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 June 30, 2004.
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
----- -----
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
----- -----
At July 30, 2004, the Corporation had 5,593,430 shares Common Stock
outstanding, $1 par value.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Page No.
--------
Index...............................................................................2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2004
and December 31, 2003..................................................3
Consolidated Statements of Income for the three months
ended June 30, 2004 and 2003...........................................4
Consolidated Statements of Income for the six months
ended June 30, 2004 and 2003...........................................5
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 2004 and 2003........................6
Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2003...........................................7
Notes to Consolidated Financial Statements...............................9
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations.............................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............25
Item 4. Controls and Procedures.................................................25
Part II. Other Information........................................................26
SIGNATURES ........................................................................27
Exhibits...........................................................................28
2
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
- --------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
June 30 December 31
2004 2003
------------ -------------
ASSETS
Cash and due from banks.........................................................$ 14,829 $ 16,236
Interest-bearing deposits in other banks........................................ 1,097 1,652
Securities available for sale, at fair value.................................... 180,052 171,376
Securities held to maturity (market value of $20,371 at
June 30, 2004 and $37,455 at December 31, 2003)............................... 19,528 36,103
----------- -----------
199,580 207,479
----------- -----------
Loans held for sale............................................................. 1,059 560
Loans, net of unearned income .................................................. 400,613 406,245
Less allowance for loan losses.................................................. (5,457) (5,292)
----------- -----------
Net loans..................................................................... 395,156 400,953
----------- -----------
Bank premises and equipment, at cost, less accumulated
depreciation of $12,297 in 2004 and $11,807 in 2003........................... 7,710 7,718
Core deposit intangibles, net................................................... 709 934
Accrued interest receivable and other assets.................................... 10,431 8,770
----------- -----------
Total assets..................................................................$ 630,571 $ 644,302
=========== ===========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 75,121 $ 71,027
Demand deposits -- interest bearing........................................... 71,071 69,053
Money market deposits......................................................... 50,434 59,251
Savings deposits.............................................................. 84,393 83,031
Time deposits................................................................. 203,878 219,326
----------- -----------
Total deposits................................................................ 484,897 501,688
----------- -----------
Repurchase agreements......................................................... 47,911 47,035
FHLB borrowings............................................................... 23,763 21,000
Accrued interest payable and other liabilities................................ 3,341 2,648
----------- -----------
Total liabilities............................................................. 559,912 572,371
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
5,593,430 shares outstanding at June 30, 2004
and 5,660,419 shares outstanding at December 31, 2003....................... 5,593 5,660
Capital in excess of par value................................................ 9,446 9,437
Retained earnings............................................................. 56,620 55,538
Accumulated other comprehensive income (loss), net............................ (1,000) 1,296
---------- ----------
Total shareholders' equity.................................................... 70,659 71,931
---------- ----------
Total liabilities and shareholders' equity....................................$ 630,571 $ 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
June 30
-------------------------
2004 2003
---------- ----------
Interest Income:
Interest and fees on loans....................................................$ 5,572 $ 6,508
Interest on deposits in other banks........................................... 13 11
Income on securities:
Federal agencies............................................................ 835 511
Mortgage-backed............................................................. 233 385
State and municipal......................................................... 525 515
Other....................................................................... 232 305
---------- ----------
Total interest income....................................................... 7,410 8,235
---------- ----------
Interest Expense:
Interest on deposits:
Demand...................................................................... 61 61
Money market................................................................ 92 125
Savings..................................................................... 104 212
Time........................................................................ 1,233 1,677
Interest on repurchase agreements............................................. 124 135
Interest on other borrowings.................................................. 250 248
---------- ----------
Total interest expense...................................................... 1,864 2,458
---------- ----------
Net Interest Income............................................................. 5,546 5,777
Provision for Loan Losses....................................................... 255 255
---------- ----------
Net Interest Income After Provision
For Loan Losses............................................................... 5,291 5,522
---------- ----------
Non-Interest Income:
Trust and investment services................................................. 743 647
Service charges on deposit accounts........................................... 631 541
Other fees and commissions.................................................... 222 210
Mortgage banking income....................................................... 211 150
Securities gains (losses), net................................................ 14 1
Other......................................................................... 224 66
---------- ----------
Total non-interest income................................................... 2,045 1,615
---------- ----------
Non-Interest Expense:
Salaries...................................................................... 1,846 1,754
Pension and other employee benefits........................................... 412 522
Occupancy and equipment....................................................... 647 640
Core deposit intangible amortization ......................................... 113 113
Other......................................................................... 931 853
---------- ----------
Total non-interest expense.................................................. 3,949 3,882
---------- ----------
Income Before Income Tax Provision.............................................. 3,387 3,255
Income Tax Provision............................................................ 963 947
---------- ----------
Net Income......................................................................$ 2,424 $ 2,308
========== ==========
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ .43 $ .40
Diluted.........................................................................$ .43 $ .40
- ---------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,610,462 5,718,821
Diluted.........................................................................5,657,721 5,776,591
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
4
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Six Months Ended
June 30
-------------------------
2004 2003
---------- ----------
Interest Income:
Interest and fees on loans....................................................$ 11,313 $ 13,067
Interest on deposits in other banks........................................... 44 36
Income on securities:
Federal agencies............................................................ 1,657 1,060
Mortgage-backed............................................................. 466 839
State and municipal......................................................... 1,037 984
Other....................................................................... 474 651
---------- ----------
Total interest income....................................................... 14,991 16,637
---------- ----------
Interest Expense:
Interest on deposits:
Demand...................................................................... 120 129
Money market................................................................ 194 264
Savings..................................................................... 213 437
Time........................................................................ 2,560 3,397
Interest on repurchase agreements............................................. 251 260
Interest on other borrowings.................................................. 491 490
---------- ----------
Total interest expense...................................................... 3,829 4,977
---------- ----------
Net Interest Income............................................................. 11,162 11,660
Provision for Loan Losses....................................................... 470 495
---------- ----------
Net Interest Income After Provision
For Loan Losses............................................................... 10,692 11,165
---------- ----------
Non-Interest Income:
Trust and investment services................................................. 1,471 1,253
Service charges on deposit accounts........................................... 1,205 964
Other fees and commissions.................................................... 468 438
Mortgage banking income....................................................... 344 278
Securities gains (losses), net................................................ 119 3
Other......................................................................... 291 141
---------- ----------
Total non-interest income................................................... 3,898 3,077
---------- ----------
Non-Interest Expense:
Salaries...................................................................... 3,614 3,475
Pension and other employee benefits........................................... 834 970
Occupancy and equipment....................................................... 1,264 1,281
Core deposit intangible amortization ......................................... 225 225
Other......................................................................... 1,813 1,740
---------- ----------
Total non-interest expense.................................................. 7,750 7,691
---------- ----------
Income Before Income Tax Provision.............................................. 6,840 6,551
Income Tax Provision............................................................ 1,946 1,909
---------- ----------
Net Income......................................................................$ 4,894 $ 4,642
========== ==========
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ .87 $ .81
Diluted.........................................................................$ .86 $ .80
- ---------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,629,370 5,737,354
Diluted.........................................................................5,681,795 5,796,769
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
5
Consolidated Statements of Changes in Shareholders' Equity
American National Bankshares Inc. and Subsidiary
Six Months Ended March 31, 2004 and 2003
(Unaudited)
(Dollars in Thousands)
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...................................... - - - 4,642 - 4,642
Change in unrealized gains (losses) on securities
available for sale, net of tax of $(247)...... - - - - (477)
--------------
Other comprehensive income.................... (477) (477)
-------------
Total comprehensive income.................... 4,165
Stock repurchased and retired................... (100,000) (100) (165) (2,221) - (2,486)
Stock options exercised......................... 93 - 1 - - 1
Cash dividends paid............................. - - - (2,118) - (2,118)
----------- ------------ ------------ ------------- -------------- -------------
Balance, June 30, 2003.......................... 5,680,909 $ 5,681 $ 9,407 $ 53,396 $ 1,814 $ 70,298
=========== ============ ============= ============= ============== =============
Balance, December 31, 2003...................... 5,660,419 $ 5,660 $ 9,437 $ 55,538 $ 1,296 $ 71,931
Net income...................................... - - - 4,894 - 4,894
Change in unrealized gains (losses) on securities
available for sale, net of tax of $(1,154).... - - - - (2,240)
Less: Reclassification adjustment for (gains)
losses on securities available for sale, net
of tax $(29).................................. - - - - (56)
--------------
Other comprehensive income.................... (2,296) (2,296)
-------------
Total comprehensive income.................... 2,598
Stock repurchased and retired................... (75,568) (76) (126) (1,621) - (1,823)
Stock options exercised......................... 8,579 9 135 - - 144
Cash dividends paid............................. - - - (2,191) - (2,191)
----------- ------------ ------------ ------------- -------------- -------------
Balance, June 30, 2004.......................... 5,593,430 $ 5,593 $ 9,446 $ 56,620 $ (1,000) $ 70,659
=========== ============ ============= ============= ============== =============
The accompanying notes are an integral part of the consolidated financial statements.
6
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Six Months Ended
-------------------------
June 30
2004 2003
---------- ----------
Cash Flows from Operating Activities:
Net income....................................................................$ 4,894 $ 4,642
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses..................................................... 470 495
Depreciation.................................................................. 490 582
Core deposit intangible amortization.......................................... 225 225
Amortization (accretion) of bond premiums and discounts, net.................. 390 471
Gain on sale or call of securities............................................ (119) (3)
Gain on loans held for sale................................................... (263) (278)
Proceeds from sales of loans held for sale.................................... 13,223 14,044
Originations of loans held for sale........................................... (13,459) (14,587)
Loss on sale of real estate owned............................................. 14 -
Gain on sale of premises and equipment........................................ (150) -
Deferred income taxes (benefit) provision..................................... (109) 7
Increase in interest receivable............................................... (4) (651)
Increase in other assets...................................................... (417) (877)
Decrease in interest payable.................................................. (114) (102)
Increase (decrease) in other liabilities...................................... 807 (35)
---------- ----------
Net cash provided by operating activities..................................... 5,878 3,933
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale.......................... 4,567 -
Proceeds from maturities and calls of securities available for sale........... 40,266 37,067
Proceeds from maturities and calls of securities held to maturity............. 16,591 2,677
Purchases of securities available for sale.................................... (57,275) (41,766)
Net decrease (increase) in loans.............................................. 5,167 (26,464)
Proceeds from sale of bank property and equipment............................. 205 -
Purchases of bank property and equipment...................................... (537) (345)
Proceeds from sales of other real estate owned................................ 198 -
---------- ----------
Net cash provided by (used in) investing activities........................... 9,182 (28,831)
---------- ----------
(Continued on next page)
7
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Six Months Ended
-------------------------
June 30
2004 2003
---------- ----------
Cash Flows from Financing Activities:
Net (decrease) increase in demand, money market,
and savings deposits........................................................ (1,343) 6,560
Net (decrease) increase in time deposits...................................... (15,448) 10,049
Net increase in repurchase agreements......................................... 876 9,907
Net increase (decrease) in FHLB borrowings.................................... 2,763 (500)
Cash dividends paid........................................................... (2,191) (2,118)
Repurchase of stock........................................................... (1,823) (2,486)
Proceeds from exercise of stock options....................................... 144 1
---------- ----------
Net cash (used in) provided by financing activities........................... (17,022) 21,413
---------- ----------
Net (Decrease) in Cash and Cash Equivalents..................................... (1,962) (3,485)
Cash and Cash Equivalents at Beginning of Period................................ 17,888 23,477
---------- ----------
Cash and Cash Equivalents at End of Period......................................$ 15,926 $ 19,992
========== ==========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.......................................................$ 14,829 $ 12,039
Interest-bearing deposits in other banks...................................... 1,097 7,953
---------- ----------
$ 15,926 $ 19,992
========== ==========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 3,943 $ 5,080
Income taxes paid.............................................................$ 1,726 $ 1,718
Transfer of loans to other real estate owned..................................$ 160 $ 94
Unrealized loss on securities available for sale..............................$ (3,479) $ (724)
The accompanying notes are an integral part of the consolidated financial statements.
8
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 June 30, 2004; the consolidated statements of income for the
three and six months ended June 30, 2004 and 2003; the consolidated statements
of changes in shareholders' equity for the six months ended June 30, 2004 and
2003; and the consolidated statements of cash flows for the six months ended
June 30, 2004 and 2003. Operating results for the three month and six month
periods ended June 30, 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 June 30, 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 June 30, 2004, and 2003 had the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
been adopted.
Six Months Ended
June 30
-----------------------
2004 2003
-------- --------
(Dollars in thousands except per share amounts)
Net income, as reported $ 4,894 $ 4,642
Deduct: total stock-based employee compensation
expense determined based on fair value method of awards (141) (54)
-------- --------
Pro forma net income $ 4,753 $ 4,588
======== ========
Basic earnings per share:
As reported $ .87 $ .81
Pro forma $ .85 $ .80
Diluted earning per share:
As reported $ .86 $ .80
Pro Forma $ .84 $ .79
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 2004 and 2003, respectively: price volatility of
33.76% and 34.79%; risk-free interest rates of 3.90% and 2.34%, expected
dividend yields of 3.00%, and expected lives of 5 years. There were 5,000 grants
in the second quarter of 2004.
9
3. SECURITIES
The amortized cost and estimated fair value of debt and equity securities
at June 30, 2004 and December 31, 2003 were as follows (in thousands):
June 30, 2004
---------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- --------------- -------------- --------------
Securities held to maturity:
Federal agencies $ 1,999 $ 48 $ - $ 2,047
Mortgage-backed 896 39 - 935
State and municipal 16,633 759 3 17,389
--------- -------- -------- ---------
Total securities held to maturity 19,528 846 3 20,371
--------- -------- -------- ---------
Securities available for sale:
Federal agencies 102,022 147 1,212 100,957
Mortgage-backed 23,144 356 225 23,275
State and municipal 36,095 480 596 35,979
Corporate bonds 13,373 471 96 13,748
Restricted stock:
FHLBA stock 1,645 - - 1,645
Federal Reserve stock 363 - - 363
Other securities 4,925 - 840 4,085
--------- -------- -------- ---------
Total securities available for sale 181,567 1,454 2,969 180,052
--------- -------- -------- ---------
Total securities $ 201,095 $ 2,300 $ 2,972 $ 200,423
========= ======== ======== =========
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
========= ======== ======== =========
10
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 June 30, 2004.
Less than 12 Months 12 Months or More Total
------------------------ ----------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
-------- ---------- --------- ---------- -------- ----------
Federal agencies $ 68,931 $ 1,071 $ 8,869 $ 141 $ 77,800 $ 1,212
Mortgage-backed 12,399 204 1,738 21 14,137 225
State and municipal 23,181 582 188 17 23,369 599
Corporate bonds 2,452 96 - - 2,452 96
Preferred stock - - 3,660 840 3,660 840
-------- ------- --------- -------- -------- -------
Total $106,963 $ 1,953 $ 14,455 $ 1,019 $121,418 $ 2,972
======== ======= ========= ======== ======== =======
The unrealized loss position is considered temporary and is due to the
general decline in interest rates.The unrealized loss of these securities is
based solely on interest rate changes and not due to credit rating changes.
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):
June 30 December 31
2004 2003
------------ -----------
Real Estate loans
Construction and land development $ 16,610 $ 12,790
Secured by farmland 3,173 3,430
Secured by 1-4 family residential properties 137,635 136,229
Secured by multi-family residential properties 9,320 6,801
Secured by nonfarm, nonresidential properties 131,104 126,164
Loans to farmers 2,251 1,618
Commercial and industrial loans 78,647 91,419
Consumer loans 17,571 23,581
Loans for nonrated industrial development obligations 4,142 4,077
Deposit overdrafts 160 136
--------- ---------
Loans, net of unearned income $ 400,613 $ 406,245
========= =========
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the six months ended June 30
was as follows (in thousands):
June 30 June 30
2004 2003
------------- -------------
Balance, January 1 $ 5,292 $ 5,622
Provisions charged against income 470 495
Recoveries of loans charged off 114 160
Loans charged off (419) (286)
-------- --------
Balance at end of period $ 5,457 $ 5,991
======== ========
11
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
June 30
-------------------------------------------------
2004 2003
---------------------- ---------------------
Per Per
Share Share
Shares Amount Shares Amount
--------- ------ --------- ------
Basic earnings per share 5,610,462 $ .43 5,718,821 $ .40
Effect of dilutive securities, stock options 47,259 - 57,770 -
--------- ------ --------- ------
Diluted earnings per share 5,657,721 $ .43 5,776,591 $ .40
========= ====== ========= ======
Six Months Ended
June 30
-------------------------------------------------
2004 2003
---------------------- ---------------------
Per Per
Share Share
Shares Amount Shares Amount
--------- ------ --------- ------
Basic earnings per share 5,629,370 $ .87 5,737,354 $ .81
Effect of dilutive securities, stock options 52,425 (.01) 59,415 (.01)
--------- ------ --------- ------
Diluted earnings per share 5,681,795 $ .86 5,796,769 $ .80
========= ====== ========= ======
7. DEFINED BENEFIT PLAN
Components of Net Period Benefit Cost (in thousands)
Six Months Ended
June 30
-------------------
2004 2003
------- -------
Service cost $ 216 $ 189
Interest cost 180 165
Expected return on plan assets (226) (145)
Amortization of prior service cost (11) (11)
Amortization of net obligation at transition - (2)
Amortization of the net (gain) loss 41 62
------- -------
Net periodic benefits cost $ 200 $ 258
======= =======
During the six months ended June 30, 2004, $357,000 in contributions were
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. 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.
12
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 and estates and
purchases equity, fixed income and mutual fund investments for customer
accounts. The trust and investment services division receives fees for
investment and administrative services. Fees are also received by this division
for individual retirement accounts managed for the community banking segment.
Unaudited segment information for the three and six month periods ended
June 30, 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.
13
Three Months Ended June 30, 2004
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 7,410 $ - $ 22 $ (22) $ 7,410
Interest expense 1,864 - 22 (22) 1,864
Non-interest income - external customers 1,041 743 261 - 2,045
Non-interest income - internal customers - 12 - (12) -
Income before income tax provision 2,959 378 50 - 3,387
Depreciation and amortization 352 6 1 - 359
Total assets 629,716 - 2,513 (1,658) 630,571
Capital expenditures 138 9 - - 147
Three Months Ended June 30, 2003
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 8,235 $ - $ 13 $ (13) $ 8,235
Interest expense 2,458 - 13 (13) 2,458
Non-interest income - external customers 772 647 196 - 1,615
Non-interest income - internal customers - 12 - (12) -
Income before income tax provision 2,911 315 29 - 3,255
Depreciation and amortization 397 6 1 - 404
Total assets 629,189 - 3,392 (1,281) 631,300
Capital expenditures 239 - - - 239
Six Months Ended June 30, 2004
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 14,991 $ - $ 30 $ (30) $ 14,991
Interest expense 3,829 - 30 (30) 3,829
Non-interest income - external customers 1,956 1,471 471 - 3,898
Non-interest income - internal customers - 24 - (24) -
Income before income tax provision 5,994 811 35 - 6,840
Depreciation and amortization 701 11 3 - 715
Total assets 629,716 - 2,513 (1,658) 630,571
Capital expenditures 508 29 - - 537
Six Months Ended June 30, 2003
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 16,637 $ - $ 24 $ (24) $ 16,637
Interest expense 4,977 - 24 (24) 4,977
Non-interest income - external customers 1,443 1,253 381 - 3,077
Non-interest income - internal customers - 24 - (24) -
Income before income tax provision 5,893 614 44 - 6,551
Depreciation and amortization 792 12 3 - 807
Total assets 629,189 - 3,392 (1,281) 631,300
Capital expenditures 342 3 - - 345
14
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 account
balances.
o Plant closings or layoffs in the Bank's primary market area could occur,
which could negatively impact the ability of borrowers to repay loans and
depositors to maintain account balances.
o Changes in interest rates could increase or 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. The specific allowance uses
various techniques to arrive at an estimate of loss for specifically identified
15
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 within 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
16
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 believes 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 is provided.
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 six months of 2004 was
$4,894,000, an increase of 5.4% over the $4,642,000 earned during the same
period of 2003. On a basic and diluted per share basis, net earnings totaled
$0.87 and $0.86, respectively, for the first six months of 2004. This compared
favorably to the basic and diluted earnings per share of $0.81 and $0.80,
respectively, recorded for the first six months of 2003. Both earnings per share
measurement increases were due to an increase in non-interest income which more
17
than offset a decline in net interest income, combined with a lower number of
shares outstanding due to stock repurchases under the Corporation's stock
repurchase program.
On an annualized basis, return on average total assets was 1.53% for the
first six months of 2004 compared to 1.52% for the same period in 2003.
Annualized return on average common shareholders' equity was 13.57% and 13.18%
for the first six months of 2004 and 2003, respectively.
The Corporation's net income for the second quarter of 2004 was $2,424,000,
an increase of 5.0% over the $2,308,000 earned during the same period of 2003.
The earnings improvement is attributable to increases in non-interest income and
control of non-interest expense. On a basic and diluted per share basis, net
earnings totaled $0.43 for the second quarter of 2004, which was a 7.5% increase
over the $0.40 earned for the same period of 2003. On an annualized basis,
return on average total assets was 1.52% for the second quarter of 2004 compared
to 1.49% for the same period in 2003. Return on average common shareholders'
equity was 13.51% and 13.14% for the second quarter of 2004 and 2003,
respectively.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$11,712,000 for the six month period ending June 30, 2004 compared to
$12,174,000 for the same period of 2003, a decline of 3.8% or $462,000. The
interest rate spread decreased to 3.51% from 3.76%, while the net interest
margin (yield on earning assets) decreased to 3.82% from 4.15% for the first six
months of 2004 compared to the same period of 2003.
Yields on earning assets declined due primarily to reductions in general
market interest rates. These reductions lowered the rates on existing variable
rate loans, new loans originated, and new securities purchased. Interest-bearing
liability costs declined at a slower pace than interest-earning assets as many
liability accounts were priced at what management considers "floor" rates of
between one percent and two tenths of one percent.
Average year-to-date interest-earning assets increased 4.7% or $27,513,000
while average interest-bearing liabilities grew 3.3%, or $15,605,000 between
June 30, 2004 and June 30, 2003. During this time, low cost non-interest bearing
demand deposit growth and growth in shareholder's equity funded the difference
between earning asset growth and interest-bearing deposit growth. The funding
mix continued to shift to lower cost transaction accounts including savings
accounts, interest-bearing demand deposits, non-interest bearing demand
deposits, and retail repurchase agreements.
During the first six months of 2004, the Federal Reserve held interest
rates unchanged. These historically low rates kept the prime lending rate at
4.00% during the six months ending June 30, 2004, which was lower than the 4.25%
prime lending rate that was in effect during most of the six month period in
2003. On June 30, 2004, the Federal Reserve Bank's Financial Open Market
Committee raised the benchmark federal funds rate 25 basis points to 1.25%. This
increase did not affect our interest income in the current period but will in
future periods. 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.
When comparing the second quarter of 2004 to the first quarter of 2004, the
interest rate spread and net interest margin declined slightly. The interest
rate spread declined from 3.52% in the first quarter of 2004 to 3.49% during the
second quarter of 2004. The net interest margin declined from 3.84% in the first
quarter of 2004 to 3.80% during the second quarter of 2004. These declines were
due to loans and investment security portfolio yields declining at a faster pace
than the cost of interest bearing liabilities.
The following tables demonstrate fluctuations in net interest income and
the related yields for the three and six month periods 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):
18
Net Interest Income and Rate / Volume Analysis
For the Three Months Ended June 30, 2004 and 2003
Interest
Average Balance Income/Expense Yield/Rate
------------------------- ------------------------ ---------------------
2004 2003 2004 2003 2004 2003
---------- ---------- ---------- --------- -------- --------
Loans:
Commercial $ 94,014 $ 123,046 $ 1,237 $ 1,753 5.26% 5.70%
Real Estate 293,191 275,880 3,937 4,138 5.37 6.00
Consumer 18,512 28,454 424 644 9.16 9.05
---------- ---------- ---------- --------- -------- --------
Total loans 405,717 427,380 5,598 6,535 5.52 6.12
---------- ---------- ---------- --------- -------- --------
Securities:
Federal agencies 105,592 60,260 835 511 3.16 3.39
Mortgage-backed 22,139 36,271 233 385 4.21 4.25
State and municipal 52,635 43,480 769 750 5.84 6.90
Other 20,765 23,175 238 316 4.58 5.45
---------- ---------- ---------- --------- -------- --------
Total securities 201,131 163,186 2,075 1,962 4.13 4.81
---------- ---------- ---------- --------- -------- --------
Deposits in other banks 5,570 3,970 13 11 .93 1.11
---------- ---------- ---------- --------- -------- --------
Total interest-earning assets 612,418 594,536 7,686 8,508 5.02 5.72
---------- --------- -------- --------
Non-earning assets 25,472 25,950
---------- ----------
Total assets $ 637,890 $ 620,486
========== ==========
Interest-bearing deposits:
Demand $ 72,794 $ 62,118 61 61 .34 .39
Money market 51,965 44,481 92 125 .71 1.12
Savings 83,847 81,273 104 212 .50 1.04
Time 208,766 232,932 1,233 1,677 2.36 2.88
---------- ---------- ---------- --------- -------- --------
Total interest-bearing deposits 417,372 420,804 1,490 2,075 1.43 1.97
Repurchase agreements 47,980 39,489 124 135 1.03 1.37
Other borrowings 22,222 22,426 250 248 4.50 4.42
---------- ---------- ---------- --------- -------- --------
Total interest-bearing
liabilities 487,574 482,719 1,864 2,458 1.53 2.04
---------- --------- --------- --------
Demand deposits 75,664 63,912
Other liabilities 2,897 3,587
Shareholders' equity 71,755 70,268
---------- ----------
Total liabilities and
shareholders' equity $ 637,890 $ 620,486
========== ==========
Interest rate spread 3.49% 3.68%
======== ========
Net interest margin 3.80% 4.07%
========= ========
Reconcilement to GAAP
- ---------------------
Net interest income - tax equivalent 5,822 6,050
Less: Taxable equivalent adjustment 276 273
---------- ---------
Net interest income - per GAPP $ 5,546 $ 5,777
========== =========
19
Net Interest Income and Rate / Volume Analysis
For the Six Months Ended June 30, 2004 and 2003
Interest
Average Balance Income/Expense Yield/Rate
------------------------- ------------------------ ---------------------
2004 2003 2004 2003 2004 2003
---------- ---------- ---------- --------- -------- --------
Loans:
Commercial $ 109,962 $ 122,157 $ 2,696 $ 3,651 4.90% 5.98%
Real Estate 276,843 267,206 7,752 8,126 5.60 6.08
Consumer 20,076 29,607 916 1,341 9.13 9.06
---------- ---------- ---------- --------- -------- --------
Total loans 406,881 418,970 11,364 13,118 5.59 6.26
---------- ---------- ---------- --------- -------- --------
Securities:
Federal agencies 103,859 59,331 1,657 1,060 3.19 3.57
Mortgage-backed 21,131 35,778 466 839 4.41 4.69
State and municipal 51,523 41,560 1,519 1,419 5.90 6.83
Other 20,336 23,991 491 679 4.83 5.66
---------- ---------- ---------- --------- -------- --------
Total securities 196,849 160,660 4,133 3,997 4.20 4.98
---------- ---------- ---------- --------- -------- --------
Deposits in other banks 9,829 6,416 44 36 .90 1.12
---------- ---------- ---------- --------- -------- --------
Total interest-earning assets 613,559 586,046 15,541 17,151 5.07 5.85
---------- --------- -------- --------
Non-earning assets 25,797 26,072
---------- ----------
Total assets $ 639,356 $ 612,118
========== ==========
Interest-bearing deposits:
Demand $ 71,724 $ 62,367 120 129 .33 .41
Money market 53,146 45,465 194 264 .73 1.16
Savings 83,802 78,747 213 437 .51 1.11
Time 212,423 230,204 2,560 3,397 2.41 2.95
---------- ---------- ---------- --------- -------- --------
Total interest-bearing deposits 421,095 416,783 3,087 4,227 1.47 2.03
Repurchase agreements 48,628 37,065 251 260 1.03 1.40
Other borrowings 21,819 22,089 491 490 4.50 4.44
---------- ---------- ---------- --------- -------- --------
Total interest-bearing
liabilities 491,542 475,937 3,829 4,977 1.56 2.09
---------- --------- --------- --------
Demand deposits 73,146 62,379
Other liabilities 2,563 3,388
Shareholders' equity 72,105 70,414
---------- ----------
Total liabilities and
shareholders' equity $ 639,356 $ 612,118
========== ==========
Interest rate spread 3.51% 3.76%
======== ========
Net interest margin 3.82% 4.15%
========= ========
Reconcilement to GAAP
- ---------------------
Net interest income - tax equivalent 11,712 12,174
Less: Taxable equivalent adjustment 550 514
---------- ---------
Net interest income - per GAPP $ 11,162 $ 11,660
========== =========
20
PROVISION AND RESERVE FOR LOAN LOSSES
The purpose of the allowance for loan losses is to provide for losses
inherent in the loan portfolio. The Bank's Credit 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 $470,000 for the first six months of 2004
versus $495,000 for the same period in 2003. Net charged off loans were $305,000
for the first six months of 2004 versus $126,000 for the same period in 2003.
The annualized ratio of net charge-offs to average outstanding loans was .15% in
2004 and .06% in 2003.
The reserve for loan losses totaled $5,457,000 at June 30, 2004, an
increase of 3.1% over the $5,292,000 recorded at December 31, 2003. The ratio of
reserves to loans, less unearned discount, was 1.36% at June 30, 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 June 30, 2004. More information regarding
loan quality is provided in the Asset Quality section.
NON-INTEREST INCOME
Non-interest income for the three months ended June 30, 2004, was
$2,045,000, an increase of 26.6% from $1,615,000 reported in the same period of
2003. Trust and investment services income increased 14.8% due to higher trust
values, new accounts, and increased management fees. Service charges on deposit
accounts grew 16.6% or $90,000 with the majority of the increase due to a new
consumer overdraft management product. Mortgage banking revenue increased 40.7%
or $61,000 due to strong demand for mortgage refinancing, and other income
increased 239.3% due to a $150,000 gain on the sale of a branch office which had
not been in operation for several years.
Non-interest income for the first six months of 2004 was $3,898,000, an
increase of 26.7% from the $3,077,000 reported in the same period of 2003. The
comparative increase was due to increases in trust and investment services
income, service charges on deposit accounts, mortgage banking income, gains on
the sale/call of securities, and the gain on the sale of the branch office.
Trust and investment services income of $1,471,000 during the first six
months of 2004 was up 17.4% compared to the same period in 2003 due to growth in
new trust business, increased management fees, and improvements in the market
value of the assets under management. The Bank's trust division manages accounts
whose market values approximated $351,000,000 at June 30, 2004, up from
$314,000,000 at June 30, 2003.
Service charges on deposit accounts grew 25.0% or $241,000 in the first six
months of 2004 when compared to the same period in 2003, with the majority of
the increase due to a new consumer overdraft management product. Mortgage
banking revenue increased 23.7% or $66,000 in the first six months of 2004 when
compared to the same period in 2003 due to strong demand for mortgage
refinancing. Mortgage banking revenue has been positively impacted by the low
interest rate environment, which resulted in significant refinance activity. As
interest rates increase, refinance activity is expected to decline.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended June 30, 2004 was
$3,949,000, an increase of 1.7% from the $3,882,000 reported for the same period
of 2003. Salary expense increased 5.2% while pension and other employee benefits
decreased 21.1% to $412,000. Benefits expense declined due to a reduction in
employee health care costs because of lower claims experience and reduced
pension funding.
21
Non-interest expense for the first six months of 2004 was $7,750,000, a
0.8% increase from the $7,691,000 reported for the same period last year. Salary
expense increased 4.0% to $3,614,000 while pension and other employee benefits
decreased 14.0% to $834,000. The salary increase is due to general salary
increases. As mentioned above, benefits expense declined due to a reduction in
employee health care costs because of lower claims experience and reduced
pension funding.
Core deposit intangible amortization of $225,000 for the first six 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 50.48% and 50.44% for the six months ended
June 30, 2004 and 2003, respectively. A lower efficiency ratio generally
indicates better expense efficiency. Leaders in expense efficiency in the
banking industry have achieved ratios in the 45% to 55% range while the majority
of the industry remains at higher levels.
INCOME TAX PROVISION
The income tax provision for the first six months of 2004 was $1,946,000,
an increase of $37,000 from the $1,909,000 reported a year earlier. The
effective tax rate for the first six months of 2004 was 28.5% compared to 29.1%
for the same period of 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Loans declined $5,632,000, or 1.4% from December 31, 2003 to June 30, 2004
due primarily to strong competition in the market. Demand deposits increased
$6,112,000, or 4.4% and savings deposits increased $1,362,000, or 1.6%. Money
market deposits declined $8,817,000, or 14.9%. One large money market customer
maintained a balance of $12,735,000 on December 31, 2003 and closed their
account in May 2004 due to the sale of their business. Excluding this one
account, money market deposits would have increased $3,918,000. Time deposits
declined $15,448,000 due in large part to high rates of interest for
certificates of deposit offered by competitors. During the first half of 2004,
the Bank chose not to be aggressive in its certificate of deposit pricing,
instead focusing on growth in low cost deposits. The Bank will continue to focus
on growing low cost deposits through its business development efforts aimed at
expanding customer relationships.
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 June 30, 2004 were $4,088,000 compared with
$3,262,000 at December 31, 2003, and $2,607,000 on June 30, 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 these loans.
There were no loans classified as troubled debt restructurings on June 30,
2004, December 31, 2003 or June 30, 2003. The following table summarizes
non-performing assets:
22
June 30 December 31 June 30
2004 2003 2003
---------- ----------- ----------
90 days past due $ - $ 53 $ 285
Non-accrual 4,088 3,262 2,607
OREO 251 303 124
------- ------ -------
Non-performing assets $ 4,339 $3,618 $ 3,016
======= ====== =======
Total non-performing loans as a percentage of total loans were 1.02% at
June 30, 2004, 0.81% at December 31, 2003, and 0.67% at June 30, 2003.
Properties received due to loan foreclosures ("OREO") totaled $251,000
at June 30, 2004, $303,000 at December 31, 2003, and $124,000 at June 30, 2003.
The gross amount of interest income that would have been recorded on
non-accrual loans as of June 30, 2004, if all such loans had been accruing
interest at the original contractual rate, was $94,000 for the six month period
ending June 30, 2004. $23,000 of interest payments received on one non-accrual
loan was recorded as interest income during the six months ended June 30, 2004.
No other interest payments on non-accrual loans were recorded as interest income
during that reporting period.
The Bank has a commercial real estate loan in the amount of $3,004,000
from a textile manufacturer who filed for reorganization under Chapter 11 of the
Bankruptcy Code on March 31, 2004. In conjunction with the filing, the borrower
has secured debtor-in-possession financing from its primary lender. Under the
current court order, the borrower is to make monthly interest payments to the
Bank from the date of the filing, and such payments are current. The loan is
secured by a first deed of trust on a commercial property recently appraised for
an amount sufficiently exceeding the loan balance.
LIQUIDITY
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity is provided generally from loan payments, increases in
deposits, lines of credit from two correspondent banks and two federal agency
banks, and a structured maturity schedule of investments. Additionally, all
securities classified as available for sale are eligible to satisfy liquidity
needs. Management believes 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 19.7% at June 30, 2004 and 21.9% at
December 31, 2003. Both of these ratios reflect adequate liquidity for the
respective periods.
The Bank has a line of credit equal to 30% of assets with the Federal Home
Loan Bank of Atlanta (FHLB) that equaled approximately $188,999,000 with
$165,237,000 available at June 30, 2004. Should the Bank ever desire to increase
their line of credit beyond the current 30% 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, and has access to
the Federal Reserve Bank's discount window. The Bank has not used these
facilities in the past year and considers these as backup sources of funds.
23
Borrowings outstanding under the FHLB line of credit were $23,763,000 at
June 30, 2004 and $21,000,000 at December 31, 2003. The Bank utilizes various
borrowing plans to take advantage of short term and long term funding needs. As
of June 30, 2004, $2,800,000 was outstanding in a daily rate credit plan for
short term purposes. The Bank also has eight fixed rate term borrowing contracts
outstanding 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
1,462,500 March 2014
-----------
$20,962,500
===========
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 June 30, 2004 and
December 31, 2003 were commitments to extent credit and standby letters of
credit only.
Commitments to extend credit, which amounted to $111,930,000 at June
30, 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 June 30, 2004 and December 31, 2003, there were no commitments
outstanding to purchase securities.
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 June 30, 2004 and December 31, 2003, the Bank had $3,559,000
and $3,477,000, respectively, in outstanding standby letters of credit.
CAPITAL RESOURCES
During the second quarter of 2004, the Corporation declared and paid a
quarterly cash dividend of $.20 per share. The dividend totaled $1,119,000 and
represented a 46.2% payout of second 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 and 43,368 shares during the second
quarter of 2004 and total 540,034 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
24
capital, of at least 8%. As of June 30, 2004 the Corporation had a ratio of
15.72% for Tier I and a ratio of 16.94% 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 June 30, 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.
There have been no material changes in the Corporation's interest
sensitivity position since December 31, 2003. Refer to the December 31, 2003
Annual Report on Form 10-K.
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
carried out its evaluation.
25
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 for the Three Months Ended June 30, 2004
--------------------------------------------------------------------------------------------------------
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
------------ ---------- ---------------------- -------------------
April 1 - 30, 2004 5,918 $24.67 5,918 196,882
May 1 - 31, 2004 28,950 23.34 28,950 167,932
June 1 - 30, 2004 8,500 22.39 8,500 159,432
------ ------
43,368 $23.29 43,368
====== ======
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
At the Corporation's Annual Shareholders Meeting held on April
27, 2004, the following business was transacted:
(1) Election of Directors
All the nominees for election to the Board of Directors were
elected to serve until the 2007 Annual Meeting of Shareholders.
Affirmative Votes Votes Withheld
----------------- --------------
Fred A. Blair 4,079,331 5,839
E. Budge Kent, Jr. 4,079,331 5,839
Fred B. Leggett, Jr. 4,079,331 5,839
Claude B. Owen, Jr. 4,068,989 16,181
5. Other information
None
26
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 Neal A. Petrovich, Senior Vice
President and Chief Financial Officer
32.1 Section 906 Certification of Charles H. Majors, President and
CEO
32.2 Section 906 Certification of Neal A. Petrovich, Senior Vice
President and Chief Financial Officer
(b) Reports on Form 8-K -
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 the appointment of Neal
A. Petrovich as Senior Vice President and Chief Financial Officer of
the Corporation.
Form 8-K filed on May 18, 2004 to announce quarterly dividend of
$0.20 per share.
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 - July 30, 2004 President and Chief Executive Officer
/s/ Neal A. Petrovich
-------------------------------------
Neal A. Petrovich
Senior Vice President and
Date - July 30, 2004 Chief Financial Officer
27