 thousand in the 2022 quarter compared to the 2021 quarter reflecting decreased demand for refinancing and lack of inventory, which decreased the demand for new home financing. Interchange income increased $92 thousand in the 2022 quarter compared to the 2021 quarter as debit card usage increased. Income from insurance investments decreased $341 thousand as the Company received less distributions during the three months ended March 31, 2022 compared to the same quarter in 2021.

Noninterest Expense

Three months ended March 31, 2022 and 2021

For the three months ended March 31, 2022, noninterest expense increased $1.3 million, or 9.1%, compared to the same quarter of 2021. Details of individual accounts are shown in the table below.

	Three Months Ended March 31,
	(Dollars in thousands)
	2022			2021		$ Change			% Change
Noninterest Expense
Salaries and employee benefits	$	8,598		$	7,518	$	1,080			14.4	%
Occupancy and equipment		1,542			1,533		9			0.6
FDIC assessment		239			224		15			6.7
Bank franchise tax		476			438		38			8.7
Core deposit intangible amortization		330			381		(51	)		(13.4	)
Data processing		847			778		69			8.9
Software		363			329		34			10.3
Other real estate owned, net		(1	)		117		(118	)		(100.9	)
Other		2,955			2,747		208			7.6
Total noninterest expense	$	15,349		$	14,065	$	1,284			9.1

Salaries and employee benefits increased $1.1 million in the 2022 quarter as compared to the 2021 quarter. The 2022 quarter reflected increases for annual salary and incentive accrual adjustments and reduced salary deferrals for loan origination costs in the 2022 quarter. The first quarter of 2021 reflected a reduction in salary expenses of $604 thousand associated with the origination of PPP loans which were deferred and recognized over the life of the loans. Other real estate owned ("OREO"), net decreased $118 thousand from the first quarter of 2021, where a loss on the sale of OREO of $111 thousand was recognized. The increase in other expenses in the first quarter of 2022 compared to the first quarter of 2021 was primarily attributable to annual vendor price increases for operational expenses and additional costs associated with investments in technology.

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Non-GAAP Financial Measures

The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of OREO 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 57.53% compared to 47.70% 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 March 31,
	2022			2021
Efficiency Ratio
Noninterest expense	$	15,349		$	14,065
Subtract: gain on sale of OREO, net of write-downs		—			(111	)
Subtract: core deposit intangible amortization		(330	)		(381	)
	$	15,019		$	13,573

Net interest income	$	20,453		$	22,423
Tax equivalent adjustment		58			60
Noninterest income		5,600			5,922
Add: (gain)/loss on fixed assets		(4	)		49
	$	26,107		$	28,454

Efficiency ratio		57.53	%		47.70	%

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 March 31,
	2022			2021
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income
Non-GAAP measures:
Interest income - loans	$	18,822		$	22,307
Interest income - investments and other		2,643			1,957
Interest expense - deposits		(569	)		(1,287	)
Interest expense - customer repurchase agreements		(6	)		(11	)
Interest expense - long-term borrowings		(379	)		(483	)
Total net interest income	$	20,511		$	22,483
Less non-GAAP measures:
Tax benefit realized on non-taxable interest income - loans	$	(34	)	$	(34	)
Tax benefit realized on non-taxable interest income - municipal securities		(24	)		(26	)
GAAP measures net interest income	$	20,453		$	22,423

Income Taxes

The effective tax rate for the first quarter of 2022 was 21.49% compared to 20.95% for the first 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.

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Fair Value Impact to Net Interest Margin

The Company's fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. The net accretion impact for the three months ended March 31, 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 March 31, 2022	$	566	$	15	$	(25	)	$	556
For the three months ended March 31, 2021		952		22		(26	)		948

For the remaining nine months of 2022 (estimated)		782		44		(101	)		725
For the years ending (estimated):
2023		808		25		(101	)		732
2024		529		6		(101	)		434
2025		393		—		(101	)		292
2026		278		—		(101	)		177
Thereafter (estimated)		867		—		(621	)		246

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 first quarter of 2022. Management is closely monitoring noninterest expenses as a result of current inflation trends to implement cost measures, as applicable.

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CHANGES IN FINANCIAL POSITION

BALANCE SHEET ANALYSIS

Securities

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

The available for sale securities portfolio was $686.2 million at March 31, 2022, compared to $692.5 million at December 31, 2021, a decrease of $6.3 million or less than 1%. At March 31, 2022, the available for sale portfolio had an amortized cost of $719.2 million resulting in a net unrealized loss of $33.0 million. At December 31, 2021, the available for sale portfolio had an amortized cost of $694.7 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 quarter. The yield on a 3-year U.S. Treasury Note, for instance, was 148 basis points higher at March 31, 2022 relative to December 31, 2021.

The Company did not sell any securities during the three months ended March 31, 2022, or three months ended March 31, 2021

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 taxable securities with relatively low optionality and moderate and overall balanced duration.

Loans

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. At March 31, 2022, the commercial real estate portfolio included concentrations of $84 million, $46 million and $208 million in hotel, restaurants, and retail loans, respectively. These concentrations total 17.0% of total loans, excluding loans in process.

Total loans were $2.0 billion at March 31, 2022, compared to $1.9 billion at December 31, 2021, an increase of $41.4 million, or 2.1%. At March 31, 2022, net PPP loans, which are in the commercial loan category, totaled $689 thousand compared to $12.2 million at December 31, 2021.

Average loans were $2.0 billion for the first quarter of 2022 and 2021, with a decrease of $49.5 million or 2.5%, primarily related to PPP forgiveness.

Loans held for sale totaled $2.5 million at March 31, 2022 and $8.5 million at December 31, 2021. Secondary loan production volume was $19.8 million for the three month period ended March 31, 2022 and $41.2 million for the same period of 2021. These loans were approximately 50% purchase and 50% refinancing for the quarter ended March 31, 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 March 31, 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	$	26,275	$	101,727	$	20,274	$	—	$	148,276
Commercial real estate - owner occupied		31,532		217,441		151,490		1,843		402,306
Commercial real estate - non-owner occupied		51,653		421,976		248,669		30,519		752,817
Residential real estate		19,575		137,614		111,227		27,533		295,949
Home equity		4,793		29,785		55,015		—		89,593
Total real estate		133,828		908,543		586,675		59,895		1,688,941

Commercial and industrial		62,578		146,458		82,222		439		291,697
Consumer		773		3,787		332		2,478		7,370

Total loans, net of deferred fees and costs	$	197,179	$	1,058,788	$	669,229	$	62,812	$	1,988,008

Interest rate sensitivity:
Fixed interest rates	$	126,671	$	898,848	$	561,334	$	16,704	$	1,603,557
Floating or adjustable rates		70,508		159,940		107,895		46,108		384,451

Total loans, gross	$	197,179	$	1,058,788	$	669,229	$	62,812	$	1,988,008

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Allowance for Loan Losses

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

At March 31, 2022, the ALLL was $18.0 million compared to $18.7 million at December 31, 2021. The ALLL as a percentage of total loans at such dates was 0.90% and 0.96%, respectively. Management will continue to evaluate the adequacy of the Company's ALLL.

The Company recognized a negative provision (recovery) of ($758) thousand in the first quarter of 2022 and no provision expense or recovery in the same quarter of 2021. The continued improvement in economic conditions, ongoing low charge-off and delinquency rates, and overall strong asset quality metrics contributed to the qualitative factor adjustments that resulted in the recovery for the 2022 quarter. The provision expense that would have been required in the first quarter of 2021 based on loan activity was offset by the adjustments to qualitative factors for improved economic conditions. Net recoveries for the three months ended March 31, 2022 were $68 thousand compared to $13 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 0.94% at March 31, 2022, compared to 1.01% at December 31, 2021. On a dollar basis, the reserve was $17.3 million at March 31, 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 is immaterial and does not include reserves related to acquired loans with deteriorated credit quality. This reserve was $654 thousand at March 31, 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):

	Three Months Ended March 31, 2022			Year Ended December 31, 2021
Balance at beginning of period	$	18,678		$	21,403

Charge-offs:
Construction and land development		—			—
Commercial real estate - owner occupied		—			3
Commercial real estate - non-owner occupied		—			—
Residential real estate		5			53
Home equity		—			—
Total real estate		5			56
Commercial and industrial		3			—
Consumer		29			90
Total charge-offs		37			146

Recoveries:
Construction and land development		—			—
Commercial real estate - owner occupied		2			7
Commercial real estate - non-owner occupied		1			8
Residential real estate		2			42
Home equity		2			57
Total real estate		7			114
Commercial and industrial		72			40
Consumer		26			92
Total recoveries		105			246

Net recoveries		(68	)		(100	)
(Recovery of) provision for loan losses		(758	)		(2,825	)
Balance at end of period	$	17,988		$	18,678

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Asset Quality Indicators

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

Asset Quality Ratios

	March 31, 2022			December 31, 2021
Allowance to loans ⁽¹⁾		0.90	%		0.96	%
ASC 450 (FAS 5) ALLL to ASC 450 loans ⁽²⁾		0.94			1.01
Net recoveries to allowance ⁽³⁾		(0.38	)		(0.54	)
Net recoveries to average loans ⁽³⁾		(0.01	)		(0.00	)
Nonperforming assets to total assets		0.06			0.07
Nonperforming loans to loans		0.09			0.11
Recoveries to net charge-offs ⁽³⁾		1,115.00			2,825.00
Recovery of provision to average loans ⁽³⁾		(0.04	)		(0.14	)
Allowance to nonperforming loans		981.34			840.59

__________________________

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

(2) - Excluding PPP loans, 0.94% at March 31, 2022 and 1.01% at December 31, 2021

(3) - Annualized

Nonperforming Assets (Loans and Other Real Estate Owned)

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

Nonperforming loans to total loans were 0.09% at March 31, 2022 and 0.11% at December 31, 2021. Nonperforming assets include nonperforming loans, OREO and repossessions. Nonperforming assets represented 0.06% and 0.07% of total assets at March 31, 2022 and December 31, 2021, respectively. The decrease in nonperforming assets resulted from a decrease of $389 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 March 31, 2022 and December 31, 2021 were $2.0 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 $1.7 million in TDRs at March 31, 2022 and December 31, 2021.

Other Real Estate Owned

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

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Deposits

The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Total deposits were $2.9 billion at both March 31, 2022 and at December 31, 2021, with an increase of $35.9 million, or 5.0%. The growth over the prior quarter is a result of continued higher than average cash balances being maintained by customers. This pattern is consistent with trends at other commercial banks.

Average interest-bearing deposits were $1.9 billion for the first quarter of 2022, compared to $1.7 for the first quarter of 2021, an increase of $140.5 million, or 8.1%. Average noninterest-bearing deposits for the 2022 quarter were $1.0 billion, compared to $842 million for the 2021 quarter, an increase of $158 million, or 18.8%.

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 first quarter of 2022 was 0.12%, down from 0.30% for the first quarter of 2021.

Certificates of Deposit over $250,000

At March 31, 2022, certificates of deposit that met or exceeded the Federal Deposit Insurance Corporation ("FDIC") insurance limit held by the Company were $138.3 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 March 31, 2022 (dollars in thousands):


	March 31, 2022
3 months or less	$	68,491
Over 3 through 6 months		23,580
Over 6 through 12 months		20,408
Over 12 months		25,804
Total	$	138,283

The Company's total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.2 billion at March 31, 2022 and at 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 $335 million at March 31, 2022 compared to $355 million at December 31, 2021, a decrease of $19.7 million, or 5.6%. This decrease is attributable to an increase in net unrealized losses in the available for sale portfolio which increased $30.9 million from December 31, 2021.

The Company paid cash dividends of $0.28 per share during the three months of 2022 while the aggregate diluted earnings per share for the same period was $0.84.

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

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

Common equity tier 1 capital ratio		12.04	%		12.85	%		12.43	%		13.15	%
Tier 1 capital ratio		13.28			12.82			13.73			13.15
Total capital ratio		14.09			13.66			14.61			14.03

Leverage Capital Ratio:

Tier 1 leverage ratio		9.31			9.01			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.

During the three month period ended March 31, 2022, the Company repurchased 88,929 shares at an average cost of $38.18 per share, for a total cost of $3.4 million. In the three month period ended March 31, 2021, the Company repurchased 54,023 shares at an average cost of $29.51 per share, for a total cost of $1.6 million.

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Liquidity

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

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

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

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

The Company has a line of credit with the FHLB, equal to 30% of the Bank's assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB. The Company had $270.0 million and $275.0 million outstanding in letters of credit at March 31, 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 March 31, 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 March 31, 2022 and at December 31, 2021 were as follows (dollars in thousands):

	March 31, 2022		December 31, 2021
Commitments to extend credit	$	697,199	$	654,436
Standby letters of credit		9,774		10,201
Mortgage loan rate-lock commitments		10,891		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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

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

Interest Rate Risk Management

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

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

A balance sheet is considered asset sensitive when its earning assets (loans and securities) reprice faster or to a greater extent than its liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively more net interest income when interest rates rise and less net interest income when they decline. Based on the Company's simulation analysis, management believes the Company's interest sensitivity position at March 31, 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 widely anticipated monetary policy tightening actions of the Federal Reserve, but the outlook is less certain for longer-term rates during the remainder of 2022.

Earnings Simulation

The following table shows the estimated impact of changes in interest rates on net interest income as of March 31, 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

	March 31, 2022
	Change in Net Interest Income
Change in interest rates	Amount			Percent
Up 4.00%	$	15,376			17.6	%
Up 3.00%		11,626			13.3
Up 2.00%		7,685			8.8
Up 1.00%		3,711			4.3
Flat		—			—
Down 0.25%		(1,454	)		(1.7	)
Down 1.00% (1)		(3,957	)		(4.5	)

__________________________

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

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

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

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Economic Value Simulation

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

The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly period ended March 31, 2022 (dollars in thousands):

Estimated Changes in Economic Value of Equity

	March 31, 2022
Change in interest rates	Amount		$ Change			% Change
Up 4.00%	$	537,536	$	155,651			40.8	%
Up 3.00%		509,906		128,021			33.5
Up 2.00%		476,721		94,836			24.8
Up 1.00%		434,656		52,771			13.8
Flat		381,885		—			—
Down 0.25%		365,968		(15,917	)		(4.2	)
Down 1.00% (1)		311,134		(70,751	)		(18.5	)

__________________________

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

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of March 31, 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 March 31, 2022 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 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; Other

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 March 31, 2022 as detailed below. Under the stock repurchase program, the Company has the remaining authority to repurchase up to $9.6 million of the Company's common stock as of March 31, 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)

January 31, 2022		2,920	$	38.18		2,920	$	12,889
February 28, 2022		61,512		38.26		61,512	$	10,535
March 31, 2022		24,497		37.99		24,497	$	9,604
Total		88,929	$	38.18		88,929

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

(a) Required 8-K disclosures

None

(b) Changes in Nominating Process

None

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ITEM 6. EXHIBITS

	10.1	Amended and Restated Employment Agreement, dated March 1, 2022, by and among American National Bankshares Inc., American National Bank and Trust Company, and Jeffrey V. Haley (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed March 7, 2022).
	10.2	Amended and Restated Employment Agreement, dated March 1, 2022, by and among American National Bankshares Inc., American National Bank and Trust Company, and Jeffrey W. Farrar (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed March 7, 2022).
	10.3	Amended and Restated Employment Agreement, dated March 1, 2022, by and among American National Bankshares Inc., American National Bank and Trust Company, and Edward C. Martin (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed March 7, 2022).
	10.4	Amended and Restated Employment Agreement, dated January 1, 2022, by and between American National Bank and Trust Company and Rhonda P. Joyce (incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K filed March 14, 2022).
	10.5	Employment Agreement, dated January 1, 2022, by and between American National Bank and Trust Company and Alexander Jung (incorporated by reference to Exhibit 10.6 of the Annual Report on Form 10-K filed March 14, 2022).
	10.6	Amended and Restated Employment Agreement, dated January 1, 2022, by and between American National Bank and Trust Company and Charles T. Canaday, Jr. (incorporated by reference to Exhibit 10.7 of the Annual Report on Form 10-K filed March 14, 2022).
	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 March 31, 2022, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

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SIGNATURES

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

AMERICAN NATIONAL BANKSHARES INC.




	By:	/s/ Jeffrey V. Haley
		Jeffrey V. Haley
		President and Chief Executive Officer
Date - May 9, 2022		(principal executive officer)

	By:	/s/ Jeffrey W. Farrar
		Jeffrey W. Farrar
		Executive Vice President,
		Chief Operating Officer and
		Chief Financial Officer
Date - May 9, 2022		(principal financial officer)

	By:	/s/ Cathy W. Liles
		Cathy W. Liles
		Senior Vice President and
		Chief Accounting Officer
Date - May 9, 2022		(principal accounting officer)