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| AMNB > SEC Filings for AMNB > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
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 (the"Bank") (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 2009 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 2008 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.
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 ("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. No events or circumstances since December 31, 2008 have occurred that would question the impairment of goodwill.
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 Securities and Exchange Commission ("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.
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.
In comparison to the first quarter of 2008, net interest income on a taxable equivalent basis decreased $328,000, or 4.7%, for the first quarter of 2009. This decrease was due primarily to reductions in interest rates. Since September 2007, the Federal Open Market Committee of the Federal Reserve Board has reduced the intended federal funds rate ten times by a total of 5.00% and, as a result, rates earned on loans fell more quickly than rates paid on deposits. The Company's net interest margin, on a fully taxable equivalent basis, was 3.61% during the first quarter of 2009, compared to 3.88% during the same quarter of 2008.
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the first quarter 2009 and 2008. 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 March 31, 2009 and 2008
(in thousands, except rates)
Interest
Average Balance Income/Expense Yield/Rate
2009 2008 2009 2008 2009 2008
Loans:
Commercial $ 96,097 $ 85,632 $ 1,100 $ 1,454 4.58 % 6.79 %
Real estate 469,346 460,429 6,779 7,789 5.78 6.77
Consumer 7,895 9,524 178 217 9.02 9.11
Total loans 573,338 555,585 8,057 9,460 5.62 6.81
Securities:
Federal agencies 45,767 50,064 521 597 4.55 4.77
Mortgage-backed 44,560 47,405 562 603 5.04 5.09
State and municipal 42,726 47,847 604 656 5.65 5.48
Other 5,014 6,383 33 99 2.63 6.20
Total securities 138,067 151,699 1,720 1,955 4.98 5.15
Deposits in other
banks 23,575 10,224 88 76 1.49 2.97
Total interest
earning assets 734,980 717,508 9,865 11,491 5.37 6.41
Nonearning assets 68,226 62,696
Total assets $ 803,206 $ 780,204
Deposits:
Demand $ 112,459 $ 107,994 190 225 0.68 0.83
Money market 64,648 51,320 198 294 1.23 2.29
Savings 61,289 63,184 40 116 0.26 0.73
Time 272,425 263,700 2,099 2,947 3.08 4.47
Total deposits 510,821 486,198 2,527 3,582 1.98 2.95
Customer repurchase
agreements 56,051 54,624 233 451 1.66 3.30
Other short-term
borrowings 2,071 3,091 3 33 0.58 4.27
Long-term borrowings 34,398 30,779 474 469 5.51 6.10
Total interest
bearing liabilities 603,341 574,692 3,237 4,535 2.15 3.16
Noninterest bearing
demand deposits 93,181 97,212
Other liabilities 3,839 5,958
Shareholders' equity 102,845 102,342
Total liabilities and
shareholders' equity $ 803,206 $ 780,204
Interest rate spread 3.22 % 3.25 %
Net interest margin 3.61 % 3.88 %
Net interest income (taxable
equivalent basis) 6,628 6,956
Less: Taxable
equivalent adjustment 215 231
Net interest income $ 6,413 $ 6,725
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Three months ended March 31
2009 vs. 2008
Change
Increase Attributable to
Interest income (Decrease) Rate Volume
Loans:
Commercial $ (354 ) $ (516 ) $ 162
Real estate (1,010 ) (1,158 ) 148
Consumer (39 ) (2 ) (37 )
Total loans (1,403 ) (1,676 ) 273
Securities:
Federal agencies (76 ) (26 ) (50 )
Mortgage-backed (41 ) (5 ) (36 )
State and municipal (52 ) 20 (72 )
Other securities (66 ) (48 ) (18 )
Total securities (235 ) (59 ) (176 )
Deposits in other banks 12 (51 ) 63
Total interest income (1,626 ) (1,786 ) 160
Interest expense
Deposits:
Demand (35 ) (44 ) 9
Money market (96 ) (160 ) 64
Savings (76 ) (73 ) (3 )
Time (848 ) (943 ) 95
Total deposits (1,055 ) (1,220 ) 165
Customer repurchase agreements (218 ) (229 ) 11
Other borrowings (25 ) (62 ) 37
Total interest expense (1,298 ) (1,511 ) 213
Net interest income $ (328 ) $ (275 ) $ (53 )
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Noninterest Income
Noninterest income decreased 65.6% to $734,000 in the first quarter of 2009 from $2,135,000 in the first quarter of 2008, due primarily to a $1.2 million valuation adjustment on foreclosed real estate assets. This property represents one relationship, an acquisition and development credit in the North Carolina Triad area, and constitutes over 60% of the Bank's other real estate owned.
Fees from the management of trusts, estates, and asset management accounts decreased to $758,000 in the first quarter of 2009 from $880,000 for the same period in 2008. Volatility in the financial markets negatively impacted account asset values, which offset the income from new account activity. A substantial portion of Trust fees are earned based on account values.
Service charges on deposit accounts were $502,000, a decline of $63,000 or 11.1% from the first quarter of 2008, primarily due to a drop in customer overdraft activity.
Brokerage fees decreased 60.1% to $57,000 in the first quarter of 2009, from $143,000 in the first quarter of 2008, due to decreased retail investment activity.
Noninterest income
Three Months Ended
March 31,
(in thousands) 2009 2008
Trust fees $ 758 $ 880
Service charges on deposit accounts 502 565
Other fees and commissions 242 203
Mortgage banking income 286 195
Brokerage fees 57 143
Securities gains (losses), net - 30
Net loss on foreclosed real estate (1,179 ) (7 )
Bank owned life insurance 34 33
Check order charges 28 29
Investment in insurance companies 2 6
VISA Incentive - 39
Other 4 19
$ 734 $ 2,135
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Noninterest Expense
Noninterest expense was $5,875,000 for the first quarter of 2009 compared to $5,449,000 for the same period in 2008, an increase of $426,000 or 7.8%.
Salaries increased $62,000 or 2.5% in the first quarter of 2009 compared to the same period in 2008, due primarily to limited salary increases.
Employee benefits increased $66,000 or 8.8% in the first quarter of 2009 over the same period last year primarily due to increases in employee insurance expenses.
The Federal Deposit Insurance Corporation ("FDIC") insurance assessment increased $200,000 in the first quarter of 2009 over the same period in 2008. This increase reflected the expiration of an assessment credit and the impact of industry-wide premium increases.
Noninterest expense
Three Months Ended
March 31,
(in thousands) 2009 2008
Salaries $ 2,531 $ 2,469
Employee benefits 813 747
Occupancy and equipment 971 966
FDIC assessment 217 17
Bank franchise tax 163 177
Core deposit intangible amortization 94 94
Telephone 115 101
Stationery and printing supplies 104 71
Director fees 65 49
Postage 58 76
Provision for unfunded lending commitments 55 42
ATM and VISA network fees 55 74
Trust services contracted 51 50
Internet banking fees 51 49
Legal 49 34
Regulatory assessments 46 44
Advertising and marketing 43 47
Auditing 40 38
Other 354 304
$ 5,875 $ 5,449
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Income Taxes
The effective tax rate for the first quarter of 2009 was 16.7% compared to 29.5% for the same period of 2008. The effective tax rate is lower than the statutory rate primarily due to income that is not taxable for Federal income tax purposes. The primary non-taxable income is that of state and municipal securities and industrial revenue bonds or loans.
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The most significant effect of inflation is on noninterest expense 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.
BALANCE SHEET ANALYSIS
Securities
The securities portfolio generates income, plays a major role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements. The portfolio consists primarily of high quality, investment-grade securities. Federal agency, mortgage-backed, and state and municipal securities comprise the majority of the portfolio.
The available for sale securities portfolio increased to $167,981,000 at March 31, 2009 from $133,695,000 at December 31, 2008. The held to maturity securities portfolio decreased to $6,811,000 at March 31, 2009 from $7,121,000 at December 31, 2008.
At March 31, 2009, the available for sale portfolio had an estimated fair value of $167,981,000 and an amortized cost of $164,350,000, resulting in a net unrealized gain of $3,631,000.At the same date, the held to maturity portfolio had an estimated fair value of $7,078,000 and an amortized cost of $6,811,000, resulting in a net unrealized gain of $267,000.
At March 31, 2009, mortgage-backed securities consist principally of obligations of U.S. Government agencies and sponsored entities. Mortgage-backed securities issued by non-U.S. Government agencies and sponsored entities as of March 31, 2009, had an amortized cost of $3,039,000 and an estimated fair value of $2,500,000; resulting in an estimated net unrealized loss of $539,000.
Loans
The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans, construction and land development loans, and home equity loans. Loans decreased to $569,003,000 at March 31, 2009 from $571,110,000 at December 31, 2008, a decline of $2,107,000 or 0.37%.
Allowance for Loan Losses, Asset Quality, and Credit Risk Management
The allowance for loan losses was virtually unchanged at $7,836,000 at March 31, 2009 compared to $7,824,000 at December 31, 2008. The allowance was 1.38% of loans at the end of the first quarter 2009 compared to 1.37% at year-end. Annualized net charge-offs represented 0.24% of total loans during the first quarter of 2009.
Nonperforming loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more as to principal and interest payments, and any loans classified as troubled debt restructurings. Nonperforming assets include nonperforming loans and foreclosed real estate. Nonperforming loans represented 0.50% of total loans at March 31, 2009 and December 31, 2008. There were no troubled debt restructurings at March 31, 2009 or December 31, 2008.
The following table summarizes nonperforming assets (in thousands):
March 31, December 31,
2009 2008
Loans 90 days or more past due $ - $ -
Nonaccrual loans 2,821 2,845
Nonperforming loans 2,821 2,845
Foreclosed real estate 3,345 4,311
Nonperforming assets $ 6,166 $ 7,156
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Deposits
The Company's deposits consist primarily of checking, money market, savings, and consumer time deposits. Deposits increased to $615,888,000 at March 31, 2009 from $589,138,000 at December 31, 2008, an increase of $26,750,000 or 4.5%. Of this increase approximately $21.6 million represents brokered deposits obtained in mid-quarter. $5 million of the proceeds were used to pay off an advance from the Federal Home Loan Bank of Atlanta; the remaining funds were used for general liquidity purposes. Management anticipates that three quarters of these funds will mature by year end and the Bank does not plan for them to be renewed. Core deposit growth continues to be an ongoing challenge for the community banking industry.
The Company's capital management strategy is to be classified as "well capitalized" under regulatory capital ratios and provide as high as possible total return to our shareholders.
Shareholders' equity decreased to $101,915,000 at March 31, 2009 from $102,300,000 at December 31, 2008. The decrease was largely the result of dividends paid during the quarter being larger than net income during the quarter. In the first quarter of 2009, the Company declared and paid a quarterly cash dividend of $.23 per share.
Banking regulators have defined minimum regulatory capital ratios that the Company and its banking subsidiary are required to maintain. These ratios take into account risk factors identified by those regulatory authorities associated with the assets and off-balance sheet activities of financial institutions. The guidelines require percentages, or "risk weights," be applied to those assets and off-balance sheet assets in relation to their perceived risk. Under the guidelines, capital strength is measured in two tiers. Tier I capital consists primarily of shareholders' equity and trust preferred capital notes, while Tier II capital consists of qualifying allowance for loan losses. "Total" capital is the combination of Tier I and Tier II capital. Another regulatory indicator of capital adequacy is the leverage ratio, which is computed by dividing Tier I capital by average quarterly assets less intangible assets.
The regulatory guidelines require that minimum total capital (Tier I plus Tier . . .
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