American National Bankshares Inc. (NASDAQ:AMNB) is a multi-state bank holding company headquartered in Danville, Virginia. The company's wholly-owned subsidiary, American National Bank and Trust Company, serves 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.

Business Overview

American National Bankshares Inc. operates in two primary business segments: community banking and wealth management. The community banking segment involves making loans to and generating deposits from individuals and businesses. It also generates income from investment securities and non-deposit fees such as automated teller machine fees and insurance commissions. The wealth management segment provides estate planning, trust account administration, investment management, and retail brokerage services, earning fees for these services.

Financials

For the full year 2022, American National Bankshares reported net income of $26.16 million on total revenue of $138.73 million. This represents a net profit margin of 18.9%. The company generated $18.36 million in annual operating cash flow and $16.82 million in free cash flow.

In the third quarter of 2023, the company reported net income of $5.79 million, or $0.54 per diluted share, compared to $9.26 million, or $0.87 per diluted share, in the same quarter of 2022. This decrease was primarily due to a $3.35 million decline in net interest income, partially offset by a $14,000 increase in noninterest income. Noninterest expense increased $1.9 million, or 11.5%, driven by $1.7 million in merger-related expenses associated with the pending acquisition by Atlantic Union Bankshares Corporation.

For the first nine months of 2023, American National Bankshares reported net income of $22.08 million, or $2.08 per diluted share, compared to $26.40 million, or $2.47 per diluted share, in the same period of 2022. Net interest income decreased $916,000, or 1.4%, while noninterest income declined $1.7 million, or 11.2%. Noninterest expense increased $2.9 million, or 6.2%, primarily due to the $1.7 million in merger-related costs.

Loans and Deposits

Total loans, net of deferred fees and costs, were $2.27 billion as of September 30, 2023, an increase of $87.0 million, or 4.0%, from December 31, 2022. Average loans, including loans held for sale, were $2.25 billion and $2.07 billion for the third quarters of 2023 and 2022, respectively, an increase of $183.2 million, or 8.9%.

Total deposits were $2.57 billion at September 30, 2023, unchanged from December 31, 2022. Average interest-bearing deposits were $1.76 billion for the third quarter of 2023, compared to $1.72 billion for the third quarter of 2022, an increase of $35.1 million, or 2.0%. Average noninterest-bearing deposits for the 2023 quarter were $872.5 million, compared to $1.05 billion for the 2022 quarter, a decrease of $179.1 million, or 17.0%.

Asset Quality

Nonperforming assets as a percentage of total assets were 0.12% at September 30, 2023, compared to 0.04% at June 30, 2023 and 0.05% at September 30, 2022. The allowance for credit losses was $25.1 million, or 1.11% of total loans, at September 30, 2023, compared to $19.6 million, or 0.91% of total loans, at December 31, 2022.

The company recorded a recovery of credit losses of $538,000 for the third quarter of 2023, compared to a provision of $615,000 in the third quarter of 2022. For the first nine months of 2023, the company recorded a provision for credit losses of $59,000, compared to $438,000 in the same period of 2022.

Liquidity

American National Bankshares maintains a strong liquidity position, with access to various funding sources, including a $110 million federal funds line of credit, the Federal Reserve Bank's discount window, and $446.5 million in additional borrowing capacity from the Federal Home Loan Bank without pledging additional collateral.

The company's regulatory capital ratios remain well above the "well-capitalized" thresholds, with a common equity tier 1 capital ratio of 11.77%, a tier 1 capital ratio of 12.89%, and a total capital ratio of 13.91% as of September 30, 2023.

Merger with Atlantic Union Bankshares

On July 24, 2023, American National Bankshares announced that it had entered into an agreement to merge with Atlantic Union Bankshares Corporation. Under the terms of the agreement, each outstanding share of American National Bankshares common stock will be converted into the right to receive 1.35 shares of Atlantic Union Bankshares common stock. The merger is expected to close in the first quarter of 2024, subject to regulatory approvals and shareholder approval.

Risks and Challenges

American National Bankshares faces several risks and challenges, including:

1. Interest rate risk: The company's net interest margin and profitability are sensitive to changes in interest rates, which could adversely affect its financial performance.

2. Credit risk: The company is exposed to the risk of loan defaults and credit losses, which could increase if economic conditions deteriorate.

3. Regulatory environment: The banking industry is heavily regulated, and changes in laws and regulations could impact the company's operations and financial results.

4. Competition: The company operates in a highly competitive industry, which could pressure its margins and market share.

5. Integration risks: The successful integration of Atlantic Union Bankshares, if the merger is completed, will be critical to realizing the anticipated benefits of the transaction.

Outlook

American National Bankshares has not provided specific financial guidance for the remainder of 2023. However, the company's management has expressed confidence in the bank's ability to navigate the current economic environment and continue delivering value to its shareholders.

Conclusion

American National Bankshares Inc. is a well-capitalized, community-focused bank holding company with a diversified business model and a strong presence in Virginia and North Carolina. While the company faces various risks and challenges, its experienced management team, robust liquidity position, and pending merger with Atlantic Union Bankshares suggest that it is well-positioned to continue generating solid financial results and creating value for its shareholders.