march312009_10q.htm
 


 

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED  March 31, 2009.

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM    TO .

Commission file number  0-12820

AMERICAN NATIONAL BANKSHARES INC.
(Exact name of registrant as specified in its charter)

VIRGINIA
 
54-1284688
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
628 Main Street
   
Danville, Virginia
 
24541
(Address of principal executive offices)
 
(Zip Code)

(434) 792-5111
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes
x
No
¨
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months.

Yes
¨
No
¨
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o                                                                Accelerated filer x                                                       Non-accelerated filer  o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)Yes¨Nox

At May 7, 2009, the Company had 6,100,323 shares Common Stock outstanding, $1 par value.

 
 






AMERICAN NATIONAL BANKSHARES INC.
 
           
Index
     
Page
 
           
Part I.
 
FINANCIAL INFORMATION
     
           
 
Item 1
Financial Statements
     
           
        3  
             
        4  
             
        5  
             
        6  
             
        7  
             
 
Item 2.
    18  
             
 
Item 3.
    27  
             
 
Item 4.
    28  
             
Part II.
OTHER INFORMATION
       
             
 
Item 1.
    29  
             
 
Item 1A.
    29  
             
 
Item 2.
    29  
             
 
Item 3.
    29  
             
 
Item 4.
    29  
             
 
Item 5.
    29  
             
 
Item 6.
    29  
             
SIGNATURES
       





Part I.  Financial Information
Item 1. Financial Statements
 
 American National Bankshares Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 
 (Dollars in thousands, except share data)
 
             
   
(Unaudited)
   
(Audited)
 
   
March 31,
   
December 31,
 
 ASSETS
 
2009
   
2008
 
 Cash and due from banks
  $ 13,632     $ 14,986  
 Interest-bearing deposits in other banks
    18,188       9,112  
                 
 Securities available for sale, at fair value
    167,981       133,695  
 Securities held to maturity
    6,811       7,121  
 Total securities
    174,792       140,816  
                 
 Loans held for sale
    2,782       1,764  
                 
 Loans, net of unearned income
    569,003       571,110  
 Less allowance for loan losses
    (7,836 )     (7,824 )
 Net loans
    561,167       563,286  
                 
 Premises and equipment, net
    18,282       17,431  
 Other real estate owned
    3,345       4,311  
 Goodwill
    22,468       22,468  
 Core deposit intangibles, net
    1,981       2,075  
 Accrued interest receivable and other assets
    12,841       12,935  
 Total assets
  $ 829,478     $ 789,184  
                 
LIABILITIES and SHAREHOLDERS' EQUITY
               
 Liabilities:
               
 Demand deposits -- noninterest bearing
  $ 98,926     $ 95,703  
 Demand deposits -- interest bearing
    94,505       116,132  
 Money market deposits
    72,085       56,615  
 Savings deposits
    63,553       59,624  
 Time deposits
    286,819       261,064  
 Total deposits
    615,888       589,138  
                 
 Short-term borrowings:
               
 Customer repurchase agreements
    60,768       51,741  
 Other short-term borrowings
    12,440       7,850  
 Long-term borrowings
    13,750       13,787  
 Trust preferred capital notes
    20,619       20,619  
 Accrued interest payable and other liabilities
    4,098       3,749  
 Total liabilities
    727,563       686,884  
                 
 Shareholders' equity:
               
 Preferred stock, $5 par, 200,000 shares authorized,
               
 none outstanding
    -       -  
 Common stock, $1 par, 10,000,000 shares authorized,
               
 6,079,161 shares outstanding at March 31, 2009 and
               
 6,085,628 shares outstanding at December 31, 2008
    6,079       6,086  
 Capital in excess of par value
    26,488       26,491  
 Retained earnings
    70,379       71,090  
 Accumulated other comprehensive loss, net
    (1,031 )     (1,367 )
 Total shareholders' equity
    101,915       102,300  
 Total liabilities and shareholders' equity
  $ 829,478     $ 789,184  
                 
The accompanying notes are an integral part of the consolidated financial statements.
         

 
3



 American National Bankshares Inc. and Subsidiaries
 
 Consolidated Statements of Income
 
(Dollars in thousands, except share and per share data) (Unaudited)
 
   
   
Three Months Ended
 
   
March 31
 
   
2009
   
2008
 
 Interest and Dividend Income:
           
 Interest and fees on loans
  $ 8,034     $ 9,444  
 Interest and dividends on securities:
               
 Taxable
    1,120       1,231  
 Tax-exempt
    386       432  
 Dividends
    22       77  
 Other interest income
    88       76  
 Total interest and dividend income
    9,650       11,260  
                 
Interest Expense:
               
 Interest on deposits
    2,527       3,582  
 Interest on short-term borrowings
    236       484  
 Interest on long-term borrowings
    131       126  
 Interest on trust preferred capital notes
    343       343  
 Total interest expense
    3,237       4,535  
                 
 Net Interest Income
    6,413       6,725  
 Provision for Loan Losses
    350       140  
                 
 Net Interest Income After Provision for Loan Losses
    6,063       6,585  
                 
 Noninterest Income:
               
 Trust fees
    758       880  
 Service charges on deposit accounts
    502       565  
 Other fees and commissions
    242       203  
 Mortgage banking income
    286       195  
 Brokerage fees
    57       143  
 Securities gains, net
    -       30  
 Net loss on foreclosed real estate
    (1,179 )     (7 )
 Other
    68       126  
 Total noninterest income
    734       2,135  
                 
 Noninterest Expense:
               
 Salaries     2,531       2,469  
 Employee benefits
    813       747  
 Occupancy and equipment
    971       966  
 FDIC assessment
    217       17  
 Bank franchise tax
    163       177  
 Core deposit intangible amortization
    94       94  
 Other
    1,086       979  
 Total noninterest expense
    5,875       5,449  
 Income Before Income Taxes
    922       3,271  
 Income Taxes
    154       966  
 Net Income
  $ 768     $ 2,305  
                 
 Net Income Per Common Share:
               
 Basic
  $ 0.13     $ 0.38  
 Diluted
  $ 0.13     $ 0.38  
 Average Common Shares Outstanding:
               
 Basic
    6,081,998       6,107,832  
 Diluted
    6,085,457       6,121,285  
                 
The accompanying notes are an integral part of the consolidated financial statements.
 

 
4


 American National Bankshares Inc. and Subsidiaries
 
Consolidated Statements of Changes in Shareholders' Equity
 
Three Months Ended March 31, 2009 and 2008
 
 (Dollars in thousands) (Unaudited)
 
                                     
                           
Accumulated
       
   
Common Stock
   
Capital in
         
Other
   
Total
 
               
Excess of
   
Retained
   
Comprehensive
   
Shareholders'
 
   
Shares
   
Amount
   
Par Value
   
Earnings
   
Income (Loss)
   
Equity
 
                                     
 Balance, December 31, 2007
    6,118,717     $ 6,119     $ 26,425     $ 69,409     $ (442 )   $ 101,511  
                                                 
 Net income
    -       -       -       2,305       -       2,305  
                                                 
 Change in unrealized gains on securities
                                               
   available for sale, net of tax, $481
    -       -       -       -       897          
                                                 
 Less:  Reclassification adjustment for gains
                                               
 on securities available for sale, net of
                                               
 tax, $(10)
    -       -       -       -       (20 )        
                                                 
 Other comprehensive income
                                    877       877  
                                                 
 Total comprehensive income
                                            3,182  
                                                 
 Stock repurchased and retired
    (28,800 )     (29 )     (124 )     (446 )     -       (599 )
                                                 
 Stock options exercised
    10,268       10       171       -       -       181  
                                                 
 Cash dividends declared, $0.23 per share
    -       -       -       (1,402 )     -       (1,402 )
                                                 
 Balance, March 31, 2008
    6,100,185     $ 6,100     $ 26,472     $ 69,866     $ 435     $ 102,873  
                                                 
 Balance, December 31, 2008
    6,085,628     $ 6,086     $ 26,491     $ 71,090     $ (1,367 )   $ 102,300  
                                                 
 Net income
    -       -       -       768       -       768  
                                                 
 Change in unrealized gains on securities
                                               
   available for sale, net of tax, $181
    -       -       -       -       336          
                                                 
 Other comprehensive income
                                    336       336  
                                                 
 Total comprehensive income
                                            1,104  
                                                 
 Stock repurchased and retired
    (7,600 )     (8 )     (33 )     (80 )     -       (121 )
                                                 
 Stock options exercised
    1,133       1       15       -       -       16  
                                                 
 Stock option expense
                    15                       15  
                                                 
 Cash dividends declared, $0.23 per share
    -       -               (1,399 )     -       (1,399 )
                                                 
 Balance, March 31, 2009
    6,079,161     $ 6,079     $ 26,488     $ 70,379     $ (1,031 )   $ 101,915  
                                                 
 The accompanying notes are an integral part of the consolidated financial statements.    

 
5


 American National Bankshares Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
 
 Three Months Ended March 31, 2009 and 2008
 
 (Dollars in thousands)  (Unaudited)
 
             
   
2009
   
2008
 
 Cash Flows from Operating Activities:
           
 Net income
  $ 768     $ 2,305  
 Adjustments to reconcile net income to net
               
 cash provided by operating activities:
               
 Provision for loan losses
    350       140  
 Depreciation
    338       353  
 Core deposit intangible amortization
    94       94  
 Net amortization (accretion) of bond premiums and discounts
    (67 )     (64 )
 Net gain on sale or call of securities
    -       (30 )
 Gain on loans held for sale
    (249 )     (166 )
 Proceeds from sales of loans held for sale
    12,554       8,279  
 Originations of loans held for sale
    (13,323 )     (8,426 )
 Net loss on foreclosed real estate
    1,179        7  
 Stock-based compensation expense
    15       -  
 Deferred income tax expense (benefit)
    (423 )     13  
 Net change in interest receivable
    12       223  
 Net change in other assets
    325       (292 )
 Net change in interest payable
    17       (63 )
 Net change in other liabilities
    332       868  
 Net cash provided by operating activities
    1,922       3,241  
                 
 Cash Flows from Investing Activities:
               
 Proceeds from maturities and calls of securities available for sale
    8,995       15,342  
 Proceeds from maturities and calls of securities held to maturity
    311       952  
 Purchases of securities available for sale
    (42,699 )     (18,377 )
 Net change in loans
    1,387       (3,386 )
 Purchases of bank property and equipment
    (1,189 )     (397 )
 Proceeds from sales of foreclosed real estate
    169       75  
 Net cash used in investing activities
    (33,026 )     (5,791 )
                 
 Cash Flows from Financing Activities:
               
 Net change in demand, money market, and savings deposits
    995       4,696  
 Net change in time deposits
    25,755       (4,378 )
 Net change in repurchase agreements
    9,027       10,288  
 Net change in short-term borrowings
    4,590       (3,975 )
 Net change in long-term borrowings
    (37 )     3,963  
 Cash dividends paid
    (1,399 )     (1,402 )
 Repurchase of stock
    (121 )     (599 )
 Proceeds from exercise of stock options
    16       181  
 Net cash provided by financing activities
    38,826       8,774  
                 
 Net Increase in Cash and Cash Equivalents
    7,722       6,224  
                 
 Cash and Cash Equivalents at Beginning of Period
    24,098       18,304  
                 
 Cash and Cash Equivalents at End of Period
  $ 31,820     $ 24,528  
                 
The accompanying notes are an integral part of the consolidated financial statements.
         

 
6

 




AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
Note 1 – Basis of Presentation

The consolidated financial statements include the accounts of American National Bankshares Inc. and its wholly owned subsidiary, American National Bank and Trust Company (collectively referred to as the “Company”).  American National Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of foreclosed real estate.

In April 2006, AMNB Statutory Trust I, a Delaware statutory trust (the “Trust”) and a wholly owned subsidiary of the Company was formed for the purpose of issuing preferred securities (the “Trust Preferred Securities”) in a private placement pursuant to an applicable exemption from registration.  Proceeds from the securities were used to fund the acquisition of Community First Financial Corporation (“Community First”) which occurred in April 2006.  Refer to Note 9 for further details concerning this variable interest entity.

All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the Trust, as detailed in Note 9.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2009; the consolidated statements of income for the three months ended March 31, 2009 and 2008; the consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2009 and 2008; and the consolidated statements of cash flows for the three months ended March 31, 2009 and 2008.  Operating results for the three month periods ended March 31, 2009 are not necessarily indicative of the results that may occur for the year ending December 31, 2009.  Certain reclassifications have been made to prior period balances to conform to the current period presentation.  These statements should be read in conjunction with the Notes to Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2008.

 

 
Note 2 – Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations” (“SFAS 141(R)”). The Standard significantly changed the financial accounting and reporting of business combination transactions.  SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008.  The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.

In April 2009, the FASB issued Staff Position (“FSP”) Financial Accounting Standards (“FAS”) 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.”  FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  The FSP is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased.  The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.  FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively.  Earlier adoption is permitted for periods ending after March 15, 2009.  The Company does not expect the adoption of FSP FAS 157-4 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principals Board Opinion No. (“APB 28-1”), “Interim Disclosures about Fair Value of Financial Instruments.”  FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  In addition, the FSP amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods.  The FSP is effective for interim periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009.  The Company does not expect the adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”  FSP FAS 115-2 and FAS 124-2 amends other-than-temporary impairment guidance for debt securities to make guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities.  The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009.  The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a material impact on its consolidated financial statements.

In April 2009, the Securities and Exchange Commission (the”SEC”) issued Staff Accounting Bulletin No. 111 (“SAB 111”).  SAB 111 amends and replaces SAB Topic 5.M. in the SAB Series entitled “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities.”  SAB 111 maintains the SEC Staff’s previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope.  The Company does not expect the implementation of SAB 111 to have a material impact on its consolidated financial statements.

Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 for previously announced accounting pronouncements.





Note 3 – Securities

The amortized cost and estimated fair value of investments in debt and equity securities at March 31, 2009 and December 31, 2008 were as follows:

   
March 31, 2009
 
(in thousands)
 
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Securities available for sale:
                       
  Debt securities:
                       
Federal agencies
  $ 74,216     $ 1,963     $ 2     $ 76,177  
Mortgage-backed
    42,934       1,491       547       43,878  
State and municipal
    40,085       819       87       40,817  
Corporate
    2,980       -       6       2,974  
  Equity securities:
                               
FHLB stock – restricted
    2,598       -       -       2,598  
Federal Reserve stock – restricted
    1,429       -       -       1,429  
Other
    108       -       -       108  
Total securities available for sale
    164,350       4,273       642       167,981  
                                 
Debt securities held to maturity:
                               
Mortgage-backed
    243       13       -       256  
State and municipal
    6,568       254       -       6,822  
Total securities held to maturity
    6,811       267       -       7,078  
Total securities
  $ 171,161     $ 4,540     $ 642     $ 175,059  


   
December 31, 2008
 
(in thousands)
 
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Securities available for sale:
                       
  Debt securities:
                       
Federal agencies
  $ 43,331     $ 2,093     $ 8     $ 45,416  
Mortgage-backed
    45,139       1,040       496       45,683  
State and municipal
    36,726       653       74       37,305  
Corporate
    1,485       3       96       1,392  
  Equity securities:
                               
FHLB stock – restricted
    2,362       -       -       2,362  
Federal Reserve stock – restricted
    1,429       -       -       1,429  
Other
    108       -       -       108  
Total securities available for sale
    130,580       3,789       674       133,695  
                                 
Debt securities held to maturity:
                               
Mortgage-backed
    254       10       -       264  
State and municipal
    6,867       261       1       7,127  
Total securities held to maturity
    7,121       271       1       7,391  
Total securities
  $ 137,701     $ 4,060     $ 675     $ 141,086  


The tables below show estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2009 and December 31, 2008.  The reference point for determining when securities are in an unrealized loss position is month-end.  Therefore, it is possible that a security’s market value exceeded its amortized cost on other days during the past twelve-month period.

Management evaluates securities for other-than-temporary impairment quarterly, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for anticipated recovery in fair value.  As of March 31, 2009, the Company held 20 securities that had been in a continuous unrealized loss position for twelve months or more.  The Company has reviewed these securities, in accordance with its accounting policy, for other-than-temporary impairment, and does not consider the balances presented in the table to be other-than-temporarily impaired as of March 31, 2009.


March 31, 2009
 
   
Total
   
Less than 12 Months
   
12 Months or More
 
(in thousands)
 
Estimated Fair
Value
   
Unrealized
Loss
   
Estimated Fair
Value
   
Unrealized
Loss
   
Estimated Fair
Value
   
Unrealized
Loss
 
Federal agencies
  $ 32,005     $ 2     $ 32,005     $ 2     $ -     $ -  
Mortgage-backed
    3,162       547       -       -       3,162       547  
State and municipal
    3,201       87       3,201       87       -       -  
Corporate
    1,993       6       1,993       6       -       -  
  Total
  $ 40,361     $ 642     $ 37,199     $ 95     $ 3,162     $ 547  

 
December 31, 2008
 
   
Total
   
Less than 12 Months
   
12 Months or More
 
(in thousands)
 
Estimated Fair
Value
   
Unrealized
Loss
   
Estimated Fair
Value
   
Unrealized
Loss
   
Estimated Fair
Value
   
Unrealized
Loss
 
Federal agencies
  $ 1,583     $ 8     $ 1,583     $ 8     $ -     $ -  
Mortgage-backed
    4,484       496       3,468       472       1,016       24  
State and municipal
    3,581       75       3,581       75       -       -  
Corporate
    389       96       -       -       389       96  
  Total
  $ 10,037     $ 675     $ 8,632     $ 555     $ 1,405     $ 120  

 
Note 4 - Loans

Loans, excluding loans held for sale, were comprised of the following:

 
(in thousands)
 
March 31,
2009
   
December 31,
2008
 
             
Construction and land development
  $ 53,579     $ 63,361  
Commercial real estate
    213,508       207,160  
Residential real estate
    134,509       136,480  
Home equity
    61,458       57,170  
     Total real estate
    463,054       464,171  
                 
Commercial and industrial
    97,261       98,546  
Consumer
    8,688       8,393  
Total loans
  $ 569,003     $ 571,110  

The following is a summary of information pertaining to impaired and nonaccrual loans:

   
March 31,
   
December 31,
 
(in thousands)
 
2009
   
2008
 
             
Impaired loans with a valuation allowance
  $ 2,470     $ 2,545  
Impaired loans without a valuation allowance
    1,426       647  
Total impaired loans
  $ 3,896     $ 3,192  
                 
Allowance provided for impaired loans,
               
  included in the allowance for loan losses
  $ 1,121     $ 1,164  
                 
Nonaccrual loans excluded from the impaired
  loan disclosure
  $ 1,006     $ 1,574  


   
Three Months
Ended March 31,
   
Three Months
Ended March 31,
 
(in thousands)
 
2009
   
2008
 
             
Average balance in impaired loans
  $ 3,383     $ 3,647  
Interest income recognized on impaired loans
  $ 36     $ 49  
Interest income recognized on nonaccrual loans
  $ -     $ -  
Interest on nonaccrual loans had they been accruing
  $ 55     $ 73  
Loans past due 90 days and still accruing interest
  $ -     $ -  
 
No additional funds are committed to be advanced in connection with impaired loans.

Foreclosed real estate was $3,345,000 at March 31, 2009 and $4,311,000 December 31, 2008.


 
Note 5 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

Changes in the allowance for loan losses and the reserve for unfunded lending commitments for the three months ended March 31, 2009 and 2008, and for the year ended December 31, 2008, are presented below:

 
 
(in thousands)
 
Three Months Ended
March 31,
   
Year
Ended
December 31,
   
Three Months Ended
March 31,
 
   
2009
   
2008
   
2008
 
Allowance for Loan Losses
                 
  Balance, beginning of period
  $ 7,824     $ 7,395     $ 7,395  
  Provision for loan losses
    350       1,620       140  
  Charge-offs
    (376 )     (1,564 )     (170 )
  Recoveries
    38       373       60  
  Balance, end of period
  $ 7,836     $ 7,824     $ 7,425  
                         
Reserve for unfunded lending commitments
                       
  Balance, beginning of period
  $ 475       151     $ 151  
  Provision for unfunded commitments
    54       324       42  
  Charge-offs
    ( 215 )     -       -  
  Balance, end of period
  $ 314     $ 475     $ 193  
                         

The reserve for unfunded loan commitments in included in other liabilities.



Note 6 – Goodwill and Other Intangible Assets

In January 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”.  Accordingly, goodwill is no longer subject to amortization, but is subject to at least an annual assessment for impairment by applying a fair value test.   A fair value-based test was performed during the third quarter of 2008 that determined the market value of the Company’s shares exceeds the consolidated carrying value, including goodwill; therefore, there has been no impairment recognized in the value of goodwill.

The changes in the carrying amount of goodwill for the quarter ended March 31, 2009, are as follows (in thousands):

      Amount   
Balance as of December 31, 2008
  $ 22,468  
Goodwill recorded during the period
    -  
Impairment losses
    -  
Balance as of March 31, 2009
  $ 22,468  
         

Core deposit intangible assets resulting from an acquisition were originally recorded at $3,112,000 in April 2006, and are being amortized over 99 months.  The net core deposit intangible at March 31, 2009 was $1,981,000.


Note 7 – Short-term Borrowings

Short-term borrowings consist of customer repurchase agreements, overnight borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”), and Federal Funds purchased.  Customer repurchase agreements are collateralized by securities of the U.S. Government or its agencies.  They mature daily.  The interest rates may be changed at the discretion of the Company. The securities underlying these agreements remain under the Company’s control.  FHLB overnight borrowings contain floating interest rates that may change daily at the discretion of the FHLB.  Federal Funds purchased are unsecured overnight borrowings from other financial institutions.  Short-term borrowings consisted of the following as of March 31, 2009 and December 31, 2008 (in thousands):

   
March 31, 
 2009
   
December 31, 2008
 
   
 
       
Customer repurchase agreements
  $ 60,768     $ 51,741  
FHLB overnight borrowings
    12,440       7,850  
    $ 73,208     $ 59,591  
                 

Note 8 – Long-term Borrowings

Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans and home equity lines of credit.  In addition, the Company pledges as collateral its capital stock in the FHLB and deposits with the FHLB.  The Company has a line of credit with the FHLB equal to 30% of the Company’s assets, subject to the amount of collateral pledged.  As of March 31, 2009, $106,631,000 in 1-4 family residential mortgage loans and $62,161,000 in home equity lines of credit were pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings.  Long-term borrowings consisted of the following fixed rate, long term advances as of March 31, 2009 and December 31, 2008 (in thousands):




 
   
 
Due by
March 31
 
2009
Advance Amount
   
Weighted
Average
Rate
 
 
Due by
December 31
 
2008
Advance Amount
   
Weighted
Average
Rate
 
                           
2010
  $ 5,000       5.26 %
2009
  $ 5,000       5.26 %
2011
    4,000       2.92  
2011
    8,000       2.93  
2012
    4,000       2.93  
2014
    787       3.78  
2014
    750       3.78       $ 13,787       3.82 %
    $ 13,750       3.82 %                  

Note 9 – Trust Preferred Capital Notes

On April 7, 2006, AMNB Statutory Trust I, a Delaware statutory trust and a newly formed, wholly owned subsidiary of the Company, issued $20,000,000 of preferred securities in a private placement pursuant to an applicable exemption from registration.  The Trust Preferred Securities mature on June 30, 2036, but may be redeemed at the Company’s option beginning on June 30, 2011.  The securities require quarterly distributions by the Trust to the holder of the Trust Preferred Securities at a fixed rate of 6.66%.  Effective June 30, 2011, the rate will reset quarterly at the three-month LIBOR plus 1.35%.  Distributions are cumulative and will accrue from the date of original issuance, but may be deferred by the Company from time to time for up to twenty consecutive quarterly periods.  The Company has guaranteed the payment of all required distributions on the Trust Preferred Securities.

The proceeds of the Trust Preferred Securities received by the Trust, along with proceeds of $619,000 received by the Trust from the issuance of common securities by the Trust to the Company, were used to purchase $20,619,000 of the Company’s junior subordinated debt securities (the “Trust Preferred Capital Notes”), issued pursuant to a Junior Subordinated Indenture entered into between the Company and Wilmington Trust Company, as trustee.  The proceeds of the Trust Preferred Capital Notes were used to fund the cash portion of the merger consideration to the former shareholders of Community First in connection with the Company’s acquisition of that company, and for general corporate purposes.  In accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, the Corporation did not eliminate through consolidation the Corporation’s $619,000 equity investment in AMNB Statutory Trust I.  Instead, the Corporation reflected this equity investment in the “Accrued interest receivable and other assets” line item in the consolidated balance sheets.

Note 10 – Stock Based Compensation

A summary of stock option transactions for the three months ended March 31, 2009, is as follows:

   
 
 
Option
Shares
   
 
Weighted Average
Exercise Price
   
Weighted Average Remaining Contractual Term
   
 
Average Intrinsic Value
($000)
 
Outstanding at December  31, 2008
    218,610     $ 20.31              
Granted
    -       -              
Exercised
    (1,133 )     14.29              
Forfeited
    (10,000 )      22.94              
Outstanding at March 31, 2009
    207,477     $ 20.22       5.2     $ 47  
Exercisable at March 31, 2009
    163,227     $ 21.09       3.9     $ 47  

The total intrinsic value of options exercised during the three month period ended March 31, 2009 was $2,000.

There were 59,000 options granted in the fourth quarter of 2008, which resulted in $15,000 compensation expense in the first quarter of 2009.  $161,000 remains to be expensed in future periods.  No other options were granted in 2008 or 2007.  There was no tax benefit associated with stock option activity during 2009, 2008, or 2007.  Under SFAS No. 123R, “Share-Based Payment” a company may only recognize tax benefits for stock options that ordinarily will result in a tax deduction when the option is exercised (“non-statutory” options).  The Company has no non-statutory stock options.

Note 11 – Earnings Per Share

The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of potentially dilutive common stock.  Potentially dilutive common stock had no effect on income available to common shareholders.

   
Three Months Ended
 
   
March 31,
 
   
2009
   
2008
 
         
Per
         
Per
 
         
Share
         
Share
 
   
Shares
   
Amount
   
Shares
   
Amount
 
Basic
    6,081,998     $ .13       6,107,832     $ .38  
Effect of dilutive securities - stock options
    3,459       -       13,453       -  
Diluted
    6,085,457     $ .13       6,121,285     $ .38  

Stock options on common stock which were not included in computing diluted earnings per share for the three month periods ended March 31, 2009 and 2008, because their effects were antidilutive, averaged 138,511 and 93,027, respectively.


 
Note 12 – Employee Benefit Plans

Following is information pertaining to the Company’s non-contributory defined benefit pension plan.

Components of Net Periodic Benefit Cost
 
Three Months Ended
 
(in thousands)
 
March 31,
 
   
2009
   
2008
 
Service cost
  $ 184     $ 181  
Interest cost
    146       128  
Expected return on plan assets
    (203 )     (164 )
Recognized net actuarial loss
    111       28  
                 
Net periodic benefit cost
  $ 238     $ 173  

The Company’s anticipated contribution for 2009 is $481,000.

Note 13 – Segment and Related Information

In accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, reportable segments include community banking and trust and investment services.

Community banking involves making loans to and generating deposits from individuals and businesses.  All assets and liabilities of the Company are allocated to community banking.  Investment income from securities is also allocated to the community banking segment.  Loan fee income, service charges from deposit accounts, and non-deposit fees such as automatic teller machine fees and insurance commissions generate additional income for community banking.

Trust and investment services include estate planning, trust account administration, investment management, and retail brokerage.  Investment management services include purchasing equity, fixed income, and mutual fund investments for customer accounts.  The trust and investment services division receives fees for investment and administrative services.  Fees are also received by this division for individual retirement accounts managed for the community banking segment.

Amounts shown in the “Other” column include activities of American National Bankshares Inc. and its subsidiary, AMNB Statutory Trust I.  Refer to Note 1 for additional information on the Trust.  The “Other” column also includes corporate items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments. Intersegment eliminations primarily consist of American National Bankshares Inc.’s investment in American National Bank and Trust Company and related equity earnings.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.  All intersegment sales prices are market based.

Segment information as of and for the three month periods ended March 31, 2009 and 2008, is shown in the following table.


  Three Months Ended March 31, 2009
         
Trust and
                   
(in thousands)
 
Community
   
Investment
         
Intersegment
       
   
Banking
   
Services
   
Other
   
Eliminations
   
Total
 
Interest income
  $ 9,650     $ -     $ 80     $ (80 )   $ 9,650  
Interest expense
    2,974       -       343     $ (80 )     3,237  
Noninterest income
    (93 )     815       12       -       734  
Operating income before income taxes
    955       294       (327 )     -       922  
Depreciation and amortization
    425       6       1       -       432  
Total assets
    828,714       -       764               829,478  
Capital expenditures
    1,181       8       -       -       1,189  
                                         
                                         
  Three Months Ended March 31, 2008
           
Trust and
                         
(in thousands)
 
Community
   
Investment
           
Intersegment
         
   
Banking
   
Services
   
Other
   
Eliminations
   
Total
 
Interest income
  $ 11,260     $ -     $ -     $ -     $ 11,260  
Interest expense
    4,192       -       343       -       4,535  
Noninterest income
    1,096       1,023       16       -       2,135  
Operating income before income taxes
    3,111       566       (406 )     -       3,271  
Depreciation and amortization
    440       6       1       -       447  
Total assets
    784,257       -       792               785,049  
Capital expenditures
    397       -       -       -       397  
                                         

Note 14 – Fair Value of Financial Instruments
 
    The Company adopted SFAS No. 157, Fair Value Measurements, on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
 
    In October of 2008, the FASB issued FSP 157-3 to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements were not issued.

 
15

 
    SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under SFAS 157 based on these two types of inputs are as follows:


 
Level 1 –
 
Valuation is based on quoted prices in active markets for identical assets and liabilities.
       
 
Level 2 –
 
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
       
 
Level 3 –
 
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
 
 
    The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).  Federal Reserve Bank and Federal Home Loan Bank stocks are carried at cost since no ready market exists and there is no quoted market value.  The Company is required to own stock in these companies as long as it is a member.  Therefore, they have been excluded from the table below.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 (in thousands):

         
Fair Value Measurements at March 31, 2009 Using
 
   
 
Balance as of March 31,
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
Description
 
2009
   
Level 1
   
Level 2
   
Level 3
 
Assets
                       
Securities available for sale
  $ 163,954     $ -     $ 163,954     $ -  
Mortgage loan derivative contracts
    (1 )     -       (1 )     -  
                                 
 
    Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
 
    The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Loans held for sale: Loans held for sale are carried at market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the quarter ended March 31, 2009. Gains and losses on the sale of loans are recorded within income from mortgage banking on the Consolidated Statements of Income.

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period (in thousands):

         
Carrying Value at March 31, 2009
 
   
 
Balance as of March 31
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
Description
 
2009
   
Level 1
   
Level 2
   
Level 3
 
Assets
                       
Loans held for sale
  $ 2,782     $ -     $ 2,782     $ -  
Impaired loans, net of valuation allowance
    1,349       -       858       491  


Note 15 – Supplemental Cash Flow Information


   
Three Months Ended
 
      March 31,  
   
2009
   
2008
 
 Supplemental Schedule of Cash and Cash Equivalents:
           
 Cash and due from banks
  $ 13,632     $ 20,310  
 Interest-bearing deposits in other banks
    18,188       4,218  
                 
    $ 31,820     $ 24,528  
                 
 Supplemental Disclosure of Cash Flow Information:
               
 Cash paid for:
               
 Interest on deposits and borrowed funds
  $ 3,286     $ 4,598  
 Income taxes
    -       72  
 Noncash investing and financing activities:
               
 Transfer of loans to other real estate owned
    382       -  
 Unrealized loss on securities available for sale
    517       1,349  


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. and its wholly owned subsidiary, American National Bank and Trust Company (the”Bank”) (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.

Reclassification

In certain circumstances, reclassifications have been made to prior period information to conform to the 2009 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 2008 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 (“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 2008 indicated that goodwill is not impaired and is properly recorded in the financial statements.  No events or circumstances since December 31, 2008 have occurred that would question the impairment of goodwill.

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 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.


RESULTS OF OPERATIONS

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.

In comparison to the first quarter of 2008, net interest income on a taxable equivalent basis decreased $328,000, or 4.7%, for the first quarter of 2009.  This decrease was due primarily to reductions in interest rates.  Since September 2007, the Federal Open Market Committee of the Federal Reserve Board has reduced the intended federal funds rate ten times by a total of 5.00% and, as a result, rates earned on loans fell more quickly than rates paid on deposits.  The Company’s net interest margin, on a fully taxable equivalent basis, was 3.61% during the first quarter of 2009, compared to 3.88% during the same quarter of 2008.

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the first quarter 2009 and 2008.  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.

 
20


Net Interest Income Analysis
 
                               For the Three Months Ended March 31, 2009 and 2008  
(in thousands, except rates)
 
                                     
               
Interest
             
   
Average Balance
   
Income/Expense
   
Yield/Rate
 
                                     
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
Loans:
                                   
Commercial
  $ 96,097     $ 85,632     $ 1,100     $ 1,454       4.58 %     6.79 %
Real estate
    469,346       460,429       6,779       7,789       5.78       6.77  
Consumer
    7,895       9,524       178       217       9.02       9.11  
Total loans
    573,338       555,585       8,057       9,460       5.62       6.81  
                                                 
Securities:
                                               
Federal agencies
    45,767       50,064       521       597       4.55       4.77  
Mortgage-backed
    44,560       47,405       562       603       5.04       5.09  
State and municipal
    42,726       47,847       604       656       5.65       5.48  
Other     5,014       6,383       33       99       2.63       6.20  
Total securities
    138,067       151,699       1,720       1,955       4.98       5.15  
                                                 
Deposits in other banks
    23,575       10,224       88       76       1.49       2.97  
                                                 
Total interest earning assets
    734,980       717,508       9,865       11,491       5.37       6.41  
                                                 
Nonearning assets
    68,226       62,696                                  
                                                 
Total assets
  $ 803,206     $ 780,204                                  
                                                 
Deposits:
                                               
Demand
  $ 112,459     $ 107,994       190       225       0.68       0.83  
Money market
    64,648       51,320       198       294       1.23       2.29  
Savings
    61,289       63,184       40       116       0.26       0.73  
Time     272,425       263,700       2,099       2,947       3.08       4.47  
Total deposits
    510,821       486,198       2,527       3,582       1.98       2.95  
                                                 
Customer repurchase agreements
    56,051       54,624       233       451       1.66       3.30  
Other short-term borrowings
    2,071       3,091       3       33       0.58       4.27  
Long-term borrowings
    34,398       30,779       474       469       5.51       6.10  
                                                 
Total interest bearing liabilities
    603,341       574,692       3,237       4,535       2.15       3.16  
                                                 
Noninterest bearing
                                               
demand deposits
    93,181       97,212                                  
Other liabilities
    3,839       5,958                                  
Shareholders' equity
    102,845       102,342                                  
Total liabilities and
                                               
shareholders' equity
  $ 803,206     $ 780,204                                  
                                                 
Interest rate spread
                                    3.22 %     3.25 %
Net interest margin
                                    3.61 %     3.88 %
                                                 
Net interest income (taxable equivalent basis)
              6,628       6,956                  
Less: Taxable equivalent adjustment
                    215       231                  
Net interest income
                  $ 6,413     $ 6,725                  



 
21




Changes in Net Interest Income (Rate/Volume Analysis)
       
(in thousands)
       
                   
   
Three months ended March 31
 
   
2009 vs. 2008
 
         
Change
 
   
Increase
   
Attributable to
 
Interest income
 
(Decrease)
   
Rate
   
Volume
 
  Loans:
                 
    Commercial
  $ (354 )   $ (516 )   $ 162  
    Real estate
    (1,010 )     (1,158 )     148  
    Consumer
    (39 )     (2 )     (37 )
      Total loans
    (1,403 )     (1,676 )     273  
  Securities:
                       
    Federal agencies
    (76 )     (26 )     (50 )
    Mortgage-backed
    (41 )     (5 )     (36 )
    State and municipal
    (52 )     20       (72 )
    Other securities
    (66 )     (48 )     (18 )
      Total securities
    (235 )     (59 )     (176 )
  Deposits in other banks
    12       (51 )     63  
      Total interest income
    (1,626 )     (1,786 )     160  
                         
Interest expense
                       
  Deposits:
                       
    Demand
    (35 )     (44 )     9  
    Money market
    (96 )     (160 )     64  
    Savings
    (76 )     (73 )     (3 )
    Time
    (848 )     (943 )     95  
      Total deposits
    (1,055 )     (1,220 )     165  
  Customer repurchase agreements
    (218 )     (229 )     11  
  Other borrowings
    (25 )     (62 )     37  
      Total interest expense
    (1,298 )     (1,511 )     213  
Net interest income
  $ (328 )   $ (275 )   $ (53 )
                         


Noninterest Income

      Noninterest income decreased 65.6% to $734,000 in the first quarter of 2009 from $2,135,000 in the first quarter of 2008, due primarily to a $1.2 million valuation adjustment on foreclosed real estate assets. This property represents one relationship, an acquisition and development credit in the North Carolina Triad area, and constitutes over 60% of the Bank's other real estate owned.

Fees from the management of trusts, estates, and asset management accounts decreased to $758,000 in the first quarter of 2009 from $880,000 for the same period in 2008.  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 $502,000, a decline of $63,000 or 11.1% from the first quarter of 2008, primarily due to a drop in customer overdraft activity.

 
22

Mortgage banking income was $286,000 in the first quarter of 2009, compared to $195,000 for the same period in 2008, an increase of $91,000 or 46.7%. This income improvement reflects the impact of historically low mortgage rates and increased refinancing activity.

Brokerage fees decreased 60.1% to $57,000 in the first quarter of 2009, from $143,000 in the first quarter of 2008, due to decreased retail investment activity.

 
Noninterest income
           
   
Three Months Ended
 
   
March 31,
 
(in thousands)
 
2009
   
2008
 
             
Trust fees
  $ 758     $ 880  
Service charges on deposit accounts
    502       565  
Other fees and commissions
    242       203  
Mortgage banking income
    286       195  
Brokerage fees
    57       143  
Securities gains (losses), net
    -       30  
Net loss on foreclosed real estate
    (1,179 )     (7 )
Bank owned life insurance
    34       33  
Check order charges
    28       29  
Investment in insurance companies
    2       6  
VISA Incentive
    -       39  
Other
    4       19  
    $ 734     $ 2,135  
                 

Noninterest Expense

Noninterest expense was $5,875,000 for the first quarter of 2009 compared to $5,449,000 for the same period in 2008, an increase of $426,000 or 7.8%.

Salaries increased $62,000 or 2.5% in the first quarter of 2009 compared to the same period in 2008, due primarily to limited salary increases.

Employee benefits increased $66,000 or 8.8% in the first quarter of 2009 over the same period last year primarily due to increases in employee insurance expenses.

The Federal Deposit Insurance Corporation (“FDIC”) insurance assessment increased $200,000 in the first quarter of 2009 over the same period in 2008. This increase reflected the expiration of an assessment credit and the impact of industry-wide premium increases.



Noninterest expense
           
   
Three Months Ended
 
   
March 31,
 
(in thousands)
 
2009
   
2008
 
             
Salaries
  $ 2,531     $ 2,469  
Employee benefits
    813       747  
Occupancy and equipment
    971       966  
FDIC assessment
    217       17  
Bank franchise tax
    163       177  
Core deposit intangible amortization
    94       94  
Telephone
    115       101  
Stationery and printing supplies
    104       71  
Director fees
    65       49  
Postage
    58       76  
Provision for unfunded lending commitments
    55       42  
ATM and VISA network fees
    55       74  
Trust services contracted
    51       50  
Internet banking fees
    51       49  
Legal
    49       34  
Regulatory assessments
    46       44  
Advertising and marketing
    43       47  
Auditing
    40       38  
Other
    354       304  
    $ 5,875     $ 5,449  
                 
 
Income Taxes

The effective tax rate for the first quarter of 2009 was 16.7% compared to 29.5% for the same period of 2008.  The effective tax rate is lower than the statutory rate primarily due to income that is not taxable for Federal income tax purposes.  The primary non-taxable income is that of state and municipal securities and industrial revenue bonds or loans.

Impact of Inflation and Changing Prices

The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories.  The most significant effect of inflation is on noninterest expense that tend to rise during periods of inflation.  Changes in interest rates have a greater impact on a financial institution’s profitability than do the effects of higher costs for goods and services.  Through its balance sheet management practices, the Company has the ability to react to those changes and measure and monitor its interest rate and liquidity risk.


 
24


BALANCE SHEET ANALYSIS

Securities

The securities portfolio generates income, plays a major role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements.  The portfolio consists primarily of high quality, investment-grade securities.  Federal agency, mortgage-backed, and state and municipal securities comprise the majority of the portfolio.

The available for sale securities portfolio increased to $167,981,000 at March 31, 2009 from $133,695,000 at December 31, 2008.  The held to maturity securities portfolio decreased to $6,811,000 at March 31, 2009 from $7,121,000 at December 31, 2008.

At March 31, 2009, the available for sale portfolio had an estimated fair value of $167,981,000 and an amortized cost of $164,350,000, resulting in a net unrealized gain of $3,631,000.At the same date, the held to maturity portfolio had an estimated fair value of $7,078,000 and an amortized cost of $6,811,000, resulting in a net unrealized gain of $267,000.

At March 31, 2009, mortgage-backed securities consist principally of obligations of U.S. Government agencies and sponsored entities.  Mortgage-backed securities issued by non-U.S. Government agencies and sponsored entities as of March 31, 2009, had an amortized cost of $3,039,000 and an estimated fair value of $2,500,000; resulting in an estimated net unrealized loss of $539,000.

Loans

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans, construction and land development loans, and home equity loans. Loans decreased to $569,003,000 at March 31, 2009 from $571,110,000 at December 31, 2008, a decline of $2,107,000 or 0.37%.

Allowance for Loan Losses, Asset Quality, and Credit Risk Management

The allowance for loan losses was virtually unchanged at $7,836,000 at March 31, 2009 compared to $7,824,000 at December 31, 2008.  The allowance was 1.38% of loans at the end of the first quarter 2009 compared to 1.37% at year-end.  Annualized net charge-offs represented 0.24% of total loans during the first quarter of 2009.

Nonperforming loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more as to principal and interest payments, and any loans classified as troubled debt restructurings.  Nonperforming assets include nonperforming loans and foreclosed real estate.  Nonperforming loans represented 0.50% of total loans at March 31, 2009 and December 31, 2008.   There were no troubled debt restructurings at March 31, 2009 or December 31, 2008.

The following table summarizes nonperforming assets (in thousands):

   
March 31,
   
December 31,
 
   
2009
   
2008
 
Loans 90 days or more past due
  $ -     $ -  
Nonaccrual loans
    2,821       2,845  
     Nonperforming loans
    2,821       2,845  
Foreclosed real estate
    3,345       4,311  
Nonperforming assets
  $ 6,166     $ 7,156  
                 
 
Deposits

The Company’s deposits consist primarily of checking, money market, savings, and consumer time deposits.  Deposits increased to $615,888,000 at March 31, 2009 from $589,138,000 at December 31, 2008, an increase of $26,750,000 or 4.5%.  Of this increase approximately $21.6 million represents brokered deposits obtained in mid-quarter. $5 million of the proceeds were used to pay off an advance from the Federal Home Loan Bank of Atlanta; the remaining funds were used for general liquidity purposes. Management anticipates that three quarters of these funds will mature by year end and the Bank does not plan for them to be renewed. Core deposit growth continues to be an ongoing challenge for the community banking industry.

 
25

Shareholders’ Equity

The Company’s capital management strategy is to be classified as “well capitalized” under regulatory capital ratios and provide as high as possible total return to our shareholders.

Shareholders’ equity decreased to $101,915,000 at March 31, 2009 from $102,300,000 at December 31, 2008.  The decrease was largely the result of dividends paid during the quarter being larger than net income during the quarter. In the first quarter of 2009, the Company declared and paid a quarterly cash dividend of $.23 per share.

Banking regulators have defined minimum regulatory capital ratios that the Company and its banking subsidiary are required to maintain.  These ratios take into account risk factors identified by those regulatory authorities associated with the assets and off-balance sheet activities of financial institutions.  The guidelines require percentages, or “risk weights,” be applied to those assets and off-balance sheet assets in relation to their perceived risk.  Under the guidelines, capital strength is measured in two tiers.  Tier I capital consists primarily of shareholders’ equity and trust preferred capital notes, while Tier II capital consists of qualifying allowance for loan losses. “Total” capital is the combination of Tier I and Tier II capital.  Another regulatory indicator of capital adequacy is the leverage ratio, which is computed by dividing Tier I capital by average quarterly assets less intangible assets.

The regulatory guidelines require that minimum total capital (Tier I plus Tier II) of 8% be held against total risk-adjusted assets, at least half of which (4%) must be Tier I capital.  At March 31, 2009, the Company's Tier I and total capital ratios were 16.23% and 17.48%, respectively.  At December 31, 2008, these ratios were 16.67% and 17.92%, respectively.  The ratios for both periods were in excess of the regulatory requirements.  The Company's leverage ratio was 12.66% and 13.04% at March 31, 2009 and December 31, 2008, respectively.  The leverage ratio has a regulatory minimum of 4%, with most institutions required to maintain a ratio of 4-5%, depending upon risk profiles and other factors.

As mandated by bank regulations, the following five capital categories are identified for insured depository institutions:  "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized."  These regulations require the federal banking regulators to take prompt corrective action with respect to insured depository institutions that do not meet minimum capital requirements. Under the regulations, well capitalized institutions must have Tier I risk-based capital ratios of at least 6%, total risk-based capital ratios of at least 10%, and leverage ratios of at least 5%, and not be subject to capital directive orders. Management believes, as of March 31, 2009, that the Company met the requirements to be considered “well capitalized

Off-Balance-Sheet Activities

The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions.  Other than AMNB Statutory Trust I, formed in 2006 to issue Trust Preferred Securities, the Company does not have any off-balance sheet subsidiaries.  Off-balance sheet transactions were as follows (in thousands):
 
   
March 31,
2009
   
December 31,
2008
 
             
Commitments to extend credit
  $ 145,667     $ 146,399  
Standby letters of credit
    2,565       2,858  
Mortgage loan rate-lock commitments
    2,783       2,031  

Commitments to extend credit to customers represent legally binding agreements with fixed expiration dates or other termination clauses.  Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future funding requirements.  Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements.

 
26


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

Effectively managing market risk is essential to achieving the Company’s financial objectives.  Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices.  The Company is not subject to currency exchange risk or commodity price risk.  The Company’s primary market risk exposure is interest rate risk; however, market risk also includes liquidity risk.  Both are discussed below.

Interest Rate Risk Management
 
Interest rate risk and its impact on net interest income is a primary market risk exposure.  The Company manages its exposure to fluctuations in interest rates through policies approved by its Asset/Liability Investment Committee (“ALCO”) and Board of Directors, both of which receive and review periodic reports of the Company’s interest rate risk position.
 
 The Company uses simulation analysis to measure the sensitivity of projected earnings to changes in interest rates.  Simulation takes into account current balance sheet volumes and the scheduled repricing dates and maturities of assets and liabilities.  It incorporates numerous assumptions including growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid.  Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.

A balance sheet is considered asset sensitive when its earning assets (loans and securities) reprice fastert than its liabilities (deposits and borrowings).  An asset sensitive balance sheet will produce more net interest income when interest rates rise and less net interest income when they decline.  Based on the Company’s simulation analysis, management believes the Company’s interest sensitivity position is asset sensitive.

Liquidity Risk Management

Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities.  Liquidity management involves maintaining the Company’s ability to meet the daily cash flow requirements of its customers, whether they are borrowers requiring funds to meet their credit needs or depositors desiring to withdraw funds.  Additionally, the parent company requires cash for various operating needs including dividends to shareholders, stock repurchases, the servicing of debt, and the payment of general corporate expenses.  The Company manages its exposure to fluctuations in interest rates through policies approved by the ALCO and Board of Directors, both of which receive periodic reports of the Company’s interest rate risk position.  The Company uses a simulation and budget model to manage the future liquidity needs of the Company.

Liquidity sources include cash and amounts due from banks, deposits in other banks, loan repayments, increases in deposits, lines of credit from the Federal Home Loan Bank of Atlanta (“FHLB”) and  the Federal Reserve Bank’s discount window, federal funds lines of credit from two correspondent banks, and maturities and sales of securities.  Management believes that these sources provide sufficient and timely liquidity.

 
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The Company has a line of credit with the FHLB, equal to 30% of the Company’s assets, subject to the amount of collateral pledged.  Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans and home equity lines of credit.  In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB.  At March 31, 2009, principal obligations to the FHLB consisted of $12,440,000 in floating-rate, overnight borrowings and $13,750,000 in fixed-rate, long-term advances.  FHLB borrowings were $21,637,000 at December 31, 2008, consisting of $7,850,000 in floating-rate, overnight borrowings and $13,787,000 in fixed-rate, long-term advances.

The Company had fixed-rate term borrowing contracts with the FHLB as of March 31, 2009, with the following final maturities (in thousands):

Amount
 
Expiration Date
 
$ 5,000,000  
April 2009
 
  4,000,000  
March 2011
 
  4,000,000  
April 2011
 
  750,000  
March 2014
 
$ 13,750,000      
 
    The Company has federal funds lines of credit established with two other banks in the amounts of $15,000,000 and $10,000,000, and has access to the Federal Reserve Bank’s discount window.  There were no amounts outstanding under these facilities at March 31, 2009.

There have been no material changes to market risk as disclosed in the Company’s 2008 Annual Report on Form 10-K.  Refer to those disclosures for further information.


ITEM 4.  CONTROLS AND PROCEDURES

 
Disclosure Controls and Procedures
 
 
The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as amended (the "Exchange Act") as of March 31, 2009. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.  There were no significant changes in the Company's internal controls over financial reporting that occurred during the quarter ended March 31, 2009 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
 
 
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PART II
 
OTHER INFORMATION

Item:
 
Legal Proceedings
The nature of the business of the Company ordinarily results in a certain amount of litigation. The Company is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Company.

      1A.
Risk Factors
 
There have been no material changes to the risk factors disclosed in the Company’s 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2009.

2.      Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases Made for the Quarter Ended March 31, 2009
 
 
 
 
Dates
 
Total Number of Shares Purchased
   
 
Average Price Paid Per share
   
Total Number of Shares Purchased as Part of Publicly
Announced
Program
   
Maximum Number of Shares that May Yet Be Purchased Under the Program
 
                         
January 1–31
    2,500     $ 16.25       2,500       87,250  
February 1-28
    2,600       15.76       2,600       84,650  
March 1-31
    2,500       15.75       2,500       82,150  
                                 

 
On August 19, 2008, the Company’s board of directors approved the extension of its stock repurchase plan, begun in 2000, to include the repurchase of up to 100,000 shares of the Company’s common stock between August 20, 2008 and August 18, 2009.  The stock may be purchased in the open market or in privately negotiated transactions as management determines to be in the best interest of the Company.

 
Defaults Upon Senior Securities
 
None

4.     
Submission of Matters to a Vote of Security Holders
None

5.      Other Information
(a)  Required 8-K disclosures
None
(b)  Changes in Nominating Process
None

 
Exhibits
 
11.
Refer to EPS calculation in the Notes to Financial Statements
 
31.1
Section 302 Certification of Charles H. Majors, President and Chief Executive Officer
 
31.2
Section 302 Certification of William W. Traynham, Senior Vice President and Chief Financial Officer
 
32.1
Section 906 Certification of Charles H. Majors, President and Chief Executive Officer
 
32.2
Section 906 Certification of William W. Traynham, Senior Vice President and Chief Financial Officer

 
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SIGNATURES
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AMERICAN NATIONAL BANKSHARES INC.

     
     
     
 
/s/ Charles H. Majors
 
 
Charles H. Majors
 
Date – May 8, 2009
President and Chief Executive Officer
 
     
 
/s/ William W. Traynham
 
 
William W. Traynham
 
 
Senior Vice President and
 
Date – May 8, 2009
Chief Financial Officer
 


 
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