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| AMNB > SEC Filings for AMNB > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
The purpose of this discussion is to focus on important factors affecting the financial condition and results of operations of the Company. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements.
Forward-Looking Statements
This report contains forward-looking statements with respect to the financial condition, results of operations and business of American National Bankshares Inc. and its wholly owned subsidiary, American National Bank and Trust Company (collectively referred to as the "Company"). These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available to management at the time these statements and disclosures were prepared. Forward-looking statements are subject to numerous assumptions, estimates, risks, and uncertainties that could cause actual conditions, events, or results to differ materially fro those stated or implied by such forward-looking statements.
A variety of factors may affect the operations, performance, business strategy, and results of the Company. Those factors include but are not limited to the following:
· Financial market volatility including the level of interest rates could affect the values of financial instruments and the amount of net interest income earned;
· General economic or business conditions, either nationally or in the market areas in which the Company does business, may be less favorable than expected, resulting in deteriorating credit quality, reduced demand for credit, or a weakened ability to generate deposits;
· Competition among financial institutions may increase and competitors may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than the Company;
· Businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards;
· The ability to retain key personnel; and
· The failure of assumptions underlying the allowance for loan losses.
Reclassification
In certain circumstances, reclassifications have been made to prior period information to conform to the 2008 presentation.
Critical Accounting Policies
The accounting and reporting policies followed by the Company conform with U.S. generally accepted accounting principles ("GAAP") and they conform to general practices within the banking industry. The Company's critical accounting policies, which are summarized below, relate to (1) the allowance for loan losses and (2) goodwill impairment. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Company's 2007 Annual Report on Form 10-K.
The financial information contained within the Company's financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method.
Allowance for Loan Losses and Reserve for Unfunded Loan Commitments
The allowance for loan losses is an estimate of the losses inherent in the loan portfolio at the balance sheet date. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards No. ("SFAS") 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows, or values observable in the secondary market, and the loan balance.
The Company's allowance for loan losses has three basic components: the formula allowance, the specific allowance, and the unallocated allowance. Each of these components is determined based upon estimates that can and do change. The formula allowance uses a historical loss view as an indicator of future losses along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries; trends in volume and terms of loans; effects of changes in underwriting standards; experience of lending staff and economic conditions; and portfolio concentrations. In the formula allowance, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The adjusted loss factor is multiplied by the period-end balances for each risk-grade category. The formula allowance is calculated for a range of outcomes. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. The unallocated allowance includes estimated losses whose impact on the portfolio has yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective and actual losses could be greater or less than the estimates.
The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance-sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included in other liabilities.
Goodwill Impairment
The Company tests goodwill on an annual basis or more frequently if events or circumstances indicate that there may have been impairment. If the carrying amount of goodwill exceeds its implied fair value, the Company would recognize an impairment loss in an amount equal to that excess. The goodwill impairment test requires management to make judgments in determining the assumptions used in the calculations. The goodwill impairment testing conducted by the Company in 2008 indicated that goodwill is not impaired and is properly recorded in the financial statements.
Non-GAAP Presentations
The analysis of net interest income in this document is performed on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets.
Internet Access to Corporate Documents
The Company provides access to its SEC filings through a link on the Investors Relations page of the Company's web site at www.amnb.com. Reports available 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 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.
American National Bankshares Inc. is the holding company of American National Bank and Trust Company, a community bank serving Southern and Central Virginia and the northern portion of Central North Carolina with twenty banking offices and a loan production office. The Bank also manages $459 million of assets in its Trust and Investment Services Division.
American National Bank and Trust Company 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 twenty-three ATMs, "AmeriLink" Internet banking, and 24-hour "Access American" telephone banking.
Additional information is available on the Company's website at www.amnb.com. The shares of American National Bankshares Inc. are traded on the NASDAQ Global Select Market under the symbol "AMNB."
The Company's mission, vision, and guiding principles are as follows:
Vision We will enhance the value of our shareholders' investment by being our communities' preferred provider of relationship-based financial services.
Guiding Principles
To achieve our vision and carry out our mission, we:
· operate a sound, efficient, and highly profitable company,
· identify and respond to our internal and external customers' needs and expectations in an ever changing financial services environment,
· provide quality sales and quality service to our customers,
· produce profitable growth,
· provide an attractive return for our shareholders,
· furnish positive leadership for the well-being of all communities we serve,
· continuously develop a challenging and rewarding work environment for our employees, and
· conduct our work with integrity and professionalism.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, primarily deposits and other funding sources. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities. A tax rate of 35% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis. Net interest income divided by average earning assets is referred to as the net interest margin. The net interest spread represents the difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities.
Net interest income during the third quarter was $6,856,000, up 1.87% over the second quarter of 2008, and down 6.7% from the third quarter of 2007. Net interest income was adversely impacted by a series of rate reductions enacted by the Federal Reserve from September 2007 to April 2008. The net interest margin was 3.90% during the recently completed quarter, up from 3.83% in the previous quarter and down from 4.27% in the third quarter of 2007. On average, loans increased $7,427,000 over the previous quarter, securities decreased $8,550,000, and deposits and customer repurchase accounts declined $1,401,000. After the end of the quarter, the Federal Reserve further lowered the federal funds rate by one-half of one percent. This rate reduction, coupled with the overall low level of interest rates, will place pressure on the Company's net interest margin in the fourth quarter.
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the three and nine month periods ending September 30, 2008 and 2007. 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
For the Three Months Ended September 30, 2008 and 2007
(in thousands, except rates)
Interest
Average Balance Income/Expense Yield/Rate
2008 2007 2008 2007 2008 2007
Loans:
Commercial $ 94,575 $ 89,531 $ 1,423 $ 1,774 6.02 % 7.93 %
Real estate 471,162 449,172 7,323 8,496 6.22 7.57
Consumer 8,445 10,702 192 253 9.09 9.46
Total loans 574,182 549,405 8,938 10,523 6.23 7.66
Securities:
Federal agency and GSE 43,543 64,738 534 732 4.91 4.52
Mortgage-backed 48,000 24,489 607 304 5.06 4.97
State and municipal 44,104 45,414 602 624 5.46 5.50
Other 6,050 6,655 54 97 3.57 5.83
Total securities 141,697 141,296 1,797 1,757 5.07 4.97
Deposits in other banks 8,489 18,093 75 236 3.53 5.22
Total interest-earning
assets 724,368 708,794 10,810 12,516 5.97 7.06
Non-earning assets 62,436 63,266
Total assets $ 786,804 $ 772,060
Deposits:
Demand $ 110,230 $ 107,259 215 405 0.78 1.51
Money market 54,642 54,203 246 379 1.80 2.80
Savings 60,499 65,162 76 220 0.50 1.35
Time 254,762 260,803 2,308 3,000 3.62 4.60
Total deposits 480,133 487,427 2,845 4,004 2.37 3.29
Customer repurchase
agreements 51,038 48,427 313 478 2.45 3.95
Borrowings 52,063 29,932 585 465 4.49 6.21
Total interest-bearing
liabilities 583,234 565,786 3,743 4,947 2.57 3.50
Noninterest bearing
demand deposits 97,130 103,477
Other liabilities 4,388 4,870
Shareholders' equity 102,052 97,927
Total liabilities and
shareholders' equity $ 786,804 $ 772,060
Interest rate spread 3.40 % 3.56 %
Net interest margin 3.90 % 4.27 %
Net interest income (taxable
equivalent basis) 7,067 7,569
Less: Taxable equivalent
adjustment 211 223
Net interest income $ 6,856 $ 7,346
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Net Interest Income Analysis
For the Nine Months Ended September 30, 2008 and 2007
(in thousands, except rates)
Interest
Average Balance Income/Expense Yield/Rate
2008 2007 2008 2007 2008 2007
Loans:
Commercial $ 90,301 $ 90,117 $ 4,219 $ 5,286 6.23 % 7.82 %
Real estate 466,346 447,366 22,580 25,025 6.46 7.46
Consumer 8,956 10,495 606 742 9.02 9.43
Total loans 565,603 547,978 27,405 31,053 6.46 7.56
Securities:
Federal agency and GSE 46,428 71,931 1,682 2,337 4.83 4.33
Mortgage-backed 48,588 21,680 1,852 792 5.08 4.87
State and municipal 46,376 45,664 1,910 1,886 5.49 5.51
Other 6,471 7,794 243 342 5.01 5.85
Total securities 147,863 147,069 5,687 5,357 5.13 4.86
Deposits in other banks 9,153 14,760 225 575 3.28 5.19
Total interest-earning
assets 722,619 709,807 33,317 36,985 6.15 6.95
Non-earning assets 62,753 63,977
Total assets $ 785,372 $ 773,784
Deposits:
Demand $ 108,463 $ 109,469 600 1,245 0.74 1.52
Money market 52,365 52,881 779 1,084 1.98 2.73
Savings 62,107 67,255 276 685 0.59 1.36
Time 257,871 259,891 7,888 8,633 4.08 4.43
Total deposits 480,806 489,496 9,543 11,647 2.65 3.17
Customer repurchase
agreements 53,069 46,912 1,103 1,353 2.77 3.85
Borrowings 46,003 33,487 1,690 1,528 4.90 6.08
Total interest-bearing
liabilities 579,878 569,895 12,336 14,528 2.84 3.40
Noninterest bearing
demand deposits 98,116 101,949
Other liabilities 5,088 4,979
Shareholders' equity 102,290 96,961
Total liabilities and
shareholders' equity $ 785,372 $ 773,784
Interest rate spread 3.31 % 3.55 %
Net interest margin 3.87 % 4.22 %
Net interest income (taxable
equivalent basis) 20,981 22,457
Less: Taxable equivalent
adjustment 670 688
Net interest income $ 20,311 $ 21,769
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Three months ended September 30
2008 vs. 2007
Interest Change
Increase Attributable to
Interest income (Decrease) Rate Volume
Loans:
Commercial $ (351 ) $ (446 ) $ 95
Real estate (1,173 ) (1,573 ) 400
Consumer (61 ) (9 ) (52 )
Total loans (1,585 ) (2,028 ) 443
Securities:
Federal agency and GSE (198 ) 58 (256 )
Mortgage-backed 303 6 297
State and municipal (22 ) (4 ) (18 )
Other securities (43 ) (35 ) (8 )
Total securities 40 25 15
Deposits in other banks (161 ) (61 ) (100 )
Total interest income (1,706 ) (2,064 ) 358
Interest expense
Deposits:
Demand (190 ) (201 ) 11
Money market (133 ) (136 ) 3
Savings (144 ) (129 ) (15 )
Time (692 ) (624 ) (68 )
Total deposits (1,159 ) (1,090 ) (69 )
Customer repurchase agreements (165 ) (190 ) 25
Borrowings 120 (155 ) 275
Total interest expense (1,204 ) (1,435 ) 231
Net interest income $ (502 ) $ (629 ) $ 127
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Nine months ended September 30
2008 vs. 2007
Interest Change
Increase Attributable to
Interest income (Decrease) Rate Volume
Loans:
Commercial $ (1,067 ) $ (1,078 ) $ 11
Real estate (2,445 ) (3,472 ) 1,027
Consumer (136 ) (31 ) (105 )
Total loans (3,648 ) (4,581 ) 933
Securities:
Federal agency and GSE (655 ) 246 (901 )
Mortgage-backed 1,060 36 1,024
State and municipal 24 (5 ) 29
Other securities (99 ) (45 ) (54 )
Total securities 330 232 98
Deposits in other banks (350 ) (172 ) (178 )
Total interest income (3,668 ) (4,521 ) 853
Interest expense
Deposits:
Demand (645 ) (634 ) (11 )
Money market (305 ) (295 ) (10 )
Savings (409 ) (360 ) (49 )
Time (745 ) (678 ) (67 )
Total deposits (2,104 ) (1,967 ) (137 )
Customer repurchase agreements (250 ) (412 ) 162
Borrowings 162 (336 ) 498
Total interest expense (2,192 ) (2,715 ) 523
Net interest income $ (1,476 ) $ (1,806 ) $ 330
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Noninterest Income
Noninterest income totaled $2,062,000 in the third quarter of 2008, a decline of $214,000 over the third quarter of 2007. During the quarter, the Company recorded a $108,000 loss on sale of its remaining preferred stock investment in FHLMC. The Company no longer owns any FNMA or FHLMC stock. Excluding this item, noninterest income declined $106,000 over the third quarter of 2007, due in large part to a reduction in retail brokerage revenue, a decline in service charge income, and a decrease in the fair value of loans held for sale.
Fees from the management of trusts, estates, and asset management accounts totaled $901,000 in the third quarter of 2008 as compared to $861,000 for the same period in 2007. Income from new account activity and fee increases offset the negative impact of financial market valuations. A substantial portion of Trust fees are earned based on account values.
Other fees and commissions as well as mortgage banking income in the third quarter were virtually unchanged from the same quarter in 2007.
Brokerage fees decreased 34.0% to $126,000 in the third quarter of 2008, from $191,000 in the third quarter of 2007, due to decreased retail customer investment activity.
Other noninterest income decreased $27,000 in the third quarter of 2008 from the comparable quarter of 2007, due primarily to a decrease in the fair value of loans held for sale.
For the first nine months of 2008, noninterest income was $6,038,000, down 12.7% over the same period of 2007. Excluding the effect of $501,000 in losses related to the Company's investments in FNMA and FHLMC preferred stock, noninterest income declined 5.5%. This decline was largely related to a reduction in customer overdraft activity, which reduced deposit service charges, a reduction in mortgage loan activity, which reduced mortgage banking income, and reduced brokerage fees.
Noninterest Income
Three Months Ended Nine Months Ended
Septemer 30, September 30,
(in thousands) 2008 2007 2008 2007
Trust fees $ 901 $ 861 $ 2,697 $ 2,664
Service charges on deposit accounts 603 631 1,769 1,878
Other fees and commissions 193 193 622 591
Mortgage banking income 238 240 633 759
Brokerage fees 126 191 370 439
Securities gains (losses), net (87 ) 45 (450 ) 134
Investment in insurance companies 43 33 114 164
Bank owned life insurance 35 34 102 100
Check order charges 33 32 95 97
Gain from sale of bankcard processor - - 39 -
Decrease in estimated fair value of
loans held for sale (49 ) - (2 ) -
Other 26 16 49 93
$ 2,062 $ 2,276 $ 6,038 $ 6,919
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Noninterest Expense
Noninterest expense totaled $5,485,000 in the third quarter of 2008, up 2.0% over the same quarter of 2007. Excluding $102,000 of expense to increase the reserve for unfunded lending commitments, noninterest expense was approximately the same as the year-earlier quarter.
Salaries expense increased $86,000 or 3.6% in the third quarter of 2008 as compared to the same period in 2007. Employee benefits expense decreased $91,000 or 11.7% over the same period last year primarily due to decreases in employee insurance expenses.
Occupancy and equipment expense increased $17,000 in the third quarter of 2008 as compared to the same period in 2007. This increase was due primarily to costs associated with the Company's new office at Bedford, Virginia.
For the first nine months of 2008, noninterest expense was $16,577,000, up 3.6% over the same period of 2007. The largest portion of the increase was due to a . . .
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