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American National Bankshares Inc. Reports First Quarter 2013 Earnings

4/18/2013

• Q1 net income of $4.1 million and diluted EPS of $0.53
• Net interest margin of 4.19% for Q1 2013
• Nonperforming assets 0.85% of total assets
• Tangible common equity to tangible assets 9.73%

For more information, contact:
William W. Traynham
Chief Financial Officer
American National Bankshares Inc.
traynhamw@amnb.com
434.773.2242

FOR IMMEDIATE RELEASE:                                April 18, 2013
DANVILLE, VA – American National Bankshares Inc. (NASDAQ: AMNB), parent company of American National Bank and Trust Company, today announced first quarter 2013 net income of $4,151,000 compared to $4,175,000 for the first quarter of 2012, a $24,000 or 0.6% decrease. Diluted earnings per share were $0.53 for the 2013 quarter and the 2012 quarter. This quarterly net income produced for 2013 a return on average assets of 1.28%, a return on average equity of 10.22%, and a return on average tangible equity of 14.98%.

     Earnings for both the 2013 and 2012 quarters were favorably impacted by the July 2011 merger between American National and MidCarolina Financial Corporation (“MidCarolina”).

Financial Performance and Overview
     Jeffrey V. Haley, President and Chief Executive Officer, reported, “American National had a strong first quarter for 2013.

     “During the past 12 months there was not significant change in our balance sheet as we worked to complete our asset quality improvement strategy for the loan portfolio we acquired from the MidCarolina merger. At March 31, 2013, American National had $792,513,000 in loans compared to $816,471,000 at March 31, 2012, a decrease of $23,958,000 or 2.9%. We believe the asset improvement strategy has been successful; over the past year our nonperforming assets as a percent of total assets have declined to 0.85% from 1.50%.

     “One of the results of this strategy is slower loan growth for a period of time. Nonetheless, we are encouraged because our loan portfolio has seen some small growth in both the Virginia and North Carolina markets this quarter compared to year end. Loans during the first quarter 2013 have increased $3,808,000 or 0.5%.

     “At March 31, 2013, American National had $1,037,748,000 in deposits compared to $1,074,730,000 at March 31, 2012, a decrease of $36,982,000 or 3.4%. This is mostly the result of an effort to reduce wholesale funding acquired with the MidCarolina merger. However, we are continuously working to grow core deposits and their affiliated relationships. The challenge in this ongoing low rate environment is to do that in a cost effective and yet competitive manner. Our cost of deposits for the first quarter 2013 is 0.71%, down from 0.84% for the 2012 first quarter.

“On the income statement side, our earnings for the first quarter were very good, $4,151,000. This is only slightly down from the same quarter of 2012. On a diluted per share basis earnings were $0.53 per share for both the 2013 quarter and the 2012 quarter.

     “There were a number of factors driving earnings this quarter.
“The impact of the fair value accounting from the MidCarolina merger continues to be significant, though decreasing quarter to quarter. We had a pretax benefit of $1,657,000 for the first quarter of 2013, compared to $2,302,000 for the first quarter of 2012. This is mostly related to the acquired loan portfolio and we expect this benefit will continue to accrete rapidly to income.

     “Provision expense was $439,000 lower for the 2013 quarter than the comparable 2012 quarter. The provision expense has been positively impacted by continued significant loan recoveries and improving asset quality metrics. During the four quarters, our allowance for loan losses, as a percentage of gross loans, has increased 15 basis points to 1.58%.

     “In noninterest income, we made a $330,000 refund this quarter related to an error in a trust agreement going back two decades. This error was detected during a review and has been resolved and recorded as a reduction in trust income. On the positive side, secondary market mortgage income was $187,000 higher this quarter than a year earlier. In addition, we realized $198,000 in gains on securities sales.

     “In noninterest expense, we realized some savings from reductions in full time equivalent employees, which are down 24 over the past year. These reductions were effected by retirements and normal attrition. In addition, the 2012 quarter included substantial expenses associated with the MidCarolina merger and with the management information system conversion, which are not recurring expenses.

     Haley concluded, “We are pleased with our first quarter earnings. We are also pleased and encouraged by the positive direction of our asset quality, performance, and balance sheet growth metrics. Nevertheless, we cannot forget that the world for community banking is challenging in all areas: economic, regulatory, technological, and operational, and is likely to remain this way. Even with these challenges, and perhaps in large measure due to them, we believe that there are and will continue to be opportunities for banks with strong capital, superior asset quality and imagination. American National Bankshares is doing everything possible to be one of those select banks.”

Capital
     American National’s capital ratios remain strong and exceed all regulatory requirements.

     Average shareholders’ equity was 12.53% of average assets at March 31, 2013, compared to 11.79% at March 31, 2012.

     Book value per common share was $20.99 at March 31, 2013, compared to $19.80 at March 31, 2012.

     Tangible book value per common share was $15.48 at March 31, 2013, compared to $14.00 at March 31, 2012.

     Tangible common equity to tangible assets was 9.73% at March 31, 2013, compared to 8.58% at March 31, 2012.

Credit Quality Measurements
     Non-performing assets, consisting of $5,185,000 of non-performing loans and $5,822,000 of foreclosed real estate, represented 0.85% of total assets at March 31, 2013, compared to 1.50% at March 31, 2012.

     Annualized net charge offs were in a net recovery position for both the 2013 and 2012 first quarters. Net recoveries for the first quarter of 2013 were six basis points (0.06%) of average loans, compared to 21 basis points (0.21%) for the first quarter of 2012.

Net Interest Income
     Net interest income before provision for loan losses decreased to $11,682,000 in the first quarter of 2013 from $13,172,000 in first quarter of 2012, a decrease of $1,490,000 or 11.3%.

     For the 2013 quarter, the net interest margin was 4.19% compared to 4.68% for the same quarter in 2012, a decrease of 49 basis points (0.49%).

     The decline in net interest income and net interest margin was driven by falling yields on earning assets, impacted by declining market rates and lower accretion income, and by lower levels of outstanding loan balances. It is partially mitigated by reduced cost of interest bearing liabilities.

Provision expense
     Provision expense for the first quarter of 2013 was $294,000 compared to $733,000 for the first quarter of 2012, a decrease of $439,000 or 59.9%.

     The allowance for loan losses as a percentage of total loans was 1.58% at March 31, 2013, compared to 1.43% at March 31, 2012. The primary driver of this increase has been renewals of performing acquired loans aggregating approximately $80 million over the past year, which are now part of the regular allowance analysis. It has been mitigated by improving asset quality and loan recoveries.

Noninterest Income
     Noninterest income totaled $2,770,000 in the first quarter of 2013, compared with $3,234,000 in the first quarter of 2012, a decrease of $464,000 or 14.3%.

     There were a number of factors impacting both periods and this change.

     For the 2013 quarter, these included: a $330,000 refund to a trust account to correct a long-standing error; a $198,000 gain on the sale of securities; and a $187,000 increase in mortgage banking fees.

     For the 2012 quarter, the largest factor was a $495,000 gain on the sale of surplus real estate, a vacant bank branch office.

Noninterest Expense
     Noninterest expense totaled $8,318,000 in the first quarter of 2013, compared to $9,927,000 in the first quarter of 2012, a decrease of $1,609,000 or 16.2%.

There were a number of factors impacting both periods.

     For the 2013 quarter, there were significant cost reductions in the salaries and benefits areas. Full time equivalent employees were reduced by 24 (7.6%) over the past year through a combination of retirements and normal attrition.

     For the 2012 quarter, there were significant non-recurring expenses associated with the July 2011 merger with MidCarolina and the management information systems conversion in February 2012.

About American National
American National Bankshares Inc. is a multi-state bank holding company with total assets of approximately $1.3 billion. Headquartered in Danville, Va., American National is the parent company of American National Bank and Trust Company. American National Bank is a community bank serving southern and central Virginia and north central North Carolina with 25 banking offices and two loan production offices. American National Bank and Trust Company also manages an additional $583 million of trust, investment and brokerage assets in its Trust and Investment Services Division. Additional information about the company and the bank is available on the bank's website at www.amnb.com.

Shares of American National are traded on the NASDAQ Global Select Market under the symbol "AMNB."

Forward-Looking Statements
This press release contains "forward-looking statements" within the meaning of federal securities laws. Certain of the statements involve significant risks and uncertainties. The statements herein are based on certain assumptions and analyses by American National and are factors it believes are appropriate in the circumstances. Actual results could differ materially from those contained in or implied by such statements for a variety of reasons including, but not limited to: changes in interest rates; changes in accounting principles, policies or guidelines; significant changes in the economic scenario; significant changes in regulatory requirements; significant changes in securities markets; and changes regarding acquisitions and dispositions. Consequently, all forward-looking statements made herein are qualified by these cautionary statements and the cautionary language in American National's most recent Form 10-K report and other documents filed with the Securities and Exchange Commission. American National Bankshares Inc. does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.


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