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| AMNB > SEC Filings for AMNB > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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.
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 ("SFAS") No. 5 (ASC 450), Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114 (ASC 310), 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 2009 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 September 30, 2009 and 2008
For the quarter ended September 30, 2009, the Company reported net income of $2,167,000 compared to $2,224,000 for the comparable quarter in 2008. The $57,000 decline in earnings was primarily due to the $212,000 increase in provision expense, a $156,000 increase in FDIC expense, and decreases in various noninterest income categories.
SUMMARY INCOME STATEMENT
(dollars in thousands)
Three months ended September 30,
2009 2008 $ change % change
Interest income $ 9,464 $ 10,599 $ (1,135 ) -10.7 %
Interest expense (2,464 ) (3,743 ) 1,279 -34.2 %
Net interest income 7,000 6,856 144 2.1 %
Provision for loan losses (492 ) (280 ) (212 ) 75.7 %
Noninterest income 2,119 2,062 57 2.8 %
Noninterest expense (5,598 ) (5,485 ) (113 ) 2.1 %
Income tax expense (862 ) (929 ) 67 -7.2 %
Net income $ 2,167 $ 2,224 $ (57 ) -2.6 %
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Nine months ended September 30, 2009 and 2008
For the nine month period ended September 30, 2009 the Company reported net income of $4,641,000 compared to $6,338,000 for the comparable period in 2008. The $1,697,000 decline in earnings was primarily due to the $896,000 increase in FDIC assessments and a $1,200,000 write-down in the first quarter of other real estate owned, reflected in the change to noninterest income.
SUMMARY INCOME STATEMENT
(dollars in thousands)
Nine months ended September 30,
2009 2008 $ change % change
Interest income $ 28,804 $ 32,647 $ (3,843 ) -11.8 %
Interest expense (8,482 ) (12,336 ) 3,854 -31.2 %
Net interest income 20,322 20,311 11 0.1 %
Provision for loan losses (1,334 ) (1,020 ) (314 ) 30.8 %
Noninterest income 5,106 6,038 (932 ) -15.4 %
Noninterest expense (17,794 ) (16,577 ) (1,217 ) 7.3 %
Income tax expense (1,659 ) (2,414 ) 755 -31.3 %
Net income $ 4,641 $ 6,338 $ (1,697 ) -26.8 %
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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 September 30, 2009 and 2008
Net interest income on a taxable equivalent basis increased $180,000, or 2.6%, for the third quarter of 2009 compared to the 2008 quarter. This increase was due primarily to changes in volumes of earning assets, as indicated by the Rate/Volume Analysis shown later in this section.
The Company's yield on earnings assets was 5.24% compared to 5.97% for the prior year quarter. The cost of interest bearing liabilities was 1.65% compared to 2.57%. These rates resulted in an interest rate spread of 3.59% compared to 3.40%. The Company's net interest margin, on a fully taxable equivalent basis, was 3.91% during the third quarter of 2009, compared to 3.90% during the 2008 quarter. Yields and rates generally fell between periods, but most of the improvement in spread and margin was related to reductions in liability pricing.
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the three months ended September 30, 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 September 30, 2009 and 2008
(in thousands, except rates)
Interest
Average Balance Income/Expense Yield/Rate
2009 2008 2009 2008 2009 2008
Loans:
Commercial $ 85,894 $ 94,575 $ 1,027 $ 1,423 4.78 % 6.02 %
Real estate 460,253 471,162 6,508 7,323 5.66 6.22
Consumer 7,468 8,445 158 192 8.46 9.09
Total loans 553,615 574,182 7,693 8,938 5.56 6.23
Securities:
Federal agencies and
GSE 56,706 43,543 538 534 3.80 4.91
Mortgage-backed &
CMO's 37,609 48,000 506 607 5.38 5.06
State and municipal 56,665 44,104 798 602 5.63 5.46
Other 8,334 6,050 80 54 3.84 3.57
Total securities 159,314 141,697 1,922 1,797 4.83 5.07
Deposits in other
banks 28,265 8,489 96 75 1.36 3.53
Total
interest-earning
assets 741,194 724,368 9,711 10,810 5.24 5.97
Non-earning assets 68,870 62,436
Total assets $ 810,064 $ 786,804
Deposits:
Demand $ 94,869 $ 110,230 31 215 0.13 0.78
Money market 76,416 54,642 107 246 0.56 1.80
Savings 62,985 60,499 38 76 0.24 0.50
Time 269,523 254,762 1,745 2,308 2.59 3.62
Total deposits 503,793 480,133 1,921 2,845 1.53 2.37
Customer repurchase
agreements 65,341 51,038 134 313 0.82 2.45
Other short-term
borrowings 460 17,589 1 116 0.87 2.64
Long-term borrowings 29,325 34,474 408 469 5.57 5.44
Total
interest-bearing
liabilities 598,919 583,234 2,464 3,743 1.65 2.57
Noninterest bearing
demand deposits 102,341 97,130
Other liabilities 5,393 4,388
Shareholders' equity 103,411 102,052
Total liabilities and
shareholders' equity $ 810,064 $ 786,804
Interest rate spread 3.59 % 3.40 %
Net interest margin 3.91 % 3.90 %
Net interest income (taxable
equivalent basis) 7,247 7,067
Less: Taxable
equivalent adjustment 247 211
Net interest income $ 7,000 $ 6,856
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Three months ended September 30
2009 vs. 2008
Interest Change
Increase Attributable to
Interest income (Decrease) Rate Volume
Loans:
Commercial $ (396 ) $ (274 ) $ (122 )
Real estate (815 ) (551 ) (264 )
Consumer (34 ) (13 ) (21 )
Total loans (1,245 ) (838 ) (407 )
Securities:
Federal agencies & GSE 4 (137 ) 141
Mortgage-backed & CMO's (101 ) 37 (138 )
State and municipal 196 20 176
Other securities 26 4 22
Total securities 125 (76 ) 201
Deposits in other banks 21 (69 ) 90
Total interest income (1,099 ) (983 ) (116 )
Interest expense
Deposits:
Demand (184 ) (158 ) (26 )
Money market (139 ) (212 ) 73
Savings (38 ) (41 ) 3
Time (563 ) (690 ) 127
Total deposits (924 ) (1,101 ) 177
Customer repurchase agreements (179 ) (249 ) 70
Borrowings (176 ) (37 ) (139 )
Total interest expense (1,279 ) (1,387 ) 108
Net interest income $ 180 $ 404 $ (224 )
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Nine months ended September 30, 2009 and 2008
Net interest income on a taxable equivalent basis increased $38,000 or 0.2% for the nine months ended September 30, 2009 compared to the 2008 period. This slight increase was due mostly to changes in rates that only slightly offset decreases due to changes in volumes of earnings assets, as indicated by the Rate/Volume Analysis shown later in this section.
The Company's yield on earnings assets was 5.31% compared to 6.15% for the prior year period. The cost of interest bearing liabilities was 1.88% compared to 2.84%. These rates resulted in an interest rate spread of 3.43% compared to 3.31%. The net interest margin, on a fully taxable equivalent basis, was 3.79% for the nine month period ended September 30, 2009 compared to 3.87% for the 2008 period, an eight basis point decline. Yields and rates generally fell between periods, but the decline in margin was mitigated by improvements in liability pricing.
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the nine-month period ended September 30, 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 Nine Months Ended September 30, 2009 and 2008
(in thousands, except rates)
Interest
Average Balance Income/Expense Yield/Rate
2009 2008 2009 2008 2009 2008
Loans:
Commercial $ 91,193 $ 90,301 $ 3,227 $ 4,219 4.72 % 6.23 %
Real estate 466,787 466,346 19,956 22,580 5.70 6.46
Consumer 7,746 8,956 511 606 8.80 9.02
Total loans 565,726 565,603 23,694 27,405 5.58 6.46
Securities:
Federal agencies and
GSE 49,606 46,428 1,584 1,682 4.26 4.83
Mortgage-backed &
CMO's 41,158 48,588 1,618 1,852 5.24 5.08
State and municipal 50,439 46,376 2,133 1,910 5.64 5.49
Other 7,212 6,471 185 243 3.42 5.01
Total securities 148,415 147,863 5,520 5,687 4.96 5.13
Deposits in other
banks 26,258 9,153 287 225 1.46 3.28
Total
interest-earning
assets 740,399 722,619 29,501 33,317 5.31 6.15
Non-earning assets 68,362 62,753
Total assets $ 808,761 $ 785,372
Deposits:
Demand $ 99,860 $ 108,463 263 600 0.35 0.74
Money market 73,112 52,365 453 779 0.83 1.98
Savings 62,284 62,107 115 276 0.25 0.59
Time 274,214 257,871 5,797 7,888 2.82 4.08
Total deposits 509,470 480,806 6,628 9,543 1.73 2.65
Customer repurchase
agreements 60,790 53,069 543 1,103 1.19 2.77
Other short-term
borrowings 1,355 11,808 5 237 0.49 2.68
Long-term borrowings 31,376 34,195 1,306 1,453 5.55 5.67
Total
interest-bearing
liabilites 602,991 579,878 8,482 12,336 1.88 2.84
Noninterest bearing
demand deposits 97,970 98,116
Other liabilities 4,740 5,088
Shareholders' equity 103,060 102,290
Total liabilities and
shareholders' equity $ 808,761 $ 785,372
Interest rate spread 3.43 % 3.31 %
Net interest margin 3.79 % 3.87 %
Net interest income (taxable
equivalent basis) 21,019 20,981
Less: Taxable
equivalent adjustment 697 670
Net interest income $ 20,322 $ 20,311
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Nine months ended September 30
2009 vs. 2008
Interest Change
Increase Attributable to
Interest income (Decrease) Rate Volume
Loans:
Commercial $ (992 ) $ (1,033 ) $ 41
Real estate (2,624 ) (2,645 ) 21
Consumer (95 ) (15 ) (80 )
Total loans (3,711 ) (3,693 ) (18 )
Securities:
Federal agencies & GSE (98 ) (208 ) 110
Mortgage-backed & CMO's (234 ) 57 (291 )
State and municipal 223 52 171
Other securities (58 ) (83 ) 25
Total securities (167 ) (182 ) 15
Deposits in other banks 62 (178 ) 240
Total interest income (3,816 ) (4,053 ) 237
Interest expense
Deposits:
Demand (337 ) (293 ) (44 )
Money market (326 ) (562 ) 236
Savings (161 ) (162 ) 1
Time (2,091 ) (2,565 ) 474
Total deposits (2,915 ) (3,582 ) 667
Customer repurchase agreements (560 ) (702 ) 142
Borrowings (379 ) (140 ) (239 )
Total interest expense (3,854 ) (4,424 ) 570
Net interest income $ 38 $ 371 $ (333 )
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Noninterest Income
Noninterest income increased to $2,119,000 in the third quarter of 2009 from $2,062,000 in the third quarter of 2008, a $57,000 or 2.8% increase. The major drivers in this increase were a $123,000 increase in mortgage banking income in the 2009 quarter and $87,000 in securities losses in the 2008 quarter.
Fees from the management of trusts, estates, and asset management accounts decreased to $813,000 in the third quarter of 2009 from $901,000 in the third quarter of 2008, an $88,000 or 9.8% 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 is earned based on account market values.
Service charges on deposit accounts decreased to $536,000 in the third quarter of 2009 from $603,000 in the third quarter of 2008, a $67,000 or 11.1% decline. This reduction was primarily the result of a decrease in customer overdraft activity.
Other fees and commissions increased $257,000 in third quarter of 2009 from $193,000 in the third quarter of 2008, an increase of $64,000 or 33.2% due primarily to increases VISA check card income.
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