-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NsRZ/x9HxdW7EgA7+HzT7lWPOxBCxMLIIDnRMaErwEDNcd7Dc9mco3hGU3g21lnc T6sKRAeFcDIcZNqubzFkdw== 0000741516-02-000016.txt : 20020515 0000741516-02-000016.hdr.sgml : 20020515 20020515144333 ACCESSION NUMBER: 0000741516-02-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN NATIONAL BANKSHARES INC CENTRAL INDEX KEY: 0000741516 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541284688 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12820 FILM NUMBER: 02651150 BUSINESS ADDRESS: STREET 1: 628 MAIN ST CITY: DANVILLE STATE: VA ZIP: 24541 BUSINESS PHONE: 4347925111 MAIL ADDRESS: STREET 1: 628 MAIN STREET STREET 2: P O BOX 191 CITY: DANVILLE STATE: VA ZIP: 24543 10-Q 1 march200210q.txt 03/31/2002 10-Q AMERICAN NATIONAL BANKSHARES INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2002. -------------- [ ] 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 . ---- ----- As reported in the Company's Current Report on Form 8-K, dated May 15, 2002, the Company terminated its relationship with Arthur Andersen, LLP ("Andersen"), its former accountant, effective May 15, 2002. As a result, in accordance with the Securities and Exchange Commission's Order of March 18, 2002 relating to former clients of Andersen, the Company is currently in the process of selecting another independent public accountant. The Company has not obtained a review of the financial statements included herein pursuant to Rule 10-01(d) of Regulation S-X promulgated under the Securities and Exchange Act of 1934, as amended. The number of shares outstanding of the issuer's common stock as of May 10, 2002 was 5,802,256. AMERICAN NATIONAL BANKSHARES INC. INDEX
Page No. Part I. Financial Information Changes in Registrant's Certifying Accountant 3 Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001........................................... 4 Consolidated Statements of Income for the three months ended March 31, 2002 and 2001................................... 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001................................... 6 Notes to Consolidated Financial Statements........................ 7 - 8 Item 2. Management's Discussion and Analysis of the Financial Condition and Results of Operations......................................... 9 -14 Part II. Other Information................................................... 15 SIGNATURES...................................................................... 15
2 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT As reported in the Company's Current Report on Form 8-K, dated May 15, 2002, the Company terminated its relationship with Arthur Andersen, its former accountant, effective May 15, 2002. As a result, in accordance with the Securities and Exchange Commission's Order of March 18, 2002 relating to former clients of Andersen, the Company is currently in the process of selecting another independent public accountant. The Company has not obtained a review of the financial statements included herein pursuant to Rule 10-01(d) of Regulation S-X promulgated under the Securities and Exchange Act of 1934, as amended. Once the Company has selected a new accountant, such accountant will review the financial statements included herein in accordance with Rule 10-01(d), if, as a result of such review, there is a change to the financial statements included herein, the Company will file an amendment to this Quarterly Report on Form 10-Q to include the disclosure required by the Securities and Exchange Commission's Order of March 18, 2002. 3 Consolidated Balance Sheets American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
March 31 December 31 2002 2001 ---------- ----------- ASSETS Cash and due from banks.........................................................$ 11,468 $ 14,798 Interest-bearing deposits in other banks........................................ 22,885 14,351 Investment securities: Securities available for sale (at market value)................................. 117,886 127,317 Securities held to maturity (market value of $28,402 at March 31, 2002 and $30,154 at December 31, 2001).............................. 27,881 29,474 ---------- ---------- 145,767 156,791 ---------- ---------- Loans, net of unearned income .................................................. 381,888 375,593 Less allowance for loan losses.................................................. (5,423) (5,334) ---------- ---------- Net loans..................................................................... 376,465 370,259 ---------- ---------- Bank premises and equipment, at cost, less accumulated depreciation of $9,949 in 2002 and $9,652 in 2001............................. 8,354 7,857 Core Deposit Intangibles........................................................ 1,721 1,834 Accrued interest receivable and other assets.................................... 7,899 6,997 ---------- ---------- Total assets..................................................................$ 574,559 $ 572,887 ========== ========== LIABILITIES and SHAREHOLDERS' EQUITY Liabilities: Demand deposits -- non-interest bearing.......................................$ 56,613 $ 58,573 Demand deposits -- interest bearing........................................... 57,892 61,405 Money market deposits......................................................... 39,665 47,024 Savings deposits.............................................................. 68,354 65,651 Time deposits................................................................. 234,545 231,359 ---------- ---------- Total deposits.............................................................. 457,069 464,012 ---------- ---------- Repurchase agreements........................................................... 34,719 27,177 FHLB borrowings................................................................. 13,000 13,000 Accrued interest payable and other liabilities.................................. 4,019 3,301 ---------- ---------- Total liabilities............................................................. 508,807 507,490 ---------- ---------- Shareholders' equity: Preferred stock, $5 par, 200,000 shares authorized, none outstanding............................................................ - - Common stock, $1 par, 10,000,000 shares authorized, 5,815,756 shares outstanding at March 31, 2002 and 5,821,956 shares outstanding at December 31, 2001....................... 5,816 5,822 Capital in excess of par value................................................ 9,583 9,588 Retained earnings............................................................. 49,772 48,678 Accumulated other comprehensive income - net unrealized gains on securities available for sale....................... 581 1,309 ---------- ---------- Total shareholders' equity.................................................. 65,752 65,397 ---------- ---------- Total liabilities and shareholders' equity..................................$ 574,559 $ 572,887 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
4 Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
Three Months Ended March 31 ------------------------- 2002 2001 ---------- ---------- Interest Income: Interest and fees on loans....................................................$ 6,749 $ 7,710 Interest on deposits in other banks........................................... 82 121 Income on investment securities: Federal agencies............................................................ 427 1,007 Mortgage-backed............................................................. 656 558 State and municipal......................................................... 456 480 Other investments........................................................... 431 427 ---------- ---------- Total interest income....................................................... 8,801 10,303 ---------- ---------- Interest Expense: Interest on deposits: Demand...................................................................... 119 165 Money market................................................................ 190 391 Savings..................................................................... 265 326 Time........................................................................ 2,530 3,293 Interest on repurchase agreements............................................. 149 328 Interest on other borrowings.................................................. 171 212 ---------- ---------- Total interest expense...................................................... 3,424 4,715 ---------- ---------- Net Interest Income............................................................. 5,377 5,588 Provision for Loan Losses....................................................... 183 262 ---------- ---------- Net Interest Income After Provision For Loan Losses............................................................... 5,194 5,326 ---------- ---------- Non-Interest Income: Trust and investment services................................................. 666 660 Service charges on deposit accounts........................................... 365 296 Other fees and commissions.................................................... 196 187 Mortgage banking income....................................................... 82 83 Securities gains, net......................................................... 19 170 Other income.................................................................. 67 47 ---------- ---------- Total non-interest income................................................... 1,395 1,443 ---------- ---------- Non-Interest Expense: Salaries...................................................................... 1,553 1,630 Pension and other employee benefits........................................... 375 355 Occupancy and equipment....................................................... 612 575 Core deposit intangible amortization ......................................... 112 112 Other......................................................................... 846 786 ---------- ---------- Total non-interest expense.................................................. 3,498 3,458 ---------- ---------- Income Before Income Tax Provision.............................................. 3,091 3,311 Income Tax Provision............................................................ 892 993 ---------- ---------- Net Income......................................................................$ 2,199 $ 2,318 ========== ========== - --------------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic...........................................................................$ .38 $ .38 Diluted.........................................................................$ .38 $ .38 - --------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Basic...........................................................................5,821,367 6,044,183 Diluted.........................................................................5,852,000 6,061,538 - --------------------------------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these statements.
5 Consolidated Statements of Cash Flows American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
Three Months Ended March 31 ------------------------- 2002 2001 ---------- ---------- Cash Flows from Operating Activities: Net income......................................................................$ 2,199 $ 2,318 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses..................................................... 183 262 Depreciation.................................................................. 297 289 Core deposit intangible amortization.......................................... 112 112 Amortization (accretion) of premiums and discounts on investment securities.................................................... 38 (5) Gain on sale of securities.................................................... (19) (170) Gain on sale of loans......................................................... (82) (83) Deferred income taxes benefit................................................. (54) (109) Increase in interest receivable............................................... (20) (18) (Increase) decrease in other assets........................................... (453) 46 (Decrease) increase in interest payable....................................... (122) 42 Increase in other liabilities................................................. 840 1,498 ---------- ---------- Net cash provided by operating activities................................... 2,919 4,182 ---------- ---------- Cash Flows from Investing Activities: Proceeds from maturities, calls, and sales of securities ..................... 22,124 15,890 Purchases of securities available for sale.................................... (11,012) (10,668) Purchases of securities held to maturity...................................... (1,209) - Net increase in loans......................................................... (6,307) (13,797) Purchases of property and equipment........................................... (794) (354) ---------- ---------- Net cash provided by (used in) investing activities......................... 2,802 (8,929) ---------- ---------- Cash Flows from Financing Activities: Net (decrease) increase in demand, money market, and savings deposits........................................................ (10,129) 4,402 Net increase in time deposits................................................. 3,186 8,336 Net increase (decrease) in repurchase agreements.............................. 7,542 (1,546) Cash dividends paid........................................................... (990) (904) Repurchase of stock........................................................... (132) (690) Proceeds from exercise of stock options....................................... 6 - ---------- ---------- Net cash (used in) provided by financing activities......................... (517) 9,598 ---------- ---------- Net Increase in Cash and Cash Equivalents....................................... 5,204 4,851 Cash and Cash Equivalents at Beginning of Period................................ 29,149 25,071 ---------- ---------- Cash and Cash Equivalents at End of Period......................................$ 34,353 $ 29,922 ========== ========== Supplemental Schedule of Cash and Cash Equivalents: Cash: Cash and due from banks.....................................................$ 11,468 $ 13,679 Interest-bearing deposits in other banks.................................... 22,885 16,243 ---------- ---------- $ 34,353 $ 29,922 ========== ========== Supplemental Disclosure of Cash Flow Information: Interest paid.................................................................$ 3,546 $ 4,673 Income taxes paid.............................................................$ 3 $ 19 The accompanying notes to consolidated financial statements are an integral part of these statements.
6 AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly American National Bankshares' financial position as of March 31, 2002, the results of its operations and its cash flows for the three months then ended. Operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The consolidated financial statements include the amounts and results of operations of American National Bankshares Inc. ("the Corporation") and its wholly owned subsidiary, American National Bank and Trust Company ("the Bank") and the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. A summary of the Corporation's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Corporation's 2001 Annual Report on Form 10-K. This report contains forward-looking statements with respect to the financial condition, results of operations and business of the Corporation and Bank. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Corporation and Bank and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ materially from those expected include the following: o General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances. o Changes in interest rates could reduce net interest income. o Competitive pressures among financial institutions may increase. o The businesses that the Corporation and Bank are engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards. o New products developed or new methods of delivering products could result in a reduction in business and income for the Corporation and Bank. o Adverse changes may occur in the securities market. NEW ACCOUNTING PRONOUNCEMENTS In June 2001 the FASB approved Statement of Financial Accounting Standard No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. Under SFAS No. 142 goodwill has an indefinite life and will no longer be amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The Corporation had no pending acquisitions initiated before or after June 30, 2001. In addition, the Corporation has no recorded goodwill. The adoption of SFAS No. 141 and 142 is not expected to have a material impact on the Corporation. COMPREHENSIVE INCOME The following is a detail of comprehensive income for the three months ended March 31, 2002 and 2001: Three Months Ended March 31 ----------------------------- 2002 2001 ------------ ------------ Net Income $ 2,199,000 $ 2,318,000 Unrealized holding gains (losses) arising during period (net of tax expense) (728,000) 831,000 ------------ ------------ Total comprehensive income $ 1,471,000 $ 3,149,000 ============ ============ 7 SEGMENT AND RELATED INFORMATION Reportable segments include community banking and trust and investment services. Community banking involves making loans to and generating deposits from individuals and businesses in the markets where the Bank has offices. All assets and liabilities of the Bank are allocated to community banking. Investment income from fixed income investments is a major source of income in addition to loan interest 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 includes estate and trust planning and administration and investment management for various entities. The trust and investment services division of the Bank manages trusts, estates and purchases equity, fixed income and mutual fund investments for customer accounts. The 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 three months ended March 31, 2002 and 2001 is shown in the following table (in thousands). The "Other" column includes corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments. Three Months Ended March 31, 2002 - ---------------------------------------------------------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------ ------------ ----- Interest income $ 8,801 $ - $ 6 $ (6) $ 8,801 Interest expense 3,424 - 6 (6) 3,424 Non-interest income - external customers 592 666 137 - 1,395 Non-interest income - internal customers - 13 - (13) - Operating income before income taxes 2,657 446 (12) - 3,091 Depreciation and amortization 400 8 1 - 409 Total assets 574,488 - 71 - 574,559 Capital expenditures 794 - - - 794
Three Months Ended March 31, 2001 - ---------------------------------------------------------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------ ------------ ----- Interest income $ 8,801 $ - $ 6 $ (6) $ 8,801 Interest income $ 10,303 $ - $ 6 $ (6) $ 10,303 Interest expense 4,715 - 6 (6) 4,715 Non-interest income - external customers 651 660 132 - 1,443 Non-interest income - internal customers - 14 - (14) - Operating income before income taxes 2,954 404 (47) - 3,311 Depreciation and amortization 382 17 2 - 401 Total assets 555,524 - 152 - 555,676 Capital expenditures 338 16 0 - 354
8 AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on important factors affecting the Corporation's financial condition and results of operations. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements, and supplemental financial data. RESULTS OF OPERATIONS NET INCOME The Corporation's net income for the first three months of 2002 was $2,199,000, a decrease of 5.1% over the $2,318,000 earned during the same period of 2001. While earnings declined on a year-to-year basis, the number of shares also declined due to stock repurchases under the Corporation's outstanding stock repurchase programs. On a basic and diluted per share basis, net earnings totaled $0.38 for the first three months of 2002, which was the same as the per share earnings during the same period of 2001. On an annualized basis, return on average total assets was 1.56% for the first three months of 2002 compared to 1.70% for the same three month period in 2001. Return on average common shareholders' equity was 13.32% and 14.64% for the first three months of 2002 and 2001, respectively. The Corporation's decline in earnings resulted from several factors. Net interest income after provision for loan losses declined $132,000, or 2.5%, for the first three months of 2002 compared to the same period in 2001 due to a decline in the interest margin and spread which was offset partially by a lower provision for loan losses. For the same comparative period, non-interest income declined by $48,000, even with a $151,000 decline in non-recurring gains on the pre-maturity call of investment securities booked in 2001. Excluding non-recurring securities gains, non-interest income increased $103,000 due to increased deposit account service charges and other income. Non-interest expense increased by $40,000 for the first three months of 2002 compared to the same three month period in 2001 due to increases in employee benefits and occupancy costs associated with a new banking office opened in Henry County in 2002. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis was $5,624,000 for the first three months of 2002 compared to $5,830,000 for the first three months of 2001, a decrease of 3.5%. The interest rate spread decreased to 3.61% from 3.72%, and the net yield on earning assets decreased to 4.17% from 4.50% in the first three months of 2002 compared to the first three months of 2001, respectively. The Net yield on earning assets decreased at a faster pace due to higher asset growth in the area of adjustable-rate commercial loans and deposits in other banks. Net interest income on a FTE basis decreased while average interest-earning assets increased 4.1%, or $21,011,000, and average interest-bearing liabilities grew 3.5%, or $14,755,000. The interest rate spread declined due to interest-earning assets repricing at a faster rate than interest bearing liabilities. Two positive developments were noted that assisted in minimizing the decline in net interest income; non-interest bearing demand deposits grew by 3.2% and interest-bearing assets grew at a faster pace than interest-bearing liabilities. During the first quarter of 2002, the Federal Reserve held interest rates at year-end 2001 levels. These historically low rates kept the prime lending rate at 4.75% during the three months ending March 31, 2002, which was much lower than the 9.5% to 8.0% range of the prime lending rate during the same period of 2001. While the Corporation's balance sheet is liability-sensitive, many liabilities remained near competitive market-driven pricing floors while assets repriced or were booked at lower asset yields. The following tables demonstrate fluctuations in net interest income and the related yields for the first three months of 2002 compared to similar prior year periods. 9 The following is an analysis of net interest income, 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. (In thousands, except rates):
Interest Average Balance Income/Expense Yield/Rate ----------------------- --------------------- ----------------- 2002 2001 2002 2001 2002 2001 -------- -------- ------- ------- ------ ------ For three months ended March 31 Loans: Commercial $157,350 $121,875 $ 2,617 $ 2,742 6.65% 9.00% Mortgage 182,750 176,487 3,221 3,806 7.05 8.63 Consumer 36,800 47,366 941 1,196 10.23 10.10 -------- -------- ------- ------- ------ ------ Total loans 376,900 345,728 6,779 7,744 7.19 8.96 -------- -------- ------- ------- ------ ------ Investment securities: U. S. Government - - - - - - Federal agencies 33,966 61,658 427 1,007 5.03 6.53 Mortgage-backed 42,301 35,184 656 558 6.20 6.34 State and municipal 37,648 39,205 650 668 6.91 6.82 Other investments 28,668 27,718 454 447 6.33 6.45 -------- -------- ------- ------- ------ ------ Total investment securities 142,583 163,765 2,187 2,680 6.14 6.55 -------- -------- ------- ------- ------ ------ Deposits in other banks 19,918 8,898 82 121 1.65 5.44 -------- -------- ------- ------- ------ ------ Total interest-earning assets 539,401 518,391 9,048 10,545 6.71 8.14 ------- ------- ------ ------ Other non-earning assets 24,386 27,200 -------- -------- Total assets $563,787 $545,591 ======== ======== Interest-bearing deposits: Demand $ 60,024 $ 57,018 119 165 .79 1.16 Money market 38,983 39,406 190 391 1.95 3.97 Savings 66,687 61,450 265 326 1.59 2.12 Time 233,203 224,314 2,530 3,293 4.34 5.87 -------- -------- ------- ------- ------ ------ Total interest-bearing deposits 398,897 382,188 3,104 4,175 3.11 4.37 Repurchase agreements 30,076 28,756 149 328 1.98 4.56 Other borrowings 13,000 16,274 171 212 5.26 5.21 -------- -------- ------- ------- ------ ------ Total interest-bearing liabilities 441,973 427,218 3,424 4,715 3.10 4.41 ------- ------- ------ ------ Demand deposits 52,541 50,935 Other liabilities 3,214 4,095 Shareholders' equity 66,059 63,343 -------- -------- Total liabilities and shareholders' equity $563,787 $545,591 ======== ======== Interest rate spread 3.61% 3.72% ====== ====== Net interest income 5,624 5,830 ======= ======= Taxable equivalent adjustment 247 242 ======= ======= Net yield on earning assets 4.17% 4.50% ====== ======
10 PROVISION AND RESERVE FOR LOAN LOSSES The allowance for loan losses is to provide for losses inherent in the loan portfolio. The Bank's Loan Committee has responsibility for determining the level of the allowance for loan losses, subject to the review of the Board of Directors. Among other factors, the Committee on a quarterly basis considers the Corporation's historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits including impaired loans and the Corporation's loan "Watch" list, and national and local economic conditions. The provision for loan losses was $183,000 for the first three months of 2002 versus $262,000 for the same period in 2001. The decreased provision for loan losses was due to a slower pace of loan growth in 2002. Net charged off loans were $94,000 for the first three months of 2002 versus $71,000 for the same period in 2001. The ratio of net charge-offs to average outstanding loans was .25% in 2002 and .12 in 2001. Management considers these charge-off ratios lower than those of their peer banks, who generally consider charge-off levels of .10% to .40% to be within reasonable norms from a historical perspective. The reserve for loan losses totaled $5,423,000 at March 31, 2002, an increase of 1.7% over the $5,334,000 recorded at December 31, 2001. The ratio of reserves to loans, less unearned discount, was 1.42% at March 31, 2002 versus 1.42% at December 31, 2001. 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, 2002. NON-INTEREST INCOME Non-interest income for the first three months of 2002 was $1,395,000, a decrease of 3.3% from $1,443,000 reported in the first three months of 2001. The comparative decline was due to a high volume of non-recurring gains on the pre-maturity call of investment securities booked in 2001. During the Federal Reserve's rate declines beginning in January of 2001, a large volume of callable government agency securities purchased at a discount were called resulting in security gains. These calls and related gains did not reoccur during the first three months of 2002. Excluding non-recurring securities gains, non-interest income increased $103,000 due to increased deposit account service charges and other income. Service charges on deposit accounts grew 23% or $69,000 in the first quarter of 2002 when compared to the same period in 2001. Trust and investment services income of $666,000 during the first three months of 2002 was up slightly compared to the same period in 2001. Because a majority of trust account fees are calculated based on the market value of the assets under management, the performance of the equity and bond markets effects trust financial performance. The Bank's trust department managed accounts whose market values approximated $332,000,000 at March 31, 2002 compared to $345,000,000 at March 31, 2001. The growth in new trust business and increased management fees slightly offset the continued low valuations in the equities markets, which negatively impacted asset values under management. NON-INTEREST EXPENSE Non-interest expense for the first three months of 2002 was $3,498,000, a 1.2% increase from the $3,458,000 reported for the same period last year. Salaries decreased 4.7% from the same period last year to $1,553,000 in 2002 while pension and other employee benefits increased 5.6% to $375,000. Occupancy and equipment increased $37,000, or 6.4%, for the first three months of 2002 from the same period in 2001. These increases were primarily the result of the Southern Henry County office that opened in March 2002, increased depreciation expense associated with recent technology initiatives, coupled with lower incentive compensation expense. Core deposit intangible amortization of $112,000 for the first three months of 2002 and 2001 represents the amortization of the premium paid for deposits acquired at the Gretna office in 1995 and Yanceyville office in 1996. The efficiency ratio, a productivity measure used to determine how well non-interest expense is managed, was 49.97% and 48.68% for the three months ended March 31, 2002 and 2001, respectively. A lower efficiency ratio generally indicates better expense efficiency. Leaders in expense efficiency in the 11 banking industry have achieved ratios in the mid-to-high 40% range while the majority of the industry remains in the 55-65% range. INCOME TAX PROVISION The income tax provision for the first three months of 2002 was $892,000, a decrease of $101,000 from $993,000 reported a year earlier. The effective tax rate for the first three months of 2002 was 28.9% compared to 29.9% for the first three months of 2001. The decrease in the effective tax rate resulted from various adjustments. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES GENERAL Total assets have increased to $574,559,000 at March 31, 2002, a nominal increase compared to the same period in 2001. Total loans increased $6,295,000 or 1.7% during the first three months of 2002. Total deposits declined $6,943,000 or 1.5% during the first three months of 2002 and repurchase agreements increased $7,542,000 or 27.8% during the same period. Repurchase agreements of $34,719,000 are used by commercial accounts to earn higher yields on short-term funds and mature daily. Growth in the loan portfolio and in interest-bearing deposits in other banks was funded by decreases in investment securities and deposits and increases in repurchase agreements. ASSET QUALITY Non-performing loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more as to principal and interest payments, and loans classified as troubled debt restructurings. Loans in a non-accrual status at March 31, 2002 were $771,000 compared with $568,000 at December 31, 2001, and $276,000 on March 31, 2001. Loans on accrual status and past due 90 days or more at March 31, 2002 were $171,000 compared with $258,000 at December 31, 2001, and $164,000 on March 31, 2001. There were no loans classified as troubled debt restructurings on March 31, 2002, December 31, 2001 or March 31, 2001. Total non-performing loans as a percentage of net loans were 0.25% at March 31, 2002, 0.22% at December 31, 2001, and 0.12% at March 31, 2001. Total non-performing loans are considered low by industry standards. Net charge-offs for the first three months of 2002, annualized, as a percentage of average loans increased to .12% in 2002 from .08% for the same period of 2001. These charge-off ratios are low by industry standards. Management considers charge-off levels of .10% to .40% to be within reasonable norms from a historical perspective. Properties received due to loan foreclosures were $117,000 at March 31, 2002, $117,000 at December 31, 2001, and $245,000 at March 31, 2001. During the first three months of 2002 the gross amount of interest income that would have been recorded on non-accrual loans and restructured loans at March 31, 2002, if all such loans had been accruing interest at the original contractual rate, was $29,000. No interest payments were recorded as interest income during the reporting period for all such non-performing loans. LIQUIDITY The Bank's net liquid assets, which includes cash and due from banks, unpledged government securities, unpledged other securities with remaining maturities of less than two years, less the Bank's reserve requirement, to net liabilities ratio was 18.6% at March 31, 2002 and 20.0% at December 31, 2001. The decline in this ratio reflects greater loan growth than deposit growth and increased pledging of securities on commercial repurchase agreements; however, both of these ratios are considered to reflect adequate liquidity for the respective periods. The Bank has a line of credit equal to 15% of assets with the Federal Home Loan Bank of Atlanta that equaled approximately $86,109,000 at March 31, 2002. Borrowings outstanding under this line of credit was $13,000,000, at March 31, 2002 and December 31, 2001. The Bank 12 has three term borrowing contracts outstanding with $3,000,000 maturing in June of 2008, $5,000,000 maturing in August of 2008, and $5,000,000 maturing in April of 2009. The FHLB has the ability to terminate the borrowings after each contract reaches an early conversion option date. Commitments to extend credit, which amount to $112,940,000 at March 31, 2002 and $121,062,000 at December 31, 2001, represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements. Commitments to purchase securities when issued were $2,295,000 at March 31, 2002. There were no commitments to purchase securities when issued at December 31, 2001. Standby letters of credit are conditional commitments issued by the Bank guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. At March 31, 2002 and December 31, 2001, the Bank had $1,309,000 and $1,531,000 respectively, in outstanding standby letters of credit. Management monitors and plans the Corporation's liquidity position for future periods. Liquidity is provided from cash and due from banks, interest-bearing deposits in other banks, repayments from loans, increases in deposits, lines of credit from two correspondent banks and two federal agency banks and a planned structured continuous maturity of investments. Management believes that these factors provide sufficient and timely liquidity for the foreseeable future. CAPITAL RESOURCES The following table displays the changes in shareholders' equity from December 31, 2001, to March 31, 2002: Equity, December 31, 2001 $65,397,000 Net earnings 2,199,000 Exercise of stock options 6,000 Repurchase of common stock (132,000) Cash dividends paid (990,000) Net change in net unrealized losses on AFS securities (728,000) ------------ Equity, March 31, 2002 $65,752,000 ============ During the first quarter of 2002, the Corporation declared and paid a quarterly cash dividend of $.17 per share. The dividend totaled $990,000 and represented a 45.0% payout of first quarter 2002 net income. The Corporation's Board of Directors authorized the repurchase of up to 300,000 shares of the Corporation's common stock between August 16, 2000 and August 15, 2001, and 250,000 shares of the Corporation's common stock between August 29,2001 and August 28, 2002. The repurchases, which may be made through open market purchases or in privately negotiated transactions, were 6,600 shares during the first quarter of 2002 and have been 300,966 shares since August 16, 2000. Federal regulatory risk-based capital ratio guidelines require percentages to be applied to various assets including off-balance-sheet assets in relation to their perceived risk. Tier I capital includes shareholders' equity and Tier II capital includes certain components of nonpermanent preferred stock and subordinated debt. The Corporation has no preferred stock or subordinated debt. Banks and bank holding companies must have a Tier I capital ratio of at least 4% and a total ratio, including Tier I and Tier II capital, of at least 8%. As of March 31, 2002 the Corporation had a ratio of 14.67% for Tier I and a ratio of 15.92% for total capital. At December 31, 2001 these ratios were 14.32% and 15.56%, respectively. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The effective management of market risk is essential to achieving the Corporation's objectives. Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest 13 rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Corporation is not subject to currency exchange risk or commodity price risk. As a financial institution, interest rate risk and its impact on net interest income is the primary market risk exposure. The Asset/Liability Investment Committee ("ALCO") is primarily responsible for establishing asset and liability strategies and for monitoring and controlling liquidity and interest rate risk. ALCO uses computer simulation analysis to measure the sensitivity of earnings and market value of equity to changes in interest rates. The projected changes in net interest income and market value of portfolio equity ("MVE") to changes in interest rates are calculated and monitored by ALCO as indicators of interest rate risk. The projected changes in net interest income and MVE to changes in interest rates at March 31, 2002 and December 31, 2001 were in compliance with established policy guidelines. These projected changes are based on numerous assumptions including no growth or change in the mix of assets or liabilities. Net interest income for the next twelve months is projected to increase when interest rates are higher than current rates and decrease when interest rates are lower than current rates. 14 PART II OTHER INFORMATION Item: 1. Legal Proceedings The nature of the business of the Corporation's banking subsidiary ordinarily results in a certain amount of litigation. The subsidiary of the Corporation is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Corporation. 2. Changes in securities None 3. Defaults upon senior securities None 4. Results of votes of security holders None 5. Other information None 6. Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K: An informational message to shareholder's which was included as part of the 2001 Annual Report and may be mailed to other interested investors throughout 2002 was filed on March 25, 2002. Amended Bylaws of American National Bankshares Inc. which was approved by the Board of Directors on April 24, 2001 was filed on March 29, 2002. 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 15, 2002 President and Chief Executive Officer /s/ Brad E. Schwartz --------------------------------------------- Brad E. Schwartz Senior Vice-President and Date - May 15, 2002 Secretary-Treasurer (Chief Financial Officer) 15 -----END PRIVACY-ENHANCED MESSAGE-----