UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2008
Commission
file number 0-12820
AMERICAN NATIONAL BANKSHARES
INC.
(Exact
name of registrant as specified in its charter)
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Virginia
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54-1284688
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(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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628 Main Street, Danville,
VA
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24541
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(Address
of principal executive offices)
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(Zip
Code)
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434-792-5111
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which
Registered
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Common
Stock, $1 par value
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The
Nasdaq Stock Market LLC
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(Nasdaq
Global Select Market)
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Securities
registered pursuant to section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer oSmaller reporting
company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.) Yes o No þ
The
aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 2008, based on the closing price, was
$95,898,967.
The
number of shares of the registrant’s common stock outstanding on March 13, 2009
was 6,079,161.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders
to be held on May 19, 2009, are incorporated by reference in Part III of this
report.
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PAGE
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ITEM
1
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3
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ITEM
1A
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8
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ITEM
1B
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Unresolved
Staff Comments
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None
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ITEM
2
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11
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ITEM
3
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12
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ITEM
4
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12
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ITEM
5
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12
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ITEM
6
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15
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ITEM
7
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16
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ITEM
7A
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23
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ITEM
8
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Financial
Statements and Supplementary Data
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35
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36
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37
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40
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41
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42
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43
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44
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ITEM
9
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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None
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ITEM
9A
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36
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ITEM
9B
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Other
Information
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None
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PART III
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ITEM
10
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Directors,
Executive Officers and Corporate Governance
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*
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ITEM
11
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Executive
Compensation
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*
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ITEM
12
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Security
Ownership of Certain Beneficial Owners and Management and
Related
Stockholder
Matters
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*
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ITEM
13
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Certain
Relationships and Related Transactions, and Director
Independence
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*
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ITEM
14
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Principal
Accounting Fees and Services
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*
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ITEM
15
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71
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_______________________________
*Certain information required by Item
10 is incorporated herein by reference to the information that appears under the
headings “Election of Directors,” “Election of Directors – Board Members Serving
on Other Publicly Traded Company Boards of Directors,” “Election of Directors –
Board of Directors and Committees - The Audit and Compliance Committee,”
“Section 16(a) Beneficial Ownership Reporting Compliance,” “Report of the Audit
and Compliance Committee,” and “Code of Conduct” in the Registrant’s Proxy
Statement for the 2009 Annual Meeting of Shareholders. The
information required by Item 401 of regulation S-K on executive officers is
disclosed herein.
The information required by Item 11 is
incorporated herein by reference to the information that appears under the
headings “Compensation Discussion and Analysis,” “Compensation Committee
Interlocks and Insider Participation,” and “Compensation Committee Report” in
the Registrant’s Proxy Statement for the 2009 Annual Meeting of
Shareholders.
The information required by Item 12 is
incorporated herein by reference to the information that appears under the
heading “Security Ownership” in the Registrant’s Proxy Statement for the 2009
Annual Meeting of Shareholders. The information required by Item
201(d) of Regulation S-K is disclosed herein. See Item 5, “Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.”
The information required by Item
13 is incorporated herein by reference to the information that appears under the
headings “Related Party Transactions” and “Election of Direectors - Board
Independence" in the Registrant's Proxy Statement for the 2009 Annual Meeting of
Shareholders.
The information required by Item 14 is
incorporated herein by reference to the information that appears under the
heading “Independent Public Accountants” in the Registrant’s Proxy Statement for
the 2009 Annual Meeting of Shareholders.
Forward-Looking
Statements
This
report contains forward-looking statements with respect to the financial
condition, results of operations and business of American National Bankshares
Inc. and its wholly owned subsidiary, American National Bank and Trust Company
(collectively referred to as the “Company”). These forward-looking
statements involve risks and uncertainties and are based on the beliefs and
assumptions of management of the Company and on information available to
management at the time these statements and disclosures were
prepared. Forward-looking statements are subject to numerous
assumptions, estimates, risks, and uncertainties that could cause actual
conditions, events, or results to differ materially from those stated or implied
by such forward-looking statements.
A variety
of factors, some of which are discussed in more detail in Item 1A – Risk
Factors, may affect the operations, performance, business strategy, and results
of the Company. Those factors include but are not limited to the
following:
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·
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Financial
market volatility including the level of interest rates could affect the
values of financial instruments and the amount of net interest income
earned;
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·
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General
economic or business conditions, either nationally or in the market areas
in which the Company does business, may be less favorable than expected,
resulting in deteriorating credit quality, reduced demand for credit, or a
weakened ability to generate
deposits;
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·
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Competition
among financial institutions may increase and competitors may have greater
financial resources and develop products and technology that enable those
competitors to compete more successfully than the
Company;
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·
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Businesses
that the Company is engaged in may be adversely affected by legislative or
regulatory changes, including changes in accounting
standards;
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·
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The
ability to retain key personnel;
and
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·
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The
failure of assumptions underlying the allowance for loan
losses.
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American National
Bankshares Inc. is a one-bank holding company organized under the laws of the
Commonwealth of Virginia in 1984. On September 1, 1984, American
National Bankshares Inc. acquired all of the outstanding capital stock of
American National Bank and Trust Company, a national banking association
chartered in 1909 under the laws of the United States. American
National Bank and Trust Company is the only banking subsidiary of American
National Bankshares Inc. In April 2006, AMNB Statutory Trust I, a
Delaware statutory trust (the “Trust”) and a wholly owned subsidiary of American
National Bankshares Inc., was formed for the purpose of issuing preferred
securities (the “Trust Preferred Securities”) in a private placement pursuant to
an applicable exemption from registration. Proceeds from the
securities were used to fund the acquisition of Community First Financial
Corporation (“Community First”). In April 2006, the Company
finalized the acquisition of Community First and acquired 100% of its preferred
and common stock through a merger transaction. Community First was a
bank holding company headquartered in Lynchburg, Virginia, and through its
subsidiary, Community First Bank, operated four banking offices serving the city
of Lynchburg and Bedford, Nelson, and Amherst Counties. The Company
entered into the merger agreement with Community First because it believed the
merger to be consistent with its expansion strategy to target entry into strong
markets that logically extend its existing footprint. The Company had
previously opened a full service banking office in the Lynchburg area and was
considering opening additional offices in that area.
The
operations of the Company are conducted at twenty banking offices and one loan
production office serving Southern and Central Virginia and the northern portion
of Central North Carolina. American National Bank and Trust Company
provides a full array of financial products and services, including commercial,
mortgage, and consumer banking; trust and investment services; and
insurance. Services are also provided through twenty-four ATMs,
“AmeriLink” Internet banking, and 24-hour “Access American” telephone
banking.
Competition and
Markets
Vigorous competition exists in the
Company’s service area. The Company competes not only with national,
regional, and community banks, but also with many other types of financial
institutions, including without limitation, savings banks, finance companies,
mutual and money market fund providers, brokerage firms, insurance companies,
credit unions, and mortgage companies. The Company has the largest
deposit market share in the City of Danville, as well as in the City of Danville
and Pittsylvania County, combined.
The
Southern Virginia market, in which the Company has a significant presence, is
under economic pressure. The region’s economic base has historically been
weighted toward the manufacturing sector. Increased global
competition has negatively impacted the textile industry and several
manufacturers have closed plants due to competitive pressures or the relocation
of some operations to foreign countries. Other important industries
include farming, tobacco processing and sales, food processing, furniture
manufacturing and sales, specialty glass manufacturing, and packaging tape
production. Companies within these industries, especially furniture
manufacturing, have also closed plants for reasons similar to those noted
above. Additional declines in manufacturing production and
unemployment could negatively impact the ability of certain borrowers to repay
loans. Also, the current economic and credit crisis, which is
resulting in rising unemployment and increasing bankruptcies, foreclosures and
bank failures nationally, may further intensify the economic pressure in
our markets.
Supervision and
Regulation
The Company is extensively regulated
under both federal and state law. The following information describes
certain aspects of that regulation applicable to the Company and does not
purport to be complete. Proposals to change the laws and regulations
governing the banking industry are frequently raised in Congress, in state
legislatures, and before the various bank regulatory agencies. The
likelihood and timing of any changes and the impact such changes might have on
the Company are impossible to determine with any certainty. A change
in applicable laws or regulations, or a change in the way such laws or
regulations are interpreted by regulatory agencies or courts, may have a
material impact on the business, operations, and earnings of the
Company.
American
National Bankshares Inc.
American National Bankshares Inc. is
qualified as a bank holding company (“BHC”) within the meaning of the Bank
Holding Company Act of 1956, as amended (the “BHC Act”), and is registered as
such with the Board of Governors of the Federal Reserve System (the
“FRB”). As a bank holding company, American National Bankshares Inc.
is required to file various reports and additional information with the FRB and
is also subject to examinations by the FRB.
The BHC Act prohibits, with certain
exceptions, a BHC from acquiring beneficial ownership or control of more than 5%
of the voting shares of any company, including a bank, without the FRB’s prior
approval and from engaging in any activity other than those of banking, managing
or controlling banks or other subsidiaries authorized under the BHC Act, or
furnishing services to or performing services for its
subsidiaries. Among the permitted activities is the ownership of
shares of any company the activities of which the FRB determines to be so
closely related to banking or managing or controlling banks as to be proper
incident thereto.
Under FRB policy, a BHC is expected to
serve as a source of financial and managerial strength to its subsidiary banks
and to commit resources to support those banks. This support may be
required at times when the BHC may not have the resources to provide
it. Under this policy, a BHC is expected to stand ready to use
available resources to provide adequate capital funds to its subsidiary banks
during periods of financial adversity and to maintain the financial flexibility
and capital-raising capacity to obtain additional resources for assisting its
subsidiary banks.
Under the Gramm-Leach-Bliley Act, a BHC
may elect to become a financial holding company and thereby engage in a broader
range of financial and other activities than are permissible for traditional
BHC’s. In order to qualify for the election, all of the depository
institution subsidiaries of the BHC must be well capitalized, well managed, and
have achieved a rating of “satisfactory” or better under the Community
Reinvestment Act (the “CRA”). Financial holding companies are
permitted to engage in activities that are “financial in nature” or incidental
or complementary thereto as determined by the FRB. The
Gramm-Leach-Bliley Act identifies several activities as “financial in nature,”
including insurance underwriting and sales, investment advisory services,
merchant banking and underwriting, and dealing or making a market in
securities. American National Bankshares Inc. has not elected to
become a financial holding company.
American
National Bank and Trust Company
American National Bank and Trust
Company is a federally chartered national bank and is a member of the Federal
Reserve System. It is subject to federal regulation by the Office of
the Comptroller of the Currency (the “OCC”), the FRB, and the Federal Deposit
Insurance Corporation (“FDIC”).
Depository institutions, including
American National Bank and Trust Company, are subject to extensive federal and
state regulations that significantly affect their business and
activities. Regulatory bodies have broad authority to implement
standards and initiate proceedings designed to prohibit deposit institutions
from engaging in unsafe and unsound banking practices. The standards
relate generally to operations and management, asset quality, interest rate
exposure, and capital. The agencies are authorized to take action
against institutions that fail to meet such standards.
As with other financial institutions,
the earnings of American National Bank and Trust Company are affected by general
economic conditions and by the monetary policies of the FRB. The FRB
exerts a substantial influence on interest rates and credit conditions,
primarily through open market operations in U.S. Government securities, setting
the reserve requirements of member banks, and establishing the discount rate on
member bank borrowings. The policies of the FRB have a direct impact
on loan and deposit growth and the interest rates charged and paid
thereon. They also impact the source and cost of funds and the rates
of return on investments. Changes in the FRB’s monetary policies have
had a significant impact on the operating results of American National Bank and
Trust Company and other financial institutions and are expected to continue to
do so in the future; however, the exact impact of such conditions and policies
upon the future business and earnings cannot accurately be
predicted.
Dividend
Restrictions and Capital Requirements
For
information regarding the limitation on bank dividends and risk-based capital
requirements, refer to Note 18 of the consolidated financial
statements. Additional information may be found in the Shareholder’s
Equity section of Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
FDIC
Insurance
American National Bank and Trust
Company’s deposits are currently insured up to the following amounts per insured
depositor by the Deposit Insurance Fund of the FDIC:
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·
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$250,000
for accounts other than retirement accounts and noninterest-bearing
transaction accounts;
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·
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$250,000
for retirement accounts; and
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·
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Unlimited
coverage for noninterest-bearing transaction accounts, which applies to
deposits in institutions such as American National Bank and Trust Company
that are participating in the FDIC’s Temporary Liquidity Guarantee
Program. For FDIC coverage purposes, interest-bearing checking
accounts with an interest rate of 0.50% or less are included in the
definition of noninterest-bearing transaction
accounts.
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Effective January 1, 2010, the standard
FDIC coverage limit per depositor will return to the prior amount of $100,000
for all deposit categories except for retirement accounts, which will continue
to be insured up to $250,000 per insured depositor.
On October 14, 2008, the FDIC announced
the Temporary Liquidity Guarantee Program (“TLG Program”) to strengthen
confidence and encourage liquidity in the banking system. The TLG
Program consists of two components: a temporary guarantee of newly-issued senior
unsecured debt the (“Debt Guarantee Program”) and a temporary unlimited
guarantee of funds in noninterest-bearing transaction accounts at FDIC-insured
institutions the (“Transaction Account Guarantee Program”). The
Company is participating in the Transaction Account Guarantee Program but is not
participating in the Debt Guarantee Program where it has the option of issuing
certain non-guaranteed senior unsecured debt.
Under federal law, deposits and certain
claims for administrative expenses and employee compensation against insured
depository institutions are afforded a priority over other general unsecured
claims against such an institution, including federal funds and letters of
credit, in the liquidation or other resolution of such an institution by any
receiver appointed by regulatory authorities. Such priority creditors
would include the FDIC.
Under the
risk-based deposit premium assessment system of the FDIC, the assessment rates
for an insured depository institution vary according to the level of risk
incurred in its activities. To arrive at an assessment rate for a
banking institution, the FDIC places it in one of four risk categories (referred
to as Risk Categories I, II, III and IV) determined by reference to its capital
levels and supervisory ratings. The assessment rates in 2008 ranged,
on an annual basis, from 5 to 43 basis points, depending on the insured
institution’s risk category as described above. Commencing in 2009,
assessment rates increased by 7 basis points in each risk category for the first
quarter of 2009. Further, for institutions such as American National
Bank and Trust Company that have elected to provide unlimited FDIC coverage for
noninterest-bearing transaction accounts, an additional assessment at the annual
rate of 10 basis points is due in 2009 for the amount of balances in
non-interest bearing transaction accounts that exceed the existing coverage
limit of $250,000 for deposit accounts other than retirement accounts and
noninterest-bearing transaction accounts.
Under a
revised assessment schedule effective April 1, 2009, The FDIC has set new
initial base assessment rates that range, on an annual basis, from 12 to 45
basis points per $100 of assessable deposits, depending on the insured
institution’s risk category as described above. These initial base
assessment rates are subject to possible adjustments, including (1) for all risk
categories, a potential increase for unsecured liabilities and potential
decrease for long-term unsecured debt and (2) for all risk categories, other
than Risk Category I, a potential increase for brokered deposits.
In February 2009, The FDIC proposed
that an emergency special assessment up to 20 basis points per $100 of deposits
be collected from all insured institutions in September 2009 and further
proposed that additional special assessments of up to 10 basis points each be
collected as considered necessary thereafter to maintain public confidence in
federal deposit insurance.
The level of FDIC insurance premium
assessments in 2007 and 2008 for American National Bank and Trust Company was
reduced by a cumulative total of $499,000 though application of a one-time
premium assessment credit that resulted from the provisions of the Federal
Deposit Insurance Reform Act of 2005.
The
Federal Deposit Insurance Corporation Improvement Act
Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 (“FDICIA”), the federal banking agencies
possess broad powers to take prompt corrective action to resolve problems of
insured depository institutions. The extent of these powers depends
upon whether the institution is “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” or “critically
undercapitalized,” as defined by the law. Under regulations
established by the federal banking agencies a “well capitalized” institution
must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at
least 10%, and a leverage ratio of at least 5%, and not be subject to a capital
directive order. An “adequately capitalized” institution must have a
Tier 1 capital ratio of a least 4%, a total capital ratio of at least 8%, and a
leverage ratio of at least 4%, or 3% in some cases. Management
believes, as of December 31, 2008 and 2007, that the Company met the
requirements for being classified as “well capitalized.”
As required by FDICIA, the federal
banking agencies also have adopted guidelines prescribing safety and soundness
standards relating to, among other things, internal controls and information
systems, internal audit systems, loan documentation, credit underwriting, and
interest rate exposure. In general, the guidelines require
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. In addition, the agencies adopted
regulations that authorize, but do not require, an institution which has been
notified that it is not in compliance with safety and soundness standard to
submit a compliance plan. If, after being so notified, an institution
fails to submit an acceptable compliance plan, the agency must issue an order
directing action to correct the deficiency and may issue an order directing
other actions of the types to which an undercapitalized institution is subject
under the prompt corrective action provisions described above.
Community
Reinvestment and Consumer Protection Laws
In
connection with its lending activities, the Company is subject to a number of
federal laws designed to protect borrowers and promote lending to various
sectors of the economy and population. These include the Equal Credit
Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the
Real Estate Settlement Procedures Act, and the Community Reinvestment
Act.
The CRA requires
the appropriate federal banking agency, in connection with its examination of a
bank, to assess the bank’s record in meeting the credit needs of the communities
served by the bank, including low and moderate income
neighborhoods. Furthermore, such assessment is also required of banks
that have applied, among other things, to merge or consolidate with or acquire
the assets or assume the liabilities of an insured depository institution, or to
open or relocate a branch. In the case of a BHC applying for approval
to acquire a bank or BHC, the record of each subsidiary bank of the applicant
BHC is subject to assessment in considering the application. Under
the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,”
“needs to improve,” or “substantial non-compliance.” The Company was
rated “outstanding” in its most recent CRA evaluation.
Anti-Money
Laundering Legislation
The
Company is subject to the Bank Secrecy Act and other anti-money laundering laws
and regulations, including the USA Patriot Act of 2001. Among other
things, these laws and regulations require the Company to take steps to prevent
the use of the Company for facilitating the flow of illegal or illicit money, to
report large currency transactions, and to file suspicious activity
reports. The Company is also required to carry out a comprehensive
anti-money laundering compliance program. Violations can result in
substantial civil and criminal sanctions. In addition, provisions of
the USA Patriot Act require the federal financial institution regulatory
agencies to consider the effectiveness of a financial institution’s anti-money
laundering activities when reviewing bank mergers and BHC
acquisitions.
Emergency
Economic Stabilization Act of 2008
In
accordance with its stated purpose of restoring liquidity and stability to the
financial system of the United States, the Emergency Economic Stabilization Act
of 2008 established the Troubled Asset Relief Program (“TARP”), under which the
United States Department of the Treasury (“UST”) is authorized to purchase
preferred stock from qualified financial institutions. The Company
meets the requirements to be considered a qualified financial
institution. Under TARP, for organizations like the Company, the
federal government’s purchase limitation is generally defined as 3% of
risk-weighted assets, or about $18 million for the Company. The terms
of the preferred stock generally provide that:
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·
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Cumulative
dividends will be paid at a rate of 5% for the first five years and 9%
thereafter;
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·
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Any
increase in the dividend rate paid on common stock during the first three
years will require the consent of the
UST;
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·
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Any
repurchase of common stock will require the consent of the
UST;
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·
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Conditions
and limitations will be placed on executive compensation;
and
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·
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UST
will receive warrants, with a term of 10 years, to purchase a number of
shares of common stock having an aggregate market price equal to 15% of
the preferred stock amount on the day of
investment.
|
After
considering the appropriateness of applying under UST’s capital purchase
program, the Company has elected not to participate. The Company
believes it has sufficient capital to meet the growth plans and credit needs of
the communities it serves without government support.
Employees
At December 31, 2008, the Company
employed 258 full-time equivalent persons. The relationship with
employees is considered to be good.
Internet Access to Company
Documents
The Company provides access to its
Securities and Exchange Commission (the “SEC”) filings through a link on the
Investor Relations page of the Company’s website at
www.amnb.com. Reports available include the annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after the reports
are filed electronically with the SEC. The SEC maintains an Internet
site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at
www.sec.gov.
Executive Officers of the
Registrant
The
following lists, as of December 31, 2008, the named executive officers of the
registrant, their ages, and their positions.
Name Age Position
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Charles
H. Majors
|
63
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President
and Chief Executive Officer of the
Company.
|
|
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Neal
A. Petrovich *
|
46
|
Senior
Vice President, Chief Financial Officer, Treasurer and Secretary of
American National Bankshares Inc.; Executive Vice President, Chief
Financial Officer, and Cashier of American National Bank and Trust Company
since November 2005; prior thereto, Senior Vice President, Chief Financial
Officer and Cashier of American National Bank and Trust Company since May
2004; prior thereto, Senior Vice President of SouthTrust
Bank.
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|
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Jeffrey
V. Haley
|
48
|
Senior
Vice President of American National Bankshares Inc.; President of Trust
and Financial Services and Executive Vice President of American National
Bank and Trust Company since July 2008; prior thereto, Executive Vice
President and Chief Operating Officer of American National Bank and Trust
Company since November 2005; prior thereto, Senior Vice President and
Chief Administrative Officer of American National Bank and Trust
Company.
|
|
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R.
Helm Dobbins
|
57
|
Senior
Vice President of American National Bankshares Inc.; Executive Vice
President and Chief Credit Officer of American National Bank and Trust
Company since November 2005; prior thereto, Senior Vice President and
Chief Credit Officer of American National Bank and Trust Company since
June 2003; Executive Vice President and Chief Credit Officer of Citizens
Bank and Trust Co. from 1998 to
2003.
|
|
|
S.
Cabell Dudley, Jr.
|
63
|
Senior
Vice President of American National Bankshares Inc. since December 2008;
Executive Vice President and Chief Lending Officer of American National
Bank and Trust Company since July 2008; prior thereto Senior Vice
President and Commercial Relationship Manager since March 2006, prior
thereto Senior Vice President of Wachovia
Bank.
|
|
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Dabney
T. P. Gilliam, Jr.
|
54
|
Senior
Vice President of American National Bankshares Inc. since December 2008;
Executive Vice President and Chief Administration Officer of American
National Bank and Trust Company since July 2008; prior thereto Senior Vice
President of American National Bank and Trust Company since February
2007; prior thereto Chief Financial Officer of RACO, Inc. from
January 2006 to February 2007; prior thereto Senior Vice President, Senior
Loan Officer and Chief Banking Officer of American National Bank and Trust
Company.
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|
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*
Mr. Petrovich resigned from the Company in February
2009.
|
ITEM 1A – RISK FACTORS
The
Company’s business is subject to interest rate risk and variations in interest
rates may negatively affect financial performance.
Changes
in the interest rate environment may reduce the Company’s profits. It
is expected that the Company will continue to realize income from the
differential or “spread” between the interest earned on loans, securities, and
other interest earning assets, and interest paid on deposits, borrowings and
other interest bearing liabilities. Net interest spreads are affected
by the difference between the maturities and repricing characteristics of
interest earning assets and interest bearing liabilities. In
addition, loan volume and yields are affected by market interest rates on loans,
and rising interest rates generally are associated with a lower volume of loan
originations. Management cannot ensure that it can minimize the
Company’s interest rate risk. While an increase in the general level
of interest rates may increase the loan yield and the net interest margin, it
may adversely affect the ability of certain borrowers with variable rate loans
to pay the interest and principal of their obligations. Accordingly,
changes in levels of market interest rates could materially and adversely affect
the net interest spread, asset quality, loan origination volume, and overall
profitability of the Company.
The
Company faces strong competition from financial services companies and other
companies that offer banking services which could negatively affect the
Company’s business.
Increased
competition may result in reduced business for the
Company. Ultimately, the Company may not be able to compete
successfully against current and future competitors. Many competitors offer the
same banking services that the Company offers in its service
area. These competitors include national, regional, and community
banks. The Company also faces competition from many other types of
financial institutions, including without limitation, savings banks, finance
companies, mutual and money market fund providers, brokerage firms, insurance
companies, credit unions, and mortgage companies. In particular,
competitors include several major financial companies whose greater resources
may afford them a marketplace advantage by enabling them to maintain numerous
banking locations and ATMs and conduct extensive promotional and
advertising campaigns.
Additionally,
banks and other financial institutions with larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have larger lending
limits and are thereby able to serve the credit needs of larger customers. Areas
of competition include interest rates for loans and deposits, efforts to obtain
loans and deposits, and range and quality of products and services provided,
including new technology-driven products and services. Technological
innovation continues to contribute to greater competition in domestic and
international financial services markets as technological advances enable more
companies to provide financial services. If the Company is unable to
attract and retain banking customers, it may be unable to continue to grow loan
and deposit portfolios and its results of operations and financial condition may
otherwise be adversely affected.
Changes
in economic conditions could materially and negatively affect the Company’s
business.
The
Company’s business is directly impacted by factors such as economic, political,
and market conditions, broad trends in industry and finance, legislative and
regulatory changes, changes in government monetary and fiscal policies, and
inflation, all of which are beyond the Company’s control. A
deterioration in economic conditions, whether caused by national or local
concerns, especially within the Company’s market area, could result in the
following consequences, any of which could hurt business materially: loan
delinquencies may increase; problem assets and foreclosures may increase; demand
for products and services may decrease; low cost or noninterest bearing deposits
may decrease; and collateral for loans, especially real estate, may decline in
value, in turn reducing customers’ borrowing power, and reducing the value of
assets and collateral associated with existing loans.
Trust and
Investment Services fee revenue is largely dependent on the fair market value of
assets under care and on trading volumes in the brokerage business. General
economic conditions and their subsequent effect on the securities markets tend
to act in correlation. When general economic conditions deteriorate,
consumer and corporate confidence in securities markets erodes, and Trust and
Investment Service revenues are negatively impacted as asset values and trading
volumes decrease.
A
downturn in the real estate market could materially and negatively affect the
Company’s business.
A
downturn in the real estate market could negatively affect the Company’s
business because significant portions of its loans are secured by real estate
(approximately 81% as of December 31, 2008). The ability to recover on defaulted
loans by selling the real estate collateral could then be diminished and the
Company would be more likely to suffer losses on defaulted loans.
Substantially
all of the Company’s real property collateral is located in its market
area. If there is a significant decline in real estate values,
especially in our market area, the collateral for loans would provide
significantly less security. Real estate values could be affected by,
among other things, an economic slowdown and an increase in interest
rates.
The
Company is dependent on key personnel and the loss of one or more of those key
personnel may materially and adversely affect the Company’s
prospects.
The
Company currently depends heavily on the services of a number of key management
personnel. The loss of key personnel could materially and adversely
affect the results of operations and financial condition. The
Company’s success also depends in part on the ability to attract and retain
additional qualified management personnel. Competition for such
personnel is strong in the banking industry and the Company may not be
successful in attracting or retaining the personnel it requires.
The
Company is subject to extensive regulation which could adversely affect its
business.
The
Company’s operations are subject to extensive regulation by federal, state, and
local governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of the Company’s operations. Because the Company’s business is highly
regulated, the laws, rules, and regulations applicable to it are subject to
regular change. There are currently proposed laws, rules, and regulations that,
if adopted, would impact the Company’s operations. There can be no assurance
that these proposed laws, rules, and regulations, or any other laws, rules, or
regulations, will not be adopted in the future, which could (i) make
compliance much more difficult and expensive, (ii) restrict the ability to
originate, broker or sell loans, or accept certain deposits, (iii) further
limit or restrict the amount of commissions, interest, or other charges earned
on loans originated by the Company, or (iv) otherwise adversely affect the
Company’s business or prospects for business.
The
primary source of the Company’s income from which it pays dividends is the
receipt of dividends from its subsidiary bank.
The
availability of dividends from the Company is limited by various statutes and
regulations. It is possible, depending upon the financial condition
of the subsidiary bank and other factors, that the Office of the Comptroller of
the Currency could assert that payment of dividends or other payments is an
unsafe or unsound practice. In the event American National Bank and
Trust Company was unable to pay dividends to American National Bankshares Inc.,
the holding company would likely have to reduce or stop paying common stock
dividends. The Company’s failure to pay dividends on its common stock
could have a material adverse effect on the market price of the common
stock.
A
limited trading market exists for the Company’s common stock which could lead to
price volatility.
The
Company’s common stock is approved for quotation on the NASDAQ Global Select
Market, but the trading volume has generally been modest. The limited trading
market for the common stock may cause fluctuations in the stock’s market value
to be exaggerated, leading to price volatility in excess of that which would
occur in a more active trading market. In addition, even if a more
active market in the Company’s common stock develops, management cannot ensure
that such a market will continue or that shareholders will be able to sell their
shares.
The
allowance for loan losses may not be adequate to cover actual
losses.
In
accordance with accounting principles generally accepted in the United States,
an allowance for loan losses is maintained to provide for loan
losses. The allowance for loan losses may not be adequate to cover
actual credit losses, and future provisions for credit losses could materially
and adversely affect operating results. The allowance for loan losses
is based on prior experience, as well as an evaluation of the risks in the
current portfolio. The amount of future losses is susceptible to
changes in economic, operating, and other conditions, including changes in
interest rates, all of which are beyond the Company’s control; and these losses
may exceed current estimates. Federal regulatory agencies, as an
integral part of their examination process, review the Company’s loans and
allowance for loan losses. While management believes that the
allowance for loan losses is adequate to cover current losses, it cannot make
assurances that it will not further increase the allowance for loan losses or
that regulators will not require it to increase this
allowance. Either of these occurrences could adversely affect
earnings.
The
allowance for loan losses requires management to make significant estimates that
affect the financial statements. Due to the inherent nature of this estimate,
management cannot provide assurance that it will not significantly increase the
allowance for loan losses which could materially and adversely affect
earnings.
The
Company is exposed to operational risk.
The
Company is exposed to many types of operational risks, including reputation,
legal, and compliance risk, the risk of fraud or theft by employees or
outsiders, unauthorized transactions by employees or operational errors,
clerical or record-keeping errors, and errors resulting from faulty or disabled
computer or telecommunications systems.
Negative
public opinion can result from the actual or alleged conduct in any number of
activities, including lending practices, corporate governance, and acquisitions,
and from actions taken by government regulators and community organizations in
response to those activities. Negative public opinion can adversely
affect the Company’s ability to attract and retain customers and can expose it
to litigation and regulatory action.
Certain
errors may be repeated or compounded before they are discovered and successfully
rectified. The Company’s necessary dependence upon automated systems to record
and process its transactions may further increase the risk that technical system
flaws or employee tampering or manipulation of those systems will result in
losses that are difficult to detect. The Company may also be subject
to disruptions of its operating systems arising from events that are wholly or
partially beyond its control (for example, computer viruses or electrical or
telecommunications outages), which may give rise to disruption of service to
customers and to financial loss or liability. The Company is further exposed to
the risk that its external vendors may be unable to fulfill their contractual
obligations (or will be subject to the same risk of fraud or operational errors
by their respective employees as is the Company) and to the risk that the
Company’s (or its vendors’) business continuity and data security systems prove
to be inadequate.
Changes
in accounting standards could impact reported earnings.
From time
to time there are changes in the financial accounting and reporting standards
that govern the preparation of the Company’s financial
statements. These changes can materially impact how the Company
records and reports its financial condition and results of
operations. In some instances, the Company could be required to apply
a new or revised standard retroactively, resulting in the restatement of prior
period financial statements.
The
Company’s information systems may experience an interruption or breach in
security.
The
Company relies heavily on communications and information systems to conduct
business. Any failure, interruption, or breach in security of these
systems could result in failures or disruptions in the Company’s relationship
management, general ledger, deposit, loan, and other systems. While
the Company has policies and procedures designed to prevent or limit the effect
of such failure, interruption, or security breach, there can be no assurance
that they will not occur or, if they do occur, that they will be adequately
addressed. Any such occurrences could damage the Company’s
reputation, result in a loss of customer business, subject the Company to
additional regulatory scrutiny, or expose the company to civil litigation and
possible financial liability, any of which could have a material adverse affect
on the Company’s financial condition and results of operations.
Recent
Negative Developments in the Financial Industry and Credit Markets May Adversely
Affect the Company’s Operations and Results.
Negative
developments in the latter half of 2007 and during 2008 in the credit and
securitization markets have resulted in uncertainty in the financial markets in
general with the expectation of the general economic downturn continuing into
2009. Loan portfolio quality has deteriorated at many institutions,
and the Company also has experienced some deterioration. In addition,
the value of real estate collateral supporting many home mortgages, including
mortgages held by the Company, has declined and may continue to
decline. Bank and bank holding company stock prices have been
negatively affected, as has the ability of banks and bank holding companies to
raise capital or borrow in the debt markets. As a result, the
potential exists for new federal or state laws and regulations regarding lending
and funding practices and liquidity standards, and bank regulatory agencies are
expected to be active in responding to concerns and trends identified in
examinations. Negative developments in the financial industry and
credit markets, and the impact of new legislation in response to those
developments, may negatively impact the Company’s operations by restricting its
business operations, including its ability to originate or sell loans, and
adversely impact its financial performance. In addition, these risks
could affect the value of the Company’s loan portfolio as well as the value of
its investment portfolio, which would also negatively affect its financial
performance.
As of
December 31, 2008, the Company maintained twenty banking offices located in
Danville, Pittsylvania County, Martinsville, Henry County, Halifax County,
Lynchburg, Bedford County, Campbell County, and Nelson County in Virginia and
Caswell County in North Carolina. The Company also operates a loan
production office in Greensboro, North Carolina.
The
principal executive offices of the Company are located at 628 Main Street in the
business district of Danville, Virginia. This building, owned by the
Company, was originally constructed in 1973 and has three floors totaling
approximately 27,000 square feet.
The
Company owns a building located at 103 Tower Drive in Danville,
Virginia. This three-story facility serves as a retail banking office
and houses certain of the Company’s finance, administrative, and operations
staff.
The
Company owns an office building on 203 Ridge Street, Danville, Virginia, which
is leased to Bankers Insurance, LLC. The Company has a minority
ownership interest in Bankers Insurance, LLC.
The
Company purchased an office building in 2008 at 445 Mount Cross Road in
Danville, Virginia where it consolidated two banking offices in January 2009 and
gained additional administrative space.
The
Company owns eleven other retail office locations for a total of fifteen owned
buildings. There are no mortgages or liens against any of the
properties owned by the Company. The Company operates twenty-four
Automated Teller Machines (“ATMs”) on owned or leased facilities. The
Company leases seven of the retail office locations and a storage
warehouse.
There are no material pending legal
proceedings to which the Company is a party or to which the property of the
Company is subject.
No matters were submitted during the
fourth quarter of the fiscal year covered by this report to a vote of security
holders of the Company through a solicitation of proxies or
otherwise.
The Company’s common stock is traded on
the NASDAQ Global Select Market under the symbol “AMNB.” At December
31, 2008, the Company had 1,662 shareholders of record. The following
table presents the high and low closing sales prices for the Company’s common
stock and dividends declared for the past two years.
|
Market Price of the Company’s Common
Stock
|
||||||||||||
|
Closing
Price
|
Dividends
|
|||||||||||
|
2008
|
High
|
Low
|
Per Share
|
|||||||||
|
4th
quarter
|
$ | 18.25 | $ | 14.01 | $ | 0.23 | ||||||
|
3rd
quarter
|
18.20 | 15.80 | 0.23 | |||||||||
|
2nd
quarter
|
22.00 | 17.45 | 0.23 | |||||||||
|
1st
quarter
|
22.64 | 18.65 | 0.23 | |||||||||
| $ | 0.92 | |||||||||||
|
Closing
Price
|
Dividends
|
|||||||||||
|
2007
|
High
|
Low
|
Per Share
|
|||||||||
|
4th
quarter
|
$ | 22.76 | $ | 19.40 | $ | 0.23 | ||||||
|
3rd
quarter
|
22.96 | 20.50 | 0.23 | |||||||||
|
2nd
quarter
|
23.08 | 22.15 | 0.23 | |||||||||
|
1st
quarter
|
23.68 | 22.02 | 0.22 | |||||||||
| $ | 0.91 | |||||||||||
The table
below presents share repurchase activity during the quarter ended December 31,
2008.
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Program
|
Maximum
Number of Shares That May Yet Be Purchased Under the Program
|
|||||||||||||
|
October
1-31, 2008
|
4,500 | $ | 16.03 | 4,500 | 92,350 | |||||||||||
|
November
1-30, 2008
|
1,100 | 17.07 | 1,100 | 91,250 | ||||||||||||
|
December
1-31, 2008
|
1,500 | 17.05 | 1,500 | 89,750 | ||||||||||||
| 7,100 | $ | 16.40 | 7,100 | |||||||||||||
Stock Compensation
Plans
The
Company maintains the 2008 Stock Incentive Plan (“2008 Plan”), which is designed
to attract and retain qualified personnel in key positions, provide employees
with a proprietary interest in the Company as an incentive to contribute to the
success of the Company, and reward employees for outstanding performance and the
attainment of targeted goals. The 2008 Plan was adopted by the Board
of Directors of the Company on February 19, 2008 and approved by the
stockholders on April 22, 2008 at the Company’s 2008 Annual
Meeting. The 2008 Plan provides for the granting of restricted stock
awards and incentive and non-statutory options to employees and directors on a
periodic basis, at the discretion of the Board or a Board designated
committee. The 2008 Plan authorized the issuance of up to 500,000
shares of common stock. The 2008 Plan replaced the Company’s stock option plan
that was approved by the shareholders at the 1997 Annual Meeting, which plan
terminated in 2006 (the “1997 Option Plan”).
The 2008
Plan is administered by a Committee of the Board of Directors of the Company
comprised of independent directors. Under the 2008 Plan, the
Committee determines which employees will be granted restricted stock awards and
options, whether such options will be incentive or non-statutory options, the
number of shares subject to each option, whether such options may be exercised
by delivering other shares of common stock, and when such options become
exercisable. In general, the per share exercise price of an incentive
stock option must be at least equal to the fair market value of a share of
common stock on the date the option is granted. Restricted stock
would be granted under terms and conditions established by the
Committee.
Stock
options become vested and exercisable in the manner specified by the
Committee. Each stock option or portion thereof shall be exercisable
at any time on or after it vests and is exercisable until ten years after its
date of grant. As of December 31, 2008, 159,610 shares remain
exercisable under the 1997 Option Plan and 14,750 shares are exercisable under
the 2008 Plan. There were 59,000 stock options awarded in
2008. All options granted in 2008 had multi-year vesting schedules to
enhance employee retention.
|
December 31, 2008
|
||||||||||||
|
Number
of Shares
to
be Issued Upon Exercise
of
Outstanding Options
|
Weighted-Average
Per Share Exercise Price of Outstanding Options
|
Number
of Shares Remaining Available
for
Future
Issuance
Under
Stock Compensation Plans
|
||||||||||
|
Equity
compensation plans approved
by shareholders
|
218,610 | $ | 20.31 | 441,000 | ||||||||
|
Equity
compensation plans not approved by shareholders
|
- | - | - | |||||||||
|
Total
|
218,610 | $ | 20.31 | 441,000 | ||||||||
Comparative Stock
Performance
The
following graph compares the Company’s cumulative total return to its
shareholders with the returns of two indexes for the five-year period ended
December 31, 2008. The cumulative total return was calculated taking
into consideration changes in stock price, cash dividends, stock dividends, and
stock splits since December 31, 2003. The indexes are the NASDAQ
Composite Index; the SNL Bank $500 Million-$1Billlion Index, which includes bank
holding companies with assets of $500 million to $1 billion and is published by
SNL Financial, LC.
American
National Bankshares Inc.
| Period Ending | ||||||||||||||||||||||||
|
Index
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
||||||||||||||||||
|
American
National Bankshares Inc.
|
100.00 | 95.98 | 95.46 | 99.37 | 88.72 | 79.51 | ||||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 108.59 | 110.08 | 120.56 | 132.39 | 78.72 | ||||||||||||||||||
|
SNL
Bank $500M-$1B
|
100.00 | 113.32 | 118.18 | 134.41 | 107.71 | 69.02 | ||||||||||||||||||
The
following table sets forth selected financial data for the Company for the last
five years:
|
(in
thousands, except per share amounts and ratios)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Results
of Operations:
|
||||||||||||||||||||
|
Interest
income
|
$ | 42,872 | $ | 48,597 | $ | 45,070 | $ | 32,479 | $ | 30,120 | ||||||||||
|
Interest
expense
|
15,839 | 19,370 | 16,661 | 8,740 | 7,479 | |||||||||||||||
|
Net
interest income
|
27,033 | 29,227 | 28,409 | 23,739 | 22,641 | |||||||||||||||
|
Provision
for loan losses
|
1,620 | 403 | 58 | 465 | 3,095 | |||||||||||||||
|
Noninterest
income
|
7,913 | 8,822 | 8,458 | 7,896 | 6,510 | |||||||||||||||
|
Noninterest
expense
|
22,124 | 21,326 | 20,264 | 17,079 | 15,011 | |||||||||||||||
|
Income
before income tax provision
|
11,202 | 16,320 | 16,545 | 14,091 | 11,045 | |||||||||||||||
|
Income
tax provision
|
3,181 | 4,876 | 5,119 | 4,097 | 3,032 | |||||||||||||||
|
Net
income
|
$ | 8,021 | $ | 11,444 | $ | 11,426 | $ | 9,994 | $ | 8,013 | ||||||||||
|
Period-end
Balances:
|
||||||||||||||||||||
|
Securities
|
$ | 140,816 | $ | 157,149 | $ | 162,621 | $ | 165,629 | $ | 188,163 | ||||||||||
|
Loans,
net of unearned income
|
571,110 | 551,391 | 542,228 | 417,087 | 407,269 | |||||||||||||||
|
Deposits
|
589,138 | 581,221 | 608,528 | 491,651 | 485,272 | |||||||||||||||
|
Assets
|
789,184 | 772,288 | 777,720 | 623,503 | 619,065 | |||||||||||||||
|
Shareholders'
equity
|
102,300 | 101,511 | 94,992 | 73,419 | 71,000 | |||||||||||||||
|
Shareholders'
equity - tangible (a)
|
77,757 | 76,591 | 69,695 | 73,287 | 70,516 | |||||||||||||||
|
Per
Share Information:
|
||||||||||||||||||||
|
Earnings
- basic
|
$ | 1.32 | $ | 1.86 | $ | 1.91 | $ | 1.83 | $ | 1.43 | ||||||||||
|
Earnings
- diluted
|
1.31 | 1.86 | 1.90 | 1.81 | 1.42 | |||||||||||||||
|
Dividends
|
0.92 | 0.91 | 0.87 | 0.83 | 0.79 | |||||||||||||||
|
Book
value
|
16.81 | 16.59 | 15.42 | 13.49 | 12.86 | |||||||||||||||
|
Book
value - tangible (a)
|
12.78 | 12.52 | 11.31 | 13.47 | 12.77 | |||||||||||||||
|
Ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
1.02 | % | 1.48 | % | 1.51 | % | 1.61 | % | 1.26 | % | ||||||||||
|
Return
on average shareholders' equity
|
7.79 | 11.69 | 12.72 | 13.95 | 11.15 | |||||||||||||||
|
Return
on average tangible equity (b)
|
10.60 | 16.09 | 16.60 | 14.35 | 11.72 | |||||||||||||||
|
Net
interest margin - taxable equivalent
|
3.87 | 4.24 | 4.20 | 4.17 | 3.90 | |||||||||||||||
|
Average
shareholders' equity / average assets
|
13.10 | 12.65 | 11.85 | 11.57 | 11.34 | |||||||||||||||
|
Dividend
payout ratio
|
69.89 | 48.82 | 45.58 | 45.39 | 55.13 | |||||||||||||||
|
Net
charge-offs to average loans
|
0.21 | 0.05 | 0.10 | 0.56 | 0.10 | |||||||||||||||
|
Allowance
for loan losses to period-end loans
|
1.37 | 1.34 | 1.34 | 1.46 | 1.96 | |||||||||||||||
|
Nonperforming
assets to total assets
|
0.91 | 0.42 | 0.45 | 0.72 | 1.35 | |||||||||||||||
|
(a)
- Excludes goodwill and other intangible assets.
|
||||||||||||||||||||
|
(b)
- Excludes amortization expense, net of tax, of intangible
assets.
|
||||||||||||||||||||
The purpose of this discussion is to
focus on significant changes in the financial condition and results of
operations of the Company during the past three years. The discussion
and analysis are intended to supplement and highlight information contained in
the accompanying Consolidated Financial Statements and the selected financial
data presented elsewhere in this Annual Report on Form
10-K. Financial institutions acquired by the Company during the past
three years and accounted for as purchases are reflected in the financial
position and results of operations of the Company since the date of their
acquisition.
RECLASSIFICIATION
In certain circumstances,
reclassifications have been made to prior period information to conform to the
2008 presentation.
CRITICAL
ACCOUNTING POLICIES
The
accounting and reporting policies followed by the Company conform with U.S.
generally accepted accounting principles (“GAAP”) and they conform to general
practices within the banking industry. The Company’s critical
accounting policies, which are summarized below, relate to (1) the allowance for
loan losses and (2) goodwill impairment. A summary of the Company’s
significant accounting policies is set forth in Note 1 to the Consolidated
Financial Statements.
The
financial information contained within the Company’s financial statements is, to
a significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already
occurred. A variety of factors could affect the ultimate value that
is obtained when earning income, recognizing an expense, recovering an asset, or
relieving a liability. In addition, GAAP itself may change from one
previously acceptable method to another method.
Allowance for Loan Losses
and Reserve for Unfunded Lending Commitments
The
allowance for loan losses is an estimate of the losses inherent in the loan
portfolio at the balance sheet date. The allowance is based on two
basic principles of accounting: (i) Statement of Financial Accounting Standards
(“SFAS”) 5, Accounting for
Contingencies, which requires that losses be accrued when they are
probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for
Impairment of a Loan, which requires that losses on impaired loans be
accrued based on the differences between the value of collateral, present value
of future cash flows, or values observable in the secondary market, and the loan
balance.
The Company’s allowance for loan losses
has three basic components: the formula allowance, the specific
allowance and the unallocated allowance. Each of these components is
determined based upon estimates that can and do change. The formula
allowance uses a historical loss view as an indicator of future losses along
with various qualitative factors, including levels and trends in delinquencies,
nonaccrual loans, charge-offs and recoveries; trends in volume and terms of
loans; effects of changes in underwriting standards; experience of lending staff
and economic conditions; and portfolio concentrations. In the formula allowance,
the historical loss rate is combined with the qualitative factors, resulting in
an adjusted loss factor for each risk-grade category of loans. The
adjusted loss factor is multiplied by the period-end balances for each
risk-grade category. The formula allowance is calculated for a range
of outcomes. The specific allowance uses various techniques to arrive
at an estimate of loss for specifically identified impaired loans. The
unallocated allowance includes estimated losses whose impact on the portfolio
has yet to be recognized in either the formula or specific
allowance. The use of these values is inherently subjective and
actual losses could be greater or less than the estimates.
The reserve for unfunded loan
commitments is an estimate of the losses inherent in off-balance-sheet loan
commitments at the balance sheet date. It is calculated by
multiplying an estimated loss factor by an estimated probability of funding, and
then by the period-end amounts for unfunded commitments. The reserve
for unfunded loan commitments is included in other liabilities.
Goodwill
Impairment
The Company tests goodwill on an annual
basis or more frequently if events or circumstances indicate that there may have
been impairment. If the carrying amount of goodwill exceeds its
implied fair value, the Company would recognize an impairment loss in an amount
equal to that excess. The goodwill impairment test requires
management to make judgments in determining the assumptions used in the
calculations. The goodwill impairment testing conducted by the
Company in 2008 indicated that goodwill is not impaired and is properly recorded
in the financial statements.
NON-GAAP
PRESENTATIONS
The
analysis of net interest income in this document is performed on a taxable
equivalent basis to facilitate performance comparisons among various taxable and
tax-exempt assets.
EXECUTIVE
OVERVIEW
American
National Bankshares Inc. is the holding company of American National Bank and
Trust Company, a community bank serving Southern and Central Virginia and the
northern portion of Central North Carolina with twenty banking offices and a
loan production office.
American
National Bank and Trust Company provides a full array of financial products and
services, including commercial, mortgage, and consumer banking; trust and
investment services; and insurance. Services are also provided
through twenty-four ATMs, “AmeriLink” Internet banking, and 24-hour “Access
American” telephone banking.
Additional
information is available on the Company’s website at www.amnb.com. The
shares of American National Bankshares Inc. are traded on the NASDAQ Global
Select Market under the symbol “AMNB.”
The
Company’s mission, vision, and guiding principles are as follows:
Mission
We
provide quality financial services with exceptional
customer service.
Vision
We will
enhance the value of our shareholders’ investment by being our communities’
preferred provider of relationship-based financial services.
Guiding
Principles
To
achieve our vision and carry out our mission, we:
|
·
|
operate
a sound, efficient, and highly profitable
company,
|
|
·
|
identify
and respond to our internal and external customers’ needs and expectations
in an ever changing financial services
environment,
|
|
·
|
provide
quality sales and quality service to our
customers,
|
|
·
|
produce
profitable growth,
|
|
·
|
provide
an attractive return for our
shareholders,
|
|
·
|
furnish
positive leadership for the well-being of all communities we
serve,
|
|
·
|
continuously
develop a challenging and rewarding work environment for our employees,
and
|
|
·
|
conduct
our work with integrity and
professionalism.
|
RESULTS
OF OPERATIONS
Net Interest
Income
Net
interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on interest bearing
liabilities, primarily deposits. Fluctuations in interest rates as
well as volume and mix changes in earning assets and interest bearing
liabilities can materially impact net interest income. The following
discussion of net interest income is presented on a taxable equivalent basis to
facilitate performance comparisons among various taxable and tax-exempt assets,
such as certain state and municipal securities. A tax rate of 35% was
used in adjusting interest on tax-exempt assets to a fully taxable equivalent
basis. Net interest income divided by average earning assets is
referred to as the net interest margin. The net interest spread represents the
difference between the average rate earned on earning assets and the average
rate paid on interest bearing liabilities.
Net
interest income decreased $2,226,000, or 7.4% from 2007 to 2008, following a
$757,000, or 2.6% increase in 2007 from 2006 levels. The decrease in
2008 was primarily due to an 8.7% decline in the net interest margin from 4.24%
in 2007 to 3.87% in 2008, the effect of which was partially offset by a 1.6%
increase in the level of average interest earning assets. The
increase in 2007 was primarily due to balance sheet growth including the
acquisition of Community First Financial Corporation in April
2006. Additionally, purchase accounting adjustments from the
Community First acquisition had a positive impact on net interest income in
2007. Payoffs of acquired loans accounted for under American
Institute of Certified Public Accountants Statement of Position 03-3 resulted in
$571,000 of interest income in 2007. Interest income related to the
valuation of other loans acquired from Community First was $536,000 in 2008 and
2007. Similarly, interest expense related to the valuation of
acquired deposits was $0 and $88,000 in 2008 and 2007,
respectively. The net interest margin decreased from 4.24% in 2007 to
3.87% in 2008, after increasing from 4.20% in 2006, due primarily to the fact
that loans, the largest component of earning assets, reprice at a much faster
pace than deposits in interest bearing liabilities. During 2008, the
Federal Open Market Committee of the Federal Reserve Board reduced the intended
federal funds rate seven times from 4.25% to 0.25%. This had a
dramatic effect on the Company’s net interest margin.
To meet
its funding needs for the Community First acquisition, the Company issued
$20,619,000 of Trust Preferred Securities during the second quarter of
2006. Interest expense associated with these securities was
$1,373,000 for 2008 and 2007 and $1,007,000 for 2006.
The
following presentation is an analysis of net interest income and related yields
and rates, on a taxable equivalent basis, for the years 2006 through
2008. Nonaccrual loans are included in average
balances. Interest income on nonaccrual loans, if recognized, is
recorded on a cash basis or when the loan returns to accrual
status.
|
Table
1 - Net Interest Income Analysis
|
||||||||||||||||||||||||||||||||||||
|
(in
thousands, except yields and rates)
|
||||||||||||||||||||||||||||||||||||
|
Average
Balance
|
Interest
Income/Expense
|
Average
Yield/Rate
|
||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||||||
|
Commercial
|
$ | 91,117 | $ | 89,673 | $ | 84,676 | $ | 5,515 | $ | 6,980 | $ | 6,481 | 6.05 | % | 7.78 | % | 7.65 | % | ||||||||||||||||||
|
Real
Estate
|
467,508 | 449,683 | 416,530 | 29,712 | 33,621 | 29,813 | 6.36 | 7.48 | 7.16 | |||||||||||||||||||||||||||
|
Consumer
|
8,774 | 10,420 | 12,287 | 795 | 975 | 1,152 | 9.06 | 9.36 | 9.38 | |||||||||||||||||||||||||||
|
Total
loans
|
567,399 | 549,776 | 513,493 | 36,022 | 41,576 | 37,446 | 6.35 | 7.56 | 7.29 | |||||||||||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||||||||||
|
Federal
agencies
|
45,660 | 68,521 | 94,589 | 2,215 | 3,032 | 3,745 | 4.85 | 4.42 | 3.96 | |||||||||||||||||||||||||||
|
Mortgage-backed
|
47,997 | 25,406 | 21,197 | 2,433 | 1,255 | 988 | 5.07 | 4.94 | 4.66 | |||||||||||||||||||||||||||
|
State
and municipal
|
45,573 | 46,069 | 46,735 | 2,505 | 2,530 | 2,624 | 5.50 | 5.49 | 5.61 | |||||||||||||||||||||||||||
|
Other
|
6,141 | 7,484 | 11,059 | 277 | 438 | 621 | 4.51 | 5.85 | 5.62 | |||||||||||||||||||||||||||
|
Total
securities
|
145,371 | 147,480 | 173,580 | 7,430 | 7,255 | 7,978 | 5.11 | 4.92 | 4.60 | |||||||||||||||||||||||||||
|
Deposits
in other banks
|
9,239 | 13,431 | 12,922 | 301 | 679 | 620 | 3.26 | 5.06 | 4.80 | |||||||||||||||||||||||||||
|
Total
interest earning assets
|
722,009 | 710,687 | 699,995 | 43,753 | 49,510 | 46,044 | 6.06 | 6.97 | 6.58 | |||||||||||||||||||||||||||
|
Nonearning
assets
|
63,859 | 62,952 | 57,807 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 785,868 | $ | 773,639 | $ | 757,802 | ||||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||||||||||
|
Demand
|
$ | 109,492 | $ | 107,834 | $ | 105,320 | 803 | 1,550 | 1,513 | 0.73 | 1.44 | 1.44 | ||||||||||||||||||||||||
|
Money
market
|
53,659 | 52,843 | 48,124 | 1,011 | 1,429 | 1,180 | 1.88 | 2.70 | 2.45 | |||||||||||||||||||||||||||
|
Savings
|
61,620 | 66,246 | 77,445 | 331 | 845 | 963 | 0.54 | 1.28 | 1.24 | |||||||||||||||||||||||||||
|
Time
|
258,773 | 261,286 | 255,856 | 10,135 | 11,711 | 9,693 | 3.92 | 4.48 | 3.79 | |||||||||||||||||||||||||||
|
Total
deposits
|
483,544 | 488,209 | 486,745 | 12,280 | 15,535 | 13,349 | 2.54 | 3.18 | 2.74 | |||||||||||||||||||||||||||
|
Customer
repurchase
|
||||||||||||||||||||||||||||||||||||
|
agreements
|
52,264 | 48,088 | 40,970 | 1,377 | 1,841 | 1,384 | 2.63 | 3.83 | 3.38 | |||||||||||||||||||||||||||
|
Other
short-term borrowings
|
9,818 | 346 | 1,240 | 252 | 19 | 69 | 2.57 | 5.49 | 5.56 | |||||||||||||||||||||||||||
|
Long-term
borrowings
|
34,235 | 32,245 | 31,847 | 1,930 | 1,975 | 1,859 | 5.64 | 6.12 | 5.84 | |||||||||||||||||||||||||||
|
Total
interest bearing
|
||||||||||||||||||||||||||||||||||||
|
liabilities
|
579,861 | 568,888 | 560,802 | 15,839 | 19,370 | 16,661 | 2.73 | 3.40 | 2.97 | |||||||||||||||||||||||||||
|
Noninterest
bearing
|
||||||||||||||||||||||||||||||||||||
|
demand
deposits
|
98,157 | 102,003 | 102,117 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
4,933 | 4,894 | 5,059 | |||||||||||||||||||||||||||||||||
|
Shareholders'
equity
|
102,917 | 97,854 | 89,824 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||||||||||||||||||
|
shareholders'
equity
|
$ | 785,868 | $ | 773,639 | $ | 757,802 | ||||||||||||||||||||||||||||||
|
Interest
rate spread
|
3.33 | % | 3.57 | % | 3.61 | % | ||||||||||||||||||||||||||||||
|
Net
interest margin
|
3.87 | % | 4.24 | % | 4.20 | % | ||||||||||||||||||||||||||||||
|
Net
interest income (taxable equivalent basis)
|
27,914 | 30,140 | 29,383 | |||||||||||||||||||||||||||||||||
|
Less: Taxable
equivalent adjustment
|
881 | 913 | 974 | |||||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 27,033 | $ | 29,227 | $ | 28,409 | ||||||||||||||||||||||||||||||
Table 2 presents
the dollar amount of changes in interest income and interest expense, and
distinguishes between changes resulting from fluctuations in average
balances of interest earning assets and interest bearing liabilities (volume),
and changes resulting from fluctuations in average interest rates on such assets
and liabilities (rate). Changes attributable to both volume and rate
have been allocated proportionately.
|
Table
2 - Changes in Net Interest Income (Rate / Volume
Analysis)
|
||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
2008 vs. 2007
|
2007 vs. 2006
|
|||||||||||||||||||||||
|
Change
|
Change
|
|||||||||||||||||||||||
|
Increase
|
Attributable
to
|
Increase
|
Attributable
to
|
|||||||||||||||||||||
|
Interest
income
|
(Decrease)
|
Rate
|
Volume
|
(Decrease)
|
Rate
|
Volume
|
||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Commercial
|
$ | (1,465 | ) | $ | (1,576 | ) | $ | 111 | $ | 499 | $ | 111 | $ | 388 | ||||||||||
|
Real
Estate
|
(3,909 | ) | (5,200 | ) | 1,291 | 3,808 | 1,367 | 2,441 | ||||||||||||||||
|
Consumer
|
(180 | ) | (30 | ) | (150 | ) | (177 | ) | (2 | ) | (175 | ) | ||||||||||||
|
Total
loans
|
(5,554 | ) | (6,806 | ) | 1,252 | 4,130 | 1,476 | 2,654 | ||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||
|
Federal
agencies
|
(817 | ) | 270 | (1,087 | ) | (713 | ) | 404 | (1,117 | ) | ||||||||||||||
|
Mortgage-backed
|
1,178 | 34 | 1,144 | 267 | 62 | 205 | ||||||||||||||||||
|
State
and municipal
|
(25 | ) | 2 | (27 | ) | (94 | ) | (57 | ) | (37 | ) | |||||||||||||
|
Other
securities
|
(161 | ) | (90 | ) | (71 | ) | (183 | ) | 25 | (208 | ) | |||||||||||||
|
Total
securities
|
175 | 216 | (41 | ) | (723 | ) | 434 | (1,157 | ) | |||||||||||||||
|
Deposits
in other banks
|
(378 | ) | (201 | ) | (177 | ) | 59 | 34 | 25 | |||||||||||||||
|
Total
interest income
|
(5,757 | ) | (6,791 | ) | 1,034 | 3,466 | 1,944 | 1,522 | ||||||||||||||||
|
Interest
expense
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Demand
|
(747 | ) | (770 | ) | 23 | 37 | 1 | 36 | ||||||||||||||||
|
Money
market
|
(418 | ) | (440 | ) | 22 | 249 | 127 | 122 | ||||||||||||||||
|
Savings
|
(514 | ) | (459 | ) | (55 | ) | (118 | ) | 24 | (142 | ) | |||||||||||||
|
Time
|
(1,576 | ) | (1,464 | ) | (112 | ) | 2,018 | 1,808 | 210 | |||||||||||||||
|
Total
deposits
|
(3,255 | ) | (3,133 | ) | (122 | ) | 2,186 | 1,960 | 226 | |||||||||||||||
|
Customer
repurchase
|
||||||||||||||||||||||||
|
agreements
|
(464 | ) | (613 | ) | 149 | 457 | 198 | 259 | ||||||||||||||||
|
Other
borrowings
|
188 | (427 | ) | 615 | 66 | 95 | (29 | ) | ||||||||||||||||
|
Total
interest expense
|
(3,531 | ) | (4,173 | ) | 642 | 2,709 | 2,253 | 456 | ||||||||||||||||
|
Net
interest income
|
$ | (2,226 | ) | $ | (2,618 | ) | $ | 392 | $ | 757 | $ | (309 | ) | $ | 1,066 | |||||||||
Noninterest Income
Noninterest
income is generated from a variety of sources, including fee-based deposit
services, trust and investment services, mortgage banking, and retail
brokerage. Noninterest income also includes net gains or losses on
sales, calls, or impairment of investment securities.
Noninterest
income was $7,913,000 in 2008, down 10.3% from 2007, resulting primarily from
decreases in trust fees, service charges on deposit accounts, mortgage banking
income, brokerage, income from investment in insurance companies, and losses of
$450,000 on securities.
Noninterest
income was $8,822,000 in 2007, up 4.3% over 2006. Increases in trust
fees, mortgage banking income, brokerage, and other fee income were partially
offset by decreases in deposit account service charges and by a $362,000
impairment charge on securities.
Fees from
the management of trusts, estates, and asset management accounts totaled
$3,467,000 in 2008, down from $3,578,000 in 2007 and up from $3,374,000 in
2006. These changes were due primarily to market value decline or
appreciation in the securities markets as a substantial proportion of these fees
are earned as a percentage of the account balances.
Service
charges on deposits accounts decreased 8.2% in 2008 and 4.6% in 2007, primarily
due to reduced customer overdraft activity.
Other
fees and commissions primarily include income generated from the Company’s debit
card, ATM, safe deposit box, merchant credit card, and wire transfer
services. Insurance commission revenue is also included in this
category. Other fees and commissions were $ 857,000 in 2008, $786,000
in 2007, and $744,000 in 2006. The increase in both 2008 and 2007 is
primarily the result of growth in debit card revenue due to increased customer
debit card activity.
Mortgage
banking income represents fees from originating and selling residential mortgage
loans. Mortgage banking income was $788,000 in 2008, $954,000 in
2007, and $709,000 in 2006. Changes in interest rates directly impact
the volume of mortgage activity and, in turn, the amount of mortgage banking fee
income earned.
Securities
are sold from time to time for balance sheet management purposes or because an
investment no longer meets the Company’s policy requirements. Net
losses on sales or calls of securities were $450,000 in 2008, resulting from
$51,000 in gains and $501,000 in losses. Net gains on sales or calls
of securities were $135,000 in 2007 and $62,000 in 2006.
During
2008, the Company sold all remaining shares it held in Federal National Mortgage
Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”)
preferred stock, resulting in a loss of $501,000 which is referenced
above. In December 2007, the Company recorded a $362,000
impairment charge relating to its holdings of FHLMC and FNMA preferred
stock. The impairment charges are recorded as a reduction of
noninterest income.
Other
noninterest income was $496,000 in 2008, $650,000 in 2007, and $496,000 in 2006.
The 2008 decline resulted primarily from a $138,000 reduction in revenue from
the Company’s investments in Bankers Insurance, LLC and Virginia Title Center,
LLC. The 2007 increase was largely the result of increased dividend revenue from
the Company’s two insurance company investments. Additionally, a full
year of revenue from the Company’s bank owned life insurance (“BOLI”) policies
increased this income category by $34,000 in 2007.
|
Table
3 - Noninterest income
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Trust
fees
|
$ | 3,467 | $ | 3,578 | $ | 3,374 | ||||||
|
Service
charges on deposit accounts
|
2,324 | 2,531 | 2,654 | |||||||||
|
Other
fees and commissions
|
857 | 786 | 744 | |||||||||
|
Mortgage
banking income
|
788 | 954 | 709 | |||||||||
|
Brokerage
fees
|
431 | 550 | 419 | |||||||||
|
Securities
gains (losses), net
|
(450 | ) | 135 | 62 | ||||||||
|
Impairment
of securities
|
- | (362 | ) | - | ||||||||
|
Investment
in insurance companies
|
142 | 280 | 220 | |||||||||
|
Bank
owned life insurance
|
136 | 134 | 100 | |||||||||
|
Check
order charges
|
129 | 127 | 113 | |||||||||
|
Other
|
89 | 109 | 63 | |||||||||
| $ | 7,913 | $ | 8,822 | $ | 8,458 | |||||||
Noninterest Expense
Noninterest
expense consists primarily of personnel, occupancy, equipment, and other
expenses. Noninterest expense was $22,124,000 in 2008, up 3.7% over
2007, due primarily to increased health insurance costs and provision for
unfunded lending commitments. Noninterest expense was
$21,326,000 in 2007, up 5.2% over 2006, due primarily to increased staff levels
and a full year of expenses associated with the April 2006 Community First
acquisition.
Personnel
expenses comprise over half of the Company’s noninterest
expense. Combined salary and benefits expense increased 2.9% in 2008
when compared to 2007. Employee insurance costs represent 73% of the
2008 increase. Personnel expenses increased 3.4% in 2007 when
compared to 2006. Combined higher staff levels and a full year of the
expenses associated with the Community First acquisition were partially offset
by a reduction in profit sharing and incentive compensation
expense. Profit sharing and incentive expense was $0 in 2008,
$287,000 in 2007, and $867,000 in 2006.
Occupancy
and equipment expense increased form $3,527,000 in 2007 to $3,701,000 in 2008,
an increase of 4.9%. The increase was primarily due to increases in
software maintenance and depreciation. Occupancy and equipment
expense increased from $2,977,000 in 2006 to $3,527,000 in 2007, an increase of
18.5%. The increase was due in large part to a full year of expenses
associated with the Community First acquisition, increased building maintenance
costs, the expenses of two new branch offices, and costs related to new
technology for check processing and network security.
Bank
franchise tax expense was $694,000 in 2008, compared with $663,000 in 2007 and
$651,000 in 2006. This expense is based in large part on the level of
shareholders’ equity.
Core
deposit intangible expense was $377,000 in 2008 and 2007, and $414,000 in
2006. The 2008 and 2007 expense consists entirely of amortization of
the core deposit intangible asset from the Community First acquisition;
beginning April 2006, this asset is being amortized on a straight-line basis
over ninety-nine months. Core deposit intangible expense in 2006 also
includes amortization of the core deposit intangible asset arising from a 1996
branch purchase.
Other
noninterest expense consists of a variety of expenses including those related to
professional services, advertising and marketing, FDIC assessment, telephone
systems, ATM and Internet banking services, trust services, supplies, Federal
Reserve services, and provision for unfunded lending
commitments. Other noninterest expense totaled $4,559,000 in
2008, $4,322,000 in 2007, and $4,196,000 in 2006. Other noninterest
expense increased 5.5% in 2008, and was largely the result of an increase in the
provision for unfunded lending commitments of $297,000 over the amount in
2007. Other noninterest expense increased 3.0% in 2007, and was
largely the result of higher trust service costs and a full year of expenses
associated with the acquisition of Community First.
|
Table
4 - Noninterest expense
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Salaries
|
$ | 9,792 | $ | 9,688 | $ | 9,520 | ||||||
|
Employee
benefits
|
3,001 | 2,749 | 2,506 | |||||||||
|
Occupancy
and equipment
|
3,701 | 3,527 | 2,977 | |||||||||
|
Bank
franchise tax
|
694 | 663 | 651 | |||||||||
|
Core
deposit intangible amortization
|
377 | 377 | 414 | |||||||||
|
Telephone
|
433 | 395 | 361 | |||||||||
|
Provision
for unfunded lending commitments
|
324 | 27 | 123 | |||||||||
|
Stationery
and printing supplies
|
306 | 335 | 395 | |||||||||
|
Trust
services contracted
|
278 | 237 | 187 | |||||||||
|
Postage
|
245 | 273 | 240 | |||||||||
|
ATM
and VISA network fees
|
243 | 329 | 303 | |||||||||
|
Director
fees
|
225 | 205 | 194 | |||||||||
|
Advertising
and marketing
|
203 | 300 | 267 | |||||||||
|
Legal
|
194 | 119 | 148 | |||||||||
|
Internet
banking fees
|
193 | 194 | 173 | |||||||||
|
FDIC
assessment
|
180 | 87 | 84 | |||||||||
|
Regulatory
assessments
|
179 | 187 | 170 | |||||||||
|
Automobile
|
174 | 147 | 103 | |||||||||
|
Auditing
|
173 | 168 | 142 | |||||||||
|
Loan
expenses
|
140 | 108 | 67 | |||||||||
|
Contributions
|
118 | 120 | 138 | |||||||||
|
Dues
and subscriptions
|
113 | 106 | 108 | |||||||||
|
Courier
service
|
107 | 106 | 97 | |||||||||
|
Correspondent
bank fees
|
86 | 161 | 161 | |||||||||
|
Other
|
645 | 718 | 735 | |||||||||
| $ | 22,124 | $ | 21,326 | $ | 20,264 | |||||||
Income
Taxes
Income
taxes on 2008 earnings amounted to $3,181,000, resulting in an effective tax
rate of 28.4%, compared to 29.9% in 2007 and 30.9% in 2006. The
Company was subject to a statutory, blended, Federal tax rate of 34.1% in 2008,
34.4% in 2007, and 34.4% in 2006. The major difference between the
statutory rate and the effective rate results from income that is not taxable
for Federal income tax purposes. The primary non-taxable income is
that of state and municipal securities and industrial revenue bonds or
loans.
Impact of Inflation and
Changing Prices
The
majority of assets and liabilities of a financial institution are monetary in
nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or
inventories. The most significant effect of inflation is on
noninterest expenses that tend to rise during periods of
inflation. Changes in interest rates have a greater impact on a
financial institution’s profitability than do the effects of higher costs for
goods and services. Through its balance sheet management practices,
the Company has the ability to react to those changes and measure and monitor
its interest rate and liquidity risk.
Effectively
managing market risk is essential to achieving the Company’s financial
objectives. Market risk reflects the risk of economic loss resulting
from changes in interest rates and market prices. The Company is
generally not subject to currency exchange risk or commodity price
risk. The Company’s primary market risk exposure is interest rate
risk; however, market risk also includes liquidity risk. Both are
discussed below.
Interest
Rate Risk Management
Interest
rate risk and its impact on net interest income is a primary market risk
exposure. The Company manages its exposure to fluctuations in
interest rates through policies approved by its Asset/Liability Investment
Committee (“ALCO”) and Board of Directors, both of which receive and review
periodic reports of the Company’s interest rate risk position.
The
Company uses simulation analysis to measure the sensitivity of projected
earnings to changes in interest rates. Simulation takes into account
current balance sheet volumes and the scheduled repricing dates and maturities
of assets and liabilities. It incorporates numerous assumptions
including growth, changes in the mix of assets and liabilities, prepayments, and
average rates earned and paid. Based on this information, management
uses the model to project net interest income under multiple interest rate
scenarios.
A balance
sheet is considered asset sensitive when its earning assets (loans and
securities) reprice faster or to a greater extent than its liabilities (deposits
and borrowings). An asset sensitive balance sheet will produce more
net interest income when interest rates rise and less net interest income when
they decline. Based on the Company’s simulation analysis, management
believes the Company’s interest sensitivity position at December 31, 2008 is
asset sensitive.
The
interest rate sensitivity position at December 31, 2008 is illustrated in the
following table. The carrying amounts of assets and liabilities are
presented in the periods they are expected to reprice or mature.
|
Table
5 - Interest Rate Sensitivity Gap Analysis
|
||||||||||||||||||||
|
December
31, 2008
|
||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Within
|
>
1 Year
|
>
3 Year
|
||||||||||||||||||
|
1
Year
|
to
3 Years
|
to
5 Years
|
>
5 Years
|
Total
|
||||||||||||||||
|
Interest
sensitive assets:
|
||||||||||||||||||||
|
Interest
bearing deposits
|
||||||||||||||||||||
|
with
other banks
|
$ | 1,112 | $ | - | $ | 8,000 | $ | - | $ | 9,112 | ||||||||||
|
Securities
|
15,116 | 41,839 | 16,802 | 67,059 | 140,816 | |||||||||||||||
|
Loans
(1)
|
347,594 | 99,879 | 73,248 | 52,153 | 572,874 | |||||||||||||||
|
Total
interest
|
||||||||||||||||||||
|
sensitive
assets
|
363,822 | 141,718 | 98,050 | 119,212 | 722,802 | |||||||||||||||
|
Interest
sensitive liabilities:
|
||||||||||||||||||||
|
Checking
and savings deposits
|
175,756 | - | - | - | 175,756 | |||||||||||||||
|
Money
market deposits
|
56,615 | - | - | - | 56,615 | |||||||||||||||
|
Time
deposits
|
181,352 | 49,873 | 29,839 | - | 261,064 | |||||||||||||||
|
Customer
repurchase agreements
|
51,741 | - | - | - | 51,741 | |||||||||||||||
|
Federal
Home Loan Bank advances
|
7,850 | 5,000 | 8,000 | 787 | 21,637 | |||||||||||||||
|
Trust
preferred capital notes
|
- | - | 20,619 | - | 20,619 | |||||||||||||||
|
Total
interest
|
||||||||||||||||||||
|
sensitive
liabilities
|
473,314 | 54,873 | 58,458 | 787 | 587,432 | |||||||||||||||
|
Interest
sensitivity gap
|
$ | (109,492 | ) | $ | 86,845 | $ | 39,592 | $ | 118,425 | $ | 135,370 | |||||||||
|
Cumulative
interest sensitivity gap
|
$ | (109,492 | ) | $ | (22,647 | ) | $ | 16,945 | $ | 135,370 | ||||||||||
|
Percentage
cumulative gap
|
||||||||||||||||||||
|
to
total interest sensitive assets
|
(15.1 | ) % | (3.1 | ) % | 2.3 | % | 18.7 | % | ||||||||||||
|
(1)
Loans include loans held for sale and are net of unearned
income.
|
||||||||||||||||||||
Table 6
shows the estimated impact of changes in interest rates on net interest income
as of December 31, 2008, assuming gradual and parallel changes in interest
rates, and consistent levels of assets and liabilities. Net interest
income for the following twelve months is projected to increase when interest
rates are higher than current rates. Due to the current low interest
rate environment, no measurement was considered necessary for a further decline
in interest rates.
|
Table
6 - Estimated Changes in Net Interest Income
|
||||||||
|
(dollars
in thousands)
|
||||||||
|
December
31, 2008
|
||||||||
|
Change
in
|
Changes
in
|
|||||||
|
Interest
|
Net
interest Income (1)
|
|||||||
|
Rates
|
Amount
|
Percent
|
||||||
|
Up 3.0%
|
$ | 2,460 | 9.3 | % | ||||
|
Up 2.0%
|
2,210 | 8.3 | ||||||
|
Up 1.0%
|
1,443 | 5.4 | ||||||
|
Up 0.5%
|
836 | 3.2 | ||||||
|
No
change
|
- | - | ||||||
|
(1)
Represents the difference between estimated net interest income for the
next 12 months in the new interest rate environment and the current
interest rate environment.
|
||||||||
Management
cannot predict future interest rates or their exact effect on net interest
income. Computations of future effects of hypothetical interest rate
changes are based on numerous assumptions and should not be relied upon as
indicative of actual results. Certain limitations are inherent in
such computations. Assets and liabilities may react differently than
projected to changes in market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while rates on other types of assets and
liabilities may lag changes in market interest rates. Interest rate
shifts may not be parallel.
Changes
in interest rates can cause substantial changes in the amount of prepayments of
loans and mortgage-backed securities, which may in turn affect the Company’s
interest rate sensitivity position. Additionally, credit risk may
rise if an interest rate increase adversely affects the ability of borrowers to
service their debt.
Liquidity
Risk Management
Liquidity
is the ability of the Company to convert assets into cash or cash equivalents
without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the Company’s
ability to meet the daily cash flow requirements of its customers, whether they
are borrowers requiring funds to meet their credit needs or depositors desiring
to withdraw funds. Additionally, the parent company requires cash for
various operating needs including dividends to shareholders, stock repurchases,
the servicing of debt, and the payment of general corporate
expenses. The Company manages its exposure to fluctuations in
interest rates through policies approved by the ALCO and Board of Directors,
both of which receive periodic reports of the Company’s interest rate risk
position. The Company uses a simulation and budget model to assist in
the management of the future liquidity needs of the Company.
Liquidity
sources include cash and amounts due from banks, deposits in other banks, loan
repayments, increases in deposits, lines of credit from the Federal Home Loan
Bank of Atlanta (“FHLB”), federal funds lines of credit from two correspondent
banks, and maturities and sales of securities. Management believes
that these sources provide sufficient and timely liquidity.
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. Under the terms
of its collateral agreement with the FHLB, the Company provides a blanket lien
covering all of its residential first mortgage loans and home equity lines of
credit. In addition, the Company pledges as collateral its capital
stock in and deposits with the FHLB. Borrowings under the line were
$21,637,000 at December 31, 2008 and $16,137,000 at December 31,
2007.
The
Company had fixed-rate term borrowing contracts with the FHLB as of December 31,
2008, with the following final maturities:
|
Amount
|
Expiration Date
|
||
| $5,000,000 |
2009
|
||
| 8,000,000 |
2011
|
||
| 787,000 |
2014
|
||
The
Company has federal funds lines of credit established with two other banks in
the amounts of $15,000,000 and $5,000,000, and has access to the Federal Reserve
Bank’s discount window. There were no amounts outstanding under these
facilities at December 31, 2008 or 2007.
BALANCE
SHEET ANALYSIS
Securities
The
securities portfolio generates income, plays a primary role in the management of
interest rate sensitivity, provides a source of liquidity, and is used to meet
collateral requirements. The securities portfolio consists primarily
of high quality investments. Federal agency, mortgage-backed, and
state and municipal securities comprise the majority of the
portfolio.
During
2008, the Company sold all remaining shares it held in FNMA and FHLMC preferred
stock.
The
following table presents information on the amortized cost, maturities, and
taxable equivalent yields of securities at the end of the last three
years.
|
Table
7 - Securities Portfolio
|
||||||||||||||||||||||||
|
(in
thousands, except yields)
|
||||||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Taxable
|
Taxable
|
Taxable
|
||||||||||||||||||||||
|
Amortized
|
Equivalent
|
Amortized
|
Equivalent
|
Amortized
|
Equivalent
|
|||||||||||||||||||
|
Cost
|
Yield
|
Cost
|
Yield
|
Cost
|
Yield
|
|||||||||||||||||||
|
Federal
Agencies:
|
||||||||||||||||||||||||
|
Within
1 year
|
$ | 8,240 | 4.58 | % | $ | 4,000 | 3.46 | % | $ | 36,969 | 3.92 | % | ||||||||||||
|
1
to 5 years
|
29,719 | 4.95 | 45,170 | 4.79 | 45,432 | 4.62 | ||||||||||||||||||
|
5
to 10 years
|
5,372 | 5.15 | 6,180 | 5.46 | 6,706 | 4.67 | ||||||||||||||||||
|
Over
10 years
|
- | - | - | - | - | - | ||||||||||||||||||
|
Total
|
43,331 | 4.91 | 55,350 | 4.77 | 89,107 | 4.34 | ||||||||||||||||||
|
Mortgage-backed:
|
||||||||||||||||||||||||
|
Within
1 year
|
746 | 3.91 | 108 | 3.43 | - | - | ||||||||||||||||||
|
1
to 5 years
|
3,435 | 4.95 | 3,461 | 4.33 | 4,460 | 4.51 | ||||||||||||||||||
|
5
to 10 years
|
12,730 | 4.81 | 14,411 | 4.85 | 8,345 | 4.83 | ||||||||||||||||||
|
Over
10 years
|
28,482 | 5.08 | 27,674 | 5.34 | 6,805 | 5.06 | ||||||||||||||||||
|
Total
|
45,393 | 4.97 | 45,654 | 5.10 | 19,610 | 4.84 | ||||||||||||||||||
|
State
and Municipal:
|
||||||||||||||||||||||||
|
Within
1 year
|
4,549 | 5.04 | 4,025 | 5.60 | 1,330 | 6.69 | ||||||||||||||||||
|
1
to 5 years
|
23,127 | 4.99 | 24,443 | 4.97 | 23,036 | 5.15 | ||||||||||||||||||
|
5
to 10 years
|
9,302 | 5.99 | 11,679 | 5.63 | 16,550 | 5.16 | ||||||||||||||||||
|
Over
10 years
|
6,615 | 6.19 | 7,878 | 5.73 | 5,179 | 6.03 | ||||||||||||||||||
|
Total
|
43,593 | 5.39 | 48,025 | 5.31 | 46,095 | 5.30 | ||||||||||||||||||
|
Other
Securities:
|
||||||||||||||||||||||||
|
Within
1 year
|
1,485 | 3.32 | - | - | 1,005 | 6.06 | ||||||||||||||||||
|
1
to 5 years
|
- | - | 1,485 | 3.32 | 1,485 | 3.32 | ||||||||||||||||||
|
5
to 10 years
|
- | - | - | - | - | - | ||||||||||||||||||
|
Over
10 years
|
3,899 | 2.35 | 4,994 | 6.56 | 6,401 | 6.21 | ||||||||||||||||||
|
Total
|
5,384 | 2.62 | 6,479 | 5.82 | 8,891 | 5.71 | ||||||||||||||||||
|
Total
portfolio
|
$ | 137,701 | 4.99 | % | $ | 155,508 | 5.08 | % | $ | 163,703 | 4.74 | % | ||||||||||||
Loans
The loan
portfolio consists primarily of commercial and residential real estate loans,
commercial loans to small and medium-sized businesses, construction and land
development loans, and home equity loans. Average loans increased
$17,623,000, or 3.2%, from 2007 to 2008. Average loans increased
$36,283,000, or 7.1%, from 2006 to 2007. The 2007 increase was due
largely to the acquisition of Community First, which occurred in April
2006.
Period-end
loans increased $19,719,000, or 3.6%, from December 31, 2007 to December 31,
2008. The increase was primarily due to growth in commercial real
estate and home equity loans.
Loans
held for sale are loans originated and in process of being sold to the secondary
market. These loans are sold servicing released and totaled $1,764,000 at
December 31, 2008, and $1,368,000 at December 31, 2007.
The
following table provides loan balances, percentage of portfolio (excluding loans
held for sale), and the percentage change since December 31, 2007 of loans
outstanding by geographic region. The loans are allocated to the
region in which they were originated. In some circumstances, loans
may be originated in one region for borrowers located in other
regions.
|
Table
8 - Loans by Geographic Region
|
||||||||||||
|
December
31, 2008
|
||||||||||||
|
(dollars
in thousands)
|
Balance
|
Percentage
of
Portfolio
|
Percentage
Change
in
Balance Since
December
31, 2007
|
|||||||||
|
Danville
region
|
$ | 218,292 | 38.2 | % | 5.9 | % | ||||||
|
Central
region
|
161,933 | 28.4 | 7.2 | |||||||||
|
Southside
region:
|
||||||||||||
|
Martinsville
and Henry County
|
111,788 | 19.6 | 3.4 | |||||||||
|
Halifax
and Pittsylvania County
|
61,415 | 10.7 | (2.8 | ) | ||||||||
|
Greensboro
area
|
17,682 | 3.1 | (23.3 | ) | ||||||||
|
Total
loans
|
$ | 571,110 | 100.0 | % | ||||||||
The
Company does not participate in highly leveraged lending transactions, as
defined by bank regulations, and there are no loans of this nature recorded in
the loan portfolio. The Company has no foreign loans in its
portfolio. While there were no concentrations of loans to any
individual, group of individuals, business, or industry that exceeded 10% of
total loans at December 31, 2008 or 2007, loans to lessors of nonresidential
buildings represented 13.7% of total loans at December 31, 2008 and 11.0% at
December 31, 2007; the lessees and lessors are engaged in a variety of
industries.
Table 9
illustrates loans by type.
|
Table
9 - Loans
|
||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Real
estate:
|
||||||||||||||||||||
|
Construction
and land development
|
$ | 63,361 | $ | 69,803 | $ | 69,404 | $ | 50,092 | $ | 34,101 | ||||||||||
|
Commercial
real estate
|
207,160 | 198,332 | 186,639 | 142,968 | 147,653 | |||||||||||||||
|
Residential
real estate
|
136,480 | 133,899 | 131,126 | 94,405 | 91,672 | |||||||||||||||
|
Home
equity
|
57,170 | 48,313 | 52,531 | 42,178 | 42,620 | |||||||||||||||
|
Total
real estate
|
464,171 | 450,347 | 439,700 | 329,643 | 316,046 | |||||||||||||||
|
Commercial
and industrial
|
98,546 | 91,028 | 91,511 | 76,735 | 75,847 | |||||||||||||||
|
Consumer
|
8,393 | 10,016 | 11,017 | 10,709 | 15,376 | |||||||||||||||
|
Total
loans
|
$ | 571,110 | $ | 551,391 | $ | 542,228 | $ | 417,087 | $ | 407,269 | ||||||||||
The
following table presents the maturity schedule of selected loan types (in
thousands).
|
Table
10 - Maturities of Selected Loan Types
|
||||||||||||
|
December
31, 2008
|
||||||||||||
|
Commercial
|
||||||||||||
|
and
|
Real
Estate
|
|||||||||||
|
(in
thousands)
|
Industrial
(1)
|
Construction
|
Total
|
|||||||||
|
1
year or less
|
$ | 63,928 | $ | 42,949 | $ | 106,877 | ||||||
|
1
to 5 years (2)
|
29,994 | 14,838 | 44,832 | |||||||||
|
After
5 years (2)
|
4,624 | 5,574 | 10,198 | |||||||||
|
Total
|
$ | 98,546 | $ | 63,361 | $ | 161,907 | ||||||
|
(1)
includes agricultural loans.
|
||||||||||||
|
(2)
Of the loans due after one year, $48,578 have predetermined interest rates
and $6,452 have floating or
|
||||||||||||
|
adjustable
interest
rates.
|
||||||||||||
Allowance for Loan Losses,
Asset Quality, and Credit Risk Management
The
purpose of the allowance for loan losses is to provide for probable losses in
the loan portfolio. The allowance is increased by the provision for
loan losses and by recoveries of previously charged-off loans. Loan
charge-offs decrease the allowance.
The
Company uses certain practices to manage its credit risk. These
practices include (a) appropriate lending limits for loan officers, (b) a loan
approval process, (c) careful underwriting of loan requests, including analysis
of borrowers, collateral, and market risks, (d) regular monitoring of the
portfolio, including diversification by type and geography, (e) review of loans
by a Loan Review department which operates independently of loan production, (f)
regular meetings of a Credit Committee to discuss portfolio and policy changes,
and (g) regular meetings of an Asset Quality Committee which reviews the status
of individual loans.
The
Company’s lenders are responsible for assigning risk ratings to loans using the
parameters set forth in the Company’s Credit Policy. The risk ratings
are reviewed for accuracy, on a sample basis, by the Company’s Loan Review
department, which operates independently of loan production. These
risk ratings are used in calculating the level of the allowance for loan
losses.
Calculations
of the allowance for loan losses are prepared quarterly by the Loan Review
department. The calculations are reviewed for adequacy each quarter
by the Company’s Credit Committee, Audit and Compliance Committee, and Board of
Directors. In determining the adequacy of the allowance for loan
losses, factors which are considered include the Company’s historical loss
experience; the size and composition of the loan portfolio; loan risk ratings;
nonperforming loans; impaired loans; other problem credits; the value and
adequacy of collateral and guarantors; and national and local economic
conditions.
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.
No single
statistic, formula, or measurement determines the adequacy of the
allowance. Management makes difficult, subjective, and complex
judgments about matters that are inherently uncertain, and different amounts
would be reported under different conditions or using different
assumptions. For analytical purposes, management allocates a portion
of the allowance to specific loan categories and specific loans (the allocated
allowance). The entire allowance is used to absorb credit losses
inherent in the loan portfolio, including identified and unidentified
losses.
The
relationships and ratios used in calculating the allowance, including the
qualitative factors, may change from period to period. Furthermore,
management cannot provide assurance that, in any particular period, the Company
will not have sizeable credit losses in relation to the amount
reserved. Management may find it necessary to significantly adjust
the allowance, considering current factors at the time, including economic
conditions, industry trends, and ongoing internal and external examination
processes. The allowance is subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance in
comparison to peer banks.
The
Southern Virginia market, in which the Company has a significant presence, is
under economic pressure. The region’s economic base has historically been
weighted toward the manufacturing sector. Increased global
competition has negatively impacted the textile industry and several
manufacturers have closed plants due to competitive pressures or the relocation
of some operations to foreign countries. Other important industries
include farming, tobacco processing and sales, food processing, furniture
manufacturing and sales, specialty glass manufacturing, and packaging tape
production. Companies within these industries, especially furniture
manufacturing, have also closed plants for reasons similar to those noted
above. Additional declines in manufacturing production and
unemployment could negatively impact the ability of certain borrowers to repay
loans. Also, the current economic and credit crisis, which is
resulting in rising unemployment and increasing bankruptcies, foreclosures and
bank failures nationally, may further intensify the economic pressure in
our markets.
The
allowance for loan losses was $7,824,000 at December 31, 2008, compared with
$7,395,000 and $7,264,000 at December 31, 2007 and 2006,
respectively. The allowance for loan losses as a percentage of loans
at each of these dates was 1.37%, 1.34%, and 1.34%, respectively. The
provision for loan losses was $1,620,000 in 2008, $403,000 in 2007, and $58,000
in 2006.
Loans
charged-off net of recoveries totaled $1,191,000 in 2008, $272,000 in 2007, and
$501,000 in 2006. One residential construction and development loan,
secured by undeveloped and partially-developed land in the Triad area of North
Carolina, accounted for $575,000 of the net charge-offs in
2008. Table 14 presents the Company’s loan loss and recovery
experience for the past five years.
The
allowance for loan losses is allocated to loan types based upon historical loss
factors; risk grades on individual loans; portfolio analyses of smaller balance,
homogenous loans; and qualitative factors. Qualitative factors
include trends in delinquencies, nonaccrual loans, and loss rates; trends in
volume and terms of loans, effects of changes in risk selection, underwriting
standards, and lending policies; experience of lending officers and other
lending staff; national and local economic trends and conditions; and
concentrations of credit. Table 12 summarizes the allocation of the
allowance for loan losses for the past five years.
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The following table shows loans that were considered impaired as of
year end.
|
Table
11 - Impaired Loans
|
||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Not
on nonaccrual status
|
$ | 1,921 | $ | 2,255 | $ | 262 | $ | 537 | $ | 1,007 | ||||||||||
|
On
nonaccrual status
|
1,271 | 1,310 | 1,114 | 2,995 | 5,303 | |||||||||||||||
|
Total
impaired loans
|
$ | 3,192 | $ | 3,565 | $ | 1,376 | $ | 3,532 | $ | 6,310 | ||||||||||
|
Table
12 - Allocation of Allowance for Loan Losses
|
||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
$
|
%
(1)
|
$
|
%
(1)
|
$
|
%
(1)
|
$
|
%
(1)
|
$
|
%
(1)
|
|||||||||||
|
Commercial
|
||||||||||||||||||||
|
(including
|
||||||||||||||||||||
|
commercial
|
||||||||||||||||||||
|
real
estate)
|
$
5,163
|
62
|
%
|
$
5,056
|
62
|
%
|
$
4,467
|
61
|
%
|
$
3,897
|
64
|
%
|
$
5,927
|
61
|
%
|
|||||
|
Residential
|
||||||||||||||||||||
|
real
estate
|
2,335
|
37
|
1,852
|
36
|
2,119
|
37
|
1,462
|
33
|
1,231
|
35
|
||||||||||
|
Consumer
|
326
|
1
|
443
|
2
|
521
|
2
|
653
|
3
|
816
|
4
|
||||||||||
|
Unallocated
|
-
|
-
|
44
|
-
|
157
|
-
|
97
|
-
|
8
|
-
|
||||||||||
|
Total
|
$
7,824
|
100
|
%
|
$
7,395
|
100
|
%
|
$
7,264
|
100
|
%
|
$
6,109
|
100
|
%
|
$
7,982
|
100
|
%
|
|||||
|
(1)
Represents the percentage of loans in each category to total
loans.
|
||||||||||||||||||||
|
Table
13 - Asset Quality Ratios
|
||||||||||||||||||||
|
As
of or for the Years Ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Allowance
to loans*
|
1.37 | % | 1.34 | % | 1.34 | % | 1.46 | % | 1.96 | % | ||||||||||
|
Net
charge-offs to year-end allowance
|
15.23 | 3.68 | 6.90 | 38.27 | 5.07 | |||||||||||||||
|
Net
charge-offs to average loans
|
0.21 | 0.05 | 0.10 | 0.56 | 0.10 | |||||||||||||||
|
Nonperforming
assets to total assets*
|
0.91 | 0.42 | 0.45 | 0.72 | 1.35 | |||||||||||||||
|
Nonperforming
loans to loans*
|
0.50 | 0.48 | 0.63 | 1.02 | 1.99 | |||||||||||||||
|
Provision
to net charge-offs
|
136.02 | 148.16 | 11.58 | 19.89 | 764.20 | |||||||||||||||
|
Provision
to average loans
|
0.29 | 0.07 | 0.01 | 0.11 | 0.77 | |||||||||||||||
|
Allowance
to nonperforming loans*
|
275.01 | 280.22 | 212.09 | 142.97 | 98.39 | |||||||||||||||
|
* -
at year end
|
||||||||||||||||||||
|
Table
14 - Summary of Loan Loss Experience
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Balance
at beginning of period
|
$ | 7,395 | $ | 7,264 | $ | 6,109 | $ | 7,982 | $ | 5,292 | ||||||||||
|
Allowance
from acquisition
|
- | - | 1,598 | - | - | |||||||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Construction
and land development
|
1,007 | - | 1 | - | - | |||||||||||||||
|
Commercial
real estate
|
61 | 54 | 136 | 2,249 | - | |||||||||||||||
|
Residential
real estate
|
196 | 140 | 163 | 35 | 85 | |||||||||||||||
|
Home
equity
|
62 | 19 | - | - | 44 | |||||||||||||||
|
Total
real estate
|
1,326 | 213 | 300 | 2,284 | 129 | |||||||||||||||
|
Commercial
and industrial
|
63 | 103 | 354 | 76 | 169 | |||||||||||||||
|
Consumer
|
175 | 199 | 259 | 217 | 357 | |||||||||||||||
|
Total
charge-offs
|
1,564 | 515 | 913 | 2,577 | 655 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Construction
and land development
|
71 | - | 1 | - | - | |||||||||||||||
|
Commercial
real estate
|
101 | 15 | 98 | 46 | 49 | |||||||||||||||
|
Residential
real estate
|
3 | 3 | 11 | 3 | - | |||||||||||||||
|
Home
equity
|
- | 1 | 1 | - | - | |||||||||||||||
|
Total
real estate
|
175 | 19 | 111 | 49 | 49 | |||||||||||||||
|
Commercial
and industrial
|
18 | 50 | 108 | 11 | 45 | |||||||||||||||
|
Consumer
|
180 | 174 | 193 | 179 | 156 | |||||||||||||||
|
Total
recoveries
|
373 | 243 | 412 | 239 | 250 | |||||||||||||||
|
Net
charge-offs
|
1,191 | 272 | 501 | 2,338 | 405 | |||||||||||||||
|
Provision
for loan losses
|
1,620 | 403 | 58 | 465 | 3,095 | |||||||||||||||
|
Balance
at end of period
|
$ | 7,824 | $ | 7,395 | $ | 7,264 | $ | 6,109 | $ | 7,982 | ||||||||||
Nonperforming loans
include loans on which interest is no longer accrued, accruing loans that are
contractually past due 90 days or more as to principal and interest payments,
and any loans classified as troubled debt
restructurings. Nonperforming assets include nonperforming loans and
foreclosed real estate. Nonperforming loans represented 0.91% of
total loans at December 31, 2008, up from 0.48% at December 31,
2007. There were no troubled debt restructurings at the end of any of
the years presented in the table.
|
Table
15 - Nonperforming Assets
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Nonaccrual
loans:
|
||||||||||||||||||||
|
Real
estate
|
$ | 2,730 | $ | 2,488 | $ | 3,195 | $ | 4,098 | $ | 7,005 | ||||||||||
|
Commercial
|
73 | 107 | 151 | 12 | 853 | |||||||||||||||
|
Agricultural
|
- | - | - | - | 12 | |||||||||||||||
|
Consumer
|
42 | 44 | 79 | 107 | 243 | |||||||||||||||
|
Total
nonaccrual loans
|
2,845 | 2,639 | 3,425 | 4,217 | 8,113 | |||||||||||||||
|
Restructured
loans
|
- | - | - | - | - | |||||||||||||||
|
Loans
past due 90 days
|
||||||||||||||||||||
|
and
accruing interest:
|
||||||||||||||||||||
|
Real
estate
|
- | - | - | 46 | - | |||||||||||||||
|
Commercial
|
- | - | - | 10 | - | |||||||||||||||
|
Agricultural
|
- | - | - | - | - | |||||||||||||||
|
Consumer
|
- | - | - | - | - | |||||||||||||||
|
Total
past due loans
|
- | - | - | 56 | - | |||||||||||||||
|
Total
nonperforming loans
|
2,845 | 2,639 | 3,425 | 4,273 | 8,113 | |||||||||||||||
|
Foreclosed
real estate
|
4,311 | 632 | 99 | 188 | 221 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 7,156 | $ | 3,271 | $ | 3,524 | $ | 4,461 | $ | 8,334 | ||||||||||
Deposits
The
Company’s deposits consist primarily of checking, money market, savings, and
consumer time deposits. Average deposits decreased 8,511,000, or
1.4%, in 2008 after increasing $1,350,000, or 0.2%, in
2007. Period-end deposits increased $ $7,917,000, or 1.4%, from
December 31, 2007 to December 31, 2008. The increase in period-end
deposits is attributed primarily to a special interest bearing demand deposit
rate arrangement with a municipality.
During
2008, demand deposits increased $7,853,000, or 3.9%, money market deposits
increased $6,361,000, or 12.7%, while savings deposits declined $2,776,000, or
4.5% and certificates of deposit declined $3,521,000, or 1.3%, as customers
sought higher-yielding accounts.
|
Table
16 - Deposits
|
||||||||||||||||||||||||
|
(in
thousands, except rates)
|
||||||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||||||||
|
Demand
deposits -
|
||||||||||||||||||||||||
|
noninterest
bearing
|
$ | 98,157 | - | % | $ | 102,003 | - | % | $ | 102,117 | - | % | ||||||||||||
|
Demand
deposits -
|
||||||||||||||||||||||||
|
interest
bearing
|
109,492 | 0.73 | 107,834 | 1.44 | 105,320 | 1.44 | ||||||||||||||||||
|
Money
market
|
53,659 | 1.88 | 52,843 | 2.70 | 48,124 | 2.45 | ||||||||||||||||||
|
Savings
|
61,620 | 0.54 | 66,246 | 1.28 | 77,445 | 1.24 | ||||||||||||||||||
|
Time
|
258,773 | 3.92 | 261,286 | 4.48 | 255,856 | 3.79 | ||||||||||||||||||
| $ | 581,701 | 2.11 | % | $ | 590,212 | 2.63 | % | $ | 588,862 | 2.27 | % | |||||||||||||
|
Table
17 - Certificates of Deposit of $100,000 or More
|
||||
|
(in
thousands)
|
||||
|
Certificates
of deposit at December 31, 2008 in amounts of $100,000 or more were
classified by maturity as follows:
|
||||
|
3
months or less
|
$ |
19,666
|
||
|
Over
3 through 6 months
|
25,405
|
|||
|
Over
6 through 12 months
|
19,086
|
|||
|
Over
12 months
|
43,029
|
|||
| $ |
107,186
|
|||
Borrowed
Funds
In
addition to internal deposit generation, the Company also relies on borrowed
funds as a supplemental source of funding. Borrowed funds consist of
customer repurchase agreements, overnight borrowings from the Federal Home Loan
Bank of Atlanta and longer-term FHLB advances, and trust preferred capital
notes. Customer repurchase agreements are borrowings collateralized
by securities of the U.S. Government or its agencies and mature
daily. The Company considers these accounts to be stable sources of
funds, as they represent customer sweep accounts. The securities
underlying these agreements remain under the Company’s control.
The
following table presents information pertaining to the Company’s short-term
borrowed funds.
|
Table
18 - Short-Term Borrowings
|
||||||||
|
(dollars
in thousands)
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Customer
repurchase agreements
|
$ | 51,741 | $ | 47,891 | ||||
|
FHLB
overnight borrowings
|
7,850 | 7,200 | ||||||
|
Total
|
$ | 59,591 | $ | 55,091 | ||||
|
Weighted
interest rate
|
1.75 | % | 3.78 | % | ||||
|
Average
for the year ended:
|
||||||||
|
Outstanding
|
$ | 62,082 | $ | 48,435 | ||||
|
Interest
rate
|
2.62 | % | 3.84 | % | ||||
|
Maximum
month-end outstanding
|
$ | 81,598 | $ | 55,091 | ||||
Shareholders’
Equity
The
Company’s goal with capital management is to generate attractive returns on
equity and pay a high rate of dividends while maintaining capital sufficient to
be classified as “well capitalized” under regulatory capital ratios and to
support growth.
Shareholders’
equity was $102,300,000 at December 31, 2008 and $101,511,000 at December 31,
2007. This increase was largely the result of net income but was
partially offset by dividends, stock repurchases and the effect of changes in
unfunded pension liability.
Shareholders’
equity was $101,511,000 at December 31, 2007 and $94,992,000 at December 31,
2006. This increase was largely the result of net income and
comprehensive income. These increases were partially offset by
dividends and stock repurchases.
The
Company declared and paid quarterly dividends totaling $0.92, $0.91, and $0.87
per share of common stock in 2008, 2007, and 2006, respectively. Cash
dividends in 2008 totaled $5,606,000 and represented a 69.9% payout of 2008 net
income, compared to 48.8% in 2007 and 45.6% in 2006.
One
measure of a financial institution’s capital level is the ratio of shareholders’
equity to assets. Shareholders’ equity was 12.96% of assets at
December 31, 2008 and 13.14% at December 31, 2007. In addition to
this measurement, banking regulators have defined minimum regulatory capital
ratios that the Company and its banking subsidiary are required to
maintain. These ratios take into account risk factors identified by
those regulatory authorities associated with the assets and off-balance sheet
activities of financial institutions. The guidelines require
percentages, or “risk weights,” be applied to those assets and off-balance sheet
assets in relation to their perceived risk. Under the guidelines,
capital strength is measured in two tiers. Tier I capital consists
primarily of shareholder’s equity and trust preferred capital notes, while Tier
II capital consists of qualifying allowance for loan losses. “Total” capital is
the total of Tier I and Tier II capital. Another regulatory indicator
of capital adequacy is the leverage ratio, which is computed by dividing Tier I
capital by average quarterly assets less intangible assets.
The
regulatory guidelines require that minimum total capital (Tier I plus Tier II)
of 8% be held against total risk-adjusted assets, at least half of which (4%)
must be Tier I capital. At December 31, 2008, the Company’s Tier I
and total capital ratios were 16.67% and 17.92%, respectively. At
December 31, 2007, these ratios were 17.03% and 18.28%,
respectively. The ratios for both years exceeded the regulatory
requirements. The Company’s leverage ratios were 13.04% and 12.98% at
December 31, 2008 and 2007, respectively. The leverage ratio has a
regulatory minimum of 4%, with most institutions required to maintain a ratio of
4-5%, depending upon risk profiles and other factors.
As
mandated by bank regulations, the following five capital categories are
identified for insured depository institutions: “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized,”
and “critically undercapitalized.” These regulations require the
federal banking regulators to take prompt corrective action with respect to
insured depository institutions that do not meet minimum capital requirements.
Under the regulations, well capitalized institutions must have Tier I risk-based
capital ratios of at least 6%, total risk-based capital ratios of at least 10%,
leverage ratios of at least 5%, and not be subject to capital directive orders.
Management believes, as of December 31, 2008 and 2007, that the Company met the
requirements to be considered “well capitalized.”
CONTRACTUAL
OBLIGATIONS
The
following items are contractual obligations of the Company as of December 31,
2008 (in thousands):
|
Payments Due By
Period
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
Under 1
Year
|
1-3
Years
|
3-5
Years
|
More than 5
years
|
||||||||||||||||
|
Time
deposits
|
$ | 261,064 | $ | 181,352 | $ | 49,873 | $ | 29,839 | $ | - | ||||||||||
|
FHLB
borrowings
|
21,637 | 12,850 | - | 8,000 | 787 | |||||||||||||||
|
Repurchase
agreements
|
51,741 | 51,741 | - | - | - | |||||||||||||||
|
Operating
leases
|
702 | 296 | 325 | 79 | 2 | |||||||||||||||
|
Trust
preferred capital notes
|
20,619 | - | - | - | 20,619 | |||||||||||||||
OFF-BALANCE
SHEET ACTIVITIES
The
Company enters into certain financial transactions in the ordinary course of
performing traditional banking services that result in off-balance sheet
transactions. Other than AMNB Statutory Trust I, formed in 2006 to
issue Trust Preferred Securities, the Company does not have any off-balance
sheet subsidiaries. Refer to Note 12 of the Consolidated Financial
Statements for a discussion of AMNB Statutory Trust I. Off-balance
sheet transactions were as follows (in thousands):
|
December
31,
|
||||||||
|
Off-Balance Sheet
Transactions
|
2008
|
2007
|
||||||
|
Commitments
to extend credit
|
$ | 146,399 | $ | 144,301 | ||||
|
Standby
letters of credit
|
2,858 | 6,222 | ||||||
|
Mortgage
loan rate-lock commitments
|
2,031 | 2,215 | ||||||
Commitments
to extend credit to customers represent legally binding agreements with fixed
expiration dates or other termination clauses. Since many of the
commitments are expected to expire without being funded, the total commitment
amounts do not necessarily represent future funding
requirements. Standby letters of credit are conditional commitments
issued by the Company guaranteeing the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements.
|
Table
19 - Quarterly Financial Results
|
||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Fourth
|
Third
|
Second
|
First
|
|||||||||||||
|
2008
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||
|
Interest
income
|
$ | 10,225 | $ | 10,599 | $ | 10,788 | $ | 11,260 | ||||||||
|
Interest
expense
|
3,503 | 3,743 | 4,058 | 4,535 | ||||||||||||
|
Net
interest income
|
6,722 | 6,856 | 6,730 | 6,725 | ||||||||||||
|
Provision
for loan losses
|
600 | 280 | 600 | 140 | ||||||||||||
|
Net
interest income after provision
for
loan losses
|
6,122 | 6,576 | 6,130 | 6,585 | ||||||||||||
|
Noninterest
income
|
1,875 | 2,062 | 1,841 | 2,135 | ||||||||||||
|
Noninterest
expense
|
5,547 | 5,485 | 5,643 | 5,449 | ||||||||||||
|
Income
before income taxes
|
2,450 | 3,153 | 2,328 | 3,271 | ||||||||||||
|
Income
taxes
|
767 | 929 | 519 | 966 | ||||||||||||
|
Net
income
|
$ | 1,683 | $ | 2,224 | $ | 1,809 | $ | 2,305 | ||||||||
|
Per
common share:
|
||||||||||||||||
|
Net
income - basic
|
$ | 0.28 | $ | 0.36 | $ | 0.30 | $ | 0.38 | ||||||||
|
Net
income - diluted
|
0.28 | 0.36 | 0.30 | 0.38 | ||||||||||||
|
Cash
dividends
|
0.23 | 0.23 | 0.23 | 0.23 | ||||||||||||
|
Fourth
|
Third
|
Second
|
First
|
|||||||||||||
|
2007
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||
|
Interest
income
|
$ | 12,300 | $ | 12,293 | $ | 12,106 | $ | 11,898 | ||||||||
|
Interest
expense
|
4,842 | 4,947 | 4,823 | 4,758 | ||||||||||||
|
Net
interest income
|
7,458 | 7,346 | 7,283 | 7,140 | ||||||||||||
|
Provision
for loan losses
|
100 | - | - | 303 | ||||||||||||
|
Net
interest income after provision
for
loan losses
|
7,358 | 7,346 | 7,283 | 6,837 | ||||||||||||
|
Noninterest
income
|
1,903 | 2,276 | 2,431 | 2,212 | ||||||||||||
|
Noninterest
expense
|
5,329 | 5,379 | 5,448 | 5,170 | ||||||||||||
|
Income
before income taxes
|
3,932 | 4,243 | 4,266 | 3,879 | ||||||||||||
|
Income
taxes
|
1,157 | 1,309 | 1,235 | 1,175 | ||||||||||||
|
Net
income
|
$ | 2,775 | $ | 2,934 | $ | 3,031 | $ | 2,704 | ||||||||
|
Per
common share:
|
||||||||||||||||
|
Net
income - basic
|
$ | 0.45 | $ | 0.48 | $ | 0.49 | $ | 0.44 | ||||||||
|
Net
income - diluted
|
0.45 | 0.48 | 0.49 | 0.44 | ||||||||||||
|
Cash
dividends
|
0.23 | 0.23 | 0.23 | 0.22 | ||||||||||||
Disclosure Controls and
Procedures
The
Company’s management, including the Chief Executive Officer and Interim
Principal Financial Officer, evaluated the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934), as amended (the “Exchange Act”) as of December 31, 2007. Based on
this evaluation, the Chief Executive Officer and Interim Principal Financial
Officer concluded that the Company’s disclosure controls and procedures are
effective to ensure that the information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in SEC
rules and forms. There were no significant changes in the Company’s internal
controls over financial reporting that occurred during the quarter ended
December 31, 2008 that have materially affected or are reasonably likely to
materially affect the Company’s internal control over financial
reporting.
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America. Management regularly monitors its internal control over
financial reporting, and actions are taken to correct deficiencies as they are
identified.
Under the
supervision and with the participation of management, including the principal
executive officer and interim principal financial officer, the Company conducted
an evaluation of the effectiveness of internal control over financial
reporting. This assessment was based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation under the framework in
Internal Control – Integrated
Framework, management concluded that the Company maintained effective
internal control over financial reporting as of December 31, 2008, as such term
is defined in Exchange Act Rules 13a-15(f).
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Further, because of changes in
conditions, internal control effectiveness may vary over time.
The
Company’s independent registered public accounting firm, Yount, Hyde and
Barbour, P.C., has audited the Company’s internal control over financial
reporting as of December 31, 2008, as stated in their report included
herein. Yount, Hyde and Barbour, P.C. also audited the Company’s
consolidated financial statements as of and for the year ended December 31,
2008.
/s/ Charles H.
Majors
Charles
H. Majors
President
and Chief Executive Officer
/s/ Charles H.
Majors
Charles
H. Majors
Interim
Principal Financial Officer
March 10,
2009
To the
Board of Directors and Shareholders
American
National Bankshares Inc.
Danville,
Virginia
We have
audited the accompanying consolidated balance sheets of American National
Bankshares Inc. and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of American National Bankshares
Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), American National Bankshares Inc. and
subsidiaries’ internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 10, 2009 expressed an
unqualified opinion on the effectiveness of American National Bankshares Inc.
and subsidiaries’ internal control over financial reporting.
Winchester,
Virginia
March 10,
2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
American
National Bankshares Inc.
Danville,
Virginia
We have
audited American National Bankshares Inc. and subsidiaries’ internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. American National Bankshares Inc. and
subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (a)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(b) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (c) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, American National Bankshares Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of income, changes in shareholders’ equity and cash
flows of American National Bankshares Inc. and subsidiaries and our report dated
March 10, 2009 expressed an unqualified opinion.
Winchester,
Virginia
March 10,
2009
|
Consolidated
Balance Sheets
|
||||||||
|
December
31, 2008 and 2007
|
||||||||
|
(Dollars
in thousands, except share and per share data)
|
||||||||
|
ASSETS
|
2008
|
2007
|
||||||
|
Cash
and due from banks
|
$ | 14,986 | $ | 18,155 | ||||
|
Interest-bearing
deposits in other banks
|
9,112 | 149 | ||||||
|
Securities
available for sale, at fair value
|
133,695 | 145,159 | ||||||
|
Securities
held to maturity (fair value of $7,391
|
||||||||
|
in
2008 and $12,250 in 2007)
|
7,121 | 11,990 | ||||||
|
Total
securities
|
140,816 | 157,149 | ||||||
|
Loans
held for sale
|
1,764 | 1,368 | ||||||
|
Loans,
net of unearned income
|
571,110 | 551,391 | ||||||
|
Less
allowance for loan losses
|
(7,824 | ) | (7,395 | ) | ||||
|
Net
loans
|
563,286 | 543,996 | ||||||
|
Premises
and equipment, net
|
17,431 | 13,348 | ||||||
|
Other
real estate owned
|
4,311 | 632 | ||||||
|
Goodwill
|
22,468 | 22,468 | ||||||
|
Core
deposit intangibles, net
|
2,075 | 2,452 | ||||||
|
Accrued
interest receivable and other assets
|
12,935 | 12,571 | ||||||
|
Total
assets
|
$ | 789,184 | $ | 772,288 | ||||
|
LIABILITIES
and SHAREHOLDERS' EQUITY
|
||||||||
|
Liabilities:
|
||||||||
|
Demand
deposits -- noninterest bearing
|
$ | 95,703 | $ | 99,231 | ||||
|
Demand
deposits -- interest bearing
|
116,132 | 104,751 | ||||||
|
Money
market deposits
|
56,615 | 50,254 | ||||||
|
Savings
deposits
|
59,624 | 62,400 | ||||||
|
Time
deposits
|
261,064 | 264,585 | ||||||
|
Total
deposits
|
589,138 | 581,221 | ||||||
|
Short-term
borrowings:
|
||||||||
|
Customer
repurchase agreements
|
51,741 | 47,891 | ||||||
|
Other
short-term borrowings
|
7,850 | 7,200 | ||||||
|
Long-term
borrowings
|
13,787 | 8,937 | ||||||
|
Trust
preferred capital notes
|
20,619 | 20,619 | ||||||
|
Accrued
interest payable and other liabilities
|
3,749 | 4,909 | ||||||
|
Total
liabilities
|
686,884 | 670,777 | ||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock, $5 par, 200,000 shares authorized,
|
||||||||
|
none
outstanding
|
- | - | ||||||
|
Common
stock, $1 par, 10,000,000 shares authorized,
|
||||||||
|
6,085,628
shares outstanding at December 31, 2008 and
|
||||||||
|
6,118,717
shares outstanding at December 31, 2007
|
6,086 | 6,119 | ||||||
|
Capital
in excess of par value
|
26,491 | 26,425 | ||||||
|
Retained
earnings
|
71,090 | 69,409 | ||||||
|
Accumulated
other comprehensive (loss), net
|
(1,367 | ) | (442 | ) | ||||
|
Total
shareholders' equity
|
102,300 | 101,511 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 789,184 | $ | 772,288 | ||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||
|
Consolidated
Statements of Income
|
||||||||||||
|
For
the Years Ended December 31, 2008, 2007, and 2006
|
||||||||||||
|
(Dollars
in thousands, except share and per share data)
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
and Dividend Income:
|
||||||||||||
|
Interest
and fees on loans
|
$ | 35,941 | $ | 41,499 | $ | 37,361 | ||||||
|
Interest
and dividends on securities:
|
||||||||||||
|
Taxable
|
4,795 | 4,409 | 5,034 | |||||||||
|
Tax-exempt
|
1,621 | 1,690 | 1,743 | |||||||||
|
Dividends
|
214 | 320 | 312 | |||||||||
|
Other
interest income
|
301 | 679 | 620 | |||||||||
|
Total
interest and dividend income
|
42,872 | 48,597 | 45,070 | |||||||||
|
Interest
Expense:
|
||||||||||||
|
Interest
on deposits
|
12,280 | 15,535 | 13,349 | |||||||||
|
Interest
on short-term borrowings
|
1,629 | 1,860 | 1,453 | |||||||||
|
Interest
on long-term borrowings
|
557 | 602 | 852 | |||||||||
|
Interest
on trust preferred capital notes
|
1,373 | 1,373 | 1,007 | |||||||||
|
Total
interest expense
|
15,839 | 19,370 | 16,661 | |||||||||
|
Net
Interest Income
|
27,033 | 29,227 | 28,409 | |||||||||
|
Provision
for Loan Losses
|
1,620 | 403 | 58 | |||||||||
|
Net
Interest Income after Provision for Loan Losses
|
25,413 | 28,824 | 28,351 | |||||||||
|
Noninterest
Income:
|
||||||||||||
|
Trust
fees
|
3,467 | 3,578 | 3,374 | |||||||||
|
Service
charges on deposit accounts
|
2,324 | 2,531 | 2,654 | |||||||||
|
Other
fees and commissions
|
857 | 786 | 744 | |||||||||
|
Mortgage
banking income
|
788 | 954 | 709 | |||||||||
|
Brokerage
fees
|
431 | 550 | 419 | |||||||||
|
Securities
gains (losses), net
|
(450 | ) | 135 | 62 | ||||||||
|
Impairment
of securities
|
- | (362 | ) | - | ||||||||
|
Other
|
496 | 650 | 496 | |||||||||
|
Total
noninterest income
|
7,913 | 8,822 | 8,458 | |||||||||
|
Noninterest
Expense:
|
||||||||||||
|
Salaries
|
9,792 | 9,688 | 9,520 | |||||||||
|
Employee
benefits
|
3,001 | 2,749 | 2,506 | |||||||||
|
Occupancy
and equipment
|
3,701 | 3,527 | 2,977 | |||||||||
|
Bank
franchise tax
|
694 | 663 | 651 | |||||||||
|
Core
deposit intangible amortization
|
377 | 377 | 414 | |||||||||
|
Other
|
4,559 | 4,322 | 4,196 | |||||||||
|
Total
noninterest expense
|
22,124 | 21,326 | 20,264 | |||||||||
|
Income
Before Income Taxes
|
11,202 | 16,320 | 16,545 | |||||||||
|
Income
Taxes
|
3,181 | 4,876 | 5,119 | |||||||||
|
Net
Income
|
$ | 8,021 | $ | 11,444 | $ | 11,426 | ||||||
|
Net
Income Per Common Share:
|
||||||||||||
|
Basic
|
$ | 1.32 | $ | 1.86 | $ | 1.91 | ||||||
|
Diluted
|
$ | 1.31 | $ | 1.86 | $ | 1.90 | ||||||
|
Average
Common Shares Outstanding:
|
||||||||||||
|
Basic
|
6,096,649 | 6,139,095 | 5,986,262 | |||||||||
|
Diluted
|
6,105,154 | 6,161,825 | 6,020,071 | |||||||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||||||
|
Consolidated
Statements of Changes in Shareholders' Equity
|
||||||||||||||||||||||||
|
For
the Years Ended December 31, 2008, 2007, and 2006
|
||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Common
Stock
|
Capital
in
|
Other
|
Total
|
|||||||||||||||||||||
|
Excess
of
|
Retained
|
Comprehensive
|
Shareholders'
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Par
Value
|
Earnings
|
Income
(Loss)
|
Equity
|
|||||||||||||||||||
|
Balance,
December 31, 2005
|
5,441,758 | $ | 5,442 | $ | 9,588 | $ | 59,109 | $ | (720 | ) | $ | 73,419 | ||||||||||||
|
Net
income
|
- | - | - | 11,426 | - | 11,426 | ||||||||||||||||||
|
Change
in unrealized losses on securities
|
||||||||||||||||||||||||
|
available
for sale, net of tax, $32
|
- | - | - | - | 58 | |||||||||||||||||||
|
Less: Reclassification
adjustment for gains
|
||||||||||||||||||||||||
|
on
securities available for sale, net of
|
||||||||||||||||||||||||
|
tax,
$(21)
|
- | - | - | - | (41 | ) | ||||||||||||||||||
|
Other
comprehensive income
|
17 | 17 | ||||||||||||||||||||||
|
Total
comprehensive income
|
11,443 | |||||||||||||||||||||||
|
Adjustment
to initially apply FASB statement
|
||||||||||||||||||||||||
|
No.
158, net of tax, $(789)
|
- | - | - | - | (1,465 | ) | (1,465 | ) | ||||||||||||||||
|
Issuance
of common stock in exchange
|
||||||||||||||||||||||||
|
for
net assets acquisition
|
746,944 | 747 | 16,799 | - | - | 17,546 | ||||||||||||||||||
|
Stock
repurchased and retired
|
(39,100 | ) | (39 | ) | (132 | ) | (741 | ) | - | (912 | ) | |||||||||||||
|
Stock
options exercised
|
12,263 | 12 | 159 | - | - | 171 | ||||||||||||||||||
|
Cash
dividends declared, $0.87 per share
|
- | - | - | (5,210 | ) | - | (5,210 | ) | ||||||||||||||||
|
Balance,
December 31, 2006
|
6,161,865 | 6,162 | 26,414 | 64,584 | (2,168 | ) | 94,992 | |||||||||||||||||
|
Net
income
|
- | - | - | 11,444 | - | 11,444 | ||||||||||||||||||
|
Change
in unrealized gains on securities
|
||||||||||||||||||||||||
|
available
for sale, net of tax, $874
|
- | - | - | - | 1,622 | |||||||||||||||||||
|
Add: Reclassification
adjustment for losses
|
||||||||||||||||||||||||
|
on
impairment of securities, net of tax, $127
|
235 | |||||||||||||||||||||||
|
Less: Reclassification
adjustment for gains
|
||||||||||||||||||||||||
|
on
securities available for sale, net of
|
||||||||||||||||||||||||
|
tax,
$(47)
|
- | - | - | - | (88 | ) | ||||||||||||||||||
|
Change
in unfunded penson liability,
|
||||||||||||||||||||||||
|
net
of tax, $(23)
|
(43 | ) | ||||||||||||||||||||||
|
Other
comprehensive income
|
1,726 | 1,726 | ||||||||||||||||||||||
|
Total
comprehensive income
|
13,170 | |||||||||||||||||||||||
|
Stock
repurchased and retired
|
(61,900 | ) | (62 | ) | (265 | ) | (1,032 | ) | - | (1,359 | ) | |||||||||||||
|
Stock
options exercised
|
18,752 | 19 | 276 | - | - | 295 | ||||||||||||||||||
|
Cash
dividends declared, $0.91 per share
|
- | - | - | (5,587 | ) | - | (5,587 | ) | ||||||||||||||||
|
Balance,
December 31, 2007
|
6,118,717 | 6,119 | 26,425 | 69,409 | (442 | ) | 101,511 | |||||||||||||||||
|
Net
income
|
- | - | - | 8,021 | - | 8,021 | ||||||||||||||||||
|
Change
in unrealized gains on securities
|
||||||||||||||||||||||||
|
available
for sale, net of tax, $359
|
- | - | - | - | 665 | |||||||||||||||||||
|
Add: Reclassification
adjustment for losses
|
||||||||||||||||||||||||
|
on
securities available for sale, net of
|
||||||||||||||||||||||||
|
tax,
$157
|
- | - | - | - | 293 | |||||||||||||||||||
|
Change
in unfunded penson liability,
|
||||||||||||||||||||||||
|
net
of tax, $(1,015)
|
(1,883 | ) | ||||||||||||||||||||||
|
Other
comprehensive loss
|
(925 | ) | (925 | ) | ||||||||||||||||||||
|
Total
comprehensive income
|
7,096 | |||||||||||||||||||||||
|
Change
in pension plan measurement date,
|
(75 | ) | (75 | ) | ||||||||||||||||||||
|
net
of tax, $(40)
|
||||||||||||||||||||||||
|
Stock
repurchased and retired
|
(46,150 | ) | (46 | ) | (199 | ) | (659 | ) | - | (904 | ) | |||||||||||||
|
Stock
options exercised
|
13,061 | 13 | 206 | - | - | 219 | ||||||||||||||||||
|
Stock
compensation expense
|
- | - | 59 | - | - | 59 | ||||||||||||||||||
|
Cash
dividends declared, $0.92 per share
|
- | - | - | (5,606 | ) | - | (5,606 | ) | ||||||||||||||||
|
Balance,
December 31, 2008
|
6,085,628 | $ | 6,086 | $ | 26,491 | $ | 71,090 | $ | (1,367 | ) | $ | 102,300 | ||||||||||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||||||||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
For
the Years Ended December 31, 2008, 2007, and 2006
|
||||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
income
|
$ | 8,021 | $ | 11,444 | $ | 11,426 | ||||||
|
Adjustments
to reconcile net income to net
|
||||||||||||
|
cash
provided by operating activities:
|
||||||||||||
|
Provision
for loan losses
|
1,620 | 403 | 58 | |||||||||
|
Depreciation
|
1,358 | 1,178 | 993 | |||||||||
|
Core
deposit intangible amortization
|
377 | 377 | 414 | |||||||||
|
Net
amortization (accretion) of bond premiums and discounts
|
(188 | ) | (51 | ) | ||||||||
|
Net
loss (gain) on sale or call of securities
|
450 | (135 | ) | (62 | ) | |||||||
|
Impairment
of securities
|
- | 362 | - | |||||||||
|
Gain
on sale of loans held for sale
|
(669 | ) | (733 | ) | (434 | ) | ||||||
|
Proceeds
from sales of loans held for sale
|
29,642 | 31,451 | 15,673 | |||||||||
|
Originations
of loans held for sale
|
(29,369 | ) | (30,424 | ) | (16,187 | ) | ||||||
|
Net
loss (gain) on sale of foreclosed real estate
|
20 | (6 | ) | (7 | ) | |||||||
|
Net
change in valuation allowance on foreclosed real estate
|
- | 10 | ||||||||||
|
Net
loss (gain) on sale of premises and equipment
|
7 | (8 | ) | - | ||||||||
|
Stock-based
compensation expense
|
59 | - | - | |||||||||
|
Deferred
income tax (benefit) expense
|
691 | (67 | ) | 732 | ||||||||
|
Net
change in interest receivable
|
398 | 316 | (54 | ) | ||||||||
|
Net
change in other assets
|
(3,852 | ) | 699 | (1,369 | ) | |||||||
|
Net
change in interest payable
|
(373 | ) | 39 | 429 | ||||||||
|
Net
change in other liabilities
|
(862 | ) | (257 | ) | (703 | ) | ||||||
|
Net
cash provided by operating activities
|
7,335 | 14,451 | 10,868 | |||||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||
|
Proceeds
from sales of securities available for sale
|
1,098 | 1,070 | 503 | |||||||||
|
Proceeds
from maturities and calls of securities available for sale
|
54,965 | 57,920 | ||||||||||
|
Proceeds
from maturities and calls of securities held to maturity
|
1,884 | 4,491 | ||||||||||
|
Purchases
of securities available for sale
|
(28,636 | ) | (49,763 | ) | (51,716 | ) | ||||||
|
Net
(increase) decrease in loans
|
(24,970 | ) | (9,933 | ) | 10,278 | |||||||
|
Proceeds
from sale of premises and equipment
|
- | 25 | 324 | |||||||||
|
Purchases
of premises and equipment
|
(5,448 | ) | (2,105 | ) | (1,045 | ) | ||||||
|
Proceeds
from sales of other real estate owned
|
317 | 30 | 421 | |||||||||
|
Increase
in other real estate owned
|
(26 | ) | (59 | ) | (230 | ) | ||||||
|
Cash
paid in acquisition
|
- | - | (17,087 | ) | ||||||||
|
Cash
acquired in acquisition
|
- | - | 2,956 | |||||||||
|
Net
cash (used in) provided by investing activities
|
(12,517 | ) | (3,886 | ) | 6,815 | |||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Net
change in demand, money market,
|
||||||||||||
|
and
savings deposits
|
11,438 | (17,884 | ) | (9,915 | ) | |||||||
|
Net
change in time deposits
|
(3,521 | ) | (9,423 | ) | (15,180 | ) | ||||||
|
Net
change in customer repurchase agreements
|
3,850 | 14,523 | (3,835 | ) | ||||||||
|
Net
change in other short-term borrowings
|
650 | 7,200 | (2,151 | ) | ||||||||
|
Net
change in long-term borrowings
|
4,850 | (6,150 | ) | (2,500 | ) | |||||||
|
Net
change in trust preferred capital notes
|
- | - | 20,619 | |||||||||
|
Cash
dividends paid
|
(5,606 | ) | (5,587 | ) | (5,210 | ) | ||||||
|
Repurchase
of stock
|
(904 | ) | (1,359 | ) | (912 | ) | ||||||
|
Proceeds
from exercise of stock options
|
219 | 295 | 171 | |||||||||
|
Net
cash provided by (used in) financing activities
|
10,976 | (18,385 | ) | (18,913 | ) | |||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
5,794 | (7,820 | ) | (1,230 | ) | |||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
18,304 | 26,124 | 27,354 | |||||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | 24,098 | $ | 18,304 | $ | 26,124 | ||||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||||||
Notes
to Consolidated Financial Statements
December
31, 2008, 2007, and 2006
Note 1 – Summary of Significant Accounting
Policies
Nature
of Operations and Consolidation
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 which occurred in April 2006. Refer to Note 12 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
12.
Cash
and Cash Equivalents
Cash
includes cash on hand and cash with correspondent banks. Cash
equivalents are short-term, highly liquid investments that are readily
convertible to cash with original maturities of three months or less and are
subject to an insignificant risk of change in value. Cash and cash
equivalents are carried at cost.
Securities
The
Company classifies securities as either held to maturity or available for
sale.
Debt
securities that management has both the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized
cost.
Securities
which may be used to meet liquidity needs arising from deposit and loan
fluctuations or changes in market conditions are classified as available for
sale. Securities available for sale are reported at estimated fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income, net of tax. Purchase premiums and discounts are recognized
in interest income using the interest method over the terms of the
securities. Declines in the fair value of held to maturity and
available for sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized impairment losses. In
estimating other than temporary impairment losses, management considers (1) the
length of time and extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for anticipated recovery in fair
value. Gains or losses realized from the sale of securities available
for sale are recorded on the trade date and are determined using the specific
identification method.
The
Company does not permit the purchase or sale of trading account
securities.
Due to
the nature and restrictions placed on the Company’s investment in common stock
of the Federal Home Loan Bank of Atlanta (“FHLB”) and the Federal Reserve Bank,
these securities have been classified as restricted equity securities and
carried at cost.
Loans
Held for Sale
Secondary
market mortgage loans are designated as held for sale at the time of their
origination. These loans are pre-sold with servicing released and the
Company does not retain any interest after the loans are sold. These
loans consist primarily of fixed-rate, single-family residential mortgage loans
which meet the underwriting characteristics of certain government-sponsored
enterprises (conforming loans). In addition, the Company requires a
firm purchase commitment from a permanent investor before a loan can be
committed, thus limiting interest rate risk. Loans held for sale are
carried at estimated fair value in the aggregate. Gains on sales of
loans are recognized at the loan closing date and are included in noninterest
income for the period.
Derivative
Loan Commitments
The
Company enters into mortgage loan commitments whereby the interest rate on the
loan is determined prior to funding (rate lock commitments). Mortgage
loan commitments are referred to as derivative loan commitments if the loan that
will result from exercise of the commitment will be held for sale upon
funding. Loan commitments that are derivatives are recognized at fair
value on the consolidated balance sheets with net changes in their fair values
recorded in other expenses. Derivative loan commitments resulted in
income of $9,000 for 2008, $21,000 in expense for 2007, and $10,000 in income
for 2006.
The
period of time between issuance of a loan commitment and sale of the loan
generally ranges from 30 to 60 days. The Company protects itself from changes in
interest rates through the use of best efforts forward delivery contracts, by
committing to sell a loan at the time the borrower commits to an interest rate
with the intent that the buyer has assumed the interest rate risk on the
loan. As a result, the Company is not generally exposed to
significant losses nor will it realize significant gains related to its rate
lock commitments due to changes in interest rates. The correlation
between the rate lock commitments and the best efforts contracts is very high
due to their similarity.
The
market value of rate lock commitments and best efforts contracts is not readily
ascertainable with precision because rate lock commitments and best efforts
contracts are not actively traded in stand-alone markets. The Company
determines the fair value of rate lock commitments and best efforts contracts by
measuring the change in the estimated value of the underlying assets while
taking into consideration the probability that the loan will be
funded.
Loans
The
Company grants mortgage, commercial, and consumer loans to
customers. A substantial portion of the loan portfolio is secured by
real estate. The ability of the Company’s debtors to honor their
contracts is dependent upon the real estate and general economic conditions in
the Company’s market area.
Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off generally are reported at their outstanding unpaid
principal balance adjusted for the allowance for loan losses, and any deferred
fees or costs. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan yield
using the interest method.
The
accrual of interest on loans is generally discontinued at the time the loan is
90 days delinquent unless the credit is well-secured and in process of
collection. Loans are typically charged off when the loan is 120 days
past due, unless secured and in process of collection. Loans are
placed on nonaccrual status or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
Interest accrued but not collected for
loans that are placed on nonaccrual status or charged-off is reversed against
interest income. The interest on these loans is accounted for on the
cash basis or cost recovery method, until qualifying for return to accrual
status. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Substandard
and doubtful risk graded commercial, commercial real estate, and construction
loans equal to or greater than $100,000 on an unsecured basis, and equal to or
greater than $250,000 on a secured basis are reviewed for
impairment. A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by
management in determining impairment and establishing a specific allowance
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and
the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan-by-loan basis for commercial,
commercial real estate, and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Generally,
large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. The Company’s policy for recognizing interest income on
impaired loans is consistent with its nonaccrual policy.
Accounting
for Certain Loans or Debt Securities Acquired in a Transfer
In January 2005, American Institute of
Certified Public Accountants Statement of Position (“SOP”) 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer, was adopted for loan
acquisitions. SOP 03-3 requires acquired loans to be recorded at fair
value and prohibits carrying over valuation allowances in the initial accounting
for acquired impaired loans. Loans carried at fair value, mortgage
loans held for sale, and loans to borrowers in good standing under revolving
credit agreements are excluded from the scope of SOP 03-3. SOP 03-3
limits the yield that may be accreted to the excess of the undiscounted expected
cash flows over the investor’s initial investment in the loan. The
excess of the contractual cash flows over expected cash flows may not be
recognized as an adjustment of yield. Subsequent increases in cash
flows expected to be collected are recognized prospectively through an
adjustment of the loan’s yield over its remaining life. Decreases in
expected cash flows are recognized as impairments. Refer to Note 5
for disclosures required under SOP 03-3.
Allowance
for Loan Losses
The
allowance for loan losses is management’s estimate of probable credit losses
that are inherent in the loan portfolio at the balance sheet
date. Increases to the allowance are made by charges to the provision
for loan losses, which is reflected in the Consolidated Statements of
Income. Loan balances deemed to be uncollectible are charged-off
against the allowance. Recoveries of previously charged-off amounts
are credited to the allowance.
The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the loan portfolio in light of
historical charge-off experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral, and prevailing economic
conditions. The 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 when the actual events
occur. The formula allowance uses a historical loss view as an
indicator of future losses along with various economic factors and, as a result,
could differ from the loss incurred in the future. The specific allowance uses
various techniques to arrive at an estimate of loss for specifically identified
impaired loans. The unallocated allowance captures losses whose
impact on the portfolio have occurred but have yet to be recognized in either
the formula or specific allowance. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available. Actual losses could be greater
or less than the estimates.
Premises
and Equipment
Land is
carried at cost. Premises and equipment are stated at cost less
accumulated depreciation and amortization. Premises and equipment are
depreciated over their estimated useful lives ranging from three years to
thirty-nine years; leasehold improvements are amortized over the lives of the
respective leases or the estimated useful lives of the improvements, whichever
is less. Software is generally amortized over three
years. Depreciation and amortization are recorded on the
straight-line method.
Costs of
maintenance and repairs are charged to expense as incurred. Costs of
replacing structural parts of major units are considered individually and are
expensed or capitalized as the facts dictate. Gains and losses on
routine dispositions are reflected in current operations.
Goodwill
and Intangible Assets
The Company adopted Statement of
Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible
Assets, in January 2002. Accordingly, goodwill is no longer subject
to amortization over its estimated useful life, but is subject to at least an
annual assessment for impairment by applying a fair value based test.
Additionally, under SFAS 142, acquired intangible assets (such as core deposit
intangibles) are separately recognized if the benefit of the assets can be sold,
transferred, licensed, rented, or exchanged, and amortized over their useful
lives. Branch acquisition transactions were outside the scope of SFAS 142
and, accordingly, intangible assets related to such transactions continued to
amortize upon the adoption of SFAS 142. The cost of purchased deposit
relationships and other intangible assets, based on independent valuation, are
being amortized over their estimated lives ranging from 8.25 years to 10
years.
Trust
Assets
Securities
and other property held by the trust and investment services segment in a
fiduciary or agency capacity are not assets of the Company and are not included
in the accompanying consolidated financial statements.
Foreclosed
Real Estate
Foreclosed
real estate represents real estate that has been acquired through loan
foreclosures or deeds received in lieu of loan payments. Generally, such
properties are appraised at the time acquired, and are recorded at the lower of
cost or fair value less estimated selling costs. When appropriate, adjustments
to cost are charged or credited to the allowance for foreclosed properties and
are reflected in operations.
Income
Taxes
The
Company uses the balance sheet method to account for deferred income tax assets
and liabilities. Under this method, the net
deferred tax asset or liability is determined based on the tax effects of the
temporary differences between the book and tax bases of the various balance
sheet assets and liabilities and gives current recognition to changes in tax
rates and laws.
When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are
not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the
benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.
Stock-Based
Compensation
The
Company’s initial stock option plan terminated on December 31, 2006, which
provided for the granting of incentive and non-statutory options to employees on
a periodic basis. The Company’s stock options had an exercise price
equal to or greater than the fair value of the stock on the date of
grant. Effective January 1, 2006, the Company adopted SFAS 123R,
Share Based Payment,
using the modified prospective method and as such, results for prior periods
have not been restated. SFAS 123R requires public companies to
recognize compensation expense related to stock-based compensation awards, such
as stock options and restricted stock, in their income statements over the
period during which an employee is required to provide service in exchange for
such award.
In April
2008, the stockholders approved the 2008 Stock Incentive Plan which makes
available 500,000 shares to be used to grant restricted stock awards and stock
options in the form of incentive stock options and non-statutory stock options
to participants. The plan will terminate on February 18, 2018, unless
terminated sooner by the board of directors.
Earnings
Per Share
Basic
earnings per share represent income available to common shareholders divided by
the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect the impact of additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued
by the Company consist solely of outstanding stock options, and are determined
using the treasury method.
Comprehensive
Income
Accounting
principles generally require that recognized revenue, expenses, gains, and
losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities and changes in the funded status of a defined benefit postretirement
plan, are reported as a separate component of the equity section of the balance
sheet. Such items, along with net income, are components of comprehensive
income. The components of accumulated other comprehensive income
(loss), net of tax, included in the equity section of the balance sheets are as
follows (in thousands):
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Unrealized
gains on securities available for sale
|
$ | 2,024 | $ | 1,066 | ||||
|
Unfunded
pension liability
|
(3,391 | ) | (1,508 | ) | ||||
|
Total
accumulated other comprehensive income (loss)
|
$ | (1,367 | ) | $ | (442 | ) | ||
Advertising
and Marketing Costs
Advertising
and marketing costs are expensed as incurred, and were $203,000, $300,000, and
$267,000 in 2008, 2007, and 2006, respectively.
Reclassifications
Certain
reclassifications have been made in prior years financial statements to conform
to classifications used in the current year.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) reached a
consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements, (“EITF Issue 06-4”). In March 2007,
the FASB reached a consensus on EITF Issue 06-10, Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements, (“EITF Issue 06-10”). Both
of these standards require a company to recognize an obligation over an
employee’s service period based upon the substantive agreement with the employee
such as the promise to maintain a life insurance policy or provide a death
benefit postretirement. The Company adopted the provisions of these standards
effective January 1, 2008. The adoption of these standards was not material to
the consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value
measurements, but rather, provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair
value. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those years. The FASB has approved a one-year deferral for the
implementation of the Statement for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The Company adopted SFAS 157 effective
January 1, 2008. The adoption of SFAS 157 was not material to the consolidated
financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS
159”). This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective of
this Statement is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The fair value option established by this Statement
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entity’s first fiscal year that begins after November 15, 2007, with early
adoption available in certain circumstances. The Company adopted SFAS 159
effective January 1, 2008. The Company decided not to report any existing
financial assets or liabilities at fair value that are not already reported,
thus the adoption of this statement did not have a material impact on the
consolidated financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (“SFAS 141(R”). The Standard will significantly
change the financial accounting and reporting of business combination
transactions. SFAS 141(R) establishes principles for how an acquirer
recognizes and measures the identifiable assets acquired, liabilities assumed,
and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141(R) is effective for acquisition dates on or
after the beginning of an entity’s first year that begins after December 15,
2008. The Company does not expect the implementation of SFAS 141(R)
to have a material impact on its consolidated financial statements, at this
time.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment
of ARB No. 51” (“SFAS 160”). The Standard will significantly change
the financial accounting and reporting of noncontrolling (or minority) interests
in consolidated financial statements. SFAS 160 is effective as of the
beginning of an entity’s first fiscal year that begins after December 15, 2008,
with early adoption prohibited. The Company does not expect the
implementation of SFAS 160 to have a material impact on its consolidated
financial statements, at this time.
In
November 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value
Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff
that the expected net future cash flows related to the associated servicing of
the loan should be included in the measurement of all written loan commitments
that are accounted for at fair value through earnings. SEC registrants are
expected to apply the views in Question 1 of SAB 109 on a prospective basis to
derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007. Implementation of SAB 109 by the Company on
January 1, 2008, did not have a material impact on its consolidated financial
statements.
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB
110”). SAB 110 expresses the current view of the staff that it will
accept a company’s election to use the simplified method discussed in SAB 107
for estimating the expected term of “plain vanilla” share options regardless of
whether the company has sufficient information to make more refined
estimates. The staff noted that it understands that detailed
information about employee exercise patterns may not be widely available by
December 31, 2007. Accordingly, the staff will continue to accept,
under certain circumstances, the use of the simplified method beyond December
31, 2007. Implementation of SAB 110 by the Company on January 1,
2008, did not have a material impact on its consolidated financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of SFAS No. 133” (“SFAS No. 161”). SFAS
No. 161 requires that an entity provide enhanced disclosures related to
derivative and hedging activities. SFAS No. 161 is effective for the Company on
January 1, 2009. The Company does not expect the implementation of
SFAS 161 to have a material impact on its consolidated financial
statements.
In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends
the factors an entity should consider in developing renewal or extension
assumptions used in determining the useful life of recognized intangible assets
under FASB SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No.
142”). The intent of FSP No. 142-3 is to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the period
of expected cash flows used to measure the fair value of the assets under SFAS
No. 141(R). FSP No. 142-3 is effective for the Company on January 1, 2009, and
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset acquisitions.
The adoption of FSP No. 142-3 is not expected to have a material impact on the
Company’s consolidated financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. SFAS No.
162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” Management
does not expect the adoption of the provisions of SFAS No. 162 to have any
impact on the consolidated financial statements.
In
September 2008, the FASB issued FASB Staff Position (“FSP”) 133-1 and FASB
Interpretations (“FIN”) 45-4, “Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No.
45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP
133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4 require a seller of credit
derivatives to disclose information about its credit derivatives and hybrid
instruments that have embedded credit derivatives to enable users of financial
statements to assess their potential effect on its financial position, financial
performance and cash flows. The disclosures required by FSP 133-1 and FIN 45-4
will be effective for the Company on December 31, 2008 and are not expected to
have a material impact on the consolidated financial statements.
In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP
157-3 clarifies the application of SFAS No. 157 in determining the fair value of
a financial asset during periods of inactive markets. FSP 157-3 was effective as
of September 30, 2008 and did not have material impact on the Company’s
consolidated financial statements.
In
December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities.” FSP No. FAS 140-4 and FIN
46(R)-8 requires enhanced disclosures about transfers of financial assets and
interests in variable interest entities. The FSP is effective for interim and
annual periods ending after December 15, 2008. Since the FSP requires only
additional disclosures concerning transfers of financial assets and interest in
variable interest entities, adoption of the FSP did not affect the Company’s
financial condition, results of operations or cash flows.
In
January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP
amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
That Continue to Be Held by a Transferor in Securitized Financial Assets,” to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASB Statement No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” and other related guidance. The FSP is effective
for interim and annual reporting periods ending after December 15, 2008 and
shall be applied prospectively. The FSP was effective as of December 31, 2008
and did not have a material impact on the consolidated financial
statements.
Note
2 – Restrictions on Cash and Amounts Due From Banks
The
Company is a member of the Federal Reserve System and is required to maintain
certain levels of its cash and cash equivalents as reserves based on regulatory
requirements. This reserve requirement was approximately $7,795,000 at December
31, 2008 and $7,368,000 at December 31, 2007.
The
Company maintains cash accounts in other commercial banks. The amount
on deposit with correspondent institutions at December 31, 2008 did not exceed
the insurance limits of the Federal Deposit Insurance Corporation.
Note
3 - Securities
The
amortized cost and estimated fair value of investments in debt and equity
securities at December 31, 2008 and 2007 were as follows:
|
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 | ||||||||||||
|
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 | ||||||||
|
December
31, 2007
|
||||||||||||||||
|
(in
thousands)
|
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
||||||||||||
|
Cost
|
Gains
|
Losses
|
Fair Value
|
|||||||||||||
|
Securities
available for sale:
|
||||||||||||||||
|
Debt
securities:
|
||||||||||||||||
|
Federal
agencies
|
$ | 55,350 | $ | 1,059 | $ | 33 | $ | 56,376 | ||||||||
|
Mortgage-backed
|
45,346 | 565 | 97 | 45,814 | ||||||||||||
|
State
and municipal
|
36,343 | 258 | 113 | 36,488 | ||||||||||||
|
Corporate
|
1,485 | - | 40 | 1,445 | ||||||||||||
|
Equity
securities:
|
||||||||||||||||
|
FHLB
stock - restricted
|
2,125 | - | - | 2,125 | ||||||||||||
|
Federal
Reserve stock - restricted
|
1,429 | - | - | 1,429 | ||||||||||||
|
FNMA
and FHLMC preferred stock
|
1,346 | 42 | - | 1,388 | ||||||||||||
|
Other
|
94 | - | - | 94 | ||||||||||||
|
Total
securities available for sale
|
143,518 | 1,924 | 283 | 145,159 | ||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||
|
Mortgage-backed
|
308 | 11 | - | 319 | ||||||||||||
|
State
and municipal
|
11,682 | 256 | 7 | 11,931 | ||||||||||||
|
Total
securities held to maturity
|
11,990 | 267 | 7 | 12,250 | ||||||||||||
|
Total
securities
|
$ | 155,508 | $ | 2,191 | $ | 290 | $ | 157,409 | ||||||||
The
amortized cost and estimated fair value of investments in securities at December
31, 2008, by contractual maturity, are shown in the following
table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties. Because mortgage-backed securities have both known
principal repayment terms as well as unknown principal repayments due to
potential borrower pre-payments, it is difficult to accurately predict the final
maturity of these investments. Mortgage-backed securities are shown
separately.
|
Available
for Sale
|
Held
to Maturity
|
||||||||||||||||
|
Amortized
|
Estimated
|
Amortized
|
Estimated
|
||||||||||||||
|
(in
thousands)
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
|||||||||||||
|
Due
in one year or less
|
$ | 13,734 | $ | 13,826 | $ | 540 | $ | 544 | |||||||||
|
Due
after one year
|
|||||||||||||||||
|
through
five years
|
50,309 | 52,578 | 2,538 | 2,604 | |||||||||||||
|
Due
after five years
|
|||||||||||||||||
|
through
ten years
|
10,884 | 11,107 | 3,789 | 3,979 | |||||||||||||
|
Due
after ten years
|
6,615 | 6,602 | - | - | |||||||||||||
|
Equity
securities
|
3,899 | 3,899 | - | - | |||||||||||||
|
Mortgage-backed
securities
|
45,139 | 45,683 | 254 | 264 | |||||||||||||
| $ | 130,580 | $ | 133,695 | $ | 7,121 | $ | 7,391 | ||||||||||
Gross
realized gains and losses from the call of all securities or the sale of
securities available for sale were as follows (in thousands):
| For the Years Ended December 31, | ||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Realized
gains
|
$ | 51 | $ | 135 | $ | 62 | ||||||
|
Realized
losses
|
(501 | ) | - | - | ||||||||
Securities
with a carrying value of approximately $90,683,000 and $85,313,000, at December
31, 2008 and 2007, respectively, were pledged to secure public deposits,
repurchase agreements, and for other purposes as required by law.
Corporate
bonds consist of investment grade debt securities, primarily issued by financial
services companies.
The table
below shows 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 December 31, 2008. The
reference point for determining when securities are in an unrealized loss
position is month-end. Therefore, it is possible that a security’s
market value exceeded its amortized cost on other days during the past
twelve-month period.
|
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 | ||||||||||||
Management
evaluates securities for other than temporary impairment quarterly, and more
frequently when economic or market concerns warrant such
evaluation. Consideration is given to the length of time and the
extent to which the fair value has been less than cost, the financial condition
and near-term prospects of the issuer, and the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for anticipated recovery in fair value. The unrealized losses are
attributable to interest rate changes and not credit concerns of the
issuer. The Company has the intent and ability to hold these
securities for the time necessary to recover the amortized
cost.
The table
below shows gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2007.
|
Total
|
Less
than 12 Months
|
12
Months or More
|
||||||||||||||||||||||
|
(in
thousands)
|
Estimated
Fair
Value
|
Unrealized
Loss
|
Estimated
Fair
Value
|
Unrealized
Loss
|
Estimated
Fair
Value
|
Unrealized
Loss
|
||||||||||||||||||
|
Federal
agencies
|
$ | 7,459 | $ | 33 | $ | - | $ | - | $ | 7,459 | $ | 33 | ||||||||||||
|
Mortgage-backed
|
10,194 | 97 | 3,508 | 35 | 6,686 | 62 | ||||||||||||||||||
|
State
and municipal
|
17,858 | 120 | 2,087 | 12 | 15,771 | 108 | ||||||||||||||||||
|
Corporate
|
1,445 | 40 | - | - | 1,445 | 40 | ||||||||||||||||||
|
Total
|
$ | 36,956 | $ | 290 | $ | 5,595 | $ | 47 | $ | 31,361 | $ | 243 | ||||||||||||
Note
4 – Loans
Loans,
excluding loans held for sale, were comprised of the following:
|
December
31,
|
||||||||
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Construction
and land development
|
$ | 63,361 | $ | 69,803 | ||||
|
Commercial
real estate
|
207,160 | 198,332 | ||||||
|
Residential
real estate
|
136,480 | 133,899 | ||||||
|
Home
equity
|
57,170 | 48,313 | ||||||
|
Total
real estate
|
464,171 | 450,347 | ||||||
|
Commercial
and industrial
|
98,546 | 91,028 | ||||||
|
Consumer
|
8,393 | 10,016 | ||||||
|
Total
loans
|
$ | 571,110 | $ | 551,391 | ||||
Net
deferred loan costs included in the above loan categories are $244,000 for 2008
and $171,000 for 2007.
The
following is a summary of information pertaining to impaired and nonaccrual
loans:
|
December
31,
|
||||||||
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Impaired
loans with a valuation allowance
|
$ | 2,545 | $ | 3,092 | ||||
|
Impaired
loans without a valuation allowance
|
647 | 473 | ||||||
|
Total
impaired loans
|
$ | 3,192 | $ | 3,565 | ||||
|
Allowance
provided for impaired loans,
|
||||||||
|
included
in the allowance for loan losses
|
$ | 1,164 | $ | 1,499 | ||||
|
Nonaccrual
loans excluded from the
|
||||||||
|
impaired
loan disclosure
|
$ | 1,574 | $ | 1,329 | ||||
|
Years
Ended December 31,
|
||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Average
balance in impaired loans
|
$ | 4,829 | $ | 2,540 | $ | 2,534 | ||||||
|
Interest
income recognized on impaired loans
|
$ | 152 | $ | 262 | $ | 121 | ||||||
|
Interest
income recognized on nonaccrual loans
|
$ | - | $ | - | $ | - | ||||||
|
Loans
past due 90 days and still accruing interest
|
$ | - | $ | - | $ | - | ||||||
No
additional funds are committed to be advanced in connection with impaired
loans.
Note
5 – Accounting for Certain Loans Acquired in a Transfer
The
Company acquired loans pursuant to the acquisition of Community First Financial
Corporation (“Community First”) in April 2006. In accordance with SOP
03-3, at acquisition the Company reviewed each loan to determine whether there
was evidence of deterioration of credit quality since origination and if it was
probable that it will be unable to collect all amounts due according to the
loan’s contractual terms. When both conditions existed, the Company
accounted for each loan individually, considered expected prepayments, and
estimated the amount and timing of undiscounted expected principal, interest,
and other cash flows (expected at acquisition) for each loan. The
Company determined the excess of the loan’s scheduled contractual principal and
contractual interest payments over all cash flows expected at acquisition as an
amount that should not be accreted into interest income (nonaccretable
difference). The remaining amount, representing the excess of the
loan’s cash flows expected to be collected over the amount paid, is accreted
into interest income over the remaining life of the loan (accretable
yield).
Over the
life of the loan, the Company continues to estimate cash flows expected to be
collected. The Company evaluates at the balance sheet date whether
the present value of its loans determined using the effective interest rates has
decreased and if so, establishes a valuation allowance for the
loan. Valuation allowances for acquired loans subject to SOP 03-3
reflect only those losses incurred after acquisition – that is, the present
value of cash flows expected at acquisition that are not expected to be
collected. Valuation allowances are established only subsequent to
acquisition of the loans. For loans that are not accounted for as
debt securities, the present value of any subsequent increase in the loan’s or
pool’s actual cash flows or cash flows expected to be collected is used first to
reverse any existing valuation allowance for that loan. For any remaining
increases in cash flows expected to be collected, the Company adjusts the amount
of accretable yield recognized on a prospective basis over the loan’s remaining
life. The Company does not have any such loans that were accounted
for as debt securities.
Loans
that were acquired in the Community First acquisition, for which there was
evidence of deterioration of credit quality since origination and for which it
was probable that all contractually required payments would not be made had an
outstanding balance of $665,000 and a carrying amount $344,000 at December 31,
2008 and an outstanding balance of $1,010,000 and a carrying amount of $582,000
at December 31, 2007.
The
carrying amount of these loans is included in the balance sheet amount of loans
receivable at December 31, 2008 and 2007. These loans are not
included in the impaired loan amounts disclosed in Note 4.
|
(in
thousands)
|
Accretable
Yield
|
|||
|
Balance
at December 31, 2006
|
$ | 692 | ||
|
Accretion
|
(52 | ) | ||
|
Reclassifications
from
nonaccretable
difference
|
1 | |||
|
Disposals
|
(530 | ) | ||
|
Balance
at December 31, 2007
|
111 | |||
|
Accretion
|
(20 | ) | ||
|
Disposals
|
(46 | ) | ||
|
Balance
at December 31, 2008
|
$ | 45 | ||
Note
6 – 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 each of the years in the three-year period ended December 31,
2008, are presented below:
|
Years
Ended December 31,
|
||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Allowance
for Loan Losses
|
||||||||||||
|
Balance,
beginning of year
|
$ | 7,395 | $ | 7,264 | $ | 6,109 | ||||||
|
Allowance
acquired in merger
|
- | - | 1,598 | |||||||||
|
Provision
for loan losses
|
1,620 | 403 | 58 | |||||||||
|
Charge-offs
|
(1,564 | ) | (515 | ) | (913 | ) | ||||||
|
Recoveries
|
373 | 243 | 412 | |||||||||
|
Balance,
end of year
|
$ | 7,824 | $ | 7,395 | $ | 7,264 | ||||||
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Reserve
for Unfunded Lending Commitments
|
||||||||||||
|
Balance,
beginning of year
|
$ | 151 | $ | 123 | $ | - | ||||||
|
Provision
for unfunded commitments
|
324 | 28 | 123 | |||||||||
|
Balance,
end of year
|
$ | 475 | $ | 151 | $ | 123 | ||||||
The reserve for unfunded
loan commitments is included in other liabilities.
Note
7 – Premises and Equipment
Major
classifications of premises and equipment are summarized as
follows:
|
(in
thousands)
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Land
|
$ | 3,977 | $ | 3,977 | ||||
|
Buildings
|
15,686 | 11,573 | ||||||
|
Leasehold
improvements
|
535 | 492 | ||||||
|
Furniture
and equipment
|
14,383 | 13,210 | ||||||
| 34,581 | 29,252 | |||||||
|
Accumulated
depreciation
|
(17,150 | ) | (15,904 | ) | ||||
|
Premises
and equipment, net
|
$ | 17,431 | $ | 13,348 | ||||
Depreciation
expense for the years ended December 31, 2008, 2007, and 2006 was $1,358,000,
$1,178,000 and $993,000, respectively.
The
Company has entered into operating leases for several of its branch and ATM
facilities. The minimum annual rental payments under these leases at
December 31, 2008 are as follows:
|
(in
thousands)
|
Minimum
Lease
|
|||
|
Year
|
Payments
|
|||
|
2009
|
$ | 296 | ||
|
2010
|
228 | |||
|
2011
|
97 | |||
|
2012
|
58 | |||
|
2013
|
21 | |||
|
2014
and after
|
2 | |||
| $ | 702 | |||
Rent
expense for the years ended December 31, 2008, 2007, and 2006 was $329,000,
$353,000, and $308,000, respectively.
Note
8– Goodwill and Other Intangible Assets
In January 2002,
the Company adopted SFAS 142, Goodwill and Other Intangible
Assets. Accordingly, goodwill is no longer subject to
amortization, but is subject to at least an annual assessment for impairment by
applying a fair value test. A fair value-based test was performed
during the third quarter of 2008 that determined the market value of the
Company’s shares exceeds the consolidated carrying value, including goodwill;
therefore, there has been no impairment recognized in the value of
goodwill.
The
changes in the carrying amount of goodwill for the year ended December 31, 2008,
are as follows (in thousands):
|
Amount
|
||||
|
Balance
as of January 1, 2008
|
$ | 22,468 | ||
|
Goodwill
recorded during year
|
- | |||
|
Impairment
losses
|
- | |||
|
Balance
as of December 31, 2008
|
$ | 22,468 | ||
Core
deposit intangibles resulting from the Community First acquisition in April 2006
were $3,112,000 and are being amortized over 99 months.
Goodwill
and intangible assets are as follow (in thousands):
|
Gross Carrying Value
|
Accumulated Amortization
|
Net Carrying Value
|
||||||||||
|
December
31, 2008
|
||||||||||||
|
Amortizable
core deposit intangibles
|
$ | 3,112 | $ | 1,037 | $ | 2,075 | ||||||
|
Goodwill
|
22,468 | - | 22,468 | |||||||||
|
December
31, 2007
|
||||||||||||
|
Amortizable
core deposit intangibles
|
$ | 3,112 | $ | 660 | $ | 2,452 | ||||||
|
Goodwill
|
22,468 | - | 22,468 | |||||||||
Amortization
expense of core deposit intangibles for the years ended December 31, 2008, 2007,
and 2006 totaled $377,000, $377,000, and $414,000, respectively. As
of December 31, 2008, the estimated future amortization expense of core deposit
intangibles is as follows (in thousands):
|
Year
|
Amount
|
|||
|
2009
|
$ | 377 | ||
|
2010
|
377 | |||
|
2011
|
377 | |||
|
2012
|
377 | |||
|
2013
|
377 | |||
|
Thereafter
|
190 | |||
Note
9 - Deposits
The
aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2008 and 2007 was $107,186,000 and $101,212,000
respectively.
At
December 31, 2008, the scheduled maturities of certificates of deposits
(included in “time” deposits on the Consolidated Balance Sheet) were as follows
(in thousands):
|
Year
|
Amount
|
|||
|
2009
|
$ | 181,352 | ||
|
2010
|
34,780 | |||
|
2011
|
15,093 | |||
|
2012
|
10,878 | |||
|
2013
|
18,961 | |||
| $ | 261,064 | |||
Note
10 – Short-term Borrowings
Short-term
borrowings consist of customer repurchase agreements, overnight borrowings from
the Federal Home Loan Bank of Atlanta (“FHLB”), and Federal Funds
purchased. Customer repurchase agreements are collateralized by
securities of the U.S. Government or its agencies. They mature
daily. The interest rates are generally fixed but may be changed at
the discretion of the Company. The securities underlying these agreements remain
under the Company’s control. FHLB overnight borrowings contain
floating interest rates that may change daily at the discretion of the
FHLB. Federal Funds purchased are unsecured overnight borrowings from
other financial institutions. Short-term borrowings consisted of the
following as of December 31, 2008 and 2007 (in thousands):
|
2008
|
2007
|
|||||||
|
|
||||||||
|
Customer
repurchase agreements
|
$ | 51,741 | $ | 47,891 | ||||
|
FHLB
overnight borrowings
|
7,850 | 7,200 | ||||||
| $ | 59,591 | $ | 55,091 | |||||
Note
11 – 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 December 31, 2008, $107,834,000 in 1-4 family residential mortgage loans and
$57,170,000 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 December 31, 2008 and 2007 (in
thousands):
|
Due
by
December 31
|
2008
Advance
Amount
|
Weighted
Average
Rate
|
Due
by
December 31
|
2007
Advance
Amount
|
Weighted
Average
Rate
|
||||||||||||
|
2009
|
$ | 5,000 | 5.26 | % |
2008
|
$ | 3,000 | 5.51 | % | ||||||||
|
2011
|
8,000 | 2.93 |
2009
|
5,000 | 5.26 | ||||||||||||
|
2014
|
787 | 3.78 |
2014
|
937 | 3.78 | ||||||||||||
| $ | 13,787 | 3.82 | % | $ | 8,937 | 5.19 | % | ||||||||||
Note
12 – Trust Preferred Capital Notes
On April
7, 2006, AMNB Statutory Trust I, a Delaware statutory trust and a newly formed,
wholly owned subsidiary of the Company, issued $20,000,000 of preferred
securities in a private placement pursuant to an applicable exemption from
registration. The Trust Preferred Securities mature on June 30, 2036,
but may be redeemed at the Company’s option beginning on June 30,
2011. The securities require quarterly distributions by the Trust to
the holder of the Trust Preferred Securities at a fixed rate of
6.66%. Effective June 30, 2011, the rate will reset quarterly at the
three-month LIBOR plus 1.35%. Distributions are cumulative and will
accrue from the date of original issuance, but may be deferred by the Company
from time to time for up to twenty consecutive quarterly periods. The
Company has guaranteed the payment of all required distributions on the Trust
Preferred Securities.
The
proceeds of the Trust Preferred Securities received by the Trust, along with
proceeds of $619,000 received by the Trust from the issuance of common
securities by the Trust to the Company, were used to purchase $20,619,000 of the
Company’s junior subordinated debt securities (the “Trust Preferred Capital
Notes”), issued pursuant to a Junior Subordinated Indenture entered into between
the Company and Wilmington Trust Company, as trustee. The proceeds of
the Trust Preferred Capital Notes were used to fund the cash portion of the
merger consideration to the former shareholders of Community First in connection
with the Company’s acquisition of that company, and for general corporate
purposes. In accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities, the Corporation did not eliminate through consolidation the
Corporation’s $619,000 equity investment in AMNB Statutory Trust
I. Instead, the Corporation reflected this equity investment in the
“Accrued interest receivable and other assets” line item in the consolidated
balance sheets.
Note
13 – Stock-Based Compensation
The
Company’s 1997 Stock Option Plan (“1997 Option Plan”) provided for the granting
of incentive and non-statutory options to employees on a periodic basis, at the
discretion of the Board or a Board designated committee. The 1997 Option Plan
authorized the issuance of up to 300,000 shares of common
stock. There were no options granted since 2004, and, effective
December 31, 2006, no further options may be granted under this
plan.
Effective
January 1, 2006, the Company adopted SFAS 123R, Share Based Payment, using
the modified prospective method and as such, results for prior periods have not
been restated. All options under the 1997 Option Plan were fully
vested prior to January 1, 2006; therefore, adoption of SFAS 123R resulted in no
compensation expense. There was no tax benefit associated with stock
option activity during 2008, 2007, or 2006. Under SFAS 123R, a
company may only recognize tax benefits for stock options that ordinarily will
result in a tax deduction when the option is exercised (“non-statutory”
options). The Company has no non-statutory stock
options.
The 2008
Stock Incentive Plan (“2008 Option Plan”) was adopted by the Board of Directors
of the Company on February 19, 2008 and approved by the stockholders on April
22, 2008. The 2008 Option Plan provides for the granting of
restricted stock awards and incentive and non-statutory options to employees and
directors on a periodic basis, at the discretion of the Board or a Board
designated committee. The 2008 Option Plan authorized the issuance of
up to 500,000 shares of common stock. SFAS 123(R) requires that
compensation cost relating to share-based payment transactions be recognized in
the financial statements with measurement based upon the fair value of the
equity or liability instruments issued. For the year ended December
31, 2008, the Company recognized $59,000 in compensation expense for stock
options.
A summary
of stock option transactions is as follows:
|
Option
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining Contractual
Term
|
Aggregate
Intrinsic
Value
($000)
|
||||||||||
|
Outstanding
at December 31, 2007
|
174,871 | $ | 21.15 | ||||||||||
|
Granted
|
59,000 | 17.00 | |||||||||||
|
Exercised
|
(13,061 | ) | 16.83 | ||||||||||
|
Forfeited
|
( 2,200 | ) | 18.86 | ||||||||||
|
Outstanding
at December 31, 2008
|
218,610 | $ | 20.31 |
5.4
years
|
$ | 91 | |||||||
|
Exercisable
at December 31, 2008
|
174,360 | $ | 21.15 |
4.2
years
|
$ | 91 | |||||||
The
aggregate intrinsic value of stock option in the table above represents the
total pre-tax intrinsic value (the amount by which the current market value of
the underlying stock exceeds the exercise price of the option) that would have
been received by the option holders had all option holders exercised their
options on December 31, 2008. This amount changes based on changes in
the market value of the Company’s stock.
The total
proceeds of the in-the-money options exercised during the year ended December
31, 2008 and 2007 was $219,000 and $295,000, respectively. Total
intrinsic value of options exercised during years ended December 31, 2008, 2007,
and 2006 was $51,000, $110,000, and $114,000, respectively.
As of
December 31, 2008, there was $176,000 unrecognized compensation
expense. There was no unrecognized compensation expense as of
December 31, 2007. Compensation expense related to stock options was
$59,000 in 2008, $0 in 2007 and 2006.
The
following table summarizes information related to stock options outstanding on
December 31, 2008:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Range
of
Exercise Prices
|
Number
of
Outstanding
Options
|
Weighted-Average
Remaining
Contractual Life
|
Weighted-Average
Exercise
Price
|
Number
of
Options
Exercisable
|
Weighted-Average
Exercise
Price
|
|||||||||||||||||
|
$
|
13.38
to 15.00
|
25,789
|
0.3 yrs
|
$
|
13.69
|
25,789 |
$
|
13.69
|
||||||||||||||
|
15.01 to 20.00
|
99,794
|
6.7
|
17.64
|
55,544 |
18.15
|
|||||||||||||||||
|
20.01
to 25.00
|
54,400
|
5.8
|
24.18
|
54,400 |
24.18
|
|||||||||||||||||
|
25.01 to 26.20
|
38,627
|
4.8
|
26.18
|
38,627 |
26.18
|
|||||||||||||||||
|
218,610
|
5.4 yrs
|
$
|
20.31
|
174,360 |
$
|
21.15
|
||||||||||||||||
The fair value of each
stock option granted in 2008 was estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
following table for the year ended December 31, 2008.
|
2008
|
||||
|
Dividend
yield
|
5.41 | % | ||
|
Expected
life in years
|
6.6 | |||
|
Expected
volatility
|
18.10 | % | ||
|
Risk-free
interest rate
|
1.77 | % | ||
|
Weighted
average fair value per option granted
|
$3.98 | |||
The expected
volatility is based on historical volatility. The risk-free interest
rates for periods within the contractual life of the awards are based on the
U.S. Treasury yield curve in effect at the time of the grant. The
expected life is based on historical exercise experience. The
dividend yield assumption is based on the Company’s history and expectation of
dividend payouts.
Note
14 – Income Taxes
The Company files
income tax returns in the U.S. federal jurisdiction and the states of Virginia
and North Carolina. With few exceptions, the Company is no longer
subject to U.S. federal, state and local income tax examinations by tax
authorities for years prior to 2005.
The Company adopted
the provisions of FIN 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007, with no impact on the consolidated financial
statements.
The components of
the Company’s net deferred tax assets were as follows:
|
(in
thousands)
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for loan losses
|
$ | 2,675 | $ | 2,476 | ||||
|
Accrued
pension benefit
|
- | 243 | ||||||
|
Nonaccrual
loan interest
|
165 | 175 | ||||||
|
Deferred
compensation
|
211 | 217 | ||||||
|
Preferred
stock impairment, net of valuation allowance
|
- | 294 | ||||||
|
Allowance
for off balance sheet items
|
166 | - | ||||||
|
Loans
|
373 | 607 | ||||||
|
Other
|
50 | 7 | ||||||
|
Total
deferred tax assets
|
3,640 | 4,019 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
|
1,005 | 806 | ||||||
|
Accretion
of discounts on securities
|
33 | 33 | ||||||
|
Core
deposit intangibles
|
508 | 535 | ||||||
|
Deferred
loan fees
|
86 | 60 | ||||||
|
Net
unrealized gains on securities
|
1,090 | 574 | ||||||
|
Prepaid
pension expense
|
240 | - | ||||||
|
Pension
liability
|
1,826 | 812 | ||||||
|
Other
|
52 | 178 | ||||||
|
Total
deferred tax liabilities
|
4,840 | 2,998 | ||||||
|
Net
deferred tax assets (liabilities)
|
$ | (1,200 | ) | $ | 1,021 | |||
The
provision for income taxes consists of the following:
|
(in
thousands)
|
Years
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Taxes
currently payable
|
$ | 2,490 | $ | 4,943 | $ | 4,387 | ||||||
|
Deferred
tax expense (benefit)
|
691 | (67 | ) | 732 | ||||||||
| $ | 3,181 | $ | 4,876 | $ |
5,119
|
|||||||
The
effective tax rates differ from the statutory federal income tax rates due to
the following items:
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
statutory rate
|
34.1 | % | 34.4 | % | 34.4 | % | ||||||
|
Nontaxable
interest income
|
(4.9 | ) | (3.5 | ) | (3.7 | ) | ||||||
|
Other
|
0.8 | (1.0 | ) | 0.2 | ||||||||
|
Effective
rate
|
28.4 | % | 29.9 | % | 30.9 | % | ||||||
Note
15 – 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.
|
Years
Ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Shares
|
Per
Share
Amount
|
Shares
|
Per
Share
Amount
|
Shares
|
Per
Share
Amount
|
|||||||||||||||||||
|
Basic
earnings per share
|
6,096,649 | $ | 1.32 | 6,139,095 | $ | 1.86 | 5,986,262 | $ | 1.91 | |||||||||||||||
|
Effect
of dilutive securities -
stock
options
|
8,505 | (.01 | ) | 22,730 | - | 33,809 | (.01 | ) | ||||||||||||||||
|
Diluted
earnings per share
|
6,105,154 | $ | 1.31 | 6,161,825 | $ | 1.86 | 6,020,071 | $ | 1.90 | |||||||||||||||
Stock
options on common stock which were not included in computing diluted EPS in
2008, 2007, and 2006, because their effects were antidilutive averaged 118,640
shares, 89,277 shares, and 88,177 shares, respectively.
Note
16 – Off-Balance Sheet Activities
The
Company is party to credit-related financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the Consolidated Balance Sheets. The Company
evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if applicable, is based on
management's credit evaluation of the customer.
The
Company's exposure to credit loss is represented by the contractual amount of
these commitments. The Company follows the same credit policies in
making commitments as it does for on-balance sheet instruments.
The
following off-balance sheet financial instruments were outstanding whose
contract amounts represent credit risk:
|
December
31,
|
||||||||
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Commitments
to extend credit
|
$ | 146,399 | $ | 144,301 | ||||
|
Standby
letters of credit
|
2,858 | 6,222 | ||||||
|
Mortgage
loan rate lock commitments
|
2,031 | 2,215 | ||||||
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. These commitments
generally consist of unused portions of lines of credit issued to customers.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Those letters of
credit are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loans to
customers.
At
December 31, 2008, the Company had entered into commitments, on a best-effort
basis, to sell loans of approximately $3,787,000. These commitments
include mortgage loan commitments and loans held for sale. Risks
arise from the possible inability of counterparties to meet the terms of their
contracts.
Note
17 – Related Party Loans
In the
ordinary course of business, loans are granted to executive officers, directors,
and their related entities. Management believes that all such loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable loans to similar,
unrelated borrowers, and do not involve more than a normal risk of
collectability or present other unfavorable features. As of December
31, 2008, none of these loans were restructured, past due, or on nonaccrual
status.
An
analysis of these loans for 2008 is as follows (in thousands):
|
Balance
at December 31, 2007
|
$ | 20,282 | ||
|
Additions
|
22,216 | |||
|
Repayments
|
(22,703 | ) | ||
|
Balance
at December 31, 2008
|
$ | 19,795 |
Note
18 – Employee Benefit Plans
Defined
Benefit Plan
The
Company maintains a non-contributory defined benefit pension plan which covers
substantially all employees who are 21 years of age or older and who have had at
least one year of service. Advanced funding is accomplished by using
the actuarial cost method known as the collective aggregate cost
method. Prior to 2008, the Company used October 31 as a measurement
date to determine postretirement benefit obligations. The requirement
under SFAS 158 to measure plan assets and benefit obligations as of the date of
the employers’ fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008.
The following table sets forth the
plan's status and related disclosures as required by SFAS 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements
No. 87, 88, 106, and 132(R):
|
As
of and for the Years Ended December 31,
|
||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Change
in Benefit Obligation:
|
||||||||||||
|
Projected
benefit obligation at beginning of year
|
$ | 8,923 | $ | 7,038 | $ | 7,225 | ||||||
|
Service
cost
|
843 | 656 | 621 | |||||||||
|
Interest
cost
|
600 | 418 | 351 | |||||||||
|
Plan
amendments
|
- | - | 101 | |||||||||
|
Actuarial
loss (gain)
|
(627 | ) | 987 | 6 | ||||||||
|
Benefits
paid
|
(157 | ) | (176 | ) | (1,266 | ) | ||||||
|
Projected
benefit obligation at end of year
|
9,582 | 8,923 | 7,038 | |||||||||
|
Change
in Plan Assets:
|
||||||||||||
|
Fair
value of plan assets at beginning of year
|
8,230 | 7,070 | 6,056 | |||||||||
|
Actual
return on plan assets
|
(2,888 | ) | 1,336 | 780 | ||||||||
|
Employer
contributions
|
5,000 | - | 1,500 | |||||||||
|
Benefits
paid
|
(158 | ) | (176 | ) | (1,266 | ) | ||||||
|
Fair
value of plan assets at end of year
|
10,184 | 8,230 | 7,070 | |||||||||
|
Funded
Status at End of Year
|
$ | 602 | $ | (693 | ) | $ | 32 | |||||
|
Amounts
Recognized in the Consolidated Balance Sheets
|
||||||||||||
|
Other
assets (liabilities)
|
$ | 602 | $ | (693 | ) | $ | 32 | |||||
|
Amounts
Recognized in Accumulated Other Comprehensive Income
|
||||||||||||
|
Net
actuarial loss
|
$ | 5,205 | $ | 2,308 | $ | 2,243 | ||||||
|
Prior
service cost
|
13 | 12 | 11 | |||||||||
|
Deferred
income tax benefit
|
(1,827 | ) | (812 | ) | (789 | ) | ||||||
|
Amount
recognized
|
$ | 3,391 | $ | 1,508 | $ | 1,465 | ||||||
|
As
of and for the Years Ended December 31,
|
||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Components
of Net Periodic Benefit Cost
|
||||||||||||
|
Service
cost
|
$ | 723 | $ | 656 | $ | 621 | ||||||
|
Interest
cost
|
515 | 418 | 351 | |||||||||
|
Expected
return on plan assets
|
(657 | ) | (564 | ) | (521 | ) | ||||||
|
Amortization
of prior service cost
|
(1 | ) | (1 | ) | (23 | ) | ||||||
|
Recognized
net actuarial loss
|
112 | 150 | 211 | |||||||||
|
Net
periodic benefit cost
|
$ | 692 | $ | 659 | $ | 639 | ||||||
|
Adjustment to Retained
Earnings Due to Change in Measurement Date
|
||||||||||||
|
Service
cost
|
$ | 121 | N/A | N/A | ||||||||
|
Interest
cost
|
86 | N/A | N/A | |||||||||
|
Expected
return on plan assets
|
(110 | ) | N/A | N/A | ||||||||
|
Recognized
net actuarial loss
|
18 | N/A | N/A | |||||||||
|
Net
periodic benefit cost
|
$ | 115 | N/A | N/A | ||||||||
|
Other
Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income
|
||||||||||||
|
Net
actuarial loss
|
$ | 2,897 | $ | 65 | $ | 2,243 | ||||||
|
Prior
service cost
|
- | - | 11 | |||||||||
|
Amortization
of prior service cost
|
1 | 1 | - | |||||||||
|
Total
recognized in other comprehensive income
|
$ | 2,898 | $ | 66 | $ | 2,254 | ||||||
|
Total
Recognized in Net Periodic Benefit Cost,
Retained
Earnings and Other Comprehensive Income
|
$ | 3,705 | $ | 725 | $ | 2,893 | ||||||
|
Weighted-Average
Assumptions at End of Year
|
||||||||||||
|
Discount
rate used for net periodic pension cost
|
6.00 | % | 6.00 | % | 5.75 | % | ||||||
|
Discount
rate used for disclosure
|
6.00 | % | 6.00 | % | 6.00 | % | ||||||
|
Expected
return on plan assets
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate
of compensation increase
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
|
N/A
– not applicable
|
||||||||||||
The
accumulated benefit obligation as of December 31, 2008, 2007, and 2006 was
$6,942,364, $6,499,448, and $4,971,000 respectively.
The plan
sponsor selects the expected long-term rate-of-return-on-assets assumption in
consultation with their investment advisors and actuary. This rate is
intended to reflect the average rate of earnings expected to be earned on the
funds invested or to be invested to provide plan benefits. Historical
performance is reviewed, especially with respect to real rates of return (net of
inflation), for the major asset classes held or anticipated to be held by the
trust, and for the trust itself. Undue weight is not given to recent
experience that may not continue over the measurement period, with higher
significance placed on current forecasts of future long-term economic
conditions.
Because
assets are held in a qualified trust, anticipated returns are not reduced for
taxes. Further, solely for this purpose, the plan is assumed to
continue in force and not terminate during the period in which assets are
invested. However, consideration is given to the potential impact of
current and future investment policy, cash flow into and out of the trust, and
expenses (both investment and non-investment) typically paid from plan assets
(to the extent such expenses are not explicitly estimated within periodic
cost).
Below is
a description of the plan’s assets. The plan’s weighted-average asset
allocations by asset category are as follows:
|
Asset Category
|
December 31, 2008
|
October 31, 2007
|
||||||
|
Fixed
Income
|
24.8 | % | 25.0 | % | ||||
|
Equity
|
34.0 | 63.7 | ||||||
|
Mutual
Funds
|
5.5 | - | ||||||
|
Cash
and Accrued Income
|
35.7 | - | ||||||
|
Other
|
-
|
11.3 | ||||||
|
Total
|
100.0 | % | 100.0 | % | ||||
The
investment policy and strategy for plan assets can best be described as a growth
and income strategy. Diversification is accomplished by limiting the
holding of any one equity issuer to no more than 5% of total
equities. Exchange traded funds are used to provide diversified
exposure to the small capitalization and international equity
markets. All fixed income investments are rated as investment grade,
with the majority of these assets invested in corporate issues. The
assets are managed by the Company’s Trust and Investment Services
Division. No derivatives are used to manage the
assets. Equity securities do not include holdings in the
Company.
Projected
benefit payments for the years 2009 to 2018 are as follows (in
thousands):
|
Year
|
Amount
|
|||
|
2009
|
$ | 57 | ||
|
2010
|
85 | |||
|
2011
|
204 | |||
|
2012
|
248 | |||
|
2013
|
290 | |||
|
2014-2018
|
2,224 | |||
The
Company does not anticipate making a contribution in 2009.
Defined
Contribution Plan
The
Company maintains a 401(k) savings plan that covers substantially all full-time
employees of the Company. The Company matches a portion of the contribution made
by employee participants after at least one year of service. The Company
contributed $263,000, $273,000, and $245,000 to the 401(k) plan in 2008, 2007,
and 2006, respectively. These amounts are included employee benefits expense for
the respective years.
Deferred
Compensation Arrangements
The
Company maintains deferred compensation agreements with certain current and
former employees providing for annual payments to each ranging from $25,000 to
$50,000 per year for ten years upon their retirement. The liabilities
under these agreements are being accrued over the officers’ remaining periods of
employment so that, on the date of their retirement, the then-present value of
the annual payments would have been accrued. The expense for these
agreements was $33,000, $55,000, and $60,000 for years 2008, 2007, and 2006,
respectively.
Profit
Sharing and Incentive Arrangements
The
Company maintains a cash profit sharing plan for full-time employees based on
the Company’s performance and a cash incentive compensation plan for officers
based on the Company’s performance and individual officer goals. The
total amount charged to salary expense for these plans was $0, $287,000, and
$867,000 for the years 2008, 2007, and 2006, respectively.
Note
19 – Fair Value of Financial Instruments
The
Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”), 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
February 2008, the FASB issued Staff Position No. 157-2 (“FSP 157-2”) which
delayed the effective date of SFAS 157 for certain nonfinancial assets and
nonfinancial liabilities except for those items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. FSP
157-2 defers the effective date of SFAS 157 for such nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. Thus, the Company has only
partially applied SFAS 157. Those items affected by FSP 157-2 include other real
estate owned (OREO), goodwill and core deposit intangibles.
In
October of 2008, the FASB issued Staff Position No. 157-3 (“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 December 31, 2008 (in
thousands):
|
Fair
Value Measurements at December 31, 2008 Using
|
||||||||||||||||
|
Balance
as of December 31,
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
|||||||||||||
|
Description
|
2008
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Securities
available for sale
|
$ | 129,904 | $ | - | $ | 129,904 | $ | - | ||||||||
|
Mortgage
loan derivative contracts
|
9 | - | 9 | - | ||||||||||||
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 nonrecurring 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. 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.
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 December 31, 2008
|
||||||||||||||||
|
Balance
as of December 31,
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
|||||||||||||
|
Description
|
2008
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Loans
held for sale
|
$ | 1,764 | $ | - | $ | 1,764 | $ | - | ||||||||
|
Impaired
loans, net of valuation allowance
|
1,381 | - | 600 | 781 | ||||||||||||
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:
|
December 31, 2008
|
December 31, 2007
|
|||||||||||||||
|
(in
thousands)
|
Carrying
|
Estimated
Fair
|
Carrying
|
Estimated
Fair
|
||||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and due from banks
|
$ | 24,098 | $ | 24,098 | $ | 18,304 | $ | 18,304 | ||||||||
|
Securities
available for sale *
|
129,904 | 129,904 | 141,605 | 141,605 | ||||||||||||
|
Securities
held to maturity
|
7,121 | 7,391 | 11,990 | 12,250 | ||||||||||||
|
Loans
held for sale
|
1,764 | 1,764 | 1,368 | 1,368 | ||||||||||||
|
Loans,
net of allowance
|
563,286 | 575,970 | 543,996 | 550,458 | ||||||||||||
|
Accrued
interest receivable
|
3,110 | 3,110 | 3,547 | 3,547 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
|
$ | 589,138 | $ | 591,159 | $ | 581,221 | $ | 581,726 | ||||||||
|
Repurchase
agreements
|
51,741 | 51,741 | 47,891 | 47,891 | ||||||||||||
|
Other
borrowings
|
21,637 | 21,630 | 16,137 | 15,850 | ||||||||||||
|
Trust
preferred capital notes
|
20,619 | 18,258 | 20,619 | 20,155 | ||||||||||||
|
Accrued
interest payable
|
1,272 | 1,272 | 1,722 | 1,722 | ||||||||||||
|
* -
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.
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 December 31, 2008 and 2007, the fair value of
off balance sheet instruments was deemed immaterial, and therefore was not
included in the table above. The various off-balance sheet
instruments were discussed in Note 16.
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
20 – Dividend Restrictions and Regulatory Capital
The
approval of the Comptroller of the Currency is required if the total of all
dividends declared by a national bank in any calendar year exceeds the bank's
net income, as defined, for that year combined with its retained net income for
the preceding two calendar years. Under this formula, the Company’s
bank subsidiary can distribute as dividends to American National Bankshares
Inc., without the approval of the Comptroller of the Currency, $1,784,000 as of
December 31, 2008.
The
Company (on a consolidated basis) and its bank subsidiary are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s and
Bank’s financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and Bank must
meet specific capital guidelines that involve quantitative measures of their
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and
classification are subject to qualitative judgments by the regulators concerning
components, risk weighting, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Under the
guidelines, total capital is defined as core (Tier I) capital and supplementary
(Tier II) capital. The Company’s Tier I capital consists primarily of
shareholders' equity and trust preferred capital notes, while Tier II capital
also includes the allowance for loan losses subject to certain limits. The
definition of assets has been modified to include items on and off the balance
sheet, with each item being assigned a "risk-weight" for the determination of
the ratio of capital to risk-adjusted assets. Management believes, as
of December 31, 2008 and 2007, that the Company met the requirements to be
considered “well capitalized.”
The
following table provides summary information regarding regulatory
capital:
|
To
Be Well
|
||||||||||||||||||
|
Minimum
|
Capitalized
Under
|
|||||||||||||||||
|
Capital
|
Prompt
Corrective
|
|||||||||||||||||
|
(in
thousands)
|
Actual
|
Requirement
|
Action
Provisions
|
|||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
December
31, 2008
|
||||||||||||||||||
|
Total
Capital
|
||||||||||||||||||
|
Company
|
$ | 106,573 | 17.92 | % | $ | 47,576 |
>8.0%
|
|||||||||||
|
Bank
|
91,686 | 15.42 | 47,565 |
>8.0
|
$ | 59,457 |
>10.0%
|
|||||||||||
|
Tier
I Capital
|
||||||||||||||||||
|
Company
|
99,124 | 16.67 | 23,788 |
>4.0
|
||||||||||||||
|
Bank
|
85,144 | 14.32 | 23,783 |
>4.0
|
35,674 |
>6.0
|
||||||||||||
|
Leverage
Capital
|
||||||||||||||||||
|
Company
|
99,124 | 13.04 | 30,408 |
>4.0
|
||||||||||||||
|
Bank
|
85,144 | 11.23 | 30,333 |
>4.0
|
37,916 |
>5.0
|
||||||||||||
|
December
31, 2007
|
||||||||||||||||||
|
Total
Capital
|
||||||||||||||||||
|
Company
|
$ | 104,179 | 18.28 | % | $ | 45,593 |
>8.0%
|
|||||||||||
|
Bank
|
93,961 | 16.49 | 45,581 |
>8.0
|
$ | 56,976 |
>10.0%
|
|||||||||||
|
Tier
I Capital
|
||||||||||||||||||
|
Company
|
97,033 | 17.03 | 22,797 |
>4.0
|
||||||||||||||
|
Bank
|
87,806 | 15.41 | 22,791 |
>4.0
|
34,186 |
>6.0
|
||||||||||||
|
Leverage
Capital
|
||||||||||||||||||
|
Company
|
97,033 | 12.98 | 29,912 |
>4.0
|
||||||||||||||
|
Bank
|
87,806 | 11.76 | 29,862 |
>4.0
|
37,328 |
>5.0
|
||||||||||||
Note
21 – Segment and Related Information
In
accordance with SFAS 131, Disclosures About Segments of an
Enterprise and Related Information, reportable segments include community
banking and trust and investment services.
Community
banking involves making loans to and generating deposits from individuals and
businesses. All assets and liabilities of the Company are allocated
to community banking. Investment income from securities is also
allocated to the community banking segment. Loan fee income, service
charges from deposit accounts, and non-deposit fees such as automated 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.
Amounts
shown in the “Other” column includes activities of American National Bankshares
Inc. The “Other” column also includes corporate items, results of
insignificant operations and, as it relates to segment profit (loss), income and
expense not allocated to reportable segments. Intersegment eliminations
primarily consist of American National Bankshares Inc.’s investment in American
National Bank and Trust Company and related equity earnings.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment sales prices are
market based.
Segment
information as of and for the years ended December 31, 2008, 2007, and 2006, is
shown in the following table:
| 2008 | ||||||||||||||||||||
|
(in
thousands)
|
Trust
and
|
|||||||||||||||||||
|
Community
|
Investment
|
Intersegment
|
||||||||||||||||||
|
Banking
|
Services
|
Other
|
Eliminations
|
Total
|
||||||||||||||||
|
Interest
income
|
$ | 42,836 | $ | - | $ | 129 | $ | (93 | ) | $ | 42,872 | |||||||||
|
Interest
expense
|
14,559 | - | 1,373 | (93 | ) | 15,839 | ||||||||||||||
|
Noninterest
income - external customers
|
3,957 | 3,899 | 57 | - | 7,913 | |||||||||||||||
|
Operating
income before income taxes
|
10,951 | 1,791 | (1,540 | ) | - | 11,202 | ||||||||||||||
|
Depreciation
and amortization
|
1,710 | 23 | 2 | - | 1,735 | |||||||||||||||
|
Total
assets
|
788,435 | - | 749 | - | 789,184 | |||||||||||||||
|
Capital
expenditures
|
5,423 | 25 | - | - | 5,448 | |||||||||||||||
| 2007 | ||||||||||||||||||||
|
(in
thousands)
|
Trust
and
|
|||||||||||||||||||
|
Community
|
Investment
|
Intersegment
|
||||||||||||||||||
|
Banking
|
Services
|
Other
|
Eliminations
|
Total
|
||||||||||||||||
|
Interest
income
|
$ | 48,597 | $ | - | $ | - | $ | - | $ | 48,597 | ||||||||||
|
Interest
expense
|
17,997 | - | 1,373 | - | 19,370 | |||||||||||||||
|
Noninterest
income - external customers
|
4,623 | 4,128 | 71 | - | 8,822 | |||||||||||||||
|
Operating
income before income taxes
|
15,615 | 2,234 | (1,529 | ) | - | 16,320 | ||||||||||||||
|
Depreciation
and amortization
|
1,528 | 25 | 2 | - | 1,555 | |||||||||||||||
|
Total
assets
|
771,518 | - | 770 | - | 772,288 | |||||||||||||||
|
Capital
expenditures
|
2,087 | 18 | - | - | 2,105 | |||||||||||||||
| 2006 | ||||||||||||||||||||
|
Trust
and
|
||||||||||||||||||||
|
Community
|
Investment
|
Intersegment
|
||||||||||||||||||
|
Banking
|
Services
|
Other
|
Eliminations
|
Total
|
||||||||||||||||
|
Interest
income
|
$ | 45,060 | $ | - | $ | 10 | $ | - | $ | 45,070 | ||||||||||
|
Interest
expense
|
15,629 | - | 1,032 | - | 16,661 | |||||||||||||||
|
Noninterest
income - external customers
|
4,623 | 3,793 | 42 | - | 8,458 | |||||||||||||||
|
Operating
income before income taxes
|
15,747 | 1,963 | (1,165 | ) | - | 16,545 | ||||||||||||||
|
Depreciation
and amortization
|
1,383 | 22 | 2 | - | 1,407 | |||||||||||||||
|
Total
assets
|
777,001 | - | 719 | - | 777,720 | |||||||||||||||
|
Capital
expenditures
|
1,044 | 1 | - | - | 1,045 | |||||||||||||||
Note
22 – Parent Company Financial Information
Condensed
Parent Company financial information is as follows (in thousands):
|
December
31,
|
|||||||||
|
Condensed Balance
Sheets
|
2008
|
2007
|
|||||||
|
Cash
|
$ | 13,356 | $ | 8,619 | |||||
|
Investment
in subsidiaries
|
108,320 | 112,903 | |||||||
|
Other
assets
|
1,311 | 671 | |||||||
|
Total
Assets
|
$ | 122,987 | $ | 122,193 | |||||
|
Trust
preferred capital notes
|
$ | 20,619 | $ | 20,619 | |||||
|
Other
liabilities
|
68 | 63 | |||||||
|
Shareholders’
equity
|
102,300 | 101,511 | |||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 122,987 | $ | 122,193 | |||||
|
Years
Ended December 31,
|
||||||||||||
|
Condensed Statements of
Income
|
2008
|
2007
|
2006
|
|||||||||
|
Dividends
from subsidiary
|
$ | 12,000 | $ | 12,000 | $ | 7,900 | ||||||
|
Other
income
|
150 | 86 | 52 | |||||||||
|
Expenses
|
1,689 | 1,615 | 1,217 | |||||||||
|
Income
taxes (benefit)
|
(523 | ) | (520 | ) | (396 | ) | ||||||
|
Income
before equity in undistributed
|
||||||||||||
|
earnings
of subsidiary
|
10,984 | 10,991 | 7,131 | |||||||||
|
Equity
(deficit) in undistributed earnings of subsidiary
|
(2,963 | ) | 453 | 4,295 | ||||||||
|
Net
Income
|
$ | 8,021 | $ | 11,444 | $ | 11,426 | ||||||
|
Years
Ended December 31,
|
||||||||||||
|
Condensed Statements of Cash
Flows
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
provided by dividends received
|
||||||||||||
|
from
subsidiary
|
$ | 12,000 | $ | 12,000 | $ | 7,900 | ||||||
|
Cash
used for payment of dividends
|
(5,606 | ) | (5,587 | ) | (5,210 | ) | ||||||
|
Cash
used for repurchase of stock
|
(904 | ) | (1,359 | ) | (912 | ) | ||||||
|
Proceeds
from exercise of options
|
219 | 295 | 171 | |||||||||
|
Other
|
(972 | ) | (1,182 | ) | 1,535 | |||||||
|
Net
increase in cash
|
$ | 4,737 | $ | 4,167 | $ | 3,484 | ||||||
Note
23 – Concentrations of Credit Risk
Substantially
all the Company’s loans are made within its market area, which includes Southern
and Central Virginia and the northern portion of Central North Carolina.
The ultimate collectability of the Company’s loan portfolio and the ability to
realize the value of any underlying collateral, if necessary, are impacted by
the economic conditions of the market area.
Loans
secured by real estate were $464,171,000, or 81% of the loan portfolio, at
December 31, 2008, and $450,347,000, or 82% of the loan portfolio, at December
31, 2007. Loans secured by commercial real estate represented the largest
portion of loans at $207,160,000 at December 31, 2008, and $198,332,000 at
December 31, 2007, 36% and 36%, respectively of total loans. While there
were no concentrations of loans to any individual, group of individuals,
business, or industry that exceeded 10% of total loans at December 31, 2008 or
2007, loans to lessors of nonresidential buildings represented 13.7% of total
loans at December 31, 2008 and 11.0% at December 31, 2007; the lessees and
lessors are engaged in a variety of industries.
Note
24 – Supplemental Cash Flow Information
|
(Dollars
in thousands)
|
For
the Years ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Supplemental
Schedule of Cash and Cash Equivalents:
|
||||||||||||
|
Cash
and due from banks
|
$ | 14,986 | $ | 18,155 | $ | 24,375 | ||||||
|
Interest-bearing
deposits in other banks
|
9,112 | 149 | 1,749 | |||||||||
| $ | 24,098 | $ | 18,304 | $ | 26,124 | |||||||
|
Supplemental
Disclosure of Cash Flow Information:
|
||||||||||||
|
Cash
paid for:
|
||||||||||||
|
Interest
on deposits and borrowed funds
|
$ | 16,289 | $ | 19,332 | $ | 14,906 | ||||||
|
Income
taxes
|
2,936 | 3,790 | 3,738 | |||||||||
|
Noncash
investing and financing activities:
|
||||||||||||
|
Transfer
of loans to other real estate owned
|
4,060 | 498 | 115 | |||||||||
|
Unrealized
gain (loss) on securities available for sale
|
1,474 | 2,723 | 8 | |||||||||
|
Change
in unfunded pension liability
|
2,898 | 66 | - | |||||||||
|
Transactions
related to the merger acquisition:
|
||||||||||||
|
Increase
in assets and liabilities
|
||||||||||||
|
Cash
and due from banks
|
$ | - | $ | - | $ | 2,956 | ||||||
|
Securities
|
- | - | 8,020 | |||||||||
|
Loans,
net
|
- | - | 134,217 | |||||||||
|
Premises
and equipment, net
|
- | - | 4,930 | |||||||||
|
Goodwill
and core deposit intangibles
|
- | - | 25,580 | |||||||||
|
Accrued
interest receivable and other assets
|
- | - | 5,481 | |||||||||
|
Demand
deposits--noninterest bearing
|
- | - | 21,376 | |||||||||
|
Demand
deposits--interest bearing
|
- | - | 120,596 | |||||||||
|
Borrowings
|
- | - | 2,500 | |||||||||
|
Accrued
interest payable and other liabilities
|
- | - | 2,079 | |||||||||
|
Issuance
of common stock
|
- | - | 17,546 | |||||||||
(a)(1) Financial
Statements. See Item 8 for reference.
(a)(2) Financial Statement
Schedules. All applicable financial statement schedules required under
Regulation S-X have been included in the Notes to the
Consolidated
Financial Statements.
(a)(3) Exhibits.
The exhibits required by Item 601of Regulation S-K are listed
below.
|
EXHIBIT INDEX
|
||
|
Exhibit #
|
Location
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation
Dated
August 20, 1997
|
Exhibit
4.1 on Form S-3
filed
August 20, 1997
|
|
3.2
|
Exhibit
3.2 on Form 8-K
filed
November 19, 2008
|
|
|
10.1
|
Deferred
Compensation Agreement between American National Bank and
Trust Company,
and
Charles H. Majors dated December 31, 2008
|
Filed
herewith
|
|
10.2
|
Executive
Severance Agreement between American National Bankshares Inc., American
National Bank
and
Trust Company, and Charles
H. Majors dated December 31, 2008
|
Filed
herewith
|
|
10.3
|
Executive
Severance Agreement between American National Bankshares Inc., American
National Bank
and
Trust Company, and Jeffrey
V. Haley dated December 31, 2008
|
Filed
herewith
|
|
10.4
|
Executive
Severance Agreement between American National Bankshares Inc., American
National Bank
and
Trust Company, and R.
Helm Dobbins dated December 31, 2008
|
Filed
herewith
|
|
10.5
|
Executive
Severance Agreement between American National Bankshares Inc., American
National Bank
and
Trust Company, and Dabney
T. P. Gilliam, Jr. dated December 31, 2008
|
Filed
herewith
|
|
10.6
|
Executive
Severance Agreement between American National Bankshares Inc., American
National Bank
and
Trust Company, and S.
Cabell Dudley, Jr. dated December 31, 2008
|
Filed
herewith
|
|
10.
7
|
Exhibit
99.0 to Form S-8
filed
on May 30, 2008
|
|
|
11.1
|
Refer
to EPS calculation in the Notes to Financial Statements
|
Filed
herewith
|
|
21.1
|
Subsidiaries
of the registrant
|
Filed
herewith
|
|
31.1
|
Section
302 Certification of Charles H. Majors, President and CEO
|
Filed
herewith
|
|
31.2
|
Section
302 Certification of Charles H. Majors, President and
Interim
Principal Financial Officer
|
Filed
herewith
|
|
32.1
|
Section
906 Certification of Charles H. Majors, President and CEO
|
Filed
herewith
|
|
32.2
|
Section
906 Certification of Charles H. Majors, President and
Interim
Principal Financial Officer
|
Filed
herewith
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
March
11, 2009
|
AMERICAN
NATIONAL BANKSHARES INC.
|
By: /s/ Charles H.
Majors
President
and
Chief
Executive Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on March 11, 2009.
|
/s/ Charles H.
Majors
|
President
and Chief Executive Officer
|
|
|
Charles
H. Majors
|
and
Interim Principal Financial Officer
|
|
|
/s/ Fred A.
Blair
|
Director
|
|
|
Fred
A. Blair
|
||
|
/s/ Frank C. Crist,
Jr.
|
Director
|
|
|
Frank
C. Crist, Jr., D.D.S.
|
||
|
/s/ Ben J. Davenport,
Jr.
|
Director
|
|
|
Ben
J. Davenport, Jr.
|
||
|
/s/ H. Dan Davis
|
Director
|
|
|
H.
Dan Davis
|
||
|
/s/ Michael P.
Haley
|
Director
|
|
|
Michael
P. Haley
|
||
|
/s/ Charles S.
Harris
|
Director
|
|
|
Charles
S. Harris
|
||
|
/s/ Lester A. Hudson,
Jr.
|
Director
|
|
|
Lester
A. Hudson, Jr., Ph.D.
|
||
|
/s/ E. Budge Kent,
Jr.
|
Director
|
|
|
E.
Budge Kent, Jr.
|
||
|
/s/ Fred B. Leggett,
Jr.
|
Director
|
|
|
Fred
B. Leggett, Jr.
|
||
|
/s/ Franklin W.
Maddux
|
Director
|
|
|
Franklin
W. Maddux, M.D.
|
||
|
/s/ Martha W.
Medley
|
Director
|
|
|
Martha
W. Medley
|
||
|
/s/ Claude B. Owen,
Jr.
|
Director
|
|
|
Claude
B. Owen, Jr.
|
||
|
/s/ James R. Jefferson
|
Assistant
Treasurer and
|
|
|
James
R. Jefferson
|
Interim
Principal Accounting
Officer
|
72