UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED  March 31,June 30, 2009.

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

Commission file numbernumber:  0-12820

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

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

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

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

YesxNo¨ 

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

Yes¨No
¨
 

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

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

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

At May 7,August 5, 2009, the Company had 6,100,3236,099,333 shares of Common Stock outstanding, $1 par value.

 
1





AMERICAN NATIONAL BANKSHARES INC.
    
Index Page
 Page
    
Part I.FINANCIAL INFORMATION 
    
 Item 11.Financial Statements 
    
  
Consolidated Balance Sheets as of March 31,June 30, 2009 and December 31, 2008
3
    
  
Consolidated Statements of Income for the three and six months ended March 31,June 30, 2009 and 2008
4
4-5
    
  
Consolidated Statements of Changes in Shareholders' Equity for the threesix months ended March 31,June 30, 2009 and 2008
5
6
    
  
Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2009 and 2008
6
7
    
  
Notes to Consolidated Financial Statements
78
    
 Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
18
23
    
 Item 3.
Quantitative and Qualitative Disclosures about Market Risk
2735
    
 Item 4.
Controls and Procedures
2836
    
Part II.
OTHER INFORMATION
 
    
 Item 1.
Legal Proceedings
2937
    
 Item 1A.
Risk Factors
2937
    
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
2937
    
 Item 3.
Defaults Upon Senior Securities
2937
    
 Item 4.
Submission of Matters to a Vote of Security Holders
2937
    
 Item 5.
Other Information
2938
    
 Item 6.
Exhibits
2938
    
SIGNATURES 




 
2

Part I.  Financial Information
Item 1. Financial Statements
 
 American National Bankshares Inc. and Subsidiaries
 Consolidated Balance Sheets
 (Dollars in thousands, except share data)
          
        (Unaudited)  (Audited)
       June 30,  December 31,
 ASSETS    2009 2008
 Cash and due from banks   $    13,905  $     14,986
 Interest-bearing deposits in other banks          26,879           9,112
          
 Securities available for sale, at fair value       144,706       133,695
 Securities held to maturity            6,712           7,121
   Total securities       151,418       140,816
          
 Loans held for sale          10,408           1,764
          
 Loans, net of unearned income       557,042       571,110
 Less allowance for loan losses          (7,934)          (7,824)
   Net loans       549,108       563,286
          
 Premises and equipment, net          18,912         17,129
 Other real estate owned            4,033           4,311
 Goodwill            22,468         22,468
 Core deposit intangibles, net            1,886           2,075
 Accrued interest receivable and other assets          12,466         13,237
   Total assets   $  811,483  $  789,184
          
LIABILITIES and SHAREHOLDERS' EQUITY     
 Liabilities:      
 Demand deposits -- noninterest bearing   $  101,449  $     95,703
 Demand deposits -- interest bearing          91,424       116,132
 Money market deposits          81,306         56,615
 Savings deposits          62,768         59,624
 Time deposits       278,284       261,064
   Total deposits       615,231       589,138
          
 Short-term borrowings:     
  Customer repurchase agreements          59,437         51,741
  Other short-term borrowings                     -           7,850
 Long-term borrowings            8,712         13,787
 Trust preferred capital notes          20,619         20,619
 Accrued interest payable and other liabilities            4,866           3,749
   Total liabilities       708,865       686,884
          
 Shareholders' equity:     
 Preferred stock, $5 par, 200,000 shares authorized,     
  none outstanding   -  -
 Common stock, $1 par, 10,000,000 shares authorized,     
  6,100,330 shares outstanding at June 30, 2009 and     
  6,085,628 shares outstanding at December 31, 2008            6,100           6,086
 Capital in excess of par value          26,772         26,491
 Retained earnings          70,682         71,090
 Accumulated other comprehensive loss, net              (936)          (1,367)
   Total shareholders' equity       102,618       102,300
   Total liabilities and shareholders' equity   $  811,483  $  789,184
          
 The accompanying notes are an integral part of the consolidated financial statements.  

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

 
3


 American National Bankshares Inc. and Subsidiaries
 Consolidated Statements of Income
 (Dollars in thousands, except per share and per share data)  (Unaudited)
         
       Three Months Ended
      June 30
      2009 2008
 Interest and Dividend Income:    
  Interest and fees on loans  $     7,917  $      8,987
  Interest and dividends on securities:    
   Taxable        1,233          1,234
   Tax-exempt           416             420
   Dividends             21               73
  Other interest income           103               74
   Total interest and dividend income        9,690        10,788
         
Interest Expense:    
  Interest on deposits        2,180          3,116
  Interest on short-term borrowings           177             427
  Interest on long-term borrowings             80             171
  Interest on trust preferred capital notes           344             344
   Total interest expense        2,781          4,058
         
 Net Interest Income        6,909          6,730
  Provision for Loan Losses           492             600
         
 Net Interest Income After Provision for Loan Losses        6,417          6,130
         
 Noninterest Income:    
  Trust fees           767             916
  Service charges on deposit accounts           511             601
  Other fees and commissions           251             226
  Mortgage banking income           568             200
  Brokerage fees             73             101
  Securities gains (losses), net               1            (138)
  Impairment of securites               -            (255)
  Net loss on foreclosed real estate            (43)                 -
  Other            125             190
   Total noninterest income        2,253          1,841
         
 Noninterest Expense:    
  Salaries         2,732          2,481
  Employee benefits           832             777
  Occupancy and equipment           719          1,210
  FDIC assessment           564               24
  Bank franchise tax           160             173
  Core deposit intangible amortization             95               95
  Other         1,219             883
   Total noninterest expense        6,321          5,643
         
  Income Before Income Taxes        2,349          2,328
  Income Taxes           643             519
  Net Income  $     1,706  $      1,809
         
 Net Income Per Common Share:    
  Basic   $      0.28  $        0.30
  Diluted   $      0.28  $        0.30
 Average Common Shares Outstanding:    
  Basic   6,096,034    6,098,184
  Diluted   6,097,047    6,108,536
         
 The accompanying notes are an integral part of the consolidated financial statements.

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

 
4

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


 American National Bankshares Inc. and Subsidiaries
 Consolidated Statements of Income
 (Dollars in thousands, except per share and per share data)  (Unaudited)
         
       Six Months Ended
      June 30
      2009 2008
 Interest and Dividend Income:    
  Interest and fees on loans  $   15,951  $   18,431
  Interest and dividends on securities:  �� 
   Taxable        2,353        2,465
   Tax-exempt           802           852
   Dividends             43           150
  Other interest income           191           150
   Total interest and dividend income       19,340       22,048
         
Interest Expense:    
  Interest on deposits        4,707        6,698
  Interest on short-term borrowings           413           911
  Interest on long-term borrowings           211           297
  Interest on trust preferred capital notes           687           687
   Total interest expense        6,018        8,593
         
 Net Interest Income       13,322       13,455
  Provision for Loan Losses           842           740
         
 Net Interest Income After Provision for Loan Losses       12,480       12,715
         
 Noninterest Income:    
  Trust fees        1,525        1,796
  Service charges on deposit accounts        1,013        1,166
  Other fees and commissions           493           429
  Mortgage banking income           854           395
  Brokerage fees           130           244
  Securities gains (losses), net               1          (108)
  Impairment of securities               -          (255)
  Net loss on foreclosed real estate       (1,222)              (7)
  Other            193           316
   Total noninterest income        2,987        3,976
         
 Noninterest Expense:    
  Salaries         5,263        4,950
  Employee benefits        1,645        1,524
  Occupancy and equipment        1,470        1,436
  FDIC assessment           781             41
  Bank franchise tax           323           350
  Core deposit intangible amortization           189           189
  Other         2,525        2,602
   Total noninterest expense       12,196       11,092
         
  Income Before Income Taxes        3,271        5,599
  Income Taxes           797        1,485
  Net Income  $     2,474  $     4,114
         
 Net Income Per Common Share:    
  Basic   $      0.41  $      0.67
  Diluted   $      0.41  $      0.67
 Average Common Shares Outstanding:    
  Basic   6,089,055  6,103,008
  Diluted   6,091,291  6,114,911
         
 The accompanying notes are an integral part of the consolidated financial statements.


 American National Bankshares Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows 
 Three Months Ended March 31, 2009 and 2008 
 (Dollars in thousands)  (Unaudited) 
       
  2009  2008 
 Cash Flows from Operating Activities:      
 Net income $768  $2,305 
 Adjustments to reconcile net income to net        
 cash provided by operating activities:        
 Provision for loan losses  350   140 
 Depreciation  338   353 
 Core deposit intangible amortization  94   94 
 Net amortization (accretion) of bond premiums and discounts  (67)  (64)
 Net gain on sale or call of securities  -   (30)
 Gain on loans held for sale  (249)  (166)
 Proceeds from sales of loans held for sale  12,554   8,279 
 Originations of loans held for sale  (13,323)  (8,426)
 Net loss on foreclosed real estate  1,179    7 
 Stock-based compensation expense  15   - 
 Deferred income tax expense (benefit)  (423)  13 
 Net change in interest receivable  12   223 
 Net change in other assets  325   (292)
 Net change in interest payable  17   (63)
 Net change in other liabilities  332   868 
 Net cash provided by operating activities  1,922   3,241 
         
 Cash Flows from Investing Activities:        
 Proceeds from maturities and calls of securities available for sale  8,995   15,342 
 Proceeds from maturities and calls of securities held to maturity  311   952 
 Purchases of securities available for sale  (42,699)  (18,377)
 Net change in loans  1,387   (3,386)
 Purchases of bank property and equipment  (1,189)  (397)
 Proceeds from sales of foreclosed real estate  169   75 
 Net cash used in investing activities  (33,026)  (5,791)
         
 Cash Flows from Financing Activities:        
 Net change in demand, money market, and savings deposits  995   4,696 
 Net change in time deposits  25,755   (4,378)
 Net change in repurchase agreements  9,027   10,288 
 Net change in short-term borrowings  4,590   (3,975)
 Net change in long-term borrowings  (37)  3,963 
 Cash dividends paid  (1,399)  (1,402)
 Repurchase of stock  (121)  (599)
 Proceeds from exercise of stock options  16   181 
 Net cash provided by financing activities  38,826   8,774 
         
 Net Increase in Cash and Cash Equivalents  7,722   6,224 
         
 Cash and Cash Equivalents at Beginning of Period  24,098   18,304 
         
 Cash and Cash Equivalents at End of Period $31,820  $24,528 
         
The accompanying notes are an integral part of the consolidated financial statements.     
 American National Bankshares Inc. and Subsidiaries
 Consolidated Statements of Changes in Shareholders' Equity
 Six Months Ended June 30, 2009 and 2008
 (Dollars in thousands) (Unaudited)
             Accumulated  
     Common Stock  Capital in    Other  Total
         Excess of  Retained  Comprehensive  Shareholders'
     Shares  Amount  Par Value  Earnings  Income (Loss)  Equity
 Balance, December 31, 2007   6,118,717  $      6,119  $    26,425  $    69,409  $           (442)  $     101,511
               
 Net income                  -                  -                  -          4,114                     -             4,114
               
 Change in unrealized gains on securities            
   available for sale, net of tax, $(332)                  -                  -                  -                  -               (618)  
               
 Add:  Reclasification adjustment for losses            
   on impairment of securities, net of tax, $89                  -                  -                  -                  -                166  
               
 Add:  Reclassification adjustment for losses            
  on securities available for sale, net of            
  tax, $38                  -                  -                  -                  -                  70  
               
   Other comprehensive income                       (382)               (382)
               
   Total comprehensive income                       3,732
               
 Change in pension plan measurement date,            
   net of tax, $(40)                         (74)                 (74)
               
 Stock repurchased and retired       (31,200)              (31)            (135)            (484)                     -               (650)
               
 Stock options exercised        10,345               10             173                  -                     -                183
               
 Cash dividends declared, $0.46 per share                  -                  -                  -         (2,806)                     -            (2,806)
               
 Balance, June 30, 2008   6,097,862  $      6,098  $    26,463  $    70,233  $           (898)  $     101,896
               
 Balance, December 31, 2008   6,085,628  $      6,086  $    26,491  $    71,090  $        (1,367)  $     102,300
               
 Net income                  -                  -                  -          2,474                     -             2,474
               
 Change in unrealized gains on securities            
   available for sale, net of tax, $232                  -                  -                  -                  -                432  
               
 Less:  Reclassification adjustment for gains            
  on securities available for sale, net of            
  tax of $0                  -                  -                  -                  -                   (1)  
               
   Other comprehensive income                        431                431
               
   Total comprehensive income                       2,905
               
 Stock repurchased and retired         (7,600)                (8)              (33)              (80)                     -               (121)
               
 Stock options exercised        22,302               22             283                  -                     -                305
               
 Stock option expense                   31                      31
               
 Cash dividends declared, $0.46 per share                  -                  -           (2,802)                     -            (2,802)
               
 Balance, June 30, 2009   6,100,330  $      6,100  $    26,772  $    70,682  $           (936)  $     102,618
The accompanying notes are an integral part of the consolidated financial statements.

 
6



 American National Bankshares Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
 Six Months Ended June 30, 2009 and 2008
 (Dollars in thousands)  (Unaudited)
       
    2009 2008
 Cash Flows from Operating Activities:   
  Net income $   2,474  $   4,114
  Adjustments to reconcile net income to net   
   cash (used in) provided by operating activities:   
   Provision for loan losses         842          740
   Depreciation         566          552
   Core deposit intangible amortization         189          188
   Net amortization (accretion) of bond premiums and discounts        (144)         (121)
   Net (gain) loss on sale or call of securities           (1)          108
   Impairment of securities             -          255
   Gain on loans held for sale        (752)         (337)
   Proceeds from sales of loans held for sale    30,756     16,400
   Originations of loans held for sale   (38,648)    (16,895)
   Net (gain) loss on foreclosed real estate          (17)             7
   Change in valuation allowance for foreclosed real estate      1,239              -
   Stock-based compensation expense           31              -
   Deferred income tax (benefit) expense        (510)            19
   Net change in interest receivable        (149)            66
   Net change in other assets      1,199      (1,084)
   Net change in interest payable        (211)         (258)
   Net change in other liabilities      1,327      (1,176)
    Net cash (used in) provided by operating activities     (1,809)       2,578
       
 Cash Flows from Investing Activities:   
   Proceeds from sales of securities available for sale             -          814
   Proceeds from maturities and calls of securities available for sale    48,188     28,991
   Proceeds from maturities and calls of securities held to maturity         411       2,164
   Purchases of securities available for sale   (58,393)    (22,109)
   Net decrease (increase) in loans    12,202    (17,694)
   Purchases of bank property and equipment     (2,349)      (1,003)
   Proceeds from sales of foreclosed real estate         190          119
    Net cash provided by (used in) investing activities         249      (8,718)
       
 Cash Flows from Financing Activities:   
   Net change in demand, money market, and savings deposits      8,873       1,419
   Net change in time deposits    17,220    (13,396)
   Net change in customer repurchase agreements      7,696     10,082
   Net change in short-term borrowings     (7,850)     16,425
   Net change in long-term borrowings     (5,075)       4,926
   Cash dividends paid     (2,802)      (2,806)
   Repurchase of stock        (121)         (650)
   Proceeds from exercise of stock options         305          183
    Net cash provided by financing activities    18,246     16,183
       
 Net Increase in Cash and Cash Equivalents    16,686     10,043
       
 Cash and Cash Equivalents at Beginning of Period    24,098     18,304
       
 Cash and Cash Equivalents at End of Period $  40,784  $  28,347
       
The accompanying notes are an integral part of the consolidated financial statements.

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

June 30, 2009

 Note 1 – Basis of Presentation

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

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

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

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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, (consistingconsisting of normal recurring accruals)accruals  necessary to present fairly the Company’s financial position as of March 31,June 30, 2009; the consolidated statements of income for the three and six months ended March 31,June 30, 2009 and 2008; the consolidated statements of changes in shareholders’ equity for the threesix months ended March 31,June 30, 2009 and 2008; and the consolidated statements of cash flows for the threesix  months ended March 31,June 30, 2009 and 2008.  Operating results for the three and six month periods ended March 31,June 30, 2009 are not necessarily indicative of the results that may occur for the year ending December 31, 2009.  Certain reclassifications have been made to prior period balances to conform to the current period presentation.  These statements should be read in conjunction with the Notes to Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2008.

 

 Note 2 – Recent Accounting Pronouncements

In December 2007,April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Statement of Financial Accounting Standards (“(‘SFAS”) No. 141(R), “Business Combinations” (“SFAS 141(R)”). The Standard significantly changed the financial accounting and reporting of business combination transactions.  SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008.  The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.

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

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

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

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

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

ReferIn May 2009, the FASB issued SFAS No. 165, “Subsequent Events.”  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  SFAS 165 is effective for interim and annual periods ending after June 15, 2009.  The Company does not expect the Company’s Annual Reportadoption of SFAS 165 to have a material impact on Form 10-Kits consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140.”  SFAS 166 provides guidance to improve the year ended December 31, 2008relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 must be applied as of the beginning of the first annual reporting period that begins after November 15, 2009 and for previously announced accounting pronouncements.interim periods within that first annual reporting period.  Earlier application is prohibited.  The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial statements.

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



 
89
           In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162.”  SFAS 168 establishes the FASB Accounting Standards Codification, which will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of SFAS 168 to have a material impact on its consolidated financial statements.

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

Note 3 – Securities

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

 March 31, 2009 June 30, 2009
(in thousands) Amortized  Unrealized  Unrealized  Estimated Amortized Unrealized Unrealized Estimated
 Cost  Gains  Losses  Fair Value Cost Gains Losses Fair Value
Securities available for sale:                   
Debt securities:                   
Federal agencies $74,216  $1,963  $2  $76,177 $ 45,665 $ 1,760 $     54 $   47,371
Mortgage-backed 42,934  1,491  547  43,878 39,160 1,334 346 40,148
State and municipal 40,085  819  87  40,817 47,767 1,036 110 48,693
Corporate 2,980  -  6  2,974 3,974 158 - 4,132
Equity securities:                       
FHLB stock – restricted 2,598  -  -  2,598 2,811 - - 2,811
Federal Reserve stock – restricted 1,429  -  -  1,429 1,429 - - 1,429
Other  108   -   -   108        122          -         -          122
Total securities available for sale  164,350   4,273   642   167,981  140,928   4,288    510   144,706
                       
Debt securities held to maturity:                       
Mortgage-backed 243  13  -  256 223 15 - 238
State and municipal  6,568   254   -   6,822      6,489      216         -      6,705
Total securities held to maturity  6,811   267   -   7,078      6,712      231         -      6,943
Total securities $171,161  $4,540  $642  $175,059 
 
$ 147,640
 
 
$ 4,519
 
 
$  510
 
 
$ 151,649


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


The Corporation’s investment in Federal Home loan Bank (“FHLB”) stock totaled $2,811,000 at June 30, 2009. FHLB stock is generally viewed as a long term investment and as a restricted investments security which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of cash dividend payments and repurchases of excess capital stock in 2009, the Corporation does not consider this investment to be other temporarily impaired at June 20, 2009 and no impairment has been recognized.
11
The tables below show estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31,June 30, 2009 and December 31, 2008.  The reference pointdate 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.

9
Management evaluates securities for other-than-temporary impairment quarterly, and more frequently whenif economic or market concerns warrant such evaluation.warrant.  Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability ofwhether the Company intends to retain its investment insell the issuer for a period of time sufficientsecurity or may be required to allow for anticipated recovery in fair value.sell the security prior to maturity.  As of March 31,June 30, 2009, the Company held 20six securities that had been in a continuous unrealized loss position for twelve months or more.  The Company has reviewed these securities in accordance with its accounting policy, for other-than-temporary impairment, and does not consider the balances presented in the table to be other-than-temporarily impaired as of March 31,June 30, 2009.

June 30, 2009

 Total Less than 12 Months 12 Months or More
(in thousands)
Estimated Fair
Value
 
Unrealized
Loss
 
Estimated Fair
Value
 
Unrealized
Loss
 
Estimated Fair
Value
 
Unrealized
Loss
Federal agencies$   1,954$     54 $  1,954$   54 $        -$      -
Mortgage-backed2,488346 -- 2,488346
State and municipal    8,059    110     7,196     79        863       31
  Total$ 12,501$  510 $  9,150$  133 $  3,351$  377


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

December 31, 2008

 Total  Less than 12 Months  12 Months or More 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
 
Estimated Fair
Value
 
Unrealized
Loss
 
Estimated Fair
Value
Unrealized
Loss
 
Estimated Fair
Value
 
Unrealized
Loss
Federal agencies $1,583  $8  $1,583  $8  $-  $-  $   1,583 $      8 $ 1,583$       8  $        - $      -
Mortgage-backed 4,484  496  3,468  472  1,016  24 4,484496 3,468472 1,01624
State and municipal 3,581  75  3,581  75  -  - 3,58175 3,58175 --
Corporate  389   96   -   -   389   96        389      96            -         -      389     96
Total $10,037  $675  $8,632  $555  $1,405  $120 $ 10,037$  675 $ 8,632$   555 $ 1,405$  120
12

 Note 4 - Loans

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

(in thousands)
 
March 31,
2009
  
December 31,
2008
 
June 30,
2009
 
December 31,
2008
         
Construction and land development $53,579  $63,361 $   50,930 $   63,361
Commercial real estate 213,508  207,160 210,832 207,160
Residential real estate 134,509  136,480 128,835 136,480
Home equity  61,458   57,170     61,818     57,170
Total real estate 463,054  464,171 452,415 464,171
           
Commercial and industrial 97,261  98,546 96,978 98,546
Consumer  8,688   8,393       7,649       8,393
Total loans $569,003  $571,110 $ 557,042 $ 571,110

10
The following is a summary of information pertaining to impaired and nonaccrual loans:

 March 31,  December 31,  June 30, December 31, 
(in thousands) 2009  2008 (in thousands)2009 2008 
           
Impaired loans with a valuation allowance $2,470  $2,545 Impaired loans with a valuation allowance$ 1,879 $  2,545 
Impaired loans without a valuation allowance  1,426   647 Impaired loans without a valuation allowance      640       647 
Total impaired loans $3,896  $3,192 Total impaired loans$ 2,519 $ 3,192 
             
Allowance provided for impaired loans,        Allowance provided for impaired loans,    
included in the allowance for loan losses $1,121  $1,164  included in the allowance for loan losses$    953 $ 1,164 
             
Nonaccrual loans excluded from the impaired
loan disclosure
 $1,006  $1,574 
Nonaccrual loans excluded from the impaired loan disclosure
$ 1,573 
$ 1,574
 
 
As of and  for theThree Months Ended Six Months Ended Three Months Ended Six Months Ended
(in thousands)June 30, 2009 June 30, 2009 June 30, 2008 June 30, 2008
        
Average balance in impaired loans……………..
 
$ 3,312
 
 
$ 3,348
 
 
$ 5,729
 
 
$4,687
Interest income recognized on impaired loans…………..
 
     47
 
 
    83
 
 
   59
 
 
   108
Interest income recognized on nonaccrual loans……….
 
       -
 
 
         -
 
 
        -
 
 
        -
Interest on non-accrual loans had they been accruing…………………….
 
 
    147
 
 
 
   202
 
 
 
      96
 
 
 
     169
Loans past due 90 days and still accruing interest….
 
   -
 
 
   -
 
 
         172
 
 
  172


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

Foreclosed real estate was $3,345,000$4,033,000 at March 31,June 30, 2009 and $4,311,000 December 31, 2008.

13

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

Changes in the allowance for loan losses and the reserve for unfunded lending commitments for the threesix months ended March 31,June 30, 2009 and 2008, and for the year ended December 31, 2008, are presented below:

(in thousands)
 
Three Months Ended
March 31,
  
Year
Ended
December 31,
  
Three Months Ended
March 31,
  
Six Months
Ended
June 30,
Year
Ended
December 31,
Six Months
Ended
June 30,
 2009  2008  2008  20092008
Allowance for Loan Losses            
Balance, beginning of period $7,824  $7,395  $7,395  $ 7,824$  7,395$ 7,395
Provision for loan losses 350  1,620  140  8421,620740
Charge-offs (376) (1,564) (170)      (798)   (1,564)     (373)
Recoveries  38   373   60         66      373     170
Balance, end of period $7,836  $7,824  $7,425  $ 7,934$  7,824$ 7,932
               
Reserve for unfunded lending commitments               
Balance, beginning of period $475  151  $151  $    475151$    151
Provision for unfunded commitments 54  324  42      (12)       324      218
Charge-offs  ( 215)  -   -      (215)           -          -
Balance, end of period $314  $475  $193  $    248$     475$    369
               

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


11

Note 6 – Goodwill and Other Intangible Assets

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

The changes in the carrying amount of goodwill for the quarter ended March 31,June 30, 2009, are as follows (in thousands):

   Amount  
Balance as of December 31, 2008 $22,468 
Goodwill recorded during the period  - 
Impairment losses  - 
Balance as of March 31, 2009 $22,468 
     
Balance as of December 31, 2008$    22,468
Goodwill recorded during the period-
Impairment losses               -
Balance as of June 30, 2009$    22,468

Core deposit intangible assets resulting from an acquisition were originally recorded at $3,112,000 in April 2006, and are being amortized over 99 months.  The net core deposit intangible at March 31,June 30, 2009 was $1,981,000.$1,886,000.
14


Note 7 – Short-term Borrowings

Short-term borrowings consist of customer repurchase agreements, overnight borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”), and Federal Funds purchased.  Customer repurchase agreements are collateralized by securities of the U.S. Government, its agencies or its agencies.Government Sponsored Enterprises (“GSE”).  They mature daily.  The interest rates may be changed at the discretion of the Company.  The securities underlying these agreements remain under the Company’s control.  FHLB overnight borrowings containhave floating interest rates that may change daily at the discretion of the FHLB.  Federal Funds purchased are unsecured overnight borrowings from other financial institutions.  Short-term borrowings consisted of the following as of March 31,June 30, 2009 and December 31, 2008 (in thousands):

 
March 31, 
 2009
  December 31, 2008 June 30, 2009 December 31, 2008
         
Customer repurchase agreements $60,768  $51,741 $ 59,437 $ 51,741
FHLB overnight borrowings  12,440   7,850              -      7,850
 $73,208  $59,591 $ 59,437 $ 59,591
           

Note 8 – Long-term Borrowings

Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans and home equity lines of credit.  In addition, the Company pledges as collateral its capital stock in the FHLB and deposits with the FHLB.  The Company has a line of credit with the FHLB equal to 30% of the Company’s assets, subject to the amount of collateral pledged.  As of March 31,June 30, 2009, $106,631,000$98,157,000 in 1-4 family residential mortgage loans and $62,161,000$57,258,000 in home equity lines of credit were pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings.  Long-term borrowings consisted of the following fixed rate, long term advances as of March 31,June 30, 2009 and December 31, 2008 (in thousands):


 
 
Due by
June 30
2009
Advance Amount
Weighted
Average
Rate
 
 
Due by
December 31
2008
Advance Amount
Weighted
Average
Rate
 
       
2011    8,0002.92 2009$  5,0005.26%
2014      712 3.78 2011     8,0002.93
 $ 8,7122.99% 2014       7873.78
     $ 13,7873.82%
       

 
12

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

Note 9 – Trust Preferred Capital Notes

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

The proceeds of the Trust Preferred Securities received by the Trust, along with proceeds of $619,000 received by the Trust from the issuance of common securities by the Trust to the Company, were used to purchase $20,619,000 of the Company’s junior subordinated debt securities (the “Trust Preferred Capital Notes”), issued pursuant to a Junior Subordinated Indenture entered into between the Company and Wilmington Trust Company, as trustee.  The proceeds of the Trust Preferred Capital Notes were used to fund the cash portion of the merger consideration to the former shareholders of Community First in connection with the Company’s acquisition of that company, and for general corporate purposes.  In accordance with FASB Interpretation No. 46R, Consolidation“Consolidation of Variable Interest EntitiesEntities”, the CorporationCompany did not eliminate through consolidation the Corporation’s $619,000 equity investment in AMNB Statutory Trust I.  Instead, the CorporationCompany reflected this equity investment in the “Accrued interest receivable and other assets” line item in the consolidated balance sheets.
15

Note 10 – Stock Based Compensation

A summary of stock option transactions for the threesix months ended March 31,June 30, 2009, is as follows:

 
 
 
Option
Shares
  
 
Weighted Average
Exercise Price
  
Weighted Average Remaining Contractual Term
  
 
Average Intrinsic Value
($000)
 
Option
Shares
Weighted Average
Exercise Price
Weighted Average Remaining Contractual Term
Average Intrinsic Value
($000)
Outstanding at December 31, 2008 218,610  $20.31       218,610$20.31  
Granted -  -       6,00016.00  
Exercised (1,133) 14.29       (22,302)13.69  
Forfeited  (10,000)   22.94        (19,500)          19.45  
Outstanding at March 31, 2009  207,477  $20.22   5.2  $47 
Exercisable at March 31, 2009 163,227  $21.09  3.9  $47 
Outstanding at June 30, 2009182,808$21.075.6$ 183
Exercisable at June 30, 2009137,058$22.474.3$   74

The total intrinsic value of options exercised during the threesix month period ended March 31,June 30, 2009 was $2,000.$52,000.

There were 59,000 options granted in the fourth quarter of 2008 and 6,000 options granted in the second quarter of 2009, which resulted in $15,000$31,000 equity related compensation expense in the first quarter of 2009.  $161,000$158,000 remains to be expensed in future periods.  No other options were granted in 2008 or 2007.2008.  There was no tax benefit associated with stock option activity during 2009 2008, or 2007.2008.  Under SFAS No. 123R, “Share-Based Payment” a company may only recognize tax benefits for stock options that ordinarily will result in a tax deduction when the option is exercised (“non-statutory” options).  The Company has no non-statutory stock options.

13
Note 11 – Earnings Per Share

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

 Three Months Ended Three Months Ended
 March 31, June 30,
 2009  2008 2009 2008
    Per     Per  Per  Per
    Share     Share  Share  Share
 Shares  Amount  Shares  Amount SharesAmount SharesAmount
Basic 6,081,998  $.13  6,107,832  $.38  6,096,034 $  .28  6,098,184 $  .30
Effect of dilutive securities - stock options  3,459   -   13,453   -        1,013        -       10,352        -
Diluted  6,085,457  $.13   6,121,285  $.38  6,097,047  $  .28 6,108,536  $  .30

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

Stock options on common stock which were not included in computing diluted earnings per share for the threesix month periods ended March 31,June 30, 2009 and 2008, because their effects were antidilutive, averaged 138,511106,511 and 93,027,116,511, respectively.


16
 Note 12 – Employee Benefit Plans

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

Components of Net Periodic Benefit Cost Three Months Ended Three Months Ended Six Months Ended
(in thousands) March 31, June 30, June 30,
 2009  2008    20092008   2009  2008
Service cost $184  $181 $ 184          $ 181 $ 368$ 362
Interest cost 146  128    146             129    292   257
Expected return on plan assets (203) (164)   (203)           (164)    (406)  (328)
Amortization of prior service cost     -               (1)       -     (1)
Recognized net actuarial loss  111   28    111              28    222    56
           
Net periodic benefit cost $238  $173 $ 238         $ 173 $ 476$ 346

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

Note 13 – Segment and Related Information

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

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

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

14
Amounts shown in the “Other” column include activities of American National Bankshares Inc. and its subsidiary, AMNB Statutory Trust I.  Refer to Note 1 for additional information on the Trust.  The “Other” column also includes corporate items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments. Intersegment eliminations primarily consist of American National Bankshares Inc.’s investment in American National Bank and Trust Company and related equity earnings.

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

17
Segment information as of and for the threesix month periods ended March 31,June 30, 2009 and 2008, is shown in the following table.


Three Months Ended March 31, 2009
  Three Months Ended June 30, 2009
    Trust and            .Trust and   
(in thousands) Community  Investment     Intersegment    (in thousands)  CommunityInvestment Intersegment 
 Banking  Services  Other  Eliminations  Total   BankingServicesOtherEliminationsTotal
Interest income $9,650  $-  $80  $(80) $9,650 Interest income  $          9,690 $             - $         79 $            (79) $   9,690
Interest expense  2,974   -   343  $(80)  3,237 Interest expense              2,516                -          344               (79)     2,781
Noninterest income  (93)  815   12   -   734 Noninterest income              1,398            839            16                  -     2,253
Operating income before income taxes  955   294   (327)  -   922 
Income (loss) before income taxesIncome (loss) before income taxes             2,330            362         (343)                  -     2,349
Depreciation and amortization  425   6   1   -   432 Depreciation and amortization                376               7              -                  -        383
Total assets  828,714   -   764       829,478 Total assets           810,728                -          755                  -  811,483
Capital expenditures  1,181   8   -   -   1,189 Capital expenditures              1,160                -              -                  -     1,160
                           
                      Three Months Ended June 30, 2008
Three Months Ended March 31, 2008
     Trust and                Trust and   
(in thousands) Community  Investment      Intersegment     
   CommunityInvestment Intersegment 
 Banking  Services  Other  Eliminations  Total   BankingServicesOtherEliminationsTotal
Interest income $11,260  $-  $-  $-  $11,260 Interest income  $         10,788 $             - $           - $               - $ 10,788
Interest expense  4,192   -   343   -   4,535 Interest expense              3,714                -          344                  -     4,058
Noninterest income  1,096   1,023   16   -   2,135 Noninterest income                 815         1,017             9                  -     1,841
Operating income before income taxes  3,111   566   (406)  -   3,271 
Income (loss) before income taxesIncome (loss) before income taxes             2,207            520         (399)                  -     2,328
Depreciation and amortization  440   6   1   -   447 Depreciation and amortization                355               6              -                  -        361
Total assets  784,257   -   792       785,049 Total assets           789,926                -          769                  -  790,695
Capital expenditures  397   -   -   -   397 Capital expenditures                 600               6              -                  -        606
                           
  Six Months Ended June 30, 2009
   Trust and   
   CommunityInvestment Intersegment 
  BankingServicesOtherEliminationsTotal
Interest incomeInterest income  $         19,340 $             - $       159 $          (159) $ 19,340
Interest expenseInterest expense 5,490                -          687             (159)     6,018
Noninterest incomeNoninterest income 1,3051,654            28                  -     2,987
Income (loss) before income taxesIncome (loss) before income taxes3,285656         (670)                  -     3,271
Depreciation and amortizationDepreciation and amortization741              13             1                  -        755
Total assetsTotal assets 810,728                -          755                  -  811,483
Capital expendituresCapital expenditures 2,3418              -                  -     2,349
       
  Six Months Ended June 30, 2008
   Trust and   
   CommunityInvestment Intersegment 
  BankingServicesOtherEliminationsTotal
Interest incomeInterest income  $         22,048 $             - $           - $               - $ 22,048
Interest expenseInterest expense              7,906                -          687                  -     8,593
Noninterest incomeNoninterest income              1,911         2,040            25                  -     3,976
Income (loss) before income taxesIncome (loss) before income taxes             5,318         1,086         (805)                  -     5,599
Depreciation and amortizationDepreciation and amortization                727              12             1                  -        740
Total assetsTotal assets           789,926                -          769                  -  790,695
Capital expendituresCapital expenditures                 997               6              -                  -     1,003

18
Note 14 – Fair Value of Financial Instruments
 
    The Company adopted SFAS No. 157, Fair”Fair Value Measurements,Measurements”, on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
    In October of 2008, the FASB issued FSP 157-3 to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements were not issued.

15
 
    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 March 31,June 30, 2009 (in thousands):

    Fair Value Measurements at March 31, 2009 Using    Fair Value Measurements at June 30, 2009 Using
 
 
Balance as of March 31,
  Quoted Prices in Active Markets for Identical Assets  Significant Other Observable Inputs  
Significant Unobservable Inputs
  
Balance as of
June 30,
 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs
Description 2009  Level 1  Level 2  Level 3  2009 Level 1 Level 2 Level 3
Assets                    
Securities available for sale $163,954  $-  $163,954  $-  $ 140,344 $      - $ 140,344 $      -
Mortgage loan derivative contracts (1) -  (1) -  1 - 1 -
                        
19
 
  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 nonrecurringnon-recurring basis in the financial statements:

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

16
Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser, outside of the Company, using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Foreclosed assets. Foreclosed assets consist of assets acquired through, or in lieu of, loan foreclosure, and are held for sale and initially were recorded at fair value, less estimated costs to sell at the date of acquisition, thus establishing a new cost basis. Loan losses arising from the acquisitions of such property are charged against the allowance for loan losses at the date the property is acquired. Subsequent to acquisition, valuations are performed periodically and the assets are carried at the lower of the new cost basis or fair value. Revenues and expenses from operations and changes in any subsequent valuation allowance are included in net foreclosed assets costs and expenses.
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period (in thousands):

    Carrying Value at March 31, 2009    Carrying Value at June 30, 2009
 
 
Balance as of March 31
  Quoted Prices in Active Markets for Identical Assets  Significant Other Observable Inputs  
Significant Unobservable Inputs
  
Balance as of
June 30,
 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs 
 
Significant Unobservable Inputs
Description 2009  Level 1  Level 2  Level 3  2009 Level 1 Level 2 Level 3
Assets                    
Loans held for sale $2,782  $-  $2,782  $-  $10,408 $      - $ 10,408 $        -
Impaired loans, net of valuation allowance 1,349  -  858  491  926 - 459  467
Foreclosed assets 4,033 - - 4,033


20
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.  Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.  SFAS 107, “Disclosures About Fair Value of Financial Instruments”, excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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

 June 30, 2009December 31, 2008
(in thousands)
 
Carrying
Estimated
Fair
 
Carrying
Estimated
Fair
 AmountValueAmountValue
Financial assets:    
Cash and due from banks$   40,784$   40,784$   24,098$   24,098
Securities available for sale * 140,344    140,344129,904129,904
Securities held to maturity6,7126,9437,1217,391
Loans held for sale10,40810,4081,7641,764
Loans, net of allowance549,103555,619563,286575,970
Accrued interest receivable3,2453,2453,1103,110
     
Financial liabilities:    
Deposits$ 615,231  $ 618,393$ 589,138  $ 591,159
Repurchase agreements59,43759,43751,74151,741
Other borrowings8,7128,68521,63721,630
Trust preferred capital notes20,61920,65720,61918,258
Accrued interest payable1,0461,0461,2721,272
     
* - Excludes restricted stock    

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

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

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

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

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

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

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

21
Other borrowings.  The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the interest rates for similar types of borrowing arrangements.

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

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

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

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



Note 15 – Supplemental Cash Flow Information


  Three Months Ended 
   March 31, 
  2009  2008 
 Supplemental Schedule of Cash and Cash Equivalents:      
 Cash and due from banks $13,632  $20,310 
 Interest-bearing deposits in other banks  18,188   4,218 
         
  $31,820  $24,528 
         
 Supplemental Disclosure of Cash Flow Information:        
 Cash paid for:        
 Interest on deposits and borrowed funds $3,286  $4,598 
 Income taxes  -   72 
 Noncash investing and financing activities:        
 Transfer of loans to other real estate owned  382   - 
 Unrealized loss on securities available for sale  517   1,349 
     Six Months Ended
(in thousands)   June 30,
    2009 2008
 Supplemental Schedule of Cash and Cash Equivalents:   
   Cash and due from banks $  13,905  $  20,082
   Interest-bearing deposits in other banks    26,879       8,265
       
     $  40,784  $  28,347
       
 Supplemental Disclosure of Cash Flow Information:   
  Cash paid for:   
   Interest on deposits and borrowed funds $   6,296  $   8,850
   Income taxes         505       1,972
  Noncash investing and financing activities:   
   Transfer of loans to other real estate owned      1,134            52
   Unrealized gain (loss) on securities available for sale         663         (587)

 
1722

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

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


Forward-Looking Statements

This report contains forward-looking statements with respect to the financial condition, results of operations and business of American National Bankshares Inc. and its wholly owned subsidiary, American National Bank and Trust Company (the”Bank”(the ”Bank”) (collectively referred to as the “Company”).  These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available to management at the time these statements and disclosures were prepared.  Forward-looking statements are subject to numerous assumptions, estimates, risks, and uncertainties that could cause actual conditions, events, or results to differ materially fro those stated or implied by such forward-looking statements.
 
A variety of factors may affect the operations, performance, business strategy, and results of the Company.  Those factors include but are not limited to the following:
 
·  Financial market volatility, including the level of interest rates, could affect the values of financial instruments and the amount of net interest income earned;
·  General economic or business conditions, either nationally or in the market areas in which the Company does business, may be less favorable than expected, resulting in deteriorating credit quality, reduced demand for credit, or a weakened ability to generate deposits;
·  Competition among financial institutions may increase and competitors may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than the Company;
·  Businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards;
·  The ability to retain key personnel; and
·  The failure of assumptions underlying the allowance for loan losses.

Reclassification

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


Critical Accounting Policies

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

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


 
1823
Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

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

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

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

Goodwill Impairment

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

Non-GAAP Presentations

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


Internet Access to Corporate Documents

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

 
1924

RESULTS OF OPERATIONS

Earnings Performance

Three months ended June 30, 2009 and 2008

For the quarter ended June 30, 2009, the Company reported net income of $1,706,000 compared to $1,809,000 for the comparable quarter in 2008. The $103,000 decline in earnings was primarily driven by a $540,000 increase in deposit insurance premiums and a $100,000 one-time increase in personnel expense associated with staff reductions, all reflected in the change in noninterest expense category and more fully discussed on page 32.
SUMMARY INCOME STATEMENT
(dollars in thousands)
For the three months ended June 30,20092008$ change% change
     
Interest income $   9,690 $ 10,788 $  (1,098)-10.2%
Interest expense    (2,781)    (4,058)     1,277-31.5%
Net interest income     6,909     6,730        1792.7%
Provision for loan losses       (492)       (600)        108-18.0%
Noninterest income     2,253     1,841        41222.4%
Noninterest expense    (6,321)    (5,643)       (678)12.0%
Income tax expense       (643)       (519)       (124)23.9%
     
Net income $   1,706 $   1,809 $    (103)-5.7%

Six months ended June 30, 2009 and 2008

For the six month period ended June 30, 2009 the Company reported net income of $2,474,000 compared to $4,114,000 for the comparable period in 2008. The $1,640,000 decline in earnings was driven by the factors noted above, however for the period the impact of the FDIC increase was $740,000, plus, most notably, a $1.2 million write-down in the first quarter of other real estate owned, reflected in the change to noninterest income.
SUMMARY INCOME STATEMENT
(dollars in thousands)
For the six months ended June 30,20092008$ change% change
     
Interest income $ 19,340 $ 22,048 $  (2,708)-12.3%
Interest expense    (6,018)    (8,593)     2,575-30.0%
Net interest income    13,322    13,455       (133)-1.0%
Provision for loan losses       (842)       (740)       (102)13.8%
Noninterest income     2,987     3,976       (989)-24.9%
Noninterest expense   (12,196)   (11,092)    (1,104)10.0%
Income tax expense       (797)    (1,485)        688-46.3%
     
Net income $   2,474 $   4,114 $  (1,640)-39.9%

25
Net Interest Income

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

In comparison to the first quarter of 2008, net interest income on a taxable equivalent basis decreased $328,000, or 4.7%, for the first quarter of 2009.  This decrease was due primarily to reductions in interest rates.  Since September 2007, the Federal Open Market Committee of the Federal Reserve Board has reduced the intended federal funds rate ten times by a total of 5.00%. Because of this historically low interest rate environment and because most of the Company’s interest bearing assets and interest paying liabilities are relatively short-term in nature, the yields and costs discussed in the following pages have, in general, fallen during the reported periods.

Three months ended June 30, 2009 and 2008

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

The Company’s yield on earnings assets was 5.33% compared to 6.07% for the prior year quarter. The cost of interest bearing liabilities was 1.83% compared to 2.79%. These rates earned on loans fell more quickly than rates paid on deposits.resulted in an interest rate spread of 3.50% compared to 3.28%. The Company’s net interest margin, on a fully taxable equivalent basis, was 3.61%3.84% during the firstsecond quarter of 2009, compared to 3.88%3.83%, during the same quarter2008 quarter.  Yields and rates generally fell between periods, but most of 2008.the improvement in spread and margin was related to liability pricing.
26
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the first quarterthree months ended June 30, 2009 and 2008.  Nonaccrual loans are included in average balances.  Interest income on nonaccrual loans, if recognized, is recorded on a cash basis or when the loan returns to accrual status.
Net Interest Income Analysis 
                                    For the Three Months Ended June 30, 2009 and 2008 
(in thousands, except rates) 
                   
        Interest       
  Average Balance  Income/Expense  Yield/Rate 
                   
  2009  2008  2009  2008  2009  2008 
Loans:                  
Commercial $91,701  $90,648  $1,100  $1,342   4.80%  5.92%
Real estate  470,859   467,424   6,669   7,468   5.67   6.39 
Consumer  7,881   8,903   175   197   8.88   8.85 
Total loans  570,441   566,975   7,944   9,007   5.57   6.35 
                         
Securities:                        
Federal agencies  46,225   45,708   525   551   4.54   4.82 
Mortgage-backed & CMO's  41,382   50,357   550   642   5.32   5.10 
State and municipal  51,718   47,201   731   652   5.65   5.53 
Other  8,251   6,981   72   90   3.49   5.16 
Total securities  147,576   150,247   1,878   1,935   5.09   5.15 
                         
Deposits in other banks  26,882   8,567   103   74   1.53   3.46 
                         
Total interest-earning assets  744,899   725,789   9,925   11,016   5.33   6.07 
                         
Non-earning assets  67,505   63,623                 
                         
Total assets $812,404  $789,412                 
                         
Deposits:                        
Demand $92,447  $107,154   42   160   0.18   0.60 
Money market  78,143   51,124   148   239   0.76   1.87 
Savings  62,557   62,648   37   84   0.24   0.54 
Time  280,729   255,281   1,953   2,633   2.78   4.13 
Total deposits  513,876   476,207   2,180   3,116   1.70   2.62 
                         
Customer repurchase agreements  60,876   53,535   176   339   1.16   2.53 
Other short-term borrowings  1,553   14,765   1   88   0.26   2.38 
Long-term borrowings  30,460   37,247   424   515   5.57   5.53 
Total interest-bearing                        
liabilities  606,765   581,754   2,781   4,058   1.83   2.79 
                         
Noninterest bearing                        
demand deposits  98,258   99,960                 
Other liabilities  4,519   5,187                 
Shareholders' equity  102,862   102,511                 
Total liabilities and                        
shareholders' equity $812,404  $789,412                 
                         
Interest rate spread                  3.50%  3.28%
Net interest margin                  3.84%  3.83%
                         
Net interest income (taxable equivalent basis)       7,144   6,958         
Less: Taxable equivalent adjustment          235   228         
Net interest income         $6,909  $6,730         
                         



Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
        
   Three months ended June 30
   2009  vs.  2008
   Interest Change
   Increase Attributable to
Interest income  (Decrease) Rate Volume
  Loans:       
    Commercial  $    (242)  $   (257)  $      15
    Real Estate       (799)       (854)         55
    Consumer         (22)           1        (23)
      Total loans     (1,063)    (1,110)         47
  Securities:      
    Federal agencies         (26)        (32)           6
    Mortgage-backed         (92)         26       (118)
    State and municipal          79         15         64
    Other securities         (18)        (32)         14
      Total securities         (57)        (23)        (34)
  Deposits in other banks          29        (59)         88
      Total interest income     (1,091)    (1,192)        101
        
Interest expense      
  Deposits:       
    Demand        (118)        (99)        (19)
    Money market         (91)       (182)         91
    Savings          (47)        (47)            -
    Time        (680)       (922)        242
      Total deposits       (936)    (1,250)        314
        
  Customer repurchase agreements      (163)       (204)         41
  Other borrowings       (178)         78       (256)
      Total interest expense     (1,277)    (1,376)         99
Net interest income  $     186  $    184  $       2

Six months ended June 30, 2009 and 2008
Net Interest Income Analysis 
                               For the Three Months Ended March 31, 2009 and 2008 
(in thousands, except rates) 
                   
        Interest       
  Average Balance  Income/Expense  Yield/Rate 
                   
  2009  2008  2009  2008  2009  2008 
Loans:                  
Commercial $96,097  $85,632  $1,100  $1,454   4.58%  6.79%
Real estate  469,346   460,429   6,779   7,789   5.78   6.77 
Consumer  7,895   9,524   178   217   9.02   9.11 
Total loans  573,338   555,585   8,057   9,460   5.62   6.81 
                         
Securities:                        
Federal agencies  45,767   50,064   521   597   4.55   4.77 
Mortgage-backed  44,560   47,405   562   603   5.04   5.09 
State and municipal  42,726   47,847   604   656   5.65   5.48 
Other  5,014   6,383   33   99   2.63   6.20 
Total securities  138,067   151,699   1,720   1,955   4.98   5.15 
                         
Deposits in other banks  23,575   10,224   88   76   1.49   2.97 
                         
Total interest earning assets  734,980   717,508   9,865   11,491   5.37   6.41 
                         
Nonearning assets  68,226   62,696                 
                         
Total assets $803,206  $780,204                 
                         
Deposits:                        
Demand $112,459  $107,994   190   225   0.68   0.83 
Money market  64,648   51,320   198   294   1.23   2.29 
Savings  61,289   63,184   40   116   0.26   0.73 
Time  272,425   263,700   2,099   2,947   3.08   4.47 
Total deposits  510,821   486,198   2,527   3,582   1.98   2.95 
                         
Customer repurchase agreements  56,051   54,624   233   451   1.66   3.30 
Other short-term borrowings  2,071   3,091   3   33   0.58   4.27 
Long-term borrowings  34,398   30,779   474   469   5.51   6.10 
                         
Total interest bearing liabilities  603,341   574,692   3,237   4,535   2.15   3.16 
                         
Noninterest bearing                        
demand deposits  93,181   97,212                 
Other liabilities  3,839   5,958                 
Shareholders' equity  102,845   102,342                 
Total liabilities and                        
shareholders' equity $803,206  $780,204                 
                         
Interest rate spread                  3.22%  3.25%
Net interest margin                  3.61%  3.88%
                         
Net interest income (taxable equivalent basis)       6,628   6,956         
Less: Taxable equivalent adjustment          215   231         
Net interest income         $6,413  $6,725         

Net interest income on a taxable equivalent basis decreased $142,000 or 1.0% for the six months ended June 30, 2009 compared to the 2008 period.  This decrease was due mostly to changes in rates, but was significantly impacted by changes in volumes of interest earning assets and interest bearing liabilities, as indicated by the Rate/Volume Analysis shown later in this section.

The Company’s yield on earnings assets was 5.35% compared to 6.24% for the prior year period. The cost of interest bearing liabilities was 1.99% compared to 2.97%. These rates resulted in an interest rate spread of 3.36% compared to 3.27%. The net interest margin, on a fully taxable equivalent basis, was 3.72% for the six month period ended June 30, 2009 compared to 3.86% for the 2008 period, a 14 basis point decline. Yields and rates generally fell between periods, but the decline in margin was mitigated by liability pricing.


The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the six-month period ended June 30, 2009 and 2008.  Nonaccrual loans are included in average balances.  Interest income on nonaccrual loans, if recognized, is recorded on a cash basis or when the loan returns to accrual status.
Net Interest Income Analysis 
                                        For the Six Months Ended June 30, 2009 and 2008 
(in thousands, except rates) 
                   
        Interest       
  Average Balance  Income/Expense  Yield/Rate 
                   
  2009  2008  2009  2008  2009  2008 
Loans:                  
Commercial $93,887  $88,140  $2,200  $2,796   4.69%  6.34%
Real estate  470,106   463,927   13,448   15,257   5.72   6.58 
Consumer  7,888   9,213   353   414   8.95   8.99 
Total loans  571,881   561,280   16,001   18,467   5.60   6.58 
                         
Securities:                        
Federal agencies  45,997   47,886   1,046   1,148   4.55   4.79 
Mortgage-backed & CMO's  42,962   48,881   1,112   1,245   5.18   5.09 
State and municipal  47,247   47,524   1,335   1,308   5.65   5.50 
Other  6,641   6,682   105   189   3.16   5.66 
Total securities  142,847   150,973   3,598   3,890   5.04   5.15 
                         
Deposits in other banks  25,237   9,488   191   150   1.51   3.16 
                         
Total interest-earning assets  739,965   721,741   19,790   22,507   5.35   6.24 
                         
Non-earning assets  68,106   63,031                 
                         
Total assets $808,071  $784,772                 
                         
Deposits:                        
Demand $102,397  $107,574   232   385   0.45   0.72 
Money market  71,433   51,222   346   533   0.97   2.08 
Savings  61,927   62,916   77   200   0.25   0.64 
Time  276,600   259,491   4,052   5,580   2.93   4.30 
Total deposits  512,357   481,203   4,707   6,698   1.84   2.78 
                         
Customer repurchase agreements  58,477   54,079   409   790   1.40   2.92 
Other short-term borrowings  1,811   8,928   4   121   0.44   2.71 
Long-term borrowings  32,418   34,013   898   984   5.54   5.79 
Total interest-bearing                        
liabilities  605,063   578,223   6,018   8,593   1.99   2.97 
                         
Noninterest bearing                        
demand deposits  95,748   98,586                 
Other liabilities  4,406   5,553                 
Shareholders' equity  102,854   102,410                 
Total liabilities and                        
shareholders' equity $808,071  $784,772                 
                         
Interest rate spread                  3.36%  3.27%
Net interest margin                  3.72%  3.86%
                         
Net interest income (taxable equivalent basis)       13,772   13,914         
Less: Taxable equivalent adjustment          450   459         
Net interest income         $13,322  $13,455         




Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
        
   Six months ended June 30
   2009  vs.  2008
   Interest Change
   Increase Attributable to
Interest income  (Decrease) Rate Volume
  Loans:       
    Commercial  $    (596)  $   (769)  $    173
    Real Estate     (1,809)    (2,010)        201
    Consumer         (61)          (2)        (59)
      Total loans     (2,466)    (2,781)        315
  Securities:      
    Federal agencies       (102)        (58)        (44)
    Mortgage-backed       (133)         20       (153)
    State and municipal          27         35          (8)
    Other securities         (84)        (83)          (1)
      Total securities       (292)        (86)       (206)
  Deposits in other banks          41       (109)        150
      Total interest income     (2,717)    (2,976)        259
        
Interest expense      
  Deposits:       
    Demand        (153)       (135)        (18)
    Money market       (187)       (350)        163
    Savings        (123)       (120)          (3)
    Time      (1,528)    (1,876)        348
      Total deposits     (1,991)    (2,481)        490
        
  Repurchase agreements       (381)       (441)         60
  Other borrowings       (203)         26       (229)
      Total interest expense     (2,575)    (2,896)        321
Net interest income  $    (142)  $     (80)  $     (62)
Changes in Net Interest Income (Rate/Volume Analysis)    
(in thousands)    
          
  Three months ended March 31 
  2009 vs. 2008 
     Change 
  Increase  Attributable to 
Interest income (Decrease)  Rate  Volume 
  Loans:         
    Commercial $(354) $(516) $162 
    Real estate  (1,010)  (1,158)  148 
    Consumer  (39)  (2)  (37)
      Total loans  (1,403)  (1,676)  273 
  Securities:            
    Federal agencies  (76)  (26)  (50)
    Mortgage-backed  (41)  (5)  (36)
    State and municipal  (52)  20   (72)
    Other securities  (66)  (48)  (18)
      Total securities  (235)  (59)  (176)
  Deposits in other banks  12   (51)  63 
      Total interest income  (1,626)  (1,786)  160 
             
Interest expense            
  Deposits:            
    Demand  (35)  (44)  9 
    Money market  (96)  (160)  64 
    Savings  (76)  (73)  (3)
    Time  (848)  (943)  95 
      Total deposits  (1,055)  (1,220)  165 
  Customer repurchase agreements  (218)  (229)  11 
  Other borrowings  (25)  (62)  37 
      Total interest expense  (1,298)  (1,511)  213 
Net interest income $(328) $(275) $(53)
             


Noninterest Income

      Noninterest income decreased 65.6%increased to $734,000$2,253,000 in the firstsecond quarter of 2009 from $2,135,000$1,841,000 in the firstsecond quarter of 2008, a $412,000 or 22.4% increase, due primarily to $393,000 in securities losses recorded during 2008 and a $1.2 million valuation adjustment on foreclosed real estate assets. This property represents one relationship, an acquisition and development credit$368,000 increase in mortgage banking income in the North Carolina Triad area, and constitutes over 60% of2009 quarter compared to the Bank's other real estate owned.prior year quarter.

Fees from the management of trusts, estates, and asset management accounts decreased to $758,000$767,000 in the firstsecond quarter of 2009 from $880,000 for$916,000 in the same period in 2008.second quarter of 2008, a $149,000 or 16.3% decline.  Volatility in the financial markets negatively impacted account asset values, which more than offset the income from new account activity.  A substantial portion of Trust fees are earned based on account market values.

Service charges on deposit accounts were $502,000, a declinedecreased to $511,000 in the second quarter of $63,000 or 11.1%2009 from $601,000 in the firstsecond quarter of 2008, a $90,000 or 15.0% decline. This reduction was primarily due tothe result of a drop in customer overdraft activity.activity fee income.

Mortgage banking income was $286,000increased to $568,000 in the firstsecond quarter of 2009 compared to $195,000 forfrom $200,000 in the same period insecond quarter of 2008, an increase of $91,000$368,000 or 46.7%184%. This income improvement reflects the impact of historically low mortgage rates and increased refinancing activity.demand. Management expects a slowdown in refinancing activity volume, beginning in the third quarter.

Brokerage fees decreased 60.1% to $57,000$73,000 in the firstsecond quarter of 2009 from $143,000$101,000 for the second quarter in the first quarter of 2008, a $28,000 or 27.7% decline. The reduction was due to decreaseda decline in retail investment activity.

Noninterest income decreased to $2,987,000 in the six months ended June 30, 2009 from $3,976,000 for the same period in 2008, a $989,000 or 24.9% decline. The major factors impacting earnings for the six month period included all the items noted above, but also, most notably, included a $1.2 million write-down of other real estate owned in 2009 and $363,000 in securities related losses recognized in the 2008 period.
Noninterest income      
  Three Months Ended 
  March 31, 
(in thousands) 2009  2008 
       
Trust fees $758  $880 
Service charges on deposit accounts  502   565 
Other fees and commissions  242   203 
Mortgage banking income  286   195 
Brokerage fees  57   143 
Securities gains (losses), net  -   30 
Net loss on foreclosed real estate  (1,179)  (7)
Bank owned life insurance  34   33 
Check order charges  28   29 
Investment in insurance companies  2   6 
VISA Incentive  -   39 
Other  4   19 
  $734  $2,135 
         

Noninterest Expense

Noninterest expense was $5,875,000$6,321,000 for the firstsecond quarter of 2009 compared to $5,449,000$5,643,000 for the same periodsecond quarter in 2008, an increase of $426,000$678,000 or 7.8%12%.

Salaries increased $62,000 or 2.5% inwere $2,732,000 for the firstsecond quarter of 2009 compared to $2,481,000 for the same periodsecond quarter of 2008, a $251,000 or 10.1% increase, due to $100,000 in 2008, due primarily toone-time costs associated with staff reductions, $138,000 in increased commissions based on secondary market lending production, and limited salary increases. Late in the second quarter management reduced the number of full time equivalent employees in the Bank by 14, over 5% of the workforce. This was accomplished through a combination of retirements, unfilled vacancies, and a small number of layoffs. Management anticipates that the annualized savings from this action will be approximately $700,000.

Employee benefits increased $66,000 or 8.8% inwere $832,000 for the firstsecond quarter of 2009 overcompared to $777,000 for the same period last yearsecond quarter of 2008, a $55,000 or 7.1% increase, due primarily due to increases in employee insurance expenses.expense.

The Federal Deposit Insurance Corporation (“FDIC”)FDIC insurance assessment increased $200,000 inwas $564,000 for the firstsecond quarter of 2009 overcompared to $24,000 for the same period in 2008. Thissecond quarter of 2008, a $540,000 or 2,250% increase.  Of this increase, reflected$362,000 was attributable to the expirationimpact of an assessment creditindustry-wide special assessment. Management anticipates similar assessments will occur in the third quarter and possibly in the fourth quarter of 2009. The remainder of the cost increase was due to the impact of industry-wide premium increases.increases and the final use of a premium credit by the Bank.


23
TableNoninterest expense was $12,196,000 for the six months ended June 30, 2009 compared to $11,092,000 for the same period of Contents2008, an increase of 9.9% or $1,104,000. Expenses for the period were impacted by the same factors noted above, however, the FDIC expense increase accounted for $740,000 or 67% of the total increase in expense.

Noninterest expense      
  Three Months Ended 
  March 31, 
(in thousands) 2009  2008 
       
Salaries $2,531  $2,469 
Employee benefits  813   747 
Occupancy and equipment  971   966 
FDIC assessment  217   17 
Bank franchise tax  163   177 
Core deposit intangible amortization  94   94 
Telephone  115   101 
Stationery and printing supplies  104   71 
Director fees  65   49 
Postage  58   76 
Provision for unfunded lending commitments  55   42 
ATM and VISA network fees  55   74 
Trust services contracted  51   50 
Internet banking fees  51   49 
Legal  49   34 
Regulatory assessments  46   44 
Advertising and marketing  43   47 
Auditing  40   38 
Other  354   304 
  $5,875  $5,449 
         
 
Income Taxes

The effective tax rate for the firstsecond quarter of 2009 was 16.7%27.4% compared to 29.5%22.3% for the same quarter of 2008.

The effective tax rate for the six months ended June 30, 2009 was 24.4% compared to 26.5% for the same period of 2008.

The effective tax rate is lower than the statutory rate primarily due to 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.

31
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 expense, that tendwhich tends 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.


 
24
CHANGES IN FINANCIAL POSITION

BALANCE SHEET ANALYSIS

Securities

The securities portfolio generates income, plays a major role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements.requirements for public deposits, and facilitates commercial customers’ repurchase agreements.  The portfolio consists primarily of high quality, investment-grade securities.  Federal agency and U. S. government sponsored enterprises, mortgage-backed, and state and municipal securities comprise the majority of the portfolio.

The available for sale securities portfolio increasedwas $144,706,000 at June 30, 2009 compared to $167,981,000 at March 31, 2009 from $133,695,000 at December 31, 2008.2008, an $11,011,000 or 8.2% increase.  The held to maturity securities portfolio decreased to $6,811,000$6,712,000 at March 31,June 30, 2009 from $7,121,000 at December 31, 2008.2008, a $409,000 or 5.7% decline.

At March 31,June 30, 2009, the available for sale portfolio had an estimated fair value of $167,981,000$144,706,000 and an amortized cost of $164,350,000,$140,928,000, resulting in a net unrealized gain of $3,631,000.At$3,778,000.At the same date,dates, the held to maturity portfolio had an estimated fair value of $7,078,000$6,943,000 and an amortized cost of $6,811,000,$6,712,000, resulting in a net unrealized gain of $267,000.$231,000.

At March 31,June 30, 2009, mortgage-backed securities consist principally of obligations of U.S. Government  agencies and sponsored entities.  Mortgage-backed securitiesenterprises.  CMOs (collateralized mortgage obligations) issued by non-U.S. Government agencies and sponsored entitiesenterprises, as of March 31,June 30, 2009, had an amortized cost of $3,039,000$2,800,000 and an estimated fair value of $2,500,000;$2,454,000; resulting in an estimated net unrealized loss of $539,000.$346,000.

Loans

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans, construction and land development loans, and home equity loans. Loans decreasedwere $557,042,000 at June 30, 2009 compared to $569,003,000 at March 31, 2009 from $571,110,000 at December 31, 2008, a $14,068,000 or 2.5% decrease. Management considers the decline in the loan portfolio primarily the result of $2,107,000 or 0.37%.the current economic climate and secondarily the result of the Company’s deliberate decision to maintain a conservative risk profile in consideration of long term asset quality.

Allowance for Loan Losses, Asset Quality, and Credit Risk Management

The allowance for loan losses was virtually unchanged$7,934,000 at $7,836,000 at March 31,June 30, 2009 compared to $7,824,000 at December 31, 2008.  The allowance was 1.38%1.42% of loans at the end of the firstsecond quarter 2009 compared to 1.37% at year-end.  Annualized net charge-offs represented 0.24%0.28% of total loans during the firstsecond quarter of 2009.

32
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 0.49% and 0.50% of total loans, respectively, at March 31,June 30, 2009 and December 31, 2008.  There were no troubled debt restructurings at March 31,June 30, 2009 or December 31, 2008.

The following table summarizes nonperforming assets (in thousands):
 June 30, December 31,
 2009 2008
Loans 90 days or more past due$       - $       -
Nonaccrual loans2,745 2,845
     Nonperforming loans2,745 2,845
Foreclosed real estate 4,033  4,311
Nonperforming assets$6,778 $7,156
    

  March 31,  December 31, 
  2009  2008 
Loans 90 days or more past due $-  $- 
Nonaccrual loans  2,821   2,845 
     Nonperforming loans  2,821   2,845 
Foreclosed real estate  3,345   4,311 
Nonperforming assets $6,166  $7,156 
         
Premises and equipment

Premises and equipment were $18,912,000 at June 30, 2009 compared to $17,129,000, a $1,783,000 or 10.4% increase. Most of this increase was related to changes in the Bank’s branch structure, most notably the recent completion of a new $2.1 million branch in Martinsville, Virginia, which opened in July 2009. The Company is actively seeking to provide better customer service through its branch system in a cost effective and efficient manner. Earlier this year the Bank closed two Danville branches in close proximity to each other. Their operations were consolidated into a new, larger facility, with extended hours, at Piedmont Drive in Danville. In April, the Bank relocated the Smith Mountain branch to a better facility in order to provide services not previously available to customers in that market. The Bank recently converted the Ridgeway branch to a drive-through only from a full-service facility. The South Main office in Danville will be closed in October. All of these changes were part of a concerted strategy to improve customer service in a cost effective and efficient manner.
 
Deposits

The Company’s deposits consist primarily of checking, money market, savings, and consumer time deposits.  Deposits increasedTotal deposits were $615,231,000 at June 30, 2009 compared to $615,888,000 at March 31, 2009 from $589,138,000 at December 31, 2008, an increase of $26,750,000a $26,093,000 or 4.5%.4.4% increase.  Of this increasechange approximately $21.6 million represents brokered deposits obtained in mid-quarter. $5 millionthe first quarter of the proceeds were used to pay off an advance from the Federal Home Loan Bank of Atlanta; the remaining funds were used for general liquidity purposes.2009. Management anticipates that three quarters$15 million of thesethose funds will mature by year endduring the third quarter and the Bank does not plan for them to be renewed. Core deposit growth continues to be an ongoing strategic goal and challenge for the Bank and the community banking industry. The Bank has a practice of maintaining only limited reliance on wholesale funding sources.

25

Shareholders’ Equity

The Company’s capital management strategy is to be classified as “well capitalized” under regulatory capital ratios and provide as high as possible total return to our shareholders.

Shareholders’ equity decreasedincreased slightly to $101,915,000$102,618,000 at March 31,June 30, 2009 from $102,300,000 at December 31, 2008.

The decreaseBoard of Directors decided to pay cash dividends of $0.23 per share in the first and second quarters, which was largelygreater than the result of dividends paidaggregate basic earnings per share during the two quarters of $0.41 per share. The Board also declared its third quarter being larger than net income duringdividend in July, $0.23 per share. The Company’s current capital position provided the quarter. InBoard of Directors with the first quarter of 2009, the Company declared and paidstrategic flexibility to temporarily pay a quarterly cash dividend of $.23 per share.disproportionate to current earnings.

33
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 shareholders’ equity (net of intangible assets and other comprehensive income) and trust preferred capital notes, while Tier II capital consists of qualifying allowance for loan losses. “Total” capital is the combination 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 March 31,June 30, 2009, the Company's Tier I and total capital ratios were 16.23%16.67% and 17.48%17.92%, respectively.  At December 31, 2008, these ratios were 16.67% and 17.92%, respectively.  The ratios for both periods were in excess of the regulatory requirements.  The Company's leverage ratio was 12.66%12.60% and 13.04% at March 31,June 30, 2009 and December 31, 2008, 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%, and leverage ratios of at least 5%, and not be subject to capital directive orders. Management believes, as of March 31,June 30, 2009, that the Company met the requirements to be considered “well capitalizedwell capitalized.

Russell 2000
   American National Bankshares Inc. (NASDAQ: AMNB) was added to the Russell 3000 Index and the Russell 2000 Index on June 29, 2009 when Russell Investments reconstituted its comprehensive set of U. S. and Global equity indexes. The Russell indexes are widely used by investment managers as index funds and performance benchmarks for investment strategies. The indexes are reconstituted annually in late May and are comprised of the 3,000 largest U. S. stocks by market capitalization. The largest 1,000 companies comprise the Russell 1000 and the next 2,000 companies comprise the Russell 2000.


Off-Balance-Sheet Activities

The Company enters into certain financial transactions in the ordinary course of performing traditional banking servicesbusiness that result in off-balance sheet transactions.commitments.  Other than AMNB Statutory Trust I, formed in 2006 to issue the Trust Preferred Securities, the Company does not have any off-balance sheet subsidiaries.  Off-balance sheet transactionscommitments were as follows (in thousands):

 
March 31,
2009
  
December 31,
2008
 
June 30,
2009
December 31,
2008
        
Commitments to extend credit $145,667  $146,399 $ 132,858$ 146,399
Standby letters of credit  2,565   2,858 2,3182,858
Mortgage loan rate-lock commitments  2,783   2,031 5,0762,031

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.


 
2634

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

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 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 InvestmentManagement Committee (“ALCO”) and the Board of Directors, both of which receivereceives 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 fastertfaster 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 is asset sensitive.

The most recent simulation projection for the Company shows that a 1% shocked, i.e. sudden, increase in market rates will result in an annualized increase in net interest income of 7.82%. The Company does not consider a decline in market rates as probable in the current economic situation.

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, but not limited to, 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 the 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 manage 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”) and  the Federal Reserve Bank’s discount window, federal funds lines of credit from two correspondent banks, and maturities and sales of securities.  Management believes that these sources provide sufficient and timelyreadily available liquidity.

 
2735
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.  At March 31,June 30, 2009, principal obligations to the FHLB consisted of $12,440,000 in floating-rate, overnight borrowings and $13,750,000$8,712,000 in fixed-rate, long-term advances.  FHLB borrowings were $21,637,000 at December 31, 2008, consisting of $7,850,000 in floating-rate, overnight borrowings and $13,787,000 in fixed-rate, long-term advances.

The Company had fixed-rate term borrowing contracts with the FHLB as of March 31,June 30, 2009, with the following final maturities (in thousands):

Amount Expiration Date 
$5,000,000 April 2009 
 4,000,000 March 2011 
 4,000,000 April 2011 
 750,000 March 2014 
$13,750,000   
AmountExpiration Date
$  4,000,000March 2011
    4,000,000April 2011
      712,000March 2014
$  8,712,000

The Company has federal funds lines of credit established with two other banks in the amounts of $15,000,000 and $10,000,000, and has access to the Federal Reserve Bank’s discount window.  There were no amounts outstanding under these facilities at March 31,June 30, 2009.

There have been no material changes to market risk as disclosed in the Company’s 2008 Annual Report on Form 10-K.  Refer to those disclosures for further information.


ITEM 44..  CONTROLS AND PROCEDURES

 
Disclosure Controls and Procedures
 
 
The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (asas defined in Rule 13a-15(e) under the Securities Exchange Act of 1934),1934, as amended (the "Exchange Act"), as of March 31,June 30, 2009. Based on this evaluation, the Chief Executive Officer and Chief 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 March 31,June 30, 2009 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
 
 
2836
PARTPart II
OTHER INFORMATION  Other Information

Item:
 
1.
Legal Proceedings

The nature of the business of the Company ordinarily results in a certain amount of litigation. The Company is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Company.

1A.
Risk Factors

 There have been no material changes to the risk factors disclosed in the Company’s 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2009.

2.      Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases Made for the Quarter Ended March 31, 2009 
 
 
 
Dates
 
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
 
             
January 1–31  2,500  $16.25   2,500   87,250 
February 1-28  2,600   15.76   2,600   84,650 
March 1-31  2,500   15.75   2,500   82,150 
                 
Repurchases Made for the Quarter Ended June 30, 2009
Dates
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
April 1–30-   $       --82,150
May 1-31-            --82,150
June 1-30 -            --82,150

 On August 19, 2008, the Company’s boardBoard of directorsDirectors approved the extension of its stock repurchase plan, begun in 2000, to include the repurchase of up to 100,000 shares of the Company’s common stock between August 20, 2008 and August 18, 2009.  The stock may be purchased in the open market or in privately negotiated transactions as management determines to be in the best interest of the Company.

3.
Defaults Upon Senior Securities

 None

Submission of Matters to a Vote of Security Holders

NoneProposal 1
To elect four Class I directors to serve three-year terms expiring at the 2012 Annual Meeting.
 Votes ForVotes Withheld
   
Ben J. Davenport, Jr.4,133,367210,319
Michael P. Haley4,134,110209,576
Charles S. Harris4,140,370203,316
Franklin W. Maddux, M.D.4,136,570207,116
   

37

Proposal 2
To elect one Class II director to serve a one-year term expiring at the 2010 Annual Meeting.
 Votes ForVotes Withheld
   
E. Budge Kent, Jr.4,147,885195,801

Proposal 3
To elect one Class III director to serve a two-year term expiring at the 2011 Annual Meeting.
 Votes ForVotes Withheld
   
Martha W. Medley4,133,345210,341

Proposal 4
To eliminate classification of terms of its Board of Directors to require that all Directors stand for election annually.

Votes For:    1,056,407      Votes Against:2,175,780        Abstain:   98,226

5.     Other Information

(a)  Required 8-K disclosures
None

(b)  Changes in Nominating Process
None

 
6.
Exhibits
10.1Executive Severance Agreement between American National Bankshares Inc., American National Bank and Trust Company, and William W. Traynham dated April 21, 2009
 11.Refer to EPS calculation in the Notes to Financial Statements
 31.1Section 302 Certification of Charles H. Majors, President and Chief Executive Officer
 31.2Section 302 Certification of William W. Traynham, Senior Vice President and Chief Financial Officer
 32.1Section 906 Certification of Charles H. Majors, President and Chief Executive Officer
 32.2Section 906 Certification of William W. Traynham, Senior Vice President and Chief Financial Officer

 
2938
SIGNATURES

SIGNATURES
Pursuant to the requirements 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.

AMERICAN NATIONAL BANKSHARES INC.

   
   
 /s/ Charles H. Majors 
 /s/ Charles H. Majors
 
 Charles H. Majors 
Date – May 8,August 7, 2009President and Chief Executive Officer 
   
 /s/ William W. Traynham 
 
William W. Traynham 
 Senior Vice President and 
Date – May 8,August 7, 2009Chief Financial Officer