American National Bankshares (AMNB) - 2020 Q1 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents American National Bankshares Inc.'s unaudited consolidated financial statements for Q1 2020, including key financial statements and detailed notes Consolidated Balance Sheets As of March 31, 2020, total assets and liabilities increased, driven by net loan and deposit growth, with a slight rise in shareholders' equity Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $2,495,065 | $2,478,550 | | Net Loans | $1,840,863 | $1,817,663 | | Total Deposits | $2,070,667 | $2,060,547 | | Total Liabilities | $2,171,772 | $2,158,292 | | Total Shareholders' Equity | $323,293 | $320,258 | Consolidated Statements of Income Net income for Q1 2020 increased to $8.54 million, driven by higher net interest and noninterest income, despite a significant rise in the provision for loan losses Q1 2020 vs. Q1 2019 Income Statement (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | | :--- | :--- | :--- | | Net Interest Income | $19,919 | $15,068 | | Provision for loan losses | $953 | $16 | | Noninterest Income | $4,495 | $3,451 | | Noninterest Expense | $13,334 | $10,929 | | Net Income | $8,542 | $6,003 | | Diluted EPS | $0.77 | $0.69 | Notes to Consolidated Financial Statements These notes detail accounting policies and financial components, covering COVID-19 impacts, the HomeTown Bankshares acquisition, portfolio composition, and other key financial disclosures - The company acknowledges that the COVID-19 pandemic will likely adversely affect future operations, earnings, and cash flows, particularly impacting loan performance and potentially requiring goodwill impairment charges, with the duration and extent of these effects not reasonably estimable at this time[17] - On April 1, 2019, the Company completed its acquisition of HomeTown Bankshares Corporation, involving exchanging 0.4150 shares of the Company's stock for each share of HomeTown common stock[31] - In response to COVID-19, the company implemented a Disaster Assistance Program (DAP), modifying loans for over 450 customers with balances of approximately $200 million through March 31, 2020, primarily through three-month deferments, which are not considered Troubled Debt Restructurings (TDRs) under CARES Act guidance[22] - The company is an active participant in the Paycheck Protection Program (PPP), having secured SBA approval for 1,913 applications totaling $267 million as of late April 2020[23] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and Q1 2020 results, analyzing key performance metrics, the impact of COVID-19 and the HomeTown acquisition, and changes across balance sheet components Q1 2020 Financial Highlights | Metric | Q1 2020 | Q4 2019 | Q1 2019 | | :--- | :--- | :--- | :--- | | Return on average assets | 1.37% | 1.20% | 1.29% | | Net interest margin | 3.52% | 3.62% | 3.50% | | Net loans receivable increase (annualized) | 5.3% | - | - | | Nonperforming assets / total assets | 0.16% | 0.15% | 0.10% | - The provision for loan losses increased significantly to $953 thousand in Q1 2020, up from $16 thousand in Q1 2019, directly resulting from early-stage declines in economic factors associated with the COVID-19 pandemic[183][212] COVID-19 Impact and Response The company implemented its business continuity plan in response to COVID-19, transitioning to remote work and participating in government relief efforts like PPP and its own DAP for loan modifications - The company implemented a Disaster Assistance Program (DAP), modifying loans for over 450 customers with balances of approximately $200 million through March 31, 2020, primarily through three-month payment deferrals[155] - The company processed a significant volume of Paycheck Protection Program (PPP) loans, with 1,913 applications approved by the SBA totaling $267 million across both funding rounds[156] Results of Operations Analysis Q1 2020 saw net interest income rise 31.7% to $20.0 million and noninterest income grow 30.3% to $4.5 million, while noninterest expense increased 22.0% to $13.3 million, and the effective tax rate decreased to 15.65% - Net interest income (taxable equivalent) increased by $4.8 million YoY, primarily due to a 35.3% increase in average loan balances from the HomeTown acquisition[186] - Noninterest income increased by $1.0 million YoY, driven by a $491,000 increase in net securities gains and higher service charges and fees[191][192] - The efficiency ratio improved to 54.46% in Q1 2020 from 56.95% in Q1 2019, indicating better operational efficiency[195][197] - The effective tax rate for Q1 2020 was 15.65%, significantly lower than 20.74% in Q1 2019, due to a tax benefit recognized from the NOL carryback provision in the CARES Act related to the HomeTown merger[199] Changes in Financial Position As of March 31, 2020, total assets reached $2.5 billion, with loans growing 1.3% to $1.85 billion, while the ALLL increased to 0.76% of total loans, and nonperforming assets remained low at 0.16% of total assets - The allowance for loan losses (ALLL) as a percentage of total loans increased to 0.76% at March 31, 2020, from 0.72% at December 31, 2019, reflecting management's response to the economic uncertainty from COVID-19[214] - Nonperforming assets remained stable at 0.16% of total assets at March 31, 2020, though management anticipates potential increases due to COVID-19, with the total impact not yet determinable[223] - The company repurchased 140,526 shares for $5.0 million in Q1 2020 but has suspended the repurchase program for the near term due to COVID-19[242] - The company and its bank subsidiary remained 'well capitalized' under all regulatory measures as of March 31, 2020[235][239] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, managed through ALCO policies, with its asset-sensitive balance sheet indicating net interest income will increase in rising rate environments - The company's balance sheet is considered asset sensitive, meaning net interest income is expected to rise if interest rates increase and fall if they decrease[254] Estimated Impact of Interest Rate Changes on Net Interest Income (as of March 31, 2020) | Change in Interest Rates | Change in Net Interest Income ($) | Change in Net Interest Income (%) | | :--- | :--- | :--- | | Up 2.00% | $5,651,000 | 7.4% | | Up 1.00% | $2,743,000 | 3.6% | | Down 0.25% | ($550,000) | (0.7)% | | Down 1.00% | ($1,800,000) | (2.3)% | Controls and Procedures As of March 31, 2020, the CEO and CFO concluded that disclosure controls and procedures are effective, with no significant changes to internal controls over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[263] Part II. OTHER INFORMATION Legal Proceedings The company is involved in routine legal proceedings, which management does not expect to materially adversely affect its financial position or results - The Company is involved in various legal proceedings considered incidental to the normal conduct of business and does not believe they will have a material adverse effect[265] Risk Factors This section highlights significant and unpredictable risks from the COVID-19 pandemic, which could adversely affect the company's credit quality, collateral values, loan repayment ability, and overall business operations - The primary updated risk factor is the COVID-19 pandemic, which could significantly and adversely affect the company's business, financial position, and operations, with the ultimate impact being highly uncertain and unpredictable[266][267] - The pandemic could exacerbate existing risk factors, potentially leading to material adverse impacts on credit quality, collateral values, loan repayment ability, product demand, funding, and operations[268] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 140,526 shares for $5.0 million in Q1 2020 under its stock repurchase program, which has since been suspended due to COVID-19 uncertainty Q1 2020 Share Repurchases | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | January 2020 | 7,434 | $35.41 | | February 2020 | 117,267 | $35.96 | | March 2020 | 15,825 | $31.64 | | Total Q1 2020 | 140,526 | $35.44 | - The stock repurchase program has been suspended for the near term due to COVID-19, with 259,474 shares remaining authorized for repurchase as of March 31, 2020[274] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and interactive data files (XBRL) - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, as well as interactive data files (XBRL)[277]