Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AMNB > SEC Filings for AMNB > Form 10-K on 12-Mar-2014All Recent SEC Filings

Show all filings for AMERICAN NATIONAL BANKSHARES INC.

Form 10-K for AMERICAN NATIONAL BANKSHARES INC.


12-Mar-2014

Annual Report


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the past three years. The discussion and analysis are intended to supplement and highlight information contained in the accompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K.

RECLASSIFICATION

In certain circumstances, reclassifications have been made to prior period information to conform to the 2013 presentation. There were no material reclassifications.

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.

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 purpose of the allowance for loan losses ("ALLL") is to provide for probable losses in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.

The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ALLL and the provision for loan loss expense.

The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan officers, (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production, (6) regular meetings of the Credit Committee to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans.

Risk grades are assigned as part of the loan origination process. From time to time, risk grades may be modified as warranted by the facts and circumstances surrounding the credit.

Calculation and analysis of the ALLL is prepared quarterly by the Finance Department. The Company's Credit Committee, Capital Management Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.

The Company's ALLL has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates and judgments.

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, regulatory, legal, competition, quality of loan review system, and value of underlying collateral. In the formula allowance for commercial and commercial real estate loans, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The period-end balances for each loan risk-grade category are multiplied by the adjusted loss factor. Allowance calculations for residential real estate and consumer loans 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.


Index
The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. These include:

The present value of expected future cash flows discounted at the loan's effective interest rate. The effective interest rate on a loan is the rate of return implicit in the loan (that is, the contractual interest rate adjusted for any net deferred loan fees or costs and any premium or discount existing at the origination or acquisition of the loan);

The loan's observable market price, or

The fair value of the collateral, net of estimated costs to dispose, if the loan is collateral dependent.

The use of these computed values is inherently subjective and actual losses could be greater or less than the estimates.

No single statistic, formula, or measurement determines the adequacy of the allowance. Management makes subjective and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans. However, the entire allowance is used to absorb credit losses inherent in the loan portfolio, including identified and unidentified losses.

The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period as facts and circumstances evolve. Furthermore, management cannot provide assurance that in any particular period the Bank will not have sizeable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factors at the time. 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 the Financial Accounting Standards Board ("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.


Index
Goodwill Impairment

The Company performs its annual analysis as of June 30 each fiscal year. Accounting guidance permits preliminary assessment of qualitative factors to determine whether more substantial impairment testing is required. The Company chose to bypass the preliminary assessment and utilized a two-step process for impairment testing of goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment. No indicators of impairment were identified during the years ended December 31, 2013, 2012 and 2011.

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.

ACQUISITION OF MIDCAROLINA FINANCIAL CORPORATION

On July 1, 2011, the Company completed its merger with MidCarolina Financial Corporation 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 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

MANAGEMENT INFORMATION SYSTEM CHANGES

Coincidentally with the merger with MidCarolina, the Company converted its management information systems from an in-house data processing system to an outsourced processing strategy. Both banks' management information systems were fully integrated and converted to Jack Henry & Associates Silverlake processing system in mid-February 2012.

RESULTS OF OPERATIONS

Net Income

Net income available to common shareholders for 2013 was $15,747,000 compared to $16,006,000 for 2012, a decrease of $259,000 or 1.6%. Basic and diluted earnings per share were $2.00 for 2013 compared to $2.04 for the 2012. This net income produced for 2013 a return on average assets of 1.20%, a return on average equity of 9.52%, and a return on average tangible equity of 13.75%.

Net income available to common shareholders for 2012 was $16,006,000 compared to $11,468,000 for 2011, an increase of $4,538,000 or 39.6%. Basic and diluted earnings per share were $2.04 for 2012 compared to $1.64 for the 2011. This net income produced for 2012 a return on average assets of 1.23%, a return on average equity of 10.08%, and a return on average tangible equity of 15.25%.

Earnings for 2013, 2012, and the second half of 2011 were favorably impacted by the July 2011 merger between American National and MidCarolina Financial Corporation.

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. 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 July 2011 merger with MidCarolina has impacted net interest income positively for 2012 and 2013. This is discussed more fully in the Fair Value Impact to Net Income. The Company expects this favorable impact to decline rapidly over the next several years.


Index
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. All references in this section relate to average yields and rates and average asset and liability balances during the periods discussed.

Net interest income on a taxable equivalent basis decreased $3,357,000 or 6.5% in 2013 from 2012, following a $9,577,000 or 22.6% increase in 2012 from 2011. The decrease in net interest income in 2013 was primarily due to changes in interest rates and lower accretion income related to the MidCarolina acquired loan portfolio. Yields on loans were 5.65% in 2013 compared to 6.06% in 2012. Costs of funds were lower in 2013 compared to 2012, especially with respect to time deposits, which were 1.22% for 2013 compared to 1.36% for 2012. Deposit rates for demand account decreased to 0.07% in 2013 from 0.13% in 2012 and money market accounts decreased to 0.19% in 2013 from 0.30% in 2012. Management regularly reviews deposit pricing and attempts to keep costs as low as possible, while remaining competitive. The net interest margin was 4.10% for 2013, 4.44% for 2012, and 4.35% for 2011.

During 2008, the Federal Open Market Committee of the FRB reduced the federal funds rate seven times from 4.25% to 0.25%, where it has remained through 2013 and into early 2014. This historically low rate environment has had a significant effect on the Company's net interest margin. Based on recent FRB pronouncements, rates are expected to remain at or near historical lows for the foreseeable future. However, the recent beginning of reductions in the Federal Reserve's policy of quantitative easing may result in upper pressure on some market interest rates.

Net interest income on a taxable equivalent basis increased $9,577,000 or 22.6% in 2012 from 2011, following a $13,899,000 or 48.7% increase in 2011 from 2010. The increase in net interest income in 2012 was primarily due to the July 2011 merger with MidCarolina, driven mostly by accretion income related to the acquired loan portfolio. Yields on loans were 6.06% in 2012 compared to 6.05% in 2011. Costs of funds were lower in 2012 compared to 2011, especially with respect to time deposits, which were 1.36% for 2012 compared to 1.63% for 2011. Deposit rates for demand account decreased to 0.13% in 2012 from 0.21% in 2011 and money market accounts decreased to 0.30% in 2012 from 0.43% in 2011. Management actively and regularly reviews deposit pricing and attempts to keep costs as low as possible. The net interest margin was 4.44% for 2012, 4.35% for 2011, and 3.78% for 2010.


Index
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the last three years. 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
                    (in thousands, except yields and rates)
                                 Average Balance                        Interest Income/Expense                   Average Yield/Rate

                      2013            2012            2011           2013         2012         2011         2013         2012         2011
Loans:
Commercial         $   125,283     $   128,031     $   107,376     $  6,082     $  6,642     $  4,947         4.85 %       5.19 %       4.61 %
Real estate            663,224         677,314         559,656       38,425       42,088       35,298         5.79         6.21         6.31
Consumer                 5,847           8,359           7,734          403          605          575         6.89         7.24         7.43
Total loans            794,354         813,704         674,766       44,910       49,335       40,820         5.65         6.06         6.05

Securities:
Federal
agencies and
GSEs                    55,435          36,066          36,247          532          545          946         0.96         1.51         2.61
Mortgage-backed
and CMOs                74,909          94,183          75,902        1,442        1,906        2,148         1.93         2.02         2.83
State and
municipal              193,254         182,939         151,254        7,750        7,829        6,872         4.01         4.28         4.54
Other                   15,007          11,654           7,038          430          435          279         2.87         3.73         3.96
Total
securities             338,605         324,842         270,441       10,154       10,715       10,245         3.00         3.30         3.79

Deposits in
other banks             53,857          32,080          29,394          151           80          127         0.28         0.25         0.43

Total interest
earning assets       1,186,816       1,170,626         974,601       55,215       60,130       51,192         4.65         5.14         5.25

Nonearning
assets                 120,338         132,455         102,493

Total assets       $ 1,307,154     $ 1,303,081     $ 1,077,094

Deposits:
Demand             $   161,602     $   142,296     $   137,211          111          190          290         0.07         0.13         0.21
Money market           178,235         174,027         132,906          338          521          572         0.19         0.30         0.43
Savings                 84,162          78,358          68,038           71          111           98         0.08         0.14         0.14
 Time                  405,213         443,549         382,008        4,940        6,021        6,243         1.22         1.36         1.63
Total deposits         829,212         838,230         720,163        5,460        6,843        7,203         0.66         0.82         1.00

Customer
repurchase
agreements              47,816          46,939          46,411           40          148          325         0.08         0.32         0.70
Other
short-term
borrowings                   1             496              66            -            2            -         0.40         0.42         0.45
Long-term
borrowings              37,437          37,415          30,991        1,083        1,148        1,252         2.89         3.07         4.04
Total interest
bearing
  liabilities          914,466         923,080         797,631        6,583        8,141        8,780         0.72         0.88         1.10

Noninterest
bearing
demand deposits        220,980         213,129         143,204
Other
liabilities              6,370           8,025           5,939
Shareholders'
equity                 165,338         158,847         130,320
Total
liabilities and
  shareholders'
equity             $ 1,307,154     $ 1,303,081     $ 1,077,094

Interest rate
spread                                                                                                        3.93 %       4.26 %       4.15 %
Net interest
margin                                                                                                        4.10 %       4.44 %       4.35 %

Net interest income (taxable
equivalent basis)                                                    48,632       51,989       42,412
Less: Taxable equivalent
adjustment                                                            2,259        2,324        2,005
Net interest
income                                                             $ 46,373     $ 49,665     $ 40,407


Index
The following table presents the dollar amount of changes in interest income and interest expense, and distinguishes between changes resulting from fluctuations in average balances of interest earning assets and interest bearing liabilities (volume),and changes resulting from fluctuations in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately.

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

                                         2013 vs. 2012                                2012 vs. 2011
                                                     Change                                      Change
                              Increase           Attributable to          Increase           Attributable to
Interest income              (Decrease)        Rate         Volume       (Decrease)        Rate         Volume
Loans:
Commercial                  $       (560 )   $    (420 )   $    (140 )   $     1,695     $     671     $   1,024
Real estate                       (3,663 )      (2,801 )        (862 )         6,790          (528 )       7,318
Consumer                            (202 )         (28 )        (174 )            30           (16 )          46
Total loans                       (4,425 )      (3,249 )      (1,176 )         8,515           127         8,388
Securities:
Federal agencies and GSEs            (13 )        (242 )         229            (401 )        (396 )          (5 )
Mortgage-backed and CMOs            (464 )         (89 )        (375 )          (242 )        (692 )         450
State and municipal                  (79 )        (507 )         428             957          (417 )       1,374
Other securities                      (5 )        (114 )         109             156           (17 )         173
Total securities                    (561 )        (952 )         391             470        (1,522 )       1,992
Deposits in other banks               71            11            60             (47 )         (58 )          11
Total interest income             (4,915 )      (4,190 )        (725 )         8,938        (1,453 )      10,391

Interest expense
Deposits:
Demand                               (79 )        (102 )          23            (100 )        (110 )          10
Money market                        (183 )        (195 )          12             (51 )        (201 )         150
Savings                              (40 )         (48 )           8              13            (2 )          15
 Time                             (1,081 )        (585 )        (496 )          (222 )      (1,145 )         923
Total deposits                    (1,383 )        (930 )        (453 )          (360 )      (1,458 )       1,098
Customer repurchase
agreements                          (108 )        (111 )           3            (177 )        (181 )           4
Other borrowings                     (67 )         (53 )         (14 )          (102 )        (346 )         244
Total interest expense            (1,558 )      (1,094 )        (464 )          (639 )      (1,985 )       1,346
Net interest income         $     (3,357 )   $  (3,096 )   $    (261 )   $     9,577     $     532     $   9,045

Noninterest Income

Noninterest income is generated from a variety of sources, including fee-based deposit services, trust and investment services, mortgage banking, and retail brokerage. Noninterest income also includes net gains or losses on sales, calls, or impairment of investment securities.

2013 compared to 2012

Noninterest income was $10,827,000 in 2013 compared to $11,410,000 in 2012, a decrease of $583,000 or 5.1%.

Fees from the management of trusts, estates, and asset management accounts were $3,689,000 in 2013 compared to $3,703,000 in 2012, a $14,000 or 0.4% decrease. This decrease was primarily the result of a $330,000 refund, paid in the first quarter of 2013, related to an error in a trust agreement going back two decades. This error was detected during a review and has been resolved and recorded as a reduction in trust income. The facts and circumstances of this trust relationship are unique. A substantial portion of trust fees are earned based on account market values, so changes in the equity markets may have a large impact on income.

Service charges on deposit accounts were $1,750,000 in 2013 compared to $1,757,000 in 2012, a $7,000 or 0.4% decrease.


Index
Other fees and commissions were $1,864,000 in 2013 compared to $1,768,000 in 2012, a $96,000 or 5.4% increase, due primarily to increases in VISA check card income.

Mortgage banking income was $2,008,000 in 2013 compared to $2,234,000 in 2012, a $226,000 or 10.1% decrease. Recent increases in mortgage interest rates have slowed demand on mortgage loan refinancing and have, accordingly, reduced volume and income. Secondary market mortgage loan volume for the year was $79,000,000 compared to over $100,000,000 the prior year.

Securities gains were $192,000 in 2013 compared to $158,000 in 2012.

Other noninterest income was $1,324,000 in 2013 compared to $1,790,000 in 2012, a $466,000 or 26.0% decrease. This decrease was primarily due a gain of $495,000 realized in 2012 from the sale of the Riverside branch office property that had been closed since 2009.

2012 compared to 2011

Noninterest income was $11,410,000 in 2012 compared to $9,244,000 in 2011, an increase of $2,166,000 or 23.4%.

Fees from the management of trusts, estates, and asset management accounts were $3,703,000 in 2012 compared to $3,561,000 in 2011, a $142,000 or 4.0% increase. A substantial portion of trust fees are earned based on account market values, so changes in the equity markets may have a large and potentially volatile impact on revenue.

Service charges on deposit accounts were $1,757,000 in 2012 compared to $1,963,000 in 2011, a $206,000 or 10.5% decrease. The almost contemporaneous nature of the MidCaolina merger, in July 2011, and the management information system conversion, in February 2012, resulted in some operational decisions that had a short term negative impact on service charge income.

Other fees and commissions were $1,768,000 in 2012 compared to $1,510,000 in 2011, a $258,000 or 17.1% increase, due primarily to increases in VISA check card income.

Mortgage banking income was $2,234,000 in 2012 compared to $1,262,000 in 2011, a $972,000 or 77.0% increase. Historically low mortgage interest rates in 2012 impacted the demand for refinanced mortgages from credit qualified borrowers. Volume during the year exceeded $100,000,000.

Securities gains were $158,000 in 2012 compared to a loss of $1,000 in 2011.

Other noninterest income was $1,790,000 in 2012 compared to $949,000 in 2011, an $841,000 or 88.6% increase. This increase was primarily due to the sale of the Riverside branch office property that closed in 2009. This transaction generated a net gain on sale of $495,000 for 2012. In addition, brokerage income was up $157,000 in 2012 over 2011.

Noninterest Expense

2013 compared to 2012

Noninterest expense was $35,105,000 in 2013 compared to $36,643,000 in 2012, a decrease of $1,538,000 or 4.2%.

Salaries were $14,059,000 in 2013 compared to $15,785,000 in 2012, a decrease of $1,726,000 or 10.9%. Employee benefits were $3,848,000 in 2013 compared to $3,604,000 in 2012, an increase of $244,000 or 6.8%. Total full time equivalent employees were 290 at the end of 2013 compared to 307 at the end of 2012.

Occupancy and equipment expense were $3,614,000 for 2013 compared to $3,951,000 for 2012, a decrease of $337,000 or 8.5%.

FDIC insurance assessment was $647,000 in 2013 compared to $692,000 in 2012, a . . .

  Add AMNB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AMNB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.