10-Q 06-30-06
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED  June 30, 2006

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO     .


Commission file number 0-12820


AMERICAN NATIONAL BANKSHARES INC.
(Exact name of registrant as specified in its charter)

VIRGINIA
  
54-1284688
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
     
628 Main Street
    
Danville, Virginia
  
24541
(Address of principal executive offices)
  
(Zip Code)

(434) 792-5111
(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes
x
No
¨
  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act.

Large accelerated filer o     Accelerated filer x      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes  ¨ No  x 


At August 9, 2006, the Corporation had 6,158,290 shares Common Stock outstanding, $1 par value.

 
 
 
 
1
 
 
 
 
 

       
   
Page
       
Part I.
  
FINANCIAL INFORMATION
  
       
 
Item 1.
  
       
   
      3
          
   
          4  
 
   
      5
       
   
                  6       
       
   
      7
 
   
      9
       
   Item 2.
        18
       
   Item 3.
       29  
     
   Item 4.
                29
       
Part II.
OTHER INFORMATION
  
       
 
Item 1.
   30
       
 
Item 2.
   30
 
.
    
 
Item 3
  30
       
 
Item 4.
  30
       
 
Item 5
  30
       
 
Item 6
  30
       
SIGNATURES
  



 
2

American National Bankshares Inc. and Subsidiary
 
 
(Dollars in thousands, except share data)
 
             
 
   
(Unaudited)
  
 (Audited)
  
     
June30, 
  
 December 31,
 
ASSETS
 
 2006
  
 2005
  
Cash and due from banks
 
$
19,352
  
$
18,300
  
Interest-bearing deposits in other banks
   
16,425
   
9,054
 
               
Securities available for sale, at fair value
   
157,636
   
147,274
 
Securities held to maturity (fair value of $15,667
             
in 2006 and $18,701 in 2005)
   
15,501
   
18,355
 
Total securities
   
173,137
   
165,629
 
               
Loans held for sale
   
1,005
   
714
 
               
Loans, net of unearned income
   
551,434
   
417,087
 
Less allowance for loan losses
   
(8,208
)
  
(6,109
)
Net loans
   
543,226
   
410,978
 
               
Bank premises and equipment, at cost, less accumulated
             
depreciation of $14,232 in 2006 and $13,194 in 2005
   
12,640
   
7,769
 
Goodwill
   
22,517
   
-
 
Core deposit intangibles, net
   
3,071
   
132
 
Accrued interest receivable and other assets
   
19,195
   
10,927
 
Total assets
 
$
810,568
  
$
623,503
  
               
LIABILITIES and SHAREHOLDERS' EQUITY
              
Liabilities:
             
Demand deposits -- noninterest bearing
 
$
109,161
  
$
85,965
  
Demand deposits -- interest bearing
   
119,767
   
90,629
 
Money market deposits
   
48,111
   
42,425
 
Savings deposits
   
81,078
   
80,315
 
Time deposits
   
274,505
   
192,317
 
Total deposits
   
632,622
   
491,651
 
               
Repurchase agreements
   
43,667
   
37,203
 
FHLB borrowings
   
17,163
   
17,238
 
Trust preferred capital notes
   
20,619
   
-
 
Accrued interest payable and other liabilities
   
4,666
   
3,992
 
Total liabilities
   
718,737
   
550,084
 
               
Shareholders' equity:
             
Preferred stock, $5 par, 200,000 shares authorized,
             
none outstanding
   
-
   
-
 
Common stock, $1 par, 10,000,000 shares authorized,
             
6,162,490 shares outstanding at June 30, 2006 and
             
5,441,758 shares outstanding at December 31, 2005
   
6,162
   
5,442
 
Capital in excess of par value
   
26,353
   
9,588
 
Retained earnings
   
61,423
   
59,109
 
Accumulated other comprehensive income (loss), net
   
(2,107
)
  
(720
)
Total shareholders' equity
   
91,831
   
73,419
 
Total liabilities and shareholders' equity
 
$
810,568
  
$
623,503
  
               
The accompanying notes are an integral part of the consolidated financial statements.
             

 
 

American National Bankshares Inc. and Subsidiary
(Dollars in thousands, except per share data) (Unaudited)
   
 
  
 Three Months Ended  
  
 
 June 30 
  
     
2006
    
2005
  
Interest Income:
             
Interest and fees on loans
 
$
10,089
  
$
6,382
  
Interest and dividends on securities:
             
Taxable
   
1,358
   
1,021
 
Tax-exempt
   
430
   
497
 
Dividends
   
78
   
59
 
Other interest income
   
191
   
28
 
Total interest income
   
12,146
   
7,987
 
Interest Expense:
              
Deposits
   
3,538
   
1,612
 
Repurchase agreements
   
335
   
214
 
Other borrowings
   
242
   
251
 
Trust preferred capital notes
   
320
   
-
 
Total interest expense
   
4,435
   
2,077
 
Net Interest Income
   
7,711
   
5,910
 
Provision for Loan Losses
   
354
   
240
 
Net Interest Income After Provision
             
for Loan Losses
   
7,357
   
5,670
 
               
Noninterest Income:
             
Trust fees
   
885
   
767
 
Service charges on deposit accounts
   
737
   
632
 
Other fees and commissions
   
292
   
273
 
Mortgage banking income
   
203
   
165
 
Securities gains, net
   
17
   
-
 
Other
   
133
   
121
 
Total noninterest income
   
2,267
   
1,958
 
Noninterest Expense:
             
Salaries
   
2,527
   
2,049
 
Pension and other employee benefits
   
673
   
503
 
Occupancy and equipment
   
744
   
633
 
Bank franchise tax
   
170
   
134
 
Core deposit intangible amortization
   
134
   
113
 
Other
   
1,108
   
788
 
Total noninterest expense
   
5,356
   
4,220
 
Income Before Income Tax Provision
   
4,268
   
3,408
 
Income Tax Provision
   
1,266
   
984
 
Net Income
 
$
3,002
  
$
2,424
  
               
Net Income Per Common Share:
             
Basic
 
$
0.49
  
$
0.44
  
Diluted
 
$
0.48
  
$
0.44
  
Average Common Shares Outstanding:
             
Basic
   
6,172,522
   
5,472,021
 
Diluted
   
6,207,543
   
5,517,736
 
               
The accompanying notes are an integral part of the consolidated financial statements.
             

 

American National Bankshares Inc. and Subsidiary
(Dollars in thousands, except per share data) (Unaudited)
 
 
  
Six Months Ended
 
 
 June 30 
  
     
2006
    
2005
 
Interest Income:
             
Interest and fees on loans
 
$
17,045
  
$
12,414
  
Interest and dividends on securities:
             
Taxable
   
2,510
   
2,140
 
Tax-exempt
   
881
   
1,024
 
Dividends
   
135
   
105
 
Other interest income
   
423
   
70
 
Total interest income
   
20,994
   
15,753
 
Interest Expense:
              
Interest on deposits
   
5,845
   
3,132
 
Interest on repurchase agreements
   
644
   
367
 
Interest on other borrowings
   
455
   
495
 
Trust preferred capital notes
   
320
   
-
 
Total interest expense
   
7,264
   
3,994
 
Net Interest Income
   
13,730
   
11,759
 
Provision for Loan Losses
   
480
   
540
 
Net Interest Income After Provision
             
for Loan Losses
   
13,250
   
11,219
 
               
Noninterest Income:
             
Trust fees
   
1,640
   
1,487
 
Service charges on deposit accounts
   
1,308
   
1,191
 
Other fees and commissions
   
601
   
524
 
Mortgage banking income
   
336
   
265
 
Securities gains, net
   
38
   
45
 
Other
   
245
   
513
 
Total noninterest income
   
4,168
   
4,025
 
Noninterest Expense:
             
Salaries
   
4,511
   
3,921
 
Pension and other employee benefits
   
1,322
   
971
 
Occupancy and equipment
   
1,390
   
1,234
 
Bank franchise tax
   
310
   
272
 
Core deposit intangible amortization
   
173
   
225
 
Other
   
2,033
   
1,588
 
Total noninterest expense
   
9,739
   
8,211
 
Income Before Income Tax Provision
   
7,679
   
7,033
 
Income Tax Provision
   
2,271
   
2,026
 
Net Income
 
$
5,408
  
$
5,007
  
               
Net Income Per Common Share:
             
Basic
 
$
0.93
  
$
0.91
  
Diluted
 
$
0.93
  
$
0.90
  
Average Common Shares Outstanding:
             
Basic
   
5,805,287
   
5,491,211
 
Diluted
   
5,840,871
   
5,538,074
 
               
The accompanying notes are an integral part of the consolidated financial statements.
             

 
 
 

American National Bankshares Inc. and Subsidiary
Six Months Ended June 30, 2006 and 2005 (Unaudited)
                                       
(Dollars in thousands)
                           
Accumulated
       
 
  
 Common Stock  
    
Capital in
         
Other
   
Total
 
 
                
Excess of  
    
Retained
   
Comprehensive
   
Shareholders'
 
   
Shares  
    
Amount
   
Par Value
   
Earnings
   
Income (Loss)
 
  
Equity
 
                                       
Balance, December 31, 2004
   
5,521,164
 
$
5,521
  
$
9,474
  
$
55,780
  
$
225
  
$
71,000
  
                                       
Net income
   
-
   
-
   
-
   
5,007
   
-
   
5,007
 
                                       
Change in unrealized losses on securities
                                     
available for sale, net of tax of $ (293)  
    
-
   
-
   
-
   
-
   
(569
)
      
                                       
                                       
 Other comprehensive income (loss)
                           
(569
)
  
(569
)
                                       
 Total comprehensive income
                                 
4,438
 
                                       
Stock repurchased and retired
   
(79,350
)
  
(79
)
  
(136
)
  
(1,732
)
  
-
   
(1,947
)
                                       
Stock options exercised
   
3,372
   
3
   
44
   
-
   
-
   
47
 
                                       
Cash dividends paid
   
-
   
-
   
-
   
(2,245
)
  
-
   
(2,245
)
                                       
Balance, June 30, 2005
   
5,445,186
 
$
5,445
  
$
9,382
  
$
56,810
  
$
(344
)
$
71,293
  
                                       
                                       
Balance, December 31, 2005
   
5,441,758
 
$
5,442
  
$
9,588
  
$
59,109
  
$
(720
)
$
73,419
  
                                       
Net income
   
-
   
-
   
-
   
5,408
   
-
   
5,408
 
                                       
Change in unrealized losses on securities
                                     
available for sale, net of tax of $ (751)
   
-
   
-
   
-
   
-
   
(1,361
)
      
                                       
Less: Reclassification adjustment for gains
                                     
on securities available for sale, net of  
                                      
tax of $ (13)  
    
-
   
-
   
-
   
-
   
(26
)
      
                                       
 Other comprehensive income (loss)
                           
(1,387
)
  
(1,387
)
                                       
 Total comprehensive income
                                 
4,021
 
                                       
Merger acquisition
   
746,944
   
747
   
16,799
               
17,546
 
                                       
Stock repurchased and retired
   
(31,200
)
  
(31
)
  
(98
)
  
(597
)
  
-
   
(726
)
                                       
Stock options exercised
   
4,988
   
4
   
64
   
-
   
-
   
68
 
                                       
Cash dividends paid
   
-
   
-
   
-
   
(2,497
)
  
-
   
(2,497
)
                                       
Balance, June 30, 2006
   
6,162,490
 
$
6,162
  
$
26,353
  
$
61,423
  
$
(2,107
)
$
91,831
  
                                       
The accompanying notes are an integral part of the consolidated financial statements.
                  


6

American National Bankshares Inc. and Subsidiary
Six Months Ended June 30, 2006 and 2005
(Dollars in thousands) (Unaudited)
               
     
2006
    
2005
  
Cash Flows from Operating Activities:
             
Net income
 
$
5,408
  
$
5,007
  
Adjustments to reconcile net income to net
             
cash provided by operating activities:  
              
Provision for loan losses  
    
480
   
540
 
Depreciation  
    
451
   
452
 
Core deposit intangible amortization  
    
173
   
225
 
Amortization of purchase accounting adjustments  
    
(200
)
  
-
 
Net amortization (accretion) of bond premiums and discounts  
    
17
   
117
 
Net gain on sale or call of securities  
    
(38
)
  
(45
)
Gain on loans held for sale  
    
(200
)
  
(184
)
Proceeds from sales of loans held for sale  
    
6,592
   
7,155
 
Originations of loans held for sale  
    
(6,683
)
  
(7,470
)
Net (gain) loss on foreclosed real estate  
    
(3
)
  
(2
)
Valuation provision for foreclosed real estate  
    
-
   
27
 
Deferred income tax (benefit)  
    
(195
)
  
(288
)
Increase in interest receivable  
    
(304
)
  
(237
)
Increase in other assets  
    
(1,883
)
  
(287
)
Increase in interest payable  
    
222
   
73
 
(Decrease) increase in other liabilities  
    
(956
)
  
231
 
 Net cash provided by operating activities
   
2,881
   
5,314
 
               
Cash Flows from Investing Activities:
             
Proceeds from sales of securities available for sale  
    
883
   
-
 
Proceeds from maturities and calls of securities available for sale  
    
32,781
   
83,894
 
Proceeds from maturities and calls of securities held to maturity  
    
2,862
   
2,992
 
Purchases of securities available for sale  
    
(38,094
)
  
(66,511
)
Net decrease (increase) in loans  
    
1,634
   
(9,403
)
Purchases of bank property and equipment  
    
(397
)
  
(545
)
Proceeds from sales of foreclosed real estate  
    
91
   
38
 
Net cash paid in merger acquisition  
    
(14,634
)
  
-
 
 Net cash (used in) provided by investing activities
   
(14,874
)
  
10,465
 
 

(Continued on next page)

 
7

 

American National Bankshares Inc. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2006 and 2005
(Dollars in thousands) (Unaudited)
               
     
2006
    
2005
  
Cash Flows from Financing Activities:
             
Net increase (decrease) in demand, money market,  
              
 and savings deposits
   
13,682
   
(2,656
)
Net decrease in time deposits  
    
(14,619
)
  
(3,424
)
Net increase in repurchase agreements  
    
6,464
   
5,296
 
Net increase (decrease) in borrowings  
    
18,044
   
(2,025
)
Cash dividends paid  
    
(2,497
)
  
(2,245
)
Repurchase of stock  
    
(726
)
  
(1,947
)
Proceeds from exercise of stock options  
    
68
   
47
 
 Net cash provided by (used in) financing activities
   
20,416
   
(6,954
)
               
Net Increase (Decrease) in Cash and Cash Equivalents
   
8,423
   
8,825
 
               
Cash and Cash Equivalents at Beginning of Period
   
27,354
   
12,568
 
               
Cash and Cash Equivalents at End of Period
 
$
35,777
  
$
21,393
  
               
               
Supplemental Schedule of Cash and Cash Equivalents:
             
Cash:
             
Cash and due from banks  
  
$
19,352
  
$
14,363
  
Interest-bearing deposits in other banks  
    
16,425
   
7,030
 
               
   
$
35,777
  
$
21,393
  
               
Supplemental Disclosure of Cash Flow Information:
             
Interest paid
 
$
6,403
  
$
3,921
  
Income taxes paid
   
2,271
   
2,271
 
Transfer of loans to other real estate owned
   
115
   
-
 
Unrealized loss on securities available for sale
   
(2,152
)
  
(862
)
               
Merger acquisition
             
Fair value of assets acquired  
    
175,423
   
-
 
Fair value of common stock issued  
    
(17,546
)
  
-
 
Cash paid
   
(17,087
)
  
-
 
Liabilities assumed  
    
140,790
   
-
 
               
The accompanying notes are an integral part of the consolidated financial statements.
              


 
8

AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements include the amounts and results of operations of American National Bankshares Inc. (the “Corporation”) and its wholly owned subsidiary, American National Bank and Trust Company (“the Bank”).

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 June 30, 2006; the consolidated statements of income for the three and six months ended June 30, 2006 and 2005; the consolidated statements of changes in shareholders’ equity for the six months ended June 30, 2006 and 2005; and the consolidated statements of cash flows for the six months ended June 30, 2006 and 2005. Operating results for the six month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. Certain reclassifications have been made to prior period balances to conform to the current period presentation.
 

NOTE 2 - TRUST PREFERRED SECURITIES

On April 7, 2006, AMNB Statutory Trust I, a Delaware statutory trust (the “Trust”) and a newly formed, wholly owned subsidiary of the Corporation, issued $20,000,000 of preferred securities (the “Trust Preferred Securities”) in a private placement pursuant to an applicable exemption from registration. The Trust Preferred Securities mature on June 30, 2036, but may be redeemed at the Corporation’s option beginning on June 30, 2011. The Trust Preferred Securities require quarterly distributions by the Trust to the holder of the Trust Preferred Securities at a fixed rate of 6.66%. Effective June 30, 2011, the rate will reset quarterly at the three-month LIBOR rate plus 1.35%. Distributions are cumulative and will accrue from the date of original issuance, but may be deferred by the Corporation from time to time for up to twenty consecutive quarterly periods. The Corporation has guaranteed the payment of all required distributions on the Trust Preferred Securities.

The proceeds of the Trust Preferred Securities received by the Trust, along with proceeds of $619,000 received by the Trust from the issuance of common securities (the “Trust Common Securities”) by the Trust to the Corporation, were used to purchase $20,619,000 of the Corporation’s junior subordinated debt securities (the “Debt Securities”), issued pursuant to a Junior Subordinated Indenture (the “Indenture”) entered into between the Corporation and Wilmington Trust Company, as trustee (the “Trustee”). The proceeds of the Debt Securities are being used to fund the cash portion of the merger consideration to the former shareholders of Community First Financial Corporation in connection with the Corporation’s acquisition of that company, and for general corporate purposes.

The Debt Securities mature thirty years from issuance, but the Corporation may redeem them, in whole or in part, after five years. The Debt Securities bear interest at a fixed rate of 6.66%. After five years, the rate will become a variable rate that will reset quarterly at the three-month LIBOR rate plus 1.35%.


NOTE 3 - STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“FAS”) No. 123R, “Share Based Payment.” FAS No. 123R requires public companies to recognize compensation expense related to stock-based compensation awards, such as stock options and restricted stock, in their income statements over the period during which an employee is required to provide service in exchange for such award. FAS No. 123R eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees" (“APB 25”). The Corporation adopted FAS No. 123R effective January 1, 2006 using the modified prospective method and as such, results for prior periods have not been restated.

There were no stock options granted in the first six months of 2006 and all options were fully vested at December 31, 2005. Therefore, no compensation expense was recorded in the period.

Prior to the implementation of FAS 123R, the Corporation applied APB 25 and related interpretations in accounting for stock options. Under APB No. 25, no stock based compensation expense was recorded, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

FAS No. 123, “Accounting for Stock-Based Compensation,” was issued in October 1995 to establish accounting and reporting standards for stock based employee compensation plans. FAS No. 123 required measurement of compensation expense provided by stock based plans using a fair value based method of accounting, and either recognition of compensation expense in the statement of income or disclosure in the notes to the financial statements. There were no stock options granted in the first six months of 2005 and all options were fully vested at December 31, 2004. Therefore, had the fair value recognition provisions of FAS No. 123 been adopted, there would have been no impact on net income.

There were no tax benefits associated with stock option activity during the first six months of 2006 or 2005. Under FAS 123R, a company may only recognize tax benefits for stock options that ordinarily will result in a tax deduction when the option is exercised (“non-statutory” options). The Corporation has no non-statutory stock options.
 
Stock option plan activity for the six months ended June 30, 2006 is summarized below:
 
 
 
 
 Shares     
Weighted Average Exercise Price Per Share
  
Average Remaining Contractual Life (in years)
 
Value Unexercised In-The-Money Options (in thousands)
Options outstanding, January 1
214,962
  
$
20.02
        
Granted
-
    
-
        
Exercised
(4,988
)
  
13.78
        
Forfeited
(700
)
  
26.10
       
Outstanding at June 30
209,274
  
$
20.15
  
5.2
 $
808
Exercisable June 30
209,274
    
20.15
  
5.2
  
808
 
The total value of in-the-money options exercised during three and six months ended June 30, 2006 was $35,000 and $50,000, respectively.

9
 
NOTE 4 - SECURITIES

The amortized cost and estimated fair value of debt and equity securities at June 30, 2006 and December 31, 2005 were as follows (in thousands):
 
   
June 30, 2006
  
   
Amortized 
    
Unrealized
    
Unrealized
    
Estimated
  
   
Cost 
    
Gains
    
Losses
    
Fair Value
  
Securities available for sale:
                          
Federal agencies
  
$
97,646
  
$
-
  
$
2,109
  
$
95,537
  
Mortgage-backed
    
19,933
    
26
    
633
    
19,326
  
State and municipal
    
32,652
    
79
    
744
    
31,987
  
Corporate
   
5,007
    
10
    
87
    
4,930
  
Equity securities:
                          
FHLB stock - restricted
    
2,436
    
-
    
-
    
2,436
  
Federal Reserve stock - restricted
    
363
    
-
    
-
    
363
  
FNMA and FHLMC preferred stock
    
2,759
    
217
    
-
    
2,976
  
Other
    
81
    
-
    
-
    
81
  
Total securities available for sale
    
160,877
    
332
    
3,573
    
157,636
  
                           
Securities held to maturity:
                          
Federal agencies
    
1,500
    
-
    
26
    
1,474
  
Mortgage-backed
    
426
    
1
    
-
    
427
  
State and municipal
    
13,575
    
258
    
67
    
13,766
  
Total securities held to maturity
    
15,501
    
259
    
93
    
15,667
  
 
Total securities
  
$
176,378
  
$
591
  
$
3,666
  
$
173,303
  


   
December 31, 2005
  
   
Amortized 
    
Unrealized
    
Unrealized
    
Estimated
  
   
Cost 
    
Gains
    
Losses
    
Fair Value
  
Securities available for sale:
                          
Federal agencies
  
$
80,764
  
$
2
  
$
1,221
  
$
79,545
  
Mortgage-backed
    
20,795
    
104
    
346
    
20,553
  
State and municipal
    
32,828
    
159
    
466
    
32,521
  
Corporate
   
8,025
    
52
    
71
    
8,006
  
Equity securities:
                          
FHLB stock - restricted
    
2,060
    
-
    
-
    
2,060
  
Federal Reserve stock - restricted
    
363
    
-
    
-
    
363
  
FNMA and FHLMC preferred stock
    
3,104
    
120
    
-
    
3,224
  
Other
    
425
    
577
    
-
    
1,002
  
Total securities available for sale
    
148,364
    
1,014
    
2,104
    
147,274
  
                           
Securities held to maturity:
                          
Federal agencies
    
1,499
    
-
    
28
    
1,471
  
Mortgage-backed
    
482
    
12
    
-
    
494
  
State and municipal
    
16,374
    
407
    
45
    
16,736
  
Total securities held to maturity
    
18,355
    
419
    
73
    
18,701
  
 
Total securities
  
$
166,719
  
$
1,433
  
$
2,177
  
$
165,975
  


 
10

 
The following table shows (in thousands) gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2006.

 
Total
  
Less than 12 Months
  
12 Months or More
  
 
Fair
Value
    
Unrealized
Loss
    
Fair
Value
    
Unrealized
Loss
    
Fair
Value
    
Unrealized
Loss
  
Federal agencies
$
97,010
  
$
2,135
  
$
47,570
  
$
890
  
$
49,440
  
$
1,245
  
Mortgage-backed
  
15,928
    
633
    
3,444
    
32
    
12,484
    
601
  
State and municipal
  
29,397
    
811
    
12,104
    
198
    
17,293
    
613
  
Corporate
  
1,398
    
87
    
-
    
-
    
1,398
    
87
  
Total
$
143,733
  
$
3,666
  
$
63,118
  
$
1,120
  
$
80,615
  
$
2,546
  


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 Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At June 30, 2006, the Bank held one hundred two debt securities having continuous unrealized loss positions for more than twelve months. Ratings for these debt securities were as follows: Forty-five of the federal agency bonds and mortgage-backed securities were rated AAA; forty-nine of the state and municipal bonds were rated AAA, five were rated AA, and one was rated A; and two corporate bonds were rated A. The unrealized losses are attributable to interest rate changes and not credit concerns of the issuer. The Corporation has the intent and ability to hold these securities for the time necessary to recover the amortized cost.
 
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, 2005.

   
Total
  
Less than 12 Months
  
12 Months or More
  
 
    
Fair
Value 
    
Unrealized
Loss
    
Fair
Value
    
Unrealized
Loss
    
Fair
Value
    
Unrealized
Loss
  
Federal agencies
  
$
73,130
  
$
1,249
  
$
18,667
  
$
190
  
$
54,463
  
$
1,059
  
Mortgage-backed
    
15,048
    
346
    
8,717
    
203
    
6,331
    
143
  
State and municipal
    
25,020
    
511
    
16,680
    
233
    
8,340
    
278
  
Corporate
    
1,414
    
71
    
-
    
-
    
1,414
    
71
  
Total
  
$
114,612
  
$
2,177
  
$
44,064
  
$
626
  
$
70,548
  
$
1,551
  


NOTE 5 - LOANS

Loans, excluding loans held for sale, were comprised of the following (in thousands):

   
June 30
     2006 
    
December 31
2005
  
Real estate:
              
Construction and land development
  
$
66,304
  
$
50,092
  
Commercial
   
192,037
    
142,968
  
1-4 family residential
    
131,653
    
94,405
  
Home equity
    
50,805
    
42,178
  
Total real estate
    
440,799
    
329,643
  
               
Commercial and industrial
    
96,621
    
76,735
  
Consumer
    
14,014
    
10,709
  
Total loans
  
$
551,434
  
$
417,087
  
 
 
11
 
    The following is a summary of information pertaining to impaired loans (in thousands):

   
June 30
  
December 31
  
 
    
2006
    
2005
 
Impaired loans without a valuation allowance
  
$
-
  
$
-
  
Impaired loans with a valuation allowance
    
2,548
    
3,532
  
Total impaired loans
  
$
2,548
  
$
3,532
  
               
Allowance provided for impaired loans,
              
included in the allowance for loan losses
  
$
628
  
$
639
  
               

The following table summarizes average balances and interest income related to impaired loans:

   
Three Months Ended June 30
  
     
2006
    
2005
  
Average balance in impaired loans
  
$
3,161
  
$
6,033
  
               
Interest income recognized on impaired loans
  
$
23
  
$
12
  
               
               
   
Six Months Ended June 30
  
     
2006
    
2005
  
Average balance in impaired loans
  
$
3,358
  
$
6,054
  
               
Interest income recognized on impaired loans
  
$
31
  
$
23
  
               

No additional funds are committed to be advanced in connection with impaired loans.

Nonaccrual loans excluded from impaired loan disclosure amounted to $2,767,000 and $1,222,000 at June 30, 2006 and December 31, 2005, respectively. If interest on nonaccrual loans had been accrued, such income would have approximated $195,000 and $212,000 for the six-month periods ended June 30, 2006 and 2005, respectively. Interest income recorded on nonaccrual loans was $0 and $43,000 for the six-month periods ended June 30, 2006 and 2005, respectively.

Loans past due 90 days and still accruing interest amounted to $226,000 at June 30, 2006 and $56,000 at December 31, 2005.

Foreclosed real estate was $435,000 at June 30, 2006 and $188,000 at December 31, 2005, and is reflected in other assets on the Consolidated Balance Sheets.
 
 
12
 
 
The Corporation acquired loans pursuant to the acquisition of Community First. In accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 03-3 (“SOP 03-3”), at acquisition, the Bank reviews each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that it will be unable to collect all amounts due according to the loan’s contractual terms. When both conditions exist, the Bank accounts for each loan individually and considers expected prepayments, and estimates the amount and timing of undiscounted expected principal, interest and other cash flows (expected at acquisition) for each loan. The Bank determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted into interest income (nonaccretable difference). The remaining amount, representing the excess of the loan’s cash flows expected to be collected over the amount paid, is accreted into interest income over the remaining life of the loan (accretable yield).

Over the life of the loan, the Bank continues to estimate cash flows expected to be collected. The Bank evaluates at the balance sheet date whether the present value of its loans determined using the effective interest rates has decreased and if so, establishes a loan loss allowance for the loan. The Corporation’s valuation allowances for all acquired loans subject to SOP 03-3 reflect only those losses incurred after acquisition - that is, the present value of cash flows expected at acquisition that are not expected to be collected. Valuation allowances are established only subsequent to acquisition of the loans. For loans that are not accounted for as debt securities, the present value of any subsequent increase in the loan’s or pool’s actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan. For any remaining increases in cash flows expected to be collected, the Bank adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.

Information regarding loans that were acquired in the acquisition, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be made, is summarized below (in thousands):

   
June 30
     2006 
  
Commercial
  
$
2,522
  
Consumer
    
385
  
Outstanding balance
  
$
2,907
  
Carrying amount, net of $0 allowance
  
$
2,040
  

The carrying amount of these loans is included in the balance sheet amounts of loans receivable at June 30, 2006. These loans are not included in the impaired loan amounts disclosed earlier in this Note.  Of these loans, an aggregate carrying amount of $1,544,000 is included in nonaccrual loans excluded from impaired loan disclosure described earlier in this Note.  There were no such loans outstanding at December 31, 2005.

   
Accretable
Yield 
  
Balance at April 1, 2006
  
$
687
  
Additions
    
(41
)
Accretion
        
Reclassifications from (to)
nonaccretable difference
    
-
  
Disposals
    
-
  
Balance at June 30, 2006
  
$
646
  
         

Loans acquired during 2006 for which it was probable at acquisition that all contractually required payments would not be collected are summarized below (in thousands). No such loans were acquired in 2005.

     
2006
  
Contractually required payments receivable at acquisition:
       
Commercial
  
$
3,887
  
Consumer
    
523
  
Subtotal
  
$
4,410
  
Cash flows expected to be collected at acquisition
  
$
3,594
  
Basis in acquired loans at acquisition
    
2,040
  

 
 
13
 
NOTE 6 - ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses for the six months ended June 30, 2006 and 2005, and for the year ended December 31, 2005 was as follows:

(in thousands)
    
June 30
 
 
December 31
 
 
June 30
 
 
 
 
2006
 
 
2005
 
 
2005
  
Balance, January 1
  
$
6,109
  
$
7,982
  
$
7,982
  
Allowance acquired in merger
    
1,598
    
-
    
-
  
Provision for loan losses
    
480
    
465
    
540
  
Loans charged-off
    
(226
)
  
(2,577
)
  
(272
)
Recoveries of loans charged-off
    
247
    
239
    
128
  
Balance at end of period
  
$
8,208
  
$
6,109
  
$
8,378
  


NOTE 7 - EARNINGS PER SHARE

The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of potential dilutive common stock. Potential dilutive common stock had no effect on income available to common shareholders.

   
Three Months Ended
  
   
June 30
  
   
2006
  
2005
  
         
Per 
          
Per
  
         
Share 
          
Share
  
   
Shares 
    
Amount
    
Shares
    
Amount
  
Basic earnings per share
    
6,172,522
  
$
.49
    
5,472,021
  
$
.44
  
Effect of dilutive securities (stock options)
    
35,021
    
(.01
)
  
45,715
    
-
 
Diluted earnings per share
    
6,207,543
  
$
..48
    
5,517,736
  
$
.44
  


   
Six Months Ended
  
   
June 30
  
   
2006
  
2005
  
         
Per 
          
Per
  
         
Share 
          
Share
  
   
Shares 
    
Amount
    
Shares
    
Amount
  
Basic earnings per share
    
5,805,287
  
$
.93
    
5,491,211
  
$
.91
  
Effect of dilutive securities (stock options)
    
35,584
    
-
   
46,863
    
(.01
)
Diluted earnings per share
    
5,840,871
  
$
.93
    
5,538,074
  
$
.90
  


Certain options on common stock were not included in computing diluted earnings per share for the six month periods ended June 30, 2006 and 2005, because their effects were antidilutive. These shares totaled 88,227 and 99,150 for the three month periods ended June 30, 2006 and 2005, respectively, and averaged 88,227 and 99,250 for the six month periods, respectively.



14

NOTE 8 - DEFINED BENEFIT PLAN

Components of Net Periodic Benefit Cost
  
Three Months Ended
  
Six Months Ended
  
(in thousands)
  
June 30
  
June 30
  
   
2006
  
2005
  
2006
  
2005
  
Service cost
 
$
165
  
$
110
  
$
291
    
220
  
Interest cost
   
88
    
92
    
176
    
184
  
Expected return on plan assets
    
(130
)
  
(126
)
  
(261
)
  
(252
)
Amortization of prior service cost
    
(6
)
  
(9
)
  
(12
)
  
(18
)
Amortization of net obligation at transition
    
-
    
-
    
-
    
-
  
Recognized net actuarial loss
    
52
    
21
    
106
    
42
  
                           
Net periodic benefit cost
  
$
169
  
$
88
  
$
300
  
$
176
  


During the six month period ended June 30, 2006, $1,500,000 in contributions were made. The Corporation plans no additional contributions for the year ending December 31, 2006.


NOTE 9 - SEGMENT AND RELATED INFORMATION

In accordance with FAS 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 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.

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.

Segment information for the six month periods ended June 30, 2006 and 2005 is shown in the following table. The “Other” column includes corporate 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.
 

 
15
 

Three Months Ended June 30, 2006
  
         
Trust and 
                    
 
    
Community  
    
Investment
          
Intersegment
        
   
Banking 
    
Services
    
Other
    
Eliminations
    
Total
  
Interest income
  
$
12,146
  
$
-
  
$
-
  
$
-
  
$
12,146
  
Interest expense
    
4,435
   
-
   
-
   
-
   
4,435
 
Noninterest income - external customers
    
1,283
   
993
   
(9
)
  
-
   
2,267
 
Depreciation and amortization
    
367
   
6
   
-
   
-
   
373
 
Total assets
    
809,265
   
-
   
1,303
   
-
   
810,568
 
Capital expenditures
    
214
   
1
   
-
   
-
   
215
 
                                 
                                 
Three Months Ended June 30, 2005
  
         
Trust and 
                    
 
    
Community 
    
Investment
          
Intersegment
        
 
    
Banking 
    
Services
    
Other
    
Eliminations
    
Total
  
Interest income
  
$
7,987
  
$
-
  
$
-
  
$
-
  
$
7,987
  
Interest expense
    
2,077
   
-
   
-
   
-
   
2,077
 
Noninterest income - external customers
    
1,082
   
871
   
5
   
-
   
1,958
 
Noninterest income - internal customers
    
-
   
12
   
-
   
(12
)
  
-
 
Operating income before income taxes
    
3,026
   
420
   
(38
)
  
-
   
3,408
 
Depreciation and amortization
    
328
   
6
   
-
   
-
   
334
 
Total assets
    
616,265
   
-
   
588
   
-
   
616,853
 
Capital expenditures
    
308
    
1
   
-
   
-
   
309
 
                                 
                                 
Six Months Ended June 30, 2006
  
         
Trust and 
                    
   
Community  
    
Investment
          
Intersegment
        
 
    
Banking 
    
Services
    
Other
    
Eliminations
    
Total
  
Interest income
  
$
20,994
  
$
-
  
$
-
  
$
-
  
$
20,994
  
Interest expense
    
7,264
   
-
   
-
   
-
   
7,264
 
Non-interest income - external customers
    
2,308
   
1,872
   
(12
)
  
-
   
4,168
 
Operating income before income taxes
    
7,156
   
935
   
(412
)
  
-
   
7,679
 
Depreciation and amortization
    
612
   
11
   
1
   
-
   
624
 
Total assets
    
809,265
   
-
   
1,303
   
-
   
810,568
 
Capital expenditures
    
396
    
1
   
-
   
-
   
397