-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KiFgNBcK7B7OGlUNjqxFbykAQQwQtz/vceN1R6aaEMIU6ncuVkzHXDrzAOZqnzle OGX3LlaP6wHIj97qvE6w9w== 0000741516-04-000020.txt : 20040506 0000741516-04-000020.hdr.sgml : 20040506 20040506155814 ACCESSION NUMBER: 0000741516-04-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN NATIONAL BANKSHARES INC CENTRAL INDEX KEY: 0000741516 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541284688 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12820 FILM NUMBER: 04785249 BUSINESS ADDRESS: STREET 1: 628 MAIN ST CITY: DANVILLE STATE: VA ZIP: 24541 BUSINESS PHONE: 4347925111 MAIL ADDRESS: STREET 1: 628 MAIN STREET STREET 2: P O BOX 191 CITY: DANVILLE STATE: VA ZIP: 24543 10-Q 1 mar200410q.txt 03-31-04 10Q AMER NATL BANKSHARES INC UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2004. -------------- [ ] 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 ------- 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 May 6, 2004, the Corporation had 5,626,054 shares Common Stock outstanding, $1 par value. AMERICAN NATIONAL BANKSHARES INC. INDEX
Page No. -------- Index...............................................................................2 Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003..................................................3 Consolidated Statements of Income for the three months ended March 31, 2004 and 2003..........................................4 Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2004 and 2003.....................5 Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003..........................................6 Notes to Consolidated Financial Statements...............................8 Item 2. Management's Discussion and Analysis of the Financial Condition and Results of Operations.............................................13 Item 3. Quantitative and Qualitative Disclosures about Market Risk..............22 Item 4. Controls and Procedures.................................................23 Part II. Other Information........................................................24 SIGNATURES ........................................................................25 Exhibits...........................................................................26
2 Consolidated Balance Sheets American National Bankshares Inc. and Subsidiary (In Thousands) - --------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited) March 31 December 31 2004 2003 ------------ ------------- ASSETS Cash and due from banks.........................................................$ 12,755 $ 16,236 Interest-bearing deposits in other banks........................................ 7,250 1,652 Securities available for sale, at fair value.................................... 186,969 171,376 Securities held to maturity (market value of $22,389 at March 31, 2004 and $37,455 at December 31, 2003).............................. 20,194 36,103 ----------- ----------- 207,163 207,479 ----------- ----------- Loans held for sale............................................................. 1,753 560 Loans, net of unearned income .................................................. 404,988 406,245 Less allowance for loan losses.................................................. (5,323) (5,292) ----------- ----------- Net loans..................................................................... 399,665 400,953 ----------- ----------- Bank premises and equipment, at cost, less accumulated depreciation of $12,056 in 2004 and $11,807 in 2003........................... 7,864 7,718 Core deposit intangibles........................................................ 822 934 Accrued interest receivable and other assets.................................... 8,626 8,770 ----------- ----------- Total assets..................................................................$ 645,898 $ 644,302 =========== =========== LIABILITIES and SHAREHOLDERS' EQUITY Liabilities: Demand deposits -- non-interest bearing.......................................$ 80,683 $ 71,027 Demand deposits -- interest bearing........................................... 72,092 69,053 Money market deposits......................................................... 53,111 59,251 Savings deposits.............................................................. 84,064 83,031 Time deposits................................................................. 212,537 219,326 ----------- ----------- Total deposits................................................................ 502,487 501,688 ----------- ----------- Repurchase agreements......................................................... 46,040 47,035 FHLB borrowings............................................................... 21,000 21,000 Accrued interest payable and other liabilities................................ 3,283 2,648 ----------- ----------- Total liabilities............................................................. 572,810 572,371 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 200,000 shares authorized, none outstanding............................................................ - - Common stock, $1 par, 10,000,000 shares authorized, 5,667,464 shares outstanding at September 30, 2003 and 5,780,816 shares outstanding at December 31, 2002....................... 5,633 5,660 Capital in excess of par value................................................ 9,472 9,437 Retained earnings............................................................. 56,210 55,538 Accumulated other comprehensive income........................................ 1,773 1,296 ---------- ---------- Total shareholders' equity.................................................... 73,088 71,931 ---------- ---------- Total liabilities and shareholders' equity....................................$ 645,898 $ 644,302 ========== ========== The accompanying notes are an integral part of the consolidated financial statements.
3 Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (Unaudited) (In Thousands) - ---------------------------------------------------------------------------------------------------------
Three Months Ended March 31 ------------------------- 2004 2003 ---------- ---------- Interest Income: Interest and fees on loans....................................................$ 5,741 $ 6,559 Interest on deposits in other banks........................................... 31 25 Income on securities: Federal agencies............................................................ 822 549 Mortgage-backed............................................................. 233 454 State and municipal......................................................... 512 469 Other securities............................................................ 242 346 ---------- ---------- Total interest income....................................................... 7,581 8,402 ---------- ---------- Interest Expense: Interest on deposits: Demand...................................................................... 59 68 Money market................................................................ 102 139 Savings..................................................................... 109 225 Time........................................................................ 1,327 1,720 Interest on repurchase agreements............................................. 127 125 Interest on other borrowings.................................................. 241 242 ---------- ---------- Total interest expense...................................................... 1,965 2,519 ---------- ---------- Net Interest Income............................................................. 5,616 5,883 Provision for Loan Losses....................................................... 215 240 ---------- ---------- Net Interest Income After Provision For Loan Losses............................................................... 5,401 5,643 ---------- ---------- Non-Interest Income: Trust and investment services................................................. 728 606 Service charges on deposit accounts........................................... 574 423 Other fees and commissions.................................................... 246 228 Mortgage banking income....................................................... 133 128 Securities gains, net......................................................... 105 2 Other income.................................................................. 67 75 ---------- ---------- Total non-interest income................................................... 1,853 1,462 ---------- ---------- Non-Interest Expense: Salaries...................................................................... 1,768 1,721 Pension and other employee benefits........................................... 422 448 Occupancy and equipment....................................................... 617 641 Core deposit intangible amortization ......................................... 112 112 Other expenses................................................................ 882 887 ---------- ---------- Total non-interest expense.................................................. 3,801 3,809 ---------- ---------- Income Before Income Tax Provision.............................................. 3,453 3,296 Income Tax Provision............................................................ 983 962 ---------- ---------- Net Income......................................................................$ 2,470 $ 2,334 ========== ========== - --------------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic...........................................................................$ .44 $ .41 Diluted.........................................................................$ .43 $ .40 - --------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Basic...........................................................................5,648,278 5,756,094 Diluted.........................................................................5,705,869 5,817,153 - --------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
4 Consolidated Statements of Changes in Shareholders' Equity American National Bankshares Inc. and Subsidiary Three Months Ended March 31, 2004 and 2003 (Unaudited) (In Thousands, except number of shares of common stock)
Accumulated Common Stock Capital in Other Total ------------------------- Excess of Retained Comprehensive Shareholders' Shares Amount Par Value Earnings Income (Loss) Equity ----------- ------------ ------------ ------------- -------------- ------------- Balance, December 31, 2002...................... 5,780,816 $ 5,781 $ 9,571 $ 53,093 $ 2,291 $ 70,736 Net income...................................... - - - 2,334 - 2,334 Change in unrealized gains on securities available for sale, net of tax of $(118)...... - - - - (230) Less: Reclassification adjustment for (gains) losses on securities available for sale, net of tax $-..................................... - - - - (1) -------------- Other comprehensive income.................... (231) (231) ------------- Total comprehensive income.................... 2,103 Stock repurchased and retired................... (35,000) (35) (57) (797) - (889) Stock options exercised......................... - - - - - - Cash dividends paid............................. - - - (1,033) - (1,033) ----------- ------------ ------------ ------------- -------------- ------------- Balance, March 31, 2003......................... 5,745,816 $ 5,746 $ 9,514 $ 53,597 $ 2,060 $ 70,917 =========== ============ ============= ============= ============== ============= Balance, December 31, 2003...................... 5,660,419 $ 5,660 $ 9,437 $ 55,538 $ 1,296 $ 71,931 Net income...................................... - - - 2,470 - 2,470 Change in unrealized gains on securities available for sale, net of tax of $281........ - - - - 546 Less: Reclassification adjustment for (gains) losses on securities available for sale, net of tax $36.................................... - - - - (69) -------------- Other comprehensive income.................... 477 477 ------------- Total comprehensive income.................... 2,947 Stock repurchased and retired................... (32,200) (32) (54) (726) - (812) Stock options exercised......................... 4,953 5 89 - - 94 Cash dividends paid............................. - - - (1,072) - (1,072) ----------- ------------ ------------ ------------- -------------- ------------- Balance, March 31, 2004......................... 5,633,172 $ 5,633 $ 9,472 $ 56,210 $ 1,773 $ 73,088 =========== ============ ============= ============= ============== ============= The accompanying notes are an integral part of the consolidated financial statements.
5 Consolidated Statements of Cash Flows American National Bankshares Inc. and Subsidiary (Unaudited) (In Thousands) - ---------------------------------------------------------------------------------------------------------
Three Months Ended ------------------------- March 31 2004 2003 ---------- ---------- Cash Flows from Operating Activities: Net income....................................................................$ 2,470 $ 2,334 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses..................................................... 215 240 Depreciation.................................................................. 244 291 Core deposit intangible amortization.......................................... 112 112 Amortization (accretion) of bond premiums and discounts....................... 210 208 Gain on sale or call of securities............................................ (105) (2) Gain on loans held for sale................................................... (99) (128) Proceeds from sales of loans held for sale.................................... 4,567 6,985 Originations of loans held for sale........................................... (5,661) (7,148) Loss on sale of real estate owned............................................. 11 - Deferred income taxes (benefit) provision..................................... (22) 13 Increase in interest receivable............................................... (107) (646) Decrease in other assets...................................................... 85 884 Decrease in interest payable.................................................. (58) (66) Increase in other liabilities................................................. 693 541 ---------- ---------- Net cash provided by operating activities..................................... 2,555 3,618 ---------- ---------- Cash Flows from Investing Activities: Proceeds from maturities and calls of securities available for sale........... 17,017 17,917 Proceeds from sales of securities available for sale.......................... 4,067 - Proceeds from maturities and calls of securities held to maturity............. 15,911 802 Purchases of securities available for sale.................................... (36,062) (20,003) Net increase (decrease) in loans.............................................. 913 (13,440) Purchases of bank property and equipment...................................... (390) (106) Proceeds from sales of other real estate owned................................ 92 - ---------- ---------- Net cash provided by (used in) investing activities........................... 1,548 (14,830) ---------- ----------
(Continued on next page) 6 Consolidated Statements of Cash Flows American National Bankshares Inc. and Subsidiary (Unaudited) (In Thousands) - ---------------------------------------------------------------------------------------------------------
Three Months Ended ------------------------- March 31 2004 2003 ---------- ---------- Cash Flows from Financing Activities: Net increase (decrease) in demand, money market, and savings deposits........................................................ 7,588 2,158 Net (decrease) increase in time deposits...................................... (6,789) 7,357 Net decrease in repurchase agreements......................................... (955) (1,352) Net decrease in FHLB borrowings............................................... - (500) Cash dividends paid........................................................... (1,072) (1,033) Repurchase of stock........................................................... (812) (889) Proceeds from exercise of stock options....................................... 94 - ---------- ---------- Net cash (used in) provided by financing activities........................... (1,986) 5,741 ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents............................ 2,117 (5,471) Cash and Cash Equivalents at Beginning of Period................................ 17,888 23,478 ---------- ---------- Cash and Cash Equivalents at End of Period......................................$ 20,005 $ 18,007 ========== ========== Supplemental Schedule of Cash and Cash Equivalents: Cash: Cash and due from banks.......................................................$ 12,755 $ 15,962 Interest-bearing deposits in other banks...................................... 7,250 2,045 ---------- ---------- $ 20,005 $ 18,007 ========== ========== Supplemental Disclosure of Cash Flow Information: Interest paid.................................................................$ 2,023 $ 2,585 Income taxes paid.............................................................$ 4 $ - Transfer of loans to other real estate owned..................................$ 160 $ - Unrealized gain (loss) on securities available for sale.......................$ 722 $ 3,563 The accompanying notes are an integral part of the consolidated financial statements.
7 AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly American National Bankshares' financial position as of March 31, 2004; the consolidated statements of income for the three months ended March 31, 2004 and 2003; the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2004 and 2003; and the consolidated statements of cash flows for the three months ended March 31, 2004 and 2003. Operating results for the three month periods ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. The consolidated financial statements include the amounts and results of operations of American National Bankshares Inc. ("the Corporation") and its wholly owned subsidiary, American National Bank and Trust Company ("the Bank") and the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. 2. STOCK BASED COMPENSATION As of March 31, 2004 the Corporation had a stock-based compensation plan. The Corporation accounts for the plan under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following illustrates the effect on net income and earnings per share for the three month periods ended March 31, 2004, and 2003 had the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, been adopted.
Three Months Ended March 31 ----------------------- 2004 2003 -------- -------- (Dollars in thousands except per share amounts) Net income, as reported $ 2,470 $ 2,334 Deduct: total stock-based employee compensation expense determined based on fair value method of awards (110) (27) -------- -------- Pro forma net income $ 2,360 $ 2,307 ======== ======== Basic earnings per share: As reported $ .44 $ .41 Pro forma $ .42 $ .40 Diluted earning per share: As reported $ .43 $ .40 Pro Forma $ .41 $ .40
The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 2003: price volatility of 34.58%, risk-free interest rates of 3.21%, and expected lives of 5 years. There were no grants in the first quarter of 2004. 8 3. SECURITIES The amortized cost and estimated fair value of debt and equity securities at March 31, 2004 and December 31, 2003 were as follows (in thousands):
March 31, 2004 --------------------------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------------- --------------- -------------- -------------- Securities held to maturity: Federal agencies $ 1,998 $ 81 $ - $ 2,079 Mortgage-backed 1,065 58 - 1,123 State and municipal 17,131 1,356 - 18,487 --------- -------- -------- --------- Total securities held to maturity 20,194 1,495 - 21,689 --------- -------- -------- --------- Securities available for sale: Federal agencies 110,620 812 - 111,420 Mortgage-backed 17,813 556 12 18,344 State and municipal 35,023 1,401 25 36,423 Corporate bonds 13,894 763 1 14,657 Restricted stock: FHLBA stock 1,645 - - 1,645 Federal Reserve stock 363 - - 363 Other securities 4,925 - 808 4,117 --------- -------- -------- --------- Total securities available for sale 184,283 3,532 846 189,969 --------- -------- -------- --------- Total securities $ 204,477 $ 5,027 $ 846 $ 208,658 ========= ======== ======== =========
December 31, 2003 --------------------------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------------- --------------- -------------- -------------- Securities held to maturity: Federal agencies $ 16,996 $ 100 $ 1 $ 17,095 Mortgage-backed 1,227 62 - 1,289 State and municipal 17,880 1,191 - 19,071 --------- -------- -------- --------- Total securities held to maturity 36,103 1,353 1 37,455 --------- -------- -------- --------- Securities available for sale: Federal agencies 97,906 676 200 98,382 Mortgage-backed 19,693 572 65 20,200 State and municipal 31,890 933 43 32,780 Corporate bonds 12,894 751 3 13,642 Restricted stock: FHLBA stock 1,741 - - 1,741 Federal Reserve stock 363 - - 363 Other securities 4,925 - 657 4,268 --------- -------- -------- --------- Total securities available for sale 169,412 2,932 968 171,376 --------- -------- -------- --------- Total securities $ 205,515 $ 4,285 $ 969 $ 208,831 ========= ======== ======== =========
9 The table below shows (in thousands) gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2004.
Less than 12 Months 12 Months or More Total ------------------------ ----------------------- ----------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss -------- ---------- --------- ---------- -------- ---------- Federal agencies $ 10,999 $ 12 $ - $ - $ 10,999 $ 12 Mortgage-backed 1,331 18 1,005 7 2,336 25 State and municipal 691 1 - - 691 1 Corporate bonds - - - - - - Preferred stock 1,640 360 2,052 448 3,692 808 -------- ----- --------- ------ -------- ----- Total $ 14,661 $ 391 $ 3,057 $ 455 $ 17,718 $ 846 ======== ===== ========= ====== ======== =====
The unrealized loss position is considered temporary and is due to the general decline in interest rates. Those issues in an unrealized loss position for more than 12 months consist primarily of $4,500,000 in preferred stocks. These are a $2,000,000 FHLMC preferred 1.66% where the interest rate adjusts every 2 years based on 2 year Treasury plus 10 basis points with a maximum rate of 11.0%; and $2,500,000 FNMA preferred 3.54% where the interest rate adjusts every 2 years based on 2 year Treasury less 16 basis points with a maximum rate of 11.0%. 70% of the dividends on these issues are tax exempt. Management intends to hold these until maturity. 4. LOANS Outstanding loans, excluding loans held for sale, were composed of the following (in thousands):
March 31 December 31 2004 2003 ------------ ----------- Real Estate loans Construction and land development $ 14,081 $ 12,790 Secured by farmland 3,230 3,430 Secured by 1-4 family residential properties 137,834 136,229 Secured by multi-family residential properties 6,691 6,801 Secured by nonfarm, nonresidential properties 127,172 126,164 Loans to farmers 2,125 1,618 Commercial and industrial loans 90,014 91,419 Consumer loans 19,489 23,581 Loans for nonrated industrial development obligations 4,232 4,077 Deposit overdrafts 120 136 --------- --------- Loans, net of unearned income $ 404,988 $ 406,245 ========= =========
5. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses for the three months ended March 31 was as follows (in thousands): March 31 March 31 2004 2003 ------------- ------------- Balance, January 1 $ 5,292 $ 5,622 Provisions charged against income 215 240 Recoveries of loans charged off 39 73 Loans charged off (223) (164) -------- -------- Balance at end of period $ 5,323 $ 5,771 ======== ======== 10 6. EARNINGS PER SHARE The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.
Three Months Ended March 31 ------------------------------------------------- 2004 2003 ---------------------- --------------------- Per Per Share Share Shares Amount Shares Amount --------- ------ --------- ------ Basic earnings per share 5,648,278 $ .44 5,756,094 $ .41 Effect of dilutive securities, stock options 57,591 (.01) 61,059 (.01) --------- ------ --------- ------ Diluted earnings per share 5,705,869 $ .43 5,817,153 $ .40 ========= ====== ========= ======
7. DEFINED BENEFIT PLAN Components of Net Period Benefit Cost (in thousands) Three Months Ended March 31 ------------------- 2004 2003 ------- ------- Service cost $ 108 $ 94 Interest cost 90 83 Expected return on plan assets (113) (72) Amortization of prior service cost (6) (6) Amortization of net obligation at transition - (1) Amortization of the net (gain) loss 21 31 ------- ------- Net periodic benefits cost $ 100 $ 129 ======= ======= As of March 31, 2004, $357,000 in contributions have been made. The Corporation plans no additional contributions for the year ending December 31, 2004. 8. SEGMENT AND RELATED INFORMATION In accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", reportable segments include community banking and trust and investment services. Community banking involves making loans to and generating deposits from individuals and businesses in the Bank's general market area. All assets and liabilities of the Bank are allocated to community banking. Investment income from fixed income investments is another major source of income. Loan fee income, service charges from deposit accounts and non-deposit fees such as automatic teller machine fees and insurance commissions generate additional income for community banking. The assets and liabilities and operating results of the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. are included in the community banking segment. ANB Mortgage Corp. performs secondary mortgage banking and ANB Services Corp. performs retail investment and insurance sales. Trust and investment services include estate and trust planning and administration and investment management for various entities. The trust and investment services division of the Bank manages trusts, estates and purchases equity, fixed income and mutual fund investments for customer accounts. The 11 trust and investment services division receives fees for investment and administrative services. Fees are also received by this division for individual retirement accounts managed for the community banking segment. Unaudited segment information for the three month periods ended March 31, 2004 and 2003 is shown in the following table (in thousands). The "Other" column includes corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments. Inter-segment eliminations primarily consist of the Corporation's investment in the Bank and related equity earnings. Three Months Ended March 31, 2004 ----------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------ ------------ -------- Interest income $ 7,581 $ - $ 8 $ (8) $ 7,581 Interest expense 1,965 - 8 (8) 1,965 Non-interest income - external customers 915 728 210 - 1,853 Non-interest income - internal customers - 12 - (12) - Operating income before income taxes 3,035 433 (15) - 3,453 Depreciation and amortization 349 5 2 - 356 Total assets 644,236 - 3,166 (1,504) 645,898 Capital expenditures 370 20 - - 390
Three Months Ended March 31, 2003 ----------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------ ------------ -------- Interest income $ 8,402 $ - $ 11 $ (11) $ 8,402 Interest expense 2,519 - 11 (11) 2,519 Non-interest income - external customers 671 606 185 - 1,462 Non-interest income - internal customers - 12 - (12) - Operating income before income taxes 2,982 299 15 - 3,296 Depreciation and amortization 395 6 2 - 403 Total assets 612,551 - 2,835 (1,209) 614,177 Capital expenditures 103 3 - - 106
12 ITEM 2. AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on important factors affecting the Corporation's financial condition and results of operations. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements, and supplemental financial data. This report contains forward-looking statements with respect to the financial condition, results of operations and business of the Corporation and Bank. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Corporation and Bank and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ materially from those expected include the following: o General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances. o Changes in interest rates could reduce income. o Competitive pressures among financial institutions may increase. o The businesses that the Corporation and Bank are engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards. o New products developed or new methods of delivering products could result in a reduction in business and income for the Corporation and Bank. o Adverse changes may occur in the securities market. CRITICAL ACCOUNTING POLICIES The Corporation's critical accounting policies are listed below. A summary of the Corporation's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Corporation's 2003 Annual Report on Form 10-K. The Corporation's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses along with various economic factors and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to 13 arrive at an estimate of loss for specifically identified loans. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The unallocated allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. Core Deposit Intangibles In July, 2001, the Financial Accounting Standards Board issued two statements - Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets, which impacted the accounting for goodwill and other intangible assets. Statement 141 eliminated the pooling method of accounting for business combinations and required that intangible assets that meet certain criteria be reported separately from goodwill. Statement 142 eliminated the amortization of goodwill and other intangibles that are determined to have an indefinite life. The Statement requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. SFAS 142 allows certain intangibles arising from Bank and Thrift acquisitions to be amortized over their estimated useful lives. The Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 in October 2002. FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions with the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. Paragraph 5 of this Statement, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted. This Statement clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, otherwise the transaction should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill. The transition provisions state that if the transaction that gave rise to the unidentifiable intangible asset was a business combination, the carrying amount of that asset shall be reclassified to goodwill as of the later of the date of acquisition or the date Statement 142 was first applied (fiscal years beginning after December 15, 2001). Any previously issued interim statements that reflect amortization of the unidentifiable intangible asset subsequent to the Statement 142 application date shall be restated to remove that amortization expense. The carrying amounts of any recognized intangible assets that meet the recognition criteria of Statement 141 that have been included in the amount reported as an unidentifiable intangible asset and for which separate accounting records have 14 been maintained shall be reclassified and accounted for as assets apart from the unidentifiable intangible asset and shall not be reclassified to goodwill. Upon adoption of these Statements, the Corporation re-evaluated its intangible assets that arose from branch acquisitions prior to July 1, 2001. The intangible assets arising from the premium paid for deposits acquired at the Gretna office in 1995 and the Yanceyville office in 1996 are classified as core deposit intangibles and continue to be amortized over their estimated lives based on management's determination that a business was not acquired in either of the two purchases. Stock Based Compensation The Corporation accounts for its stock compensation plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Non-GAAP Presentations The management's discussion and analysis refers to the efficiency ratio, which is computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income. This is a non-GAAP financial measure which we believe provides investors with important information regarding our operational efficiency. Comparison of our efficiency ratio with those of other companies may not be possible because other companies may calculate the efficiency ratio differently. The Corporation, in referring to its net income, is referring to income under accounting principals generally accepted in the United States of America, or "GAAP". The analysis of net interest income in this document is performed on a tax equivalent basis. Management feels the tax equivalent presentation better reflects total return, as many financial assets have specific tax advantages that modify their effective yields. A reconcilement of tax-equivalent net interest income to net interest income under generally accepted accounting principals, or "GAAP", is provided in those statements. New Accounting Pronouncements No new accounting pronouncements have been issued since December 31, 2003. Refer to the Corporation's December 31, 2003 Annual Report on Form 10-K for previously announced accounting pronouncements. INTERNET ACCESS TO CORPORATE DOCUMENTS The Corporation provides access to their SEC filings through the corporate Web site at www.amnb.com. After accessing the Web site, the filings are available upon selecting the American National Bankshares Inc. icon. Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. RESULTS OF OPERATIONS NET INCOME The Corporation's net income for the first three months of 2004 was $2,470,000, an increase of 5.8% over the $2,334,000 earned during the same period of 2003. On a basic and diluted per share basis, net earnings totaled $0.44 and $0.43, respectively, for the first three months of 2004. This compared favorably to the $0.41 and $0.40 in basic and diluted earnings per share recorded for the first three months of 2003. Both earnings per share measurement 15 increases were due to increases in non-interest income which more than offset the decline in net interest income, combined with a lower number of shares outstanding due to stock repurchases under the Corporation's outstanding stock repurchase program. On an annualized basis, return on average total assets was 1.54% for the first three months of 2004 compared to 1.55% for the same period in 2003. Annualized return on average common shareholders' equity was 13.62% and 13.23% for the first three months of 2004 and 2003, respectively. Net interest income after provision for loan losses decreased $242,000, or 4.3%, for the first three months of 2004 compared to the same period in 2003 due to a decline in the interest rate spread coupled with changes in the earning asset mix. For the same comparative period, non-interest income increased by $391,000, led by growth in service charges, trust and investment services income, and securities gains. Non-interest expense decreased by $8,000 for the first three months of 2004 compared to the same period in 2003, further assisting the improvement to earnings. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis was $5,890,000 for the first three month period ending March 31, 2004 compared to $6,124,000 for the same period of 2003, a decrease of 3.8%. The interest rate spread decreased to 3.52% from 3.84%, and the net interest margin decreased to 3.84% from 4.24% in the first three months of 2004 compared to the same period of 2003. Yields on earning assets declined due to decreases in interest rate indexes which are used to price commercial loans, the scheduled re-pricing of variable rate real estate loans to lower rates, the reinvestment of investment portfolio cash flows into lower yielding investments, and the addition of new loans at lower market rates of interest. Interest-bearing liability costs declined at a slower pace than interest-earning assets as many liability accounts were priced at what management consider "floor" rates of between one percent and two tenths of one percent. This, coupled with the maturity-based repricing of certificates of deposit, accounted for the 22.0% decline in interest expense. Average interest-earning assets increased 6.4%, or $37,096,000 while average interest-bearing liabilities grew 5.4%, or $25,230,000 between March 31, 2003 and March 31, 2004. During this time low cost non-interest bearing demand deposit growth funded the majority of the difference between earning asset growth and interest bearing deposit growth, represented the majority of total deposit growth and now represents 14.3% of total deposits. While the Corporation's balance sheet is technically liability-sensitive, management feels many of the funding costs are at or very close to market floors, and it is increasingly difficult to reduce funding costs at the same pace with the market-driven reductions in asset yields. The resultant decrease in interest income from the lower yields on earning assets exceeded the decrease in interest expense from lower costs of interest-bearing liabilities producing the decline in the interest rate spread. During the first three months of 2004, the Federal Reserve held interest rates unchanged, yet they were below the rates of one year prior. These historically low rates kept the prime lending rate at 4.00% during the three months ending March 31, 2004, which was lower than the 4.25% prime lending rate during the same period of 2003. Many of the Corporation's assets reprice at the prime lending rate or at a rate based on the rates on U.S. Treasury securities. As mentioned above, the Corporation's balance sheet is liability-sensitive, many liabilities have approached pricing floors while assets continue to reprice or be booked at lower yields. When compared to the fourth quarter of 2003, the interest rate spread and net yield on earning assets in the first quarter of 2004 increased with a positive trend noted. The interest rate spread improved from 3.77% in the fourth quarter of 2004 to 3.84% during the first quarter of 2004. The net yield on earning assets improved from 4.22% in the fourth quarter of 2003 to 4.24% during the first quarter of 2004. This improvement was due to several factors including 16 a higher level of time deposits repricing to lower market interest rates, growth in non-interest bearing demand deposits and management's overall focus on managing the margin during the ongoing low rate period experienced in 2004. The following tables demonstrate fluctuations in net interest income and the related yields for the first three months of 2004 compared to similar prior year periods. Net interest income is on a taxable equivalent basis. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis or when the loan returns to accrual status (in thousands, except rates): 17 Net Interest Income and Rate / Volume Analysis For the Three Months Ended March 31, 2004 and 2003
Interest Average Balance Income/Expense Yield/Rate ------------------------- ------------------------ --------------------- 2004 2003 2004 2003 2004 2003 ---------- ---------- ---------- --------- -------- -------- Loans: Commercial $ 125,777 $ 120,959 $ 1,459 $ 1,898 4.64% 6.28% Mortgage 260,495 258,531 3,815 3,988 5.86 6.17 Consumer 21,639 30,759 492 697 9.09 9.06 ---------- ---------- ---------- --------- -------- -------- Total loans 407,911 410,249 5,766 6,583 5.65 6.42 ---------- ---------- ---------- --------- -------- -------- Securities: Federal agencies 102,126 58,390 822 549 3.22 3.76 Mortgage-backed 20,123 35,279 233 454 4.63 5.15 State and municipal 50,410 39,618 750 669 5.95 6.75 Other securities 19,908 24,816 253 363 5.08 5.85 ---------- ---------- ---------- --------- -------- -------- Total securities 192,567 158,103 2,058 2,035 4.27 5.15 ---------- ---------- ---------- --------- -------- -------- Deposits in other banks 13,833 8,863 31 25 .90 1.13 ---------- ---------- ---------- --------- -------- -------- Total interest-earning assets 614,311 577,215 7,855 8,643 5.11 5.99 ---------- --------- -------- -------- Other non-earning assets 26,558 26,455 ---------- ---------- Total assets $ 640,869 $ 603,670 ========== ========== Interest-bearing deposits: Demand $ 69,755 $ 62,618 59 68 .34 .43 Money market 54,328 46,459 102 139 .75 1.20 Savings 83,757 76,193 109 225 .52 1.18 Time 215,775 227,446 1,327 1,720 2.46 3.02 ---------- ---------- ---------- --------- -------- -------- Total interest-bearing deposits 423,615 412,716 1,597 2,152 1.51 2.09 Repurchase agreements 49,277 34,615 127 125 1.03 1.44 Other borrowings 21,416 21,747 241 242 4.50 4.45 ---------- ---------- ---------- --------- -------- -------- Total interest-bearing liabilities 494,308 469,078 1,965 2,519 1.59 2.15 ---------- --------- --------- -------- Demand deposits 70,627 60,831 Other liabilities 3,403 3,185 Shareholders' equity 72,531 70,576 ---------- ---------- Total liabilities and shareholders' equity $ 640,869 $ 603,670 ========== ========== Interest rate spread 3.52% 3.84% ======== ======== Net interest margin 3.84% 4.24% ========= ======== Reconcilement to GAAP - --------------------- Net interest income - tax equivalent 5,890 6,124 Less: Taxable equivalent adjustment 274 241 ---------- --------- $ 5,616 $ 5,883 ========== =========
18 PROVISION AND RESERVE FOR LOAN LOSSES The allowance for loan losses is to provide for losses inherent in the loan portfolio. The Bank's Loan Committee has responsibility for determining the level of the allowance for loan losses, subject to the review of the Board of Directors. Among other factors, the Committee on a quarterly basis considers the Corporation's historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits including impaired loans, the Bank's loan "Watch" list, and national and local economic conditions. The provision for loan losses was $215,000 for the first three months of 2004 versus $240,000 for the same period in 2003. Net charged off loans were $184,000 for the first three months of 2004 versus $91,000 for the same period in 2003. The annualized ratio of net charge-offs to average outstanding loans was .18% in 2004 and .09% in 2003. Management considers these charge-off ratios lower than those of their peer banks, who generally consider charge-off levels of .10% to .40% to be within reasonable norms from a historical perspective. The reserve for loan losses totaled $5,323,000 at March 31, 2004, an increase of 0.6% over the $5,292,000 recorded at December 31, 2003. The ratio of reserves to loans, less unearned discount, was 1.31% at March 31, 2004 versus 1.30% at December 31, 2003. Management believes that the allowance for loan losses is adequate to absorb any inherent losses on existing loans in the Corporation's loan portfolio at March 31, 2004. NON-INTEREST INCOME Non-interest income for the first three months of 2004 was $1,853,000, an increase of 26.7% from $1,462,000 reported in the same period of 2003. The comparative increase was due to increases in service charge income, securities gains, and trust and investment services. Service charges on deposit accounts grew 35.7% or $151,000 in the first three months of 2004 when compared to the same period in 2003. Securities gains taken during the first quarter of 2004 were $105,000 as compared to only $2,000 during the first quarter of 2003 Trust and investment services income of $728,000 during the first three months of 2004 was up 20.1% compared to the same period in 2003. Because a majority of trust account fees are calculated based on the market value of the assets under management, the performance of the equity markets affects trust financial performance. The Bank's trust division managed accounts whose market values approximated $347,000,000 at March 31, 2004, compared to $291,000,000 one year prior, a 19.2% increase in asset value. The growth in new trust business, increased management fees, and higher valuations in the financial markets produced the positive results. NON-INTEREST EXPENSE Non-interest expense for the first three months of 2004 was $3,801,000, a 0.2% decrease from the $3,809,000 reported for the same period last year. Salaries increased 2.7% from the same period last year to $1,768,000 in 2004 while pension and other employee benefits decreased 5.8% to $422,000. The salary increase is due primarily to annual salary increases. Occupancy and equipment expenses decreased $24,000, or 3.7%, for the first three months of 2004 from the same period in 2003, primarily the result of reduced depreciation expense. Core deposit intangible amortization of $112,000 for the first three months of 2004 and 2003 represents the amortization of the premium paid for deposits acquired at the Gretna office in 1995 and Yanceyville office in 1996. These are being amortized on a ten year straight-line basis. The efficiency ratio, a productivity measure used to determine how well non-interest expense is managed, was 49.76% and 50.29% for the three months ended March 31, 2004 and 2003, respectively. A lower efficiency ratio generally 19 indicates better expense efficiency. Leaders in expense efficiency in the banking industry have achieved ratios in the 45% to 50% range while the majority of the industry remains in the 60-70% range. INCOME TAX PROVISION The income tax provision for the first three months of 2004 was $983,000, an increase of $21,000 from $962,000 reported a year earlier. The effective tax rate for the first three months of 2004 was 28.5% compared to 29.2% for the same period of 2003. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES GENERAL Total assets increased 0.2% to $645,898,000 at March 31, 2004 when compared to assets of $644,302,000 at December 31, 2003. On an annual basis total assets increased 5.2% at March 31, 2004 when compared to assets of $614,177,000 at March 31, 2003. There were only minor changes in the major categories of assets and liabilities during the quarter. ASSET QUALITY Non-performing loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more as to principal and interest payments, and loans classified as troubled debt restructurings. Loans in a non-accrual status at March 31, 2004 were $3,828,000 compared with $3,262,000 at December 31, 2003, and $448,000 on March 31, 2003. The majority of the non-accrual loans, and the increase in their balances from the year ago period, are related to two commercial loan relationships. Management is working closely with the borrowers to improve the Bank's collateral position and status of this loan. Management continues to have a good relationship with both borrowers. Loans on accrual status and past due 90 days or more at March 31, 2004 were $15,000 compared with $53,000 at December 31, 2003, and $214,000 on March 31, 2003. There were no loans classified as troubled debt restructurings on March 31, 2004, December 31, 2003 or March 31, 2003.
March 31 December 31 March 31 2004 2003 2003 ---------- ----------- ---------- 90 days past due $ 15 $ 53 $ 214 Non-accrual 3,828 3,262 448 OREO 360 303 30 ------- ------ ------ Non-performing assets $ 4,203 $3,618 $ 692 ======= ====== ======
Total non-performing loans as a percentage of total loans were 0.95% at March 31, 2004, 0.86% at December 31, 2003, and 0.16% at March 31, 2003. Properties received due to loan foreclosures were $360,000 at March 31, 2004, $303,000 at December 31, 2003, and $30,000 at March 31, 2003. The gross amount of interest income that would have been recorded on non-accrual loans as of March 31, 2004, if all such loans had been accruing interest at the original contractual rate, was $31,000 for the three month period ending March 31, 2004. No interest payments were recorded as interest income during the reporting period for all such non-performing loans. 20 LIQUIDITY Management monitors and plans the Corporation's liquidity position for future periods. Liquidity is provided from cash and due from banks, interest-bearing deposits in other banks, repayments from loans, increases in deposits, lines of credit from two correspondent banks and two federal agency banks and a planned structured continuous maturity of investments. Management believes that these factors provide sufficient and timely liquidity for the foreseeable future. Management also takes into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit, commitments to purchase securities and standby letters of credit. The Corporation's net liquid assets, which includes cash and due from banks, unpledged government securities, unpledged other securities with remaining maturities of less than two years, less the Bank's reserve requirement, to net liabilities ratio was 20.6 at March 31, 2004 and 19.1% at December 31, 2003. Both of these ratios are considered to reflect adequate liquidity for the respective periods. The Bank has a line of credit equal to 15% of assets with the Federal Home Loan Bank of Atlanta (FHLB) that equaled approximately $96,790,000 with $75,790,000 available at March 31, 2004. Should the Bank ever desire to increase their line of credit beyond the current 15% limit, the FHLB would allow borrowings of up to 40% of total assets once the bank meets specific eligibility requirements. The Bank also has federal funds lines of credit facilities established with two other banks in the amounts of $12,000,000 and $5,000,000, as well as has access to the Federal Reserve Bank's discount window should a liquidity crisis occur. The Bank has not used these facilities in the past year and considers these as backup sources of funds. Borrowings outstanding under the FHLB line of credit were $21,000,000 at March 31, 2004 and $21,000,000 at December 31, 2003. The Bank has eight fixed rate term borrowing contracts outstanding as of March 31, 2004, with the following final maturities: Amount Expiration Date ----------- --------------- $ 1,500,000 July 2004 3,000,000 July 2005 1,000,000 July 2006 1,000,000 July 2007 3,000,000 June 2008 5,000,000 August 2008 5,000,000 April 2009 1,500,000 March 2014 ----------- $21,000,000 =========== OFF-BALANCE SHEET TRANSACTIONS The Corporation enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. The off-balance sheet transactions as of March 31, 2004 and December 31, 2003 were commitments to extent credit and standby letters of credit only. Commitments to extend credit, which amounted to $115,316,000 at March 31, 2004 and $124,905,000 at December 31, 2003, represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements. As of March 31, 2004 there were two commitments to purchase securities in the amount of $982,000 when settled in April. No commitments to purchase securities existed on December 31, 2003. 21 Standby letters of credit are conditional commitments issued by the Bank guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. At March 31, 2004 and December 31, 2003, the Bank had $3,672,000 and $3,477,000 respectively, in outstanding standby letters of credit. CAPITAL RESOURCES During the first quarter of 2004, the Corporation declared and paid a quarterly cash dividend of $.19 per share. The dividend totaled $1,072,000 and represented a 43.4% payout of first quarter 2004 net income. The Corporation's Board of Directors authorized the repurchase of up to 300,000 shares of the Corporation's common stock between August 16, 2000 and August 15, 2001, 250,000 shares between August 29, 2001 and August 28, 2003, 250,000 shares between August 21, 2003 and August 19, 2004, and 250,000 shares between August 20, 2004 and August 17, 2004 The repurchases, which may be made through open market purchases or in privately negotiated transactions, were 32,200 shares during the first quarter of 2004 and total 496,666 shares since purchases began on August 16, 2000. Federal regulatory risk-based capital ratio guidelines require percentages to be applied to various assets including off-balance-sheet assets in relation to their perceived risk. Tier I capital includes shareholders' equity and Tier II capital includes certain components of nonpermanent preferred stock and subordinated debt. The Corporation had no preferred stock or subordinated debt outstanding. Banks and bank holding companies must have a Tier I capital ratio of at least 4% and a total ratio, including Tier I and Tier II capital, of at least 8%. As of March 31, 2004 the Corporation had a ratio of 15.14% for Tier I and a ratio of 16.29% for total capital. At December 31, 2003 these ratios were 14.85% and 15.99%, respectively. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The effective management of market risk is essential to achieving the Corporation's objectives. Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Corporation is not subject to currency exchange risk or commodity price risk. As a financial institution, interest rate risk and its impact on net interest income is the primary market risk exposure. The Asset/Liability Investment Committee ("ALCO") is primarily responsible for establishing asset and liability strategies and for monitoring and controlling liquidity and interest rate risk. ALCO uses computer simulation analysis to measure the sensitivity of earnings and market value of equity to changes in interest rates. The projected changes in net interest income and market value of portfolio equity ("MVE") to changes in interest rates are calculated and monitored by ALCO as indicators of interest rate risk. The projected changes in net interest income and MVE to changes in interest rates at March 31, 2004 and December 31, 2003 were within compliance of established policy guidelines. These projected changes are based on numerous assumptions of growth and changes in the mix of assets or liabilities. Net interest income for the next twelve months is projected to increase when interest rates are higher than current rates and decrease when interest rates are lower than current rates. 22 ITEM 4. CONTROLS AND PROCEDURES We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Within the 90 days prior to the date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in periodic SEC filings. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Corporation carries out its evaluation. 23 PART II OTHER INFORMATION Item: 1. Legal Proceedings The nature of the business of the Corporation's banking subsidiary ordinarily results in a certain amount of litigation. The subsidiary of the Corporation is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Corporation. 2. Changes in securities, use of proceeds and issuer purchases or equity securities
Issuer Purchases of Equity Securities -------------------------------------------------------------------------------------------------------- Total Number of Shares Maximum Number of Total Number Average Purchased as Part of Shares that May Yet of Shares Price Paid Publicly Announced Be Purchased Under Purchased Per share Program the Program ------------ ---------- ---------------------- ------------------- January 1-31, 2004 - - - 235,000 February 1-29, 2004 16,000 $25.93 16,000 219,000 March 1-31, 2004 16,200 24.54 16,200 202,800 ------ ------ 32,200 $25.23 32,200
On August 19, 2003, the Corporation's board of directors authorized the repurchase of up to 250,000 shares of the Corporation's common stock between August 20, 2003 and August 17, 2004. The stock may be purchased in the open market and/or in privately negotiated transactions as management and the board of directors determine to be in the best interest of the Corporation. 3. Defaults upon senior securities None 4. Submission of matters to a vote of security holders None 5. Other information None 6. Exhibits and Reports on Form 8-K (a) Exhibits - 11. Refer to EPS calculation in the Notes to Financial Statements 31.1 Section 302 Certification of Charles H. Majors, President and CEO 31.2 Section 302 Certification of James R. Jefferson, Assistant Treasurer (Interim CFO) 32.1 Section 906 Certification of Charles H. Majors, President and CEO 32.2 Section 906 Certification of James R. Jefferson, Assistant Treasurer (Interim CFO) (b) Reports on Form 8-K - Form 8-K filed January 21, 2004 to announce the Corporation's year end and fourth quarter financial results. 24 Form 8-K filed January 30, 2004 to announce the Corporation's investor presentation at the February 3, 2004 Southeast Super-Community Bank Conference. Form 8-K filed on March 19, 2004 to announce quarterly dividend of $0.19 per share. Form 8-K filed April 6, 2004 to announce the resignation of Brad E. Schwartz as the Corporation's Senior Vice President and Chief Financial Officer, as well as the Secretary to the Corporation. Form 8-K filed April 21, 2004 to announce the Corporation's first quarter 2004 financial results. Form 8-K filed April 27, 2004 to announce the election of directors at the Corporation's annual shareholders meeting and to announce the opening of a loan production office in Greensboro, North Carolina. Form 8-K filed on April 29, 2004 to announce Neal A. Petrovich appointment as Senior Vice President and Chief Financial Officer of the Corporation. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN NATIONAL BANKSHARES INC. /s/ Charles H. Majors ------------------------------------- Charles H. Majors Date - May 6, 2004 President and Chief Executive Officer /s/ James R. Jefferson --------------------------------------------- James R. Jefferson Assistant Treasurer Date - May 6, 2004 (Interim Chief Financial Officer) 25 EX-31 2 ex31mar0410q.txt EXHIBITS 31.1 & 31.2 03-31-04 10Q Exhibit 31.1 SECTION 302 CERTIFICATION* I, Charles H. Majors, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American National Bankshares Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 6, 2004 /s/ Charles H. Majors - ------------------------------------- Charles H. Majors, President and Chief Executive Officer Exhibit 31.2 SECTION 302 CERTIFICATION* I, James R. Jefferson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American National Bankshares Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 6, 2004 /s/ James R. Jefferson - --------------------------------- James R. Jefferson, Assistant Treasurer (Interim Chief Financial Officer) EX-32 3 ex32mar10q.txt EXHIBITS 32.1 & 32.2 03-31-04 10Q Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANNES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of American National Bankshares Inc. (the "Company") for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles H. Majors, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbannes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Charles H. Majors - ------------------------------------- Charles H. Majors President and Chief Executive Officer May 6, 2004 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANNES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of American National Bankshares Inc. (the "Company") for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James R. Jefferson, Assistant Treasurer (Interim Chief Financial Officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbannes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ James R. Jefferson - --------------------------------------------- James R. Jefferson Assistant Treasurer (Interim Chief Financial Officer) May 6, 2004 -----END PRIVACY-ENHANCED MESSAGE-----