march312009_10q.htm
 
 

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

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

Commission file number  0-12820

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

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

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

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

Yes
x
No
¨
  

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

Yes
¨
No
¨
  

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

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

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

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

 
 





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





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

 
3


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

 
4

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

 
5

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

 
6
 




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


 
Note 1 – Basis of Presentation

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

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

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

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

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

 

 
Note 2 – Recent Accounting Pronouncements

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

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

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

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

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

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

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





Note 3 – Securities

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

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


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


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

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


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

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

 
Note 4 - Loans

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

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

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

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


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

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


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

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

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

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



Note 6 – Goodwill and Other Intangible Assets

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

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

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

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


Note 7 – Short-term Borrowings

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

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

Note 8 – Long-term Borrowings

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




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

Note 9 – Trust Preferred Capital Notes

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

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

Note 10 – Stock Based Compensation

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

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

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

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

Note 11 – Earnings Per Share

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

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

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


 
Note 12 – Employee Benefit Plans

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

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

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

Note 13 – Segment and Related Information

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

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

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

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

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

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


  Three Months Ended March 31, 2009
         
Trust and
                    
(in thousands)
  
Community
    
Investment
          
Intersegment
        
   
Banking