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AMNB > SEC Filings for AMNB > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for AMERICAN NATIONAL BANKSHARES INC.

Form 10-Q for AMERICAN NATIONAL BANKSHARES INC.


9-Aug-2013

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, some of which are discussed in more detail in Item 1A - Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2012, 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;

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

Risks associated with mergers and other acquisitions and other expansion activities.

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) mergers and acquisitions, (3) acquired loans with specific credit-related deterioration and (4) goodwill impairment. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements of the 10-K for December 31, 2012.


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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 general allowance and the specific allowance. Each component is determined based upon estimates. With regard to commercial loans, the general 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 general 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 is 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 all other segments are analyzed by risk-grade category and multiplied by the adjusted loss factor. The general 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.

Mergers and Acquisitions

Business combinations are accounted for under Accounting Standards Codification ("ASC") 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions.

Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company will account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities will be recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the Consolidated Statements of Income classified within the noninterest expense caption.

Acquired Loans with Specific Credit-Related Deterioration

Acquired loans with specific credit deterioration are accounted for by the Company in accordance with FASB ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. 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.


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Goodwill Impairment

Goodwill is subject to at least an annual assessment for impairment by applying a fair value test. An annual fair value-based test was performed as of June 30, 2013 that determined the market value of the Company's shares exceeded the consolidated carrying value, including goodwill; therefore, there has been no impairment recognized in the value of goodwill.

In September 2011, the FASB published Accounting Statement Update ("ASU") 2011-08, Testing Goodwill for Impairment. This amendment was an effort to reduce the complexity of the two step impairment test required by the original version of the ASU. Under this amendment, the reporting entity has the option to assess relevant "qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting entity is less than the carrying amount."

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. Details of the transaction are discussed in Note 2 in the Consolidated Financial Statements included in the report.

RESULTS OF OPERATIONS

Earnings Performance

Three months ended June 30, 2013 and 2012

For the quarter ended June 30, 2013, the Company reported net income of $4,210,000 compared to $4,274,000 for the comparable quarter in 2012. The $64,000 or 1.5% decrease in earnings was primarily due to declines in yields on earning assets and lower levels of earnings assets. It was partially mitigated by lower cost of funds. Earnings were also positively impacted by lower provision expense and lower levels of noninterest expense.


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                            SUMMARY INCOME STATEMENT
                             (Dollars in thousands)


   For the three months ended June 30,     2013         2012       $ Change      % Change

   Interest income                       $ 13,347     $ 14,886     $  (1,539 )       -10.3 %
   Interest expense                        (1,654 )     (2,070 )         416         -20.1 %
   Net interest income                     11,693       12,816        (1,123 )        -8.8 %
   Provision for loan losses                    -         (733 )         733        -100.0 %
   Noninterest income                       2,686        2,800          (114 )        -4.1 %
   Noninterest expense                     (8,428 )     (8,833 )         405          -4.6 %
   Income tax expense                      (1,741 )     (1,776 )          35          -2.0 %

   Net income                            $  4,210     $  4,274     $     (64 )        -1.5 %

Six months ended June 30, 2013 and 2012

For the six month period ended June 30, 2013, the Company reported net income of $8,361,000 compared to $8,449,000 for the comparable period in 2012. The $88,000 or 1.0% decrease was primarily due to declines in yields on earning assets and lower levels of earnings assets. It was partially mitigated by lower cost of funds. Earnings were also positively impacted by lower provision expense and lower levels of noninterest expense.

                            SUMMARY INCOME STATEMENT
                             (Dollars in thousands)

   For the six months ended June 30,     2013          2012        $ Change       % Change

   Interest income                     $  26,756     $  30,228     $  (3,472 )        -11.5 %
   Interest expense                       (3,381 )      (4,240 )         859          -20.3 %
   Net interest income                    23,375        25,988        (2,613 )        -10.1 %
   Provision for loan losses                (294 )      (1,466 )       1,172          -79.9 %
   Noninterest income                      5,456         6,034          (578 )         -9.6 %
   Noninterest expense                   (16,746 )     (18,760 )       2,014          -10.7 %
   Income tax expense                     (3,430 )      (3,347 )         (83 )          2.5 %

   Net income                          $   8,361     $   8,449     $     (88 )         -1.0 %

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 June 30, 2013 and 2012

Net interest income on a taxable equivalent basis decreased $1,146,000 or 8.5%, for the second quarter of 2013 compared to the same quarter of 2012. This was primarily due to declines in yields on earning assets, impacted by lower market interest rates and lower accretion income. It was partially mitigated by reductions in the cost of interest bearing liabilities.


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For the second quarter of 2013, the Company's yield on interest-earning assets was 4.73%, compared to 5.28% for the second quarter of 2012. The cost of interest-bearing liabilities was 0.73% compared to 0.88%. The interest rate spread was 4.00% compared to 4.40%. The net interest margin, on a fully taxable equivalent basis, was 4.16% compared to 4.57%, a reduction of 41 basis points (0.41%).

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 June 30, 2013 and 2012. 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.


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          Net Interest Income Analysis
For the Three Months Ended June 30, 2013 and 2012
          (in thousands, except rates)



                                                               Interest
                              Average Balance               Income/Expense                Yield/Rate

                           2013            2012           2013          2012          2013          2012
Loans:
Commercial              $   132,381     $   130,697     $   1,605     $   1,727          4.86 %        5.30 %
Real estate                 656,995         681,870         9,682        10,859          5.89          6.37
Consumer                      6,097           7,294           102           139          6.71          7.64
Total loans                 795,473         819,861        11,389        12,725          5.73          6.21

Securities:
Federal agencies &
GSEs                         53,349          41,517           126           155          0.94          1.49
Mortgage-backed &
CMOs                         76,999          99,391           338           486          1.76          1.96
State and municipal         191,536         182,499         1,927         1,975          4.02          4.33
Other                        13,362          12,589            95           117          2.84          3.72
Total securities            335,246         335,996         2,486         2,733          2.97          3.25

Deposits in other
banks                        46,817          17,630            39            18          0.33          0.41

Total
interest-earning
assets                    1,177,536       1,173,487        13,914        15,476          4.73          5.28

Non-earning assets          124,955         134,897

Total assets            $ 1,302,491     $ 1,308,384

Deposits:
Demand                  $   164,094     $   155,550            28            54          0.07          0.14
Money market                169,417         172,439            78           127          0.18          0.30
Savings                      84,471          78,608            17            30          0.08          0.15
Time                        410,862         448,076         1,246         1,518          1.22          1.36
Total deposits              828,844         854,673         1,369         1,729          0.66          0.81

Customer repurchase
agreements                   47,081          48,742            14            49          0.12          0.40
Other short-term
borrowings                        -           1,878             -             2             -          0.43
Long-term borrowings         37,393          37,419           271           290          2.90          3.10
Total
interest-bearing
liabilities                 913,318         942,712         1,654         2,070          0.73          0.88

Noninterest bearing
demand deposits             216,600         199,754
Other liabilities             6,423           8,528
Shareholders' equity        166,150         157,390
Total liabilities and
shareholders' equity    $ 1,302,491     $ 1,308,384

Interest rate spread                                                                     4.00 %        4.40 %
Net interest margin                                                                      4.16 %        4.57 %

Net interest income
(taxable equivalent
basis)                                                     12,260        13,406
Less: Taxable
equivalent adjustment                                         567           590
Net interest income                                     $  11,693     $  12,816


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

                                                Three Months Ended June 30
                                                      2013 vs. 2012
                                           Interest               Change
                                           Increase           Attributable to
         Interest income                  (Decrease)         Rate        Volume
         Loans:
         Commercial                       $      (122 )    $    (144 )   $    22
         Real Estate                           (1,177 )         (791 )      (386 )
         Consumer                                 (37 )          (16 )       (21 )
         Total loans                           (1,336 )         (951 )      (385 )
         Securities:
         Federal agencies                         (29 )          (66 )        37
         Mortgage-backed                         (148 )          (46 )      (102 )
         State and municipal                      (48 )         (143 )        95
         Other securities                         (22 )          (29 )         7
         Total securities                        (247 )         (284 )        37
         Deposits in other banks                   21             (4 )        25
         Total interest income                 (1,562 )       (1,239 )      (323 )

         Interest expense
         Deposits:
         Demand                                   (26 )          (29 )         3
         Money market                             (49 )          (47 )        (2 )
         Savings                                  (13 )          (15 )         2
         Time                                    (272 )         (152 )      (120 )
         Total deposits                          (360 )         (243 )      (117 )

         Customer repurchase agreements           (35 )          (33 )        (2 )
         Other borrowings                         (21 )           (7 )       (14 )
         Total interest expense                  (416 )         (283 )      (133 )
         Net interest income              $    (1,146 )    $    (956 )   $  (190 )

Six months ended June 30, 2013 and 2012

Net interest income on a taxable equivalent basis decreased $2,650,000 or 9.8%, for the six months ended June 30, 2013 compared to the comparable period in 2012. This was primarily due to declines in yields on earning assets, impacted by lower market interest rates and lower accretion income. It was partially mitigated by reductions in the cost of interest-bearing liabilities.

For the first six months of 2013, the Company's yield on interest-earnings assets was 4.75% compared to 5.35% for the first six months of 2012. The cost of interest-bearing liabilities was 0.75% compared to 0.89%. The interest rate spread was 4.00% compared to 4.46%. The net interest margin, on a fully taxable equivalent basis, was 4.18% compared to 4.63%, for a reduction of 45 basis points (0.45%).

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the six months ended June 30, 2013 and 2012. 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.


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         Net Interest Income Analysis
For the Six Months Ended June 30, 2013 and 2012
         (in thousands, except rates)



                                                               Interest
                              Average Balance               Income/Expense                Yield/Rate

                           2013            2012           2013          2012          2013          2012
Loans:
Commercial              $   128,022     $   137,057     $   3,195     $   3,538          5.03 %        5.18 %
Real estate                 659,254         674,964        19,410        21,977          5.89          6.51
Consumer                      6,100          10,181           212           366          7.01          7.21
Total loans                 793,376         822,202        22,817        25,881          5.76          6.30

Securities:
Federal agencies &
GSEs                         49,698          36,178           242           317          0.97          1.75
Mortgage-backed &
CMOs                         78,208          99,255           718         1,015          1.84          2.05
State and municipal         190,303         181,683         3,859         3,951          4.06          4.35
Other                        12,612          10,462           190           211          3.01          4.03
Total securities            330,821         327,578         5,009         5,494          3.03          3.35

Deposits in other
banks                        50,299          24,624            68            28          0.27          0.23

Total
interest-earning
assets                    1,174,496       1,174,404        27,894        31,403          4.75          5.35

Non-earning assets          124,892         135,949

Total assets            $ 1,299,388     $ 1,310,353

Deposits:
Demand                  $   159,351     $   163,014            60           110          0.08          0.14
Money market                170,940         179,180           171           288          0.20          0.32
Savings                      83,589          77,557            37            59          0.09          0.15
Time                        412,467         447,720         2,537         3,109          1.24          1.39
Total deposits              826,347         867,471         2,805         3,566          0.68          0.82

Customer repurchase
agreements                   48,679          47,986            35            92          0.14          0.38
Other short-term
borrowings                        -             997             -             2             -          0.40
Long-term borrowings         37,396          37,420           541           580          2.89          3.10
Total
interest-bearing
liabilities                 912,422         953,874         3,381         4,240          0.75          0.89

Noninterest bearing
demand deposits             215,463         191,517
Other liabilities             6,164           8,925
Shareholders' equity        165,339         156,037
Total liabilities and
shareholders' equity    $ 1,299,388     $ 1,310,353

Interest rate spread                                                                     4.00 %        4.46 %
Net interest margin                                                                      4.18 %        4.63 %

Net interest income
(taxable equivalent
basis)                                                     24,513        27,163
Less: Taxable
equivalent adjustment                                       1,138         1,175
Net interest income                                     $  23,375     $  25,988


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

                                              Six Months Ended June 30
                                                   2013 vs. 2012
                                         Interest              Change
. . .
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