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.
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
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Commission file number 0-12820
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AMERICAN NATIONAL BANKSHARES INC.
---------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1284688
-------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
628 Main Street
Danville, Virginia 24541
---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(434) 792-5111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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At May 6, 2005, the Corporation had 5,486,642 shares Common Stock
outstanding, $1 par value.
AMERICAN NATIONAL BANKSHARES INC.
Index Page No.
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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