-----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, M+qKCgZI7Sst670w8MAXnmFYrPlp57HQoSa8aScoyWSsNTDt8mUlvnrRWH/gcUAZ SuLYJWrT7/jRXpISIj7Ndw== 0000741516-02-000027.txt : 20021112 0000741516-02-000027.hdr.sgml : 20021111 20021112155642 ACCESSION NUMBER: 0000741516-02-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021112 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: 02817240 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 sept0210q.txt 10-Q 09/30/02 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 September 30, 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 ----- ----- The number of shares outstanding of the issuer's common stock as of November 12, 2002 was 5,780,616. AMERICAN NATIONAL BANKSHARES INC. INDEX
Page No. Index 2 Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001........................................... 3 Consolidated Statements of Income for the three months ended September 30, 2002 and 2001............................... 4 Consolidated Statements of Income for the nine months ended September 30, 2002 and 2001............................... 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001............................... 6 Notes to Consolidated Financial Statements........................ 7 - 11 Item 2. Management's Discussion and Analysis of the Financial Condition and Results of Operations......................................... 12 - 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 20 Item 4. Controls and Procedures............................................. 21 Part II. Other Information................................................... 22 SIGNATURES...................................................................... 22
2 Consolidated Balance Sheets American National Bankshares Inc. and Subsidiary (In Thousands) - ---------------------------------------------------------------------------------------------------------
(Unaudited) September 30 December 31 2002 2001 ------------ ----------- ASSETS Cash and due from banks.........................................................$ 18,108 $ 14,798 Interest-bearing deposits in other banks........................................ 26,278 14,351 Investment securities: Securities available for sale (at market value)............................... 126,014 127,317 Securities held to maturity (market value of $29,863 at September 30, 2002 and $30,154 at December 31, 2001)........................ 28,147 29,474 ---------- ---------- 154,161 156,791 ---------- ---------- Loans, net of unearned income .................................................. 396,720 375,593 Less allowance for loan losses.................................................. (5,574) (5,334) ---------- ---------- Net loans..................................................................... 391,146 370,259 ---------- ---------- Bank premises and equipment, at cost, less accumulated depreciation of $10,419 in 2002 and $9,652 in 2001............................ 8,235 7,857 Core Deposit Intangibles........................................................ 1,496 1,834 Accrued interest receivable and other assets.................................... 7,189 6,997 ---------- ---------- Total assets..................................................................$ 606,613 $ 572,887 ========== ========== LIABILITIES and SHAREHOLDERS' EQUITY Liabilities: Demand deposits -- non-interest bearing.......................................$ 66,379 $ 58,573 Demand deposits -- interest bearing........................................... 60,631 61,405 Money market deposits......................................................... 46,693 47,024 Savings deposits.............................................................. 71,857 65,651 Time deposits................................................................. 228,225 231,359 ---------- ---------- Total deposits.............................................................. 473,785 464,012 ---------- ---------- Repurchase agreements........................................................... 37,730 27,177 FHLB borrowings................................................................. 22,000 13,000 Accrued interest payable and other liabilities.................................. 3,334 3,301 ---------- ---------- Total liabilities............................................................. 536,849 507,490 ---------- ---------- Shareholders' equity: Preferred stock, $5 par, 200,000 shares authorized, none outstanding............................................................ - - Common stock, $1 par, 10,000,000 shares authorized, 5,785,616 shares outstanding at September 30, 2002 and 5,821,956 shares outstanding at December 31, 2001....................... 5,786 5,822 Capital in excess of par value................................................ 9,576 9,588 Retained earnings............................................................. 51,784 48,678 Accumulated other comprehensive income - net unrealized gains on securities available for sale....................... 2,618 1,309 ---------- ---------- Total shareholders' equity.................................................. 69,764 65,397 ---------- ---------- Total liabilities and shareholders' equity..................................$ 606,613 $ 572,887 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements.
3 Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
Three Months Ended September 30 ------------------------- 2002 2001 ---------- ---------- Interest Income: Interest and fees on loans....................................................$ 6,919 $ 7,573 Interest on deposits in other banks........................................... 57 80 Income on investment securities: Federal agencies............................................................ 479 553 Mortgage-backed............................................................. 576 761 State and municipal......................................................... 484 486 Other investments........................................................... 378 483 ---------- ---------- Total interest income....................................................... 8,893 9,936 ---------- ---------- Interest Expense: Interest on deposits: Demand...................................................................... 105 103 Money market................................................................ 196 335 Savings..................................................................... 268 298 Time........................................................................ 2,005 3,120 Interest on repurchase agreements............................................. 167 277 Interest on other borrowings.................................................. 231 206 ---------- ---------- Total interest expense...................................................... 2,972 4,339 ---------- ---------- Net Interest Income............................................................. 5,921 5,597 Provision for Loan Losses....................................................... 214 252 ---------- ---------- Net Interest Income After Provision For Loan Losses............................................................... 5,707 5,345 ---------- ---------- Non-Interest Income: Trust and investment services................................................. 606 623 Service charges on deposit accounts........................................... 451 342 Other fees and commissions.................................................... 194 175 Mortgage banking income....................................................... 112 93 Securities gains, net......................................................... - 10 Other income.................................................................. 71 65 ---------- ---------- Total non-interest income................................................... 1,434 1,308 ---------- ---------- Non-Interest Expense: Salaries...................................................................... 1,727 1,556 Pension and other employee benefits........................................... 389 378 Occupancy and equipment....................................................... 615 584 Core deposit intangible amortization ......................................... 112 112 Other......................................................................... 817 804 ---------- ---------- Total non-interest expense.................................................. 3,660 3,434 ---------- ---------- Income Before Income Tax Provision.............................................. 3,481 3,219 Income Tax Provision............................................................ 1,020 928 ---------- ---------- Net Income......................................................................$ 2,461 $ 2,291 ========== ========== - --------------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic...........................................................................$ .42 $ .39 Diluted.........................................................................$ .42 $ .39 - --------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Basic...........................................................................5,794,241 5,912,701 Diluted.........................................................................5,855,760 5,937,451 - --------------------------------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these statements.
4 Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
Nine Months Ended September 30 ------------------------- 2002 2001 ---------- ---------- Interest Income: Interest and fees on loans....................................................$ 20,453 $ 22,997 Interest on deposits in other banks........................................... 170 269 Income on investment securities: Federal agencies............................................................ 1,424 2,322 Mortgage-backed............................................................. 1,830 2,003 State and municipal......................................................... 1,416 1,448 Other investments........................................................... 1,188 1,391 ---------- ---------- Total interest income....................................................... 26,481 30,430 ---------- ---------- Interest Expense: Interest on deposits: Demand...................................................................... 334 385 Money market................................................................ 601 1,069 Savings..................................................................... 803 912 Time........................................................................ 6,729 9,739 Interest on repurchase agreements............................................. 477 889 Interest on other borrowings.................................................. 578 632 ---------- ---------- Total interest expense...................................................... 9,522 13,626 ---------- ---------- Net Interest Income............................................................. 16,959 16,804 Provision for Loan Losses....................................................... 633 787 ---------- ---------- Net Interest Income After Provision For Loan Losses............................................................... 16,326 16,017 ---------- ---------- Non-Interest Income: Trust and investment services................................................. 1,938 1,943 Service charges on deposit accounts........................................... 1,232 1,003 Other fees and commissions.................................................... 620 559 Mortgage banking income....................................................... 263 283 Securities gains, net......................................................... 19 360 Other income.................................................................. 202 171 ---------- ---------- Total non-interest income................................................... 4,274 4,319 ---------- ---------- Non-Interest Expense: Salaries...................................................................... 4,941 4,811 Pension and other employee benefits........................................... 1,160 1,099 Occupancy and equipment....................................................... 1,834 1,724 Core deposit intangible amortization ......................................... 337 337 Other......................................................................... 2,465 2,371 ---------- ---------- Total non-interest expense.................................................. 10,737 10,342 ---------- ---------- Income Before Income Tax Provision.............................................. 9,863 9,994 Income Tax Provision............................................................ 2,868 2,935 ---------- ---------- Net Income......................................................................$ 6,995 $ 7,059 ========== ========== - --------------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic...........................................................................$ 1.20 $ 1.18 Diluted.........................................................................$ 1.20 $ 1.18 - --------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Basic...........................................................................5,806,639 5,985,070 Diluted.........................................................................5,852,431 6,006,635 - --------------------------------------------------------------------------------------------------------- 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) - ---------------------------------------------------------------------------------------------------------
Nine Months Ended September 30 ------------------------- 2002 2001 ---------- ---------- Cash Flows from Operating Activities: Net income......................................................................$ 6,995 $ 7,059 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses..................................................... 633 787 Depreciation.................................................................. 891 871 Core deposit intangible amortization.......................................... 337 337 Amortization (accretion) of premiums and discounts on investment securities.................................................... 150 51 Gain on sale of securities.................................................... (19) (360) Gain on sale of loans......................................................... (263) (283) Loss on sale of real estate owned............................................. 1 20 Loss on disposal of property and equipment.................................... 16 - Deferred income taxes benefit................................................. (158) (314) (Increase) decrease in interest receivable.................................... (218) 254 Increase in other assets...................................................... (576) (102) Decrease in interest payable.................................................. (259) (115) Increase in other liabilities................................................. 292 1,324 ---------- ---------- Net cash provided by operating activities................................... 7,822 9,529 ---------- ---------- Cash Flows from Investing Activities: Proceeds from maturities, calls, and sales of securities ..................... 48,354 57,636 Purchases of securities available for sale.................................... (40,380) (41,069) Purchases of securities held to maturity...................................... (3,492) (302) Net increase in loans......................................................... (21,421) (33,004) Proceeds from sale of real estate owned....................................... 261 195 Purchases of real estate owned................................................ (11) - Purchases of property and equipment........................................... (1,285) (783) ---------- ---------- Net cash used in investing activities....................................... (17,974) (17,327) ---------- ---------- Cash Flows from Financing Activities: Net increase in demand, money market, and savings deposits........................................................ 12,907 12,832 Net (decrease) increase in time deposits...................................... (3,134) 11,590 Net increase (decrease) in repurchase agreements.............................. 10,553 (2,404) Net increase (decrease) in Federal Home Loan Bank borrowings.................. 9,000 (3,000) Cash dividends paid........................................................... (3,076) (2,933) Repurchase of stock........................................................... (919) (2,927) Proceeds from exercise of stock options....................................... 58 179 ---------- ---------- Net cash provided by financing activities................................... 25,389 13,337 ---------- ---------- Net Increase in Cash and Cash Equivalents....................................... 15,237 5,539 Cash and Cash Equivalents at Beginning of Period................................ 29,149 25,071 ---------- ---------- Cash and Cash Equivalents at End of Period......................................$ 44,386 $ 30,610 ========== ========== Supplemental Schedule of Cash and Cash Equivalents: Cash: Cash and due from banks.....................................................$ 18,108 $ 14,315 Interest-bearing deposits in other banks.................................... 26,278 16,295 ---------- ---------- $ 44,386 $ 30,610 ========== ========== Supplemental Disclosure of Cash Flow Information: Interest paid.................................................................$ 9,781 $ 13,741 Income taxes paid.............................................................$ 2,907 $ 2,202 Transfer of loans to other real estate owned..................................$ 164 $ 85 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 September 30, 2002, its cash flows for the nine months then ended, and the results of its operations for the three and nine months then ended. Operating results for the three and nine month periods ended September 30, 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. CRITICAL ACCOUNTING POLICIES 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. The Corporation's critical accounting policies are listed below. GENERAL The Corporation's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses along with various economic factors and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified loans. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The unallocated allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. 7 CORE DEPOSIT INTANGIBLES In July, 2001, the Financial Accounting Standards Board issued two statements - Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets, which impacted the accounting for goodwill and other intangible assets. Statement 141 eliminated the pooling method of accounting for business combinations and required that intangible assets that meet certain criteria be reported separately from goodwill. Statement 142 eliminated the amortization of goodwill and other intangibles that are determined to have an indefinite life. The Statement requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. SFAS 142 allows certain intangibles arising from Bank and Thrift acquisitions to be amortized over their estimated useful lives. Upon adoption of these Statements, the Corporation re-evaluated its intangible assets that arose from branch acquisitions prior to July 1, 2001. The intangible assets arising from the premium paid for deposits acquired at the Gretna office in 1995 and the Yanceyville office in 1996 are classified as core deposit intangibles and continue to be amortized over their estimated lives. FORWARD LOOKING STATEMENTS 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 April 2002, the Financial Accounting Standards Board issued Statement 145, Recission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this Statement related to Statement 13 are effective for transactions occurring after May 15, 2002, with early application encouraged. In June 2002, the Financial Accounting Standards Board issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The standard requires companies to 8 recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31 2002, with early application encouraged. The Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 in October 2002. FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions with the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. Paragraph 5 of this Statement, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted. This Statement clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, otherwise the transaction should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill. The transition provisions state that if the transaction that gave rise to the unidentifiable intangible asset was a business combination, the carrying amount of that asset shall be reclassified to goodwill as of the later of the date of acquisition or the date Statement 142 was first applied (fiscal years beginning after December 15, 2001). Any previously issued interim statements that reflect amortization of the unidentifiable intangible asset subsequent to the Statement 142 application date shall be restated to remove that amortization expense. The carrying amounts of any recognized intangible assets that meet the recognition criteria of Statement 141 that have been included in the amount reported as an unidentifiable intangible asset and for which separate accounting records have been maintained shall be reclassified and accounted for as assets apart from the unidentifiable intangible asset and shall not be reclassified to goodwill. The Corporation is currently in the process of evaluating the impact, if any, arising from the adoption of Statement 147. 9 COMPREHENSIVE INCOME The following is a detail of comprehensive income for the three and nine months ended September 30, 2002 and 2001:
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- ----------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net Income $ 2,461,000 $ 2,291,000 $ 6,995,000 $ 7,059,000 Unrealized holding gains arising during period (net of tax expense) 681,000 828,000 1,309,000 1,738,000 ------------ ------------ ------------ ------------ Total comprehensive income $ 3,142,000 $ 3,119,000 $ 8,304,000 $ 8,797,000 ============ ============ ============ ============
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. Loan fee income, service charges from deposit accounts and non-deposit fees such as automatic teller machine fees and insurance commissions generate additional income for community banking. The assets and liabilities and operating results of the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. are included in the community banking segment. ANB Mortgage Corp. performs secondary mortgage banking and ANB Services Corp. performs retail investment and insurance sales. 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. Unaudited segment information for the three and nine month periods ended September 30, 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. 10 Three Months Ended September 30, 2002 - ---------------------------------------------------------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------ ------------ ----- Interest income $ 8,893 $ - $ 10 $ (10) $ 8,893 Interest expense 2,972 - 10 (10) 2,972 Non-interest income - external customers 641 606 187 - 1,434 Non-interest income - internal customers - 12 - (12) - Operating income before income taxes 3,056 396 29 - 3,481 Depreciation and amortization 399 8 2 - 409 Total assets 606,502 - 111 - 606,613 Capital expenditures 108 - 104 - 212
Three Months Ended September 30, 2001 - ---------------------------------------------------------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------ ------------ ----- Interest income $ 9,936 $ - $ 10 $ (10) $ 9,936 Interest expense 4,339 - 10 (10) 4,339 Non-interest income - external customers 544 623 141 - 1,308 Non-interest income - internal customers - 14 - (14) - Operating income before income taxes 2,954 392 (127) - 3,219 Depreciation and amortization 385 18 2 - 405 Total assets 563,880 - 94 - 563,974 Capital expenditures 94 - - - 94
Nine Months Ended September 30, 2002 - ---------------------------------------------------------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------ ------------ ----- Interest income $ 26,481 $ - $ 21 $ (21) $ 26,481 Interest expense 9,522 - 21 (21) 9,522 Non-interest income - external customers 1,852 1,938 484 - 4,274 Non-interest income - internal customers - 37 - (37) - Operating income before income taxes 8,526 1,299 38 - 9,863 Depreciation and amortization 1,202 23 3 - 1,228 Total assets 606,502 - 111 - 606,613 Capital expenditures 1,165 16 104 - 1,285
Nine Months Ended September 30, 2001 - ---------------------------------------------------------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------ ------------ ----- Interest income $ 30,430 $ - $ 24 $ (24) $ 30,430 Interest expense 13,626 - 24 (24) 13,626 Non-interest income - external customers 1,926 1,943 450 - 4,319 Non-interest income - internal customers - 41 - (41) - Operating income before income taxes 8,799 1,206 (11) - 9,994 Depreciation and amortization 1,149 52 7 - 1,208 Total assets 563,880 - 94 - 563,974 Capital expenditures 767 16 - - 783
11 ITEM 2. AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on important factors affecting the 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 nine months of 2002 was $6,995,000, a decrease of 0.9% over the $7,059,000 earned during the same period of 2001. On a basic and diluted per share basis, net earnings totaled $1.20 for the first nine months of 2002, which was 1.7% higher than the $1.18 earned for 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, and this produced the increase in the earnings per share results. On an annualized basis, return on average total assets was 1.62% for the first nine months of 2002 compared to 1.70% for the same period in 2001. Annualized return on average common shareholders' equity was 13.94% and 14.55% for the first nine months of 2002 and 2001, respectively. Net interest income after provision for loan losses increased $309,000, or 1.9%, for the first nine months of 2002 compared to the same period in 2001 due to an improvement in the interest rate spread and a lower provision for loan losses. For the same comparative period, non-interest income excluding securities gains increased by $296,000, led by growth in service charges and other fees and commission income. Including non-recurring securities gains of $19,000 in 2002 and $360,000 in 2001, non-interest income decreased $45,000. Non-interest expense increased by $395,000 for the first nine months of 2002 compared to the same period in 2001 due to increases in salaries and employee benefits, corporate insurance costs and the occupancy cost associated with a new banking office opened in Henry County, Virginia, in March of 2002. The Corporation's net income for the third quarter of 2002 was $2,461,000, an increase of 7.4% over the $2,291,000 earned during the same period of 2001. The increase in earnings on a year-to-year basis coupled with a lower number of outstanding shares due to stock repurchases under the Corporation's outstanding stock repurchase programs created an improved earnings per share. On a basic and diluted per share basis, net earnings totaled $0.42 for the third quarter of 2002, which was 7.7% higher than the $0.39 earned for the same period of 2001. On an annualized basis, return on average total assets was 1.67% for the third quarter of 2002 compared to 1.64% for the same period in 2001. Annualized return on average common shareholders' equity was 14.34% and 14.07% for the third quarter of 2002 and 2001, respectively. The Corporation's earnings improvement in the third quarter was primarily due to improved net interest income due to overall balance sheet growth and a slight three basis point improvement in the fully-tax equivalent net yield on earning assets. Also contributing to the improved earnings was an increase in non-interest income driven by increased deposit service charges and other fees as well as improvements in mortgage banking income. 12 NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis was $17,692,000 for the first nine month period ending September 30, 2002 compared to $17,540,000 for the same period of 2001, an increase of 0.9%. The interest rate spread increased to 3.77% from 3.69%, and the net yield on earning assets decreased to 4.30% from 4.44% in the first nine months of 2002 compared to the same period of 2001, respectively. The net yield on earning assets decreased due to a change in the mix of assets and the greater asset growth in the area of adjustable-rate commercial loans and deposits in other banks. While the net yield on earning assets declined for the first nine months of 2002 when compared to the previous year, the interest rate spread improved slightly. Average interest-earning assets increased 4.1%, or $21,781,000 while average interest-bearing liabilities grew 3.5%, or $15,123,000 during the first nine months of 2002. At the same time non-earning assets declined by 3.1% and non-interest bearing demand deposits increased 8.5%. These positive developments in the balance sheet mix, coupled with the repricing of fixed term certificates of deposits to lower levels, produced the slightly improved interest rate spread. Net interest income on a fully taxable equivalent ("FTE") basis was $6,171,000 for the third quarter of 2002 compared to $5,845,000 for the same period of 2001, an increase of 5.6%. The interest rate spread increased to 3.92% from 3.65%, and the net yield on earning assets increased to 4.40% from 4.37% in the third quarter of 2002 compared to the same period of 2001, respectively. The net yield on earning assets increased due to interest-bearing liabilities repricing at a faster pace than interest-earning assets. When compared to the second quarter of 2002, the interest rate spread and net yield on earning assets in the third quarter of 2002 increased with a positive trend noted. The interest rate spread improved from 3.80% in the second quarter of 2002 to 3.92% during the third quarter of 2002. The net yield on earning assets improved from 4.33% in the second quarter of 2002 to 4.40% during the third quarter of 2002. This improvement was due to several factors including faster growth in earning assets, a higher level of time deposits repricing to lower market interest rates, growth in non-interest bearing demand deposits and management's overall focus on managing the margin during the historic rate period experienced in 2002. During the first nine months 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 nine months ending September 30, 2002, which was much lower than the 9.5% to 6.0% range of the prime lending rate during the same period of 2001. While the Corporation's balance sheet is liability-sensitive, many liabilities remain near competitive market-driven pricing floors while assets continue to reprice or be booked at lower yields. The following tables demonstrate fluctuations in net interest income and the related yields for the first nine months of 2002 and for the third quarter of 2002, compared to similar prior year periods. 13 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 ----------------------- --------------------- ----------------- For nine months ended September 30 2002 2001 2002 2001 2002 2001 -------- -------- ------- ------- ------ ------ Loans: Commercial $169,413 $134,601 $ 8,378 $ 8,405 6.59% 8.33% Mortgage 183,740 179,183 9,455 11,211 6.86 8.34 Consumer 34,780 44,921 2,715 3,484 10.41 10.34 -------- -------- ------- ------- ------ ------ Total loans 387,933 358,705 20,548 23,100 7.06 8.59 -------- -------- ------- ------- ------ ------ Investment securities: Federal agencies 40,257 47,704 1,424 2,322 4.72 6.49 Mortgage-backed 40,478 42,835 1,830 2,003 6.03 6.23 State and municipal 39,164 39,406 1,998 2,015 6.80 6.82 Other investments 27,287 30,175 1,244 1,457 6.08 6.44 -------- -------- ------- ------- ------ ------ Total investment securities 147,186 160,120 6,496 7,797 5.88 6.49 -------- -------- ------- ------- ------ ------ Deposits in other banks 13,656 8,169 170 269 1.66 4.39 -------- -------- ------- ------- ------ ------ Total interest-earning assets 548,775 526,994 27,214 31,166 6.61 7.89 ------- ------- ------ ------ Other non-earning assets 25,286 26,083 -------- -------- Total assets $574,061 $553,077 ======== ======== Interest-bearing deposits: Demand $ 59,110 $ 56,030 334 385 .75 .92 Money market 41,185 40,262 601 1,069 1.95 3.54 Savings 69,054 62,271 803 912 1.55 1.95 Time 229,761 228,086 6,729 9,739 3.90 5.69 -------- -------- ------- ------- ------ ------ Total interest-bearing deposits 399,110 386,649 8,467 12,105 2.83 4.17 Repurchase agreements 32,419 29,108 477 889 1.96 4.07 Other borrowings 15,682 16,331 578 632 4.91 5.16 -------- -------- ------- ------- ------ ------ Total interest-bearing liabilities 447,211 432,088 9,522 13,626 2.84 4.20 ------- ------- ------ ------ Demand deposits 56,668 52,221 Other liabilities 3,278 4,069 Shareholders' equity 66,904 64,699 -------- -------- Total liabilities and shareholders' equity $574,061 $553,077 ======== ======== Interest rate spread 3.77% 3.69% ====== ====== Net interest income $17,692 $17,540 ======= ======= Taxable equivalent adjustment $ 733 $ 736 ======= ======= Net yield on earning assets 4.30% 4.44% ====== ======
14 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 ----------------------- --------------------- ----------------- For three months ended September 30 2002 2001 2002 2001 2002 2001 -------- -------- ------- ------- ------ ------ Loans: Commercial $180,756 $145,676 $ 2,976 $ 2,848 6.59% 7.82% Mortgage 185,015 181,733 3,103 3,648 6.71 8.03 Consumer 33,043 42,497 872 1,112 10.56 10.47 -------- -------- ------- ------- ------ ------ Total loans 398,814 369,906 6,951 7,608 6.97 8.23 -------- -------- ------- ------- ------ ------ Investment securities: Federal agencies 41,672 34,505 479 553 4.60 6.41 Mortgage-backed 40,428 49,347 576 761 5.70 6.17 State and municipal 40,291 39,650 685 677 6.80 6.83 Other investments 26,543 31,441 395 505 5.95 6.42 -------- -------- ------- ------- ------ ------ Total investment securities 148,934 154,943 2,135 2,496 5.73 6.44 -------- -------- ------- ------- ------ ------ Deposits in other banks 13,520 9,745 57 80 1.69 3.28 -------- -------- ------- ------- ------ ------ Total interest-earning assets 561,268 534,594 9,143 10,184 6.52 7.62 ------- ------- ------ ------ Other non-earning assets 27,031 25,605 -------- -------- Total assets $588,299 $560,199 ======== ======== Interest-bearing deposits: Demand $ 58,856 $ 55,535 105 103 .71 .74 Money market 44,440 41,949 196 335 1.76 3.19 Savings 71,349 63,469 268 298 1.50 1.88 Time 226,666 230,018 2,005 3,120 3.54 5.43 -------- -------- ------- ------- ------ ------ Total interest-bearing deposits 401,311 390,971 2,574 3,856 2.57 3.95 Repurchase agreements 35,224 30,432 167 277 1.90 3.64 Other borrowings 20,210 16,093 231 206 4.57 5.12 -------- -------- ------- ------- ------ ------ Total interest-bearing liabilities 456,745 437,496 2,972 4,339 2.60 3.97 ------- ------- ------ ------ Demand deposits 59,436 53,413 Other liabilities 3,495 4,172 Shareholders' equity 68,623 65,118 -------- -------- Total liabilities and shareholders' equity $588,299 $560,199 ======== ======== Interest rate spread 3.92% 3.65% ====== ====== Net interest income $ 6,171 $ 5,845 ======= ======= Taxable equivalent adjustment $ 250 $ 248 ======= ======= Net yield on earning assets 4.40% 4.37% ====== ======
15 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, the Bank's loan "Watch" list, and national and local economic conditions. The provision for loan losses was $633,000 for the first nine months of 2002 versus $787,000 for the same period in 2001. Net charged off loans were $393,000 for the first nine months of 2002 versus $281,000 for the same period in 2001. The annualized ratio of net charge-offs to average outstanding loans was .14% in 2002 and .10% 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. For the third quarter ending September 30, 2002, net charge-offs were $117,000 compared to $151,000 for the same period one year prior. The reserve for loan losses totaled $5,574,000 at September 30, 2002, an increase of 4.5% over the $5,334,000 recorded at December 31, 2001. The ratio of reserves to loans, less unearned discount, was 1.41% at September 30, 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 September 30, 2002. NON-INTEREST INCOME Non-interest income for the first nine months of 2002 was $4,274,000, a decrease of 1.0% from $4,319,000 reported in the same period 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. The level of calls and related gains did not reoccur during the first nine months of 2002. Excluding non-recurring securities gains, non-interest income increased by $296,000 during the first nine months of 2002 when compared to the same period one year prior due to increased deposit account service charges and other fee and commission income. Service charges on deposit accounts grew 22.8% or $229,000 in the first nine months of 2002 when compared to the same period in 2001. Trust and investment services income of $1,938,000 during the first nine months of 2002 was down 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 markets continue to affect trust financial performance. The Bank's trust division managed accounts whose market values approximated $289,000,000 at September 30, 2002, compared to $330,000,000 one year prior. The growth in new trust business and increased management fees slightly offset the continued low valuations in the financial markets, which negatively impacted asset values under management. Non-interest income for the third quarter of 2002 was $1,434,000, an increase of 9.6% from $1,308,000 reported in the same period of 2001. Non-interest income increased $126,000 due to increased deposit account service charges, other fee and commission income, and improved mortgage banking income. 16 NON-INTEREST EXPENSE Non-interest expense for the first nine months of 2002 was $10,737,000, a 3.8% increase from the $10,342,000 reported for the same period last year. Salaries increased 2.7% from the same period last year to $4,941,000 in 2002 while pension and other employee benefits increased 5.6% to $1,160,000. Occupancy and equipment increased $110,000, or 6.4%, for the first nine months of 2002 from the same period in 2001. These increases were primarily the result of the Henry County, Virginia office that opened in March 2002, increased depreciation expense associated with recent technology initiatives, and increases in insurance expenses which are categorized in the other expense category. Core deposit intangible amortization of $337,000 for the first nine 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 48.87% and 48.01% for the nine months ended September 30, 2002 and 2001, respectively. A lower efficiency ratio generally indicates better expense efficiency. Leaders in expense efficiency in the banking industry have achieved ratios in the 45% to 50% range while the majority of the industry remains in the 55-65% range. Non-interest expense for the third quarter of 2002 was $3,660,000, a 6.6% increase from $3,434,000 reported for the same period of 2001. The reasons for increased non-interest expense for the third quarter ended September 30, 2002 were primarily the result of the Southern Henry County office that opened in March 2002, increased depreciation expense associated with recent technology initiatives, and an increase in salaries, pension and employee benefits, and insurance expense. INCOME TAX PROVISION The income tax provision for the first nine months of 2002 was $2,868,000, a decrease of $67,000 from $2,935,000 reported a year earlier. The effective tax rate for the first nine months of 2002 was 29.1% compared to 29.4% for the same period of 2001. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES GENERAL Total assets increased 5.9% to $606,613,000 at September 30, 2002 when compared to assets of $572,887,000 at December 31, 2001. Asset growth has been concentrated in the loan portfolio and in interest-bearing deposits in other banks. Loans grew 5.6% to $396,720,000 at September 30, 2002, up from $375,593,000 at December 31, 2001. Loan growth has been concentrated in the commercial, commercial real estate and equity line of credit sectors of the portfolio. The increase in interest-bearing deposits in other banks occurred due to increases in deposit and repurchase agreement balances in the third quarter combined with a record low level of interest rates that tempered the Corporation's ability to place the funds into adequately earning assets. Once market rates shift from the September 30, 2002 level the Corporation intends to reduce the level of interest bearing bank balances in other banks in order to generate a higher overall return. Similar to total asset growth, total liabilities grew 5.8% to $536,849,000 at September 30, 2002 when compared to $507,490,000 at December 31, 2001. Total deposits increased $9,773,000 or 2.1% during the first nine months of 2002 and other borrowings including Federal Home Loan Bank advances and repurchase agreements increased $19,553,000 or 48.7% during the same period. $9,000,000 of the growth was related to borrowing fixed rate advances from the Federal Home Loan Bank of Atlanta to directly offset the purchase of mortgage-backed securities and the remainder of the growth was in retail repurchase agreements. Retail repurchase agreements are used by commercial accounts to earn interest on short-term funds and mature daily. A shift to lower cost deposits was seen as growth of $7,806,000 or 17 13.3% was noted in non-interest bearing demand deposits and growth of $6,206,000 or 9.5% was noted in savings accounts. The primary decline in deposits occurred in the higher cost time deposit and money market account categories. This change in deposit mix continued to lower the Corporation's cost of funds on a linked quarter-basis and was a contributing factor in improvements noted in the interest rate spread and yield on earning assets. 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 September 30, 2002 were $383,000 compared with $568,000 at December 31, 2001, and $503,000 on September 30, 2001. Loans on accrual status and past due 90 days or more at September 30, 2002 were $256,000 compared with $258,000 at December 31, 2001, and $186,000 on September 30, 2001. There were no loans classified as troubled debt restructurings on September 30, 2002, December 31, 2001 or September 30, 2001. Total non-performing loans as a percentage of total loans were 0.16% at September 30, 2002, 0.22% at December 31, 2001, and 0.18% at September 30, 2001. The Corporation's total non-performing loans are considered low by industry standards. Properties received due to loan foreclosures were $30,000 at September 30, 2002, $117,000 at December 31, 2001, and $115,000 at September 30, 2001. The gross amount of interest income that would have been recorded on non-accrual loans and restructured loans as of September 30, 2002, if all such loans had been accruing interest at the original contractual rate, was $13,000 for the nine month period ending September 30, 2002. No interest payments were recorded as interest income during the reporting period for all such non-performing loans. LIQUIDITY 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. Management also takes into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit, commitments to purchase securities and standby letters of credit. The Corporation'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 20.1% at September 30, 2002 and 20.0% at December 31, 2001. 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 (FHLB) that equaled approximately $90,905,000 at September 30, 2002. Should the Bank ever desire to increase their line of credit beyond the current 15% limit, the FHLB would allow borrowings of up to 40% of total assets once the bank meets specific eligibility requirements. The Bank also has federal funds lines of credit facilities established with two other banks in the amounts of $12,000,000 and $5,000,000, as well as has access to the Federal Reserve Bank of Richmond's discount window should a liquidity crisis occur. The Bank has not used these facilities in the past year and considers these as backup sources of funds. 18 Borrowings outstanding under the FHLB line of credit were $22,000,000 at September 30, 2002 and $13,000,000 at December 31, 2001. The Bank has ten fixed rate term borrowing contracts outstanding as of September 30, 2002, with the following final maturities: Amount Expiration Date ---------- --------------- $ 500,000 January 2003 500,000 July 2003 1,500,000 January 2004 1,500,000 July 2004 3,000,000 July 2005 1,000,000 July 2006 1,000,000 July 2007 3,000,000 June 2008 5,000,000 August 2008 5,000,000 April 2009 OFF-BALANCE SHEET TRANSACTIONS The Corporation enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. The off-balance sheet transactions recognized as of September 30, 2002 and December 31, 2001 were commitments to extent credit and standby letters of credit only. The Corporation does not have any off-balance sheet subsidiaries or special purpose entities. Commitments to extend credit, which amount to $112,493,000 at September 30, 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. As of September 30, 2002, there was one commitment to purchase securities in the amount of $2,000,000 when issued on October 4, 2002. No commitments to purchase securities existed on 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 September 30, 2002 and December 31, 2001, the Bank had $3,462,000 and $1,000,000 respectively, in outstanding standby letters of credit. CAPITAL RESOURCES The following table displays the changes in shareholders' equity from December 31, 2001, to September 30, 2002: Equity, December 31, 2001 $65,397,000 Net earnings 6,995,000 Exercise of stock options 58,000 Repurchase of common stock (919,000) Cash dividends paid (3,076,000) Net change in net unrealized losses on AFS securities 1,309,000 ------------- Equity, September 30, 2002 $69,764,000 ============= 19 During the third quarter of 2002, the Corporation declared and paid a quarterly cash dividend of $.18 per share. The dividend totaled $1,042,000 and represented a 42.3% payout of third quarter 2002 net income. During the second quarter of 2002, the Corporation declared and paid a quarterly cash dividend of $.18 per share. The dividend totaled $1,044,000 and represented a 44.7% payout of second quarter 2002 net income. 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. For the nine months ending September 30, 2002, the Corporation paid out $3,076,000 in cash dividends which represented 44.0% of net income for the nine month period ended September 30, 2002. 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, 250,000 shares between August 29, 2001 and August 28, 2002, and 250,000 shares between August 21, 2002 and August 19, 2003. 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, 13,500 shares during the second quarter of 2002 and 20,000 shares during the third quarter to total 334,466 shares since purchases began on 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 had no preferred stock or subordinated debt outstanding. 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 September 30, 2002 the Corporation had a ratio of 14.59% for Tier I and a ratio of 15.84% for total capital. At December 31, 2001 these ratios were 14.32% and 15.56%, respectively. ITEM 3. 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 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 September 30, 2002 and December 31, 2001 were within compliance of established policy guidelines. These projected changes are based on numerous assumptions of growth and changes 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. 20 ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in periodic SEC filings. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Corporation carries out its evaluation. 21 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 and use of proceeds 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 (3)(ii) Amended Bylaws dated September 17, 2002 (99)(a) Section 302 Certification of Charles H. Majors, President and CEO (99)(b) Section 302 Certification of Brad E. Schwarts, Senior Vice President & CFO (b) Reports on Form 8-K None 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 - November 12, 2002 President and Chief Executive Officer /s/ Brad E. Schwartz --------------------------------------------- Brad E. Schwartz Senior Vice-President and Date - November 12, 2002 Secretary-Treasurer (Chief Financial Officer) 22 EX-99 2 cert090210q.txt EXHIBITS 99(A) AND 99(B) CERTIFICATIONS Exhibit (99)(a) SECTION 302 CERTIFICATION* ------------------------- I, Charles H. Majors, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American National Bankshares Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 ----------------- /s/ Charles H. Majors - ---------------------------------- Charles H. Majors, President and Chief Executive Officer Exhibit (99)(b) SECTION 302 CERTIFICATION* ------------------------- I, Brad E. Schwartz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American National Bankshares Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 ----------------- /s/ Brad E. Schwartz - ---------------------------------- Brad E. Schwartz, Senior Vice President and Chief Financial Officer EX-3.(II) 3 exbylaws090210q.txt EXHIBIT 3(II) BY-LAWS Exhibit (3)(ii). BYLAWS OF AMERICAN NATIONAL BANKSHARES INC. ARTICLE I MEETING OF SHAREHOLDERS Section 1.1. Annual Meeting. -------------- a) The regular annual meeting of the shareholders of the Company for the election of directors and for the transaction of such other business as may properly come before it shall be held at the principal office of the Company in Danville, Virginia, or at such other place as the Board of Directors may designate, on the fourth Tuesday in April. To be properly brought before an annual meeting, business must be (i) specified in the notice of annual meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the annual meeting by a shareholder. In addition to any other applicable requirements for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary. For a shareholder proposal to be timely if it is to be included in the Company's proxy statement, the shareholder must comply with the applicable provisions of the federal securities laws. For a shareholder proposal to be timely if it is not to be included in the Company's proxy statement, a shareholder's notice must be in writing and delivered or mailed to and received by the Secretary not less than sixty (60) days before the first anniversary of the date of the Company's proxy statement in connection with the last annual meeting. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the shareholder proposing such business, (iii) the class, series and number of the Company's shares that are beneficially owned by the shareholder, and (iv) any material interest of the shareholder in such business. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at the 1 annual meeting except in accordance with the procedures set forth in this Section 1.1; provided, however, that nothing in this Section 1.1 shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting. In the event that a shareholder attempts to bring business before an annual meeting without complying with the provisions of this Section 1.1, the chairman of the meeting shall declare to the shareholders present at the meeting that the business was not properly brought before the meeting in accordance with the foregoing procedures, and such business shall not be transacted. b) Notice of such meeting, setting forth clearly the time, place and purpose of the meeting, shall be mailed, postage prepaid, at least ten (10) days before the date thereof, addressed to each shareholder at his address appearing on the books of the Company. If, for any reason, an election of those directors whose terms expire is not made at the meeting, the meeting may be adjourned to a later date for the purpose or, if this is not done, the Board of Directors shall order an election to be held on some subsequent day as soon thereafter as practicable, according to the provisions of law; and notice thereof shall be given in the manner herein provided for the annual meeting. Section 1.2. Special Meetings. ---------------- Except as otherwise specifically provided by statute, special meetings of the shareholders may be called for any purpose at any time by the Board of Directors or by any shareholder at the written request of at least ten per cent (10%) of the shares entitled to vote at the meeting. Every such special meeting, unless otherwise provided by law, shall be called by mailing, postage prepaid, not less than ten (10) days before the date fixed for such meeting, to each shareholder at his address appearing on the books of the Company, notice stating the time, place and purpose of the meeting. Section 1.3. Record Date for Shareholders Meetings. ------------------------------------- Shareholders entitled to notice of the annual meeting or any special meeting shall be shareholders shown by the records of the Company to be shareholders fifty (50) days before the date of any such meeting or on such other 2 date as may be fixed in advance by the Board of Directors, which date shall not be more than fifty (50) days and not less than ten (10) days before the date of the shareholders meeting. Section 1.4. Proxies. ------- Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing. Proxies shall be valid only for one meeting, to be specified therein, and any adjournments of such meeting. Section 1.5. Quorum. ------ At every meeting of shareholders, each shareholder shall be entitled to cast one vote either in person or by proxy for each share of stock held by him as shown by the records of the Company fifty (50) days before the date of the shareholders meeting or held by him on the record date fixed by the Board of Directors pursuant to Section 1.3 hereof upon any matter coming before the meeting except as otherwise expressly provided by these bylaws. A majority of the outstanding stock, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders unless otherwise provided by law; but less than quorum may adjourn a meeting from time to time, and the meeting may be held, as adjourned, without further notice. Section 1.6. Judges of Elections. ------------------- Every election of directors shall be managed by three judges, who shall be appointed from among the shareholders by the Board of Directors. The judges of election shall hold and conduct the election at which they are appointed to serve; and, after the election, they shall file with the Secretary a certificate under their hands, certifying the result thereof and the names of the directors elected. The judges of election, at the request of the Chairman of the meeting, shall act as tellers of any other vote by ballot taken at such meeting, and shall certify the result thereof. ARTICLE II DIRECTORS Section 2.1. Authority of Directors. ---------------------- 3 The Board of Directors (referred to in these bylaws as the "Board") shall have power to manage and administer the business and affairs of the Company. Except as expressly limited by law, all corporate powers of the Company shall be vested in and may be exercised by the Board, but the Board may delegate powers as provided in these bylaws. Section 2.2. Number. ------ The Board of Directors shall consist of thirteen (13) shareholders. Section 2.3. Regular Meetings. ---------------- Regular meetings of the Board of Directors shall be held, without notice, at the principal office of the Company on the third Tuesday of each month or on such other day or at such other place as the Board may previously designate. When any regular meeting of the Board falls upon a holiday, the meeting shall be held on the next business day unless the Board shall designate some other day. Section 2.4. Organization Meeting. -------------------- If possible, the Board shall meet on the same day of the annual meeting of shareholders for the purpose of organizing the new Board and for the purpose of electing officers of the Company for the succeeding year, but in any event, the new Board shall be organized and officers elected no later than the next regular meeting of the Board. Section 2.5. Special Meeting. --------------- Special meetings of the Board may be called by the Chairman of the Board or the President, or at the request of three or more directors upon not less than two days' notice. Each director shall be given notice stating the time, place and purpose of a special meeting. Notice may be given in writing or in person or by telegraph. Section 2.6. Quorum. ------ At any meeting of the Board, a majority of the Board shall constitute a quorum. Less than a quorum may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice. In the event of the death or disability of directors by reason of war or other catastrophe, reducing the total 4 Board to less than that required for a quorum, a majority of the remaining Board shall constitute a quorum. Section 2.7. Waiver of Notice. ---------------- Any director may in writing waive notice of any regular or special meeting at any time before or after the holding thereof. Section 2.8. Vacancies. --------- When any vacancy occurs among the directors, the remaining members of the Board may appoint a director to fill such vacancy at any regular meeting of the Board or at any special meeting called for that purpose. Any directorships not filled by the shareholders shall be treated as vacancies to be filled by and in the discretion of the Board. Section 2.9. Qualification of Directors. -------------------------- No person shall be elected a director who is not the owner and holder in his own name, unpledged and unencumbered in any way, of shares of stock of the Company having a par value or market value of not less than One Thousand Dollars ($1,000). Section 2.10. Committees. ---------- The Board may appoint such committees from time to time as the Board deems proper for the management of the business and affairs of the Company, and the Board may delegate to the President the appointment of other committees which the Board deems necessary for the direction of the business and affairs of the Company. Section 2.11. Declaration of Dividends. ------------------------ The Board may, in its discretion, from time to time declare dividends as permitted by law. Such dividends may be payable in money, stock of the Company, or in other assets of the Company. The Directors may fix a date not exceeding thirty (30) days preceding the date fixed for the payment of any dividend as the record date for the determination of shareholders entitled to receive payment of any dividend, provided the record date shall be not less than seven (7) days after the date on which the dividend is declared; and only shareholders of 5 record on the date so fixed shall be entitled to receive such dividend notwithstanding any transfer of shares on the books of the Company after any record date so fixed. ARTICLE III OFFICERS Section 3.1. Officers to be Elected by the Board. ----------------------------------- The Board of Directors shall annually elect the following officers: a President, a Secretary, and a Treasurer. The Directors may annually elect one or more Vice President, Senior Vice Presidents, and Executive Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as the Board may think necessary or desirable. The President shall be a director. Other officers may, but need not be directors. Any two offices not inconsistent with each other may be held by the same person, except no person may serve as both President and Secretary. Section 3.2. Term. ---- Unless otherwise specified, each officer shall be elected for a term of one year but shall continue to hold office thereafter until his successor is elected or until he resigns, retires, or is removed from office. Section 3.3. Salaries. -------- The salaries and other compensation of officers shall be fixed by the Board or by such person or persons to whom the power to fix compensation has been delegated. Section 3.4. President. --------- The President shall be the Chief Executive Officer of the Company and shall have and may exercise all of the powers and duties customarily performed and exercised by the chief executive officer of a corporation by whatever name called. He shall have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board. He shall act as Chairman of the Board and shall preside at all meetings of the Board and meetings of shareholders. Any reference to the "Chairman of the Board" 6 contained in the Articles of Incorporation or these bylaws shall be deemed a reference to the President. It shall be the duty of the President to make a report of the Company's condition to the shareholders at their annual meeting. Unless the Board shall otherwise direct by resolution, the President shall vote the shares of all securities held by the Company. Section 3.5. Vice Presidents. --------------- Vice Presidents may be designated as Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, and Assistant Vice Presidents. The Board may annually elect such number of each designation as it may deem proper. Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents shall have such responsibilities and duties as shall be specifically assigned to them by the Board or, in the absence of such specific assignment of duties by the Board, they shall have such responsibilities and duties as shall be assigned to them by the President. Section 3.6. Secretary. --------- The Secretary shall act as secretary at all meetings of the shareholders and at all meetings of the Board. He shall issue notices for such meetings in accordance with the requirements of the Bylaws. He shall have custody of the corporate seal and, upon request of the President, shall attest any instrument relating to real or personal property and perform such other duties as from time to time shall be assigned to him by the Board or by the President. Section 3.7. Assistant Secretaries. --------------------- Each Assistant Secretary shall perform such duties as shall be assigned to him by the Board or by the President and, in the absence or disability of the Secretary, one or more of the Assistant Secretaries designated by the President shall have all of the powers and perform all of the duties of the Secretary. Section 3.8. Treasurer. --------- The Treasurer shall have such responsibilities and duties as shall be assigned to him by the Board or by the President. Section 3.9. Assistant Treasurers. -------------------- 7 An Assistant Treasurer shall have such responsibilities and duties as shall be assigned to him by the Board or by the President. ARTICLE IV STOCK AND STOCK CERTIFICATES Section 4.1. Certificates. ------------ The shares of stock of the Company shall be represented by certificates signed by the President or a Vice President and the Secretary or an Assistant Secretary, manually or by facsimile, and shall bear the seal of the Company or a printed or engraved facsimile or the seal, shall be in such form as the Board may prescribe, and shall be issued for one or more full shares only. Section 4.2. Transfer. -------- Shares of stock shall be transferable on the books of the Company by the holder or by an attorney or legal representative thereof duly authorized by a power of attorney filed with the Company and upon surrender of the stock certificate or certificates for such shares properly endorsed. Section 4.3. Address of Shareholders. ----------------------- Every shareholder shall keep the Company advised of his mailing address. The Company may rely upon its shareholder records as to the mailing address of any shareholder unless and until otherwise advised in writing. Section 4.4. Lost Certificates. ----------------- The holder of any shares of stock of this Company, the certificate or certificates for which shall have been lost or destroyed, shall immediately notify the Company for such fact. A new certificate or certificates may be issued upon satisfactory proof of the loss or destruction of the old certificate, and the Company may require a bond which shall be in such sum, contain such terms and provisions, and have such surety or sureties as the Company may require. ARTICLE V SEAL Section 5.1. Form. ---- 8 The seal of the Company shall consist of the words "American National Bankshares Inc." in concentric circles with the work "Seal" appearing in the inner circle, and shall be in the form impressed hereon. Section 5.2. Use of Seal. ----------- The seal may be affixed to any document by the Secretary, any Assistant Secretary, or other person specifically authorized by the Board or the President. ARTICLE VI FISCAL YEAR Section 6.1. Fiscal Year. ----------- The fiscal year of the Company shall be the calendar year. ARTICLE VII BYLAWS Section 7.1. Amendments. ---------- The bylaws may be amended, altered or repealed either by the shareholders at any regular meeting of the shareholders or at any special meeting called for that purpose or by an affirmative vote of a majority of the Board at any regular or special meeting, and the authority of the Board shall include the authority to amend, alter or repeal any bylaw adopted by the shareholders unless the shareholders with respect to any specific bylaw shall limit the power of the Board to amend or repeal any such specific bylaw. Section 7.2. Inspection. ---------- A copy of the bylaws with all amendments thereto shall be kept in the custody of the Secretary at the principal office of the Company and shall be open for inspection to all shareholders during normal business hours. Adopted January 24, 1984 and Amended February 20, 1996 Amended April 27, 1999 Amended April 25, 2000 9 Amended March 20, 2001 Amended April 24, 2001 Last Amended September 17, 2002 -----END PRIVACY-ENHANCED MESSAGE-----