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, 2004.
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
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Commission file number 0-12820
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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.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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At May 6, 2004, the Corporation had 5,626,054 shares Common Stock
outstanding, $1 par value.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Page No.
--------
Index...............................................................................2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003..................................................3
Consolidated Statements of Income for the three months
ended March 31, 2004 and 2003..........................................4
Consolidated Statements of Changes in Shareholders' Equity
for the three months ended March 31, 2004 and 2003.....................5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003..........................................6
Notes to Consolidated Financial Statements...............................8
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations.............................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............22
Item 4. Controls and Procedures.................................................23
Part II. Other Information........................................................24
SIGNATURES ........................................................................25
Exhibits...........................................................................26
2
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
- --------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
March 31 December 31
2004 2003
------------ -------------
ASSETS
Cash and due from banks.........................................................$ 12,755 $ 16,236
Interest-bearing deposits in other banks........................................ 7,250 1,652
Securities available for sale, at fair value.................................... 186,969 171,376
Securities held to maturity (market value of $22,389 at
March 31, 2004 and $37,455 at December 31, 2003).............................. 20,194 36,103
----------- -----------
207,163 207,479
----------- -----------
Loans held for sale............................................................. 1,753 560
Loans, net of unearned income .................................................. 404,988 406,245
Less allowance for loan losses.................................................. (5,323) (5,292)
----------- -----------
Net loans..................................................................... 399,665 400,953
----------- -----------
Bank premises and equipment, at cost, less accumulated
depreciation of $12,056 in 2004 and $11,807 in 2003........................... 7,864 7,718
Core deposit intangibles........................................................ 822 934
Accrued interest receivable and other assets.................................... 8,626 8,770
----------- -----------
Total assets..................................................................$ 645,898 $ 644,302
=========== ===========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 80,683 $ 71,027
Demand deposits -- interest bearing........................................... 72,092 69,053
Money market deposits......................................................... 53,111 59,251
Savings deposits.............................................................. 84,064 83,031
Time deposits................................................................. 212,537 219,326
----------- -----------
Total deposits................................................................ 502,487 501,688
----------- -----------
Repurchase agreements......................................................... 46,040 47,035
FHLB borrowings............................................................... 21,000 21,000
Accrued interest payable and other liabilities................................ 3,283 2,648
----------- -----------
Total liabilities............................................................. 572,810 572,371
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
5,667,464 shares outstanding at September 30, 2003
and 5,780,816 shares outstanding at December 31, 2002....................... 5,633 5,660
Capital in excess of par value................................................ 9,472 9,437
Retained earnings............................................................. 56,210 55,538
Accumulated other comprehensive income........................................ 1,773 1,296
---------- ----------
Total shareholders' equity.................................................... 73,088 71,931
---------- ----------
Total liabilities and shareholders' equity....................................$ 645,898 $ 644,302
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
3
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
-------------------------
2004 2003
---------- ----------
Interest Income:
Interest and fees on loans....................................................$ 5,741 $ 6,559
Interest on deposits in other banks........................................... 31 25
Income on securities:
Federal agencies............................................................ 822 549
Mortgage-backed............................................................. 233 454
State and municipal......................................................... 512 469
Other securities............................................................ 242 346
---------- ----------
Total interest income....................................................... 7,581 8,402
---------- ----------
Interest Expense:
Interest on deposits:
Demand...................................................................... 59 68
Money market................................................................ 102 139
Savings..................................................................... 109 225
Time........................................................................ 1,327 1,720
Interest on repurchase agreements............................................. 127 125
Interest on other borrowings.................................................. 241 242
---------- ----------
Total interest expense...................................................... 1,965 2,519
---------- ----------
Net Interest Income............................................................. 5,616 5,883
Provision for Loan Losses....................................................... 215 240
---------- ----------
Net Interest Income After Provision
For Loan Losses............................................................... 5,401 5,643
---------- ----------
Non-Interest Income:
Trust and investment services................................................. 728 606
Service charges on deposit accounts........................................... 574 423
Other fees and commissions.................................................... 246 228
Mortgage banking income....................................................... 133 128
Securities gains, net......................................................... 105 2
Other income.................................................................. 67 75
---------- ----------
Total non-interest income................................................... 1,853 1,462
---------- ----------
Non-Interest Expense:
Salaries...................................................................... 1,768 1,721
Pension and other employee benefits........................................... 422 448
Occupancy and equipment....................................................... 617 641
Core deposit intangible amortization ......................................... 112 112
Other expenses................................................................ 882 887
---------- ----------
Total non-interest expense.................................................. 3,801 3,809
---------- ----------
Income Before Income Tax Provision.............................................. 3,453 3,296
Income Tax Provision............................................................ 983 962
---------- ----------
Net Income......................................................................$ 2,470 $ 2,334
========== ==========
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ .44 $ .41
Diluted.........................................................................$ .43 $ .40
- ---------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,648,278 5,756,094
Diluted.........................................................................5,705,869 5,817,153
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
4
Consolidated Statements of Changes in Shareholders' Equity
American National Bankshares Inc. and Subsidiary
Three Months Ended March 31, 2004 and 2003
(Unaudited)
(In Thousands, except number of shares of common stock)
Accumulated
Common Stock Capital in Other Total
------------------------- Excess of Retained Comprehensive Shareholders'
Shares Amount Par Value Earnings Income (Loss) Equity
----------- ------------ ------------ ------------- -------------- -------------
Balance, December 31, 2002...................... 5,780,816 $ 5,781 $ 9,571 $ 53,093 $ 2,291 $ 70,736
Net income...................................... - - - 2,334 - 2,334
Change in unrealized gains on securities
available for sale, net of tax of $(118)...... - - - - (230)
Less: Reclassification adjustment for (gains)
losses on securities available for sale, net
of tax $-..................................... - - - - (1)
--------------
Other comprehensive income.................... (231) (231)
-------------
Total comprehensive income.................... 2,103
Stock repurchased and retired................... (35,000) (35) (57) (797) - (889)
Stock options exercised......................... - - - - - -
Cash dividends paid............................. - - - (1,033) - (1,033)
----------- ------------ ------------ ------------- -------------- -------------
Balance, March 31, 2003......................... 5,745,816 $ 5,746 $ 9,514 $ 53,597 $ 2,060 $ 70,917
=========== ============ ============= ============= ============== =============
Balance, December 31, 2003...................... 5,660,419 $ 5,660 $ 9,437 $ 55,538 $ 1,296 $ 71,931
Net income...................................... - - - 2,470 - 2,470
Change in unrealized gains on securities
available for sale, net of tax of $281........ - - - - 546
Less: Reclassification adjustment for (gains)
losses on securities available for sale, net
of tax $36.................................... - - - - (69)
--------------
Other comprehensive income.................... 477 477
-------------
Total comprehensive income.................... 2,947
Stock repurchased and retired................... (32,200) (32) (54) (726) - (812)
Stock options exercised......................... 4,953 5 89 - - 94
Cash dividends paid............................. - - - (1,072) - (1,072)
----------- ------------ ------------ ------------- -------------- -------------
Balance, March 31, 2004......................... 5,633,172 $ 5,633 $ 9,472 $ 56,210 $ 1,773 $ 73,088
=========== ============ ============= ============= ============== =============
The accompanying notes are an integral part of the consolidated financial statements.
5
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------
March 31
2004 2003
---------- ----------
Cash Flows from Operating Activities:
Net income....................................................................$ 2,470 $ 2,334
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses..................................................... 215 240
Depreciation.................................................................. 244 291
Core deposit intangible amortization.......................................... 112 112
Amortization (accretion) of bond premiums and discounts....................... 210 208
Gain on sale or call of securities............................................ (105) (2)
Gain on loans held for sale................................................... (99) (128)
Proceeds from sales of loans held for sale.................................... 4,567 6,985
Originations of loans held for sale........................................... (5,661) (7,148)
Loss on sale of real estate owned............................................. 11 -
Deferred income taxes (benefit) provision..................................... (22) 13
Increase in interest receivable............................................... (107) (646)
Decrease in other assets...................................................... 85 884
Decrease in interest payable.................................................. (58) (66)
Increase in other liabilities................................................. 693 541
---------- ----------
Net cash provided by operating activities..................................... 2,555 3,618
---------- ----------
Cash Flows from Investing Activities:
Proceeds from maturities and calls of securities available for sale........... 17,017 17,917
Proceeds from sales of securities available for sale.......................... 4,067 -
Proceeds from maturities and calls of securities held to maturity............. 15,911 802
Purchases of securities available for sale.................................... (36,062) (20,003)
Net increase (decrease) in loans.............................................. 913 (13,440)
Purchases of bank property and equipment...................................... (390) (106)
Proceeds from sales of other real estate owned................................ 92 -
---------- ----------
Net cash provided by (used in) investing activities........................... 1,548 (14,830)
---------- ----------
(Continued on next page)
6
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------
March 31
2004 2003
---------- ----------
Cash Flows from Financing Activities:
Net increase (decrease) in demand, money market,
and savings deposits........................................................ 7,588 2,158
Net (decrease) increase in time deposits...................................... (6,789) 7,357
Net decrease in repurchase agreements......................................... (955) (1,352)
Net decrease in FHLB borrowings............................................... - (500)
Cash dividends paid........................................................... (1,072) (1,033)
Repurchase of stock........................................................... (812) (889)
Proceeds from exercise of stock options....................................... 94 -
---------- ----------
Net cash (used in) provided by financing activities........................... (1,986) 5,741
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents............................ 2,117 (5,471)
Cash and Cash Equivalents at Beginning of Period................................ 17,888 23,478
---------- ----------
Cash and Cash Equivalents at End of Period......................................$ 20,005 $ 18,007
========== ==========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.......................................................$ 12,755 $ 15,962
Interest-bearing deposits in other banks...................................... 7,250 2,045
---------- ----------
$ 20,005 $ 18,007
========== ==========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 2,023 $ 2,585
Income taxes paid.............................................................$ 4 $ -
Transfer of loans to other real estate owned..................................$ 160 $ -
Unrealized gain (loss) on securities available for sale.......................$ 722 $ 3,563
The accompanying notes are an integral part of the consolidated financial statements.
7
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly American National Bankshares' financial
position as of March 31, 2004; the consolidated statements of income for the
three months ended March 31, 2004 and 2003; the consolidated statements of
changes in shareholders' equity for the three months ended March 31, 2004 and
2003; and the consolidated statements of cash flows for the three months ended
March 31, 2004 and 2003. Operating results for the three month periods ended
March 31, 2004 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004.
The consolidated financial statements include the amounts and results of
operations of American National Bankshares Inc. ("the Corporation") and its
wholly owned subsidiary, American National Bank and Trust Company ("the Bank")
and the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp.
2. STOCK BASED COMPENSATION
As of March 31, 2004 the Corporation had a stock-based compensation plan.
The Corporation accounts for the plan under the recognition and measurement
principles of APB Opinion 25, Accounting for Stock Issued to Employees, and
related interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the date of the grant. The
following illustrates the effect on net income and earnings per share for the
three month periods ended March 31, 2004, and 2003 had the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, been adopted.
Three Months Ended
March 31
-----------------------
2004 2003
-------- --------
(Dollars in thousands except per share amounts)
Net income, as reported $ 2,470 $ 2,334
Deduct: total stock-based employee compensation
expense determined based on fair value method of awards (110) (27)
-------- --------
Pro forma net income $ 2,360 $ 2,307
======== ========
Basic earnings per share:
As reported $ .44 $ .41
Pro forma $ .42 $ .40
Diluted earning per share:
As reported $ .43 $ .40
Pro Forma $ .41 $ .40
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 2003: price volatility of 34.58%, risk-free interest
rates of 3.21%, and expected lives of 5 years. There were no grants in the first
quarter of 2004.
8
3. SECURITIES
The amortized cost and estimated fair value of debt and equity securities
at March 31, 2004 and December 31, 2003 were as follows (in thousands):
March 31, 2004
---------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- --------------- -------------- --------------
Securities held to maturity:
Federal agencies $ 1,998 $ 81 $ - $ 2,079
Mortgage-backed 1,065 58 - 1,123
State and municipal 17,131 1,356 - 18,487
--------- -------- -------- ---------
Total securities held to maturity 20,194 1,495 - 21,689
--------- -------- -------- ---------
Securities available for sale:
Federal agencies 110,620 812 - 111,420
Mortgage-backed 17,813 556 12 18,344
State and municipal 35,023 1,401 25 36,423
Corporate bonds 13,894 763 1 14,657
Restricted stock:
FHLBA stock 1,645 - - 1,645
Federal Reserve stock 363 - - 363
Other securities 4,925 - 808 4,117
--------- -------- -------- ---------
Total securities available for sale 184,283 3,532 846 189,969
--------- -------- -------- ---------
Total securities $ 204,477 $ 5,027 $ 846 $ 208,658
========= ======== ======== =========
December 31, 2003
---------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- --------------- -------------- --------------
Securities held to maturity:
Federal agencies $ 16,996 $ 100 $ 1 $ 17,095
Mortgage-backed 1,227 62 - 1,289
State and municipal 17,880 1,191 - 19,071
--------- -------- -------- ---------
Total securities held to maturity 36,103 1,353 1 37,455
--------- -------- -------- ---------
Securities available for sale:
Federal agencies 97,906 676 200 98,382
Mortgage-backed 19,693 572 65 20,200
State and municipal 31,890 933 43 32,780
Corporate bonds 12,894 751 3 13,642
Restricted stock:
FHLBA stock 1,741 - - 1,741
Federal Reserve stock 363 - - 363
Other securities 4,925 - 657 4,268
--------- -------- -------- ---------
Total securities available for sale 169,412 2,932 968 171,376
--------- -------- -------- ---------
Total securities $ 205,515 $ 4,285 $ 969 $ 208,831
========= ======== ======== =========
9
The table below shows (in thousands) gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at March 31,
2004.
Less than 12 Months 12 Months or More Total
------------------------ ----------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
-------- ---------- --------- ---------- -------- ----------
Federal agencies $ 10,999 $ 12 $ - $ - $ 10,999 $ 12
Mortgage-backed 1,331 18 1,005 7 2,336 25
State and municipal 691 1 - - 691 1
Corporate bonds - - - - - -
Preferred stock 1,640 360 2,052 448 3,692 808
-------- ----- --------- ------ -------- -----
Total $ 14,661 $ 391 $ 3,057 $ 455 $ 17,718 $ 846
======== ===== ========= ====== ======== =====
The unrealized loss position is considered temporary and is due to the
general decline in interest rates. Those issues in an unrealized loss position
for more than 12 months consist primarily of $4,500,000 in preferred stocks.
These are a $2,000,000 FHLMC preferred 1.66% where the interest rate adjusts
every 2 years based on 2 year Treasury plus 10 basis points with a maximum rate
of 11.0%; and $2,500,000 FNMA preferred 3.54% where the interest rate adjusts
every 2 years based on 2 year Treasury less 16 basis points with a maximum rate
of 11.0%. 70% of the dividends on these issues are tax exempt. Management
intends to hold these until maturity.
4. LOANS
Outstanding loans, excluding loans held for sale, were composed of the
following (in thousands):
March 31 December 31
2004 2003
------------ -----------
Real Estate loans
Construction and land development $ 14,081 $ 12,790
Secured by farmland 3,230 3,430
Secured by 1-4 family residential properties 137,834 136,229
Secured by multi-family residential properties 6,691 6,801
Secured by nonfarm, nonresidential properties 127,172 126,164
Loans to farmers 2,125 1,618
Commercial and industrial loans 90,014 91,419
Consumer loans 19,489 23,581
Loans for nonrated industrial development obligations 4,232 4,077
Deposit overdrafts 120 136
--------- ---------
Loans, net of unearned income $ 404,988 $ 406,245
========= =========
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the three months ended March
31 was as follows (in thousands):
March 31 March 31
2004 2003
------------- -------------
Balance, January 1 $ 5,292 $ 5,622
Provisions charged against income 215 240
Recoveries of loans charged off 39 73
Loans charged off (223) (164)
-------- --------
Balance at end of period $ 5,323 $ 5,771
======== ========
10
6. 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
diluted potential common stock. Potential dilutive common stock had no effect on
income available to common shareholders.
Three Months Ended
March 31
-------------------------------------------------
2004 2003
---------------------- ---------------------
Per Per
Share Share
Shares Amount Shares Amount
--------- ------ --------- ------
Basic earnings per share 5,648,278 $ .44 5,756,094 $ .41
Effect of dilutive securities, stock options 57,591 (.01) 61,059 (.01)
--------- ------ --------- ------
Diluted earnings per share 5,705,869 $ .43 5,817,153 $ .40
========= ====== ========= ======
7. DEFINED BENEFIT PLAN
Components of Net Period Benefit Cost (in thousands)
Three Months Ended
March 31
-------------------
2004 2003
------- -------
Service cost $ 108 $ 94
Interest cost 90 83
Expected return on plan assets (113) (72)
Amortization of prior service cost (6) (6)
Amortization of net obligation at transition - (1)
Amortization of the net (gain) loss 21 31
------- -------
Net periodic benefits cost $ 100 $ 129
======= =======
As of March 31, 2004, $357,000 in contributions have been made. The
Corporation plans no additional contributions for the year ending December 31,
2004.
8. SEGMENT AND RELATED INFORMATION
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", reportable segments include community
banking and trust and investment services.
Community banking involves making loans to and generating deposits from
individuals and businesses in the Bank's general market area. All assets and
liabilities of the Bank are allocated to community banking. Investment income
from fixed income investments is another major source of income. 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. The assets and liabilities and operating results
of the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. are
included in the community banking segment. ANB Mortgage Corp. performs secondary
mortgage banking and ANB Services Corp. performs retail investment and insurance
sales.
Trust and investment services include estate and trust planning and
administration and investment management for various entities. The trust and
investment services division of the Bank manages trusts, estates and purchases
equity, fixed income and mutual fund investments for customer accounts. The
11
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.
Unaudited segment information for the three month periods ended March 31,
2004 and 2003 is shown in the following table (in thousands). The "Other" column
includes corporate related items, results of insignificant operations and, as it
relates to segment profit (loss), income and expense not allocated to reportable
segments. Inter-segment eliminations primarily consist of the Corporation's
investment in the Bank and related equity earnings.
Three Months Ended March 31, 2004
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 7,581 $ - $ 8 $ (8) $ 7,581
Interest expense 1,965 - 8 (8) 1,965
Non-interest income - external customers 915 728 210 - 1,853
Non-interest income - internal customers - 12 - (12) -
Operating income before income taxes 3,035 433 (15) - 3,453
Depreciation and amortization 349 5 2 - 356
Total assets 644,236 - 3,166 (1,504) 645,898
Capital expenditures 370 20 - - 390
Three Months Ended March 31, 2003
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 8,402 $ - $ 11 $ (11) $ 8,402
Interest expense 2,519 - 11 (11) 2,519
Non-interest income - external customers 671 606 185 - 1,462
Non-interest income - internal customers - 12 - (12) -
Operating income before income taxes 2,982 299 15 - 3,296
Depreciation and amortization 395 6 2 - 403
Total assets 612,551 - 2,835 (1,209) 614,177
Capital expenditures 103 3 - - 106
12
ITEM 2.
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
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 Corporation's financial condition and results of operations. The discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements, and supplemental financial data.
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of the Corporation and
Bank. These forward-looking statements involve risks and uncertainties and are
based on the beliefs and assumptions of management of the Corporation and Bank
and on information available at the time these statements and disclosures were
prepared. Factors that may cause actual results to differ materially from those
expected include the following:
o General economic conditions may deteriorate and negatively impact the
ability of borrowers to repay loans and depositors to maintain balances.
o Changes in interest rates could reduce income.
o Competitive pressures among financial institutions may increase.
o The businesses that the Corporation and Bank are engaged in may be
adversely affected by legislative or regulatory changes, including changes
in accounting standards.
o New products developed or new methods of delivering products could result
in a reduction in business and income for the Corporation and Bank.
o Adverse changes may occur in the securities market.
CRITICAL ACCOUNTING POLICIES
The Corporation's critical accounting policies are listed below. A summary
of the Corporation's significant accounting policies is set forth in Note 1 to
the Consolidated Financial Statements in the Corporation's 2003 Annual Report on
Form 10-K.
The Corporation's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our 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. Although the economics of our transactions would be the same,
the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimable and (ii)
SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has three basic components: the formula
allowance, the specific allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses a historical loss view as an
indicator of future losses along with various economic factors and, as a result,
could differ from the loss incurred in the future. However, since this history
is updated with the most recent loss information, the errors that might
otherwise occur are mitigated. The specific allowance uses various techniques to
13
arrive at an estimate of loss for specifically identified loans. Historical loss
information, expected cash flows and fair market value of collateral are used to
estimate these losses. The unallocated allowance captures losses whose impact on
the portfolio have occurred but have yet to be recognized in either the formula
or specific allowance. The use of these values is inherently subjective and our
actual losses could be greater or less than the estimates.
Core Deposit Intangibles
In July, 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which impacted the accounting for goodwill and
other intangible assets. Statement 141 eliminated the pooling method of
accounting for business combinations and required that intangible assets that
meet certain criteria be reported separately from goodwill. Statement 142
eliminated the amortization of goodwill and other intangibles that are
determined to have an indefinite life. The Statement requires, at a minimum,
annual impairment tests for goodwill and other intangible assets that are
determined to have an indefinite life. SFAS 142 allows certain intangibles
arising from Bank and Thrift acquisitions to be amortized over their estimated
useful lives.
The Financial Accounting Standards Board issued Statement No. 147,
Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9 in October 2002. FASB Statement No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method, provided interpretive guidance
on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
this Statement removes acquisitions of financial institutions from the scope of
both Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in
paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess
of the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions with the scope of this Statement. In addition,
this Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of this Statement, which relates to the application of the
purchase method of accounting, is effective for acquisitions for which the date
of acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
This Statement clarifies that a branch acquisition that meets the
definition of a business should be accounted for as a business combination,
otherwise the transaction should be accounted for as an acquisition of net
assets that does not result in the recognition of goodwill. The transition
provisions state that if the transaction that gave rise to the unidentifiable
intangible asset was a business combination, the carrying amount of that asset
shall be reclassified to goodwill as of the later of the date of acquisition or
the date Statement 142 was first applied (fiscal years beginning after December
15, 2001). Any previously issued interim statements that reflect amortization of
the unidentifiable intangible asset subsequent to the Statement 142 application
date shall be restated to remove that amortization expense. The carrying amounts
of any recognized intangible assets that meet the recognition criteria of
Statement 141 that have been included in the amount reported as an
unidentifiable intangible asset and for which separate accounting records have
14
been maintained shall be reclassified and accounted for as assets apart from the
unidentifiable intangible asset and shall not be reclassified to goodwill.
Upon adoption of these Statements, the Corporation re-evaluated its
intangible assets that arose from branch acquisitions prior to July 1, 2001. The
intangible assets arising from the premium paid for deposits acquired at the
Gretna office in 1995 and the Yanceyville office in 1996 are classified as core
deposit intangibles and continue to be amortized over their estimated lives
based on management's determination that a business was not acquired in either
of the two purchases.
Stock Based Compensation
The Corporation accounts for its stock compensation plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant.
Non-GAAP Presentations
The management's discussion and analysis refers to the efficiency ratio,
which is computed by dividing non-interest expense by the sum of net interest
income on a tax equivalent basis and non-interest income. This is a non-GAAP
financial measure which we believe provides investors with important information
regarding our operational efficiency. Comparison of our efficiency ratio with
those of other companies may not be possible because other companies may
calculate the efficiency ratio differently. The Corporation, in referring to its
net income, is referring to income under accounting principals generally
accepted in the United States of America, or "GAAP".
The analysis of net interest income in this document is performed on a tax
equivalent basis. Management feels the tax equivalent presentation better
reflects total return, as many financial assets have specific tax advantages
that modify their effective yields. A reconcilement of tax-equivalent net
interest income to net interest income under generally accepted accounting
principals, or "GAAP", is provided in those statements.
New Accounting Pronouncements
No new accounting pronouncements have been issued since December 31, 2003.
Refer to the Corporation's December 31, 2003 Annual Report on Form 10-K for
previously announced accounting pronouncements.
INTERNET ACCESS TO CORPORATE DOCUMENTS
The Corporation provides access to their SEC filings through the corporate
Web site at www.amnb.com. After accessing the Web site, the filings are
available upon selecting the American National Bankshares Inc. icon. 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 electronically filed with or
furnished to the SEC.
RESULTS OF OPERATIONS
NET INCOME
The Corporation's net income for the first three months of 2004 was
$2,470,000, an increase of 5.8% over the $2,334,000 earned during the same
period of 2003. On a basic and diluted per share basis, net earnings totaled
$0.44 and $0.43, respectively, for the first three months of 2004. This compared
favorably to the $0.41 and $0.40 in basic and diluted earnings per share
recorded for the first three months of 2003. Both earnings per share measurement
15
increases were due to increases in non-interest income which more than offset
the decline in net interest income, combined with a lower number of shares
outstanding due to stock repurchases under the Corporation's outstanding stock
repurchase program.
On an annualized basis, return on average total assets was 1.54% for the
first three months of 2004 compared to 1.55% for the same period in 2003.
Annualized return on average common shareholders' equity was 13.62% and 13.23%
for the first three months of 2004 and 2003, respectively.
Net interest income after provision for loan losses decreased $242,000, or
4.3%, for the first three months of 2004 compared to the same period in 2003 due
to a decline in the interest rate spread coupled with changes in the earning
asset mix. For the same comparative period, non-interest income increased by
$391,000, led by growth in service charges, trust and investment services
income, and securities gains. Non-interest expense decreased by $8,000 for the
first three months of 2004 compared to the same period in 2003, further
assisting the improvement to earnings.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$5,890,000 for the first three month period ending March 31, 2004 compared to
$6,124,000 for the same period of 2003, a decrease of 3.8%. The interest rate
spread decreased to 3.52% from 3.84%, and the net interest margin decreased to
3.84% from 4.24% in the first three months of 2004 compared to the same period
of 2003.
Yields on earning assets declined due to decreases in interest rate indexes
which are used to price commercial loans, the scheduled re-pricing of variable
rate real estate loans to lower rates, the reinvestment of investment portfolio
cash flows into lower yielding investments, and the addition of new loans at
lower market rates of interest.
Interest-bearing liability costs declined at a slower pace than
interest-earning assets as many liability accounts were priced at what
management consider "floor" rates of between one percent and two tenths of one
percent. This, coupled with the maturity-based repricing of certificates of
deposit, accounted for the 22.0% decline in interest expense.
Average interest-earning assets increased 6.4%, or $37,096,000 while
average interest-bearing liabilities grew 5.4%, or $25,230,000 between March 31,
2003 and March 31, 2004. During this time low cost non-interest bearing demand
deposit growth funded the majority of the difference between earning asset
growth and interest bearing deposit growth, represented the majority of total
deposit growth and now represents 14.3% of total deposits. While the
Corporation's balance sheet is technically liability-sensitive, management feels
many of the funding costs are at or very close to market floors, and it is
increasingly difficult to reduce funding costs at the same pace with the
market-driven reductions in asset yields. The resultant decrease in interest
income from the lower yields on earning assets exceeded the decrease in interest
expense from lower costs of interest-bearing liabilities producing the decline
in the interest rate spread.
During the first three months of 2004, the Federal Reserve held interest
rates unchanged, yet they were below the rates of one year prior. These
historically low rates kept the prime lending rate at 4.00% during the three
months ending March 31, 2004, which was lower than the 4.25% prime lending rate
during the same period of 2003. Many of the Corporation's assets reprice at the
prime lending rate or at a rate based on the rates on U.S. Treasury securities.
As mentioned above, the Corporation's balance sheet is liability-sensitive, many
liabilities have approached pricing floors while assets continue to reprice or
be booked at lower yields.
When compared to the fourth quarter of 2003, the interest rate spread and
net yield on earning assets in the first quarter of 2004 increased with a
positive trend noted. The interest rate spread improved from 3.77% in the fourth
quarter of 2004 to 3.84% during the first quarter of 2004. The net yield on
earning assets improved from 4.22% in the fourth quarter of 2003 to 4.24% during
the first quarter of 2004. This improvement was due to several factors including
16
a higher level of time deposits repricing to lower market interest rates, growth
in non-interest bearing demand deposits and management's overall focus on
managing the margin during the ongoing low rate period experienced in 2004.
The following tables demonstrate fluctuations in net interest income and
the related yields for the first three months of 2004 compared to similar prior
year periods. Net interest income is on a taxable equivalent basis. 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 (in thousands, except rates):
17
Net Interest Income and Rate / Volume Analysis
For the Three Months Ended March 31, 2004 and 2003
Interest
Average Balance Income/Expense Yield/Rate
------------------------- ------------------------ ---------------------
2004 2003 2004 2003 2004 2003
---------- ---------- ---------- --------- -------- --------
Loans:
Commercial $ 125,777 $ 120,959 $ 1,459 $ 1,898 4.64% 6.28%
Mortgage 260,495 258,531 3,815 3,988 5.86 6.17
Consumer 21,639 30,759 492 697 9.09 9.06
---------- ---------- ---------- --------- -------- --------
Total loans 407,911 410,249 5,766 6,583 5.65 6.42
---------- ---------- ---------- --------- -------- --------
Securities:
Federal agencies 102,126 58,390 822 549 3.22 3.76
Mortgage-backed 20,123 35,279 233 454 4.63 5.15
State and municipal 50,410 39,618 750 669 5.95 6.75
Other securities 19,908 24,816 253 363 5.08 5.85
---------- ---------- ---------- --------- -------- --------
Total securities 192,567 158,103 2,058 2,035 4.27 5.15
---------- ---------- ---------- --------- -------- --------
Deposits in other banks 13,833 8,863 31 25 .90 1.13
---------- ---------- ---------- --------- -------- --------
Total interest-earning assets 614,311 577,215 7,855 8,643 5.11 5.99
---------- --------- -------- --------
Other non-earning assets 26,558 26,455
---------- ----------
Total assets $ 640,869 $ 603,670
========== ==========
Interest-bearing deposits:
Demand $ 69,755 $ 62,618 59 68 .34 .43
Money market 54,328 46,459 102 139 .75 1.20
Savings 83,757 76,193 109 225 .52 1.18
Time 215,775 227,446 1,327 1,720 2.46 3.02
---------- ---------- ---------- --------- -------- --------
Total interest-bearing deposits 423,615 412,716 1,597 2,152 1.51 2.09
Repurchase agreements 49,277 34,615 127 125 1.03 1.44
Other borrowings 21,416 21,747 241 242 4.50 4.45
---------- ---------- ---------- --------- -------- --------
Total interest-bearing
liabilities 494,308 469,078 1,965 2,519 1.59 2.15
---------- --------- --------- --------
Demand deposits 70,627 60,831
Other liabilities 3,403 3,185
Shareholders' equity 72,531 70,576
---------- ----------
Total liabilities and
shareholders' equity $ 640,869 $ 603,670
========== ==========
Interest rate spread 3.52% 3.84%
======== ========
Net interest margin 3.84% 4.24%
========= ========
Reconcilement to GAAP
- ---------------------
Net interest income - tax equivalent 5,890 6,124
Less: Taxable equivalent adjustment 274 241
---------- ---------
$ 5,616 $ 5,883
========== =========
18
PROVISION AND RESERVE FOR LOAN LOSSES
The allowance for loan losses is to provide for losses inherent in the loan
portfolio. The Bank's Loan Committee has responsibility for determining the
level of the allowance for loan losses, subject to the review of the Board of
Directors. Among other factors, the Committee on a quarterly basis considers the
Corporation's historical loss experience, the size and composition of the loan
portfolio, the value and adequacy of collateral and guarantors, non-performing
credits including impaired loans, the Bank's loan "Watch" list, and national and
local economic conditions.
The provision for loan losses was $215,000 for the first three months of
2004 versus $240,000 for the same period in 2003. Net charged off loans were
$184,000 for the first three months of 2004 versus $91,000 for the same period
in 2003. The annualized ratio of net charge-offs to average outstanding loans
was .18% in 2004 and .09% in 2003. Management considers these charge-off ratios
lower than those of their peer banks, who generally consider charge-off levels
of .10% to .40% to be within reasonable norms from a historical perspective.
The reserve for loan losses totaled $5,323,000 at March 31, 2004, an
increase of 0.6% over the $5,292,000 recorded at December 31, 2003. The ratio of
reserves to loans, less unearned discount, was 1.31% at March 31, 2004 versus
1.30% at December 31, 2003. Management believes that the allowance for loan
losses is adequate to absorb any inherent losses on existing loans in the
Corporation's loan portfolio at March 31, 2004.
NON-INTEREST INCOME
Non-interest income for the first three months of 2004 was $1,853,000, an
increase of 26.7% from $1,462,000 reported in the same period of 2003. The
comparative increase was due to increases in service charge income, securities
gains, and trust and investment services. Service charges on deposit accounts
grew 35.7% or $151,000 in the first three months of 2004 when compared to the
same period in 2003. Securities gains taken during the first quarter of 2004
were $105,000 as compared to only $2,000 during the first quarter of 2003
Trust and investment services income of $728,000 during the first three
months of 2004 was up 20.1% compared to the same period in 2003. Because a
majority of trust account fees are calculated based on the market value of the
assets under management, the performance of the equity markets affects trust
financial performance. The Bank's trust division managed accounts whose market
values approximated $347,000,000 at March 31, 2004, compared to $291,000,000 one
year prior, a 19.2% increase in asset value. The growth in new trust business,
increased management fees, and higher valuations in the financial markets
produced the positive results.
NON-INTEREST EXPENSE
Non-interest expense for the first three months of 2004 was $3,801,000, a
0.2% decrease from the $3,809,000 reported for the same period last year.
Salaries increased 2.7% from the same period last year to $1,768,000 in 2004
while pension and other employee benefits decreased 5.8% to $422,000. The salary
increase is due primarily to annual salary increases. Occupancy and equipment
expenses decreased $24,000, or 3.7%, for the first three months of 2004 from the
same period in 2003, primarily the result of reduced depreciation expense.
Core deposit intangible amortization of $112,000 for the first three months
of 2004 and 2003 represents the amortization of the premium paid for deposits
acquired at the Gretna office in 1995 and Yanceyville office in 1996. These are
being amortized on a ten year straight-line basis.
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, was 49.76% and 50.29% for the three months
ended March 31, 2004 and 2003, respectively. A lower efficiency ratio generally
19
indicates better expense efficiency. Leaders in expense efficiency in the
banking industry have achieved ratios in the 45% to 50% range while the majority
of the industry remains in the 60-70% range.
INCOME TAX PROVISION
The income tax provision for the first three months of 2004 was $983,000,
an increase of $21,000 from $962,000 reported a year earlier. The effective tax
rate for the first three months of 2004 was 28.5% compared to 29.2% for the same
period of 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Total assets increased 0.2% to $645,898,000 at March 31, 2004 when compared
to assets of $644,302,000 at December 31, 2003. On an annual basis total assets
increased 5.2% at March 31, 2004 when compared to assets of $614,177,000 at
March 31, 2003. There were only minor changes in the major categories of assets
and liabilities during the quarter.
ASSET QUALITY
Non-performing 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 loans classified as troubled debt restructurings.
Loans in a non-accrual status at March 31, 2004 were $3,828,000 compared with
$3,262,000 at December 31, 2003, and $448,000 on March 31, 2003. The majority of
the non-accrual loans, and the increase in their balances from the year ago
period, are related to two commercial loan relationships. Management is working
closely with the borrowers to improve the Bank's collateral position and status
of this loan. Management continues to have a good relationship with both
borrowers.
Loans on accrual status and past due 90 days or more at March 31, 2004 were
$15,000 compared with $53,000 at December 31, 2003, and $214,000 on March 31,
2003. There were no loans classified as troubled debt restructurings on March
31, 2004, December 31, 2003 or March 31, 2003.
March 31 December 31 March 31
2004 2003 2003
---------- ----------- ----------
90 days past due $ 15 $ 53 $ 214
Non-accrual 3,828 3,262 448
OREO 360 303 30
------- ------ ------
Non-performing assets $ 4,203 $3,618 $ 692
======= ====== ======
Total non-performing loans as a percentage of total loans were 0.95% at
March 31, 2004, 0.86% at December 31, 2003, and 0.16% at March 31, 2003.
Properties received due to loan foreclosures were $360,000 at March 31,
2004, $303,000 at December 31, 2003, and $30,000 at March 31, 2003.
The gross amount of interest income that would have been recorded on
non-accrual loans as of March 31, 2004, if all such loans had been accruing
interest at the original contractual rate, was $31,000 for the three month
period ending March 31, 2004. No interest payments were recorded as interest
income during the reporting period for all such non-performing loans.
20
LIQUIDITY
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity is provided from cash and due from banks,
interest-bearing deposits in other banks, repayments from loans, increases in
deposits, lines of credit from two correspondent banks and two federal agency
banks and a planned structured continuous maturity of investments. Management
believes that these factors provide sufficient and timely liquidity for the
foreseeable future.
Management also takes into account any liquidity needs generated by
off-balance sheet transactions such as commitments to extend credit, commitments
to purchase securities and standby letters of credit.
The Corporation's net liquid assets, which includes cash and due from
banks, unpledged government securities, unpledged other securities with
remaining maturities of less than two years, less the Bank's reserve
requirement, to net liabilities ratio was 20.6 at March 31, 2004 and 19.1% at
December 31, 2003. Both of these ratios are considered to reflect adequate
liquidity for the respective periods.
The Bank has a line of credit equal to 15% of assets with the Federal Home
Loan Bank of Atlanta (FHLB) that equaled approximately $96,790,000 with
$75,790,000 available at March 31, 2004. Should the Bank ever desire to increase
their line of credit beyond the current 15% limit, the FHLB would allow
borrowings of up to 40% of total assets once the bank meets specific eligibility
requirements.
The Bank also has federal funds lines of credit facilities established with
two other banks in the amounts of $12,000,000 and $5,000,000, as well as has
access to the Federal Reserve Bank's discount window should a liquidity crisis
occur. The Bank has not used these facilities in the past year and considers
these as backup sources of funds.
Borrowings outstanding under the FHLB line of credit were $21,000,000 at
March 31, 2004 and $21,000,000 at December 31, 2003. The Bank has eight fixed
rate term borrowing contracts outstanding as of March 31, 2004, with the
following final maturities:
Amount Expiration Date
----------- ---------------
$ 1,500,000 July 2004
3,000,000 July 2005
1,000,000 July 2006
1,000,000 July 2007
3,000,000 June 2008
5,000,000 August 2008
5,000,000 April 2009
1,500,000 March 2014
-----------
$21,000,000
===========
OFF-BALANCE SHEET TRANSACTIONS
The Corporation enters into certain financial transactions in the ordinary
course of performing traditional banking services that result in off-balance
sheet transactions. The off-balance sheet transactions as of March 31, 2004 and
December 31, 2003 were commitments to extent credit and standby letters of
credit only.
Commitments to extend credit, which amounted to $115,316,000 at March
31, 2004 and $124,905,000 at December 31, 2003, represent legally binding
agreements to lend to customers 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
liquidity requirements.
As of March 31, 2004 there were two commitments to purchase securities
in the amount of $982,000 when settled in April. No commitments to purchase
securities existed on December 31, 2003.
21
Standby letters of credit are conditional commitments issued by the
Bank guaranteeing the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. At March 31, 2004 and December 31, 2003, the Bank had $3,672,000
and $3,477,000 respectively, in outstanding standby letters of credit.
CAPITAL RESOURCES
During the first quarter of 2004, the Corporation declared and paid a
quarterly cash dividend of $.19 per share. The dividend totaled $1,072,000 and
represented a 43.4% payout of first quarter 2004 net income.
The Corporation's Board of Directors authorized the repurchase of up to
300,000 shares of the Corporation's common stock between August 16, 2000 and
August 15, 2001, 250,000 shares between August 29, 2001 and August 28, 2003,
250,000 shares between August 21, 2003 and August 19, 2004, and 250,000 shares
between August 20, 2004 and August 17, 2004 The repurchases, which may be made
through open market purchases or in privately negotiated transactions, were
32,200 shares during the first quarter of 2004 and total 496,666 shares since
purchases began on August 16, 2000.
Federal regulatory risk-based capital ratio guidelines require
percentages to be applied to various assets including off-balance-sheet assets
in relation to their perceived risk. Tier I capital includes shareholders'
equity and Tier II capital includes certain components of nonpermanent preferred
stock and subordinated debt. The Corporation had no preferred stock or
subordinated debt outstanding. Banks and bank holding companies must have a Tier
I capital ratio of at least 4% and a total ratio, including Tier I and Tier II
capital, of at least 8%. As of March 31, 2004 the Corporation had a ratio of
15.14% for Tier I and a ratio of 16.29% for total capital. At December 31, 2003
these ratios were 14.85% and 15.99%, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effective management of market risk is essential to achieving the
Corporation's objectives. Market risk reflects the risk of economic loss
resulting from adverse changes in market prices and interest rates. This risk of
loss can be reflected in diminished current market values and/or reduced
potential net interest income in future periods. The Corporation is not subject
to currency exchange risk or commodity price risk.
As a financial institution, interest rate risk and its impact on net
interest income is the primary market risk exposure. The Asset/Liability
Investment Committee ("ALCO") is primarily responsible for establishing asset
and liability strategies and for monitoring and controlling liquidity and
interest rate risk.
ALCO uses computer simulation analysis to measure the sensitivity of
earnings and market value of equity to changes in interest rates. The projected
changes in net interest income and market value of portfolio equity ("MVE") to
changes in interest rates are calculated and monitored by ALCO as indicators of
interest rate risk. The projected changes in net interest income and MVE to
changes in interest rates at March 31, 2004 and December 31, 2003 were within
compliance of established policy guidelines. These projected changes are based
on numerous assumptions of growth and changes in the mix of assets or
liabilities. Net interest income for the next twelve months is projected to
increase when interest rates are higher than current rates and decrease when
interest rates are lower than current rates.
22
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of our published financial
statements and other disclosures included in this report. Within the 90 days
prior to the date of this report, the Corporation carried out an evaluation,
under the supervision and with the participation of the Corporation's
management, including the Corporation's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Corporation's Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Corporation (including its consolidated subsidiaries) required
to be included in periodic SEC filings. There have been no significant changes
in the Corporation's internal controls or in other factors that could
significantly affect internal controls subsequent to the date the Corporation
carries out its evaluation.
23
PART II
OTHER INFORMATION
Item:
1. Legal Proceedings
The nature of the business of the Corporation's banking
subsidiary ordinarily results in a certain amount of litigation. The
subsidiary of the Corporation is involved in various legal
proceedings, all of which are considered incidental to the normal
conduct of business. Management believes that the liabilities
arising from these proceedings will not have a material adverse
effect on the consolidated financial position or consolidated results
of operations of the Corporation.
2. Changes in securities, use of proceeds and issuer purchases or equity
securities
Issuer Purchases of Equity Securities
--------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of
Total Number Average Purchased as Part of Shares that May Yet
of Shares Price Paid Publicly Announced Be Purchased Under
Purchased Per share Program the Program
------------ ---------- ---------------------- -------------------
January 1-31, 2004 - - - 235,000
February 1-29, 2004 16,000 $25.93 16,000 219,000
March 1-31, 2004 16,200 24.54 16,200 202,800
------ ------
32,200 $25.23 32,200
On August 19, 2003, the Corporation's board of directors
authorized the repurchase of up to 250,000 shares of the
Corporation's common stock between August 20, 2003 and August 17,
2004. The stock may be purchased in the open market and/or in
privately negotiated transactions as management and the board of
directors determine to be in the best interest of the Corporation.
3. Defaults upon senior securities
None
4. Submission of matters to a vote of security holders
None
5. Other information
None
6. Exhibits and Reports on Form 8-K
(a) Exhibits -
11. Refer to EPS calculation in the Notes to Financial Statements
31.1 Section 302 Certification of Charles H. Majors, President and
CEO
31.2 Section 302 Certification of James R. Jefferson, Assistant
Treasurer (Interim CFO)
32.1 Section 906 Certification of Charles H. Majors, President and
CEO
32.2 Section 906 Certification of James R. Jefferson, Assistant
Treasurer (Interim CFO)
(b) Reports on Form 8-K -
Form 8-K filed January 21, 2004 to announce the Corporation's year
end and fourth quarter financial results.
24
Form 8-K filed January 30, 2004 to announce the Corporation's
investor presentation at the February 3, 2004 Southeast
Super-Community Bank Conference.
Form 8-K filed on March 19, 2004 to announce quarterly dividend of
$0.19 per share.
Form 8-K filed April 6, 2004 to announce the resignation of Brad E.
Schwartz as the Corporation's Senior Vice President and Chief
Financial Officer, as well as the Secretary to the Corporation.
Form 8-K filed April 21, 2004 to announce the Corporation's first
quarter 2004 financial results.
Form 8-K filed April 27, 2004 to announce the election of directors
at the Corporation's annual shareholders meeting and to announce the
opening of a loan production office in Greensboro, North Carolina.
Form 8-K filed on April 29, 2004 to announce Neal A. Petrovich
appointment as Senior Vice President and Chief Financial Officer of
the Corporation.
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
-------------------------------------
Charles H. Majors
Date - May 6, 2004 President and Chief Executive Officer
/s/ James R. Jefferson
---------------------------------------------
James R. Jefferson
Assistant Treasurer
Date - May 6, 2004 (Interim Chief Financial Officer)
25