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| AMNB > SEC Filings for AMNB > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-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") No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 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
Earnings Performance
Three months ended June 30, 2009 and 2008
For the quarter ended June 30, 2009, the Company reported net income of $1,706,000 compared to $1,809,000 for the comparable quarter in 2008. The $103,000 decline in earnings was primarily driven by a $540,000 increase in deposit insurance premiums and a $100,000 one-time increase in personnel expense associated with staff reductions, all reflected in the change in noninterest expense category and more fully discussed on page 32.
SUMMARY INCOME STATEMENT
(dollars in thousands)
For the three months ended June 30, 2009 2008 $ change % change
Interest income $ 9,690 $ 10,788 $ (1,098) -10.2%
Interest expense (2,781) (4,058) 1,277 -31.5%
Net interest income 6,909 6,730 179 2.7%
Provision for loan losses (492) (600) 108 -18.0%
Noninterest income 2,253 1,841 412 22.4%
Noninterest expense (6,321) (5,643) (678) 12.0%
Income tax expense (643) (519) (124) 23.9%
Net income $ 1,706 $ 1,809 $ (103) -5.7%
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Six months ended June 30, 2009 and 2008
For the six month period ended June 30, 2009 the Company reported net income of $2,474,000 compared to $4,114,000 for the comparable period in 2008. The $1,640,000 decline in earnings was driven by the factors noted above, however for the period the impact of the FDIC increase was $740,000, plus, most notably, a $1.2 million write-down in the first quarter of other real estate owned, reflected in the change to noninterest income.
SUMMARY INCOME STATEMENT
(dollars in thousands)
For the six months ended June 30, 2009 2008 $ change % change
Interest income $ 19,340 $ 22,048 $ (2,708) -12.3%
Interest expense (6,018) (8,593) 2,575 -30.0%
Net interest income 13,322 13,455 (133) -1.0%
Provision for loan losses (842) (740) (102) 13.8%
Noninterest income 2,987 3,976 (989) -24.9%
Noninterest expense (12,196) (11,092) (1,104) 10.0%
Income tax expense (797) (1,485) 688 -46.3%
Net income $ 2,474 $ 4,114 $ (1,640) -39.9%
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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.
Since September 2007, the Federal Open Market Committee of the Federal Reserve Board has reduced the federal funds rate ten times by a total of 5.00%. Because of this historically low interest rate environment and because most of the Company's interest bearing assets and interest paying liabilities are relatively short-term in nature, the yields and costs discussed in the following pages have, in general, fallen during the reported periods.
Three months ended June 30, 2009 and 2008
Net interest income on a taxable equivalent basis increased $186,000, or 2.7%, for the second quarter of 2009 compared to the 2008 quarter. This increase was almost entirely due to changes in interest rates, as indicated by the Rate/Volume Analysis shown later in this section.
The Company's yield on earnings assets was 5.33% compared to 6.07% for the prior year quarter. The cost of interest bearing liabilities was 1.83% compared to 2.79%. These rates resulted in an interest rate spread of 3.50% compared to 3.28%. The Company's net interest margin, on a fully taxable equivalent basis, was 3.84% during the second quarter of 2009, compared to 3.83%, during the 2008 quarter. Yields and rates generally fell between periods, but most of the improvement in spread and margin was related to liability pricing.
Net Interest Income Analysis
For the Three Months Ended June 30, 2009 and 2008
(in thousands, except rates)
Interest
Average Balance Income/Expense Yield/Rate
2009 2008 2009 2008 2009 2008
Loans:
Commercial $ 91,701 $ 90,648 $ 1,100 $ 1,342 4.80 % 5.92 %
Real estate 470,859 467,424 6,669 7,468 5.67 6.39
Consumer 7,881 8,903 175 197 8.88 8.85
Total loans 570,441 566,975 7,944 9,007 5.57 6.35
Securities:
Federal agencies 46,225 45,708 525 551 4.54 4.82
Mortgage-backed &
CMO's 41,382 50,357 550 642 5.32 5.10
State and municipal 51,718 47,201 731 652 5.65 5.53
Other 8,251 6,981 72 90 3.49 5.16
Total securities 147,576 150,247 1,878 1,935 5.09 5.15
Deposits in other
banks 26,882 8,567 103 74 1.53 3.46
Total
interest-earning
assets 744,899 725,789 9,925 11,016 5.33 6.07
Non-earning assets 67,505 63,623
Total assets $ 812,404 $ 789,412
Deposits:
Demand $ 92,447 $ 107,154 42 160 0.18 0.60
Money market 78,143 51,124 148 239 0.76 1.87
Savings 62,557 62,648 37 84 0.24 0.54
Time 280,729 255,281 1,953 2,633 2.78 4.13
Total deposits 513,876 476,207 2,180 3,116 1.70 2.62
Customer repurchase
agreements 60,876 53,535 176 339 1.16 2.53
Other short-term
borrowings 1,553 14,765 1 88 0.26 2.38
Long-term borrowings 30,460 37,247 424 515 5.57 5.53
Total
interest-bearing
liabilities 606,765 581,754 2,781 4,058 1.83 2.79
Noninterest bearing
demand deposits 98,258 99,960
Other liabilities 4,519 5,187
Shareholders' equity 102,862 102,511
Total liabilities and
shareholders' equity $ 812,404 $ 789,412
Interest rate spread 3.50 % 3.28 %
Net interest margin 3.84 % 3.83 %
Net interest income (taxable
equivalent basis) 7,144 6,958
Less: Taxable
equivalent adjustment 235 228
Net interest income $ 6,909 $ 6,730
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Three months ended June 30
2009 vs. 2008
Interest Change
Increase Attributable to
Interest income (Decrease) Rate Volume
Loans:
Commercial $ (242) $ (257) $ 15
Real Estate (799) (854) 55
Consumer (22) 1 (23)
Total loans (1,063) (1,110) 47
Securities:
Federal agencies (26) (32) 6
Mortgage-backed (92) 26 (118)
State and municipal 79 15 64
Other securities (18) (32) 14
Total securities (57) (23) (34)
Deposits in other banks 29 (59) 88
Total interest income (1,091) (1,192) 101
Interest expense
Deposits:
Demand (118) (99) (19)
Money market (91) (182) 91
Savings (47) (47) -
Time (680) (922) 242
Total deposits (936) (1,250) 314
Customer repurchase agreements (163) (204) 41
Other borrowings (178) 78 (256)
Total interest expense (1,277) (1,376) 99
Net interest income $ 186 $ 184 $ 2
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Six months ended June 30, 2009 and 2008
Net interest income on a taxable equivalent basis decreased $142,000 or 1.0% for the six months ended June 30, 2009 compared to the 2008 period. This decrease was due mostly to changes in rates, but was significantly impacted by changes in volumes of interest earning assets and interest bearing liabilities, as indicated by the Rate/Volume Analysis shown later in this section.
The Company's yield on earnings assets was 5.35% compared to 6.24% for the prior year period. The cost of interest bearing liabilities was 1.99% compared to 2.97%. These rates resulted in an interest rate spread of 3.36% compared to 3.27%. The net interest margin, on a fully taxable equivalent basis, was 3.72% for the six month period ended June 30, 2009 compared to 3.86% for the 2008 period, a 14 basis point decline. Yields and rates generally fell between periods, but the decline in margin was mitigated by liability pricing.
Net Interest Income Analysis
For the Six Months Ended June 30, 2009 and 2008
(in thousands, except rates)
Interest
Average Balance Income/Expense Yield/Rate
2009 2008 2009 2008 2009 2008
Loans:
Commercial $ 93,887 $ 88,140 $ 2,200 $ 2,796 4.69 % 6.34 %
Real estate 470,106 463,927 13,448 15,257 5.72 6.58
Consumer 7,888 9,213 353 414 8.95 8.99
Total loans 571,881 561,280 16,001 18,467 5.60 6.58
Securities:
Federal agencies 45,997 47,886 1,046 1,148 4.55 4.79
Mortgage-backed &
CMO's 42,962 48,881 1,112 1,245 5.18 5.09
State and municipal 47,247 47,524 1,335 1,308 5.65 5.50
Other 6,641 6,682 105 189 3.16 5.66
Total securities 142,847 150,973 3,598 3,890 5.04 5.15
Deposits in other
banks 25,237 9,488 191 150 1.51 3.16
Total
interest-earning
assets 739,965 721,741 19,790 22,507 5.35 6.24
Non-earning assets 68,106 63,031
Total assets $ 808,071 $ 784,772
Deposits:
Demand $ 102,397 $ 107,574 232 385 0.45 0.72
Money market 71,433 51,222 346 533 0.97 2.08
Savings 61,927 62,916 77 200 0.25 0.64
Time 276,600 259,491 4,052 5,580 2.93 4.30
Total deposits 512,357 481,203 4,707 6,698 1.84 2.78
Customer repurchase
agreements 58,477 54,079 409 790 1.40 2.92
Other short-term
borrowings 1,811 8,928 4 121 0.44 2.71
Long-term borrowings 32,418 34,013 898 984 5.54 5.79
Total
interest-bearing
liabilities 605,063 578,223 6,018 8,593 1.99 2.97
Noninterest bearing
demand deposits 95,748 98,586
Other liabilities 4,406 5,553
Shareholders' equity 102,854 102,410
Total liabilities and
shareholders' equity $ 808,071 $ 784,772
Interest rate spread 3.36 % 3.27 %
Net interest margin 3.72 % 3.86 %
Net interest income (taxable
equivalent basis) 13,772 13,914
Less: Taxable
equivalent adjustment 450 459
Net interest income $ 13,322 $ 13,455
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Six months ended June 30
2009 vs. 2008
Interest Change
Increase Attributable to
Interest income (Decrease) Rate Volume
Loans:
Commercial $ (596) $ (769) $ 173
Real Estate (1,809) (2,010) 201
Consumer (61) (2) (59)
Total loans (2,466) (2,781) 315
Securities:
Federal agencies (102) (58) (44)
Mortgage-backed (133) 20 (153)
State and municipal 27 35 (8)
Other securities (84) (83) (1)
Total securities (292) (86) (206)
Deposits in other banks 41 (109) 150
Total interest income (2,717) (2,976) 259
Interest expense
Deposits:
Demand (153) (135) (18)
Money market (187) (350) 163
Savings (123) (120) (3)
Time (1,528) (1,876) 348
Total deposits (1,991) (2,481) 490
Repurchase agreements (381) (441) 60
Other borrowings (203) 26 (229)
Total interest expense (2,575) (2,896) 321
Net interest income $ (142) $ (80) $ (62)
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Noninterest Income
Noninterest income increased to $2,253,000 in the second quarter of 2009 from $1,841,000 in the second quarter of 2008, a $412,000 or 22.4% increase, due primarily to $393,000 in securities losses recorded during 2008 and a $368,000 increase in mortgage banking income in the 2009 quarter compared to the prior year quarter.
Fees from the management of trusts, estates, and asset management accounts decreased to $767,000 in the second quarter of 2009 from $916,000 in the second quarter of 2008, a $149,000 or 16.3% decline. Volatility in the financial markets negatively impacted account asset values, which more than offset the income from new account activity. A substantial portion of Trust fees are earned based on account market values.
Service charges on deposit accounts decreased to $511,000 in the second quarter of 2009 from $601,000 in the second quarter of 2008, a $90,000 or 15.0% decline. This reduction was primarily the result of a drop in customer overdraft activity fee income.
Brokerage fees decreased to $73,000 in the second quarter of 2009 from $101,000 for the second quarter in 2008, a $28,000 or 27.7% decline. The reduction was . . .
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