UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2008
Commission
file number 0-12820
AMERICAN NATIONAL BANKSHARES
INC.
(Exact
name of registrant as specified in its charter)
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Virginia
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54-1284688
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(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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628 Main Street, Danville,
VA
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24541
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(Address
of principal executive offices)
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(Zip
Code)
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434-792-5111
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which
Registered
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Common
Stock, $1 par value
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The
Nasdaq Stock Market LLC
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(Nasdaq
Global Select Market)
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Securities
registered pursuant to section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. £
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 definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer oSmaller reporting
company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.) Yes o No þ
The
aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 2008, based on the closing price, was
$95,898,967.
The
number of shares of the registrant’s common stock outstanding on March 13, 2009
was 6,079,161.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders
to be held on May 19, 2009, are incorporated by reference in Part III of this
report.
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PAGE
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ITEM
1
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3
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ITEM
1A
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8
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ITEM
1B
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Unresolved
Staff Comments
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None
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ITEM
2
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11
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ITEM
3
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12
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ITEM
4
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12
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ITEM
5
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12
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ITEM
6
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15
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ITEM
7
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16
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ITEM
7A
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23
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ITEM
8
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Financial
Statements and Supplementary Data
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35
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36
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37
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40
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41
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42
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43
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44
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ITEM
9
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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None
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ITEM
9A
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36
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ITEM
9B
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Other
Information
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None
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PART III
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ITEM
10
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Directors,
Executive Officers and Corporate Governance
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*
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ITEM
11
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Executive
Compensation
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*
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ITEM
12
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Security
Ownership of Certain Beneficial Owners and Management and
Related
Stockholder
Matters
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*
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ITEM
13
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Certain
Relationships and Related Transactions, and Director
Independence
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*
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ITEM
14
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Principal
Accounting Fees and Services
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*
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ITEM
15
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71
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_______________________________
*Certain information required by Item
10 is incorporated herein by reference to the information that appears under the
headings “Election of Directors,” “Election of Directors – Board Members Serving
on Other Publicly Traded Company Boards of Directors,” “Election of Directors –
Board of Directors and Committees - The Audit and Compliance Committee,”
“Section 16(a) Beneficial Ownership Reporting Compliance,” “Report of the Audit
and Compliance Committee,” and “Code of Conduct” in the Registrant’s Proxy
Statement for the 2009 Annual Meeting of Shareholders. The
information required by Item 401 of regulation S-K on executive officers is
disclosed herein.
The information required by Item 11 is
incorporated herein by reference to the information that appears under the
headings “Compensation Discussion and Analysis,” “Compensation Committee
Interlocks and Insider Participation,” and “Compensation Committee Report” in
the Registrant’s Proxy Statement for the 2009 Annual Meeting of
Shareholders.
The information required by Item 12 is
incorporated herein by reference to the information that appears under the
heading “Security Ownership” in the Registrant’s Proxy Statement for the 2009
Annual Meeting of Shareholders. The information required by Item
201(d) of Regulation S-K is disclosed herein. See Item 5, “Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.”
The information required by Item
13 is incorporated herein by reference to the information that appears under the
headings “Related Party Transactions” and “Election of Direectors - Board
Independence" in the Registrant's Proxy Statement for the 2009 Annual Meeting of
Shareholders.
The information required by Item 14 is
incorporated herein by reference to the information that appears under the
heading “Independent Public Accountants” in the Registrant’s Proxy Statement for
the 2009 Annual Meeting of Shareholders.
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 from those stated or implied
by such forward-looking statements.
A variety
of factors, some of which are discussed in more detail in Item 1A – Risk
Factors, may affect the operations, performance, business strategy, and results
of the Company. Those factors include but are not limited to the
following:
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·
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Financial
market volatility including the level of interest rates could affect the
values of financial instruments and the amount of net interest income
earned;
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·
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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;
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·
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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;
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·
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Businesses
that the Company is engaged in may be adversely affected by legislative or
regulatory changes, including changes in accounting
standards;
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·
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The
ability to retain key personnel;
and
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·
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The
failure of assumptions underlying the allowance for loan
losses.
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American National
Bankshares Inc. is a one-bank holding company organized under the laws of the
Commonwealth of Virginia in 1984. On September 1, 1984, American
National Bankshares Inc. acquired all of the outstanding capital stock of
American National Bank and Trust Company, a national banking association
chartered in 1909 under the laws of the United States. American
National Bank and Trust Company is the only banking subsidiary of American
National Bankshares Inc. In April 2006, AMNB Statutory Trust I, a
Delaware statutory trust (the “Trust”) and a wholly owned subsidiary of American
National Bankshares Inc., 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”). In April 2006, the Company
finalized the acquisition of Community First and acquired 100% of its preferred
and common stock through a merger transaction. Community First was a
bank holding company headquartered in Lynchburg, Virginia, and through its
subsidiary, Community First Bank, operated four banking offices serving the city
of Lynchburg and Bedford, Nelson, and Amherst Counties. The Company
entered into the merger agreement with Community First because it believed the
merger to be consistent with its expansion strategy to target entry into strong
markets that logically extend its existing footprint. The Company had
previously opened a full service banking office in the Lynchburg area and was
considering opening additional offices in that area.
The
operations of the Company are conducted at twenty banking offices and one loan
production office serving Southern and Central Virginia and the northern portion
of Central North Carolina. American National Bank and Trust Company
provides a full array of financial products and services, including commercial,
mortgage, and consumer banking; trust and investment services; and
insurance. Services are also provided through twenty-four ATMs,
“AmeriLink” Internet banking, and 24-hour “Access American” telephone
banking.
Competition and
Markets
Vigorous competition exists in the
Company’s service area. The Company competes not only with national,
regional, and community banks, but also with many other types of financial
institutions, including without limitation, savings banks, finance companies,
mutual and money market fund providers, brokerage firms, insurance companies,
credit unions, and mortgage companies. The Company has the largest
deposit market share in the City of Danville, as well as in the City of Danville
and Pittsylvania County, combined.
The
Southern Virginia market, in which the Company has a significant presence, is
under economic pressure. The region’s economic base has historically been
weighted toward the manufacturing sector. Increased global
competition has negatively impacted the textile industry and several
manufacturers have closed plants due to competitive pressures or the relocation
of some operations to foreign countries. Other important industries
include farming, tobacco processing and sales, food processing, furniture
manufacturing and sales, specialty glass manufacturing, and packaging tape
production. Companies within these industries, especially furniture
manufacturing, have also closed plants for reasons similar to those noted
above. Additional declines in manufacturing production and
unemployment could negatively impact the ability of certain borrowers to repay
loans. Also, the current economic and credit crisis, which is
resulting in rising unemployment and increasing bankruptcies, foreclosures and
bank failures nationally, may further intensify the economic pressure in
our markets.
Supervision and
Regulation
The Company is extensively regulated
under both federal and state law. The following information describes
certain aspects of that regulation applicable to the Company and does not
purport to be complete. Proposals to change the laws and regulations
governing the banking industry are frequently raised in Congress, in state
legislatures, and before the various bank regulatory agencies. The
likelihood and timing of any changes and the impact such changes might have on
the Company are impossible to determine with any certainty. A change
in applicable laws or regulations, or a change in the way such laws or
regulations are interpreted by regulatory agencies or courts, may have a
material impact on the business, operations, and earnings of the
Company.
American
National Bankshares Inc.
American National Bankshares Inc. is
qualified as a bank holding company (“BHC”) within the meaning of the Bank
Holding Company Act of 1956, as amended (the “BHC Act”), and is registered as
such with the Board of Governors of the Federal Reserve System (the
“FRB”). As a bank holding company, American National Bankshares Inc.
is required to file various reports and additional information with the FRB and
is also subject to examinations by the FRB.
The BHC Act prohibits, with certain
exceptions, a BHC from acquiring beneficial ownership or control of more than 5%
of the voting shares of any company, including a bank, without the FRB’s prior
approval and from engaging in any activity other than those of banking, managing
or controlling banks or other subsidiaries authorized under the BHC Act, or
furnishing services to or performing services for its
subsidiaries. Among the permitted activities is the ownership of
shares of any company the activities of which the FRB determines to be so
closely related to banking or managing or controlling banks as to be proper
incident thereto.
Under FRB policy, a BHC is expected to
serve as a source of financial and managerial strength to its subsidiary banks
and to commit resources to support those banks. This support may be
required at times when the BHC may not have the resources to provide
it. Under this policy, a BHC is expected to stand ready to use
available resources to provide adequate capital funds to its subsidiary banks
during periods of financial adversity and to maintain the financial flexibility
and capital-raising capacity to obtain additional resources for assisting its
subsidiary banks.
Under the Gramm-Leach-Bliley Act, a BHC
may elect to become a financial holding company and thereby engage in a broader
range of financial and other activities than are permissible for traditional
BHC’s. In order to qualify for the election, all of the depository
institution subsidiaries of the BHC must be well capitalized, well managed, and
have achieved a rating of “satisfactory” or better under the Community
Reinvestment Act (the “CRA”). Financial holding companies are
permitted to engage in activities that are “financial in nature” or incidental
or complementary thereto as determined by the FRB. The
Gramm-Leach-Bliley Act identifies several activities as “financial in nature,”
including insurance underwriting and sales, investment advisory services,
merchant banking and underwriting, and dealing or making a market in
securities. American National Bankshares Inc. has not elected to
become a financial holding company.
American
National Bank and Trust Company
American National Bank and Trust
Company is a federally chartered national bank and is a member of the Federal
Reserve System. It is subject to federal regulation by the Office of
the Comptroller of the Currency (the “OCC”), the FRB, and the Federal Deposit
Insurance Corporation (“FDIC”).
Depository institutions, including
American National Bank and Trust Company, are subject to extensive federal and
state regulations that significantly affect their business and
activities. Regulatory bodies have broad authority to implement
standards and initiate proceedings designed to prohibit deposit institutions
from engaging in unsafe and unsound banking practices. The standards
relate generally to operations and management, asset quality, interest rate
exposure, and capital. The agencies are authorized to take action
against institutions that fail to meet such standards.
As with other financial institutions,
the earnings of American National Bank and Trust Company are affected by general
economic conditions and by the monetary policies of the FRB. The FRB
exerts a substantial influence on interest rates and credit conditions,
primarily through open market operations in U.S. Government securities, setting
the reserve requirements of member banks, and establishing the discount rate on
member bank borrowings. The policies of the FRB have a direct impact
on loan and deposit growth and the interest rates charged and paid
thereon. They also impact the source and cost of funds and the rates
of return on investments. Changes in the FRB’s monetary policies have
had a significant impact on the operating results of American National Bank and
Trust Company and other financial institutions and are expected to continue to
do so in the future; however, the exact impact of such conditions and policies
upon the future business and earnings cannot accurately be
predicted.
Dividend
Restrictions and Capital Requirements
For
information regarding the limitation on bank dividends and risk-based capital
requirements, refer to Note 18 of the consolidated financial
statements. Additional information may be found in the Shareholder’s
Equity section of Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
FDIC
Insurance
American National Bank and Trust
Company’s deposits are currently insured up to the following amounts per insured
depositor by the Deposit Insurance Fund of the FDIC:
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·
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$250,000
for accounts other than retirement accounts and noninterest-bearing
transaction accounts;
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·
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$250,000
for retirement accounts; and
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·
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Unlimited
coverage for noninterest-bearing transaction accounts, which applies to
deposits in institutions such as American National Bank and Trust Company
that are participating in the FDIC’s Temporary Liquidity Guarantee
Program. For FDIC coverage purposes, interest-bearing checking
accounts with an interest rate of 0.50% or less are included in the
definition of noninterest-bearing transaction
accounts.
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Effective January 1, 2010, the standard
FDIC coverage limit per depositor will return to the prior amount of $100,000
for all deposit categories except for retirement accounts, which will continue
to be insured up to $250,000 per insured depositor.
On October 14, 2008, the FDIC announced
the Temporary Liquidity Guarantee Program (“TLG Program”) to strengthen
confidence and encourage liquidity in the banking system. The TLG
Program consists of two components: a temporary guarantee of newly-issued senior
unsecured debt the (“Debt Guarantee Program”) and a temporary unlimited
guarantee of funds in noninterest-bearing transaction accounts at FDIC-insured
institutions the (“Transaction Account Guarantee Program”). The
Company is participating in the Transaction Account Guarantee Program but is not
participating in the Debt Guarantee Program where it has the option of issuing
certain non-guaranteed senior unsecured debt.
Under federal law, deposits and certain
claims for administrative expenses and employee compensation against insured
depository institutions are afforded a priority over other general unsecured
claims against such an institution, including federal funds and letters of
credit, in the liquidation or other resolution of such an institution by any
receiver appointed by regulatory authorities. Such priority creditors
would include the FDIC.
Under the
risk-based deposit premium assessment system of the FDIC, the assessment rates
for an insured depository institution vary according to the level of risk
incurred in its activities. To arrive at an assessment rate for a
banking institution, the FDIC places it in one of four risk categories (referred
to as Risk Categories I, II, III and IV) determined by reference to its capital
levels and supervisory ratings. The assessment rates in 2008 ranged,
on an annual basis, from 5 to 43 basis points, depending on the insured
institution’s risk category as described above. Commencing in 2009,
assessment rates increased by 7 basis points in each risk category for the first
quarter of 2009. Further, for institutions such as American National
Bank and Trust Company that have elected to provide unlimited FDIC coverage for
noninterest-bearing transaction accounts, an additional assessment at the annual
rate of 10 basis points is due in 2009 for the amount of balances in
non-interest bearing transaction accounts that exceed the existing coverage
limit of $250,000 for deposit accounts other than retirement accounts and
noninterest-bearing transaction accounts.
Under a
revised assessment schedule effective April 1, 2009, The FDIC has set new
initial base assessment rates that range, on an annual basis, from 12 to 45
basis points per $100 of assessable deposits, depending on the insured
institution’s risk category as described above. These initial base
assessment rates are subject to possible adjustments, including (1) for all risk
categories, a potential increase for unsecured liabilities and potential
decrease for long-term unsecured debt and (2) for all risk categories, other
than Risk Category I, a potential increase for brokered deposits.
In February 2009, The FDIC proposed
that an emergency special assessment up to 20 basis points per $100 of deposits
be collected from all insured institutions in September 2009 and further
proposed that additional special assessments of up to 10 basis points each be
collected as considered necessary thereafter to maintain public confidence in
federal deposit insurance.
The level of FDIC insurance premium
assessments in 2007 and 2008 for American National Bank and Trust Company was
reduced by a cumulative total of $499,000 though application of a one-time
premium assessment credit that resulted from the provisions of the Federal
Deposit Insurance Reform Act of 2005.
The
Federal Deposit Insurance Corporation Improvement Act
Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 (“FDICIA”), the federal banking agencies
possess broad powers to take prompt corrective action to resolve problems of
insured depository institutions. The extent of these powers depends
upon whether the institution is “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” or “critically
undercapitalized,” as defined by the law. Under regulations
established by the federal banking agencies a “well capitalized” institution
must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at
least 10%, and a leverage ratio of at least 5%, and not be subject to a capital
directive order. An “adequately capitalized” institution must have a
Tier 1 capital ratio of a least 4%, a total capital ratio of at least 8%, and a
leverage ratio of at least 4%, or 3% in some cases. Management
believes, as of December 31, 2008 and 2007, that the Company met the
requirements for being classified as “well capitalized.”
As required by FDICIA, the federal
banking agencies also have adopted guidelines prescribing safety and soundness
standards relating to, among other things, internal controls and information
systems, internal audit systems, loan documentation, credit underwriting, and
interest rate exposure. In general, the guidelines require
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. In addition, the agencies adopted
regulations that authorize, but do not require, an institution which has been
notified that it is not in compliance with safety and soundness standard to
submit a compliance plan. If, after being so notified, an institution
fails to submit an acceptable compliance plan, the agency must issue an order
directing action to correct the deficiency and may issue an order directing
other actions of the types to which an undercapitalized institution is subject
under the prompt corrective action provisions described above.
Community
Reinvestment and Consumer Protection Laws
In
connection with its lending activities, the Company is subject to a number of
federal laws designed to protect borrowers and promote lending to various
sectors of the economy and population. These include the Equal Credit
Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the
Real Estate Settlement Procedures Act, and the Community Reinvestment
Act.
The CRA requires
the appropriate federal banking agency, in connection with its examination of a
bank, to assess the bank’s record in meeting the credit needs of the communities
served by the bank, including low and moderate income
neighborhoods. Furthermore, such assessment is also required of banks
that have applied, among other things, to merge or consolidate with or acquire
the assets or assume the liabilities of an insured depository institution, or to
open or relocate a branch. In the case of a BHC applying for approval
to acquire a bank or BHC, the record of each subsidiary bank of the applicant
BHC is subject to assessment in considering the application. Under
the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,”
“needs to improve,” or “substantial non-compliance.” The Company was
rated “outstanding” in its most recent CRA evaluation.
Anti-Money
Laundering Legislation
The
Company is subject to the Bank Secrecy Act and other anti-money laundering laws
and regulations, including the USA Patriot Act of 2001. Among other
things, these laws and regulations require the Company to take steps to prevent
the use of the Company for facilitating the flow of illegal or illicit money, to
report large currency transactions, and to file suspicious activity
reports. The Company is also required to carry out a comprehensive
anti-money laundering compliance program. Violations can result in
substantial civil and criminal sanctions. In addition, provisions of
the USA Patriot Act require the federal financial institution regulatory
agencies to consider the effectiveness of a financial institution’s anti-money
laundering activities when reviewing bank mergers and BHC
acquisitions.
Emergency
Economic Stabilization Act of 2008
In
accordance with its stated purpose of restoring liquidity and stability to the
financial system of the United States, the Emergency Economic Stabilization Act
of 2008 established the Troubled Asset Relief Program (“TARP”), under which the
United States Department of the Treasury (“UST”) is authorized to purchase
preferred stock from qualified financial institutions. The Company
meets the requirements to be considered a qualified financial
institution. Under TARP, for organizations like the Company, the
federal government’s purchase limitation is generally defined as 3% of
risk-weighted assets, or about $18 million for the Company. The terms
of the preferred stock generally provide that:
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·
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Cumulative
dividends will be paid at a rate of 5% for the first five years and 9%
thereafter;
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·
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Any
increase in the dividend rate paid on common stock during the first three
years will require the consent of the
UST;
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·
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Any
repurchase of common stock will require the consent of the
UST;
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·
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Conditions
and limitations will be placed on executive compensation;
and
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·
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UST
will receive warrants, with a term of 10 years, to purchase a number of
shares of common stock having an aggregate market price equal to 15% of
the preferred stock amount on the day of
investment.
|
After
considering the appropriateness of applying under UST’s capital purchase
program, the Company has elected not to participate. The Company
believes it has sufficient capital to meet the growth plans and credit needs of
the communities it serves without government support.
Employees
At December 31, 2008, the Company
employed 258 full-time equivalent persons. The relationship with
employees is considered to be good.
Internet Access to Company
Documents
The Company provides access to its
Securities and Exchange Commission (the “SEC”) filings through a link on the
Investor Relations page of the Company’s website 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.
Executive Officers of the
Registrant
The
following lists, as of December 31, 2008, the named executive officers of the
registrant, their ages, and their positions.
Name Age Position
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Charles
H. Majors
|
63
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President
and Chief Executive Officer of the
Company.
|
|
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Neal
A. Petrovich *
|
46
|
Senior
Vice President, Chief Financial Officer, Treasurer and Secretary of
American National Bankshares Inc.; Executive Vice President, Chief
Financial Officer, and Cashier of American National Bank and Trust Company
since November 2005; prior thereto, Senior Vice President, Chief Financial
Officer and Cashier of American National Bank and Trust Company since May
2004; prior thereto, Senior Vice President of SouthTrust
Bank.
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|
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Jeffrey
V. Haley
|
48
|
Senior
Vice President of American National Bankshares Inc.; President of Trust
and Financial Services and Executive Vice President of American National
Bank and Trust Company since July 2008; prior thereto, Executive Vice
President and Chief Operating Officer of American National Bank and Trust
Company since November 2005; prior thereto, Senior Vice President and
Chief Administrative Officer of American National Bank and Trust
Company.
|
|
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R.
Helm Dobbins
|
57
|
Senior
Vice President of American National Bankshares Inc.; Executive Vice
President and Chief Credit Officer of American National Bank and Trust
Company since November 2005; prior thereto, Senior Vice President and
Chief Credit Officer of American National Bank and Trust Company since
June 2003; Executive Vice President and Chief Credit Officer of Citizens
Bank and Trust Co. from 1998 to
2003.
|
|
|
S.
Cabell Dudley, Jr.
|
63
|
Senior
Vice President of American National Bankshares Inc. since December 2008;
Executive Vice President and Chief Lending Officer of American National
Bank and Trust Company since July 2008; prior thereto Senior Vice
President and Commercial Relationship Manager since March 2006, prior
thereto Senior Vice President of Wachovia
Bank.
|
|
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Dabney
T. P. Gilliam, Jr.
|
54
|
Senior
Vice President of American National Bankshares Inc. since December 2008;
Executive Vice President and Chief Administration Officer of American
National Bank and Trust Company since July 2008; prior thereto Senior Vice
President of American National Bank and Trust Company since February
2007; prior thereto Chief Financial Officer of RACO, Inc. from
January 2006 to February 2007; prior thereto Senior Vice President, Senior
Loan Officer and Chief Banking Officer of American National Bank and Trust
Company.
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|
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*
Mr. Petrovich resigned from the Company in February
2009.
|
ITEM 1A – RISK FACTORS
The
Company’s business is subject to interest rate risk and variations in interest
rates may negatively affect financial performance.
Changes
in the interest rate environment may reduce the Company’s profits. It
is expected that the Company will continue to realize income from the
differential or “spread” between the interest earned on loans, securities, and
other interest earning assets, and interest paid on deposits, borrowings and
other interest bearing liabilities. Net interest spreads are affected
by the difference between the maturities and repricing characteristics of
interest earning assets and interest bearing liabilities. In
addition, loan volume and yields are affected by market interest rates on loans,
and rising interest rates generally are associated with a lower volume of loan
originations. Management cannot ensure that it can minimize the
Company’s interest rate risk. While an increase in the general level
of interest rates may increase the loan yield and the net interest margin, it
may adversely affect the ability of certain borrowers with variable rate loans
to pay the interest and principal of their obligations. Accordingly,
changes in levels of market interest rates could materially and adversely affect
the net interest spread, asset quality, loan origination volume, and overall
profitability of the Company.
The
Company faces strong competition from financial services companies and other
companies that offer banking services which could negatively affect the
Company’s business.
Increased
competition may result in reduced business for the
Company. Ultimately, the Company may not be able to compete
successfully against current and future competitors. Many competitors offer the
same banking services that the Company offers in its service
area. These competitors include national, regional, and community
banks. The Company also faces competition from many other types of
financial institutions, including without limitation, savings banks, finance
companies, mutual and money market fund providers, brokerage firms, insurance
companies, credit unions, and mortgage companies. In particular,
competitors include several major financial companies whose greater resources
may afford them a marketplace advantage by enabling them to maintain numerous
banking locations and ATMs and conduct extensive promotional and
advertising campaigns.
Additionally,
banks and other financial institutions with larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have larger lending
limits and are thereby able to serve the credit needs of larger customers. Areas
of competition include interest rates for loans and deposits, efforts to obtain
loans and deposits, and range and quality of products and services provided,
including new technology-driven products and services. Technological
innovation continues to contribute to greater competition in domestic and
international financial services markets as technological advances enable more
companies to provide financial services. If the Company is unable to
attract and retain banking customers, it may be unable to continue to grow loan
and deposit portfolios and its results of operations and financial condition may
otherwise be adversely affected.
Changes
in economic conditions could materially and negatively affect the Company’s
business.
The
Company’s business is directly impacted by factors such as economic, political,
and market conditions, broad trends in industry and finance, legislative and
regulatory changes, changes in government monetary and fiscal policies, and
inflation, all of which are beyond the Company’s control. A
deterioration in economic conditions, whether caused by national or local
concerns, especially within the Company’s market area, could result in the
following consequences, any of which could hurt business materially: loan
delinquencies may increase; problem assets and foreclosures may increase; demand
for products and services may decrease; low cost or noninterest bearing deposits
may decrease; and collateral for loans, especially real estate, may decline in
value, in turn reducing customers’ borrowing power, and reducing the value of
assets and collateral associated with existing loans.
Trust and
Investment Services fee revenue is largely dependent on the fair market value of
assets under care and on trading volumes in the brokerage business. General
economic conditions and their subsequent effect on the securities markets tend
to act in correlation. When general economic conditions deteriorate,
consumer and corporate confidence in securities markets erodes, and Trust and
Investment Service revenues are negatively impacted as asset values and trading
volumes decrease.
A
downturn in the real estate market could materially and negatively affect the
Company’s business.
A
downturn in the real estate market could negatively affect the Company’s
business because significant portions of its loans are secured by real estate
(approximately 81% as of December 31, 2008). The ability to recover on defaulted
loans by selling the real estate collateral could then be diminished and the
Company would be more likely to suffer losses on defaulted loans.
Substantially
all of the Company’s real property collateral is located in its market
area. If there is a significant decline in real estate values,
especially in our market area, the collateral for loans would provide
significantly less security. Real estate values could be affected by,
among other things, an economic slowdown and an increase in interest
rates.
The
Company is dependent on key personnel and the loss of one or more of those key
personnel may materially and adversely affect the Company’s
prospects.
The
Company currently depends heavily on the services of a number of key management
personnel. The loss of key personnel could materially and adversely
affect the results of operations and financial condition. The
Company’s success also depends in part on the ability to attract and retain
additional qualified management personnel. Competition for such
personnel is strong in the banking industry and the Company may not be
successful in attracting or retaining the personnel it requires.
The
Company is subject to extensive regulation which could adversely affect its
business.
The
Company’s operations are subject to extensive regulation by federal, state, and
local governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of the Company’s operations. Because the Company’s business is highly
regulated, the laws, rules, and regulations applicable to it are subject to
regular change. There are currently proposed laws, rules, and regulations that,
if adopted, would impact the Company’s operations. There can be no assurance
that these proposed laws, rules, and regulations, or any other laws, rules, or
regulations, will not be adopted in the future, which could (i) make
compliance much more difficult and expensive, (ii) restrict the ability to
originate, broker or sell loans, or accept certain deposits, (iii) further
limit or restrict the amount of commissions, interest, or other charges earned
on loans originated by the Company, or (iv) otherwise adversely affect the
Company’s business or prospects for business.
The
primary source of the Company’s income from which it pays dividends is the
receipt of dividends from its subsidiary bank.
The
availability of dividends from the Company is limited by various statutes and
regulations. It is possible, depending upon the financial condition
of the subsidiary bank and other factors, that the Office of the Comptroller of
the Currency could assert that payment of dividends or other payments is an
unsafe or unsound practice. In the event American National Bank and
Trust Company was unable to pay dividends to American National Bankshares Inc.,
the holding company would likely have to reduce or stop paying common stock
dividends. The Company’s failure to pay dividends on its common stock
could have a material adverse effect on the market price of the common
stock.
A
limited trading market exists for the Company’s common stock which could lead to
price volatility.
The
Company’s common stock is approved for quotation on the NASDAQ Global Select
Market, but the trading volume has generally been modest. The limited trading
market for the common stock may cause fluctuations in the stock’s market value
to be exaggerated, leading to price volatility in excess of that which would
occur in a more active trading market. In addition, even if a more
active market in the Company’s common stock develops, management cannot ensure
that such a market will continue or that shareholders will be able to sell their
shares.
The
allowance for loan losses may not be adequate to cover actual
losses.
In
accordance with accounting principles generally accepted in the United States,
an allowance for loan losses is maintained to provide for loan
losses. The allowance for loan losses may not be adequate to cover
actual credit losses, and future provisions for credit losses could materially
and adversely affect operating results. The allowance for loan losses
is based on prior experience, as well as an evaluation of the risks in the
current portfolio. The amount of future losses is susceptible to
changes in economic, operating, and other conditions, including changes in
interest rates, all of which are beyond the Company’s control; and these losses
may exceed current estimates. Federal regulatory agencies, as an
integral part of their examination process, review the Company’s loans and
allowance for loan losses. While management believes that the
allowance for loan losses is adequate to cover current losses, it cannot make
assurances that it will not further increase the allowance for loan losses or
that regulators will not require it to increase this
allowance. Either of these occurrences could adversely affect
earnings.
The
allowance for loan losses requires management to make significant estimates that
affect the financial statements. Due to the inherent nature of this estimate,
management cannot provide assurance that it will not significantly increase the
allowance for loan losses which could materially and adversely affect
earnings.
The
Company is exposed to operational risk.
The
Company is exposed to many types of operational risks, including reputation,
legal, and compliance risk, the risk of fraud or theft by employees or
outsiders, unauthorized transactions by employees or operational errors,
clerical or record-keeping errors, and errors resulting from faulty or disabled
computer or telecommunications systems.
Negative
public opinion can result from the actual or alleged conduct in any number of
activities, including lending practices, corporate governance, and acquisitions,
and from actions taken by government regulators and community organizations in
response to those activities. Negative public opinion can adversely
affect the Company’s ability to attract and retain customers and can expose it
to litigation and regulatory action.
Certain
errors may be repeated or compounded before they are discovered and successfully
rectified. The Company’s necessary dependence upon automated systems to record
and process its transactions may further increase the risk that technical system
flaws or employee tampering or manipulation of those systems will result in
losses that are difficult to detect. The Company may also be subject
to disruptions of its operating systems arising from events that are wholly or
partially beyond its control (for example, computer viruses or electrical or
telecommunications outages), which may give rise to disruption of service to
customers and to financial loss or liability. The Company is further exposed to
the risk that its external vendors may be unable to fulfill their contractual
obligations (or will be subject to the same risk of fraud or operational errors
by their respective employees as is the Company) and to the risk that the
Company’s (or its vendors’) business continuity and data security systems prove
to be inadequate.
Changes
in accounting standards could impact reported earnings.
From time
to time there are changes in the financial accounting and reporting standards
that govern the preparation of the Company’s financial
statements. These changes can materially impact how the Company
records and reports its financial condition and results of
operations. In some instances, the Company could be required to apply
a new or revised standard retroactively, resulting in the restatement of prior
period financial statements.
The
Company’s information systems may experience an interruption or breach in
security.
The
Company relies heavily on communications and information systems to conduct
business. Any failure, interruption, or breach in security of these
systems could result in failures or disruptions in the Company’s relationship
management, general ledger, deposit, loan, and other systems. While
the Company has policies and procedures designed to prevent or limit the effect
of such failure, interruption, or security breach, there can be no assurance
that they will not occur or, if they do occur, that they will be adequately
addressed. Any such occurrences could damage the Company’s
reputation, result in a loss of customer business, subject the Company to
additional regulatory scrutiny, or expose the company to civil litigation and
possible financial liability, any of which could have a material adverse affect
on the Company’s financial condition and results of operations.
Recent
Negative Developments in the Financial Industry and Credit Markets May Adversely
Affect the Company’s Operations and Results.
Negative
developments in the latter half of 2007 and during 2008 in the credit and
securitization markets have resulted in uncertainty in the financial markets in
general with the expectation of the general economic downturn continuing into
2009. Loan portfolio quality has deteriorated at many institutions,
and the Company also has experienced some deterioration. In addition,
the value of real estate collateral supporting many home mortgages, including
mortgages held by the Company, has declined and may continue to
decline. Bank and bank holding company stock prices have been
negatively affected, as has the ability of banks and bank holding companies to
raise capital or borrow in the debt markets. As a result, the
potential exists for new federal or state laws and regulations regarding lending
and funding practices and liquidity standards, and bank regulatory agencies are
expected to be active in responding to concerns and trends identified in
examinations. Negative developments in the financial industry and
credit markets, and the impact of new legislation in response to those
developments, may negatively impact the Company’s operations by restricting its
business operations, including its ability to originate or sell loans, and
adversely impact its financial performance. In addition, these risks
could affect the value of the Company’s loan portfolio as well as the value of
its investment portfolio, which would also negatively affect its financial
performance.
As of
December 31, 2008, the Company maintained twenty banking offices located in
Danville, Pittsylvania County, Martinsville, Henry County, Halifax County,
Lynchburg, Bedford County, Campbell County, and Nelson County in Virginia and
Caswell County in North Carolina. The Company also operates a loan
production office in Greensboro, North Carolina.
The
principal executive offices of the Company are located at 628 Main Street in the
business district of Danville, Virginia. This building, owned by the
Company, was originally constructed in 1973 and has three floors totaling
approximately 27,000 square feet.
The
Company owns a building located at 103 Tower Drive in Danville,
Virginia. This three-story facility serves as a retail banking office
and houses certain of the Company’s finance, administrative, and operations
staff.
The
Company owns an office building on 203 Ridge Street, Danville, Virginia, which
is leased to Bankers Insurance, LLC. The Company has a minority
ownership interest in Bankers Insurance, LLC.
The
Company purchased an office building in 2008 at 445 Mount Cross Road in
Danville, Virginia where it consolidated two banking offices in January 2009 and
gained additional administrative space.
The
Company owns eleven other retail office locations for a total of fifteen owned
buildings. There are no mortgages or liens against any of the
properties owned by the Company. The Company operates twenty-four
Automated Teller Machines (“ATMs”) on owned or leased facilities. The
Company leases seven of the retail office locations and a storage
warehouse.
There are no material pending legal
proceedings to which the Company is a party or to which the property of the
Company is subject.
No matters were submitted during the
fourth quarter of the fiscal year covered by this report to a vote of security
holders of the Company through a solicitation of proxies or
otherwise.
The Company’s common stock is traded on
the NASDAQ Global Select Market under the symbol “AMNB.” At December
31, 2008, the Company had 1,662 shareholders of record. The following
table presents the high and low closing sales prices for the Company’s common
stock and dividends declared for the past two years.
|
Market Price of the Company’s Common
Stock
|
||||||||||||
|
Closing
Price
|
Dividends
|
|||||||||||
|
2008
|
High
|
Low
|
Per Share
|
|||||||||
|
4th
quarter
|
$ | 18.25 | $ | 14.01 | $ | 0.23 | ||||||
|
3rd
quarter
|
18.20 | 15.80 | 0.23 | |||||||||
|
2nd
quarter
|
22.00 | 17.45 | 0.23 | |||||||||
|
1st
quarter
|
22.64 | 18.65 | 0.23 | |||||||||
| $ | 0.92 | |||||||||||
|
Closing
Price
|
Dividends
|
|||||||||||
|
2007
|
High
|
Low
|
Per Share
|
|||||||||
|
4th
quarter
|
$ | 22.76 | $ | 19.40 | $ | 0.23 | ||||||
|
3rd
quarter
|
22.96 | 20.50 | 0.23 | |||||||||
|
2nd
quarter
|
23.08 | 22.15 | 0.23 | |||||||||
|
1st
quarter
|
23.68 | 22.02 | 0.22 | |||||||||
| $ | 0.91 | |||||||||||
The table
below presents share repurchase activity during the quarter ended December 31,
2008.
|
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
|
|||||||||||||
|
October
1-31, 2008
|
4,500 | $ | 16.03 | 4,500 | 92,350 | |||||||||||
|
November
1-30, 2008
|
1,100 | 17.07 | 1,100 | 91,250 | ||||||||||||
|
December
1-31, 2008
|
1,500 | 17.05 | 1,500 | 89,750 | ||||||||||||
| 7,100 | $ | 16.40 | 7,100 | |||||||||||||
Stock Compensation
Plans
The
Company maintains the 2008 Stock Incentive Plan (“2008 Plan”), which is designed
to attract and retain qualified personnel in key positions, provide employees
with a proprietary interest in the Company as an incentive to contribute to the
success of the Company, and reward employees for outstanding performance and the
attainment of targeted goals. The 2008 Plan was adopted by the Board
of Directors of the Company on February 19, 2008 and approved by the
stockholders on April 22, 2008 at the Company’s 2008 Annual
Meeting. The 2008 Plan provides for the granting of restricted stock
awards and incentive and non-statutory options to employees and directors on a
periodic basis, at the discretion of the Board or a Board designated
committee. The 2008 Plan authorized the issuance of up to 500,000
shares of common stock. The 2008 Plan replaced the Company’s stock option plan
that was approved by the shareholders at the 1997 Annual Meeting, which plan
terminated in 2006 (the “1997 Option Plan”).
The 2008
Plan is administered by a Committee of the Board of Directors of the Company
comprised of independent directors. Under the 2008 Plan, the
Committee determines which employees will be granted restricted stock awards and
options, whether such options will be incentive or non-statutory options, the
number of shares subject to each option, whether such options may be exercised
by delivering other shares of common stock, and when such options become
exercisable. In general, the per share exercise price of an incentive
stock option must be at least equal to the fair market value of a share of
common stock on the date the option is granted. Restricted stock
would be granted under terms and conditions established by the
Committee.
Stock
options become vested and exercisable in the manner specified by the
Committee. Each stock option or portion thereof shall be exercisable
at any time on or after it vests and is exercisable until ten years after its
date of grant. As of December 31, 2008, 159,610 shares remain
exercisable under the 1997 Option Plan and 14,750 shares are exercisable under
the 2008 Plan. There were 59,000 stock options awarded in
2008. All options granted in 2008 had multi-year vesting schedules to
enhance employee retention.
|
December 31, 2008
|
||||||||||||
|
Number
of Shares
to
be Issued Upon Exercise
of
Outstanding Options
|
Weighted-Average
Per Share Exercise Price of Outstanding Options
|
Number
of Shares Remaining Available
for
Future
Issuance
Under
Stock Compensation Plans
|
||||||||||
|
Equity
compensation plans approved
by shareholders
|
218,610 | $ | 20.31 | 441,000 | ||||||||
|
Equity
compensation plans not approved by shareholders
|
- | - | - | |||||||||
|
Total
|
218,610 | $ | 20.31 | 441,000 | ||||||||
Comparative Stock
Performance
The
following graph compares the Company’s cumulative total return to its
shareholders with the returns of two indexes for the five-year period ended
December 31, 2008. The cumulative total return was calculated taking
into consideration changes in stock price, cash dividends, stock dividends, and
stock splits since December 31, 2003. The indexes are the NASDAQ
Composite Index; the SNL Bank $500 Million-$1Billlion Index, which includes bank
holding companies with assets of $500 million to $1 billion and is published by
SNL Financial, LC.
American
National Bankshares Inc.
| Period Ending | ||||||||||||||||||||||||
|
Index
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
||||||||||||||||||
|
American
National Bankshares Inc.
|
100.00 | 95.98 | 95.46 | 99.37 | 88.72 | 79.51 | ||||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 108.59 | 110.08 | 120.56 | 132.39 | 78.72 | ||||||||||||||||||
|
SNL
Bank $500M-$1B
|
100.00 | 113.32 | 118.18 | 134.41 | 107.71 | 69.02 | ||||||||||||||||||
The
following table sets forth selected financial data for the Company for the last
five years:
|
(in
thousands, except per share amounts and ratios)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Results
of Operations:
|
||||||||||||||||||||
|
Interest
income
|
$ | 42,872 | $ | 48,597 | $ | 45,070 | $ | 32,479 | $ | 30,120 | ||||||||||
|
Interest
expense
|
15,839 | 19,370 | 16,661 | 8,740 | 7,479 | |||||||||||||||
|
Net
interest income
|
27,033 | 29,227 | 28,409 | 23,739 | 22,641 | |||||||||||||||
|
Provision
for loan losses
|
1,620 | 403 | 58 | 465 | 3,095 | |||||||||||||||
|
Noninterest
income
|
7,913 | 8,822 | 8,458 | 7,896 | 6,510 | |||||||||||||||
|
Noninterest
expense
|
22,124 | 21,326 | 20,264 | 17,079 | 15,011 | |||||||||||||||
|
Income
before income tax provision
|
11,202 | 16,320 | 16,545 | 14,091 | 11,045 | |||||||||||||||
|
Income
tax provision
|
3,181 | 4,876 | 5,119 | 4,097 | 3,032 | |||||||||||||||
|
Net
income
|
$ | 8,021 | $ | 11,444 | $ | 11,426 | $ | 9,994 | $ | 8,013 | ||||||||||
|
Period-end
Balances:
|
||||||||||||||||||||
|
Securities
|
$ | 140,816 | $ | 157,149 | $ | 162,621 | $ | 165,629 | $ | 188,163 | ||||||||||
|
Loans,
net of unearned income
|
571,110 | 551,391 | 542,228 | 417,087 | 407,269 | |||||||||||||||
|
Deposits
|
589,138 | 581,221 | 608,528 | 491,651 | 485,272 | |||||||||||||||
|
Assets
|
789,184 | 772,288 | 777,720 | 623,503 | 619,065 | |||||||||||||||
|
Shareholders'
equity
|
102,300 | 101,511 | 94,992 | 73,419 | 71,000 | |||||||||||||||
|
Shareholders'
equity - tangible (a)
|
77,757 | 76,591 | 69,695 | 73,287 | 70,516 | |||||||||||||||
|
Per
Share Information:
|
||||||||||||||||||||
|
Earnings
- basic
|
$ | 1.32 | $ | 1.86 | $ | 1.91 | $ | 1.83 | $ | 1.43 | ||||||||||
|
Earnings
- diluted
|
1.31 | 1.86 | 1.90 | 1.81 | 1.42 | |||||||||||||||
|
Dividends
|
0.92 | 0.91 | 0.87 | 0.83 | 0.79 | |||||||||||||||
|
Book
value
|
16.81 | 16.59 | 15.42 | 13.49 | 12.86 | |||||||||||||||
|
Book
value - tangible (a)
|
12.78 | 12.52 | 11.31 | 13.47 | 12.77 | |||||||||||||||
|
Ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
1.02 | % | 1.48 | % | 1.51 | % | 1.61 | % | 1.26 | % | ||||||||||
|
Return
on average shareholders' equity
|
7.79 | 11.69 | 12.72 | 13.95 | 11.15 | |||||||||||||||
|
Return
on average tangible equity (b)
|
10.60 | 16.09 | 16.60 | 14.35 | 11.72 | |||||||||||||||
|
Net
interest margin - taxable equivalent
|
3.87 | 4.24 | 4.20 | 4.17 | 3.90 | |||||||||||||||
|
Average
shareholders' equity / average assets
|
13.10 | 12.65 | 11.85 | 11.57 | 11.34 | |||||||||||||||
|
Dividend
payout ratio
|
69.89 | 48.82 | 45.58 | 45.39 | 55.13 | |||||||||||||||
|
Net
charge-offs to average loans
|
0.21 | 0.05 | 0.10 | 0.56 | 0.10 | |||||||||||||||
|
Allowance
for loan losses to period-end loans
|
1.37 | 1.34 | 1.34 | 1.46 | 1.96 | |||||||||||||||
|
Nonperforming
assets to total assets
|
0.91 | 0.42 | 0.45 | 0.72 | 1.35 | |||||||||||||||
|
(a)
- Excludes goodwill and other intangible assets.
|
||||||||||||||||||||
|
(b)
- Excludes amortization expense, net of tax, of intangible
assets.
|
||||||||||||||||||||
The purpose of this discussion is to
focus on significant changes in the financial condition and results of
operations of the Company during the past three years. The discussion
and analysis are intended to supplement and highlight information contained in
the accompanying Consolidated Financial Statements and the selected financial
data presented elsewhere in this Annual Report on Form
10-K. Financial institutions acquired by the Company during the past
three years and accounted for as purchases are reflected in the financial
position and results of operations of the Company since the date of their
acquisition.
RECLASSIFICIATION
In certain circumstances,
reclassifications have been made to prior period information to conform to the
2008 presentation.
CRITICAL
ACCOUNTING POLICIES
The
accounting and reporting policies followed by the Company conform with U.S.
generally accepted accounting principles (“GAAP”) and they conform to general
practices within the banking industry. The Company’s critical
accounting policies, which are summarized below, relate to (1) the allowance for
loan losses and (2) goodwill impairment. A summary of the Company’s
significant accounting policies is set forth in Note 1 to the Consolidated
Financial Statements.
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 Lending 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.
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.
EXECUTIVE
OVERVIEW
American
National Bankshares Inc. is the holding company of American National Bank and
Trust Company, a community bank serving Southern and Central Virginia and the
northern portion of Central North Carolina with twenty banking offices and a
loan production office.
American
National Bank and Trust Company provides a full array of financial products and
services, including commercial, mortgage, and consumer banking; trust and
investment services; and insurance. Services are also provided
through twenty-four ATMs, “AmeriLink” Internet banking, and 24-hour “Access
American” telephone banking.
Additional
information is available on the Company’s website at www.amnb.com. The
shares of American National Bankshares Inc. are traded on the NASDAQ Global
Select Market under the symbol “AMNB.”
The
Company’s mission, vision, and guiding principles are as follows:
Mission
We
provide quality financial services with exceptional
customer service.
Vision
We will
enhance the value of our shareholders’ investment by being our communities’
preferred provider of relationship-based financial services.
Guiding
Principles
To
achieve our vision and carry out our mission, we:
|
·
|
operate
a sound, efficient, and highly profitable
company,
|
|
·
|
identify
and respond to our internal and external customers’ needs and expectations
in an ever changing financial services
environment,
|
|
·
|
provide
quality sales and quality service to our
customers,
|
|
·
|
produce
profitable growth,
|
|
·
|
provide
an attractive return for our
shareholders,
|
|
·
|
furnish
positive leadership for the well-being of all communities we
serve,
|
|
·
|
continuously
develop a challenging and rewarding work environment for our employees,
and
|
|
·
|
conduct
our work with integrity and
professionalism.
|
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. Fluctuations in interest rates as
well as volume and mix changes in earning assets and interest bearing
liabilities can materially impact net interest income. The following
discussion of net interest income is presented on a taxable equivalent basis to
facilitate performance comparisons among various taxable and tax-exempt assets,
such as certain state and municipal securities. A tax rate of 35% was
used in adjusting interest on tax-exempt assets to a fully taxable equivalent
basis. Net interest income divided by average earning assets is
referred to as the net interest margin. The net interest spread represents the
difference between the average rate earned on earning assets and the average
rate paid on interest bearing liabilities.
Net
interest income decreased $2,226,000, or 7.4% from 2007 to 2008, following a
$757,000, or 2.6% increase in 2007 from 2006 levels. The decrease in
2008 was primarily due to an 8.7% decline in the net interest margin from 4.24%
in 2007 to 3.87% in 2008, the effect of which was partially offset by a 1.6%
increase in the level of average interest earning assets. The
increase in 2007 was primarily due to balance sheet growth including the
acquisition of Community First Financial Corporation in April
2006. Additionally, purchase accounting adjustments from the
Community First acquisition had a positive impact on net interest income in
2007. Payoffs of acquired loans accounted for under American
Institute of Certified Public Accountants Statement of Position 03-3 resulted in
$571,000 of interest income in 2007. Interest income related to the
valuation of other loans acquired from Community First was $536,000 in 2008 and
2007. Similarly, interest expense related to the valuation of
acquired deposits was $0 and $88,000 in 2008 and 2007,
respectively. The net interest margin decreased from 4.24% in 2007 to
3.87% in 2008, after increasing from 4.20% in 2006, due primarily to the fact
that loans, the largest component of earning assets, reprice at a much faster
pace than deposits in interest bearing liabilities. During 2008, the
Federal Open Market Committee of the Federal Reserve Board reduced the intended
federal funds rate seven times from 4.25% to 0.25%. This had a
dramatic effect on the Company’s net interest margin.
To meet
its funding needs for the Community First acquisition, the Company issued
$20,619,000 of Trust Preferred Securities during the second quarter of
2006. Interest expense associated with these securities was
$1,373,000 for 2008 and 2007 and $1,007,000 for 2006.
The
following presentation is an analysis of net interest income and related yields
and rates, on a taxable equivalent basis, for the years 2006 through
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.
|
Table
1 - Net Interest Income Analysis
|
||||||||||||||||||||||||||||||||||||
|
(in
thousands, except yields and rates)
|
||||||||||||||||||||||||||||||||||||
|
Average
Balance
|
Interest
Income/Expense
|
Average
Yield/Rate
|
||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||||||
|
Commercial
|
$ | 91,117 | $ | 89,673 | $ | 84,676 | $ | 5,515 | $ | 6,980 | $ | 6,481 | 6.05 | % | 7.78 | % | 7.65 | % | ||||||||||||||||||
|
Real
Estate
|
467,508 | 449,683 | 416,530 | 29,712 | 33,621 | 29,813 | 6.36 | 7.48 | 7.16 | |||||||||||||||||||||||||||
|
Consumer
|
8,774 | 10,420 | 12,287 | 795 | 975 | 1,152 | 9.06 | 9.36 | 9.38 | |||||||||||||||||||||||||||
|
Total
loans
|
567,399 | 549,776 | 513,493 | 36,022 | 41,576 | 37,446 | 6.35 | 7.56 | 7.29 | |||||||||||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||||||||||
|
Federal
agencies
|
45,660 | 68,521 | 94,589 | 2,215 | 3,032 | 3,745 | 4.85 | 4.42 | 3.96 | |||||||||||||||||||||||||||
|
Mortgage-backed
|
47,997 | 25,406 | 21,197 | 2,433 | 1,255 | 988 | 5.07 | 4.94 | 4.66 | |||||||||||||||||||||||||||
|
State
and municipal
|
45,573 | 46,069 | 46,735 | 2,505 | 2,530 | 2,624 | 5.50 | 5.49 | 5.61 | |||||||||||||||||||||||||||
|
Other
|
6,141 | 7,484 | 11,059 | 277 | 438 | 621 | 4.51 | 5.85 | 5.62 | |||||||||||||||||||||||||||
|
Total
securities
|
145,371 | 147,480 | 173,580 | 7,430 | 7,255 | 7,978 | 5.11 | 4.92 | 4.60 | |||||||||||||||||||||||||||
|
Deposits
in other banks
|
9,239 | 13,431 | 12,922 | 301 | 679 | 620 | 3.26 | 5.06 | 4.80 | |||||||||||||||||||||||||||
|
Total
interest earning assets
|
722,009 | 710,687 | 699,995 | 43,753 | 49,510 | 46,044 | 6.06 | 6.97 | 6.58 | |||||||||||||||||||||||||||
|
Nonearning
assets
|
63,859 | 62,952 | 57,807 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 785,868 | $ | 773,639 | $ | 757,802 | ||||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||||||||||
|
Demand
|
$ | 109,492 | $ | 107,834 | $ | 105,320 | 803 | 1,550 | 1,513 | 0.73 | 1.44 | 1.44 | ||||||||||||||||||||||||
|
Money
market
|
53,659 | 52,843 | 48,124 | 1,011 | 1,429 | 1,180 | 1.88 | 2.70 | 2.45 | |||||||||||||||||||||||||||
|
Savings
|
61,620 | 66,246 | 77,445 | 331 | 845 | 963 | 0.54 | 1.28 | 1.24 | |||||||||||||||||||||||||||
|
Time
|
258,773 | 261,286 | 255,856 | 10,135 | 11,711 | 9,693 | 3.92 | 4.48 | 3.79 | |||||||||||||||||||||||||||
|
Total
deposits
|
483,544 | 488,209 | 486,745 | 12,280 | 15,535 | 13,349 | 2.54 | 3.18 | 2.74 | |||||||||||||||||||||||||||
|
Customer
repurchase
|
||||||||||||||||||||||||||||||||||||
|
agreements
|
52,264 | 48,088 | 40,970 | 1,377 | 1,841 | 1,384 | 2.63 | 3.83 | 3.38 | |||||||||||||||||||||||||||
|
Other
short-term borrowings
|
9,818 | 346 | 1,240 | 252 | 19 | 69 | 2.57 | 5.49 | 5.56 | |||||||||||||||||||||||||||
|
Long-term
borrowings
|
34,235 | 32,245 | 31,847 | 1,930 | 1,975 | 1,859 | 5.64 | 6.12 | 5.84 | |||||||||||||||||||||||||||
|
Total
interest bearing
|
||||||||||||||||||||||||||||||||||||
|
liabilities
|
579,861 | 568,888 | 560,802 | 15,839 | 19,370 | 16,661 | 2.73 | 3.40 | 2.97 | |||||||||||||||||||||||||||
|
Noninterest
bearing
|
||||||||||||||||||||||||||||||||||||
|
demand
deposits
|
98,157 | 102,003 | 102,117 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
4,933 | 4,894 | 5,059 | |||||||||||||||||||||||||||||||||
|
Shareholders'
equity
|
102,917 | 97,854 | 89,824 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||||||||||||||||||
|
shareholders'
equity
|
$ | 785,868 | $ | 773,639 | $ | 757,802 | ||||||||||||||||||||||||||||||
|
Interest
rate spread
|
3.33 | % | 3.57 | % | 3.61 | % | ||||||||||||||||||||||||||||||
|
Net
interest margin
|
3.87 | % | 4.24 | % | 4.20 | % | ||||||||||||||||||||||||||||||
|
Net
interest income (taxable equivalent basis)
|
27,914 | 30,140 | 29,383 | |||||||||||||||||||||||||||||||||
|
Less: Taxable
equivalent adjustment
|
881 | 913 | 974 | |||||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 27,033 | $ | 29,227 | $ | 28,409 | ||||||||||||||||||||||||||||||
Table 2 presents
the dollar amount of changes in interest income and interest expense, and
distinguishes between changes resulting from fluctuations in average
balances of interest earning assets and interest bearing liabilities (volume),
and changes resulting from fluctuations in average interest rates on such assets
and liabilities (rate). Changes attributable to both volume and rate
have been allocated proportionately.
|
Table
2 - Changes in Net Interest Income (Rate / Volume
Analysis)
|
||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
2008 vs. 2007
|
2007 vs. 2006
|
|||||||||||||||||||||||
|
Change
|
Change
|
|||||||||||||||||||||||
|
Increase
|
Attributable
to
|
Increase
|
Attributable
to
|
|||||||||||||||||||||
|
Interest
income
|
(Decrease)
|
Rate
|
Volume
|
(Decrease)
|
Rate
|
Volume
|
||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Commercial
|
$ | (1,465 | ) | $ | (1,576 | ) | $ | 111 | $ | 499 | $ | 111 | $ | 388 | ||||||||||
|
Real
Estate
|
(3,909 | ) | (5,200 | ) | 1,291 | 3,808 | 1,367 | 2,441 | ||||||||||||||||
|
Consumer
|
(180 | ) | (30 | ) | (150 | ) | (177 | ) | (2 | ) | (175 | ) | ||||||||||||
|
Total
loans
|
(5,554 | ) | (6,806 | ) | 1,252 | 4,130 | 1,476 | 2,654 | ||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||
|
Federal
agencies
|
(817 | ) | 270 | (1,087 | ) | (713 | ) | 404 | (1,117 | ) | ||||||||||||||
|
Mortgage-backed
|
1,178 | 34 | 1,144 | 267 | 62 | 205 | ||||||||||||||||||
|
State
and municipal
|
(25 | ) | 2 | (27 | ) | (94 | ) | (57 | ) | (37 | ) | |||||||||||||
|
Other
securities
|
(161 | ) | (90 | ) | (71 | ) | (183 | ) | 25 | (208 | ) | |||||||||||||
|
Total
securities
|
175 | 216 | (41 | ) | (723 | ) | 434 | (1,157 | ) | |||||||||||||||
|
Deposits
in other banks
|
(378 | ) | (201 | ) | (177 | ) | 59 | 34 | 25 | |||||||||||||||
|
Total
interest income
|
(5,757 | ) | (6,791 | ) | 1,034 | 3,466 | 1,944 | 1,522 | ||||||||||||||||
|
Interest
expense
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Demand
|
(747 | ) | (770 | ) | 23 | 37 | 1 | 36 | ||||||||||||||||
|
Money
market
|
(418 | ) | (440 | ) | 22 | 249 | 127 | 122 | ||||||||||||||||
|
Savings
|
(514 | ) | (459 | ) | (55 | ) | (118 | ) | 24 | (142 | ) | |||||||||||||
|
Time
|
(1,576 | ) | (1,464 | ) | (112 | ) | 2,018 | 1,808 | 210 | |||||||||||||||
|
Total
deposits
|
(3,255 | ) | (3,133 | ) | (122 | ) | 2,186 | 1,960 | 226 | |||||||||||||||
|
Customer
repurchase
|
||||||||||||||||||||||||
|
agreements
|
(464 | ) | (613 | ) | 149 | 457 | 198 | 259 | ||||||||||||||||
|
Other
borrowings
|
188 | (427 | ) | 615 | 66 | 95 | (29 | ) | ||||||||||||||||
|
Total
interest expense
|
(3,531 | ) | (4,173 | ) | 642 | 2,709 | 2,253 | 456 | ||||||||||||||||
|
Net
interest income
|
$ | (2,226 | ) | $ | (2,618 | ) | $ | 392 | $ | 757 | $ | (309 | ) | $ | 1,066 | |||||||||
Noninterest Income
Noninterest
income is generated from a variety of sources, including fee-based deposit
services, trust and investment services, mortgage banking, and retail
brokerage. Noninterest income also includes net gains or losses on
sales, calls, or impairment of investment securities.
Noninterest
income was $7,913,000 in 2008, down 10.3% from 2007, resulting primarily from
decreases in trust fees, service charges on deposit accounts, mortgage banking
income, brokerage, income from investment in insurance companies, and losses of
$450,000 on securities.
Noninterest
income was $8,822,000 in 2007, up 4.3% over 2006. Increases in trust
fees, mortgage banking income, brokerage, and other fee income were partially
offset by decreases in deposit account service charges and by a $362,000
impairment charge on securities.
Fees from
the management of trusts, estates, and asset management accounts totaled
$3,467,000 in 2008, down from $3,578,000 in 2007 and up from $3,374,000 in
2006. These changes were due primarily to market value decline or
appreciation in the securities markets as a substantial proportion of these fees
are earned as a percentage of the account balances.
Service
charges on deposits accounts decreased 8.2% in 2008 and 4.6% in 2007, primarily
due to reduced customer overdraft activity.
Other
fees and commissions primarily include income generated from the Company’s debit
card, ATM, safe deposit box, merchant credit card, and wire transfer
services. Insurance commission revenue is also included in this
category. Other fees and commissions were $ 857,000 in 2008, $786,000
in 2007, and $744,000 in 2006. The increase in both 2008 and 2007 is
primarily the result of growth in debit card revenue due to increased customer
debit card activity.
Mortgage
banking income represents fees from originating and selling residential mortgage
loans. Mortgage banking income was $788,000 in 2008, $954,000 in
2007, and $709,000 in 2006. Changes in interest rates directly impact
the volume of mortgage activity and, in turn, the amount of mortgage banking fee
income earned.
Securities
are sold from time to time for balance sheet management purposes or because an
investment no longer meets the Company’s policy requirements. Net
losses on sales or calls of securities were $450,000 in 2008, resulting from
$51,000 in gains and $501,000 in losses. Net gains on sales or calls
of securities were $135,000 in 2007 and $62,000 in 2006.
During
2008, the Company sold all remaining shares it held in Federal National Mortgage
Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”)
preferred stock, resulting in a loss of $501,000 which is referenced
above. In December 2007, the Company recorded a $362,000
impairment charge relating to its holdings of FHLMC and FNMA preferred
stock. The impairment charges are recorded as a reduction of
noninterest income.
Other
noninterest income was $496,000 in 2008, $650,000 in 2007, and $496,000 in 2006.
The 2008 decline resulted primarily from a $138,000 reduction in revenue from
the Company’s investments in Bankers Insurance, LLC and Virginia Title Center,
LLC. The 2007 increase was largely the result of increased dividend revenue from
the Company’s two insurance company investments. Additionally, a full
year of revenue from the Company’s bank owned life insurance (“BOLI”) policies
increased this income category by $34,000 in 2007.
|
Table
3 - Noninterest income
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
||||||||||||