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| AMNB > SEC Filings for AMNB > Form 10-Q on 9-Nov-2012 | All Recent SEC Filings |
9-Nov-2012
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. (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 %
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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 %
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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.
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
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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 )
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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
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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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