SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2002.
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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 .
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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
----- -----
The number of shares outstanding of the issuer's common stock as of November 12,
2002 was 5,780,616.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Page No.
Index 2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001........................................... 3
Consolidated Statements of Income for the three months
ended September 30, 2002 and 2001............................... 4
Consolidated Statements of Income for the nine months
ended September 30, 2002 and 2001............................... 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001............................... 6
Notes to Consolidated Financial Statements........................ 7 - 11
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations......................................... 12 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 20
Item 4. Controls and Procedures............................................. 21
Part II. Other Information................................................... 22
SIGNATURES...................................................................... 22
2
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
(Unaudited)
September 30 December 31
2002 2001
------------ -----------
ASSETS
Cash and due from banks.........................................................$ 18,108 $ 14,798
Interest-bearing deposits in other banks........................................ 26,278 14,351
Investment securities:
Securities available for sale (at market value)............................... 126,014 127,317
Securities held to maturity (market value of $29,863 at
September 30, 2002 and $30,154 at December 31, 2001)........................ 28,147 29,474
---------- ----------
154,161 156,791
---------- ----------
Loans, net of unearned income .................................................. 396,720 375,593
Less allowance for loan losses.................................................. (5,574) (5,334)
---------- ----------
Net loans..................................................................... 391,146 370,259
---------- ----------
Bank premises and equipment, at cost, less accumulated
depreciation of $10,419 in 2002 and $9,652 in 2001............................ 8,235 7,857
Core Deposit Intangibles........................................................ 1,496 1,834
Accrued interest receivable and other assets.................................... 7,189 6,997
---------- ----------
Total assets..................................................................$ 606,613 $ 572,887
========== ==========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 66,379 $ 58,573
Demand deposits -- interest bearing........................................... 60,631 61,405
Money market deposits......................................................... 46,693 47,024
Savings deposits.............................................................. 71,857 65,651
Time deposits................................................................. 228,225 231,359
---------- ----------
Total deposits.............................................................. 473,785 464,012
---------- ----------
Repurchase agreements........................................................... 37,730 27,177
FHLB borrowings................................................................. 22,000 13,000
Accrued interest payable and other liabilities.................................. 3,334 3,301
---------- ----------
Total liabilities............................................................. 536,849 507,490
---------- ----------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
5,785,616 shares outstanding at September 30, 2002
and 5,821,956 shares outstanding at December 31, 2001....................... 5,786 5,822
Capital in excess of par value................................................ 9,576 9,588
Retained earnings............................................................. 51,784 48,678
Accumulated other comprehensive income -
net unrealized gains on securities available for sale....................... 2,618 1,309
---------- ----------
Total shareholders' equity.................................................. 69,764 65,397
---------- ----------
Total liabilities and shareholders' equity..................................$ 606,613 $ 572,887
========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
3
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
September 30
-------------------------
2002 2001
---------- ----------
Interest Income:
Interest and fees on loans....................................................$ 6,919 $ 7,573
Interest on deposits in other banks........................................... 57 80
Income on investment securities:
Federal agencies............................................................ 479 553
Mortgage-backed............................................................. 576 761
State and municipal......................................................... 484 486
Other investments........................................................... 378 483
---------- ----------
Total interest income....................................................... 8,893 9,936
---------- ----------
Interest Expense:
Interest on deposits:
Demand...................................................................... 105 103
Money market................................................................ 196 335
Savings..................................................................... 268 298
Time........................................................................ 2,005 3,120
Interest on repurchase agreements............................................. 167 277
Interest on other borrowings.................................................. 231 206
---------- ----------
Total interest expense...................................................... 2,972 4,339
---------- ----------
Net Interest Income............................................................. 5,921 5,597
Provision for Loan Losses....................................................... 214 252
---------- ----------
Net Interest Income After Provision
For Loan Losses............................................................... 5,707 5,345
---------- ----------
Non-Interest Income:
Trust and investment services................................................. 606 623
Service charges on deposit accounts........................................... 451 342
Other fees and commissions.................................................... 194 175
Mortgage banking income....................................................... 112 93
Securities gains, net......................................................... - 10
Other income.................................................................. 71 65
---------- ----------
Total non-interest income................................................... 1,434 1,308
---------- ----------
Non-Interest Expense:
Salaries...................................................................... 1,727 1,556
Pension and other employee benefits........................................... 389 378
Occupancy and equipment....................................................... 615 584
Core deposit intangible amortization ......................................... 112 112
Other......................................................................... 817 804
---------- ----------
Total non-interest expense.................................................. 3,660 3,434
---------- ----------
Income Before Income Tax Provision.............................................. 3,481 3,219
Income Tax Provision............................................................ 1,020 928
---------- ----------
Net Income......................................................................$ 2,461 $ 2,291
========== ==========
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ .42 $ .39
Diluted.........................................................................$ .42 $ .39
- ---------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,794,241 5,912,701
Diluted.........................................................................5,855,760 5,937,451
- ---------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
4
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
-------------------------
2002 2001
---------- ----------
Interest Income:
Interest and fees on loans....................................................$ 20,453 $ 22,997
Interest on deposits in other banks........................................... 170 269
Income on investment securities:
Federal agencies............................................................ 1,424 2,322
Mortgage-backed............................................................. 1,830 2,003
State and municipal......................................................... 1,416 1,448
Other investments........................................................... 1,188 1,391
---------- ----------
Total interest income....................................................... 26,481 30,430
---------- ----------
Interest Expense:
Interest on deposits:
Demand...................................................................... 334 385
Money market................................................................ 601 1,069
Savings..................................................................... 803 912
Time........................................................................ 6,729 9,739
Interest on repurchase agreements............................................. 477 889
Interest on other borrowings.................................................. 578 632
---------- ----------
Total interest expense...................................................... 9,522 13,626
---------- ----------
Net Interest Income............................................................. 16,959 16,804
Provision for Loan Losses....................................................... 633 787
---------- ----------
Net Interest Income After Provision
For Loan Losses............................................................... 16,326 16,017
---------- ----------
Non-Interest Income:
Trust and investment services................................................. 1,938 1,943
Service charges on deposit accounts........................................... 1,232 1,003
Other fees and commissions.................................................... 620 559
Mortgage banking income....................................................... 263 283
Securities gains, net......................................................... 19 360
Other income.................................................................. 202 171
---------- ----------
Total non-interest income................................................... 4,274 4,319
---------- ----------
Non-Interest Expense:
Salaries...................................................................... 4,941 4,811
Pension and other employee benefits........................................... 1,160 1,099
Occupancy and equipment....................................................... 1,834 1,724
Core deposit intangible amortization ......................................... 337 337
Other......................................................................... 2,465 2,371
---------- ----------
Total non-interest expense.................................................. 10,737 10,342
---------- ----------
Income Before Income Tax Provision.............................................. 9,863 9,994
Income Tax Provision............................................................ 2,868 2,935
---------- ----------
Net Income......................................................................$ 6,995 $ 7,059
========== ==========
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ 1.20 $ 1.18
Diluted.........................................................................$ 1.20 $ 1.18
- ---------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,806,639 5,985,070
Diluted.........................................................................5,852,431 6,006,635
- ---------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
-------------------------
2002 2001
---------- ----------
Cash Flows from Operating Activities:
Net income......................................................................$ 6,995 $ 7,059
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses..................................................... 633 787
Depreciation.................................................................. 891 871
Core deposit intangible amortization.......................................... 337 337
Amortization (accretion) of premiums and discounts
on investment securities.................................................... 150 51
Gain on sale of securities.................................................... (19) (360)
Gain on sale of loans......................................................... (263) (283)
Loss on sale of real estate owned............................................. 1 20
Loss on disposal of property and equipment.................................... 16 -
Deferred income taxes benefit................................................. (158) (314)
(Increase) decrease in interest receivable.................................... (218) 254
Increase in other assets...................................................... (576) (102)
Decrease in interest payable.................................................. (259) (115)
Increase in other liabilities................................................. 292 1,324
---------- ----------
Net cash provided by operating activities................................... 7,822 9,529
---------- ----------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ..................... 48,354 57,636
Purchases of securities available for sale.................................... (40,380) (41,069)
Purchases of securities held to maturity...................................... (3,492) (302)
Net increase in loans......................................................... (21,421) (33,004)
Proceeds from sale of real estate owned....................................... 261 195
Purchases of real estate owned................................................ (11) -
Purchases of property and equipment........................................... (1,285) (783)
---------- ----------
Net cash used in investing activities....................................... (17,974) (17,327)
---------- ----------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits........................................................ 12,907 12,832
Net (decrease) increase in time deposits...................................... (3,134) 11,590
Net increase (decrease) in repurchase agreements.............................. 10,553 (2,404)
Net increase (decrease) in Federal Home Loan Bank borrowings.................. 9,000 (3,000)
Cash dividends paid........................................................... (3,076) (2,933)
Repurchase of stock........................................................... (919) (2,927)
Proceeds from exercise of stock options....................................... 58 179
---------- ----------
Net cash provided by financing activities................................... 25,389 13,337
---------- ----------
Net Increase in Cash and Cash Equivalents....................................... 15,237 5,539
Cash and Cash Equivalents at Beginning of Period................................ 29,149 25,071
---------- ----------
Cash and Cash Equivalents at End of Period......................................$ 44,386 $ 30,610
========== ==========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 18,108 $ 14,315
Interest-bearing deposits in other banks.................................... 26,278 16,295
---------- ----------
$ 44,386 $ 30,610
========== ==========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 9,781 $ 13,741
Income taxes paid.............................................................$ 2,907 $ 2,202
Transfer of loans to other real estate owned..................................$ 164 $ 85
The accompanying notes to consolidated financial statements are an integral part of these statements.
6
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly American National Bankshares'
financial position as of September 30, 2002, its cash flows for the nine months
then ended, and the results of its operations for the three and nine months then
ended. Operating results for the three and nine month periods ended September
30, 2002 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2002.
The consolidated financial statements include the amounts and results
of operations of American National Bankshares Inc. ("the Corporation") and its
wholly owned subsidiary, American National Bank and Trust Company ("the Bank")
and the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp.
CRITICAL ACCOUNTING POLICIES
A summary of the Corporation's significant accounting policies is set
forth in Note 1 to the Consolidated Financial Statements in the Corporation's
2001 Annual Report on Form 10-K. The Corporation's critical accounting policies
are listed below.
GENERAL
The Corporation's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. In addition, GAAP itself may change from one previously acceptable
method to another method. Although the economics of our transactions would be
the same, the timing of events that would impact our transactions could change.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimable and (ii)
SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has three basic components: the formula
allowance, the specific allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses a historical loss view as an
indicator of future losses along with various economic factors and, as a result,
could differ from the loss incurred in the future. However, since this history
is updated with the most recent loss information, the errors that might
otherwise occur are mitigated. The specific allowance uses various techniques to
arrive at an estimate of loss for specifically identified loans. Historical loss
information, expected cash flows and fair market value of collateral are used to
estimate these losses. The unallocated allowance captures losses whose impact on
the portfolio have occurred but have yet to be recognized in either the formula
or specific allowance. The use of these values is inherently subjective and our
actual losses could be greater or less than the estimates.
7
CORE DEPOSIT INTANGIBLES
In July, 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which impacted the accounting for goodwill and
other intangible assets. Statement 141 eliminated the pooling method of
accounting for business combinations and required that intangible assets that
meet certain criteria be reported separately from goodwill. Statement 142
eliminated the amortization of goodwill and other intangibles that are
determined to have an indefinite life. The Statement requires, at a minimum,
annual impairment tests for goodwill and other intangible assets that are
determined to have an indefinite life. SFAS 142 allows certain intangibles
arising from Bank and Thrift acquisitions to be amortized over their estimated
useful lives.
Upon adoption of these Statements, the Corporation re-evaluated its
intangible assets that arose from branch acquisitions prior to July 1, 2001. The
intangible assets arising from the premium paid for deposits acquired at the
Gretna office in 1995 and the Yanceyville office in 1996 are classified as core
deposit intangibles and continue to be amortized over their estimated lives.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of the Corporation and
Bank. These forward-looking statements involve risks and uncertainties and are
based on the beliefs and assumptions of management of the Corporation and Bank
and on information available at the time these statements and disclosures were
prepared. Factors that may cause actual results to differ materially from those
expected include the following:
o General economic conditions may deteriorate and negatively impact the
ability of borrowers to repay loans and depositors to maintain balances.
o Changes in interest rates could reduce net interest income.
o Competitive pressures among financial institutions may increase.
o The businesses that the Corporation and Bank are engaged in may be
adversely affected by legislative or regulatory changes, including changes
in accounting standards.
o New products developed or new methods of delivering products could result
in a reduction in business and income for the Corporation and Bank.
o Adverse changes may occur in the securities market.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued
Statement 145, Recission of FASB No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of this
Statement related to Statement 13 are effective for transactions occurring after
May 15, 2002, with early application encouraged.
In June 2002, the Financial Accounting Standards Board issued Statement
146, Accounting for Costs Associated with Exit or Disposal Activities. This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The standard requires companies to
8
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31 2002, with early application encouraged.
The Financial Accounting Standards Board issued Statement No. 147,
Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9 in October 2002. FASB Statement No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method, provided interpretive guidance
on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
this Statement removes acquisitions of financial institutions from the scope of
both Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in
paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess
of the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions with the scope of this Statement. In addition,
this Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of this Statement, which relates to the application of the
purchase method of accounting, is effective for acquisitions for which the date
of acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
This Statement clarifies that a branch acquisition that meets the
definition of a business should be accounted for as a business combination,
otherwise the transaction should be accounted for as an acquisition of net
assets that does not result in the recognition of goodwill.
The transition provisions state that if the transaction that gave rise
to the unidentifiable intangible asset was a business combination, the carrying
amount of that asset shall be reclassified to goodwill as of the later of the
date of acquisition or the date Statement 142 was first applied (fiscal years
beginning after December 15, 2001). Any previously issued interim statements
that reflect amortization of the unidentifiable intangible asset subsequent to
the Statement 142 application date shall be restated to remove that amortization
expense. The carrying amounts of any recognized intangible assets that meet the
recognition criteria of Statement 141 that have been included in the amount
reported as an unidentifiable intangible asset and for which separate accounting
records have been maintained shall be reclassified and accounted for as assets
apart from the unidentifiable intangible asset and shall not be reclassified to
goodwill.
The Corporation is currently in the process of evaluating the impact,
if any, arising from the adoption of Statement 147.
9
COMPREHENSIVE INCOME
The following is a detail of comprehensive income for the three and nine
months ended September 30, 2002 and 2001:
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net Income $ 2,461,000 $ 2,291,000 $ 6,995,000 $ 7,059,000
Unrealized holding gains arising
during period (net of tax expense) 681,000 828,000 1,309,000 1,738,000
------------ ------------ ------------ ------------
Total comprehensive income $ 3,142,000 $ 3,119,000 $ 8,304,000 $ 8,797,000
============ ============ ============ ============
SEGMENT AND RELATED INFORMATION
Reportable segments include community banking and trust and investment
services. Community banking involves making loans to and generating deposits
from individuals and businesses in the markets where the Bank has offices. All
assets and liabilities of the Bank are allocated to community banking.
Investment income from fixed income investments is a major source of income.
Loan fee income, service charges from deposit accounts and non-deposit fees such
as automatic teller machine fees and insurance commissions generate additional
income for community banking. The assets and liabilities and operating results
of the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. are
included in the community banking segment. ANB Mortgage Corp. performs secondary
mortgage banking and ANB Services Corp. performs retail investment and insurance
sales.
Trust and investment services includes estate and trust planning and
administration and investment management for various entities. The trust and
investment services division of the Bank manages trusts, estates and purchases
equity, fixed income and mutual fund investments for customer accounts. The
trust and investment services division receives fees for investment and
administrative services. Fees are also received by this division for individual
retirement accounts managed for the community banking segment.
Unaudited segment information for the three and nine month periods ended
September 30, 2002 and 2001 is shown in the following table (in thousands). The
"Other" column includes corporate related items, results of insignificant
operations and, as it relates to segment profit (loss), income and expense not
allocated to reportable segments.
10
Three Months Ended September 30, 2002
- ---------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ -----
Interest income $ 8,893 $ - $ 10 $ (10) $ 8,893
Interest expense 2,972 - 10 (10) 2,972
Non-interest income - external customers 641 606 187 - 1,434
Non-interest income - internal customers - 12 - (12) -
Operating income before income taxes 3,056 396 29 - 3,481
Depreciation and amortization 399 8 2 - 409
Total assets 606,502 - 111 - 606,613
Capital expenditures 108 - 104 - 212
Three Months Ended September 30, 2001
- ---------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ -----
Interest income $ 9,936 $ - $ 10 $ (10) $ 9,936
Interest expense 4,339 - 10 (10) 4,339
Non-interest income - external customers 544 623 141 - 1,308
Non-interest income - internal customers - 14 - (14) -
Operating income before income taxes 2,954 392 (127) - 3,219
Depreciation and amortization 385 18 2 - 405
Total assets 563,880 - 94 - 563,974
Capital expenditures 94 - - - 94
Nine Months Ended September 30, 2002
- ---------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ -----
Interest income $ 26,481 $ - $ 21 $ (21) $ 26,481
Interest expense 9,522 - 21 (21) 9,522
Non-interest income - external customers 1,852 1,938 484 - 4,274
Non-interest income - internal customers - 37 - (37) -
Operating income before income taxes 8,526 1,299 38 - 9,863
Depreciation and amortization 1,202 23 3 - 1,228
Total assets 606,502 - 111 - 606,613
Capital expenditures 1,165 16 104 - 1,285
Nine Months Ended September 30, 2001
- ---------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ -----
Interest income $ 30,430 $ - $ 24 $ (24) $ 30,430
Interest expense 13,626 - 24 (24) 13,626
Non-interest income - external customers 1,926 1,943 450 - 4,319
Non-interest income - internal customers - 41 - (41) -
Operating income before income taxes 8,799 1,206 (11) - 9,994
Depreciation and amortization 1,149 52 7 - 1,208
Total assets 563,880 - 94 - 563,974
Capital expenditures 767 16 - - 783
11
ITEM 2.
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to focus on important factors affecting
the Corporation's financial condition and results of operations. The discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements, and supplemental financial data.
RESULTS OF OPERATIONS
NET INCOME
The Corporation's net income for the first nine months of 2002 was
$6,995,000, a decrease of 0.9% over the $7,059,000 earned during the same period
of 2001. On a basic and diluted per share basis, net earnings totaled $1.20 for
the first nine months of 2002, which was 1.7% higher than the $1.18 earned for
the same period of 2001. While earnings declined on a year-to-year basis, the
number of shares also declined due to stock repurchases under the Corporation's
outstanding stock repurchase programs, and this produced the increase in the
earnings per share results.
On an annualized basis, return on average total assets was 1.62% for the
first nine months of 2002 compared to 1.70% for the same period in 2001.
Annualized return on average common shareholders' equity was 13.94% and 14.55%
for the first nine months of 2002 and 2001, respectively.
Net interest income after provision for loan losses increased $309,000,
or 1.9%, for the first nine months of 2002 compared to the same period in 2001
due to an improvement in the interest rate spread and a lower provision for loan
losses. For the same comparative period, non-interest income excluding
securities gains increased by $296,000, led by growth in service charges and
other fees and commission income. Including non-recurring securities gains of
$19,000 in 2002 and $360,000 in 2001, non-interest income decreased $45,000.
Non-interest expense increased by $395,000 for the first nine months of 2002
compared to the same period in 2001 due to increases in salaries and employee
benefits, corporate insurance costs and the occupancy cost associated with a new
banking office opened in Henry County, Virginia, in March of 2002.
The Corporation's net income for the third quarter of 2002 was $2,461,000,
an increase of 7.4% over the $2,291,000 earned during the same period of 2001.
The increase in earnings on a year-to-year basis coupled with a lower number of
outstanding shares due to stock repurchases under the Corporation's outstanding
stock repurchase programs created an improved earnings per share. On a basic and
diluted per share basis, net earnings totaled $0.42 for the third quarter of
2002, which was 7.7% higher than the $0.39 earned for the same period of 2001.
On an annualized basis, return on average total assets was 1.67% for the third
quarter of 2002 compared to 1.64% for the same period in 2001. Annualized return
on average common shareholders' equity was 14.34% and 14.07% for the third
quarter of 2002 and 2001, respectively.
The Corporation's earnings improvement in the third quarter was
primarily due to improved net interest income due to overall balance sheet
growth and a slight three basis point improvement in the fully-tax equivalent
net yield on earning assets. Also contributing to the improved earnings was an
increase in non-interest income driven by increased deposit service charges and
other fees as well as improvements in mortgage banking income.
12
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$17,692,000 for the first nine month period ending September 30, 2002 compared
to $17,540,000 for the same period of 2001, an increase of 0.9%. The interest
rate spread increased to 3.77% from 3.69%, and the net yield on earning assets
decreased to 4.30% from 4.44% in the first nine months of 2002 compared to the
same period of 2001, respectively. The net yield on earning assets decreased due
to a change in the mix of assets and the greater asset growth in the area of
adjustable-rate commercial loans and deposits in other banks.
While the net yield on earning assets declined for the first nine
months of 2002 when compared to the previous year, the interest rate spread
improved slightly. Average interest-earning assets increased 4.1%, or
$21,781,000 while average interest-bearing liabilities grew 3.5%, or $15,123,000
during the first nine months of 2002. At the same time non-earning assets
declined by 3.1% and non-interest bearing demand deposits increased 8.5%. These
positive developments in the balance sheet mix, coupled with the repricing of
fixed term certificates of deposits to lower levels, produced the slightly
improved interest rate spread.
Net interest income on a fully taxable equivalent ("FTE") basis was
$6,171,000 for the third quarter of 2002 compared to $5,845,000 for the same
period of 2001, an increase of 5.6%. The interest rate spread increased to 3.92%
from 3.65%, and the net yield on earning assets increased to 4.40% from 4.37% in
the third quarter of 2002 compared to the same period of 2001, respectively. The
net yield on earning assets increased due to interest-bearing liabilities
repricing at a faster pace than interest-earning assets.
When compared to the second quarter of 2002, the interest rate spread
and net yield on earning assets in the third quarter of 2002 increased with a
positive trend noted. The interest rate spread improved from 3.80% in the second
quarter of 2002 to 3.92% during the third quarter of 2002. The net yield on
earning assets improved from 4.33% in the second quarter of 2002 to 4.40% during
the third quarter of 2002. This improvement was due to several factors including
faster growth in earning assets, a higher level of time deposits repricing to
lower market interest rates, growth in non-interest bearing demand deposits and
management's overall focus on managing the margin during the historic rate
period experienced in 2002.
During the first nine months of 2002, the Federal Reserve held interest
rates at year-end 2001 levels. These historically low rates kept the prime
lending rate at 4.75% during the nine months ending September 30, 2002, which
was much lower than the 9.5% to 6.0% range of the prime lending rate during the
same period of 2001. While the Corporation's balance sheet is
liability-sensitive, many liabilities remain near competitive market-driven
pricing floors while assets continue to reprice or be booked at lower yields.
The following tables demonstrate fluctuations in net interest income and
the related yields for the first nine months of 2002 and for the third quarter
of 2002, compared to similar prior year periods.
13
The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included
in average balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis. (In thousands,
except rates):
Interest
Average Balance Income/Expense Yield/Rate
----------------------- --------------------- -----------------
For nine months ended September 30
2002 2001 2002 2001 2002 2001
-------- -------- ------- ------- ------ ------
Loans:
Commercial $169,413 $134,601 $ 8,378 $ 8,405 6.59% 8.33%
Mortgage 183,740 179,183 9,455 11,211 6.86 8.34
Consumer 34,780 44,921 2,715 3,484 10.41 10.34
-------- -------- ------- ------- ------ ------
Total loans 387,933 358,705 20,548 23,100 7.06 8.59
-------- -------- ------- ------- ------ ------
Investment securities:
Federal agencies 40,257 47,704 1,424 2,322 4.72 6.49
Mortgage-backed 40,478 42,835 1,830 2,003 6.03 6.23
State and municipal 39,164 39,406 1,998 2,015 6.80 6.82
Other investments 27,287 30,175 1,244 1,457 6.08 6.44
-------- -------- ------- ------- ------ ------
Total investment securities 147,186 160,120 6,496 7,797 5.88 6.49
-------- -------- ------- ------- ------ ------
Deposits in other banks 13,656 8,169 170 269 1.66 4.39
-------- -------- ------- ------- ------ ------
Total interest-earning assets 548,775 526,994 27,214 31,166 6.61 7.89
------- ------- ------ ------
Other non-earning assets 25,286 26,083
-------- --------
Total assets $574,061 $553,077
======== ========
Interest-bearing deposits:
Demand $ 59,110 $ 56,030 334 385 .75 .92
Money market 41,185 40,262 601 1,069 1.95 3.54
Savings 69,054 62,271 803 912 1.55 1.95
Time 229,761 228,086 6,729 9,739 3.90 5.69
-------- -------- ------- ------- ------ ------
Total interest-bearing deposits 399,110 386,649 8,467 12,105 2.83 4.17
Repurchase agreements 32,419 29,108 477 889 1.96 4.07
Other borrowings 15,682 16,331 578 632 4.91 5.16
-------- -------- ------- ------- ------ ------
Total interest-bearing
liabilities 447,211 432,088 9,522 13,626 2.84 4.20
------- ------- ------ ------
Demand deposits 56,668 52,221
Other liabilities 3,278 4,069
Shareholders' equity 66,904 64,699
-------- --------
Total liabilities and
shareholders' equity $574,061 $553,077
======== ========
Interest rate spread 3.77% 3.69%
====== ======
Net interest income $17,692 $17,540
======= =======
Taxable equivalent adjustment $ 733 $ 736
======= =======
Net yield on earning assets 4.30% 4.44%
====== ======
14
The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included
in average balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis. (In thousands,
except rates):
Interest
Average Balance Income/Expense Yield/Rate
----------------------- --------------------- -----------------
For three months ended September 30
2002 2001 2002 2001 2002 2001
-------- -------- ------- ------- ------ ------
Loans:
Commercial $180,756 $145,676 $ 2,976 $ 2,848 6.59% 7.82%
Mortgage 185,015 181,733 3,103 3,648 6.71 8.03
Consumer 33,043 42,497 872 1,112 10.56 10.47
-------- -------- ------- ------- ------ ------
Total loans 398,814 369,906 6,951 7,608 6.97 8.23
-------- -------- ------- ------- ------ ------
Investment securities:
Federal agencies 41,672 34,505 479 553 4.60 6.41
Mortgage-backed 40,428 49,347 576 761 5.70 6.17
State and municipal 40,291 39,650 685 677 6.80 6.83
Other investments 26,543 31,441 395 505 5.95 6.42
-------- -------- ------- ------- ------ ------
Total investment securities 148,934 154,943 2,135 2,496 5.73 6.44
-------- -------- ------- ------- ------ ------
Deposits in other banks 13,520 9,745 57 80 1.69 3.28
-------- -------- ------- ------- ------ ------
Total interest-earning assets 561,268 534,594 9,143 10,184 6.52 7.62
------- ------- ------ ------
Other non-earning assets 27,031 25,605
-------- --------
Total assets $588,299 $560,199
======== ========
Interest-bearing deposits:
Demand $ 58,856 $ 55,535 105 103 .71 .74
Money market 44,440 41,949 196 335 1.76 3.19
Savings 71,349 63,469 268 298 1.50 1.88
Time 226,666 230,018 2,005 3,120 3.54 5.43
-------- -------- ------- ------- ------ ------
Total interest-bearing deposits 401,311 390,971 2,574 3,856 2.57 3.95
Repurchase agreements 35,224 30,432 167 277 1.90 3.64
Other borrowings 20,210 16,093 231 206 4.57 5.12
-------- -------- ------- ------- ------ ------
Total interest-bearing
liabilities 456,745 437,496 2,972 4,339 2.60 3.97
------- ------- ------ ------
Demand deposits 59,436 53,413
Other liabilities 3,495 4,172
Shareholders' equity 68,623 65,118
-------- --------
Total liabilities and
shareholders' equity $588,299 $560,199
======== ========
Interest rate spread 3.92% 3.65%
====== ======
Net interest income $ 6,171 $ 5,845
======= =======
Taxable equivalent adjustment $ 250 $ 248
======= =======
Net yield on earning assets 4.40% 4.37%
====== ======
15
PROVISION AND RESERVE FOR LOAN LOSSES
The allowance for loan losses is to provide for losses inherent in the
loan portfolio. The Bank's Loan Committee has responsibility for determining the
level of the allowance for loan losses, subject to the review of the Board of
Directors. Among other factors, the Committee on a quarterly basis considers the
Corporation's historical loss experience, the size and composition of the loan
portfolio, the value and adequacy of collateral and guarantors, non-performing
credits including impaired loans, the Bank's loan "Watch" list, and national and
local economic conditions.
The provision for loan losses was $633,000 for the first nine months of
2002 versus $787,000 for the same period in 2001. Net charged off loans were
$393,000 for the first nine months of 2002 versus $281,000 for the same period
in 2001. The annualized ratio of net charge-offs to average outstanding loans
was .14% in 2002 and .10% in 2001. Management considers these charge-off ratios
lower than those of their peer banks, who generally consider charge-off levels
of .10% to .40% to be within reasonable norms from a historical perspective.
For the third quarter ending September 30, 2002, net charge-offs were
$117,000 compared to $151,000 for the same period one year prior.
The reserve for loan losses totaled $5,574,000 at September 30, 2002, an
increase of 4.5% over the $5,334,000 recorded at December 31, 2001. The ratio of
reserves to loans, less unearned discount, was 1.41% at September 30, 2002
versus 1.42% at December 31, 2001. Management believes that the allowance for
loan losses is adequate to absorb any inherent losses on existing loans in the
Corporation's loan portfolio at September 30, 2002.
NON-INTEREST INCOME
Non-interest income for the first nine months of 2002 was $4,274,000, a
decrease of 1.0% from $4,319,000 reported in the same period of 2001. The
comparative decline was due to a high volume of non-recurring gains on the
pre-maturity call of investment securities booked in 2001. During the Federal
Reserve's rate declines beginning in January of 2001, a large volume of callable
government agency securities purchased at a discount were called resulting in
security gains. The level of calls and related gains did not reoccur during the
first nine months of 2002.
Excluding non-recurring securities gains, non-interest income increased
by $296,000 during the first nine months of 2002 when compared to the same
period one year prior due to increased deposit account service charges and other
fee and commission income. Service charges on deposit accounts grew 22.8% or
$229,000 in the first nine months of 2002 when compared to the same period in
2001.
Trust and investment services income of $1,938,000 during the first
nine months of 2002 was down slightly compared to the same period in 2001.
Because a majority of trust account fees are calculated based on the market
value of the assets under management, the performance of the equity markets
continue to affect trust financial performance. The Bank's trust division
managed accounts whose market values approximated $289,000,000 at September 30,
2002, compared to $330,000,000 one year prior. The growth in new trust business
and increased management fees slightly offset the continued low valuations in
the financial markets, which negatively impacted asset values under management.
Non-interest income for the third quarter of 2002 was $1,434,000, an
increase of 9.6% from $1,308,000 reported in the same period of 2001.
Non-interest income increased $126,000 due to increased deposit account service
charges, other fee and commission income, and improved mortgage banking income.
16
NON-INTEREST EXPENSE
Non-interest expense for the first nine months of 2002 was $10,737,000,
a 3.8% increase from the $10,342,000 reported for the same period last year.
Salaries increased 2.7% from the same period last year to $4,941,000 in 2002
while pension and other employee benefits increased 5.6% to $1,160,000.
Occupancy and equipment increased $110,000, or 6.4%, for the first nine months
of 2002 from the same period in 2001. These increases were primarily the result
of the Henry County, Virginia office that opened in March 2002, increased
depreciation expense associated with recent technology initiatives, and
increases in insurance expenses which are categorized in the other expense
category.
Core deposit intangible amortization of $337,000 for the first nine
months of 2002 and 2001 represents the amortization of the premium paid for
deposits acquired at the Gretna office in 1995 and Yanceyville office in 1996.
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, was 48.87% and 48.01% for the nine months ended
September 30, 2002 and 2001, respectively. A lower efficiency ratio generally
indicates better expense efficiency. Leaders in expense efficiency in the
banking industry have achieved ratios in the 45% to 50% range while the majority
of the industry remains in the 55-65% range.
Non-interest expense for the third quarter of 2002 was $3,660,000, a
6.6% increase from $3,434,000 reported for the same period of 2001. The reasons
for increased non-interest expense for the third quarter ended September 30,
2002 were primarily the result of the Southern Henry County office that opened
in March 2002, increased depreciation expense associated with recent technology
initiatives, and an increase in salaries, pension and employee benefits, and
insurance expense.
INCOME TAX PROVISION
The income tax provision for the first nine months of 2002 was
$2,868,000, a decrease of $67,000 from $2,935,000 reported a year earlier. The
effective tax rate for the first nine months of 2002 was 29.1% compared to 29.4%
for the same period of 2001.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Total assets increased 5.9% to $606,613,000 at September 30, 2002 when
compared to assets of $572,887,000 at December 31, 2001. Asset growth has been
concentrated in the loan portfolio and in interest-bearing deposits in other
banks. Loans grew 5.6% to $396,720,000 at September 30, 2002, up from
$375,593,000 at December 31, 2001. Loan growth has been concentrated in the
commercial, commercial real estate and equity line of credit sectors of the
portfolio. The increase in interest-bearing deposits in other banks occurred due
to increases in deposit and repurchase agreement balances in the third quarter
combined with a record low level of interest rates that tempered the
Corporation's ability to place the funds into adequately earning assets. Once
market rates shift from the September 30, 2002 level the Corporation intends to
reduce the level of interest bearing bank balances in other banks in order to
generate a higher overall return.
Similar to total asset growth, total liabilities grew 5.8% to
$536,849,000 at September 30, 2002 when compared to $507,490,000 at December 31,
2001. Total deposits increased $9,773,000 or 2.1% during the first nine months
of 2002 and other borrowings including Federal Home Loan Bank advances and
repurchase agreements increased $19,553,000 or 48.7% during the same period.
$9,000,000 of the growth was related to borrowing fixed rate advances from the
Federal Home Loan Bank of Atlanta to directly offset the purchase of
mortgage-backed securities and the remainder of the growth was in retail
repurchase agreements. Retail repurchase agreements are used by commercial
accounts to earn interest on short-term funds and mature daily. A shift to lower
cost deposits was seen as growth of $7,806,000 or
17
13.3% was noted in non-interest bearing demand deposits and growth of $6,206,000
or 9.5% was noted in savings accounts. The primary decline in deposits occurred
in the higher cost time deposit and money market account categories. This change
in deposit mix continued to lower the Corporation's cost of funds on a linked
quarter-basis and was a contributing factor in improvements noted in the
interest rate spread and yield on earning assets.
ASSET QUALITY
Non-performing loans include loans on which interest is no longer
accrued, accruing loans that are contractually past due 90 days or more as to
principal and interest payments, and loans classified as troubled debt
restructurings. Loans in a non-accrual status at September 30, 2002 were
$383,000 compared with $568,000 at December 31, 2001, and $503,000 on September
30, 2001. Loans on accrual status and past due 90 days or more at September 30,
2002 were $256,000 compared with $258,000 at December 31, 2001, and $186,000 on
September 30, 2001. There were no loans classified as troubled debt
restructurings on September 30, 2002, December 31, 2001 or September 30, 2001.
Total non-performing loans as a percentage of total loans were 0.16% at
September 30, 2002, 0.22% at December 31, 2001, and 0.18% at September 30, 2001.
The Corporation's total non-performing loans are considered low by industry
standards.
Properties received due to loan foreclosures were $30,000 at September
30, 2002, $117,000 at December 31, 2001, and $115,000 at September 30, 2001.
The gross amount of interest income that would have been recorded on
non-accrual loans and restructured loans as of September 30, 2002, if all such
loans had been accruing interest at the original contractual rate, was $13,000
for the nine month period ending September 30, 2002. No interest payments were
recorded as interest income during the reporting period for all such
non-performing loans.
LIQUIDITY
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity is provided from cash and due from banks,
interest-bearing deposits in other banks, repayments from loans, increases in
deposits, lines of credit from two correspondent banks and two federal agency
banks and a planned structured continuous maturity of investments. Management
believes that these factors provide sufficient and timely liquidity for the
foreseeable future.
Management also takes into account any liquidity needs generated by
off-balance sheet transactions such as commitments to extend credit, commitments
to purchase securities and standby letters of credit.
The Corporation's net liquid assets, which includes cash and due from
banks, unpledged government securities, unpledged other securities with
remaining maturities of less than two years, less the Bank's reserve
requirement, to net liabilities ratio was 20.1% at September 30, 2002 and 20.0%
at December 31, 2001. Both of these ratios are considered to reflect adequate
liquidity for the respective periods.
The Bank has a line of credit equal to 15% of assets with the Federal Home
Loan Bank of Atlanta (FHLB) that equaled approximately $90,905,000 at September
30, 2002. Should the Bank ever desire to increase their line of credit beyond
the current 15% limit, the FHLB would allow borrowings of up to 40% of total
assets once the bank meets specific eligibility requirements.
The Bank also has federal funds lines of credit facilities established with
two other banks in the amounts of $12,000,000 and $5,000,000, as well as has
access to the Federal Reserve Bank of Richmond's discount window should a
liquidity crisis occur. The Bank has not used these facilities in the past year
and considers these as backup sources of funds.
18
Borrowings outstanding under the FHLB line of credit were $22,000,000 at
September 30, 2002 and $13,000,000 at December 31, 2001. The Bank has ten fixed
rate term borrowing contracts outstanding as of September 30, 2002, with the
following final maturities:
Amount Expiration Date
---------- ---------------
$ 500,000 January 2003
500,000 July 2003
1,500,000 January 2004
1,500,000 July 2004
3,000,000 July 2005
1,000,000 July 2006
1,000,000 July 2007
3,000,000 June 2008
5,000,000 August 2008
5,000,000 April 2009
OFF-BALANCE SHEET TRANSACTIONS
The Corporation enters into certain financial transactions in the ordinary
course of performing traditional banking services that result in off-balance
sheet transactions. The off-balance sheet transactions recognized as of
September 30, 2002 and December 31, 2001 were commitments to extent credit and
standby letters of credit only. The Corporation does not have any off-balance
sheet subsidiaries or special purpose entities.
Commitments to extend credit, which amount to $112,493,000 at September
30, 2002 and $121,062,000 at December 31, 2001, represent legally binding
agreements to lend to customers with fixed expiration dates or other termination
clauses. Since many of the commitments are expected to expire without being
funded, the total commitment amounts do not necessarily represent future
liquidity requirements.
As of September 30, 2002, there was one commitment to purchase
securities in the amount of $2,000,000 when issued on October 4, 2002. No
commitments to purchase securities existed on December 31, 2001.
Standby letters of credit are conditional commitments issued by the
Bank guaranteeing the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. At September 30, 2002 and December 31, 2001, the Bank had
$3,462,000 and $1,000,000 respectively, in outstanding standby letters of
credit.
CAPITAL RESOURCES
The following table displays the changes in shareholders' equity from
December 31, 2001, to September 30, 2002:
Equity, December 31, 2001 $65,397,000
Net earnings 6,995,000
Exercise of stock options 58,000
Repurchase of common stock (919,000)
Cash dividends paid (3,076,000)
Net change in net unrealized losses on AFS securities 1,309,000
-------------
Equity, September 30, 2002 $69,764,000
=============
19
During the third quarter of 2002, the Corporation declared and paid a
quarterly cash dividend of $.18 per share. The dividend totaled $1,042,000 and
represented a 42.3% payout of third quarter 2002 net income. During the second
quarter of 2002, the Corporation declared and paid a quarterly cash dividend of
$.18 per share. The dividend totaled $1,044,000 and represented a 44.7% payout
of second quarter 2002 net income. During the first quarter of 2002, the
Corporation declared and paid a quarterly cash dividend of $.17 per share. The
dividend totaled $990,000 and represented a 45.0% payout of first quarter 2002
net income. For the nine months ending September 30, 2002, the Corporation paid
out $3,076,000 in cash dividends which represented 44.0% of net income for the
nine month period ended September 30, 2002.
The Corporation's Board of Directors authorized the repurchase of up to
300,000 shares of the Corporation's common stock between August 16, 2000 and
August 15, 2001, 250,000 shares between August 29, 2001 and August 28, 2002, and
250,000 shares between August 21, 2002 and August 19, 2003. The repurchases,
which may be made through open market purchases or in privately negotiated
transactions, were 6,600 shares during the first quarter of 2002, 13,500 shares
during the second quarter of 2002 and 20,000 shares during the third quarter to
total 334,466 shares since purchases began on August 16, 2000.
Federal regulatory risk-based capital ratio guidelines require
percentages to be applied to various assets including off-balance-sheet assets
in relation to their perceived risk. Tier I capital includes shareholders'
equity and Tier II capital includes certain components of nonpermanent preferred
stock and subordinated debt. The Corporation had no preferred stock or
subordinated debt outstanding. Banks and bank holding companies must have a Tier
I capital ratio of at least 4% and a total ratio, including Tier I and Tier II
capital, of at least 8%. As of September 30, 2002 the Corporation had a ratio of
14.59% for Tier I and a ratio of 15.84% for total capital. At December 31, 2001
these ratios were 14.32% and 15.56%, respectively.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effective management of market risk is essential to achieving the
Corporation's objectives. Market risk reflects the risk of economic loss
resulting from adverse changes in market prices and interest rates. This risk of
loss can be reflected in diminished current market values and/or reduced
potential net interest income in future periods. The Corporation is not subject
to currency exchange risk or commodity price risk.
As a financial institution, interest rate risk and its impact on net
interest income is the primary market risk exposure. The Asset/Liability
Investment Committee ("ALCO") is primarily responsible for establishing asset
and liability strategies and for monitoring and controlling liquidity and
interest rate risk.
ALCO uses computer simulation analysis to measure the sensitivity of
earnings and market value of equity to changes in interest rates. The projected
changes in net interest income and market value of portfolio equity ("MVE") to
changes in interest rates are calculated and monitored by ALCO as indicators of
interest rate risk. The projected changes in net interest income and MVE to
changes in interest rates at September 30, 2002 and December 31, 2001 were
within compliance of established policy guidelines. These projected changes are
based on numerous assumptions of growth and changes in the mix of assets or
liabilities. Net interest income for the next twelve months is projected to
increase when interest rates are higher than current rates and decrease when
interest rates are lower than current rates.
20
ITEM 4.
CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Corporation
carried out an evaluation, under the supervision and with the participation of
the Corporation's management, including the Corporation's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Corporation's Chief Executive
Officer and Chief Financial Officer concluded that the Corporation's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Corporation (including its consolidated
subsidiaries) required to be included in periodic SEC filings. There have been
no significant changes in the Corporation's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
the Corporation carries out its evaluation.
21
PART II.
OTHER INFORMATION
Item:
1. Legal Proceedings
The nature of the business of the Corporation's banking subsidiary
ordinarily results in a certain amount of litigation. The subsidiary of the
Corporation is involved in various legal proceedings, all of which are
considered incidental to the normal conduct of business. Management believes
that the liabilities arising from these proceedings will not have a material
adverse effect on the consolidated financial position or consolidated results of
operations of the Corporation.
2. Changes in securities and use of proceeds
None
3. Defaults upon senior securities
None
4. Results of votes of security holders
None
5. Other information
None
6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(ii) Amended Bylaws dated September 17, 2002
(99)(a) Section 302 Certification of Charles H. Majors,
President and CEO
(99)(b) Section 302 Certification of Brad E. Schwarts,
Senior Vice President & CFO
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN NATIONAL BANKSHARES INC.
/s/ Charles H. Majors
---------------------------------------------
Charles H. Majors
Date - November 12, 2002 President and Chief Executive Officer
/s/ Brad E. Schwartz
---------------------------------------------
Brad E. Schwartz
Senior Vice-President and
Date - November 12, 2002 Secretary-Treasurer (Chief Financial Officer)
22