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
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[ ] 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
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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