Edgar Filing: AMERICAN NATIONAL BANKSHARES INC

june302007_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2007.


□ 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 þ No o

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 Exchange Act.
Large accelerated filer o		Accelerated filer þ		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 o	No þ

At August 7, 2007, the Company had 6,142,867 shares Common Stock outstanding, $1 par value.

AMERICAN NATIONAL BANKSHARES INC.


Index			Page

Part I		FINANCIAL INFORMATION

	Item 1	Financial Statements (Unaudited)

		Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	3

		Consolidated Statements of Income for the three months ended June 30, 2007 and 2006	4

		Consolidated Statements of Income for the six months ended June 30, 2007 and 2006	5

		Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2007 and 2006	6

		Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006	7

		Notes to Consolidated Financial Statements	9

	Item 2	Management's Discussion and Analysis of the Financial Condition and Results of Operations	16

	Item 3	Quantitative and Qualitative Disclosures about Market Risk	25

	Item 4	Controls and Procedures	25

Part II		OTHER INFORMATION

	Item 1	Legal Proceedings	26

	Item 1A	Risk Factors	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

Index

American National Bankshares Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands, except share data)

	(Unaudited)			(Audited)
	June 30,			December 31,
ASSETS	2007			2006
Cash and due from banks	$	21,735		$	24,375
Interest bearing deposits in other banks		17,053			1,749

Securities available for sale, at fair value		121,083			148,748
Securities held to maturity (fair value of $13,255
in 2007 and $14,131 in 2006)		13,148			13,873
Total securities		134,231			162,621

Loans held for sale		2,306			1,662

Loans, net of unearned income		551,744			542,228
Less allowance for loan losses		(7,493	)		(7,264	)
Net loans		544,251			534,964

Bank premises and equipment, at cost, less accumulated
depreciation of $15,304 in 2007 and $14,755 in 2006		12,899			12,438
Goodwill		22,468			22,468
Core deposit intangibles, net		2,641			2,829
Accrued interest receivable and other assets		13,553			14,614
Total assets	$	771,137		$	777,720

LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- noninterest bearing	$	107,206		$	106,885
Demand deposits -- interest bearing		110,482			107,170
Money market deposits		50,749			50,948
Savings deposits		66,948			69,517
Time deposits		260,359			274,008
Total deposits		595,744			608,528

Repurchase agreements		43,615			33,368
FHLB borrowings		10,012			15,087
Trust preferred capital notes		20,619			20,619
Accrued interest payable and other liabilities		3,898			5,126
Total liabilities		673,888			682,728

Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding		-			-
Common stock, $1 par, 10,000,000 shares authorized,
6,145,617 shares outstanding at June 30, 2007 and
6,161,865 shares outstanding at December 31, 2006		6,146			6,162
Capital in excess of par value		26,422			26,414
Retained earnings		67,122			64,584
Accumulated other comprehensive income (loss), net		(2,441	)		(2,168	)
Total shareholders' equity		97,249			94,992
Total liabilities and shareholders' equity	$	771,137		$	777,720


The accompanying notes are an integral part of the consolidated financial statements.

Index

American National Bankshares Inc. and Subsidiary
Consolidated Statements of Income
(Dollars in thousands, except per share and per share data) (Unaudited)
	Three Months Ended
	June 30
	2007		2006
Interest Income:
Interest and fees on loans	$	10,408	$	10,089
Interest and dividends on securities:
Taxable		1,028		1,358
Tax-exempt		420		430
Dividends		82		78
Other interest income		168		191
Total interest income		12,106		12,146
Interest Expense:
Interest on deposits		3,860		3,538
Interest on repurchase agreements		449		335
Interest on trust preferred capital notes		344		320
Interest on other borrowings		170		242
Total interest expense		4,823		4,435
Net Interest Income		7,283		7,711
Provision for loan losses		-		354
Net Interest Income After Provision
for Loan Losses		7,283		7,357

Noninterest Income:
Trust fees		924		885
Service charges on deposit accounts		625		737
Mortgage banking income		329		203
Brokerage fees		159		109
Other fees and commissions		198		183
Securities gains, net		64		17
Other		132		133
Total noninterest income		2,431		2,267
Noninterest Expense:
Salaries		2,514		2,527
Pension and other employee benefits		737		673
Occupancy and equipment		850		744
Bank franchise tax		165		170
Other		1,182		1,242
Total noninterest expense		5,448		5,356
Income Before Income Tax Provision		4,266		4,268
Income Tax Provision		1,235		1,266
Net Income	$	3,031	$	3,002

Net Income Per Common Share:
Basic	$	0.49	$	0.49
Diluted	$	0.49	$	0.48
Average Common Shares Outstanding:
Basic		6,150,216		6,172,522
Diluted		6,177,165		6,207,543

The accompanying notes are an integral part of the consolidated financial statements.

Index

American National Bankshares Inc. and Subsidiary
Consolidated Statements of Income
(Dollars in thousands, except per share and per share data) (Unaudited)
	Six Months Ended
	June 30
	2007		2006
Interest Income:
Interest and fees on loans	$	20,487	$	17,045
Interest and dividends on securities:
Taxable		2,164		2,510
Tax-exempt		843		881
Dividends		171		135
Other interest income		339		423
Total interest income		24,004		20,994
Interest Expense:
Interest on deposits		7,643		5,845
Interest on repurchase agreements		875		644
Interest on trust preferred capital notes		687		320
Interest on other borrowings		376		455
Total interest expense		9,581		7,264
Net Interest Income		14,423		13,730
Provision for loan losses		303		480
Net Interest Income After Provision
for Loan Losses		14,120		13,250

Noninterest Income:
Trust fees		1,803		1,640
Service charges on deposit accounts		1,247		1,308
Mortgage banking income		519		336
Brokerage fees		248		234
Other fees and commissions		398		367
Securities gains, net		89		38
Other		339		245
Total noninterest income		4,643		4,168
Noninterest Expense:
Salaries		4,904		4,511
Pension and other employee benefits		1,385		1,322
Occupancy and equipment		1,679		1,390
Bank franchise tax		333		310
Other		2,317		2,206
Total noninterest expense		10,618		9,739
Income Before Income Tax Provision		8,145		7,679
Income Tax Provision		2,410		2,271
Net Income	$	5,735	$	5,408

Net Income Per Common Share:
Basic	$	0.93	$	0.93
Diluted	$	0.93	$	0.93
Average Common Shares Outstanding:
Basic		6,153,496		5,805,287
Diluted		6,181,107		5,840,871

The accompanying notes are an integral part of the consolidated financial statements.

Index

American National Bankshares Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2007 and 2006 (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, 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 declared ($ .43 per share)	-			-			-			(2,497	)		-			(2,497	)

Balance, June 30, 2006	6,162,490		$	6,162		$	26,353		$	61,423		$	(2,107	)	$	91,831


Balance, December 31, 2006	6,161,865		$	6,162		$	26,414		$	64,584		$	(2,168	)		94,992

Net income	-			-			-			5,735			-			5,735

Change in unrealized losses on securities
available for sale, net of tax of $ (117)	-			-			-			-			(214	)

Less: Reclassification adjustment for gains
on securities available for sale, net of
tax of $ (30)	-			-			-			-			(59	)

Other comprehensive income (loss)													(273	)		(273	)

Total comprehensive income																5,462

Stock repurchased and retired	(24,300	)		(24	)		(104	)		(428	)		-			(556	)

Stock options exercised	8,052			8			112			-			-			120

Cash dividends declared ($ .45 per share)	-			-			-			(2,769	)		-			(2,769	)

Balance, June 30, 2007	6,145,617		$	6,146		$	26,422		$	67,122		$	(2,441	)	$	97,249

The accompanying notes are an integral part of the consolidated financial statements.

Index

American National Bankshares Inc. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2007 and 2006
(Dollars in thousands) (Unaudited)
	2007			2006
Cash Flows from Operating Activities:
Net income	$	5,735		$	5,408
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		303			480
Depreciation		564			451
Core deposit intangible amortization		188			173
Amortization of purchase accounting adjustments		-			(200	)
Net amortization (accretion) of bond premiums and discounts		(59	)		17
Net gain on sale or call of securities		(89	)		(38	)
Gain on loans held for sale		(397	)		(200	)
Proceeds from sales of loans held for sale		17,862			6,592
Originations of loans held for sale		(18,109	)		(6,683	)
Net gain on foreclosed real estate		(6	)		(3	)
Change in valuation allowance for foreclosed real estate		(10	)		-
Gain on sale of premises and equipment		(9	)		-
Deferred income tax expense (benefit)		92			(195	)
Change in interest receivable		(15	)		(304	)
Change in other assets		1,117			(1,883	)
Change in interest payable		(100	)		222
Change in other liabilities		(1,128	)		(956	)
Net cash provided by operating activities		5,939			2,881

Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale		665			883
Proceeds from maturities and calls of securities available for sale		31,589			32,781
Proceeds from maturities and calls of securities held to maturity		725			2,862
Purchases of securities available for sale		(4,861	)		(38,094	)
Net change in loans		(9,590	)		1,634
Net cash paid in merger acquisition		-			(14,634	)
Purchases of bank property and equipment		(1,016	)		(397	)
Proceeds from sales of foreclosed real estate		30			91
Net cash provided by (used in) investing activities		17,542			(14,874	)

(Continued on next page)

Index

American National Bankshares Inc. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2007 and 2006
(Dollars in thousands) (Unaudited)
	2007			2006
Cash Flows from Financing Activities:

Net change in demand, money market, and savings deposits		865			13,682
Net change in time deposits		(13,649	)		(14,619	)
Net change in repurchase agreements		10,247			6,464
Net change in FHLB borrowings		(5,075	)		18,044
Cash dividends paid		(2,769	)		(2,497	)
Repurchase of stock		(556	)		(726	)
Proceeds from exercise of stock options		120			68
Net cash (used in) provided by financing activities		(10,817	)		20,416

Net Increase in Cash and Cash Equivalents		12,664			8,423

Cash and Cash Equivalents at Beginning of Period		26,124			27,354

Cash and Cash Equivalents at End of Period	$	38,788		$	35,777


Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks	$	21,735		$	19,352
Interest bearing deposits in other banks		17,053			16,425

	$	38,788		$	35,777

Supplemental Disclosure of Cash Flow Information:
Interest paid	$	8,995		$	6,403
Income taxes paid		1,022			918
Transfer of loans to other real estate owned		-			115
Unrealized gain (loss) on securities available for sale		(420	)		(2,152	)


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.

Index

AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2007; the consolidated statements of income for the three months and six months ended June 30, 2007 and 2006; the consolidated statements of changes in shareholders’ equity for the six months ended June 30, 2007 and 2006; and the consolidated statements of cash flows for the six months ended June 30, 2007 and 2006. Operating results for the six month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. Certain reclassifications have been made to prior period balances to conform to the current period presentation. The statements should be read in conjunction with the Notes to Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2006.

Note 2 - Securities

The amortized cost and estimated fair value of investments in debt and equity securities at June 30, 2007 and December 31, 2006 were as follows:

	June 30, 2007
(in thousands)	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available for sale:
Debt securities:
Federal agencies	$	62,571	$	1	$	704	$	61,868
Mortgage-backed		19,530		57		345		19,242
State and municipal		33,557		54		793		32,818
Corporate		1,485		-		51		1,434
Equity securities:
FHLB stock – restricted		1,851		-		-		1,851
Federal Reserve stock - restricted		1,429		-		-		1,429
FNMA and FHLMC preferred stock		2,067		279		-		2,346
Other		95		-		-		95
Total securities available for sale		122,585		391		1,893		121,083

Securities held to maturity:
Federal agencies		1,000		-		1		999
Mortgage-backed		347		5		-		352
State and municipal		11,801		157		54		11,904
Total securities held to maturity		13,148		162		55		13,255
Total securities	$	135,733	$	553	$	1,948	$	134,338

Index

	December 31, 2006
(in thousands)	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available for sale:
Debt securities:
Federal agencies	$	88,106	$	40	$	819	$	87,327
Mortgage-backed		19,225		104		353		18,976
State and municipal		33,608		168		423		33,353
Corporate		2,490		3		56		2,437
Equity securities:
FHLB stock - restricted		2,248		-		-		2,248
Federal Reserve stock - restricted		1,429		-		-		1,429
FNMA and FHLMC preferred stock		2,643		254		-		2,897
Other		81		-		-		81
Total securities available for sale		149,830		569		1,651		148,748

Securities held to maturity:
Federal agencies		1,001		-		12		989
Mortgage-backed		385		9		-		394
State and municipal		12,487		291		30		12,748
Total securities held to maturity		13,873		300		42		14,131
Total securities	$	163,703	$	869	$	1,693	$	162,879

The following table shows 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, 2007.

	Total				Less than 12 Months				12 Months or More
(in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Federal agencies	$	60,391	$	705	$	15,951	$	147	$	44,440	$	558
Mortgage-backed		13,450		345		3,967		41		9,483		304
State and municipal		30,798		847		6,793		136		24,005		711
Corporate		1,434		51		-		-		1,434		51
Total	$	106,073	$	1,948	$	26,711	$	324	$	79,362	$	1,624

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 Company 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 attributable to interest rate changes and not credit concerns of the issuer. The Company has the intent and ability to hold these securities for the time necessary to recover the amortized cost. As of June 30, 2007, the Company held 126 securities that had been in a continuous unrealized loss position for twelve months or more.

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at December 31, 2006.

	Total				Less than 12 Months				12 Months or More
(in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Federal agencies	$	72,091	$	831	$	21,439	$	113	$	50,652	$	718
Mortgage-backed		11,091		353		242		2		10,849		351
State and municipal		25,310		453		3,784		51		21,526		402
Corporate		1,429		56		-		-		1,429		56
Total	$	109,921	$	1,693	$	25,465	$	166	$	84,456	$	1,527

Index

Note 3 - Loans

Loans, excluding loans held for sale, were comprised of the following:

(in thousands)	June 30, 2007		December 31, 2006

Construction and land development	$	73,596	$	69,404
Commercial real estate		196,426		186,639
Residential real estate		129,032		131,126
Home equity		48,136		52,531
Total real estate		447,190		439,700

Commercial and industrial		93,763		91,511
Consumer		10,791		11,017
Total loans	$	551,744	$	542,228

The following is a summary of information pertaining to impaired and nonaccrual loans:

(in thousands)	June 30, 2007		December 31, 2006

Impaired loans without a valuation allowance	$	936	$	472
Impaired loans with a valuation allowance		3,105		904
Total impaired loans	$	4,041	$	1,376

Allowance provided for impaired loans,
included in the allowance for loan losses	$	912	$	241

Nonaccrual loans excluded from the impaired loan disclosure	$	1,356	$	2,311

	As of and for the Three Months Ended June 30,		As of and for the Six Months Ended June 30,		As of and for the Three Months Ended June 30,		As of and for the Six Months Ended June 30,
(in thousands)	2007		2007		2006		2006

Average balance in impaired loans	$	2,292	$	1,939	$	3,161	$	3,358

Interest income recognized on impaired loans	$	103	$	107	$	23	$	31

Interest income recognized on nonaccrual loans	$	-	$	-	$	-	$	-

Interest on nonaccrual loans had they been accruing	$	73	$	148	$	129	$	195

Loans past due 90 days and still accruing interest	$	-	$	-	$	226	$	226

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

Foreclosed real estate was $85,000 at June 30, 2007 and $99,000 at December 31, 2006, and is included in other assets on the Consolidated Balance Sheets.

Index

Note 4 - Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

Changes in the allowance for loan losses and the reserve for unfunded lending commitments for the six months ended June 30, 2007 and 2006, and for the year ended December 31, 2006 are presented below:

(in thousands)	Six Months Ended June 30, 2007		Year Ended December 31, 2006		Six Months Ended June 30, 2006
Allowance for Loan Losses
Balance, beginning of period	$	7,264	$	6,109	$	6,109
Allowance acquired in merger		-		1,598		1,598
Provision for loan losses		303		58