10-Q 1 amcannb20230930_10q.htm FORM 10-Q amcannb20230930_10q.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to           

 

Commission file number: 0-12820

 

AMERICAN NATIONAL BANKSHARES INC.

(Exact name of registrant as specified in its charter)

   

Virginia

 

54-1284688

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

628 Main Street, Danville, Virginia

 

24541

(Address of principal executive offices)

 

(Zip Code)

(434) 792-5111

(Registrant's telephone number, including area code)

 

(Not applicable)

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

 

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

   

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

AMNB

Nasdaq Global Select Market

 

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

 

Yes

No

 

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

 

Yes

No

 

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

  

Large accelerated filer  ☐

Accelerated filer  ☒

Non-accelerated filer  ☐ 

Smaller reporting company 

 

Emerging growth company 

 

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

 

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

 

Yes

No

 

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

 

 

 
 

AMERICAN NATIONAL BANKSHARES INC.

 

       

Index

 

 

Page

 

 

 

 

Part I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

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

3

 

 

 

 

 

 

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

4

 

 

 

 

 

 

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

5

 

 

 

 

 

 

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

6

 

 

 

 

 

 

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

8

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

9

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

32

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

48

 

 

 

 

 

Item 4.

Controls and Procedures

49

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

50

 

 

 

 

 

Item 1A.

Risk Factors

50

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

50

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

50

 

 

 

 

 

Item 4.

Mine Safety Disclosures

50

       

 

Item 5.

Other Information

50

 

 

 

 

 

Item 6.

Exhibits

51

 

 

 

 

SIGNATURES

52

 

 

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

American National Bankshares Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

  

(Unaudited) September 30, 2023

  

December 31, 2022

 

Assets

      * 

Cash and due from banks

 $34,646  $32,207 

Interest-bearing deposits in other banks

  40,622   41,133 

Securities available for sale, at fair value

  543,915   608,062 

Restricted stock, at cost

  12,936   12,651 

Loans held for sale

  1,981   1,061 

Loans, net of deferred fees and costs

  2,273,455   2,186,449 

Less allowance for credit losses - loans

  (25,124)  (19,555)

Net loans

  2,248,331   2,166,894 

Premises and equipment, net

  32,167   32,900 

Assets held-for-sale

  1,131   1,382 

Other real estate owned, net of valuation allowance

     27 

Goodwill

  85,048   85,048 

Core deposit intangibles, net

  2,550   3,367 

Bank owned life insurance

  30,197   29,692 

Other assets

  57,734   51,478 

Total assets

 $3,091,258  $3,065,902 
         

Liabilities

        

Noninterest-bearing deposits

 $848,017  $1,010,602 

Interest-bearing deposits

  1,723,227   1,585,726 

Total deposits

  2,571,244   2,596,328 

Customer repurchase agreements

  60,035   370 

Other short-term borrowings

  85,000   100,531 

Junior subordinated debt

  28,410   28,334 

Other liabilities

  19,291   19,165 

Total liabilities

  2,763,980   2,744,728 
         

Shareholders' equity

        

Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding

      

Common stock, $1 par value, 20,000,000 shares authorized, 10,629,111 shares outstanding at September 30, 2023 and 10,608,781 shares outstanding at December 31, 2022

  10,544   10,538 

Capital in excess of par value

  142,392   141,948 

Retained earnings

  231,962   223,664 

Accumulated other comprehensive loss, net

  (57,620)  (54,976)

Total shareholders' equity

  327,278   321,174 

Total liabilities and shareholders' equity

 $3,091,258  $3,065,902 

 

*

Derived from audited consolidated financial statements

 

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

 

 

 

 

American National Bankshares Inc.

Consolidated Statements of Income

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

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Interest and Dividend Income:

                

Interest and fees on loans

 $27,512  $21,160  $78,476  $59,024 

Interest and dividends on securities:

                

Taxable

  2,564   2,664   7,855   7,344 

Tax-exempt

  24   110   115   297 

Dividends

  163   118   529   347 

Other interest income

  797   1,099   1,818   2,076 

Total interest and dividend income

  31,060   25,151   88,793   69,088 

Interest Expense:

                

Interest on deposits

  9,057   741   19,149   1,956 

Interest on short-term borrowings

  938   11   3,427   26 

Interest on long-term borrowings

  402   392   1,183   1,156 

Total interest expense

  10,397   1,144   23,759   3,138 

Net Interest Income

  20,663   24,007   65,034   65,950 

Provision for (recovery of) credit losses

  (538)  615   59   438 

Net Interest Income After Provision for (Recovery of) Credit Losses

  21,201   23,392   64,975   65,512 

Noninterest Income:

                

Wealth management income

  1,736   1,603   5,030   4,999 

Service charges on deposit accounts

  565   681   1,685   2,079 

Interchange fees

  1,162   1,013   3,458   2,990 

Other fees and commissions

  169   233   493   699 

Mortgage banking income

  293   388   634   1,490 

Securities losses, net

        (68)   

Income from Small Business Investment Companies

  453   501   888   1,672 

Income from insurance investments

  128   100   594   644 

Losses on premises and equipment, net

     (2)  (113)  (82)

Other

  268   243   900   706 

Total noninterest income

  4,774   4,760   13,501   15,197 

Noninterest Expense:

                

Salaries and employee benefits

  9,229   9,618   26,701   26,936 

Occupancy and equipment

  1,601   1,514   4,676   4,576 

FDIC assessment

  354   227   1,053   694 

Bank franchise tax

  520   488   1,550   1,452 

Core deposit intangible amortization

  262   310   817   960 

Data processing

  821   818   2,611   2,446 

Software

  470   362   1,391   1,088 

Other real estate owned, net

  (10)  3   (10)  4 

Merger related expenses

  1,702      1,702    

Other

  3,394   3,108   9,683   9,096 

Total noninterest expense

  18,343   16,448   50,174   47,252 

Income Before Income Taxes

  7,632   11,704   28,302   33,457 

Income Taxes

  1,844   2,448   6,218   7,062 

Net Income

 $5,788  $9,256  $22,084  $26,395 

Net Income Per Common Share:

                

Basic

 $0.54  $0.87  $2.08  $2.47 

Diluted

 $0.54  $0.87  $2.08  $2.47 

Weighted Average Common Shares Outstanding:

                

Basic

  10,625,709   10,640,952   10,626,599   10,694,096 

Diluted

  10,625,709   10,643,073   10,627,732   10,696,409 

 

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

 

 

 

 

American National Bankshares Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands) (Unaudited)

 

   

Three Months Ended September 30,

 
   

2023

   

2022

 

Net income

  $ 5,788     $ 9,256  
                 

Other comprehensive loss:

               
                 

Unrealized losses on securities available for sale

    (5,388 )     (25,234 )

Tax effect

    1,163       5,448  
                 

Unrealized gains on cash flow hedges

    464       1,459  

Tax effect

    (97 )     (306 )
                 

Other comprehensive loss

    (3,858 )     (18,633 )
                 

Comprehensive income (loss)

  $ 1,930     $ (9,377 )

 

   

Nine Months Ended September 30,

 
   

2023

   

2022

 

Net income

  $ 22,084     $ 26,395  
                 

Other comprehensive loss:

               
                 

Unrealized losses on securities available for sale

    (4,087 )     (71,381 )

Tax effect

    882       15,410  
                 

Reclassification adjustment for losses on sales or calls of securities available for sale

    68        

Tax effect

    (14 )      
                 

Unrealized gains on cash flow hedges

    642       4,298  

Tax effect

    (135 )     (903 )
                 

Other comprehensive loss

    (2,644 )     (52,576 )
                 

Comprehensive income (loss)

  $ 19,440     $ (26,181 )

 

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

 

 

 

American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended September 30, 2023 and 2022

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

 

  Common Stock  

Capital in Excess of Par Value

  Retained Earnings  

Accumulated Other Comprehensive Loss

  

Total Shareholders' Equity

 

Balance, June 30, 2022

 $10,588  $143,337  $212,524  $(39,018) $327,431 
                     

Net income

        9,256      9,256 
                     

Other comprehensive loss

           (18,633)  (18,633)
                     

Stock repurchased (60,104 shares)

  (60)  (1,999)        (2,059)
                     

Vesting of restricted stock (496 shares)

  1   (1)         
                     

Equity based compensation (3,752 shares)

  4   357         361 
                     

Cash dividends paid, $0.28 per share

        (2,966)     (2,966)
                     

Balance, September 30, 2022

 $10,533  $141,694  $218,814  $(57,651) $313,390 
                     

Balance, June 30, 2023

 $10,535  $141,954  $229,363  $(53,762) $328,090 
                     

Net income

        5,788      5,788 
                     

Other comprehensive loss

           (3,858)  (3,858)
                     

Vesting of restricted stock (3,717 shares)

  4   (4)         
                     

Equity based compensation (5,482 shares)

  5   442         447 
                     

Cash dividends paid, $0.30 per share

        (3,189)     (3,189)
                     

Balance, September 30, 2023

 $10,544  $142,392  $231,962  $(57,620) $327,278 

 

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

 

 

American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2023 and 2022

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

 

  Common Stock  

Capital in Excess of Par Value

  Retained Earnings  

Accumulated Other Comprehensive Loss

  

Total Shareholders' Equity

 

Balance, December 31, 2021

 $10,710  $147,777  $201,380  $(5,075) $354,792 
                     

Net income

        26,395      26,395 
                     

Other comprehensive loss

           (52,576)  (52,576)
                     

Stock repurchased (203,709 shares)

  (204)  (7,182)        (7,386)
                     

Stock options exercised (713 shares)

  1   11         12 
                     

Vesting of restricted stock (14,390 shares)

  14   (14)         
                     

Equity based compensation (12,543 shares)

  12   1,102         1,114 
                     

Cash dividends paid, $0.84 per share

        (8,961)     (8,961)
                     

Balance, September 30, 2022

 $10,533  $141,694  $218,814  $(57,651) $313,390 
                     

Balance, December 31, 2022

 $10,538  $141,948  $223,664  $(54,976) $321,174 
                     

Net income

        22,084      22,084 
                     

Other comprehensive loss

           (2,644)  (2,644)
                     

Stock repurchased (34,131 shares)

  (34)  (1,010)        (1,044)
                     

Stock options exercised (4,150 shares)

  4   65         69 
                     

Vesting of restricted stock (16,906 shares)

  17   (17)         
                     

Equity based compensation (19,360 shares)

  19   1,406         1,425 
                     

Impact of adoption of CECL

        (4,221)     (4,221)
                     

Cash dividends paid, $0.90 per share

        (9,565)     (9,565)
                     

Balance, September 30, 2023

 $10,544  $142,392  $231,962  $(57,620) $327,278 

 

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

 

 

 

American National Bankshares Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands) (Unaudited)

 

    Nine Months Ended September 30,  
   

2023

   

2022

 

Cash Flows from Operating Activities:

               

Net income

  $ 22,084     $ 26,395  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for credit losses

    59       438  

Depreciation

    1,589       1,687  

Net accretion of acquisition accounting adjustments

    (1,582 )     (1,345 )

Core deposit intangible amortization

    817       960  

Net amortization of securities

    796       1,304  

Net loss on sale or call of securities available for sale

    68        

Gain on sale of loans held for sale

    (634 )     (1,490 )

Proceeds from sales of loans held for sale

    63,877       62,910  

Net gain on other real estate owned

    (13 )      

Originations of loans held for sale

    (64,163 )     (55,791 )

Losses on sale or disposal of premises and equipment, net

    113       82  

Equity based compensation expense

    1,425       1,114  

Net change in bank owned life insurance

    (505 )     (373 )

Deferred income tax (benefit) expense

    (1,139 )     720  

Net change in other assets

    (2,468 )     (5,051 )

Net change in other liabilities

    (223 )     331  

Net cash provided by operating activities

    20,101       31,891  
                 

Cash Flows from Investing Activities:

               

Proceeds from sales of securities available for sale

    13,180        

Proceeds from maturities, calls and paydowns of securities available for sale

    46,085       83,015  

Purchases of securities available for sale

          (105,117 )

Net change in restricted stock

    (285 )     (327 )

Net increase in loans

    (85,009 )     (171,381 )

Net change in collateral with other financial institutions

          3,200  

Proceeds from sale of premises and equipment

          4  

Purchases of premises and equipment, net

    (1,305 )     (894 )

Proceeds from sale of assets held-for-sale

    587        

Proceeds from sale of other real estate owned

    40        

Net cash used in investing activities

    (26,707 )     (191,500 )
                 

Cash Flows from Financing Activities:

               

Net change in noninterest-bearing deposits

    (162,585 )     35,722  

Net change in interest-bearing deposits

    137,525       (235,165 )

Net change in customer repurchase agreements

    59,665       (40,503 )

Repayment of other short-term borrowings

    (15,531 )      

Common stock dividends paid

    (9,565 )     (8,961 )

Repurchase of common stock

    (1,044 )     (7,386 )

Proceeds from exercise of stock options

    69       12  

Net cash provided by (used in) financing activities

    8,534       (256,281 )

Net Increase (Decrease) in Cash and Cash Equivalents

    1,928       (415,890 )

Cash and Cash Equivalents at Beginning of Period

    73,340       510,868  

Cash and Cash Equivalents at End of Period

  $ 75,268     $ 94,978  

 

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

 

 

AMERICAN NATIONAL BANKSHARES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1 – Accounting Policies

 

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

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses and goodwill and intangible assets.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may occur for any other period. Certain prior period balances have been reclassified to conform to the current period presentation. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

 

Accounting Standards Adopted in 2023 

 

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

 

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

 

In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by FASB as part of its post-implementation review of the credit losses standard that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings ("TDRs") by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the provision in ASU 2022-02 related to the recognition and measurement of TDRs on a prospective basis on January 1, 2023. The TDR classification is no longer applicable subsequent to December 31, 2022. The adoption of ASU 2022-02 did not have a material effect on the Company's consolidated financial statements. See Note 3 - "Loans" for discussion.

 

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

 

9

 

Allowance for Credit Losses-Loans

 

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

 

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

 

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

 

Allowance for Unfunded Commitments

 

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

 

Allowance for Available for Sale ("AFS") Securities

 

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

 

Recent Accounting Pronouncements

 

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

 

10

 

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

 

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

 

Agreement and Plan of Merger

 

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

 

Note 2 – Securities

 

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

 

  

September 30, 2023

 
  Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 

Securities available for sale:

                

U.S. Treasury

 $151,806  $  $11,155  $140,651 

Federal agencies and GSEs

  84,380   3   6,570   77,813 

Mortgage-backed and CMOs

  303,150      46,260   256,890 

State and municipal

  48,836      5,005   43,831 

Corporate

  30,809      6,079   24,730 

Total securities available for sale

 $618,981  $3  $75,069  $543,915 

 

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

 

  

December 31, 2022

 
  Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 

Securities available for sale:

                

U.S. Treasury

 $152,033  $  $12,606  $139,427 

Federal agencies and GSEs

  90,363   4   7,019   83,348 

Mortgage-backed and CMOs

  336,393   1   42,301   294,093 

State and municipal

  69,023   12   5,312   63,723 

Corporate

  31,299      3,828   27,471 

Total securities available for sale

 $679,111  $17  $71,066  $608,062 

 

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

 

11

 

Restricted Stock

 

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

 

  September 30, 2023  December 31, 2022 

FRB stock

 $6,585  $6,545 

FHLB stock

  6,351   6,106 

Total restricted stock

 $12,936  $12,651 

 

Unrealized Losses on Securities

 

The following table shows estimated fair value and gross unrealized losses for which an allowance for credit losses has not been recorded, aggregated by category and length of time that securities have been in a continuous unrealized loss position, at September 30, 2023. The reference point for determining when securities are in an unrealized loss position is month end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.

 

AFS securities that have been in a continuous unrealized loss position, at September 30, 2023, were as follows (dollars in thousands):

 

  

Total

  

Less than 12 Months

  

12 Months or More

 
  

Fair Value