SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2003
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
----- -----
Commission file number 0-12820
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AMERICAN NATIONAL BANKSHARES INC.
---------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1284688
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
628 Main Street
Danville, Virginia 24541
- ---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(434) 792-5111
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
----- -----
At November 6, 2003, the Corporation had 5,662,909 shares common stock
outstanding, $1 par value.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Page No.
--------
Index...............................................................................2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002..................................................3
Consolidated Statements of Income for the three months
ended September 30, 2003 and 2002......................................4
Consolidated Statements of Income for the nine months
ended September 30, 2003 and 2002......................................5
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended September 30, 2003 and 2002..................6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002......................................7
Notes to Consolidated Financial Statements...............................9
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations.............................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............26
Item 4. Controls and Procedures.................................................27
Part II. Other Information........................................................28
SIGNATURES ........................................................................29
Exhibits...........................................................................30
2
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
- -------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
September 30 December 31
2003 2002
------------ ------------
ASSETS
Cash and due from banks.........................................................$ 17,713 $ 16,757
Interest-bearing deposits in other banks........................................ 13,574 6,720
Securities available for sale, at fair value.................................... 158,605 137,046
Securities held to maturity (market value of $23,320 at
September 30, 2003 and $28,219 at December 31, 2002).......................... 21,922 26,778
----------- -----------
180,527 163,824
----------- -----------
Loans held for sale............................................................. 740 1,285
Loans, net of unearned income .................................................. 419,916 406,403
Less allowance for loan losses.................................................. (6,067) (5,622)
----------- -----------
Net loans..................................................................... 413,849 400,781
----------- -----------
Bank premises and equipment, at cost, less accumulated
depreciation of $11,547 in 2003 and $10,673 in 2002........................... 7,725 8,167
Core deposit intangibles........................................................ 1,047 1,384
Accrued interest receivable and other assets.................................... 8,861 6,941
----------- -----------
Total assets..................................................................$ 644,036 $ 605,859
=========== ===========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 71,624 $ 69,102
Demand deposits -- interest bearing........................................... 66,393 62,680
Money market deposits......................................................... 49,607 43,831
Savings deposits.............................................................. 82,480 73,410
Time deposits................................................................. 231,106 224,539
----------- -----------
Total deposits................................................................ 501,210 473,562
----------- -----------
Repurchase agreements......................................................... 47,091 36,155
FHLB borrowings............................................................... 21,000 22,000
Accrued interest payable and other liabilities................................ 3,672 3,406
----------- -----------
Total liabilities............................................................. 572,973 535,123
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding........................................................... - -
Common stock, $1 par, 10,000,000 shares authorized,
5,667,464 shares outstanding at September 30, 2003
and 5,780,816 shares outstanding at December 31, 2002...................... 5,667 5,781
Capital in excess of par value............................................... 9,404 9,571
Retained earnings............................................................ 54,378 53,093
Accumulated other comprehensive income....................................... 1,614 2,291
----------- -----------
Total shareholders' equity................................................... 71,063 70,736
----------- -----------
Total liabilities and shareholders' equity...................................$ 644,036 $ 605,859
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
3
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
September 30
-------------------------
2003 2002
---------- ----------
Interest Income:
Interest and fees on loans....................................................$ 6,270 $ 6,919
Interest on deposits in other banks........................................... 33 57
Income on securities:
Federal agencies............................................................ 560 479
Mortgage-backed............................................................. 225 576
State and municipal......................................................... 472 484
Other investments........................................................... 284 378
---------- ----------
Total interest income....................................................... 7,844 8,893
---------- ----------
Interest Expense:
Interest on deposits:
Demand...................................................................... 45 105
Money market................................................................ 110 196
Savings..................................................................... 150 268
Time........................................................................ 1,613 2,005
Interest on repurchase agreements............................................. 113 167
Interest on other borrowings.................................................. 245 231
---------- ----------
Total interest expense...................................................... 2,276 2,972
---------- ----------
Net Interest Income............................................................. 5,568 5,921
Provision for Loan Losses....................................................... 170 214
---------- ----------
Net Interest Income After Provision
For Loan Losses............................................................... 5,398 5,707
---------- ----------
Non-Interest Income:
Trust and investment services................................................. 625 606
Service charges on deposit accounts........................................... 577 451
Other fees and commissions.................................................... 241 194
Mortgage banking income....................................................... 203 112
Securities gains, net......................................................... 43 -
Other income.................................................................. 111 71
---------- ----------
Total non-interest income................................................... 1,800 1,434
---------- ----------
Non-Interest Expense:
Salaries...................................................................... 1,758 1,727
Pension and other employee benefits........................................... 433 389
Occupancy and equipment....................................................... 624 615
Core deposit intangible amortization ......................................... 112 112
Other expenses................................................................ 875 817
---------- ----------
Total non-interest expense.................................................. 3,802 3,660
---------- ----------
Income Before Income Tax Provision.............................................. 3,396 3,481
Income Tax Provision............................................................ 991 1,020
---------- ----------
Net Income......................................................................$ 2,405 $ 2,461
========== ==========
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ .42 $ .42
Diluted.........................................................................$ .42 $ .42
- ---------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,674,259 5,794,241
Diluted.........................................................................5,738,622 5,855,760
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
4
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
-------------------------
2003 2002
---------- ----------
Interest Income:
Interest and fees on loans....................................................$ 19,337 $ 20,453
Interest on deposits in other banks........................................... 69 170
Income on securities:
Federal agencies............................................................ 1,620 1,424
Mortgage-backed............................................................. 1,064 1,830
State and municipal......................................................... 1,456 1,416
Other investments........................................................... 935 1,188
---------- ----------
Total interest income....................................................... 24,481 26,481
---------- ----------
Interest Expense:
Interest on deposits:
Demand...................................................................... 174 334
Money market................................................................ 374 601
Savings..................................................................... 587 803
Time........................................................................ 5,010 6,729
Interest on repurchase agreements............................................. 373 477
Interest on other borrowings.................................................. 735 578
---------- ----------
Total interest expense...................................................... 7,253 9,522
---------- ----------
Net Interest Income............................................................. 17,228 16,959
Provision for Loan Losses....................................................... 665 633
---------- ----------
Net Interest Income After Provision
For Loan Losses............................................................... 16,563 16,326
---------- ----------
Non-Interest Income:
Trust and investment services................................................. 1,878 1,938
Service charges on deposit accounts........................................... 1,541 1,232
Other fees and commissions.................................................... 679 620
Mortgage banking income....................................................... 481 263
Securities gains, net......................................................... 46 19
Other income.................................................................. 252 202
---------- ----------
Total non-interest income................................................... 4,877 4,274
---------- ----------
Non-Interest Expense:
Salaries...................................................................... 5,233 4,941
Pension and other employee benefits........................................... 1,403 1,160
Occupancy and equipment....................................................... 1,905 1,834
Core deposit intangible amortization ......................................... 337 337
Other expenses................................................................ 2,615 2,465
---------- ----------
Total non-interest expense.................................................. 11,493 10,737
---------- ----------
Income Before Income Tax Provision.............................................. 9,947 9,863
Income Tax Provision............................................................ 2,900 2,868
---------- ----------
Net Income......................................................................$ 7,047 $ 6,995
========== ==========
- ---------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ 1.23 $ 1.20
Diluted.........................................................................$ 1.22 $ 1.20
- ---------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,716,092 5,806,639
Diluted.........................................................................5,777,156 5,852,431
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
5
Consolidated Statements of Changes in Shareholders' Equity
American National Bankshares Inc. and Subsidiary
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
(In Thousands, except number of shares of common stock)
Accumulated
Common Stock Capital in Other Total
------------------------- Excess of Retained Comprehensive Shareholders'
Shares Amount Par Value Earnings Income (Loss) Equity
----------- ------------ ------------ ------------- -------------- -------------
Balance, December 31, 2001...................... 5,821,956 $ 5,822 $ 9,588 $ 48,678 $ 1,309 $ 65,397
Net income...................................... - - - 6,995 - 6,995
Change in unrealized gains on securities
available for sale, net of tax of $674........ - - - - 1,309 1,309
------------ ------------- -------------
Total comprehensive income.................... 6,995 1,309 8,304
Stock repurchased and retired................... (40,100) (40) (66) (813) - (919)
Stock options exercised......................... 3,760 4 54 - - 58
Cash dividends paid............................. - - - (3,076) - (3,076)
----------- ------------ ------------ ------------- -------------- -------------
Balance, September 30, 2002..................... 5,785,616 $ 5,786 $ 9,576 $ 51,784 $ 2,618 $ 69,764
========== ============ ============ ============= ============== =============
Balance, December 31, 2002...................... 5,780,816 $ 5,781 $ 9,571 $ 53,093 $ 2,291 $ 70,736
Net income...................................... - - - 7,047 - 7,047
Change in unrealized gains on securities
available for sale, net of tax of $348........ - - - - (677) (677)
------------- -------------- -------------
Total comprehensive income.................... 7,047 (677) 6,370
Stock repurchased and retired................... (115,000) (115) (190) (2,567) - (2,872)
Stock options exercised......................... 1,648 1 23 - - 24
Cash dividends paid............................. - - - (3,195) - (3,195)
----------- ------------ ------------ ------------- -------------- -------------
Balance, September 30, 2003..................... 5,667,464 $ 5,667 $ 9,404 $ 54,378 $ 1,614 $ 71,063
=========== ============ ============= ============= ============== =============
The accompanying notes are an integral part of the consolidated financial statements.
6
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended
-------------------------
September 30
2003 2002
---------- ----------
Cash Flows from Operating Activities:
Net income....................................................................$ 7,047 $ 6,995
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses..................................................... 665 633
Depreciation.................................................................. 873 891
Core deposit intangible amortization.......................................... 337 337
Amortization (accretion) of bond premiums and discounts....................... 822 150
Gain on sale or call of securities............................................ (46) (19)
Gain on loans held for sale................................................... (481) (263)
Proceeds from sales of loans held for sale.................................... 27,162 11,472
Originations of loans held for sale........................................... (26,136) (12,787)
Loss on sale of real estate owned............................................. 6 1
Loss on disposal of property and equipment.................................... - 16
Deferred income taxes benefit................................................. (27) (158)
Increase in interest receivable............................................... (708) (218)
Increase in other assets...................................................... (721) (576)
Decrease in interest payable.................................................. (148) (259)
Increase in other liabilities................................................. 414 292
---------- ----------
Net cash provided by operating activities..................................... 9,059 6,507
---------- ----------
Cash Flows from Investing Activities:
Proceeds from maturities and calls of securities available for sale........... 58,997 42,482
Proceeds from maturities and calls of securities held to maturity............. 4,860 4,820
Proceeds from sales of securities available for sale.......................... - 1,052
Purchases of securities available for sale.................................... (82,361) (40,380)
Purchases of securities held to maturity...................................... - (3,492)
Net increase in loans......................................................... (13,865) (20,106)
Purchases of bank property and equipment...................................... (431) (1,285)
Proceeds from sales of other real estate owned................................ 10 261
Purchases of other real estate owned.......................................... - (11)
---------- ----------
Net cash used in investing activities......................................... (32,790) (16,659)
---------- ----------
(Continued on next page)
7
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(Unaudited)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended
-------------------------
September 30
2003 2002
---------- ----------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits........................................................ 21,081 12,907
Net increase (decrease) in time deposits...................................... 6,567 (3,134)
Net increase in repurchase agreements......................................... 10,936 10,553
Net (decrease) increase in FHLB borrowings.................................... (1,000) 9,000
Cash dividends paid........................................................... (3,195) (3,076)
Repurchase of stock........................................................... (2,872) (919)
Proceeds from exercise of stock options....................................... 24 58
---------- ----------
Net cash provided by financing activities..................................... 31,541 25,389
---------- ----------
Net Increase in Cash and Cash Equivalents....................................... 7,810 15,237
Cash and Cash Equivalents at Beginning of Period................................ 23,477 29,149
---------- ----------
Cash and Cash Equivalents at End of Period......................................$ 31,287 $ 44,386
========== ==========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.......................................................$ 17,713 $ 18,108
Interest-bearing deposits in other banks...................................... 13,574 26,278
---------- ----------
$ 31,287 $ 44,386
========== ==========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 7,401 $ 9,781
Income taxes paid.............................................................$ 2,666 $ 2,907
Transfer of loans to other real estate owned..................................$ 132 $ 164
Unrealized gain (loss) on securities available for sale.......................$ 2,887 $ 3,966
The accompanying notes are an integral part of the consolidated financial statements.
8
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly American National Bankshares' financial
position as of September 30, 2003; the consolidated statements of income for the
three and nine months ended September 30, 2003 and 2002; the consolidated
statements of changes in shareholders' equity for the nine months ended
September 30, 2003 and 2002; and the consolidated statements of cash flows for
the nine months ended September 30, 2003 and 2002. Operating results for the
three month and nine month periods ended September 30, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003.
The consolidated financial statements include the amounts and results
of operations of American National Bankshares Inc. ("the Corporation") and its
wholly owned subsidiary, American National Bank and Trust Company ("the Bank")
and the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp.
2. STOCK BASED COMPENSATION
As of September 30, 2003 the Corporation had a stock-based compensation
plan. The Corporation accounts for the plan under the recognition and
measurement principles of APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under the plan had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following illustrates the effect on net income and
earnings per share for the three and nine month periods ended September 30,
2003, and 2002 had the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, been adopted.
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Dollars in thousands except per share amounts)
Net income, as reported $ 2,405 $ 2,461 $ 7,047 $ 6,995
Deduct: total stock-based employee compensation
expense determined based on fair value method of awards (37) (52) (90) (113)
-------- -------- -------- --------
Pro forma net income $ 2,368 $ 2,409 $ 6,957 $ 6,882
======== ======== ======== ========
Basic earnings per share:
As reported $ .42 $ .42 $ 1.23 $ 1.20
Pro forma $ .42 $ .41 $ 1.22 $ 1.18
Diluted earning per share:
As reported $ .42 $ .42 $ 1.22 $ 1.20
Pro Forma $ .41 $ .41 $ 1.20 $ 1.18
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 2002: price volatility of 36.8%, risk-free interest
rates of 4.08%, and expected lives of 5 years. The weighted average assumptions
for grants in 2003 were: price volatility of 36.8%, risk-free interest rates of
2.27%, and expected lives of 5 years.
9
3. SECURITIES
The amortized cost and estimated fair value of securities in debt and
equity securities at September 30, 2003 were as follows:
(In Thousands)
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- --------------- -------------- --------------
Securities available for sale:
Federal agencies $ 81,031 $ 974 $ 66 $ 81,939
Mortgage-backed 23,811 628 67 24,372
State and municipal 28,963 879 105 29,737
Corporate bonds 14,883 956 - 15,839
Restricted stock:
FHLBA stock 1,741 - - 1,741
Federal Reserve stock 364 - - 364
Other securities 4,925 - 312 4,613
--------- -------- -------- ---------
Total securities available for sale $ 155,718 $ 3,437 $ 550 $ 158,605
--------- -------- -------- ---------
Securities held to maturity:
Federal agencies $ 1,997 $ 127 $ - $ 2,124
Mortgage-backed 1,492 66 - 1,558
State and municipal 18,433 1,205 - 19,638
--------- -------- -------- ---------
Total securities held to maturity $ 21,922 $ 1,398 $ - $ 23,320
--------- -------- -------- ---------
Total securities $ 177,640 $ 4,835 $ 550 $ 181,925
========= ======== ======== =========
The amortized cost and estimated fair value of securities in debt and
equity securities at December 31, 2002 were as follows:
(In Thousands)
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- --------------- -------------- --------------
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 - - 2,029
Federal Reserve stock 363 - - 363
Other securities 4,925 - 67 4,858
--------- -------- -------- ---------
Total securities available for sale $ 133,134 $ 3,990 $ 78 $ 137,046
--------- -------- -------- ---------
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
--------- -------- -------- ---------
Total securities $ 159,912 $ 5,431 $ 78 $ 165,265
========= ======== ======== =========
10
4. LOANS
Outstanding loans, excluding loans held for sale, were composed of the
following:
(In Thousands)
September 30 December 31
2003 2002
------------ -----------
Real Estate loans
Construction and land development $ 12,619 $ 9,208
Secured by farmland 3,584 1,485
Secured by 1-4 family residential properties 136,725 129,905
Secured by multi-family residential properties 5,629 6,329
Secured by nonfarm, nonresidential properties 127,955 107,263
Loans to farmers 1,833 1,844
Commercial and industrial loans 102,652 113,575
Consumer loans 24,739 32,008
Loans for nonrated industrial development obligations 4,064 4,745
Deposit overdrafts 116 41
--------- ---------
Loans, net of unearned income $ 419,916 $ 406,403
========= =========
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the nine months ended
September 30 was as follows:
(In Thousands)
September 30 September 30
2003 2002
------------- -------------
Balance, January 1 $ 5,622 $ 5,334
Provisions charged against income 665 633
Recoveries of loans charged off 197 106
Loans charged off (417) (499)
-------- --------
Balance at end of period $ 6,067 $ 5,574
======== ========
6. COMPREHENSIVE INCOME
The following is a detail of comprehensive income for the three and nine
months ended September 30, 2003 and 2002 (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2003 2002 2003 2002
------- ------ ------ ------
Net Income $2,405 $2,461 $7,047 $6,995
Change in unrealized gains (losses) on securities (200) 681 (677) 1,309
available for sale, net of tax expense ------- ------ ------- ------
Total comprehensive income $2,205 $3,142 $6,370 $8,304
======= ====== ======= ======
11
7. EARNINGS PER SHARE
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of diluted potential common stock. Potential dilutive common stock had no effect
on income available to common shareholders.
Three Months Ended
September 30
-------------------------------------------------
2003 2002
---------------------- ---------------------
Per Per
Share Share
Shares Amount Shares Amount
--------- ------ --------- ------
Basic earnings per share 5,674,259 $ .42 5,794,241 $ .42
Effect of dilutive securities, stock options 64,363 - 61,519 -
--------- ------ --------- ------
Diluted earnings per share 5,738,622 $ .42 5,855,760 $ .42
========= ====== ========= ======
Nine Months Ended
September 30
-------------------------------------------------
2003 2002
---------------------- ---------------------
Per Per
Share Share
Shares Amount Shares Amount
--------- ------ --------- ------
Basic earnings per share 5,716,092 $ 1.23 5,806,639 $ 1.20
Effect of dilutive securities, stock options 61,064 (.01) 45,792 -
--------- ------ --------- ------
Diluted earnings per share 5,777,156 $ 1.22 5,852,431 $ 1.20
========= ====== ========= ======
8. SEGMENT AND RELATED INFORMATION
The Corporation adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1998. Reportable segments include
community banking and trust and investment services.
Community banking involves making loans to and generating deposits from
individuals and businesses in the Bank's general market area. All assets and
liabilities of the Bank are allocated to community banking. Investment income
from fixed income investments is another major source of income. Loan fee
income, service charges from deposit accounts and non-deposit fees such as
automatic teller machine fees and insurance commissions generate additional
income for community banking. The assets and liabilities and operating results
of the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. are
included in the community banking segment. ANB Mortgage Corp. performs secondary
mortgage banking and ANB Services Corp. performs retail investment and insurance
sales.
Trust and investment services include estate and trust planning and
administration and investment management for various entities. The trust and
investment services division of the Bank manages trusts, estates and purchases
equity, fixed income and mutual fund investments for customer accounts. The
trust and investment services division receives fees for investment and
administrative services. Fees are also received by this division for individual
retirement accounts managed for the community banking segment.
Unaudited segment information for the three and nine month periods ended
September 30, 2003 and 2002 is shown in the following table (in thousands). The
"Other" column includes corporate related items, results of insignificant
operations and, as it relates to segment profit (loss), income and expense not
allocated to reportable segments.
12
Three Months Ended September 30, 2003
- ---------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ -----
Interest income $ 7,844 $ - $ 25 $ (25) $ 7,844
Interest expense 2,276 - 25 (25) 2,276
Non-interest income - external customers 898 625 277 - 1,800
Non-interest income - internal customers - 12 - (12) -
Operating income before income taxes 2,969 335 92 - 3,396
Depreciation and amortization 395 6 2 - 403
Total assets 644,127 - (91) - 644,036
Capital expenditures 88 - - - 86
Three Months Ended September 30, 2002
- ---------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ -----
Interest income $ 8,893 $ - $ 10 $ (10) $ 8,893
Interest expense 2,972 - 10 (10) 2,972
Non-interest income - external customers 641 606 187 - 1,434
Non-interest income - internal customers - 12 - (12) -
Operating income before income taxes 3,056 396 29 - 3,481
Depreciation and amortization 399 8 2 - 409
Total assets 606,502 - 111 - 606,613
Capital expenditures 108 - 104 - 212
Nine Months Ended September 30, 2003
- ---------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ -----
Interest income $ 24,481 $ - $ 49 $ (49) $ 24,481
Interest expense 7,253 - 49 (49) 7,253
Non-interest income - external customers 2,341 1,878 658 - 4,877
Non-interest income - internal customers - 36 - (36) -
Operating income before income taxes 8,862 949 136 - 9,947
Depreciation and amortization 1,187 18 5 - 1,210
Total assets 644,127 - (91) - 644,036
Capital expenditures 428 3 - - 431
Nine Months Ended September 30, 2002
- ---------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------ ------------ -----
Interest income $ 26,481 $ - $ 21 $ (21) $ 26,481
Interest expense 9,522 - 21 (21) 9,522
Non-interest income - external customers 1,852 1,938 484 - 4,274
Non-interest income - internal customers - 37 - (37) -
Operating income before income taxes 8,526 1,299 38 - 9,863
Depreciation and amortization 1,202 23 3 - 1,228
Total assets 606,502 - 111 - 606,613
Capital expenditures 1,165 16 104 - 1,285
13
ITEM 2.
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to focus on important factors affecting
the Corporation's financial condition and results of operations. The discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements, and supplemental financial data.
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of the Corporation and
Bank. These forward-looking statements involve risks and uncertainties and are
based on the beliefs and assumptions of management of the Corporation and Bank
and on information available at the time these statements and disclosures were
prepared. Factors that may cause actual results to differ materially from those
expected include the following:
o General economic conditions may deteriorate and negatively impact the
ability of borrowers to repay loans and depositors to maintain balances.
o Changes in interest rates could reduce income
o Competitive pressures among financial institutions may increase.
o The businesses that the Corporation and Bank are engaged in may be
adversely affected by legislative or regulatory changes, including changes
in accounting standards.
o New products developed or new methods of delivering products could result
in a reduction in business and income for the Corporation and Bank.
o Adverse changes may occur in the securities market.
CRITICAL ACCOUNTING POLICIES
The Corporation's critical accounting policies are listed below. A
summary of the Corporation's significant accounting policies is set forth in
Note 1 to the Consolidated Financial Statements in the Corporation's 2002 Annual
Report on Form 10-K.
The Corporation's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained when earning
income, recognizing an expense, recovering an asset or relieving a liability. In
addition, GAAP itself may change from one previously acceptable method to
another method. Although the economics of our transactions would be the same,
the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimable and (ii)
SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has three basic components: the formula
allowance, the specific allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses a historical loss view as an
indicator of future losses along with various economic factors and, as a result,
could differ from the loss incurred in the future. However, since this history
is updated with the most recent loss information, the errors that might
otherwise occur are mitigated. The specific allowance uses various techniques to
14
arrive at an estimate of loss for specifically identified loans. Historical loss
information, expected cash flows and fair market value of collateral are used to
estimate these losses. The unallocated allowance captures losses whose impact on
the portfolio have occurred but have yet to be recognized in either the formula
or specific allowance. The use of these values is inherently subjective and our
actual losses could be greater or less than the estimates.
Core Deposit Intangibles
In July, 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which impacted the accounting for goodwill and
other intangible assets. Statement 141 eliminated the pooling method of
accounting for business combinations and required that intangible assets that
meet certain criteria be reported separately from goodwill. Statement 142
eliminated the amortization of goodwill and other intangibles that are
determined to have an indefinite life. The Statement requires, at a minimum,
annual impairment tests for goodwill and other intangible assets that are
determined to have an indefinite life. SFAS 142 allows certain intangibles
arising from Bank and Thrift acquisitions to be amortized over their estimated
useful lives.
The Financial Accounting Standards Board issued Statement No. 147,
Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9 in October 2002. FASB Statement No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method, provided interpretive guidance
on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
this Statement removes acquisitions of financial institutions from the scope of
both Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in
paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess
of the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions within the scope of this Statement. In addition,
this Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of this Statement, which relates to the application of the
purchase method of accounting, is effective for acquisitions for which the date
of acquisition was 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
15
been maintained shall be reclassified and accounted for as assets apart from the
unidentifiable intangible asset and shall not be reclassified to goodwill.
Upon adoption of these Statements, the Corporation re-evaluated its
intangible assets that arose from branch acquisitions prior to July 1, 2001. The
intangible assets arising from the premium paid for deposits acquired at the
Gretna office in 1995 and the Yanceyville office in 1996 are classified as core
deposit intangibles and continue to be amortized over their estimated lives
based on management's determination that a business was not acquired in either
of the two purchases.
Non-GAAP Presentations
The management's discussion and analysis refers to the efficiency ratio,
which is computed by dividing non-interest expense by the sum of net interest
income on a tax equivalent basis and non-interest income. This is a non-GAAP
financial measure which we believe provides investors with important information
regarding our operational efficiency. Comparison of our efficiency ratio with
those of other companies may not be possible because other companies may
calculate the efficiency ratio differently. The Corporation, in referring to its
net income, is referring to income under generally accepted accounting
principals, or "GAAP".
The analysis of net interest income in this document is performed on a tax
equivalent basis. Management feels the tax equivalent presentation better
reflects total return, as many financial assets have specific tax advantages
that modify their effective yields. A reconcilement of tax-equivalent net
interest income to net interest income under generally accepted accounting
principals, or "GAAP", is provided in those statements.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). The Interpretation elaborates
on the disclosures to be made by a guarantor in its financial statements under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The Interpretation
requires disclosure of the nature of the guarantee, the maximum potential amount
of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of the
Interpretation were effective beginning January 1, 2003. Management does not
anticipate that the recognition requirements of this Interpretation will have a
material impact on the Corporation's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This Interpretation provides guidance
with respect to the identification of variable interest entities and when the
assets, liabilities, noncontrolling interests, and results of operations of a
variable interest entity need to be included in a corporation's consolidated
financial statements. The Interpretation requires consolidation by business
enterprises of variable interest entities in cases where the equity investment
at risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, which is provided
through other interests that will absorb some or all of the expected losses of
the entity, or in cases where the equity investors lack one or more of the
essential characteristics of a controlling financial interest, which include the
ability to make decisions about the entity's activities through voting rights,
the obligations to absorb the expected losses of the entity if they occur, or
the right to receive the expected residual returns of the entity if they occur.
The Interpretation applies immediately to variable interest entities created
after January 31, 2003, and applies to previously existing entities beginning in
the fourth quarter of 2003. Management is currently evaluating the applicability
of FIN 46 but the adoption of this Interpretation is not expected to have a
material impact on the Corporation's consolidated financial statements.
16
In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is effective for contracts
entered into or modified after June 30, 2003 and is not expected to have an
impact on the Corporation's consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatory redeemable
financial instruments of nonpublic entities. Adoption of the Statement did not
result in an impact on the Corporation's consolidated financial statements.
Refer to the Corporation's December 31, 2002 Annual Report on Form 10-K for
previously announced accounting pronouncements.
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.
RESULTS OF OPERATIONS
NET INCOME
The Corporation's net income for the third quarter of 2003 was $2,405,000,
a decline of 2.3% over the $2,461,000 earned during the same period of 2002. The
slight decline in income was a result of several factors. Interest income
declined at a faster pace than interest expense as loans and investments
repriced to lower market rates faster than their funding liabilities. This
reduction in net interest income, coupled with slight increases in overhead
expenses, was partially offset with strong increases in non-interest income and
a decline in the provision for loan losses.
While earnings declined on a year-to-year basis, the number of shares also
declined due to stock repurchases under the Corporation's outstanding stock
repurchase program. On a basic and diluted per share basis, net earnings totaled
$0.42 for the third quarter of 2003, which was the same as the $0.42 earned for
the same period of 2002. On an annualized basis, return on average total assets
was 1.52% for the third quarter of 2003, compared to 1.67% for the same period
in 2002. Return on average common shareholders' equity was 13.78% and 14.34% for
the third quarter of 2003 and 2002, respectively.
The Corporation's net income for the first nine months of 2003 was
$7,047,000, an increase of 0.7% over the $6,995,000 earned during the same
period of 2002. On a basic and diluted per share basis, net earnings totaled
$1.23 and $1.22 respectively, for the first nine months of 2003. This compared
favorably to the $1.20 in basic and diluted earnings per share recorded for the
first nine months of 2002. Both earnings per share measurement increases were
due to a combination of improved net income combined with a lower number of
17
shares outstanding due to stock repurchases under the Corporation's outstanding
stock repurchase program.
Net interest income after provision for loan losses increased $237,000, or
1.5%, for the first nine months of 2003 compared to the same period in 2002 due
to overall growth in assets and liabilities offset by a decline in the net yield
on earning assets. For the same comparative period, non-interest income
increased by $603,000, led by growth in service charges and mortgage banking
fees. Non-interest expense increased by $756,000 for the first nine months of
2003 compared to the same period in 2002 due primarily to increases in salary
and employee benefit expenses.
On an annualized basis, return on average total assets was 1.52% for the
first nine months of 2003 compared to 1.62% for the same period in 2002.
Annualized return on average common shareholders' equity was 13.39% and 13.94%
for the first nine months of 2003 and 2002, respectively.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$17,993,000 for the nine month period ending September 30, 2003 compared to
$17,692,000 for the same period of 2002, an increase of 1.7% or $301,000. The
interest rate spread decreased to 3.67% from 3.77%, while the net yield on
earning assets decreased to 4.05% from 4.30% for the first nine months of 2003
compared to the same period of 2002.
Yields on earning assets declined due to decreases in interest rate
indexes which are used to price commercial loans, the scheduled re-pricing of
variable rate real estate loans to lower rates, the reinvestment of investment
portfolio cash flows into lower yielding investments, and the addition of new
loans at lower market rates of interest. The rapid prepayments of principal on
mortgage-backed securities purchased at a premium forced faster premium
amortization and further reduced yields on that portion of the securities
portfolio.
Interest-bearing liability costs declined at a slower pace than
interest-earning assets as many liability accounts were priced at what
management considers "floor" rates of between one percent and two tenths of one
percent. This, coupled with the maturity-based repricing of certificates of
deposit, accounted for the 23.8% decline in interest expense.
Average interest-earning assets increased 7.9%, or $43,481,000 while
average interest-bearing liabilities grew 7.5%, or $33,691,000 between September
30, 2002 and September 30, 2003. During this time low cost non-interest bearing
demand deposit growth and growth in shareholder's equity funded the difference
between earning asset growth and interest bearing deposit growth. The funding
mix continued to shift to lower cost transaction accounts including savings
accounts, interest-bearing demand deposits, non-interest bearing demand
deposits, and retail repurchase agreements.
Year to date changes in the interest rate spread and net yield on
earning assets for the nine month period ending September 30, 2003 compared to
the same period in 2002 were negative. The interest rate spread declined from
3.77% in 2002 to 3.67% in 2003. The net yield on earning assets declined from
4.30% in 2002 to 4.05% in 2003. These declines were due to loans and investment
security portfolio yields declining by 0.93% and the cost of interest bearing
liabilities declining by 0.83%.
In late June 2003 the Federal Reserve Bank's Financial Open Market
Committee lowered the benchmark federal funds rate 25 basis points to 1.00%.
This change lowered the prime lending rate to 4.00% for the entire quarter
ending September 30, 2003, which was lower than the 4.75% prime lending rate
during the same period of 2002. Many of the Corporation's assets reprice based
on the prime lending rate or at a rate based on the rates on U.S. Treasury
securities. While the Corporation's balance sheet is liability-sensitive, many
liabilities have approached pricing floors while assets continue to reprice or
be booked at lower yields.
18
When compared to the second quarter of 2003, the interest rate spread and
net yield on earning assets in the third quarter of 2003 declined. The interest
rate spread declined from 3.68% in the second quarter of 2003 to 3.49% during
the third quarter of 2003. The net yield on earning assets declined from 4.07%
in the second quarter of 2003 to 3.84% during the third quarter of 2003. These
declines were due to loans and investment security portfolio yields declining at
a faster pace than the cost of interest bearing liabilities. Spread and yield
compression are expected to continue if rates remain at their current levels.
The following tables demonstrate fluctuations in net interest income
and the related yields for the three and nine month periods ending September 30,
2003, compared to similar prior year periods.
19
Net Interest Income and Rate / Volume Analysis
For the Three Months Ended September 30, 2003 and 2002
Taxable Equivalent Basis (In Thousands)
Interest
Average Balance Income/Expense Yield/Rate
------------------------- ------------------------ ---------------------
2003 2002 2003 2002 2003 2002
---------- ---------- ---------- --------- -------- --------
Loans:
Commercial $ 221,583 $ 180,756 $ 3,114 $ 2,976 5.62% 6.59%
Mortgage 178,343 185,015 2,518 3,103 5.65 6.71
Consumer 26,220 33,043 663 872 10.11 10.56
---------- ---------- ---------- --------- -------- --------
Total loans 426,146 398,814 6,295 6,951 5.91 6.97
---------- ---------- ---------- --------- -------- --------
Securities:
Federal agencies 71,808 41,672 560 479 3.12 4.60
Mortgage-backed 28,431 40,428 225 576 3.17 5.70
State and municipal 43,986 40,291 687 685 6.25 6.80
Other securities 21,665 26,543 295 395 5.45 5.95
---------- ---------- ---------- --------- -------- --------
Total securities 165,890 148,934 1,767 2,135 4.26 5.73
---------- ---------- ---------- --------- -------- --------
Deposits in other banks 13,636 13,520 33 57 .97 1.69
---------- ---------- ---------- --------- -------- --------
Total interest-earning assets 605,672 561,268 8,095 9,143 5.35 6.52
---------- --------- -------- --------
Other non-earning assets 26,168 27,031
---------- ----------
Total assets $ 631,840 $ 588,299
========== ==========
Interest-bearing deposits:
Demand $ 63,856 $ 58,856 45 105 .28 .71
Money market 47,618 44,440 110 196 .92 1.76
Savings 82,118 71,349 150 268 .73 1.50
Time 233,310 226,666 1,613 2,005 2.77 3.54
---------- ---------- ---------- --------- -------- --------
Total interest-bearing deposits 426,902 401,311 1,918 2,574 1.80 2.57
Repurchase agreements 42,024 35,224 113 167 1.08 1.90
Other borrowings 21,152 20,210 245 231 4.63 4.57
---------- ---------- ---------- --------- -------- --------
Total interest-bearing
liabilities 490,078 456,745 2,276 2,972 1.86 2.60
---------- --------- --------- --------
Demand deposits 69,565 59,436
Other liabilities 2,399 3,495
Shareholders' equity 69,798 68,623
---------- ----------
Total liabilities and
shareholders' equity $ 631,840 $ 588,299
========== ==========
Interest rate spread 3.49% 3.92%
======== ========
Net yield on earning assets 3.84% 4.40%
========= ========
Reconcilement to GAAP
- ---------------------
Net interest income - tax equivalent $ 5,819 $ 6,171
Less: Taxable equivalent adjustment 251 250
---------- ---------
$ 5,568 $ 5,921
========== =========
20
Net Interest Income and Rate / Volume Analysis
For the Nine Months Ended September 30, 2003 and 2002
Taxable Equivalent Basis (In Thousands)
Interest
Average Balance Income/Expense Yield/Rate
------------------------- ------------------------ ---------------------
2003 2002 2003 2002 2003 2002
---------- ---------- ---------- --------- -------- --------
Loans:
Commercial $ 215,090 $ 169,413 $ 9,240 $ 8,378 5.73% 6.59%
Mortgage 178,458 183,740 7,991 9,455 5.97 6.86
Consumer 27,849 34,780 2,182 2,715 10.45 10.41
---------- ---------- ---------- --------- -------- --------
Total loans 421,397 387,933 19,413 20,548 6.14 7.06
---------- ---------- ---------- --------- -------- --------
Securities:
Federal agencies 63,535 40,257 1,620 1,424 3.40 4.72
Mortgage-backed 33,302 40,478 1,064 1,830 4.26 6.03
State and municipal 42,377 39,164 2,106 1,998 6.63 6.80
Other securities 22,926 27,287 974 1,244 5.66 6.08
---------- ---------- ---------- --------- -------- --------
Total securities 162,140 147,186 5,764 6,496 4.74 5.88
---------- ---------- ---------- --------- -------- --------
Deposits in other banks 8,719 13,656 69 170 1.06 1.66
---------- ---------- ---------- --------- -------- --------
Total interest-earning assets 592,256 548,775 25,246 27,214 5.68 6.61
---------- --------- -------- --------
Other non-earning assets 26,506 25,286
---------- ----------
Total assets $ 618,762 $ 574,061
========== ==========
Interest-bearing deposits:
Demand $ 62,869 $ 59,110 174 334 .37 .75
Money market 46,190 41,185 374 601 1.08 1.95
Savings 79,883 69,054 587 803 .98 1.55
Time 231,451 229,761 5,010 6,729 2.89 3.90
---------- ---------- ---------- --------- -------- --------
Total interest-bearing deposits 420,393 399,110 6,145 8,467 1.84 2.83
Repurchase agreements 38,736 32,419 373 477 1.28 1.96
Other borrowings 21,773 15,682 735 578 4.50 4.91
---------- ---------- ---------- --------- -------- --------
Total interest-bearing
liabilities 480,902 447,211 7,253 9,522 2.01 2.84
---------- --------- --------- --------
Demand deposits 65,452 56,668
Other liabilities 2,211 3,278
Shareholders' equity 70,197 66,904
---------- ----------
Total liabilities and
shareholders' equity $ 618,762 $ 574,061
========== ==========
Interest rate spread 3.67% 3.77%
======== ========
Net yield on earning assets 4.05% 4.30%
========= ========
Reconcilement to GAAP
- ---------------------
Net interest income - tax equivalent $ 17,993 $ 17,692
Less: Taxable equivalent adjustment 765 733
---------- ---------
$ 17,228 $ 16,959
========== =========
21
PROVISION AND RESERVE FOR LOAN LOSSES
The allowance for loan losses is to provide for losses inherent in the
loan portfolio. The Bank's Credit Committee has responsibility for determining
the level of the allowance for loan losses, subject to the review of the Board
of Directors. Among other factors, the Committee on a quarterly basis considers
the Corporation's historical loss experience, the size and composition of the
loan portfolio, the value and adequacy of collateral and guarantors,
non-performing credits including impaired loans, the Bank's loan "Watch" list,
and national and local economic conditions.
The provision for loan losses was $665,000 for the first nine months of
2003 versus $633,000 for the same period in 2002. Net charged off loans were
$220,000 for the first nine months of 2003 versus $393,000 for the same period
in 2002. The annualized ratio of net charge-offs to average outstanding loans
was .07% in 2003 and .14% in 2002. Management considers these charge-off ratios
lower than those of their peer banks, who generally consider charge-off levels
of .10% to .40% to be within reasonable norms from a historical perspective.
The reserve for loan losses totaled $6,067,000 at September 30, 2003, an
increase of 7.9% over the $5,622,000 recorded at December 31, 2002. The ratio of
reserves to loans, less unearned discount, was 1.44% at September 30, 2003
versus 1.38% at December 31, 2002. The need to increase this ratio in proportion
to total loans since year end 2002 is due to an increase in identified
non-performing credits. Management believes that the allowance for loan losses
is adequate to absorb any inherent losses on existing loans in the Corporation's
loan portfolio at September 30, 2003.
NON-INTEREST INCOME
Non-interest income for the three months ending September 30, 2003, was
$1,800,000, an increase of 25.5% from $1,434,000 reported in the same period of
2002. The increase was due primarily to increases in service charges on deposit
accounts, mortgage banking revenue, and gains on sale and calls of securities.
Service charges on deposit accounts grew 27.9% or $126,000 in the third quarter
of 2003 when compared to the same period in 2002, with the majority of the
increase due to a new consumer overdraft management product. Mortgage banking
revenue increased 81.3% or $91,000 for the three months ending September 30,
2003 when compared to the same period in 2002 due to strong demand for mortgage
refinancing. Gains on sale and calls of securities were $43,000 in the third
quarter of 2003 with none in the comparative quarter of 2002.
Non-interest income for the first nine months of 2003 was $4,877,000,
an increase of 14.1% from the $4,274,000 reported in the same period of 2002.
The comparative increase was due primarily to increases in service charge
income, mortgage banking fees, and other fees and commissions which offset the
slight market-driven decline in trust and investment services revenue. Service
charges on deposit accounts grew 25.1% or $309,000 in the first nine months of
2003 when compared to the same period in 2002, with the majority of the increase
due to a new consumer overdraft management product. Mortgage banking revenue
increased 82.9% or $218,000 in the first nine months of 2003 when compared to
the same period in 2002 due to strong demand for mortgage refinancing.
Trust and investment services income of $1,878,000 during the first
nine months of 2003 was down 3.1% compared to the same period in 2002. Higher
trust asset values than one year prior were offset by declines in estate fee
income, accounting for the decline. The Bank's trust division managed accounts
whose market values approximated $320 million at September 30, 2003, up from
$315 million at June 30, 2003, up from $289 million one year prior.
22
NON-INTEREST EXPENSE
Non-interest expense for the three months ending September 30, 2003 was
$3,802,000, a 3.9% increase from the $3,660,000 reported for the same period
last year. Salaries increased 1.8% from the same period last year to $1,758,000
as of September 30, 2003 while pension and other employee benefits increased
11.3% to $433,000. The salary increase is due to the growth in staff in the
areas of trust and investment services and lending and overall annual salary
increases. Benefits increases have been driven by significant increases in
employee health care costs and pension expense related to the market-driven
decline of pension asset values.
Non-interest expense for the first nine months of 2003 was $11,493,000,
a 7.0% increase from the $10,737,000 reported for the same period last year.
Salaries increased 5.9% from the same period last year to $5,233,000 as of
September 30, 2003 while pension and other employee benefits increased 20.9% to
$1,403,000. The salary increase is due to the growth of staff in the areas of
trust and investment services and lending, the accrual for incentive
compensation which was not accrued in the prior period, and overall annual
salary increases. Benefits increases have been driven by significant increases
in employee health care costs and pension expense related to the market-driven
decline of pension asset values.
Occupancy and equipment increased $71,000, or 3.9%, for the first nine
months of 2003 from the same period in 2002. These increases were primarily the
result of the Henry County, Virginia office that opened in March 2002, increased
technology software and hardware costs, and increases in building maintenance
and utility expenses.
Core deposit intangible amortization of $337,000 for the first nine
months of 2003 and 2002 represents the amortization of the premium paid for
deposits acquired at the Gretna office in 1995 and Yanceyville office in 1996.
These are being amortized on a ten year straight-line basis.
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, was 50.35% and 48.91% for the nine months ended
September 30, 2003 and 2002, respectively. A lower efficiency ratio generally
indicates better expense efficiency. Leaders in expense efficiency in the
banking industry have achieved ratios in the 45% to 55% range while the majority
of the industry remains in the 60-70% range. This is a non-GAAP financial
measure.
INCOME TAX PROVISION
The income tax provision for the first nine months of 2003 was
$2,900,000, an increase of $32,000 from the $2,868,000 reported a year earlier.
The effective tax rate for the first nine months of 2003 was 29.2% compared to
29.1% for the same period of 2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Total assets increased 6.3% to $644,036,000 at September 30, 2003 when
compared to assets of $605,859,000 at December 31, 2002. On an annual basis,
total assets increased 6.1% at September 30, 2003 when compared to assets of
$606,613,000 at September 30, 2002.
For the first nine months of 2003 asset growth of $38.2 million has
been concentrated in the loan and securities portfolio. Loans, net of unearned
income, grew 3.3% or $13,513,000 to $419,916,000 at September 30, 2003, up from
$406,403,000 at December 31, 2002. Loan growth has been concentrated in the
commercial and commercial real estate sectors of the portfolio. Securities grew
10.2% or $16,703,000 to $180,527,000 at September 30, 2003, up from $163,824,000
at December 31, 2002. Interest-bearing deposits in other banks increased by
$6,854,000 to $13,574,000 at September 30, 2003.
23
The funding for the loan growth was through insured deposit and
repurchase agreement account growth. Total insured deposits grew 5.8% or
$27,648,000 to $501,210,000 at September 30, 2003 when compared to $473,562,000
at December 31, 2002. Insured deposits grew in all account categories. Retail
repurchase agreements grew 30.2% or $10,936,000 to $47,091,000 at September 30,
2003 when compared to $36,155,000 at December 31, 2002.
ASSET QUALITY
Non-performing loans include loans on which interest is no longer
accrued, accruing loans that are contractually past due 90 days or more as to
principal and interest payments, and loans classified as troubled debt
restructurings. Loans in a non-accrual status at September 30, 2003 were
$2,612,000 compared with $301,000 at December 31, 2002, and $383,000 on
September 30, 2002. The increase in non-accrual loans is due to one commercial
loan, determined to be impaired according to SFAS 114. This loan was placed on
non-accrual status during the second quarter of 2003. Management is working
closely with the borrower to improve the Bank's collateral position and status
of this loan. During the third quarter management received principal payments
and additional collateral from this borrower, and anticipates further reductions
in the balance outstanding in the next several months from the borrower's
liquidation of collateral.
Loans on accrual status and past due 90 days or more at September 30,
2003 were $362,000 compared with $239,000 at December 31, 2002, and $256,000 on
September 30, 2002. There were no loans classified as troubled debt
restructurings on September 30, 2003, December 31, 2002 or September 30, 2002.
September 30 December 31 September 30
2003 2002 2002
------------ ----------- ------------
90 days past due $ 362 $ 239 $ 256
Non-accrual 2,612 301 383
OREO 146 30 30
------- ------ ------
Non-performing assets $ 3,120 $ 570 $ 669
======= ====== ======
Total non-performing loans as a percentage of total loans were 0.71% at
September 30, 2003, 0.13% at December 31, 2002, and 0.16% at September 30, 2002.
Properties received due to loan foreclosures were $146,000 at September
30, 2003, $30,000 at December 31, 2002, and $30,000 at September 30, 2002.
The gross amount of interest income that would have been recorded on
non-accrual loans as of September 30, 2003, if all such loans had been accruing
interest at the original contractual rate, was $43,000 for the nine month period
ending September 30, 2003. No interest payments were recorded as interest income
during the reporting period for all such non-performing loans.
LIQUIDITY
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity is provided from cash and due from banks,
interest-bearing deposits in other banks, repayments from loans, increases in
deposits, lines of credit from two correspondent banks and two federal agency
banks and a planned structured continuous maturity of investments. Management
believes that these factors provide sufficient and timely liquidity for the
foreseeable future.
Management also takes into account any liquidity needs generated by
off-balance sheet transactions such as commitments to extend credit, commitments
to purchase securities and standby letters of credit.
24
The Corporation's net liquid assets, which includes cash and due from
banks, unpledged government securities, unpledged other securities with
remaining maturities of less than two years, less the Bank's reserve
requirement, to net liabilities ratio was 19.9% at September 30, 2003 and 19.1%
at December 31, 2002. Both of these ratios are considered to reflect adequate
liquidity for the respective periods.
The Bank has a line of credit equal to 15% of assets with the Federal Home
Loan Bank of Atlanta (FHLB) that equaled approximately $96,510,000 with
$75,510,000 available at September 30, 2003. Should the Bank ever desire to
increase their line of credit beyond the current 15% limit, the FHLB would allow
borrowings of up to 40% of total assets once the bank meets specific eligibility
requirements.
The Bank also has federal funds lines of credit facilities established with
two other banks in the amounts of $12,000,000 and $5,000,000, as well as has
access to the Federal Reserve Bank's discount window should a liquidity crisis
occur. The Bank has not used these facilities in the past year and considers
these as backup sources of funds.
Borrowings outstanding under the FHLB line of credit were $21,000,000 at
September 30, 2003 and $22,000,000 at December 31, 2002. The Bank has eight
fixed rate term borrowing contracts outstanding as of September 30, 2003, with
the following final maturities:
Amount Expiration Date
----------- ---------------
$ 1,500,000 January 2004
1,500,000 July 2004
3,000,000 July 2005
1,000,000 July 2006
1,000,000 July 2007
3,000,000 June 2008
5,000,000 August 2008
5,000,000 April 2009
-----------
$21,000,000
===========
OFF-BALANCE SHEET TRANSACTIONS
The Corporation enters into certain financial transactions in the ordinary
course of performing traditional banking services that result in off-balance
sheet transactions. The off-balance sheet transactions recognized as of
September 30, 2003 and December 31, 2002 were commitments to extent credit and
standby letters of credit only.
Commitments to extend credit, which amounted to $121,157,000 at
September 30, 2003 and $107,771,000 at December 31, 2002, represent legally
binding agreements to lend to customers with fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire
without being funded, the total commitment amounts do not necessarily represent
future liquidity requirements.
As of September 30, 2003 there were four commitments to purchase
securities in the amount of $1,816,000 when settled in October. No commitments
to purchase securities existed on December 31, 2002.
Standby letters of credit are conditional commitments issued by the
Bank guaranteeing the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. At September 30, 2003 and December 31, 2002, the Bank had
$3,562,000 and $3,489,000 respectively, in outstanding standby letters of
credit.
25
CAPITAL RESOURCES
During the third quarter of 2003, the Corporation declared and paid a
quarterly cash dividend of $.19 per share. The dividend totaled $1,078,000 and
represented a 44.8% payout of third quarter 2003 net income. During the first
nine months of 2003, the Corporation declared and paid a quarterly cash dividend
of $.56 per share. The dividend totaled $3,195,000 and represented a 45.3%
payout of 2003 net income.
The Corporation's Board of Directors authorized the repurchase of up to
300,000 shares of the Corporation's common stock between August 16, 2000 and
August 15, 2001, 250,000 shares between August 29, 2001 and August 28, 2002,
250,000 shares between August 21, 2002 and August 19, 2003, and 250,000 shares
between August 20, 2003 and August 17, 2004 The repurchases, which may be made
through open market purchases or in privately negotiated transactions, were
15,000 shares during the third quarter of 2003 and 115,000 shares during the
first nine months of 2003 and total 454,466 shares since purchases began on
August 16, 2000.
Federal regulatory risk-based capital ratio guidelines require
percentages to be applied to various assets including off-balance-sheet assets
in relation to their perceived risk. Tier I capital includes shareholders'
equity and Tier II capital includes certain components of nonpermanent preferred
stock and subordinated debt. The Corporation had no preferred stock or
subordinated debt outstanding. Banks and bank holding companies must have a Tier
I capital ratio of at least 4% and a total ratio, including Tier I and Tier II
capital, of at least 8%. As of September 30, 2003 the Corporation had a ratio of
14.21% for Tier I and a ratio of 15.46% for total capital. At December 31, 2002
these ratios were 14.41% and 15.63%, respectively.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effective management of market risk is essential to achieving the
Corporation's objectives. Market risk reflects the risk of economic loss
resulting from adverse changes in market prices and interest rates. This risk of
loss can be reflected in diminished current market values and/or reduced
potential net interest income in future periods. The Corporation is not subject
to currency exchange risk or commodity price risk.
As a financial institution, interest rate risk and its impact on net
interest income is the primary market risk exposure. The Asset/Liability
Investment Committee ("ALCO") is primarily responsible for establishing asset
and liability strategies and for monitoring and controlling liquidity and
interest rate risk.
ALCO uses computer simulation analysis to measure the sensitivity of
earnings and market value of equity to changes in interest rates. The projected
changes in net interest income and market value of portfolio equity ("MVE") to
changes in interest rates are calculated and monitored by ALCO as indicators of
interest rate risk. The projected changes in net interest income and MVE to
changes in interest rates at September 30, 2003 and December 31, 2002 were
within compliance of established policy guidelines, except for a decrease in
current rates by 300 basis points on September 30, 2003, or three percent.
Management does not consider this scenario possible, given the current
historically low level of interest rates. These projected changes are based on
numerous assumptions of growth and changes in the mix of assets or liabilities.
Net interest income for the next twelve months is projected to increase when
interest rates are higher than current rates and decrease when interest rates
are lower than current rates.
26
ITEM 4.
CONTROLS AND PROCEDURES
We maintain a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of our published financial
statements and other disclosures included in this report. Within the 90 days
prior to the date of this report, the Corporation carried out an evaluation,
under the supervision and with the participation of the Corporation's
management, including the Corporation's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Corporation's Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Corporation (including its consolidated subsidiaries) required
to be included in periodic SEC filings. There have been no significant changes
in the Corporation's internal controls or in other factors that could
significantly affect internal controls subsequent to the date the Corporation
carries out its evaluation.
27
PART II
OTHER INFORMATION
Item:
1. Legal Proceedings
The nature of the business of the Corporation's banking subsidiary
ordinarily results in a certain amount of litigation. The subsidiary
of the Corporation is involved in various legal proceedings, all of
which are considered incidental to the normal conduct of business.
Management believes that the liabilities arising from these
proceedings will not have a material adverse effect on the
consolidated financial position or consolidated results of operations
of the Corporation.
2. Changes in securities and use of proceeds
None
3. Defaults upon senior securities
None
4. Submission of matters to a vote of security holders
None
5. Other information
None
6. Exhibits and Reports on Form 8-K
(a) Exhibits -
11. Refer to EPS calculation in the Notes to Financial Statements
31.1 Section 302 Certification of Charles H. Majors, President and
CEO
31.2 Section 302 Certification of Brad E. Schwartz, Senior Vice
President and Secretary-Treasurer (CFO)
32.1 Section 906 Certification of Charles H. Majors, President and
CEO
32.2 Section 906 Certification of Brad E. Schwartz, Senior Vice
President and Secretary-Treasurer (CFO)
(b) Reports on Form 8-K -
Form 8-K filed July 21, 2003 to announce the Corporation's "Quarterly
Financial Update" for the second quarter of 2003.
Form 8-K filed August 20, 2003 to announce the Corporation's approval
to repurchase up to 250,000 shares of common stock between August 20,
2003 and August 17, 2004 and to announce a quarterly dividend of
$.19 per share payable on September 19, 2003 to shareholders of
record as of September 5, 2003.
Form 8-K filed October 22, 2003 to announce the Corporation's
"Quarterly Financial Update" for the third quarter of 2003.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN NATIONAL BANKSHARES INC.
/s/ Charles H. Majors
-------------------------------------
Charles H. Majors
Date - November 6, 2003 President and Chief Executive Officer
/s/ Brad E. Schwartz
---------------------------------------------
Brad E. Schwartz
Senior Vice-President and
Date - November 6, 2003 Secretary-Treasurer (Chief Financial Officer)
29