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AMNB > SEC Filings for AMNB > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for AMERICAN NATIONAL BANKSHARES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for AMERICAN NATIONAL BANKSHARES INC


9-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank"). 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 from 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 some competitors may have greater financial resources and the ability to 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;

The failure of assumptions underlying the allowance for loan losses; and

The potential for negative financial or operational impact of the completed merger with MidCarolina Financial Corporation and other mergers and acquisitions.

Reclassification

In certain circumstances, reclassifications have been made to prior period information to conform to the 2012 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, (2) acquired loans with specific credit-related deterioration and (3) goodwill impairment.

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

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: Financial Accounting Standards Board ("FASB") Topic 450-25 Contingencies - Recognition which requires that losses be accrued when they are probable of occurring and estimable and FASB Topic 310-10 Receivables - Overall - Subsequent Measurement 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 two basic components: the formula allowance and the specific allowance. Each component is determined based upon estimates. With regard to commercial loans, the formula allowance uses historical loss experience 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, economic conditions, and portfolio concentrations. In the formula allowance, the migrated historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. With regard to consumer loans, the allowance calculations are calculated based on historical losses for each product category without regard to risk grade. This loss rate is combined with qualitative factors resulting in an adjusted loss factor for each product category. The period-end balances for each loan risk-grade category are multiplied by the adjusted loss factor. 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 use of these computed 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.

Acquired Loans with Specific Credit-Related Deterioration

Acquired loans with specific credit deterioration are accounted for by the Company in accordance with FASB Accounting Standards Codification 310-30. Certain acquired loans, those for which specific credit-related deterioration, since origination, is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield.

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 2012 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 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 information on the Company's website is not incorporated into this report or any other filing the Company makes 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.


ACQUISITION OF MIDCAROLINA FINANCIAL CORPORATION

On July 1, 2011, the Company completed its merger with MidCarolina Financial Corporation ("MidCarolina") pursuant to the Agreement and Plan of Reorganization, dated December 15, 2010, between the Company and MidCarolina. MidCarolina was headquartered in Burlington, North Carolina, and engaged in banking operations through its subsidiary bank, MidCarolina Bank. The transaction has significantly expanded the Company's footprint in North Carolina, adding eight branches in Alamance and Guilford Counties.

Pursuant to the terms of the merger agreement with MidCarolina, as a result of the merger, the holders of shares of MidCarolina common stock received 0.33 shares of the Company's common stock for each share of MidCarolina common stock held immediately prior to the effective date of the merger. Each option to purchase a share of MidCarolina common stock outstanding immediately prior to the effective date of the merger was converted into an option to purchase shares of Company common stock, adjusted for the 0.33 exchange ratio. Additionally, the holders of shares of noncumulative perpetual Series A preferred stock of MidCarolina received one share of a newly authorized noncumulative perpetual Series A preferred stock of the Company for each MidCarolina preferred share held immediately before the merger. The Company's Series A preferred stock was issued with terms, preferences, rights and limitations that are identical in all material respects to the MidCarolina Series A preferred stock

The Company issued 1,626,157 shares of additional common stock in connection with the MidCarolina merger. This represents 20.8% of the outstanding shares of the Company's common stock as of September 30, 2012.

In connection with the transaction, MidCarolina Bank was merged with and into the Bank.

On November 15, 2011, the Company repurchased all 5,000 shares of the Series A preferred stock issued in the merger. The shares had a $1,000 liquidation preference per share. While the Series A preferred stock was subject to redemption at 104.5% of par during the twelve month period beginning August 15, 2011, the Company paid 62% of par, or an aggregate purchase price of $3.1 million, to repurchase all 5,000 outstanding shares from the sole holder of the securities.

To date, the acquisition has been accretive to earnings.


RESULTS OF OPERATIONS

Earnings Performance

Three months ended September 30, 2012 and 2011

For the quarter ended September 30, 2012, the Company reported net income of $3,639,000 compared to $4,129,000 for the comparable quarter in 2011. The $490,000 or 11.9% decrease in earnings was primarily due to declines in yields on earning assets.

                                  SUMMARY INCOME STATEMENT
                                   (Dollars in thousands)

For the three months ended September 30,     2012         2011       $ Change       % Change

Interest income                            $ 13,546     $ 14,779     $  (1,233 )         -8.3 %
Interest expense                             (2,046 )     (2,436 )         390          -16.0 %
Net interest income                          11,500       12,343          (843 )         -6.8 %
Provision for loan losses                      (333 )       (525 )         192          -36.6 %
Noninterest income                            2,690        2,698            (8 )         -0.3 %
Noninterest expense                          (8,880 )     (8,564 )        (316 )          3.7 %
Income tax expense                           (1,338 )     (1,823 )         485          -26.6 %
Net income                                 $  3,639     $  4,129     $    (490 )        -11.9 %

Nine months ended September 30, 2012 and 2011

For the nine month period ended September 30, 2012, the Company reported net income of $12,088,000 compared to $6,919,000 for the comparable period in 2011. The $5,169,000 or 74.7% increase in earnings was primarily due to the positive impact of the July 2011 merger with MidCarolina.

                                    SUMMARY INCOME STATEMENT
                                     (Dollars in thousands)

For the nine months ended September 30,      2012          2011         $ Change       % Change

Interest income                            $  43,774     $  32,010     $   11,764           36.8 %
Interest expense                              (6,286 )      (6,463 )          177           -2.7 %
Net interest income                           37,488        25,547         11,941           46.7 %
Provision for loan losses                     (1,799 )      (1,198 )         (601 )         50.2 %
Noninterest income                             8,724         6,657          2,067           31.1 %
Noninterest expense                          (27,640 )     (21,371 )       (6,269 )         29.3 %
Income tax expense                            (4,685 )      (2,716 )       (1,969 )         72.5 %
Net income                                 $  12,088     $   6,919     $    5,169           74.7 %


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.

Three months ended September 30, 2012 and 2011

Net interest income on a taxable equivalent basis decreased $834,000 or 6.5%, for the third quarter of 2012 compared to the same quarter of 2011. This was almost entirely due to declines in yields on earning assets, which was only partially mitigated by reductions in the cost of interest bearing liabilities.

For the third quarter of 2012, the Company's yield on interest-earning assets was 4.84% compared to 5.23% for the third quarter of 2011. The cost of interest-bearing liabilities was 0.88% compared to 0.99%. The interest rate spread was 3.96% compared to 4.24%. The net interest margin, on a fully taxable equivalent basis, was 4.14% compared to 4.41%, for a reduction of 27 basis points (0.27%).

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, 2012 and 2011. 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, 2012 and 2011
                                       (in thousands, except rates)

                                                               Interest
                              Average Balance               Income/Expense                Yield/Rate

                           2012            2011           2012          2011          2012          2011
Loans:
Commercial              $   126,701     $   136,204     $   1,598     $   1,603          5.00 %        4.67 %
Real estate                 676,905         685,628         9,743        10,778          5.76          6.29
Consumer                      6,844           8,529           119           163          6.90          7.58
Total loans                 810,450         830,361        11,460        12,544          5.65          6.04

Securities:
Federal agencies             36,181          32,448           118           186          1.30          2.29
Mortgage-backed &
CMOs                         92,708          87,785           472           615          2.04          2.80
State and municipal         180,820         168,134         1,933         1,896          4.28          4.51
Other                        13,846           7,728           121            78          3.50          4.04
Total securities            323,555         296,095         2,644         2,775          3.27          3.75

Deposits in other
banks                        32,567          45,526            19            28          0.23          0.24

Total
interest-earning
assets                    1,166,572       1,171,982        14,123        15,347          4.84          5.23

Non-earning assets          131,126         134,814

Total assets            $ 1,297,698     $ 1,306,796

Deposits:
Demand                  $   144,284     $   171,744            44           132          0.12          0.30
Money market                168,212         208,962           126           232          0.30          0.44
Savings                      78,808          72,088            29            26          0.15          0.14
Time                        448,598         444,079         1,526         1,689          1.35          1.51
Total deposits              839,902         896,873         1,725         2,079          0.81          0.92

Customer repurchase
agreements                   46,297          45,356            33            82          0.28          0.72
Other short-term
borrowings                        -               2             -             -             -          0.75
Long-term borrowings         37,413          37,439           288           275          3.08          2.94
Total
interest-bearing
liabilities                 923,612         979,670         2,046         2,436          0.88          0.99

Noninterest bearing
demand deposits             204,532         170,618
Other liabilities             9,686           7,475
Shareholders' equity        159,868         149,033
Total liabilities and
shareholders' equity    $ 1,297,698     $ 1,306,796

Interest rate spread                                                                     3.96 %        4.24 %
Net interest margin                                                                      4.14 %        4.41 %

Net interest income (taxable
equivalent basis)                                          12,077        12,911
Less: Taxable
equivalent adjustment                                         577           568
Net interest income                                     $  11,500     $  12,343


                  Changes in Net Interest Income (Rate/Volume Analysis)
                                     (in thousands)

                                              Three Months Ended September 30
                                                       2012 vs. 2011
                                          Interest                  Change
                                          Increase             Attributable to
      Interest income                    (Decrease)            Rate         Volume
       Loans:
        Commercial                      $         (5 )     $        111     $  (116 )
        Real Estate                           (1,035 )             (899 )      (136 )
        Consumer                                 (44 )              (14 )       (30 )
         Total loans                          (1,084 )             (802 )      (282 )
       Securities:
        Federal agencies                         (68 )              (87 )        19
        Mortgage-backed                         (143 )             (176 )        33
        State and municipal                       37               (102 )       139
        Other securities                          43                (12 )        55
         Total securities                       (131 )             (377 )       246
       Deposits in other banks                    (9 )               (1 )        (8 )
         Total interest income                (1,224 )           (1,180 )       (44 )

      Interest expense
       Deposits:
        Demand                                   (88 )              (70 )       (18 )
        Money market                            (106 )              (66 )       (40 )
        Savings                                    3                  1           2
        Time                                    (163 )             (180 )        17
         Total deposits                         (354 )             (315 )       (39 )

       Customer repurchase agreements            (49 )              (51 )         2
       Other borrowings                           13                 13           -
         Total interest expense                 (390 )             (353 )       (37 )
      Net interest income               $       (834 )     $       (827 )   $    (7 )

Nine months ended September 30, 2012 and 2011

Net interest income on a taxable equivalent basis increased $12,269,000 or 45.5%, for the nine months ended September 30, 2012 compared to the comparable period in 2011. This was due primarily to the impact of the July 2011 merger with MidCarolina.

For the first nine months of 2012, the Company's yield on interest-earnings assets was 5.18% compared to 4.93% for the first nine months of 2011. The cost of interest-bearing liabilities was 0.91% compared to 1.17%. The interest rate spread was 4.27% compared to 3.76%. The net interest margin, on a fully taxable equivalent basis, was 4.47% compared to 3.98%. The increase in yield on earning assets was primarily driven by the impact of the MidCarolina merger and loan related accretion, which during the first half of 2012 included $1,899,000 in additional accretion related to the resolution of several significant purchased credit impaired loans.

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the nine months ended September 30, 2012 and 2011. 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, 2012 and 2011
                                      (in thousands, except rates)

                                                             Interest
                             Average Balance              Income/Expense                Yield/Rate

                           2012           2011          2012          2011          2012          2011
Loans:
Commercial              $   129,821     $  98,121     $   5,136     $   3,392          5.29 %        4.62 %
Real estate                 679,375       516,165        31,720        22,093          6.23          5.71
Consumer                      9,060         7,574           485           419          7.16          7.40
Total loans                 818,256       621,860        37,341        25,904          6.09          5.56

Securities:
Federal agencies             36,179        37,197           435           765          1.60          2.74
Mortgage-backed &
CMOs                         97,057        67,843         1,487         1,571          2.04          3.09
State and municipal         181,393       141,481         5,884         4,889          4.33          4.61
Other                        11,598         6,538           332           193          3.82          3.94
Total securities            326,227       253,059         8,138         7,418          3.33          3.91

Deposits in other
banks                        27,291        29,104            47           112          0.23          0.51

Total
interest-earning
assets                    1,171,774       904,023        45,526        33,434          5.18          4.93

Non-earning assets          134,330        95,196

Total assets            $ 1,306,104     $ 999,219

Deposits:
Demand                  $   144,284     $ 122,497           154           167          0.14          0.18
Money market                168,212       111,801           414           382          0.33          0.46
Savings                      78,808        66,138            88            69          0.15          0.14
Time                        447,906       363,655         4,635         4,628          1.38          1.70
Total deposits              839,210       664,091         5,291         5,246          0.84          1.06

Customer repurchase
agreements                   46,297        45,452           125           244          0.36          0.72
Other short-term
borrowings                        -            45             2             -             -          0.47
Long-term borrowings         37,413        28,820           868           973          3.09          4.50
Total
interest-bearing
liabilities                 922,920       738,408         6,286         6,463          0.91          1.17

Noninterest bearing
demand deposits             205,446       133,008
Other liabilities            20,415         4,619
Shareholders' equity        157,323       123,184
Total liabilities and
shareholders' equity    $ 1,306,104     $ 999,219

Interest rate spread                                                                   4.27 %        3.76 %
Net interest margin                                                                    4.47 %        3.98 %

Net interest income (taxable
equivalent basis)                                        39,240        26,971
Less: Taxable
equivalent adjustment                                     1,752         1,424
Net interest income                                   $  37,488     $  25,547


                  Changes in Net Interest Income (Rate/Volume Analysis)
                                     (in thousands)

                                            Nine Months Ended September 30
                                                     2012 vs. 2011
                                         Interest                Change
                                         Increase            Attributable to
          Interest income               (Decrease)          Rate        Volume
           Loans:
            Commercial                  $     1,744       $    539     $  1,205
            Real Estate                       9,627          2,148        7,479
            Consumer                             66            (14 )         80
             Total loans                     11,437          2,673        8,764
           Securities:
            Federal agencies                   (330 )         (310 )        (20 )
. . .
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