Edgar Filing: AMERICAN NATIONAL BANKSHARES INC

sept302009_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 September 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 November 5, 2009, the Company had 6,107,327 shares of Common Stock outstanding, $1 par value.

Table of Contents

AMERICAN NATIONAL BANKSHARES INC.

Index			Page

Part I.		FINANCIAL INFORMATION

	Item 1.	Financial Statements

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

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

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

		Consolidated Statements of Cash Flows for the nine months ended September 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	25

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

	Item 4.	Controls and Procedures	39

Part II.		OTHER INFORMATION

	Item 1.	Legal Proceedings	40

	Item 1A.	Risk Factors	40

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

	Item 3.	Defaults Upon Senior Securities	40

	Item 4.	Submission of Matters to a Vote of Security Holders	40

	Item 5.	Other Information	40

	Item 6.	Exhibits	41

SIGNATURES

Table of Contents

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)
	September 30,			December 31,
ASSETS	2009			2008
Cash and due from banks	$	17,451		$	14,986
Interest-bearing deposits in other banks		8,892			9,112

Securities available for sale, at fair value		181,953			133,695
Securities held to maturity		6,540			7,121
Total securities		188,493			140,816

Loans held for sale		3,840			1,764

Loans		539,188			571,110
Less allowance for loan losses		(8,260	)		(7,824	)
Net loans		530,928			563,286

Premises and equipment, net		19,390			17,129
Other real estate owned		4,558			4,311
Goodwill		22,468			22,468
Core deposit intangibles, net		1,792			2,075
Accrued interest receivable and other assets		12,534			13,237
Total assets	$	810,346		$	789,184

LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- noninterest bearing	$	105,100		$	95,703
Demand deposits -- interest bearing		92,012			116,132
Money market deposits		71,424			56,615
Savings deposits		62,420			59,624
Time deposits		265,339			261,064
Total deposits		596,295			589,138

Short-term borrowings:
Customer repurchase agreements		71,339			51,741
Other short-term borrowings		4,000			7,850
Long-term borrowings		8,675			13,787
Trust preferred capital notes		20,619			20,619
Accrued interest payable and other liabilities		4,513			3,749
Total liabilities		705,441			686,884

Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding		-			-
Common stock, $1 par, 10,000,000 shares authorized,
6,107,327 shares outstanding at September 30, 2009 and
6,085,628 shares outstanding at December 31, 2008		6,107			6,086
Capital in excess of par value		26,900			26,491
Retained earnings		71,445			71,090
Accumulated other comprehensive Income (loss), net		453			(1,367	)
Total shareholders' equity		104,905			102,300
Total liabilities and shareholders' equity	$	810,346		$	789,184

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

Table of Contents

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

	Three Months Ended
	September 30
	2009		2008
Interest and Dividend Income:
Interest and fees on loans	$	7,666	$	8,916
Interest and dividends on securities:
Taxable		1,241		1,179
Tax-exempt		434		388
Dividends		27		41
Other interest income		96		75
Total interest and dividend income		9,464		10,599

Interest Expense:
Interest on deposits		1,921		2,845
Interest on short-term borrowings		135		429
Interest on long-term borrowings		65		126
Interest on trust preferred capital notes		343		343
Total interest expense		2,464		3,743

Net Interest Income		7,000		6,856
Provision for Loan Losses		492		280

Net Interest Income After Provision for Loan Losses		6,508		6,576

Noninterest Income:
Trust fees		813		901
Service charges on deposit accounts		536		603
Other fees and commissions		257		193
Mortgage banking income		361		238
Brokerage fees		23		126
Securities gains (losses), net		1		(87	)
Other		128		88
Total noninterest income		2,119		2,062

Noninterest Expense:
Salaries		2,471		2,466
Employee benefits		806		688
Occupancy and equipment		704		684
FDIC assessment		203		47
Bank franchise tax		160		172
Core deposit intangible amortization		94		94
Other		1,160		1,334
Total noninterest expense		5,598		5,485

Income Before Income Taxes		3,029		3,153
Income Taxes		862		929
Net Income	$	2,167	$	2,224

Net Income Per Common Share:
Basic	$	0.36	$	0.36
Diluted	$	0.35	$	0.36
Average Common Shares Outstanding:
Basic		6,104,505		6,093,851
Diluted		6,111,913		6,100,089

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

Table of Contents

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

	Nine Months Ended
	September 30
	2009			2008
Interest and Dividend Income:
Interest and fees on loans	$	23,617		$	27,347
Interest and dividends on securities:
Taxable		3,594			3,644
Tax-exempt		1,236			1,240
Dividends		70			191
Other interest income		287			225
Total interest and dividend income		28,804			32,647

Interest Expense:
Interest on deposits		6,628			9,543
Interest on short-term borrowings		548			1,340
Interest on long-term borrowings		276			423
Interest on trust preferred capital notes		1,030			1,030
Total interest expense		8,482			12,336

Net Interest Income		20,322			20,311
Provision for Loan Losses		1,334			1,020

Net Interest Income After Provision for Loan Losses		18,988			19,291

Noninterest Income:
Trust fees		2,338			2,697
Service charges on deposit accounts		1,549			1,769
Other fees and commissions		750			622
Mortgage banking income		1,215			633
Brokerage fees		153			370
Securities gains (losses), net		2			(450	)
Net loss on foreclosed real estate		(1,222	)		(7	)
Other		321			404
Total noninterest income		5,106			6,038

Noninterest Expense:
Salaries		7,734			7,416
Employee benefits		2,451			2,212
Occupancy and equipment		2,174			2,120
FDIC assessment		984			88
Bank franchise tax		483			522
Core deposit intangible amortization		283			283
Other		3,685			3,936
Total noninterest expense		17,794			16,577

Income Before Income Taxes		6,300			8,752
Income Taxes		1,659			2,414
Net Income	$	4,641		$	6,338

Net Income Per Common Share:
Basic	$	0.76		$	1.04
Diluted	$	0.76		$	1.04
Average Common Shares Outstanding:
Basic		6,094,261			6,099,933
Diluted		6,098,221			6,109,947

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

Table of Contents

American National Bankshares Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 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		-			-			-			6,338			-			6,338

Change in unrealized gain (loss) on securities
available for sale, net of tax, $(297)		-			-			-			-			(555	)

Add: Reclassification adjustment for losses
on securities available for sale, net of
tax, $157		-			-			-			-			293

Other comprehensive income (loss)														(262	)		(262	)

Total comprehensive income																	6,076

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

Stock repurchased and retired		(39,050	)		(39	)		(169	)		(579	)		-			(787	)

Stock options exercised		11,137			11			183			-			-			194

Cash dividends declared, $0.69 per share		-			-			-			(4,206	)		-			(4,206	)

Balance, September 30, 2008		6,090,804		$	6,091		$	26,439		$	70,962		$	(778	)	$	102,714

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

Net income		-			-			-			4,641			-			4,641

Change in unrealized gain (loss) on securities
available for sale, net of tax, $979		-			-			-			-			1,822

Less: Reclassification adjustment for gains
on securities available for sale, net of
tax of $0		-			-			-			-			(2	)

Other comprehensive income														1,820			1,820

Total comprehensive income																	6,461

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

Stock options exercised		29,299			29			395			-			-			424

Stock option expense								47									47

Cash dividends declared, $0.69 per share		-			-						(4,206	)		-			(4,206	)

Balance, September 30, 2009		6,107,327		$	6,107		$	26,900		$	71,445		$	453		$	104,905

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

Table of Contents

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

	2009			2008
Cash Flows from Operating Activities:
Net income	$	4,641		$	6,338
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		1,334			1,020
Depreciation		877			808
Core deposit intangible amortization		283			283
Net amortization (accretion) of bond premiums and discounts		(180	)		(196	)
Net (gain) loss on sale or call of securities		(2	)		450
Gain on loans held for sale		(1,074	)		(535	)
Proceeds from sales of loans held for sale		53,564			29,302
Originations of loans held for sale		(54,566	)		(29,668	)
Net (gain) loss on foreclosed real estate		(17	)		7
Change in valuation allowance for foreclosed real estate		1,239			-
Stock-based compensation expense		47			-
Deferred income tax (benefit) expense		(727	)		274
Net change in interest receivable		(496	)		70
Net change in other assets		945			(760	)
Net change in interest payable		(318	)		(372	)
Net change in other liabilities		1,082			(978	)
Net cash provided by operating activities		6,632			6,043

Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale		-			1,098
Proceeds from maturities and calls of securities available for sale		55,248			35,534
Proceeds from maturities and calls of securities held to maturity		583			4,881
Purchases of securities available for sale		(100,525	)		(26,267	)
Net (increase) decrease in loans		29,238			(25,892	)
Purchases of bank property and equipment		(3,138	)		(4,491	)
Proceeds from sales of foreclosed real estate		317			297
Increase in foreclosed real estate		-			(26	)
Net cash (used in) investing activities		(18,277	)		(14,866	)

Cash Flows from Financing Activities:
Net change in demand, money market, and savings deposits		2,882			8,794
Net change in time deposits		4,275			(958	)
Net change in customer repurchase agreements		19,598			(2,940	)
Net change in short-term borrowings		(3,850	)		18,720
Net change in long-term borrowings		(5,112	)		4,888
Cash dividends paid		(4,206	)		(4,206	)
Repurchase of stock		(121	)		(787	)
Proceeds from exercise of stock options		424			194
Net cash provided by financing activities		13,890			23,705

Net Increase in Cash and Cash Equivalents		2,245			14,882

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

Cash and Cash Equivalents at End of Period	$	26,343		$	33,186

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

Table of Contents

AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2009; the consolidated statements of income for the three and nine months ended September 30, 2009 and 2008; the consolidated statements of changes in shareholders’ equity for the nine months ended September 30, 2009 and 2008; and the consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008. Operating results for the three and nine month periods ended September 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 December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)) (ASC 805 Business Combinations). 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.

Table of Contents

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (ASC 805 Business Combinations). 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” (ASC 820 Fair Value Measurements and Disclosures). 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 APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (ASC 825 Financial Instruments and ASC 270 Interim Reporting). 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” (ASC 320 Investments – Debt and Equity Securities). 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 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.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (ASC 855 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.

Table of Contents

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (ASC 860 Transfers and Servicing). SFAS 166 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a report 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 is effective for interim and annual periods beginning after November 15, 2009. 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 Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC 810 Consolidation). SFAS 167 improves financial reporting by enterprises involved with variable interest entities. SFAS 167 is effective for interim and annual periods beginning after November 15, 2009. Early adoption is prohibited. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – replacement of FASB Statement No. 162” (ASC 105 Generally Accepted Accounting Principles). 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. SFAS 168 is effective immediately. The Company does not expect the adoption of SFAS 168 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued EITF Issue No. 09-1, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” (ASC 470 Debt). EITF Issue No. 09-1 clarifies how an entity should account for an own-share lending arrangement that is entered into in contemplation of a convertible debt offering. EITF Issue No. 09-1 is effective for arrangements entered into on or after June 15, 2009. Early adoption is prohibited. The Company does not expect the adoption of EITF Issue No. 09-1 to have a material impact on its consolidated financial statements.

In June 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 112 (SAB 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 U.S. GAAP. The Company does not expect the adoption of SAB 112 to have a material impact on its consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05), “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.” ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall,” and provides clarification for the fair value measurement of liabilities. ASU 2009-05 is effective for the first reporting period including interim period beginning after issuance. The Company does not expect the adoption of ASU 2009-05 to have a material impact on its consolidated financial statements.

In September 2009, the FASB issued Accounting Standards Update No. 2009-12 (ASU 2009-12), “Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” ASU 2009-12 provides guidance on estimating the fair value of alternative investments. ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. The Company does not expect the adoption of ASU 2009-12 to have a material impact on its consolidated financial statements.

Table of Contents

In October 2009, the FASB issued Accounting Standards Update No. 2009-15 (ASU 2009-15), “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company does not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.

In October 2009, the Securities and Exchange Commission issued Release No. 33-99072, “Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers.” Release No. 33-99072 delays the requirement for non-accelerated filers to include an attestation report of their independent auditor on internal control over financial reporting with their annual report until the fiscal year ending on or after June 15, 2010.

Note 3 – Securities

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

	September 30, 2009
(in thousands)	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available for sale:
Debt securities:
Federal agencies	$	80,483	$	1,827	$	3	$	82,307
Mortgage-backed		35,741		1,657		231		37,167
State and municipal		51,483		2,466		15		53,934
Corporate		3,968		215		-		4,183
Equity securities:
FHLB stock – restricted		2,812		-		-		2,812
Federal Reserve stock – restricted		1,429		-		-		1,429
Other		121		-		-		121
Total securities available for sale		176,037		6,165		249		181,953

Debt securities held to maturity:
Mortgage-backed		211		14		-		225
State and municipal		6,329		277		-		6,606
Total securities held to maturity		6,540		291		-		6,831
Total securities	$	182,577	$	6,456	$	249	$	188,784

Table of Contents

	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 $2,812,000 at September 30, 2009. FHLB stock is generally viewed as a long term investment and as a restricted investment security which is carried at cost, because there is no market for the stock other than the FHLB 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.

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 September 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 or does not expect to recover the security’s entire amortized cost even if the Company does not intend to sell. As of September 30, 2009, the Company held three 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 September 30, 2009.

Table of Contents

September 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	$	10,015	$	3	$	10,015	$	3	$	-	$	-
Mortgage-backed		2,366		231		-		-		2,366		231
State and municipal		468		15		-		-		468		15
Total	$	12,849	$	249	$	10,015	$	3	$	2,834	$	246

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)	September 30, 2009		December 31, 2008

Construction and land development	$	46,175	$	63,361
Commercial real estate		209,470		207,160
Residential real estate		126,392		136,480
Home equity		62,519		57,170
Total real estate		444,556		464,171

Commercial and industrial		87,226		98,546
Consumer		7,406		8,393
Total loans	$	539,188	$	571,110

Table of Contents

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

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

Impaired loans with a valuation allowance	$	2,562	$	2,545
Impaired loans without a valuation allowance		1,615		647
Total impaired loans	$	4,177	$	3,192

Allowance provided for impaired loans,
included in the allowance for loan losses	$	1,186	$	1,164

Nonaccrual loans excluded from the impaired loan disclosure	$	1,292	$	1,574

As of and for the	Nine Months Ended		Nine Months Ended
(in thousands)	September 30, 2009		September 30, 2008

Average balance in impaired loans	$	3,409	$	5,390

Interest income recognized on impaired loans		100		128

Interest income recognized on nonaccrual loans		-		-

Interest on non-accrual loans had they been accruing		148		282

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 $4,558,000 at September 30, 2009 and $4,311,000 December 31, 2008.

Table of Contents

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

(in thousands)	Nine Months Ended September 30,			Year Ended December 31,			Nine Months Ended September 30,
	2009			2008			2008
Allowance for Loan Losses
Balance, beginning of period	$	7,824		$	7,395		$	7,395
Provision for loan losses		1,334			1,620			1,020
Charge-offs		(1,116	)		(1,564	)		(552	)
Recoveries		218			373			220
Balance, end of period	$	8,260		$	7,824		$	8,083

Reserve for unfunded lending commitments
Balance, beginning of period	$	475			151		$	151
Provision for unfunded commitments		(11	)		324			319
Charge-offs		(215	)		-			-
Balance, end of period	$	249		$	475		$	470

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 (ASC 805), “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 2009 that determined there has been no impairment in the value of goodwill.

The changes in the carrying amount of goodwill for the quarter ended September 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 September 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 September 30, 2009 was $1,792,000.

Table of Contents

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 September 30, 2009 and December 31, 2008 (in thousands):

	September 30, 2009		December 31, 2008

Customer repurchase agreements	$	71,339	$	51,741
FHLB overnight borrowings		4,000		7,850
	$	75,339	$	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 September 30, 2009, $98,157,000 in 1-4 family residential mortgage loans and $58,175,000 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 September 30, 2009 and December 31, 2008 (in thousands):


Due by September 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		675		3.78			2011		8,000		2.93
	$	8,675		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 September 30, 2036, but may be redeemed at the Company’s option beginning on September 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 September 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 the accounting pronouncement, “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.

Table of Contents

Note 10 – Stock Based Compensation

A summary of stock option transactions for the nine months ended September 30, 2009, is as follows:

Option

Weighted Average