UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2004.
------------------
[ ] TRANSITION REPORT UNDER 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 November 8, 2004, the Corporation had 5,517,299 shares Common Stock
outstanding, $1 par value.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Page No.
--------
Index...............................................................................2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003..................................................3
Consolidated Statements of Income for the three months
ended September 30, 2004 and 2003......................................4
Consolidated Statements of Income for the nine months
ended September 30, 2004 and 2003......................................5
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended September 30, 2004 and 2003..................6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003......................................7
Notes to Consolidated Financial Statements...............................9
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations.............................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............25
Item 4. Controls and Procedures.................................................25
Part II. Other Information........................................................26
SIGNATURES ........................................................................27
Exhibits...........................................................................28
2
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands Except Share Data)
- --------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
September 30 December 31
2004 2003
------------ -------------
ASSETS
Cash and due from banks.........................................................$ 13,676 $ 16,236
Interest-bearing deposits in other banks........................................ 2,809 1,652
Securities available for sale, at fair value.................................... 177,664 171,376
Securities held to maturity (market value of $22,389 at
September 30, 2004 and $37,455 at December 31, 2003).......................... 21,328 36,103
----------- -----------
198,992 207,479
----------- -----------
Loans held for sale............................................................. 1,203 560
Loans, net of unearned income .................................................. 394,710 406,245
Less allowance for loan losses.................................................. (5,599) (5,292)
----------- -----------
Net loans..................................................................... 389,111 400,953
----------- -----------
Bank premises and equipment, at cost, less accumulated
depreciation of $12,451 in 2004 and $11,807 in 2003........................... 7,660 7,718
Core deposit intangibles, net................................................... 597 934
Accrued interest receivable and other assets.................................... 9,391 8,770
----------- -----------
Total assets..................................................................$ 623,439 $ 644,302
=========== ===========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 81,670 $ 71,027
Demand deposits -- interest bearing........................................... 71,242 69,053
Money market deposits......................................................... 51,139 59,251
Savings deposits.............................................................. 82,649 83,031
Time deposits................................................................. 197,317 219,326
----------- -----------
Total deposits.............................................................. 484,017 501,688
----------- -----------
Repurchase agreements......................................................... 45,696 47,035
FHLB borrowings............................................................... 19,425 21,000
Accrued interest payable and other liabilities................................ 2,873 2,648
----------- -----------
Total liabilities........................................................... 552,011 572,371
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
5,522,299 shares outstanding at September 30, 2004
and 5,660,419 shares outstanding at December 31, 2003....................... 5,522 5,660
Capital in excess of par value................................................ 9,433 9,437
Retained earnings............................................................. 56,217 55,538
Accumulated other comprehensive income (loss), net............................ 256 1,296
----------- -----------
Total shareholders' equity.................................................. 71,428 71,931
----------- -----------
Total liabilities and shareholders' equity..................................$ 623,439 $ 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 Except Share Data)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
September 30
-------------------------
2004 2003
---------- ----------
Interest Income:
Interest and fees on loans....................................................$ 5,572 $ 6,270
Interest on deposits in other banks........................................... 24 33
Income on securities:
Federal agencies............................................................ 798 560
Mortgage-backed............................................................. 273 225
State and municipal......................................................... 521 472
Other ...................................................................... 221 284
---------- ----------
Total interest income..................................................... 7,409 7,844
---------- ----------
Interest Expense:
Interest on deposits:
Demand...................................................................... 66 45
Money market................................................................ 91 110
Savings..................................................................... 108 150
Time........................................................................ 1,149 1,613
Interest on repurchase agreements............................................. 126 113
Interest on other borrowings.................................................. 243 245
---------- ----------
Total interest expense...................................................... 1,783 2,276
---------- ----------
Net Interest Income............................................................. 5,626 5,568
Provision for loan losses....................................................... 255 170
---------- ----------
Net Interest Income After Provision
For Loan Losses............................................................... 5,371 5,398
---------- ----------
Non-Interest Income:
Trust and investment services................................................. 737 625
Service charges on deposit accounts........................................... 590 577
Other fees and commissions.................................................... 201 241
Mortgage banking income....................................................... 116 203
Securities gains, net......................................................... - 43
Other......................................................................... 92 111
---------- ----------
Total non-interest income................................................... 1,736 1,800
---------- ----------
Non-Interest Expense:
Salaries...................................................................... 1,855 1,758
Pension and other employee benefits........................................... 427 433
Occupancy and equipment....................................................... 580 624
Core deposit intangible amortization ......................................... 112 112
Other......................................................................... 872 875
---------- ----------
Total non-interest expense.................................................. 3,846 3,802
---------- ----------
Income Before Income Tax Provision.............................................. 3,261 3,396
Income Tax Provision............................................................ 922 991
---------- ----------
Net Income......................................................................$ 2,339 $ 2,405
========== ==========
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ .42 $ .42
Diluted.........................................................................$ .42 $ .42
- ---------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,587,042 5,674,259
Diluted.........................................................................5,632,715 5,738,622
- ---------------------------------------------------------------------------------------------------------
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 Except Share Data)
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
-------------------------
2004 2003
---------- ----------
Interest Income:
Interest and fees on loans....................................................$ 16,885 $ 19,337
Interest on deposits in other banks........................................... 68 69
Income on securities:
Federal agencies............................................................ 2,455 1,620
Mortgage-backed............................................................. 739 1,064
State and municipal......................................................... 1,558 1,456
Other....................................................................... 695 935
---------- ----------
Total interest income..................................................... 22,400 24,481
---------- ----------
Interest Expense:
Interest on deposits:
Demand...................................................................... 186 174
Money market................................................................ 285 374
Savings..................................................................... 321 587
Time........................................................................ 3,709 5,010
Interest on repurchase agreements............................................. 377 373
Interest on other borrowings.................................................. 734 735
---------- ----------
Total interest expense...................................................... 5,612 7,253
---------- ----------
Net Interest Income............................................................. 16,788 17,228
Provision for loan losses....................................................... 725 665
---------- ----------
Net Interest Income After Provision
For Loan Losses............................................................... 16,063 16,563
---------- ----------
Non-Interest Income:
Trust and investment services................................................. 2,208 1,878
Service charges on deposit accounts........................................... 1,795 1,541
Other fees and commissions.................................................... 669 679
Mortgage banking income....................................................... 460 481
Securities gains, net......................................................... 119 46
Other......................................................................... 383 252
---------- ----------
Total non-interest income................................................... 5,634 4,877
---------- ----------
Non-Interest Expense:
Salaries...................................................................... 5,469 5,233
Pension and other employee benefits........................................... 1,261 1,403
Occupancy and equipment....................................................... 1,844 1,905
Core deposit intangible amortization ......................................... 337 337
Other......................................................................... 2,685 2,615
---------- ----------
Total non-interest expense.................................................. 11,596 11,493
---------- ----------
Income Before Income Tax Provision.............................................. 10,101 9,947
Income Tax Provision............................................................ 2,868 2,900
---------- ----------
Net Income......................................................................$ 7,233 $ 7,047
========== ==========
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ 1.29 $ 1.23
Diluted.........................................................................$ 1.28 $ 1.22
- ---------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,615,946 5,716,092
Diluted.........................................................................5,666,120 5,777,156
- ---------------------------------------------------------------------------------------------------------
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
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(In Thousands)
Accumulated
Common Stock Capital in Other Total
------------------------- Excess of Retained Comprehensive Shareholders'
Shares Amount Par Value Earnings Income Equity
----------- ------------ ------------ ------------- -------------- -------------
Balance, December 31, 2002...................... 5,780,816 $ 5,781 $ 9,571 $ 53,093 $ 2,291 $ 70,736
Net income...................................... - - - 7,047 - 7,047
Change in unrealized gains (losses) on securities
available for sale, net of tax of $348........ - - - - (677)
--------------
Other comprehensive income (loss)............. (677) (677)
-------------
Total comprehensive income.................... 6,370
Stock repurchased and retired................... (115,000) (115) (190) (2,567) - (2,872)
Stock options exercised......................... 1,648 1 23 - - 24
Cash dividends paid............................. - - - (3,195) - (3,195)
----------- ------------ ------------ ------------- -------------- -------------
Balance, September 30, 2003..................... 5,667,464 $ 5,667 $ 9,404 $ 54,378 $ 1,614 $ 71,063
=========== ============ ============= ============= ============== =============
Balance, December 31, 2003...................... 5,660,419 $ 5,660 $ 9,437 $ 55,538 $ 1,296 $ 71,931
Net income...................................... - - - 7,233 - 7,233
Change in unrealized gains (losses) on securities
available for sale, net of tax of $(496)...... - - - - (961)
Less: Reclassification adjustment for (gains)
losses on securities available for sale, net
of tax $(40).................................. - - - - (79)
--------------
Other comprehensive income (loss)............. (1,040) (1,040)
-------------
Total comprehensive income.................... 6,193
Stock repurchased and retired................... (154,968) (155) (259) (3,246) - (3,660)
Stock options exercised......................... 16,848 17 255 - - 272
Cash dividends paid............................. - - - (3,308) - (3,308)
----------- ------------ ------------ ------------- -------------- -------------
Balance, September 30, 2004..................... 5,522,299 $ 5,522 $ 9,433 $ 56,217 $ 256 $ 71,428
=========== ============ ============= ============= ============== =============
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)
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended
-------------------------
September 30
2004 2003
---------- ----------
Cash Flows from Operating Activities:
Net income....................................................................$ 7,233 $ 7,047
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................................................... 725 665
Depreciation................................................................ 734 873
Core deposit intangible amortization........................................ 337 337
Amortization (accretion) of bond premiums and discounts, net................ 508 822
Gain on sale or call of securities.......................................... (119) (46)
Gain on loans held for sale................................................. (364) (481)
Proceeds from sales of loans held for sale.................................. 17,569 27,162
Originations of loans held for sale......................................... (17,848) (26,136)
Loss on sale of real estate owned........................................... 23 6
Gain on disposal of property and equipment.................................. (172) -
Deferred income taxes benefit............................................... (157) (27)
Increase in interest receivable............................................. (54) (708)
Decrease (increase) in other assets......................................... 54 (721)
Decrease in interest payable................................................ (150) (148)
Increase in other liabilities............................................... 375 414
---------- ----------
Net cash provided by operating activities................................. 8,694 9,059
---------- ----------
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........... 50,728 58,997
Proceeds from maturities and calls of securities held to maturity............. 17,191 4,860
Purchases of securities available for sale.................................... (63,563) (82,361)
Purchases of securities held to maturity...................................... (2,401) -
Net decrease (increase) in loans.............................................. 10,927 (13,865)
Proceeds from sale of bank property and equipment............................. 227 -
Purchases of bank property and equipment...................................... (731) (431)
Proceeds from sales of other real estate owned................................ 239 10
---------- ----------
Net cash provided by (used in) investing activities......................... 17,184 (32,790)
---------- ----------
(Continued on next page)
7
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended
-------------------------
September 30
2004 2003
---------- ----------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits........................................................ 4,338 21,081
Net (decrease) increase in time deposits...................................... (22,009) 6,567
Net (decrease) increase in repurchase agreements ............................. (1,339) 10,936
Net decrease in FHLB borrowings............................................... (1,575) (1,000)
Cash dividends paid........................................................... (3,308) (3,195)
Repurchase of stock........................................................... (3,660) (2,872)
Proceeds from exercise of stock options....................................... 272 24
---------- ----------
Net cash (used in) provided by financing activities......................... (27,281) 31,541
---------- ----------
Net (Decrease) Increase in Cash and Cash Equivalents........................ (1,403) 7,810
Cash and Cash Equivalents at Beginning of Period............................ 17,888 23,477
---------- ----------
Cash and Cash Equivalents at End of Period..................................$ 16,485 $ 31,287
========== ==========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 13,676 $ 17,713
Interest-bearing deposits in other banks.................................... 2,809 13,574
---------- ----------
$ 16,485 $ 31,287
========== ==========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 5,762 $ 7,401
Income taxes paid.............................................................$ 2,804 $ 2,666
Transfer of loans to other real estate owned........................... $ 190 $ 132
Unrealized gain (loss) on securities available for sale............. $ (1,576) $ 2,887
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
The consolidated financial statements (the "Corporation") include the
amounts and results of operations of American National Bankshares Inc. 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.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the Corporation's financial position as of
September 30, 2004; the consolidated statements of income for the three and nine
months ended September 30, 2004 and 2003; the consolidated statements of changes
in shareholders' equity for the nine months ended September 30, 2004 and 2003;
and the consolidated statements of cash flows for the nine months ended
September 30, 2004 and 2003. Operating results for the three month and nine
month periods ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
2. STOCK BASED COMPENSATION
As of September 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 nine month periods ended September 30, 2004 and 2003
had the fair value recognition provisions of FASB Statement No. 123, Accounting
for Stock-Based Compensation, been adopted.
Nine Months Ended
----------------------
September 30
-----------------------
(Dollars in thousands except per share amounts) 2004 2003
------ ------
Net income, as reported $7,233 $7,047
Deduct: total stock-based employee compensation
expense determined based on fair value
method of awards (223) (90)
------- -------
Pro forma net income $7,010 $6,957
======= =======
Basic earnings per share:
As reported $ 1.29 $ 1.23
Pro forma $ 1.25 $ 1.22
Diluted earnings per share:
As reported $ 1.28 $ 1.22
Pro forma $ 1.24 $ 1.20
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 September 30, 2004 and December 31, 2003 were as follows (in thousands):
September 30, 2004
---------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
Securities held to maturity:
Federal agencies $ 3,001 $ 30 $ 5 $ 3,026
Mortgage-backed 781 40 - 821
State and municipal 17,546 996 - 18,542
--------- -------- -------- ---------
Total securities held to maturity 21,328 1,066 5 22,389
--------- -------- -------- ---------
Securities available for sale:
Federal agencies 94,988 248 479 94,757
Mortgage-backed 26,704 443 37 27,110
State and municipal 35,799 811 69 36,541
Corporate bonds 12,852 474 41 13,285
Restricted stock :
FHLBA stock 1,645 - - 1,645
Federal Reserve stock 363 - - 363
Other 4,925 - 962 3,963
--------- -------- -------- ---------
Total securities available for sale 177,276 1,976 1,588 177,664
--------- -------- -------- ---------
Total securities $ 198,604 $ 3,042 $ 1,593 $ 200,053
========= ======== ======== =========
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 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 September 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 $ 46,171 $ 403 $ 8,928 $ 81 $ 55,099 $ 484
Mortgage-backed 6,117 27 1,501 10 7,618 37
State and municipal 6,916 62 198 7 7,114 69
Corporate bonds 2,501 41 - - 2,501 41
Preferred stock - 3,538 962 3,538 962 -
-------- ------- -------- ------- -------- -------
Total $ 61,705 $ 533 $ 14,165 $ 1,060 $ 75,870 $ 1,593
======== ======= ======== ======= ======== =======
The unrealized loss position is considered temporary and is due to the
general decline in interest rates. The impairment 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 cost basis in preferred stocks. These are a $2,000,000 FHLMC
preferred stock with a 1.66% dividend yield where the dividend 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 stock with a 1.37% dividend yield 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 has the ability to hold these securities to maturity.
4. LOANS
Loans, excluding loans held for sale, were comprised of the following:
(in thousands) September 30 December 31
2004 2003
------------ -----------
Real Estate loans
Construction and land development $ 27,110 $ 12,790
Secured by farmland 2,936 3,430
Secured by 1-4 family residential properties 134,958 136,229
Secured by multi-family residential properties 9,176 6,801
Secured by nonfarm, nonresidential properties 124,723 126,164
Loans to farmers 2,135 1,618
Commercial and industrial loans 73,238 91,419
Consumer loans 16,148 23,581
Loans for nonrated industrial development obligations 4,167 4,077
Deposit overdrafts 119 136
--------- ---------
Loans, net of unearned income $ 394,710 $ 406,245
========= =========
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the nine months ended
September 30 was as follows:
(in thousands) September 30 September 30
2004 2003
------------ ------------
Balance, January 1 $ 5,292 $ 5,622
Provisions charged against income 725 665
Recoveries of loans charged off 170 197
Loans charged off (588) (417)
----------- -----------
Balance at end of period $ 5,599 $ 6,067
=========== ===========
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
potential dilutive common stock. Potential dilutive common stock had no effect
on income available to common shareholders.
Three Months Ended
September 30
-------------------------------------------------------
2004 2003
------------------------ ------------------------
Per Per
Share Share
Shares Amount Shares Amount
---------- ------ ---------- ------
Basic earnings per share 5,587,042 $ .42 5,674,259 $ .42
Effect of dilutive securities (stock options) 45,673 - 64,363 -
---------- ------ ---------- ------
Diluted earnings per share 5,632,715 $ .42 5,738,622 $ .42
========== ====== ========== ======
Nine Months Ended
September 30
-------------------------------------------------------
2004 2003
------------------------ ------------------------
Per Per
Share Share
Shares Amount Shares Amount
---------- ------- ---------- ------
Basic earnings per share 5,615,946 $ 1.29 5,716,092 $ 1.23
Effect of dilutive securities (stock options) 50,174 (.01) 61,064 (.01)
---------- -------- --------- -------
Diluted earnings per share 5,666,120 $ 1.28 5,777,156 $ 1.22
========== ======== ========== =======
7. DEFINED BENEFIT PLAN
Components of Net Periodic Benefit Cost
Nine Months Ended
(in thousands) September 30
-----------------------
2004 2003
---- ----
Service cost $ 324 $ 282
Interest cost 270 249
Expected return on plan assets (339) (216)
Amortization of prior service cost (18) (18)
Amortization of net obligation at transition - (3)
Amortization of the net loss 63 93
------ ------
Net periodic benefit cost $ 300 $ 387
====== ======
During the nine months ended September 30, 2004, $357,000 in contributions
was 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
12
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 provided to customers include estate
planning, trust account management and administration, and investment
management. Investment management services include purchasing 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 nine month periods ended
September 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 September 30, 2004
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 7,409 $ - $ 11 $ (11) $ 7,409
Interest expense 1,783 - 11 (11) 1,783
Non-interest income - external customers 837 737 162 - 1,736
Non-interest income - internal customers - 12 - (12) -
Operating income before income taxes 2,876 394 (9) - 3,261
Depreciation and amortization 349 5 2 - 356
Total assets 622,422 - 2,677 (1,660) 623,439
Capital expenditures 194 - - - 194
Three Months Ended September 30, 2003
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 7,844 $ - $ 25 $ (25) $ 7,844
Interest expense 2,276 - 25 (25) 2,276
Non-interest income - external customers 898 625 277 - 1,800
Non-interest income - internal customers - 12 - (12) -
Operating income before income taxes 2,969 335 92 - 3,396
Depreciation and amortization 395 6 2 - 403
Total assets 643,387 - 2,087 (1,438) 644,036
Capital expenditures 86 - - - 86
Nine Months Ended September 30, 2004
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 22,400 $ - $ 41 $ (41) $ 22,400
Interest expense 5,612 - 41 (41) 5,612
Non-interest income - external customers 2,793 2,208 633 - 5,634
Non-interest income - internal customers - 36 - (36) -
Operating income before income taxes 8,870 1,205 26 - 10,101
Depreciation and amortization 1,050 16 5 - 1,071
Total assets 622,422 - ,677 (1,660) 623,439
Capital expenditures 702 29 - - 731
Nine Months Ended September 30, 2003
----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ --------
Interest income $ 24,481 $ - $ 49 $ (49) $ 24,481
Interest expense 7,253 - 49 (49) 7,253
Non-interest income - external customers 2,341 1,878 658 - 4,877
Non-interest income - internal customers - 36 - (36) -
Operating income before income taxes 8,862 949 136 - 9,947
Depreciation and amortization 1,187 18 5 - 1,210
Total assets 643,387 - 2,087 (1,438) 644,036
Capital expenditures 428 3 - - 431
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 financial condition and results of operations of American National
Bankshares Inc. and American National Bank and Trust Company (the "Bank"). The
consolidated entity is referred to as the "Corporation." 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 might 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 Competition 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
15
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
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.
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 the
plan 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
On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105,
"Application of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105
clarifies existing accounting practices relating to the valuation of issued loan
commitments, including interest rate lock commitments ("IRLC"), subject to SFAS
No. 149 and Derivative Implementation Group Issue C13, "Scope Exceptions: When
a Loan Commitment is included in the Scope of Statement 133." Furthermore, SAB
105 disallows the inclusion of the values of a servicing component and other
internally developed intangible assets in the initial and subsequent IRLC
valuation. The provisions of SAB 105 were effective for loan commitments entered
into after March 31, 2004. The Corporation has adopted the provisions of SAB
105. Since the provisions of SAB 105 affect only the timing of the recognition
of mortgage banking income, management does not anticipate that this guidance
will have a material adverse effect on either the Corporation's consolidated
financial position or consolidated results of operations.
Emerging Issues Task Force Issue No. (EITF) 03-1 "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments" was
issued and is effective March 31, 2004. The EITF 03-1 provides guidance for
determining the meaning of "other-than-temporarily impaired" and its
application to certain debt and equity securities within the scope of Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS No. 115") and investments accounted for under
the cost method. The guidance requires that investments which have declined in
value due to credit concerns or solely due to changes in interest rates must be
recorded as other-than-temporarily impaired unless the Corporation can assert
and demonstrate its intention to hold the security for a period of time
sufficient to allow for a recovery of fair value up to or beyond the cost of the
investment which might mean maturity. This issue also requires disclosures
assessing the ability and intent to hold investments in instances in which an
investor determines that an investment with a fair value less than cost is not
other-than-temporarily impaired.
16
On September 30, 2004, the Financial Accounting Standards Board decided
to delay the effective date for the measurement and recognition guidance
contained in Issue 03-1. This delay does not suspend the requirement to
recognize other-than-temporary impairments as required by existing authoritative
literature. The disclosure guidance in Issue 03-1 was not delayed and is
included in Note 3 of the consolidated financial statements.
EITF No. 03-16, "Accounting for Investments in Limited Liability
Companies was ratified by the Board and is effective for reporting periods
beginning after June 15, 2004." APB Opinion No. 18, "The Equity Method of
Accounting Investments in Common Stock," prescribes the accounting for
investments in common stock of corporations that are not consolidated. AICPA
Accounting Interpretation 2, "Investments in Partnerships Ventures," of Opinion
18, indicates that "many of the provisions of the Opinion would be appropriate
in accounting" for partnerships. In EITF Abstracts, Topic No. D-46, "Accounting
for Limited Partnership Investments," the SEC staff clarified its view that
investments of more than 3 to 5 percent are considered to be more than minor
and, therefore, should be accounted for using the equity method. Limited
liability companies (LLCs) have characteristics of both corporations and
partnerships, but are dissimilar from both in certain respects. Due to those
similarities and differences, diversity in practice exists with respect to
accounting for non-controlling investments in LLCs. The consensus reached was
that an LLC should be viewed as similar to a corporation or similar to a
partnership for purposes of determining whether a non-controlling investment
should be accounted for using the cost method or the equity method of
accounting. This had no material impact on the Corporation.
Internet Access to Corporate Documents
The Corporation provides access to its SEC filings through the corporate
Web site at WWW.AMNB.COM. After accessing the Web site, the filings are
available upon selecting the Investor Relations 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.
EXECUTIVE OVERVIEW
American National Bankshares Inc. is the holding company of American
National Bank and Trust Company, a community bank with thirteen offices in
Danville, Chatham, Collinsville, Gretna, Martinsville, Henry County, and South
Boston, Virginia; one office in Yanceyville, North Carolina; and a loan
production office in Greensboro, North Carolina. Services are also provided
through nineteen ATMs, "AmeriLink" internet banking, and our 24-hour "Access
American" phone banking. Banking subsidiaries include ANB Mortgage Corp.
(secondary mortgage origination), ANB Investor Services (retail brokerage) and
ANB Insurance Services (full-service insurance agency). Our mission is to
provide quality financial services with exceptional customer service.
Additional information is available on our website at www.amnb.com. The shares
of American National Bankshares Inc. are traded on the NASDAQ National Market
under the symbol "AMNB".
The Corporation specializes in providing financial services to businesses
and consumers. Current priorities are to
o increase the size of our loan portfolio without sacrificing credit quality,
o grow our checking, savings, and money market deposits,
o increase fee income through our trust, investment, and mortgage banking
services, and
o continue to control our costs.
17
RESULTS OF OPERATIONS
SUMMARY
The Corporation's net income for the first nine months of 2004 was
$7,233,000, an increase of 2.6% over the $7,047,000 earned during the same
period of 2003. On a basic and diluted per share basis, net earnings totaled
$1.29 and $1.28, respectively, for the first nine months of 2004. This compared
favorably to the basic and diluted earnings per share of $1.23 and $1.22,
respectively, recorded for the first nine months of 2003. Both increases were
due to an improvement in non-interest income which more 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.
Return on average assets was 1.52% for both the first nine months of 2004
and 2003. Annualized return on average shareholders' equity was 13.42% and
13.39% for the first nine months of 2004 and 2003, respectively.
Net income for the third quarter of 2004 was $2,339,000, a decrease of 2.7%
over the $2,405,000 earned during the same period of 2003. The earnings decline
is attributable to a $64,000, or 3.6%, decrease in non-interest income.
Non-interest income for the same quarter in 2003 included $43,000 in net
securities gains and $203,000 in mortgage banking fees which were earned during
a time of significant refinance activity by homeowners. Mortgage banking fee
income was $116,000 during the recently completed quarter. On a basic and
diluted per share basis, net earnings totaled $0.42 for the third quarter of
2004, unchanged from the third quarter of 2003. Return on average total assets
was 1.50% for the third quarter of 2004 compared to 1.52% for the same period in
2003. Return on average shareholders' equity was 13.11% and 13.78% for the third
quarter of 2004 and 2003, respectively.
NET INTEREST INCOME
Net interest income, the Corporation's largest source of revenue, on a
fully taxable equivalent ("FTE") basis was $16,788,000 for the nine month period
ending September 30, 2004 compared to $17,228,000 for the same period of 2003, a
decline of 2.6% or $440,000. The interest rate spread decreased to 3.55% from
3.67%, while the net interest margin decreased to 3.86% from 4.05% for the first
nine months of 2004 compared to the same period of 2003.
Net interest income declined due primarily to a reduction in the rates
earned on loans and pay-downs on participation loans (portions of loans
purchased from other banks). The loan pay-downs impacted the mix of earning
assets; during the first nine months of 2003, loans accounted for 71% of earning
assets, compared with 66% during the first nine months of 2004. Since loans are
generally the Corporation's highest-yielding assets, this change in mix
negatively impacted interest income. Quality loan growth remains the
Corporation's number one priority.
Average year-to-date interest-earning assets increased 2.7% or $16,134,000
while average interest-bearing liabilities grew 0.8%, or $3,647,000 between
September 30, 2003 and September 30, 2004. During this time, low cost
non-interest bearing demand deposit growth and increases in shareholders' equity
funded the difference between earning asset growth and interest-bearing
liabilities 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. This
reflects the Corporation's strategy to grow low cost deposits by focusing on
customer relationships.
The Federal Reserve raised short-term interest rates three times between
June 30, 2004 and September 21, 2004, for a total increase of .75%. This
increased the interest income the Corporation earned in overnight funds,
investment securities, and loans during the third quarter of 2004; as a result,
the interest rate spread and the net interest margin improved to 3.63% and
3.94%, respectively. Net interest income for the third quarter of 2004 was
$5,626,000, up 1.0% over the same quarter last year.
The following tables (in thousands, except rates) demonstrate changes in
net interest income and the related yields for the three and nine 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.
18
Net Interest Income and Rate / Volume Analysis
For the Three Months Ended September 30, 2004 and 2003
Interest
Average Balance Income/Expense Yield/Rate
------------------------- ------------------------ ---------------------
2004 2003 2004 2003 2004 2003
---------- ---------- ---------- --------- -------- --------
Loans:
Commercial $ 82,058 $ 116,289 $ 1,147 $ 1,659 5.59% 5.71%
Real Estate 296,007 283,789 4,063 4,044 5.49 5.70
Consumer 16,904 26,068 388 592 9.18 9.08
---------- ---------- ---------- --------- ------ ------
Total loans 394,969 426,146 5,598 6,295 5.67 5.91
---------- ---------- ---------- --------- ------ ------
Securities:
Federal agencies 99,313 71,808 798 560 3.21 3.12
Mortgage-backed 24,794 28,431 273 225 4.40 3.17
State and municipal 52,358 43,986 761 687 5.81 6.25
Other 20,103 21,665 227 295 4.52 5.45
---------- ---------- ---------- --------- ------ ------
Total securities 196,568 165,890 2,059 1,767 4.19 4.26
---------- ---------- ---------- --------- ------ ------
Deposits in other banks 6,751 13,636 24 33 1.42 .97
---------- ---------- ---------- --------- ------ ------
Total interest-earning assets 598,288 605,672 7,681 8,095 5.14 5.35
---------- --------- ------ ------
Other non-earning assets 24,033 26,168
---------- ----------
Total assets $ 622,321 $ 631,840
========== ==========
Interest-bearing deposits:
Demand $ 71,908 $ 63,856 66 45 .37 .28
Money market 49,638 47,618 91 110 .73 .92
Savings 83,879 82,118 108 150 .52 .73
Time 199,701 233,310 1,149 1,613 2.30 2.77
---------- ---------- ---------- --------- ------ ------
Total interest-bearing deposits 405,126 426,902 1,414 1,918 1.40 1.80
Repurchase agreements 45,108 42,024 126 113 1.12 1.08
Other borrowings 20,530 21,152 243 245 4.73 4.63
---------- ---------- ---------- --------- ------ ------
Total interest-bearing
liabilities 470,764 490,078 1,783 2,276 1.51 1.86
---------- --------- ------ ------
Demand deposits 77,043 69,565
Other liabilities 3,137 2,399
Shareholders' equity 71,377 69,798
---------- ----------
Total liabilities and
shareholders' equity $ 622,321 $ 631,840
========== ==========
Interest rate spread 3.63% 3.49%
====== ======
Net interest margin 3.94% 3.84%
====== ======
Reconcilement to GAAP
- ---------------------
Net interest income - tax equivalent 5,898 5,819
Less: Taxable equivalent adjustment 272 251
---------- ---------
$ 5,626 $ 5,568
========== =========
19
Net Interest Income and Rate / Volume Analysis
For the Nine Months Ended September 30, 2004 and 2003
Interest
Average Balance Income/Expense Yield/Rate
------------------------- ------------------------ ---------------------
2004 2003 2004 2003 2004 2003
---------- ---------- ---------- --------- -------- --------
Loans:
Commercial $ 100,592 $ 120,237 $ 3,843 $ 5,310 5.09% 5.89%
Real Estate 283,255 272,733 11,815 12,170 5.56 5.95
Consumer 19,010 28,427 1,304 1,933 9.15 9.07
---------- ---------- ---------- --------- ------ ------
Total loans 402,857 421,397 16,962 19,413 5.61 6.14
---------- ---------- ---------- --------- ------ ------
Securities:
Federal agencies 102,332 63,535 2,455 1,620 3.20 3.40
Mortgage-backed 22,361 33,302 739 1,064 4.41 4.26
State and municipal 51,803 42,377 2,280 2,106 5.87 6.63
Other 20,258 22,926 718 974 4.73 5.66
---------- ---------- ---------- --------- ------ ------
Total securities 196,754 162,140 6,192 5,764 4.20 4.74
---------- ---------- ---------- --------- ------ ------
Deposits in other banks 8,779 8,719 68 69 1.03 1.06
---------- ---------- ---------- --------- ------ ------
Total interest-earning assets 608,390 592,256 23,222 25,246 5.09 5.68
---------- --------- ------ ------
Other non-earning assets 25,245 26,506
---------- ----------
Total assets $ 633,635 $ 618,762
========== ==========
Interest-bearing deposits:
Demand $ 71,786 $ 62,869 186 174 .35 .37
Money market 51,968 46,190 285 374 .73 1.08
Savings 83,828 79,883 321 587 .51 .98
Time 208,151 231,451 3,709 5,010 2.38 2.89
---------- ---------- ---------- --------- ------ ------
Total interest-bearing deposits 415,733 420,393 4,501 6,145 1.44 1.95
Repurchase agreements 47,446 38,736 377 373 1.06 1.28
Other borrowings 21,370 21,773 734 735 4.58 4.50
---------- ---------- ---------- --------- ------ ------
Total interest-bearing
liabilities 484,549 480,902 5,612 7,253 1.54 2.01
---------- --------- ------ ------
Demand deposits 74,454 65,452
Other liabilities 2,763 2,211
Shareholders' equity 71,869 70,197
---------- ----------
Total liabilities and
shareholders' equity $ 633,635 $ 618,762
========== ==========
Interest rate spread 3.55% 3.67%
====== ======
Net interest margin 3.86% 4.05%
====== ======
Reconcilement to GAAP
- ---------------------
Net interest income - tax equivalent 17,610 17,993
Less: Taxable equivalent adjustment 822 765
---------- ---------
$ 16,788 $ 17,228
========== =========
20
PROVISION AND ALLOWANCE 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 $725,000 for the first nine months of
2004 versus $665,000 for the same period in 2003. Charged-off loans, net of
recoveries of previously charged-off loans, were $418,000 for the first nine
months of 2004 versus $220,000 for the same period in 2003. The annualized ratio
of net charge-offs to average loans was .24% in 2004 and .07% in 2003.
The allowance for loan losses was $5,599,000 at September 30, 2004 and
$5,292,000 at December 31, 2003. The ratio of the allowance to loans was 1.42%
at September 30, 2004 versus 1.30% at December 31, 2003. The allowance for loan
losses increased due primarily to an increase in nonperforming loans as
described in the Asset Quality section of this analysis. 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 September 30, 2004. More
information regarding loan quality is provided in the Asset Quality section.
NON-INTEREST INCOME
Non-interest income for the first nine months of 2004 was $5,634,000, an
increase of 15.5% from the $4,877,000 earned in the same period of 2003. The
increase was due primarily to improvements in trust and investment services
income and service charges on deposit accounts. Less significant increases
included higher gains on the sales and calls of securities and on the
disposition of real estate.
Trust and investment services income of $2,208,000 during the first nine
months of 2004 was up 17.6% compared to the same period in 2003 due to new trust
business, improvements in the market value of the assets under management, and
increased management fees. The Bank's trust division manages accounts whose
market values approximated $349,000,000 at September 30, 2004, up from
$320,000,000 at September 30, 2003.
Service charges on deposit accounts grew 16.5% or $254,000 from the first
nine months of 2003 to 2004. The majority of the increase came from a new
consumer overdraft management product.
Non-interest income declined $64,000, or 3.6%, from the third quarter of
2003 to 2004. The year-earlier quarter included $43,000 in net securities gains
and $203,000 in mortgage banking fees which were earned during a time of
significant refinance activity by homeowners. Mortgage banking fee income was
$116,000 during the recently completed quarter. Changes in interest rates
directly impact the volume of refinance activity and, in turn, the amount of
mortgage banking fee income earned.
NON-INTEREST EXPENSE
Non-interest expense continues to be well contained. For the first nine
months of 2004, non-interest expense was $11,596,000, a 0.9% increase from the
$11,493,000 reported for the same period last year. Salary expense increased
4.5% to $5,469,000 while pension and other employee benefits decreased 10.1% to
$1,261,000. The salary increase is due to general pay raises. Benefits expense
declined due to a reduction in employee health care costs because of lower
claims experience and reduced pension funding.
Non-interest expense for the three months ended September 30, 2004 was
$3,846,000, an increase of 1.2% from the $3,802,000 reported for the same period
of 2003. Salary expense accounted for the majority of the increase; this expense
21
was up 5.5% due to general pay raises and the hiring of new employees, including
two employees in our Greensboro loan production office and two employees in our
Martinsville trust office.
Core deposit intangible amortization of $337,000 for the first nine 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 50.45% and 50.19% for the nine months ended
September 30, 2004 and 2003, respectively. A lower efficiency ratio generally
indicates better expense efficiency. The Corporation's efficiency ratio is
better than that of its peer group.
INCOME TAX PROVISION
The income tax provision for the first nine months of 2004 was $2,868,000,
a decrease of $32,000 from the $2,900,000 reported a year earlier. The effective
tax rate for the first nine months of 2004 was 28.4% compared to 29.2% for the
same period of 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Loans declined $11,535,000, or 2.8% from December 31, 2003 to September 30,
2004 due primarily to strong competition in our market, pay-downs of
participation loans, and more stringent underwriting requirements. Demand
deposits increased $12,832,000 or 9.2% while money market deposits declined
$8,112,000, or 13.7%. 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 $4,623,000. Time deposits declined $22,009,000 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 those 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.
Non-performing assets are comprised of non-performing loans and foreclosed real
estate. Loans in a non-accrual status at September 30, 2004 were $4,307,000
compared with $3,262,000 at December 31, 2003, and $2,612,000 on September 30,
2003. The increase from the year ago period is related to two commercial loan
relationships. Both loan relationships are secured by a combination of business
assets and real estate and both borrowers are making monthly payments.
There were no loans classified as troubled debt restructurings on September
30, 2004, December 31, 2003 or September 30, 2003. The following table
summarizes non-performing assets:
September 30 December 31 September 30
2004 2003 2003
------------ ----------- ------------
90 days past due $ - $ 53 $ 362
Non-accrual 4,307 3,262 2,612
Foreclosed real estate 231 303 146
-------- -------- --------
Non-performing assets $ 4,538 $ 3,618 $ 3,120
======== ======== ========
22
Total non-performing loans as a percentage of total loans were 1.09% at
September 30, 2004, 0.81% at December 31, 2003, and 0.71% at September 30, 2003.
This increase directly correlates with the increase in the allowance for loan
losses as a percentage of total loans.
The gross amount of interest income that would have been recorded on
non-accrual loans as of September 30, 2004, if all such loans had been accruing
interest at the original contractual rate, was $86,000 for the nine month period
ending September 30, 2004. An additional $37,000 of interest payments actually
received on one non-accrual loan was recorded as interest income during the nine
months ended September 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 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
customer deposits, lines of credit from two correspondent banks and one federal
agency bank, 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
and unpledged debt securities, less the Bank's reserve requirement, to net
liabilities ratio was 22.6% at September 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 $186,850,000 with
$167,425,000 available at September 30, 2004. Should the Bank ever desire to
increase its 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.
Borrowings outstanding under the FHLB line of credit were $19,425,000 at
September 30, 2004 and $21,000,000 at December 31, 2003. The Bank utilizes
various borrowing plans to satisfy short term and long term funding needs. As of
September 30, 2004, no short term borrowing was outstanding. The Bank had seven
fixed rate term borrowing contracts outstanding with the following final
maturities:
Amount Expiration Date
----------- ---------------
$ 2,000,000 July 2005
2,000,000 July 2006
1,000,000 July 2007
3,000,000 June 2008
5,000,000 August 2008
5,000,000 April 2009
1,425,000 March 2014
-----------
$19,425,000
===========
23
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 September 30, 2004
and December 31, 2003 were commitments to extent credit and standby letters of
credit only.
Commitments to extend credit, which amounted to $139,787,000 at
September 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. Commitments to extend credit include the
unfunded portion of customers' lines of credit.
As of September 30, 2004 there was one commitment to purchase securities in
the amount of $271,000. At 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
September 30, 2004 and December 31, 2003, the Bank had $3,096,000 and
$3,477,000, respectively, in outstanding standby letters of credit.
CAPITAL RESOURCES
During the third quarter of 2004, the Corporation declared and paid a
quarterly cash dividend of $.20 per share. The dividend totaled $1,117,000 and
represented a 47.8% payout of third quarter 2004 net income. During the first
nine months of 2004, the Corporation declared and paid quarterly cash dividends
of $.59 per share in aggregate. The dividend totaled $3,308,000 and represented
a 45.7% payout of 2004 net income.
On August 17, 2004, the Corporation's board of directors approved the
extension of its stock repurchase plan, to include the repurchase of up to
250,000 shares of the Corporation's common stock between August 18, 2004 and
August 16, 2005. 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. The number of shares
repurchased during the current year was 32,200 in the first quarter, 43,368 in
the second quarter, and 79,400 shares in the third quarter. 619,434 shares have
been repurchased since 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 September 30, 2004 the Corporation had a ratio of 15.88% for
Tier I and a ratio of 17.13% for total capital. At December 31, 2003 these
ratios were 14.85% and 15.99%, respectively.
24
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 September 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. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------------------------------------------------------
Repurchases made for the Quarter Ended September 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
---------------------- ------------ ---------- ---------------------- -------------------
July 1-31, 2004 2,000 21.55 2,000 157,432
---------------------- ------------ ---------- ---------------------- -------------------
August 1-19, 2004 500 23.55 500 156,932
---------------------- ------------ ---------- ---------------------- -------------------
New term started
---------------------- ------------ ---------- ---------------------- -------------------
August 20-31, 2004 12,000 23.79 12,000 238,000
---------------------- ------------ ---------- ---------------------- -------------------
September 1-30, 2004 64,900 23.07 64,900 173,100
------ ------
---------------------- ------------ ---------- ---------------------- -------------------
79,400 23.15 79,400
====== ======
---------------------- ------------ ---------- ---------------------- -------------------
On August 17, 2004, the Corporation's board of directors approved the
extension of its stock repurchase plan, to include the repurchase of
up to 250,000 shares of the Corporation's common stock between August
18, 2004 and August 16, 2005. 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
(b) Changes in Nominating Process
None
6. 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
26
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 - November 8, 2004 President and Chief Executive Officer
/s/ Neal A. Petrovich
-------------------------------------
Neal A. Petrovich
Senior Vice President and
Date - November 8, 2004 Chief Financial Officer
27