EDGAR 10-K Filing

Company CIK: 741516
Filing Year: 2024
Filename: 741516_10-K_2024_0001437749-24-008036.json

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ITEM 1. BUSINESS
ITEM 1 - BUSINESS
Overview
American National Bankshares Inc. is a one-bank holding company organized under the laws of the Commonwealth of Virginia in 1984. On September 1, 1984, the Company acquired all of the outstanding capital stock of American National Bank and Trust Company (the "Bank"), a national banking association chartered in 1909 under the laws of the United States. American National Bank and Trust Company is the only banking subsidiary of the Company.
As of December 31, 2023, the operations of the Company were conducted at 26 banking offices in south central Virginia and north central North Carolina. Through these offices, the Company serves its primary market area of south central Virginia, the New River Valley and Roanoke, Virginia, and north central North Carolina. The Bank provides a full array of financial products and services, including commercial, mortgage, and consumer banking; trust and investment services; and insurance. Services are also provided through 34 Automated Teller Machines ("ATMs"), "Online Banking," and "Telephone Banking."
The Company has two reportable segments, (i) community banking and (ii) wealth management. For more financial data and other information about each of the Company's operating segments, refer to "Note 21 - Segment and Related Information" of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Agreement and Plan of Merger
On July 24, 2023, the Company entered into an Agreement and Plan of Merger with Atlantic Union Bankshares Corporation. 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. The merger is expected to close on April 1, 2024, subject to satisfaction of customary closing conditions.
Human Capital Resources
Profile
At December 31, 2023, the Company employed 334 full-time persons and 40 part-time persons. None of our employees are represented by a union or covered under a collective bargaining agreement. In the opinion of the management of the Company, relations with employees of the Company and the Bank are good.
As a holding company for a community bank, the Company is a relationship-driven organization. A key aspect of the Company's business strategy is for its senior officers to have primary contact with current and potential customers. The Company's growth and development are in large part a result of these personalized relationships with the customer base. The success of the Company also often depends on its ability to hire and retain qualified banking officers. The Company's senior officers have considerable experience in the banking industry and related financial services and are extremely valuable.
Corporate Culture
The Company believes that as a regional community bank it is only as strong as the communities it serves, and has established core values to guide the organization. We are relationship focused establishing trust by respecting others and doing the right thing. We work together as a team and value diverse perspectives that help move us forward together. We fulfill commitments through responsive communication and service to and with our employees, shareholders and customers. We strive to embrace change as it comes and to continually work to be better. We work to be genuine in both words and actions. The Company has worked to utilize technology to allow for more digital transactions for our customers and more options for remote work and virtual meetings. We work with local organizations to provide financial education to the communities we serve and support various not-for-profit organizations. During the pandemic, we were ardent participants in the Paycheck Protection Program ("PPP"), assisting small businesses, their employees and their communities.
Compensation and Benefits
The Company's senior officer compensation programs are designed to attract, retain and motivate bankers with the ability to generate strong business results and ensure the long-term success of the Company. The compensation committee of the Company's board of directors has established compensation programs that reflect and support the Company's strategic and financial performance goals, the primary goal being the creation of long-term value for the shareholders of the Company, while protecting the interests of the depositors of the Bank. In addition to competitive base and incentive compensation, the Company offers competitive benefits including paid vacation and sick leave, a 401(k) plan, health, dental, and vision plans, life and disability coverage, and a wellness plan. The Company has also entered into employment contracts with certain of its senior officers, and purchased key man life insurance policies to mitigate the risk of an unforeseen departure or death of certain of the senior officers.
100% of our employees were eligible for an incentive opportunity in 2023. Incentive plans include a mix of individual and corporate goals that are measurable and defined.
Diversity, Equity and Inclusion
We are committed to hiring diverse talent and fostering, cultivating and preserving a culture of a diversity, equity and inclusion. We believe that the collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities, and talent that our teammates invest in their work represents a significant part of not only our culture, but our reputation and achievement. We strive to foster a culture and workplace that, among other things, is inclusive and welcoming, treats everyone with respect and dignity, promotes people on their merits, and promotes diversity of thoughts, ideas, perspective and values. Our Board believes that diversity contributes to the overall effectiveness of the Board and generally conceptualizes diversity expansively to include, without limitation, concepts such as race, gender, ethnicity, sexual orientation, education, age, work experience, professional skills, geographic location and other qualities or attributes that support diversity. We have a Diversity, Equity and Inclusion Committee which includes a cross-functional group of teammates from diverse backgrounds, that manages our efforts to create a more diverse, equitable, and inclusive workplace.
Competition and Markets
Vigorous competition exists in the Company's service areas. The Company competes not only with national, regional, and community banks, but also with other types of financial institutions including finance companies, mutual and money market fund providers, financial technology companies, brokerage firms, wealth management firms, insurance companies, credit unions, and mortgage companies.
In addition, nonbank competitors are increasingly offering products and services that traditionally were only offered by banks. Many of these nonbank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks, which may allow them to offer greater lending limits and certain products and services that we do not provide.
The Company's primary market area is south central Virginia and north central North Carolina. The Company also has a significant presence in Roanoke, Virginia that increased substantially in connection with the acquisition of HomeTown Bankshares Corporation ("HomeTown") in 2019. The Company's Virginia banking offices are located in the cities of Danville, Lynchburg, Martinsville, Roanoke, and Salem and in the counties of Campbell, Franklin, Halifax, Henry, Montgomery, Pittsylvania and Roanoke. In North Carolina, the Company's banking offices are located in the cities of Burlington, Graham, Greensboro, Mebane, Raleigh, Winston-Salem, and Yanceyville, which are within the counties of Alamance, Caswell, Forsyth, Guilford, and Wake.
Unemployment levels in each Virginia market the Company serves have remained low for the past twelve months. Based on Virginia Employment Commission data, the state's seasonally-adjusted unemployment rate was 3.0% as of December 31, 2023 and December 31, 2022 and continued to be below the national rate of 3.7% at December 31, 2023. North Carolina's unemployment rate was 3.5% as of December 31, 2023, compared to 3.9% at December 31, 2022 and slightly below the national rate of 3.7% at December 31, 2023.
Service sectors, financials, medical, manufacturing, construction, timber management and production, and technology related businesses have remained strong. Other important business industries include farming, tobacco and hemp processing and sales, and food processing. New businesses continue to move into the Company's Virginia and North Carolina footprints, which has been positive for economic growth.
The Company's market area in North Carolina includes larger metropolitan areas characterized by strong competition in attracting deposits and making loans. Its most direct competition for deposits comes from commercial banks and credit unions located in the market area, including many regional and national banks. The company has experienced strong loan growth in these markets, but has been more challenged in growing deposit market share.
Supervision and Regulation
The Company and the Bank are extensively regulated under federal and state law. The following description briefly addresses certain provisions of federal and state laws and regulations, and their potential effects on the Company and the Bank. Proposals to change the laws, regulations, and policies governing the banking industry are frequently raised in U.S. Congress, in state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Company and the Bank are impossible to determine with any certainty. A change in applicable laws, regulations or policies, or a change in the way such laws, regulations or policies are interpreted by regulatory agencies or courts, may have a material impact on the business, operations, and earnings of the Company and the Bank.
American National Bankshares Inc.
American National Bankshares Inc. is qualified as a bank holding company ("BHC") within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Board of Governors of the Federal Reserve System (the "FRB"). As a bank holding company, the Company is subject to supervision, regulation and examination by the FRB and is required to file various reports and additional information with the FRB. The Company is also registered under the bank holding company laws of Virginia and is subject to supervision, regulation and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the "SCC").
American National Bank and Trust Company
American National Bank and Trust Company is a federally chartered national bank and is a member of the Federal Reserve System. As a national bank, the Bank is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC") and is required to file various reports and additional information with the OCC. The OCC has primary supervisory and regulatory authority over the operations of the Bank. Because the Bank accepts insured deposits from the public, it is also subject to examination by the Federal Deposit Insurance Corporation ("FDIC").
Depository institutions, including the Bank, are subject to extensive federal and state regulations that significantly affect their business and activities. Regulatory bodies have broad authority to implement standards and initiate proceedings designed to prohibit depository institutions from engaging in unsafe and unsound banking practices. The standards relate generally to operations and management, asset quality, interest rate exposure, and capital. The bank regulatory agencies are authorized to take action against institutions that fail to meet such standards.
As with other financial institutions, the earnings of the Bank are affected by general economic conditions and by the monetary policies of the FRB. The FRB exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, setting the reserve requirements of member banks, and establishing the discount rate on member bank borrowings. The policies of the FRB have a direct impact on loan and deposit growth and the interest rates charged and paid thereon. They also impact the source, cost of funds, and the rates of return on investments. Changes in the FRB's monetary policies have had a significant impact on the operating results of the Bank and other financial institutions and are expected to continue to do so in the future; however, the exact impact of such conditions and policies upon the future business and earnings cannot accurately be predicted.
Deposit Insurance
The deposits of the Bank are insured up to applicable limits by the DIF and are subject to deposit insurance assessments to maintain the DIF. The deposit insurance assessment base of the Bank is based on its average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The FDIC uses a "financial ratios method" based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets, such as the Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk ("CAMELS"). CAMELS composite ratings set a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions.
In March 2016, the FDIC implemented by final rule certain Dodd-Frank Act provisions by raising the DIF's minimum reserve ratio from 1.15% to 1.35%. The FDIC imposed a 4.5 basis point annual surcharge on insured depository institutions with total consolidated assets of $10 billion or more. The rule granted credits to smaller banks, such as the Bank, for the portion of their regular assessments that contributed to increasing the reserve ratio from 1.15% to 1.35%. In October 2022, the FDIC adopted a final rule to increase the assessment base rate schedules uniformly by two basis points beginning with the first quarterly assessment period of 2023. In 2023 and 2022, the Company recorded expense of $1.4 million and $903 thousand, respectively, for FDIC insurance premiums.
Capital Requirements
The FRB, the OCC and the FDIC have issued substantially similar capital guidelines applicable to all banks and bank holding companies. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.
Effective January 1, 2015, the Company and the Bank became subject to rules implementing the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision (the "Basel Committee") and certain provisions of the Dodd-Frank Act (the "Basel III Capital Rules"). The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets ("CET1") of at least 4.5%, plus a 2.5% "capital conservation buffer" (effectively resulting in a minimum CET1 ratio of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer, which was phased in ratably over a four year period beginning January 1, 2016, is designed to absorb losses during periods of economic stress. Institutions with a CET1 ratio above the minimum (4.5%) but below the minimum plus the conservation buffer (7.0%) will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall.
With respect to the Bank, the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act (the "FDIA") were also revised, effective as of January 1, 2015, to incorporate a CET1 ratio and to increase certain other capital ratios. To be well capitalized under the revised regulations, a bank must have the following minimum capital ratios: (i) a CET1 ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%. See "Prompt Corrective Action" below.
The Tier 1 and total capital to risk-weighted asset ratios of the Company were 12.81% and 13.82%, respectively, as of December 31, 2023, thus exceeding the minimum requirements. The CET 1 ratio of the Company was 11.70% and the Bank was 12.61% as of December 31, 2023. The Tier 1 and total capital to risk-weighted asset ratios of the Bank were 12.61% and 13.62%, respectively, as of December 31, 2023, also exceeding the minimum requirements.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures (and higher percentages for certain other types of interests), and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.
On September 17, 2019, the federal banking agencies jointly issued a final rule required by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the "EGRRCPA") that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to be subject to a 9% leverage ratio (commonly referred to as the community bank leverage ratio or "CBLR"). Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and are deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework has a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. The Company and the Bank do not currently expect to opt into the CBLR framework.
Dividends
The Company's principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank's payment of dividends to the Company. As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years. A depository institution may not pay any dividend if payment would cause the institution to become "undercapitalized" or if it already is "undercapitalized." The OCC may prevent the payment of a dividend if it determines that the payment would be an unsafe and unsound banking practice. The OCC also has advised that a national bank should generally pay dividends only out of current operating earnings.
Permitted Activities
As a bank holding company, the permitted activities of the Company are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the FRB determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the FRB must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition, and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. Despite prior approval, the FRB may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the FRB has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity.
Banking Acquisitions; Changes in Control
The BHC Act and related regulations require, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless it already owns a majority of such voting shares), (ii) acquire all or substantially all of the assets of another bank or bank holding company, or (iii) merge or consolidate with any other bank holding company. In determining whether to approve a proposed bank acquisition, the FRB will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, any outstanding regulatory compliance issues of any institution that is a party to the transaction, the projected capital ratios and levels on a post-acquisition basis, the financial condition of each institution that is a party to the transaction and of the combined institution after the transaction, the parties' managerial resources and risk management and governance processes and systems, the parties' compliance with the Bank Secrecy Act and anti-money laundering requirements, and the acquiring institution's performance under the Community Reinvestment Act of 1977, as amended (the "CRA"), and compliance with fair housing and other consumer protection laws.
Subject to certain exceptions, the BHC Act and the Change in Bank Control Act, together with the applicable regulations, require FRB approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered its securities with the Securities and Exchange Commission (the "SEC") under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. The Company's common stock is registered under Section 12 of the Exchange Act.
In addition, Virginia law requires the prior approval of the SCC for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares of a Virginia bank or any holding company that controls a Virginia bank, or (ii) the acquisition by a Virginia bank holding company of a bank or its holding company domiciled outside Virginia.
Source of Strength
FRB policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Safety and Soundness
There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event of a depository institution insolvency, receivership or default. For example, under the Federal Deposit Insurance Corporation Improvement Act of 1991, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.
Under the FDIA, the federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to capital management, internal controls and information systems, internal audit systems, data security, loan documentation, credit underwriting, interest rate exposure, risk management, vendor management, corporate governance, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines.
Prompt Corrective Action
The federal bank regulatory agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," as defined by the law. "Well capitalized" institutions may generally operate without additional supervisory restriction. With respect to "adequately capitalized" institutions, such banks cannot normally pay dividends or make any capital contributions that would leave the bank undercapitalized; they cannot pay a management fee to a controlling person if after paying the fee, it would be undercapitalized; and they cannot accept, renew, or rollover any brokered deposit unless the bank has applied for and been granted a waiver by the FDIC.
Immediately upon becoming "undercapitalized," a depository institution becomes subject to the provisions of Section 38 of the FDIA, which: (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution's assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the DIF, subject in certain cases to specified procedures. These discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of the institution or the sale of the institution to a willing purchaser; and (iv) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. Management believes, as of December 31, 2023 and 2022, the Bank met the requirements for being classified as "well capitalized."
Transactions with Affiliates
Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or "affiliates" or to make loans to insiders is limited. Loan transactions with an affiliate generally must be collateralized and certain transactions between the Bank and its affiliates, including the sale of assets, the payment of money, or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions. In addition, the Bank generally may not purchase securities issued or underwritten by affiliates.
Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank, are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives (which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank's unimpaired capital and unimpaired surplus. Section 22(g) of the Federal Reserve Act identifies limited circumstances in which the Bank is permitted to extend credit to executive officers.
Consumer Financial Protection
The Company is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. If the Company fails to comply with these laws and regulations, it may be subject to various penalties. Failure to comply with consumer protection requirements may also result in failure to obtain any required bank regulatory approval for merger or acquisition transactions the Company may wish to pursue or being prohibited from engaging in such transactions even if approval is not required.
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the "CFPB"), and giving it responsibility for implementing, examining, and enforcing compliance with federal consumer protection laws. The CFPB focuses on (i) risks to consumers and compliance with the federal consumer financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in those markets, (iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv) non-depository companies that offer one or more consumer financial products or services.
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit "unfair, deceptive or abusive" acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer's ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer's (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer's interests. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. Further regulatory positions taken by the CFPB may influence how other regulatory agencies may apply the subject consumer financial protection laws and regulations.
Community Reinvestment Act
The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. Furthermore, such assessment is also required of banks that have applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch. In the case of a BHC applying for approval to acquire a bank or BHC, the record of each subsidiary bank of the applicant BHC is subject to assessment in considering the application. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The Bank was rated "satisfactory" in its most recent CRA evaluation.
On October 24, 2023, the federal bank regulatory agencies issued a final rule to modernize their respective CRA regulations. The revised rules substantially alter the methodology for assessing compliance with the CRA, with material aspects taking effect January 1, 2026 and revised data reporting requirements taking effect January 1, 2027. Among other things, the revised rules evaluate lending outside traditional assessment areas generated by the growth of non-branch delivery systems, such as online and mobile banking, apply a metrics-based benchmarking approach to assessment, and clarify eligible CRA activities. The final rules are likely to make it more challenging and/or costly for the Bank to receive a rating of at least "satisfactory" on its CRA evaluation.
Anti-Money Laundering Legislation
The Company is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities ("AML laws"). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020.
The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.
Office of Foreign Assets Control
The U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") is responsible for administering and enforcing economic and trade sanctions against specified foreign parties, including countries and regimes, foreign individuals and other foreign organizations and entities. OFAC publishes lists of prohibited parties that are regularly consulted by the Company in the conduct of its business in order to assure compliance. The Company is responsible for, among other things, blocking accounts of, and transactions with, prohibited parties identified by OFAC, avoiding unlicensed trade and financial transactions with such parties and reporting blocked transactions after their occurrence. Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for the Company.
Privacy Legislation
Several recent laws, including the Right to Financial Privacy Act, and related regulations issued by the federal bank regulatory agencies, also provide new protections against the transfer and use of customer information by financial institutions. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers' personal information. Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy provisions generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated parties without prior notice and approval from the customer.
In October 2023, the CFPB proposed a new rule that would require a provider of payment accounts or products, such as the Bank, to make certain data available to consumers upon request regarding the products or services they obtain from the provider. The proposed rule is intended to give consumers control over their financial data, including with whom it is shared, and encourage competition in the provision of consumer financial products and services. For banks with over $850 million and less than $50 billion in total assets, such as the Bank, compliance would be required approximately two and one-half years after adoption of the final rule.
Incentive Compensation
The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets, that encourage inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. In 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees, or benefits that could lead to material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately balance risk and reward. The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements. The comment period for these proposed rules has closed, and a final rule has not yet been published. If the rules are adopted as proposed, they will restrict the manner in which executive compensation is structured.
The Nasdaq Stock Market, LLC, the exchange on which our common stock is listed, enacted a rule that became effective in 2023 requiring listed companies to adopt policies mandating the recovery or "clawback" of excess incentive compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. The company has adopted a clawback policy compliant with such rule, a copy of which is attached as Exhibit 97 to this From 10-K.
Mortgage Banking Regulation
In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank's mortgage origination activities are subject to the FRB's Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.
Cybersecurity
The federal bank regulatory agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution's board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal bank regulatory agencies expect financial institutions to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution's operations after a cyberattack. If we fail to meet the expectations set forth in this regulatory guidance, we could be subject to various regulatory actions and any remediation efforts may require us to devote significant resources
On November 18, 2021, the federal bank regulatory agencies issued a final rule, effective April 1, 2022, imposing new notification requirements for cybersecurity incidents. The rule requires financial institutions to notify their primary federal regulator as soon as possible and no later than 36 hours after the institution determines that a cybersecurity incident has occurred that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the institution's: (i) ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business, (ii) business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value, or (iii) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.
In July 2023, the SEC issued a final rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies that are subject to the reporting requirements of the Exchange Act. Specifically, the final rule requires current reporting about material cybersecurity incidents, periodic disclosures about a registrant's policies and procedures to identify and manage cybersecurity risk, management's role in implementing cybersecurity policies and procedures, and the board of directors' cybersecurity expertise, if any, and its oversight of cybersecurity risk. See Item 1C. Cybersecurity of this Form 10-K for a discussion of the Company's cybersecurity risk management, strategy and governance.
To date, the Company has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but its systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could affect the regulatory structure under which the Company and the Bank operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material adverse effect on the business, financial condition and results of operations of the Company and the Bank.
Effect of Governmental Monetary Policies
The Company's operations are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates to influence general economic conditions. These policies have a significant impact on overall growth and distribution of loans, investments and deposits; they affect interest rates charged on loans or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future. As a result, it is difficult for the Company to predict the potential effects of possible changes in monetary policies upon its future operating results.
Internet Access to Company Documents
The Company provides access to its SEC filings through a link on the Investor Relations page of the Company's website at www.amnb.com. Reports available at no cost include the annual report 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 Annual Report on Form 10-K 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.
Executive Officers of the Company
The following table lists the executive officers of the Company, their ages, and their positions:
Name
Age
Position
Jeffrey V. Haley
President and Chief Executive Officer of the Company and the Bank since January 2013. President of the Company and Chief Executive Officer of the Bank since January 2012. Executive Vice President of the Company from June 2010 to December 2011. Senior Vice President of the Company from July 2008 to May 2010. President of the Bank since June 2010. Executive Vice President of the Bank, as well as President of Trust and Financial Services from July 2008 to May 2010. Executive Vice President and Chief Operating Officer of the Bank from November 2005 to June 2007.
Jeffrey W. Farrar
Jeffrey W. Farrar, also known as Jeff, among other names, joined the bank on August 1, 2019 and serves as Senior Executive Vice President, Chief Operating and Chief Financial Officer. Mr. Farrar has more than twenty-eight years of executive-level experience in community banking. Prior to his current role, he was Executive Vice President and Chief Financial Officer at Old Point Financial Corporation for two years and prior to that served in several executive capacities with Atlantic Union Bankshares Corporation and its predecessor companies. Mr. Farrar is a certified public accountant and a graduate of Virginia Tech with a B.S. in Accounting and a recipient of a Master's in Business Administration from Virginia Commonwealth University.
Edward C. Martin
Senior Executive Vice President and Chief Administrative Officer of the Company and the Bank and President of Virginia Banking since August 2020. Executive Vice President and Chief Credit Officer of the Company from December 2019 until August 2020. Executive Vice President and Chief Credit Officer of the Bank from March 2017 until August 2020. Senior Credit Officer of the Bank from September 2016 until March 2017. Regional Credit Officer of Bank of North Carolina from July 2015 to September 2016. Chief Credit Officer of Valley Bank from June 2007 to June 2015.
Rhonda P. Joyce
Executive Vice President and Co-Head of Banking: Commercial of the Bank since November 2021. Executive Vice President and Regional President of the Bank from September 2016 until November 2021. Senior Vice President and Market President since joining the Bank in connection with the MidCarolina Financial Corporation merger in July 2011.
Alexander Jung
Executive Vice President and Co-Head of Banking: Consumer & Financial Services of the Bank since November 2021. Senior Vice President and President of the North Carolina Market, Blue Ridge Bank, N.A. from September 2020 to October 2021. Various leadership roles in commercial, retail and mortgage banking at Branch Banking and Trust Company from March 1993 to December 2018.

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ITEM 1A. RISK FACTORS
ITEM 1A - RISK FACTORS
RISK RELATED TO THE PROPOSED MERGER WITH ATLANTIC UNION
Combining Atlantic Union and the Company may be more difficult, costly or time-consuming than expected.
The success of the merger will depend, in part, on Atlantic Union's ability to realize the anticipated benefits and cost savings from combining the businesses of Atlantic Union and the Company and to combine the businesses of Atlantic Union and the Company in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of the Company or decreasing revenues due to loss of customers. If the parties are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings and anticipated benefits of the merger could be less than anticipated, and integration may result in additional unforeseen expenses.
Atlantic Union and the Company have operated, and, until the completion of the merger, will continue to operate, independently. To realize the full extent of the anticipated benefits of the merger, after the completion of the merger, Atlantic Union expects to integrate the Company's business into its own. The integration process in the merger could result in the loss of key employees, the disruption of each party's ongoing business, inconsistencies in standards, controls, procedures and policies that affect adversely either party's ability to maintain relationships with customers and employees or achieve the anticipated benefits of the merger. The loss of key employees could adversely affect Atlantic Union's ability to successfully conduct its business in the markets in which the Company now operates, which could have an adverse effect on Atlantic Union's financial results and the value of its common stock. If Atlantic Union experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be disruptions that cause Atlantic Union and the Company to lose customers or cause customers to withdraw their deposits from the Company's or Atlantic Union's banking subsidiaries, or other unintended consequences that could have a material adverse effect on Atlantic Union's or the Company's results of operations or financial condition after the merger. These integration matters could have an adverse effect on the Company during this transition period and on the combined company for an undetermined period after consummation of the merger.
Because the exchange ratio is fixed and the market price of Atlantic Union common stock will fluctuate, the value of the consideration to be received by the Company's shareholders in the merger may change.
Pursuant to the merger agreement, upon completion of the merger, each share of the Company's common stock, except for certain shares of the Company's common stock owned by the Company or Atlantic Union, that is issued and outstanding immediately prior to the effective time of the merger will be converted automatically into the right to receive 1.35 shares of common stock of Atlantic Union. The closing price of Atlantic Union common stock on the date that the merger is completed may vary from the closing price of Atlantic Union common stock on the date the Company and Atlantic Union announced the signing of the merger agreement. Because the merger consideration is determined by a fixed exchange ratio, the Company's shareholders will not know or be able to calculate the exact value of the shares of Atlantic Union common stock they will receive until completion of the merger. Any change in the market price of Atlantic Union common stock prior to completion of the merger will affect the value of the merger consideration that the Company's shareholders will receive upon completion of the merger. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the companies' respective businesses, operations and prospects, changes in estimates or recommendations by securities analysis or ratings agencies, and regulatory considerations, among other things. Many of these factors are beyond the control of the Company and Atlantic Union.
The merger may distract management of the Company from its other responsibilities.
The merger could cause the management of the Company to focus its time and energies on matters related to the merger that otherwise would be directed to its business and operations. Any such distraction on the part of the Company's management, if significant, could affect its ability to service existing business and develop new business and may adversely affect the business and earnings of the Company before the merger, or the business and earnings of the combined company after the merger.
Termination of the merger agreement with Atlantic Union could negatively impact the Company.
Each of the Company's and Atlantic Union's obligation to consummate the merger remains subject to a number of conditions which must be fulfilled to consummate the merger, and there can be no assurance that all of the conditions will be satisfied, or that the merger will be completed on the proposed terms, within the expected timeframe, or at all. Any delay in completing the merger could cause the Company not to realize some or all of the benefits that the Company expects to achieve if the merger is successfully completed within its expected timeframe. If the merger agreement is terminated, the Company's business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of the Company's common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be beneficial and will be completed. Atlantic Union and/or the Company may be subject to litigation related to any failure to complete the merger or to proceedings commenced against either company to perform obligations under the merger agreement. If the merger agreement is terminated under certain circumstances, the Company may be required to pay to Atlantic Union a termination fee of approximately $17.2 million.
In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the merger is not completed, the Company would have to recognize these expenses and would have committed substantial time and resources by management, without realizing the expected benefits of the merger. In addition, failure to consummate the merger also may result in negative reactions from the financial markets or from the Company's customers, vendors and employees.
The merger agreement with Atlantic Union limits the ability of the Company to pursue alternatives to the merger.
The merger agreement contains customary "no-shop" provisions that, subject to limited exceptions, limit the ability of the Company to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of the Company. In addition, under certain circumstances, if the merger agreement is terminated and the Company consummates a similar transaction with a party other than Atlantic Union, the Company must pay to Atlantic Union a fee of approximately $17.2 million. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing the acquisition even if it were prepared to pay consideration, with respect to the Company, with a higher per share market price than that proposed in the merger.
The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effects of the merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company's ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees by the Company may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the Company or the combined company following the merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company or the combined company following the merger, the Company's business, or the business of the combined company following the merger, could be harmed. In addition, the Company has agreed to operate its business in the ordinary course prior to the closing of the merger and from taking certain specified actions without the consent of Atlantic Union. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger.
Shareholder litigation could prevent or delay the completion of the merger or otherwise negatively impact the Company's business, financial condition and results of operations.
Shareholders of the Company and/or Atlantic Union may file lawsuits against the Company, Atlantic Union and/or the directors and officers of either company in connection with the merger. One of the conditions to the closing is that no law, order, injunction or decree issued by any court or governmental entity of competent jurisdiction that would prevent, prohibit or make illegal the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement be in effect. If any plaintiff were successful in obtaining an injunction prohibiting the Company or Atlantic Union from completing the merger, the bank merger or any of the other transactions contemplated by the merger agreement, then such injunction may delay or prevent the effectiveness of the merger and could result in significant costs to the Company, including any cost associated with the indemnification of the Company's directors and officers. The Company may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the merger. Shareholder lawsuits may divert management attention from management of each company's business or operations. Such litigation could have an adverse effect on the Company's business, financial condition and results of operations and could prevent or delay the completion of the merger
CREDIT RISK
The Company's credit standards and its on-going credit assessment processes might not protect it from significant credit losses.
The Company takes credit risk by virtue of making loans and extending loan commitments and letters of credit. The Company manages credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going process of assessment of the quality of the credit already extended. The Company's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Company's credit administration function employs risk management techniques to help ensure that problem loans are promptly identified. While these procedures are designed to provide the Company with the information needed to implement policy adjustments where necessary and to take appropriate corrective actions, and have proven to be reasonably effective to date, there can be no assurance that such measures will be effective in avoiding future undue credit risk.
The Company's focus on lending to small to mid-sized community-based businesses may increase its credit risk.
Most of the Company's commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. Additionally, these loans may increase concentration risk as to industry or collateral securing the loans. If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company's results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by the Company in recent years, and the borrowers may not have experienced a complete business or economic cycle. The deterioration of the borrowers' businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on the Company's financial condition and results of operations.
The Company depends on the accuracy and completeness of information about clients and counterparties, and its financial condition could be adversely affected if it relies on misleading information.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, the Company may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information, which the Company does not independently verify. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, the Company may assume that a customer's audited financial statements conform with accounting principles generally accepted in the United States of America ("GAAP") and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. The Company's financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading.
The allowance for credit losses ("ACL") may not be adequate to cover actual losses.
In accordance with GAAP, an allowance for credit losses is maintained by the Company to provide for credit losses on loans. The allowance for credit losses may not be adequate to cover actual credit losses, and future provisions for credit losses could materially and adversely affect operating results. The allowance for credit losses is based on prior experience, reasonable and supportable forecasts of economic conditions, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating, and other outside forces and conditions, including changes in interest rates, all of which are beyond the Company's control; and these losses may exceed current estimates. Federal bank regulatory agencies, as a part of their examination process, review the Company's loans and allowance for credit losses. While management believes that the allowance for credit losses is adequate to cover current losses, it cannot make assurances that it will not further increase the allowance for credit losses or that regulators will not require it to increase this allowance. Either of these occurrences could adversely affect earnings.
In addition, the adoption of Accounting Standards Update ("ASU") 2016-13, as amended, could result in a change in the amount of the allowance for credit losses as a result of changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model, which encompasses allowances for losses expected to be incurred over the life of the portfolio and a look forward of economic forecasts. The measure of the Company's ACL is dependent on the adoption and interpretation of the new standard. The new standard may create more volatility. ASU 2016-13 was adopted on January 1, 2023. Refer to Note 1 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.
Nonperforming assets take significant time to resolve and adversely affect the Company's results of operations and financial condition.
The Company's nonperforming assets adversely affect its net income in various ways. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases credit administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related asset to the then fair market value of the collateral less estimated selling costs, which may, and often does, result in a loss. An increase in the level of nonperforming assets also increases the Company's risk profile and may impact the capital levels regulators believe are appropriate in light of such risks. The Company utilizes various techniques such as workouts, restructurings, and loan sales to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers' performance or financial condition, could adversely affect the Company's business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including generation of new loans. There can be no assurance that the Company will avoid increases in nonperforming loans in the future.
A downturn in the local real estate market could materially and negatively affect the Company's business.
The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity lines of credit, consumer and other loans. Many of these loans are secured by real estate (both residential and commercial) located in the Company's market area. At December 31, 2023, the Company had approximately $2.3 billion in loans, of which approximately $2.2 billion (95.8%) were secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral could then be diminished and the Company would be more likely to suffer losses. Some degree of instability in the commercial real estate markets is expected in the coming quarters as loans are refinanced in markets with higher vacancy rates under current economic conditions. The outlook for commercial real estate remains dependent on the broader economic environment and, specifically, how major subsectors respond to a higher interest rate environment and higher prices for commodities, goods and services. A downturn in the real estate market in the areas in which the Company conducts its operations could negatively affect the Company's business.
The Company relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if the Company is forced to foreclose upon such loans.
A significant portion of the Company's loan portfolio consists of loans secured by real estate. The Company relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of the Company's loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan and will suffer a loss.
MARKET RISK
The Company's business is subject to interest rate risk, and variations in interest rates and inadequate management of interest rate risk may negatively affect financial performance.
Changes in the interest rate environment may reduce the Company's profits. It is expected that the Company will continue to realize income from the spread between the interest earned on loans, securities, and other interest earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and there is extensive competition for new loan originations from qualified borrowers.
Our interest-earning assets and interest-bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types may lag behind. The result of these changes to rates may cause differing spreads on interest-earning assets and interest-bearing liabilities. Any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on our business, financial condition, and results of operations. While we take measures, such as hedging our mortgage loans held for sale, intended to manage risks from changes in market interest rates, we cannot control or accurately predict changes in the rates of interest or be sure our protective measures are adequate.
LIQUIDITY RISK
Liquidity could be impaired by an inability to access the capital markets or an unforeseen outflow of cash.
Liquidity is essential to our business. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could reduce our access to liquidity sources include a downturn in the economy, difficult credit markets or the liquidity needs of our depositors. A substantial majority of our liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days' notice, while a substantial portion of our assets are loans, which cannot be called or sold in the same time frame. We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason. Our access to deposits may be negatively impacted by, among other factors, changes in interest rates which could promote increased competition for deposits, including from new financial technology competitors, or provide customers with alternative investment options. Additionally, negative news about us or the banking industry in general could negatively impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits. Furthermore, as many regional banking organizations experienced in 2023, the failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to fail" or remove deposits from the banking system entirely. As of December 31, 2023, approximately 40.5% of our deposits were uninsured and we rely on these deposits for liquidity. A failure to maintain adequate liquidity could have a material adverse effect on our business, financial condition and results of operations.
Unrealized losses in our securities portfolio could affect liquidity.
As market interest rates have increased, we have experienced significant unrealized losses on our available for sale securities portfolio. Unrealized losses related to available for sale securities are reflected in accumulated other comprehensive loss in our consolidated balance sheets and reduce the level of our book capital and tangible common equity. However, such unrealized losses do not affect our regulatory capital ratios. We actively monitor our available for securities portfolio and we do not currently anticipate the need to realize material losses from the sale of securities for liquidity purposes. Furthermore, we believe it is unlikely that we would be required to sell any such securities before recovery of their amortized cost bases, which may be at maturity. Nonetheless, our access to liquidity sources could be affected by unrealized losses if securities must be sold at a loss; tangible capital ratios continue to decline from an increase in unrealized losses or realized credit losses; the Federal Home Loan Bank of Atlanta or other funding sources reduce capacity; or bank regulators impose restrictions on us that impact the level of interest rates we may pay on deposits or our ability to access brokered deposits. Additionally, significant unrealized losses could negatively impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits.
Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.
The closures of Silicon Valley Bank and Signature Bank in March 2023, and First Republic Bank in May 2023, and concerns about similar future events, have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. More recently, concerns about commercial real estate concentrations at regional and community banks have exacerbated this volatility. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company's liquidity, loan funding capacity, net interest margin, capital and results of operations. While federal bank regulators took action to ensure that depositors of the failed banks had access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly. Furthermore, there is no guarantee that regional bank failures or bank runs similar to the ones that occurred in 2023 will not occur in the future and, if they were to occur, they may have a material and adverse impact on customer and investor confidence in regional banks negatively impacting the Company's liquidity, capital, results of operations and stock price.
TECHNOLOGY RISK
The Company's operations may be adversely affected by cybersecurity risks.
The Company relies heavily on communications and information systems to conduct business. Our computer systems and network infrastructure and those of third parties, on which we are highly dependent, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, social engineering attacks targeting our employees and customers, malware intrusion or data corruption attempts, terrorist activities or identity theft. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in the Company's internet banking, deposit, loan, and other systems. While the Company has policies and procedures designed to prevent or limit the effect of such failure, interruption, or security breach of the Company's information systems, there can be no assurance that they will not occur or, if they do occur, that they will be adequately addressed. Further, to access the Company's products and services, its customers may use computers and mobile devices that are beyond the Company's security control systems. The occurrence of any failure, interruption or security breach of the Company's communications and information systems could damage the Company's reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability. Additionally, the Company outsources its data processing to a third-party. If the Company's third party provider encounters difficulties or if the Company has difficulty in communicating with such third party, it will significantly affect the Company's ability to adequately process and account for customer transactions, which would significantly affect its business operations.
In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and the Company's business strategy. The Company has invested in accepted technologies, and annually reviews processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company's computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems, and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company's reputation, which could adversely affect the Company's business. Furthermore, as cyberattacks continue to evolve and increase, the Company may be required to expend significant additional resources to modify or enhance its protective measures, or to investigate and remediate any identified information security vulnerabilities.
Multiple major U.S. retailers, financial institutions, government agencies and departments have experienced data systems incursions reportedly resulting in the thefts of credit and debit card information, online account information, and other financial data of tens of millions of individuals and customers. Retailer incursions affect cards issued and deposit accounts maintained by many financial institutions, including the Bank. Although neither the Company's nor the Bank's systems are breached in government or retailer incursions, these events can cause the Bank to reissue a significant number of cards and take other costly steps to avoid significant theft loss to the Bank and its customers. In some cases, the Bank may be required to reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within the Company's nor the Bank's control include internet service providers, electronic mail portal providers, social media portals, distant-server (so called "cloud") service providers, electronic data security providers, personal computers and mobile phones, telecommunications companies, and mobile phone manufacturers.
Consumers may increasingly decide not to use the Bank to complete their financial transactions because of technological and other changes, which would have a material adverse impact on the Company's financial condition and operations.
Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. In particular, the activity of fintech companies has grown significantly over recent years and is expected to continue to grow. Fintech companies have and may continue to offer bank or bank-like products and some fintech companies have applied for bank charters. In addition, other fintech companies have partnered with existing banks to allow them to offer deposit products to their customers. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as "disintermediation," could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on the Company's financial condition and results of operations.
OPERATIONAL RISK
The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Company's operations and prospects.
The Company is a relationship-driven organization. A key aspect of the Company's business strategy is for its senior officers to have primary contact with current and potential customers. The Company's growth and development are in large part a result of these personalized relationships with the customer base. The success of the Company also often depends on its ability to hire and retain qualified banking officers.
The Company's senior officers have considerable experience in the banking industry and related financial services and are extremely valuable and would be difficult to replace. The loss of the services of these officers could have a material adverse effect upon future prospects. Although the Company has entered into employment contracts with certain of its senior executive officers, and purchased key man life insurance policies to mitigate the risk of an unforeseen departure or death of certain of the senior executive officers, it cannot offer any assurance that they and other key employees will remain employed by the Company. The unexpected loss of services of one or more of these key employees could have a material adverse effect on operations and possibly result in reduced revenues.
Failure to maintain effective systems of internal and disclosure control could have a material adverse effect on the Company's results of operation and financial condition.
Effective internal and disclosure controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company's ongoing monitoring of internal control, it may discover material weaknesses or significant deficiencies in its internal control that require remediation. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.
The Company has in the past discovered, and may in the future discover, areas of its internal controls that need improvement. Even so, the Company is continuing to work to improve its internal controls. The Company cannot be certain that these measures will ensure that it implements and maintains adequate controls over its financial processes and reporting in the future. Any failure to maintain effective controls or to timely effect any necessary improvement of the Company's internal and disclosure controls could, among other things, result in losses from fraud or error, harm the Company's reputation or cause investors to lose confidence in the Company's reported financial information, all of which could have a material adverse effect on the Company's results of operation and financial condition.
The carrying value of goodwill may be adversely impacted.
When the Company completes an acquisition, generally goodwill is recorded on the date of acquisition as an asset. Current accounting guidance requires for goodwill to be tested for impairment, which the Company performs an impairment analysis at least annually, rather than amortizing it over a period of time. A significant adverse change in expected future cash flows or sustained adverse change in the Company's common stock could require the asset to become impaired. If impaired, the Company would incur a non-cash charge to earnings that would have a significant impact on the results of operations. The carrying value of goodwill was approximately $85.0 million at December 31, 2023.
The Company relies on other companies to provide key components of the Company's business infrastructure.
Third parties provide key components of the Company's business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. While the Company has selected these third-party vendors carefully, it does not control their actions. Any problem caused by these third-parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cybersecurity breaches, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect the Company's ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficulties of a third-party vendor could also hurt the Company's operations if those difficulties interface with the vendor's ability to serve the Company. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to the Company's business operations.
LEGAL, REGULATORY AND COMPLIANCE RISK
The Company is subject to extensive regulation which could adversely affect its business.
The Company's operations as a publicly traded corporation, a bank holding company, and a parent company to an insured depository institution are subject to extensive regulation by federal, state, and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of the Company's operations. Because the Company's business is highly regulated, the laws, rules, and regulations applicable to it are subject to frequent and sometimes extensive change. Such changes could include higher capital requirements, increased insurance premiums, increased compliance costs, reductions of non-interest income and limitations on services that can be provided. Actions by regulatory agencies or significant litigation against the Company could cause it to devote significant time and resources to defend itself and may lead to liability or penalties that materially affect the Company and its shareholders. Any future changes in the laws, rules or regulations applicable to the Company may negatively affect the Company's business and results of operations.
Regulatory capital standards may have an adverse effect on the Company's profitability, lending, and ability to pay dividends on the Company's securities.
The Company is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that the Company and the Bank must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. If the Company fails to meet these minimum capital guidelines and/or other regulatory requirements, its financial condition would be materially and adversely affected. The Basel III Capital Rules require bank holding companies and their subsidiaries to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. The Bank must also comply with the capital requirements set forth in the "prompt corrective action" regulations pursuant to Section 38 of the FDIA. Satisfying capital requirements may require the Company to limit its banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect its business, financial condition and results of operations.
Regulations issued by the CFPB could adversely impact earnings due to, among other things, increased compliance costs or costs due to noncompliance.
The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. As an independent bureau within the Federal Reserve System, the CFPB may impose requirements more severe than the previous bank regulatory agencies. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The CFPB has recently pursued a more aggressive enforcement policy with respect to a range of regulatory compliance matters, specifically including fair lending, loan servicing, financial institution sales and marketing practices, and financial institution consumer fee and account management practices. For example, in 2023, the CFPB brought enforcement actions against a number of financial institutions for overdraft practices that the CFPB alleged to be unlawful and ordered each of these institutions to pay a substantial civil money penalty in addition to customer restitution. Despite our ongoing compliance efforts, we may become subject to regulatory enforcement actions with respect to our programs and practices. The costs and limitations related to this additional regulatory scrutiny with respect to consumer product offerings and services may adversely affect the Company's profitability.
Changes in accounting standards could impact reported earnings.
From time to time, with increasing frequency, there are changes in the financial accounting and reporting standards that govern the preparation of the Company's financial statements. These changes can materially impact how the Company records and reports its financial condition and results of operations. In some instances, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Refer to Note 1 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.
Current and proposed regulation addressing consumer privacy and data use and security could increase the Company's costs and impact its reputation.
The Company is subject to a number of laws concerning consumer privacy and data use and security, including information safeguard rules under the Gramm-Leach-Bliley Act. These rules require that financial institutions develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution's size and complexity, the nature and scope of the financial institution's activities, and the sensitivity of any customer information at issue. The United States has experienced a heightened legislative and regulatory focus on privacy and data security, including requiring consumer notification in the event of a data breach. In addition, most states have enacted security breach legislation requiring varying levels of consumer notification in the event of certain types of security breaches. New regulations in these areas may increase the Company's compliance costs, which could negatively impact earnings. In addition, failure to comply with the privacy and data use and security laws and regulations to which the Company is subject, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions, penalties or other adverse consequences and loss of consumer confidence, which could materially adversely affect the Company's results of operations, overall business, and reputation.
The Company is subject to claims and litigation pertaining to fiduciary responsibility.
From time to time, customers make claims and take legal action pertaining to the performance of the Company's fiduciary responsibilities. Whether customer claims and legal action related to the performance of the Company's fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on the Company's financial condition and results of operations.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to ESG practices may impose additional costs on the Company or expose it to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of the work force, and racial and social justice issues. Increased ESG related compliance costs could result in increases to the Company's overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact the Company's reputation, ability to do business with certain partners, and the Company's stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.
STRATEGIC RISK
The Company faces strong competition from financial services companies and other companies that offer banking and other financial services, which could negatively affect the Company's business.
The Company encounters substantial competition from other financial institutions in its market area. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that the Company offers. These competitors include national, regional, and community banks. The Company also faces competition from many other types of financial institutions, including finance companies, mutual and money market fund providers, financial technology ("fintech") companies, brokerage firms, insurance companies, credit unions, financial subsidiaries of certain industrial corporations, and mortgage companies. In particular, competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns. Increased competition may result in reduced business for the Company.
Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. These institutions also may have differing pricing and underwriting standards, which may adversely affect the Company through the loss of business or causing a misalignment in the Company's risk-return relationship. Areas of competition include interest rates for loans and deposits, efforts to obtain loans and deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic financial services markets as technological advances enable more companies to provide financial services. If the Company is unable to attract and retain banking customers, it may be unable to continue to grow loan and deposit portfolios and its results of operations and financial condition may be adversely affected.
RISKS RELATING TO OUR SECURITIES
While the Company's common stock is currently traded on the Nasdaq Global Select Market, it has less liquidity than stocks for larger companies quoted on a national securities exchange.
The trading volume in the Company's common stock on the Nasdaq Global Select Market has been relatively low when compared with larger companies listed on the Nasdaq Global Select Market or other stock exchanges. There is no assurance that a more active and liquid trading market for the common stock will exist in the future. Consequently, shareholders may not be able to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares. In addition, the Company cannot predict the effect, if any, that future sales of the Company's common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of the common stock.
Economic and other conditions may cause volatility in the price of the Company's common stock.
In the current economic environment, the prices of publicly traded stocks in the financial services sector have been volatile. However, even in a more stable economic environment the price of the Company's common stock can be affected by a variety of factors such as expected or actual results of operations, changes in analysts' recommendations or projections, announcements of developments related to its businesses, operating and stock performance of other companies deemed to be peers, news or expectations based on the performance of others in the financial services industry, and expected impacts of a changing regulatory environment. These factors not only impact the price of the Company's common stock but could also affect the liquidity of the stock given the Company's size, geographical footprint, and industry. The price for shares of the Company's common stock may fluctuate significantly in the future, and these fluctuations may be unrelated to the Company's performance. General market price declines or market volatility in the future could adversely affect the price for shares of the Company's common stock, and the current market price of such shares may not be indicative of future market prices.
Future issuances of the Company's common stock could adversely affect the market price of the common stock and could be dilutive.
The Company is not restricted from issuing additional shares of common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, shares of common stock. Issuances of a substantial number of shares of common stock, or the expectation that such issuances might occur could materially adversely affect the market price of the shares of the common stock and could be dilutive to shareholders. Because the Company's decision to issue common stock in the future will depend on market conditions and other factors, it cannot predict or estimate the amount, timing or nature of possible future issuances of its common stock. Accordingly, the Company's shareholders bear the risk that future issuances will reduce the market price of the common stock and dilute their stock holdings in the Company.
The primary source of the Company's income from which it pays cash dividends is the receipt of dividends from its subsidiary bank.
The availability of dividends from the Company is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event the Bank was unable to pay dividends to the Company, or be limited in the payment of such dividends, the Company would likely have to reduce or stop paying common stock dividends. The Company's reduction, limitation or failure to pay such dividends on its common stock could have a material adverse effect on the market price of the common stock.
The Company's governing documents and Virginia law contain anti-takeover provisions that could negatively impact its shareholders.
The Company's Articles of Incorporation and Bylaws and the Virginia Stock Corporation Act contain certain provisions designed to enhance the ability of the Company's Board of Directors to deal with attempts to acquire control of the Company. These provisions and the ability to set the voting rights, preferences and other terms of any series of preferred stock that may be issued, may be deemed to have an anti-takeover effect and may discourage takeovers (which certain shareholders may deem to be in their best interest). To the extent that such takeover attempts are discouraged, temporary fluctuations in the market price of the Company's common stock resulting from actual or rumored takeover attempts may be inhibited. These provisions also could discourage or make more difficult a merger, tender offer, or proxy contest, even though such transactions may be favorable to the interests of shareholders, and could potentially adversely affect the market price of the Company's common stock.
GENERAL RISK
Changes in economic conditions could materially and negatively affect the Company's business.
The Company's business is directly impacted by economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond the Company's control. A deterioration in economic conditions, whether caused by global, national or local events (including inflation, the COVID-19 pandemic, rising wages in a tight labor market, geopolitical instability and supply chain complications), especially within the Company's market area, could result in potentially negative material consequences such as the following, among others: loan delinquencies increasing; problem assets and foreclosures increasing; demand for products and services decreasing; low cost or noninterest bearing deposits decreasing; and collateral for loans, especially real estate, declining in value, in turn reducing customers' borrowing power, and reducing the value of assets and collateral associated with existing loans. Each of these consequences may have a material adverse effect on the Company's financial condition and results of operations.
Wealth management income is a major source of non-interest income for the Company. Trust and brokerage fee revenue is largely dependent on the fair market value of assets under management and on trading volumes in the brokerage business. General economic conditions and their subsequent effect on the securities markets tend to act in correlation. When general economic conditions deteriorate, securities markets generally decline in value, and the Company's trust and brokerage fee revenue is negatively impacted as asset values and trading volumes decrease.
The Company's exposure to operational, technological and organizational risk may adversely affect the Company.
The Company is exposed to many types of operational risks, including reputation, legal, and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, clerical or record-keeping errors, and errors resulting from faulty or disabled computer or telecommunications systems.
Negative public opinion can result from the actual or alleged conduct in any number of activities, including lending practices, corporate governance, and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect the Company's ability to attract and retain customers and can expose it to litigation and regulatory action.
Certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company's necessary dependence upon automated systems to record and process its transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is the Company) and to the risk that the Company's (or its vendors') business continuity and data security systems prove to be inadequate.
The Company's risk-management framework may not be effective in mitigating risk and loss.
The Company maintains an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These risks include, but are not limited to: strategic, interest-rate, credit, liquidity, operations, pricing, reputation, compliance, litigation and cybersecurity. While the Company assesses and improves this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Company's risk-management program, or if its controls break down, the Company's results of operations and financial condition may be adversely affected.
Negative perception of the Company through media may adversely affect the Company's reputation and business.
The Company's reputation is critical to the success of its business. The Company believes that its brand image has been well received by customers, reflecting the fact that the brand image, like the Company's business, is based in part on trust and confidence. The Company's reputation and brand image could be negatively affected by rapid and widespread distribution of publicity through social and traditional media channels. The Company's reputation could also be affected by the Company's association with clients affected negatively through social and traditional media distribution, or other third parties, or by circumstances outside of the Company's control. Negative publicity, whether deserved or undeserved, could affect the Company's ability to attract or retain customers, or cause the Company to incur additional liabilities or costs, or result in additional regulatory scrutiny.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact the Company's business.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. Federal and state legislatures and regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. The federal banking agencies, including the OCC, have emphasized that climate-related risks are faced by banking organizations of all types and sizes and are in the process of enhancing supervisory expectations regarding banks' risk management practices. In December 2021, the OCC published proposed principles for climate risk management by banking organizations with more than $100 billion in assets. The OCC also has appointed its first ever Climate Change Risk Officer and established an internal climate risk implementation committee in order to assist with these initiatives and to support the agency's efforts to enhance its supervision of climate change risk management. Similar and even more expansive initiatives are expected, including potentially increasing supervisory expectations with respect to banks' risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. To the extent that these initiatives lead to the promulgation of new regulations or supervisory guidance applicable to the Company, the Company would likely experience increased compliance costs and other compliance-related risks.
The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact the Company's financial condition and results of operations; however, the physical effects of climate change may also directly impact the Company. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in the Bank's loan portfolio. Additionally, if insurance obtained by borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to borrowers, the collateral securing loans may be negatively impacted by climate change, which could impact the Company's financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on customers and impact the communities in which the Company operates. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on the Company's financial condition and results of operations.
Severe weather, natural disasters, acts of war or terrorism, geopolitical instability, public health issues, and other external events could significantly impact the Company's business.
Severe weather, natural disasters, acts of war or terrorism, geopolitical instability, public health issues, and other adverse external events could have a significant impact on the Company's ability to conduct business. In addition, such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on its financial condition and results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2 - PROPERTIES
As of December 31, 2023, the Company maintained 26 banking offices that are used in the normal course of business. The principal executive offices of the Company are located at 628 Main Street in the business district of Danville, Virginia. This building is owned by the Company. The Company leases certain space located at 202 S. Jefferson Street, Roanoke, Virginia as a result of the merger with HomeTown. This office serves as the Virginia banking headquarters. The Company leases an office at 703 Green Valley Road in Greensboro, North Carolina. This building serves as the head office for the Company's North Carolina banking headquarters.
The Company owns 22 other offices for a total of 23 owned buildings. There are no mortgages or liens against any of the properties owned by the Company. The Company operates 34 ATMs on owned or leased facilities. The Company leases five other offices for a total of seven leased office locations and leases one storage warehouse. Management believes that upon expiration of each of the Company's leases it will be able to extend the lease on satisfactory terms or relocate to another acceptable location.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3 - LEGAL PROCEEDINGS
In the ordinary course of operations, the Company and the Bank are parties to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4 - MINE SAFETY DISCLOSURES
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market and Dividend Information
The Company's common stock is traded on the Nasdaq Global Select Market under the symbol "AMNB." At December 31, 2023, the Company had 3,686 shareholders of record.
The Company's future dividend policy is subject to the discretion of the Boards of Directors of the Company and the Bank and will depend upon a number of factors, including future earnings, financial condition, cash requirements and general business conditions. The Company and the Bank are also subject to certain restrictions imposed by the reserve and capital requirements of federal and state statutes and regulations. See "Part I, Item 1. Business - Supervision and Regulation - Dividends," for information on regulatory restrictions on dividends.
Stock Compensation Plans
The Company's 2018 Stock Incentive 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 plan and stock compensation in general are discussed in Note 13 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
The following table summarizes information, as of December 31, 2023, relating to the Company's equity based compensation plans, pursuant to which grants of options to acquire shares of common stock have been and may be granted from time to time.
December 31, 2023
Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
Weighted-Average Per Share Exercise Price of Outstanding Options, Warrants and Rights
Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by shareholders
-
$ -
423,148
Equity compensation plans not approved by shareholders
-
-
-
Total
-
$ -
423,148
Stock Repurchase Program
On January 26, 2023, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of a stock repurchase program that authorized the repurchase of up to $10.0 million of the Company's common stock through December 31, 2023.There were no shares repurchased during the three months ended December 31, 2023. In 2023, the Company repurchased 34,131 shares at an average cost of $30.58 for a total cost of $1.0 million.
Comparative Stock Performance
The following graph compares the Company's cumulative total return to its shareholders with the returns of two indexes for the five-year period ended December 31, 2023. The cumulative total return was calculated taking into consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2018. The indexes are the Nasdaq Composite Index and the SNL Bank $1 Billion - $5 Billion Index, which includes bank holding companies with assets of $1 billion to $5 billion and is published by SNL Financial, LC.
Period Ending
Index
12/31/2018
12/31/2019
12/31/2020
12/31/2021
12/31/2022
12/31/2023
American National Bankshares Inc.
$ 100.00
$ 139.05
$ 95.92
$ 142.30
$ 143.94
$ 196.69
Nasdaq Composite
100.00
136.69
198.10
242.03
163.28
236.17
SNL Bank $1B-$5B
100.00
125.46
113.94
158.62
139.85
140.55

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6 - RESERVED

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The main purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the past three years. The discussion and analysis are intended to supplement and highlight information contained in the accompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K.
RECLASSIFICATION
In certain circumstances, reclassifications have been made to prior period information to conform to the 2023 presentation. There were no material reclassifications.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies followed by the Company conform with GAAP and to general practices within the banking industry. The Company's critical accounting policies, which are summarized below, relate to (1) the allowance for credit losses, and (2) goodwill and intangible assets. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements.
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 ("ACL") - Loans
The purpose of the ACL is to provide for probable expected losses inherent in the loan portfolio. The allowance is increased by the provision for credit losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.
The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the 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 (the Loan Review function consists of a co-sourced arrangement using both internal personnel and external vendors to provide the Company with a more robust review function of the loan portfolio), (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 input from the Credit Department. The Company's Credit Committee, Risk and Compliance Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.
The Company's 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 and an assessment of peer loss experience. 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.
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.
On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new accounting standard replaced the incurred loss model used for the calculations for the years ended December 31, 2022 and 2021.
Goodwill and Intangible Assets
The Company follows Accounting Standards Codification ("ASC") 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company records as goodwill the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. The Company performs its annual analysis on June 30 of each fiscal year. No indicators of impairment were noted for the years ended December 31, 2023, 2022, and 2021. Intangible assets with definite useful lives are amortizing over their estimated useful lives of 5 to 10 years. Goodwill is the only intangible asset with an indefinite life on the Company's consolidated balance sheets.
NON-GAAP PRESENTATIONS
Non-GAAP presentations are provided because the Company believes these may be valuable to investors. These include (1) the calculation of the efficiency ratio, (2) the analysis of net interest income presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, (3) return on average tangible common equity, (4) tangible common equity to tangible assets ratio, and (5) tangible book value per share. 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. In addition, the Company's non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company, in referring to its net income, is referring to income under GAAP.
The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of other real estate owned ("OREO"), and (2) core deposit intangible amortization, and (3) merger related expenses by net interest income including tax equivalent income on nontaxable loans and securities and noninterest income and excluding gains or losses on securities and gains or losses on sale or disposal of premises and equipment. The efficiency ratio for 2023, 2022, and 2021 was 62.31%, 57.37%, and 51.05%, respectively. The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands):
Year Ended December 31,
Efficiency Ratio
Noninterest expense
$ 68,050
$ 64,086
$ 59,008
Add/subtract: gain/loss on sale OREO, net of writedowns
(111 )
Subtract: core deposit intangible amortization
(1,069 )
(1,260 )
(1,464 )
Subtract: merger related expenses
(2,577 )
-
-
Adjusted noninterest expense
$ 64,417
$ 62,828
$ 57,433
Net interest income
$ 84,582
$ 90,238
$ 90,391
Tax equivalent adjustment
Noninterest income
18,336
18,807
21,031
Add/subtract: loss/(gain) on securities
-
(35 )
Add/subtract: loss/(gain) on sale of fixed assets
Adjusted revenues
$ 103,377
$ 109,517
$ 112,513
Efficiency ratio
62.31 %
57.37 %
51.05 %
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 is 21% for 2023, 2022, and 2021. 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 (in thousands):
Year Ended December 31,
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income
Non-GAAP measures:
Interest income - loans
$ 106,670
$ 82,708
$ 87,181
Interest income - investments and other
13,795
13,540
8,856
Interest expense - deposits
(28,843 )
(3,553 )
(3,645 )
Interest expense - customer repurchase agreements
(2,980 )
(26 )
(22 )
Interest expense - other short-term borrowings
(2,212 )
(633 )
-
Interest expense - long-term borrowings
(1,612 )
(1,554 )
(1,738 )
Total net interest income
$ 84,818
$ 90,482
$ 90,632
Less non-GAAP measures:
Tax benefit realized on nontaxable interest income - loans
(199 )
(139 )
(141 )
Tax benefit realized on nontaxable interest income - municipal securities
(37 )
(105 )
(100 )
GAAP measures net interest income
$ 84,582
$ 90,238
$ 90,391
Return on average tangible common equity is calculated by dividing net income available to common shareholders by average common equity.
Year Ended December 31,
Return on Average Tangible Common Equity
Return on average common equity (GAAP basis)
7.94 %
10.36 %
12.50 %
Impact of excluding average goodwill and other intangibles
3.24 %
4.20 %
4.84 %
Return on average tangible common equity (non-GAAP)
11.18 %
14.56 %
17.34 %
Tangible common equity to tangible assets ratio is calculated by dividing period-end common equity less period-end intangibles by period-end assets less period-end intangibles.
As of December 31,
Tangible Common Equity to Tangible Assets
Common equity to assets ratio (GAAP basis)
11.10 %
10.48 %
Impact of excluding goodwill and other intangibles
(2.58 )%
(2.66 )%
Tangible common equity to tangible assets ratio (non-GAAP)
8.52 %
7.82 %
The Company presents book value per share (period-end shareholders' equity divided by period-end common shares outstanding) and tangible book value per share. In calculating tangible book value, the Company excludes goodwill and other intangible assets.
As of December 31,
Tangible Book Value Per Share
Book value per share (GAAP basis)
$ 32.27
$ 30.27
Impact of excluding goodwill and other intangibles
(8.21 )
(8.33 )
Tangible book value per share (non-GAAP)
$ 24.06
$ 21.94
RESULTS OF OPERATIONS
Executive Overview
The Company's 2023 financial highlights include the following:
•
Net income available to common shareholders was $26.2 million and diluted earnings per share was $2.46 for the year ended December 31, 2023, compared to net income of $34.4 million and diluted earnings per share of $3.23 for the year ended December 31, 2022.
•
Earnings produced a return on average tangible common equity of 11.18% for 2023, compared to 14.56% for 2022.*
•
Period end net loans grew $101.9 million or 4.7% in 2023 as compared to 2022.
•
Period-end deposits increased $10.2 million or less than one percent as compared to 2022.
•
The 2023 provision for credit losses totaled $495 thousand, compared to $1.6 million in the prior year.
•
Nonperforming assets as a percentage of total assets were 0.19% at December 31, 2023, up from 0.05% at December 31, 2022.
•
Net charge-offs to total average loans were 0.00% for 2023, compared to 0.04% for 2022.
*Refer to the Non-GAAP Financial Measures section within this section for further information on these non-GAAP financial measurements.
Net Income
Net income for 2023 was $26.2 million compared to $34.4 million for 2022, a decrease of $8.2 million or 24.0%. Basic and diluted earnings per share were $2.46 for 2023 compared to $3.23 for 2022. This net income produced for 2023 a return on average assets of 0.85%, a return on average common equity of 7.94%, and a return on average tangible common equity of 11.18%.
Net income for 2022 was $34.4 million compared to $43.5 million for 2021, decrease of $9.1 million or 20.9%. Basic earnings per share were $3.23 per share for 2022 compared to $4.00 for 2021. This net income produced for 2022 a return on average assets of 1.07%, a return on average common equity of 10.36%, and a return on average tangible common equity of 14.56%.
The decrease in earnings in 2023 was primarily caused by the increased cost of deposits net of increased interest income in a significantly higher rate environment in 2023 compared to 2022 and merger related expenses in 2023.
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 borrowings. 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 for 2023, 2022, and 2021. 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 average rate earned on earning assets and the average rate paid on interest bearing liabilities. All references in this section relate to average yields and rates and average asset and liability balances during the periods discussed.
Net interest income on a taxable equivalent basis decreased $5.7 million, or 6.3%, in 2023 from 2022, following a decrease of $150 thousand, or less than one percent, in 2022 from 2021. The decrease in net interest income in 2023 was the net result of higher deposit and borrowing costs and increased interest income compared to 2022. Average interest-bearing deposit balances for 2023 were down $67.9 million, or 3.8%, from 2022.
Yields on loans were 4.72% in 2023 compared to 4.02% in 2022. Cost of interest-bearing deposits was 1.70% in 2023 compared to 0.20% in 2022. Between 2023 and 2022, deposit rates for demand, money market and savings accounts, and time deposits increased by 56, 177, and 230 basis points, respectively. The net interest margin was 2.86% for 2022, compared to 2.97% for 2022. The decrease in net interest margin was driven by increasing interest rates on both sides of the balance sheet.
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the last three years. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans, if recognized, is recorded on a cash basis or when the loan returns to accrual status.
Net Interest Income Analysis
(dollars in thousands)
Average Balance
Interest Income/Expense(1)
Average Yield/Rate
Total loans (2)
$ 2,234,583
$ 2,055,393
$ 1,964,378
$ 106,670
$ 82,708
$ 87,181
4.72 %
4.02 %
4.44 %
Securities:
Taxable
640,322
700,660
530,506
11,034
10,538
7,774
1.72
1.50
1.47
Tax exempt
6,336
19,341
19,048
2.78
2.66
2.54
Total securities
646,658
720,001
549,554
11,210
11,049
8,258
1.73
1.53
1.50
Deposits in other banks
47,755
267,381
453,867
2,585
2,491
5.41
0.93
0.13
Total interest earning assets
2,928,996
3,042,775
2,967,799
120,465
96,248
96,037
4.07
3.16
3.24
Nonearning assets
148,356
168,893
208,765
Total assets
$ 3,077,352
$ 3,211,668
$ 3,176,564
Deposits:
Demand
$ 483,573
$ 522,043
$ 476,710
2,892
0.60
0.04
0.03
Savings and money market
888,355
962,419
954,071
17,285
1,750
1.95
0.18
0.08
Time
325,322
280,672
366,604
8,666
1,601
2,709
2.67
0.57
0.74
Total interest bearing deposits
1,697,250
1,765,134
1,797,385
28,843
3,553
3,645
1.70
0.20
0.20
Customer repurchase agreements
48,409
24,005
37,632
2,980
4.57
0.11
0.06
Other short-term borrowings
58,072
15,629
-
2,212
-
5.06
4.05
0.00
Long-term borrowings
28,381
28,280
31,878
1,612
1,554
1,738
5.60
5.50
5.45
Total interest bearing liabilities
1,832,112
1,833,048
1,866,895
35,647
5,766
5,405
1.94
0.31
0.29
Noninterest bearing demand deposits
897,199
1,028,871
939,186
Other liabilities
18,702
17,393
22,325
Shareholders' equity
329,339
332,356
348,158
Total liabilities and shareholders' equity
$ 3,077,352
$ 3,211,668
$ 3,176,564
Interest rate spread
2.13 %
2.85 %
2.95 %
Net interest margin
2.86 %
2.97 %
3.05 %
Net interest income (taxable equivalent basis)
84,818
90,482
90,632
Less: Taxable equivalent adjustment(3)
Net interest income
$ 84,582
$ 90,238
$ 90,391
______________________
(1) Interest income includes net accretion/amortization of acquired loan fair value adjustments and the net accretion/amortization of deferred loan fees/costs.
(2) Nonaccrual loans are included in the average balances.
(3) A tax rate of 21% in 2023, 2022, and 2021 was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis.
The following table presents the dollar amount of changes in interest income and interest expense, and distinguishes between changes resulting from fluctuations in average balances of interest earning assets and interest bearing liabilities (volume) and changes resulting from fluctuations in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately (dollars in thousands):
Changes in Net Interest Income (Rate / Volume Analysis)
2023 vs. 2022
2022 vs. 2021
Change
Change
Increase
Attributable to
Increase
Attributable to
(Decrease)
Rate
Volume
(Decrease)
Rate
Volume
Interest income
Total loans
23,962
16,323
7,639
(4,473 )
(7,915 )
3,442
Securities:
Taxable
1,453
(957 )
2,764
2,331
Tax exempt
(335 )
(360 )
Total securities
1,478
(1,317 )
2,791
2,337
Deposits in other banks
3,576
(3,482 )
1,893
2,233
(340 )
Total interest income
24,217
21,377
2,840
(5,228 )
5,439
Interest expense
Deposits:
Demand
2,690
2,706
(16 )
Savings and money market
15,535
15,680
(145 )
(21 )
Time
7,065
6,771
(1,108 )
(546 )
(562 )
Total deposits
25,290
25,157
(92 )
(568 )
Customer repurchase agreements
2,954
2,901
(10 )
Other short-term borrowings
1,579
(40 )
1,619
-
Long-term borrowings
(184 )
(198 )
Total interest expense
29,881
28,070
1,811
(143 )
Net interest income
$ (5,664 )
$ (6,693 )
$ 1,029
$ (150 )
$ (5,732 )
$ 5,582
Fair Value Impact to Net Interest Margin
The Company's fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. The impact of net accretion for 2021, 2022, and 2023 and the remaining estimated net accretion are reflected in the following table (dollars in thousands):
Loans Accretion
Deposit Accretion
Borrowings Amortization
Total
For the year ended December 31, 2021
$ 5,259
$
$ (101 )
$ 5,236
For the year ended December 31, 2022
1,648
(102 )
1,597
For the year ended December 31, 2023
1,968
(102 )
1,897
For the years ending (estimated):
(101 )
-
(101 )
-
(101 )
-
(101 )
-
(101 )
Thereafter (estimated)
-
(444 )
Noninterest Income
For the year ended December 31, 2023, noninterest income decreased $471 thousand, or 2.5%, compared to the year ended December 31, 2022.
Year Ended December 31,
(Dollars in thousands)
$ Change
% Change
Noninterest income:
Wealth management income
$ 6,751
$ 6,521
$
3.5 %
Service charges on deposit accounts
2,216
2,676
(460 )
(17.2 )
Interchange fees
4,775
4,107
16.3
Other fees and commissions
(256 )
(28.3 )
Mortgage banking income
1,666
(842 )
(50.5 )
Securities losses, net
(68 )
-
(68 )
-
Income from Small Business Investment Companies
1,409
(477 )
(33.9 )
Income from insurance investments
2.3
Losses on premises and equipment, net
(155 )
(228 )
32.0
Other
1,647
1,003
64.2
Total noninterest income
$ 18,336
$ 18,807
$ (471 )
(2.5 )%
Service charges on deposit accounts decreased by $460 thousand in 2023 compared to 2022 while interchange fees increased by $668 thousand. Mortgage banking income decreased by $842 thousand reflecting decreased demand for new home purchases and refinancing in a higher rate environment in 2023 than 2022. Income from small business investment companies decreased by $477 thousand in 2023. This income is based on the funds' net income and is difficult to predict. Other income increased by $644 thousand in 2023 compared to 2022 primarily due to the sale of other investments which are included in other assets on the consolidated balance sheets.
Year Ended December 31,
(Dollars in thousands)
$ Change
% Change
Noninterest income:
Wealth management income
$ 6,521
$ 6,019
$
8.3 %
Service charges on deposit accounts
2,676
2,611
2.5
Interchange fees
4,107
4,152
(45 )
(1.1 )
Other fees and commissions
13.1
Mortgage banking income
1,666
4,195
(2,529 )
(60.3 )
Securities gains, net
-
(35 )
(100.0 )
Income from Small Business Investment Companies
1,409
1,972
(563 )
(28.5 )
Income from insurance investments
1,199
(452 )
(37.7 )
Losses on premises and equipment, net
(228 )
(885 )
(74.2 )
Other
1,003
7.6
Total noninterest income
$ 18,807
$ 21,031
$ (2,224 )
(10.6 )%
Wealth management income increased $502 thousand for 2022 compared to 2021 primarily caused by growth in clients. Mortgage banking income decreased $2.5 million for 2022 compared to 2021. The decrease in 2022 was the result of decreased volume for new purchases and refinancing of existing loans as interest rates were increased seven times in 2022. Income from Small Business Investment Companies ("SBICs") investments decreased $563 thousand as rising interest rates impacted the market valuation of their portfolios. Income from insurance investments decreased $452 thousand in 2022 compared to 2021. The year ended December 31, 2022 reflected lower losses on premises and equipment, net compared to 2021. The 2022 year reflected a write-down of $146 thousand on a building acquired in the HomeTown acquisition while the 2021 year reflected losses of $588 thousand from the sale of two buildings and the write-down of $218 thousand on an additional property from that acquisition.
Noninterest Expense
For the year ended December 31, 2023, noninterest expense increased $4.0 million, or 6.2%, as compared to the year ended December 31, 2022.
Year Ended December 31,
(Dollars in thousands)
$ Change
% Change
Noninterest expense:
Salaries and employee benefits
$ 36,356
$ 36,382
$ (26 )
(0.1 )%
Occupancy and equipment
6,219
6,075
2.4
FDIC assessment
1,404
55.5
Bank franchise tax
2,052
1,953
5.1
Amortization of intangible assets
1,069
1,260
(191 )
(15.2 )
Data processing
3,565
3,310
7.7
Software
1,829
1,505
21.5
Other real estate owned, net
(10 )
(13 )
(433.3 )
Merger related expenses
2,577
-
2,577
-
Other
12,989
12,695
2.3
Total noninterest expense
$ 68,050
$ 64,086
$ 3,964
6.2 %
The year ended December 31, 2023 reflected an increase of $501 thousand in FDIC insurance expense compared to 2022 due to an increase in the base assessment rate. The year ended December 31, 2023 included $2.6 million in merger related expenses for the merger with Atlantic Union.
Year Ended December 31,
(Dollars in thousands)
$ Change
% Change
Noninterest expense:
Salaries and employee benefits
$ 36,382
$ 32,342
$ 4,040
12.5 %
Occupancy and equipment
6,075
6,032
0.7
FDIC assessment
4.5
Bank franchise tax
1,953
1,767
10.5
Core deposit intangible amortization
1,260
1,464
(204 )
(13.9 )
Data processing
3,310
2,958
11.9
Software
1,505
1,368
10.0
Other real estate owned, net
(128 )
(97.7 )
Other
12,695
12,082
5.1
Total noninterest expense
$ 64,086
$ 59,008
$ 5,078
8.6 %
Salaries and employee benefits increased $4.0 million in 2022 as compared to 2021. The year ended December 31, 2022 reflected additional incentive expenses based on measurement to goals. Data processing costs increased by $352 thousand due to increased volume of transactions and vendor price increases. Other expenses increased $613 thousand in 2022 compared to 2021 as a result of vendor price increases and investments in technology.
Income Taxes
Income taxes on 2023 earnings amounted to $8.2 million, resulting in an effective tax rate of 23.9%, compared to 20.6% in 2022 and 21.2% in 2021. The increase in the rate in 2023 compared to 2022 was primarily due to the non-deductibility of merger related expenses for tax purposes. Excluding merger related expenses, the effective tax rate fluctuations are attributable to changes in pre-tax earnings and the levels of permanent tax differences.
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 expenses that tend 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.
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 its Asset Liability Committee ("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 December 31, 2023 is asset sensitive.
Earnings Simulation
The table below shows the estimated impact of changes in interest rates on net interest income as of December 31, 2023 (dollars in thousands), assuming instantaneous and parallel changes in interest rates, and consistent levels of assets and liabilities. Net interest income for the following twelve months is projected to increase when interest rates are higher than current rates.
Estimated Changes in Net Interest Income
December 31, 2023
Change in net interest income
Change in interest rates
Amount
Percent
Up 4.0%
$ 3,855
2.1 %
Up 3.0%
2,803
1.6
Up 2.0%
1,952
1.1
Up 1.0%
1,036
0.6
Flat
-
-
Down 1.0%
(1,563 )
(0.9 )
Down 2.0%
(4,541 )
(2.5 )
Down 3.0%
(9,114 )
(5.1 )
Down 4.0%
(12,423 )
(6.9 )
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.
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.
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 period ended December 31, 2023 (dollars in thousands):
Estimated Changes in Economic Value of Equity
December 31, 2023
Change in interest rates
Amount
$ Change
% Change
Up 4.0%
$ 383,325
$ (10,545 )
(2.7 )%
Up 3.0%
398,250
4,380
1.1
Up 2.0%
408,498
14,628
3.7
Up 1.0%
408,205
14,335
3.6
Flat
393,870
-
-
Down 1.0%
367,483
(26,387 )
(6.7 )
Down 2.0%
318,723
(75,147 )
(19.1 )
Down 3.0%
253,575
(140,295 )
(35.6 )
Down 4.0%
169,068
(224,802 )
(57.1 )
Liquidity Risk Management
Liquidity is the ability of the Company in a timely manner to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. 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 and liquidity needs through policies approved by the 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, bond maturities and calls, and increases in deposits. Further, the Company maintains a large, high quality, very liquid bond portfolio, which is generally 0% to 50% unpledged and would, accordingly, be available for sale if necessary.
Off balance sheet sources include lines of credit from the Federal Home Loan Bank of Atlanta ("FHLB"), federal funds lines of credit, and access to the Federal Reserve Bank of Richmond's discount window.
The Company has a line of credit with the FHLB, equal to 30% of the Company'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, home equity lines of credit, commercial real estate loans and commercial construction loans. In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB. At December 31, 2023 and 2022, there were $35.0 million and $100.5 million, respectively, in principal advance obligations to the FHLB. The Company had $210 million in outstanding FHLB letters of credit at December 31, 2023 compared to $170 million in letters of credit at December 31, 2022. The letters of credit provide the Bank with additional collateral for securing public entity deposits above FDIC insurance levels, thereby providing less need for collateral pledging from the securities portfolio and accordingly increasing the Company's balance sheet liquidity.
Short-term borrowing is discussed in Note 10 and long-term borrowing is discussed in Note 11 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
The Company has federal funds lines of credit established with correspondent banks in the amount of $60 million and has access to the Federal Reserve Bank of Richmond's discount window. There were no amounts outstanding under these facilities at December 31, 2023.
The Bank also participates with the IntraFi Insured Cash Sweep, a product which provides the Bank the capability of providing additional deposit insurance to customers in the context of a money market account arrangement.
BALANCE SHEET ANALYSIS
Securities
The securities portfolio generates income, plays a strategic role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements. The securities portfolio consists of high quality investments, mostly federal agency, mortgage-backed, and state and municipal securities.
The Company is cognizant of the current rising interest rate environment and has executed an asset liability strategy of purchasing high quality taxable securities with relatively low optionality and short and overall balanced duration.
The following table presents information on the maturities and taxable equivalent yields of available for sale securities:
As of December 31,
Taxable
Taxable
Equivalent
Equivalent
Yield
Yield
U. S. Treasury
Within 1 year
1.36 %
0.72 %
1 to 5 years
1.30
0.90
5 to 10 years
-
1.32
Over 10 years
-
-
Total
1.32
0.92
Federal Agencies:
Within 1 year
2.26
0.45
1 to 5 years
2.35
1.29
5 to 10 years
3.17
2.36
Over 10 years
2.75
3.81
Total
2.51
1.60
Mortgage-backed:
Within 1 year
2.31
2.58
1 to 5 years
2.02
3.25
5 to 10 years
2.23
2.02
Over 10 years
2.26
1.56
Total
2.24
1.76
State and Municipal:
Within 1 year
2.69
2.45
1 to 5 years
2.94
1.80
5 to 10 years
4.05
2.07
Over 10 years
3.65
4.10
Total
3.14
2.15
Corporate Securities:
Within 1 year
-
2.41
1 to 5 years
6.50
-
5 to 10 years
2.84
4.95
Over 10 years
-
-
Total
2.87
4.91
Total portfolio
2.17 %
1.73 %
The Company had no equity securities at December 31, 2023 and 2022.
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.
Average loans increased $179.2 million, or 8.7%, from 2022 to 2023. Average loans increased $91.0 million or 4.6%, from 2021 to 2022.
At December 31, 2023, total loans, net of deferred fees and costs, were $2.3 billion, an increase of $101.9 million, or 4.7%, from the prior year.
Loans held for sale and associated with secondary mortgage activity totaled $1.3 million at December 31, 2023 and $1.1 million at December 31, 2022. Loan production volume was $82.0 million and $61.0 million for 2023 and 2022, respectively. These loans were approximately 67% purchase, 33% refinancing for the years ended December 31, 2023 and 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 portfolio maturities as of the dates indicated by segment (dollars in thousands):
Loans
As of December 31, 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
$ 39,494
$ 178,989
$ 51,373
$ 4,179
$ 274,035
Commercial real estate - owner occupied
47,355
272,954
92,439
1,573
414,321
Commercial real estate - non-owner occupied
77,703
542,986
172,041
37,925
830,655
Residential real estate
16,906
174,871
147,857
30,258
369,892
Home equity
3,566
24,577
52,237
9,918
90,298
Total real estate
185,024
1,194,377
515,947
83,853
1,979,201
Commercial and industrial
62,508
139,234
91,481
9,082
302,305
Consumer
3,860
1,465
6,814
Total loans, net of deferred fees and costs
$ 248,442
$ 1,337,471
$ 608,007
$ 94,400
$ 2,288,320
Interest rate sensitivity:
Fixed interest rates
$ 203,590
$ 1,196,059
$ 482,194
$ 29,212
$ 1,911,055
Floating or adjustable rates
44,852
141,412
125,813
65,188
377,265
Total loans, gross
$ 248,442
$ 1,337,471
$ 608,007
$ 94,400
$ 2,288,320
The Company does not participate in or have any highly leveraged lending transactions, as defined by bank regulations. The Company has no foreign loans. There were no concentrations of loans to any individual, group of individuals, business, or industry that exceeded 10% of total loans at December 31, 2023 or 2022.
Provision for Credit Losses - Loans
The Company had a provision for credit losses on loans of $433 thousand for the year ended December 31, 2023 compared to $1.6 million for the year ended December 31, 2022, and a negative provision for loan losses of ($2.8) million for the year ended December 31, 2021.
The provision for 2023 and 2022 was primarily the result of loan growth. The negative provision in 2021 was the result of improved economic data supporting changes to the qualitative factors.
Allowance for Credit Losses
The purpose of the ACL - loans is to provide for probable expected losses inherent in the loan portfolio. The allowance is increased by the provision for credit losses 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 an increase of $5.2 million in 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 prepayments 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 and consideration of peer loss experience. 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.
The ACL was $25.3 million, $19.6 million, and $18.7 million at December 31, 2023, 2022, and 2021, respectively. The ACL as a percentage of loans at each of those dates was 1.10%, 0.89%, and 0.96%, respectively.
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 Financial Accounting Standards Board 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 table presents the Company's credit loss and recovery experience for the years ended December 31, 2023 and 2022 (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
$
$
$ 19,555
Day 1 impact of CECL adoption
1,078
2,069
5,192
Provision for (recovery of) credit losses
(317 )
(355 )
(69 )
(25 )
Charge-offs
(894 )
-
-
-
(6 )
(9 )
(93 )
(1,002 )
Recoveries
1,095
Balance at December 31, 2023
$ 3,745
$ 2,847
$ 4,583
$ 9,111
$ 3,928
$
$
$ 25,273
Average Loans
$ 239,822
$ 251,054
$ 429,139
$ 860,363
$ 353,533
$ 92,085
$ 6,799
$ 2,232,795
Ratio of net (recoveries) charge-offs to average loans
0.17 %
(0.00 )%
(0.01 )%
(0.02 )%
(0.04 )%
(0.05 )%
(0.43 )%
(0.00 )%
Commercial
Construction and Land Development
Commercial Real Estate - Owner Occupied
Commercial Real Estate - Non-owner Occupied
Residential Real Estate
Consumer
Total
Balance at December 31, 2021
$ 2,668
$ 1,397
$ 3,964
$ 7,141
$ 3,458
$
$ 18,678
Recovery of provision for credit losses
(199 )
1,597
Charge-offs
(357 )
-
-
(436 )
(5 )
(221 )
(1,019 )
Recoveries
-
Balance at December 31, 2022
$ 2,874
$ 1,796
$ 3,785
$ 7,184
$ 3,867
$
$ 19,555
Average Loans
$ 237,213
$ 177,718
$ 411,744
$ 814,440
$ 404,465
$ 6,578
$ 2,052,158
Ratio of net (recoveries) charge-offs to average loans
0.10 %
0.00 %
(0.00 )%
0.05 %
(0.01 )%
1.63 %
0.04 %
Asset Quality Indicators
The following table provides certain qualitative indicators relevant to the Company's loan portfolio for the past three years.
Asset Quality Ratios
As of or For the Year Ended December 31,
Allowance to loans
1.10 %
0.89 %
0.96 %
Net recoveries/charge-offs to allowance
0.00
3.68
(0.54 )
Net recoveries/charge-offs to average loans
0.00
0.04
(0.01 )
Nonperforming assets to total assets
0.19
0.05
0.07
Nonperforming loans to loans
0.25
0.06
0.11
Provision to net recoveries/charge-offs
(532.25 )
221.81
2,825.00
Provision to average loans
0.02
0.08
(0.14 )
Allowance to nonperforming loans
434.69
1,478.08
840.59
__________________________
Nonperforming Assets (Loans and Other Real Estate Owned)
Nonperforming loans include loans on which interest is no longer accrued and accruing loans that are contractually past due 90 days or more. Nonperforming loans include loans originated and loans acquired exclusive of purchased credit impaired loans.
Nonperforming loans to total loans were 0.25% at December 31, 2023 and 0.06% at December 31, 2022. The increase in nonperforming loans during 2023 was $4.5 million compared to 2022.
Nonperforming assets include nonperforming loans, foreclosed real estate and repossessions. Nonperforming assets represented 0.19% of total assets at December 31, 2023 compared to 0.05% of total assets at December 31, 2022.
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 December 31, 2023 were $5.6 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 December 31, 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.
Period-end total deposits increased $10.2 million, or 3.9%, during 2023. Customers have become more rate sensitive as market rates have moved up during the course of the year. This has been a trend for all commercial banks. The Company has only a relatively small portion of its time deposits provided by wholesale sources. Total average deposits decreased $199.6 million or 7.1% for 2023 compared to 2022.
Average deposits and rates for the years indicated (dollars in thousands):
Deposits
Year Ended December 31,
Average
Average
Balance
Rate
Balance
Rate
Noninterest bearing deposits
$ 897,199
- %
$ 1,028,871
- %
Interest bearing accounts:
NOW accounts
$ 483,573
0.60 %
$ 522,043
0.04 %
Money market
655,300
2.60
688,631
0.24
Savings
233,055
0.10
273,788
0.04
Time
325,322
2.66
280,672
0.57
Total interest bearing deposits
$ 1,697,250
1.70 %
$ 1,765,134
0.20 %
Average total deposits
$ 2,594,449
1.11 %
$ 2,794,005
0.13 %
Certificates of Deposit over $250,000
At December 31, 2023, certificates of deposit that meet or exceed the FDIC insurance limit held by the Company were $138.5 million. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit at December 31, 2023. Amounts of $250 thousand or more were classified by maturity as follows (dollars in thousands):
December 31, 2023
3 months or less
$ 71,076
Over 3 through 6 months
28,114
Over 6 through 12 months
35,209
Over 12 months
4,101
Total
$ 138,500
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 and $1.2 billion at December 31, 2023 and 2022, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.
Borrowed Funds
In addition to internal deposit generation, the Company also relies on borrowed funds as a supplemental source of funding. Borrowed funds consist of customer repurchase agreements, overnight borrowings from the FHLB and longer-term FHLB advances, subordinated debt acquired in the HomeTown merger, and trust preferred capital notes. Customer repurchase agreements are borrowings collateralized by securities of the U.S. Government, its agencies, or Government Sponsored Enterprises ("GSEs") and generally mature daily. The Company considers these accounts to be a stable and low cost source of funds. The securities underlying these agreements remain under the Company's control. Refer to Note 10 and Note 11 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of short-term and long-term debt. At December 31, 2023 and 2022, the Company had short-term debt of $35.0 million and $100.5 million, respectively.
In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At December 31, 2023, the Bank's public deposits totaled $283.8 million. The Company is legally required to provide collateral to secure the deposits that exceed the insurance coverage provided by the FDIC. This collateral can be provided in the form of certain types of government agency bonds or letters of credit from the FHLB. At year-end 2023, the Company had $210.0 million in letters of credit with the FHLB outstanding to supplement collateral for such deposits.
Shareholders' Equity
The Company's goal with capital management is to comply with all regulatory capital requirements and to support growth, while generating acceptable returns on equity and paying a high rate of dividends.
Shareholders' equity was $343.2 million at December 31, 2023 and $321.2 million at December 31, 2022.
The Company declared and paid quarterly dividends totaling $1.20 per share for 2023, $1.14 per share for 2022, and $1.09 per share for 2021. Cash dividends in 2023 totaled $12.8 million and represented a 48.8% payout of 2023 net income, compared to a 35.3% payout in 2022, and a 27.2% payout in 2021.
The Company and the Bank became subject to the Basel III Capital Rules. The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. In addition, to be well capitalized under the "prompt corrective action" regulations pursuant to Section 38 of the FDIA, the Bank must have the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.
On September 17, 2019, the federal banking agencies jointly issued a final rule required by the EGRRCPA that will permit qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to opt into the CBLR framework. Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and will be deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. The Company and the Bank have not opted into the CBLR framework.
The following table represents the major regulatory capital ratios for the Company as of the dates indicated:
As of December 31,
Risk-Based Capital Ratios:
Common equity tier 1 capital ratio
11.70 %
11.70 %
Tier 1 capital ratio
12.81 %
12.86 %
Total capital ratio
13.82 %
13.67 %
Leverage Capital Ratios:
Tier 1 leverage ratio
10.61 %
10.36 %
Management believes the Company is in compliance with all regulatory capital requirements applicable to it, and the Bank meets the requirements to be considered "well capitalized" under the prompt corrective action framework as of December 31, 2023 and 2022.
Stock Repurchase Programs
On January 26, 2023, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of another stock repurchase program. The program authorizes the repurchase of up to $10 million of the Company's common stock through December 31, 2023.The Company repurchased 34,131 shares at an average of $30.58 for a total cost of $1.0 million during the year ended December 31, 2023.
In 2022, the Company repurchased 206,978 shares at an average cost of $36.26 per share for a total cost of $7.5 million. In 2021, the Company repurchased 265,939 shares at an average cost of $33.08 per share for a total cost of $8.8 million.
CONTRACTUAL OBLIGATIONS
The following items are contractual obligations of the Company as of December 31, 2023 (dollars in thousands):
Payments Due By Period
Total
Under 1 Year
1-3 Years
3-5 Years
More than 5 years
Time deposits
$ 372,066
$ 325,529
$ 30,432
$ 11,838
$ 4,267
Repurchase agreements
59,348
59,348
-
-
-
Operating leases
7,641
1,204
2,146
1,744
2,547
Junior subordinated debt
28,435
-
-
-
28,435
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 AMNB Statutory Trust I, formed in 2006 to issue trust preferred securities, and MidCarolina Trust I and MidCarolina Trust II, the Company does not have any off-balance sheet subsidiaries. Refer to Note 11 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of junior subordinated debt. Off-balance sheet transactions were as follows as of the dates indicated (dollars in thousands):
December 31,
Off-Balance Sheet Commitments
Commitments to extend credit
$ 614,705
$ 635,851
Standby letters of credit
17,228
12,897
Mortgage loan rate-lock commitments
1,822
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is incorporated herein by reference from Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
American National Bankshares Inc.
Danville, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of American National Bankshares Inc. and its Subsidiary (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 15, 2024 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Adoption of New Accounting Standard
As discussed in Notes 1 and 5 to the financial statements, the Company changed its method of accounting for credit losses in 2023 due to the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, including all related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - Loans Collectively Evaluated for Impairment - Qualitative Factors
As described in Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Credit Losses - Loans and Reserve for Unfunded Lending Commitments) to the consolidated financial statements, the Company maintains an allowance for credit losses on loans (“ACLL”) to absorb expected losses in the Company’s loan portfolio. The ACLL consists of quantitative and qualitative allowances for loans collectively assessed for credit losses and an allowance for loans that are individually assessed for credit losses.
The quantitative allowance is applied to loan balances pooled by loan type and credit risk indicator using historical default and loss experience as well as estimates for prepayments to calculate lifetime expected losses, with the exception of certain residential real estate loans that use a vintage loss estimation methodology which pools loans by date of origination and applies historical average loss rates based on the age of the loans. The qualitative adjustment factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio. Management evaluates qualitative factors primarily by considering current and expected economic conditions; effects of changes in risk selection, underwriting standards, and lending policies; experience, ability and depth of lending personnel; changes in the quality of its loan review system; regulatory, legal, and competitive factors; and an assessment of the Company’s loss experience in comparison to peer group averages.
Management exercised significant judgment when measuring loans collectively assessed for credit losses. We identified the measurement of the ACLL as a critical audit matter as auditing the estimate involved especially complex and subjective auditor judgment in evaluating and testing management’s assessment of an inherently complex accounting estimate and process that requires significant management judgment.
The primary audit procedures we performed to address this critical audit matter included:
●
Obtaining an understanding and testing the design and operating effectiveness of the Company’s ACLL internal controls, and management review controls related to collectively evaluated loans, including the process for selection, implementation, and ongoing maintenance of:
o
The underlying methodologies of the expected loss models, including identification of loan pools, model validation, monitoring, and the completeness and accuracy of key data inputs and assumptions.
o
Qualitative factors, including development and review of the data inputs used as the basis for the allocations and management’s review and approval of the reasonableness of the assumptions used to develop the adjustments, sources of reasonable and supportable economic forecasts and other key inputs.
o
Governance and management review processes.
●
Substantively testing management’s process for measuring the ACLL related to collectively evaluated loans, including:
o
Evaluating the conceptual soundness of the model and significant assumptions, including the identification of loan pools.
o
Testing of key data inputs used in the model.
o
Evaluating the methodology’s qualitative factors, including:
■
The completeness and accuracy of the data inputs used as a basis for the qualitative factors.
■
The reasonableness of management’s judgments related to the determination of the qualitative factors.
■
The directional consistency and reasonableness of the qualitative factor adjustments.
o
Testing the mathematical accuracy of the allowance calculation.
/s/ YOUNT, HYDE & BARBOUR, P.C.
We have served as the Company's auditor since 2002.
Richmond, Virginia
March 15, 2024
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
American National Bankshares Inc.
Danville, Virginia
Opinion on the Internal Control over Financial Reporting
We have audited American National Bankshares Inc. and its Subsidiary’s (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements of the Company and our report dated March 15, 2024 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Richmond, Virginia
March 15, 2024
American National Bankshares Inc.
Consolidated Balance Sheets
As of December 31, 2023 and 2022
(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks
$ 31,500 $ 32,207
Interest-bearing deposits in other banks
35,219 41,133
Securities available for sale, at fair value
521,519 608,062
Restricted stock, at cost
10,614 12,651
Loans held for sale
1,279 1,061
Loans, net of deferred fees and costs
2,288,320 2,186,449
Less allowance for credit losses
(25,273 ) (19,555 )
Net loans
2,263,047 2,166,894
Premises and equipment, net
31,809 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
2,298 3,367
Bank owned life insurance
30,409 29,692
Other assets
76,844 51,478
Total assets
$ 3,090,717 $ 3,065,902
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits
$ 805,584 $ 1,010,602
Interest-bearing deposits
1,800,929 1,585,726
Total deposits
2,606,513 2,596,328
Customer repurchase agreements
59,348 370
Other short-term borrowings
35,000 100,531
Junior subordinated debt
28,435 28,334
Other liabilities
18,253 19,165
Total liabilities
2,747,549 2,744,728
Commitments and contingencies
Shareholders' equity:
Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding
- -
Common stock, $1 par value, 20,000,000 shares authorized, 10,633,409 shares outstanding at December 31, 2023 and 10,608,781 shares outstanding at December 31, 2022
10,551 10,538
Capital in excess of par value
142,834 141,948
Retained earnings
232,847 223,664
Accumulated other comprehensive loss, net
(43,064 ) (54,976 )
Total shareholders' equity
343,168 321,174
Total liabilities and shareholders' equity
$ 3,090,717 $ 3,065,902
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Income
For the Years Ended December 31, 2023, 2022, and 2021
(Dollars in thousands, except per share data)
Interest and Dividend Income:
Interest and fees on loans
$ 106,471
$ 82,568
$ 87,040
Interest and dividends on securities:
Taxable
10,358
10,065
7,309
Tax-exempt
Dividends
Other interest income
2,585
2,491
Total interest and dividend income
120,229
96,004
95,796
Interest Expense:
Interest on deposits
28,843
3,553
3,645
Interest on short-term borrowings
5,192
Interest on subordinated debt
-
-
Interest on junior subordinated debt
1,612
1,554
1,535
Total interest expense
35,647
5,766
5,405
Net Interest Income
84,582
90,238
90,391
Provision for (recovery of) credit losses
1,597
(2,825 )
Net Interest Income after Provision for (Recovery of) Credit Losses
84,087
88,641
93,216
Noninterest Income:
Wealth management income
6,751
6,521
6,019
Service charges on deposit accounts
2,216
2,676
2,611
Interchange fees
4,775
4,107
4,152
Other fees and commissions
Mortgage banking income
1,666
4,195
Securities (losses) gains, net
(68 )
-
Income from Small Business Investment Companies
1,409
1,972
Income from insurance investments
1,199
Losses on premises and equipment, net
(155 )
(228 )
(885 )
Other
1,647
1,003
Total noninterest income
18,336
18,807
21,031
Noninterest Expense:
Salaries and employee benefits
36,356
36,382
32,342
Occupancy and equipment
6,219
6,075
6,032
FDIC assessment
1,404
Bank franchise tax
2,052
1,953
1,767
Amortization of intangible assets
1,069
1,260
1,464
Data processing
3,565
3,310
2,958
Software
1,829
1,505
1,368
Other real estate owned, net
(10 )
Merger related expenses
2,577
-
-
Other
12,989
12,695
12,082
Total noninterest expense
68,050
64,086
59,008
Income Before Income Taxes
34,373
43,362
55,239
Income Taxes
8,214
8,934
11,713
Net Income
$ 26,159
$ 34,428
$ 43,526
Net Income Per Common Share:
Basic
$ 2.46
$ 3.23
$ 4.00
Diluted
$ 2.46
$ 3.23
$ 4.00
Weighted Average Common Shares Outstanding:
Basic
10,627,709
10,672,314
10,873,817
Diluted
10,628,559
10,674,613
10,877,231
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2023, 2022, and 2021
(Dollars in thousands)
Year Ended December 31,
Net income
$ 26,159
$ 34,428
$ 43,526
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale
14,709
(68,877 )
(12,236 )
Tax effect
(3,168 )
14,868
2,643
Reclassification adjustment for losses (gains) on sale or call of securities
-
(35 )
Tax effect
(14 )
-
Unrealized gains on cash flow hedges
4,125
2,068
Tax effect
(387 )
(866 )
(434 )
Change in unfunded pension liability
(112 )
1,082
Tax effect
(233 )
(115 )
Other comprehensive income (loss)
11,912
(49,901 )
(7,512 )
Comprehensive income (loss)
$ 38,071
$ (15,473 )
$ 36,014
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2023, 2022, and 2021
(Dollars in thousands, except per share data)
Accumulated
Capital in
Other
Total
Common
Excess of
Retained
Comprehensive
Shareholders'
Stock
Par Value
Earnings
Income (Loss)
Equity
Balance, December 31, 2020
$ 10,926 $ 154,850 $ 169,681 $ 2,437 $ 337,894
Net income
- - 43,526 - 43,526
Other comprehensive loss
- - - (7,512 ) (7,512 )
Stock repurchased (265,939 shares)
(266 ) (8,544 ) - - (8,810 )
Stock options exercised (5,346 shares)
5 84 - - 89
Vesting of restricted stock (23,968 shares)
24 (24 ) - - -
Equity based compensation (45,193 shares)
21 1,411 - - 1,432
Cash dividends paid, $1.09 per share
- - (11,827 ) - (11,827 )
Balance, December 31, 2021
10,710 147,777 201,380 (5,075 ) 354,792
Net income
- - 34,428 - 34,428
Other comprehensive loss
- - - (49,901 ) (49,901 )
Stock repurchased (206,978 shares)
(207 ) (7,298 ) - - (7,505 )
Stock options exercised (713 shares)
1 11 - - 12
Vesting of restricted stock (17,583 shares)
18 (18 ) - - -
Equity based compensation (16,462 shares)
16 1,476 - - 1,492
Cash dividends paid, $1.14 per share
- - (12,144 ) - (12,144 )
Balance, December 31, 2022
10,538 141,948 223,664 (54,976 ) 321,174
Net income
- - 26,159 - 26,159
Other comprehensive income
- - - 11,912 11,912
Stock repurchased (34,131 shares)
(34 ) (1,010 ) - - (1,044 )
Stock options exercised (4,150 shares)
4 65 - - 69
Vesting of restricted stock (19,264 shares)
19 (19 ) - - -
Equity based compensation (23,934 shares)
24 1,850 - - 1,874
Impact of adoption of CECL
- - (4,221 ) - (4,221 )
Cash dividends paid, $1.20 per share
- - (12,755 ) - (12,755 )
Balance, December 31, 2023
$ 10,551 $ 142,834 $ 232,847 $ (43,064 ) $ 343,168
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2023, 2022, and 2021
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income
$ 26,159
$ 34,428
$ 43,526
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for (recovery of) credit losses
1,597
(2,825 )
Depreciation
2,094
2,246
2,243
Net accretion of acquisition accounting adjustments
(1,897 )
(1,597 )
(5,236 )
Core deposit intangible amortization
1,069
1,260
1,464
Net amortization of securities
1,038
1,646
1,846
Net loss (gain) on sale or call of securities available for sale
-
(35 )
Gain on sale of loans held for sale
(824 )
(1,666 )
(4,195 )
Proceeds from sales of loans held for sale
82,535
70,059
154,041
Originations of loans held for sale
(81,929 )
(60,973 )
(142,736 )
Net (gain) loss on other real estate owned
(13 )
(2 )
Net loss on sale, write-down or disposal of premises and equipment
Net loss on sale of assets held-for-sale
-
-
Equity based compensation expense
1,874
1,492
1,432
Earnings on bank owned life insurance
(717 )
(585 )
(625 )
Deferred income tax expense (benefit)
1,273
(385 )
Net change in other assets
(11,197 )
(2,484 )
Net change in other liabilities
(1,217 )
2,677
Net cash (used in) provided by operating activities
18,966
47,941
51,095
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
66,622
120,052
192,672
Purchases of securities available for sale
-
(106,170 )
(433,690 )
Net change in restricted stock
2,037
(4,595 )
Net (increase) decrease in loans
(99,872 )
(238,993 )
73,836
Net change in collateral with other financial institutions
3,200
1,700
Proceeds from sale of other investments
-
-
Proceeds from swap terminations
2,037
-
-
Proceeds from sale of premises and equipment
2,031
Purchases of premises and equipment
(1,538 )
(1,196 )
(1,000 )
Proceeds from sales of other real estate owned
Proceeds from the sale of assets held-for-sale
-
-
Net cash provided by (used in) used in investing activities
(15,520 )
(227,580 )
(162,527 )
Cash Flows from Financing Activities:
Net change in noninterest-bearing deposits
(205,018 )
1,521
178,987
Net change in interest-bearing deposits
215,234
(295,496 )
100,114
Net change in customer repurchase agreements
58,978
(40,758 )
(1,423 )
Net change in short-term borrowings
(65,531 )
100,531
-
Net change in junior subordinated debt
-
-
(7,500 )
Common stock dividends paid
(12,755 )
(12,144 )
(11,827 )
Repurchase of common stock
(1,044 )
(7,505 )
(8,810 )
Proceeds from exercise of stock options
Net cash (used in) provided by financing activities
(10,067 )
(253,839 )
249,630
Net (Decrease) Increase in Cash and Cash Equivalents
(6,621 )
(433,478 )
138,198
Cash and Cash Equivalents at Beginning of Period
73,340
506,818
368,620
Cash and Cash Equivalents at End of Period
$ 66,719
$ 73,340
$ 506,818
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Notes to Consolidated Financial Statements
December 31, 2023, 2022, and 2021
Note 1 - Summary of Significant Accounting Policies
Nature of Operations and Consolidation
The consolidated financial statements include the accounts of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank"). The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.
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 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, goodwill and intangible assets.
The accompanying consolidated financial statements include financial information related to the Company and its majority-owned subsidiaries and those variable interest entities where the Company is the primary beneficiary, if any. In preparing the consolidated financial statements, all significant inter-company accounts and transactions have been eliminated. Assets held in an agency or fiduciary capacity are not included in the consolidated financial statements. Accounting guidance states that if a business enterprise is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. An entity is deemed to be the primary beneficiary of a variable interest entity if that entity has both the power to direct the activities that most significantly impact its economic performance; and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the variable interest entity. Refer to Note 11 for further details concerning variable interest entities.
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. 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 on April 1, 2024, subject to satisfaction of customary closing conditions.
Cash and Cash Equivalents
Cash includes cash on hand, cash with correspondent banks, and cash on deposit at the Federal Reserve Bank of Richmond. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash with original maturities of three months or less and are subject to an insignificant risk of change in value. Cash and cash equivalents are carried at cost.
Interest-bearing Deposits in Other Banks
Interest-bearing deposits in other banks mature within one year and are carried at cost.
Securities
For available-for-sale ("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 allowance for credit losses ("ACL") recorded against any securities in the Company's AFS securities portfolio at December 31, 2023. See Note 3 - "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.
The Company does not currently have any securities in held to maturity or trading and has no plans to add any to either category.
Equity securities with readily determinable fair values are carried at fair value with changes in fair value included in noninterest income.
Due to the nature and restrictions placed on the Company's investment in common stock of the Federal Home Loan Bank of Atlanta ("FHLB") and the Federal Reserve Bank of Richmond, these securities have been classified as restricted equity securities and carried at cost.
Loans Held for Sale
Secondary market mortgage loans are designated as held for sale at the time of their origination. These loans are pre-sold with servicing released and the Company does not retain any interest after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government-sponsored enterprises (conforming loans). In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at fair value. Gains on sales of loans are recognized at the loan closing date and are included in noninterest income.
Derivative Loan Commitments
The Company enters into mortgage loan commitments whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheets with net changes in their fair values recorded in other expenses.
The period of time between issuance of a loan commitment and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery contracts, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed the interest rate risk on the loan. As a result, the Company is not generally exposed to significant losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.
The fair value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the estimated value of the underlying assets while taking into consideration the probability that the loans will be funded.
Loans Held for Investment
The Company makes mortgage, commercial, and consumer loans. A substantial portion of the loan portfolio is secured by real estate. The ability of the Company's debtors to honor their contracts is dependent upon the real estate market and general economic conditions in the Company's market area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balance adjusted for the allowance for credit losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Loans are typically charged off when the loan is 120 days past due, unless secured and in process of collection. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.
Interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
A loan is considered past due when a payment of principal or interest or both is due but not paid. Management closely monitors past due loans in timeframes of 30-59 days, 60-89 days, and 90 or more days past due.
These policies apply to all loan portfolio classes and segments.
The Company's loan portfolio is organized by major segment. These include: commercial, commercial real estate, residential real estate and consumer loans. Each segment has particular risk characteristics that are specific to the borrower and the generic category of credit. Commercial loan repayments are highly dependent on cash flows associated with the underlying business and its profitability. They can also be impacted by changes in collateral values. Commercial real estate loans share the same general risk characteristics as commercial loans but are often more dependent on the value of the underlying real estate collateral and, when construction is involved, the ultimate completion of and sale of the project. Residential real estate loans are generally dependent on the value of collateral and the credit worthiness of the underlying borrower. Consumer loans are very similar in risk characteristics to residential real estate.
Allowance for Credit Losses ("ACL") - 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 allowance 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 prepayments 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 and consideration of peer loss experience. 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 through the provision for credit losses. 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 the provision is recorded in ACL and the reserve is in "Other Liabilities" within the Company's Consolidated Balance Sheets.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Premises and equipment are depreciated over their estimated useful lives ranging from three years to thirty-nine years; leasehold improvements are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever is less. Software is generally amortized over three years. Depreciation and amortization are recorded on the straight-line method.
Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate. Gains and losses on routine dispositions are reflected in current operations.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired. The Company follows Accounting Standards Codification ("ASC") 350, Intangibles - Goodwill and Other, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The Company performs its annual analysis as of June 30 each year. Goodwill is not amortized, but is subject to at least an annual assessment for impairment. Other acquired intangible assets with finite lives (such as core deposit intangibles) are initially recorded at estimated fair value and are amortized over their useful lives. Core deposit and other intangible assets are generally amortized using accelerated methods over their useful lives of five to ten years.
Leases
The Company determines if an arrangement is a lease at inception. All of the Company's leases are currently classified as operating leases and are included in other assets and other liabilities on the Company's Consolidated Balance Sheets. Periodic operating lease costs are recorded in occupancy expenses of premises on the Company's Consolidated Statements of Income.
Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease arrangements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of the expected future lease payments over the remaining lease term. In determining the present value of future lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The operating ROU assets are adjusted for any lease payments made at or before the lease commencement date, initial direct costs, any lease incentives received and, for acquired leases, any favorable or unfavorable fair value adjustments. The present value of the lease liability may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options provided in the lease terms. Lease expense is recognized on a straight-line basis over the expected lease term. Lease agreements that include lease and non-lease components, such as common area maintenance charges, are accounted for separately.
Wealth Management Assets
Securities and other property held by the wealth management segment in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements.
Other Real Estate Owned ("OREO")
OREO represents real estate that has been acquired through loan foreclosures or deeds received in lieu of loan payments. Generally, such properties are appraised at the time acquired and are recorded at fair value less estimated selling costs. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in noninterest expense.
Bank Owned Life Insurance
In connection with mergers, the Company has acquired bank owned life insurance ("BOLI"). The asset is reflected as the cash surrender value of the policies as provided by the insurer on a monthly basis.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company - put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Income Taxes
The Company uses the balance sheet method to account for deferred income tax assets and liabilities. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company had no liability for unrecognized tax benefits as of December 31, 2023 and 2022.
Stock-Based Compensation
Stock compensation accounting guidance ASC 718, Compensation - Stock Compensation, requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees' service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for restricted stock awards.
Earnings Per Common Share
Basic earnings per common share represent income available to common shareholders divided by the average number of common shares outstanding during the period. Diluted earnings per common share reflect the impact of additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company consist solely of outstanding stock options and are determined using the treasury method. Nonvested shares of restricted stock are included in the computation of basic earnings per share because the holder has voting rights and shares in non-forfeitable dividends during the vesting period.
Comprehensive Income
Comprehensive income is shown in a two statement approach; the first statement presents total net income and its components followed by a second statement that presents all the components of other comprehensive income which include unrealized gains and losses on available for sale securities, unrealized gains and losses on cash flow hedges, and changes in the funded status of the defined benefit postretirement plan.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred.
Mergers and Acquisitions
Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions. Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities is recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expense caption. Merger related expenses were $2.6 million for the year ended December 31, 2023. There were no such acquisition related costs for the years ended December 31, 2022, or 2021.
Derivative Financial Instruments
The Company uses derivatives primarily to manage risk associated with changing interest rates. The Company's derivative financial instruments consisted of interest rate swaps that qualify as cash flow hedges of the Company's trust preferred capital notes. The Company recognized derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheets. The effective portion of the gain or loss on the Company's cash flow hedges was reported as a component of other comprehensive income, net of deferred income taxes, and was reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. The company terminated the interest rate swaps in October 2023. See Note 12 - "Derivative Financial Instruments and Hedging Activities" for additional information.
Reclassifications
Certain reclassifications have been made in prior years' financial statements to conform to classifications used in the current year. There were no material reclassifications.
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. 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 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 4 - "Loans" for discussion.
Information contained within the report prior to adoption of ASU 2022-02 and ASU 2016-13 for the year ended December 31, 2022 and 2021, respectively, reflects prior GAAP.
In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate ("LIBOR") would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023. To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU was effective for all entities upon issuance. The Company adopted ASU 2022-06 in the year ended December 31, 2023. The adoption did not have a material effect on the Company's consolidated financial statements.
Recent Accounting Pronouncements
In December 2023, FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity's applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its consolidated financial statements.
In November 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark ("CODM"), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity's consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively. The Company does not expect the adoption of ASU 2023-07 to have a material impact on its consolidated financial statements.
In October 2023, the Financial Accounting Standards Board (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 Accounting Standards Codification. 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 Codification 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.
Note 2 - Restrictions on Cash
The Company maintains cash accounts in other commercial banks. The amount on deposit with correspondent institutions at December 31, 2023 exceeded the insurance limits of the FDIC by$2.8 million.
Note 3 - Securities
The amortized cost and estimated fair value of investments in securities at December 31, 2023 and 2022 were as follows (dollars in thousands):
December 31, 2023
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
Securities available for sale:
U.S. Treasury
$ 131,731 $ - $ 7,964 $ 123,767
Federal agencies and GSEs
76,702 3 4,472 72,233
Mortgage-backed and CMOs
292,590 1 35,827 256,764
State and municipal
45,999 - 3,577 42,422
Corporate
30,812 - 4,479 26,333
Total securities available for sale
$ 577,834 $ 4 $ 56,319 $ 521,519
The Company had no equity securities at December 31, 2023 or December 31, 2022.
(Dollars in thousands)
December 31, 2022
Amortized
Unrealized
Unrealized
Cost
Gains
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 amortized cost and estimated fair value of investments in debt securities at December 31, 2023, by contractual maturity, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because mortgage-backed securities have both known principal repayment terms as well as unknown principal repayments due to potential borrower pre-payments, it is difficult to accurately predict the final maturity of these investments. Mortgage-backed securities are shown separately (dollars in thousands):
Available for Sale
Amortized
Cost
Fair Value
Due in one year or less
$ 66,221 $ 64,528
Due after one year through five years
155,815 144,776
Due after five years through ten years
52,229 45,302
Due after ten years
10,979 10,148
Mortgage-backed and CMOs
292,590 256,765
$ 577,834 $ 521,519
Gross realized gains and losses on, and the proceeds from the sale of, securities available for sale were as follows (dollars in thousands):
For the Year Ended December 31,
Gross realized gains
$ 55 $ - $ 35
Gross realized losses
(123 ) - -
Proceeds from sales of securities
13,180 - 561
Securities with a carrying value of approximately $202.0 million and $118.9 million at December 31, 2023 and 2022, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. FHLB letters of credit were used as additional collateral in the amounts of $210.0 million at December 31, 2023 and $170.0 million at December 31, 2022.
Unrealized Losses on Securities
The following table shows estimated fair value and gross unrealized losses for which an ACL has not been recorded, aggregated by category and length of time that securities have been in a continuous unrealized loss position, at December 31, 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 December 31, 2023, were as follows (dollars in thousands):
Total
Less than 12 Months
12 Months or More
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Loss
Value
Loss
Value
Loss
U.S. Treasury
$ 123,767 $ 7,964 $ - $ - $ 123,767 $ 7,964
Federal agencies and GSEs
71,975 4,472 210 - 71,765 4,472
Mortgage-backed and CMOs
256,615 35,827 111 2 256,504 35,825
State and municipal
42,377 3,577 1,621 15 40,756 3,562
Corporate
26,333 4,479 1,506 194 24,827 4,285
Total
$ 521,067 $ 56,319 $ 3,448 $ 211 $ 517,619 $ 56,108
U.S. Treasury: The unrealized losses on the Company's investment in 19 U.S. Treasury securities were caused by normal market fluctuations. Nineteen 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 bases 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 bases, which may be maturity, the Company concluded there were no credit related losses at December 31, 2023.
Federal agencies and GSEs: The unrealized losses on the Company's investment in 38 government sponsored entities ("GSEs") were caused by normal market fluctuations. Thirty-seven 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 bases 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 bases, which may be maturity, the Company concluded there were no credit related losses at December 31, 2023.
Mortgage-backed securities: The unrealized losses on the Company's investment in 131 GSE mortgage-backed securities were caused by normal market fluctuations. One hundred twenty-one 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 bases 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 bases, which may be maturity, the Company concluded there were no credit related losses at December 31, 2023.
Collateralized Mortgage Obligations: The unrealized losses associated with 53 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 bases 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 its amortized cost bases, which may be maturity, the Company concluded there were no credit related losses at December 31, 2023.
State and municipal securities: The unrealized losses on 59 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 A- or higher), and principal and interest payments have been made timely. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases 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 bases, which may be maturity, the Company concluded there were no credit related losses at December 31, 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. These securities are not rated, but the Company conducted thorough internal credit reviews prior to purchase and conducts ongoing quarterly reviews of these companies as well, and the Company's analysis did not indicate the existence of credit loss. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company concluded there were no credit related losses at December 31, 2023.
Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond and FHLB, these securities have been classified as restricted equity securities and carried at cost. These 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 sheet. Restricted equity securities consist of Federal Reserve Bank of Richmond stock in the amount of $6.6 million and $6.5 million as of December 31, 2023 and 2022 respectively, and FHLB stock in the amount of $4.0 million and $6.1 million as of December 31, 2023 and 2022, respectively.
Allowance for Credit Losses-Available for Sale Securities
As of December 31, 2023 and 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 December 31, 2023, which were comprised of 312 individual securities, represent a credit loss impairment. As of December 31, 2023 and 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
Net proceeds from sales of AFS securities for the year ended December 31, 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. The Company did not have any sales of AFS securities during the year ended December 31, 2022 and recorded realized gains of $35 thousand for the year ended December 31, 2021.
The table below shows gross unrealized losses and fair value, 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
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Loss
Value
Loss
Value
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
Note 4 - Loans
Loans, excluding loans held for sale at December 31, 2023 and 2022 were comprised of the following (dollars in thousands):
December 31,
Commercial
$ 302,305 $ 304,247
Commercial real estate:
Construction and land development
274,035 197,525
Commercial real estate - owner occupied
414,321 418,462
Commercial real estate - non-owner occupied
830,655 827,728
Residential real estate:
Residential
369,892 338,132
Home equity
90,298 93,740
Consumer
6,814 6,615
Total loans, net of deferred fees and costs
$ 2,288,320 $ 2,186,449
Net deferred loan costs included in the above loan categories are $255 thousand for 2023 and $202 thousand for 2022 in all other categories.
Overdraft deposits were reclassified to consumer loans in the amount of $132 thousand and $70 thousand for 2023 and 2022, respectively.
Acquired Loans
The following information as of and for the year ended December 31, 2022 was in accordance with the guidance in effect prior to the adoption of ASC 326. The outstanding principal balance and the carrying amount of these loans, including ASC 310-30 loans, included in the consolidated balance sheets at December 31, 2022 were as follows (dollars in thousands):
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, at December 31, 2022 are as follows (dollars in thousands):
Outstanding principal balance
$ 17,788
Carrying amount
13,541
The following table presents changes in the accretable yield on purchased credit impaired loans, for which the Company applies ASC 310-30, for the year ended December 31, 2022,(dollars in thousands):
Balance at January 1
$ 4,902
Accretion
(2,186 )
Reclassification from nonaccretable difference
Other changes, net (1)
(172 )
Balance at December 31
$ 3,530
_________________________
(1) This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate acquired impaired loans, and discounted payoffs that occurred in the period.
Past Due Loans
The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2023 (dollars in thousands):
90 Days +
Past Due
Non-
Total
30- 59 Days
60-89 Days
and Still
Accrual
Past
Total
Past Due
Past Due
Accruing
Loans
Due
Current
Loans
Commercial
$ 1,642 $ - $ - $ - $ 1,642 $ 300,663 $ 302,305
Commercial real estate:
Construction and land development
326 - - - 326 273,709 274,035
Commercial real estate - owner occupied
269 - - 2,911 3,180 411,141 414,321
Commercial real estate - non-owner occupied
597 - - 2,327 2,924 827,731 830,655
Residential:
Residential
614 208 - 390 1,212 368,680 369,892
Home equity
121 25 - 171 317 89,981 90,298
Consumer
1 3 - 15 19 6,795 6,814
Total
$ 3,570 $ 236 $ - $ 5,814 $ 9,620 $ 2,278,700 $ 2,288,320
The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2022 (dollars in thousands):
90 Days +
Past Due
Non-
Total
30- 59 Days
60-89 Days
and Still
Accrual
Past
Total
Past Due
Past Due
Accruing
Loans
Due
Current
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). All payments received while on nonaccrual status are applied against the principal balance of the loan. The Company does not recognize interest income while loans are on nonaccrual status.
CECL
Incurred Loss
December 31, 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
2,911 - 2,911 -
Commercial real estate-non-owner occupied
2,327 - 2,327 301
Residential:
Residential
340 50 390 797
Home equity
- 171 171 205
Consumer
- 15 15 -
Total
$ 5,578 $ 236 $ 5,814 $ 1,307
The following table represents the accrued interest receivables written off by reversing interest during the twelve months ended December 31, 2023 (dollars in thousands).
For the Twelve Months Ended December 31, 2023
Commercial
$ 2
Commercial real estate:
Construction and land development
-
Commercial real estate-owner occupied
Commercial real estate-non-owner occupied
Residential:
Residential
Home equity
Consumer
-
Total accrued interest reversed
$ 31
The following table presents a nonaccrual loan analysis of collateral dependent loans as of December 31, 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:
$ - $ - $ - $ 2,327 $ 2,911 $ 5,238
Residential:
Residential
340 - - - - 340
Home equity
- - - - - -
Total collateral dependent loans
$ 340 $ - $ - $ 2,327 $ 2,911 $ 5,578
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 loans modified to borrowers experiencing financial difficulty during the year ended December 31, 2023. All loans shown in the table below are in nonaccrual status except for the residential real estate loan. All loans shown below are paying in agreement with the terms and are not past due. There have been no defaults in the years ended December 31, 2023 or 2022. 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):
Type of Modification
Amortized Cost Basis
% of Total Loan Type
Financial Effect
Commercial real estate-owner occupied
$ 2,315 0.56 % Term extension.
Commercial real estate-nonowner occupied
2,517 0.30 Interest rate reduction and term extension.
Residential real estate
8 - Term extension.
Commercial real estate-owner occupied
454 0.11 Term extension.
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2022 (dollars in thousands):
Unpaid
Average
Interest
Recorded
Principal
Related
Recorded
Income
Investment
Balance
Allowance
Investment
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
- - - - -
Residential:
Residential
- - - 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
In the table above, recorded investment may be different than unpaid principal balance due to acquired loans with a premium or discount and loans with unearned costs or unearned fees.
Residential Real Estate in process of Foreclosure
The Company had $23 thousand and $715 thousand in residential real estate loans in the process of foreclosure at December 31, and December 31, , respectively. The Company had no residential OREO at December 31, and 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; 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 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.
The following table shows the Company's recorded investment in loans by credit quality indicators further disaggregated by year of origination as of December 31, 2023 (dollars in thousands):
Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Term Loans by Year of Origination
Prior
Revolving
Total
Commercial
Pass
$ 38,996 $ 37,024 $ 53,730 $ 18,292 $ 8,886 $ 24,380 $ 109,050 $ 290,358
Special Mention
1,311 1,071 2,054 61 386 65 1,801 6,749
Substandard
- 134 16 - 324 2,390 2,334 5,198
Total commercial
$ 40,307 $ 38,229 $ 55,800 $ 18,353 $ 9,596 $ 26,835 $ 113,185 $ 302,305
Current period gross write-offs
$ - $ - $ (359 ) $ - $ - $ - $ (535 ) $ (894 )
Construction and land development
Pass
$ 51,120 $ 83,122 $ 100,392 $ 7,462 $ 5,296 $ 16,116 $ 6,063 $ 269,571
Special Mention
- - 4,364 - - - - 4,364
Substandard
- - - - - 100 - 100
Total construction and land development
$ 51,120 $ 83,122 $ 104,756 $ 7,462 $ 5,296 $ 16,216 $ 6,063 $ 274,035
Current period gross write-offs
$ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate - owner occupied
Pass
$ 32,233 $ 60,890 $ 98,415 $ 42,971 $ 23,733 $ 138,802 $ 5,208 $ 402,252
Special Mention
- - 1,329 - - 788 4,529 6,646
Substandard
- - - 2,315 - 2,654 454 5,423
Total commercial real estate - owner occupied
$ 32,233 $ 60,890 $ 99,744 $ 45,286 $ 23,733 $ 142,244 $ 10,191 $ 414,321
Current period gross write-offs
$ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate - non-owner occupied
Pass
$ 47,264 $ 144,118 $ 219,493 $ 129,747 $ 56,852 $ 209,351 $ 6,336 $ 813,161
Special Mention
- - - 121 1,034 6,960 - 8,115
Substandard
3,073 - 1,330 1,458 1,866 1,652 - 9,379
Total commercial real estate - non-owner occupied
$ 50,337 $ 144,118 $ 220,823 $ 131,326 $ 59,752 $ 217,963 $ 6,336 $ 830,655
Current period gross write-offs
$ - $ - $ - $ - $ - $ - $ - $ -
Residential
Pass
$ 74,488 $ 93,929 $ 83,377 $ 23,637 $ 14,226 $ 63,336 $ 14,381 $ 367,374
Special Mention
- 256 199 - - 757 - 1,212
Substandard
- - 259 229 - 818 - 1,306
Total residential
$ 74,488 $ 94,185 $ 83,835 $ 23,866 $ 14,226 $ 64,911 $ 14,381 $ 369,892
Current period gross write-offs
$ - $ - $ - $ - $ - $ (6 ) $ - $ (6 )
Home equity
Pass
$ - $ - $ - $ - $ - $ - $ 89,872 $ 89,872
Special Mention
- - - - - - - -
Substandard
- - - - - - 426 426
Total home equity
$ - $ - $ - $ - $ - $ - $ 90,298 $ 90,298
Current period gross write-offs
$ - $ - $ - $ - $ - $ - $ (9 ) $ (9 )
Consumer
Pass
$ 2,452 $ 1,276 $ 477 $ 225 $ 141 $ 1,717 $ 509 $ 6,797
Special Mention
- - - - - - - -
Substandard
- 2 - - - 15 - 17
Total consumer
$ 2,452 $ 1,278 $ 477 $ 225 $ 141 $ 1,732 $ 509 $ 6,814
Current period gross write-offs
$ (3 ) $ (2 ) $ (7 ) $ - $ - $ (78 ) $ (3 ) $ (93 )
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 Real Estate
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
Total
$ 6,615
Note 5 - 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) for each of the years in the three-year period ended December 31, 2023, are presented below (dollars in thousands):
Year Ended December 31,
Allowance for Credit Losses
Balance, beginning of year
$ 19,555 $ 18,678 $ 21,403
Day 1 impact of CECL adoption
5,192 - -
Provision for (recovery of) credit losses
433 1,597 (2,825 )
Charge-offs
(1,002 ) (1,019 ) (146 )
Recoveries
1,095 299 246
Balance, end of year
$ 25,273 $ 19,555 $ 18,678
Year Ended December 31,
Reserve for Unfunded Lending Commitments
Balance, beginning of year
$ 377 $ 386 $ 304
Day 1 impact of CECL adoption
305 - -
Provision for (recovery of) unfunded commitments
63 (9 ) 82
Balance, end of year
$ 745 $ 377 $ 386
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 be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted through the provision for credit losses. 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.
The following table presents the Company's allowance for credit losses by portfolio segment at and for the year ended December 31, 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
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
Charge-offs
(894 ) - - - (6 ) (9 ) (93 ) (1,002 )
Recoveries
492 10 37 213 164 57 122 1,095
Provision/(recovery)
390 769 (317 ) (355 ) 40 (69 ) (25 ) 433
Balance at December 31, 2023
$ 3,745 $ 2,847 $ 4,583 $ 9,111 $ 3,928 $ 959 $ 100 $ 25,273
The following table presents the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment for the year ended December 31, 2022 (dollars in thousands):
Commercial (1)
Construction and Land Development
Commercial Real Estate - Owner Occupied
Commercial Real Estate - Non-owner Occupied
Residential Real Estate
Consumer
Total
Allowance for Loan Losses
Balance at December 31, 2021
$ 2,668 $ 1,397 $ 3,964 $ 7,141 $ 3,458 $ 50 $ 18,678
Charge-offs
(357 ) - - (436 ) (5 ) (221 ) (1,019 )
Recoveries
121 - 20 3 41 114 299
Provision/(recovery)
442 399 (199 ) 476 373 106 1,597
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
(1) Includes PPP loans, which are guaranteed by the SBA and have no related allowance.
The allowance for credit losses - loans is allocated to loan segments based upon historical default and loss experience, prepayment 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 forecast period; experience of lending staff; quality of loan review system; and changes in the regulatory, legal, and competitive environment.
The provision expense recorded of $433 thousand for the year ended December 31, 2023 was necessitated by loan growth. For the year ended December 31, 2022, the Company recorded a provision expense of $1.6 million necessitated by loan growth. Management will continue to evaluate the adequacy of the Company's allowance for credit losses as more economic data becomes available and as changes within the Company's loan portfolio are known. Changes in economic conditions may require further changes in the level of allowance.
Note 6 - Premises and Equipment
Major classifications of premises and equipment at December 31, 2023 and 2022 are summarized as follows (dollars in thousands):
December 31,
Land
$ 8,859 $ 9,308
Buildings
32,538 32,515
Leasehold improvements
1,615 1,536
Furniture and equipment
17,216 19,379
60,228 62,738
Accumulated depreciation
(28,419 ) (29,838 )
Premises and equipment, net
$ 31,809 $ 32,900
Depreciation expense was $2.1 million for the year ended December 31, 2023 and $2.2 million in 2022 and 2021.
Note 7 - Goodwill and Other Intangible Assets
The Company records as goodwill the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. In testing goodwill for impairment, the Company must first decide if circumstances lead to a determination that it is not more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing, it concludes that it is not more likely than not that the fair value of a reporting unit is greater than its carrying value, then no further testing is required and the goodwill is not impaired. The Company performed its annual analysis for the years ended December 31, 2023 and 2022, respectively, and no indications of impairment were noted.
Core deposit intangibles resulting from the MainStreet Bankshares, Inc. acquisition in January 2015 were $1.8 million and are being amortized on an accelerated basis over 120 months. Core deposit intangibles resulting from the acquisition of HomeTown Bankshares Corporation ("Hometown") in April 2019 were $8.2 million and are being amortized on an accelerated basis over 120 months.
The changes in the carrying amount of goodwill and intangibles for the twelve months ended December 31, 2023, are as follows (dollars in thousands):
Goodwill
Intangibles
Balance at December 31, 2022
$ 85,048 $ 3,367
Amortization
- (1,069 )
Balance at December 31, 2023
$ 85,048 $ 2,298
Goodwill and intangible assets at December 31, 2023 and 2022 were as follows (dollars in thousands):
Gross Carrying
Accumulated
Net Carrying
Value
Amortization
Value
December 31, 2023
Core deposit intangibles
$ 19,708 $ (17,410 ) $ 2,298
Goodwill
85,048 - 85,048
December 31, 2022
Core deposit intangibles
$ 19,708 $ (16,341 ) $ 3,367
Goodwill
85,048 - 85,048
Amortization expense of core deposit intangibles for the years ended December 31, 2023, 2022, and 2021 was $1.1 million, $1.3 million, and $1.5 million, respectively. As of December 31, 2023, the estimated future amortization expense of core deposit intangibles is as follows (dollars in thousands):
Year
Amount
$ 800
Total
$ 2,298
Note 8 - Leases
The right-of-use assets and lease liabilities relate to banking offices and other space occupied by the Company under noncancelable operating lease agreements. The aggregate right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Company's consolidated balance sheets. Lease liabilities represent the Company's obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company's incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company's right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
The Company's long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
The following tables present information about the Company's leases as of December 31, 2023 and 2022 and for the years ended December 31, 2023, 2022, and 2021 (dollars in thousands):
December 31, 2023
December 31, 2022
Lease liabilities
$ 6,541 $ 3,318
Right-of-use assets
$ 6,460 $ 3,245
Weighted average remaining lease term (in years)
7.49 6.77
Weighted average discount rate
4.12 % 3.16 %
Year Ended Year Ended Year Ended
December 31, 2023
December 31, 2022
December 31, 2021
Lease cost
Operating lease cost
$ 1,255 $ 1,072 $ 1,069
Short-term lease cost
- - -
Total lease cost
$ 1,255 $ 1,072 $ 1,069
Cash paid for amounts included in the measurement of lease liabilities
$ 1,243 $ 1,083 $ 1,047
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 December 31, 2023
$ 1,204
1,182
2029 and after
2,547
Total undiscounted cash flows
$ 7,641
Discount
(1,100 )
Lease liabilities
$ 6,541
Lease expense, a component of occupancy and equipment expense, for the years ended December 31, 2023 totaled $1.4 million and $1.2 million for the years ended December 31, 2022 and 2021. The amounts recognized in lease expense include insurance, property taxes, and common area maintenance.
Note 9 - Deposits
The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2023 and 2022 was $138.5 million and $89.8 million, respectively.
At December 31, 2023, the scheduled maturities and amounts of certificates of deposits (included in interest-bearing deposits on the consolidated balance sheets) were as follows (dollars in thousands):
Year
Amount
$ 325,529
17,422
13,010
6,736
5,102
2029 and after
4,267
Total
$ 372,066
There were no brokered time deposits at December 31, 2023 or December 31, 2022.
Note 10 - Short-term Borrowings
Short-term borrowings consist of customer repurchase agreements, overnight borrowings from the FHLB, and federal funds purchased. The Company has federal funds lines of credit established with correspondent banks in the amount of $110 million and has access to the Federal Reserve Bank of Richmond's discount window. The Company has $215.5 million in collateral pledged to the Federal reserve discount window. Customer repurchase agreements are collateralized by securities of the U.S. Government, its agencies or GSEs. They mature daily. The interest rates are generally fixed but 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. Short-term borrowings consisted solely of the following at December 31, 2023 and 2022 (dollars in thousands):
December 31, 2023
December 31, 2022
Amount
Weighted Average Rate Amount
Weighted Average Rate
Customer repurchase agreements
$ 59,348 4.75 % $ 370 0.10 %
FHLB borrowings
35,000 5.57 100,531 4.42
Total short-term borrowings
$ 94,348 5.05 % $ 100,901 4.40 %
Note 11 - 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 December 31, 2023, $1.1 billion 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 December 31, 2023 was $408.3 million, with $245.0 million remaining collateral eligible to be pledged.
In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At December 31, 2023, the Bank's public deposits totaled $283.8 million. The Company is required to provide collateral to secure the deposits that exceed the insurance coverage provided by the FDIC. This collateral can be provided in the form of certain types of government or agency bonds or letters of credit from the FHLB. At December 31, 2023, the Company had $210.0 million in letters of credit with the FHLB outstanding as well as $132.3 million in agency, state, and municipal securities 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 subsidiary of the Company, issued $20 million of preferred securities (the "Trust Preferred Securities") in a private placement pursuant to an applicable exemption from registration. The Trust Preferred Securities mature on June 30, 2036, but may be redeemed at the Company's option beginning on September 30, 2011. Initially, the securities required quarterly distributions by the trust to the holder of the Trust Preferred Securities at a fixed rate of 6.66%. Effective September 30, 2011, the rate resets quarterly at the three-month LIBOR plus 1.35%. Effective July 2023, the rate resets quarterly at the three-month SOFR plus 1.35%. 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 (the "Trust Preferred Capital Notes"), issued pursuant to a junior subordinated debenture entered into between the Company and Wilmington Trust Company, as trustee.
The Company also has outstanding $8.8 million in junior subordinated debentures to MidCarolina Trust I and MidCarolina Trust II, two separate unconsolidated 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 are 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 thousand equity investment in the MidCarolina Trusts. Instead, the Company reflected these equity investments in other assets in the Company's consolidated balance sheets.
A description of the junior subordinated debt securities outstanding payable to the trusts is shown below (dollars in thousands):
Principal Amount
As of December 31,
Issuing Entity
Date Issued
Interest Rate
Maturity Date
AMNB Trust I
4/7/2006
SOFR plus 1.35%
6/30/2036
$ 20,619 $ 20,619
MidCarolina Trust I
10/29/2002
SOFR plus 3.45%
11/7/2032
4,657 4,601
MidCarolina Trust II
12/3/2003
SOFR plus 2.95%
10/7/2033
3,159 3,114
$ 28,435 $ 28,334
The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $498 thousand and $449 thousand at December 31, 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 were recorded as a result of the acquisition of MidCarolina on July 1, 2011, and are being amortized into interest expense over the remaining lives of the respective borrowings.
Note 12 - Derivative Financial Instruments and Hedging Activities
The Company uses derivative financial instruments ("derivatives") primarily to manage risks associated with changing interest rates. The Company's derivatives were 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 was not significant.
Terms and conditions of the interest rate swaps vary and amounts receivable or payable are recognized as accrued under the terms of the agreements. The Company assesses the effectiveness of each hedging relationship on a periodic basis. In accordance with ASC 815, Derivatives and Hedging, the effective portions of the derivatives' unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company's assessment, its cash flow hedges are highly effective, but to the extent that any ineffectiveness exists in the hedge relationships, the amounts would be recorded in the Company's consolidated statements of income.
The Company terminated the swap agreements on October 16, 2023, earlier than their maturity of June 2028. Net proceeds from the termination was $2.0 million for settlement of deferred gains and interest and $850 thousand cash collateral returned. The other comprehensive income component remained on the balance sheet and will accrete from the time of execution to the end of the hedge term since the swaps were terminated early.
(Dollars in thousands)
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
In addition, the Company has commitments to fund certain mortgage loans (interest rate lock commitments) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors which are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of change in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships.
Note 13 - Stock-Based Compensation
The Company's 2018 Stock Incentive Plan (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. During the year ended December 31, 2023, 4,150 stock options were exercised at the granted price of $16.63. The Company had no outstanding stock option awards at December 31, 2023. There was no recognized or unrecognized stock compensation expense attributable to outstanding stock options at December 31, 2023 or 2022. No stock options were granted in 2023, 2022, and 2021.
The total proceeds of the in-the-money options exercised during the years ended December 31, 2023, 2022, and 2021 were $69 thousand, $12 thousand, and $89 thousand, respectively. Total intrinsic value (the amount by which the current fair value of the underlying stock exceeds the exercise price) of options exercised during the years ended December 31, 2023, 2022, and 2021 was $0, $16 thousand, and $96 thousand, respectively.
Restricted Stock
The Company from time-to-time grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company's common stock. The value of the stock awarded is established as the fair market value of the 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. All restricted stock grants cliff vest at the end of a 36-month period beginning on the date of grant. Nonvested restricted stock activity for the year ended December 31, 2023 is summarized in the following table:
Weighted
Average Grant
Shares
Date Value Per Share
Nonvested at December 31, 2022
71,707 $ 33.39
Granted
32,554 35.78
Vested
(19,805 ) 33.73
Forfeited
(1,878 ) 34.16
Nonvested at December 31, 2023
82,578 34.21
As of December 31, 2023, 2022, and 2021, there was $1.2 million, $1.1 million, and $782 thousand, respectively, in unrecognized compensation cost related to nonvested restricted stock granted under the 2018 Plan. This cost is expected to be recognized over the next 12 to 36 months. The share-based compensation expense for nonvested restricted stock was $1.1 million, $889 thousand, and $749 thousand during 2023, 2022, and 2021, respectively.
Note 14 - Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and the states of Virginia and North Carolina. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years prior to 2020.
The components of the Company's net deferred tax assets were as follows (dollars in thousands):
December 31,
Deferred tax assets:
Allowance for credit losses
$ 5,476
$ 4,226
Nonaccrual loan interest
Other real estate owned valuation allowance
-
Deferred compensation
1,182
1,277
Acquisition accounting
1,174
Lease liability, net of right of use asset
Accrued pension liability
Net unrealized loss on cash flow hedges
-
Net unrealized loss on securities available for sale
12,161
15,339
Other
Total deferred tax assets
20,821
22,733
Deferred tax liabilities:
Depreciation
1,044
Core deposit intangibles
Deferred loan origination costs, net
Net unrealized gain on cash flow hedges
-
Prepaid merger expenses
1,240
-
Other
Total deferred tax liabilities
2,957
2,271
Net deferred tax assets
$ 17,864
$ 20,462
The provision for income taxes consists of the following (dollars in thousands):
Year Ended December 31,
Current tax expense
$ 6,941
$ 9,319
$ 10,905
Deferred tax expense (benefit)
1,273
(385 )
Total income tax expense
$ 8,214
$ 8,934
$ 11,713
A reconcilement of the "expected" federal income tax expense to reported income tax expense is as follows (dollars in thousands):
Year Ended December 31,
Expected federal tax expense
$ 7,218
$ 9,106
$ 11,600
Nondeductible merger related expense
-
-
Nondeductible interest expense
Tax-exempt interest
(186 )
(202 )
(198 )
State income taxes
Other, net
(288 )
(23 )
Total income tax expense
$ 8,214
$ 8,934
$ 11,713
Note 15 - 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.
Year Ended December 31,
Per Share
Per Share
Per Share
Shares
Amount
Shares
Amount
Shares
Amount
Basic earnings per share
10,627,709 $ 2.46 10,672,314 $ 3.23 10,873,817 $ 4.00
Effect of dilutive securities - stock options
850 - 2,299 - 3,414 -
Diluted earnings per share
10,628,559 $ 2.46 10,674,613 $ 3.23 10,877,231 $ 4.00
There were no outstanding stock options that were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive in 2023, 2022, and 2021.
Note 16 - Off-Balance Sheet Activities
The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if applicable, is based on management's credit evaluation of the customer.
The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
The following off-balance sheet financial instruments whose contract amounts represent credit risk were outstanding at December 31, 2023 and 2022 (dollars in thousands):
December 31,
Commitments to extend credit
$ 614,705 $ 635,851
Standby letters of credit
17,228 12,897
Mortgage loan rate lock commitments
1,822 1,920
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally consist of unused portions of lines of credit issued to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
At December 31, 2023, the Company had locked-rate commitments to originate mortgage loans amounting to approximately $1.8 million and loans held for sale of $1.3 million. Risks arise from the possible inability of counterparties to meet the terms of their contracts, though the Company has never experienced a failure of one of its counterparties to perform. If a loan becomes past due 90 days within 180 days of sale, the Company would be required to repurchase the loan.
Note 17 - Related Party Transactions
In the ordinary course of business, loans are granted to executive officers, directors, and their related entities. Management believes that all such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to similar, unrelated borrowers, and do not involve more than a normal risk of collectability or present other unfavorable features. As of December 31, 2023 and 2022, none of these loans was restructured, past due, or on nonaccrual status.
An analysis of these loans for 2023 is as follows (dollars in thousands):
Balance at December 31, 2022
$ 24,476
Additions
7,332
Repayments
(4,372 )
Reclassifications(1)
9,494
Balance at December 31, 2023
$ 36,930
(1) Reclassifications consist of loans for two Board of Directors who joined the Company in May 2023.
Related party deposits totaled $10.6 million at December 31, 2023 and $9.5 million at December 31, 2022.
Note 18 - Employee Benefit Plans
Defined Benefit Plan
The Company previously maintained a non-contributory defined benefit pension plan which covered substantially all employees who were 21 years of age or older and who had at least one year of service. The Company froze its pension plan to new participants and converted its pension plan to a cash balance plan effective December 31, 2009. Each year, existing participants will receive, with some adjustments, income based on the yield of the 10 year U.S. Treasury Note in December of the preceding year. The Plan notified participants of the intent to apply for Internal Revenue Service approval to terminate the Pension Plan. Final determination can take 12-24 months for the projected benefit payments. Total projected payments of $3.5 million are estimated to be disbursed in 2024. Information pertaining to the activity in the plan is as follows (dollars in thousands):
As of and for the Year Ended December 31,
Change in Benefit Obligation:
Projected benefit obligation at beginning of year
$ 3,270 $ 5,013 $ 5,821
Service cost
- - -
Interest cost
166 107 91
Actuarial (gain) loss
185 (1,403 ) (259 )
Settlement gain (loss)
- (10 ) 6
Benefits paid
(78 ) (437 ) (646 )
Projected benefit obligation at end of year
3,543 3,270 5,013
Change in Plan Assets:
Fair value of plan assets at beginning of year
4,264 5,045 4,701
Actual return on plan assets
158 (344 ) 190
Employer contributions
- - 800
Benefits paid
(78 ) (437 ) (646 )
Fair value of plan assets at end of year
4,344 4,264 5,045
Funded Status at End of Year
$ 801 $ 994 $ 32
Amounts Recognized in the Consolidated Balance Sheets
Other assets
$ 801 $ 994 $ 32
Amounts Recognized in Accumulated Other Comprehensive Loss
Net actuarial loss
$ 512 $ 400 $ 1,481
Deferred income taxes
(110 ) (86 ) (320 )
Amount recognized
$ 402 $ 314 $ 1,161
As of and for the Year Ended December 31,
Components of Net Periodic Benefit Cost
Service cost
$ - $ - $ -
Interest cost
166 107 91
Expected return on plan assets
(85 ) (245 ) (230 )
Recognized net loss due to settlement
- 112 195
Recognized net actuarial loss
- 145 182
Net periodic benefit cost
$ 81 $ 119 $ 238
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss (Income)
Net actuarial loss (gain)
$ 112 $ (1,082 ) $ (590 )
Amortization of prior service cost
- - -
Total recognized in other comprehensive loss
$ 112 $ (1,082 ) $ (590 )
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Loss (Income)
$ 193 $ (963 ) $ (352 )
The accumulated benefit obligation as of December 31, 2023, 2022, and 2021 was $3.5 million, $3.3 million, and $5.0 million, respectively. The rate of compensation increase is no longer applicable since the defined benefit plan was frozen and converted to a cash balance plan.
The plan sponsor selected the expected long-term rate-of-return-on-assets assumption in consultation with their investment advisors and actuary. This rate was intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate during the period in which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).
Below is a description of the plan's assets. The plan's weighted-average asset allocations by asset category are as follows as of December 31, 2023 and 2022:
Asset Category
December 31,
Fixed Income
54.4 % 71.4 %
Cash and Accrued Income
45.6 % 28.6 %
Total
100.0 % 100.0 %
The investment policy and strategy for plan assets can best be described as a growth and income strategy. Diversification is accomplished by limiting the holding of any one equity issuer to no more than 5% of total equities. Exchange traded funds are used to provide diversified exposure to the small capitalization and international equity markets. All fixed income investments are rated as investment grade, with the majority of these assets invested in corporate issues. The assets are managed by the Company's Trust and Investment Services Division. No derivatives are used to manage the assets. Equity securities do not include holdings in the Company.
The fair value of the Company's pension plan assets at December 31, 2023 and 2022, by asset category are as follows (dollars in thousands):
Fair Value Measurements at December 31, 2023 Using
Quoted Prices
Significant
in Active
Other
Significant
Balance as of
Markets for
Observable
Unobservable
December 31,
Identical Assets
Inputs
Inputs
Asset Category
Level 1
Level 2
Level 3
Cash
$ 1,961 $ 1,961 $ - $ -
Fixed income securities
Government sponsored entities
1,267 - 1,267 -
Municipal bonds and notes
733 - 733 -
Corporate bonds and notes
383 - 383 -
$ 4,344 $ 1,961 $ 2,383 $ -
Fair Value Measurements at December 31, 2022 Using
Quoted Prices
Significant
in Active
Other
Significant
Balance as of
Markets for
Observable
Unobservable
December 31,
Identical Assets
Inputs
Inputs
Asset Category
Level 1
Level 2
Level 3
Cash
$ 1,218 $ 1,218 $ - $ -
Fixed income securities
Government sponsored entities
1,532 - 1,532 -
Municipal bonds and notes
1,154 - 1,154 -
Corporate bonds and notes
360 - 360 -
$ 4,264 $ 1,218 $ 3,046 $ -
401(k) Plan
The Company maintains a 401(k) plan that covers substantially all full-time employees of the Company. The Company matches a portion of the contribution made by employee participants after at least one year of service. The Company contributed $1.4 million, $1.2 million, and $1.1 million to the 401(k) plan in 2023, 2022, and 2021, respectively. These amounts are included in employee benefits expense for the respective years.
Deferred Compensation Arrangements
Prior to 2015, the Company maintained deferred compensation agreements with former employees providing for annual payments to each ranging from $25,000 to $50,000 per year for 10 years upon their retirement. The liabilities under these agreements were accrued over the officers' remaining periods of employment so that, on the date of their retirement, the then-present value of the annual payments had been accrued. As of December 31, 2023, the Company only had one remaining agreement under which payments are being made to a former officer. The liabilities were $50 thousand and $100 thousand at December 31, 2023 and 2022, respectively. There was no expense for this agreement for the years ended December 31, 2023, 2022, and 2021. As a result of acquisitions, the Company has various agreements with current and former employees and executives with balances of $4.8 million and $5.4 million at December 31, 2023 and 2022, respectively that accrue through eligibility and are payable upon retirement. The Company recognized income of $143 thousand for the year ended December 31, 2023, due to the effect of rising interest rates on the actuarial liability. The Company recognized expenses of $159 thousand and $430 thousand for the years ended December 31, 2022 and 2021, respectively.
Certain named executive officers are eligible to participate in a voluntary, nonqualified deferred compensation plan pursuant to which the officers may defer any portion of their annual cash incentive payments. In addition, the Company may make discretionary cash bonus contributions to the deferred compensation plan. Such contributions, if any, are made on an annual basis after the Committee assesses the performance of each of the named executive officers and the Company during the most recently completed fiscal year. The contributions charged to salary expense were $90 thousand, $86 thousand and $184 for the years ended December 31, 2023, 2022, and 2021, respectively.
Incentive Arrangements
The Company maintains a cash incentive compensation plan for officers based on the Company's performance and individual officer goals. The total amount charged to salary expense for this plan was $3.3 million, $5.1 million, and $3.1 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Note 19 - 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 FASB ASC 825, Financial Instruments, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 -
Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 -
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 -
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
The following describes the valuation techniques used by the Company to measure certain financial assets and 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).
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 during the period (dollars in thousands):
Fair Value Measurements at December 31, 2023 Using
Quoted Prices
Significant
in Active
Other
Significant
Balance as of
Markets for
Observable
Unobservable
December 31,
Identical Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
Securities available for sale:
U.S. Treasury
$ 123,767
$ -
$ 123,767
$ -
Federal agencies and GSEs
72,233
-
72,233
-
Mortgage-backed and CMOs
256,764
-
256,764
-
State and municipal
42,422
-
42,422
-
Corporate
26,333
-
26,333
-
Total securities available for sale
$ 521,519
$ -
$ 521,519
$ -
Loans held for sale
$ 1,279
$ -
$ 1,279
$ -
Fair Value Measurements at December 31, 2022 Using
Quoted Prices
Significant
in Active
Other
Significant
Balance as of
Markets for
Observable
Unobservable
December 31,
Identical Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
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.
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:
Other real estate owned: Measurement for fair values for other real estate owned are the same as impaired loans. Any fair value adjustments are recorded in the period incurred as a valuation allowance against OREO with the associated expense included in OREO expense, net on the consolidated statements of income.
There were no Company assets measured at fair value on a nonrecurring basis at December 31, 2023.The following table summarizes the Company's assets that were measured at fair value on a nonrecurring basis during the period ended December 31, 2022 (dollars in thousands):
Fair Value Measurements at December 31, 2022 Using
Quoted Prices
Significant
in Active
Other
Significant
Balance as of
Markets for
Observable
Unobservable
December 31,
Identical Assets
Inputs
Inputs
Description
Level 1
Level 2
Level 3
Assets:
Other real estate owned, net
$
$ -
$ -
$
FASB 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 Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
The carrying values and estimated fair values of the Company's financial instruments at December 31, 2023 are as follows (dollars in thousands):
Fair Value Measurements at December 31, 2023 Using
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
Fair Value
Carrying Value
Level 1
Level 2
Level 3
Balance
Financial Assets:
Cash and cash equivalents
$ 66,719
$ 66,719
$ -
$ -
$ 66,719
Securities available for sale
521,519
-
521,519
-
521,519
Restricted stock
10,614
-
10,614
-
10,614
Loans held for sale
1,279
-
1,279
-
1,279
Loans, net of allowance
2,263,047
-
-
2,161,793
2,161,793
Bank owned life insurance
30,409
-
30,409
-
30,409
Accrued interest receivable
8,161
-
8,161
-
8,161
Financial Liabilities:
Deposits
$ 2,606,513
$ -
$ 2,602,453
$ -
$ 2,602,453
Repurchase agreements
59,348
-
59,348
-
59,348
Other short-term borrowings
35,000
-
35,000
-
35,000
Junior subordinated debt
28,435
-
-
22,985
22,985
Accrued interest payable
2,386
-
2,386
-
2,386
The carrying values and estimated 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
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
Fair Value
Carrying 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
-
-
Other short-term borrowings
100,531
-
100,531
-
100,531
Junior subordinated debt
28,334
-
-
24,479
24,479
Accrued interest payable
-
-
Note 20 - Dividend Restrictions and Regulatory Capital
The approval of the Office of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's retained net income, as defined, for that year combined with its retained net income for the preceding two calendar years. Under this formula, the Bank can distribute as dividends to the Company, without the approval of the Office of the Comptroller of the Currency, up to $65.1 million as of December 31, 2023. Dividends paid by the Bank to the Company are the only significant source of funding for dividends paid by the Company to its shareholders.
Federal bank regulators have issued substantially similar guidelines requiring banks and bank holding companies to maintain capital at certain levels. In addition, regulators may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Failure to meet minimum capital requirements can trigger certain mandatory and discretionary actions by regulators that could have a direct material effect on the Company's financial condition and results of operations.
Management believes that as of December 31, 2023, the Company and Bank met all capital adequacy requirements to which they are subject. At year-end 2023 and 2022, the most recent regulatory notifications categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category.
Actual and required capital amounts (in thousands) and ratios are presented below at year-end.
To Be Well
Capitalized Under
Prompt Corrective
Actual
Required for Capital Adequacy Purposes*
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2023
Common Equity Tier 1
Company
$ 298,885 11.70 % $ 178,891 >7.00% N/A N/A
Bank
322,168 12.61 178,826 >7.00 $ 166,053 >6.50%
Tier 1 Capital
Company
327,320 12.81 217,225 >8.50 N/A N/A
Bank
322,168 12.61 217,146 >8.50 204,372 >8.00
Total Capital
Company
353,180 13.82 268,337 >10.50 N/A N/A
Bank
348,028 13.62 268,239 >10.50 255,465 >10.00
Leverage Capital
Company
327,320 10.61 123,359 >4.00 N/A N/A
Bank
322,168 10.46 123,238 >4.00 154,048 >5.00
December 31, 2022
Common Equity Tier 1
Company
$ 287,735 11.70 % $ 172,098 >7.00% N/A N/A
Bank
308,690 12.57 171,962 >7.00 $ 159,679 >6.50%
Tier 1 Capital
Company
316,069 12.86 208,977 >8.50 N/A N/A
Bank
308,690 12.57 208,811 >8.50 196,528 >8.00
Total Capital
Company
336,001 13.67 258,147 >10.50 N/A N/A
Bank
328,622 13.38 257,942 >10.50 245,660 >10.00
Leverage Capital
Company
316,069 10.36 122,086 >4.00 N/A N/A
Bank
308,690 10.12 121,990 >4.00 152,488 >5.00
*Ratios include the conservation buffer.
Note 21 - 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. All assets and liabilities of the Company are allocated to community banking. 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 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 years ended December 31, 2023, 2022, and 2021, is shown in the following table (dollars in thousands):
Community Banking
Wealth Management
Total
Interest income
$ 120,229
$ -
$ 120,229
Interest expense
35,647
-
35,647
Noninterest income
11,585
6,751
18,336
Noninterest expense
65,008
3,042
68,050
Income before income taxes
30,664
3,709
34,373
Net income
23,229
2,930
26,159
Depreciation and amortization
3,157
3,162
Total assets
3,090,502
3,090,717
Goodwill
85,048
-
85,048
Capital expenditures
1,538
-
1,538
Community Banking
Wealth Management
Total
Interest income
$ 96,004
$ -
$ 96,004
Interest expense
5,766
-
5,766
Noninterest income
12,286
6,521
18,807
Noninterest expense
61,173
2,913
64,086
Income before income taxes
39,754
3,608
43,362
Net income
31,578
2,850
34,428
Depreciation and amortization
3,496
3,506
Total assets
3,065,611
3,065,902
Goodwill
85,048
-
85,048
Capital expenditures
1,196
-
1,196
Community Banking
Wealth Management
Total
Interest income
$ 95,796
$ -
$ 95,796
Interest expense
5,405
-
5,405
Noninterest income
15,012
6,019
21,031
Noninterest expense
56,251
2,757
59,008
Income before income taxes
51,977
3,262
55,239
Net income
40,949
2,577
43,526
Depreciation and amortization
3,697
3,707
Total assets
3,334,347
3,334,597
Goodwill
85,018
-
85,018
Capital expenditures
1,000
-
1,000
Note 22 - Parent Company Financial Information
Condensed Parent Company financial information is as follows (dollars in thousands):
December 31,
Parent Company Condensed Balance Sheets
Cash
$ 4,343
$ 3,906
Securities available for sale, at fair value
1,506
1,639
Investment in subsidiaries
366,032
342,013
Due from subsidiaries
Other assets
-
2,222
Total Assets
$ 372,145
$ 349,932
Junior subordinated debt
$ 28,435
$ 28,334
Other liabilities
Shareholders' equity
343,168
321,174
Total Liabilities and Shareholders' Equity
$ 372,145
$ 349,932
Year Ended December 31,
Parent Company Condensed Statements of Income
Dividends from subsidiary
$ 16,000
$ 16,000
$ 16,000
Other income
Expenses
5,627
2,994
3,057
Income tax benefit
(832 )
(598 )
(556 )
Income before equity in undistributed earnings of subsidiary
11,403
13,750
13,910
Equity in undistributed earnings of subsidiary
14,756
20,678
29,616
Net Income
$ 26,159
$ 34,428
$ 43,526
Year Ended December 31,
Parent Company Condensed Statements of Cash Flows
Cash Flows from Operating Activities:
Net income
$ 26,159
$ 34,428
$ 43,526
Adjustments to reconcile net income to net cash provided by operating activities:
(Equity in undistributed earnings) of subsidiary
(14,756 )
(20,678 )
(29,616 )
Net amortization of securities
-
-
Net change in other assets
2,545
(876 )
Net change in other liabilities
Net cash provided by operating activities
14,167
12,983
14,049
Cash Flows from Investing Activities:
Sales, calls and maturities of equity securities
-
-
6,800
Net cash provided by investing activities
-
-
6,800
Cash Flows from Financing Activities:
Common stock dividends paid
(12,755 )
(12,144 )
(11,827 )
Repurchase of common stock
(1,044 )
(7,505 )
(8,810 )
Proceeds from exercise of stock options
Net change in subordinated debt
-
-
(7,500 )
Net cash used in financing activities
(13,730 )
(19,637 )
(28,048 )
Net increase (decrease) in cash and cash equivalents
(6,654 )
(7,199 )
Cash and cash equivalents at beginning of period
3,906
10,560
17,759
Cash and cash equivalents at end of period
$ 4,343
$ 3,906
$ 10,560
Note 23 - Supplemental Cash Flow Information
(dollars in thousands)
As of or for the Year Ended December 31,
Supplemental Schedule of Cash and Cash Equivalents:
Cash and due from banks
$ 31,500 $ 32,207 $ 23,095
Interest-bearing deposits in other banks
35,219 41,133 483,723
$ 66,719 $ 73,340 $ 506,818
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest on deposits and borrowed funds
$ 34,029 $ 5,308 $ 5,791
Income taxes
8,228 8,472 3,102
Noncash investing and financing activities:
Unsettled securities transactions
20,369 - -
Transfer of loans to repossessions
- 53 -
Transfer from premises and equipment to other assets held for sale
449 - 1,316
Increase (decrease) in operating lease right-of-use asset
2,425 240 (21 )
Increase (decrease) in operating lease liabilities
2,425 240 (21 )
Unrealized gains (losses) on securities available for sale
14,709 (68,877 ) (12,271 )
Unrealized gains on cash flow hedges
- 4,125 2,068
Change in unfunded pension liability
(112 ) 1082 590
Note 24 - Accumulated Other Comprehensive Loss
Changes in each component of accumulated other comprehensive loss were as follows (dollars in thousands):
Unrealized
Adjustments
Accumulated
Net Unrealized
Gains (Losses)
Related to
Other
Gains/Losses
on Cash Flow
Pension
Comprehensive
on Securities
Hedges
Benefits
Loss
Balance at Balance at December 31, 2020
$ 7,920 $ (3,846 ) $ (1,637 ) $ 2,437
Net unrealized losses on securities available for sale, net of tax, $(2,643)
(9,593 ) - - (9,593 )
Reclassification adjustment for realized losses on securities, net of tax, $(7)
(28 ) - - (28 )
Net unrealized gains on cash flow hedges, net of tax, $434
- 1,634 - 1,634
Change in unfunded pension liability, net of tax, $115
- - 475 475
Balance at December 31, 2021
(1,701 ) (2,212 ) (1,162 ) (5,075 )
Net unrealized losses on securities available for sale, net of tax, $(14,868)
(54,009 ) - - (54,009 )
Net unrealized gains on cash flow hedges, net of tax, $866
- 3,259 - 3,259
Change in unfunded pension liability, net of tax, $233
- - 849 849
Balance at December 31, 2022
(55,710 ) 1,047 (313 ) (54,976 )
Net unrealized gains on securities available for sale, net of tax, $3,168
11,541 - - 11,541
Reclassification adjustment for realized losses on securities, net of tax, $14
54 - - 54
Net unrealized losses on cash flow hedges, net of tax, $387
- 408 - 408
Change in unfunded pension liability, net of tax, $(21)
- - (91 ) (91 )
Balance at December 31, 2023
$ (44,115 ) $ 1,455 $ (404 ) $ (43,064 )
The following table provides information regarding reclassifications out of accumulated other comprehensive loss (dollars in thousands):
Reclassifications Out of Accumulated Other Comprehensive Loss
For the Three Years Ended December 31, 2023
Details about AOCI Components
Amount Reclassified from AOCI
Affected Line Item in the Statement of Where Net Income is Presented
Year Ended December 31,
Available for sale securities:
Realized (losses) gains on sale of securities
$ (68 )
$ -
$
Securities (losses)gains, net
Tax effect
-
(7 ) Income taxes
$ (54 )
$ -
$
Net of tax

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of 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 Exchange Act), as of December 31, 2023. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no significant changes in the Company's internal controls over financial reporting that occurred during the year ended December 31, 2023 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
Management's Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management regularly monitors its internal control over financial reporting, and actions are taken to correct deficiencies as they are identified.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting. This assessment was based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation under the framework in Internal Control - Integrated Framework, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2023, as such term is defined in Exchange Act Rule 13a-15(f).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, because of changes in conditions, internal control effectiveness may vary over time.
The Company's independent registered public accounting firm, Yount, Hyde and Barbour, P.C., has audited the Company's internal control over financial reporting as of December 31, 2023, as stated in their report included in Item 8 of this Form 10-K. Yount, Hyde and Barbour, P.C. also audited the Company's consolidated financial statements as of and for the year ended December 31, 2023.
/s/ Jeffrey V. Haley
Jeffrey V. Haley
President and Chief Executive Officer
/s/ Jeffrey W. Farrar
Jeffrey W. Farrar
Executive Vice President,
Chief Operating Officer and Chief Financial Officer
March 15, 2024

---

ITEM 9B. OTHER INFORMATION
ITEM 9B - OTHER INFORMATION
(a) None.
(b) During the quarter ended December 31, 2023, no director or Section 16 officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangements.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10 - Directors, Executive Officers and Corporate Governance
Information as to Item 10 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11 - Executive Compensation
Information as to Item 11 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information as to Item 12 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 - Certain Relationships and Related Transactions, and Director Independence
Information as to Item 13 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14 - Principal Accountant Fees and Services
Information as to Item 14 will be set forth in an amendment to this Form 10-K to be filed on Form 10-K/A with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year covered by this report and is incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements and Reports of Independent Registered Public Accounting Firm (PCAOB ID 613). See Item 8 for reference.
(a)(2)
Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X have been included in the Notes to the Consolidated Financial Statements.
(a)(3)
Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.
EXHIBIT INDEX
Exhibit No.
Description
Location
2.1
Agreement and Plan of Reorganization, dated October 1, 2018, between American National Bankshares Inc. and HomeTown Bankshares Corporation
Exhibit 2.1 on Form 8-K filed October 5, 2018
2.2 Agreement and Plan of Merger by and between Atlantic Union Bankshares Corporation and American National Bankshares Inc. dated July 24, 2023 Exhibit 2.1 on Form 8-K filed July 25, 2023
3.1
Articles of Incorporation, as amended
Exhibit 3.1 on Form 8-K filed May 19, 2023
3.2
Bylaws, as amended
Exhibit 3.2 on Form 8-K filed May 19, 2023
4.1
Description of American National Bankshares Inc.'s Securities
Filed herewith
10.1
Amended and Restated Employment Agreement, dated March 1, 2022, by and among American National Bankshares Inc., American National Bank and Trust Company, and Jeffrey V. Haley
Exhibit 10.1 on Form 8-K filed March 7, 2022
10.2
Amended and Restated Employment Agreement, dated March 1, 2022, by and among American National Bankshares Inc., American National Bank and Trust Company, and Jeffrey W. Farrar
Exhibit 10.2 on Form 8-K filed March 7, 2022
10.3
Amended and Restated Employment Agreement, dated March 1, 2022, by and among American National Bankshares Inc., American National Bank and Trust Company, and Edward C. Martin Exhibit 10.3 on Form 8-K filed March 7, 2022
10.4
Employment Agreement between American National Bank and Trust Company and John H. Settle, Jr. dated February 8, 2017
Exhibit 10.8 on Form 10-K filed March 8, 2019
10.5 Amended and Restated Employment Agreement, dated January 1, 2022, by and between American National Bank and Trust Company and Rhonda P. Joyce
Exhibit 10.5 on Form 10-K filed March 14, 2022
10.6 Employment Agreement, dated January 1, 2022, by and between American National Bank and Trust Company and Alexander Jung Exhibit 10.6 on Form 10-K filed March 14, 2022
10.7 Amended and Restated Employment Agreement, dated January 1, 2022, by and between American National Bank and Trust Company and Charles T. Canaday, Jr. Exhibit 10.7 on Form 10-K filed March 14, 2022
10.8
American National Bankshares Inc. 2008 Stock Incentive Plan
Appendix A of the Proxy Statement for the Annual Meeting of Shareholders held on April 22, 2008, filed on March 14, 2008
10.9
American National Bankshares Inc. 2018 Equity Compensation Plan
Appendix A of the Proxy Statement for the Annual Meeting of Shareholders held on May 15, 2018, filed on April 12, 2018
EXHIBIT INDEX
Exhibit No.
Description
Location
10.10
HomeTown Bank 2005 Stock Option Plan
Exhibit 4.0 on Post-Effective Amendment No. 1 on Form S-8 to Form S-4 filed April 1, 2019
10.11 Deferred Compensation Agreement between American National Bank and Trust Company, and Charles H. Majors dated December 31, 2008 Exhibit 10.1 on Form 10-K filed March 16, 2009
10.12 Restated Virginia Bankers Association Non-Qualified Deferred Compensation Plan for Executives of American National Bank and Trust Company, as restated effective January 1, 2017 Exhibit 10.12 on Form 10-K filed March 14, 2022
10.13 162(m) Amendment to the Restated Virginia Bankers Association Non-Qualified Deferred Compensation Plan for Executives of American National Bank and Trust Company, as restated effective January 1, 2018 Exhibit 10.13 on Form 10-K filed March 14, 2022
10.14
Adoption Agreement for the Restated Virginia Bankers Association Non-Qualified Deferred Compensation Plan for Executives of American National Bank and Trust Company, effective January 1, 2020
Exhibit 10.14 on Form 10-K filed March 14, 2022
10.15 Form of Amendment to Employment Agreement for certain executive officers Exhibit 10.1 on Form 10-K filed December 22, 2023
21.1
Subsidiaries of the registrant
Filed herewith
23.1
Consent of Yount, Hyde & Barbour, P.C.
Filed herewith
31.1
Section 302 Certification of Jeffrey V. Haley, President and Chief Executive Officer
Filed herewith
31.2
Section 302 Certification of Jeffrey W. Farrar, Executive Vice President, Chief Operating Officer and Chief Financial Officer
Filed herewith
32.1
Section 906 Certification of Jeffrey V. Haley, President and Chief Executive Officer
Filed herewith
32.2
Section 906 Certification of Jeffrey W. Farrar, Executive Vice President, Chief Operating Officer and Chief Financial Officer
Filed herewith
Clawback Policy Filed herewith
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).