UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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Commission file number 0-12820
AMERICAN NATIONAL BANKSHARES INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1284688
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
628 Main Street
Danville, Virginia 24541
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 434-792-5111
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1 Par Value NASDAQ National Market
-------------------------- --------------------------------------
(Title of each class) (Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ X ] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 7, 2003 was $129,845,331. The number of shares of the
Registrant's Common Stock outstanding on March 7, 2003 was 5,745,816.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 22, 2003 are incorporated by reference in Part
III of this report.
1
CROSS REFERENCE
Page
----
PART I
ITEM 1 - Business 4
ITEM 2 - Properties 5
ITEM 3 - Legal Proceedings 6
ITEM 4 - Submission of Matters to a Vote of Security Holders 6
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters 6
ITEM 6 - Selected Financial Data 7
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8
ITEM 7A - Quantitative and Qualitative Disclosures about Market Risk 10
ITEM 8 - Financial Statements and Supplementary Data
Quarterly Financial Results for 2002 and 2001 26
Management's Report on Financial Statements 27
Reports of Independent Public Accountants 28
Consolidated Balance Sheets at December 31, 2002 and 2001 30
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2002 31
Consolidated Statements of Changes in Shareholders' Equity for each
of the years in the three-year period ended December 31, 2002 32
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2002 33
Notes to Consolidated Financial Statements 34
ITEM 9 - Changes in and disagreements with Accountants on Accounting and Financial Disclosure *
PART III
ITEM 10 - Directors and Executive Officers of the Registrant *
ITEM 11 - Executive Compensation *
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management *
ITEM 13 - Certain Relationships and Related Transactions *
ITEM 14 - Controls and Procedures 25
PART IV
ITEM 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for reference)
Exhibits
- --------
3.1 Amended and Restated Articles of Incorporation Exhibit 4.1 on Form S-3
dated August 20, 1997 filed August 20, 1997
3.2 Amended Bylaws dated March 29, 2002 Exhibit 3.2 on Form 8-K
filed March 29, 2002
10.1 Agreement between American National Bank and Exhibit 4a on Form 10-K
Trust Company and James A. Motley dated filed March 28, 1994
August 26, 1982, as amended August 11, 1987
10.2 Agreement between American National Bank and Trust Exhibit 10.3 on Form 10-K
Company and E. Budge Kent, Jr. dated June 12, 1997 filed March 27, 1998
2
10.3 American National Bankshares Inc. Stock Option Plan dated Exhibit 4.3 on form S-8
August 19, 1997 filed September 17, 1997
10.4 Agreement between American National Bank and Trust Exhibit 4 on Form 10-K
Company and H. Dan Davis dated March 14, 1996 filed September 27, 1995
10.5 Agreement between American National Bankshares Inc., Exhibit 10.5 on Form 10-K
American National Bank and Trust Company and filed March 25, 2002
Charles H. Majors dated December 18, 2001
10.6 Agreement between American National Bankshares Inc., Exhibit 10.6 on Form 10-K
American National Bank and Trust Company and filed March 25, 2002
E. Budge Kent, Jr. dated December 18, 2001
10.7 Agreement between American National Bankshares Inc., Exhibit 10.7 on Form 10-K
American National Bank and Trust Company and filed March 25, 2002
Dabney T. P. Gilliam, Jr. dated December 18, 2001
10.8 Agreement between American National Bankshares Inc., Exhibit 10.8 on Form 10-K
American National Bank and Trust Company and filed March 25, 2002
Jeffrey V. Haley dated December 18, 2001
10.9 Agreement between American National Bankshares Inc., Exhibit 10.9 on Form 10-K
American National Bank and Trust Company and filed March 25, 2002
Brad E. Schwartz dated December 18, 2001
10.10 Agreement between American National Bank and Trust Exhibit 10.10 on Form 10-K
Company and Charles H. Majors dated January 1, 2002 filed March 25, 2002
99.2 American National Bankshares Inc. Dividend Reinvestment Exhibit 99 on Form S-3
Plan dated August 19, 1997 filed August 20, 1997
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 2002.
- --------------
* The information required by Item 9 is incorporated herein by reference to the information that appears under the headings
"Report of Audit and Compliance Committee" and "Independent Public Accountants" in the Registrant's Proxy Statement for the
April 2003 Annual Meeting of Shareholders.
The information required by Item 10 is incorporated herein by reference to the information that appears under the headings
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for
the April 2003 Annual Meeting of Shareholders.
The information required by Item 11 is incorporated herein by reference to the information that appears under the headings
"Board Committees and Compensation", "Report of Human Resources and Compensation Committee on Executive Compensation",
"Executive Compensation", and "Certain Agreements with Executive Officers" in the Registrant's Proxy Statement for the April
2003 Annual Meeting of Shareholders.
The information required by Item 12 is incorporated herein by reference to the information that appears under the headings
"Security Ownership of Certain Beneficial Owners" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the April 2003 Annual Meeting of Shareholders.
The information required by Item 13 is incorporated herein by reference to the information that appears under the heading
"Interest of Management in Certain Transactions"' in the Registrant's Proxy Statement for the April 2003 Annual Meeting of
Shareholders.
3
ITEM 1 - BUSINESS
American National Bankshares Inc. (the "Corporation") is a one-bank holding
company organized under the laws of the State of Virginia in 1984. On September
1, 1984, the Corporation acquired all of the outstanding capital stock of
American National Bank and Trust Company (the "Bank"), a National Banking
Association chartered in 1909 under the laws of the United States. The Bank is
the only subsidiary of the Corporation. At December 31, 2002 the Corporation
employed 207 persons (FTE).
American National Bank and Trust Company
The Bank has been operating as a commercial bank headquartered in Danville,
Virginia since its organization in 1909. The Bank has expanded through internal
growth and through mergers and acquisitions. In 1996 the Corporation completed
the merger of Mutual Savings Bank, F.S.B. ("Mutual") with $84,718,000 in assets
into the Bank. The Mutual merger was accounted for as a pooling of interests.
The Bank completed two retail office purchases in 1995 and 1996 that added
$57,700,000 in deposits and $6,925,000 in loans. The two acquisitions were
accounted for as purchases and related core deposit intangible assets of
$4,504,000 are being amortized over ten years. The Bank opened retail banking
offices in Chatham and Martinsville, Virginia and closed a limited service
retail office in Danville during 1999 and opened a branch office in South
Boston, Virginia during 2000. In March 2002, the Bank opened their fourteenth
retail banking office in southern Henry County, Virginia.
The Bank has two wholly owned subsidiaries. ANB Mortgage Corp. originates
and sells secondary-market mortgage loans. ANB Services Corporation, operating
as ANB Investor Services and ANB Insurance Services, offer non-deposit
investment products such as mutual funds and a full-line of insurance products
through an affiliation with Bankers Insurance LLC.
The operations of the Bank are conducted at fourteen offices located
throughout the Bank's trade area, which includes the Cities of Danville and
Martinsville, Pittsylvania, Henry, and Halifax Counties in Virginia, and the
northern half of Caswell County in North Carolina. Seven of these offices are
located in Danville, one office each in Gretna, Chatham, Martinsville,
Collinsville, southern Henry County, and South Boston, Virginia and Yanceyville,
North Carolina. The Bank also has fifteen automated teller machines at various
locations in the trade area. The Bank offers all services normally offered by a
full-service commercial bank, including commercial and consumer demand and time
deposit accounts, commercial and consumer loans and trust services.
Competition
The Bank's primary service area is generally defined as the Cities of
Danville and Martinsville, Pittsylvania, Henry, and Halifax Counties in
Virginia, and the northern half of Caswell County in North Carolina. Vigorous
competition exists in this service area. The Bank competes not only with other
commercial banks but also with diversified financial institutions, money market
and mutual funds, mortgage, insurance, and finance companies. As of December 31,
2002, there were approximately 14 banks operating in this service area. American
National Bank and Trust Company has the largest deposit market share in Danville
and Pittsylvania County.
Supervision and Regulation
The Corporation is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("the Act") and is registered as such with the Board
of Governors of the Federal Reserve System ("the Federal Reserve Board"). As a
bank holding company, the Corporation is required to file with the Federal
Reserve Board an annual report and such other information as may be required.
The Federal Reserve Board may also make examinations of the Corporation.
The operations of the Bank are subject to federal statutes and to
regulations of the Comptroller of the Currency, the Federal Reserve Board and
the Federal Deposit Insurance Corporation, which insures the Bank's deposits.
The primary supervisory authority over the Bank is the Comptroller of the
Currency, which regularly examines such areas as reserves, loans, investments,
regulatory compliance, information systems, management practices and other
aspects of the Bank's operations. These examinations are designed primarily for
the protection of the Bank's depositors. In addition to these regular
examinations, the Bank must furnish the Comptroller periodic reports containing
a full and accurate statement of its affairs.
As a national bank, the Bank is a member of the Federal Reserve System and
is affected by general fiscal and monetary policies of the Federal Reserve
Board. The techniques used by the Federal Reserve Board include setting the
reserve requirements of member banks and establishing the discount rate on
member bank borrowings.
4
Government Monetary Policies and Economic Controls
The policies of the Federal Reserve Board have a direct effect on the
amount of bank loans and deposits and the interest rates charged and paid
thereon. While these policies can materially affect the revenues and income of
commercial banks, the impact of such conditions and policies upon the future
business and earnings of the Bank cannot accurately be predicted.
Foreign Operations
The Corporation does not engage in any foreign operations.
Internet Access to Corporate Documents
The Corporation provides access to their SEC filings through the corporate
Web site at WWW.AMNB.COM. After accessing the Web site, the filings are
available upon selecting the American National Bankshares Inc. icon. Reports
available include the annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after the reports are electronically filed with or
furnished to the SEC.
Executive Officers
This information is incorporated by reference to the Registrant's Proxy
Statement for the April 2003 Annual Meeting of Shareholders.
ITEM 2 - PROPERTIES
The principal executive offices of the Corporation as well as the principal
executive offices of the Bank are located at 628 Main Street, Danville,
Virginia. As of March 24, 2003 the Bank maintained fourteen full service offices
retail banking offices. Seven are located within the City of Danville, with
others located at Gretna, Chatham, Martinsville, southern Henry County,
Collinsville, and South Boston, Virginia and Yanceyville, North Carolina. The
Bank's Trust and Investment Division operates two offices, ANB Mortgage Corp.
has two offices, and ANB Investor Services and ANB Insurance Services have one
office. The Corporation owns an office building on 203 Ridge Street, Danville,
Virginia which is currently leased to Bankers Insurance, LLC. The Bank owns and
operates fifteen Automated Teller Machines ("ATMs"). There are no mortgages or
liens against any property of the Bank or the Corporation. Leased offices are
marked with an *.
BANK OFFICES
Main Office 628 Main Street, Danville, Virginia 24541
Airport Office 1407 South Boston Road, Danville, Virginia 24540
Chatham Office 13880 U.S. Highway 29, Chatham, Virginia 24531
Collinsville Office 2484 Virginia Avenue, Collinsville, Virginia 24078
Gretna Office 109 Main Street, Gretna, Virginia 24557
Martinsville Office * 201 East Main Street, Martinsville, Virginia 24112
Nor-Dan Office 239 Nor-Dan Drive, Danville, Virginia 24540
Riverside Office 1081 Riverside Drive, Danville, Virginia 24540
South Boston Office * 3229 Halifax Road, South Boston, Virginia 24592
South Main Office 1013 South Main Street, Danville, Virginia 24541
Tower Drive Office 103 Tower Drive, Danville, Virginia 24540
West Main Office * 2016 West Main Street, Danville, Virginia 24541
Yanceyville Office 173 Main Street, Yanceyville, North Carolina 27379
220 South Office * 3810 Greensboro Road, Ridgeway, Virginia 24148
ATM LOCATIONS
Airport Office 1407 South Boston Road, Danville, Virginia 24540
Chatham Office 13880 U.S. Highway 29, Chatham, Virginia 24531
Collinsville Office 2484 Virginia Avenue, Collinsville, Virginia 24078
Franklin Turnpike * 2725 Franklin Turnpike, Danville, Virginia 24540
Yanceyville * Highways 86 & 158, Yanceyville, North Carolina 27379
Huffman's Car Wash * 596 West Main Street, Danville, Virginia 24541
Martinsville Office * 201 East Main Street, Martinsville, Virginia 24112
Riverside Office 1081 Riverside Drive, Danville, Virginia 24540
South Boston Office * 3229 Halifax Road, South Boston, Virginia 24592
220 South Office * 3810 Greensboro Road, Ridgeway, Virginia 24148
Danville Regional Medical Center * 142 South Main Street, Danville, Virginia 24541
Liberty Fair Mall * 240 Commonwealth Boulevard, Martinsville, Virginia 24112
Nor-Dan Office 239 Nor-Dan Drive, Danville, Virginia 24540
Piedmont Mall * 325 Piedmont Drive, Danville, Virginia 24540
West Main Office * 2016 West Main Street, Danville, Virginia 24541
5
ITEM 3 - Legal Proceedings
There are no material pending legal proceedings to which the Corporation is
a party or to which the property of the Corporation is subject.
ITEM 4 - Submission of Matters to a Vote of Security Holders
No Matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Corporation through
a solicitation of proxies or otherwise.
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters
The Corporation's common stock is traded on the NASDAQ National Market
under the symbol "AMNB". At March 7, 2003 the Corporation had 1,378 shareholders
of record. The tables below present the high and low closing sales' prices known
to management for the Corporation's common stock and dividends declared for the
past two years. Market value and dividends are shown per share and are based on
the shares outstanding for 2002 and 2001.
Market Price of the Corporation's Common Stock
NASDAQ closing price Dividends
-------------------- declared
2002 Low High per share
- ----------- ------- ------ ---------
4th quarter $ 25.80 $ 27.24 $ .18
3rd quarter $ 25.81 $ 29.00 $ .18
2nd quarter $ 19.25 $ 27.39 $ .18
1st quarter $ 18.05 $ 20.32 $ .17
------
$ .71
======
2001 Low High per share
- ----------- ------- ------- ---------
4th quarter $ 17.50 $ 19.10 $ .17
3rd quarter $ 17.75 $ 19.40 $ .17
2nd quarter $ 18.25 $ 20.94 $ .17
1st quarter $ 14.25 $ 25.00 $ .15
------
$ .66
======
6
ITEM 6 - Summary of Selected Consolidated Financial Data
Summary of Selected Consolidated Financial Data
(in thousands, except per share amounts)
American National Bankshares Inc. & Subsidiary
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Operations Information:
Interest income:
Loans.....................................................$ 27,150 $ 30,217 $ 28,300 $ 23,959 $ 23,356
Interest on deposits in other banks....................... 248 385 179 273 272
Investment securities..................................... 7,737 9,218 10,127 9,467 9,026
-------- -------- -------- -------- --------
Total interest income................................... 35,135 39,820 38,606 33,699 32,654
Interest expense............................................ 12,310 17,502 17,343 14,736 14,472
-------- -------- -------- -------- --------
Net interest income......................................... 22,825 22,318 21,263 18,963 18,182
Provision for loan losses................................... 873 1,015 1,020 670 927
Non-interest income......................................... 5,712 5,668 4,771 4,493 4,079
Non-interest expense........................................ 14,285 13,614 12,923 11,542 11,013
-------- -------- -------- -------- --------
Income before income taxes.................................. 13,379 13,357 12,091 11,244 10,321
Income taxes................................................ 3,918 3,942 3,415 3,320 3,123
-------- -------- -------- -------- --------
Net income..................................................$ 9,461 $ 9,415 $ 8,676 $ 7,924 $ 7,198
======== ======== ========= ======== ========
Balance Sheet Information:
Securities..................................................$163,824 $156,791 $162,929 $166,272 $163,413
Loans held for sale......................................... 1,285 253 399 220 1,233
Net loans................................................... 400,781 370,006 334,611 289,386 264,465
Total deposits.............................................. 473,562 464,012 426,588 385,558 358,325
Shareholders' equity........................................ 70,736 65,397 63,338 56,719 54,861
Total assets................................................ 605,859 572,887 541,389 491,391 460,383
Per Share Information:*
Earnings - basic............................................$ 1.63 $ 1.58 $ 1.42 $ 1.30 $ 1.18
Earnings - diluted.......................................... 1.62 1.58 1.42 1.30 1.18
Dividends................................................... .71 .66 .585 .525 0.465
Book value.................................................. 12.24 11.23 10.45 9.29 8.99
Ratios:
Return on average assets.................................... 1.63% 1.69% 1.70% 1.68% 1.64%
Return on average shareholders' equity...................... 13.97% 14.49% 14.74% 14.17% 13.79%
Average shareholder's equity/average assets 11.64% 11.68% 11.54% 11.89% 11.86%
Total risk-based capital/assets............................. 15.49% 15.56% 17.09% 17.79% 18.04%
Dividend payout ratio....................................... 43.52% 41.68% 41.07% 40.44% 39.43%
Net charge-offs to average net loans........................ .15% .12% .13% .13% .15%
Allowance for loan losses to period-end
loans, net of unearned income............................. 1.38% 1.42% 1.40% 1.41% 1.42%
* Per share amounts have been restated to reflect the impact of a 2-for-1 stock split effected in the form of a 100% stock
dividend issued to stockholders July 15, 1999, with a record date of July 1, 1999.
7
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The purpose of this discussion is to focus on important factors affecting
the Corporation's financial condition and results of operations. The discussion
and analysis should be read in conjunction with the audited consolidated
financial statements and related notes to assist in the evaluation of the
Corporation's 2002 performance.
RESULTS OF OPERATIONS
NET INCOME
The Corporation reported record profitability during 2002. Net income
for the year ended December 31, 2002 was $9,461,000, an increase of 0.5% over
the $9,415,000 earned during the same period of 2001. On a basic per share
basis, net earnings totaled $1.63 and on a diluted per share basis earnings
totaled $1.62 for the year ended December 31, 2002. For the year ended December
31, 2001, both basic and diluted earnings per share were $1.58.
Two important and commonly used measures of profitability are return on
assets (net income as a percentage of average total assets) and return on
shareholders' equity (net income as a percentage of average common shareholders'
equity). The Corporation's returns on average assets were 1.63%, 1.69%, and
1.70% for the years ended December 31, 2002, 2001 and 2000, respectively. The
returns on average shareholders' equity were 13.97%, 14.49%, and 14.74% for the
last three years.
The Corporation's moderate growth in earnings was due to several
factors. Net interest income after provision for loan losses improved $649,000,
or 3.05%, for 2002 compared to the same period in 2001 due to overall loan and
deposit growth, which was partially offset by a decline in the net yield on
earning assets. Non-interest income grew by $44,000. Excluding securities gains
and losses, non-interest income grew by $372,000. In 2001 the Corporation had a
large volume of non-recurring gains on the pre-maturity call of securities which
was not experienced in 2002.
NET INTEREST INCOME
Net interest income, the Corporation's primary source of revenue, is
the excess of interest income over interest expense. Net interest income is
influenced by a number of factors, including the volume of interest-earning
assets and interest-bearing liabilities and the interest rates earned on earning
assets and the interest rates paid to obtain funding to support the assets. For
analytical purposes, net interest income is adjusted to a taxable equivalent
basis to recognize the income tax savings on tax-exempt assets, such as state
and municipal securities. A tax rate of 34% was used in adjusting interest on
tax-exempt securities and loans to a fully taxable equivalent basis. The
difference between rates earned on interest-earning assets (with an adjustment
made to tax-exempt income to provide comparability with taxable income, i.e. the
"FTE" adjustment) and the cost of the supporting funds is measured by the net
interest margin.
The FTE-adjusted net interest margin is the primary measure used in
evaluating the effectiveness of the management of earning assets and the
liabilities funding those assets. The FTE-adjusted net interest margin was 4.28%
in 2002, 4.39% in 2001 and 4.54% in 2000. The eleven basis point decrease in net
yield during 2002 was primarily the result of U.S. monetary policy that kept
rates at historic lows during the year. During 2002, the Federal Reserve
decreased the target federal funds rate in November by 0.50%, for a total two
year reduction of 5.25%. The continued low target federal funds rate and the
related effect on the prime lending rate and U.S. Treasury security rates had a
negative impact on net interest income in 2002. The Wall Street Journal prime
rate fell from 4.75% at January 1, 2002 to 4.25% at December 31, 2002.
While the Corporation's balance sheet is liability-sensitive, it
remained increasingly difficult to reduce funding costs at the same pace with
the market-driven reductions in asset yields. The resultant decrease in interest
income from the lower yield on earning assets exceeded the decrease in interest
expense from lower costs of interest-bearing liabilities. The higher interest
rate spread occurred because average-interest-bearing liabilities grew more in
the lower cost areas of demand deposits, savings and repurchase accounts while
the primary growth in average loans was in the commercial and commercial real
estate portfolios. Table 1 demonstrates fluctuations in net interest income and
the related yields for the years 2002, 2001, and 2000.
8
Table 1 - Net Interest Income Analysis
The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included in average
balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis (in thousands, except rates):
Average Balance Interest Income/Expense Average Yield/Rate
------------------------------ ------------------------------ ---------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- -------- ------- ------- -------
Loans:
Commercial $174,172 $139,094 $100,298 $ 11,337 $ 11,188 $ 9,273 6.51% 8.04% 9.25%
Mortgage 183,297 179,682 165,260 12,383 14,622 14,101 6.76 8.14 8.53
Consumer 33,925 43,609 50,218 3,555 4,541 4,977 10.48 10.41 9.91
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total loans 391,394 362,385 315,776 27,275 30,351 28,351 6.97 8.38 8.98
-------- -------- -------- -------- -------- -------- ------- ------- -------
Securities:
U. S. Government - - 2,641 - - 168 - - 6.36
Federal agencies 43,063 42,698 64,784 1,942 2,709 4,231 4.51 6.34 6.53
Mortgage-backed 40,055 43,628 36,729 2,352 2,723 2,319 5.87 6.24 6.31
State and municipal 39,173 39,208 39,796 2,667 2,677 2,708 6.81 6.83 6.80
Other securities 26,962 30,947 23,420 1,629 1,959 1,464 6.04 6.33 6.25
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total securities 149,253 156,481 167,370 8,590 10,068 10,890 5.76 6.43 6.51
-------- -------- -------- -------- -------- -------- ------- -------- -------
Deposits in other banks 15,792 11,726 2,879 248 385 179 1.57 3.28 6.22
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total interest-earning assets 556,439 530,592 486,025 36,113 40,804 39,420 6.49 7.69 8.11
-------- -------- -------- ------- -------- -------
Other non-earning assets 25,459 25,841 24,269
-------- -------- --------
Total assets $581,898 $556,433 $510,294
======== ======== ========
Deposits:
Demand $ 59,852 $ 56,419 $ 56,141 417 495 1,035 .70 .88 1.84
Money market 42,369 41,225 24,861 775 1,318 865 1.83 3.20 3.48
Savings 70,073 62,792 63,739 1,049 1,177 1,671 1.50 1.87 2.62
Time 229,074 229,050 202,890 8,607 12,617 11,095 3.76 5.51 5.47
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total deposits 401,368 389,486 347,631 10,848 15,607 14,666 2.70 4.01 4.22
Repurchase agreements 34,183 29,814 27,608 634 1,088 1,362 1.85 3.65 4.93
Other borrowings 17,274 15,491 23,397 828 807 1,315 4.79 5.21 5.62
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total interest-bearing
liabilities 452,825 434,791 398,636 12,310 17,502 17,343 2.72 4.03 4.35
-------- -------- -------- -------- -------- -------- ------- -------- -------
Demand deposits 58,075 52,719 49,126
Other liabilities 3,289 3,941 3,654
Shareholders' equity 67,709 64,982 58,878
-------- -------- --------
Total liabilities and
Shareholders' equity $581,898 $556,433 $510,294
======== ======== ========
Interest rate spread 3.77% 3.66% 3.76%
======= ======== =======
Net interest income $ 23,803 $ 23,302 $ 22,077
======== ======== ========
Taxable equivalent adjustment $ 978 $ 984 $ 814
======== ======== ========
Net yield on earning assets 4.28% 4.39% 4.54%
======= ======== =======
The growth in the volume of loans increased the tax-equivalent interest
income on loans by $1,789,000, while the decline in rates on new and existing
loans reduced the same number by $4,865,000. The net effect of the volume
increase and the general rate decline decreased tax-equivalent interest income
on loans by $3,076,000. Had rates increased to more normalized levels in 2002,
interest income on loans would have been greater. Interest income on a
tax-equivalent basis declined $1,478,000 on investment securities due to
declines in both volume and yields on investment securities.
Total interest expense decreased by a net amount of $5,192,000 in 2002,
with a decrease of $5,614,000 due to lower rate funding costs in all categories
with volume primarily in the savings and repurchase agreement categories
accounting for most of the $422,000 increase in interest rates due to volume.
Time deposits led the decline in interest expense as a majority re-priced during
the year.
9
Table 2 presents the dollar amount of changes in interest income and
interest expense, and distinguishes between the changes related to increases or
decreases in average outstanding balances of interest-earning assets and
interest-bearing liabilities (volume), and the changes related to increases or
decreases in average interest rates on such assets and liabilities (rate).
Table 2 - Changes in Net Interest Income (Rate/Volume Analysis)
Net interest income is the product of the volume of average earning assets
and the average rates earned, less the volume of average interest-bearing
liabilities and the average rates paid. The portion of change relating to both
rate and volume is allocated to each of the rate and volume changes based on the
relative change in each category. The following table analyzes the changes in
both rate and volume components of net interest income on a taxable equivalent
basis for the past two years (in thousands):
2002 vs. 2001 2001 vs. 2000
------------------------------------ -----------------------------------
Change Change
Interest Attributable to Interest Attributable to
Increase ---------------------- Increase ----------------------
(Decrease) Rate Volume (Decrease) Rate Volume
---------- --------- --------- ---------- --------- ---------
Interest income
Loans:
Commercial $ 149 $ (2,366) $ 2,515 $ 1,915 $ (1,323) $ 3,238
Mortgage (2,239) (2,528) 289 521 (672) 1,193
Consumer (986) 29 (1,015) (436) 243 (679)
-------- --------- --------- -------- --------- ---------
Total loans (3,076) (4,865) 1,789 2,000 (1,752) 3,752
-------- --------- --------- -------- --------- ---------
Securities:
U.S. Government - - - (168) (84) (84)
Federal agencies (767) (790) 23 (1,522) (118) (1,404)
Mortgage-backed (371) (156) (215) 404 (27) 431
State and municipal (10) (8) (2) (31) 9 (40)
Other securities (330) (86) (244) 495 19 476
-------- --------- --------- -------- --------- ---------
Total securities (1,478) (1,040) (438) (822) (201) (621)
-------- --------- --------- -------- --------- ---------
Deposits in other banks (137) (243) 106 206 (119) 325
-------- --------- --------- -------- --------- ---------
Total interest income (4,691) (6,148) 1,457 1,384 (2,072) 3,456
-------- --------- --------- -------- --------- ---------
Interest expense
Deposits:
Demand (78) (107) 29 (540) (545) 5
Money market (543) (579) 36 453 (75) 528
Savings (128) (254) 126 (494) (470) (24)
Time (4,010) (4,011) 1 1,522 82 1,440
-------- --------- --------- -------- --------- ---------
Total deposits (4,759) (4,951) 192 941 (1,008) 1,949
Repurchase agreements (454) (595) 141 (274) (376) 102
Other borrowings 21 (68) 89 (508) (90) (418)
-------- --------- --------- -------- --------- ---------
Total interest expense (5,192) (5,614) 422 159 (1,474) 1,633
-------- --------- --------- -------- --------- ---------
Net interest income $ 501 $ (534) $ 1,035 $ 1,225 $ (598) $ 1,823
======== ========= ========= ======== ========= =========
MARKET RISK MANAGEMENT
As the holding company for a commercial bank, the Corporation's primary
component of market risk is interest rate volatility. The Corporation's primary
objectives for managing interest rate volatility are to identify opportunities
to maximize net interest income while ensuring adequate liquidity and carefully
managing interest rate risk. The Asset/Liability Investment Committee ("ALCO"),
which is composed of executive officers, is responsible for:
o Monitoring corporate financial performance;
o Meeting liquidity requirements;
o Establishing interest rate parameters, indices, and terms for loan
and deposit products;
o Assessing and evaluating the competitive rate environment;
o Reviewing and approving investment portfolio transactions under
established policy guidelines;
o Monitoring and measuring interest rate risk.
Interest rate risk refers to the exposure of the Corporation's earnings and
market value of portfolio equity ("MVE") to changes in interest rates. The
magnitude of the change in earnings and MVE resulting from interest rate changes
is impacted by the time remaining to maturity on fixed-rate obligations, the
contractual ability to adjust rates prior to maturity, competition, and the
general level of interest rates and customer actions.
10
There are several common sources of interest rate risk that must be
effectively managed if there is to be minimal impact on the Corporation's
earnings and capital. Repricing risk arises largely from timing differences in
the pricing of assets and liabilities. Reinvestment risk refers to the
reinvestment of cash flows from interest payments and maturing assets at lower
or higher rates. Basis risk exists when different yield curves or pricing
indices do not change at precisely the same time or in the same magnitude such
that assets and liabilities with the same maturity are not all affected equally.
Yield curve risk refers to unequal movements in interest rates across a full
range of maturities.
In determining the appropriate level of interest rate risk, ALCO
reviews the changes in net interest income and MVE given various changes in
interest rates. The Corporation also considers the most likely interest rate
scenarios, local economics, liquidity needs, business strategies, and other
factors in determining the appropriate levels of interest rate risk. To
effectively measure and manage interest rate risk, simulation analysis is used
to determine the impact on net interest income and MVE from changes in interest
rates.
Interest rate sensitivity analysis presents the amount of assets and
liabilities that are estimated to reprice through specified periods if there are
not changes in balance sheet mix. The interest rate sensitivity analysis in
Table 3 reflects the Corporation's assets and liabilities on December 31, 2002
that will either be repriced in accordance with market rates, mature or are
estimated to mature early or prepay within the periods indicated (in thousands):
Table 3 - Interest Rate Sensitivity Analysis
3 Months > 3 Months > 1 Year > 3 Year
or Less to 1 Year to 3 Years to 5 Years > 5 Years Total
---------- ------------ ------------ ------------ ----------- ----------
Interest sensitive assets:
Interest bearing deposits
with other banks $ 6,720 $ - $ - $ - $ - $ 6,720
Securities 17,133 24,527 44,789 37,037 40,338 163,824
Loans 115,383 161,027 119,634 10,748 896 407,688
---------- ------------ ------------ ------------ ----------- ----------
Total interest
sensitive assets 139,236 185,554 164,423 47,785 41,234 578,232
---------- ------------ ------------ ------------ ------------ ----------
Interest sensitive liabilities:
NOW and savings deposits 136,090 - - - - 136,090
Money market deposits 43,831 - - - - 43,831
Time deposits 51,201 91,560 65,590 16,067 121 224,539
Repurchase agreements and
other borrowings 36,155 1,000 3,000 5,000 13,000 58,155
---------- ------------ ------------ ------------ ------------ ----------
Total interest
sensitive liabilities 267,277 92,560 68,590 21,067 13,121 462,615
---------- ------------- ----------- ----------- ------------ ----------
Interest sensitivity gap $(128,041) $ 92,994 $ 95,833 $ 26,718 $ 28,113 $ 115,617
========== ============= =========== =========== ============ ==========
Cumulative interest sensitivity gap $(128,041) $ (35,047) $ 60,786 $ 87,504 $ 115,617
========== ============= =========== =========== ============
Percentage cumulative gap
to total interest sensitive assets (22.1)% (6.1)% 10.5 % 15.1 % 20.0 %
Of the loans in the above table that either mature or can be repriced in periods over 1 year, $70,340 have adjustable rates
and $56,340 have fixed rates. Investment security prepayments were estimated using recent market information.
Because of inherent limitations in interest rate sensitivity analysis, ALCO
uses more sophisticated interest rate risk measurement techniques. Simulation
analysis is used to subject the current repricing conditions to rising and
falling interest rates in increments and decrements of 1%, 2% and 3% to
determine how net interest income changes for the next twelve months. ALCO also
measures the effects of changes in interest rates on the Market Value of Equity
(MVE) by discounting future cash flows of deposits and loans using new rates at
which deposits and loans would be made to similar depositors and borrowers.
Market value changes on the investment portfolio are estimated by discounting
future cash flows and using duration analysis. Loan and investment security
prepayments are estimated using current market information. Table 4 shows the
estimated impact of changes in interest rates up and down 1%, 2% and 3% on net
interest income and on MVE as of December 31, 2002 (in thousands).
The negative one year cumulative interest sensitivity gap of $35,047,000 on
December 31, 2002 has declined from the negative one year cumulative interest
sensitivity gap of $71,761,000 on December 31, 2001, indicating a more balanced
repricing gap position. This negative gap in the interest rate sensitivity
analysis normally implies that the Corporation's net interest income would rise
if rates decline and fall if rates increase. The simulation analysis presents a
more accurate picture since certain rate indices that reprice deposits do not
change with the same magnitude over the same period of time as changes in the
prime rate or other indices that reprice loans.
11
Table 4 - Change in Net Interest Income and Market Value of Portfolio Equity
Changes in Changes in Market Value
Change in Net Interest Income (1) of Portfolio Equity (2)
Interest ----------------------- ------------------------
Rates Amount Percent Amount Percent
- --------- -------- ---------- -------- ----------
Up 3% $ 2,189 9.18 % $(9,857) (10.41)%
Up 2% 1,506 6.32 (8,027) (8.48)
Up 1% 776 3.25 (6,171) (6.52)
Down 1% (848) (3.56) 2,919 3.08
Down 2% (2,008) (8.42) 1,775 1.87
Down 3% $(3,332) (13.97)% $ 1,501 1.58 %
(1) Represents the difference between estimated net interest income for the
next 12 months in the new interest rate environment and the current
interest rate environment.
(2) Represents the difference between market value of portfolio equity in the
new interest rate environment and the current interest rate environment,
and then adjusted for income taxes using a 34% tax rate.
While the Corporation cannot predict future interest rates or their effects
on MVE or net interest income, the analysis indicates that a change in interest
rates of plus or minus 3% is unlikely to have a material adverse effect on net
interest income and MVE in future periods. Computations of prospective effects
of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, asset and liability
prepayments and composition and should not be relied upon as indicative of
actual results. Certain limitations are inherent in such computations. Certain
assets and liabilities may react differently than projected to changes in market
interest rates. The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while rates on
other types of assets and liabilities may lag behind changes in market interest
rates. Also, the methodology used estimates of various rates of withdrawal for
money market deposits, savings, and checking accounts, which may vary
significantly from actual experience.
The Corporation is also subject to prepayment risk, particularly in falling
interest rate environments or in environments where the slope of the yield curve
is relatively flat or negative. Such changes in the interest rate environment
can cause substantial changes in the level of prepayments of loans, which may
also affect the Corporation's interest rate sensitivity gap position.
Additionally, credit risk may increase if an interest rate increase adversely
affects the ability of many borrowers to service their debt.
Non-Interest Income
Non-interest income totaled $5,712,000 in 2002 compared with $5,668,000
in 2001 and $4,771,000 in 2000. This was an increase of 0.8% for 2002, compared
to an 18.8% increase for 2001 and an increase of 6.2% during 2000. The major
components of non-interest income are trust and investment services, service
charges on deposit accounts, securities gains or losses, other fees and
insurance commissions, mortgage banking income and other income. The comparative
decline in non-interest income growth when compared to previous years was due to
two primary factors. First, trust income continued to be negatively impacted by
the declines in the equity markets which reduced asset-based fee income. Second,
the large volume of securities gains reported in 2001 due to the sharp reduction
in interest rates did not reoccur in 2002.
Excluding non-recurring securities gains, operating non-interest income
increased by $372,000 in 2002, or 7.0%, when compared to 2001 due to increased
service charges on deposit accounts, other fees and commission, and increases in
other income.
Trust and investment services revenue is the largest contributor to the
Corporation's non-interest income. Fees from the management of trusts, estates
and customer investments totaled $2,516,000 in 2002, a decrease of $53,000, or
2.1%, from 2001. Trust and investment services fees in 2001 decreased 3.3% from
2000. In both 2002 and 2001 the decreases in income resulted from declines in
the equity markets, which reduced portfolio value-based management fees. The
trust division has addressed these external market decline impact with an
increased fee structure and continued account volume growth through new account
acquisition to partially offset the market-based income reductions. The Bank's
trust and investment services division managed assets with an approximate market
value of $297,630,000 at December 31, 2002, compared to $334,942,000 one year
prior.
12
Service charges on deposit accounts were $1,706,000 in 2002, an
increase of $321,000, or 23.2%, from 2001. Service charges during 2001 totaled
$1,385,000, which was a 24.3% increase from 2000. Changes in the fee structure
and additional accounts obtained contributed to the growth in income in 2002 and
2001. Service charge pricing on deposit accounts is typically changed annually
to reflect current costs and competition.
Other fees and commissions were $816,000 in 2002, $749,000 in 2001, and
$592,000 in 2000. Non-customer ATM fees, debit and credit card fees, safe
deposit box rent, brokerage investment commissions and insurance commissions
represent the majority of the income in this category. The increase in 2002
resulted primarily from additional earnings at ANB Investor Services,
improvements in safe deposit box rentals, and increases in interchange income
for visa check card transactions.
Mortgage banking income represents fees from originating and selling
residential mortgage loans through a wholly owned subsidiary of the Bank, which
began operations in December 1996. Mortgage banking income was $361,000 in 2002,
$365,000 in 2001 and $240,000 in 2000. While loan volume was higher in 2002
compared to 2001, the average yield per loan sold declined due to the
competitive nature of the local markets.
Securities gains of $39,000 in 2002 represented a sharp decline from the
$367,000 in net gains recorded in 2001. The gains in 2001 were primarily the
result of pre-maturity calls of U.S. Government Agency investment securities.
The Corporation strategically purchased a large volume of these securities in
2000 at a discount to their par value, and these discounts were then recognized
as gains at the pre-maturity call date.
Other income was $273,000 in 2002, an increase of 17.7% from the
$232,000 recorded in 2001, which in turn was an increase of 36.5% from $170,000
recorded in 2000. Check order income and dividends from equity investments in a
title agency account for the majority of other income.
Non-Interest Expense
Non-interest expense for 2002 was $14,285,000, a 4.9% increase from the
$13,614,000 reported in 2001, which in turn increased 5.3%, over $12,923,000 in
2000. Non-interest expense includes salaries, pension, health insurance and
other employee benefits, occupancy and equipment expense, core deposit
intangible amortization and other expenses.
Salaries of $6,520,000 in 2002 increased only $136,000, or 2.1%, over
2001 due primarily to a full year of staffing the new southern Henry County
office, merit increases, and declines in incentive compensation. Salaries of
$6,384,000 in 2001 increased $313,000, or 5.2%, over 2000 due to new branch
offices in South Boston and Martinsville, increased incentive compensation and
merit increases.
Pension and other employee benefits totaled $1,471,000 in 2002, an
increase of 5.8% from the $1,391,000 recorded in 2001, which in turn was an
increase of 20.5% from the $1,154,000 reported in 2000. The increases in both
years are due to increased premiums on medical insurance and higher pension
costs. While some of the increase is due to additional staffing, the majority of
the increases are due to the recent trend of health care insurance expenses
increasing at a much higher rate than overall inflation. Pension expense has
also been negatively impacted by a combination of lower interest rates and a
poorly performing equity market.
Occupancy and equipment expense of $2,460,000 for 2002 increased $144,000,
or 6.2%, over $2,316,000 recorded in 2001, which increased 6.0% from $2,184,000
recorded in 2000. The higher occupancy and equipment expense in 2002 resulted
from the new southern Henry County office that opened in March 2002 and from
higher depreciation, maintenance and licensing fees on new equipment and
software designed to improve product delivery and increase productivity.
Core deposit intangible expense of $450,000 represents the amortization
of the premium paid for deposits acquired at the Gretna office in 1995 and the
Yanceyville office in 1996. The core deposit intangible continues to be
amortized on a straight-line basis over a ten-year period based on management's
conclusion that the purchase did not constitute the acquisition of a business.
Other expense was $3,385,000 in 2002, an increase of 10.1% over the
$3,074,000 reported in 2001, which increased from $3,064,000 recorded in 2000.
The increase in 2002 was due to increases in ATM expense and telephone expense
related to the conversion to a new ATM services vendor and increases in
insurance, legal, audit, and internet banking related expenses. Some of the
increase is also attributable to the new southern Henry County retail office.
13
Management continued to focus on controlling overhead expenses in relation
to income growth. The efficiency ratio, a productivity measure used to determine
how well non-interest expense is managed, was 48.4%, 47.6%, and 48.1%, for 2002,
2001, and 2000, respectively. A lower efficiency ratio indicates more favorable
expense efficiency. Leaders in expense efficiency in the banking industry have
achieved ratios in the mid-to-high 40% range while the majority of the industry
remains in the 55-65% range. The efficiency ratio is calculated by dividing
non-interest expense by the sum of taxable equivalent net interest income and
non-interest income.
INCOME TAX PROVISION
Applicable income taxes on 2002 earnings amounted to $3,918,000, resulting
in an effective tax rate of 29.3% compared to $3,941,000, or 29.5% in 2001, and
$3,415,000, or 28.2% in 2000. In each year, the Corporation was subject to a
Federal tax rate of 34.2%. The major difference between the statutory rate and
the effective rate results from income that is not taxable for Federal income
tax purposes. The primary non-taxable income is that of state and municipal
securities and industrial revenue bonds or loans. The decrease in the effective
tax rate for 2002 as compared to 2001 was a result of the increase in earnings
from tax-exempt assets, such as loans to municipalities or investment
obligations of state and political subdivisions, as a percentage of total
income.
Financial Condition, Liquidity and Capital Resources
GENERAL
Total assets increased 5.8% to $605,859,000 at December 31, 2002 when
compared to assets of $572,887,000 at December 31, 2001. Asset growth has been
concentrated in the loan and the investment securities portfolio. Loans grew
8.3% to $406,403,000 at December 31, 2002, up from $375,340,000 at December 31,
2001. Loan growth has been concentrated in the commercial, commercial real
estate and equity line of credit sectors of the portfolio. The increase in
investment securities occurred in the available for sale portfolio and the
Corporation reduced lower yielding interest bearing deposits in other banks to
fund a portion of the loan and investment growth.
Total liabilities grew 5.4% to $535,124,000 at December 31, 2002 when
compared to $507,490,000 at December 31, 2001. Total deposits increased
$9,550,000 or 2.1% during 2002 and other borrowings including Federal Home Loan
Bank advances and repurchase agreements increased $17,978,000 or 44.7% during
the same period. $9,000,000 of the growth was related to borrowing fixed rate
advances from the Federal Home Loan Bank of Atlanta to directly offset the
purchase of mortgage-backed securities and the remainder of the growth was in
retail repurchase agreements. Retail repurchase agreements are used by
commercial accounts to earn interest on short-term funds and mature daily. While
total deposit growth was 2.1% for 2002, there was a shift to lower cost deposits
during the year. This change in deposit mix continued to lower the Corporation's
cost of funds on a linked quarter-basis and was a contributing factor in
improvements noted in the interest rate spread.
SECURITIES
The securities portfolio consists primarily of securities for which an
active market exists. The Bank's policy is to invest primarily in securities of
the U. S. Government and its agencies and in other high grade fixed income
securities to minimize credit risk. The securities portfolio plays a primary
role in the management of interest rate sensitivity and generates substantial
interest income. In addition, the portfolio serves as a source of liquidity and
is used to meet collateral requirements.
The securities portfolio consists of two components, securities held to
maturity and securities available for sale. Securities are classified as held to
maturity based on management's intent and the Corporation's ability, at the time
of purchase, to hold such securities to maturity. These securities are carried
at amortized cost. Securities which may be sold in response to changes in market
interest rates, changes in securities' prepayment risk, increases in loan
demand, general liquidity needs, and other similar factors are classified as
available for sale and are carried at estimated fair value.
At December 31, 2002 total securities at amortized cost were $163,824,000,
an increase of 4.5% from year-end 2001. Securities of U.S. government agencies
represented 36.7% of the securities portfolio book value, mortgage securities
issued by U.S. government corporations were 22.3%, obligations of state and
municipal subdivisions were 24.5%, and other investments were 16.6%.
As of December 31, 2002, there was a net unrealized gain of $3,912,000
related to the available for sale investment portfolio compared to $1,984,000 at
year-end 2001. The market value of securities held to maturity at December 31,
2002 was more than the book value by $1,441,000. Note 2 of the consolidated
financial statements provides details of the amortized cost, unrealized gains
14
and losses, and estimated fair value of each category of the investment
portfolio as of December 31, 2002 and 2001.
The state and municipal securities were diversified among many different
issues and localities. Table 5 details the Corporation's investment security
portfolio.
Table 5 - Investment Portfolio
This table presents information on the amortized cost, maturities and taxable equivalent yields of securities
at the end of the last 3 years (in thousands, except yields):
2002 2001 2000
------------------------- --------------------------- --------------------------
Taxable Taxable Taxable
Book Equivalent Book Equivalent Book Equivalent
Value Yield Value Yield Value Yield
---------- ---------- --------- ---------- ---------- ----------
Federal Agencies:
Within 1 year $ 1,000 2.55% $ - -% $ 20,514 7.08%
1 to 5 years 40,650 4.17 28,192 5.35 42,842 6.83
5 to 10 years 17,642 3.13 5,000 6.12 2,000 6.84
Over 10 years - - - - - -
---------- ------- --------- ------- ---------- -------
Total 59,292 3.83 33,192 5.47 65,356 6.91
---------- ------- --------- ------- ---------- -------
Mortgage-backed:
Within 1 year 1,144 6.48 1,881 6.87 3 7.08
1 to 5 years 281 6.62 4,141 6.72 8,095 6.77
5 to 10 years 14,429 4.81 6,175 6.19 2,080 6.62
Over 10 years 19,499 5.87 31,909 6.25 23,930 6.20
---------- ------- --------- ------- --------- -------
Total 35,353 5.46 44,106 6.31 34,108 6.36
---------- ------- --------- ------- --------- -------
State and Municipal:
Within 1 year 3,204 6.76 1,501 7.89 2,210 7.76
1 to 5 years 17,720 6.44 17,310 7.33 12,080 7.64
5 to 10 years 14,678 6.56 19,324 7.54 22,352 7.44
Over 10 years 3,677 6.97 531 7.79 2,246 7.39
---------- ------- --------- ------- --------- -------
Total 39,279 6.56 38,666 7.46 38,888 7.52
---------- ------- --------- ------- --------- -------
Other Securities:
Within 1 year 5,219 6.45 10,525 2.10 2,045 6.29
1 to 5 years 13,434 6.13 17,790 6.50 9,056 6.77
5 to 10 years - - 3,098 6.32 7,557 6.23
Over 10 years 7,335 5.17 7,430 5.51 5,430 6.36
---------- ------- --------- ------- --------- -------
Total 25,988 5.92 38,843 5.10 24,088 6.47
---------- ------- --------- ------- --------- -------
Total portfolio $ 159,912 5.20% $ 154,807 6.11% $ 162,440 6.87%
========== ======= ========= ======= ========= =======
Loan Portfolio
The Corporation's lending activities are its principal source of
income. Loans, net of unearned income increased $31,063,000 or 8.3% during 2002
and increased $35,584,000 or 10.5% from 2000 to 2001. The decline in the
percentage of loan growth in 2002 is attributable to general economic
conditions.
The primary increases in types of loans in 2002 were real estate loans
secured by non-farm, nonresidential properties and commercial and industrial
loans. Management considers the loan portfolio diversified and it consists of
32.0% in residential real estate loans, 30.6% in other real estate secured loans
including commercial real estate, multi-family, farmland and construction and
land development loans, 28.4% in commercial, industrial and agricultural loans,
and 7.9% in consumer loans as of December 31, 2002, as detailed in Table 6 and 7
(in thousands) classified by type.
The Corporation does not participate in highly leveraged lending
transactions, as defined by the bank regulators and there are no loans of this
nature recorded in the loan portfolio. The Corporation has no foreign loans in
its portfolio. At December 31, 2002, the Bank had no loan concentrations (loans
to borrowers engaged in similar activities) which exceeded 10% of total loans.
15
Table 6 - Loans
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Real estate loans:
Construction and land development $ 9,208 $ 10,282 $ 9,284 $ 7,317 $ 8,104
Secured by farmland 1,485 1,110 1,616 1,306 1,491
Secured by 1-4 family residential
properties 129,905 126,607 121,449 108,994 95,711
Secured by multi-family (5 or more)
residential properties 6,329 6,385 5,023 4,532 2,268
Secured by nonfarm, nonresidential
properties 107,263 88,648 67,312 54,170 44,251
Loans to farmers 1,844 1,452 1,625 2,468 2,293
Commercial and industrial loans 113,575 98,324 83,428 66,459 67,154
Consumer loans 32,008 36,077 44,389 45,235 46,337
Loans for nonrated industrial
development obligations 4,745 6,436 5,590 3,236 1,895
Deposit overdrafts 41 19 40 24 15
---------- ---------- ---------- ---------- ----------
Loans - net of unearned income $ 406,403 $ 375,340 $ 339,756 $ 293,741 $ 269,519
========== ========== ========== ========== ==========
Table 7 - Scheduled Loan Maturities
Commercial
and Real Estate
Agricultural Construction Total
------------ ------------ -----
Fixed Rate:
1 year of Less $ 2,307 $ - $ 2,307
1-5 years 9,542 1,510 11,052
After 5 years 2,517 104 2,621
-------- -------- --------
Total 14,366 1,614 15,980
-------- -------- --------
Variable Rate:
1 year of Less 84,675 6,974 91,649
1-5 years 19,620 620 20,240
After 5 years 1,503 - 1,503
-------- -------- --------
Total 105,798 7,594 113,392
-------- -------- --------
Total Loans and Leases (1) $120,164 $ 9,208 $129,372
======== ======== ========
(1) This table excludes:
Real Estate Mortgage Loans $244,982
Consumer Loans 32,008
Other Loans 41
--------
$277,031
========
16
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is to provide for losses inherent in the loan
portfolio. The Bank's Loan Committee has responsibility for determining the
level of the allowance for loan losses, subject to the review of the Board of
Directors. Among other factors, the Committee on a quarterly basis considers the
Corporation's historical loss experience, the size and composition of the loan
portfolio, the value and adequacy of collateral and guarantors, non-performing
credits including impaired loans and the Corporation's loan "Watch" list, and
national and local economic conditions.
The economy of the Corporation's trade area, which includes the City of
Danville, City of Martinsville, Town of South Boston, Pittsylvania, Henry and
Halifax Counties in Virginia, Town of Yanceyville and the northern half of
Caswell County in North Carolina, is heavily dependent on manufacturing. While
diversification has occurred in manufacturing in recent years, an apparel/home
fashions textile firm and a tire manufacturing plant in Danville employ a
significant workforce. Increased global competition has negatively impacted the
textile industry in the area with several plants closing due to competitive
pressures or due to relocation of some operations to foreign countries. Other
important industries include farming, tobacco processing and sales, food
processing, furniture manufacturing and sales, specialty glass manufacturing,
and packaging tape production. The local economy of the Corporation's trade area
continues to remain stable at this time and the Corporation's loan losses have
not been significant in recent years; however, an inherent risk to the loan
portfolio exists if significant declines continue in the manufacturing sector
along with a corresponding reduction in employment.
There are additional risks of future loan losses that cannot be precisely
quantified or attributed to particular loans or classes of loans. Since those
factors include general economic trends as well as conditions affecting
individual borrowers, the allowance for loan losses is an estimate. The sum of
these elements is the Loan Committee's recommended level of the allowance for
loan losses. The unallocated portion of the allowance is based on loss factors
that cannot be associated with specific loans or loan categories. These factors
include management's subjective evaluation of such conditions as credit quality
trends, collateral values, portfolio concentrations, specific industry
conditions in the regional economy, regulatory examination results, internal
audit and loan review findings, recent loss experiences in particular portfolio
segments, etc. The unallocated portion of the allowance for losses reflects
management's attempt to ensure that the overall reserve appropriately reflects a
margin for the imprecision necessarily inherent in estimates of credit losses.
The allowance is also subject to regulatory examinations and determination
as to adequacy, which may take into account such factors as the methodology used
to calculate the allowance and the size of the allowance in comparison to peer
banks identified by regulatory agencies.
In 2002, the Corporation accrued $873,000 in provision for loan losses
compared to $1,015,000 in 2001 and $1,020,000 in 2000. The provision for loan
losses in 2002 was influenced by an 8.3% increase in loans in 2002, the
composition of the loan growth, and by slightly higher net charge-offs. Over the
past several years, the Corporation has substantially increased its portfolio of
commercial loans. The risks associated with increasing the volume of commercial
and commercial real estate loans resulted in an increase in the provision for
loan losses for 2001 and 2000 when compared to years prior to 2000. While the
Corporation continues to increase its commercial loan portfolio, the portfolio
also continues to become "more seasoned", allowing management to better assess
the risk associated with the portfolio.
Loans charged off during 2002 amounted to $740,000 compared to $602,000 in
2001 and $567,000 in 2000. Recoveries amounted to $155,000, $175,000, and
$158,000 in 2002, 2001, and 2000, respectively. Net charge-offs increased to
$585,000 in 2002 from $427,000 in 2001 and $409,000 in 2000. The ratio of net
charge-offs to average outstanding loans was .15% in 2002, .12% in 2001, and
..13% in 2000. Management considers these charge-off ratios lower than those of
their peer banks, who generally consider charge-off levels of .10% to .40% to be
within reasonable norms from a historical perspective. Table 10 presents the
Corporation's loan loss and recovery experience (in thousands) for the past five
years.
The allowance for loan losses totaled $5,622,000 at December 31, 2002,
an increase of 5.4% over December 31, 2001. The ratio of the allowance to loans,
less unearned income, was 1.38% at December 31, 2002 and 1.42% at December 31,
2001. The decrease in the allowance to loans ratio is supported by the allowance
methodology listed above, the decline in the balance and aging of the indirect
consumer loan portfolio, and the overall condition of the Corporation's trade
areas. The reduction in the unallocated portion of the allowance is due to
improved measurement in the allowance methodology. Management believes that the
allowance for loan losses is adequate to absorb any inherent losses on existing
loans in the Corporation's loan portfolio at December 31, 2002.
17
Table 8 - Allocation of Allowance for Loan Losses
Management has allocated the allowance for loan losses to loan categories as follows (in thousands):
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Commercial (including
commercial real estate) $3,196 59% $2,005 55% $1,691 50% $1,190 46% $1,046 47%
Real estate-
residential 781 33 236 35 177 37 167 39 151 36
Consumer 1,247 8 1,276 10 1,304 13 1,503 15 1,525 17
Unallocated 398 - 1,817 - 1,574 - 1,275 - 1,099 -
Balance at
end of year $5,622 100% $5,334 100% $4,746 100% $4,135 100% $3,821 100%
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
Management's criteria for evaluating the adequacy of its allowance for loan losses includes individual evaluation of
significant loans and overall portfolio analyses for more homogeneous, smaller balance loan portfolios. Based on management's
evaluation, estimated loan loss allowances are assigned to the individual loans which present a greater risk of loan loss. The
remaining loan loss allowance is allocated to the remaining loans on an overall portfolio basis based on historical loss experience.
The assessed risk of loan loss is higher in the commercial and consumer loan categories as these categories contain loans which are
more significant to the Corporation and to the individual borrowers, thereby exposing the Corporation to a greater risk of loss in
the event of downturns in the financial position of individual borrowers. The remaining loan categories are typically for lesser
amounts and are distributed over a much larger population of borrowers, thereby reducing the Corporation's risk of loan loss.
Table 9 - Loan Loss Ratios
2002 2001 2000
------- -------- -------
Allowance as percentage of outstanding loans, net of unearned income 1.38% 1.42% 1.40%
Net charge-offs as percentage of allowance 10.41 8.00 8.60
Net charge-offs as percentage of average loans, net of unearned income .15 .12 .13
Provision as percentage of net charge-offs 149.23 237.72 250.00
Provision as percentage of average loans, net of unearned income .22 .28 .32
Allowance for loan losses to nonperforming loans 10.41X 6.46X 12.33X
18
Table 10 - Summary of Loan Loss Experience (in thousands)
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance at beginning of period $5,334 $4,746 $4,135 $3,821 $3,277
------ ------ ------ ------ ------
Charge-offs:
Commercial loans 343 141 141 34 68
Real estate loans 33 59 9 - -
Consumer loans 364 402 417 475 440
------ ------ ------ ------ ------
740 602 567 509 508
------ ------ ------ ------ ------
Recoveries:
Commercial loans 28 75 32 40 9
Real estate loans 3 3 1 - -
Consumer loans 124 97 125 113 116
------ ------ ------ ------ ------
155 175 158 153 125
------ ------ ------ ------ ------
Net charge-offs 585 427 409 356 383
Provision for loan losses 873 1,015 1,020 670 927
------ ------ ------ ------ ------
Balance at end of period $5,622 $5,334 $4,746 $4,135 $3,821
====== ====== ====== ====== ======
Percent of net charge-offs
to average net loans outstanding
during the period .15% .12% .13% .13% .15%
====== ======= ======= ====== ======
ASSET QUALITY AND NON-PERFORMING LOANS
The Corporation identifies specific credit exposures through its
periodic analysis of the loan portfolio and monitors general exposures from
economic trends, market values and other external factors. The Corporation
maintains an allowance for loan losses, which is available to absorb losses
inherent in the loan portfolio. The allowance is increased by the provision for
losses and by recoveries from losses. Charge-offs decrease the allowance. The
adequacy of the allowance for loan losses is determined on a quarterly basis.
Various factors as defined in the previous section "Allowance and Provision for
Loan Losses" are considered in determining the adequacy of the allowance.
Loans, other than consumer, are generally placed on non-accrual status
when any portion of principal or interest is 90 days past due or collectability
is uncertain. Unless loans are in the process of collection, income recognized
on consumer loans is discontinued and the loans are charged off after a
delinquency of 90 days. Under the Corporation's policy a non-accruing loan may
be restored to accrual status when none of its principal and interest is due and
unpaid and the Corporation expects repayment of the remaining contractual
principal and interest or when it otherwise becomes well secured and in the
process of collection.
Non-performing loans include loans on which interest is no longer accrued,
accruing loans that are contractually past due 90 days or more as to principal
and interest payments, and loans classified as troubled debt restructurings and
are detailed in Table 11. Loans in a non-accrual status at December 31, 2002
were $301,000 compared with $568,000 at December 31, 2001. Loans on accrual
status and past due 90 days or more at December 31, 2002 were $239,000 compared
with $258,000 at December 31, 2001. There were no loans classified as troubled
debt restructurings or potential problem loans on December 31, 2002 or December
31, 2001. Potential problem loans are defined as loans not disclosed above where
known information about possible credit problems of borrowers causes management
to have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.
The gross amount of interest income that would have been recorded on
non-accrual loans and restructured loans for the year ending December 31, 2002,
if all such loans had been accruing interest at the original contractual rate,
was $20,000. No interest payments were recorded as interest income during the
reporting period for all such non-performing loans.
Management has in place an aggressive program to control loan
delinquencies, and the level of past due loans and non-performing loans is
considered to be within an acceptable range. Total non-performing loans as a
percentage of net loans was .13% at December 31, 2002 and .22% at December 31,
2001. Total non-performing loans are considered low by industry standards.
Properties received due to loan foreclosures were $30,000 at December 31,
2002 and $117,000 at December 31, 2001.
19
Table 11 - Nonperforming Loans
Amounts are in thousands, except ratios
2002 2001 2000 1999 1998
------- -------- -------- -------- --------
Nonaccruing loans:
Real Estate $ 293 $ 414 $ 65 $ 107 $ 58
Commercial - 115 67 131 132
Agricultural 8 39 14 54 -
-------- -------- -------- -------- --------
Total nonaccruing loans 301 568 146 292 190
-------- -------- -------- -------- --------
Restructured loans:
Total restructured loans - - - - -
-------- -------- -------- -------- --------
Loans past due 90 days
and accruing interest:
Real Estate - - - 3 -
Consumer 205 217 176 232 239
Commercial 33 33 49 44 3
Agricultural 1 8 14 8 7
-------- -------- -------- -------- --------
Total past due loans 239 258 239 287 249
-------- -------- -------- -------- --------
Total nonperforming loans $ 540 $ 826 $ 385 $ 579 $ 439
======== ======== ======== ======== ========
Asset Quality Ratios:
Allowance for loan losses
to year-end net loans 1.38% 1.42% 1.40% 1.41% 1.42%
Nonperforming loans
to year-end net loans .13% .22% .11% .20% .16%
Allowance for loan losses
to nonperforming loans 10.41X 6.46X 12.33X 7.14X 8.70X
LIQUIDITY
Liquidity is the measure of the Corporation's ability to generate
sufficient funds to meet customer demands for loans and the withdrawal of
deposit balances. The Corporation, in its normal course of business, maintains
cash reserves and has an adequate flow of funds from loan payments and maturing
investment securities to meet present liquidity needs. Liquidity is provided
from cash and amounts due from banks, federal funds sold, interest-bearing
deposits in other banks, repayments from loans, increases in deposits, lines of
credit from the Federal Home Loan Bank and two correspondent banks, and maturing
investments. Management believes that these factors provide sufficient and
timely liquidity for the foreseeable future.
Management also takes into account any liquidity needs generated by
off-balance sheet transactions such as commitments to extend credit, commitments
to purchase securities and standby letters of credit.
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity strategies are implemented and monitored by the Bank's
Asset/Liability Investment Committee (ALCO). The Committee uses a simulation
model to assess the future liquidity needs of the Corporation and manage the
investment of funds.
The Bank has a line of credit equal to 15% of assets with the Federal Home
Loan Bank of Atlanta that equaled approximately $90,790,000 at December 31,
2002. Should the Bank ever desire to increase their line of credit beyond the
current 15% limit, the FHLB would allow borrowings of up to 40% of total assets
once the bank meets specific eligibility requirements. Borrowings outstanding
under this line of credit were $22,000,000 and $13,000,000 respectively, at
December 31, 2002 and December 31, 2001. Federal Home Loan Bank advances have
increased by $9,000,000 since December 31, 2001, due to borrowings that were
immediately offset with investment securities purchases.
20
The Bank has ten fixed rate term borrowing contracts outstanding as of
December 31, 2002, with the following final maturities:
Amount Expiration Date
---------- ---------------
$1,000,000 2003
$3,000,000 2004
$2,000,000 2005
$2,000,000 2006
$1,000,000 2007
$8,000,000 2008
$5,000,000 2009
The Bank also has federal funds lines of credit facilities established with
two other banks in the amounts of $12,000,000 and $5,000,000, as well as access
to the Federal Reserve Bank of Richmond's discount window should a liquidity
crisis occur. The Bank has not used the facilities in the past year and
considers these as backup sources of funds.
DEPOSITS
The Corporation's major source of funds and liquidity is its deposit
base. Table 12 presents the average balances of deposits and the average rates
paid on those deposits for the past 3 years (in thousands). Expansion of the
Corporation's earning assets is based largely on the growth of deposits from
individuals and small and medium size businesses. These deposits are more stable
in number and size than large denomination certificates of deposit. In addition,
the Corporation's customers have relatively stable requirements for funds.
The mix of the deposit base (time deposits versus demand, money market and
savings) is constantly subject to change. During 2002 the deposit mix changed
with the primary average balance increases in savings accounts of $7,281,000,
followed by an increase in non-interest bearing demand deposits of $5,356,000,
and an increase in interest-bearing demand deposits of $3,433,000. There was
little growth in the higher cost certificates of deposit and money market
accounts. The growth in transaction accounts was widespread in the industry, as
customers placed more of their funds into savings and demand deposit accounts
due to poorly performing equity markets and the historically low rate
environment. Certificates of deposit of $100,000 or more are detailed in Table
13.
Table 12 - Deposits
2002 2001 2000
-------------------- -------------------- --------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- -------- -------
Demand deposits -
non-interest bearing $ 58,075 -% $ 52,719 -% $ 49,126 -%
Demand deposits - interest bearing 59,852 .70 56,419 .88 56,141 1.84
Money market 42,369 1.83 41,225 3.20 24,861 3.48
Savings 70,073 1.50 62,792 1.87 63,739 2.62
Time 229,074 3.76 229,050 5.51 202,890 5.47
-------- ------- -------- ------- -------- -------
$459,443 2.36% $442,205 3.53% $396,757 3.70%
======== ======== ========
Table 13 - Certificates of Deposit
Certificates of deposit at the end of 2002 in amounts of $100,000 or more were
classified by maturity as follows (in thousands):
3 months or less $ 15,286
Over 3 through 6 months 10,184
Over 6 through 12 months 10,626
Over 12 months 23,981
--------
$ 60,077
========
21
OFF-BALANCE SHEET TRANSACTIONS
The Corporation enters into certain financial transactions in the ordinary
course of performing traditional banking services that result in off-balance
sheet transactions. The off-balance sheet transactions recognized as of December
31, 2002 were commitments to extent credit and standby letters of credit only.
The Corporation does not have any off-balance sheet subsidiaries or special
purpose entities.
Commitments to extend credit, which amounted to $107,771,000 at
December 31, 2002 and $121,062,000 at December 31, 2001, represent legally
binding agreements to lend to customers with fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire
without being funded, the total commitment amounts do not necessarily represent
future liquidity requirements.
There were no commitments to purchase securities when issued as of
December 31, 2002 or December 31, 2001.
Standby letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. At
December 31, 2002 and December 31, 2001, the Bank had $3,489,000 and $1,000,000
respectively, in outstanding standby letters of credit.
CAPITAL RESOURCES
The following table displays the changes in shareholders' equity, in
thousands, from December 31, 2001, to December 31, 2002:
Shareholders' Equity, December 31, 2001 $ 65,397
Net earnings 9,461
Exercise of stock options 61
Repurchase of common stock (1,049)
Cash dividends paid (4,117)
Net change in net unrealized losses on AFS securities 1,273
Net Change in Minimum Pension Liability (290)
---------
Shareholders' Equity, December 31, 2002 $ 70,736
=========
The assessment of capital adequacy depends on a number of factors such as
asset quality, liquidity, earnings performance, and changing competitive
conditions and economic forces. The adequacy of the Corporation's capital is
reviewed by management on an ongoing basis. Management seeks to maintain a
structure that will ensure an adequate level of capital to support anticipated
asset growth and absorb potential losses.
The Corporation's Board of Directors authorized the repurchase of up to
300,000 shares of the Corporation's common stock between August 16, 2000 and
August 15, 2001, 250,000 shares of the Corporation's common stock between August
29, 2001 and August 28, 2002, and 250,000 shares between August 21, 2002 and
August 19, 2003. During 2002, the Corporation repurchased 45,100 shares of its
common stock in the open market at an average per share price of $23.26. During
2001, the Corporation repurchased 254,366 shares of its common stock, in the
open market at an average per share price of $18.08. From the inception of the
stock repurchase plan through December 31, 2002, the Corporation has purchased
and retired 339,466 shares of its common stock.
Regulatory agencies issued risk-based capital guidelines to more
appropriately consider the credit risk inherent in the assets and off-balance
sheet activities of a financial institution in the assessment of capital
adequacy. Federal regulatory risk-based capital ratio guidelines require
percentages to be applied to various assets, including off-balance-sheet assets,
in relation to their perceived risk. Under the guidelines, total capital has
been defined as core (Tier I) capital and supplementary (Tier II) capital. The
Corporation's Tier I capital consists primarily of shareholder's equity, while
Tier II capital consists of the allowance for loan losses. The definition of
assets has been modified to include items on and off the balance sheet, with
each item being assigned a "risk-weight" for the determination of the ratio of
capital to risk-adjusted assets.
The guidelines require that total capital (Tier I plus Tier II) of 8%
be held against total risk-adjusted assets, at least half of which (4%) must be
Tier I capital. At December 31, 2002, the Corporation's Tier I and total capital
ratios were 14.41% and 15.49%, respectively. At December 31, 2001, these ratios
were 14.32% and 15.56%, respectively. The ratios for both years were well in
excess of the regulatory requirements.
As mandated by the Federal Deposit Insurance Corporation Act of 1991
("FDICIA"), the following five capital categories are identified for insured
depository institutions: "well capitalized", "adequately capitalized",
22
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". FDICIA requires the federal banking regulators to take prompt
corrective action with respect to insured depository institutions that do not
meet minimum capital requirements. Under the regulations, well capitalized
institutions must have Tier I risk-based capital ratios of at least 6%, total
risk-based capital ratios of at least 10% and leverage ratios of at least 5% and
not be subject to capital directive orders. Under these guidelines, the
Corporation and the Bank have always been and continue to be considered well
capitalized.
The Corporation's leverage ratios (Tier 1 capital divided by average
quarterly assets less intangible assets) were 11.00% and 10.96% at December 31,
2002 and 2001, respectively. The leverage ratio has a regulatory minimum of 3%,
with most institutions required to maintain a ratio one to two percent above the
3% minimum depending upon risk profiles and other factors.
The Board of Directors declared regular quarterly dividends totaling
$.71 and $.66 per share of common stock in 2002 and 2001, respectively. Cash
dividends totaled $4,117,000 and represented a 43.5% payout of 2002 net income,
compared to 41.7% in 2001. The Board of Directors reviews the Corporation's
dividend policy regularly and increases dividends when justified by earnings
after considering future capital needs.
Shareholders' equity was 11.7% of assets at December 31, 2002 and 11.4% at
December 31, 2001. Shareholders' equity was $70,736,000 at December 31, 2002 and
$65,397,000 at December 31, 2001.
The Corporation's stock began trading on the NASDAQ National Market on
April 23, 1999 after having been traded on the OTC Bulletin Board. The change to
NASDAQ was made to improve the marketability of the stock. The total market
value of American National Bankshares Inc. common stock at December 31, 2002, at
$26.00 per share (the last trade recorded on the NASDAQ National Market during
2002) was $150,301,000, compared to $108,871,000 at December 31, 2001 when the
stock was last traded at $18.70 per share. The market value of the Corporation's
common stock was 212 percent of its book value with book value per common share
at $12.24 on December 31, 2002.
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from most industrial companies
that have significant investments in fixed assets. Due to this fact, the effects
of inflation on the Corporation's balance sheet are minimal, meaning that there
are no substantial increases or decreases in net purchasing power over time. The
most significant effect of inflation is on other expenses that tend to rise
during periods of general inflation.
Management feels that the most significant impact on financial results
is changes in interest rates and the Corporation's ability to react to those
changes. As discussed previously, management is attempting to measure, monitor
and control interest rate risk.
CRITICAL ACCOUNTING POLICIES
The Corporation's critical accounting policies are listed below.
General
The Corporation's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. In addition, GAAP itself may change from one previously acceptable
method to another method. Although the economics of our transactions would be
the same, the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimable and (ii)
SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
23
Our allowance for loan losses has three basic components: the formula
allowance, the specific allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses a historical loss view as an
indicator of future losses along with various economic factors and, as a result,
could differ from the loss incurred in the future. However, since this history
is updated with the most recent loss information, the errors that might
otherwise occur are mitigated. The specific allowance uses various techniques to
arrive at an estimate of loss for specifically identified loans. Historical loss
information, expected cash flows and fair market value of collateral are used to
estimate these losses. The unallocated allowance captures losses whose impact on
the portfolio have occurred but have yet to be recognized in either the formula
or specific allowance. The use of these values is inherently subjective and our
actual losses could be greater or less than the estimates.
Core Deposit Intangibles
In July, 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which impacted the accounting for goodwill and
other intangible assets. Statement 141 eliminated the pooling method of
accounting for business combinations and required that intangible assets that
meet certain criteria be reported separately from goodwill. Statement 142
eliminated the amortization of goodwill and other intangibles that are
determined to have an indefinite life. The Statement requires, at a minimum,
annual impairment tests for goodwill and other intangible assets that are
determined to have an indefinite life. SFAS 142 allows certain intangibles
arising from Bank and Thrift acquisitions to be amortized over their estimated
useful lives.
The Financial Accounting Standards Board issued Statement No. 147,
Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9 in October 2002. FASB Statement No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method, provided interpretive guidance
on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
this Statement removes acquisitions of financial institutions from the scope of
both Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in
paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess
of the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions with the scope of this Statement. In addition,
this Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of this Statement, which relates to the application of the
purchase method of accounting, is effective for acquisitions for which the date
of acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
This Statement clarifies that a branch acquisition that meets the
definition of a business should be accounted for as a business combination,
otherwise the transaction should be accounted for as an acquisition of net
assets that does not result in the recognition of goodwill. The transition
provisions state that if the transaction that gave rise to the unidentifiable
intangible asset was a business combination, the carrying amount of that asset
shall be reclassified to goodwill as of the later of the date of acquisition or
the date Statement 142 was first applied (fiscal years beginning after December
15, 2001). Any previously issued interim statements that reflect amortization of
the unidentifiable intangible asset subsequent to the Statement 142 application
date shall be restated to remove that amortization expense. The carrying amounts
of any recognized intangible assets that meet the recognition criteria of
Statement 141 that have been included in the amount reported as an
unidentifiable intangible asset and for which separate accounting records have
been maintained shall be reclassified and accounted for as assets apart from the
unidentifiable intangible asset and shall not be reclassified to goodwill.
Upon adoption of these Statements, the Corporation re-evaluated its
intangible assets that arose from branch acquisitions prior to July 1, 2001. The
intangible assets arising from the premium paid for deposits acquired at the
Gretna office in 1995 and the Yanceyville office in 1996 are classified as core
deposit intangibles and continue to be amortized over their estimated lives
based on management's determination that a business was not acquired in either
of the two purchases.
24
Stock Based Compensation
The Corporation accounts for its stock compensation plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements made by or on behalf of the Corporation.
These forward-looking statements involve risks and uncertainties and are based
on the beliefs and assumptions of management of the Corporation and Bank and on
information available at the time these statements and disclosures were
prepared. Factors that may cause actual results to differ materially from those
expected include the following:
o General economic conditions may deteriorate and negatively impact the
ability of borrowers to repay loans and depositors to maintain
balances.
o Changes in interest rates could reduce net interest income.
o Competitive pressures among financial institutions may increase.
o Legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses that the Corporation
and Bank are engaged in.
o New products developed or new methods of delivering products could
result in a reduction in business and income for the Corporation and
Bank.
o Adverse changes may occur in the securities market.
ITEM 14 - CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Corporation
carried out an evaluation, under the supervision and with the participation of
the Corporation's management, including the Corporation's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Corporation's Chief Executive
Officer and Chief Financial Officer concluded that the Corporation's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Corporation (including its consolidated
subsidiaries) required to be included in periodic SEC filings. There have been
no significant changes in the Corporation's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
the Corporation carries out its evaluation.
25
Table 14 - Quarterly Financial Results
American National Bankshares Inc. and Subsidiary
(in thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2002
Interest income..........................................$ 8,654 $ 8,893 $ 8,787 $ 8,801
Interest expense......................................... 2,788 2,972 3,126 3,424
------- ------- ------- -------
Net interest income.................................... 5,866 5,921 5,661 5,377
Provision for loan losses................................ 240 214 236 183
------- ------- ------- -------
Net interest income after provision.................... 5,626 5,707 5,425 5,194
Non-interest income...................................... 1,438 1,434 1,445 1,395
Non-interest expense..................................... 3,548 3,660 3,579 3,498
------- ------- ------- -------
Income before income tax provision..................... 3,516 3,481 3,291 3,091
Income tax provision..................................... 1,050 1,020 956 892
------- ------- ------- -------
Net income.............................................$ 2,466 $ 2,461 $ 2,335 $ 2,199
======= ======= ======= =======
Per common share:
Net income (basic).....................................$ .43 $ .42 $ .40 $ .38
Net income (diluted)...................................$ .42 $ .42 $ .40 $ .38
Cash dividends.........................................$ .18 $ .18 $ .18 $ .17
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001
Interest income..........................................$ 9,390 $ 9,936 $10,191 $10,303
Interest expense......................................... 3,876 4,339 4,572 4,715
------- ------- ------- -------
Net interest income.................................... 5,514 5,597 5,619 5,588
Provision for loan losses................................ 228 252 273 262
------- ------- ------- -------
Net interest income after provision.................... 5,286 5,345 5,346 5,326
Non-interest income...................................... 1,349 1,308 1,568 1,443
Non-interest expense..................................... 3,272 3,434 3,450 3,458
------- ------- ------- -------
Income before income tax provision..................... 3,363 3,219 3,464 3,311
Income tax provision..................................... 1,007 928 1,014 993
------- ------- ------- -------
Net income.............................................$ 2,356 $ 2,291 $ 2,450 $ 2,318
======= ======= ======= =======
Per common share:
Net income (basic).....................................$ .40 $ .39 $ .41 $ .38
Net income (diluted)...................................$ .40 $ .39 $ .41 $ .38
Cash dividends.........................................$ .17 $ .17 $ .17 $ .15
26
MANAGEMENT'S REPORT ON
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following consolidated financial statements and related notes to
consolidated financial statements of American National Bankshares Inc. and
Subsidiary were prepared by Management which has the primary responsibility for
the integrity of the financial information. The statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and include amounts that are based on Management's best estimates
and judgment. Financial information elsewhere in this Annual Report is presented
on a basis consistent with that in the financial statements.
In meeting its responsibility for the fair presentation of the
financial statements, Management relies on the Corporation's comprehensive
system of internal accounting controls. This system provides reasonable
assurance that assets are safeguarded and transactions are recorded to permit
the preparation of appropriate financial information. The system of internal
controls is characterized by an effective control-oriented environment within
the Corporation which is augmented by written policies and procedures, internal
audits and the careful selection and training of qualified personnel.
The functioning of the accounting system and related internal
accounting controls is under the general oversight of the Audit and Compliance
Committee of the Board of Directors which is comprised of three outside
directors. The accounting system and related controls are reviewed by an
extensive program of internal audits. The Audit and Compliance Committee meets
regularly with the internal auditors to review their work and ensure that they
are properly discharging their responsibilities. In addition, the Committee
reviews and approves the scope and timing of the internal audits and any
findings with respect to the system of internal controls. The Audit and
Compliance Committee also meets periodically with representatives of Yount, Hyde
and Barbour, PC, the Corporation's independent public accountants, to discuss
the results of their audit as well as other audit and financial matters. Reports
of examinations conducted by the Office of the Comptroller of the Currency are
also reviewed by the committee members.
The responsibility of Yount, Hyde and Barbour, PC is limited to an
expression of their opinion as to the fairness of the financial statements
presented. Their opinion is based on an audit conducted in accordance with
generally accepted auditing standards as described in the second paragraph of
their report.
/s/Charles H. Majors
- -------------------------------------
Charles H. Majors
President and Chief Executive Officer
/s/Brad E. Schwartz
- -------------------------------------------
Brad E. Schwartz
Senior Vice President, Secretary, Treasurer
& Chief Financial Officer
January 21, 2003
27
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
American National Bankshares, Inc.
Danville, Virginia
We have audited the accompanying consolidated balance sheet of American National
Bankshares, Inc. as of December 31, 2002, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of American
National Bankshares, Inc. for the year ended December 31, 2001 were audited by
other auditors who have ceased operations and whose report, dated January 15,
2002, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
National Bankshares, Inc. as of December 31, 2002, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Yount, Hyde and Barbour, P.C.
/s/Yount, Hyde & Barbour, P.C.
- ------------------------------
Winchester, Virginia
February 7, 2003
28
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To American National Bankshares Inc.:
We have audited the accompanying consolidated balance sheets of
American National Bankshares Inc. (a Virginia corporation) and Subsidiary as of
December 31, 2001 and 2000, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American National Bankshares Inc. and Subsidiary as of December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
/s/Arthur Andersen LLP
- -----------------------
Raleigh, North Carolina
January 15, 2002
NOTE: This Report was not re-issued with the consent of Arthur Andersen, the
Company's independent auditor for the accompanying consolidated balance sheets
of American National Bankshares Inc. (a Virginia corporation) and Subsidiary as
of December 31, 2001, and the related consolidated statements of income, changes
in shareholders' equity and cash flows for each of the two years in the period
ended December 31, 2001. Arthur Andersen has ceased operations and was not
available to provide consent of re-issuance.
29
Consolidated Balance Sheets
December 31, 2002 and 2001
American National Bankshares Inc. and Subsidiary
- ---------------------------------------------------------------------------------------------------------------
2002 2001
------------- -------------
ASSETS
Cash and due from banks ........................................................$ 16,757,283 $ 14,797,926
Interest-bearing deposits in other banks........................................ 6,720,335 14,350,723
Securities available for sale, at fair value.................................... 137,046,119 127,316,666
Securities held to maturity (market value of $28,219,299
in 2002 and $30,154,043 in 2001).............................................. 26,777,747 29,474,139
------------- -------------
Total securities.............................................................. 163,823,866 156,790,805
------------- -------------
Loans held for sale............................................................. 1,285,020 253,021
Loans, net of unearned income .................................................. 406,403,107 375,339,939
Less allowance for loan losses................................................ (5,622,150) (5,334,456)
------------- -------------
Net loans..................................................................... 400,780,957 370,005,483
------------- -------------
Bank premises and equipment, at cost, less accumulated
depreciation of $10,673,195 in 2002 and $9,651,610 in 2001.................... 8,167,476 7,857,426
Core deposit intangibles........................................................ 1,383,870 1,833,686
Accrued interest receivable and other assets.................................... 6,940,494 6,998,086
------------- -------------
Total assets..................................................................$605,859,301 $572,887,156
============= =============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 69,102,211 $ 58,573,035
Demand deposits -- interest bearing........................................... 62,679,718 61,404,626
Money market deposits......................................................... 43,830,781 47,024,615
Savings deposits.............................................................. 73,410,623 65,650,939
Time deposits................................................................. 224,539,145 231,358,568
------------- -------------
Total deposits................................................................ 473,562,478 464,011,783
------------- -------------
Repurchase agreements........................................................... 36,155,251 27,176,758
FHLB Borrowings................................................................. 22,000,000 13,000,000
Accrued interest payable and other liabilities.................................. 3,405,913 3,301,342
------------- -------------
Total liabilities............................................................. 535,123,642 507,489,883
------------- -------------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
5,780,816 shares outstanding at December 31, 2002 and
5,821,956 shares outstanding at December 31, 2001........................... 5,780,816 5,821,956
Capital in excess of par value.................................................. 9,571,508 9,588,502
Retained earnings............................................................... 53,092,527 48,677,761
Accumulated other comprehensive income ......................................... 2,290,808 1,309,054
------------- -------------
Total shareholders' equity.................................................... 70,735,659 65,397,273
------------- -------------
Total liabilities and shareholders' equity....................................$605,859,301 $572,887,156
============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
30
Consolidated Statements of Income
For The Years Ended December 31, 2002, 2001 and 2000
American National Bankshares Inc. and Subsidiary
- -------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------ ------------ -------------
Interest Income:
Interest and fees on loans......................................$ 27,149,521 $ 30,216,549 $ 28,300,030
Interest on deposits in other banks............................. 248,270 385,019 179,215
Income on investment securities:
U S Government................................................ - - 167,977
Federal agencies.............................................. 1,941,974 2,709,097 4,231,105
Mortgage-backed............................................... 2,351,830 2,723,146 2,319,166
State and municipal .......................................... 1,887,506 1,916,297 1,944,604
Other investments............................................. 1,555,947 1,869,711 1,464,462
------------ ------------ -------------
Total interest income......................................... 35,135,048 39,819,819 38,606,559
------------ ------------ -------------
Interest Expense:
Interest on deposits:
Demand........................................................ 416,924 494,930 1,034,845
Money market.................................................. 775,051 1,318,002 865,024
Savings....................................................... 1,048,564 1,176,704 1,671,108
Time.......................................................... 8,606,409 12,617,362 11,094,637
Interest on repurchase agreements............................... 634,996 1,087,823 1,362,104
Interest on other borrowings.................................... 827,800 806,869 1,315,507
------------ ------------ -------------
Total interest expense........................................ 12,309,744 17,501,690 17,343,225
------------ ------------ -------------
Net Interest Income............................................. 22,825,304 22,318,129 21,263,334
Provision for Loan Losses....................................... 873,000 1,015,000 1,020,000
------------ ------------ -------------
Net Interest Income After Provision
For Loan Losses............................................... 21,952,304 21,303,129 20,243,334
------------ ------------ -------------
Non-Interest Income:
Trust and investment services................................. 2,515,937 2,569,125 2,657,802
Service charges on deposit accounts........................... 1,706,137 1,385,339 1,113,548
Other fees and commissions.................................... 816,360 749,072 591,724
Mortgage banking income....................................... 360,669 365,349 240,390
Securities gains (losses), net................................ 39,334 367,035 (1,751)
Other income.................................................. 273,281 231,998 169,747
------------ ------------ -------------
Total non-interest income..................................... 5,711,718 5,667,918 4,771,460
------------ ------------ -------------
Non-Interest Expense:
Salaries...................................................... 6,519,552 6,383,811 6,071,352
Pension and other employee benefits........................... 1,470,682 1,390,591 1,154,352
Occupancy and equipment ...................................... 2,459,647 2,316,282 2,184,099
Core deposit intangible amortization.......................... 449,816 449,816 449,816
Other ........................................................ 3,384,839 3,073,702 3,063,880
------------ ------------ -------------
Total non-interest expense.................................... 14,284,536 13,614,202 12,923,499
------------ ------------ -------------
Income Before Income Tax Provision.............................. 13,379,486 13,356,845 12,091,295
Income Tax Provision............................................ 3,918,191 3,941,474 3,414,930
------------ ------------ -------------
Net Income......................................................$ 9,461,295 $ 9,415,371 $ 8,676,365
============ ============ =============
Net Income Per Common Share:
Basic.........................................................$ 1.63 $ 1.58 $ 1.42
Diluted.......................................................$ 1.62 $ 1.58 $ 1.42
Average Common Shares Outstanding:
Basic......................................................... 5,800,302 5,949,811 6,096,037
Diluted....................................................... 5,850,349 5,973,153 6,101,415
The accompanying notes to consolidated financial statements are an integral part of these statements.
31
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2002, 2001 and 2000
American National Bankshares Inc. and Subsidiary
Accumulated
Common Stock Capital in Other Total
------------------------- Excess of Retained Comprehensive Shareholders'
Shares Amount Par Value Earnings Income (Loss) Equity
----------- ------------ ------------ ------------- -------------- -------------
Balance, December 31, 1999...................... 6,103,701 $ 6,103,701 $ 9,895,359 $ 42,466,592 $ (1,747,102) $ 56,718,550
Net income...................................... - - - 8,676,365 - 8,676,365
Change in unrealized gains on securities
available for sale, net of tax of $1,066,477.. - - - - 2,070,219 2,070,219
-------------
Comprehensive income.......................... 10,746,584
Stock repurchased and retired................... (40,000) (40,000) (64,854) (459,334) - (564,188)
Stock options exercised......................... 71 71 923 - - 994
Cash dividends declared and paid................ - - - (3,563,657) - (3,563,657)
----------- ------------ ------------ ------------- -------------- -------------
Balance, December 31, 2000...................... 6,063,772 6,063,772 9,831,428 47,119,966 323,117 63,338,283
Net income...................................... - - - 9,415,371 - 9,415,371
Change in unrealized gains on securities
available for sale, net of tax of $507,906.... - - - - 985,937 985,937
-------------
Comprehensive income.......................... 10,401,308
Stock repurchased and retired................... (254,366) (254,366) (412,413) (3,933,272) - (4,600,051)
Stock options exercised......................... 12,550 12,550 169,487 - - 182,037
Cash dividends declared and paid................ - - - (3,924,304) - (3,924,304)
----------- ------------ ------------ ------------- -------------- -------------
Balance, December 31, 2001...................... 5,821,956 5,821,956 9,588,502 48,677,761 1,309,054 65,397,273
Net income...................................... - - - 9,461,295 - 9,461,295
Other comprehensive income, net of tax:
Change in unrealized gains on securities
available for sale, net of tax of $655,634.... - - - - 1,272,701
Minimum pension liability adjustment,
net of tax of $149,882........................ (290,947)
--------------
Other comprehensive income.................... 981,754 981,754
-------------
Comprehensive income.......................... 10,443,049
Stock repurchased and retired................... (45,100) (45,100) (74,278) (929,432) - (1,048,810)
Stock options exercised......................... 3,960 3,960 57,284 - - 61,244
Cash dividends declared and paid................ - - - (4,117,097) - (4,117,097)
----------- ------------ ------------ ------------- -------------- -------------
Balance, December 31, 2002..................... 5,780,816 $ 5,780,816 $ 9,571,508 $ 53,092,527 $ 2,290,808 $ 70,735,659
=========== ============ ============= ============= ============== =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
32
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
American National Bankshares Inc. and Subsidiary
2002 2001 2000
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income....................................................................$ 9,461,295 $ 9,415,371 $ 8,676,365
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses..................................................... 873,000 1,015,000 1,020,000
Depreciation.................................................................. 1,143,865 1,171,113 1,116,688
Core deposit intangible amortization.......................................... 449,816 449,816 449,816
Amortization (accretion) of bond premiums and discounts....................... 295,169 74,916 (49,789)
(Gain) loss on sale or call of securities..................................... (39,334) (367,035) 1,751
Gain on loans held for sale................................................... (360,669) (365,349) (240,390)
Proceeds from sales of loans held for sale.................................... 17,764,033 17,523,936 11,944,756
Originations of loans held for sale........................................... (18,435,363) (17,012,797) (11,883,665)
Loss (gain) on sale of premises and equipment................................. 15,618 (2,000) -
Loss on sale of real estate owned............................................. 1,192 19,950 -
Deferred income taxes provision (benefit)..................................... 48,656 (356,927) (415,002)
(Increase) decrease in interest receivable.................................... (65,834) 863,391 (529,596)
(Increase) in other assets.................................................... (518,118) 87,036 (697,250)
(Decrease) increase in interest payable....................................... (359,459) (312,404) 284,949
Increase (decrease) in other liabilities...................................... 23,201 (118,873) 287,868
------------- ------------- -------------
Net cash provided by operating activities..................................... 10,297,068 12,085,144 9,966,501
------------- ------------- -------------
Cash Flows from Investing Activities:
Proceeds from maturities and calls of securities available for sale........... 54,414,161 62,114,339 11,986,520
Proceeds from sales of securities available for sale.......................... 1,052,500 - -
Proceeds from maturities and calls of securities held to maturity............. 6,196,585 13,644,822 2,274,760
Purchases of securities available for sale.................................... (63,531,500) (67,267,483) (7,504,500)
Purchases of securities held to maturity...................................... (3,492,307) (567,376) (229,097)
Net increase in loans......................................................... (31,812,761) (36,496,485) (46,244,733)
Purchases of bank premises and equipment...................................... (1,469,533) (1,158,129) (933,548)
Proceeds from sales of other real estate owned................................ 261,126 195,050 -
Purchases of other real estate owned.......................................... (10,895) - (215,000)
------------- ------------- -------------
Net cash used in investing activities......................................... (38,392,624) (29,535,262) (40,865,598)
------------- ------------- -------------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits........................................................ 16,370,118 25,818,018 16,645,617
Net (decrease) increase in time deposits...................................... (6,819,423) 11,605,446 24,384,583
Net increase (decrease) in repurchase agreements.............................. 8,978,493 (4,552,842) 6,775,267
Net increase (decrease) in FHLB borrowings.................................... 9,000,000 (3,000,000) (5,000,000)
Cash dividends paid........................................................... (4,117,097) (3,924,304) (3,563,657)
Repurchase of stock........................................................... (1,048,810) (4,600,051) (564,188)
Proceeds from exercise of stock options....................................... 61,244 182,037 994
------------- ------------- -------------
Net cash provided by financing activities..................................... 22,424,525 21,528,304 38,678,616
-------------- ------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents.......................... (5,671,031) 4,078,186 7,779,519
Cash and Cash Equivalents at Beginning of Period.............................. 29,148,649 25,070,463 17,290,944
------------- ------------- -------------
Cash and Cash Equivalents at End of Period....................................$ 23,477,618 $ 29,148,649 $ 25,070,463
============= ============= =============
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 16,757,283 $ 14,797,926 $ 16,392,313
Interest-bearing deposits in other banks.................................... 6,720,335 14,350,723 8,678,150
------------- ------------- -------------
$ 23,477,618 $ 29,148,649 $ 25,070,463
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 12,669,203 $ 17,814,094 $ 17,058,276
Income taxes paid.............................................................$ 4,012,453 $ 4,363,234 $ 3,788,800
Transfer of loans to other real estate owned..................................$ 164,287 $ 87,136 $ -
The accompanying notes to consolidated financial statements are an integral part of these statements.
33
American National Bankshares Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
1. Summary of Significant Accounting Policies:
Nature of Operations and Consolidation
The consolidated financial statements include the amounts and results of
operations of American National Bankshares Inc. ("the Corporation") and its
wholly owned subsidiary, American National Bank and Trust Company ("the Bank").
The Bank offers a wide variety of retail, commercial and trust banking services
through its offices located in the trade area of the Cities of Danville and
Martinsville, the Counties of Pittsylvania, Henry, and Halifax in Virginia and
the County of Caswell in North Carolina. ANB Mortgage Corp., a wholly owned
subsidiary of the Bank, offers secondary market mortgage lending. ANB Services
Corp., another wholly owned subsidiary of the Bank, was formed in October 1999
to offer non-deposit products such as mutual funds and insurance products. All
significant inter-company transactions and accounts are eliminated in
consolidation.
Cash and Cash Equivalents
Cash includes cash on hand and cash with correspondent banks. Cash
equivalents are short-term, highly liquid investments that are readily
convertible to cash with original maturities of three months or less and that
are subject to an insignificant risk of change in value. Cash and cash
equivalents are carried at cost.
Securities
The Corporation classifies securities as either held to maturity or
available for sale.
Debt securities acquired that management has both the positive intent
and ability to be held to maturity are classified as held to maturity and
recorded at amortized cost.
Securities which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities available for sale are reported at estimated fair value,
with unrealized gains and losses excluded from earnings and reported in other
comprehensive income, net of tax. Gains or losses realized from the sale of
securities available for sale are recorded on the trade date and are determined
by using the specific identification method Declines in the fair value of held
to maturity and available for sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses.
The Corporation does not permit the purchase or sale of trading account
securities. Premiums and discounts on securities are recognized in interest
income using the interest method over the terms of the securities.
Loans Held for Sale
Loans originated by ANB Mortgage Corp. are designated as held for sale
at the time of their origination. These loans are pre-sold with servicing
released and the Bank does not retain any interest or obligation after the loans
are sold. These loans consist primarily of fixed-rate, single-family residential
mortgage loans which meet the underwriting characteristics of certain
government-sponsored enterprises (conforming loans). In addition, the Bank
requires a firm purchase commitment from a permanent investor before a loan can
be committed, thus limiting interest rate risk. Loans held for sale are carried
at the lower of aggregate cost or fair value. Gains on sales of loans are
recognized at the loan closing date and are included in non-interest income for
the period.
Loans
The Corporation grants mortgage, commercial and consumer loans to
customers. A substantial portion of the loan portfolio is represented by real
estate loans. The ability of the Corporation's debtors to honor their contracts
is dependent upon the real estate and general economic conditions in the
Corporation's market area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balances adjusted for the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest income is
accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized as an adjustment of the
related loan yield using the interest method.
34
The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Installment loans are typically charged off no later than
90 days past due. In all cases, loans are placed on nonaccrual or charged-off at
an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged-off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
The allowance for loan losses has three basic components: the formula allowance,
the specific allowance and the unallocated allowance. Each of these components
is determined based upon estimates that can and do change when the actual events
occur. The formula allowance uses a historical loss view as an indicator of
future losses along with various economic factors and, as a result, could differ
from the loss incurred in the future. The specific allowance uses various
techniques to arrive at an estimate of loss for specifically identified impaired
loans. The unallocated allowance captures losses whose impact on the portfolio
have occurred but have yet to be recognized in either the formula or specific
allowance. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available and actual losses could be greater or less than the estimates.
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for impairment disclosures.
Bank Premises and Equipment
Additions and major replacements are added to bank premises and
equipment at cost. Maintenance and repair costs are charged to expense when
incurred. Premises and equipment are depreciated using the straight-line method
over their estimated lives generally as follows: buildings, 10 to 50 years;
leasehold improvements, 5 to 15 years; and furniture and equipment, 3 to 10
years.
Intangible Assets
Premiums paid on acquisitions of deposits (core deposit intangibles)
are shown in the "Consolidated Balance Sheets". Such assets are being amortized
on a straight-line basis over 10 years. At December 31, 2002, the Bank had
$1,384,000 recorded as core deposit intangibles, net of amortization. The Bank
recorded core deposit intangible amortization of approximately $450,000 for each
of the three years ended December 31, 2002. Core deposit intangibles are
periodically reviewed for impairment. As of December 31, 2002, no impairment had
been identified. In October 2002, the Financial Accounting Standards Board
issued Statement No. 147, Acquisitions of Certain Financial Institutions. After
reviewing this statement, the Corporation decided to continue amortization of
the core deposit intangible assets related to two previous branch office
acquisitions.
35
Foreclosed Properties
Foreclosed properties are included in other assets and represent other
real estate that has been acquired through loan foreclosures or deeds received
in lieu of loan payments. Generally, such properties are appraised at the time
booked, and they are recorded at the lower of cost or fair value less estimated
selling costs. When appropriate, adjustments to cost are charged or credited to
the allowance for foreclosed properties.
Income Taxes
The Corporation uses the balance sheet method to account for deferred
income tax assets and liabilities. Under this method, the net deferred tax asset
or liability is determined based on the tax effects of the temporary differences
between the book and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws.
Defined Benefit Plan
The Corporation has a pension plan for its employees. Benefits are
generally based upon years of service and the employees' compensation. The
Corporation's funding policy is to make the maximum contribution permitted by
the Employee Retirement Income Security Act.
Stock Option Plan
At December 31, 2002, the Corporation had a stock option plan, which is
described more fully in Note 7. The Corporation accounts for those plans under
the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Corporation had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based compensation (in thousands):
2002 2001 2000
-------- -------- --------
Net income, as reported $9,461 $9,415 $8,676
Deduct: total stock-based compensation
expense determined under fair value
based method for all awards (169) (160) (37)
------- ------- -------
Pro forma net income $9,292 $9,255 $8,639
======= ======= =======
Earnings per share:
Basic, as reported $ 1.63 $ 1.58 $ 1.42
Basic, pro forma $ 1.60 $ 1.56 $ 1.38
Diluted, as reported $ 1.62 $ 1.58 $ 1.42
Diluted, pro forma $ 1.59 $ 1.55 $ 1.38
Earnings Per Share
Basic earnings per share represents income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Corporation relate solely to
outstanding stock options, and are determined using the treasury method.
Shareholders' Equity
During 2002, the Corporation repurchased 45,100 shares of its common stock,
in the open market at prices between $19.55 and $26.05 per share. During 2001,
the Corporation repurchased 254,366 shares of its common stock, in the open
market at prices between $14.63 and $19.00 per share. From the inception of the
stock repurchase plan through December 31, 2002, the Corporation has purchased
and retired 339,466 shares of its common stock.
Comprehensive Income
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on available for
sale securities and minimum pension liability adjustments, are reported as a
separate component of the equity section of the balance sheet, such items, along
with net income, are components of comprehensive income.
36
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses and the valuation of foreclosed real estate.
Reclassifications
Certain reclassifications have been made in prior years' financial
statements to conform to classifications used in the current year.
New Accounting Pronouncements.
In December 2001, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 01-6, Accounting by Certain
Entities (Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others, to reconcile and conform the accounting and financial
reporting provisions established by various AICPA industry audit guides. This
Statement is effective for annual and interim financial statements issued for
fiscal years beginning after December 15, 2001, and did not have a material
impact on the Corporation's consolidated financial statements.
On March 13, 2002, the Financial Accounting Standard Board determined
that commitments for the origination of mortgage loans that will be held for
sale must be accounted for as derivatives instruments, effective for fiscal
quarters beginning after April 10, 2002. The Bank enters into commitments to
originate loans whereby the interest rate on the loan is determined prior to
funding. Such rate lock commitments on mortgage loans to be sold in the
secondary market are considered derivatives. Accordingly, these commitments
including any fees received from the potential borrower are recorded at fair
value in derivative assets or liabilities, with changes in fair value recorded
in the net gain or loss on sale of mortgage loans. Fair value is based on fees
currently charged to enter into similar agreements, and for fixed-rate
commitments also considers the difference between current levels of interest
rates and the committed rates. The cumulative effect of adopting Statement No.
133 for rate lock commitments as of December 31, 2002, was not material. The
Corporation originally adopted Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities on January 1, 2001.
In June 2002, the Financial Accounting Standards Board issued Statement
146, Accounting for Costs Associated with Exit or Disposal Activities. This
Statement requires recognition of a liability, when incurred, for costs
associated with an exit or disposal activity. The liability should be measured
at fair value. The provisions of the Statement are effective for exit or
disposal activities initiated after December 31, 2002.
Effective January 1, 2002, the Corporation adopted Financial Accounting
Standards Board Statement No. 142, Goodwill and Other Intangible Assets.
Accordingly, goodwill is no longer subject to amortization over its estimated
useful life, but is subject to at least an annual assessment for impairment by
applying a fair value based test. Additionally, Statement 142 requires that
acquired intangible assets (such as core deposit intangibles) be separately
recognized if the benefit of the asset can be sold, transferred, licensed,
rented, or exchanged, and amortized over their estimated useful life. Branch
acquisition transactions were outside the scope of the Statement and therefore
any intangible asset arising from such transactions remained subject to
amortization over their estimated useful life.
In October 2002, the Financial Accounting Standards Board issued
Statement No. 147, Acquisitions of Certain Financial Institutions. The Statement
amends previous interpretive guidance on the application of the purchase method
of accounting to acquisitions of financial institutions, and requires the
application of Statement No. 141, Business Combinations, and Statement No. 142
to branch acquisitions if such transactions meet the definition of a business
combination. The provisions of the Statement do not apply to transactions
between two or more mutual enterprises. In addition, the Statement amends
Statement No. 144, Accounting for the Impairment of Long-Lived Assets, to
include in its scope core deposit intangibles of financial institutions.
Accordingly, such intangibles are subject to a recoverability test based on
undiscounted cash flows, and to the impairment recognition and measurement
provisions required for other long-lived assets held and used.
The adoption of Statement No., 142, and 147 did not have a material impact
on the Corporation's consolidated financial statements.
The Financial Accounting Standards Board issued Statement No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of Statement No. 123, in December 2002. The Statement amends Statement
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, the Statement amends the disclosure requirements of Statement 123
37
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Finally, this Statement amends
APB Opinion No. 28, Interim Financial Reporting, to require disclosure about the
effects of stock options in interim financial information. The amendments to
Statement No. 123 are effective for financial statements for fiscal years ending
after December 15, 2002. The amendments to APB No. 28 are effective for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002
The Corporation continues to record stock options under APB Opinion No.
25, Accounting for Stock Issued to Employees, and has not adopted the
alternative methods allowable under Statement No. 148.
2. Securities:
The amortized cost and estimated fair value of investments in debt and
equity securities at December 31, 2002 and 2001 were as follows (in thousands):
2002
---------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Securities held to maturity:
Federal agencies $ 1,996 $ 173 $ - $ 2,169
Mortgage-backed 4,126 144 - 4,270
State and municipal 20,656 1,124 - 21,780
--------- ------- ----- ----------
Total securities held to maturity 26,778 1,441 - 28,219
--------- ------- ----- ----------
Securities available for sale:
Federal agencies 57,296 900 2 58,194
Mortgage-backed 31,227 1,235 - 32,462
State and municipal 18,623 908 - 19,531
Corporate bonds 18,671 947 9 19,609
Restricted stock:
FHLBA stock 2,029 - - 2,039
Federal Reserve stock 363 - - 363
Other securities 4,925 - 67 4,858
--------- ------- ----- ----------
Total securities available for sale 133,134 3,990 78 137,046
--------- ------- ----- ----------
Total securities $ 159,912 $ 5,431 $ 78 $ 165,265
========= ======= ===== ==========
2001
---------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Securities held to maturity:
Federal agencies $ 1,994 $ 119 $ - $ 2,113
Mortgage-backed 7,167 122 - 7,289
State and municipal 20,313 467 28 20,752
--------- ------- ----- ----------
Total securities held to maturity 29,474 708 28 30,154
--------- ------- ----- ----------
Securities available for sale:
Federal agencies 31,198 496 190 31,504
Mortgage-backed 36,939 638 - 37,577
State and municipal 18,353 543 1 18,895
Corporate bonds 31,413 633 15 32,031
Restricted stock:
FHLBA stock 2,139 - - 2,139
Federal Reserve stock 363 - - 363
Other securities 4,928 - 120 4,808
--------- ------- ----- ----------
Total securities available for sale 125,333 2,310 326 127,317
--------- ------- ----- ----------
Total securities $ 154,807 $ 3,018 $ 354 $ 157,471
========= ======= ===== ==========
38
The amortized cost and estimated fair value of investments in
securities at December 31, 2002, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Because mortgage-backed securities have both known
principal repayment terms as well as unknown principal repayments due to
potential borrower pre-payments, it is difficult to accurately predict the final
maturity of these investments. The majority of mortgage-backed securities held
have a stated final maturity of greater than ten years and these investments are
listed separately below.
Held to Maturity Available for Sale
------------------------------ -----------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------- ---------- --------- ----------
Due in one year or less $ 400 $ 408 $ 9,022 $ 9,182
Due after one year
through five years 8,912 9,514 62,893 65,098
Due after five years
through ten years 9,663 10,185 22,657 23,036
Due after ten years 3,677 3,842 18 18
Mortgage-backed Securities 4,126 4,270 31,227 32,462
No stated maturity - - 7,317 7,250
-------- -------- --------- ---------
$ 26,778 $ 28,219 $ 133,134 $ 137,046
======== ======== ========= =========
Gross realized gains and losses from the call of all securities or the
sale of securities available for sale for the years ended December 31, 2002 and
2001 are as follows:
2002 2001
---- ----
Realized gains $ 39 $ 368
Realized (losses) $ - $ 1
Proceeds from the maturities, payments, and calls of securities held to
maturity were $6,197,000 and $13,645,000 in 2002 and 2001. Proceeds from the
maturities, payments, calls, and sales of securities available for sale were
$55,467,000 and $62,114,000 in 2002 and 2001. Gains from the call of securities
prior to maturity were $36,000 and gains from the sale of securities available
for sale were $3,000 in 2002. All gains and losses in 2001 were from the call of
securities prior to maturity.
Securities with a book value of approximately $57,525,000 and
$57,320,000 at December 31, 2002 and 2001 were pledged to secure public
deposits, repurchase agreements and for other purposes as required by law.
Corporate bonds consist of high quality debt securities, primarily issued
in the financial services industry.
3. Loans:
Outstanding loans, excluding loans held for sale, at December 31, 2002
and 2001 were composed of the following (in thousands):
2002 2001
----------- -----------
Real Estate loans
Construction and land development $ 9,208 $ 10,282
Secured by farmland 1,485 1,110
Secured by 1 - 4 family residential properties 129,905 126,607
Secured by multi-family (5 or more) residential properties 6,329 6,385
Secured by nonfarm, nonresidential properties 107,263 88,648
Loans to farmers 1,844 1,452
Commercial and industrial loans 113,575 98,324
Consumer loans 32,008 36,077
Loans for nonrated industrial development obligations 4,745 6,436
Deposit overdrafts 41 19
----------- -----------
Loans, net of unearned income $ 406,403 $ 375,340
=========== ===========
39
Certain loans are impaired under FASB Statement No. 114 when, based on
current information and events, it is likely that an institution will be unable
to collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the original loan agreement. No additional funds are
committed to be advanced in connection with impaired loans.
The following is a summary of information pertaining to impaired loans (in
thousands):
2002 2001
--------- ---------
Impaired loans for which an allowance
has been provided $ - $ -
Impaired loans for which no allowance
has been provided 54 178
--------- ---------
Total impaired loans $ 54 $ 178
========= =========
Allowance provided for impaired loans,
included in the allowance for loan losses $ - $ -
========= =========
2002 2001 2000
---- ---- ----
Average balance in impaired loans $158 $160 $135
==== ==== ====
Interest income recognized $ - $ - $ -
==== ==== ====
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $247,000, $453,000 and $79,000 at December 31, 2002, 2001 and 2000,
respectively. If interest on impaired and nonaccrual loans had been accrued,
such income would have approximated $20,000, $33,000 and $15,000 for 2002, 2001
and 2000, respectively.
Loans past due 90 days and still accruing interest amounted to $239,000,
$258,000, and $239,000 as of December 31, 2002, 2001 and 2000 , respectively.
Properties received due to loan foreclosures were $30,000 at December 31,
2002 and $117,000 at December 31, 2001 and are recorded as other assets on the
Consolidated Balance Sheets.
The loan portfolio is concentrated primarily in the immediate
geographic region. There were no concentrations of loans to any individual,
group of individuals, businesses or industry that exceeded 10% of the
outstanding loans at December 31, 2002.
An analysis of the allowance for loan losses is as follows (in
thousands):
2002 2001 2000
------- ------- -------
Balance, beginning of year $5,334 $4,746 $4,135
Provision for loan losses charged to expense 873 1,015 1,020
Charge-offs (740) (602) (567)
Recoveries 155 175 158
------- ------- ------
Balance, end of year $5,622 $5,334 $4,746
======= ======= =======
4. Premises and Equipment:
Major classifications of premises and equipment are summarized as follows
(in thousands):
As of December 31
------------------------
2002 2001
--------- ---------
Land $ 1,604 $ 1,583
Buildings 7,375 7,213
Leasehold Improvements 865 537
Equipment 8,996 8,176
--------- ---------
18,840 17,509
Less Accumulated Depreciation (10,673) (9,652)
--------- ---------
Total Premises and Equipment, net of accumulated depreciation $ 8,167 $ 7,857
========= =========
40
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
amounted to $1,144,000, $1,171,000 and $1,117,000, respectively.
5. Deposits:
The aggregate amount of time deposits in denominations of $100,000 or
more at December 31, 2002 and 2001 was $60,077,000 and $63,436,000,
respectively.
At December 31, 2002, the scheduled maturities of CDs are as follows (in
thousands):
2003 $142,761
2004 51,622
2005 13,968
2006 11,819
2007 4,247
Thereafter 122
--------
$224,539
6. Borrowings:
Repurchase agreements of $36,155,000 and $27,177,000 were outstanding
at December 31, 2002 and 2001, respectively. Repurchase agreements are
borrowings collateralized by securities of the U.S. Government or its agencies
and mature daily. The securities underlying these agreements remain under the
Corporation's control. The maximum balance of repurchase agreements at any
month-end during 2002 was $40,091,000 and during 2001 was $32,318,000.
Under the terms of its collateral agreement with the Federal Home Loan Bank
of Atlanta ("FHLBA"), the Bank maintains otherwise unencumbered qualifying
assets (principally 1-4 family residential mortgage loans and U.S. Government
and Agency notes and bonds) in the amount of at least as much as its advances
from the FHLBA. The Bank's FHLBA stock is also pledged to secure these advances.
At December 31, 2002 and 2001, such advances (in thousands) mature as follows:
2002 Weighted 2001 Weighted
Due by Advance Average Due by Advance Avereage
December 31 Amount Rate December 31 Amount Rate
----------- ----------- -------- ----------- ----------- --------
2003 $ 1,000,000 2.14% 2003 $ - -%
2004 3,000,000 2.67 2004 - -
2005 2,000,000 3.53 2005 - -
2006 2,000,000 4.08 2006 - -
2007 1,000,000 4.33 2007 - -
2008 8,000,000 5.25 2008 8,000,000 5.25
2009 5,000,000 5.26 2009 5,000,000 5.26
----------- -------- ----------- --------
$22,000,000 4.45% $13,000,000 4.45%
=========== ======== =========== ========
Included in the table above at December 31, 2002 is $13,000,000 of
convertible advances whereby the FHLBA has the option at a predetermined time to
convert the fixed interest rate to an adjustable rate tied to LIBOR (London
Inter Bank Offering Rate). The Bank had the option to repay these advances if
the FHLBA converts the interest rate. These advances are included in the year in
which they mature. The Bank has a line of credit equal to 15% of the Bank's
assets with the FHLBA that equaled approximately $90,790,000 at December 31,
2002.
7. Stock Options:
The Company's 1997 Stock Option Plan ("Option Plan") provides for the
granting of incentive and non-qualified options to the Company's employees on a
periodic basis, at the discretion of the Board or a Board designated committee.
The Option Plan authorizes the issuance of up to 300,000 shares of common stock
and has a term of ten years.
The weighted average fair values of options at their grant date during
2002, 2001 and 2000 were $8.78, $9.03, and $7.25, respectively. The estimated
fair value of each option granted is calculated using the Black-Scholes
option-pricing model. The following summarizes the weighted-average of the
assumptions used in the model:
2002 2001 2000
------ ------ ------
Risk-free interest rate 4.08% 4.52% 6.17%
Expected years until exercise 5.00 5.50 5.50
Expected stock volatility 36.76% 40.10% 47.95%
41
At December 31, 2002, and 2001, the Corporation had 100,794 shares and
135,694 shares, respectively, of its authorized common stock reserved for its
incentive and nonqualified stock option plan. These options vest from
immediately to two years and have a maximum term of ten years from the date of
the option grant.
A summary of stock option transactions under the plan follows:
Option Option Price
Shares Per Share
--------- --------------
Outstanding at December 31, 1999 138,600 $13.69 - 20.00
Granted 17,400 $13.25 - 15.50
Exercised (71) $14.00
Forfeited (4,229) $13.69 - 14.00
---------
Outstanding at December 31, 2000 151,700 $13.25 - 20.00
Granted 23,800 $16.50
Exercised (12,550) $13.25 - 17.19
Forfeited (11,500) $13.56 - 18.75
--------
Outstanding at December 31, 2001 151,450 $13.38 - 20.00
Granted 35,700 $19.95 - 26.10
Exercised (3,960) $14.00 - 17.19
Forfeited (800) $14.00 - 15.50
---------
Outstanding at December 31, 2002 182,390 $13.38 - 26.10
=========
The following table summarizes information related to stock options
outstanding on December 31, 2002:
Number of Average Life of Number of Options
Exercise Price Outstanding Options Outstanding Options Exercisable
- --------------- ------------------- ------------------- -----------------
$13.38 - $26.10 182,390 7.9 years 167,090
8. Income Taxes:
The components of the Corporation's net deferred tax assets as of
December 31, 2002 and December 31, 2001, were as follows (in thousands):
2002 2001
-------- --------
Deferred tax assets:
Allowance for loan losses $ 1,912 $ 1,814
Deferred compensation 257 266
Core deposit intangible 354 303
Pension liability 150 16
Other 11 5
-------- --------
Total deferred tax assets 2,684 2,404
-------- --------
Deferred tax liabilities:
Depreciation 388 265
Accretion of discount 20 14
Prepaid pension 111 -
Loan loss recapture 81 143
Net unrealized gains on securities 1,330 674
Other 151 151
-------- --------
Total deferred tax liabilities 2,081 1,247
-------- --------
Net deferred tax assets before valuation allowance $ 603 $ 1,157
======== ========
The provision for income taxes consists of the following (in thousands):
2002 2001 2000
-------- -------- --------
Taxes currently payable $ 3,870 $ 4,298 $ 3,830
Deferred tax expense (benefit) 48 (357) (415)
-------- -------- --------
$ 3,918 $ 3,941 $ 3,415
======== ======== ========
42
The effective tax rates differ from the statutory federal income tax rates
due to the following items:
2002 2001 2000
------- ------- -------
Federal statutory rate 34.2 % 34.2 % 34.0 %
Nontaxable interest income (4.9) (4.9) (4.7)
Other 0.0 .2 (1.1)
------- ------- -------
29.3 % 29.5 % 28.2 %
======= ======= =======
9. Earnings Per Share:
The following shows the weighted average number of shares used in computing
earnings per share and the effect on weighted average number of shares of
diluted potential common stock. Potential dilutive common stock had no effect on
income available to common shareholders.
2002 2001 2000
------------------------- ------------------------- --------------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
----------- --------- ----------- --------- ----------- ----------
Basic earnings per share 5,800,302 $ 1.63 5,949,811 $ 1.58 6,096,037 $ 1.42
Effect of dilutive securities,
stock options 50,047 23,342 5,378
----------- ---------- -----------
Diluted earnings per share 5,850,349 $ 1.62 5,973,153 $ 1.58 6,101,415 $ 1.42
=========== ========== ===========
10. Commitments and Contingent Liabilities:
Financial instruments with off-balance-sheet risk:
- --------------------------------------------------
The Corporation is party to credit-related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Corporation's exposure to credit loss is represented by the contractual
amount of these commitments. The Corporation follows the same credit policies
in making commitments as it does for on-balance-sheet instruments.
At December 31, 2002 and 2001, the following financial instruments were
outstanding whose contract amounts represent credit risk:
2002 2001
------------ ------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $107,771,000 $121,062,000
Standby letters of credit $ 3,489,000 $ 1,000,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation, is based on management's credit evaluation
of the customer.
Unfunded commitments under commercial lines of credit and revolving credit
lines are commitments for possible future extensions of credit to existing
customers. These lines of credit are uncollateralized and usually do not contain
a specified maturity date and may not be drawn upon to the total extent to which
the Corporation is committed.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Those
letters of credit are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation generally holds collateral supporting those commitments if
deemed necessary.
The Corporation does not have any off-balance sheet subsidiaries or special
purpose entities. There were no commitments to purchase securities at December
31, 2002 or December 31, 2001.
43
Concentration of credit risk:
- -----------------------------
The Corporation is principally a local lender and therefore has a
significant concentration of residential and commercial real estate loans as
well as consumer and commercial business loans to borrowers who reside in and/or
which are collateralized by real estate located primarily in our trade area.
Other commitments:
- ------------------
The Bank has entered into operating leases for several of its branch and
ATM facilities. The minimum annual rental payments under these leases at
December 31, 2002, (in thousands) are as follows:
Minimum Lease
Year Payments
---- -------------
2003 $ 92
2004 87
2005 59
2006 45
2007 48
2008 and thereafter 132
Rent expense under these leases for each of the years ended December
31, 2002, 2001, and 2000, were $90,000, $89,000, and $53,000, respectively.
The Bank is a member of the Federal Reserve System and is required to
maintain certain levels of its cash and cash equivalents as reserves based on
regulatory requirements. This reserve requirement was approximately $3,098,000
at December 31, 2002 and $2,190,000 at December 31, 2001.
ANB Mortgage Corp. originates and sells residential real estate loans
to investors. Based on certain pre-defined criteria, including borrower
non-payment or fraud, ANB Mortgage Corp. may be required to repurchase loans
back from the investor. Since the inception of ANB Mortgage Corp. no loans have
been repurchased.
11. Related Party Transactions:
The Corporation's Directors provide the Bank with substantial amounts
of business, and many are among its largest depositors and borrowers. The
maximum amount of loans outstanding to total loans for officers, directors and
their business interests at any month-end during 2002 was 5.3% and during 2001
was 4.5%. Management believes that all such loans are made on substantially the
same terms, including interest rates, as those prevailing at the time for
comparable loans to similar, unrelated borrowers, and do not involve more than a
normal risk of collectability. As of December 31, 2002, none of these loans were
restructured, nor were any related party loans charged off during 2002.
An analysis of these loans for 2002 is as follows (in thousands):
Balance, beginning of year $ 12,857
Additions 37,325
Repayments (28,768)
---------
Balance, end of year $ 21,414
=========
12. Employee Benefit Plans:
The Bank's retirement plan is a non-contributory defined benefit pension
plan which covers substantially all employees of the Bank who are 21 years of
age or older and who have had at least one year of service. Advanced funding is
accomplished by using the actuarial cost method known as the collective
aggregate cost method.
The following table sets forth the plan's funded status as of December 31,
2002 and 2001 (in thousands):
2002 2001
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 4,837 $ 4,122
Service cost 319 274
Interest cost 336 309
Actuarial (gain) loss 274 262
Benefits paid (891) (130)
-------- --------
Benefit obligation at end of year $ 4,875 $ 4,837
======== ========
44
2002 2001
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,360 $ 4,453
Actual return on plan assets (692) (237)
Employer contributions 654 274
Benefits paid (891) (130)
-------- --------
Fair value of plan assets at end of year $ 3,431 $ 4,360
======== ========
Deferred asset (gain) loss $ 1,037 $ 593
(Accrued) prepaid pension cost:
Funded status $(1,445) $ (477)
Unrecognized net actuarial (gain) loss 1,871 566
Unrecognized net obligation at transition (5) (17)
Unrecognized prior service cost (96) (120)
-------- --------
(Accrued) benefit cost included in other liabilities $ 325 $ (48)
======== ========
Amounts recognized in the statement of financial position:
Prepaid asset $ 325
Accrued benefit liability (441)
Deferred income tax benefit 150
Accumulated other comprehensive income, net 291
--------
Net amount recognized $ 325
========
Major assumptions and net periodic pension cost include the following:
2002 2001 2000
-------- -------- --------
Components of net periodic benefit cost:
Service cost $ 319 $ 274 $ 238
Interest cost 337 309 322
Expected return on plan assets (346) (356) (404)
Amortization of prior service cost (24) (24) (24)
Amortization of net obligation at transition (12) (12) (12)
Recognized net actuarial gain 7 - (12)
-------- -------- --------
Net periodic benefit cost $ 281 $ 191 $ 108
======== ======== ========
2002 2001 2000
-------- --------- --------
Weighted-average assumptions:
Discount rate:
Pre-retirement 6.75% 7.00% 7.50%
Post-retirement 6.00% 6.00% 6.00%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.00% 4.00% 4.00%
In 1982, the Board of Directors of the Bank adopted deferred compensation
agreements with certain key officers providing for annual payments to each
ranging from $25,000 to $50,000 per year for ten years upon their retirement.
The liabilities under these agreements are being accrued over the officers'
remaining period of employment so that, on the date of their retirement, the
then-present value of the annual payments would have been accrued. The expense
for this plan was $77,000, $68,000 and $110,000 for years 2002, 2001 and 2000,
respectively.
A 401(k) savings plan was adopted in 1995 that covers substantially all
full-time employees of the Bank. The Bank matches a portion of the contribution
made by employee participants after at least one year of service. The Bank
contributed $136,000, $116,000 and $110,000 to the 401(k) plan in 2002, 2001 and
2000, respectively. These amounts are included in pension and other employee
benefits expense for the respective years.
45
13. Fair Value of Financial Instruments:
The estimated fair values of the Corporation's assets are as follows
(in thousands):
December 31, 2002 December 31, 2001
------------------------------ --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 23,478 $ 23,478 $ 29,149 $ 29,149
Securities, available for sale 137,046 137,046 127,317 127,317
Securities held to maturity 26,778 28,219 29,474 30,154
Loans held for sale 1,285 1,285 253 253
Loans, net of allowance 400,781 408,792 370,006 376,929
Accrued interest receivable 3,556 3,556 3,490 3,490
Financial liabilities:
Deposits $ 473,562 $ 474,102 $ 464,012 $ 466,455
Repurchase agreements 36,155 36,155 27,177 27,177
Other borrowings 22,000 24,884 13,000 13,656
Accrued interest payable 1,065 1,065 1,424 1,424
Off balance sheet instruments:
Commitments to extend credit - - - -
Standby letters of credit - 35 - 10
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practical to
estimate that value:
Cash and cash equivalents. The carrying amount is a reasonable estimate of fair
value.
Securities. Fair values are based on quoted market prices or dealer quotes. The
carrying value of restricted stock approximates fair value.
Loans held for sale. The carrying amount is a reasonable estimate of fair value.
Loans. For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. Fair values for
certain mortgage loans (e.g., one-to-four family residential), credit card
loans, and other consumer loans are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. Fair values for other loans (e.g.,
commercial real estate and investment property mortgage loans, commercial and
industrial loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. Fair values for nonperforming loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
Accrued interest receivable. The carrying amount is a reasonable estimate of
fair value.
Deposits. The fair value of demand deposits, savings deposits, and money market
deposits equals the carrying value. The fair value of fixed-rate certificates of
deposit is estimated by discounting the future cash flows using the current
rates at which similar deposit instruments would be offered to depositors for
the same remaining maturities at current rates.
Repurchase agreements. The carrying amount is a reasonable estimate of fair
value.
Other borrowings. The fair vales of the Corporation's long-term borrowings are
estimated using discounted cash flow analyses based on the Corporation's
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest payable. The carrying amount is a reasonable estimate of fair
value.
Off balance sheet instruments. The fair value of commitments to extend credit is
estimated using the fees currently charged (if any) to enter into agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. Fees are generally not charged to extend
credit. All such commitments were subject to current market rates and pose no
known credit exposure. As a result, no fair value has been estimated for these
commitments. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
46
The Corporation assumes interest rate risk (the risk that general
interest rate levels will change) as a result of its normal operations. As a
result, the fair values of the Corporation's financial instruments will change
when interest rate levels change and that change may be either favorable or
unfavorable to the Corporation. Management attempts to match maturities of
assets and liabilities to the extent believed necessary to minimize interest
rate risk. However, borrowers with fixed rate obligations are less likely to
prepay in a rising rate environment and more likely to prepay in a falling rate
environment. Conversely, depositors who are receiving fixed rates are more
likely to withdraw funds before maturity in a rising rate environment and less
likely to do so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest rate risk
by adjusting terms of new loans and deposits and by investing in securities with
terms that mitigate the Corporation's overall interest rate risk.
14. Dividend Restrictions and Regulatory Capital:
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of the Corporation's and the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Corporation's and the Bank's capital
amounts and classification are subject to qualitative judgments by the
regulators concerning components, risk weighting, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Under the guidelines, total capital has been defined as core (Tier I)
capital and supplementary (Tier II) capital. The Corporation's Tier I capital
consists primarily of shareholders' equity, while Tier II capital consists of
the allowance for loan losses. The definition of assets has been modified to
include items on and off the balance sheet, with each item being assigned a
"risk-weight" for the determination of the ratio of capital to risk-adjusted
assets.
The guidelines require that total capital (Tier I plus Tier II) of 8%
be held against total risk-adjusted assets, at least half of which (4%) must be
Tier I capital. At December 31, 2002, the Corporation's Tier I and total capital
ratios were 14.41% and 15.49%, respectively. At December 31, 2001, these ratios
were 14.32% and 15.56%, respectively. The ratios for both years were well in
excess of the regulatory requirements. Management believes, as of December 31,
2002, that the Corporation and the Bank meet all regulatory capital adequacy
requirements to which they are subject.
The approval of the Comptroller of the Currency is required if the total of
all dividends declared by a national bank in any calendar year exceeds the
bank's net income, as defined, for that year combined with its retained net
income for the preceding two calendar years. Under this formula, the Bank can
distribute as dividends, without the approval of the Comptroller of the
Currency, $4,711,000 plus an additional amount equal to the Bank's net income
for 2002 up to the date of any dividend declaration.
The following table provides summary information regarding regulatory
capital (in thousands):
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
----------------------- ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2002
Total Capital
Corporation $ 72,021 15.63% $ 36,863 >8.0%
Bank 69,328 15.06% 36,816 >8.0% $ 46,020 >10.0%
Tier I Capital
Corporation 66,399 14.41% 18,431 >4.0%
Bank 64,359 13.98% 18,408 >4.0% 27,612 >6.0%
Leverage Capital
Corporation 66,399 11.00% 18,103 >3.0%
Bank 64,359 10. 68% 18,076 >3.0% 30,126 >5.0%
47
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
----------------------- ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2001
Total Capital
Corporation $ 67,187 15.56% $ 34,544 >8.0%
Bank 65,260 15.13% 34,505 >8.0% $ 43,131 >10.0%
Tier I Capital
Corporation 61,853 14.32% 17,272 >4.0%
Bank 60,569 14.04% 17,253 >4.0% 25,879 >6.0%
Leverage Capital
Corporation 61,853 10.96% 16,927 >3.0%
Bank $ 60,569 10.75% $ 16,903 >3.0% 28,172 >5.0%
15. Segment and Related Information:
The Corporation adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", in 1998. Reportable segments include
community banking and trust and investment services. Community banking involves
making loans to and generating deposits from individuals and businesses in the
markets where the Bank has offices. All assets and liabilities of the Bank are
allocated to community banking. Investment income from fixed income investments
is a major source of income. Loan fee income, service charges from deposit
accounts and non-deposit fees such as automatic teller machine fees and
insurance commissions generate additional income for community banking. The
assets and liabilities and operating results of the Bank's two subsidiaries, ANB
Mortgage Corp. and ANB Services Corp. are included in the community banking
segment. ANB Mortgage Corp. performs secondary mortgage banking and ANB Services
Corp. performs retail investment and insurance sales.
Trust and investment services include estate and trust planning and
administration and investment management for various entities. The trust and
investment services division of the Bank manages trusts, estates and purchases
equity, fixed income and mutual fund investments for customer accounts. The
trust and investment services division receives fees for investment and
administrative services. Fees are also received by this division for individual
retirement accounts managed for the community banking segment.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. All intersegment sales prices
are market based.
Segment information for the years 2002, 2001 and 2000 is shown in the
following table (in thousands). The "Other" column includes corporate related
items, results of insignificant operations and, as it relates to segment profit
(loss), income and expense not allocated to reportable segments. Inter-segment
eliminations primarily consist of the Corporation's investment in the Bank and
related equity earnings.
48
2002
-----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ ---------
Interest income $ 35,135 $ - $ 31 $ (31) $ 35,135
Interest expense 12,310 - 31 (31) 12,310
Non-interest income - external customers 2,564 2,516 632 - 5,712
Non-interest income - internal customers - 48 - (48) -
Operating income before income taxes 11,798 1,543 38 - 13,379
Depreciation and amortization 1,570 21 3 - 1,594
Total assets 605,767 - 92 - 605,859
Capital expenditures $ 1,331 $ 16 $ 123 $ - 1,470
2001
-----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ ---------
Interest income $ 39,820 $ - $ 30 $ (30) $ 39,820
Interest expense 17,502 - 30 (30) 17,502
Non-interest income - external customers 2,509 2,569 590 - 5,668
Non-interest income - internal customers - 54 - (54) -
Operating income before income taxes 11,697 1,656 4 - 13,357
Depreciation and amortization 1,586 25 10 - 1,621
Total assets 572,820 - 67 - 572,887
Capital expenditures $ 1,141 $ 16 $ 1 $ - 1,158
2000
-----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ ---------
Interest income $ 38,606 $ - $ 22 $ (22) $ 38,606
Interest expense 17,343 - 22 (22) 17,343
Non-interest income - external customers 1,772 2,658 341 - 4,771
Non-interest income - internal customers - 54 - (54) -
Operating income before income taxes 10,588 1,791 (288) - 12,091
Depreciation and amortization 1,516 40 11 - 1,567
Total assets 541,273 - 116 - 541,389
Capital expenditures $ 906 $ 19 $ 9 $ - 934
49
16. Parent Company Financial Information:
Condensed parent company financial information is as follows (in
thousands):
As of December 31
----------------------
Condensed Balance Sheets 2002 2001
------------------------ -------- --------
Assets
Cash $ 1,782 $ 1,126
Investment in Subsidiary 68,369 63,791
Other Assets 585 480
-------- --------
Total Assets $ 70,736 $ 65,397
======== ========
Liabilities $ - $ -
Shareholders' Equity 70,736 65,397
-------- --------
Total Liabilities and Shareholders' Equity $ 70,736 $ 65,397
======== ========
For the Year Ended
December 31
-------------------------------------
Condensed Statements of Income 2002 2001 2000
------------------------------ --------- --------- ---------
Dividends from Subsidiary $ 6,000 $ 8,985 $ 4,640
Income 10 - -
Expenses (145) (105) (140)
--------- --------- ---------
Income Before Equity in Undistributed
Earnings of Subsidiary 5,865 8,880 4,500
Equity in Undistributed Earnings
of Subsidiary 3,596 535 4,176
--------- --------- ---------
Net Income $ 9,461 $ 9,415 $ 8,676
========= ========= =========
For the Year Ended
December 31
-------------------------------------
Condensed Statements of Cash Flows 2002 2001 2000
---------------------------------- --------- --------- ---------
Cash provided by dividends received
from Subsidiary $ 6,000 $ 8,985 $ 4,640
Cash used for payment of dividends (4,117) (3,924) (3,564)
Cash used for repurchase of stock (1,049) (4,600) (564)
Other (178) 53 (111)
--------- --------- ---------
Net increase in cash $ 656 $ 514 $ 401
========= ========= =========
50
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 18, 2003 AMERICAN NATIONAL BANKSHARES INC.
By: /s/ Brad E. Schwartz
-------------------------------------------
Senior Vice President, Secretary, Treasurer
& Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 18, 2003.
/s/ Charles H. Majors
- ----------------------------- President and
Charles H. Majors Chief Executive Officer
/s/ Willie G. Barker, Jr. Director
- -----------------------------
Willie G. Barker, Jr.
/s/ Richard G. Barkhouser Director
- -----------------------------
Richard G. Barkhouser
/s/ Fred A. Blair Director
- -----------------------------
Fred A. Blair
/s/ Ben J. Davenport, Jr. Director
- -----------------------------
Ben J. Davenport, Jr.
/s/ H. Dan Davis Director
- -----------------------------
H. Dan Davis
/s/ Michael P. Haley Director
- -----------------------------
Michael P. Haley
/s/ Lester A. Hudson, Jr. Director
- -----------------------------
Lester A. Hudson, Jr.
/s/ E. Budge Kent, Jr. Director
- -----------------------------
E. Budge Kent, Jr.
/s/ Fred B. Leggett, Jr. Director
- -----------------------------
Fred B. Leggett, Jr.
/s/ Franklin W. Maddux Director
- -----------------------------
Franklin W. Maddux
/s/ James A. Motley Director
- -----------------------------
James A. Motley
/s/ Claude B. Owen, Jr. Director
- -----------------------------
Claude B. Owen, Jr.
/s/ Brad E. Schwartz
- ----------------------------- Senior Vice President, Secretary, Treasurer
Brad E. Schwartz & Chief Financial Officer
51
Exhibit (99)(a) SECTION 302 CERTIFICATION*
I, Charles H. Majors, certify that:
1. I have reviewed this annual report on Form 10-K of American National
Bankshares Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 11, 2003
/s/ Charles H. Majors
- -------------------------------------
Charles H. Majors,
President and Chief Executive Officer
52
Exhibit (99)(b) SECTION 302 CERTIFICATION*
I, Brad E. Schwartz, certify that:
1. I have reviewed this annual report on Form 10-K of American National
Bankshares Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 11, 2003
/s/ Brad E. Schwartz
- -------------------------------------------
Brad E. Schwartz,
Senior Vice President, Secretary, Treasurer
& Chief Financial Officer
53