-----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, FRTBdJpOU6gm+ovF1bVTjQ5H235BRvVJ0lqK5Fefm/D16s2s/XWkNLjzvz5Rl3IC xtNdZipN+XDXkXEILdDTMw== 0000741516-05-000018.txt : 20050506 0000741516-05-000018.hdr.sgml : 20050506 20050506155633 ACCESSION NUMBER: 0000741516-05-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050506 DATE AS OF CHANGE: 20050506 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: 05807973 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 mar200510q.txt 03/2005 10Q 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 March 31, 2005. -------------- [ ] 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 ------- 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, 2005, the Corporation had 5,486,642 shares Common Stock outstanding, $1 par value. AMERICAN NATIONAL BANKSHARES INC.
Index Page No. - ----- -------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004..................................................3 Consolidated Statements of Income for the three months ended March 31, 2005 and 2004..........................................4 Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2005 and 2004................. 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004...................................... 6 Notes to Consolidated Financial Statements........................... 7 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........... 24 Item 4. Controls and Procedures.............................................. 25 Part II. OTHER INFORMATION Item 1. Legal Proceedings.................................................... 26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......... 26 Item 3. Defaults Upon Senior Securities...................................... 26 Item 4. Submission of Matters to a Vote of Security Holders.................. 26 Item 5. Other Information.................................................... 26 Item 6. Exhibits............................................................. 26 SIGNATURES ..................................................................... 27
2 American National Bankshares Inc. and Subsidiary Consolidated Balance Sheets (In thousands, except share data) - --------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited) March 31, December 31, 2005 2004 ------------ ------------ ASSETS Cash and due from banks.........................................................$ 16,848 $ 12,371 Interest-bearing deposits in other banks........................................ 327 197 Securities available for sale, at fair value.................................... 160,816 165,958 Securities held to maturity (fair value of $20,396 in 2005 and $23,088 in 2004).................................................. 19,776 22,205 ----------- ----------- Total securities.............................................................. 180,592 188,163 ----------- ----------- Loans held for sale............................................................. 885 971 Loans, net of unearned income .................................................. 416,276 407,269 Less allowance for loan losses.................................................. (8,127) (7,982) ----------- ----------- Net loans..................................................................... 408,149 399,287 ----------- ----------- Bank premises and equipment, at cost, less accumulated depreciation of $12,592 in 2005 and $12,362 in 2004........................... 7,522 7,517 Core deposit intangibles, net................................................... 372 484 Accrued interest receivable and other assets.................................... 10,985 10,075 ----------- ----------- Total assets..................................................................$ 625,680 $ 619,065 =========== =========== LIABILITIES and SHAREHOLDERS' EQUITY Liabilities: Demand deposits -- noninterest bearing........................................$ 82,509 $ 75,256 Demand deposits -- interest bearing........................................... 78,603 80,793 Money market deposits......................................................... 51,318 52,031 Savings deposits.............................................................. 84,405 83,216 Time deposits................................................................. 192,463 193,976 ----------- ----------- Total deposits.............................................................. 489,298 485,272 ----------- ----------- Repurchase agreements......................................................... 40,969 38,945 FHLB borrowings............................................................... 20,900 21,338 Accrued interest payable and other liabilities................................ 3,778 2,510 ----------- ----------- Total liabilities........................................................... 554,945 548,065 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 200,000 shares authorized, none outstanding............................................................ - - Common stock, $1 par, 10,000,000 shares authorized, 5,491,682 shares outstanding at March 31, 2005 and 5,521,164 shares outstanding at December 31, 2004........................... 5,492 5,521 Capital in excess of par value................................................ 9,434 9,474 Retained earnings............................................................. 56,592 55,780 Accumulated other comprehensive income, net................................... (783) 225 ----------- ----------- Total shareholders' equity.................................................. 70,735 71,000 ----------- ----------- Total liabilities and shareholders' equity..................................$ 625,680 $ 619,065 =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
3 American National Bankshares Inc. and Subsidiary Consolidated Statements of Income (In thousands, except per share data) (Unaudited) - -------------------------------------------------------------------------------------------------------
Three Months Ended March 31 ------------------------- 2005 2004 ---------- ---------- Interest Income: Interest and fees on loans....................................................$ 6,032 $ 5,741 Interest and dividends on securities: Taxable..................................................................... 1,119 1,267 Tax-exempt.................................................................. 527 491 Dividends................................................................... 46 51 Other interest income......................................................... 42 31 ---------- ---------- Total interest income....................................................... 7,766 7,581 ---------- ---------- Interest Expense: Interest on deposits.......................................................... 1,520 1,597 Interest on repurchase agreements............................................. 153 127 Interest on other borrowings.................................................. 244 241 ---------- ---------- Total interest expense...................................................... 1,917 1,965 ---------- ---------- Net Interest Income........................................................... 5,849 5,616 Provision for Loan Losses..................................................... 300 215 ---------- ---------- Net Interest Income After Provision For Loan Losses............................................................. 5,549 5,401 ---------- ---------- Noninterest Income: Trust and investment services................................................. 720 728 Service charges on deposit accounts........................................... 559 574 Other fees and commissions.................................................... 251 246 Mortgage banking income....................................................... 100 133 Securities gains, net......................................................... 45 105 Other......................................................................... 392 67 ---------- ---------- Total noninterest income.................................................... 2,067 1,853 ---------- ---------- Noninterest Expense: Salaries...................................................................... 1,872 1,768 Pension and other employee benefits........................................... 468 422 Occupancy and equipment....................................................... 601 617 Bank franchise tax............................................................ 138 140 Core deposit intangible amortization ......................................... 112 112 Other......................................................................... 800 742 ---------- ---------- Total noninterest expense................................................... 3,991 3,801 ---------- ---------- Income Before Income Tax Provision............................................ 3,625 3,453 Income Tax Provision.......................................................... 1,042 983 ---------- ---------- Net Income....................................................................$ 2,583 $ 2,470 ========== ========== - ------------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic.........................................................................$ .47 $ .44 Diluted.......................................................................$ .46 $ .43 - ------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Basic.........................................................................5,510,614 5,648,278 Diluted.......................................................................5,558,625 5,705,869 - ------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
4 American National Bankshares Inc. and Subsidiary Consolidated Statements of Changes in Shareholders' Equity Three Months Ended March 31, 2005 and 2004
Accumulated Common Stock Capital in Other Total ------------------------- Excess of Retained Comprehensive Shareholders' Shares Amount Par Value Earnings Income Equity ----------- ------------ ------------ ------------- -------------- ------------- (In thousands, except share data) (Unaudited) 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 of $(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 =========== ============ ============= ============= ============== ============= Balance, December 31, 2004...................... 5,521,164 $ 5,521 $ 9,474 $ 55,780 $ 225 $ 71,000 Net income...................................... - - - 2,583 - 2,583 Change in unrealized losses on securities available for sale, net of tax of $(519)...... - - - - (1,008) -------------- Other comprehensive income.................... (1,008) (1,008) ------------- Total comprehensive income.................... 1,575 Stock repurchased and retired................... (30,400) (30) (52) (671) - (753) Stock options exercised......................... 918 1 12 - - 13 Cash dividends paid............................. - - - (1,100) - (1,100) ----------- ------------ ------------ ------------- -------------- ------------- Balance, March 31, 2005......................... 5,491,682 $ 5,492 $ 9,434 $ 56,592 $ (783) $ 70,735 =========== ============ ============= ============= ============== ============= The accompanying notes are an integral part of the consolidated financial statements.
5 American National Bankshares Inc. and Subsidiary Consolidated Statements of Cash Flows (In thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
Three Months Ended ------------------------- March 31 2005 2004 ---------- ---------- Cash Flows from Operating Activities: Net income....................................................................$ 2,583 $ 2,470 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses................................................... 300 215 Depreciation................................................................ 231 244 Core deposit intangible amortization........................................ 112 112 Amortization (accretion) of bond premiums and discounts, net................ 49 210 Gain on sale or call of securities.......................................... (45) (105) Gain on loans held for sale................................................. (68) (99) Proceeds from sales of loans held for sale.................................. 3,003 4,567 Originations of loans held for sale......................................... (2,849) (5,661) Loss on sale of real estate owned........................................... 2 11 Valuation allowance on other real estate owned.............................. 27 - Deferred income taxes benefit............................................... (68) (22) Increase in interest receivable............................................. (291) (107) (Increase) decrease in other assets......................................... (70) 85 Increase (decrease) in interest payable..................................... 5 (58) Increase in other liabilities............................................... 1,263 693 ---------- ---------- Net cash provided by operating activities................................. 4,184 2,555 ---------- ---------- Cash Flows from Investing Activities: Proceeds from maturities and calls of securities available for sale......... 15,094 17,017 Proceeds from sales of securities available for sale........................ - 4,067 Proceeds from maturities and calls of securities held to maturity........... 2,436 15,911 Purchases of securities available for sale.................................. (11,490) (36,062) Net (increase) decrease in loans............................................ (9,162) 913 Purchases of bank property and equipment.................................... (236) (390) Proceeds from sales of other real estate owned.............................. 9 92 ---------- ---------- Net cash (used in) provided by investing activities....................... (3,349) 1,548 ---------- ----------
(Continued on next page) 6 (Continued from previous page) American National Bankshares Inc. and Subsidiary Consolidated Statements of Cash Flows (In thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
Three Months Ended ------------------------- March 31 2005 2004 ---------- ---------- Cash Flows from Financing Activities: Net increase in demand, money market, and savings deposits...................................................... 5,539 7,588 Net decrease in time deposits............................................... (1,513) (6,789) Net increase (decrease) in repurchase agreements ........................... 2,024 (995) Net decrease in FHLB borrowings............................................. (438) - Cash dividends paid......................................................... (1,100) (1,072) Repurchase of stock......................................................... (753) (812) Proceeds from exercise of stock options..................................... 13 94 ---------- ---------- Net cash provided by (used in) financing activities....................... 3,772 (1,986) ---------- ---------- Net Increase in Cash and Cash Equivalents................................. 4,607 2,117 Cash and Cash Equivalents at Beginning of Period.......................... 12,568 17,888 ---------- ---------- Cash and Cash Equivalents at End of Period................................$ 17,175 $ 20,005 ========== ========== Supplemental Schedule of Cash and Cash Equivalents: Cash: Cash and due from banks.....................................................$ 16,848 $ 12,755 Interest-bearing deposits in other banks.................................... 327 7,250 ---------- ---------- $ 17,175 $ 20,005 ========== ========== Supplemental Disclosure of Cash Flow Information: Interest paid...............................................................$ 1,913 $ 2,023 Income taxes paid...........................................................$ 10 $ 4 Transfer of loans to other real estate owned................................$ - $ 160 Unrealized gain (loss) on securities available for sale.....................$ (1,527) $ 722 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 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"). Activities of the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp., were moved within the Bank in 2005. These subsidiaries have not been dissolved. 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 March 31, 2005; the consolidated statements of income for the three months ended March 31 2005 and 2004; the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2005 and 2004; and the consolidated statements of cash flows for the three months ended March 31, 2005 and 2004. Operating results for the three month periods ended March 31, 2005 and 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. 2. STOCK BASED COMPENSATION As of March 31, 2005 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, 2005 and 2004 had the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, been adopted. Three Months Ended ----------------------- March 31 ----------------------- (In thousands except per share amounts) 2005 2004 ------ ------ Net income, as reported $2,583 $2,470 Deduct: total stock-based employee compensation expense determined based on fair value method of awards - (110) ------- ------- Pro forma net income $2,583 $2,360 ======= ======= Basic earnings per share: As reported $ .47 $ .44 Pro forma $ .47 $ .42 Diluted earnings per share: As reported $ .46 $ .43 Pro forma $ .46 $ .41 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: dividend yield of 3.23%, price volatility of 31.08%, risk-free interest rates of 3.89%, and expected life of 6.82 years. There were no grants in the first quarter of 2005. All options were vested at December 31, 2004. 8 3. SECURITIES The amortized cost and estimated fair value of debt and equity securities at March 31, 2005 and December 31, 2004 were as follows (in thousands):
March 31, 2005 --------------------------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- Securities available for sale: Federal agencies $ 83,225 $ 9 $ 1,313 $ 81,921 Mortgage-backed 26,899 223 342 26,780 State and municipal 35,337 338 254 35,421 Corporate bonds 10,061 175 67 10,169 Equity securities: FHLB stock - restricted 2,178 - - 2,178 Federal Reserve stock - restricted 363 - - 363 FNMA & FHLMC preferred stock 3,515 44 - 3,559 Other securities 425 - - 425 --------- -------- -------- --------- Total securities available for sale 162,003 789 1,976 160,816 --------- -------- -------- --------- Securities held to maturity: Federal agencies 1,497 - 25 1,472 Mortgage-backed 626 26 - 652 State and municipal 17,653 649 30 18,272 --------- -------- -------- --------- Total securities held to maturity 19,776 675 55 20,396 --------- -------- -------- --------- Total securities $ 181,779 $ 1,464 $ 2,031 $ 181,212 ========= ======== ======== =========
December 31, 2004 --------------------------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- Securities available for sale: Federal agencies $ 83,969 $ 107 $ 755 $ 83,321 Mortgage-backed 28,608 402 77 28,933 State and municipal 35,714 658 88 36,284 Corporate bonds 10,776 295 42 11,029 Equity securities: FHLB stock - restricted 2,248 - - 2,248 Federal Reserve stock - restricted 363 - - 363 FNMA & FHLMC preferred stock 3,515 - 160 3,355 Other securities 425 - - 425 --------- -------- -------- --------- Total securities available for sale 165,618 1,462 1,122 165,958 --------- -------- -------- --------- Securities held to maturity: Federal agencies 3,496 5 10 3,491 Mortgage-backed 701 36 - 737 State and municipal 18,008 860 8 18,860 --------- -------- -------- --------- Total securities held to maturity 22,205 901 18 23,088 --------- -------- -------- --------- Total securities $ 187,823 $ 2,363 $ 1,140 $ 189,046 ========= ======== ======== =========
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, 2005. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.
Less than 12 Months 12 Months or More Total ----------------------- ---------------------- ----------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ----- ---------- ----- ---------- ----- ---------- Federal agencies $ 45,533 $ 629 $ 34,844 $ 709 $ 80,377 $ 1,338 Mortgage-backed 19,445 318 1,523 24 20,968 342 State and municipal 15,009 156 5,158 128 20,167 284 Corporate bonds - - 1,417 67 1,417 67 Preferred stock - - - - - - -------- ------- -------- ------- -------- ------- Total $ 79,987 $ 1,103 $ 42,942 $ 928 $122,929 $ 2,031 ======== ======= ======== ======= ======== =======
Management evaluates securities for other-than-temporary impairment quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The unrealized losses are primarily attributable to interest rate changes. The Corporation has the intent and ability to hold these securities for the time necessary to recover the amortized cost. An other-than-temporary impairment charge of $985,000 on $4,500,000 of Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") perpetual preferred stock was charged to earnings in the fourth quarter of 2004. This was done after a thorough analysis of recent public disclosures about FHLMC and FNMA, the length of time the market value of the securities had been less than cost, the amount of the loss in comparison with the amortized cost, the results of an impairment analysis conducted by an outside party, and accounting interpretations. As of March 31, 2005, these securities have an estimated unrealized gain of $44,000 based on their adjusted carrying value. 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 December 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 $ 57,916 $ 639 $ 8,880 $ 126 $ 66,796 $ 765 Mortgage-backed 9,596 74 1,358 3 10,954 77 State and municipal 7,869 89 198 7 8,067 96 Corporate bonds 1,442 42 - - 1,442 42 Preferred stock - - 3,355 160 3,355 160 -------- ------- -------- ------- -------- ------- Total $ 76,823 $ 844 $ 13,791 $ 296 $ 90,614 $ 1,140 ======== ======= ======== ======= ======== =======
10 4. LOANS Loans, excluding loans held for sale, were comprised of the following:
(In thousands) March 31 December 31 2005 2004 ------------ ----------- Real estate: Construction and land development $ 44,916 $ 34,101 Commercial 149,273 147,653 1 - 4 family residential 93,724 91,672 Home equity 42,329 42,620 --------- --------- Total real estate 330,242 316,046 Commercial and industrial 72,943 75,847 Consumer 13,091 15,376 --------- --------- Total loans $ 416,276 $ 407,269 ========= =========
The following is a summary of information pertaining to impaired loans:
(In thousands) March 31 December 31 2005 2004 ------------ ----------- Impaired loans without a valuation allowance $ - $ - Impaired loans with a valuation allowance 6,035 6,310 --------- --------- Total impaired loans $ 6,035 $ 6,310 ========= ========= Allowance related to impaired loans, included in the allowance for loan losses $ 2,995 $ 3,151 ========= =========
The following summarized average balances and interest income related to impaired loans for the three months ended:
(In thousands) March 31 December 31 2005 2004 ----------- ----------- Average balance in impaired loans $ 6,099 $ 3,448 =========== ========= Interest income recognized on impaired loans $ 11 $ 18 =========== =========
No additional funds are committed to be advanced in connection with impaired loans. Nonaccrual loans excluded from impaired loan disclosure amounted to $2,709,000 and $2,810,000 at March 31, 2005 and December 31, 2004, respectively. If interest on nonaccrual loans had been accrued, such income would have approximated $9,000 and $31,000 for March 31, 2005 and 2004, respectively. Loans past due 90 days and still accruing interest amounted to $0 at March 31, 2005 and at December 31, 2004. Foreclosed real estate was $183,000 at March 31, 2005 and $221,000 at December 31, 2004, and is recorded as other assets on the Consolidated Balance Sheets. 11 5. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses for the three months ended March 31 and December 31, 2004 were as follows:
(In thousands) March 31 December 31 March 31 2005 2004 2004 ------------ ------------ ------------ Balance, January 1 $ 7,982 $ 5,292 $ 5,292 Provision for loan loses 300 3,095 215 Loans charged-off (233) (655) (223) Recoveries of loans charged-off 78 250 39 ----------- ----------- ----------- Balance at end of period $ 8,127 $ 7,982 $ 5,323 =========== =========== ===========
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 dilutive potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.
Three Months Ended March 31 ------------------------------------------------------- 2005 2004 ------------------------ ------------------------ Per Per Share Share Shares Amount Shares Amount ---------- ------ ---------- ------ Basic earnings per share 5,510,614 $ .47 5,648,278 $ .44 Effect of dilutive securities (stock options) 48,011 (.01) 57,591 (.01) ---------- ------ ---------- ------ Diluted earnings per share 5,558,625 $ .46 5,705,869 $ .43 ========== ====== ========== ======
7. DEFINED BENEFIT PLAN Components of Net Periodic Benefit Cost Three Months Ended (In thousands) March 31 ----------------------- 2005 2004 ---- ---- Service cost $ 110 $ 108 Interest cost 92 90 Expected return on plan assets (126) (113) Amortization of prior service cost (9) (6) Amortization of net obligation at transition - - Recognized net actuarial loss 21 21 ------ ------ Net periodic benefit cost $ 88 $ 100 ====== ====== During the three-month period ended March 31, 2005, $333,000 in contributions were made. The Corporation plans no additional contributions for the year ending December 31, 2005. 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 securities is also allocated to the 12 community banking segment. 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, liabilities and operating results of the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. are included in the "Other" segment for 2004. ANB Mortgage Corp. performed secondary mortgage banking and ANB Services Corp. performed retail investment and insurance sales. The activities of both subsidiaries were moved within the Bank in 2005. Trust and investment services include estate planning, trust account 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 month periods ended March 31, 2005 and 2004 is shown in the following table. 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, 2005 ---------------------------------------------------------------------- (In thousands)
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------ ------------ -------- Interest income $ 7,766 $ - $ - $ - $ 7,766 Interest expense 1,917 - - - 1,917 Noninterest income - external customers 1,278 788 1 - 2,067 Noninterest income - internal customers - 12 - (12) - Operating income before income taxes 3,281 390 (46) - 3,625 Depreciation and amortization 338 4 1 - 343 Total assets 625,080 - 600 - 625,680 Capital expenditures 203 33 - - 236
Three Months Ended March 31, 2004 ---------------------------------------------------------------------- (In thousands)
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 Noninterest income - external customers 915 728 210 - 1,853 Noninterest 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
13 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 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. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Corporation and on information available to management 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 Corporation'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 Businesses that the Corporation is 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. o Adverse changes may occur in the securities market. RECLASSIFICATION In certain circumstances, reclassifications have been made to prior period information to conform to the 2005 presentation. 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 2004 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 the 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 the transactions would be the same, the timing of events that would impact those transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses inherent in the loan portfolio at the balance sheet date. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses on 14 impaired loans 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. The Corporation's 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 qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs, and recoveries; trends in volume and terms of loans; effects of changes in underwriting standards; experience of lending staff; economic conditions; and portfolio concentrations. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. The unallocated allowance includes estimated losses whose impact on the portfolio has yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective and uncertain and actual losses could be greater or less than the estimates. Non-GAAP Presentations The management's discussion and analysis refers to the efficiency ratio, which is computed by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income (excluding gains on sales of securities or other assets). This is a non-GAAP financial measure which management believes provides investors with important information regarding the Corporation's 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 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 December 16, 2004, the Financial Accounting Standards Board issued Statement No. 123R (revised 2004), "Share-Based Payment," (FAS 123R) that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of income. The effective date of FAS 123R (as amended by the SEC) is for annual periods beginning after June 15, 2005. The provisions of FAS 123R do not have an impact on the Corporation's results of operations at the present time. In March 2005, the SEC issued Staff Accounting Bulleting No. 107 (SAB 107). SAB 107 expresses the views of the SEC staff regarding the interaction of FAS 123R and certain SEC rules and regulations and provides the SEC staff's view regarding the valuation of share-based payment arrangements for public companies. SAB 107 does not impact the Corporation's results of operations at the present time. Refer to the Corporation's December 31, 2004 Annual Report on Form 10-K for previously announced accounting pronouncements. 15 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 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 the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. ----------- EXECUTIVE OVERVIEW American National Bankshares Inc. is the holding company of American National Bank and Trust Company, a community bank with thirteen full service offices in Danville, Chatham, Collinsville, Gretna, Martinsville, Henry County, and South Boston, Virginia; a loan production office in Lynchburg, Virginia; one office in Yanceyville, North Carolina; and a loan production office in Greensboro, North Carolina. American National Bank and Trust Company provides a full array of financial products and services, including commercial, mortgage, and consumer banking; trust and investment services; and insurance. Services are also provided through eighteen ATMs, "AmeriLink" Internet banking, and our 24-hour "Access American" phone banking. 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. RESULTS OF OPERATIONS NET INCOME The Corporation's net income for the first three months of 2005 was $2,583,000, an increase of 4.6% over the $2,470,000 earned during the same period of 2004. On a basic and diluted per share basis, net earnings totaled $0.47 and $0.46, respectively, for the first three months of 2005. This compared favorably to the $0.44 and $0.43 in basic and diluted earnings per share recorded for the first three months of 2004. Both increases were due to growth in net interest income and noninterest income which more than offset the increase in noninterest expense, combined with a lower number of shares outstanding due to stock repurchases. On an annualized basis, return on average total assets was 1.66% for the first three months of 2005 compared to 1.54% for the same period in 2004. Annualized return on average common shareholders' equity was 14.51% and 13.62% for the first three months of 2005 and 2004, respectively. Net interest income after provision for loan losses increased $148,000, or 2.7%, for the first three months of 2005 compared to the same period in 2004 due to an increase in the interest rate spread coupled with changes in the earning asset mix. For the same comparative period, noninterest income increased by $214,000, due primarily to $320,000 in income from the sale of a debit card and ATM processor, of which the Bank was a member. Noninterest expense increased by $190,000 for the first three months of 2005 compared to the same period in 2004, due primarily to increases in salary and benefits expense. 16 NET INTEREST INCOME Net interest income, the Corporation's largest source of revenue, on a fully taxable equivalent ("FTE") basis was $6,134,000 for the first three month period ended March 31, 2005 compared to $5,890,000 for the same period of 2004, an increase of 4.1%. The interest rate spread increased to 3.74% from 3.52%, and the net interest margin increased to 4.10% from 3.84% in the first three months of 2005 compared to the same period of 2004. Net interest income increased because yields on interest-earning assets increased faster than the yields paid on interest-earning liabilities. Yields on earning assets improved due to increases in interest rate indexes which are used to price commercial loans, the scheduled repricing of variable rate real estate loans to higher rates, the reinvestment of investment portfolio cash flows into slightly higher yielding investments, and the addition of new loans at market rates of interest. Quality loan growth remains a top priority. Average year-to-date interest-earning assets decreased 2.6% or $16,228,000 while average interest-bearing liabilities declined 5.2%, or $25,510,000 between March 31, 2005 and March 31, 2004. During this time, low cost noninterest-bearing demand deposit growth funded the difference between interest-earning assets decline and interest-bearing liabilities decline. 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 two times between December 31, 2004 and March 31, 2005, for a total increase of .50%. This increased the interest income the Corporation earned in overnight funds, investment securities, and loans during the first quarter of 2005; as a result, the interest rate spread and the net interest margin improved to 3.74% and 4.10%, respectively. The following tables demonstrate fluctuations in net interest income and the related yields for the first three months of 2005 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: 17 Net Interest Income and Rate / Volume Analysis For the Three Months Ended March 31, 2005 and 2004 (In thousands, except rates)
Interest Average Balance Income/Expense Yield/Rate ------------------------- ------------------------ --------------------- 2005 2004 2005 2004 2005 2004 ---------- ---------- ---------- --------- -------- -------- Loans: Commercial $ 72,734 $ 125,777 $ 1,133 $ 1,459 6.23% 4.64% Real Estate 323,473 260,495 4,603 3,815 5.69 5.86 Consumer 14,172 21,639 320 492 9.03 9.09 ---------- ---------- ---------- --------- ------ ------ Total loans 410,379 407,911 6,056 5,766 5.90 5.65 ---------- ---------- ---------- --------- ------ ------ Securities: Federal agencies 82,256 102,126 648 822 3.15 3.22 Mortgage-backed 28,530 20,123 307 233 4.30 4.63 State and municipal 53,306 50,410 802 750 6.02 5.95 Other 16,760 19,908 196 253 4.68 5.08 ---------- ---------- ---------- --------- ------ ------ Total securities 180,852 192,567 1,953 2,058 4.32 4.27 ---------- ---------- ---------- --------- ------ ------ Deposits in other banks 6,852 13,833 42 31 2.45 .90 ---------- ---------- ---------- --------- ------ ------ Total interest-earning assets 598,083 614,311 8,051 7,855 5.38 5.11 ---------- --------- ------ ------ Other non-earning assets 23,058 26,558 ---------- ---------- Total assets $ 621,141 $ 640,869 ========== ========== Interest-bearing deposits: Demand $ 79,426 $ 69,755 104 59 .52 .34 Money market 52,130 54,328 155 102 1.19 .75 Savings 83,361 83,757 130 109 .62 .52 Time 193,261 215,775 1,131 1,327 2.34 2.46 ---------- ---------- ---------- --------- ------ ------ Total interest-bearing deposits 408,178 423,615 1,520 1,597 1.49 1.51 Repurchase agreements 39,326 49,277 153 127 1.56 1.03 Other borrowings 21,294 21,416 244 241 4.58 4.50 ---------- ---------- ---------- --------- ------ ------ Total interest-bearing liabilities 468,798 494,308 1,917 1,965 1.64 1.59 ---------- --------- ------ ------ Demand deposits 78,440 70,627 Other liabilities 2,725 3,403 Shareholders' equity 71,178 72,531 ---------- ---------- Total liabilities and shareholders' equity $ 621,141 $ 640,869 ========== ========== Interest rate spread 3.74% 3.52% ====== ====== Net interest margin 4.10% 3.84% ====== ====== Reconcilement to GAAP - --------------------- Net interest income - tax equivalent 6,134 5,890 Less: Taxable equivalent adjustment 285 274 ---------- --------- $ 5,849 $ 5,616 ========== =========
18 ALLOWANCE AND PROVISION FOR LOAN LOSSES The purpose of the allowance for loan losses is to provide for losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Charge-offs of loan balances decrease the allowance. The Corporation's lenders are responsible for assigning risk ratings to loans using the parameters set forth in the Corporation's Credit Policy. The risk ratings are reviewed for accuracy, on a sample basis, by the Corporation's Loan Review department, which operates independently of loan production. These risk ratings are used in calculating the level of the allowance for loan losses. The Corporation's Credit Committee has responsibility for determining the level and adequacy of the allowance for loan losses, subject to review by 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; individual risk ratings; nonperforming loans, impaired loans, other problem credits; the value and adequacy of collateral and guarantors; and national and local economic conditions. No single statistic, formula or measurement determines the adequacy of the allowance. Management makes difficult, subjective and complex judgements about matters that are inherently uncertain and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, the Corporation allocates a portion of the allowance to specific loan categories and specific loans (the allocated allowance). The entire allowance is used to absorb credit losses inherent in the total loan portfolio. The allowance is supplemented to adjust for imprecision (particularly in commercial, commercial real estate and construction lending) and to provide for a range of possible outcomes inherent in estimates used for the allocated allowance. This reflects the result of the Corporation's judgement of risks inherent in the portfolio, economic uncertainties and other subjective factors, including industry trends in our region. The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period. Furthermore, we cannot provide assurance that, in any particular period, the Corporation will not have sizeable credit losses in relation to the amount reserved. The Corporation may find it necessary to significantly adjust the allowance, considering current factors at the time, including economic conditions, industry trends and ongoing internal and external examination processes. This is also necessary to absorb losses in the portfolio, including those not yet identifiable. A significant portion of the Corporation's trade area, which includes the City of Danville, City of Martinsville, Town of South Boston, Pittsylvania, Henry and Halifax Counties in Virginia, Town of Yanceyville and the northern half of Caswell County in North Carolina, is under economic pressure. The region has traditionally been heavily dependent on manufacturing. While diversification has occurred in manufacturing in recent years, a textile firm and a tire manufacturing plant in Danville employ a significant workforce. Increased global competition has negatively impacted the textile industry in the area with several manufacturers closing due to competitive pressures or due to the relocation of some operations to foreign countries. Other important industries include farming, tobacco processing and sales, food processing, furniture manufacturing and sales, specialty glass manufacturing, and packaging tape production. An inherent risk to the loan portfolio exists if significant declines continue in the manufacturing sector along with a corresponding reduction in employment. The unallocated portion of the allowance reflects management's attempt to provide that the overall reserve appropriately reflects a margin for the imprecision necessarily inherent in estimates of credit losses. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. 19 The provision for loan losses was $300,000 for the first three months of 2005 versus $215,000 for the same period in 2004. Net charged-off loans were $155,000 for the first three months of 2005 versus $184,000 for the same period in 2004. The annualized ratio of net charge-offs to average loans was .15% in 2005 and .18% in 2004. The allowance for loan losses was $8,127,000 at March 31, 2005, an increase of 1.8% over the $7,982,000 recorded at December 31, 2004. The allowance was 1.95% of loans at March 31, 2005 versus 1.96% at December 31, 2004. 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, 2005. More information regarding loan quality is provided in the Asset Quality, Credit Risk Management and Nonperforming Assets section. NONINTEREST INCOME Noninterest income for the first three months of 2005 was $2,067,000, an increase of 11.5% from $1,853,000 reported in the same period of 2004. The primary reason for the increase was a one time gain on the sale of the Bank's membership in a debit card and ATM processor. Trust and investment services income of $720,000 during the first three months of 2005 was down 1.1% compared to the same period in 2004. A majority of trust account fees are calculated based on the monthly market value of the assets under management, therefore performance of the equity markets affects trust financial performance. The Bank's trust division managed accounts whose market values approximated $347,074,000 at March 31, 2005. Mortgage banking income was $100,000 for the first three months of 2005 as compared to $133,000 in 2004. The decline was due to a reduced number of mortgage refinancings in 2005. Other noninterest income increased by $325,000, due primarily to $320,000 in income from the sale of a debit card and ATM processor, of which the Bank was a member. NONINTEREST EXPENSE Noninterest expense for the first three months of 2005 was $3,991,000, a 5.0% increase from the $3,801,000 reported for the same period last year. Salaries increased 5.9% from the same period last year to $1,872,000 in 2005 while pension and other employee benefits increased 10.9% to $468,000. The salary increase is due primarily to annual salary increases and increased staff positions. Benefits expense increased due to higher health care costs. Occupancy and equipment expenses decreased $16,000, or 2.6%, for the first three months of 2005 from the same period in 2004, primarily the result of reduced depreciation expense. Core deposit intangible amortization of $112,000 for the first three months of 2005 and 2004 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 noninterest expense is managed, was 48.76% and 49.69% for the three months ended March 31, 2005 and 2004, respectively. A lower efficiency ratio generally indicates better expense efficiency. Based on regulatory peer group information, leaders in expense efficiency in the banking industry have achieved ratios in the 45% to 55% range while the peer group average is approximately 60%. INCOME TAX PROVISION The income tax provision for the first three months of 2005 was $1,042,000, an increase of $59,000 from $983,000 reported a year earlier. The effective tax rate for the first three months of 2005 was 28.7% compared to 28.5% for the same period of 2004. The effective tax rate is lower than the statutory rate primarily due to tax exempt state and municipal securities. 20 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL GENERAL Total assets increased 1.1% to $625,680,000 at March 31, 2005 when compared to assets of $619,065,000 at December 31, 2004. During the past year, the Corporation chose not to aggressively pursue high-rate certificates of deposit. During the quarter ended March 31, 2005, loans increased $9,007,000 or 2.2% while deposit accounts increased $4,026,000 or 0.8%. There were only minor changes in the major categories of assets and liabilities during the quarter. ASSET QUALITY, CREDIT RISK MANAGEMENT AND NONPERFORMING ASSETS The Corporation identifies specific credit exposures through its periodic analysis of the loan portfolio and monitors general exposures from economic trends and other external factors. The Corporation maintains an allowance for loan losses, which is available to absorb losses inherent in the loan portfolio. The adequacy of the allowance for loan losses is determined on a quarterly basis. Various factors as defined in the section "Allowance and Provision for Loan Losses" are considered in determining the adequacy of the allowance. The Corporation uses certain general practices to manage its credit risk. These practices include (a) appropriate lending limits for loan officers, (b) a loan approval process, (c) careful underwriting of loan requests, including analysis of borrowers, collateral, and market risks, (d) regular monitoring of the portfolio, (e) review of loans by a Loan Review department which operates independently of loan production, (f) regular meetings of a Credit Committee to discuss portfolio and policy changes, and (g) regular meetings of an Asset Quality Committee which reviews the status of individual loans. Loans are generally placed on nonaccrual status when any portion of principal or interest is 90 days past due or collection is uncertain. Unless loans are secured and in the process of collection, they are normally charged off after a delinquency of 120 days. Under the Corporation's policy, a nonaccruing loan may be restored to accrual status when none of its principal and interest is past due and unpaid, the borrower has shown a reasonable sustained ability to service the debt, and the Corporation expects repayment of the remaining contractual principal and interest or when the loan otherwise becomes secured and in the process of collection. In December 2004, the Corporation added an additional $2.0 million to its allowance for loan losses primarily related to a $4.5 million loan secured by a hotel in a major North Carolina metropolitan area. Although payments on the loan have always been current, the cash flow and collateral valuation of the hotel deteriorated; thus, the loan was deemed impaired and was placed on nonaccrual status at December 31, 2004. Nonperforming 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. Nonperforming assets include nonperforming loans and foreclosed real estate. Loans in a nonaccrual status at March 31, 2005 were $8,050,000 compared with $8,113,000 at December 31, 2004. Loans on accrual status and past due 90 days or more were $0 at both March 31, 2005 and December 31, 2004. There were no loans classified as troubled debt restructurings on March 31, 2005 or December 31, 2004. 21 March 31 December 31 2005 2004 ------------ ----------- 90 days past due $ - $ - Nonaccrual 8,050 8,113 Foreclosed real estate 183 221 -------- -------- Nonperforming assets $ 8,233 $ 8,334 ======== ======== Total nonperforming loans as a percentage of total loans were 1.93% at March 31, 2005 and 1.99% at December 31, 2004. The gross amount of interest income that would have been recorded on nonaccrual loans for the period ended March 31, 2005, if all such loans had been accruing interest at the original contractual rate, was $106,000. No interest payments were recorded as interest income during the reporting period for all such nonaccrual loans. LIQUIDITY Liquidity is the measure of the Corporation's ability to generate sufficient funds to meet customer demands for loans and the withdrawal of deposit balances. Liquidity is provided from cash and amounts due from banks, federal funds sold, interest-bearing deposits in other banks, loan repayments, increases in deposits, lines of credit from the Federal Home Loan Bank of Atlanta ("FHLB") and two correspondent banks, and maturing investments. Management believes that these sources provide sufficient and timely liquidity for the foreseeable future. Management monitors and plans the Corporation's liquidity position for future periods. Liquidity strategies are implemented and monitored by ALCO. The Committee uses a simulation and budget model to assess the future liquidity needs of the Corporation and manage the investment of funds. The Corporation's net liquid assets, which includes cash and due from banks and unpledged securities available-for-sale, less the Corporation's reserve requirement, to liabilities ratio was 21.3% at March 31, 2005 and 19.7% at December 31, 2004. Both of these ratios reflect adequate liquidity for the respective periods. The Corporation has credit availability equal to 30% of assets with FHLB that equaled $187.5 million, with $166.6 million available, at March 31, 2005. Borrowings outstanding under this line of credit were $20.9 million and $21.3 million, respectively, at March 31, 2005 and December 31, 2004. Under the terms of its collateral agreement with the FHLB, the Corporation provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans and home equity lines of credit. In addition, the Corporation pledges as collateral its capital stock in the FHLB and deposits with the FHLB. The Bank has a daily rate credit line and seven fixed rate term borrowing contracts outstanding as of March 31, 2005, with the following final maturities: Amount Expiration Date ----------- --------------- $ 1,550,000 Daily 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 1,350,000 March 2014 ----------- $20,900,000 =========== 22 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. 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 Corporation does not have any off-balance sheet subsidiaries or special purpose entities. Off-balance sheet transactions were as follows (in thousands): Off-Balance Sheet Transactions March 31, 2005 December 31, 2004 ------------------------------------- -------------- ----------------- Commitments to extend credit $ 125,691 $ 130,862 Standby letters of credit 2,884 4,849 Commitments to purchase securities - - Mortgage loan locked-rate commitments $ 1,567 $ 2,818 Commitments to extend credit to customers represent legally binding agreements 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. Standby letters of credit are conditional commitments issued by the Corporation guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. CAPITAL During the first quarter of 2005, the Corporation declared and paid a quarterly cash dividend of $.20 per share. The dividend totaled $1,100,000 and represented a 42.6% payout of first quarter 2005 net income. On August 17, 2004, the Corporation's board of directors approved the extension of its stock repurchase plan, begun in 2000, 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. During the first quarter, 30,400 shares were repurchased. 654,834 shares have been repurchased since August 16, 2000. One measure of a financial institution's capital strength is the ratio of shareholder's equity to assets. Shareholders' equity was 11.3% of assets at March 31, 2005 and 11.5% at December 31, 2004. In addition to this measurement, banking regulators have defined minimum regulatory capital ratios for financial institutions. These ratios take into account risk factors identified by those regulatory authorities associated with the assets and off-balance sheet activities of financial institutions. The guidelines require percentages, or "risk weights" be applied to those assets and off-balance-sheet assets in relation to their perceived risk. Under the guidelines, capital strength is measured in two tiers. Tier I capital consists primarily of shareholder's equity, while Tier II capital consists of qualifying allowance for loan losses. Total capital is the total of Tier I and Tier II capital. Another indicator of capital adequacy is the leverage ratio, which is computed by dividing Tier I capital by average quarterly assets less intangible assets. The guidelines require that total capital (Tier I plus Tier II) of 8% be held against total risk-adjusted assets, at least half of which (4%) must be Tier I capital. At March 31, 2005, the Corporation's Tier I and total capital ratios were 15.56% and 16.82%, respectively. At December 31, 2004, these ratios were 15.48% and 16.73%, respectively. The ratios for both periods were in excess of the regulatory requirements. The Corporation's leverage ratios were 11.41% and 11.02% at March 31, 2005 and December 31, 2004, respectively. The leverage ratio has a regulatory minimum of 3%, with most institutions required to 23 maintain a ratio one to two percent above the 3% minimum depending upon risk profiles and other factors. As mandated by the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), the following five capital categories are identified for insured depository institutions: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". FDICIA requires the federal banking regulators to take prompt corrective action with respect to insured depository institutions that do not meet minimum capital requirements. Under the regulations, well capitalized institutions must have Tier I risk-based capital ratios of at least 6%, total risk-based capital ratios of at least 10%, and leverage ratios of at least 5% and not be subject to capital directive orders. Under these guidelines, the Corporation and the Bank exceeded the minimum ratios to be considered well capitalized at March 31, 2005 and December 31, 2004. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK MANAGEMENT Effectively managing market risk is essential to achieving the Corporation's financial objectives. Market risk reflects the risk of economic loss resulting from adverse changes in interest rates and market prices. 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 magnitude of the change in earnings resulting from interest rate changes is impacted by the time remaining to maturity on fixed-rate obligations, the contractual ability to adjust rates prior to maturity, competition, and the general level of interest rates and customer actions. 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. The Corporation's primary objectives for managing interest rate volatility are to maximize net interest income while ensuring adequate liquidity and managing interest rate risk within established policy guidelines. ALCO is also responsible for evaluating the competitive rate environment and reviewing investment portfolio transactions. In gap analysis, financial institutions compute the difference between interest-earning assets and interest-bearing liabilities, and use those differences to estimate interest rate risk. Because of inherent limitations in gap analysis, the Corporation uses more sophisticated interest rate risk measurement techniques. Simulation analysis is used to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account the Corporation's current balance sheet volumes and the scheduled maturities and payments of assets and liabilities. It incorporates numerous assumptions including growth, changes in the mix of assets and liabilities, projected prepayments, and average rates earned and paid. Based on this information, the model projects net interest income under multiple interest rate scenarios. Management believes the simulation analysis presents a more accurate picture since certain rate indices that affect liabilities do not change with the same magnitude over the same period of time as changes in the prime rate or other indices that affect rates on loans and securities. The Corporation cannot predict future interest rates or their exact effects on net interest income. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, asset and liability prepayments and balance sheet composition and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Also, 24 the methodology uses estimates of various rates of withdrawal for money market deposits, savings, and checking accounts, which may vary significantly from actual experience. The Corporation is also subject to prepayment risk, particularly in falling interest rate environments or in environments where the slope of the yield curve is relatively flat or negative. Such changes in the interest rate environment can cause substantial changes in the level of prepayments of loans, which may also affect the Corporation's interest rate sensitivity position. Additionally, credit risk may increase if an interest rate increase adversely affects the ability of borrowers to service their debt. There have been no material changes in the Corporation's interest sensitivity position since December 31, 2004. Refer to the December 31, 2004 Annual Report on Form 10-K. ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES The Corporation's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Corporation's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of March 31, 2005. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective. There were no significant changes in the Corporation's internal controls over financial reporting that occurred during the quarter ended March 31, 2005 that have materially affected or are reasonably likely to materially affect the Corporation's internal control over financial reporting. 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 March 31, 2005 ----------------------------------------------------------------------------------------------------------- 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, 2005 - $ - - 168,100 ---------------------- ------------ ---------- ---------------------- ------------------- February 1 - 28, 2005 20,000 24.93 20,000 148,100 ---------------------- ------------ ---------- ---------------------- ------------------- March 1 - 31, 2005 10,400 24.49 10,400 137,700 ------ ------ ---------------------- ------------ ---------- ---------------------- ------------------- 30,400 $ 24.78 30,400 ====== ====== ---------------------- ------------ ---------- ---------------------- -------------------
On August 17, 2004, the Corporation's board of directors approved the extension of its stock repurchase plan, begun in 2000, 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 (a) Required 8-K Disclosures None (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 Chief Executive Officer 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 Chief Executive Officer 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 - May 6, 2005 President and Chief Executive Officer /s/ Neal A. Petrovich ------------------------------------- Neal A. Petrovich Senior Vice President and Date - May 6, 2005 Chief Financial Officer 27 EX-31 2 ex3110q032005.txt EXHIBIT 31.1 & 31.2 03/2005 10Q Exhibit 31.1 CERTIFICATIONS -------------- 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and 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 report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter 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 and material weaknesses 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, 2005 /s/Charles H. Majors - ------------------------------------- Charles H. Majors, President and Chief Executive Officer Exhibit 31.2 CERTIFICATIONS -------------- I, Neal A. Petrovich, 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and 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 report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter 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 and material weaknesses 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, 2005 /s/ Neal A. Petrovich - ------------------------- Neal A. Petrovich, Senior Vice President and Chief Financial Officer EX-32 3 ex3210q032005.txt EXHIBIT 32.1 & 32.2 03/2005 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 "Corporation") for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles H. Majors, President and Chief Executive Officer of the Corporation, 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 Corporation. /s/Charles H. Majors - ------------------------------------- Charles H. Majors President and Chief Executive Officer May 6, 2005 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 "Corporation") for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Neal A. Petrovich, Senior Vice President and Chief Financial Officer of the Corporation, 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 Corporation. /s/Neal A. Petrovich - ------------------------- Neal A. Petrovich Senior Vice President and Chief Financial Officer May 6, 2005 -----END PRIVACY-ENHANCED MESSAGE-----