AMERICAN NATIONAL BANKSHARES INC. - Quarter Report: 2023 September (Form 10-Q)

Assets

Valuation Technique

Unobservable Input

Range; Weighted Average (1)

Individually assessed loans

Discounted appraised value

Selling cost

8.00% - 15%

amcannb20230930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to

Commission file number: 0-12820

AMERICAN NATIONAL BANKSHARES INC.

(Exact name of registrant as specified in its charter)


Virginia		54-1284688
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

628 Main Street, Danville, Virginia		24541
(Address of principal executive offices)		(Zip Code)

(434) 792-5111

(Registrant's telephone number, including area code)

(Not applicable)

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

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


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

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

Yes

☒

☐

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

Yes

☒

☐

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


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

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

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

Yes

☐

☒

At November 6, 2023, the Company had 10,628,987 shares of Common Stock outstanding, $1 par value.

Table of Contents

AMERICAN NATIONAL BANKSHARES INC.


Index			Page

Part I.		FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	3

		Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022 (unaudited)	4

		Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022 (unaudited)	5

		Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited)	6

		Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)	8

		Notes to Consolidated Financial Statements (unaudited)	9

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

	Item 4.	Controls and Procedures	49

Part II.		OTHER INFORMATION

	Item 1.	Legal Proceedings	50

	Item 1A.	Risk Factors	50

	Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	50

	Item 3.	Defaults Upon Senior Securities	50

	Item 4.	Mine Safety Disclosures	50


	Item 5.	Other Information	50

	Item 6.	Exhibits	51

SIGNATURES			52

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

American National Bankshares Inc.
Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	*(Unaudited) September 30, 2023*			*December 31, 2022*
Assets					*
Cash and due from banks	$	34,646		$	32,207
Interest-bearing deposits in other banks		40,622			41,133
Securities available for sale, at fair value		543,915			608,062
Restricted stock, at cost		12,936			12,651
Loans held for sale		1,981			1,061
Loans, net of deferred fees and costs		2,273,455			2,186,449
Less allowance for credit losses - loans		(25,124	)		(19,555	)
Net loans		2,248,331			2,166,894
Premises and equipment, net		32,167			32,900
Assets held-for-sale		1,131			1,382
Other real estate owned, net of valuation allowance		—			27
Goodwill		85,048			85,048
Core deposit intangibles, net		2,550			3,367
Bank owned life insurance		30,197			29,692
Other assets		57,734			51,478
Total assets	$	3,091,258		$	3,065,902

Liabilities
Noninterest-bearing deposits	$	848,017		$	1,010,602
Interest-bearing deposits		1,723,227			1,585,726
Total deposits		2,571,244			2,596,328
Customer repurchase agreements		60,035			370
Other short-term borrowings		85,000			100,531
Junior subordinated debt		28,410			28,334
Other liabilities		19,291			19,165
Total liabilities		2,763,980			2,744,728

Shareholders' equity
Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding		—			—
Common stock, $1 par value, 20,000,000 shares authorized, 10,629,111 shares outstanding at September 30, 2023 and 10,608,781 shares outstanding at December 31, 2022		10,544			10,538
Capital in excess of par value		142,392			141,948
Retained earnings		231,962			223,664
Accumulated other comprehensive loss, net		(57,620	)		(54,976	)
Total shareholders' equity		327,278			321,174
Total liabilities and shareholders' equity	$	3,091,258		$	3,065,902

*	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 September 30,*						*Nine Months Ended September 30,*
	*2023*			*2022*			*2023*			*2022*
Interest and Dividend Income:
Interest and fees on loans	$	27,512		$	21,160		$	78,476		$	59,024
Interest and dividends on securities:
Taxable		2,564			2,664			7,855			7,344
Tax-exempt		24			110			115			297
Dividends		163			118			529			347
Other interest income		797			1,099			1,818			2,076
Total interest and dividend income		31,060			25,151			88,793			69,088
Interest Expense:
Interest on deposits		9,057			741			19,149			1,956
Interest on short-term borrowings		938			11			3,427			26
Interest on long-term borrowings		402			392			1,183			1,156
Total interest expense		10,397			1,144			23,759			3,138
Net Interest Income		20,663			24,007			65,034			65,950
Provision for (recovery of) credit losses		(538	)		615			59			438
Net Interest Income After Provision for (Recovery of) Credit Losses		21,201			23,392			64,975			65,512
Noninterest Income:
Wealth management income		1,736			1,603			5,030			4,999
Service charges on deposit accounts		565			681			1,685			2,079
Interchange fees		1,162			1,013			3,458			2,990
Other fees and commissions		169			233			493			699
Mortgage banking income		293			388			634			1,490
Securities losses, net		—			—			(68	)		—
Income from Small Business Investment Companies		453			501			888			1,672
Income from insurance investments		128			100			594			644
Losses on premises and equipment, net		—			(2	)		(113	)		(82	)
Other		268			243			900			706
Total noninterest income		4,774			4,760			13,501			15,197
Noninterest Expense:
Salaries and employee benefits		9,229			9,618			26,701			26,936
Occupancy and equipment		1,601			1,514			4,676			4,576
FDIC assessment		354			227			1,053			694
Bank franchise tax		520			488			1,550			1,452
Core deposit intangible amortization		262			310			817			960
Data processing		821			818			2,611			2,446
Software		470			362			1,391			1,088
Other real estate owned, net		(10	)		3			(10	)		4
Merger related expenses		1,702			—			1,702			—
Other		3,394			3,108			9,683			9,096
Total noninterest expense		18,343			16,448			50,174			47,252
Income Before Income Taxes		7,632			11,704			28,302			33,457
Income Taxes		1,844			2,448			6,218			7,062
Net Income	$	5,788		$	9,256		$	22,084		$	26,395
Net Income Per Common Share:
Basic	$	0.54		$	0.87		$	2.08		$	2.47
Diluted	$	0.54		$	0.87		$	2.08		$	2.47
Weighted Average Common Shares Outstanding:
Basic		10,625,709			10,640,952			10,626,599			10,694,096
Diluted		10,625,709			10,643,073			10,627,732			10,696,409

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

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

	*Three Months Ended September 30,*
	*2023*			*2022*
Net income	$	5,788		$	9,256

Other comprehensive loss:

Unrealized losses on securities available for sale		(5,388	)		(25,234	)
Tax effect		1,163			5,448

Unrealized gains on cash flow hedges		464			1,459
Tax effect		(97	)		(306	)

Other comprehensive loss		(3,858	)		(18,633	)

Comprehensive income (loss)	$	1,930		$	(9,377	)

	*Nine Months Ended September 30,*
	*2023*			*2022*
Net income	$	22,084		$	26,395

Other comprehensive loss:

Unrealized losses on securities available for sale		(4,087	)		(71,381	)
Tax effect		882			15,410

Reclassification adjustment for losses on sales or calls of securities available for sale		68			—
Tax effect		(14	)		—

Unrealized gains on cash flow hedges		642			4,298
Tax effect		(135	)		(903	)

Other comprehensive loss		(2,644	)		(52,576	)

Comprehensive income (loss)	$	19,440		$	(26,181	)

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

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American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended September 30, 2023 and 2022

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

	*Common Stock*			*Capital in Excess of Par Value*			*Retained Earnings*			*Accumulated Other Comprehensive Loss*			*Total Shareholders' Equity*
Balance, June 30, 2022	$	10,588		$	143,337		$	212,524		$	(39,018	)	$	327,431

Net income		—			—			9,256			—			9,256

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

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

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

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

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

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

Balance, June 30, 2023	$	10,535		$	141,954		$	229,363		$	(53,762	)	$	328,090

Net income		—			—			5,788			—			5,788

Other comprehensive loss		—			—			—			(3,858	)		(3,858	)

Vesting of restricted stock (3,717 shares)		4			(4	)		—			—			—

Equity based compensation (5,482 shares)		5			442			—			—			447

Cash dividends paid, $0.30 per share		—			—			(3,189	)		—			(3,189	)

Balance, September 30, 2023	$	10,544		$	142,392		$	231,962		$	(57,620	)	$	327,278

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

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American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2023 and 2022

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

	*Common Stock*			*Capital in Excess of Par Value*			*Retained Earnings*			*Accumulated Other Comprehensive Loss*			*Total Shareholders' Equity*
Balance, December 31, 2021	$	10,710		$	147,777		$	201,380		$	(5,075	)	$	354,792

Net income		—			—			26,395			—			26,395

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

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

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

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

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

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

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

Balance, December 31, 2022	$	10,538		$	141,948		$	223,664		$	(54,976	)	$	321,174

Net income		—			—			22,084			—			22,084

Other comprehensive loss		—			—			—			(2,644	)		(2,644	)

Stock repurchased (34,131 shares)		(34	)		(1,010	)		—			—			(1,044	)

Stock options exercised (4,150 shares)		4			65			—			—			69

Vesting of restricted stock (16,906 shares)		17			(17	)		—			—			—

Equity based compensation (19,360 shares)		19			1,406			—			—			1,425

Impact of adoption of CECL		—			—			(4,221	)		—			(4,221	)

Cash dividends paid, $0.90 per share		—			—			(9,565	)		—			(9,565	)

Balance, September 30, 2023	$	10,544		$	142,392		$	231,962		$	(57,620	)	$	327,278

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

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

	*Nine Months Ended September 30,*
	*2023*			*2022*
Cash Flows from Operating Activities:
Net income	$	22,084		$	26,395
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		59			438
Depreciation		1,589			1,687
Net accretion of acquisition accounting adjustments		(1,582	)		(1,345	)
Core deposit intangible amortization		817			960
Net amortization of securities		796			1,304
Net loss on sale or call of securities available for sale		68			—
Gain on sale of loans held for sale		(634	)		(1,490	)
Proceeds from sales of loans held for sale		63,877			62,910
Net gain on other real estate owned		(13	)		—
Originations of loans held for sale		(64,163	)		(55,791	)
Losses on sale or disposal of premises and equipment, net		113			82
Equity based compensation expense		1,425			1,114
Net change in bank owned life insurance		(505	)		(373	)
Deferred income tax (benefit) expense		(1,139	)		720
Net change in other assets		(2,468	)		(5,051	)
Net change in other liabilities		(223	)		331
Net cash provided by operating activities		20,101			31,891

Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale		13,180			—
Proceeds from maturities, calls and paydowns of securities available for sale		46,085			83,015
Purchases of securities available for sale		—			(105,117	)
Net change in restricted stock		(285	)		(327	)
Net increase in loans		(85,009	)		(171,381	)
Net change in collateral with other financial institutions		—			3,200
Proceeds from sale of premises and equipment		—			4
Purchases of premises and equipment, net		(1,305	)		(894	)
Proceeds from sale of assets held-for-sale		587			—
Proceeds from sale of other real estate owned		40			—
Net cash used in investing activities		(26,707	)		(191,500	)

Cash Flows from Financing Activities:
Net change in noninterest-bearing deposits		(162,585	)		35,722
Net change in interest-bearing deposits		137,525			(235,165	)
Net change in customer repurchase agreements		59,665			(40,503	)
Repayment of other short-term borrowings		(15,531	)		—
Common stock dividends paid		(9,565	)		(8,961	)
Repurchase of common stock		(1,044	)		(7,386	)
Proceeds from exercise of stock options		69			12
Net cash provided by (used in) financing activities		8,534			(256,281	)
Net Increase (Decrease) in Cash and Cash Equivalents		1,928			(415,890	)
Cash and Cash Equivalents at Beginning of Period		73,340			510,868
Cash and Cash Equivalents at End of Period	$	75,268		$	94,978

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 credit losses and goodwill and intangible assets.

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. Certain prior period balances have been reclassified to conform to the current period presentation. 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, 2022. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. CECL requires an estimate of credit losses from the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses ("ACL"). In addition, CECL required changes to the accounting for available for sale debt securities. One such change is to require impairments deemed to be permanent in nature as credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities. The adjustments recorded at adoption were increases to the allowance for credit losses on loans of $5.2 million, $305 thousand to the reserve for unfunded loan commitments and $1.2 million to deferred tax assets. The adjustment to retained earnings was a decrease of $4.2 million.

The Company adopted Accounting Standards Codification ("ASC") 326 using the prospective transition approach for purchased credit deteriorated ("PCD") assets that were previously classified as purchased credit impaired ("PCI") under ASC 310-30. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards ("Incurred Loss Model"). The Company adopted ASC 326 using the prospective transition approach for debt securities. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan is 90 days past due, or earlier if the Company believes the collection of interest is doubtful.

In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by FASB as part of its post-implementation review of the credit losses standard that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings ("TDRs") 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 Company adopted the provision in ASU 2022-02 related to the recognition and measurement of TDRs on a prospective basis on January 1, 2023. The TDR classification is no longer applicable subsequent to December 31, 2022. The adoption of ASU 2022-02 did not have a material effect on the Company's consolidated financial statements. See Note 3 - "Loans" for discussion.

Information contained within the report prior to adoption of ASU 2022-02 and ASU 2016-13 for the first three and nine month periods of 2022 and the year ended December 31, 2022, reflects prior GAAP.

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Allowance for Credit Losses-Loans

The provision for credit losses charged to operations is an amount sufficient to bring the allowance to an estimated balance that management considers adequate to absorb expected losses in the Company's loan portfolio. The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Amortized cost is the principal balance outstanding, net of any purchase premiums and discounts and net of any deferred loan fees and costs. The ACL represents management's estimate of credit losses over the remaining life of the loan portfolio. Loans are charged off against the ACL when management believes the loan balance is no longer collectible. Subsequent recoveries of previously charged off amounts are recorded as increases to the ACL.

The Company's ACL consists of quantitative and qualitative allowances and an allowance for loans that are individually assessed for credit losses. Each of these components is determined based upon estimates and judgments. The quantitative allowance uses historical default and loss experience as well as estimates for weighted average lives to calculate lifetime expected losses, along with various qualitative factors, including the effects of changes in risk selection, underwriting standards, and lending policies; expected economic conditions throughout a reasonable and supportable period of 24 months; experience of lending staff; quality of the loan review system; and changes in the regulatory, legal, and competitive environment. The Company considers economic forecasts from highly recognized third-parties for the model inputs. Loans are segmented based on the type of loan and internal risk ratings. The Company utilizes two calculation methodologies to estimate the collective quantitative allowance: the vintage method and the non-discounted cash flow method. Allowance estimates for residential real estate loans are determined by a vintage method which pools loans by date of origination and applies historical average loss rates based on the age of the loans. Allowance estimates for all other loan types are determined by a non-discounted cash flow method which applies historical probabilities of default and loss given default rates to model expected cash flows for each loan through its life and forecast future expected losses.

Loans that do not share risk characteristics are evaluated on an individual basis. The individual reserve component relates to loans that have shown substantial credit deterioration as measured by risk rating and/or delinquency status. In addition, the Company has elected the practical expedient that would include loans for individual assessment consideration if the repayment of the loan is expected substantially through the operation or sale of collateral because the borrower is experiencing financial difficulty. Where the source of repayment is the sale of collateral, the ACL is based on the fair value of the underlying collateral, less selling costs, compared to the amortized cost basis of the loan. If the ACL is based on the operation of the collateral, the reserve is calculated based on the fair value of the collateral calculated as the present value of expected cash flows from the operation of the collateral, compared to the amortized cost basis. If the Company determines that the value of a collateral dependent loan is less than the recorded investment in the loan, the Company charges off the deficiency if it is determined that such amount is deemed to be a confirmed loss.

Allowance for Unfunded Commitments

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The reserve for unfunded commitments is adjusted as a provision for credit loss expense. The calculation of the allowance is consistent with the loss rate calculations for the loan portfolio described above. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded and is included in "Other Liabilities" within the Company's Consolidated Balance Sheets.

Allowance for Available for Sale ("AFS") Securities

For AFS securities, the Company evaluates the fair value and credit quality of its AFS securities on at least a quarterly basis. In the event the fair value of a security falls below its amortized cost basis, the security will be evaluated to determine whether the decline in value was caused by changes in market interest rates or security credit quality. The primary indicators of credit quality for the Company's AFS portfolio are security type and credit rating, which is influenced by a number of security-specific factors that may include obligor cash flow, geography, seniority, and others. There is currently no ACL recorded against any securities in the Company's AFS securities portfolio at September 30, 2023. See Note 2 - "Securities" for additional information on the Company's ACL analysis. If unrealized losses are related to credit quality, the Company estimates the credit related loss by evaluating the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security and a credit loss exists, an ACL shall be recorded for the credit loss, limited by the amount that the fair value is less than amortized cost basis.

Recent Accounting Pronouncements

In October 2023, FASB issued ASU 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative". This ASU incorporates certain U.S. Securities and Exchange Commission ("SEC") disclosure requirements into the FASB ASC. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the ASC with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

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In August 2023, FASB issued ASU 2023-05, "Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement". This ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification® Master Glossary. While joint ventures are defined in the Master Glossary, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements. The amendments in the ASU require that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). This ASU is effective on a prospective basis for all joint ventures with a formation date on or after January 1, 2025. Early adoption of ASU 2023-05 is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance). A joint venture that elects to early adopt may apply ASU 2023-05 either prospectively or retrospectively. The Company does not expect the adoption of ASU 2023-05 to have a material impact on its consolidated financial statements.

In July 2023, the FASB issued ASU 2023-03, "Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)". This ASU amends the FASB ASC for Securities Exchange Commission ("SEC") paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force Meeting ("EITF"), the EITF assists FASB in improving financial reporting and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

Agreement and Plan of Merger

On July 24, 2023, the Company entered into an Agreement and Plan of Merger with Atlantic Union Bankshares Corporation ("Atlantic Union"). The merger agreement provides that the Company will merge with and into Atlantic Union, with Atlantic Union continuing as the surviving entity. Immediately following the merger of the Company and Atlantic Union, the Bank will merge with and into Atlantic Union's wholly owned bank subsidiary, Atlantic Union Bank, with Atlantic Union Bank continuing as the surviving bank. The merger agreement was approved by the Board of Directors of each of the Company and Atlantic Union. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of common stock of the Company will be converted into the right to receive 1.35 shares of common stock of Atlantic Union, with cash to be paid in lieu of any fractional shares. Each restricted stock award of the Company that is unvested immediately prior to the merger will fully vest and be cancelled and converted automatically into the right to receive 1.35 shares of Atlantic Union common stock in respect of each share of Company common stock underlying such award. The merger is expected to close in the first quarter of 2024, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval by the Company's shareholders.

Note 2 – Securities

The amortized cost and fair value of investments in securities AFS at September 30, 2023 were as follows (dollars in thousands):

	*September 30, 2023*
	*Amortized Cost*		*Unrealized Gains*		*Unrealized Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	151,806	$	—	$	11,155	$	140,651
Federal agencies and GSEs		84,380		3		6,570		77,813
Mortgage-backed and CMOs		303,150		—		46,260		256,890
State and municipal		48,836		—		5,005		43,831
Corporate		30,809		—		6,079		24,730
Total securities available for sale	$	618,981	$	3	$	75,069	$	543,915

The amortized cost and fair value of investments in AFS securities at December 31, 2022 were as follows (dollars in thousands):

	*December 31, 2022*
	*Amortized Cost*		*Unrealized Gains*		*Unrealized Losses*		*Fair Value*
Securities available for sale:
U.S. Treasury	$	152,033	$	—	$	12,606	$	139,427
Federal agencies and GSEs		90,363		4		7,019		83,348
Mortgage-backed and CMOs		336,393		1		42,301		294,093
State and municipal		69,023		12		5,312		63,723
Corporate		31,299		—		3,828		27,471
Total securities available for sale	$	679,111	$	17	$	71,066	$	608,062

The adoption of ASC 326 requires an evaluation of AFS securities for credit losses. At September 30, 2023, there was no allowance for credit losses related to the AFS portfolio. Accrued interest receivable on the securities portfolio is excluded from the estimate of credit losses and totaled $1.5 million at September 30, 2023. Prior guidance was in effect at December 31, 2022.

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Restricted Stock

Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond ("FRB") and Federal Home Loan Bank of Atlanta ("FHLB"), these securities have been classified as restricted equity securities and carried at cost. The restricted securities are not subject to the investment security classification requirements and are included as a separate line item on the Company's consolidated balance sheets. The FRB requires the Bank to maintain stock with a par value equal to 3.00% of its outstanding capital and an additional 3.00% is on call. The FHLB requires the Bank to maintain stock in an amount equal to 3.75% of outstanding borrowings and a specific percentage of the Bank's total assets. The cost of restricted stock at September 30, 2023 and December 31, 2022 was as follows (dollars in thousands):

	*September 30, 2023*		*December 31, 2022*
FRB stock	$	6,585	$	6,545
FHLB stock		6,351		6,106
Total restricted stock	$	12,936	$	12,651

Unrealized Losses on Securities

The following table shows estimated fair value and gross unrealized losses for which an allowance for credit losses has not been recorded, aggregated by category and length of time that securities have been in a continuous unrealized loss position, at September 30, 2023. 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.

AFS securities that have been in a continuous unrealized loss position, at September 30, 2023, 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	$	140,651	$	11,155	$	—	$	—	$	140,651	$	11,155
Federal agencies and GSEs		77,548		6,570		212		—		77,336		6,570
Mortgage-backed and CMOs		256,890		46,260		291		10		256,599		46,250
State and municipal		41,531		5,005		3,170		332		38,361		4,673
Corporate		24,730		6,079		—		—		24,730		6,079
Total	$	541,350	$	75,069	$	3,673	$	342	$	537,677	$	74,727

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, 2022 (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	$	139,427	$	12,606	$	10,824	$	915	$	128,603	$	11,691
Federal agencies and GSEs		82,958		7,019		29,204		1,920		53,754		5,099
Mortgage-backed and CMOs		293,929		42,301		96,758		7,245		197,171		35,056
State and municipal		60,629		5,312		31,866		980		28,763		4,332
Corporate		27,471		3,828		18,991		2,556		8,480		1,272
Total	$	604,414	$	71,066	$	187,643	$	13,616	$	416,771	$	57,450

U.S. Treasury securities: The unrealized losses on the Company's investment in 22 U.S. Treasury securities were caused by normal market fluctuations. All 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 concluded there were no credit related losses related to these securities at September 30, 2023.

Federal agencies and GSEs: The unrealized losses on the Company's investment in 40 government sponsored entities ("GSE") securities were caused by normal market fluctuations. Thirty-nine 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 concluded there were no credit related losses related to these securities at September 30, 2023.

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Mortgage-backed securities: The unrealized losses on the Company's investment in 137 GSE mortgage-backed securities were caused by normal market fluctuations. One hundred twenty-two 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 concluded there were no credit losses related to these securities at September 30, 2023.

Collateralized Mortgage Obligations: The unrealized losses associated with 55 GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. All 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 concluded there were no credit losses related to these securities at September 30, 2023.

State and municipal securities: The unrealized losses on 61 state and municipal securities were caused by normal market fluctuations. Fifty-seven 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 concluded there were no credit losses related to these securities at September 30, 2023.

Corporate securities: The unrealized losses on 12 corporate securities were caused by normal market fluctuations and not credit deterioration. All of these securities were in an unrealized loss position for 12 months or more. One of these securities is rated Baa2 by Moody's. The remaining eleven securities are not rated, and the Company conducts thorough internal quarterly credit reviews to assess ongoing financial strength including asset quality, capital and liquidity including independent evaluation of risk profiles. 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 concluded there were no credit losses related to these securities at September 30, 2023.

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 concluded there were no credit losses related to restricted stock at September 30, 2023.

Allowance for Credit Losses-Available for Sale Securities

As of September 30, 2023 and December 31, 2022, there were no allowances for credit losses-securities available for sale. The Company does not believe that the AFS debt securities that were in an unrealized loss position as of September 30, 2023, which were comprised of 327 individual securities, represent a credit loss impairment. As of September 30, 2023, and December 31, 2022, the gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk free," and have a long history of zero credit losses. Total gross unrealized losses were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

Realized Gains and Losses

The Company had no security sales in the three months ended September 30, 2023. Net proceeds from sales of AFS securities for the nine months ended September 30, 2023 totaled $13.2 million. Gross realized gains on these sales were $55 thousand, while gross realized losses were $123 thousand, which resulted in a net realized loss of $68 thousand for the nine months ended September 30, 2023. The Company did not have any sales of AFS securities during the three or nine months ended September 30, 2022.

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Note 3 – Loans

Loans, net of deferred fees and costs and excluding loans held for sale, at September 30, 2023 and December 31, 2022, were comprised of the following (dollars in thousands):

	*September 30, 2023*		*December 31, 2022*
Commercial	$	322,209	$	304,247
Commercial real estate:
Construction and land development		269,840		197,525
Commercial real estate - owner occupied		413,151		418,462
Commercial real estate - non-owner occupied		803,440		827,728
Residential real estate:
Residential		366,557		338,132
Home equity		91,393		93,740
Consumer		6,865		6,615
Total loans, net of deferred fees and costs	$	2,273,455	$	2,186,449

Acquired Loans

The following information as of and for the year ended December 31, 2022 was in accordance with guidance in effect prior to the adoption of ASC 326. 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 December 31, 2022 were as follows (dollars in thousands):

	December 31, 2022
Outstanding principal balance	$	125,856
Carrying amount		120,432

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 were as follows (dollars in thousands):

	December 31, 2022
Outstanding principal balance	$	17,788
Carrying amount		13,541

The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applied ASC 310-30 (dollars in thousands):

	December 31, 2022
Balance at January 1	$	4,902
Accretion		(2,186	)
Reclassification from nonaccretable difference		986
Other changes, net (1)		(172	)
	$	3,530

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(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 September 30, 2023 (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	$	—	$	—	$	—	$	—	$	—	$	322,209	$	322,209
Commercial real estate:
Construction and land development		—		—		—		—		—		269,840		269,840
Commercial real estate - owner occupied		46		84		—		2,932		3,062		410,089		413,151
Commercial real estate - non-owner occupied		597		—		—		89		686		802,754		803,440
Residential:
Residential		171		306		—		494		971		365,586		366,557
Home equity		76		50		—		209		335		91,058		91,393
Consumer		3		3		—		16		22		6,843		6,865
Total	$	893	$	443	$	—	$	3,740	$	5,076	$	2,268,379	$	2,273,455

The following table shows an analysis by portfolio segment of the Company's past due loans at December 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	$	161	$	—	$	—	$	4	$	165	$	304,082	$	304,247
Commercial real estate:
Construction and land development		—		—		—		—		—		197,525		197,525
Commercial real estate - owner occupied		724		268		—		—		992		417,470		418,462
Commercial real estate - non-owner occupied		319		—		—		301		620		827,108		827,728
Residential:
Residential		664		90		—		797		1,551		336,581		338,132
Home equity		104		—		—		205		309		93,431		93,740
Consumer		—		—		16		—		16		6,599		6,615
Total	$	1,972	$	358	$	16	$	1,307	$	3,653	$	2,182,796	$	2,186,449

The following table is a summary of nonaccrual loans by major categories for the dates indicated (dollars in thousands):

	*CECL*						*Incurred Loss*
	*September 30, 2023*						*December 31, 2022*
	*Nonaccrual Loans*		*Nonaccrual Loans*		*Total*
	*with No Allowance*		*with an Allowance*		*Nonaccrual Loans*		*Nonaccrual Loans*
Commercial	$	-	$	-	$	-	$	4
Commercial real estate:
Construction and land development		-		-		-		-
Commercial real estate-owner occupied		2,932		-		2,932		-
Commercial real estate-non-owner occupied		89		-		89		301
Residential:
Residential		352		142		494		797
Home equity		161		48		209		205
Consumer		-		16		16		-
Total	$	3,534	$	206	$	3,740	$	1,307

All payments received while on non-accrual status are applied against the principal balance of the loan. The Company does not recognize interest income while loans are on non-accrual status.

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The following table represents the accrued interest receivables written off by reversing interest income during the three and nine months ended September 30, 2023 (dollars in thousands):

	*For the Three Months Ended September 30, 2023*		*For the Nine Months Ended September 30, 2023*
Commercial	$	-	$	2
Commercial real estate:
Construction and land development		-		-
Commercial real estate-owner occupied		2		10
Commercial real estate-non-owner occupied		-		-
Residential:
Residential		-		3
Home equity		-		-
Consumer		-		-
Total accrued interest reversed	$	2	$	15

The following table presents a nonaccrual loan analysis of collateral dependent loans as of September 30, 2023. Only loans over the Company's threshold are assessed (dollars in thousands):

	*Residential*		*Business*				*Commercial*		*Owner*		*Total*
	*Properties*		*Assets*		*Land*		*Property*		*Occupied*		*Loans*

Commercial real estate:	$	-	$	-	$	-	$	89	$	2,932	$	3,021
Residential:
Residential		352		-		-		-		-		352
Home equity		161		-		-		-		-		161
Total collateral dependent loans	$	513	$	-	$	-	$	89	$	2,932	$	3,534

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

The following table shows the amortized cost basis of the three loans modified to borrowers experiencing financial difficulty during the three months and four loans modified to borrowers in the nine months ended September 30, 2023. It is shown by class of loan and type of concession granted and describes the financial effect of the modification made to the borrower experiencing financial difficulty (dollars in thousands):

	*Term Extension*
	*Amortized Cost Basis*		*% of Total Loan Type*			*Financial Effect*

Commercial real estate-owner occupied	$	2,359		0.57	%	Added a year to the term of one loan with principal deferment.
Commercial real estate-nonowner occupied		2,536		0.32		Interest rate reduction and term extension.
Residential real estate		9		-		Term extension.
Commercial real estate-owner occupied		426		0.10		Term extension.

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Impaired Loans

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 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		2,420		2,420		—		1,454		108
Commercial real estate - non-owner occupied		1,360		1,359		—		1,186		40
Residential:
Residential		1,149		1,156		—		935		21
Home equity		165		165		—		93		—
Consumer		—		—		—		—		—
	$	5,094	$	5,100	$	—	$	3,668	$	169
With a related allowance recorded:
Commercial	$	—	$	—	$	—	$	139	$	—
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		—		—		—		—		—
Commercial real estate - non-owner occupied (1)		—		—		—		—		—
Residential:
Residential (1)		—		—		—		41		—
Home equity		—		—		—		—		—
Consumer		—		—		—		38		—
	$	—	$	—	$	—	$	218	$	—
Total:
Commercial	$	—	$	—	$	—	$	139	$	—
Commercial real estate:
Construction and land development		—		—		—		—		—
Commercial real estate - owner occupied		2,420		2,420		—		1,454		108
Commercial real estate - non-owner occupied		1,360		1,359		—		1,186		40
Residential:
Residential		1,149		1,156		—		976		21
Home equity		165		165		—		93		—
Consumer		—		—		—		38		—
	$	5,094	$	5,100	$	—	$	3,886	$	169

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(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.

Residential Real Estate in Process of Foreclosure

The Company had $23 thousand in residential loans in process of foreclosure at September 30, 2023 and $715 thousand in process of foreclosure at December 31, 2022. The Company had no residential other real estate owned ("OREO") at September 30, 2023 or at December 31, 2022.

Risk Grades

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

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

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

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.

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The following table shows the Company's recorded investment in loans by credit quality indicators further disaggregated by year of origination as of September 30, 2023 (dollars in thousands):

	*Term Loans by Year of Origination*
	*2023*		*2022*		*2021*			*2020*		*2019*		*Prior*			*Revolving*			*Total*
Commercial
Pass	$	32,493	$	39,259	$	56,532		$	19,732	$	9,918	$	26,263		$	123,200		$	307,397
Special Mention		95		1,136		2,279			74		474		1,628			4,603			10,289
Substandard		-		145		18			-		368		1,022			2,970			4,523
Total commercial	$	32,588	$	40,540	$	58,829		$	19,806	$	10,760	$	28,913		$	130,773		$	322,209
Current period gross write-offs	$	-	$	-	$	(360	)	$	-	$	-	$	-		$	-		$	(360	)

Construction and land development
Pass	$	35,441	$	65,601	$	121,106		$	7,539	$	5,383	$	16,523		$	6,905		$	258,498
Special Mention		-		7,661		3,575			-		-		-			-			11,236
Substandard		-		-		-			-		-		106			-			106
Total construction and land development	$	35,441	$	73,262	$	124,681		$	7,539	$	5,383	$	16,629		$	6,905		$	269,840
Current period gross write-offs	$	-	$	-	$	-		$	-	$	-	$	-		$	-		$	-

Commercial real estate - owner occupied
Pass	$	22,939	$	62,403	$	100,457		$	43,938	$	24,956	$	139,317		$	7,897		$	401,907
Special Mention		-		-		1,363			229		-		801			3,275			5,668
Substandard		-		-		-			2,359		-		2,791			426			5,576
Total commercial real estate - owner occupied	$	22,939	$	62,403	$	101,820		$	46,526	$	24,956	$	142,909		$	11,598		$	413,151
Current period gross write-offs	$	-	$	-	$	-		$	-	$	-	$	-		$	-		$	-

Commercial real estate - non-owner occupied
Pass	$	32,400	$	145,445	$	194,531		$	131,640	$	58,943	$	222,755		$	6,459		$	792,173
Special Mention		-		-		-			-		319		2,164			-			2,483
Substandard		3,097		-		1,340			1,474		1,869		1,004			-			8,784
Total commercial real estate - non-owner occupied	$	35,497	$	145,445	$	195,871		$	133,114	$	61,131	$	225,923		$	6,459		$	803,440
Current period gross write-offs	$	-	$	-	$	-		$	-	$	-	$	-		$	-		$	-

Residential
Pass	$	59,660	$	96,791	$	86,351		$	24,725	$	14,419	$	65,774		$	15,773		$	363,493
Special Mention		-		258		201			-		310		785			-			1,554
Substandard		-		-		262			126		-		1,122			-			1,510
Total residential	$	59,660	$	97,049	$	86,814		$	24,851	$	14,729	$	67,681		$	15,773		$	366,557
Current period gross write-offs	$	-	$	-	$	-		$	-	$	-	$	(6	)	$	-		$	(6	)

Home equity
Pass	$	-	$	-	$	-		$	-	$	-	$	-		$	90,853		$	90,853
Special Mention		-		-		-			-		-		-			-			-
Substandard		-		-		-			-		-		-			540			540
Total home equity	$	-	$	-	$	-		$	-	$	-	$	-		$	91,393		$	91,393
Current period gross write-offs	$	-	$	-	$	-		$	-	$	-	$	-		$	-		$	-

Consumer
Pass	$	2,172	$	1,460	$	556		$	262	$	163	$	1,708		$	521		$	6,842
Special Mention		-		-		-			-		-		-			-			-
Substandard		-		4		-			-		-		17			2			23
Total consumer	$	2,172	$	1,464	$	556		$	262	$	163	$	1,725		$	523		$	6,865
Current period gross write-offs	$	-	$	-	$	(6	)	$	-	$	-	$	(56	)	$	(1	)	$	(63	)

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The following tables show the Company's loan portfolio broken down by internal risk grading as of December 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	$	288,041	$	197,331	$	405,223	$	826,844	$	333,124	$	93,062
Special Mention		10,657		—		2,388		239		1,577		—
Substandard		5,548		194		10,851		645		3,431		678
Doubtful		1		—		—		—		—		—
Total	$	304,247	$	197,525	$	418,462	$	827,728	$	338,132	$	93,740

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	*Consumer*
Performing	$	6,599
Nonperforming		16
Total	$	6,615

Note 4 – Allowance for Credit Losses - Loans and Reserve for Unfunded Lending Commitments

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

	*Nine Months Ended September 30, 2023*			*Year Ended December 31, 2022*			*Nine Months Ended September 30, 2022*
Allowance for Credit Losses - Loans
Balance, beginning of period	$	19,555		$	18,678		$	18,678
Day 1 impact of CECL adoption		5,192			-			-
Provision for credit losses		15			1,597			438
Charge-offs		(429	)		(1,019	)		(185	)
Recoveries		791			299			258
Balance, end of period	$	25,124		$	19,555		$	19,189

Reserve for Unfunded Lending Commitments
Balance, beginning of period	$	377		$	386		$	386
Day 1 impact of CECL adoption		305			-			-
Provision for (recovery of) unfunded commitments		44			(9	)		(8	)
Balance, end of period	$	726		$	377		$	378

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans, and are discussed in Note 1. The allowance for unfunded loan commitments is included in other liabilities on the Company's consolidated balance sheets.

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The following table presents changes in the Company's allowance for credit losses by portfolio segment at and for the nine months ended September 30, 2023 (dollars in thousands):

	*Commercial*			*Construction and Land Development*		*Commercial Real Estate - Owner Occupied*			*Commercial Real Estate - Non-owner Occupied*			*Residential Real Estate*			*Home Equity*			*Consumer*			*Total*
Allowance for Credit Losses - Loans
Balance at December 31, 2022	$	2,874		$	1,796	$	3,785		$	7,184		$	3,077		$	790		$	49		$	19,555
Day 1 impact of CECL adoption		883			272		1,078			2,069			653			190			47			5,192
Provision for (recovery of) credit losses		(40	)		756		(315	)		(388	)		103			(77	)		(24	)		15
Charge-offs		(360	)		—		—			—			(6	)		—			(63	)		(429	)
Recoveries		471			6		32			40			100			50			92			791
Balance at September 30, 2023	$	3,828		$	2,830	$	4,580		$	8,905		$	3,927		$	953		$	101		$	25,124

__________________________

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, 2022 (dollars in thousands):

	*Commercial*			*Construction and Land Development*		*Commercial Real Estate - Owner Occupied*			*Commercial Real Estate - Non-owner Occupied*			*Residential Real Estate*			*Consumer*			*Total*
Allowance for Loan Losses
Balance at December 31, 2021	$	2,668		$	1,397	$	3,964		$	7,141		$	3,458		$	50		$	18,678
Provision for loan losses		442			399		(199	)		476			373			106			1,597
Charge-offs		(357	)		—		—			(436	)		(5	)		(221	)		(1,019	)
Recoveries		121			—		20			3			41			114			299
Balance at December 31, 2022	$	2,874		$	1,796	$	3,785		$	7,184		$	3,867		$	49		$	19,555

Balance at December 31, 2022:

Allowance for Loan Losses
Individually evaluated for impairment	$	—		$	—	$	—		$	—		$	—		$	—		$	—
Collectively evaluated for impairment		2,873			1,772		3,762			7,184			3,822			49			19,462
Purchased credit impaired loans		1			24		23			—			45			—			93
Total	$	2,874		$	1,796	$	3,785		$	7,184		$	3,867		$	49		$	19,555

Loans
Individually evaluated for impairment	$	—		$	—	$	2,420		$	1,360		$	1,314		$	—		$	5,094
Collectively evaluated for impairment		304,240			196,357		408,656			824,153			427,809			6,599			2,167,814
Purchased credit impaired loans		7			1,168		7,386			2,215			2,749			16			13,541
Total	$	304,247		$	197,525	$	418,462		$	827,728		$	431,872		$	6,615		$	2,186,449

__________________________

The allowance for credit losses - loans is allocated to loan segments based upon historical default and loss experience, weighted average life estimates, risk grades on individual loans, and qualitative factors. Qualitative factors include effects of changes in risk selection, underwriting standards, and lending policies; expected economic conditions throughout a reasonable and supportable period; experience of lending staff; quality of loan review system; and changes in the regulatory, legal, and competitive environment.

The Company recorded a recovery of credit losses for the third quarter of 2023 of $538 thousand compared to a provision of $615 thousand in the third quarter of the previous year. The negative provision for the third quarter of 2023 was a function of net recovery activity during the period as well as a slight reduction in the expected loss rate from the CECL model. The provision expense in the third quarter of 2022 was the result of loan growth during the period. The allowance for unfunded commitments is included in other liabilities on the consolidated balance sheets.

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Note 5 – Goodwill and Other Intangible Assets

The Company's goodwill was recognized in connection with past business combinations and is reported at the community banking segment. The Company reviews the carrying value of the goodwill annually as of June 30 or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. The Company performed a qualitative assessment of goodwill at June 30, 2023, and concluded that no impairment existed. No indicators were identified during the nine months ended September 30, 2023 or 2022.

Core deposit intangibles resulting from the acquisitions of MainStreet BankShares, Inc. in January 2015 and HomeTown Bankshares Corporation ("HomeTown") in April 2019 were $10.0 million in the aggregate and are being amortized on an accelerated basis over 120 months. The changes in the carrying amount of goodwill and intangibles for the nine months ended September 30, 2023, are as follows (dollars in thousands):

	*Goodwill*		*Intangibles*
Balance at December 31, 2022	$	85,048	$	3,367
Amortization		—		(817	)
Balance at September 30, 2023	$	85,048	$	2,550

Note 6 – Leases

The Company's leases are recorded under ASC 842, Leases. Lease liabilities represent the Company's obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company's incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company's right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. The aggregate right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Company's consolidated balance sheets.

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

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

	*September 30, 2023*			*December 31, 2022*
Lease liabilities	$	5,261		$	3,318
Right-of-use assets	$	5,191		$	3,245
Weighted average remaining lease term (years)		8.38			6.77
Weighted average discount rate		3.88	%		3.16	%

	*Three Months Ended September 30, 2023*		*Three Months Ended September 30, 2022*
Lease cost
Operating lease cost	$	351	$	268
Short-term lease cost		—		—
Total lease cost	$	351	$	268

Cash paid for amounts included in the measurement of lease liabilities	$	346	$	271

	*Nine Months Ended September 30, 2023*		*Nine Months Ended September 30, 2022*
Lease cost
Operating lease cost	$	913	$	803
Short-term lease cost		—		—
Total lease cost	$	913	$	803

Cash paid for amounts included in the measurement of lease liabilities	$	916	$	810

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

Lease payments due	*As of September 30, 2023*
Three months ending December 31, 2023	$	265
Twelve months ending December 31, 2024		883
Twelve months ending December 31, 2025		835
Twelve months ending December 31, 2026		607
Twelve months ending December 31, 2027		546
Twelve months ending December 31, 2028		550
Thereafter		2,548
Total undiscounted cash flows		6,234
Discount		(973	)
Lease liabilities	$	5,261

Note 7 – Short-term Borrowings

Short-term borrowings may consist of customer repurchase agreements, short-term borrowings from the FHLB and federal funds purchased. The Company has federal funds lines of credit established with correspondent banks in the amount of $110.0 million and has access to the FRB's discount window. Customer repurchase agreements are collateralized by securities of the U.S. Government or GSEs. They mature daily. The interest rates may be changed at the discretion of the Company. The securities underlying these agreements remain under the Company's control. FHLB overnight borrowings contain floating interest rates that may change daily at the discretion of the FHLB. Federal funds purchased are unsecured overnight borrowings from other financial institutions. Short-term borrowings consisted of the following at September 30, 2023 and December 31, 2022 (dollars in thousands):

	*September 30, 2023*		*December 31, 2022*
Customer repurchase agreements	$	60,035	$	370
Other short-term borrowings		85,000		100,531
Total short-term borrowings	$	145,035	$	100,901

Note 8 – Long-term Borrowings

Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in the FHLB and deposits with the FHLB. The Company has a line of credit with the FHLB equal to 30% of the Company's assets, subject to the amount of collateral pledged. As of September 30, 2023, $921.5 million in eligible collateral was pledged under the blanket floating lien agreement, which covers both short-term and long-term borrowings. FHLB availability based on pledged collateral at September 30, 2023 was $677.6 million, with $446.5 million of additional borrowing capacity without pledging additional collateral.

The Company had junior subordinated debt at September 30, 2023 and 2022, as noted below.

In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At September 30, 2023, the Bank's public deposits totaled $252.3 million. The Company is required to provide collateral to secure the deposits that exceed the insurance coverage provided by the Federal Deposit Insurance Corporation. This collateral can be provided in the form of certain types of government or agency bonds or letters of credit from the FHLB. At September 30, 2023, the Company had $170.0 million in letters of credit with the FHLB outstanding, as well as $170.3 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 any time. Distributions are cumulative and 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, issued pursuant to junior subordinated debentures entered into between the Company and Wilmington Trust Company, as trustee.

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The Company has $7.8 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 September 30, 2023 and December 31, 2022 (dollars in thousands):

Principal Amount

Issuing Entity

Date Issued

Interest Rate

Maturity Date

September 30, 2023

December 31, 2022

AMNB Statutory Trust I

4/7/2006

SOFR plus 1.35%

6/30/2036

20,619

MidCarolina Trust I

10/29/2002

SOFR plus 3.45%

11/7/2032

4,643

4,601

MidCarolina Trust II

12/3/2003

SOFR plus 2.95%

10/7/2033

3,148

3,114

28,410

28,334

The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $512 thousand and $461 thousand at September 30, 2023 and $554 thousand and $495 thousand at December 31, 2022, respectively. The original fair value adjustments of $1.2 million and $1.0 million are being amortized into interest expense over the remaining lives of the respective borrowings.

Note 9 - Derivative Financial Instruments and Hedging Activities

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

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

All interest rate swaps were entered into with counterparties that met the Company's credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in these derivative contracts is not significant. The interest rates swaps were terminated in October 2023 (see Note 16 - Subsequent Events - Swap Terminations).

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.

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The following tables present information on the Company's derivative financial instruments as of September 30, 2023 and December 31, 2022 (dollars in thousands):

	*September 30, 2023*
	*Notional Amount*		*Positions*		*Assets*		*Liabilities*		*Cash Collateral Pledged*
Cash flow hedges:
Interest rate swaps:
Variable-rate to fixed-rate swaps with counterparty	$	28,500		3	$	1,966	$	—	$	850

	*December 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	$	1,325	$	—	$	850

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 options awards representing 40,753 shares of the Company's stock were issued in conjunction with the HomeTown acquisition in 2019. At September 30, 2023, all options related to the acquisition had been exercised. As of September 30, 2023, there were no nonvested stock option grants and no unrecognized compensation expense for stock options.

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 employee stock awarded is established as the fair value of the Company's common stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. The restricted stock granted cliff vests at the end of a 36-month period beginning on the date of the grant. Nonvested restricted stock activity for the nine months ended September 30, 2023 is summarized in the following table.

	*Shares*			*Weighted Average Grant Date Value Per Share*
Nonvested at December 31, 2022		71,676		$	33.39
Granted		32,585			36.49
Vested		(17,446	)		35.70
Forfeited		(1,603	)		34.27
Nonvested at September 30, 2023		85,212		$	34.09

As of September 30, 2023 and December 31, 2022, there was $1.4 million and $1.1 million, respectively, in unrecognized compensation cost related to nonvested restricted stock granted under the 2018 Plan. The cost is expected to be recognized over the next 12 to 36 months. The share-based compensation expense for nonvested restricted stock was $800 thousand and $665 thousand during the first nine months of 2023 and 2022, respectively.

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Note 11 – Earnings Per Common Share

The following shows the weighted average number of shares used in computing earnings per common share and the effect on the weighted average number of shares of potentially dilutive common stock. Potentially dilutive common stock had no effect on income available to common shareholders. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period including voting rights and sharing in nonforfeitable dividends. The following table presents basic and diluted earnings per share for the three and nine month periods ended September 30, 2023 and 2022:

	*Three Months Ended September 30,*
	*2023*				*2022*
	*Shares*		*Per Share Amount*		*Shares*		*Per Share Amount*
Basic earnings per share		10,625,709	$	0.54		10,640,952	$	0.87
Effect of dilutive securities - stock options		—		—		2,121		—
Diluted earnings per share		10,625,709	$	0.54		10,643,073	$	0.87

	*Nine Months Ended September 30,*
	*2023*				*2022*
	*Shares*		*Per Share Amount*		*Shares*		*Per Share Amount*
Basic earnings per share		10,626,599	$	2.08		10,694,096	$	2.47
Effect of dilutive securities - stock options		1,133		—		2,313		-
Diluted earnings per share		10,627,732	$	2.08		10,696,409	$	2.47

Outstanding stock options on common stock whose effects are anti-dilutive are not included in computing diluted earnings per share. There were no anti-dilutive stock options for the three or nine months ended September 30, 2023 and 2022.

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 September 30, 2023 or December 31, 2022.

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

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

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

	*Fair Value Measurements at September 30, 2023 Using*
	*Balance at September 30,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2023*		*Level 1*		*Level 2*		*Level 3*
Securities available for sale:
U.S. Treasury	$	140,651	$	—	$	140,651	$	—
Federal agencies and GSEs		77,813		—		77,813		—
Mortgage-backed and CMOs		256,890		—		256,890		—
State and municipal		43,831		—		43,831		—
Corporate		24,730		—		24,730		—
Total securities available for sale	$	543,915	$	—	$	543,915	$	—
Loans held for sale	$	1,981	$	—	$	1,981	$	—
Derivatives - cash flow hedges	$	1,966	$	—	$	1,966	$	—

	*Fair Value Measurements at December 31, 2022 Using*
	*Balance at December 31,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2022*		*Level 1*		*Level 2*		*Level 3*
Securities available for sale:
U.S. Treasury	$	139,427	$	—	$	139,427	$	—
Federal agencies and GSEs		83,348		—		83,348		—
Mortgage-backed and CMOs		294,093		—		294,093		—
State and municipal		63,723		—		63,723		—
Corporate		27,471		—		27,471		—
Total securities available for sale	$	608,062	$	—	$	608,062	$	—
Loans held for sale	$	1,061	$	—	$	1,061	$	—
Derivative - cash flow hedges	$	1,325	$	—	$	1,325	$	—

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:

Loans evaluated for credit losses: Loans are individually evaluated for credit losses 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. These loans are assessed based on the fair value of the collateral values only and not evaluated based on loan type or risk characteristics. The measurement of the loss associated with the 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. 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). Individually assessed loans allocated to the allowance for credit losses - loans are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the consolidated statements of income.

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

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

	*Fair Value Measurements at September 30, 2023 Using*
	*Balance at September 30,*		*Quoted Prices in Active Markets for Identical Assets*		*Significant Other Observable Inputs*		*Significant Unobservable Inputs*
Description	*2023*		*Level 1*		*Level 2*		*Level 3*
Assets:
Individually assessed loans, net of valuation allowance	$	742	$	—	$	—	$	742

	*Fair Value Measurements at December 31, 2022 Using*
	*Balance at December 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:

Other real estate owned, net	$	27	$	-	$	-	$	27

Quantitative Information about Level 3 Fair Value Measurements as of September 30, 2023 is as follows:

__________________________

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

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

The carrying values and the exit pricing concept fair values of the Company's financial instruments at September 30, 2023 are as follows (dollars in thousands):

	*Fair Value Measurements at September 30, 2023 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	$	75,268	$	75,268	$	—	$	—	$	75,268
Securities available for sale		543,915		—		543,915		—		543,915
Restricted stock		12,936		—		12,936		—		12,936
Loans held for sale		1,981		—		1,981		—		1,981
Loans, net of allowance		2,248,331		—		—		2,091,303		2,091,303
Derivative - cash flow hedges		1,966		—		1,966		—		1,966
Bank owned life insurance		30,197		—		30,197		—		30,197
Accrued interest receivable		7,650		—		7,650		—		7,650

Financial Liabilities:
Deposits	$	2,571,244	$	—	$	2,645,444	$	—	$	2,645,444
Repurchase agreements		60,035		—		60,035		—		60,035
Other short-term borrowings		85,000		—		85,000		—		85,000
Junior subordinated debt		28,410		—		—		22,907		22,907
Accrued interest payable		2,024		—		2,024		—		2,024

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

	*Fair Value Measurements at December 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	$	73,340	$	73,340	$	—	$	—	$	73,340
Securities available for sale		608,062		—		608,062		—		608,062
Restricted stock		12,651		—		12,651		—		12,651
Loans held for sale		1,061		—		1,061		—		1,061
Loans, net of allowance		2,166,894		—		—		2,096,480		2,096,480
Bank owned life insurance		29,692		—		29,692		—		29,692
Derivative - cash flow hedges		1,325		—		1,325		—		1,325
Accrued interest receivable		7,255		—		7,255		—		7,255

Financial Liabilities:
Deposits	$	2,596,328	$	—	$	2,595,713	$	—	$	2,595,713
Repurchase agreements		370		—		370		—		370
Other short-term borrowings		100,531		—		100,531		—		100,531
Junior subordinated debt		28,334		—		—		24,479		24,479
Accrued interest payable		799		—		799		—		799

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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 and nine months ended September 30, 2023 and 2022 is shown in the following tables (dollars in thousands):

	*As of and For the Three Months Ended September 30, 2023*
	*Community Banking*		*Wealth Management*		*Total*
Interest income	$	31,060	$	—	$	31,060
Interest expense		10,397		—		10,397
Noninterest income		3,038		1,736		4,774
Noninterest expense		17,656		687		18,343
Income before income taxes		6,583		1,049		7,632
Net income		4,992		796		5,788
Depreciation and amortization		784		1		785
Total assets		3,091,004		254		3,091,258
Goodwill		85,048		—		85,048
Capital expenditures		696		—		696

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

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	*As of and For the Nine Months Ended September 30, 2023*
	*Community Banking*		*Trust and Investment Services*		*Total*
Interest income	$	88,793	$	—	$	88,793
Interest expense		23,759		—		23,759
Noninterest income		8,470		5,031		13,501
Noninterest expense		47,910		2,264		50,174
Income before income taxes		25,535		2,767		28,302
Net income		19,925		2,159		22,084
Depreciation and amortization		2,402		4		2,406
Total assets		3,091,004		254		3,091,258
Goodwill		85,048		—		85,048
Capital expenditures		1,305		—		1,305

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

Note 14 – Supplemental Cash Flow Information

Supplemental cash flow information as of and for the nine months ended September 30, 2023 and 2022 is shown in the following table (dollars in thousands):

	*2023*			*2022*
Supplemental Schedule of Cash and Cash Equivalents:
Cash and due from banks	$	34,646		$	35,437
Interest-bearing deposits in other banks		40,622			59,541
Cash and Cash Equivalents	$	75,268		$	94,978

Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest on deposits and borrowed funds	$	22,511		$	3,160
Income taxes		6,809			1,482
Noncash investing and financing activities:
Transfer from premises and equipment to assets held for sale		449			—
Net unrealized losses on securities available for sale		(4,019	)		(71,381	)
Net unrealized gains on cash flow hedges		642			4,298

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Note 15 – Accumulated Other Comprehensive Loss

Changes in each component of AOCI for the three and nine months ended September 30, 2023 and 2022 were as follows (dollars in thousands):

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

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

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

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

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

Balance at June 30, 2023	$	(54,636	)	$	1,187	$	(313	)	$	(53,762	)

Net unrealized losses on securities available for sale, net of tax, $(1,163)		(4,225	)		—		—			(4,225	)

Net unrealized gains on cash flow hedges, net of tax, $97		—			367		—			367

Balance at September 30, 2023	$	(58,861	)	$	1,554	$	(313	)	$	(57,620	)

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

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

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

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

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

Balance at December 31, 2022	$	(55,710	)	$	1,047		$	(313	)	$	(54,976	)

Net unrealized losses on securities available for sale, net of tax, $(882)		(3,205	)		—			—			(3,205	)

Reclassification adjustment for realized losses on securities, net of tax, $14		54			—			—			54

Net unrealized gains on cash flow hedges, net of tax, $135		—			507			—			507

Balance at September 30, 2023	$	(58,861	)	$	1,554		$	(313	)	$	(57,620	)

Note 16 – Subsequent Events - Swap Terminations

On October 16, 2023, the Company terminated the three interest rate swaps designated as cash flow hedges related to its trust preferred capital notes, as previously discussed in Note 9. Prior to the termination, the Company had recorded $1.6 million in other assets and $413 thousand as a component of other comprehensive income related to the interest rate swap derivatives.

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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

Certain statements in this Form 10-Q of American National Bankshares Inc. (the "Company") may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements regarding anticipated changes in the interest rate environment, future economic conditions and the impacts of current economic uncertainties, and projections, predictions, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact. Such forward-looking statements are based on certain assumptions as of the time they are made, and are inherently subject to known and unknown risks and uncertainties, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Such statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," "intend," "will," "may," "view," "seek to," "opportunity," "potential," "continue," "confidence" or words of similar meaning, or other statements concerning opinions or judgment of our management about future events. Although we believe that our expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of our existing knowledge of our business and operations, there can be no assurance that actual future results, performance, or achievements of, or trends affecting, us will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the following:

●

the businesses of the Company and Atlantic Union Bankshares Corporation ("Atlantic Union") may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected;

●

the expected growth opportunities or cost savings from the merger with Atlantic Union may not be fully realized or may take longer to realize than expected;

●

deposit attrition, operating costs, customer losses and business disruption prior to and following the merger with Atlantic Union, including adverse effects on relationships with employees and customers, may be greater than expected;

●

the regulatory and shareholder approvals required for the merger with Atlantic Union may not be obtained;

●

the level of inflation;

●

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 ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s or banking industry’s reputation becomes damaged;

●

the adequacy of the level of the Company’s allowance for credit losses, the amount of credit loss provisions required in future periods, and the failure of assumptions underlying the allowance for credit 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;

●

the effects of climate change, natural disasters, and extreme weather events;

●

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;

●

the impact of health emergencies, epidemics or pandemics;

●

risks related to environmental, social and governance practices; and

●

risks associated with mergers, acquisitions, and other expansion activities.

The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included herein and in our Annual Report on Form 10-K for the year ended December 31, 2022, and quarterly report on Form 10-Q for the period ended June 30, 2023 including those discussed in the section entitled "Risk Factors." If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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Reclassification

In certain circumstances, reclassifications have been made to prior period information to conform to the 2023 presentation.

Agreement and Plan of Merger

On July 24, 2023, the Company entered into an Agreement and Plan of Merger with Atlantic Union. The merger agreement provides that the Company will merge with and into Atlantic Union, with Atlantic Union continuing as the surviving entity. Immediately following the merger of the Company and Atlantic Union, the Bank will merge with and into Atlantic Union’s wholly owned bank subsidiary, Atlantic Union Bank, with Atlantic Union Bank continuing as the surviving bank. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of common stock of the Company will be converted into the right to receive 1.35 shares of common stock of Atlantic Union, with cash to be paid in lieu of any fractional shares. The merger is expected to close in the first quarter of 2024, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval by the Company’s shareholders.

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 the allowance for credit losses ("ACL") and goodwill and intangible assets. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K for the year ended December 31, 2022.

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 Credit Losses - Loans

The purpose of the ACL is to provide for expected losses in the loan portfolio. The allowance is increased by the provision for credit losses for loans, available for sale securities and unfunded commitments, 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 ACL and the provision for or recovery of credit loss expense.

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

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

Calculation and analysis of the ACL 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 ACL has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates and judgments.

The Company's ACL consists of quantitative and qualitative allowances and an allowance for loans that are individually assessed for credit losses. Each of these components is determined based upon estimates and judgments. The quantitative allowance uses historical default and loss experience as well as estimates for weighted average lives to calculate lifetime expected losses, along with various qualitative factors, including the effects of changes in risk selection, underwriting standards, and lending policies; expected economic conditions throughout a reasonable and supportable period of 24 months; experience of lending staff; quality of the loan review system; and changes in the regulatory, legal, and competitive environment. The Company considers economic forecasts from highly recognized third-parties for the model inputs. Loans are segmented based on the type of loan and internal risk ratings. The Company utilizes two calculation methodologies to estimate the collective quantitative allowance: the vintage method and the non-discounted cash flow method. Allowance estimates for residential real estate loans are determined by a vintage method which pools loans by date of origination and applies historical average loss rates based on the age of the loans. Allowance estimates for all other loan types are determined by a non-discounted cash flow method which applies historical probabilities of default and loss given default rates to model expected cash flows for each loan through its life and forecast future expected losses.

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Loans that do not share risk characteristics are evaluated on an individual basis. The individual reserve component relates to loans that have shown substantial credit deterioration as measured by risk rating and/or delinquency status. In addition, the Company has elected the practical expedient that would include loans for individual assessment consideration if the repayment of the loan is expected substantially through the operation or sale of collateral because the borrower is experiencing financial difficulty. Where the source of repayment is the sale of collateral, the ACL is based on the fair value of the underlying collateral, less selling costs, compared to the amortized cost basis of the loan. If the ACL is based on the operation of the collateral, the reserve is calculated based on the fair value of the collateral calculated as the present value of expected cash flows from the operation of the collateral, compared to the amortized cost basis. If the Company determines that the value of a collateral dependent loan is less than the recorded investment in the loan, the Company charges off the deficiency if it is determined that such amount is deemed to be a confirmed loss.

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.

Goodwill and Intangible Assets

The Company's goodwill was recognized in connection with past business combinations and is reported at the community banking segment. The Company reviews the carrying value annually at June 30 or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. The annual evaluation at June 30, 2023 concluded that no impairment existed. No indicators of impairment were noted for the nine months ended September 30, 2023 or 2022. 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.

Non-GAAP Presentations

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

Internet Access to Corporate Documents

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

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RESULTS OF OPERATIONS

Executive Overview

Third quarter 2023 financial highlights include the following:

•

Net income was $5.8 million, or $0.54 per diluted common share, for the third quarter of 2023, compared to $7.1 million or $0.67 per diluted common share, for the previous quarter and $9.3 million or $0.87 per diluted common share, for the same quarter of 2022.

•

Average deposits grew $51.5 million, or 8.0% annualized, during the quarter and decreased $144.0 million, or 5.2%, from the same quarter of 2022.

•

Loans grew $29.0 million, or 5.2% annualized, during the quarter and increased $154.0 million, or 7.3%, from the same quarter of 2022.

•

Fully taxable equivalent net interest margin was 2.76% for the third quarter, down from 2.88% in the previous quarter and 3.20% in the same quarter of the prior year.

•

Annualized net recoveries as a percentage of average loans outstanding were (0.06%) for the third quarter of 2023, compared to (0.05%) in the previous quarter and (0.01%) in the same quarter in the prior year.

•

Nonperforming assets as a percentage of total assets were 0.12% at September 30, 2023, compared to 0.04% at June 30, 2023 and 0.05% at September 30, 2022

Net Interest Income

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

Three months ended September 30, 2023 and 2022

Net interest income on a taxable equivalent basis was $20.7 million for the third quarter of 2023, a decrease of $3.4 million, or 13.9%, compared to $24.1 million for the same quarter of 2022. Average loan balances for the 2023 quarter were up $183.2 million, or 8.9%, over the 2022 quarter reflecting core loan growth since the third quarter of 2022. Loan yields for the quarter were 72 basis points higher than the 2022 quarter.

For the third quarter of 2023, the Company's yield on interest-earning assets was 4.17%, compared to 3.35% for the third quarter of 2022. The cost of interest-bearing deposits was 2.04% for the 2023 quarter compared to 0.17% for the 2022 quarter. The interest rate spread was 1.96% for the 2023 quarter compared to 3.09% for the 2022 quarter. The net interest margin, on a fully taxable equivalent basis, was 2.76% for the 2023 quarter compared to 3.20% for the 2022 quarter, a contraction of 44 basis points. The decline from the same quarter in 2022 is a reflection of a changing mix of assets and increasing market rates resulting in an increase in the yield on average earning assets of 82 basis points, more than offset by a 195 basis point rise in the cost of average interest-bearing liabilities.

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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 September 30, 2023 and 2022. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans is only recognized when the loan returns to accrual status or at full payment of principal.

Net Interest Income Analysis (dollars in thousands)

	Three Months Ended September 30,
	2023		2022		2023		2022		2023			2022
	Average Balance				Income/Expense				Yield/Rate

Total loans	$	2,251,163	$	2,068,003	$	27,559	$	21,191		4.81	%		4.09	%

Securities:
Taxable		630,034		708,076		2,727		2,782		1.73			1.56
Tax exempt		4,279		20,459		30		138		2.85			2.70
Total securities		634,313		728,535		2,757		2,920		1.74			1.60

Deposits in other banks		53,758		208,754		797		1,099		5.88			2.09

Total interest-earning assets		2,939,234		3,005,292		31,113		25,210		4.17			3.35

Non-earning assets		148,997		165,036

Total assets	$	3,088,231	$	3,170,328

Deposits:
Demand	$	489,126	$	522,021		983		34		0.80			0.03
Savings and money market		923,732		950,339		5,448		368		2.34			0.15
Time		346,136		251,571		2,626		339		3.00			0.53
Total deposits		1,758,994		1,723,931		9,057		741		2.04			0.17

Customer repurchase agreements		65,550		18,719		759		11		4.60			0.23
Other short-term borrowings		12,935		—		179		—		5.42			—
Long-term borrowings		28,393		28,293		402		392		5.55			5.54
Total interest-bearing liabilities		1,865,872		1,770,943		10,397		1,144		2.21			0.26

Noninterest-bearing demand deposits		872,488		1,051,585
Other liabilities		20,059		17,482
Shareholders' equity		329,812		330,318
Total liabilities and shareholders' equity	$	3,088,231	$	3,170,328

Interest rate spread										1.96	%		3.09	%
Net interest margin										2.76	%		3.20	%

Net interest income (taxable equivalent basis)						20,716		24,066
Less: Taxable equivalent adjustment						53		59
Net interest income					$	20,663	$	24,007

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

	Three Months Ended September 30,
	2023 vs. 2022
				Change
	Increase			Attributable to
	(Decrease)			Rate			Volume
Interest income

Total loans	$	6,368		$	4,377		$	1,991

Securities:
Taxable		(55	)		268			(323	)
Tax exempt		(108	)		5			(113	)
Total securities		(163	)		273			(436	)
Deposits in other banks		(302	)		944			(1,246	)
Total interest income		5,903			5,594			309

Interest expense
Deposits:
Demand		949			951			(2	)
Savings and money markets		5,080			5,091			(11	)
Time		2,287			2,115			172
Total deposits		8,316			8,157			159
Customer repurchase agreements		748			660			88
Other short-term borrowings		179			—			179
Long-term borrowings		10			9			1
Total interest expense		9,253			8,826			427
Net interest income	$	(3,350	)	$	(3,232	)	$	(118	)

Nine months ended September 30, 2023 and 2022

Net interest income on a taxable equivalent basis was $65.2 million for the nine months ended September 30, 2023, a decrease of $925 thousand, or 1.4%, compared to $66.1 million, for the same period of 2022. Average loan balances for the 2023 period were up $202.7 million, or 10.0%, over the 2022 period reflecting core loan growth since the third quarter of 2022. Loan yields for the period were 77 basis points higher than the 2022 period.

For the nine months ended September 30, 2023, the Company's yield on interest-earning assets was 4.03%, compared to 3.00% for 2022. The cost of interest-bearing deposits was 1.52% for the 2023 period compared to 0.14% for the 2022 period. The interest rate spread was 2.28% for the 2023 period compared to 2.78% for the 2022 period. The net interest margin, on a fully taxable equivalent basis, was 2.94% for the 2023 period compared to 2.86% for the 2022 period, an increase of 8 basis points. The increase from the same period in 2022 is a reflection of a changing mix of assets and increasing market rates resulting in an increase in the yield on average earning assets of 103 basis points, partially offset by a 153 basis point rise in the cost of average interest-bearing liabilities.

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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 nine months ended September 30, 2023 and 2022. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans is only recognized when the loan returns to accrual status or at full payment of principal.

Net Interest Income Analysis (dollars in thousands)

	Nine Months Ended September 30,
	2023		2022		2023		2022		2023			2022
	Average Balance				Income/Expense				Yield/Rate
Total Loans	$	2,219,599	$	2,016,903	$	78,612	$	59,122		4.68	%		3.91	%

Securities:
Taxable		647,688		703,048		8,384		7,691		1.73			1.46
Tax exempt		7,049		18,977		146		375		2.76			2.64
Total securities		654,737		722,025		8,530		8,066		1.74			1.49

Deposits in other banks		46,445		344,887		1,818		2,076		5.23			0.80

Total interest-earning assets		2,920,781		3,083,815		88,960		69,264		4.03			3.00

Non-earning assets		149,533		176,821

Total assets	$	3,070,314	$	3,260,636

Deposits:
Demand	$	480,422	$	531,301		1,815		107		0.51			0.03
Savings and Money Market		891,035		995,555		11,841		708		1.78			0.10
Time		309,854		290,725		5,493		1,141		2.37			0.52
Total deposits		1,681,311		1,817,581		19,149		1,956		1.52			0.14

Customer repurchase agreements		45,071		31,858		1,519		26		4.50			0.11
Other short-term borrowings		52,142		—		1,908		—		4.83			—
Long-term borrowings		28,368		28,268		1,183		1,156		5.50			5.45
Total interest-bearing liabilities		1,806,892		1,877,707		23,759		3,138		1.75			0.22

Noninterest-bearing demand deposits		917,113		1,027,942
Other liabilities		17,909		17,354
Shareholders' equity		328,400		337,633
Total liabilities and shareholders' equity	$	3,070,314	$	3,260,636

Interest rate spread										2.28	%		2.78	%
Net interest margin										2.94	%		2.86	%

Net interest income (taxable equivalent basis)						65,201		66,126
Less: Taxable equivalent adjustment						167		176
Net interest income					$	65,034	$	65,950

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

	Nine Months Ended September 30,
	2023 vs. 2022
				Change
	Increase			Attributable to
	(Decrease)			Rate			Volume
Interest income
Total loans	$	19,490		$	13,146		$	6,344

Securities:
Taxable		693			1,332			(639	)
Tax exempt		(229	)		17			(246	)
Total securities		464			1,349			(885	)
Deposits in other banks		(258	)		2,882			(3,140	)
Total interest income		19,696			17,377			2,319

Interest expense
Deposits:
Demand		1,708			1,719			(11	)
Savings and money markets		11,133			11,215			(82	)
Time		4,352			4,272			80
Total deposits		17,193			17,206			(13	)
Customer repurchase agreements		1,493			1,478			15
Other short-term borrowings		1,908			—			1,908
Long-term borrowings		27			23			4
Total interest expense		20,621			18,707			1,914
Net interest income (taxable equivalent basis)	$	(925	)	$	(1,330	)	$	405

Noninterest Income

Three months ended September 30, 2023 and 2022

For the quarter ended September 30, 2023, noninterest income increased $14 thousand, or 0.3%, compared to the comparable 2022 quarter. Details of individual accounts are shown in the table below.

	Three Months Ended September 30,
	(Dollars in thousands)
	2023		2022			$ Change			% Change
Noninterest income:
Wealth management income	$	1,736	$	1,603		$	133			8.3	%
Service charges on deposit accounts		565		681			(116	)		(17.0	)
Interchange fees		1,162		1,013			149			14.7
Other fees and commissions		169		233			(64	)		(27.5	)
Mortgage banking income		293		388			(95	)		(24.5	)
Income from Small Business Investment Companies		453		501			(48	)		(9.6	)
Income from insurance investments		128		100			28			28.0
Losses on premises and equipment, net		—		(2	)		2			100.0
Other		268		243			25			10.3
Total noninterest income	$	4,774	$	4,760		$	14			0.3

Wealth management income increased $133 thousand compared to the same quarter of 2022, reflecting net growth in assets under management and market gains. Interchange fees increased $149 thousand. Mortgage banking income decreased $95 thousand in the 2023 quarter compared to the 2022 quarter, reflecting decreased demand for new home purchases and refinancing in an increasing rate environment. Service charges on deposit accounts decreased $116 thousand reflecting lower non-sufficient funds fee income in the 2023 quarter.

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Nine months ended September 30, 2023 and 2022

For the nine months ended September 30, 2023, noninterest income decreased $1.7 million, or 11.2%, compared to the same period of 2022. Details of individual accounts are shown in the table below.

	Nine Months Ended September 30,
	(Dollars in thousands)
	2023			2022			$ Change			% Change
Noninterest income:
Wealth management income	$	5,030		$	4,999		$	31			0.6	%
Service charges on deposit accounts		1,685			2,079			(394	)		(19.0	)
Interchange fees		3,458			2,990			468			15.7
Other fees and commissions		493			699			(206	)		(29.5	)
Mortgage banking income		634			1,490			(856	)		(57.4	)
Securities losses, net		(68	)		—			(68	)		—
Income from Small Business Investment Companies		888			1,672			(784	)		(46.9	)
Income from insurance investments		594			644			(50	)		(7.8	)
Losses on premises and equipment, net		(113	)		(82	)		(31	)		(37.8	)
Other		900			706			194			27.5
Total noninterest income	$	13,501		$	15,197		$	(1,696	)		(11.2	)

Service charges on deposits decreased $394 thousand while interchange fees increased $468 thousand. Mortgage banking income decreased $856 thousand in the first nine months of 2023 compared to the same period in 2022, reflecting decreased demand for new home purchases and refinancing in an increasing rate environment. Income from small business investment companies declined by $784 thousand in the first three quarters of 2023 period compared to the same period of 2022 reflecting lower distributions received and fair market value adjustments.

Noninterest Expense

Three months ended September 30, 2023 and 2022

For the three months ended September 30, 2023, noninterest expense increased $1.9 million, or 11.5%, compared to the same quarter of 2022. Details of individual accounts are shown in the table below.

	Three Months Ended September 30,
	(Dollars in thousands)
	2023			2022		$ Change			% Change
Noninterest Expense
Salaries and employee benefits	$	9,229		$	9,618	$	(389	)		(4.0	)%
Occupancy and equipment		1,601			1,514		87			5.7
FDIC assessment		354			227		127			55.9
Bank franchise tax		520			488		32			6.6
Core deposit intangible amortization		262			310		(48	)		(15.5	)
Data processing		821			818		3			0.4
Software		470			362		108			29.8
Other real estate owned, net		(10	)		3		(13	)		(433.3	)
Merger related expenses		1,702			—		1,702			—
Other		3,394			3,108		286			9.2
Total noninterest expense	$	18,343		$	16,448	$	1,895			11.5

The $1.7 million in merger related expenses in the third quarter of 2023 is associated with the pending merger agreement with Atlantic Union. The $389 thousand decrease in salary and employee benefits in the third quarter of 2023 compared to the same quarter of 2022 was primarily due to lower incentive and commission expense partially offset by a higher salary base. The increase in the Federal Deposit Insurance Corporation ("FDIC") assessment of $127 thousand was the result of an increase in the base assessment rate. The increase in other expenses was primarily the result of increased costs in director compensation.

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Nine months ended September 30, 2023 and 2022

For the nine months ended September 30, 2023, noninterest expense increased $2.9 million, or 6.2%, compared to the same period of 2022. Details of individual accounts are shown in the table below.

	Nine Months Ended September 30,
	(Dollars in thousands)
	2023			2022		$ Change			% Change
Noninterest Expense
Salaries and employee benefits	$	26,701		$	26,936	$	(235	)		(0.9	)%
Occupancy and equipment		4,676			4,576		100			2.2
FDIC assessment		1,053			694		359			51.7
Bank franchise tax		1,550			1,452		98			6.7
Core deposit intangible amortization		817			960		(143	)		(14.9	)
Data processing		2,611			2,446		165			6.7
Software		1,391			1,088		303			27.8
Other real estate owned, net		(10	)		4		(14	)		(350.0	)
Merger related expenses		1,702			—		1,702			—
Other		9,683			9,096		587			6.5
Total noninterest expense	$	50,174		$	47,252	$	2,922			6.2

The $1.7 million in merger related expenses in 2023 is associated with the pending merger agreement with Atlantic Union. The $235 thousand decrease in salary and employee benefits in the nine months ended September 30, 2023 compared to the same period of 2022 was primarily due to reduced incentive and commission expense partially offset by a higher salary base. The increase in the FDIC assessment of $359 thousand was the result of an increase in the base assessment rate. Software expense increased $303 thousand for upgrades in ATM programs and other product upgrades. Other expenses increased $587 thousand reflecting inflationary price increases from vendors for various products and services in the 2023 period compared to the 2022 period.

Non-GAAP Financial Measures

The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of other real estate owned ("OREO"), (2) core deposit intangible amortization and (c) merger related expenses 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 2023 quarter was 64.31% compared to 55.98% for the 2022 quarter. The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance but cautions that such information not be viewed as a substitute for GAAP information. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Efficiency Ratio
Noninterest expense	$	18,343		$	16,448		$	50,174		$	47,252
Add: gain on sale of OREO, net of write-downs		13			—			13			—
Subtract: core deposit intangible amortization		(262	)		(310	)		(817	)		(960	)
Subtract: merger related expenses		(1,702	)		—			(1,702	)		—
	$	16,392		$	16,138		$	47,668		$	46,292

Net interest income	$	20,663		$	24,007		$	65,034		$	65,950
Tax equivalent adjustment		53			59			167			176
Noninterest income		4,774			4,760			13,501			15,197
Add: losses on securities		—			—			68			—
Add: losses on premise and equipment		—			2			113			82
	$	25,490		$	28,828		$	78,883		$	81,405

Efficiency ratio		64.31	%		55.98	%		60.43	%		56.87	%

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Net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for both the 2023 and 2022 periods is 21%. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income
Non-GAAP measures:
Interest income - loans	$	27,559		$	21,191		$	78,612		$	59,122
Interest income - investments and other		3,554			4,019			10,348			10,142
Interest expense - deposits		(9,057	)		(741	)		(19,149	)		(1,956	)
Interest expense - customer repurchase agreements		(759	)		(11	)		(1,519	)		(26	)
Interest expense - other short-term borrowings		(179	)		—			(1,908	)		—
Interest expense - long-term borrowings		(402	)		(392	)		(1,183	)		(1,156	)
Total net interest income	$	20,716		$	24,066		$	65,201		$	66,126
Less non-GAAP measures:
Tax benefit realized on non-taxable interest income - loans	$	(47	)	$	(31	)	$	(136	)	$	(98	)
Tax benefit realized on non-taxable interest income - municipal securities		(6	)		(28	)		(31	)		(78	)
GAAP measures net interest income	$	20,663		$	24,007		$	65,034		$	65,950

Income Taxes

The effective tax rate for the third quarter of 2023 was 24.16% compared to 20.92% for the third quarter of 2022. The effective rate for the nine months of 2023 was 21.97% compared to 21.11% in the same period of 2022. The increase in the rate for the 2023 quarter compared to the 2022 is the result of the non-deductibility of the majority of the $1.7 million in merger related expenses. The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of the assets and liabilities using the applicable enacted tax rate.

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 had been consistently benign over the past several years but substantially increased beginning in mid-2021. Inflation has moderated in 2023 but is still significantly elevated relative to recent history. Management is closely monitoring noninterest expenses as a result of current inflation trends to implement cost mitigation measures, as applicable.

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.

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The available for sale securities portfolio was $543.9 million at September 30, 2023, compared to $608.1 million at December 31, 2022, a decrease of $64.1 million, or 10.5%. At September 30, 2023, the available for sale portfolio had an amortized cost of $619.0 million, resulting in a net unrealized loss of $75.1 million. At December 31, 2022, the available for sale portfolio had an amortized cost of $679.1 million, resulting in a net unrealized loss of $71.1 million. The slight deterioration in the net unrealized loss was a result of an increase in market rates during the period which was partially offset by the reductions in the size and duration of the portfolio.

The Company sold securities available for sale totaling $12.8 million par value, net and realized a net loss of $68 thousand during the nine months ended September 30, 2023. There were no security sales during the nine months ended September 30, 2022. The Company has other sources of liquidity and currently intends to hold the remaining available for sale securities until maturity. The Company has established lines of credit totaling $110.0 million with correspondent banks, has access to the Federal Reserve discount borrowing window, and $446.5 million of borrowing capacity at the Federal Home Loan Bank ("FHLB") without pledging additional collateral.

The Company is cognizant of the recent volatility in market interest rates and has elected to execute an asset liability strategy of holding high quality securities with relatively low optionality and moderate and overall balanced duration.

Loans

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans.

Total loans were $2.3 billion at September 30, 2023 an increase of $87.0 million, or 4.0% from December 31, 2022. Average loans, including loans held for sale, were $2.3 billion and $2.1 billion for the third quarters of 2023 and 2022, respectively, an increase of $183.2 million, or 8.9%.

Loans held for sale totaled $2.0 million at September 30, 2023 and $1.1 million at December 31, 2022. Secondary loan production volume was $64.2 million for the nine month period ended September 30, 2023 and $55.8 million for the same period of 2022. These loans were approximately 75% purchase and 25% refinance for the quarter ended September 30, 2023, and 65% purchase and 35% refinance for the year ended December 31, 2022.

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

	As of September 30, 2023
	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	$	30,773	$	195,901	$	39,628	$	3,538	$	269,840
Commercial real estate - owner occupied		42,618		261,696		107,242		1,595		413,151
Commercial real estate - non-owner occupied		80,960		489,014		196,456		37,010		803,440
Residential real estate		17,094		173,429		149,884		26,150		366,557
Home equity		4,758		25,153		54,435		7,047		91,393
Total real estate		176,203		1,145,193		547,645		75,340		1,944,381

Commercial and industrial		78,376		148,920		85,826		9,087		322,209
Consumer		500		4,115		513		1,737		6,865

Total loans, net of deferred fees and costs	$	255,079	$	1,298,228	$	633,984	$	86,164	$	2,273,455

Interest rate sensitivity:
Fixed interest rates	$	199,461	$	1,130,164	$	505,288	$	30,435	$	1,865,348
Floating or adjustable rates		55,617		168,065		128,696		55,729		408,107

Total loans, gross	$	255,078	$	1,298,229	$	633,984	$	86,164	$	2,273,455

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Allowance for Credit Losses

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

On January 1, 2023, the Company adopted the current expected credit losses ("CECL") standard for estimating credit losses, which resulted in increases of $5.2 million in the ACL. At September 30, 2023, the ACL was $25.1 million compared to $19.6 million at December 31, 2022. The ACL as a percentage of total loans at such dates was 1.11% and 0.91%, respectively. Management will continue to evaluate the adequacy of the Company's ACL.

The Company recorded a recovery of credit losses for the third quarter of 2023 of $538 thousand compared to a provision of $615 thousand in the third quarter of the previous year. The negative provision for the third quarter of 2023 was a function of net recovery activity during the period as well as a slight reduction in the expected loss rate from the CECL model. The provision expense in the third quarter of 2022 was the result of loan growth during the period. The allowance for unfunded commitments is included in other liabilities on the consolidated balance sheets.

Prior to the adoption of ASC 326, the Company computed its ASC 450 loan balance by reducing total loans by acquired loans and loans that were evaluated for impairment individually. The general allowance at December 31, 2022 was 0.94%. On a dollar basis, the reserve was $19.5 million. This segment of the allowance represented by far the largest portion of the loan portfolio and the largest aggregate risk. There was no allowance for performing acquired loans in accordance with GAAP. The FASB ASC 450 loan loss reserve balance is the total allowance for loan and lease losses reduced by allowances associated with these other pools of loans. The was no specific reserves related to impaired loans at December 31, 2022. The reserve related to the acquired loans with deteriorated credit quality was $93 thousand at December 31, 2022. This was the only portion of the reserve related to acquired loans as of that date.

The following tables present the Company's credit loss and recovery experience for the periods indicated (dollars in thousands):

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

Balance at December 31, 2022	$	2,874		$	1,796		$	3,785		$	7,184		$	3,077		$	790		$	49		$	19,555
Day 1 impact of CECL adoption		883			272			1,078			2,069			653			190			47			5,192
Provision for (recovery of) credit losses		(40	)		756			(315	)		(388	)		103			(77	)		(24	)		15
Charge-offs		(360	)		—			—			—			(6	)		—			(63	)		(429	)
Recoveries		471			6			32			40			100			50			92			791
Balance at September 30, 2023	$	3,828		$	2,830		$	4,580		$	8,905		$	3,927			953		$	101		$	25,124

Average Loans	$	238,283		$	237,021		$	439,810		$	855,282		$	348,484		$	92,258		$	6,760		$	2,217,898
Ratio of net (recoveries) charge-offs to average loans*		(0.06	)%		(0.00	)%		(0.01	)%		(0.01	)%		(0.04	)%		(0.07	)%		(0.57	)%		(0.02	)%

*Annualized

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

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

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

* Annualized

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Asset Quality Indicators

The following table provides qualitative indicators relevant to the Company's loan portfolio at September 30, 2023 and December 31, 2022.

Asset Quality Ratios

	September 30, 2023			December 31, 2022
Allowance to loans		1.11	%		0.91	%
Net recoveries to allowance (1)		1.92			3.68
Net recoveries to average loans (1)		0.02			0.04
Nonperforming assets to total assets		0.12			0.05
Nonperforming loans to loans		0.16			0.06
Provision to net recoveries/charge-offs (1)		(0.16	)		221.81
Provision to average loans (1)		0.00			0.08
Allowance to nonperforming loans		671.76			1,478.08

__________________________

(1) - Annualized

Nonperforming Assets (Loans and Other Real Estate Owned)

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

Nonperforming loans to total loans were 0.16% at September 30, 2023 and 0.06% at December 31, 2022. Nonperforming assets include nonperforming loans, OREO and repossessions. Nonperforming assets represented 0.12% of total assets at September 30, 2023 and 0.05% at December 31, 2022. The increase in nonperforming assets resulted from an increase of $2.4 million 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.

Individually Assessed Loans

A loan is individually assessed 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 individually assessed loans at September 30, 2023 were $3.5 million. Impaired loans, exclusive of purchased credit impaired loans, were $5.1 million at December 31, 2022.

Other Real Estate Owned

There was no OREO as of September 30, 2023 compared to $27 thousand at December 31, 2022. OREO is initially recorded at fair value, less estimated costs to sell at the date of foreclosure. Loan losses resulting from foreclosure are charged against the ACL 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.

Deposits

The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Total deposits were $2.6 billion at September 30, 2023 and December 31, 2022.

Average interest-bearing deposits were $1.8 billion for the third quarter of 2023, compared to $1.7 billion for the third quarter of 2022, an increase of $35.1 million, or 2.0%. Average noninterest-bearing deposits for the 2023 quarter were $872.5 million, compared to $1.1 billion for the 2022 quarter, a decrease of $179.1 million, or 17.0%.

The Company's primary focus on the liability side of the balance sheet is growing core deposits and their affiliated relationships. The Company's cost of interest-bearing deposits for the third quarter of 2023 was 2.04% compared to 0.17% for the third quarter of 2022.

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Certificates of Deposit over $250,000

At September 30, 2023, certificates of deposit that met or exceeded the FDIC insurance limit held by the Company were $133.4 million, and were $87.6 million at December 31, 2022. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limits at September 30, 2023 (dollars in thousands):

	September 30, 2023
3 months or less	$	34,118
Over 3 through 6 months		67,892
Over 6 through 12 months		25,459
Over 12 months		5,966
Total	$	133,435

The Company's total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250 thousand, were approximately $1.0 billion at September 30, 2023 and approximately $974.0 million at December 31, 2022. 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 $327.3 million at September 30, 2023 compared to $321.2 million at December 31, 2022, an increase of $6.1 million, or 1.9%.

The Company paid cash dividends of $0.90 per share during the nine months of 2023 while the diluted earnings per share for the same period was $2.08.

The following table provides information on the regulatory capital ratios for the Company and the Bank at September 30, 2023 and December 31, 2022. Management believes, as of September 30, 2023, that the Company and the Bank more than satisfy all capital adequacy requirements to which they are subject.

	Percentage At September 30, 2023						Percentage At December 31, 2022
Risk-Based Capital Ratios:	Company			Bank			Company			Bank

Common equity tier 1 capital ratio		11.77	%		12.68	%		11.70	%		12.57	%
Tier 1 capital ratio		12.89			12.68			12.86			12.57
Total capital ratio		13.91			13.69			13.67			13.38

Leverage Capital Ratio:

Tier 1 leverage ratio		10.61			10.44			10.36			10.12

Stock Repurchase Program

The Company has an approved one year stock repurchase plan that authorizes repurchases of up to $10 million of the Company's common stock through December 31, 2023.

During the nine month period ended September 30, 2023, the Company repurchased 34,131 shares at an average cost of $30.58 per share, for a total cost of $1.0 million. In the nine month period ended September 30, 2022, the Company repurchased 203,709 shares at an average cost of $36.26 per share, for a total cost of $7.4 million. Under the terms of the merger agreement with Atlantic Union, the Company may not repurchase shares without the prior approval of Atlantic Union.

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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 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. At September 30, 2023 and December 31, 2022, there were $85.0 million and $100.5 million, respectively, in principal advance obligations to the FHLB. The Company's remaining credit availability from the FHLB was $677.6 million as of September 30, 2023, $446.5 million of which could be accessed without pledging additional collateral.

Also, the Company had $170.0 million outstanding in letters of credit at September 30, 2023 and December 31, 2022. 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 $110.0 million and has access to the Federal Reserve Bank of Richmond's discount window. There were no amounts outstanding under these facilities at September 30, 2023 or December 31, 2022.

The Company has a relationship with IntraFi 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 the Economic Growth, Regulatory Relief, and Consumer Protection Act, 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. The Company had $85.9 million deposits through IntraFi's program as of September 30, 2023 and none at December 31, 2022.

Off-Balance Sheet Activities

The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. Other than subsidiaries to issue trust preferred securities, the Company does not have any off-balance sheet subsidiaries. Off-balance sheet transactions at September 30, 2023 and at December 31, 2022 were as follows (dollars in thousands):

	September 30, 2023		December 31, 2022
Commitments to extend credit	$	619,096	$	635,851
Standby letters of credit		11,826		12,897
Mortgage loan rate-lock commitments		2,917		1,920

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

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

Interest Rate Risk Management

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

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

A balance sheet is considered asset sensitive when its earning assets (loans and securities) reprice faster or to a greater extent than its liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively more net interest income when interest rates rise and less net interest income when they decline. Based on the Company's simulation analysis, management believes the Company's interest sensitivity position at September 30, 2023 is somewhat asset sensitive. Management makes no predictions on the direction or magnitude of future rates and seeks to maintain a relatively neutral interest rate risk profile to minimize the exposure to higher or lower market rates.

Earnings Simulation

The following table shows the estimated impact of changes in interest rates on net interest income as of September 30, 2023 (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 marginally when interest rates are higher than current rates.

Estimated Changes in Net Interest Income

	September 30, 2023
	Change in Net Interest Income
Change in interest rates	Amount			Percent
Up 4.00%	$	(178	)		-0.2	%
Up 3.00%		(159	)		(0.2	)
Up 2.00%		(82	)		(1.0	)
Up 1.00%		(35	)		(0.0	)
Flat		—			—
Down 1.00%		(1,015	)		(1.2	)
Down 2.00%		(2,562	)		(3.0	)
Down 3.00%		(5,041	)		(5.9	)
Down 4.00%		(7,252	)		(8.5	)

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.

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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.

Economic Value Simulation

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

The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly period ended September 30, 2023 (dollars in thousands):

Estimated Changes in Economic Value of Equity

	September 30, 2023
Change in interest rates	Amount		$ Change			% Change
Up 4.00%	$	386,579	$	(23,895	)		-5.8	%
Up 3.00%		403,921		(6,553	)		(1.6	)
Up 2.00%		417,248		6,774			1.7
Up 1.00%		420,739		10,265			2.5
Flat		410,474		—			—
Down 1.00%		388,112		(22,362	)		(5.5	)
Down 2.00%		343,351		(67,123	)		(16.4	)
Down 3.00%		279,069		(131,405	)		(32.0	)
Down 4.00%		199,858		(210,616	)		(51.3	)

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of September 30, 2023. 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 changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2023 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, 2022, filed with the SEC on March 14, 2023, and Quarterly Report on Form 10-Q for the period ended June 30, 2023, filed with the SEC on August 9, 2023.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Sales of Unregistered Securities - None

(b) Use of Proceeds - Not applicable

Stock Repurchase Program

The Company has an approved one year stock repurchase plan that authorizes the repurchase of up to $10 million of the Company's common stock through December 31, 2023. 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.

There were no shares of the Company's common stock repurchased during the three months ended September 30, 2023. Under the stock repurchase program, the Company has the remaining authority to repurchase up to $9.0 million of the Company's common stock as of September 30, 2023. Under the terms of the merger agreement with Atlantic Union, the Company may not repurchase shares without the prior consent of Atlantic Union.

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

None

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ITEM 6. EXHIBITS

31.1	Section 302 Certification of Jeffrey V. Haley, President and Chief Executive Officer.
31.2	Section 302 Certification of Jeffrey W. Farrar, Senior 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, Senior Executive Vice President, Chief Operating Officer and Chief Financial Officer.
101	Interactive data files formatted in Inline eXtensible Business Reporting Language for the quarter ended September 30, 2023 pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Consolidated Statements of Changes in Shareholders' Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited).
104	The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

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SIGNATURES

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

AMERICAN NATIONAL BANKSHARES INC.




	By:	/s/ Jeffrey V. Haley
		Jeffrey V. Haley
		President and Chief Executive Officer
Date - November 8, 2023		(principal executive officer)

	By:	/s/ Jeffrey W. Farrar
		Jeffrey W. Farrar
		Senior Executive Vice President,
		Chief Operating Officer and
		Chief Financial Officer
Date - November 8, 2023		(principal financial officer)

	By:	/s/ Cathy W. Liles
		Cathy W. Liles
		Senior Vice President and
		Chief Accounting Officer
Date - November 8, 2023		(principal accounting officer)