10-K 1 annual10k2002.txt 10K AMERICAN NATIONAL BANKSHARES INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 ----------------- 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) Registrant's telephone number, including area code: 434-792-5111 -------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None ---- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $1 Par Value NASDAQ National Market -------------------------- -------------------------------------- (Title of each class) (Name of exchange on which registered) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ X ] No [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant at March 7, 2003 was $129,845,331. The number of shares of the Registrant's Common Stock outstanding on March 7, 2003 was 5,745,816. Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 22, 2003 are incorporated by reference in Part III of this report. 1 CROSS REFERENCE Page ---- PART I ITEM 1 - Business 4 ITEM 2 - Properties 5 ITEM 3 - Legal Proceedings 6 ITEM 4 - Submission of Matters to a Vote of Security Holders 6 PART II ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters 6 ITEM 6 - Selected Financial Data 7 ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 ITEM 7A - Quantitative and Qualitative Disclosures about Market Risk 10 ITEM 8 - Financial Statements and Supplementary Data Quarterly Financial Results for 2002 and 2001 26 Management's Report on Financial Statements 27 Reports of Independent Public Accountants 28 Consolidated Balance Sheets at December 31, 2002 and 2001 30 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2002 31 Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 2002 32 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002 33 Notes to Consolidated Financial Statements 34 ITEM 9 - Changes in and disagreements with Accountants on Accounting and Financial Disclosure * PART III ITEM 10 - Directors and Executive Officers of the Registrant * ITEM 11 - Executive Compensation * ITEM 12 - Security Ownership of Certain Beneficial Owners and Management * ITEM 13 - Certain Relationships and Related Transactions * ITEM 14 - Controls and Procedures 25 PART IV ITEM 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements (See Item 8 for reference)
Exhibits -------- 3.1 Amended and Restated Articles of Incorporation Exhibit 4.1 on Form S-3 dated August 20, 1997 filed August 20, 1997 3.2 Amended Bylaws dated March 29, 2002 Exhibit 3.2 on Form 8-K filed March 29, 2002 10.1 Agreement between American National Bank and Exhibit 4a on Form 10-K Trust Company and James A. Motley dated filed March 28, 1994 August 26, 1982, as amended August 11, 1987 10.2 Agreement between American National Bank and Trust Exhibit 10.3 on Form 10-K Company and E. Budge Kent, Jr. dated June 12, 1997 filed March 27, 1998
2 10.3 American National Bankshares Inc. Stock Option Plan dated Exhibit 4.3 on form S-8 August 19, 1997 filed September 17, 1997 10.4 Agreement between American National Bank and Trust Exhibit 4 on Form 10-K Company and H. Dan Davis dated March 14, 1996 filed September 27, 1995 10.5 Agreement between American National Bankshares Inc., Exhibit 10.5 on Form 10-K American National Bank and Trust Company and filed March 25, 2002 Charles H. Majors dated December 18, 2001 10.6 Agreement between American National Bankshares Inc., Exhibit 10.6 on Form 10-K American National Bank and Trust Company and filed March 25, 2002 E. Budge Kent, Jr. dated December 18, 2001 10.7 Agreement between American National Bankshares Inc., Exhibit 10.7 on Form 10-K American National Bank and Trust Company and filed March 25, 2002 Dabney T. P. Gilliam, Jr. dated December 18, 2001 10.8 Agreement between American National Bankshares Inc., Exhibit 10.8 on Form 10-K American National Bank and Trust Company and filed March 25, 2002 Jeffrey V. Haley dated December 18, 2001 10.9 Agreement between American National Bankshares Inc., Exhibit 10.9 on Form 10-K American National Bank and Trust Company and filed March 25, 2002 Brad E. Schwartz dated December 18, 2001 10.10 Agreement between American National Bank and Trust Exhibit 10.10 on Form 10-K Company and Charles H. Majors dated January 1, 2002 filed March 25, 2002 99.2 American National Bankshares Inc. Dividend Reinvestment Exhibit 99 on Form S-3 Plan dated August 19, 1997 filed August 20, 1997 (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 2002. -------------- * The information required by Item 9 is incorporated herein by reference to the information that appears under the headings "Report of Audit and Compliance Committee" and "Independent Public Accountants" in the Registrant's Proxy Statement for the April 2003 Annual Meeting of Shareholders. The information required by Item 10 is incorporated herein by reference to the information that appears under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the April 2003 Annual Meeting of Shareholders. The information required by Item 11 is incorporated herein by reference to the information that appears under the headings "Board Committees and Compensation", "Report of Human Resources and Compensation Committee on Executive Compensation", "Executive Compensation", and "Certain Agreements with Executive Officers" in the Registrant's Proxy Statement for the April 2003 Annual Meeting of Shareholders. The information required by Item 12 is incorporated herein by reference to the information that appears under the headings "Security Ownership of Certain Beneficial Owners" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the April 2003 Annual Meeting of Shareholders. The information required by Item 13 is incorporated herein by reference to the information that appears under the heading "Interest of Management in Certain Transactions"' in the Registrant's Proxy Statement for the April 2003 Annual Meeting of Shareholders.
3 ITEM 1 - BUSINESS American National Bankshares Inc. (the "Corporation") is a one-bank holding company organized under the laws of the State of Virginia in 1984. On September 1, 1984, the Corporation acquired all of the outstanding capital stock of American National Bank and Trust Company (the "Bank"), a National Banking Association chartered in 1909 under the laws of the United States. The Bank is the only subsidiary of the Corporation. At December 31, 2002 the Corporation employed 207 persons (FTE). American National Bank and Trust Company The Bank has been operating as a commercial bank headquartered in Danville, Virginia since its organization in 1909. The Bank has expanded through internal growth and through mergers and acquisitions. In 1996 the Corporation completed the merger of Mutual Savings Bank, F.S.B. ("Mutual") with $84,718,000 in assets into the Bank. The Mutual merger was accounted for as a pooling of interests. The Bank completed two retail office purchases in 1995 and 1996 that added $57,700,000 in deposits and $6,925,000 in loans. The two acquisitions were accounted for as purchases and related core deposit intangible assets of $4,504,000 are being amortized over ten years. The Bank opened retail banking offices in Chatham and Martinsville, Virginia and closed a limited service retail office in Danville during 1999 and opened a branch office in South Boston, Virginia during 2000. In March 2002, the Bank opened their fourteenth retail banking office in southern Henry County, Virginia. The Bank has two wholly owned subsidiaries. ANB Mortgage Corp. originates and sells secondary-market mortgage loans. ANB Services Corporation, operating as ANB Investor Services and ANB Insurance Services, offer non-deposit investment products such as mutual funds and a full-line of insurance products through an affiliation with Bankers Insurance LLC. The operations of the Bank are conducted at fourteen offices located throughout the Bank's trade area, which includes the Cities of Danville and Martinsville, Pittsylvania, Henry, and Halifax Counties in Virginia, and the northern half of Caswell County in North Carolina. Seven of these offices are located in Danville, one office each in Gretna, Chatham, Martinsville, Collinsville, southern Henry County, and South Boston, Virginia and Yanceyville, North Carolina. The Bank also has fifteen automated teller machines at various locations in the trade area. The Bank offers all services normally offered by a full-service commercial bank, including commercial and consumer demand and time deposit accounts, commercial and consumer loans and trust services. Competition The Bank's primary service area is generally defined as the Cities of Danville and Martinsville, Pittsylvania, Henry, and Halifax Counties in Virginia, and the northern half of Caswell County in North Carolina. Vigorous competition exists in this service area. The Bank competes not only with other commercial banks but also with diversified financial institutions, money market and mutual funds, mortgage, insurance, and finance companies. As of December 31, 2002, there were approximately 14 banks operating in this service area. American National Bank and Trust Company has the largest deposit market share in Danville and Pittsylvania County. Supervision and Regulation The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956 ("the Act") and is registered as such with the Board of Governors of the Federal Reserve System ("the Federal Reserve Board"). As a bank holding company, the Corporation is required to file with the Federal Reserve Board an annual report and such other information as may be required. The Federal Reserve Board may also make examinations of the Corporation. The operations of the Bank are subject to federal statutes and to regulations of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation, which insures the Bank's deposits. The primary supervisory authority over the Bank is the Comptroller of the Currency, which regularly examines such areas as reserves, loans, investments, regulatory compliance, information systems, management practices and other aspects of the Bank's operations. These examinations are designed primarily for the protection of the Bank's depositors. In addition to these regular examinations, the Bank must furnish the Comptroller periodic reports containing a full and accurate statement of its affairs. As a national bank, the Bank is a member of the Federal Reserve System and is affected by general fiscal and monetary policies of the Federal Reserve Board. The techniques used by the Federal Reserve Board include setting the reserve requirements of member banks and establishing the discount rate on member bank borrowings. 4 Government Monetary Policies and Economic Controls The policies of the Federal Reserve Board have a direct effect on the amount of bank loans and deposits and the interest rates charged and paid thereon. While these policies can materially affect the revenues and income of commercial banks, the impact of such conditions and policies upon the future business and earnings of the Bank cannot accurately be predicted. Foreign Operations The Corporation does not engage in any foreign operations. Internet Access to Corporate Documents The Corporation provides access to their SEC filings through the corporate Web site at WWW.AMNB.COM. After accessing the Web site, the filings are available upon selecting the American National Bankshares Inc. icon. Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. Executive Officers This information is incorporated by reference to the Registrant's Proxy Statement for the April 2003 Annual Meeting of Shareholders. ITEM 2 - PROPERTIES The principal executive offices of the Corporation as well as the principal executive offices of the Bank are located at 628 Main Street, Danville, Virginia. As of March 24, 2003 the Bank maintained fourteen full service offices retail banking offices. Seven are located within the City of Danville, with others located at Gretna, Chatham, Martinsville, southern Henry County, Collinsville, and South Boston, Virginia and Yanceyville, North Carolina. The Bank's Trust and Investment Division operates two offices, ANB Mortgage Corp. has two offices, and ANB Investor Services and ANB Insurance Services have one office. The Corporation owns an office building on 203 Ridge Street, Danville, Virginia which is currently leased to Bankers Insurance, LLC. The Bank owns and operates fifteen Automated Teller Machines ("ATMs"). There are no mortgages or liens against any property of the Bank or the Corporation. Leased offices are marked with an *.
BANK OFFICES Main Office 628 Main Street, Danville, Virginia 24541 Airport Office 1407 South Boston Road, Danville, Virginia 24540 Chatham Office 13880 U.S. Highway 29, Chatham, Virginia 24531 Collinsville Office 2484 Virginia Avenue, Collinsville, Virginia 24078 Gretna Office 109 Main Street, Gretna, Virginia 24557 Martinsville Office * 201 East Main Street, Martinsville, Virginia 24112 Nor-Dan Office 239 Nor-Dan Drive, Danville, Virginia 24540 Riverside Office 1081 Riverside Drive, Danville, Virginia 24540 South Boston Office * 3229 Halifax Road, South Boston, Virginia 24592 South Main Office 1013 South Main Street, Danville, Virginia 24541 Tower Drive Office 103 Tower Drive, Danville, Virginia 24540 West Main Office * 2016 West Main Street, Danville, Virginia 24541 Yanceyville Office 173 Main Street, Yanceyville, North Carolina 27379 220 South Office * 3810 Greensboro Road, Ridgeway, Virginia 24148
ATM LOCATIONS Airport Office 1407 South Boston Road, Danville, Virginia 24540 Chatham Office 13880 U.S. Highway 29, Chatham, Virginia 24531 Collinsville Office 2484 Virginia Avenue, Collinsville, Virginia 24078 Franklin Turnpike * 2725 Franklin Turnpike, Danville, Virginia 24540 Yanceyville * Highways 86 & 158, Yanceyville, North Carolina 27379 Huffman's Car Wash * 596 West Main Street, Danville, Virginia 24541 Martinsville Office * 201 East Main Street, Martinsville, Virginia 24112 Riverside Office 1081 Riverside Drive, Danville, Virginia 24540 South Boston Office * 3229 Halifax Road, South Boston, Virginia 24592 220 South Office * 3810 Greensboro Road, Ridgeway, Virginia 24148 Danville Regional Medical Center * 142 South Main Street, Danville, Virginia 24541 Liberty Fair Mall * 240 Commonwealth Boulevard, Martinsville, Virginia 24112 Nor-Dan Office 239 Nor-Dan Drive, Danville, Virginia 24540 Piedmont Mall * 325 Piedmont Drive, Danville, Virginia 24540 West Main Office * 2016 West Main Street, Danville, Virginia 24541
5 ITEM 3 - Legal Proceedings There are no material pending legal proceedings to which the Corporation is a party or to which the property of the Corporation is subject. ITEM 4 - Submission of Matters to a Vote of Security Holders No Matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Corporation through a solicitation of proxies or otherwise. ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters The Corporation's common stock is traded on the NASDAQ National Market under the symbol "AMNB". At March 7, 2003 the Corporation had 1,378 shareholders of record. The tables below present the high and low closing sales' prices known to management for the Corporation's common stock and dividends declared for the past two years. Market value and dividends are shown per share and are based on the shares outstanding for 2002 and 2001. Market Price of the Corporation's Common Stock NASDAQ closing price Dividends -------------------- declared 2002 Low High per share ----------- ------- ------ --------- 4th quarter $ 25.80 $ 27.24 $ .18 3rd quarter $ 25.81 $ 29.00 $ .18 2nd quarter $ 19.25 $ 27.39 $ .18 1st quarter $ 18.05 $ 20.32 $ .17 ------ $ .71 ====== 2001 Low High per share ----------- ------- ------- --------- 4th quarter $ 17.50 $ 19.10 $ .17 3rd quarter $ 17.75 $ 19.40 $ .17 2nd quarter $ 18.25 $ 20.94 $ .17 1st quarter $ 14.25 $ 25.00 $ .15 ------ $ .66 ====== 6 ITEM 6 - Summary of Selected Consolidated Financial Data Summary of Selected Consolidated Financial Data (in thousands, except per share amounts) American National Bankshares Inc. & Subsidiary
2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Operations Information: Interest income: Loans.....................................................$ 27,150 $ 30,217 $ 28,300 $ 23,959 $ 23,356 Interest on deposits in other banks....................... 248 385 179 273 272 Investment securities..................................... 7,737 9,218 10,127 9,467 9,026 -------- -------- -------- -------- -------- Total interest income................................... 35,135 39,820 38,606 33,699 32,654 Interest expense............................................ 12,310 17,502 17,343 14,736 14,472 -------- -------- -------- -------- -------- Net interest income......................................... 22,825 22,318 21,263 18,963 18,182 Provision for loan losses................................... 873 1,015 1,020 670 927 Non-interest income......................................... 5,712 5,668 4,771 4,493 4,079 Non-interest expense........................................ 14,285 13,614 12,923 11,542 11,013 -------- -------- -------- -------- -------- Income before income taxes.................................. 13,379 13,357 12,091 11,244 10,321 Income taxes................................................ 3,918 3,942 3,415 3,320 3,123 -------- -------- -------- -------- -------- Net income..................................................$ 9,461 $ 9,415 $ 8,676 $ 7,924 $ 7,198 ======== ======== ========= ======== ======== Balance Sheet Information: Securities..................................................$163,824 $156,791 $162,929 $166,272 $163,413 Loans held for sale......................................... 1,285 253 399 220 1,233 Net loans................................................... 400,781 370,006 334,611 289,386 264,465 Total deposits.............................................. 473,562 464,012 426,588 385,558 358,325 Shareholders' equity........................................ 70,736 65,397 63,338 56,719 54,861 Total assets................................................ 605,859 572,887 541,389 491,391 460,383 Per Share Information:* Earnings - basic............................................$ 1.63 $ 1.58 $ 1.42 $ 1.30 $ 1.18 Earnings - diluted.......................................... 1.62 1.58 1.42 1.30 1.18 Dividends................................................... .71 .66 .585 .525 0.465 Book value.................................................. 12.24 11.23 10.45 9.29 8.99 Ratios: Return on average assets.................................... 1.63% 1.69% 1.70% 1.68% 1.64% Return on average shareholders' equity...................... 13.97% 14.49% 14.74% 14.17% 13.79% Average shareholder's equity/average assets 11.64% 11.68% 11.54% 11.89% 11.86% Total risk-based capital/assets............................. 15.49% 15.56% 17.09% 17.79% 18.04% Dividend payout ratio....................................... 43.52% 41.68% 41.07% 40.44% 39.43% Net charge-offs to average net loans........................ .15% .12% .13% .13% .15% Allowance for loan losses to period-end loans, net of unearned income............................. 1.38% 1.42% 1.40% 1.41% 1.42% * Per share amounts have been restated to reflect the impact of a 2-for-1 stock split effected in the form of a 100% stock dividend issued to stockholders July 15, 1999, with a record date of July 1, 1999.
7 AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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 audited consolidated financial statements and related notes to assist in the evaluation of the Corporation's 2002 performance. RESULTS OF OPERATIONS NET INCOME The Corporation reported record profitability during 2002. Net income for the year ended December 31, 2002 was $9,461,000, an increase of 0.5% over the $9,415,000 earned during the same period of 2001. On a basic per share basis, net earnings totaled $1.63 and on a diluted per share basis earnings totaled $1.62 for the year ended December 31, 2002. For the year ended December 31, 2001, both basic and diluted earnings per share were $1.58. Two important and commonly used measures of profitability are return on assets (net income as a percentage of average total assets) and return on shareholders' equity (net income as a percentage of average common shareholders' equity). The Corporation's returns on average assets were 1.63%, 1.69%, and 1.70% for the years ended December 31, 2002, 2001 and 2000, respectively. The returns on average shareholders' equity were 13.97%, 14.49%, and 14.74% for the last three years. The Corporation's moderate growth in earnings was due to several factors. Net interest income after provision for loan losses improved $649,000, or 3.05%, for 2002 compared to the same period in 2001 due to overall loan and deposit growth, which was partially offset by a decline in the net yield on earning assets. Non-interest income grew by $44,000. Excluding securities gains and losses, non-interest income grew by $372,000. In 2001 the Corporation had a large volume of non-recurring gains on the pre-maturity call of securities which was not experienced in 2002. NET INTEREST INCOME Net interest income, the Corporation's primary source of revenue, is the excess of interest income over interest expense. Net interest income is influenced by a number of factors, including the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on earning assets and the interest rates paid to obtain funding to support the assets. For analytical purposes, net interest income is adjusted to a taxable equivalent basis to recognize the income tax savings on tax-exempt assets, such as state and municipal securities. A tax rate of 34% was used in adjusting interest on tax-exempt securities and loans to a fully taxable equivalent basis. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income, i.e. the "FTE" adjustment) and the cost of the supporting funds is measured by the net interest margin. The FTE-adjusted net interest margin is the primary measure used in evaluating the effectiveness of the management of earning assets and the liabilities funding those assets. The FTE-adjusted net interest margin was 4.28% in 2002, 4.39% in 2001 and 4.54% in 2000. The eleven basis point decrease in net yield during 2002 was primarily the result of U.S. monetary policy that kept rates at historic lows during the year. During 2002, the Federal Reserve decreased the target federal funds rate in November by 0.50%, for a total two year reduction of 5.25%. The continued low target federal funds rate and the related effect on the prime lending rate and U.S. Treasury security rates had a negative impact on net interest income in 2002. The Wall Street Journal prime rate fell from 4.75% at January 1, 2002 to 4.25% at December 31, 2002. While the Corporation's balance sheet is liability-sensitive, it remained increasingly difficult to reduce funding costs at the same pace with the market-driven reductions in asset yields. The resultant decrease in interest income from the lower yield on earning assets exceeded the decrease in interest expense from lower costs of interest-bearing liabilities. The higher interest rate spread occurred because average-interest-bearing liabilities grew more in the lower cost areas of demand deposits, savings and repurchase accounts while the primary growth in average loans was in the commercial and commercial real estate portfolios. Table 1 demonstrates fluctuations in net interest income and the related yields for the years 2002, 2001, and 2000. 8 Table 1 - Net Interest Income Analysis 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):
Average Balance Interest Income/Expense Average Yield/Rate ------------------------------ ------------------------------ --------------------------- 2002 2001 2000 2002 2001 2000 2002 2001 2000 -------- -------- -------- -------- -------- -------- ------- ------- ------- Loans: Commercial $174,172 $139,094 $100,298 $ 11,337 $ 11,188 $ 9,273 6.51% 8.04% 9.25% Mortgage 183,297 179,682 165,260 12,383 14,622 14,101 6.76 8.14 8.53 Consumer 33,925 43,609 50,218 3,555 4,541 4,977 10.48 10.41 9.91 -------- -------- -------- -------- -------- -------- ------- ------- ------- Total loans 391,394 362,385 315,776 27,275 30,351 28,351 6.97 8.38 8.98 -------- -------- -------- -------- -------- -------- ------- ------- ------- Securities: U. S. Government - - 2,641 - - 168 - - 6.36 Federal agencies 43,063 42,698 64,784 1,942 2,709 4,231 4.51 6.34 6.53 Mortgage-backed 40,055 43,628 36,729 2,352 2,723 2,319 5.87 6.24 6.31 State and municipal 39,173 39,208 39,796 2,667 2,677 2,708 6.81 6.83 6.80 Other securities 26,962 30,947 23,420 1,629 1,959 1,464 6.04 6.33 6.25 -------- -------- -------- -------- -------- -------- ------- -------- ------- Total securities 149,253 156,481 167,370 8,590 10,068 10,890 5.76 6.43 6.51 -------- -------- -------- -------- -------- -------- ------- -------- ------- Deposits in other banks 15,792 11,726 2,879 248 385 179 1.57 3.28 6.22 -------- -------- -------- -------- -------- -------- ------- -------- ------- Total interest-earning assets 556,439 530,592 486,025 36,113 40,804 39,420 6.49 7.69 8.11 -------- -------- -------- ------- -------- ------- Other non-earning assets 25,459 25,841 24,269 -------- -------- -------- Total assets $581,898 $556,433 $510,294 ======== ======== ======== Deposits: Demand $ 59,852 $ 56,419 $ 56,141 417 495 1,035 .70 .88 1.84 Money market 42,369 41,225 24,861 775 1,318 865 1.83 3.20 3.48 Savings 70,073 62,792 63,739 1,049 1,177 1,671 1.50 1.87 2.62 Time 229,074 229,050 202,890 8,607 12,617 11,095 3.76 5.51 5.47 -------- -------- -------- -------- -------- -------- ------- -------- ------- Total deposits 401,368 389,486 347,631 10,848 15,607 14,666 2.70 4.01 4.22 Repurchase agreements 34,183 29,814 27,608 634 1,088 1,362 1.85 3.65 4.93 Other borrowings 17,274 15,491 23,397 828 807 1,315 4.79 5.21 5.62 -------- -------- -------- -------- -------- -------- ------- -------- ------- Total interest-bearing liabilities 452,825 434,791 398,636 12,310 17,502 17,343 2.72 4.03 4.35 -------- -------- -------- -------- -------- -------- ------- -------- ------- Demand deposits 58,075 52,719 49,126 Other liabilities 3,289 3,941 3,654 Shareholders' equity 67,709 64,982 58,878 -------- -------- -------- Total liabilities and Shareholders' equity $581,898 $556,433 $510,294 ======== ======== ======== Interest rate spread 3.77% 3.66% 3.76% ======= ======== ======= Net interest income $ 23,803 $ 23,302 $ 22,077 ======== ======== ======== Taxable equivalent adjustment $ 978 $ 984 $ 814 ======== ======== ======== Net yield on earning assets 4.28% 4.39% 4.54% ======= ======== =======
The growth in the volume of loans increased the tax-equivalent interest income on loans by $1,789,000, while the decline in rates on new and existing loans reduced the same number by $4,865,000. The net effect of the volume increase and the general rate decline decreased tax-equivalent interest income on loans by $3,076,000. Had rates increased to more normalized levels in 2002, interest income on loans would have been greater. Interest income on a tax-equivalent basis declined $1,478,000 on investment securities due to declines in both volume and yields on investment securities. Total interest expense decreased by a net amount of $5,192,000 in 2002, with a decrease of $5,614,000 due to lower rate funding costs in all categories with volume primarily in the savings and repurchase agreement categories accounting for most of the $422,000 increase in interest rates due to volume. Time deposits led the decline in interest expense as a majority re-priced during the year. 9 Table 2 presents the dollar amount of changes in interest income and interest expense, and distinguishes between the changes related to increases or decreases in average outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). Table 2 - Changes in Net Interest Income (Rate/Volume Analysis) Net interest income is the product of the volume of average earning assets and the average rates earned, less the volume of average interest-bearing liabilities and the average rates paid. The portion of change relating to both rate and volume is allocated to each of the rate and volume changes based on the relative change in each category. The following table analyzes the changes in both rate and volume components of net interest income on a taxable equivalent basis for the past two years (in thousands):
2002 vs. 2001 2001 vs. 2000 ------------------------------------ ----------------------------------- Change Change Interest Attributable to Interest Attributable to Increase ---------------------- Increase ---------------------- (Decrease) Rate Volume (Decrease) Rate Volume ---------- --------- --------- ---------- --------- --------- Interest income Loans: Commercial $ 149 $ (2,366) $ 2,515 $ 1,915 $ (1,323) $ 3,238 Mortgage (2,239) (2,528) 289 521 (672) 1,193 Consumer (986) 29 (1,015) (436) 243 (679) -------- --------- --------- -------- --------- --------- Total loans (3,076) (4,865) 1,789 2,000 (1,752) 3,752 -------- --------- --------- -------- --------- --------- Securities: U.S. Government - - - (168) (84) (84) Federal agencies (767) (790) 23 (1,522) (118) (1,404) Mortgage-backed (371) (156) (215) 404 (27) 431 State and municipal (10) (8) (2) (31) 9 (40) Other securities (330) (86) (244) 495 19 476 -------- --------- --------- -------- --------- --------- Total securities (1,478) (1,040) (438) (822) (201) (621) -------- --------- --------- -------- --------- --------- Deposits in other banks (137) (243) 106 206 (119) 325 -------- --------- --------- -------- --------- --------- Total interest income (4,691) (6,148) 1,457 1,384 (2,072) 3,456 -------- --------- --------- -------- --------- --------- Interest expense Deposits: Demand (78) (107) 29 (540) (545) 5 Money market (543) (579) 36 453 (75) 528 Savings (128) (254) 126 (494) (470) (24) Time (4,010) (4,011) 1 1,522 82 1,440 -------- --------- --------- -------- --------- --------- Total deposits (4,759) (4,951) 192 941 (1,008) 1,949 Repurchase agreements (454) (595) 141 (274) (376) 102 Other borrowings 21 (68) 89 (508) (90) (418) -------- --------- --------- -------- --------- --------- Total interest expense (5,192) (5,614) 422 159 (1,474) 1,633 -------- --------- --------- -------- --------- --------- Net interest income $ 501 $ (534) $ 1,035 $ 1,225 $ (598) $ 1,823 ======== ========= ========= ======== ========= =========
MARKET RISK MANAGEMENT As the holding company for a commercial bank, the Corporation's primary component of market risk is interest rate volatility. The Corporation's primary objectives for managing interest rate volatility are to identify opportunities to maximize net interest income while ensuring adequate liquidity and carefully managing interest rate risk. The Asset/Liability Investment Committee ("ALCO"), which is composed of executive officers, is responsible for: o Monitoring corporate financial performance; o Meeting liquidity requirements; o Establishing interest rate parameters, indices, and terms for loan and deposit products; o Assessing and evaluating the competitive rate environment; o Reviewing and approving investment portfolio transactions under established policy guidelines; o Monitoring and measuring interest rate risk. Interest rate risk refers to the exposure of the Corporation's earnings and market value of portfolio equity ("MVE") to changes in interest rates. The magnitude of the change in earnings and MVE resulting from interest rate changes is impacted by the time remaining to maturity on fixed-rate obligations, the contractual ability to adjust rates prior to maturity, competition, and the general level of interest rates and customer actions. 10 There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on the Corporation's earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities. Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across a full range of maturities. In determining the appropriate level of interest rate risk, ALCO reviews the changes in net interest income and MVE given various changes in interest rates. The Corporation also considers the most likely interest rate scenarios, local economics, liquidity needs, business strategies, and other factors in determining the appropriate levels of interest rate risk. To effectively measure and manage interest rate risk, simulation analysis is used to determine the impact on net interest income and MVE from changes in interest rates. Interest rate sensitivity analysis presents the amount of assets and liabilities that are estimated to reprice through specified periods if there are not changes in balance sheet mix. The interest rate sensitivity analysis in Table 3 reflects the Corporation's assets and liabilities on December 31, 2002 that will either be repriced in accordance with market rates, mature or are estimated to mature early or prepay within the periods indicated (in thousands): Table 3 - Interest Rate Sensitivity Analysis
3 Months > 3 Months > 1 Year > 3 Year or Less to 1 Year to 3 Years to 5 Years > 5 Years Total ---------- ------------ ------------ ------------ ----------- ---------- Interest sensitive assets: Interest bearing deposits with other banks $ 6,720 $ - $ - $ - $ - $ 6,720 Securities 17,133 24,527 44,789 37,037 40,338 163,824 Loans 115,383 161,027 119,634 10,748 896 407,688 ---------- ------------ ------------ ------------ ----------- ---------- Total interest sensitive assets 139,236 185,554 164,423 47,785 41,234 578,232 ---------- ------------ ------------ ------------ ------------ ---------- Interest sensitive liabilities: NOW and savings deposits 136,090 - - - - 136,090 Money market deposits 43,831 - - - - 43,831 Time deposits 51,201 91,560 65,590 16,067 121 224,539 Repurchase agreements and other borrowings 36,155 1,000 3,000 5,000 13,000 58,155 ---------- ------------ ------------ ------------ ------------ ---------- Total interest sensitive liabilities 267,277 92,560 68,590 21,067 13,121 462,615 ---------- ------------- ----------- ----------- ------------ ---------- Interest sensitivity gap $(128,041) $ 92,994 $ 95,833 $ 26,718 $ 28,113 $ 115,617 ========== ============= =========== =========== ============ ========== Cumulative interest sensitivity gap $(128,041) $ (35,047) $ 60,786 $ 87,504 $ 115,617 ========== ============= =========== =========== ============ Percentage cumulative gap to total interest sensitive assets (22.1)% (6.1)% 10.5 % 15.1 % 20.0 % Of the loans in the above table that either mature or can be repriced in periods over 1 year, $70,340 have adjustable rates and $56,340 have fixed rates. Investment security prepayments were estimated using recent market information.
Because of inherent limitations in interest rate sensitivity analysis, ALCO uses more sophisticated interest rate risk measurement techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and decrements of 1%, 2% and 3% to determine how net interest income changes for the next twelve months. ALCO also measures the effects of changes in interest rates on the Market Value of Equity (MVE) by discounting future cash flows of deposits and loans using new rates at which deposits and loans would be made to similar depositors and borrowers. Market value changes on the investment portfolio are estimated by discounting future cash flows and using duration analysis. Loan and investment security prepayments are estimated using current market information. Table 4 shows the estimated impact of changes in interest rates up and down 1%, 2% and 3% on net interest income and on MVE as of December 31, 2002 (in thousands). The negative one year cumulative interest sensitivity gap of $35,047,000 on December 31, 2002 has declined from the negative one year cumulative interest sensitivity gap of $71,761,000 on December 31, 2001, indicating a more balanced repricing gap position. This negative gap in the interest rate sensitivity analysis normally implies that the Corporation's net interest income would rise if rates decline and fall if rates increase. The simulation analysis presents a more accurate picture since certain rate indices that reprice deposits do not change with the same magnitude over the same period of time as changes in the prime rate or other indices that reprice loans. 11 Table 4 - Change in Net Interest Income and Market Value of Portfolio Equity Changes in Changes in Market Value Change in Net Interest Income (1) of Portfolio Equity (2) Interest ----------------------- ------------------------ Rates Amount Percent Amount Percent --------- -------- ---------- -------- ---------- Up 3% $ 2,189 9.18 % $(9,857) (10.41)% Up 2% 1,506 6.32 (8,027) (8.48) Up 1% 776 3.25 (6,171) (6.52) Down 1% (848) (3.56) 2,919 3.08 Down 2% (2,008) (8.42) 1,775 1.87 Down 3% $(3,332) (13.97)% $ 1,501 1.58 % (1) Represents the difference between estimated net interest income for the next 12 months in the new interest rate environment and the current interest rate environment. (2) Represents the difference between market value of portfolio equity in the new interest rate environment and the current interest rate environment, and then adjusted for income taxes using a 34% tax rate. While the Corporation cannot predict future interest rates or their effects on MVE or net interest income, the analysis indicates that a change in interest rates of plus or minus 3% is unlikely to have a material adverse effect on net interest income and MVE in future periods. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, asset and liability prepayments and composition and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Certain assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Also, the methodology used estimates of various rates of withdrawal for money market deposits, savings, and checking accounts, which may vary significantly from actual experience. The Corporation is also subject to prepayment risk, particularly in falling interest rate environments or in environments where the slope of the yield curve is relatively flat or negative. Such changes in the interest rate environment can cause substantial changes in the level of prepayments of loans, which may also affect the Corporation's interest rate sensitivity gap position. Additionally, credit risk may increase if an interest rate increase adversely affects the ability of many borrowers to service their debt. Non-Interest Income Non-interest income totaled $5,712,000 in 2002 compared with $5,668,000 in 2001 and $4,771,000 in 2000. This was an increase of 0.8% for 2002, compared to an 18.8% increase for 2001 and an increase of 6.2% during 2000. The major components of non-interest income are trust and investment services, service charges on deposit accounts, securities gains or losses, other fees and insurance commissions, mortgage banking income and other income. The comparative decline in non-interest income growth when compared to previous years was due to two primary factors. First, trust income continued to be negatively impacted by the declines in the equity markets which reduced asset-based fee income. Second, the large volume of securities gains reported in 2001 due to the sharp reduction in interest rates did not reoccur in 2002. Excluding non-recurring securities gains, operating non-interest income increased by $372,000 in 2002, or 7.0%, when compared to 2001 due to increased service charges on deposit accounts, other fees and commission, and increases in other income. Trust and investment services revenue is the largest contributor to the Corporation's non-interest income. Fees from the management of trusts, estates and customer investments totaled $2,516,000 in 2002, a decrease of $53,000, or 2.1%, from 2001. Trust and investment services fees in 2001 decreased 3.3% from 2000. In both 2002 and 2001 the decreases in income resulted from declines in the equity markets, which reduced portfolio value-based management fees. The trust division has addressed these external market decline impact with an increased fee structure and continued account volume growth through new account acquisition to partially offset the market-based income reductions. The Bank's trust and investment services division managed assets with an approximate market value of $297,630,000 at December 31, 2002, compared to $334,942,000 one year prior. 12 Service charges on deposit accounts were $1,706,000 in 2002, an increase of $321,000, or 23.2%, from 2001. Service charges during 2001 totaled $1,385,000, which was a 24.3% increase from 2000. Changes in the fee structure and additional accounts obtained contributed to the growth in income in 2002 and 2001. Service charge pricing on deposit accounts is typically changed annually to reflect current costs and competition. Other fees and commissions were $816,000 in 2002, $749,000 in 2001, and $592,000 in 2000. Non-customer ATM fees, debit and credit card fees, safe deposit box rent, brokerage investment commissions and insurance commissions represent the majority of the income in this category. The increase in 2002 resulted primarily from additional earnings at ANB Investor Services, improvements in safe deposit box rentals, and increases in interchange income for visa check card transactions. Mortgage banking income represents fees from originating and selling residential mortgage loans through a wholly owned subsidiary of the Bank, which began operations in December 1996. Mortgage banking income was $361,000 in 2002, $365,000 in 2001 and $240,000 in 2000. While loan volume was higher in 2002 compared to 2001, the average yield per loan sold declined due to the competitive nature of the local markets. Securities gains of $39,000 in 2002 represented a sharp decline from the $367,000 in net gains recorded in 2001. The gains in 2001 were primarily the result of pre-maturity calls of U.S. Government Agency investment securities. The Corporation strategically purchased a large volume of these securities in 2000 at a discount to their par value, and these discounts were then recognized as gains at the pre-maturity call date. Other income was $273,000 in 2002, an increase of 17.7% from the $232,000 recorded in 2001, which in turn was an increase of 36.5% from $170,000 recorded in 2000. Check order income and dividends from equity investments in a title agency account for the majority of other income. Non-Interest Expense Non-interest expense for 2002 was $14,285,000, a 4.9% increase from the $13,614,000 reported in 2001, which in turn increased 5.3%, over $12,923,000 in 2000. Non-interest expense includes salaries, pension, health insurance and other employee benefits, occupancy and equipment expense, core deposit intangible amortization and other expenses. Salaries of $6,520,000 in 2002 increased only $136,000, or 2.1%, over 2001 due primarily to a full year of staffing the new southern Henry County office, merit increases, and declines in incentive compensation. Salaries of $6,384,000 in 2001 increased $313,000, or 5.2%, over 2000 due to new branch offices in South Boston and Martinsville, increased incentive compensation and merit increases. Pension and other employee benefits totaled $1,471,000 in 2002, an increase of 5.8% from the $1,391,000 recorded in 2001, which in turn was an increase of 20.5% from the $1,154,000 reported in 2000. The increases in both years are due to increased premiums on medical insurance and higher pension costs. While some of the increase is due to additional staffing, the majority of the increases are due to the recent trend of health care insurance expenses increasing at a much higher rate than overall inflation. Pension expense has also been negatively impacted by a combination of lower interest rates and a poorly performing equity market. Occupancy and equipment expense of $2,460,000 for 2002 increased $144,000, or 6.2%, over $2,316,000 recorded in 2001, which increased 6.0% from $2,184,000 recorded in 2000. The higher occupancy and equipment expense in 2002 resulted from the new southern Henry County office that opened in March 2002 and from higher depreciation, maintenance and licensing fees on new equipment and software designed to improve product delivery and increase productivity. Core deposit intangible expense of $450,000 represents the amortization of the premium paid for deposits acquired at the Gretna office in 1995 and the Yanceyville office in 1996. The core deposit intangible continues to be amortized on a straight-line basis over a ten-year period based on management's conclusion that the purchase did not constitute the acquisition of a business. Other expense was $3,385,000 in 2002, an increase of 10.1% over the $3,074,000 reported in 2001, which increased from $3,064,000 recorded in 2000. The increase in 2002 was due to increases in ATM expense and telephone expense related to the conversion to a new ATM services vendor and increases in insurance, legal, audit, and internet banking related expenses. Some of the increase is also attributable to the new southern Henry County retail office. 13 Management continued to focus on controlling overhead expenses in relation to income growth. The efficiency ratio, a productivity measure used to determine how well non-interest expense is managed, was 48.4%, 47.6%, and 48.1%, for 2002, 2001, and 2000, respectively. A lower efficiency ratio indicates more favorable expense efficiency. Leaders in expense efficiency in the banking industry have achieved ratios in the mid-to-high 40% range while the majority of the industry remains in the 55-65% range. The efficiency ratio is calculated by dividing non-interest expense by the sum of taxable equivalent net interest income and non-interest income. INCOME TAX PROVISION Applicable income taxes on 2002 earnings amounted to $3,918,000, resulting in an effective tax rate of 29.3% compared to $3,941,000, or 29.5% in 2001, and $3,415,000, or 28.2% in 2000. In each year, the Corporation was subject to a Federal tax rate of 34.2%. The major difference between the statutory rate and the effective rate results from income that is not taxable for Federal income tax purposes. The primary non-taxable income is that of state and municipal securities and industrial revenue bonds or loans. The decrease in the effective tax rate for 2002 as compared to 2001 was a result of the increase in earnings from tax-exempt assets, such as loans to municipalities or investment obligations of state and political subdivisions, as a percentage of total income. Financial Condition, Liquidity and Capital Resources GENERAL Total assets increased 5.8% to $605,859,000 at December 31, 2002 when compared to assets of $572,887,000 at December 31, 2001. Asset growth has been concentrated in the loan and the investment securities portfolio. Loans grew 8.3% to $406,403,000 at December 31, 2002, up from $375,340,000 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 investment securities occurred in the available for sale portfolio and the Corporation reduced lower yielding interest bearing deposits in other banks to fund a portion of the loan and investment growth. Total liabilities grew 5.4% to $535,124,000 at December 31, 2002 when compared to $507,490,000 at December 31, 2001. Total deposits increased $9,550,000 or 2.1% during 2002 and other borrowings including Federal Home Loan Bank advances and repurchase agreements increased $17,978,000 or 44.7% 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. While total deposit growth was 2.1% for 2002, there was a shift to lower cost deposits during the year. 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. SECURITIES The securities portfolio consists primarily of securities for which an active market exists. The Bank's policy is to invest primarily in securities of the U. S. Government and its agencies and in other high grade fixed income securities to minimize credit risk. The securities portfolio plays a primary role in the management of interest rate sensitivity and generates substantial interest income. In addition, the portfolio serves as a source of liquidity and is used to meet collateral requirements. The securities portfolio consists of two components, securities held to maturity and securities available for sale. Securities are classified as held to maturity based on management's intent and the Corporation's ability, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost. Securities which may be sold in response to changes in market interest rates, changes in securities' prepayment risk, increases in loan demand, general liquidity needs, and other similar factors are classified as available for sale and are carried at estimated fair value. At December 31, 2002 total securities at amortized cost were $163,824,000, an increase of 4.5% from year-end 2001. Securities of U.S. government agencies represented 36.7% of the securities portfolio book value, mortgage securities issued by U.S. government corporations were 22.3%, obligations of state and municipal subdivisions were 24.5%, and other investments were 16.6%. As of December 31, 2002, there was a net unrealized gain of $3,912,000 related to the available for sale investment portfolio compared to $1,984,000 at year-end 2001. The market value of securities held to maturity at December 31, 2002 was more than the book value by $1,441,000. Note 2 of the consolidated financial statements provides details of the amortized cost, unrealized gains 14 and losses, and estimated fair value of each category of the investment portfolio as of December 31, 2002 and 2001. The state and municipal securities were diversified among many different issues and localities. Table 5 details the Corporation's investment security portfolio. Table 5 - Investment Portfolio This table presents information on the amortized cost, maturities and taxable equivalent yields of securities at the end of the last 3 years (in thousands, except yields):
2002 2001 2000 ------------------------- --------------------------- -------------------------- Taxable Taxable Taxable Book Equivalent Book Equivalent Book Equivalent Value Yield Value Yield Value Yield ---------- ---------- --------- ---------- ---------- ---------- Federal Agencies: Within 1 year $ 1,000 2.55% $ - -% $ 20,514 7.08% 1 to 5 years 40,650 4.17 28,192 5.35 42,842 6.83 5 to 10 years 17,642 3.13 5,000 6.12 2,000 6.84 Over 10 years - - - - - - ---------- ------- --------- ------- ---------- ------- Total 59,292 3.83 33,192 5.47 65,356 6.91 ---------- ------- --------- ------- ---------- ------- Mortgage-backed: Within 1 year 1,144 6.48 1,881 6.87 3 7.08 1 to 5 years 281 6.62 4,141 6.72 8,095 6.77 5 to 10 years 14,429 4.81 6,175 6.19 2,080 6.62 Over 10 years 19,499 5.87 31,909 6.25 23,930 6.20 ---------- ------- --------- ------- --------- ------- Total 35,353 5.46 44,106 6.31 34,108 6.36 ---------- ------- --------- ------- --------- ------- State and Municipal: Within 1 year 3,204 6.76 1,501 7.89 2,210 7.76 1 to 5 years 17,720 6.44 17,310 7.33 12,080 7.64 5 to 10 years 14,678 6.56 19,324 7.54 22,352 7.44 Over 10 years 3,677 6.97 531 7.79 2,246 7.39 ---------- ------- --------- ------- --------- ------- Total 39,279 6.56 38,666 7.46 38,888 7.52 ---------- ------- --------- ------- --------- ------- Other Securities: Within 1 year 5,219 6.45 10,525 2.10 2,045 6.29 1 to 5 years 13,434 6.13 17,790 6.50 9,056 6.77 5 to 10 years - - 3,098 6.32 7,557 6.23 Over 10 years 7,335 5.17 7,430 5.51 5,430 6.36 ---------- ------- --------- ------- --------- ------- Total 25,988 5.92 38,843 5.10 24,088 6.47 ---------- ------- --------- ------- --------- ------- Total portfolio $ 159,912 5.20% $ 154,807 6.11% $ 162,440 6.87% ========== ======= ========= ======= ========= =======
Loan Portfolio The Corporation's lending activities are its principal source of income. Loans, net of unearned income increased $31,063,000 or 8.3% during 2002 and increased $35,584,000 or 10.5% from 2000 to 2001. The decline in the percentage of loan growth in 2002 is attributable to general economic conditions. The primary increases in types of loans in 2002 were real estate loans secured by non-farm, nonresidential properties and commercial and industrial loans. Management considers the loan portfolio diversified and it consists of 32.0% in residential real estate loans, 30.6% in other real estate secured loans including commercial real estate, multi-family, farmland and construction and land development loans, 28.4% in commercial, industrial and agricultural loans, and 7.9% in consumer loans as of December 31, 2002, as detailed in Table 6 and 7 (in thousands) classified by type. The Corporation does not participate in highly leveraged lending transactions, as defined by the bank regulators and there are no loans of this nature recorded in the loan portfolio. The Corporation has no foreign loans in its portfolio. At December 31, 2002, the Bank had no loan concentrations (loans to borrowers engaged in similar activities) which exceeded 10% of total loans. 15 Table 6 - Loans
2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- Real estate loans: Construction and land development $ 9,208 $ 10,282 $ 9,284 $ 7,317 $ 8,104 Secured by farmland 1,485 1,110 1,616 1,306 1,491 Secured by 1-4 family residential properties 129,905 126,607 121,449 108,994 95,711 Secured by multi-family (5 or more) residential properties 6,329 6,385 5,023 4,532 2,268 Secured by nonfarm, nonresidential properties 107,263 88,648 67,312 54,170 44,251 Loans to farmers 1,844 1,452 1,625 2,468 2,293 Commercial and industrial loans 113,575 98,324 83,428 66,459 67,154 Consumer loans 32,008 36,077 44,389 45,235 46,337 Loans for nonrated industrial development obligations 4,745 6,436 5,590 3,236 1,895 Deposit overdrafts 41 19 40 24 15 ---------- ---------- ---------- ---------- ---------- Loans - net of unearned income $ 406,403 $ 375,340 $ 339,756 $ 293,741 $ 269,519 ========== ========== ========== ========== ==========
Table 7 - Scheduled Loan Maturities Commercial and Real Estate Agricultural Construction Total ------------ ------------ ----- Fixed Rate: 1 year of Less $ 2,307 $ - $ 2,307 1-5 years 9,542 1,510 11,052 After 5 years 2,517 104 2,621 -------- -------- -------- Total 14,366 1,614 15,980 -------- -------- -------- Variable Rate: 1 year of Less 84,675 6,974 91,649 1-5 years 19,620 620 20,240 After 5 years 1,503 - 1,503 -------- -------- -------- Total 105,798 7,594 113,392 -------- -------- -------- Total Loans and Leases (1) $120,164 $ 9,208 $129,372 ======== ======== ======== (1) This table excludes: Real Estate Mortgage Loans $244,982 Consumer Loans 32,008 Other Loans 41 -------- $277,031 ======== 16 ALLOWANCE AND PROVISION FOR LOAN LOSSES The allowance for loan losses is to provide for losses inherent in the loan portfolio. The Bank's Loan Committee has responsibility for determining the level of the allowance for loan losses, subject to the review of the Board of Directors. Among other factors, the Committee on a quarterly basis considers the Corporation's historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits including impaired loans and the Corporation's loan "Watch" list, and national and local economic conditions. The economy of the Corporation's trade area, which includes the City of Danville, City of Martinsville, Town of South Boston, Pittsylvania, Henry and Halifax Counties in Virginia, Town of Yanceyville and the northern half of Caswell County in North Carolina, is heavily dependent on manufacturing. While diversification has occurred in manufacturing in recent years, an apparel/home fashions textile firm and a tire manufacturing plant in Danville employ a significant workforce. Increased global competition has negatively impacted the textile industry in the area with several plants closing due to competitive pressures or due to relocation of some operations to foreign countries. Other important industries include farming, tobacco processing and sales, food processing, furniture manufacturing and sales, specialty glass manufacturing, and packaging tape production. The local economy of the Corporation's trade area continues to remain stable at this time and the Corporation's loan losses have not been significant in recent years; however, an inherent risk to the loan portfolio exists if significant declines continue in the manufacturing sector along with a corresponding reduction in employment. There are additional risks of future loan losses that cannot be precisely quantified or attributed to particular loans or classes of loans. Since those factors include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The sum of these elements is the Loan Committee's recommended level of the allowance for loan losses. The unallocated portion of the allowance is based on loss factors that cannot be associated with specific loans or loan categories. These factors include management's subjective evaluation of such conditions as credit quality trends, collateral values, portfolio concentrations, specific industry conditions in the regional economy, regulatory examination results, internal audit and loan review findings, recent loss experiences in particular portfolio segments, etc. The unallocated portion of the allowance for losses reflects management's attempt to ensure that the overall reserve appropriately reflects a margin for the imprecision necessarily inherent in estimates of credit losses. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. In 2002, the Corporation accrued $873,000 in provision for loan losses compared to $1,015,000 in 2001 and $1,020,000 in 2000. The provision for loan losses in 2002 was influenced by an 8.3% increase in loans in 2002, the composition of the loan growth, and by slightly higher net charge-offs. Over the past several years, the Corporation has substantially increased its portfolio of commercial loans. The risks associated with increasing the volume of commercial and commercial real estate loans resulted in an increase in the provision for loan losses for 2001 and 2000 when compared to years prior to 2000. While the Corporation continues to increase its commercial loan portfolio, the portfolio also continues to become "more seasoned", allowing management to better assess the risk associated with the portfolio. Loans charged off during 2002 amounted to $740,000 compared to $602,000 in 2001 and $567,000 in 2000. Recoveries amounted to $155,000, $175,000, and $158,000 in 2002, 2001, and 2000, respectively. Net charge-offs increased to $585,000 in 2002 from $427,000 in 2001 and $409,000 in 2000. The ratio of net charge-offs to average outstanding loans was .15% in 2002, .12% in 2001, and .13% in 2000. 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. Table 10 presents the Corporation's loan loss and recovery experience (in thousands) for the past five years. The allowance for loan losses totaled $5,622,000 at December 31, 2002, an increase of 5.4% over December 31, 2001. The ratio of the allowance to loans, less unearned income, was 1.38% at December 31, 2002 and 1.42% at December 31, 2001. The decrease in the allowance to loans ratio is supported by the allowance methodology listed above, the decline in the balance and aging of the indirect consumer loan portfolio, and the overall condition of the Corporation's trade areas. The reduction in the unallocated portion of the allowance is due to improved measurement in the allowance methodology. 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 December 31, 2002. 17 Table 8 - Allocation of Allowance for Loan Losses Management has allocated the allowance for loan losses to loan categories as follows (in thousands):
2002 2001 2000 1999 1998 ---------------- ---------------- ---------------- ---------------- ---------------- Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each category category category category category to total to total to total to total to total Amount loans Amount loans Amount loans Amount loans Amount loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- Commercial (including commercial real estate) $3,196 59% $2,005 55% $1,691 50% $1,190 46% $1,046 47% Real estate- residential 781 33 236 35 177 37 167 39 151 36 Consumer 1,247 8 1,276 10 1,304 13 1,503 15 1,525 17 Unallocated 398 - 1,817 - 1,574 - 1,275 - 1,099 - Balance at end of year $5,622 100% $5,334 100% $4,746 100% $4,135 100% $3,821 100% ====== ======== ====== ======== ====== ======== ====== ======== ====== ======== Management's criteria for evaluating the adequacy of its allowance for loan losses includes individual evaluation of significant loans and overall portfolio analyses for more homogeneous, smaller balance loan portfolios. Based on management's evaluation, estimated loan loss allowances are assigned to the individual loans which present a greater risk of loan loss. The remaining loan loss allowance is allocated to the remaining loans on an overall portfolio basis based on historical loss experience. The assessed risk of loan loss is higher in the commercial and consumer loan categories as these categories contain loans which are more significant to the Corporation and to the individual borrowers, thereby exposing the Corporation to a greater risk of loss in the event of downturns in the financial position of individual borrowers. The remaining loan categories are typically for lesser amounts and are distributed over a much larger population of borrowers, thereby reducing the Corporation's risk of loan loss.
Table 9 - Loan Loss Ratios
2002 2001 2000 ------- -------- ------- Allowance as percentage of outstanding loans, net of unearned income 1.38% 1.42% 1.40% Net charge-offs as percentage of allowance 10.41 8.00 8.60 Net charge-offs as percentage of average loans, net of unearned income .15 .12 .13 Provision as percentage of net charge-offs 149.23 237.72 250.00 Provision as percentage of average loans, net of unearned income .22 .28 .32 Allowance for loan losses to nonperforming loans 10.41X 6.46X 12.33X
18 Table 10 - Summary of Loan Loss Experience (in thousands)
2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ Balance at beginning of period $5,334 $4,746 $4,135 $3,821 $3,277 ------ ------ ------ ------ ------ Charge-offs: Commercial loans 343 141 141 34 68 Real estate loans 33 59 9 - - Consumer loans 364 402 417 475 440 ------ ------ ------ ------ ------ 740 602 567 509 508 ------ ------ ------ ------ ------ Recoveries: Commercial loans 28 75 32 40 9 Real estate loans 3 3 1 - - Consumer loans 124 97 125 113 116 ------ ------ ------ ------ ------ 155 175 158 153 125 ------ ------ ------ ------ ------ Net charge-offs 585 427 409 356 383 Provision for loan losses 873 1,015 1,020 670 927 ------ ------ ------ ------ ------ Balance at end of period $5,622 $5,334 $4,746 $4,135 $3,821 ====== ====== ====== ====== ====== Percent of net charge-offs to average net loans outstanding during the period .15% .12% .13% .13% .15% ====== ======= ======= ====== ======
ASSET QUALITY AND NON-PERFORMING LOANS The Corporation identifies specific credit exposures through its periodic analysis of the loan portfolio and monitors general exposures from economic trends, market values and other external factors. The Corporation maintains an allowance for loan losses, which is available to absorb losses inherent in the loan portfolio. The allowance is increased by the provision for losses and by recoveries from losses. Charge-offs decrease the allowance. The adequacy of the allowance for loan losses is determined on a quarterly basis. Various factors as defined in the previous section "Allowance and Provision for Loan Losses" are considered in determining the adequacy of the allowance. Loans, other than consumer, are generally placed on non-accrual status when any portion of principal or interest is 90 days past due or collectability is uncertain. Unless loans are in the process of collection, income recognized on consumer loans is discontinued and the loans are charged off after a delinquency of 90 days. Under the Corporation's policy a non-accruing loan may be restored to accrual status when none of its principal and interest is due and unpaid and the Corporation expects repayment of the remaining contractual principal and interest or when it otherwise becomes well secured and in the process of collection. 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 and are detailed in Table 11. Loans in a non-accrual status at December 31, 2002 were $301,000 compared with $568,000 at December 31, 2001. Loans on accrual status and past due 90 days or more at December 31, 2002 were $239,000 compared with $258,000 at December 31, 2001. There were no loans classified as troubled debt restructurings or potential problem loans on December 31, 2002 or December 31, 2001. Potential problem loans are defined as loans not disclosed above where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. The gross amount of interest income that would have been recorded on non-accrual loans and restructured loans for the year ending December 31, 2002, if all such loans had been accruing interest at the original contractual rate, was $20,000. No interest payments were recorded as interest income during the reporting period for all such non-performing loans. Management has in place an aggressive program to control loan delinquencies, and the level of past due loans and non-performing loans is considered to be within an acceptable range. Total non-performing loans as a percentage of net loans was .13% at December 31, 2002 and .22% at December 31, 2001. Total non-performing loans are considered low by industry standards. Properties received due to loan foreclosures were $30,000 at December 31, 2002 and $117,000 at December 31, 2001. 19 Table 11 - Nonperforming Loans Amounts are in thousands, except ratios
2002 2001 2000 1999 1998 ------- -------- -------- -------- -------- Nonaccruing loans: Real Estate $ 293 $ 414 $ 65 $ 107 $ 58 Commercial - 115 67 131 132 Agricultural 8 39 14 54 - -------- -------- -------- -------- -------- Total nonaccruing loans 301 568 146 292 190 -------- -------- -------- -------- -------- Restructured loans: Total restructured loans - - - - - -------- -------- -------- -------- -------- Loans past due 90 days and accruing interest: Real Estate - - - 3 - Consumer 205 217 176 232 239 Commercial 33 33 49 44 3 Agricultural 1 8 14 8 7 -------- -------- -------- -------- -------- Total past due loans 239 258 239 287 249 -------- -------- -------- -------- -------- Total nonperforming loans $ 540 $ 826 $ 385 $ 579 $ 439 ======== ======== ======== ======== ======== Asset Quality Ratios: Allowance for loan losses to year-end net loans 1.38% 1.42% 1.40% 1.41% 1.42% Nonperforming loans to year-end net loans .13% .22% .11% .20% .16% Allowance for loan losses to nonperforming loans 10.41X 6.46X 12.33X 7.14X 8.70X
LIQUIDITY Liquidity is the measure of the Corporation's ability to generate sufficient funds to meet customer demands for loans and the withdrawal of deposit balances. The Corporation, in its normal course of business, maintains cash reserves and has an adequate flow of funds from loan payments and maturing investment securities to meet present liquidity needs. Liquidity is provided from cash and amounts due from banks, federal funds sold, interest-bearing deposits in other banks, repayments from loans, increases in deposits, lines of credit from the Federal Home Loan Bank and two correspondent banks, and maturing 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. Management monitors and plans the Corporation's liquidity position for future periods. Liquidity strategies are implemented and monitored by the Bank's Asset/Liability Investment Committee (ALCO). The Committee uses a simulation model to assess the future liquidity needs of the Corporation and manage the investment of funds. The Bank has a line of credit equal to 15% of assets with the Federal Home Loan Bank of Atlanta that equaled approximately $90,790,000 at December 31, 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. Borrowings outstanding under this line of credit were $22,000,000 and $13,000,000 respectively, at December 31, 2002 and December 31, 2001. Federal Home Loan Bank advances have increased by $9,000,000 since December 31, 2001, due to borrowings that were immediately offset with investment securities purchases. 20 The Bank has ten fixed rate term borrowing contracts outstanding as of December 31, 2002, with the following final maturities: Amount Expiration Date ---------- --------------- $1,000,000 2003 $3,000,000 2004 $2,000,000 2005 $2,000,000 2006 $1,000,000 2007 $8,000,000 2008 $5,000,000 2009 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 access to the Federal Reserve Bank of Richmond's discount window should a liquidity crisis occur. The Bank has not used the facilities in the past year and considers these as backup sources of funds. DEPOSITS The Corporation's major source of funds and liquidity is its deposit base. Table 12 presents the average balances of deposits and the average rates paid on those deposits for the past 3 years (in thousands). Expansion of the Corporation's earning assets is based largely on the growth of deposits from individuals and small and medium size businesses. These deposits are more stable in number and size than large denomination certificates of deposit. In addition, the Corporation's customers have relatively stable requirements for funds. The mix of the deposit base (time deposits versus demand, money market and savings) is constantly subject to change. During 2002 the deposit mix changed with the primary average balance increases in savings accounts of $7,281,000, followed by an increase in non-interest bearing demand deposits of $5,356,000, and an increase in interest-bearing demand deposits of $3,433,000. There was little growth in the higher cost certificates of deposit and money market accounts. The growth in transaction accounts was widespread in the industry, as customers placed more of their funds into savings and demand deposit accounts due to poorly performing equity markets and the historically low rate environment. Certificates of deposit of $100,000 or more are detailed in Table 13. Table 12 - Deposits
2002 2001 2000 -------------------- -------------------- -------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------- ------- -------- ------- -------- ------- Demand deposits - non-interest bearing $ 58,075 -% $ 52,719 -% $ 49,126 -% Demand deposits - interest bearing 59,852 .70 56,419 .88 56,141 1.84 Money market 42,369 1.83 41,225 3.20 24,861 3.48 Savings 70,073 1.50 62,792 1.87 63,739 2.62 Time 229,074 3.76 229,050 5.51 202,890 5.47 -------- ------- -------- ------- -------- ------- $459,443 2.36% $442,205 3.53% $396,757 3.70% ======== ======== ========
Table 13 - Certificates of Deposit Certificates of deposit at the end of 2002 in amounts of $100,000 or more were classified by maturity as follows (in thousands): 3 months or less $ 15,286 Over 3 through 6 months 10,184 Over 6 through 12 months 10,626 Over 12 months 23,981 -------- $ 60,077 ======== 21 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 December 31, 2002 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 amounted to $107,771,000 at December 31, 2002 and $121,062,000 at December 31, 2001, represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements. There were no commitments to purchase securities when issued as of December 31, 2002 or 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 December 31, 2002 and December 31, 2001, the Bank had $3,489,000 and $1,000,000 respectively, in outstanding standby letters of credit. CAPITAL RESOURCES The following table displays the changes in shareholders' equity, in thousands, from December 31, 2001, to December 31, 2002: Shareholders' Equity, December 31, 2001 $ 65,397 Net earnings 9,461 Exercise of stock options 61 Repurchase of common stock (1,049) Cash dividends paid (4,117) Net change in net unrealized losses on AFS securities 1,273 Net Change in Minimum Pension Liability (290) --------- Shareholders' Equity, December 31, 2002 $ 70,736 ========= The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Corporation's capital is reviewed by management on an ongoing basis. Management seeks to maintain a structure that will ensure an adequate level of capital to support anticipated asset growth and absorb potential losses. 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 of the Corporation's common stock between August 29, 2001 and August 28, 2002, and 250,000 shares between August 21, 2002 and August 19, 2003. During 2002, the Corporation repurchased 45,100 shares of its common stock in the open market at an average per share price of $23.26. During 2001, the Corporation repurchased 254,366 shares of its common stock, in the open market at an average per share price of $18.08. From the inception of the stock repurchase plan through December 31, 2002, the Corporation has purchased and retired 339,466 shares of its common stock. Regulatory agencies issued risk-based capital guidelines to more appropriately consider the credit risk inherent in the assets and off-balance sheet activities of a financial institution in the assessment of capital adequacy. 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. Under the guidelines, total capital has been defined as core (Tier I) capital and supplementary (Tier II) capital. The Corporation's Tier I capital consists primarily of shareholder's equity, while Tier II capital consists of the allowance for loan losses. The definition of assets has been modified to include items on and off the balance sheet, with each item being assigned a "risk-weight" for the determination of the ratio of capital to risk-adjusted assets. The guidelines require that total capital (Tier I plus Tier II) of 8% be held against total risk-adjusted assets, at least half of which (4%) must be Tier I capital. At December 31, 2002, the Corporation's Tier I and total capital ratios were 14.41% and 15.49%, respectively. At December 31, 2001, these ratios were 14.32% and 15.56%, respectively. The ratios for both years were well in excess of the regulatory requirements. As mandated by the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), the following five capital categories are identified for insured depository institutions: "well capitalized", "adequately capitalized", 22 "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". FDICIA requires the federal banking regulators to take prompt corrective action with respect to insured depository institutions that do not meet minimum capital requirements. Under the regulations, well capitalized institutions must have Tier I risk-based capital ratios of at least 6%, total risk-based capital ratios of at least 10% and leverage ratios of at least 5% and not be subject to capital directive orders. Under these guidelines, the Corporation and the Bank have always been and continue to be considered well capitalized. The Corporation's leverage ratios (Tier 1 capital divided by average quarterly assets less intangible assets) were 11.00% and 10.96% at December 31, 2002 and 2001, respectively. The leverage ratio has a regulatory minimum of 3%, with most institutions required to maintain a ratio one to two percent above the 3% minimum depending upon risk profiles and other factors. The Board of Directors declared regular quarterly dividends totaling $.71 and $.66 per share of common stock in 2002 and 2001, respectively. Cash dividends totaled $4,117,000 and represented a 43.5% payout of 2002 net income, compared to 41.7% in 2001. The Board of Directors reviews the Corporation's dividend policy regularly and increases dividends when justified by earnings after considering future capital needs. Shareholders' equity was 11.7% of assets at December 31, 2002 and 11.4% at December 31, 2001. Shareholders' equity was $70,736,000 at December 31, 2002 and $65,397,000 at December 31, 2001. The Corporation's stock began trading on the NASDAQ National Market on April 23, 1999 after having been traded on the OTC Bulletin Board. The change to NASDAQ was made to improve the marketability of the stock. The total market value of American National Bankshares Inc. common stock at December 31, 2002, at $26.00 per share (the last trade recorded on the NASDAQ National Market during 2002) was $150,301,000, compared to $108,871,000 at December 31, 2001 when the stock was last traded at $18.70 per share. The market value of the Corporation's common stock was 212 percent of its book value with book value per common share at $12.24 on December 31, 2002. Impact of Inflation and Changing Prices The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most industrial companies that have significant investments in fixed assets. Due to this fact, the effects of inflation on the Corporation's balance sheet are minimal, meaning that there are no substantial increases or decreases in net purchasing power over time. The most significant effect of inflation is on other expenses that tend to rise during periods of general inflation. Management feels that the most significant impact on financial results is changes in interest rates and the Corporation's ability to react to those changes. As discussed previously, management is attempting to measure, monitor and control interest rate risk. CRITICAL ACCOUNTING POLICIES 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. 23 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. 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. 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. 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 based on management's determination that a business was not acquired in either of the two purchases. 24 Stock Based Compensation The Corporation accounts for its stock compensation plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Corporation. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Corporation and 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 Legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses that the Corporation and Bank are engaged in. 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. ITEM 14 - 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. 25 Table 14 - Quarterly Financial Results American National Bankshares Inc. and Subsidiary (in thousands, except per share amounts)
Fourth Third Second First Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2002 Interest income..........................................$ 8,654 $ 8,893 $ 8,787 $ 8,801 Interest expense......................................... 2,788 2,972 3,126 3,424 ------- ------- ------- ------- Net interest income.................................... 5,866 5,921 5,661 5,377 Provision for loan losses................................ 240 214 236 183 ------- ------- ------- ------- Net interest income after provision.................... 5,626 5,707 5,425 5,194 Non-interest income...................................... 1,438 1,434 1,445 1,395 Non-interest expense..................................... 3,548 3,660 3,579 3,498 ------- ------- ------- ------- Income before income tax provision..................... 3,516 3,481 3,291 3,091 Income tax provision..................................... 1,050 1,020 956 892 ------- ------- ------- ------- Net income.............................................$ 2,466 $ 2,461 $ 2,335 $ 2,199 ======= ======= ======= ======= Per common share: Net income (basic).....................................$ .43 $ .42 $ .40 $ .38 Net income (diluted)...................................$ .42 $ .42 $ .40 $ .38 Cash dividends.........................................$ .18 $ .18 $ .18 $ .17
Fourth Third Second First Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2001 Interest income..........................................$ 9,390 $ 9,936 $10,191 $10,303 Interest expense......................................... 3,876 4,339 4,572 4,715 ------- ------- ------- ------- Net interest income.................................... 5,514 5,597 5,619 5,588 Provision for loan losses................................ 228 252 273 262 ------- ------- ------- ------- Net interest income after provision.................... 5,286 5,345 5,346 5,326 Non-interest income...................................... 1,349 1,308 1,568 1,443 Non-interest expense..................................... 3,272 3,434 3,450 3,458 ------- ------- ------- ------- Income before income tax provision..................... 3,363 3,219 3,464 3,311 Income tax provision..................................... 1,007 928 1,014 993 ------- ------- ------- ------- Net income.............................................$ 2,356 $ 2,291 $ 2,450 $ 2,318 ======= ======= ======= ======= Per common share: Net income (basic).....................................$ .40 $ .39 $ .41 $ .38 Net income (diluted)...................................$ .40 $ .39 $ .41 $ .38 Cash dividends.........................................$ .17 $ .17 $ .17 $ .15
26 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The following consolidated financial statements and related notes to consolidated financial statements of American National Bankshares Inc. and Subsidiary were prepared by Management which has the primary responsibility for the integrity of the financial information. The statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts that are based on Management's best estimates and judgment. Financial information elsewhere in this Annual Report is presented on a basis consistent with that in the financial statements. In meeting its responsibility for the fair presentation of the financial statements, Management relies on the Corporation's comprehensive system of internal accounting controls. This system provides reasonable assurance that assets are safeguarded and transactions are recorded to permit the preparation of appropriate financial information. The system of internal controls is characterized by an effective control-oriented environment within the Corporation which is augmented by written policies and procedures, internal audits and the careful selection and training of qualified personnel. The functioning of the accounting system and related internal accounting controls is under the general oversight of the Audit and Compliance Committee of the Board of Directors which is comprised of three outside directors. The accounting system and related controls are reviewed by an extensive program of internal audits. The Audit and Compliance Committee meets regularly with the internal auditors to review their work and ensure that they are properly discharging their responsibilities. In addition, the Committee reviews and approves the scope and timing of the internal audits and any findings with respect to the system of internal controls. The Audit and Compliance Committee also meets periodically with representatives of Yount, Hyde and Barbour, PC, the Corporation's independent public accountants, to discuss the results of their audit as well as other audit and financial matters. Reports of examinations conducted by the Office of the Comptroller of the Currency are also reviewed by the committee members. The responsibility of Yount, Hyde and Barbour, PC is limited to an expression of their opinion as to the fairness of the financial statements presented. Their opinion is based on an audit conducted in accordance with generally accepted auditing standards as described in the second paragraph of their report. /s/Charles H. Majors ------------------------------------- Charles H. Majors President and Chief Executive Officer /s/Brad E. Schwartz ------------------------------------------- Brad E. Schwartz Senior Vice President, Secretary, Treasurer & Chief Financial Officer January 21, 2003 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS -------------------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT To the Shareholders and Board of Directors American National Bankshares, Inc. Danville, Virginia We have audited the accompanying consolidated balance sheet of American National Bankshares, Inc. as of December 31, 2002, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of American National Bankshares, Inc. for the year ended December 31, 2001 were audited by other auditors who have ceased operations and whose report, dated January 15, 2002, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of American National Bankshares, Inc. as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Yount, Hyde and Barbour, P.C. /s/Yount, Hyde & Barbour, P.C. ------------------------------ Winchester, Virginia February 7, 2003 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS -------------------------------------------------------------------------------- To American National Bankshares Inc.: We have audited the accompanying consolidated balance sheets of American National Bankshares Inc. (a Virginia corporation) and Subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American National Bankshares Inc. and Subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP /s/Arthur Andersen LLP ----------------------- Raleigh, North Carolina January 15, 2002 NOTE: This Report was not re-issued with the consent of Arthur Andersen, the Company's independent auditor for the accompanying consolidated balance sheets of American National Bankshares Inc. (a Virginia corporation) and Subsidiary as of December 31, 2001, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 2001. Arthur Andersen has ceased operations and was not available to provide consent of re-issuance. 29 Consolidated Balance Sheets December 31, 2002 and 2001 American National Bankshares Inc. and Subsidiary ---------------------------------------------------------------------------------------------------------------
2002 2001 ------------- ------------- ASSETS Cash and due from banks ........................................................$ 16,757,283 $ 14,797,926 Interest-bearing deposits in other banks........................................ 6,720,335 14,350,723 Securities available for sale, at fair value.................................... 137,046,119 127,316,666 Securities held to maturity (market value of $28,219,299 in 2002 and $30,154,043 in 2001).............................................. 26,777,747 29,474,139 ------------- ------------- Total securities.............................................................. 163,823,866 156,790,805 ------------- ------------- Loans held for sale............................................................. 1,285,020 253,021 Loans, net of unearned income .................................................. 406,403,107 375,339,939 Less allowance for loan losses................................................ (5,622,150) (5,334,456) ------------- ------------- Net loans..................................................................... 400,780,957 370,005,483 ------------- ------------- Bank premises and equipment, at cost, less accumulated depreciation of $10,673,195 in 2002 and $9,651,610 in 2001.................... 8,167,476 7,857,426 Core deposit intangibles........................................................ 1,383,870 1,833,686 Accrued interest receivable and other assets.................................... 6,940,494 6,998,086 ------------- ------------- Total assets..................................................................$605,859,301 $572,887,156 ============= ============= LIABILITIES and SHAREHOLDERS' EQUITY Liabilities: Demand deposits -- non-interest bearing.......................................$ 69,102,211 $ 58,573,035 Demand deposits -- interest bearing........................................... 62,679,718 61,404,626 Money market deposits......................................................... 43,830,781 47,024,615 Savings deposits.............................................................. 73,410,623 65,650,939 Time deposits................................................................. 224,539,145 231,358,568 ------------- ------------- Total deposits................................................................ 473,562,478 464,011,783 ------------- ------------- Repurchase agreements........................................................... 36,155,251 27,176,758 FHLB Borrowings................................................................. 22,000,000 13,000,000 Accrued interest payable and other liabilities.................................. 3,405,913 3,301,342 ------------- ------------- Total liabilities............................................................. 535,123,642 507,489,883 ------------- ------------- Shareholders' equity: Preferred stock, $5 par, 200,000 shares authorized, none outstanding............................................................ - - Common stock, $1 par, 10,000,000 shares authorized, 5,780,816 shares outstanding at December 31, 2002 and 5,821,956 shares outstanding at December 31, 2001........................... 5,780,816 5,821,956 Capital in excess of par value.................................................. 9,571,508 9,588,502 Retained earnings............................................................... 53,092,527 48,677,761 Accumulated other comprehensive income ......................................... 2,290,808 1,309,054 ------------- ------------- Total shareholders' equity.................................................... 70,735,659 65,397,273 ------------- ------------- Total liabilities and shareholders' equity....................................$605,859,301 $572,887,156 ============= ============= The accompanying notes to consolidated financial statements are an integral part of these statements.
30 Consolidated Statements of Income For The Years Ended December 31, 2002, 2001 and 2000 American National Bankshares Inc. and Subsidiary -------------------------------------------------------------------------------------------------------------
2002 2001 2000 ------------ ------------ ------------- Interest Income: Interest and fees on loans......................................$ 27,149,521 $ 30,216,549 $ 28,300,030 Interest on deposits in other banks............................. 248,270 385,019 179,215 Income on investment securities: U S Government................................................ - - 167,977 Federal agencies.............................................. 1,941,974 2,709,097 4,231,105 Mortgage-backed............................................... 2,351,830 2,723,146 2,319,166 State and municipal .......................................... 1,887,506 1,916,297 1,944,604 Other investments............................................. 1,555,947 1,869,711 1,464,462 ------------ ------------ ------------- Total interest income......................................... 35,135,048 39,819,819 38,606,559 ------------ ------------ ------------- Interest Expense: Interest on deposits: Demand........................................................ 416,924 494,930 1,034,845 Money market.................................................. 775,051 1,318,002 865,024 Savings....................................................... 1,048,564 1,176,704 1,671,108 Time.......................................................... 8,606,409 12,617,362 11,094,637 Interest on repurchase agreements............................... 634,996 1,087,823 1,362,104 Interest on other borrowings.................................... 827,800 806,869 1,315,507 ------------ ------------ ------------- Total interest expense........................................ 12,309,744 17,501,690 17,343,225 ------------ ------------ ------------- Net Interest Income............................................. 22,825,304 22,318,129 21,263,334 Provision for Loan Losses....................................... 873,000 1,015,000 1,020,000 ------------ ------------ ------------- Net Interest Income After Provision For Loan Losses............................................... 21,952,304 21,303,129 20,243,334 ------------ ------------ ------------- Non-Interest Income: Trust and investment services................................. 2,515,937 2,569,125 2,657,802 Service charges on deposit accounts........................... 1,706,137 1,385,339 1,113,548 Other fees and commissions.................................... 816,360 749,072 591,724 Mortgage banking income....................................... 360,669 365,349 240,390 Securities gains (losses), net................................ 39,334 367,035 (1,751) Other income.................................................. 273,281 231,998 169,747 ------------ ------------ ------------- Total non-interest income..................................... 5,711,718 5,667,918 4,771,460 ------------ ------------ ------------- Non-Interest Expense: Salaries...................................................... 6,519,552 6,383,811 6,071,352 Pension and other employee benefits........................... 1,470,682 1,390,591 1,154,352 Occupancy and equipment ...................................... 2,459,647 2,316,282 2,184,099 Core deposit intangible amortization.......................... 449,816 449,816 449,816 Other ........................................................ 3,384,839 3,073,702 3,063,880 ------------ ------------ ------------- Total non-interest expense.................................... 14,284,536 13,614,202 12,923,499 ------------ ------------ ------------- Income Before Income Tax Provision.............................. 13,379,486 13,356,845 12,091,295 Income Tax Provision............................................ 3,918,191 3,941,474 3,414,930 ------------ ------------ ------------- Net Income......................................................$ 9,461,295 $ 9,415,371 $ 8,676,365 ============ ============ ============= Net Income Per Common Share: Basic.........................................................$ 1.63 $ 1.58 $ 1.42 Diluted.......................................................$ 1.62 $ 1.58 $ 1.42 Average Common Shares Outstanding: Basic......................................................... 5,800,302 5,949,811 6,096,037 Diluted....................................................... 5,850,349 5,973,153 6,101,415 The accompanying notes to consolidated financial statements are an integral part of these statements.
31 Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2002, 2001 and 2000 American National Bankshares Inc. and Subsidiary
Accumulated Common Stock Capital in Other Total ------------------------- Excess of Retained Comprehensive Shareholders' Shares Amount Par Value Earnings Income (Loss) Equity ----------- ------------ ------------ ------------- -------------- ------------- Balance, December 31, 1999...................... 6,103,701 $ 6,103,701 $ 9,895,359 $ 42,466,592 $ (1,747,102) $ 56,718,550 Net income...................................... - - - 8,676,365 - 8,676,365 Change in unrealized gains on securities available for sale, net of tax of $1,066,477.. - - - - 2,070,219 2,070,219 ------------- Comprehensive income.......................... 10,746,584 Stock repurchased and retired................... (40,000) (40,000) (64,854) (459,334) - (564,188) Stock options exercised......................... 71 71 923 - - 994 Cash dividends declared and paid................ - - - (3,563,657) - (3,563,657) ----------- ------------ ------------ ------------- -------------- ------------- Balance, December 31, 2000...................... 6,063,772 6,063,772 9,831,428 47,119,966 323,117 63,338,283 Net income...................................... - - - 9,415,371 - 9,415,371 Change in unrealized gains on securities available for sale, net of tax of $507,906.... - - - - 985,937 985,937 ------------- Comprehensive income.......................... 10,401,308 Stock repurchased and retired................... (254,366) (254,366) (412,413) (3,933,272) - (4,600,051) Stock options exercised......................... 12,550 12,550 169,487 - - 182,037 Cash dividends declared and paid................ - - - (3,924,304) - (3,924,304) ----------- ------------ ------------ ------------- -------------- ------------- Balance, December 31, 2001...................... 5,821,956 5,821,956 9,588,502 48,677,761 1,309,054 65,397,273 Net income...................................... - - - 9,461,295 - 9,461,295 Other comprehensive income, net of tax: Change in unrealized gains on securities available for sale, net of tax of $655,634.... - - - - 1,272,701 Minimum pension liability adjustment, net of tax of $149,882........................ (290,947) -------------- Other comprehensive income.................... 981,754 981,754 ------------- Comprehensive income.......................... 10,443,049 Stock repurchased and retired................... (45,100) (45,100) (74,278) (929,432) - (1,048,810) Stock options exercised......................... 3,960 3,960 57,284 - - 61,244 Cash dividends declared and paid................ - - - (4,117,097) - (4,117,097) ----------- ------------ ------------ ------------- -------------- ------------- Balance, December 31, 2002..................... 5,780,816 $ 5,780,816 $ 9,571,508 $ 53,092,527 $ 2,290,808 $ 70,735,659 =========== ============ ============= ============= ============== ============= The accompanying notes to consolidated financial statements are an integral part of these statements.
32 Consolidated Statements of Cash Flows For the Years Ended December 31, 2002, 2001 and 2000 American National Bankshares Inc. and Subsidiary
2002 2001 2000 ------------- ------------- ------------- Cash Flows from Operating Activities: Net income....................................................................$ 9,461,295 $ 9,415,371 $ 8,676,365 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses..................................................... 873,000 1,015,000 1,020,000 Depreciation.................................................................. 1,143,865 1,171,113 1,116,688 Core deposit intangible amortization.......................................... 449,816 449,816 449,816 Amortization (accretion) of bond premiums and discounts....................... 295,169 74,916 (49,789) (Gain) loss on sale or call of securities..................................... (39,334) (367,035) 1,751 Gain on loans held for sale................................................... (360,669) (365,349) (240,390) Proceeds from sales of loans held for sale.................................... 17,764,033 17,523,936 11,944,756 Originations of loans held for sale........................................... (18,435,363) (17,012,797) (11,883,665) Loss (gain) on sale of premises and equipment................................. 15,618 (2,000) - Loss on sale of real estate owned............................................. 1,192 19,950 - Deferred income taxes provision (benefit)..................................... 48,656 (356,927) (415,002) (Increase) decrease in interest receivable.................................... (65,834) 863,391 (529,596) (Increase) in other assets.................................................... (518,118) 87,036 (697,250) (Decrease) increase in interest payable....................................... (359,459) (312,404) 284,949 Increase (decrease) in other liabilities...................................... 23,201 (118,873) 287,868 ------------- ------------- ------------- Net cash provided by operating activities..................................... 10,297,068 12,085,144 9,966,501 ------------- ------------- ------------- Cash Flows from Investing Activities: Proceeds from maturities and calls of securities available for sale........... 54,414,161 62,114,339 11,986,520 Proceeds from sales of securities available for sale.......................... 1,052,500 - - Proceeds from maturities and calls of securities held to maturity............. 6,196,585 13,644,822 2,274,760 Purchases of securities available for sale.................................... (63,531,500) (67,267,483) (7,504,500) Purchases of securities held to maturity...................................... (3,492,307) (567,376) (229,097) Net increase in loans......................................................... (31,812,761) (36,496,485) (46,244,733) Purchases of bank premises and equipment...................................... (1,469,533) (1,158,129) (933,548) Proceeds from sales of other real estate owned................................ 261,126 195,050 - Purchases of other real estate owned.......................................... (10,895) - (215,000) ------------- ------------- ------------- Net cash used in investing activities......................................... (38,392,624) (29,535,262) (40,865,598) ------------- ------------- ------------- Cash Flows from Financing Activities: Net increase in demand, money market, and savings deposits........................................................ 16,370,118 25,818,018 16,645,617 Net (decrease) increase in time deposits...................................... (6,819,423) 11,605,446 24,384,583 Net increase (decrease) in repurchase agreements.............................. 8,978,493 (4,552,842) 6,775,267 Net increase (decrease) in FHLB borrowings.................................... 9,000,000 (3,000,000) (5,000,000) Cash dividends paid........................................................... (4,117,097) (3,924,304) (3,563,657) Repurchase of stock........................................................... (1,048,810) (4,600,051) (564,188) Proceeds from exercise of stock options....................................... 61,244 182,037 994 ------------- ------------- ------------- Net cash provided by financing activities..................................... 22,424,525 21,528,304 38,678,616 -------------- ------------- ------------- Net (Decrease) Increase in Cash and Cash Equivalents.......................... (5,671,031) 4,078,186 7,779,519 Cash and Cash Equivalents at Beginning of Period.............................. 29,148,649 25,070,463 17,290,944 ------------- ------------- ------------- Cash and Cash Equivalents at End of Period....................................$ 23,477,618 $ 29,148,649 $ 25,070,463 ============= ============= ============= Supplemental Schedule of Cash and Cash Equivalents: Cash: Cash and due from banks.....................................................$ 16,757,283 $ 14,797,926 $ 16,392,313 Interest-bearing deposits in other banks.................................... 6,720,335 14,350,723 8,678,150 ------------- ------------- ------------- $ 23,477,618 $ 29,148,649 $ 25,070,463 ============= ============= ============= Supplemental Disclosure of Cash Flow Information: Interest paid.................................................................$ 12,669,203 $ 17,814,094 $ 17,058,276 Income taxes paid.............................................................$ 4,012,453 $ 4,363,234 $ 3,788,800 Transfer of loans to other real estate owned..................................$ 164,287 $ 87,136 $ - The accompanying notes to consolidated financial statements are an integral part of these statements.
33 American National Bankshares Inc. and Subsidiary Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 1. Summary of Significant Accounting Policies: Nature of Operations and Consolidation 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"). The Bank offers a wide variety of retail, commercial and trust banking services through its offices located in the trade area of the Cities of Danville and Martinsville, the Counties of Pittsylvania, Henry, and Halifax in Virginia and the County of Caswell in North Carolina. ANB Mortgage Corp., a wholly owned subsidiary of the Bank, offers secondary market mortgage lending. ANB Services Corp., another wholly owned subsidiary of the Bank, was formed in October 1999 to offer non-deposit products such as mutual funds and insurance products. All significant inter-company transactions and accounts are eliminated in consolidation. Cash and Cash Equivalents Cash includes cash on hand and cash with correspondent banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. Cash and cash equivalents are carried at cost. Securities The Corporation classifies securities as either held to maturity or available for sale. Debt securities acquired that management has both the positive intent and ability to be held to maturity are classified as held to maturity and recorded at amortized cost. Securities which may be used to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital and investment requirements, or unforeseen changes in market conditions, including interest rates, market values or inflation rates, are classified as available for sale. Securities available for sale are reported at estimated fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. Gains or losses realized from the sale of securities available for sale are recorded on the trade date and are determined by using the specific identification method Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. The Corporation does not permit the purchase or sale of trading account securities. Premiums and discounts on securities are recognized in interest income using the interest method over the terms of the securities. Loans Held for Sale Loans originated by ANB Mortgage Corp. are designated as held for sale at the time of their origination. These loans are pre-sold with servicing released and the Bank does not retain any interest or obligation after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government-sponsored enterprises (conforming loans). In addition, the Bank requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at the lower of aggregate cost or fair value. Gains on sales of loans are recognized at the loan closing date and are included in non-interest income for the period. Loans The Corporation grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by real estate loans. The ability of the Corporation's debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Corporation's market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. 34 The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Installment loans are typically charged off no later than 90 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The 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. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. 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. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and actual losses could be greater or less than the estimates. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures. Bank Premises and Equipment Additions and major replacements are added to bank premises and equipment at cost. Maintenance and repair costs are charged to expense when incurred. Premises and equipment are depreciated using the straight-line method over their estimated lives generally as follows: buildings, 10 to 50 years; leasehold improvements, 5 to 15 years; and furniture and equipment, 3 to 10 years. Intangible Assets Premiums paid on acquisitions of deposits (core deposit intangibles) are shown in the "Consolidated Balance Sheets". Such assets are being amortized on a straight-line basis over 10 years. At December 31, 2002, the Bank had $1,384,000 recorded as core deposit intangibles, net of amortization. The Bank recorded core deposit intangible amortization of approximately $450,000 for each of the three years ended December 31, 2002. Core deposit intangibles are periodically reviewed for impairment. As of December 31, 2002, no impairment had been identified. In October 2002, the Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions. After reviewing this statement, the Corporation decided to continue amortization of the core deposit intangible assets related to two previous branch office acquisitions. 35 Foreclosed Properties Foreclosed properties are included in other assets and represent other real estate that has been acquired through loan foreclosures or deeds received in lieu of loan payments. Generally, such properties are appraised at the time booked, and they are recorded at the lower of cost or fair value less estimated selling costs. When appropriate, adjustments to cost are charged or credited to the allowance for foreclosed properties. Income Taxes The Corporation uses the balance sheet method to account for deferred income tax assets and liabilities. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Defined Benefit Plan The Corporation has a pension plan for its employees. Benefits are generally based upon years of service and the employees' compensation. The Corporation's funding policy is to make the maximum contribution permitted by the Employee Retirement Income Security Act. Stock Option Plan At December 31, 2002, the Corporation had a stock option plan, which is described more fully in Note 7. The Corporation accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (in thousands): 2002 2001 2000 -------- -------- -------- Net income, as reported $9,461 $9,415 $8,676 Deduct: total stock-based compensation expense determined under fair value based method for all awards (169) (160) (37) ------- ------- ------- Pro forma net income $9,292 $9,255 $8,639 ======= ======= ======= Earnings per share: Basic, as reported $ 1.63 $ 1.58 $ 1.42 Basic, pro forma $ 1.60 $ 1.56 $ 1.38 Diluted, as reported $ 1.62 $ 1.58 $ 1.42 Diluted, pro forma $ 1.59 $ 1.55 $ 1.38 Earnings Per Share Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury method. Shareholders' Equity During 2002, the Corporation repurchased 45,100 shares of its common stock, in the open market at prices between $19.55 and $26.05 per share. During 2001, the Corporation repurchased 254,366 shares of its common stock, in the open market at prices between $14.63 and $19.00 per share. From the inception of the stock repurchase plan through December 31, 2002, the Corporation has purchased and retired 339,466 shares of its common stock. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and minimum pension liability adjustments, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. 36 Use of Estimates in the Preparation of Financial Statements The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of foreclosed real estate. Reclassifications Certain reclassifications have been made in prior years' financial statements to conform to classifications used in the current year. New Accounting Pronouncements. In December 2001, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 01-6, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others, to reconcile and conform the accounting and financial reporting provisions established by various AICPA industry audit guides. This Statement is effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2001, and did not have a material impact on the Corporation's consolidated financial statements. On March 13, 2002, the Financial Accounting Standard Board determined that commitments for the origination of mortgage loans that will be held for sale must be accounted for as derivatives instruments, effective for fiscal quarters beginning after April 10, 2002. The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding. Such rate lock commitments on mortgage loans to be sold in the secondary market are considered derivatives. Accordingly, these commitments including any fees received from the potential borrower are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. The cumulative effect of adopting Statement No. 133 for rate lock commitments as of December 31, 2002, was not material. The Corporation originally adopted Statement No. 133, Accounting for Derivative Instruments and Hedging Activities on January 1, 2001. In June 2002, the Financial Accounting Standards Board issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recognition of a liability, when incurred, for costs associated with an exit or disposal activity. The liability should be measured at fair value. The provisions of the Statement are effective for exit or disposal activities initiated after December 31, 2002. Effective January 1, 2002, the Corporation adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, Statement 142 requires that acquired intangible assets (such as core deposit intangibles) be separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their estimated useful life. Branch acquisition transactions were outside the scope of the Statement and therefore any intangible asset arising from such transactions remained subject to amortization over their estimated useful life. In October 2002, the Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions. The Statement amends previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of Statement No. 141, Business Combinations, and Statement No. 142 to branch acquisitions if such transactions meet the definition of a business combination. The provisions of the Statement do not apply to transactions between two or more mutual enterprises. In addition, the Statement amends Statement No. 144, Accounting for the Impairment of Long-Lived Assets, to include in its scope core deposit intangibles of financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used. The adoption of Statement No., 142, and 147 did not have a material impact on the Corporation's consolidated financial statements. The Financial Accounting Standards Board issued Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of Statement No. 123, in December 2002. The Statement amends Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the Statement amends the disclosure requirements of Statement 123 37 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about the effects of stock options in interim financial information. The amendments to Statement No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. The amendments to APB No. 28 are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002 The Corporation continues to record stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees, and has not adopted the alternative methods allowable under Statement No. 148. 2. Securities: The amortized cost and estimated fair value of investments in debt and equity securities at December 31, 2002 and 2001 were as follows (in thousands):
2002 --------------------------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------- ---------- ---------- ---------- Securities held to maturity: Federal agencies $ 1,996 $ 173 $ - $ 2,169 Mortgage-backed 4,126 144 - 4,270 State and municipal 20,656 1,124 - 21,780 --------- ------- ----- ---------- Total securities held to maturity 26,778 1,441 - 28,219 --------- ------- ----- ---------- Securities available for sale: Federal agencies 57,296 900 2 58,194 Mortgage-backed 31,227 1,235 - 32,462 State and municipal 18,623 908 - 19,531 Corporate bonds 18,671 947 9 19,609 Restricted stock: FHLBA stock 2,029 - - 2,039 Federal Reserve stock 363 - - 363 Other securities 4,925 - 67 4,858 --------- ------- ----- ---------- Total securities available for sale 133,134 3,990 78 137,046 --------- ------- ----- ---------- Total securities $ 159,912 $ 5,431 $ 78 $ 165,265 ========= ======= ===== ==========
2001 --------------------------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------- ---------- ---------- ---------- Securities held to maturity: Federal agencies $ 1,994 $ 119 $ - $ 2,113 Mortgage-backed 7,167 122 - 7,289 State and municipal 20,313 467 28 20,752 --------- ------- ----- ---------- Total securities held to maturity 29,474 708 28 30,154 --------- ------- ----- ---------- Securities available for sale: Federal agencies 31,198 496 190 31,504 Mortgage-backed 36,939 638 - 37,577 State and municipal 18,353 543 1 18,895 Corporate bonds 31,413 633 15 32,031 Restricted stock: FHLBA stock 2,139 - - 2,139 Federal Reserve stock 363 - - 363 Other securities 4,928 - 120 4,808 --------- ------- ----- ---------- Total securities available for sale 125,333 2,310 326 127,317 --------- ------- ----- ---------- Total securities $ 154,807 $ 3,018 $ 354 $ 157,471 ========= ======= ===== ==========
38 The amortized cost and estimated fair value of investments in securities at December 31, 2002, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because mortgage-backed securities have both known principal repayment terms as well as unknown principal repayments due to potential borrower pre-payments, it is difficult to accurately predict the final maturity of these investments. The majority of mortgage-backed securities held have a stated final maturity of greater than ten years and these investments are listed separately below.
Held to Maturity Available for Sale ------------------------------ ----------------------------- Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ---------- ---------- --------- ---------- Due in one year or less $ 400 $ 408 $ 9,022 $ 9,182 Due after one year through five years 8,912 9,514 62,893 65,098 Due after five years through ten years 9,663 10,185 22,657 23,036 Due after ten years 3,677 3,842 18 18 Mortgage-backed Securities 4,126 4,270 31,227 32,462 No stated maturity - - 7,317 7,250 -------- -------- --------- --------- $ 26,778 $ 28,219 $ 133,134 $ 137,046 ======== ======== ========= =========
Gross realized gains and losses from the call of all securities or the sale of securities available for sale for the years ended December 31, 2002 and 2001 are as follows: 2002 2001 ---- ---- Realized gains $ 39 $ 368 Realized (losses) $ - $ 1 Proceeds from the maturities, payments, and calls of securities held to maturity were $6,197,000 and $13,645,000 in 2002 and 2001. Proceeds from the maturities, payments, calls, and sales of securities available for sale were $55,467,000 and $62,114,000 in 2002 and 2001. Gains from the call of securities prior to maturity were $36,000 and gains from the sale of securities available for sale were $3,000 in 2002. All gains and losses in 2001 were from the call of securities prior to maturity. Securities with a book value of approximately $57,525,000 and $57,320,000 at December 31, 2002 and 2001 were pledged to secure public deposits, repurchase agreements and for other purposes as required by law. Corporate bonds consist of high quality debt securities, primarily issued in the financial services industry. 3. Loans: Outstanding loans, excluding loans held for sale, at December 31, 2002 and 2001 were composed of the following (in thousands):
2002 2001 ----------- ----------- Real Estate loans Construction and land development $ 9,208 $ 10,282 Secured by farmland 1,485 1,110 Secured by 1 - 4 family residential properties 129,905 126,607 Secured by multi-family (5 or more) residential properties 6,329 6,385 Secured by nonfarm, nonresidential properties 107,263 88,648 Loans to farmers 1,844 1,452 Commercial and industrial loans 113,575 98,324 Consumer loans 32,008 36,077 Loans for nonrated industrial development obligations 4,745 6,436 Deposit overdrafts 41 19 ----------- ----------- Loans, net of unearned income $ 406,403 $ 375,340 =========== ===========
39 Certain loans are impaired under FASB Statement No. 114 when, based on current information and events, it is likely that an institution will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the original loan agreement. No additional funds are committed to be advanced in connection with impaired loans. The following is a summary of information pertaining to impaired loans (in thousands): 2002 2001 --------- --------- Impaired loans for which an allowance has been provided $ - $ - Impaired loans for which no allowance has been provided 54 178 --------- --------- Total impaired loans $ 54 $ 178 ========= ========= Allowance provided for impaired loans, included in the allowance for loan losses $ - $ - ========= ========= 2002 2001 2000 ---- ---- ---- Average balance in impaired loans $158 $160 $135 ==== ==== ==== Interest income recognized $ - $ - $ - ==== ==== ==== Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted to $247,000, $453,000 and $79,000 at December 31, 2002, 2001 and 2000, respectively. If interest on impaired and nonaccrual loans had been accrued, such income would have approximated $20,000, $33,000 and $15,000 for 2002, 2001 and 2000, respectively. Loans past due 90 days and still accruing interest amounted to $239,000, $258,000, and $239,000 as of December 31, 2002, 2001 and 2000 , respectively. Properties received due to loan foreclosures were $30,000 at December 31, 2002 and $117,000 at December 31, 2001 and are recorded as other assets on the Consolidated Balance Sheets. The loan portfolio is concentrated primarily in the immediate geographic region. There were no concentrations of loans to any individual, group of individuals, businesses or industry that exceeded 10% of the outstanding loans at December 31, 2002. An analysis of the allowance for loan losses is as follows (in thousands): 2002 2001 2000 ------- ------- ------- Balance, beginning of year $5,334 $4,746 $4,135 Provision for loan losses charged to expense 873 1,015 1,020 Charge-offs (740) (602) (567) Recoveries 155 175 158 ------- ------- ------ Balance, end of year $5,622 $5,334 $4,746 ======= ======= ======= 4. Premises and Equipment: Major classifications of premises and equipment are summarized as follows (in thousands):
As of December 31 ------------------------ 2002 2001 --------- --------- Land $ 1,604 $ 1,583 Buildings 7,375 7,213 Leasehold Improvements 865 537 Equipment 8,996 8,176 --------- --------- 18,840 17,509 Less Accumulated Depreciation (10,673) (9,652) --------- --------- Total Premises and Equipment, net of accumulated depreciation $ 8,167 $ 7,857 ========= =========
40 Depreciation expense for the years ended December 31, 2002, 2001 and 2000 amounted to $1,144,000, $1,171,000 and $1,117,000, respectively. 5. Deposits: The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2002 and 2001 was $60,077,000 and $63,436,000, respectively. At December 31, 2002, the scheduled maturities of CDs are as follows (in thousands): 2003 $142,761 2004 51,622 2005 13,968 2006 11,819 2007 4,247 Thereafter 122 -------- $224,539 6. Borrowings: Repurchase agreements of $36,155,000 and $27,177,000 were outstanding at December 31, 2002 and 2001, respectively. Repurchase agreements are borrowings collateralized by securities of the U.S. Government or its agencies and mature daily. The securities underlying these agreements remain under the Corporation's control. The maximum balance of repurchase agreements at any month-end during 2002 was $40,091,000 and during 2001 was $32,318,000. Under the terms of its collateral agreement with the Federal Home Loan Bank of Atlanta ("FHLBA"), the Bank maintains otherwise unencumbered qualifying assets (principally 1-4 family residential mortgage loans and U.S. Government and Agency notes and bonds) in the amount of at least as much as its advances from the FHLBA. The Bank's FHLBA stock is also pledged to secure these advances. At December 31, 2002 and 2001, such advances (in thousands) mature as follows:
2002 Weighted 2001 Weighted Due by Advance Average Due by Advance Avereage December 31 Amount Rate December 31 Amount Rate ----------- ----------- -------- ----------- ----------- -------- 2003 $ 1,000,000 2.14% 2003 $ - -% 2004 3,000,000 2.67 2004 - - 2005 2,000,000 3.53 2005 - - 2006 2,000,000 4.08 2006 - - 2007 1,000,000 4.33 2007 - - 2008 8,000,000 5.25 2008 8,000,000 5.25 2009 5,000,000 5.26 2009 5,000,000 5.26 ----------- -------- ----------- -------- $22,000,000 4.45% $13,000,000 4.45% =========== ======== =========== ========
Included in the table above at December 31, 2002 is $13,000,000 of convertible advances whereby the FHLBA has the option at a predetermined time to convert the fixed interest rate to an adjustable rate tied to LIBOR (London Inter Bank Offering Rate). The Bank had the option to repay these advances if the FHLBA converts the interest rate. These advances are included in the year in which they mature. The Bank has a line of credit equal to 15% of the Bank's assets with the FHLBA that equaled approximately $90,790,000 at December 31, 2002. 7. Stock Options: The Company's 1997 Stock Option Plan ("Option Plan") provides for the granting of incentive and non-qualified options to the Company's employees on a periodic basis, at the discretion of the Board or a Board designated committee. The Option Plan authorizes the issuance of up to 300,000 shares of common stock and has a term of ten years. The weighted average fair values of options at their grant date during 2002, 2001 and 2000 were $8.78, $9.03, and $7.25, respectively. The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. The following summarizes the weighted-average of the assumptions used in the model: 2002 2001 2000 ------ ------ ------ Risk-free interest rate 4.08% 4.52% 6.17% Expected years until exercise 5.00 5.50 5.50 Expected stock volatility 36.76% 40.10% 47.95% 41 At December 31, 2002, and 2001, the Corporation had 100,794 shares and 135,694 shares, respectively, of its authorized common stock reserved for its incentive and nonqualified stock option plan. These options vest from immediately to two years and have a maximum term of ten years from the date of the option grant. A summary of stock option transactions under the plan follows: Option Option Price Shares Per Share --------- -------------- Outstanding at December 31, 1999 138,600 $13.69 - 20.00 Granted 17,400 $13.25 - 15.50 Exercised (71) $14.00 Forfeited (4,229) $13.69 - 14.00 --------- Outstanding at December 31, 2000 151,700 $13.25 - 20.00 Granted 23,800 $16.50 Exercised (12,550) $13.25 - 17.19 Forfeited (11,500) $13.56 - 18.75 -------- Outstanding at December 31, 2001 151,450 $13.38 - 20.00 Granted 35,700 $19.95 - 26.10 Exercised (3,960) $14.00 - 17.19 Forfeited (800) $14.00 - 15.50 --------- Outstanding at December 31, 2002 182,390 $13.38 - 26.10 ========= The following table summarizes information related to stock options outstanding on December 31, 2002: Number of Average Life of Number of Options Exercise Price Outstanding Options Outstanding Options Exercisable --------------- ------------------- ------------------- ----------------- $13.38 - $26.10 182,390 7.9 years 167,090 8. Income Taxes: The components of the Corporation's net deferred tax assets as of December 31, 2002 and December 31, 2001, were as follows (in thousands):
2002 2001 -------- -------- Deferred tax assets: Allowance for loan losses $ 1,912 $ 1,814 Deferred compensation 257 266 Core deposit intangible 354 303 Pension liability 150 16 Other 11 5 -------- -------- Total deferred tax assets 2,684 2,404 -------- -------- Deferred tax liabilities: Depreciation 388 265 Accretion of discount 20 14 Prepaid pension 111 - Loan loss recapture 81 143 Net unrealized gains on securities 1,330 674 Other 151 151 -------- -------- Total deferred tax liabilities 2,081 1,247 -------- -------- Net deferred tax assets before valuation allowance $ 603 $ 1,157 ======== ========
The provision for income taxes consists of the following (in thousands):
2002 2001 2000 -------- -------- -------- Taxes currently payable $ 3,870 $ 4,298 $ 3,830 Deferred tax expense (benefit) 48 (357) (415) -------- -------- -------- $ 3,918 $ 3,941 $ 3,415 ======== ======== ========
42 The effective tax rates differ from the statutory federal income tax rates due to the following items: 2002 2001 2000 ------- ------- ------- Federal statutory rate 34.2 % 34.2 % 34.0 % Nontaxable interest income (4.9) (4.9) (4.7) Other 0.0 .2 (1.1) ------- ------- ------- 29.3 % 29.5 % 28.2 % ======= ======= ======= 9. Earnings Per Share: The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.
2002 2001 2000 ------------------------- ------------------------- -------------------------- Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount ----------- --------- ----------- --------- ----------- ---------- Basic earnings per share 5,800,302 $ 1.63 5,949,811 $ 1.58 6,096,037 $ 1.42 Effect of dilutive securities, stock options 50,047 23,342 5,378 ----------- ---------- ----------- Diluted earnings per share 5,850,349 $ 1.62 5,973,153 $ 1.58 6,101,415 $ 1.42 =========== ========== ===========
10. Commitments and Contingent Liabilities: Financial instruments with off-balance-sheet risk: -------------------------------------------------- The Corporation is party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Corporation's exposure to credit loss is represented by the contractual amount of these commitments. The Corporation follows the same credit policies in making commitments as it does for on-balance-sheet instruments. At December 31, 2002 and 2001, the following financial instruments were outstanding whose contract amounts represent credit risk: 2002 2001 ------------ ------------ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $107,771,000 $121,062,000 Standby letters of credit $ 3,489,000 $ 1,000,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, is based on management's credit evaluation of the customer. Unfunded commitments under commercial lines of credit and revolving credit lines are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Corporation is committed. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. The Corporation does not have any off-balance sheet subsidiaries or special purpose entities. There were no commitments to purchase securities at December 31, 2002 or December 31, 2001. 43 Concentration of credit risk: ----------------------------- The Corporation is principally a local lender and therefore has a significant concentration of residential and commercial real estate loans as well as consumer and commercial business loans to borrowers who reside in and/or which are collateralized by real estate located primarily in our trade area. Other commitments: ------------------ The Bank has entered into operating leases for several of its branch and ATM facilities. The minimum annual rental payments under these leases at December 31, 2002, (in thousands) are as follows: Minimum Lease Year Payments ---- ------------- 2003 $ 92 2004 87 2005 59 2006 45 2007 48 2008 and thereafter 132 Rent expense under these leases for each of the years ended December 31, 2002, 2001, and 2000, were $90,000, $89,000, and $53,000, respectively. The Bank is a member of the Federal Reserve System and is required to maintain certain levels of its cash and cash equivalents as reserves based on regulatory requirements. This reserve requirement was approximately $3,098,000 at December 31, 2002 and $2,190,000 at December 31, 2001. ANB Mortgage Corp. originates and sells residential real estate loans to investors. Based on certain pre-defined criteria, including borrower non-payment or fraud, ANB Mortgage Corp. may be required to repurchase loans back from the investor. Since the inception of ANB Mortgage Corp. no loans have been repurchased. 11. Related Party Transactions: The Corporation's Directors provide the Bank with substantial amounts of business, and many are among its largest depositors and borrowers. The maximum amount of loans outstanding to total loans for officers, directors and their business interests at any month-end during 2002 was 5.3% and during 2001 was 4.5%. Management believes that all such loans are made on substantially the same terms, including interest rates, as those prevailing at the time for comparable loans to similar, unrelated borrowers, and do not involve more than a normal risk of collectability. As of December 31, 2002, none of these loans were restructured, nor were any related party loans charged off during 2002. An analysis of these loans for 2002 is as follows (in thousands): Balance, beginning of year $ 12,857 Additions 37,325 Repayments (28,768) --------- Balance, end of year $ 21,414 ========= 12. Employee Benefit Plans: The Bank's retirement plan is a non-contributory defined benefit pension plan which covers substantially all employees of the Bank who are 21 years of age or older and who have had at least one year of service. Advanced funding is accomplished by using the actuarial cost method known as the collective aggregate cost method. The following table sets forth the plan's funded status as of December 31, 2002 and 2001 (in thousands): 2002 2001 -------- -------- Change in benefit obligation: Benefit obligation at beginning of year $ 4,837 $ 4,122 Service cost 319 274 Interest cost 336 309 Actuarial (gain) loss 274 262 Benefits paid (891) (130) -------- -------- Benefit obligation at end of year $ 4,875 $ 4,837 ======== ======== 44
2002 2001 -------- -------- Change in plan assets: Fair value of plan assets at beginning of year $ 4,360 $ 4,453 Actual return on plan assets (692) (237) Employer contributions 654 274 Benefits paid (891) (130) -------- -------- Fair value of plan assets at end of year $ 3,431 $ 4,360 ======== ======== Deferred asset (gain) loss $ 1,037 $ 593 (Accrued) prepaid pension cost: Funded status $(1,445) $ (477) Unrecognized net actuarial (gain) loss 1,871 566 Unrecognized net obligation at transition (5) (17) Unrecognized prior service cost (96) (120) -------- -------- (Accrued) benefit cost included in other liabilities $ 325 $ (48) ======== ========
Amounts recognized in the statement of financial position: Prepaid asset $ 325 Accrued benefit liability (441) Deferred income tax benefit 150 Accumulated other comprehensive income, net 291 -------- Net amount recognized $ 325 ========
Major assumptions and net periodic pension cost include the following:
2002 2001 2000 -------- -------- -------- Components of net periodic benefit cost: Service cost $ 319 $ 274 $ 238 Interest cost 337 309 322 Expected return on plan assets (346) (356) (404) Amortization of prior service cost (24) (24) (24) Amortization of net obligation at transition (12) (12) (12) Recognized net actuarial gain 7 - (12) -------- -------- -------- Net periodic benefit cost $ 281 $ 191 $ 108 ======== ======== ========
2002 2001 2000 -------- --------- -------- Weighted-average assumptions: Discount rate: Pre-retirement 6.75% 7.00% 7.50% Post-retirement 6.00% 6.00% 6.00% Expected return on plan assets 8.00% 8.00% 8.00% Rate of compensation increase 4.00% 4.00% 4.00%
In 1982, the Board of Directors of the Bank adopted deferred compensation agreements with certain key officers providing for annual payments to each ranging from $25,000 to $50,000 per year for ten years upon their retirement. The liabilities under these agreements are being accrued over the officers' remaining period of employment so that, on the date of their retirement, the then-present value of the annual payments would have been accrued. The expense for this plan was $77,000, $68,000 and $110,000 for years 2002, 2001 and 2000, respectively. A 401(k) savings plan was adopted in 1995 that covers substantially all full-time employees of the Bank. The Bank matches a portion of the contribution made by employee participants after at least one year of service. The Bank contributed $136,000, $116,000 and $110,000 to the 401(k) plan in 2002, 2001 and 2000, respectively. These amounts are included in pension and other employee benefits expense for the respective years. 45 13. Fair Value of Financial Instruments: The estimated fair values of the Corporation's assets are as follows (in thousands):
December 31, 2002 December 31, 2001 ------------------------------ -------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Financial assets: Cash and due from banks $ 23,478 $ 23,478 $ 29,149 $ 29,149 Securities, available for sale 137,046 137,046 127,317 127,317 Securities held to maturity 26,778 28,219 29,474 30,154 Loans held for sale 1,285 1,285 253 253 Loans, net of allowance 400,781 408,792 370,006 376,929 Accrued interest receivable 3,556 3,556 3,490 3,490 Financial liabilities: Deposits $ 473,562 $ 474,102 $ 464,012 $ 466,455 Repurchase agreements 36,155 36,155 27,177 27,177 Other borrowings 22,000 24,884 13,000 13,656 Accrued interest payable 1,065 1,065 1,424 1,424 Off balance sheet instruments: Commitments to extend credit - - - - Standby letters of credit - 35 - 10
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value: Cash and cash equivalents. The carrying amount is a reasonable estimate of fair value. Securities. Fair values are based on quoted market prices or dealer quotes. The carrying value of restricted stock approximates fair value. Loans held for sale. The carrying amount is a reasonable estimate of fair value. Loans. For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Accrued interest receivable. The carrying amount is a reasonable estimate of fair value. Deposits. The fair value of demand deposits, savings deposits, and money market deposits equals the carrying value. The fair value of fixed-rate certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposit instruments would be offered to depositors for the same remaining maturities at current rates. Repurchase agreements. The carrying amount is a reasonable estimate of fair value. Other borrowings. The fair vales of the Corporation's long-term borrowings are estimated using discounted cash flow analyses based on the Corporation's incremental borrowing rates for similar types of borrowing arrangements. Accrued interest payable. The carrying amount is a reasonable estimate of fair value. Off balance sheet instruments. The fair value of commitments to extend credit is estimated using the fees currently charged (if any) to enter into agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. Fees are generally not charged to extend credit. All such commitments were subject to current market rates and pose no known credit exposure. As a result, no fair value has been estimated for these commitments. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. 46 The Corporation assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Corporation's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Corporation's overall interest rate risk. 14. Dividend Restrictions and Regulatory Capital: The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and the Bank's capital amounts and classification are subject to qualitative judgments by the regulators concerning components, risk weighting, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Under the guidelines, total capital has been defined as core (Tier I) capital and supplementary (Tier II) capital. The Corporation's Tier I capital consists primarily of shareholders' equity, while Tier II capital consists of the allowance for loan losses. The definition of assets has been modified to include items on and off the balance sheet, with each item being assigned a "risk-weight" for the determination of the ratio of capital to risk-adjusted assets. The guidelines require that total capital (Tier I plus Tier II) of 8% be held against total risk-adjusted assets, at least half of which (4%) must be Tier I capital. At December 31, 2002, the Corporation's Tier I and total capital ratios were 14.41% and 15.49%, respectively. At December 31, 2001, these ratios were 14.32% and 15.56%, respectively. The ratios for both years were well in excess of the regulatory requirements. Management believes, as of December 31, 2002, that the Corporation and the Bank meet all regulatory capital adequacy requirements to which they are subject. The approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's net income, as defined, for that year combined with its retained net income for the preceding two calendar years. Under this formula, the Bank can distribute as dividends, without the approval of the Comptroller of the Currency, $4,711,000 plus an additional amount equal to the Bank's net income for 2002 up to the date of any dividend declaration. The following table provides summary information regarding regulatory capital (in thousands):
To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirement Action Provisions ----------------------- ---------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 2002 Total Capital Corporation $ 72,021 15.63% $ 36,863 >8.0% Bank 69,328 15.06% 36,816 >8.0% $ 46,020 >10.0% Tier I Capital Corporation 66,399 14.41% 18,431 >4.0% Bank 64,359 13.98% 18,408 >4.0% 27,612 >6.0% Leverage Capital Corporation 66,399 11.00% 18,103 >3.0% Bank 64,359 10. 68% 18,076 >3.0% 30,126 >5.0%
47
To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirement Action Provisions ----------------------- ---------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 2001 Total Capital Corporation $ 67,187 15.56% $ 34,544 >8.0% Bank 65,260 15.13% 34,505 >8.0% $ 43,131 >10.0% Tier I Capital Corporation 61,853 14.32% 17,272 >4.0% Bank 60,569 14.04% 17,253 >4.0% 25,879 >6.0% Leverage Capital Corporation 61,853 10.96% 16,927 >3.0% Bank $ 60,569 10.75% $ 16,903 >3.0% 28,172 >5.0%
15. Segment and Related Information: The Corporation adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", in 1998. 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 include 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. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All intersegment sales prices are market based. Segment information for the years 2002, 2001 and 2000 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. Inter-segment eliminations primarily consist of the Corporation's investment in the Bank and related equity earnings. 48
2002 ----------------------------------------------------------------------- Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------- ------------ --------- Interest income $ 35,135 $ - $ 31 $ (31) $ 35,135 Interest expense 12,310 - 31 (31) 12,310 Non-interest income - external customers 2,564 2,516 632 - 5,712 Non-interest income - internal customers - 48 - (48) - Operating income before income taxes 11,798 1,543 38 - 13,379 Depreciation and amortization 1,570 21 3 - 1,594 Total assets 605,767 - 92 - 605,859 Capital expenditures $ 1,331 $ 16 $ 123 $ - 1,470
2001 ----------------------------------------------------------------------- Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------- ------------ --------- Interest income $ 39,820 $ - $ 30 $ (30) $ 39,820 Interest expense 17,502 - 30 (30) 17,502 Non-interest income - external customers 2,509 2,569 590 - 5,668 Non-interest income - internal customers - 54 - (54) - Operating income before income taxes 11,697 1,656 4 - 13,357 Depreciation and amortization 1,586 25 10 - 1,621 Total assets 572,820 - 67 - 572,887 Capital expenditures $ 1,141 $ 16 $ 1 $ - 1,158
2000 ----------------------------------------------------------------------- Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ------- ------------ --------- Interest income $ 38,606 $ - $ 22 $ (22) $ 38,606 Interest expense 17,343 - 22 (22) 17,343 Non-interest income - external customers 1,772 2,658 341 - 4,771 Non-interest income - internal customers - 54 - (54) - Operating income before income taxes 10,588 1,791 (288) - 12,091 Depreciation and amortization 1,516 40 11 - 1,567 Total assets 541,273 - 116 - 541,389 Capital expenditures $ 906 $ 19 $ 9 $ - 934
49 16. Parent Company Financial Information: Condensed parent company financial information is as follows (in thousands): As of December 31 ---------------------- Condensed Balance Sheets 2002 2001 ------------------------ -------- -------- Assets Cash $ 1,782 $ 1,126 Investment in Subsidiary 68,369 63,791 Other Assets 585 480 -------- -------- Total Assets $ 70,736 $ 65,397 ======== ======== Liabilities $ - $ - Shareholders' Equity 70,736 65,397 -------- -------- Total Liabilities and Shareholders' Equity $ 70,736 $ 65,397 ======== ========
For the Year Ended December 31 ------------------------------------- Condensed Statements of Income 2002 2001 2000 ------------------------------ --------- --------- --------- Dividends from Subsidiary $ 6,000 $ 8,985 $ 4,640 Income 10 - - Expenses (145) (105) (140) --------- --------- --------- Income Before Equity in Undistributed Earnings of Subsidiary 5,865 8,880 4,500 Equity in Undistributed Earnings of Subsidiary 3,596 535 4,176 --------- --------- --------- Net Income $ 9,461 $ 9,415 $ 8,676 ========= ========= =========
For the Year Ended December 31 ------------------------------------- Condensed Statements of Cash Flows 2002 2001 2000 ---------------------------------- --------- --------- --------- Cash provided by dividends received from Subsidiary $ 6,000 $ 8,985 $ 4,640 Cash used for payment of dividends (4,117) (3,924) (3,564) Cash used for repurchase of stock (1,049) (4,600) (564) Other (178) 53 (111) --------- --------- --------- Net increase in cash $ 656 $ 514 $ 401 ========= ========= =========
50 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) 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. March 18, 2003 AMERICAN NATIONAL BANKSHARES INC. By: /s/ Brad E. Schwartz ------------------------------------------- Senior Vice President, Secretary, Treasurer & Chief Financial Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 18, 2003. /s/ Charles H. Majors ----------------------------- President and Charles H. Majors Chief Executive Officer /s/ Willie G. Barker, Jr. Director ----------------------------- Willie G. Barker, Jr. /s/ Richard G. Barkhouser Director ----------------------------- Richard G. Barkhouser /s/ Fred A. Blair Director ----------------------------- Fred A. Blair /s/ Ben J. Davenport, Jr. Director ----------------------------- Ben J. Davenport, Jr. /s/ H. Dan Davis Director ----------------------------- H. Dan Davis /s/ Michael P. Haley Director ----------------------------- Michael P. Haley /s/ Lester A. Hudson, Jr. Director ----------------------------- Lester A. Hudson, Jr. /s/ E. Budge Kent, Jr. Director ----------------------------- E. Budge Kent, Jr. /s/ Fred B. Leggett, Jr. Director ----------------------------- Fred B. Leggett, Jr. /s/ Franklin W. Maddux Director ----------------------------- Franklin W. Maddux /s/ James A. Motley Director ----------------------------- James A. Motley /s/ Claude B. Owen, Jr. Director ----------------------------- Claude B. Owen, Jr. /s/ Brad E. Schwartz ----------------------------- Senior Vice President, Secretary, Treasurer Brad E. Schwartz & Chief Financial Officer 51 Exhibit (99)(a) SECTION 302 CERTIFICATION* I, Charles H. Majors, certify that: 1. I have reviewed this annual report on Form 10-K of American National Bankshares Inc.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and (c) presented in this annual 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 annual 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: March 11, 2003 /s/ Charles H. Majors ------------------------------------- Charles H. Majors, President and Chief Executive Officer 52 Exhibit (99)(b) SECTION 302 CERTIFICATION* I, Brad E. Schwartz, certify that: 1. I have reviewed this annual report on Form 10-K of American National Bankshares Inc.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and (c) presented in this annual 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 annual 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: March 11, 2003 /s/ Brad E. Schwartz ------------------------------------------- Brad E. Schwartz, Senior Vice President, Secretary, Treasurer & Chief Financial Officer 53