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| AMNB > SEC Filings for AMNB > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
The purpose of this discussion is to focus on important factors affecting the financial condition and results of operations of the Company. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements.
Forward-Looking Statements
This report contains forward-looking statements with respect to the financial condition, results of operations and business of American National Bankshares Inc. and its wholly owned subsidiary, American National Bank and Trust Company (collectively referred to as the "Company"). These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available to management at the time these statements and disclosures were prepared. Forward-looking statements are subject to numerous assumptions, estimates, risks, and uncertainties that could cause actual conditions, events, or results to differ materially fro those stated or implied by such forward-looking statements.
A variety of factors may affect the operations, performance, business strategy, and results of the Company. Those factors include but are not limited to the following:
· Financial market volatility including the level of interest rates could affect the values of financial instruments and the amount of net interest income earned;
· General economic or business conditions, either nationally or in the market areas in which the Company does business, may be less favorable than expected, resulting in deteriorating credit quality, reduced demand for credit, or a weakened ability to generate deposits;
· Competition among financial institutions may increase and competitors may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than the Company;
· Businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards;
· The ability to retain key personnel; and
· The failure of assumptions underlying the allowance for loan losses.
In certain circumstances, reclassifications have been made to prior period information to conform to the 2008 presentation.
Critical Accounting Policies
The accounting and reporting policies followed by the Company conform with U.S. generally accepted accounting principles ("GAAP") and they conform to general practices within the banking industry. The Company's critical accounting policies, which are summarized below, relate to (1) the allowance for loan losses and (2) goodwill impairment. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Company's 2007 Annual Report on Form 10-K.
The financial information contained within the Company's financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method.
Allowance for Loan Losses and Reserve for Unfunded Loan Commitments
The allowance for loan losses is an estimate of the losses inherent in the loan portfolio at the balance sheet date. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards No. ("SFAS") 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows, or values observable in the secondary market, and the loan balance.
The Company's allowance for loan losses has three basic components: the formula allowance, the specific allowance, and the unallocated allowance. Each of these components is determined based upon estimates that can and do change. The formula allowance uses a historical loss view as an indicator of future losses along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries; trends in volume and terms of loans; effects of changes in underwriting standards; experience of lending staff and economic conditions; and portfolio concentrations. In the formula allowance, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The adjusted loss factor is multiplied by the period-end balances for each risk-grade category. The formula allowance is calculated for a range of outcomes. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. The unallocated allowance includes estimated losses whose impact on the portfolio has yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective and actual losses could be greater or less than the estimates.
The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance-sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included in other liabilities.
Goodwill Impairment
The Company tests goodwill on an annual basis or more frequently if events or circumstances indicate that there may have been impairment. If the carrying amount of goodwill exceeds its implied fair value, the Company would recognize an impairment loss in an amount equal to that excess. The goodwill impairment test requires management to make judgments in determining the assumptions used in the calculations. The goodwill impairment testing conducted by the Company in 2007 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 SEC filings through a link on the Investors Relations page of the Company's web site at www.amnb.com. Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
American National Bankshares Inc. is the holding company of American National Bank and Trust Company, a community bank serving Southern and Central Virginia and the northern portion of Central North Carolina with twenty banking offices and a loan production office. The Bank also manages $471 million of assets in its Trust and Investment Services Division.
American National Bank and Trust Company provides a full array of financial products and services, including commercial, mortgage, and consumer banking; trust and investment services; and insurance. Services are also provided through twenty-three ATMs, "AmeriLink" Internet banking, and 24-hour "Access American" telephone banking.
Additional information is available on the Company's website at www.amnb.com. The shares of American National Bankshares Inc. are traded on the NASDAQ Global Select Market under the symbol "AMNB."
The Company's mission, vision, and guiding principles are as follows:
Vision We will enhance the value of our shareholders' investment by being our communities' preferred provider of relationship-based financial services.
Guiding Principles
To achieve our vision and carry out our mission, we:
· operate a sound, efficient, and highly profitable company,
· identify and respond to our internal and external customers' needs and expectations in an ever changing financial services environment,
· provide quality sales and quality service to our customers,
· produce profitable growth,
· provide an attractive return for our shareholders,
· furnish positive leadership for the well-being of all communities we serve,
· continuously develop a challenging and rewarding work environment for our employees, and
· conduct our work with integrity and professionalism.
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.
Net interest income during the second quarter was $6.73 million, approximately the same as recorded during the first quarter of 2008, and down 7.6% from the second quarter of 2007. Net interest income was adversely impacted by a series of rate reductions enacted by the Federal Reserve from September 2007 to April 2008. The net interest margin was 3.83% during the recently completed quarter, down from 3.88% in the previous quarter and 4.26% in the second quarter of 2007. Net interest income was augmented in the current quarter by $84,000 related to the payoff of a loan acquired in a merger and accounted for under special accounting rules for acquired loans. Loans increased $10.8 million, on average, over the previous quarter, while average deposits and customer repurchase accounts declined $8.3 million. Largely as a result of these changes, the company increased its average borrowings by $18.1 million during the quarter.
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the first quarter 2008 and 2007. 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 June 30, 2008 and 2007
(in thousands, except rates)
Interest
Average Balance Income/Expense Yield/Rate
2008 2007 2008 2007 2008 2007
Loans:
Commercial $ 90,648 $ 91,852 $ 1,342 $ 1,819 5.92 % 7.92 %
Real estate 467,424 448,024 7,468 8,364 6.39 7.47
Consumer 8,903 10,434 197 247 8.85 9.47
Total loans 566,975 550,310 9,007 10,430 6.35 7.58
Securities:
Federal agencies 45,708 68,991 551 748 4.82 4.34
Mortgage-backed &
CMO's 50,357 20,501 642 247 5.10 4.82
State and municipal 47,201 45,623 652 628 5.53 5.51
Other 6,981 7,991 90 116 5.16 5.81
Total securities 150,247 143,106 1,935 1,739 5.15 4.86
Deposits in other
banks 8,567 12,869 74 168 3.46 5.22
Total
interest-earning
assets 725,789 706,285 11,016 12,337 6.07 6.99
Non-earning assets 63,623 64,425
Total assets $ 789,412 $ 770,710
Deposits:
Demand $ 107,154 $ 111,064 160 416 0.60 1.50
Money market 51,124 52,279 239 356 1.87 2.72
Savings 62,648 67,716 84 230 0.54 1.36
Time 255,281 256,263 2,633 2,858 4.13 4.46
Total deposits 476,207 487,322 3,116 3,860 2.62 3.17
Repurchase
agreements 53,535 46,032 339 449 2.53 3.90
Other borrowings 52,012 33,884 603 514 4.64 6.07
Total
interest-bearing
liabilities 581,754 567,238 4,058 4,823 2.79 3.40
Noninterest bearing
demand deposits 99,960 101,024
Other liabilities 5,187 5,265
Shareholders'
equity 102,511 97,183
Total liabilities
and
shareholders'
equity $ 789,412 $ 770,710
Interest rate
spread 3.28 % 3.59 %
Net interest margin 3.83 % 4.26 %
Net interest income (taxable
equivalent basis) 6,958 7,514
Less: Taxable
equivalent
adjustment 228 231
Net interest income $ 6,730 $ 7,283
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Net Interest Income Analysis
For the Six Months Ended June 30, 2008 and 2007
(in thousands, except rates)
Interest
Average Balance Income/Expense Yield/Rate
2008 2007 2008 2007 2008 2007
Loans:
Commercial $ 88,140 $ 90,415 $ 2,796 $ 3,512 6.34 % 7.77 %
Real estate 463,927 446,448 15,257 16,529 6.58 7.40
Consumer 9,213 10,390 414 489 8.99 9.41
Total loans 561,280 547,253 18,467 20,530 6.58 7.50
Securities:
Federal agencies 47,886 75,587 1,148 1,605 4.79 4.25
Mortgage-backed &
CMO's 48,881 20,253 1,245 488 5.09 4.82
State and municipal 47,524 45,792 1,308 1,262 5.50 5.51
Other 6,682 8,372 189 245 5.66 5.85
Total securities 150,973 150,004 3,890 3,600 5.15 4.80
Deposits in other
banks 9,488 13,064 150 339 3.16 5.19
Total
interest-earning
assets 721,741 710,321 22,507 24,469 6.24 6.89
Non-earning assets 63,031 64,346
Total assets $ 784,772 $ 774,667
Deposits:
Demand $ 107,574 $ 110,592 385 840 0.72 1.52
Money market 51,222 52,210 533 705 2.08 2.70
Savings 62,916 68,318 200 465 0.64 1.36
Time 259,491 259,426 5,580 5,633 4.30 4.34
Total deposits 481,203 490,546 6,698 7,643 2.78 3.12
Repurchase
agreements 54,079 46,142 790 875 2.92 3.79
Other borrowings 42,941 35,294 1,105 1,063 5.15 6.02
Total
interest-bearing
liabilities 578,223 571,982 8,593 9,581 2.97 3.35
Noninterest bearing
demand deposits 98,586 101,177
Other liabilities 5,553 5,074
Shareholders'
equity 102,410 96,434
Total liabilities
and
shareholders'
equity $ 784,772 $ 774,667
Interest rate
spread 3.27 % 3.54 %
Net interest margin 3.86 % 4.19 %
Net interest income (taxable
equivalent basis) 13,914 14,888
Less: Taxable
equivalent
adjustment 459 465
Net interest income $ 13,455 $ 14,423
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Three Months Ended June 30
2008 vs. 2007
Interest Change
Increase Attributable to
Interest income (Decrease) Rate Volume
Loans:
Commercial $ (477 ) $ (453 ) $ (24 )
Real Estate (896 ) (1,246 ) 350
Consumer (50 ) (15 ) (35 )
Total loans (1,423 ) (1,714 ) 291
Securities:
Federal agencies (197 ) 77 (274 )
Mortgage-backed 395 15 380
State and municipal 24 2 22
Other securities (26 ) (12 ) (14 )
Total securities 196 82 114
Deposits in other banks (94 ) (47 ) (47 )
Total interest income (1,321 ) (1,679 ) 358
Interest expense
Deposits:
Demand (256 ) (242 ) (14 )
Money market (117 ) (109 ) (8 )
Savings (146 ) (130 ) (16 )
Time (225 ) (214 ) (11 )
Total deposits (744 ) (695 ) (49 )
Repurchase agreements (110 ) (175 ) 65
Other borrowings 89 (141 ) 230
Total interest expense (765 ) (1,011 ) 246
Net interest income $ (556 ) $ (668 ) $ 112
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Six Months Ended June 30
2008 vs. 2007
Interest Change
Increase Attributable to
Interest income (Decrease) Rate Volume
Loans:
Commercial $ (716 ) $ (630 ) $ (86 )
Real Estate (1,272 ) (1,900 ) 628
Consumer (75 ) (21 ) (54 )
Total loans (2,063 ) (2,551 ) 488
Securities:
Federal agencies (457 ) 187 (644 )
Mortgage-backed 757 29 728
State and municipal 46 (2 ) 48
Other securities (56 ) (8 ) (48 )
Total securities 290 206 84
Deposits in other banks (189 ) (111 ) (78 )
Total interest income (1,962 ) (2,456 ) 494
Interest expense
Deposits:
Demand (455 ) (433 ) (22 )
Money market (172 ) (159 ) (13 )
Savings (265 ) (231 ) (34 )
Time (53 ) (54 ) 1
Total deposits (945 ) (877 ) (68 )
Repurchase agreements (85 ) (221 ) 136
Other borrowings 42 (168 ) 210
Total interest expense (988 ) (1,266 ) 278
Net interest income $ (974 ) $ (1,190 ) $ 216
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Noninterest Income
Noninterest income totaled $1.84 million in the second quarter of 2008, a decline of $590,000 over the second quarter of 2007. Noninterest income was significantly impacted by expenses associated with the Company's preferred stock investments. During the quarter, the Company recorded a $139,000 loss on sale of its remaining preferred stock investment in FNMA, and recorded an impairment loss of $255,000 on its investment in FHLMC preferred stock. The impairment expense is classified as a reduction of other noninterest income. Excluding these items, noninterest income declined $196,000 over the second quarter of 2007, due in large part to a reduction in mortgage banking and retail brokerage revenue.
Fees from the management of trusts, estates, and asset management accounts totaled $916,000 in the second quarter of 2008 as compared to $924,000 for the same period in 2007. Volatility in the financial markets negatively impacted account asset values, which offset the income from new account activity. A substantial portion of Trust fees are earned based on account values.
Service charges on deposit accounts were $601,000, a decline of $24,000 or 3.8% from the second quarter of 2007, primarily due to a drop in customer overdraft activity.
Mortgage banking income decreased 129,000 or 39.2% over the second quarter of 2007 due to a decline in consumer home purchase and refinance activity.
Brokerage fees decreased 36.5% to $101,000 in the second quarter of 2008, from $159,000 in the second quarter of 2007, due to decreased retail customer investment activity, which was unusually high in the second quarter 2007.
Other noninterest income increased $58,000 in the second quarter of 2008 from the comparable quarter of 2007, due primarily to an increase in the estimated value of loans held for sale.
For the first six months of 2008, noninterest income was $3.98 million, down 14.4% over the same period of 2007. Excluding the effect of the aforementioned special charges related to the Company's preferred stock investments in FNMA and FHLMC, noninterest income declined 5.9%. This decline was largely related to a reduction in customer overdraft activity, which reduced deposit service charges, and a reduction in mortgage loan activity, which reduced mortgage banking income.
Noninterest Income
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2008 2007 2008 2007
Trust fees $ 916 $ 924 $ 1,796 $ 1,803
Service charges on deposit accounts 601 625 1,166 1,247
Other fees and commissions 226 198 429 398
Mortgage banking income 200 329 395 519
Brokerage fees 101 159 244 248
Securities gains (losses), net (138 ) 64 (108 ) 89
Impairment of securities (255 ) - (255 ) -
Investment in insurance companies 65 40 71 131
Bank owned life insurance 34 33 67 66
Check order charges 33 33 62 65
Increase in estimated fair value of loans
held for sale 47 - 47 -
Gain from sale of bankcard processor - - 39 -
Other 11 26 23 77
$ 1,841 $ 2,431 $ 3,976 $ 4,643
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Noninterest Expense
Noninterest expense totaled $5.64 million in the second quarter of 2008, up 3.6% over the same quarter of 2007. Excluding $176,000 of expense to increase the reserve for unfunded lending commitments, noninterest expense was approximately the same as the year-earlier quarter.
Salaries expense decreased $33,000 or 1.3% in the second quarter of 2008 as compared to the same period in 2007, due primarily to reductions in profit sharing and incentive compensation accruals. Employee benefits expense increased $40,000 or 5.4% over the same period last year primarily due to increases in employee insurance expenses.
Occupancy and equipment expense increased $78,000 in the second quarter of 2008 as compared to the same period in 2007. This increase was due primarily to investments in new operational technology and costs associated with the Company's new offices at Bedford and Smith Mountain Lake, Virginia.
For the first six months of 2008, noninterest expense was $11.09 million, up . . .
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