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When it comes to investing in the regional banking sector there are two variables that most investors should look for, and they are dividend income and upside potential. In the article I wanted to focus on the very attractive yield and promising upside of one of the most undervalued banks within the Appalachian region.

American National Bancshares, Inc. (AMNB) which is based in Danville, Virginia, operates as the bank holding company for American National Bank and Trust Company. American National Bank and Trust Company offers customers located in Virginia and North Carolina various types of bank-related products such as checking and savings accounts for individual customers and various mortgage products for homeowners.

On November 21st the company declared a $0.23/share quarterly dividend that was in-line with the company's previous distribution. It also announced a December 21st date for its regular dividend distribution, which is intended for shareholders of record as of December 7th. As a result of the announcement, the company now yields 4.75% ($0.92) on an annual basis, which is then broken down and distributed to shareholders each quarter.

In my opinion there are three positive catalysts to consider when it comes to AMNB. From a value perspective shares currently possess a P/E ratio of 9.09 and trade at an 8.20% discount to its 50 DMA and a 17.67% discount to its 200 DMA. The second variable to consider is the fact that the company presents a very nice value proposition when using Graham's Number. AMNB's diluted TTM earnings per share at 2.13, and a MRQ book value per share value at 20.66, implies a Graham Number fair value = SQRT (22.5*2.13*20.66) = $31.46. Based on Wednesday's closing price of $19.37, this implies a potential upside of 38.42% from current levels. Lastly, and most importantly, potential investors need to consider the fact that the company has surpassed analysts' estimates by an average of 9.23% in each of the last four quarters.

As per the company's most recent quarterly report, I wanted to highlight some of the improvements and milestones American National has accomplished up until this point:

Total Deposits: "At September 30, 2012, American National had $1.052 billion in deposits compared to $1.064 billion at September 30, 2011. Over the past year total deposits are down $12 million or 1.1%. This is primarily the result of a planned strategy to reduce wholesale funding since the merger. One of our strategic goals is growing deposit market share through increases in core deposits." If the bank can continue to demonstrate a reduction of anywhere from 2% - 4% per quarter over the next few quarters, then I strongly believe the strategy will be successful in reducing wholesale funding.

MidCarolina Merger: "A large portion of our earnings were driven by the merger with MidCarolina. Approximately $1,281,000 of pretax income for the third quarter of 2012 was directly related to various ongoing categorical fair value adjustments, the vast majority of which results from the loan portfolio purchase discount". If MidCarolina can continue to contribute to the company's earnings over the next 12 months, American National may indeed jump on similar types of acquisitions if and when they present themselves.

Long-Term Outlook: During the company's third quarter conference call Chairman and CEO Charles Majors noted that, "As we move forward, we are continuing to seek high quality organic growth in all our markets and, at the same time, preparing American National for any strategic acquisition opportunities that may arise in the next few years. The current economic and regulatory environment, notably implementation of Dodd-Frank and the potential implementation of Basel III, is adding significantly to the challenges faced by smaller community banks. We expect that these macro-level forces will be the catalyst for a wave of merger and acquisition opportunities in our industry over the next few years." That wave of merger and acquisition opportunities will actually allow American National to benefit from what seemingly is a growth-by-acquisition strategy that Mr. Majors has implemented. Although no specific targets have been named, any acquisition similar in scope and asset size to the MidCarolina transaction could possess mimetic long-term benefits.

For potential investors looking to establish a position in American National Bancshares, I'd continue to take a closer look at the company and keep a watchful eye out for such things as an improvement in earnings and dividend growth or any sign of a possible acquisition.

As is the case with most regional banks, potential investors need not worry about high-volatility or rogue traders looking to make a quick buck. The sector as a whole tends to trade on the lighter slide, which in my opinion offers investors a very important quality, and that is peace of mind.

Source: American National: A Virginia Bank Offering Investors Income, Value And Peace Of Mind