Edgar Filing: AMERICAN NATIONAL BANKSHARES INC

june302009_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 June 30, 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

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

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¨ No x

At August 5, 2009, the Company had 6,099,333 shares of Common Stock outstanding, $1 par value.

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AMERICAN NATIONAL BANKSHARES INC.

Index			Page


Part I.		FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	3

		Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008	4-5

		Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2009 and 2008	6

		Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	7

		Notes to Consolidated Financial Statements	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35

	Item 4.	Controls and Procedures	36

Part II.		OTHER INFORMATION

	Item 1.	Legal Proceedings	37

	Item 1A.	Risk Factors	37

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

	Item 3.	Defaults Upon Senior Securities	37

	Item 4.	Submission of Matters to a Vote of Security Holders	37

	Item 5.	Other Information	38

	Item 6.	Exhibits	38

SIGNATURES

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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)
			June 30,	December 31,
ASSETS			2009	2008
Cash and due from banks			$ 13,905	$ 14,986
Interest-bearing deposits in other banks			26,879	9,112

Securities available for sale, at fair value			144,706	133,695
Securities held to maturity			6,712	7,121
		Total securities	151,418	140,816

Loans held for sale			10,408	1,764

Loans, net of unearned income			557,042	571,110
Less allowance for loan losses			(7,934)	(7,824)
		Net loans	549,108	563,286

Premises and equipment, net			18,912	17,129
Other real estate owned			4,033	4,311
Goodwill			22,468	22,468
Core deposit intangibles, net			1,886	2,075
Accrued interest receivable and other assets			12,466	13,237
		Total assets	$ 811,483	$ 789,184

LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- noninterest bearing			$ 101,449	$ 95,703
Demand deposits -- interest bearing			91,424	116,132
Money market deposits			81,306	56,615
Savings deposits			62,768	59,624
Time deposits			278,284	261,064
		Total deposits	615,231	589,138

Short-term borrowings:
	Customer repurchase agreements		59,437	51,741
	Other short-term borrowings		-	7,850
Long-term borrowings			8,712	13,787
Trust preferred capital notes			20,619	20,619
Accrued interest payable and other liabilities			4,866	3,749
		Total liabilities	708,865	686,884

Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
	none outstanding		-	-
Common stock, $1 par, 10,000,000 shares authorized,
	6,100,330 shares outstanding at June 30, 2009 and
	6,085,628 shares outstanding at December 31, 2008		6,100	6,086
Capital in excess of par value			26,772	26,491
Retained earnings			70,682	71,090
Accumulated other comprehensive loss, net			(936)	(1,367)
		Total shareholders' equity	102,618	102,300
		Total liabilities and shareholders' equity	$ 811,483	$ 789,184

The accompanying notes are an integral part of the consolidated financial statements.

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American National Bankshares Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share and per share data) (Unaudited)


			Three Months Ended
			June 30
			2009	2008
Interest and Dividend Income:
	Interest and fees on loans		$ 7,917	$ 8,987
	Interest and dividends on securities:
		Taxable	1,233	1,234
		Tax-exempt	416	420
		Dividends	21	73
	Other interest income		103	74
		Total interest and dividend income	9,690	10,788

Interest Expense:
	Interest on deposits		2,180	3,116
	Interest on short-term borrowings		177	427
	Interest on long-term borrowings		80	171
	Interest on trust preferred capital notes		344	344
		Total interest expense	2,781	4,058

Net Interest Income			6,909	6,730
	Provision for Loan Losses		492	600

Net Interest Income After Provision for Loan Losses			6,417	6,130

Noninterest Income:
	Trust fees		767	916
	Service charges on deposit accounts		511	601
	Other fees and commissions		251	226
	Mortgage banking income		568	200
	Brokerage fees		73	101
	Securities gains (losses), net		1	(138)
	Impairment of securites		-	(255)
	Net loss on foreclosed real estate		(43)	-
	Other		125	190
		Total noninterest income	2,253	1,841

Noninterest Expense:
	Salaries		2,732	2,481
	Employee benefits		832	777
	Occupancy and equipment		719	1,210
	FDIC assessment		564	24
	Bank franchise tax		160	173
	Core deposit intangible amortization		95	95
	Other		1,219	883
		Total noninterest expense	6,321	5,643

	Income Before Income Taxes		2,349	2,328
	Income Taxes		643	519
	Net Income		$ 1,706	$ 1,809

Net Income Per Common Share:
	Basic		$ 0.28	$ 0.30
	Diluted		$ 0.28	$ 0.30
Average Common Shares Outstanding:
	Basic		6,096,034	6,098,184
	Diluted		6,097,047	6,108,536

The accompanying notes are an integral part of the consolidated financial statements.

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American National Bankshares Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share and per share data) (Unaudited)


			Six Months Ended
			June 30
			2009	2008
Interest and Dividend Income:
	Interest and fees on loans		$ 15,951	$ 18,431
	Interest and dividends on securities:
		Taxable	2,353	2,465
		Tax-exempt	802	852
		Dividends	43	150
	Other interest income		191	150
		Total interest and dividend income	19,340	22,048

Interest Expense:
	Interest on deposits		4,707	6,698
	Interest on short-term borrowings		413	911
	Interest on long-term borrowings		211	297
	Interest on trust preferred capital notes		687	687
		Total interest expense	6,018	8,593

Net Interest Income			13,322	13,455
	Provision for Loan Losses		842	740

Net Interest Income After Provision for Loan Losses			12,480	12,715

Noninterest Income:
	Trust fees		1,525	1,796
	Service charges on deposit accounts		1,013	1,166
	Other fees and commissions		493	429
	Mortgage banking income		854	395
	Brokerage fees		130	244
	Securities gains (losses), net		1	(108)
	Impairment of securities		-	(255)
	Net loss on foreclosed real estate		(1,222)	(7)
	Other		193	316
		Total noninterest income	2,987	3,976

Noninterest Expense:
	Salaries		5,263	4,950
	Employee benefits		1,645	1,524
	Occupancy and equipment		1,470	1,436
	FDIC assessment		781	41
	Bank franchise tax		323	350
	Core deposit intangible amortization		189	189
	Other		2,525	2,602
		Total noninterest expense	12,196	11,092

	Income Before Income Taxes		3,271	5,599
	Income Taxes		797	1,485
	Net Income		$ 2,474	$ 4,114

Net Income Per Common Share:
	Basic		$ 0.41	$ 0.67
	Diluted		$ 0.41	$ 0.67
Average Common Shares Outstanding:
	Basic		6,089,055	6,103,008
	Diluted		6,091,291	6,114,911

The accompanying notes are an integral part of the consolidated financial statements.

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American National Bankshares Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 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			-	-	-	4,114	-	4,114

Change in unrealized gains on securities
available for sale, net of tax, $(332)			-	-	-	-	(618)

Add: Reclasification adjustment for losses
on impairment of securities, net of tax, $89			-	-	-	-	166

Add: Reclassification adjustment for losses
	on securities available for sale, net of
	tax, $38		-	-	-	-	70

		Other comprehensive income					(382)	(382)

		Total comprehensive income						3,732

Change in pension plan measurement date,
net of tax, $(40)							(74)	(74)

Stock repurchased and retired			(31,200)	(31)	(135)	(484)	-	(650)

Stock options exercised			10,345	10	173	-	-	183

Cash dividends declared, $0.46 per share			-	-	-	(2,806)	-	(2,806)

Balance, June 30, 2008			6,097,862	$ 6,098	$ 26,463	$ 70,233	$ (898)	$ 101,896

Balance, December 31, 2008			6,085,628	$ 6,086	$ 26,491	$ 71,090	$ (1,367)	$ 102,300

Net income			-	-	-	2,474	-	2,474

Change in unrealized gains on securities
available for sale, net of tax, $232			-	-	-	-	432

Less: Reclassification adjustment for gains
	on securities available for sale, net of
	tax of $0		-	-	-	-	(1)

		Other comprehensive income					431	431

		Total comprehensive income						2,905

Stock repurchased and retired			(7,600)	(8)	(33)	(80)	-	(121)

Stock options exercised			22,302	22	283	-	-	305

Stock option expense					31			31

Cash dividends declared, $0.46 per share			-	-		(2,802)	-	(2,802)

Balance, June 30, 2009			6,100,330	$ 6,100	$ 26,772	$ 70,682	$ (936)	$ 102,618
The accompanying notes are an integral part of the consolidated financial statements.

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American National Bankshares Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2009 and 2008
(Dollars in thousands) (Unaudited)


				2009	2008
Cash Flows from Operating Activities:
	Net income			$ 2,474	$ 4,114
	Adjustments to reconcile net income to net
		cash (used in) provided by operating activities:
		Provision for loan losses		842	740
		Depreciation		566	552
		Core deposit intangible amortization		189	188
		Net amortization (accretion) of bond premiums and discounts		(144)	(121)
		Net (gain) loss on sale or call of securities		(1)	108
		Impairment of securities		-	255
		Gain on loans held for sale		(752)	(337)
		Proceeds from sales of loans held for sale		30,756	16,400
		Originations of loans held for sale		(38,648)	(16,895)
		Net (gain) loss on foreclosed real estate		(17)	7
		Change in valuation allowance for foreclosed real estate		1,239	-
		Stock-based compensation expense		31	-
		Deferred income tax (benefit) expense		(510)	19
		Net change in interest receivable		(149)	66
		Net change in other assets		1,199	(1,084)
		Net change in interest payable		(211)	(258)
		Net change in other liabilities		1,327	(1,176)
			Net cash (used in) provided by operating activities	(1,809)	2,578

Cash Flows from Investing Activities:
		Proceeds from sales of securities available for sale		-	814
		Proceeds from maturities and calls of securities available for sale		48,188	28,991
		Proceeds from maturities and calls of securities held to maturity		411	2,164
		Purchases of securities available for sale		(58,393)	(22,109)
		Net decrease (increase) in loans		12,202	(17,694)
		Purchases of bank property and equipment		(2,349)	(1,003)
		Proceeds from sales of foreclosed real estate		190	119
			Net cash provided by (used in) investing activities	249	(8,718)

Cash Flows from Financing Activities:
		Net change in demand, money market, and savings deposits		8,873	1,419
		Net change in time deposits		17,220	(13,396)
		Net change in customer repurchase agreements		7,696	10,082
		Net change in short-term borrowings		(7,850)	16,425
		Net change in long-term borrowings		(5,075)	4,926
		Cash dividends paid		(2,802)	(2,806)
		Repurchase of stock		(121)	(650)
		Proceeds from exercise of stock options		305	183
			Net cash provided by financing activities	18,246	16,183

Net Increase in Cash and Cash Equivalents				16,686	10,043

Cash and Cash Equivalents at Beginning of Period				24,098	18,304

Cash and Cash Equivalents at End of Period				$ 40,784	$ 28,347

The accompanying notes are an integral part of the consolidated financial statements.

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AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

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 June 30, 2009; the consolidated statements of income for the three and six months ended June 30, 2009 and 2008; the consolidated statements of changes in shareholders’ equity for the six months ended June 30, 2009 and 2008; and the consolidated statements of cash flows for the six months ended June 30, 2009 and 2008. Operating results for the three and six month periods ended June 30, 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 April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Statement of Financial Accounting Standards (‘SFAS”) 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP SFAS 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 SFAS 141(R)-1 to have a material impact on its consolidated financial statements.

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In April 2009, the FASB issued FSP SFAS 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 SFAS 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 SFAS 157-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. The Company does not expect the adoption of FSP SFAS 157-4 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP SFAS 107-1 and Accounting Principals Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP SFAS 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. The Company does not expect the adoption of FSP SFAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP SFAS 115-2 and SFAS 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 SFAS 115-2 and SFAS 124-2 are effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of FSP SFAS 115-2 and SFAS 124-2 to have a material impact on its consolidated financial statements.

In April 2009, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 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.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of SFAS 165 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140.” SFAS 166 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 must be applied as of the beginning of the first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. Earlier application is prohibited. The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS 167 improves financial reporting by enterprises involved with variable interest entities. SFAS 167 will be effective as of the beginning of the first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. Earlier application is prohibited. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial statements.

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In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162.” SFAS 168 establishes the FASB Accounting Standards Codification, which will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of SFAS 168 to have a material impact on its consolidated financial statements.

In June 2009, the SEC issued SAB No. 112. SAB 112 revises or rescinds portions of the interpretative guidance included in the codification of SABs in order to make the interpretive guidance consistent with current GAAP. The Company does not expect the adoption of SAB 112 to have a material impact on its consolidated financial statements.

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Note 3 – Securities

The amortized cost and estimated fair value of investments in debt and equity securities at June 30, 2009 and December 31, 2008 were as follows:

	June 30, 2009
(in thousands)	Amortized	Unrealized	Unrealized	Estimated
	Cost	Gains	Losses	Fair Value
Securities available for sale:
Debt securities:
Federal agencies	$ 45,665	$ 1,760	$ 54	$ 47,371
Mortgage-backed	39,160	1,334	346	40,148
State and municipal	47,767	1,036	110	48,693
Corporate	3,974	158	-	4,132
Equity securities:
FHLB stock – restricted	2,811	-	-	2,811
Federal Reserve stock – restricted	1,429	-	-	1,429
Other	122	-	-	122
Total securities available for sale	140,928	4,288	510	144,706

Debt securities held to maturity:
Mortgage-backed	223	15	-	238
State and municipal	6,489	216	-	6,705
Total securities held to maturity	6,712	231	-	6,943
Total securities	$ 147,640	$ 4,519	$ 510	$ 151,649

	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 Corporation’s investment in Federal Home loan Bank (“FHLB”) stock totaled $2,811,000 at June 30, 2009. FHLB stock is generally viewed as a long term investment and as a restricted investments security which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of cash dividend payments and repurchases of excess capital stock in 2009, the Corporation does not consider this investment to be other temporarily impaired at June 20, 2009 and no impairment has been recognized.

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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 June 30, 2009 and December 31, 2008. The date 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 if economic or market concerns warrant. 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 whether the Company intends to sell the security or may be required to sell the security prior to maturity. As of June 30, 2009, the Company held six securities that had been in a continuous unrealized loss position for twelve months or more. The Company has reviewed these securities for other-than-temporary impairment, and does not consider the balances presented in the table to be other-than-temporarily impaired as of June 30, 2009.

June 30, 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	$ 1,954	$ 54	$ 1,954	$ 54	$ -	$ -
Mortgage-backed	2,488	346	-	-	2,488	346
State and municipal	8,059	110	7,196	79	863	31
Total	$ 12,501	$ 510	$ 9,150	$ 133	$ 3,351	$ 377

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

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Note 4 - Loans

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

(in thousands)	June 30, 2009	December 31, 2008

Construction and land development	$ 50,930	$ 63,361
Commercial real estate	210,832	207,160
Residential real estate	128,835	136,480
Home equity	61,818	57,170
Total real estate	452,415	464,171

Commercial and industrial	96,978	98,546
Consumer	7,649	8,393
Total loans	$ 557,042	$ 571,110

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

	June 30,	December 31,
(in thousands)	2009	2008

Impaired loans with a valuation allowance	$ 1,879	$ 2,545
Impaired loans without a valuation allowance	640	647
Total impaired loans	$ 2,519	$ 3,192

Allowance provided for impaired loans,
included in the allowance for loan losses	$ 953	$ 1,164

Nonaccrual loans excluded from the impaired loan disclosure	$ 1,573	$ 1,574

As of and for the	Three Months Ended	Six Months Ended	Three Months Ended	Six Months Ended
(in thousands)	June 30, 2009	June 30, 2009	June 30, 2008	June 30, 2008

Average balance in impaired loans……………..	$ 3,312	$ 3,348	$ 5,729	$4,687
Interest income recognized on impaired loans…………..	47	83	59	108
Interest income recognized on nonaccrual loans……….	-	-	-	-
Interest on non-accrual loans had they been accruing…………………….	147	202	96	169
Loans past due 90 days and still accruing interest….	-	-	172	172

No additional funds are committed to be advanced in connection with impaired loans.

Foreclosed real estate was $4,033,000 at June 30, 2009 and $4,311,000 December 31, 2008.

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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 six months ended June 30, 2009 and 2008, and for the year ended December 31, 2008, are presented below:

(in thousands)	Six Months Ended June 30,	Year Ended December 31,	Six Months Ended June 30,
	2009	2008	2008
Allowance for Loan Losses
Balance, beginning of period	$ 7,824	$ 7,395	$ 7,395
Provision for loan losses	842	1,620	740
Charge-offs	(798)	(1,564)	(373)
Recoveries	66	373	170
Balance, end of period	$ 7,934	$ 7,824	$ 7,932

Reserve for unfunded lending commitments
Balance, beginning of period	$ 475	151	$ 151
Provision for unfunded commitments	(12)	324	218
Charge-offs	(215)	-	-
Balance, end of period	$ 248	$ 475	$ 369

The reserve for unfunded loan commitments is 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 there has been no impairment in the value of goodwill.

The changes in the carrying amount of goodwill for the quarter ended June 30, 2009, are as follows (in thousands):

Balance as of December 31, 2008		$ 22,468
Goodwill recorded during the period		-
Impairment losses		-
Balance as of June 30, 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 June 30, 2009 was $1,886,000.

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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, its agencies or Government Sponsored Enterprises (“GSE”). They mature daily. The interest rates may be changed at the discretion of the Company. FHLB overnight borrowings have 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 June 30, 2009 and December 31, 2008 (in thousands):

	June 30, 2009	December 31, 2008

Customer repurchase agreements	$ 59,437	$ 51,741
FHLB overnight borrowings	-	7,850
	$ 59,437	$ 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 June 30, 2009, $98,157,000 in 1-4 family residential mortgage loans and $57,258,000 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 June 30, 2009 and December 31, 2008 (in thousands):


Due by June 30	2009 Advance Amount	Weighted Average Rate	Due by December 31	2008 Advance Amount	Weighted Average Rate


2011	8,000	2.92	2009	$ 5,000	5.26%
2014	712	3.78	2011	8,000	2.93
	$ 8,712	2.99%	2014	787	3.78
				$ 13,787	3.82%

Note 9 – Trust Preferred Capital Notes

On April 7, 2006, AMNB Statutory Trust I, a Delaware statutory trust and a 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 Company did not eliminate through consolidation the Corporation’s $619,000 equity investment in AMNB Statutory Trust I. Instead, the Company reflected this equity investment in the “Accrued interest receivable and other assets” line item in the consolidated balance sheets.

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Note 10 – Stock Based Compensation

A summary of stock option transactions for the six months ended June 30, 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	6,000	16.00
Exercised	(22,302)	13.69
Forfeited	(19,500)	19.45
Outstanding at June 30, 2009	182,808	$21.07	5.6	$ 183
Exercisable at June 30, 2009	137,058	$22.47	4.3	$ 74

The total intrinsic value of options exercised during the six month period ended June 30, 2009 was $52,000.

There were 59,000 options granted in the fourth quarter of 2008 and 6,000 options granted in the second quarter of 2009, which resulted in $31,000 equity related compensation expense in 2009. $158,000 remains to be expensed in future periods. No other options were granted in 2008. There was no tax benefit associated with stock option activity during 2009 or 2008. 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
	June 30,
	2009		2008
		Per		Per
		Share		Share
	Shares	Amount	Shares	Amount
Basic	6,096,034	$ .28	6,098,184	$ .30
Effect of dilutive securities - stock options	1,013	-	10,352	-
Diluted	6,097,047	$ .28	6,108,536	$ .30

	Six Months Ended
	June 30,
	2009		2008
		Per		Per
		Share		Share
	Shares	Amount	Shares	Amount
Basic	6,089,055	$ .41	6,103,008	$ .67
Effect of dilutive securities - stock options	2,236	-	11,903	-
Diluted	6,091,291	$ .41	6,114,911	$ .67

Stock options on common stock which were not included in computing diluted earnings per share for the six month periods ended June 30, 2009 and 2008, because their effects were antidilutive, averaged 106,511 and 116,511, respectively.

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Note 12 – Employee Benefit Plans

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

Components of Net Periodic Benefit Cost	Three Months Ended		Six Months Ended
(in thousands)	June 30,		June 30,
	2009	2008	2009	2008
Service cost	$ 184	$ 181	$ 368	$ 362
Interest cost	146	129	292	257
Expected return on plan assets	(203)	(164)	(406)	(328)
Amortization of prior service cost	-	(1)	-	(1)
Recognized net actuarial loss	111	28	222	56

Net periodic benefit cost	$ 238	$ 173	$ 476	$ 346

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.

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Segment information as of and for the six month periods ended June 30, 2009 and 2008, is shown in the following table.

	Three Months Ended June 30, 2009
	.	Trust and
(in thousands)	Community	Investment		Intersegment
	Banking	Services	Other	Eliminations	Total
Interest income	$ 9,690	$ -	$ 79	$ (79)	$ 9,690
Interest expense	2,516	-	344	(79)	2,781
Noninterest income	1,398	839	16	-	2,253
Income (loss) before income taxes	2,330	362	(343)	-	2,349
Depreciation and amortization	376	7	-	-	383
Total assets	810,728	-	755	-	811,483
Capital expenditures	1,160	-	-	-	1,160

	Three Months Ended June 30, 2008
		Trust and
	Community	Investment		Intersegment
	Banking	Services	Other	Eliminations	Total
Interest income	$ 10,788	$ -	$ -	$ -	$ 10,788
Interest expense	3,714	-	344	-	4,058
Noninterest income	815	1,017	9	-	1,841
Income (loss) before income taxes	2,207	520	(399)	-	2,328
Depreciation and amortization	355	6	-	-	361
Total assets	789,926	-	769	-	790,695
Capital expenditures	600	6	-	-	606

	Six Months Ended June 30, 2009
		Trust and
	Community	Investment		Intersegment
	Banking	Services	Other	Eliminations	Total
Interest income	$ 19,340	$ -	$ 159	$ (159)	$ 19,340
Interest expense	5,490	-	687	(159)	6,018
Noninterest income	1,305	1,654	28	-	2,987
Income (loss) before income taxes	3,285	656	(670)	-	3,271
Depreciation and amortization	741	13	1	-	755
Total assets	810,728	-	755	-	811,483
Capital expenditures	2,341	8	-	-	2,349

	Six Months Ended June 30, 2008
		Trust and
	Community	Investment		Intersegment
	Banking	Services	Other	Eliminations	Total
Interest income	$ 22,048	$ -	$ -	$ -	$ 22,048
Interest expense	7,906	-	687	-	8,593
Noninterest income	1,911	2,040	25	-	3,976
Income (loss) before income taxes	5,318	1,086	(805)	-	5,599
Depreciation and amortization	727	12	1	-	740
Total assets	789,926	-	769	-	790,695
Capital expenditures	997	6	-	-	1,003

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Note 14 – Fair Value of Financial Instruments

The Company adopted SFAS No. 157, ”Fair Value Measurements”, on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

In October of 2008, the FASB issued FSP 157-3 to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements were not issued.

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

	Level 1 –		Valuation is based on quoted prices in active markets for identical assets and liabilities.

	Level 2 –		Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

	Level 3 –		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

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

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 (in thousands):

		Fair Value Measurements at June 30, 2009 Using
	Balance as of June 30,	Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
Description	2009	Level 1	Level 2	Level 3
Assets
Securities available for sale	$ 140,344	$ -	$ 140,344	$ -
Mortgage loan derivative contracts	1	-	1	-

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Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a non-recurring basis in the financial statements:

Loans held for sale: Loans held for sale are carried at market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the year ended December 31, 2008 or the period ended June 30, 2009. Gains and losses on the sale of loans are recorded within income from mortgage banking on the Consolidated Statements of Income.

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

Foreclosed assets. Foreclosed assets consist of assets acquired through, or in lieu of, loan foreclosure, and are held for sale and initially were recorded at fair value, less estimated costs to sell at the date of acquisition, thus establishing a new cost basis. Loan losses arising from the acquisitions of such property are charged against the allowance for loan losses at the date the property is acquired. Subsequent to acquisition, valuations are performed periodically and the assets are carried at the lower of the new cost basis or fair value. Revenues and expenses from operations and changes in any subsequent valuation allowance are included in net foreclosed assets costs and expenses.

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

		Carrying Value at June 30, 2009
	Balance as of June 30,	Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
Description	2009	Level 1	Level 2	Level 3
Assets
Loans held for sale	$10,408	$ -	$ 10,408	$ -
Impaired loans, net of valuation allowance	926	-	459	467
Foreclosed assets	4,033	-	-	4,033

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The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107, “Disclosures About Fair Value of Financial Instruments”, excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The estimated fair values of the Company’s assets are as follows:

	June 30, 2009		December 31, 2008
(in thousands)	Carrying	Estimated Fair	Carrying	Estimated Fair
	Amount	Value	Amount	Value
Financial assets:
Cash and due from banks	$ 40,784	$ 40,784	$ 24,098	$ 24,098
Securities available for sale *	140,344	140,344	129,904	129,904
Securities held to maturity	6,712	6,943	7,121	7,391
Loans held for sale	10,408	10,408	1,764	1,764
Loans, net of allowance	549,103	555,619	563,286	575,970
Accrued interest receivable	3,245	3,245	3,110	3,110

Financial liabilities:
Deposits	$ 615,231	$ 618,393	$ 589,138	$ 591,159
Repurchase agreements	59,437	59,437	51,741	51,741
Other borrowings	8,712	8,685	21,637	21,630
Trust preferred capital notes	20,619	20,657	20,619	18,258
Accrued interest payable	1,046	1,046	1,272	1,272

* - Excludes restricted stock

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and cash equivalents. The carrying amount is a reasonable estimate of fair value.

Securities. Fair values are based on quoted market prices or dealer quotes. The carrying value of restricted stock approximates fair value.

Loans held for sale. The carrying amount is a reasonable estimate of fair value.

Loans. For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans are estimated based upon discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Accrued interest receivable. The carrying amount is a reasonable estimate of fair value.

Deposits. The fair value of demand deposits, savings deposits, and money market deposits equals the carrying value. The fair value of fixed-rate certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposit instruments would be offered to depositors for the same remaining maturities.

Repurchase agreements. The carrying amount is a reasonable estimate of fair value.

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Other borrowings. The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the interest rates for similar types of borrowing arrangements.

Trust preferred capital notes. Fair value is calculated by discounting the future cash flows using the estimated current interest rates at which similar securities would be issued.

Accrued interest payable. The carrying amount is a reasonable estimate of fair value.

Off-balance sheet instruments. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At June 30, 2009 and December 31, 2008, the fair value of off balance sheet instruments was deemed immaterial, and therefore was not included in the table above.

The Company assumes interest rate risk (the risk that interest rates will change) in its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rates change and that change may be either favorable or unfavorable to the Company.

Note 15 – Supplemental Cash Flow Information

			Six Months Ended
(in thousands)			June 30,
			2009	2008
Supplemental Schedule of Cash and Cash Equivalents:
		Cash and due from banks	$ 13,905	$ 20,082
		Interest-bearing deposits in other banks	26,879	8,265

			$ 40,784	$ 28,347

Supplemental Disclosure of Cash Flow Information:
	Cash paid for:
		Interest on deposits and borrowed funds	$ 6,296	$ 8,850
		Income taxes	505	1,972
	Noncash investing and financing activities:
		Transfer of loans to other real estate owned	1,134	52
		Unrealized gain (loss) on securities available for sale	663	(587)

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The purpose of this discussion is to focus on important factors affecting the financial condition and results of operations of the Company. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements.

Forward-Looking Statements

This report contains forward-looking statements with respect to the financial condition, results of operations and business of American National Bankshares Inc. and its wholly owned subsidiary, American National Bank and Trust Company (the ”Bank”) (collectively referred to as the “Company”). These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available to management at the time these statements and disclosures were prepared. Forward-looking statements are subject to numerous assumptions, estimates, risks, and uncertainties that could cause actual conditions, events, or results to differ materially fro those stated or implied by such forward-looking statements.

A variety of factors may affect the operations, performance, business strategy, and results of the Company. Those factors include but are not limited to the following:

·	Financial market volatility, including the level of interest rates, could affect the values of financial instruments and the amount of net interest income earned;

·	General economic or business conditions, either nationally or in the market areas in which the Company does business, may be less favorable than expected, resulting in deteriorating credit quality, reduced demand for credit, or a weakened ability to generate deposits;

·	Competition among financial institutions may increase and competitors may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than the Company;

·	Businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards;

·	The ability to retain key personnel; and

·	The failure of assumptions underlying the allowance for loan losses.

Reclassification

In certain circumstances, reclassifications have been made to prior period information to conform to the 2009 presentation.

Critical Accounting Policies

The accounting and reporting policies followed by the Company conform with U.S. generally accepted accounting principles (“GAAP”) and they conform to general practices within the banking industry. The Company’s critical accounting policies, which are summarized below, relate to (1) the allowance for loan losses and (2) goodwill impairment. A summary of the Company’s significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Company’s 2008 Annual Report on Form 10-K.

The financial information contained within the Company’s financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method.

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Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

The allowance for loan losses is an estimate of the losses inherent in the loan portfolio at the balance sheet date. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows, or values observable in the secondary market, and the loan balance.

The Company’s allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change. The formula allowance uses a historical loss view as an indicator of future losses along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries; trends in volume and terms of loans; effects of changes in underwriting standards; experience of lending staff and economic conditions; and portfolio concentrations. In the formula allowance, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The adjusted loss factor is multiplied by the period-end balances for each risk-grade category. The formula allowance is calculated for a range of outcomes. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. The unallocated allowance includes estimated losses whose impact on the portfolio has yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective and actual losses could be greater or less than the estimates.

The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance-sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included in other liabilities.

Goodwill Impairment

The Company tests goodwill on an annual basis or more frequently if events or circumstances indicate that there may have been impairment. If the carrying amount of goodwill exceeds its implied fair value, the Company would recognize an impairment loss in an amount equal to that excess. The goodwill impairment test requires management to make judgments in determining the assumptions used in the calculations. The goodwill impairment testing conducted by the Company in 2008 indicated that goodwill is not impaired and is properly recorded in the financial statements. No events or circumstances since December 31, 2008 have occurred that would question the impairment of goodwill.

Non-GAAP Presentations

The analysis of net interest income in this document is performed on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets.

Internet Access to Corporate Documents

The Company provides access to its Securities and Exchange Commission (“SEC”) filings through a link on the Investors Relations page of the Company’s web site at www.amnb.com. Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

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RESULTS OF OPERATIONS

Earnings Performance

Three months ended June 30, 2009 and 2008

For the quarter ended June 30, 2009, the Company reported net income of $1,706,000 compared to $1,809,000 for the comparable quarter in 2008. The $103,000 decline in earnings was primarily driven by a $540,000 increase in deposit insurance premiums and a $100,000 one-time increase in personnel expense associated with staff reductions, all reflected in the change in noninterest expense category and more fully discussed on page 32.

SUMMARY INCOME STATEMENT
(dollars in thousands)
For the three months ended June 30,	2009	2008	$ change	% change

Interest income	$ 9,690	$ 10,788	$ (1,098)	-10.2%
Interest expense	(2,781)	(4,058)	1,277	-31.5%
Net interest income	6,909	6,730	179	2.7%
Provision for loan losses	(492)	(600)	108	-18.0%
Noninterest income	2,253	1,841	412	22.4%
Noninterest expense	(6,321)	(5,643)	(678)	12.0%
Income tax expense	(643)	(519)	(124)	23.9%

Net income	$ 1,706	$ 1,809	$ (103)	-5.7%

Six months ended June 30, 2009 and 2008

For the six month period ended June 30, 2009 the Company reported net income of $2,474,000 compared to $4,114,000 for the comparable period in 2008. The $1,640,000 decline in earnings was driven by the factors noted above, however for the period the impact of the FDIC increase was $740,000, plus, most notably, a $1.2 million write-down in the first quarter of other real estate owned, reflected in the change to noninterest income.

SUMMARY INCOME STATEMENT
(dollars in thousands)
For the six months ended June 30,	2009	2008	$ change	% change

Interest income	$ 19,340	$ 22,048	$ (2,708)	-12.3%
Interest expense	(6,018)	(8,593)	2,575	-30.0%
Net interest income	13,322	13,455	(133)	-1.0%
Provision for loan losses	(842)	(740)	(102)	13.8%
Noninterest income	2,987	3,976	(989)	-24.9%
Noninterest expense	(12,196)	(11,092)	(1,104)	10.0%
Income tax expense	(797)	(1,485)	688	-46.3%

Net income	$ 2,474	$ 4,114	$ (1,640)	-39.9%

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Net Interest Income

Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, primarily deposits and other funding sources. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities. A tax rate of 35% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis. Net interest income divided by average earning assets is referred to as the net interest margin. The net interest spread represents the difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities.

Since September 2007, the Federal Open Market Committee of the Federal Reserve Board has reduced the federal funds rate ten times by a total of 5.00%. Because of this historically low interest rate environment and because most of the Company’s interest bearing assets and interest paying liabilities are relatively short-term in nature, the yields and costs discussed in the following pages have, in general, fallen during the reported periods.

Three months ended June 30, 2009 and 2008

Net interest income on a taxable equivalent basis increased $186,000, or 2.7%, for the second quarter of 2009 compared to the 2008 quarter. This increase was almost entirely due to changes in interest rates, as indicated by the Rate/Volume Analysis shown later in this section.

The Company’s yield on earnings assets was 5.33% compared to 6.07% for the prior year quarter. The cost of interest bearing liabilities was 1.83% compared to 2.79%. These rates resulted in an interest rate spread of 3.50% compared to 3.28%. The Company’s net interest margin, on a fully taxable equivalent basis, was 3.84% during the second quarter of 2009, compared to 3.83%, during the 2008 quarter. Yields and rates generally fell between periods, but most of the improvement in spread and margin was related to liability pricing.

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The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the three months ended June 30, 2009 and 2008. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans, if recognized, is recorded on a cash basis or when the loan returns to accrual status.

Net Interest Income Analysis
For the Three Months Ended June 30, 2009 and 2008
(in thousands, except rates)

					Interest
	Average Balance				Income/Expense				Yield/Rate

	2009		2008		2009		2008		2009			2008
Loans:
Commercial	$	91,701	$	90,648	$	1,100	$	1,342		4.80	%		5.92	%
Real estate		470,859		467,424		6,669		7,468		5.67			6.39
Consumer		7,881		8,903		175		197		8.88			8.85
Total loans		570,441		566,975		7,944		9,007		5.57			6.35

Securities:
Federal agencies		46,225		45,708		525		551		4.54			4.82
Mortgage-backed & CMO's		41,382		50,357		550		642		5.32			5.10
State and municipal		51,718		47,201		731		652		5.65			5.53
Other		8,251		6,981		72		90		3.49			5.16
Total securities		147,576		150,247		1,878		1,935		5.09			5.15

Deposits in other banks		26,882		8,567