-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ARAN7/8fTi4qJl/YybrN5jTqACz2fVrXkCCIMoqWbGYxBIcuUu+bhXnsVJAP2B4R jIQDnm9CzsmgRpsjSzYFzQ== 0000741516-03-000016.txt : 20030812 0000741516-03-000016.hdr.sgml : 20030812 20030812165540 ACCESSION NUMBER: 0000741516-03-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN NATIONAL BANKSHARES INC CENTRAL INDEX KEY: 0000741516 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541284688 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12820 FILM NUMBER: 03838199 BUSINESS ADDRESS: STREET 1: 628 MAIN ST CITY: DANVILLE STATE: VA ZIP: 24541 BUSINESS PHONE: 4347925111 MAIL ADDRESS: STREET 1: 628 MAIN STREET STREET 2: P O BOX 191 CITY: DANVILLE STATE: VA ZIP: 24543 10-Q 1 june200310q.txt 10Q 06/30/03 AMERICAN NATIONANL BANKSHARES INC SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2003 ------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ----- ----- Commission file number 0-12820 ------- AMERICAN NATIONAL BANKSHARES INC. --------------------------------- (Exact name of registrant as specified in its charter) VIRGINIA 54-1284688 - -------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 628 Main Street Danville, Virginia 24541 - ---------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) (434) 792-5111 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ----- ----- At August 12, 2003, 5,671,467 shares of the registrant's common stock, $1 par value, were outstanding. AMERICAN NATIONAL BANKSHARES INC. INDEX
Page No. -------- Index...............................................................................2 Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002..................................................3 Consolidated Statements of Income for the three months ended June 30, 2003 and 2002...........................................4 Consolidated Statements of Income for the six months ended June 30, 2003 and 2002...........................................5 Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002...........................................6 Notes to Consolidated Financial Statements...............................7 Item 2. Management's Discussion and Analysis of the Financial Condition and Results of Operations.............................................11 Item 3. Quantitative and Qualitative Disclosures about Market Risk..............22 Item 4. Controls and Procedures.................................................22 Part II. Other Information........................................................23 SIGNATURES ........................................................................24 Exhibits...........................................................................25
2 Consolidated Balance Sheets American National Bankshares Inc. and Subsidiary (In Thousands) - -------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited) June 30 December 31 2003 2002 ------------ ------------ ASSETS Cash and due from banks.........................................................$ 12,039 $ 16,757 Interest-bearing deposits in other banks........................................ 7,953 6,720 Securities available for sale, at fair value.................................... 140,550 137,046 Securities held to maturity (market value of $25,915 at June 30, 2003 and $28,219 at December 31, 2002)............................... 24,105 26,778 ----------- ----------- 164,655 163,824 ----------- ----------- Loans held for sale............................................................. 2,106 1,285 Loans, net of unearned income .................................................. 432,647 406,403 Less allowance for loan losses.................................................. (5,991) (5,622) ----------- ----------- Net loans..................................................................... 426,656 400,781 ----------- ----------- Bank premises and equipment, at cost, less accumulated depreciation of $11,257 in 2003 and $10,673 in 2002........................... 7,930 8,167 Core deposit intangibles........................................................ 1,159 1,384 Accrued interest receivable and other assets.................................... 8,802 6,941 ----------- ----------- Total assets..................................................................$ 631,300 $ 605,859 =========== =========== LIABILITIES and SHAREHOLDERS' EQUITY Liabilities: Demand deposits -- non-interest bearing.......................................$ 68,166 $ 69,102 Demand deposits -- interest bearing........................................... 60,943 62,680 Money market deposits......................................................... 44,634 43,831 Savings deposits.............................................................. 81,840 73,410 Time deposits................................................................. 234,588 224,539 ----------- ----------- Total deposits................................................................ 490,171 473,562 ----------- ----------- Repurchase agreements......................................................... 46,062 36,155 FHLB borrowings............................................................... 21,500 22,000 Accrued interest payable and other liabilities................................ 3,269 3,406 ----------- ----------- Total liabilities............................................................. 561,002 535,123 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 200,000 shares authorized, none outstanding........................................................... - - Common stock, $1 par, 10,000,000 shares authorized, 5,680,909 shares outstanding at June 30, 2003 and 5,780,816 shares outstanding at December 31, 2002...................... 5,681 5,781 Capital in excess of par value............................................... 9,407 9,571 Retained earnings............................................................ 53,396 53,093 Accumulated other comprehensive income....................................... 1,814 2,291 ----------- ----------- Total shareholders' equity................................................... 70,298 70,736 ----------- ----------- Total liabilities and shareholders' equity...................................$ 631,300 $ 605,859 =========== =========== The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
3 Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
Three Months Ended June 30 ------------------------- 2003 2002 ---------- ---------- Interest Income: Interest and fees on loans....................................................$ 6,508 $ 6,785 Interest on deposits in other banks........................................... 11 31 Income on securities: Federal agencies............................................................ 511 518 Mortgage-backed............................................................. 385 598 State and municipal......................................................... 515 476 Other investments........................................................... 305 379 ---------- ---------- Total interest income....................................................... 8,235 8,787 ---------- ---------- Interest Expense: Interest on deposits: Demand...................................................................... 61 110 Money market................................................................ 125 215 Savings..................................................................... 212 270 Time........................................................................ 1,677 2,194 Interest on repurchase agreements............................................. 135 161 Interest on other borrowings.................................................. 248 176 ---------- ---------- Total interest expense...................................................... 2,458 3,126 ---------- ---------- Net Interest Income............................................................. 5,777 5,661 Provision for Loan Losses....................................................... 255 236 ---------- ---------- Net Interest Income After Provision For Loan Losses............................................................... 5,522 5,425 ---------- ---------- Non-Interest Income: Trust and investment services................................................. 647 666 Service charges on deposit accounts........................................... 541 416 Other fees and commissions.................................................... 210 230 Mortgage banking income....................................................... 150 69 Securities gains, net......................................................... 1 - Other income.................................................................. 66 64 ---------- ---------- Total non-interest income................................................... 1,615 1,445 ---------- ---------- Non-Interest Expense: Salaries...................................................................... 1,754 1,661 Pension and other employee benefits........................................... 522 396 Occupancy and equipment....................................................... 640 607 Core deposit intangible amortization ......................................... 113 113 Other......................................................................... 853 802 ---------- ---------- Total non-interest expense.................................................. 3,882 3,579 ---------- ---------- Income Before Income Tax Provision.............................................. 3,255 3,291 Income Tax Provision............................................................ 947 956 ---------- ---------- Net Income......................................................................$ 2,308 $ 2,335 ========== ========== - --------------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic...........................................................................$ .40 $ .40 Diluted.........................................................................$ .40 $ .40 - --------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Basic...........................................................................5,718,821 5,804,608 Diluted.........................................................................5,776,591 5,846,835 - --------------------------------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these statements.
4 Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
Six Months Ended June 30 ------------------------- 2003 2002 ---------- ---------- Interest Income: Interest and fees on loans....................................................$ 13,067 $ 13,534 Interest on deposits in other banks........................................... 36 113 Income on securities: Federal agencies............................................................ 1,060 945 Mortgage-backed............................................................. 839 1,254 State and municipal......................................................... 984 932 Other investments........................................................... 651 810 ---------- ---------- Total interest income....................................................... 16,637 17,588 ---------- ---------- Interest Expense: Interest on deposits: Demand...................................................................... 129 229 Money market................................................................ 264 405 Savings..................................................................... 437 535 Time........................................................................ 3,397 4,724 Interest on repurchase agreements............................................. 260 310 Interest on other borrowings.................................................. 490 347 ---------- ---------- Total interest expense...................................................... 4,977 6,550 ---------- ---------- Net Interest Income............................................................. 11,660 11,038 Provision for Loan Losses....................................................... 495 419 ---------- ---------- Net Interest Income After Provision For Loan Losses............................................................... 11,165 10,619 ---------- ---------- Non-Interest Income: Trust and investment services................................................. 1,253 1,332 Service charges on deposit accounts........................................... 964 781 Other fees and commissions.................................................... 438 426 Mortgage banking income....................................................... 278 151 Securities gains, net......................................................... 3 19 Other income.................................................................. 141 131 ---------- ---------- Total non-interest income................................................... 3,077 2,840 ---------- ---------- Non-Interest Expense: Salaries...................................................................... 3,475 3,214 Pension and other employee benefits........................................... 970 771 Occupancy and equipment....................................................... 1,281 1,219 Core deposit intangible amortization ......................................... 225 225 Other......................................................................... 1,740 1,648 ---------- ---------- Total non-interest expense.................................................. 7,691 7,077 ---------- ---------- Income Before Income Tax Provision.............................................. 6,551 6,382 Income Tax Provision............................................................ 1,909 1,848 ---------- ---------- Net Income......................................................................$ 4,642 $ 4,534 ========== ========== - --------------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic...........................................................................$ .81 $ .78 Diluted.........................................................................$ .80 $ .78 - --------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Basic...........................................................................5,737,354 5,812,941 Diluted.........................................................................5,796,769 5,849,018 - --------------------------------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these statements.
5 Consolidated Statements of Cash Flows American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ---------------------------------------------------------------------------------------------------------
Six Months Ended ------------------------- June 30 2003 2002 ---------- ---------- Cash Flows from Operating Activities: Net income....................................................................$ 4,642 $ 4,534 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses..................................................... 495 419 Depreciation.................................................................. 582 594 Core deposit intangible amortization.......................................... 225 225 Amortization (accretion) of bond premiums and discounts....................... 471 89 Gain on sale or call of securities............................................ (3) (19) Gain on loans held for sale................................................... (278) (151) Proceeds from sales of loans held for sale.................................... 14,044 6,542 Originations of loans held for sale........................................... (14,587) (6,701) Loss on sale of real estate owned............................................. - 10 Deferred income taxes provision (benefit)..................................... 7 (111) Increase in interest receivable............................................... (651) (151) Increase in other assets...................................................... (877) (642) Decrease in interest payable.................................................. (102) (259) Decrease in other liabilities................................................. (35) (161) ---------- ---------- Net cash provided by operating activities..................................... 3,933 4,218 ---------- ---------- Cash Flows from Investing Activities: Proceeds from maturities and calls of securities available for sale........... 37,067 22,967 Proceeds from sales of securities available for sale.......................... - 1,053 Proceeds from maturities and calls of securities held to maturity............. 2,677 3,970 Purchases of securities available for sale.................................... (41,766) (20,000) Purchases of securities held to maturity...................................... - (3,492) Net increase in loans......................................................... (26,464) (16,245) Purchases of bank property and equipment...................................... (345) (1,073) Proceeds from sales of other real estate owned................................ - 106 Purchases of other real estate owned.......................................... - (11) ---------- ---------- Net cash used in investing activities......................................... (28,831) (12,725) ---------- ---------- Cash Flows from Financing Activities: Net increase (decrease) in demand, money market, and savings deposits........................................................ 6,560 (412) Net increase (decrease) in time deposits...................................... 10,049 (6,118) Net increase in repurchase agreements......................................... 9,907 638 Net (decrease) increase in FHLB borrowings.................................... (500) 2,050 Cash dividends paid........................................................... (2,118) (2,034) Repurchase of stock........................................................... (2,486) (397) Proceeds from exercise of stock options....................................... 1 9 ---------- ---------- Net cash provided by (used in) financing activities........................... 21,413 (6,264) ---------- ---------- Net Decrease in Cash and Cash Equivalents....................................... (3,485) (14,771) Cash and Cash Equivalents at Beginning of Period................................ 23,477 29,149 ---------- ---------- Cash and Cash Equivalents at End of Period......................................$ 19,992 $ 14,378 ========== ========== Supplemental Schedule of Cash and Cash Equivalents: Cash: Cash and due from banks.......................................................$ 12,039 $ 13,992 Interest-bearing deposits in other banks...................................... 7,953 386 ---------- ---------- $ 19,992 $ 14,378 ========== ========== Supplemental Disclosure of Cash Flow Information: Interest paid.................................................................$ 5,080 $ 6,809 Income taxes paid.............................................................$ 1,718 $ 1,839 Transfer of loans to other real estate owned..................................$ 94 $ 164 Unrealized gain (loss) on securities available for sale.......................$ (723) $ 952 The accompanying notes to consolidated financial statements are an integral part of these statements.
6 AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly American National Bankshares' financial position as of June 30, 2003, its cash flows for the six months then ended, and the results of its operations for the three months and six months then ended. Operating results for the three month and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The consolidated financial statements include the amounts and results of operations of American National Bankshares Inc. ("the Corporation") and its wholly owned subsidiary, American National Bank and Trust Company ("the Bank") and the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. STOCK BASED COMPENSATION As of June 30, 2003 the Corporation had a stock-based compensation plan. The Corporation accounts for the plan under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following illustrates the effect on net income and earnings per share for the six months ended June 30, 2003, and 2002 had the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, been adopted.
(Dollars in thousands except per share amounts) June 30, 2003 June 30, 2002 - ------------------------------------------------ ------------- ------------- Net income, as reported $ 4,642 $ 4,534 Deduct: Total stock-based employee compensation expense determined based on fair value method of awards, (54) (61) -------- -------- Pro forma net income $ 4,588 $ 4,473 ======== ======== Basic earnings per share: As reported $ .81 $ .78 Pro forma $ .80 $ .77 Diluted earning per share: As reported $ .80 $ .78 Pro Forma $ .79 $ .76
The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 2002: price volatility of 36.8%, risk-free interest rates of 4.08%, and expected lives of 5 years. The weighted average assumptions for grants in 2003 were: price volatility of 36.8%, risk-free interest rates of 2.27%, and expected lives of 5 years. 7 COMPREHENSIVE INCOME The following is a detail of comprehensive income for the three and six months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended June 30 June 30 ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net Income $ 2,308,000 $ 2,335,000 $ 4,642,000 $ 4,534,000 Unrealized gains (losses) on securities available for sale, net of tax expense (246,000) 1,356,000 (477,000) 628,000 ------------ ------------ ------------ ------------ Total comprehensive income $ 2,062,000 $ 3,691,000 $ 4,165,000 $ 5,162,000 ============ ============ ============ ============
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.
Three Months Ended June 30 --------------------------------------------- 2003 2002 -------------------- -------------------- Per Share Shares Amount Shares Amount --------- ------ --------- ------ Basic earnings per share 5,718,821 $ .40 5,804,608 $ .40 Effect of dilutive securities, stock options 57,770 - 42,227 - --------- ------ --------- ------ Diluted earning per share 5,776,591 $ .40 5,846,835 $ .40 ========= ====== ========= ======
Six Months Ended June 30 --------------------------------------------- 2003 2002 -------------------- -------------------- Per Share Shares Amount Shares Amount --------- ------ --------- ------ Basic earnings per share 5,737,354 $ .81 5,812,941 $ .78 Effect of dilutive securities, stock options 59,415 (.01) 36,077 - --------- ------ --------- ------ Diluted earning per share 5,796,769 $ .80 5,849,018 $ .78 ========= ====== ========= ======
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 Bank's general market area. All assets and liabilities of the Bank are allocated to community banking. Investment income from fixed income investments is another 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. 8 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. Unaudited segment information for the three and six month periods ended June 30, 2003 and 2002 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. 9
Three Months Ended June 30, 2003 - ---------------------------------------------------------------------------------------------------------------------------- Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ----- ------------ ----- Interest income $ 8,235 $ - $ 13 $ (13) $ 8,235 Interest expense 2,458 - 13 (13) 2,458 Non-interest income - external customers 772 647 196 - 1,615 Non-interest income - internal customers - 12 - (12) - Operating income before income taxes 2,911 315 29 - 3,255 Depreciation and amortization 397 6 1 - 404 Total assets 631,295 - 5 - 631,300 Capital expenditures 239 - - - 239
Three Months Ended June 30, 2002 - ---------------------------------------------------------------------------------------------------------------------------- Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ----- ------------ ----- Interest income $ 8,787 $ - $ 5 $ (5) $ 8,787 Interest expense 3,126 - 5 (5) 3,126 Non-interest income - external customers 619 666 160 - 1,445 Non-interest income - internal customers - 12 - (12) - Operating income before income taxes 2,813 457 21 - 3,291 Depreciation and amortization 403 7 - - 410 Total assets 571,323 - 42 - 571,365 Capital expenditures 263 16 - - 279
Six Months Ended June 30, 2003 - ---------------------------------------------------------------------------------------------------------------------------- Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ----- ------------ ----- Interest income $ 16,637 $ - $ 24 $ (24) $ 16,637 Interest expense 4,977 - 24 (24) 4,977 Non-interest income - external customers 1,443 1,253 381 - 3,077 Non-interest income - internal customers - 24 - (24) - Operating income before income taxes 5,893 614 44 - 6,551 Depreciation and amortization 792 12 3 - 807 Total assets 631,295 - 5 - 631,300 Capital expenditures 342 3 - - 345
Six Months Ended June 30, 2002 - ---------------------------------------------------------------------------------------------------------------------------- Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ----- ------------ ----- Interest income $ 17,588 $ - $ 11 $ (11) $ 17,588 Interest expense 6,550 - 11 (11) 6,550 Non-interest income - external customers 1,211 1,332 297 - 2,840 Non-interest income - internal customers - 25 - (25) - Operating income before income taxes 5,470 903 9 - 6,382 Depreciation and amortization 803 15 1 - 819 Total assets 571,323 - 42 - 571,365 Capital expenditures 1,057 16 - - 1,073
10 ITEM 2. AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on important factors affecting the Corporation's financial condition and results of operations. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements, and supplemental financial data. This report contains forward-looking statements with respect to the financial condition, results of operations and business of the Corporation and Bank. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Corporation and Bank and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ materially from those expected include the following: o General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances. o Changes in interest rates could reduce income. o Competitive pressures among financial institutions may increase. o The businesses that the Corporation and Bank are engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards. o New products developed or new methods of delivering products could result in a reduction in business and income for the Corporation and Bank. o Adverse changes may occur in the securities market. RESULTS OF OPERATIONS NET INCOME The Corporation's net income for the first six months of 2003 was $4,642,000, an increase of 2.4% over the $4,534,000 earned during the same period of 2002. On a basic and diluted per share basis, net earnings totaled $0.81 and $0.80, respectively, for the first six months of 2003. This compared favorably to the $0.78 in basic and diluted earnings per share recorded for the first six months of 2002. Both earnings per share measurement increases were due to a combination of improved net income combined with a lower number of shares outstanding due to stock repurchases under the Corporation's outstanding stock repurchase program. On an annualized basis, return on average total assets was 1.52% for the first six months of 2003 compared to 1.60% for the same period in 2002. Annualized return on average common shareholders' equity was 13.18% and 13.74% for the first six months of 2003 and 2002, respectively. Net interest income after provision for loan losses increased $546,000, or 5.1%, for the first six months of 2003 compared to the same period in 2002 due to overall growth in assets and liabilities offset slightly by a decline in the yield on earning assets. For the same comparative period, non-interest income increased by $237,000, led by growth in service charges and mortgage banking fees. Non-interest expense increased by $614,000 for the first six months of 2003 compared to the same period in 2002 due primarily to increases in salary and employee benefit expenses. The Corporation's net income for the second quarter of 2003 was $2,308,000, a decrease of 1.2% over the $2,335,000 earned during the same period of 2002. The Corporation's slight decline in earnings was primarily the result of non-interest expenses, primarily salaries and benefits, growing at a faster pace than net interest and non-interest income. While earnings declined on a year-to-year basis, the number of shares also declined due to stock repurchases under the Corporation's outstanding stock repurchase program. On a basic and diluted per share basis, net earnings totaled $0.40 for the second quarter of 11 2003, which was the same as the $0.40 earned for the same period of 2002. On an annualized basis, return on average total assets was 1.49% for the second quarter of 2003 compared to 1.64% for the same period in 2002. Return on average common shareholders' equity was 13.14% and 14.16% for the second quarter of 2003 and 2002, respectively. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis was $12,174,000 for the six month period ending June 30, 2003 compared to $11,521,000 for the same period of 2002, an increase of 5.7% or $653,000. The interest rate spread increased to 3.76% from 3.70%, while the net yield on earning assets decreased to 4.15% from 4.25% for the first six months of 2003 compared to the same period of 2002. Yields on earning assets declined due to decreases in interest rate indexes which are used to price commercial loans, the scheduled re-pricing of variable rate real estate loans to lower rates, the reinvestment of investment portfolio cash flows into lower yielding investments, and the addition of new loans at lower market rates of interest. Interest-bearing liability costs declined at a faster pace when compared to the previous year, as management took aggressive steps to reprice interest-bearing deposit accounts. This, coupled with the maturity-based repricing of certificates of deposit, accounted for the 24.0% decline in interest expense. Average interest-earning assets increased 8.1%, or $43,714,000 while average interest-bearing liabilities grew 7.6%, or $33,574,000 between June 30, 2002 and June 30, 2003. During this time low cost non-interest bearing demand deposit growth funded the majority of the difference between earning asset growth and interest bearing deposit growth, represented 27.6% of total deposit growth and now representing 13.1% of total deposits. These positive developments in the balance sheet mix, coupled with the aggressive stance on deposit costs, produced the improved interest rate spread. In late June 2003 the Federal Reserve Bank's Financial Open Market Committee lowered the benchmark federal funds rate 25 basis points to 1.00%. This change lowered the prime lending rate to 4.00% as of June 30, 2003, which was lower than the 4.75% prime lending rate during the same period of 2002. Many of the Corporation's assets reprice based on the prime lending rate or at a rate based on the rates on U.S. Treasury securities. While the Corporation's balance sheet is liability-sensitive, many liabilities have approached pricing floors while assets continue to reprice or be booked at lower yields. Due to this, spread and yield compression are expected to continue if rates remain at their current levels. When compared to the first quarter of 2003, the interest rate spread and net yield on earning assets in the second quarter of 2003 declined. The interest rate spread declined from 3.84% in the first quarter of 2003 to 3.68% during the second quarter of 2003. The net yield on earning assets declined from 4.24% in the first quarter of 2003 to 4.07% during the second quarter of 2003. These declines were due to loans and investment security portfolio yields declining at a faster pace than the cost of interest bearing liabilities. The following tables demonstrate fluctuations in net interest income and the related yields for the six and three month periods ending June 30, 2003, compared to similar prior year periods. 12 The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis. (In thousands, except rates):
Interest For six months ended June 30 Average Balance Income/Expense Yield/Rate ------------------------- ------------------------ --------------------- 2003 2002 2003 2002 2003 2002 ---------- ---------- ---------- --------- -------- -------- Loans: Commercial $ 211,612 $ 163,556 $ 6,126 $ 5,402 5.79% 6.61% Mortgage 178,682 183,092 5,473 6,352 6.13 6.94 Consumer 28,676 35,663 1,519 1,843 10.59 10.34 ---------- ---------- ---------- --------- -------- -------- Total loans 418,970 382,311 13,118 13,597 6.26 7.11 ---------- ---------- ---------- --------- -------- -------- Investment securities: Federal agencies 59,331 39,538 1,060 945 3.57 4.78 Mortgage-backed 35,778 40,503 839 1,254 4.69 6.19 State and municipal 41,560 38,591 1,419 1,313 6.83 6.80 Other investments 23,991 27,664 679 849 5.66 6.14 ---------- ---------- ---------- --------- -------- -------- Total investment securities 160,660 146,296 3,997 4,361 4.98 5.96 ---------- ---------- ---------- --------- -------- -------- Deposits in other banks 6,416 13,725 36 113 1.12 1.65 ---------- ---------- ---------- --------- -------- -------- Total interest-earning assets 586,046 542,332 17,151 18,071 5.85 6.66 ---------- --------- -------- -------- Other non-earning assets 26,072 24,446 ---------- ---------- Total assets $ 612,118 $ 566,778 ========== ========== Interest-bearing deposits: Demand $ 62,367 $ 59,240 129 229 .41 .77 Money market 45,465 39,530 264 405 1.16 2.05 Savings 78,747 67,888 437 535 1.11 1.58 Time 230,204 231,334 3,397 4,724 2.95 4.08 ---------- ---------- ---------- --------- -------- -------- Total interest-bearing deposits 416,783 397,992 4,227 5,893 2.03 2.96 Repurchase agreements 37,065 30,993 260 310 1.40 2.00 Other borrowings 22,089 13,378 490 347 4.44 5.19 ---------- ---------- ---------- --------- -------- -------- Total interest-bearing liabilities 475,937 442,363 4,977 6,550 2.09 2.96 ---------- --------- --------- -------- Demand deposits 62,379 55,201 Other liabilities 3,388 3,225 Shareholders' equity 70,414 65,989 ---------- ---------- Total liabilities and shareholders' equity $ 612,118 $ 566,778 ========== ========== Interest rate spread 3.76% 3.70% ======== ======== Net yield on earning assets 4.15% 4.25% ========= ======== Reconcilement to GAAP - --------------------- Net interest income - tax equivalent $ 12,174 $ 11,521 Less: Taxable equivalent adjustment 514 483 ---------- --------- Net interest income - per GAAP $ 11,660 $ 11,038 ========== =========
13 The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis. (In thousands, except rates):
Interest For three months ended June 30 Average Balance Income/Expense Yield/Rate ------------------------- ------------------------ --------------------- 2003 2002 2003 2002 2003 2002 ---------- ---------- ---------- --------- -------- -------- Loans: Commercial $ 221,310 $ 169,693 $ 3,150 $ 2,785 5.69% 6.56% Mortgage 178,212 183,430 2,673 3,131 6.00 6.83 Consumer 27,858 34,538 712 902 10.22 10.45 ---------- ---------- ---------- --------- -------- -------- Total loans 427,380 387,661 6,535 6,818 6.12 7.04 ---------- ---------- ---------- --------- -------- -------- Investment securities: Federal agencies 60,260 45,038 511 518 3.39 4.60 Mortgage-backed 36,271 38,724 385 598 4.25 6.18 State and municipal 43,480 39,523 750 663 6.90 6.71 Other investments 23,175 26,672 316 395 5.45 5.92 ---------- ---------- ---------- --------- -------- -------- Total investment securities 163,186 149,957 1,962 2,174 4.81 5.80 ---------- ---------- ---------- --------- -------- -------- Deposits in other banks 3,970 7,600 11 31 1.11 1.63 ---------- ---------- ---------- --------- -------- -------- Total interest-earning assets 594,536 545,218 8,508 9,023 5.72 6.62 ---------- --------- -------- -------- Other non-earning assets 25,950 24,546 ---------- ---------- Total assets $ 620,486 $ 569,764 ========== ========== Interest-bearing deposits: Demand $ 62,118 $ 58,464 61 110 .39 .75 Money market 44,481 40,070 125 215 1.12 2.15 Savings 81,273 69,076 212 270 1.04 1.56 Time 232,932 229,486 1,677 2,194 2.88 3.82 ---------- ---------- ---------- --------- -------- -------- Total interest-bearing deposits 420,804 397,096 2,075 2,789 1.97 2.81 Repurchase agreements 39,489 31,899 135 161 1.37 2.02 Other borrowings 22,426 13,755 248 176 4.42 5.12 ---------- ---------- ---------- --------- -------- -------- Total interest-bearing liabilities 482,719 442,750 2,458 3,126 2.04 2.82 ---------- --------- --------- -------- Demand deposits 63,912 57,797 Other liabilities 3,587 3,245 Shareholders' equity 70,268 65,972 ---------- ---------- Total liabilities and shareholders' equity $ 620,486 $ 569,764 ========== ========== Interest rate spread 3.68% 3.80% ======== ======== Net yield on earning assets 4.07% 4.33% ========= ======== Reconcilement to GAAP - --------------------- Net interest income - tax equivalent $ 6,050 $ 5,897 Less: Taxable equivalent adjustment 273 236 ---------- --------- Net interest income - per GAAP $ 5,777 $ 5,661 ========== =========
14 PROVISION AND RESERVE FOR LOAN LOSSES The allowance for loan losses is to provide for losses inherent in the loan portfolio. The Bank's Loan Committee has responsibility for determining the level of the allowance for loan losses, subject to the review of the Board of Directors. Among other factors, the Committee on a quarterly basis considers the Corporation's historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits including impaired loans, the Bank's loan "Watch" list, and national and local economic conditions. The provision for loan losses was $495,000 for the first six months of 2003 versus $419,000 for the same period in 2002. Net charged off loans were $126,000 for the first six months of 2003 versus $276,000 for the same period in 2002. The annualized ratio of net charge-offs to average outstanding loans was .06% in 2003 and .14% in 2002. Management considers these charge-off ratios lower than those of their peer banks, who generally consider charge-off levels of .10% to ..40% to be within reasonable norms from a historical perspective. The reserve for loan losses totaled $5,991,000 at June 30, 2003, an increase of 6.6% over the $5,622,000 recorded at December 31, 2002. The ratio of reserves to loans, less unearned discount, was 1.38% at June 30, 2003 versus 1.38% at December 31, 2002. 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 June 30, 2003. NON-INTEREST INCOME Non-interest income for the first six months of 2003 was $3,077,000, an increase of 8.3% from the $2,840,000 reported in the same period of 2002. The comparative increase was due to increases in service charge income, mortgage banking fees, and other fees and commissions which offset the market-driven decline in trust and investment services revenue. Service charges on deposit accounts grew 23.4% or $183,000 in the first six months of 2003 when compared to the same period in 2002, with the majority of the increase due to a new consumer overdraft management product. Mortgage banking revenue increased 84.1% or $127,000 in the first six months of 2003 when compared to the same period in 2002 due to strong demand for mortgage refinancing. Trust and investment services income of $1,253,000 during the first six months of 2003 was down 5.9% compared to the same period in 2002. Because a majority of trust account fees are calculated based on the market value of the assets under management, the performance of the equity markets continues to affect trust financial performance. The Bank's trust division managed accounts whose market values approximated $315,000,000 at June 30, 2003, up from $291,000,000 at March 31, 2003, but down from $332,000,000 one year prior. The growth in new trust business and increased management fees slightly offset the continued low valuations in the financial markets, which negatively impacted asset values under management. Recent equity market trends show promise of earnings improvement in this area should valuation improvements continue. Non-interest income for the three months ending June 30, 2003, was $1,615,000, an increase of 11.8% from $1,445,000 reported in the same period of 2002. The increase was due to increases in service charges on deposit accounts and mortgage banking revenue. Service charges on deposit accounts grew 30.0% or $125,000 in the second quarter of 2003 when compared to the same period in 2002, with the majority of the increase due to a new consumer overdraft management product. Mortgage banking revenue increased 117.4% or $81,000 for the three months ending June 30, 2003 when compared to the same period in 2002 due to strong demand for mortgage refinancing. 15 NON-INTEREST EXPENSE Non-interest expense for the first six months of 2003 was $7,691,000, an 8.7% increase from the $7,077,000 reported for the same period last year. Salaries increased 8.1% from the same period last year to $3,475,000 as of June 30, 2003 while pension and other employee benefits increased 25.8% to $970,000. The salary increase is due to the growth of staff in the areas of trust and investment services and lending, the accrual for incentive compensation which was not accrued in the prior period, and overall annual salary increases. Benefits increases have been driven by significant increases in employee health care costs and pension expense related to the market-driven decline of pension assets. Occupancy and equipment increased $62,000, or 5.1%, for the first six months of 2003 from the same period in 2002. These increases were primarily the result of the Henry County, Virginia office that opened in March 2002, increased technology software and hardware costs, and increases in building maintenance and utility expenses. Core deposit intangible amortization of $225,000 for the first six months of 2003 and 2002 represents the amortization of the premium paid for deposits acquired at the Gretna office in 1995 and Yanceyville office in 1996. These are being amortized on a ten year straight-line basis. The efficiency ratio, a productivity measure used to determine how well non-interest expense is managed, was 50.44% and 49.31% for the six months ended June 30, 2003 and 2002, respectively. A lower efficiency ratio generally indicates better expense efficiency. Leaders in expense efficiency in the banking industry have achieved ratios in the 45% to 55% range while the majority of the industry remains in the 60-70% range. Non-interest expense for the three months ending June 30, 2003 was $3,882,000, an 8.5% increase from the $3,579,000 reported for the same period last year. Salaries increased 5.6% from the same period last year to $1,754,000 as of June 30, 2003 while pension and other employee benefits increased 31.8% to $522,000. The salary increase is due to the growth in staff in the areas of trust and investment services and lending and overall annual salary increases. Benefits increases have been driven by significant increases in employee health care costs and pension expense related to the market-driven decline of pension assets. INCOME TAX PROVISION The income tax provision for the first six months of 2003 was $1,909,000, an increase of $61,000 from the $1,848,000 reported a year earlier. The effective tax rate for the first six months of 2003 was 29.1% compared to 29.0% for the same period of 2002. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES GENERAL Total assets increased 4.2% to $631,300,000 at June 30, 2003 when compared to assets of $605,859,000 at December 31, 2002. On an annual basis total assets increased 10.5% at June 30, 2003 when compared to assets of $571,365,000 at June 30, 2002. For the first six months of 2003 asset growth has been concentrated in the loan portfolio. Loans, net of unearned income, grew 6.5% or $26,244,000 to $432,647,000 at June 30, 2003, up from $406,403,000 at December 31, 2002. Loan growth has been concentrated in the commercial and commercial real estate sectors of the portfolio. The funding for the loan growth was through insured deposit and repurchase agreement account growth. Total insured deposits grew 3.5% or $16,609,000 to $490,171,000 at June 30, 2003 when compared to $473,562,000 at December 31, 2002. Insured deposits grew in time deposits and 16 savings account categories. Repurchase agreements grew 27.4% or $9,907,000 to $46,062,000 at June 30, 2003 when compared to $36,155,000 at December 31, 2002. ASSET QUALITY Non-performing loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more as to principal and interest payments, and loans classified as troubled debt restructurings. Loans in a non-accrual status at June 30, 2003 were $2,607,000 compared with $301,000 at December 31, 2002, and $479,000 on June 30, 2002. The majority of the increase in non-accrual loans is due to one commercial loan, determined to be impaired according to SFAS 114. This loan was placed on non-accrual status during the second quarter of 2003. Management is working closely with the borrower to improve the Bank's collateral position and status of this loan, with significant pay-down anticipated in the next six months from the borrower's liquidation of collateral. Loans on accrual status and past due 90 days or more at June 30, 2003 were $285,000 compared with $239,000 at December 31, 2002, and $305,000 on June 30, 2002. There were no loans classified as troubled debt restructurings on June 30, 2003, December 31, 2002 or June 30, 2002. Total non-performing loans as a percentage of total loans were 0.67% at June 30, 2003, 0.13% at December 31, 2002, and 0.20% at June 30, 2002. Properties received due to loan foreclosures were $124,000 at June 30, 2003, $30,000 at December 31, 2002, and $177,000 at June 30, 2002. The gross amount of interest income that would have been recorded on non-accrual loans and restructured loans as of June 30, 2003, if all such loans had been accruing interest at the original contractual rate, was $41,000 for the six month period ending June 30, 2003. No interest payments were recorded as interest income during the reporting period for all such non-performing loans. LIQUIDITY Management monitors and plans the Corporation's liquidity position for future periods. Liquidity is provided from cash and due from banks, interest-bearing deposits in other banks, repayments from loans, increases in deposits, lines of credit from two correspondent banks and two federal agency banks and a planned structured continuous maturity of investments. Management believes that these factors provide sufficient and timely liquidity for the foreseeable future. Management also takes into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit, commitments to purchase securities and standby letters of credit. The Corporation's net liquid assets, which includes cash and due from banks, unpledged government securities, unpledged other securities with remaining maturities of less than two years, less the Bank's reserve requirement, to net liabilities ratio was 15.6% at June 30, 2003 and 19.1% at December 31, 2002. Both of these ratios are considered to reflect adequate liquidity for the respective periods. The Bank has a line of credit equal to 15% of assets with the Federal Home Loan Bank of Atlanta (FHLB) that equaled approximately $94,600,000 with $73,100,000 available at June 30, 2003. Should the Bank ever desire to increase their line of credit beyond the current 15% limit, the FHLB would allow borrowings of up to 40% of total assets once the bank meets specific eligibility requirements. The Bank also has federal funds lines of credit facilities established with two other banks in the amounts of $12,000,000 and $5,000,000, as well as has access to the Federal Reserve Bank of Richmond's discount window should a liquidity crisis occur. The Bank has not used these facilities in the past year and considers these as backup sources of funds. 17 Borrowings outstanding under the FHLB line of credit were $21,500,000 at June 30, 2003 and $22,000,000 at December 31, 2002. The Bank has nine fixed rate term borrowing contracts outstanding as of June 30, 2003, with the following final maturities: Amount Expiration Date --------- --------------- 500,000 July 2003 1,500,000 January 2004 1,500,000 July 2004 3,000,000 July 2005 1,000,000 July 2006 1,000,000 July 2007 3,000,000 June 2008 5,000,000 August 2008 5,000,000 April 2009 OFF-BALANCE SHEET TRANSACTIONS The Corporation enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. The off-balance sheet transactions recognized as of June 30, 2003 and 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 $101,351,000 at June 30, 2003 and $107,771,000 at December 31, 2002, represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements. As of June 30, 2003 there was one commitment to purchase securities in the amount of $435,000 when issued in July. No commitments to purchase securities existed on December 31, 2002. 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 June 30, 2003 and December 31, 2002, the Bank had $3,578,000 and $3,489,000 respectively, in outstanding standby letters of credit. CAPITAL RESOURCES The following table displays the changes in shareholders' equity from December 31, 2002, to June 30, 2003: Equity, December 31, 2002 $ 70,736,000 Net earnings 4,642,000 Exercise of stock options 1,000 Repurchase of common stock (2,486,000) Cash dividends paid (2,118,000) Net change in accumulated other comprehensive income (477,000) ------------- Equity, June 30, 2003 $ 70,298,000 ============= During the second quarter of 2003, the Corporation declared and paid a quarterly cash dividend of $.19 per share. The dividend totaled $1,085,000 and represented a 47.0% payout of second quarter 2003 net income. During the first quarter of 2003, the Corporation declared and paid a quarterly cash dividend of 18 $.18 per share. The dividend totaled $1,033,000 and represented a 44.3% payout of first quarter 2003 net income. The Corporation's Board of Directors authorized the repurchase of up to 300,000 shares of the Corporation's common stock between August 16, 2000 and August 15, 2001, 250,000 shares between August 29, 2001 and August 28, 2002, and 250,000 shares between August 21, 2002 and August 19, 2003. The repurchases, which may be made through open market purchases or in privately negotiated transactions, were 35,000 shares during the first quarter of 2003 and 65,000 shares during the second quarter or 2003 and total 439,466 shares since purchases began on August 16, 2000. Federal regulatory risk-based capital ratio guidelines require percentages to be applied to various assets including off-balance-sheet assets in relation to their perceived risk. Tier I capital includes shareholders' equity and Tier II capital includes certain components of nonpermanent preferred stock and subordinated debt. The Corporation had no preferred stock or subordinated debt outstanding. Banks and bank holding companies must have a Tier I capital ratio of at least 4% and a total ratio, including Tier I and Tier II capital, of at least 8%. As of June 30, 2003 the Corporation had a ratio of 13.76% for Tier I and a ratio of 15.01% for total capital. At December 31, 2002 these ratios were 14.41% and 15.63%, respectively. 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. CRITICAL ACCOUNTING POLICIES The Corporation's critical accounting policies are listed below. A summary of the Corporation's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Corporation's 2002 Annual Report on Form 10-K. 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 when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses along with various economic factors and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might 19 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 within 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 20 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. Non-GAAP Presentations The management's discussion and analysis refers to the efficiency ratio, which is computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income. This is a non-GAAP financial measure which we believe provides investors with important information regarding our operational efficiency. Comparison of our efficiency ratio with those of other companies may not be possible because other companies may calculate the efficiency ratio differently. The Corporation, in referring to its net income, is referring to income under generally accepted accounting principals, or "GAAP". The analysis of net interest income on pages 15 and 16 is performed on a tax equivalent basis. Management feels the tax equivalent presentation better reflects total return, as many financial assets have specific tax advantages that modify their effective yields. A reconcilement of tax-equivalent net interest income to net interest income under generally accepted accounting principals, or "GAAP", is provided in those statements. NEW ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an impact on the Corporation's consolidated financial statements. In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Corporation's consolidated financial statements. Refer to the Corporation's December 31, 2002 Annual Report on Form 10-K for previously announced accounting pronouncements. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The effective management of market risk is essential to achieving the Corporation's objectives. Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Corporation is not subject to currency exchange risk or commodity price risk. As a financial institution, interest rate risk and its impact on net interest income is the primary market risk exposure. The Asset/Liability Investment Committee ("ALCO") is primarily responsible for establishing asset and liability strategies and for monitoring and controlling liquidity and interest rate risk. ALCO uses computer simulation analysis to measure the sensitivity of earnings and market value of equity to changes in interest rates. The projected changes in net interest income and market value of portfolio equity ("MVE") to changes in interest rates are calculated and monitored by ALCO as indicators of interest rate risk. The projected changes in net interest income and MVE to changes in interest rates at June 30, 2003 and December 31, 2002 were within compliance of established policy guidelines, except for a decrease in current rates by 300 basis points, or three percent. Management does not consider this scenario possible, given the current historically low level of interest rates. These projected changes are based on numerous assumptions of growth and changes in the mix of assets or liabilities. Net interest income for the next twelve months is projected to increase when interest rates are higher than current rates and decrease when interest rates are lower than current rates. ITEM 4. CONTROLS AND PROCEDURES We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report 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. 22 PART II OTHER INFORMATION Item: 1. Legal Proceedings The nature of the business of the Corporation's banking subsidiary ordinarily results in a certain amount of litigation. The subsidiary of the Corporation is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Corporation. 2. Changes in securities and use of proceeds None 3. Defaults upon senior securities None 4. Submission of matters to a vote of security holders At the Corporation's Annual Shareholders Meeting held on April 22, 2003, the following business was transacted: (1) Election of Directors All the nominees for election to the Board of Directors were elected to serve until the 2006 Annual Meeting of Shareholders. Affirmative Votes Votes Withheld Willie G. Barker, Jr. 4,116,143 14,265 Ben J. Davenport, Jr. 4,123,193 14,265 Michael P. Haley 4,127,945 14,265 Franklin W. Maddux 4,125,545 14,265 5. Other information None 6. Exhibits and Reports on Form 8-K (a) Exhibits - 11 Refer to EPS Calculation in the Notes to Financial Statements 31.1 Section 302 Certification of Charles H. Majors, President and CEO 31.2 Section 302 Certification of Brad E. Schwartz, Senior Vice-President and Secretary-Treasurer (CFO) 32.1 Section 906 Certification of Charles H. Majors, President and CEO 32.2 Section 906 Certification of Brad E. Schwartz, Senior Vice-President and Secretary-Treasurer (CFO) (b) Reports on Form 8-K: An 8-K was filed April 16, 2003, to file the Registrant's "Quarterly Financial Update" for the first quarter of 2003. An 8-K was filed April 22, 2003 to amend the bylaws of American National Bankshares Inc. as of April 22, 2003. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN NATIONAL BANKSHARES INC. /s/ Charles H. Majors --------------------------------------------- Charles H. Majors Date - August 12, 2003 President and Chief Executive Officer /s/ Brad E. Schwartz --------------------------------------------- Brad E. Schwartz Senior Vice-President and Date - August 12, 2003 Secretary-Treasurer (Chief Financial Officer) 24 EX-31 2 ex311060310q.txt 06/30/03 302 CERTIFICATION - CEO Exhibit 31.1 SECTION 302 CERTIFICATION - ------------------------- I, Charles H. Majors, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American National Bankshares Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervison, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting Date: August 12, 2003 /s/ Charles H. Majors - ------------------------------------- Charles H. Majors, President and Chief Executive Officer EX-31 3 ex312060310q.txt 06/30/03 302 CERTIFICATION - CFO Exhibit 31.2 SECTION 302 CERTIFICATION - ------------------------- I, Brad E. Schwartz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American National Bankshares Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervison, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting Date: August 12, 2003 /s/ Brad E. Schwartz - ------------------------------------------------- Brad E. Schwartz, Senior Vice-President and Secretary-Treasurer (Chief Financial Officer) EX-32 4 ex321060310q.txt 06/30/03 906 CERTIFICATION - CEO Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANNES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of American National Bankshares Inc. (the "Company") for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles H. Majors, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbannes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Charles H. Majors - ------------------------------------- Charles H. Majors President and Chief Executive Officer August 12, 2003 EX-32 5 ex322060310q.txt 06/30/03 906 CERTIFICATION - CFO Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANNES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of American National Bankshares Inc. (the "Company") for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles H. Majors, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbannes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Brad E. Schwartz - --------------------------------------------- Brad E. Schwartz Senior Vice-President and Secretary-Treasurer (Chief Financial Officer) August 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----