march312008_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, 2008.

¨
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 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, 2008, the Company had 6,097,785 shares Common Stock outstanding, $1 par value.


AMERICAN NATIONAL BANKSHARES INC.
       
Index
    
Page
       
Part I.
  
FINANCIAL INFORMATION
  
       
 
Item 1
Financial Statements (Unaudited)
  
       
   
3
       
   
4
       
   
5
       
   
6
       
   
7
       
 
Item 2.
16
       
 
Item 3.
26
       
 
Item 4.
27
       
Part II.
OTHER INFORMATION
  
       
 
Item 1.
28
       
 
Item 1A.
28
       
 
Item 2.
28
 
.
    
 
Item 3
28
       
 
Item 4.
28
       
 
Item 5
28
       
 
Item 6
28
       
SIGNATURES
  

 
2
 
 Consolidated Balance Sheets
 (Dollars in thousands, except share data)
             
   
(Unaudited)
    
(Audited)
  
   
March 31,
    
December 31,
  
 ASSETS
  
2008
    
2007
  
 Cash and due from banks
   $ 20,310     $ 18,155  
 Interest-bearing deposits in other banks
     4,218       149  
                 
 Securities available for sale, at fair value
     149,636       145,159  
 Securities held to maturity (fair value of $11,380
                
 in 2008 and $12,250 in 2007)
     11,039       11,990  
 Total securities
     160,675       157,149  
                 
 Loans held for sale
     1,681       1,368  
                 
 Loans, net of unearned income
     554,667       551,391  
 Less allowance for loan losses
     (7,425 )     (7,395 )
 Net loans
     547,242       543,996  
                 
 Premises and equipment, net
     13,392       13,348  
 Goodwill
     22,468       22,468  
 Core deposit intangibles, net
     2,358       2,452  
 Accrued interest receivable and other assets
     12,705       13,203  
 Total assets
   $ 785,049     $ 772,288  
                 
LIABILITIES and SHAREHOLDERS' EQUITY
                
 Liabilities:
                
 Demand deposits -- noninterest bearing
   $ 101,195     $ 99,231  
 Demand deposits -- interest bearing
     103,365       104,751  
 Money market deposits
     52,574       50,254  
 Savings deposits
     64,198       62,400  
 Time deposits
     260,207       264,585  
 Total deposits
     581,539       581,221  
                 
 Repurchase agreements
     58,179       47,891  
 FHLB borrowings
     16,125       16,137  
 Trust preferred capital notes
     20,619       20,619  
 Accrued interest payable and other liabilities
     5,714       4,909  
 Total liabilities
     682,176       670,777  
                 
 Shareholders' equity:
                
 Preferred stock, $5 par, 200,000 shares authorized,
                
 none outstanding
     -       -  
 Common stock, $1 par, 10,000,000 shares authorized,
                
 6,100,185 shares outstanding at March 31, 2008 and
                
 6,118,717 shares outstanding at December 31, 2007
     6,100       6,119  
 Capital in excess of par value
     26,472       26,425  
 Retained earnings
     69,866       69,409  
 Accumulated other comprehensive income (loss), net
     435       (442 )
 Total shareholders' equity
     102,873       101,511  
 Total liabilities and shareholders' equity
   $ 785,049     $ 772,288  
                 
The accompanying notes are an integral part of the consolidated financial statements.
          
                 
 
 
3
 
 American National Bankshares Inc. and Subsidiaries
(Dollars in thousands, except per share and per share data) (Unaudited)
 
   
Three Months Ended
  
   
March 31
  
   
2008
    
2007
  
 Interest and Dividend Income:
            
 Interest and fees on loans
   $ 9,444     $ 10,079  
 Interest and dividends on securities:
                
 Taxable
     1,231       1,136  
 Tax-exempt
     432       423  
 Dividends
     77       89  
 Other interest income
     76       171  
 Total interest and dividend income
     11,260       11,898  
                 
Interest Expense:
                
 Interest on deposits
     3,582       3,783  
 Interest on repurchase agreements
     451       426  
 Interest on other borrowings
     159       206  
 Interest on trust preferred capital notes
     343       343  
 Total interest expense
     4,535       4,758  
                 
 Net Interest Income
     6,725       7,140  
 Provision for Loan Losses
     140       303  
                 
 Net Interest Income After Provision for Loan Losses
     6,585       6,837  
                 
 Noninterest Income:
                
 Trust fees
     880       879  
 Service charges on deposit accounts
     565       622  
 Other fees and commissions
     203       200  
 Mortgage banking income
     195       190  
 Brokerage fees
     143       89  
 Securities gains, net
     30       25  
 Other
     119       207  
 Total noninterest income
     2,135       2,212  
                 
 Noninterest Expense:
                
 Salaries
     2,469       2,390  
 Employee benefits
     747       648  
 Occupancy and equipment
     966       829  
 Bank franchise tax
     177       168  
 Core deposit intangible amortization
     94       94  
 Other
     996       1,041  
 Total noninterest expense
     5,449       5,170  
 Income Before Income Taxes
     3,271       3,879  
 Income Taxes
     966       1,175  
 Net Income
   $ 2,305     $ 2,704  
                 
 Net Income Per Common Share:
                
 Basic
   $ 0.38     $ 0.44  
 Diluted
   $ 0.38     $ 0.44  
 Average Common Shares Outstanding:
                
 Basic
     6,107,832       6,156,812  
 Diluted
     6,121,285       6,185,084  
                 
The accompanying notes are an integral part of the consolidated financial statements.
  
                 
 
 
4
 
American National Bankshares Inc. and Subsidiaries
Three Months Ended March 31, 2008 and 2007
 (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, 2006
     6,161,865     $ 6,162     $ 26,414     $ 64,584     $ (2,168 )   $ 94,992  
                                                 
 Net income
     -       -       -       2,704       -       2,704  
                                                 
 Change in unrealized gains on securities
                                                
   available for sale, net of tax of $266
     -       -       -       -       494          
                                                 
 Less:  Reclassification adjustment for gains
                                                
 on securities available for sale, net of
                                                
 tax of $(13)
     -       -       -       -       (25 )        
                                                 
 Other comprehensive income
                                     469       469  
                                                 
 Comprehensive income
                                             3,173  
                                                 
 Stock repurchased and retired
     (11,600 )     (12 )     (50 )     (207 )     -       (269 )
                                                 
 Stock options exercised
     6,558       7       92       -       -       99  
                                                 
 Cash dividends declared
     -       -       -       (1,355 )     -       (1,355 )
                                                 
 Balance, March 31, 2007
     6,156,823     $ 6,157     $ 26,456     $ 65,726     $ (1,699 )   $ 96,640  
                                                 
                                                 
 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 of $481
     -       -       -       -       897          
                                                 
 Less:  Reclassification adjustment for gains
                                                
 on securities available for sale, net of
                                                
 tax of $(10)
     -       -       -       -       (20 )        
                                                 
 Other comprehensive income
                                     877       877  
                                                 
 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
     -       -       -       (1,402 )     -       (1,402 )
                                                 
 Balance, March 31, 2008
     6,100,185     $ 6,100     $ 26,472     $ 69,866     $ 435     $ 102,873  
                                                 
The accompanying notes are an integral part of the consolidated financial statements.
                          
 

5

 American National Bankshares Inc. and Subsidiaries
Three Months Ended March 31, 2008 and 2007
 (Dollars in thousands)  (Unaudited)
             
   
2008
    
2007
  
 Cash Flows from Operating Activities:
            
 Net income
   $ 2,305     $ 2,704  
 Adjustments to reconcile net income to net
                
 cash provided by operating activities:
                
 Provision for loan losses
     140       303  
 Depreciation
     353       282  
 Core deposit intangible amortization
     94       94  
   Net  (accretion) of bond premiums and discounts
     (64 )     (26 )
 Net gain on sale or call of securities
     (30 )     (25 )
 Gain on loans held for sale
     (166 )     (134 )
 Proceeds from sales of loans held for sale
     8,279       6,384  
 Originations of loans held for sale
     (8,426 )     (6,605 )
 Net loss on foreclosed real estate
     7       -  
 Gain on sale of premises and equipment
     -       (9 )
 Deferred income tax expense (benefit)
     13       (253 )
 Net change in interest receivable
     223       (135 )
 Net change in other assets
     (292 )     802  
 Net change in interest payable
     (63 )     (53 )
 Net change in other liabilities
     868       (581 )
 Net cash provided by operating activities
     3,241       2,748  
                 
 Cash Flows from Investing Activities:
                
 Proceeds from sales of securities available for sale
     -       215  
 Proceeds from maturities and calls of securities available for sale
     15,342       13,522  
 Proceeds from maturities and calls of securities held to maturity
     952       398  
 Purchases of securities available for sale
     (18,377 )     (2,748 )
 Net change in loans
     (3,386 )     (1,106 )
 Purchases of bank property and equipment
     (397 )     (594 )
 Proceeds from sales of foreclosed real estate
     75       -  
 Net cash (used in) provided by investing activities
     (5,791 )     9,687  
                 
 Cash Flows from Financing Activities:
                
 Net change in demand, money market, and savings deposits
     4,696       18,137  
 Net change in time deposits
     (4,378 )     (20,631 )
 Net change in repurchase agreements
     10,288       11,158  
 Net change in FHLB borrowings
     (12 )     (37 )
 Cash dividends paid
     (1,402 )     (1,355 )
 Repurchase of stock
     (599 )     (269 )
 Proceeds from exercise of stock options
     181       99  
 Net cash provided by financing activities
     8,774       7,102  
                 
 Net Increase in Cash and Cash Equivalents
     6,224       19,537  
                 
 Cash and Cash Equivalents at Beginning of Period
     18,304       26,124  
                 
 Cash and Cash Equivalents at End of Period
   $ 24,528     $ 45,661  
                 
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.

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.  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 the Trust.  Instead, the Corporation reflected this equity investment in the “Trust Preferred Capital Notes” line item in the consolidated balance sheets.

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

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, 2008; the consolidated statements of income for the three months ended March 31, 2008 and 2007; the consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2008 and 2007; and the consolidated statements of cash flows for the three months ended March 31, 2008 and 2007.  Operating results for the three month periods ended March 31, 2008 are not necessarily indicative of the results that may occur for the year ending December 31, 2008.  Certain reclassifications have been made to prior period balances to conform to the current period presentation.  The 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, 2007.

 
 
Note 2 - New Accounting Pronouncements
 
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.  SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company does not expect the implementation of SFAS 161 to have a material impact on its consolidated financial statements.

 
Adoption of New Accounting Standards:

In the first quarter of 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”) and requires an entity to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred.  SFAS 159 was effective for fiscal years beginning after November 15, 2007.  The adoption of SFAS 159 did not have a material effect on the Company’s financial position or results of operations.

7
In the first quarter of 2008, the Company adopted SFAS No. 157, Fair Value Measurements.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 does not require any new fair value measurements but may change current practice for some entities.  This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years.  Further discussion on this standard can be found in Note 12 to the consolidated financial statements.

Refer to the Company’s December 31, 2007 Annual Report on Form 10-K 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, 2008 and December 31, 2007 were as follows:

   
March 31, 2008
  
(in thousands)
  
Amortized
    
Unrealized
    
Unrealized
    
Estimated
  
   
Cost
    
Gains
    
Losses
    
Fair Value
  
Securities available for sale:
                        
  Debt securities:
                        
Federal agencies
   $ 51,719     $ 1,919     $ -     $ 53,638  
Mortgage-backed
     51,168       839       98       51,909  
State and municipal
     37,291       706       21       37,976  
Corporate
     1,485       -       89       1,396  
  Equity securities:
                                
FHLB stock – restricted
     2,115       -       -       2,115  
Federal Reserve stock – restricted
     1,429       -       -       1,429  
FNMA and FHLMC preferred stock
     1,346       -       267       1,079  
Other
     94       -       -       94  
Total securities available for sale
     146,647       3,464       475       149,636  
                                 
Debt securities held to maturity:
                                
Mortgage-backed
     297       12       -       309  
State and municipal
     10,742       329       -       11,071  
Total securities held to maturity
     11,039       341       -       11,380  
 
Total securities
   $ 157,686     $ 3,805     $ 475     $ 161,016  

 
8
 
 
   
December 31, 2007
  
(in thousands)
  
Amortized
    
Unrealized
    
Unrealized
    
Estimated
  
   
Cost
    
Gains
    
Losses
    
Fair Value
  
Securities available for sale:
                        
  Debt securities:
                        
Federal agencies
   $ 55,350     $ 1,059     $ 33     $ 56,376  
Mortgage-backed
     45,346       565       97       45,814  
State and municipal
     36,343       258       113       36,488  
Corporate
     1,485       -       40       1,445  
  Equity securities:
                                
FHLB stock – restricted
     2,125       -       -       2,125  
Federal Reserve stock – restricted
     1,429       -       -       1,429  
FNMA and FHLMC preferred stock
     1,346       42       -       1,388  
Other
     94       -       -       94  
Total securities available for sale
     143,518       1,924       283       145,159  
                                 
Debt securities held to maturity:
                                
Mortgage-backed
     308       11       -       319  
State and municipal
     11,682       256       7       11,931  
Total securities held to maturity
     11,990       267       7       12,250  
 
Total securities
   $ 155,508     $ 2,191     $ 290     $ 157,409  


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, 2008 and December 31, 2007.  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, 2008, the Company held 21 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, 2008.


March 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
  
Mortgage-backed
   $ 13,276     $ 98     $ 12,158     $ 84     $ 1,118     $ 14  
State and municipal
     2,342       21       2,342       21       -       -  
Corporate
     1,397       89       -       -       1,397       89  
Preferred stock
     1,079       267       1,079       267       -       -  
  Total
   $ 18,094     $ 475     $ 15,579     $ 372     $ 2,515     $ 103  



9


December 31, 2007

   
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
   $ 7,459     $ 33     $ -     $ -     $ 7,459     $ 33  
Mortgage-backed
     10,194       97       3,508       35       6,686       62  
State and municipal
     17,858       120       2,087       12       15,771       108  
Corporate
     1,445       40       -       -       1,445       40  
  Total
   $ 36,956     $ 290     $ 5,595     $ 47     $ 31,361     $ 243  


Note 4 - Loans

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

 
(in thousands)
  
March 31,
2008
    
December 31,
2007
  
             
Construction and land development
   $ 72,001     $ 69,803  
Commercial real estate
     198,698       198,332  
Residential real estate
     138,384       133,899  
Home equity
     48,958       48,313  
     Total real estate
     458,041       450,347  
                 
Commercial and industrial
     87,199       91,028  
Consumer
     9,427       10,016  
Total loans
   $ 554,667     $ 551,391  

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

   
March 31,
    
December 31,
  
(in thousands)
  
2008
    
2007
  
             
Impaired loans with a valuation allowance
   $ 2,838     $ 3,092  
Impaired loans without a valuation allowance
     689       473  
Total impaired loans
   $ 3,527     $ 3,565  
                 
Allowance provided for impaired loans,
                
    included in the allowance for loan losses
   $ 1,374     $ 1,499  
                 
Nonaccrual loans excluded from the impaired loan disclosure
   $ 1,523     $ 1,329  


   
Three Months
Ended March 31,
    
Three Months
Ended March 31,
  
(in thousands)
  
2008
    
2007
  
             
Average balance in impaired loans
   $ 3,647     $ 1,587  
Interest income recognized on impaired loans
   $ 49     $ 4  
Interest income recognized on nonaccrual loans
   $ -     $ -  
Interest on nonaccrual loans had they been accruing
   $ 73     $ 75  
Loans past due 90 days and still accruing interest
   $ -     $ -  
 
 
10
No additional funds are committed to be advanced in connection with impaired loans.

Foreclosed real estate was $550,000 at March 31, 2008 and $632,000 December 31, 2007, and is included in other assets on the Consolidated Balance Sheets.


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, 2008 and 2007, and for the year ended December 31, 2007, are presented below:

 
 
(in thousands)
  
Three Months Ended
March 31,
    
Year
Ended
December 31,
    
Three Months Ended
March 31,
  
   
2008
    
2007
    
2007
  
Allowance for Loan Losses
                  
  Balance, beginning of period
   $ 7,395     $ 7,264     $ 7,264  
  Provision for loan losses
     140       403       303  
  Charge-offs
     (170 )     (515 )     (49 )
  Recoveries
     60       243       72  
  Balance, end of period
   $ 7,425     $ 7,395     $ 7,590  
                         
Reserve for unfunded lending commitments
                        
  Balance, beginning of period
   $ 151       123     $ 123  
  Provision for unfunded commitments
     42       28       8  
  Balance, end of period
   $ 193     $ 151     $ 131  
                         

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 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 2007 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, 2007, are as follows (in thousands):

Balance as of December 31, 2007
   $ 22,468  
Goodwill recorded during the period
     -  
Impairment losses
     -  
Balance as of March 31, 2008
   $ 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.
 

 
11
Note 7 – Stock Based Compensation

A summary of stock option transactions for the three months ended March 31, 2008, is as follows:

   
 
 
 
Option
Shares
    
 
 
Weighted Average
Exercise Price
    
Weighted Average Remaining Contractual Term
    
 
 
Average Intrinsic Value
($000)
  
Outstanding at December  31, 2007
     174,871     $ 21.15              
Granted
     -       -              
Exercised
     (10,268 )     17.68              
Forfeited
     -        -              
Outstanding at March 31, 2008
     164,603     $ 21.37       4.3     $ 331  
Exercisable at March 31, 2008
     164,603     $ 21.37       4.3     $ 331  

The total intrinsic value of options exercised during the three month period ended March 31, 2008 was $44,000.

Effective January 1, 2006, the Company adopted SFAS 123R, Share Based Payment, using the modified prospective method and as such, results for prior periods have not been restated.  All options were fully vested prior to January 1, 2006; therefore, adoption of SFAS 123R resulted in no compensation expense.  No options have been granted since the January 1, 2006 adoption date.  There was no tax benefit associated with stock option activity during 2007, 2006, or 2005.  Under SFAS 123R, 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 8 – 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,
  
   
2008
    
2007
  
         
Per
          
Per
  
         
Share
          
Share
  
   
Shares
    
Amount
    
Shares
    
Amount
  
Basic
     6,107,832     $ .38       6,156,812     $ .44  
Effect of dilutive securities - stock options
     13,453       -       28,272       -  
Diluted
     6,121,285     $ .38       6,185,084     $ .44  

Stock options on common stock which were not included in computing diluted earnings per share for the three month periods ended March 31, 2008 and 2007, because their effects were antidilutive, averaged 93,027 and 88,027, respectively.
 
 
12

Note 9 – 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,
  
   
2008
    
             2007
  
Service cost
   $ 181     $ 164  
Interest cost
     128       105  
Expected return on plan assets
     (164 )     (141 )
Amortization of prior service cost
     -       (1 )
Recognized net actuarial loss
     28       38  
                 
Net periodic benefit cost
   $ 173     $ 165  

 
    The Company's maximum estimated contribution for 2008 is $7,100,000.
Note 10 – Segment and Related Information

In accordance with SFAS 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 AMNB Statutory Trust I.  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, 2008 and 2007, is shown in the following table.

13
 
 
  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  
                                         
                                         
  Three Months Ended March 31, 2007
           
Trust and
                          
(in thousands)
  
Community
    
Investment
            
Intersegment
          
   
Banking
    
Services
    
Other
    
Eliminations
    
Total
  
Interest income
   $ 11,898     $ -     $ -     $ -     $ 11,898  
Interest expense
     4,415       -       343       -       4,758  
Noninterest income
     1,205       968       39       -       2,212  
Operating income before income taxes
     3,762       498       (381 )     -       3,879  
Depreciation and amortization
     370       5       1       -       376  
Total assets
     786,768       -       776               787,544  
Capital expenditures
     592       2       -       -       594  
                                         

 
 
 Note 11 – Supplemental Cash Flow Information
 
   
Three Months Ended
  
  (in thousands)     March 31,  
   
2008
    
2007
  
 Supplemental Schedule of Cash and Cash Equivalents:
            
 Cash and due from banks
   $ 20,310     $ 22,844  
 Interest-bearing deposits in other banks
     4,218       22,817  
                 
    $ 24,528     $ 45,661  
                 
 Supplemental Disclosure of Cash Flow Information:
                
 Cash paid for:                
     Interest paid on deposits and borrowed funds
   $ 4,598     $ 4,468  
     Income taxes
     72       -  
 Noncash investing and financing activities:                
     Unrealized gain on securities available for sale
     1,349       722  
                 
 

Note 12 – Fair Value Measurements

During the first quarter of 2008, the Company adopted SFAS 157, Fair Value Measurements.  Under SFAS 157, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement.  The fair value hierarchy in SFAS 157 prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels.  It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The three levels are defined as follows:
 

 
14
·  
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
·  
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
·  
Level 3 inputs are unobservable inputs for the asset or liability.
 
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  Level 1 securities would include highly liquid government bonds such as U.S. Treasury securities.  The fair value for Level 2 securities is estimated by using pricing models, quoted prices of similar securities with similar characteristics, discounted cash flow, or other valuation methodologies.  The pricing models are primarily industry-standard models that consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.  These assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.  Level 2 securities would include U.S. agency securities, mortgage-backed agency and non-agency securities, obligations of states and political subdivisions, and certain corporate, asset backed, and other securities.  In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.  All of the Company’s securities are considered to be Level 2 securities as of March 31, 2008.

Loans Held for Sale and Mortgage Loan Derivative Contracts

Loans held for sale and mortgage loan derivative contracts are measured at fair value based upon published rates from one of the Company’s mortgage loan investors.


At March 31, 2008, the Company’s assets and liabilities at fair value are allocated between Levels 1, 2 and 3 as follows:

    Level 1   Level 2   Level 3  
Total
Securities available for sale
    
-
     $ 149,636       -     $ 149,636  
Securities held to maturity
     -       11,380       -       11,380  
Loans held for sale
     -       1,681       -       1,681  
Mortgage loan derivative contracts:
                                
      Gross positive fair value
     -       61       -       61  
      Gross negative fair value
     -       (61 )     -       (61 )


15
 
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 (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
·