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, 2003
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Commission file number 0-12820
AMERICAN NATIONAL BANKSHARES INC.
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1284688
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(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
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(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 (229.405 of this chapter) 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 June 30, 2003 was $117,125,134. The number of shares of the
Registrant's Common Stock outstanding on March 10, 2004 was 5,643,679.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 27, 2004 are incorporated by reference in Part
III of this report.
1
CROSS REFERENCE
Page
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PART I
ITEM 1 - Business 5
ITEM 2 - Properties 6
ITEM 3 - Legal Proceedings 7
ITEM 4 - Submission of Matters to a Vote of Security Holders 7
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters 7
ITEM 6 - Selected Financial Data 9
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10
ITEM 7A - Quantitative and Qualitative Disclosures about Market Risk 13
ITEM 8 - Financial Statements and Supplementary Data
Quarterly Financial Results for 2003 and 2002 30
Management's Report on Financial Statements 31
Reports of Independent Public Accountants 32
Consolidated Balance Sheets at December 31, 2003 and 2002 34
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2003 35
Consolidated Statements of Changes in Shareholders' Equity for each
of the years in the three-year period ended December 31, 2003 36
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2003 37
Notes to Consolidated Financial Statements 38
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure *
ITEM 9A - Controls and Procedures 29
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 - Principal Accounting Fees and Services *
PART IV
ITEM 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for reference)
(a)(3) 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 April 22, 2003 Exhibit 3.2 on Form 8-K
filed April 23, 2003
10.1 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
10.2 American National Bankshares Inc. Stock Option Plan dated Exhibit 4.3 on form S-8
August 19, 1997 filed September 17, 1997
10.3 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
10.4 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
2
10.5 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
10.6 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
10.7 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
10.8 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
10.9 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
11. Refer to EPS calculation in the Notes to Financial Statements Filed herewith
31.1 Section 302 Certification of Charles H. Majors, President and CEO Filed herewith
31.2 Section 302 Certification of Brad E. Schwartz, Senior Vice President
and Secretary-Treasurer (CFO) Filed herewith
32.1 Section 906 Certification of Charles H. Majors, President and CEO Filed herewith
32.2 Section 906 Certification of Brad E. Schwartz, Senior Vice President
and Secretary-Treasurer (CFO) Filed herewith
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 during the fourth quarter of 2003.
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* The information required by Item 9 is incorporated herein by reference to
the information that appears under the heading "Independent Public
Accountants" in the Registrant's Proxy Statement for the April 2004 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", "Report of the
Audit and Compliance Committee", and "Code of Conduct" in the Registrant's
Proxy Statement for the April 2004 Annual Meeting of Shareholders.
The information required by Item 11 is incorporated herein by reference to
the information that appears under the headings "Comparative Stock
Performance", "Report of Human Resources and Compensation Committee on
Executive Compensation", and "Executive Compensation" in the Registrant's
Proxy Statement for the April 2004 Annual Meeting of Shareholders.
3
The information required by Item 12 is incorporated herein by reference to
the information that appears under the headings "Security Ownership" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the April 2004 Annual Meeting of
Shareholders.
The information required by Item 13 is incorporated herein by reference to
the information that appears under the heading "Related Party Transactions"
in the Registrant's Proxy Statement for the April 2004 Annual Meeting of
Shareholders.
The information required by Item 14 is incorporated herein by reference to
the information that appears under the heading "Independent Public
Accountants" in the Registrant's Proxy Statement for the April 2004 Annual
Meeting of Shareholders.
4
PART I
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, 2003 the Corporation
employed 208 full-time equivalent persons, and relations with the employees is
considered good.
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, 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, offers 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 twenty 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 and Markets
The Bank's primary service area is generally defined as 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. Vigorous competition exists in this service
area. The Bank competes not only with other commercial banks but also with
diversified financial institutions, credit unions, money market and mutual
funds, mortgage, insurance, and finance companies. American National Bank and
Trust Company has the largest deposit market share in both the City of Danville
and in Pittsylvania County.
The Bank's market areas, primarily in an area known collectively as
Southside Virginia, are heavily dependent on manufacturing and are under a great
deal of economic pressure. The region has traditionally been the home to
textile, furniture, and other manufacturing as well as serving as a hub for
tobacco production and distribution. While diversification has occurred in
manufacturing in recent years, a textile firm and a tire manufacturing plant in
Danville and several large furniture manufacturers in the Henry County/City of
Martinsville area employ a significant workforce. Danville's largest employer,
Dan River Inc., a textile manufacturer, continues to experience financial
hardship. Increased global competition has negatively impacted the textile and
furniture industries in the area with several plants closing due to competitive
pressures or due to the relocation of some operations to foreign countries.
Unemployment as a percent of the workforce remains greater than that of most
other regions of Virginia. The area is also known as a center of commerce for
the tobacco industry, and the major tobacco companies continue to operate leaf
collection and processing facilities in the region. While certain industries
have declined and reduced their workforces, the region has been proactive in the
area of economic development and attracted some new industry, as well as
creating job growth in the education, government, and service sectors.
Supervision and Regulation
The Corporation is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including the
filing of annual, quarterly, and other reports with the Securities and Exchange
Commission (the "SEC"). As an Exchange Act reporting company, the Corporation is
directly affected by the Sarbannes-Oxley Act of 2002 (the "SOX"), which is aimed
at improving corporate governance and reporting procedures. The Corporation is
5
complying with new SEC and other rules and regulations implemented pursuant to
SOX and intends to comply with any applicable rules and regulations implemented
in the future.
The Corporation's common stock is listed on the Nasdaq National market, and
the Corporation must comply with the listing requirements and rules of the
exchange.
The Corporation is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 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 Office of the Comptroller of the Currency (the "OCC"), the
Federal Reserve Board and the Federal Deposit Insurance Corporation, which
insures the Bank's deposits.
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.
The primary supervisory authority of 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 OCC periodic reports containing a full
and accurate statement of its affairs.
Government Monetary Policies and Economic Controls
The policies of the Federal Reserve Board have a direct effect on loan and
deposit growth 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. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC at www.sec.gov.
Executive Officers
This information is incorporated by reference to the Registrant's Proxy
Statement for the April 2004 Annual Meeting of Shareholders.
ITEM 2 - PROPERTIES
The following describes the location and general character of the principal
offices and other materially important physical properties of the Corporation.
As of December 31, 2003, the Bank maintained fourteen full service retail
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/ANB Insurance Services has one office.
The principal executive offices of the Corporation, as well as the
principal executive offices of the Bank, are located at 628 Main Street in the
business district of Danville, Virginia. This building, owned by the Bank, was
originally constructed in 1973 and has three floors totaling 27,000 square feet.
The Corporation owns a building located at 103 Tower Drive in Danville,
Virginia. This three-story facility totaling 15,000 square feet was constructed
in 1985, and serves as a retail banking office, the headquarters and office of
ANB Mortgage Corp., as well as housing operations and administrative staff of
the Bank.
6
The Corporation owns an office building on 203 Ridge Street, Danville,
Virginia, which is currently leased to Bankers Insurance, LLC. The Bank has a
minority ownership interest in Bankers Insurance, LLC.
The Bank leases a three building office complex in Martinsville, Virginia,
that houses a retail banking office, a trust and investment services office, and
an office for ANB Mortgage Corp. This office serves as the headquarters for the
Martinsville/Henry County market. The Bank also leases the retail banking
offices in South Boston, Southern Henry County, and on West Main Street in
Danville, Virginia. The Southern Henry County location is a ground lease, and
the Bank owns the building. Total lease payments in 2003 for these facilities,
as well as for ATM leases at non-retail office locations, were $126,000.
The Bank owns eight other retail office locations for a total of ten owned
retail office locations. There are no mortgages or liens against any of the
properties owned by the Bank or the Corporation.
The Bank operates twenty Automated Teller Machines ("ATMs") on owned or
leased facilities.
There were no directors or officers with any ownership interest in any
leased facility of the Bank or the Corporation.
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.
PART II
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 year end 2003 the Corporation had 1,345 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 2003 and 2002.
Market Price of the Corporation's Common Stock
Nasdaq closing price Dividends
-------------------- declared
2003 Low High per share
- ----------- ------- ------ ---------
4th quarter $ 24.99 $ 27.23 $ .19
3rd quarter $ 24.77 $ 28.11 $ .19
2nd quarter $ 22.87 $ 25.96 $ .19
1st quarter $ 24.30 $ 27.06 $ .18
------
$ .75
======
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
======
7
Stock Option Plan
The Corporation maintains a stock option plan (the "Plan") that is designed
to attract and retain qualified personnel in key positions, provide employees
with a proprietary interest in the Corporation as an incentive to contribute to
the success of the Corporation and the Bank and reward employees for outstanding
performance and the attainment of targeted goals. The Stock Option Plan provides
for the grant of incentive stock options intended to comply with the
requirements of Section 422 of the Internal Revenue Code of 1986 ("incentive
stock options"), as well as non-qualified stock options.
The Plan was approved by the Shareholders at the April 1997 Annual Meeting,
and is administered by a committee of the Board of Directors of the Corporation,
each member of which is a "non-employee director" as defined in Rule 16b-3 under
the Securities Exchange Act of 1934. Unless sooner terminated, the Plan is in
effect until December 31, 2006. Under the Plan, the committee determines which
employees will be granted options, whether such options will be incentive or
non-qualified options, the number of shares subject to each option, whether such
options may be exercised by delivering other shares of common stock and when
such options become exercisable. In general, the per share exercise price of an
incentive stock option must be at least equal to the fair market value of a
share of common stock on the date the option is granted
Stock options shall become vested and exercisable in the manner specified
by the committee. In general, each stock option or portion thereof shall be
exercisable at any time on or after it vests and is exercisable until ten years
after its date of grant
Year Ended December 31, 2003
------------------------------------------------------------------------
Number of Shares Weighted-Average Number of Shares
to be Issued Upon Per Share Exercise Remaining Available
Exercise Price of for Future Issuance
of Outstanding Outstanding Options Under
Options Stock Option Plan
----------------- ------------------- -------------------
Equity compensation plans
approved by shareholders 224,037 $18.77 54,544
Equity compensation plans not
approved by shareholders - - -
------- ------ ------
Total 224,037 $18.77 54,544
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8
ITEM 6 - Summary of Selected Consolidated Financial Data
(in thousands, except per share amounts)
American National Bankshares Inc. & Subsidiary
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Operations Information:
Interest income:
Interest on deposits in other banks.......................$ 110 $ 248 $ 385 $ 179 $ 273
Securities................................................ 6,840 7,737 9,218 10,127 9,467
Loans..................................................... 25,228 27,150 30,217 28,300 23,959
-------- -------- -------- -------- --------
Total interest income................................... 32,178 35,135 39,820 38,606 33,699
Interest expense............................................ 9,391 12,310 17,502 17,343 14,736
-------- -------- -------- -------- --------
Net interest income......................................... 22,787 22,825 22,318 21,263 18,963
Provision for loan losses................................... 920 873 1,015 1,020 670
Non-interest income......................................... 6,671 5,712 5,668 4,771 4,493
Non-interest expense........................................ 15,111 14,285 13,614 12,923 11,542
-------- -------- -------- -------- --------
Income before income taxes.................................. 13,427 13,379 13,357 12,091 11,244
Income taxes................................................ 3,914 3,918 3,942 3,415 3,320
-------- -------- -------- -------- --------
Net income..................................................$ 9,513 $ 9,461 $ 9,415 $ 8,676 $ 7,924
======== ======== ======== ======== ========
Balance Sheet Information:
Securities..................................................$207,479 $163,824 $156,791 $162,929 $166,272
Net loans................................................... 400,953 400,781 370,006 334,611 289,386
Total deposits.............................................. 501,688 473,562 464,012 426,588 385,558
Shareholders' equity........................................ 71,931 70,736 65,397 63,338 56,719
Total assets................................................ 644,302 605,859 572,887 541,389 491,391
Per Share Information:*
Earnings - basic............................................$ 1.67 $ 1.63 $ 1.58 $ 1.42 $ 1.30
Earnings - diluted.......................................... 1.65 1.62 1.58 1.42 1.30
Dividends................................................... .75 .71 .66 .585 .525
Book value.................................................. 12.71 12.24 11.23 10.45 9.29
Ratios:
Return on average assets.................................... 1.52% 1.63% 1.69% 1.70% 1.68%
Return on average shareholders' equity...................... 13.52% 13.97% 14.49% 14.74% 14.17%
Average shareholder's equity/average assets................. 11.27% 11.64% 11.68% 11.54% 11.89%
Total risk-based capital/assets............................. 15.99% 15.63% 15.56% 17.09% 17.79%
Dividend payout ratio....................................... 44.90% 43.52% 41.68% 41.07% 40.44%
Net charge-offs to average net loans........................ .30% .15% .12% .13% .13%
Allowance for loan losses to period-end
loans, net of unearned income............................. 1.30% 1.38% 1.42% 1.40% 1.41%
* 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 shareholders July 15, 1999, with a record date of July 1, 1999.
9
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 2003 performance.
ANALYSIS OF OPERATING RESULTS
NET INCOME
The Corporation reported record profitability during 2003. Net income for
the year ended December 31, 2003 was $9,513,000, an increase of 0.55% over the
$9,461,000 earned during the same period of 2002. On a basic per share basis,
net earnings totaled $1.67 and on a diluted per share basis earnings totaled
$1.65 for the year ended December 31, 2003. For the year ended December 31,
2002, basic earnings per share were $1.63 and diluted earnings per share were
$1.62.
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 1.52%, 1.63%, and
1.69% for the years ended December 31, 2003, 2002 and 2001, respectively. The
returns on average shareholders' equity were 13.52%, 13.97%, and 14.49% 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 declined $86,000, or 0.38%,
for 2003 compared to the same period in 2002 due to the lack of year-over-year
loan growth, an increase in the allowance for loan losses, and a continued
decline in the net interest margin. Non-interest income grew by $960,000, or
16.8%, and was driven by growth in deposit service charges and overdraft/NSF
fees, mortgage banking income, and other fees and commissions. Unfortunately,
the overall increase in revenue was mostly offset by an increase in non-interest
expense of $826,000, or 5.8%. The net effect was an increase in net income of
$52,000.
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, the mix of interest-earning assets and
interest-bearing liabilities, 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 3.98%
in 2003, 4.28% in 2002, and 4.39% in 2001. The thirty basis point (0.30%)
decrease in net yield during 2003 was primarily the result of U.S. monetary
policy that kept rates at historic lows during the year. During 2003, the
Federal Reserve decreased the target federal funds rate in June by 0.25%, for a
total three year reduction of 5.50%. 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 over the past three years.
The Wall Street Journal prime rate fell from 4.25% at January 1, 2003 to 4.00%
at December 31, 2003, compared to 9.50% at December 31, 2000. Almost half of the
loan portfolio is tied to the Wall Street Journal prime rate, with 70.5% of all
loans repricing due to maturity or contractual repricing (to the prime rate or a
U.S. Treasury index rate) during 2004.
While the Corporation's balance sheet is technically liability-sensitive,
management feels many of the funding costs are at or very close to market
floors, and through the year it remained increasingly difficult to reduce
funding costs at the same pace with the customer- or market-driven reductions in
asset yields. The resultant decrease in interest income from the lower yields
10
on earning assets exceeded the decrease in interest expense from lower costs of
interest-bearing liabilities. The mix of earning assets and liabilities also
affects the net interest margin. While the Corporation continues to grow funding
liabilities in the lower cost areas of demand deposits, savings accounts, and
repurchase agreements, the lack of loan growth forced growth of the investment
securities portfolio. The investment securities portfolio earns a lower rate of
interest typically than the loan portfolio, and therefore when investment
securities grow faster than loans, the overall yield declines. Because the
funding rates do not typically move upward to the full extent of the asset
indexes, and due to the heavy concentration of earning assets repricing in 2004,
Management considers the Corporation's balance sheet to be asset-sensitive.
Table 1 demonstrates fluctuations in net interest income and the related yields
for the years 2003, 2002, and 2001.
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
------------------------------ ------------------------------ ---------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
-------- -------- -------- -------- -------- -------- ------- ------- -------
Loans:
Commercial $214,242 $174,172 $139,094 $ 11,966 $ 11,337 $ 11,188 5.59% 6.51% 8.04%
Mortgage 177,423 183,297 179,682 10,574 12,383 14,622 5.96 6.76 8.14
Consumer 27,205 33,925 43,609 2,790 3,555 4,541 10.26 10.48 10.41
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total loans 418,870 391,394 362,385 25,330 27,275 30,351 6.05 6.97 8.38
-------- -------- -------- -------- -------- -------- ------- ------- -------
Securities:
Federal agencies 71,153 43,063 42,698 2,365 1,942 2,709 3.32 4.51 6.34
Mortgage-backed 30,745 40,055 43,628 1,316 2,352 2,723 4.28 5.87 6.24
State and municipal 43,993 39,173 39,208 2,844 2,667 2,677 6.46 6.81 6.83
Other securities 22,696 26,962 30,947 1,247 1,629 1,959 5.49 6.04 6.33
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total securities 168,587 149,253 156,481 7,772 8,590 10,068 4.61 5.76 6.43
-------- -------- -------- -------- -------- -------- ------- ------- -------
Deposits in other banks 11,236 15,792 11,726 110 248 385 .98 1.57 3.28
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total interest-earning assets 598,693 556,439 530,592 33,212 36,113 40,804 5.55 6.49 7.69
-------- -------- -------- ------- ------- -------
Other non-earning assets 25,918 25,459 25,841
-------- -------- --------
Total assets $624,611 $581,898 $556,433
======== ======== ========
Deposits:
Demand $ 63,858 $ 59,852 $ 56,419 225 417 495 .35 .70 .88
Money market 47,293 42,369 41,225 478 775 1,318 1.01 1.83 3.20
Savings 80,876 70,073 62,792 713 1,049 1,177 .88 1.50 1.87
Time 230,070 229,074 229,050 6,500 8,607 12,617 2.83 3.76 5.51
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total deposits 422,097 401,368 389,486 7,916 10,848 15,607 1.88 2.70 4.01
Repurchase agreements 40,917 34,183 29,814 496 634 1,088 1.21 1.85 3.65
Other borrowings 21,578 17,274 15,491 979 828 807 4.54 4.79 5.21
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total interest-bearing
liabilities 484,592 452,825 434,791 9,391 12,310 17,502 1.94 2.72 4.03
-------- -------- -------- -------- -------- -------- ------- ------- -------
Demand deposits 66,300 58,075 52,719
Other liabilities 3,352 3,289 3,941
Shareholders' equity 70,367 67,709 64,982
-------- -------- --------
Total liabilities and
Shareholders' equity $624,611 $581,898 $556,433
======== ======== ========
Interest rate spread 3.61% 3.77% 3.66%
======= ======= =======
Net interest margin 3.98% 4.28% 4.39%
======= ======= =======
Reconcilement to GAPP
Net interest income tax equivalent 23,821 23,803 23,302
Less: Taxable equivalent adjustment 1,034 978 984
-------- -------- --------
$ 22,787 $ 22,825 $ 22,318
======== ======== ========
11
The growth in the volume of loans throughout the year could not offset the
decline due to rates, with the tax-equivalent interest income on loans declining
by $1,945,000. This was a much smaller decline than the decline that occurred
between 2002 and 2001, when the decline was $3,076,000. In 2003 the mortgage
loan category accounted for the majority of the net decrease, which was due to
the refinancing of existing loans to lower rates, adding new loans at lower
market rates, and losing variable rate mortgage loans to the fixed-rate
secondary market. Had the prime rate and U.S. Treasury rates remained flat or
risen in 2003 to more historically normalized levels, interest income on loans
would have been much greater.
The growth in the volume of investment securities also could not offset the
decline due to rates, with the tax-equivalent interest income on investment
securities declining by $818,000. The primary driver of the decline in income
was mortgage-backed securities, which declined in volume due to rapid payoffs of
the underlying mortgages during the first three quarters of 2003, combined with
new volume being added at the current low market rates.
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).
Total interest expense decreased by a net amount of $2,919,000 in 2003,
with a decrease of $3,514,000 due to lower rate funding costs in all categories
with volume primarily in the savings, repurchase agreements, and other
borrowings categories accounting for most of the $595,000 increase in expense
due to volume. Time deposits led the decline in interest expense as a majority
of these accounts re-priced during the year.
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):
2003 vs. 2002 2002 vs. 2001
------------------------------------ -----------------------------------
Change Change
Interest Attributable to Interest Attributable to
Increase ---------------------- Increase ----------------------
(Decrease) Rate Volume (Decrease) Rate Volume
---------- --------- --------- ---------- --------- ---------
Interest income
Loans:
Commercial $ 629 $ (1,750) $ 2,379 $ 149 $ (2,366) $ 2,515
Mortgage (1,809) (1,422) (387) (2,239) (2,528) 289
Consumer (765) (74) (691) (986) 29 (1,015)
---------- --------- ---------- ---------- --------- ---------
Total loans (1,945) (3,246) 1,301 (3,076) (4,865) 1,789
---------- --------- ---------- ---------- --------- ---------
Securities:
Federal agencies 423 (606) 1,029 (767) (790) 23
Mortgage-backed (1,036) (558) (478) (371) (156) (215)
State and municipal 177 (139) 316 (10) (8) (2)
Other securities (382) (139) (243) (330) (86) (244)
---------- --------- ---------- ---------- --------- ---------
Total securities (818) (1,442) 624 (1,478) (1,040) (438)
---------- --------- ---------- ---------- --------- ---------
Deposits in other banks (138) (78) (60) (137) (243) 106
---------- --------- ---------- ---------- --------- ---------
Total interest income (2,901) (4,766) 1,865 (4,691) (6,148) 1,457
---------- --------- ---------- ---------- --------- ---------
Interest expense
Deposits:
Demand (192) (218) 26 (78) (107) 29
Money market (297) (379) 82 (543) (579) 36
Savings (336) (480) 144 (128) (254) 126
Time (2,107) (2,144) 37 (4,010) (4,011) 1
---------- --------- ---------- ---------- --------- ---------
Total deposits (2,932) (3,221) 289 (4,759) (4,951) 192
Repurchase agreements (138) (247) 109 (454) (595) 141
Other borrowings 151 (46) 197 21 (68) 89
---------- --------- ---------- ---------- --------- ---------
Total interest expense (2,919) (3,514) 595 (5,192) (5,614) 422
---------- --------- ---------- ---------- --------- ---------
Net interest income $ 18 $ (1,252) $ 1,270 $ 501 $ (534) $ 1,035
========== ========= ========== ========== ========= =========
12
MARKET RISK MANAGEMENT
Management spent a great deal of time focusing on the management of the
balance sheet in 2003, as rates hit lows not seen since the 1950's. 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 and other selected 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.
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
no changes in balance sheet mix. The interest rate sensitivity analysis in Table
3 reflects the Corporation's assets and liabilities on December 31, 2003 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):
13
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 $ 1,652 $ - $ - $ - $ - $ 1,652
Securities 35,433 50,705 56,872 18,059 46,410 207,479
Loans 118,812 167,449 113,789 5,376 819 406,245
----------- ----------- ---------- ----------- --------- ---------
Total interest sensitive assets 155,897 218,154 170,661 23,435 47,229 615,376
----------- ----------- ---------- ----------- --------- ---------
Interest sensitive liabilities:
NOW and savings deposits 152,084 - - - - 152,084
Money market deposits 59,251 - - - - 59,251
Time deposits 41,910 102,424 53,604 21,295 93 219,326
Repurchase agreements and
other borrowings 48,535 1,500 4,000 9,000 5,000 68,035
----------- ----------- ---------- ----------- --------- ---------
Total interest sensitive liabilities 301,780 103,924 57,604 30,295 5,093 498,696
----------- ----------- ---------- ----------- --------- ---------
Interest sensitivity gap $ (145,883) $ 114,230 $ 113,057 $ (6,860) $ 42,136 $ 116,680
=========== =========== ========== =========== ========= =========
Cumulative interest sensitivity gap $ (145,883) $ (31,653) $ 81,404 $ 74,544 $ 116,680
=========== =========== ========== =========== =========
Percentage cumulative gap
to total interest sensitive assets (23.7)% (5.1)% 13.2 % 12.1 % 19.0 %
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 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, 2003 (in thousands).
The projected changes in net interest income and MVE to changes in interest
rates at December 31, 2003, were within compliance of established policy
guidelines, except for a decrease in current rates by 300 basis points on
December 31, 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.
The negative one year cumulative interest sensitivity gap of $31,653,000 on
December 31, 2003 has declined from the negative one year cumulative interest
sensitivity gap of $35,047,000 on December 31, 2002, and the negative one year
cumulative interest sensitivity gap of $71,761,000 on December 31, 2001. This
decline indicates 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 affect liabilities 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
and investment securities.
14
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% $ 2,586 10.99 % $ (4,514) (4.77)%
Up 2% 1,571 6.67 (2,948) (3.11)
Up 1% 1,111 4.72 (1,424) (1.50)
Down 1% (842) (3.58) 1,273 1.34
Down 2% (2,257) (9.59) 2,264 2.39
Down 3% (3,686) (15.66) 2,262 2.39
(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 exact
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.
Based on the modeling system used by the Corporation to measure the impact
of rate changes to net interest income, an increase of just 1% to the federal
funds rate, and the resulting changes to the Wall Street Journal prime rate and
expected changes to the U.S. Treasury interest rate curve would add, for a full
twelve month period, $1,111,000 to pre-tax net interest income. Should the same
rates decrease by 1%, pre-tax net interest income would decline by $842,000 for
a twelve month period. Management continues to believe interest rates are at or
near a floor and anticipates the federal funds and other market interest rates
to rise either late in 2004 or early in 2005.
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 $6,671,000 in 2003 compared with $5,712,000 in
2002 and $5,668,000 in 2001. This was an increase of 16.8% for 2003, compared to
only a 0.8% increase for 2002. The major components of non-interest income are
from 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 Corporation had two important initiatives in 2003 that drove the
increase in non-interest income. Service charges on deposit accounts increased
primarily due to the introduction of an overdraft/NSF program that allows retail
customers to overdraw their accounts without the negative stigma associated with
an overdraft. This program was initiated in April of 2003 with broad customer
acceptance. ANB Mortgage Corp. also expanded their origination staff during 2003
to take advantage of the low interest rate environment and refinancing boom. The
rate environment had a positive impact on loan volume closed, which drove
revenue growth in this area.
15
While income from the trust and investment services division continues to
be the number one category of non-interest income, there was nominal growth in
2003 as the market values of assets slowly recovered from their lows of the
previous two years. Fees from the management of trusts, estates and asset
management accounts totaled $2,523,000 in 2003, a slight increase from
$2,516,000 of 2002. Trust and investment services fees in 2002 decreased 2.1%
from 2001. Declines in the equity markets placed pressure on the growth in fee
income in 2003 and 2002. The Bank's trust and investment services division
managed assets with an approximate market value of $338,000,000 at December 31,
2003 and $297,630,000 at December 31, 2002, compared to $334,942,000 at year end
2001. Only in the fourth quarter of 2003 did asset values grow back to the
levels of year-end 2001.
Service charges on deposit accounts were $2,163,000 in 2003, an increase of
$457,000, or 26.8%, from 2002. Service charges during 2002 totaled $1,706,000,
which was a 23.2% increase from 2001. As noted above, the main reason for the
increase was the introduction of an overdraft/NSF program. Changes in the fee
structure and additional accounts obtained contributed to the remaining portion
of the growth in income in 2003, and to all the increase in income in 2002.
Service charge pricing on deposit accounts is typically changed annually to
reflect current costs and competition.
Other fees and commissions were $914,000 in 2003, $816,000 in 2002, and
$749,000 in 2001. 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 2003
resulted primarily from additional earnings at ANB Investor Services, increases
in interchange income from debit card transactions, and growth in non-customer
ATM transaction fees.
Mortgage banking income represents fees from originating and selling
residential mortgage loans through ANB Mortgage Corp., a wholly owned subsidiary
of the Bank, which began operations in December 1996. Mortgage banking income
was $571,000 in 2003, $361,000 in 2002, and $365,000 in 2001. Both loan volume
and the yield per loan were higher in 2003, contributing to the increase in
revenue.
Securities gains of $115,000 in 2003 were up from $39,000 in 2002, but down
considerably from the $367,000 in net gains recorded in 2001. In 2003 Management
sold certain securities that either no longer met the investment strategy of the
Corporation or were considered a positive swap of like-kind securities at a
slightly longer maturity. A portion of the gains were due to pre-maturity calls
at a premium or at par. The large volume of gains in 2001 was primarily the
result of pre-maturity calls of U.S. government agency investment securities
during a period of rapid interest rate decline.
Other income was $386,000 in 2003, an increase of 41.1% from the $273,000
recorded in 2002, which in turn was an increase of 17.8% from $232,000 recorded
in 2001. Check order income and dividends from an equity interest in a title
agency account for the majority of other income. The mortgage refinance boom of
2003 was the primary reason the dividend returns on the Corporation's investment
in the title agency increased. Also in other income were funds from the highway
department to compensate the Corporation for encroachment at one of the Danville
retail banking offices.
NON-INTEREST EXPENSE
Non-interest expense for 2003 was $15,111,000, a 5.8% increase from the
$14,285,000 reported in 2002, which in turn increased 4.9%, over $13,614,000 in
2001. Non-interest expense includes salaries, pension, health insurance and
other employee benefits, occupancy and equipment expense, core deposit
intangible amortization and other expenses. The majority of the increase in this
area was due to additional pension expense and healthcare insurance premium
increases.
Salaries of $6,844,000 in 2003 increased $324,000, or 5.0%, over 2002 due
to additional staffing as well as salary increases for existing staff. Salaries
of $6,520,000 in 2002 increased only $136,000, and were held to only a 2.1%
increase from 2001 through more efficient staffing.
Pension and other employee benefits totaled $1,814,000 in 2003, an increase
of 23.3% from the $1,471,000 recorded in 2002, which in turn was an increase of
5.8% from the $1,391,000 reported in 2001. The increases in both years are due
to two major items that were outside of the control of management: increased
premiums on medical insurance and higher pension costs. Other benefit cost
increases could be traced to additional staffing or plan participation as social
security taxes, Medicare taxes, and 401k contribution expenses increased.
Pension expense in 2003 was $531,000, compared to $296,000 in 2002 and
$209,000 in 2001. A large number of withdrawals in 2002 related to retirement
payouts and a lower interest rate environment, combined with the general decline
in the market value of the assets under management and the returns on those
assets, created the large 79.4% increase in pension expense in 2003 when
compared to 2002. Health care insurance expenses continued to increase at a much
16
higher rate than overall inflation, with expense net of employee health care
contributions of $537,000 in 2003 compared to $496,000 in 2002.
Occupancy and equipment expense increased only marginally to $2,513,000 in
2003. The 2.2% increase was primarily driven by increases in computer software
maintenance and other small increases relating to facility utilities expenses.
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.
The amortization will be complete in 2005 for the Gretna office and 2006 for the
Yanceyville office.
Other expense was $3,490,000 in 2003, an increase of 3.1% over the
$3,385,000 reported in 2002, which increased from $3,074,000 recorded in 2001.
The increase in 2003 was due to increased marketing expenses, ATM and Visa
network fees, and Virginia bank franchise taxes, which was partially offset by a
reduction in professional expenses.
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 49.7%, 48.4%, and 47.6% for 2003,
2002, and 2001, respectively. A lower efficiency ratio indicates more favorable
expense efficiency. Leaders in expense efficiency in the banking industry have
achieved ratios in the 45-55% range while the majority of the industry remains
in the 55-70% 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 2003 earnings amounted to $3,914,000, resulting
in an effective tax rate of 29.2% compared to $3,918,000, or 29.3% in 2002, and
$3,941,000, or 29.5% in 2001. The Corporation was subject to a blended Federal
tax rate of 34.3% in 2003, and a Federal tax rate of 34.2% in 2002 and 2001. 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 2003 as
compared to 2002 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 6.3% to $644,302,000 at December 31, 2003 when
compared to assets of $605,859,000 at December 31, 2002. Asset growth has been
concentrated in the investment securities portfolio. Portfolio loan growth was
flat for 2003. Portfolio loans exclude loans held for sale, which are loans
originated for the secondary market by ANB Mortgage Corp. that have closed but
not funded. Even with loan growth flat overall, commercial and commercial real
estate loans increased while there was a decline in residential mortgage and
consumer loans. The increase in investment securities primarily occurred in the
U.S. Government Agency and municipal securities portfolios.
Total liabilities grew 7.0% to $572,371,000 at December 31, 2003 when
compared to $535,124,000 at December 31, 2002. Total deposits increased
$28,125,000 or 5.9% during 2003 and retail repurchase agreement accounts
increased $10,879,000 or 30.1%. Retail repurchase agreements are used by
commercial accounts to earn interest on short-term funds and mature daily.
Management considers these accounts to be core funding. The deposit growth and
resultant mix again shifted to lower cost deposits during the year such as
non-interest checking, interest checking, savings, and money market accounts.
Borrowed fixed-rate advances from the Federal Home Loan Bank of Atlanta declined
$1,000,000 as one fixed-rate advance matured.
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
17
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.
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):
2003 2002 2001
------------------------- --------------------------- --------------------------
Taxable Taxable Taxable
Book Equivalent Book Equivalent Book Equivalent
Value Yield Value Yield Value Yield
--------- ---------- --------- ---------- ---------- ----------
Federal Agencies:
Within 1 year $ 18,033 1.40 % $ 1,000 2.55 % $ - - %
1 to 5 years 63,199 3.24 40,650 4.17 28,192 5.35
5 to 10 years 33,670 2.81 17,642 3.13 5,000 6.12
Over 10 years - - - - - -
--------- ---------- --------- ---------- --------- ----------
Total 114,902 2.82 59,292 3.83 33,192 5.47
--------- ---------- --------- ---------- --------- ----------
Mortgage-backed:
Within 1 year - - 1,144 6.48 1,881 6.87
1 to 5 years 1,259 3.13 281 6.62 4,141 6.72
5 to 10 years 8,958 4.95 14,429 4.81 6,175 6.19
Over 10 years 10,703 4.71 19,499 5.87 31,909 6.25
--------- ---------- --------- ---------- --------- ----------
Total 20,920 4.72 35,353 5.46 44,106 6.31
--------- ---------- --------- ---------- --------- ----------
State and Municipal:
Within 1 year 2,150 6.71 3,204 6.76 1,501 7.89
1 to 5 years 17,019 6.11 17,720 6.44 17,310 7.33
5 to 10 years 26,689 5.14 14,678 6.56 19,324 7.54
Over 10 years 3,912 6.52 3,677 6.97 531 7.79
--------- ---------- --------- ----------- --------- ----------
Total 49,770 5.65 39,279 6.56 38,666 7.46
--------- ---------- --------- ----------- --------- ----------
Other Securities:
Within 1 year 2,003 6.15 5,219 6.45 10,525 2.10
1 to 5 years 10,891 6.02 13,434 6.13 17,790 6.50
5 to 10 years - - - - 3,098 6.32
Over 10 years 7,029 2.91 7,335 5.17 7,430 5.51
--------- ---------- --------- ----------- ------------- ----------
Total 19,923 4.94 25,988 5.92 38,843 5.10
--------- ---------- --------- ----------- ------------- ----------
Total portfolio $ 205,515 3.91 % $ 159,912 5.20 % $154,807 6.11 %
========= ========== ========= =========== ============= ==========
At December 31, 2003 total securities at amortized cost were $205,515,000,
an increase of 28.5% from year-end 2002. A portion of the increase, $15,000,000,
was a short-term investment used to offset a large customer deposit that
deposited in the Bank between December 2003 and January 2004. Excluding this
short-term investment, securities growth would have been 19.1%, or $30,603,000.
Securities of U.S. government agencies represented 55.9% of the securities
portfolio book value, mortgage securities issued by U.S. government corporations
were 10.2%, obligations of state and municipal subdivisions were 24.2%, and
other investments were 9.7%. The $15,000,000 short term investment was invested
in U.S. government agency securities.
18
As of December 31, 2003, there was a net unrealized gain of $1,964,000
related to the available for sale investment portfolio compared to $3,912,000 at
year-end 2002. The market value of securities held to maturity at December 31,
2003 was more than the book value by $1,352,000. Note 2 of the consolidated
financial statements provides details of the amortized cost, unrealized gains
and losses, and estimated fair value of each category of the investment
portfolio as of December 31, 2003 and 2002.
The state and municipal securities were diversified among many different
issues and localities.
Loan Portfolio
The Corporation's lending activities are its principal source of income.
Loans, net of unearned income declined $158,000 or 0.04% during 2003 after
increasing $31,063,000 or 8.3% in 2002. Loans held for sale are loans originated
for the secondary market by ANB Mortgage Corp. that have closed but not funded
declined from $1,285,000 to $560,000 from 2002 to 2003. The discussion below
excludes loans held for sale.
While loan growth was flat on a year to year basis, there was strong loan
growth through mid-year 2003. Loans grew $13,349,000 in the first quarter of
2003 and an additional $12,895,000 in the second quarter of 2003. Loans began to
decline in the later half of the year as loans dropped ($12,731,000) in the
third quarter of 2003 and an additional ($13,671,000) in the fourth quarter of
2003. The loan growth in the first half of the year was offset by the payoff of
approximately $18,000,000 in out of market participation loans and a decline in
overall loan volume and line of credit activity.
The primary increases in types of loans in 2003 were in loans secured by
real estate, which were offset by declines in commercial and industrial and
consumer loans. Real estate loans secured by non-farm, nonresidential properties
and real estate loans secured by 1-4 family property increased at a greater pace
than other loans. Management considers the loan portfolio diversified as it
consists of 33.5% in residential real estate loans, 36.7% in other real estate
secured loans including commercial real estate, multi-family, farmland and
construction and land development loans, 24.0% in commercial, industrial and
agricultural loans, and 5.8% in consumer loans as of December 31, 2003, 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, 2003, the Bank had no loan concentrations (loans
to borrowers engaged in similar activities) which exceeded 10% of total loans.
Table 6 - Loans
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Real estate loans:
Construction and land development $ 12,790 $ 9,208 $ 10,282 $ 9,284 $ 7,317
Secured by farmland 3,430 1,485 1,110 1,616 1,306
Secured by 1-4 family residential
properties 136,229 129,905 126,607 121,449 108,994
Secured by multi-family (5 or more)
residential properties 6,801 6,329 6,385 5,023 4,532
Secured by nonfarm, nonresidential
properties 126,164 107,263 88,648 67,312 54,170
Loans to farmers 1,618 1,844 1,452 1,625 2,468
Commercial and industrial loans 91,419 113,575 98,324 83,428 66,459
Consumer loans 23,581 32,008 36,077 44,389 45,235
Loans for nonrated industrial
development obligations 4,077 4,745 6,436 5,590 3,236
Deposit overdrafts 136 41 19 40 24
-------- -------- -------- -------- --------
Loans - net of unearned income $406,245 $406,403 $375,340 $339,756 $293,741
======== ======== ======== ======== ========
19
Table 7 - Scheduled Loan Maturities
Commercial
and Real Estate
Agricultural Construction Total
------------ ------------ -----
1 year or less $ 27,088 $ 1,347 $ 28,435
1-5 years 55,208 10,416 65,624
After 5 years 14,818 1,027 15,845
-------- -------- --------
Total $ 97,114 $ 12,790 $109,904
======== ======== ========
Of the loans due after one year, $14,904 have predetermined interest rates
and $66,954 have floating or adjustable interest rates.
ALLOWANCE AND PROVISION 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 review by 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, a 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 manufacturers closing due to competitive pressures or due to
the 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. 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 Credit Committee's recommended level for the allowance.
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 2003, the Corporation accrued $920,000 in provision for loan losses
compared to $873,000 in 2002 and $1,015,000 in 2001. The provision for loan
losses in 2003 was considered adequate when considering the lack of loan
portfolio growth along with the increase in net loans charged-off in 2003, the
growth in non-performing loans, and the status of general market conditions.
Loans charged off during 2003 amounted to $1,457,000 compared to $740,000
in 2002 and $602,000 in 2001. Recoveries amounted to $207,000, $155,000, and
$175,000 in 2003, 2002, and 2001, respectively. Net charge-offs increased to
$1,250,000 in 2003 from $585,000 in 2002 and $427,000 in 2001.
The ratio of net charge-offs to average outstanding loans was 0.30% in
2003, 0.15% in 2002, and 0.12% in 2001. In 2003 one large commercial loan was
partially charged-off in the amount of $744,000, which amounted to 50% of the
20
remaining balance of an outstanding non-accrual loan. Management is working with
this customer on a primary and secondary source of repayment of this amount and
the remaining balance due, including interest due but not accrued. Management
considers the charge-off levels of 2003 to be greater than historical averages
due to this one loan. Table 10 presents the Corporation's loan loss and recovery
experience (in thousands) for the past five years.
The allowance for loan losses totaled $5,292,000 at December 31, 2002, a
decrease of 5.9% over December 31, 2002. The ratio of the allowance to loans,
less unearned income, was 1.30% at December 31, 2003 and 1.38% at December 31,
2002. The decrease in the allowance to loans ratio is supported by the fact that
one of the loans previously supported in the allowance was charged-off, the
continued decline in the consumer loan portfolio which has historically driven
the majority of the net loan losses, and the overall condition of the portfolio.
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, 2003.
Table 8 - Allocation of Allowance for Loan Losses
Management has allocated the allowance for loan losses to loan categories as follows (in thousands):
2003 2002 2002 2000 1999
---------------- ---------------- ---------------- ---------------- ----------------
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) $2,881 59% $3,196 59% $2,005 55% $1,691 50% $1,190 46%
Real estate-
residential 848 35 781 33 236 35 177 37 167 39
Consumer 1,141 6 1,247 8 1,276 10 1,304 13 1,503 15
Unallocated 422 - 398 - 1,817 - 1,574 - 1,275 -
------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Balance at
end of year $5,292 100% $5,622 100% $5,334 100% $4,746 100% $4,135 100%
====== ======= ====== ======= ====== ======= ====== ======= ====== =======
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 non-real estate secured 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
2003 2002 2001
------- -------- -------
Allowance as percentage of outstanding loans, net of unearned income 1.30% 1.38% 1.42%
Net charge-offs as percentage of allowance 23.62 10.41 8.00
Net charge-offs as percentage of average loans, net of unearned income .30 .15 .12
Provision as percentage of net charge-offs 73.60 149.23 237.72
Provision as percentage of average loans, net of unearned income .22 .22 .28
Allowance for loan losses to nonperforming loans 1.60X 10.41X 6.46X
21
Table 10 - Summary of Loan Loss Experience (in thousands)
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Balance at beginning of period $5,622 $5,334 $4,746 $4,135 $3,821
------ ------ ------ ------ ------
Charge-offs:
Commercial loans 1,004 343 141 141 34
Real estate loans 80 33 59 9 -
Consumer loans 373 364 402 417 475
------ ------ ------ ------ ------
1,457 740 602 567 509
------ ------ ------ ------ ------
Recoveries:
Commercial loans 105 28 75 32 40
Real estate loans - 3 3 1 -
Consumer loans 102 124 97 125 113
------- ------ ------ ------- ------
207 155 175 158 153
------ ------ ------ ------- ------
Net charge-offs 1,250 585 427 409 356
Provision for loan losses 920 873 1,015 1,020 670
------ ------ ------ ------ ------
Balance at end of period $5,292 $5,622 $5,334 $4,746 $4,135
====== ====== ====== ====== ======
Percent of net charge-offs
to average net loans outstanding
during the period .30% .15% .12% .13% .13%
====== ====== ====== ====== ======
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 of loan balances 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 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, consumer loans are normally charged off
after a delinquency of 120 days. Under the Corporation's policy, a non-accruing
loan may be restored to accrual status when none of its principal and interest
is past due and unpaid, the borrower has shown a reasonable sustained ability to
service the debt, 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.
In 2003 the Corporation spent considerable time and energy to improve the
operations of the lending and credit functions. A new Chief Credit Officer
position was created in 2003, and during the second half of 2003 a new credit
policy manual was created and implemented, new lending committee structures were
introduced, and a new risk grading methodology was adopted. This new risk
grading system has better focused management on identifying loan portfolio
risks. The decline in several asset quality measurements on a year-to-year basis
can be partially explained by the more aggressive approach management is taking
using the new risk grading process. These systems were considered necessary to
support future loan growth in existing and new markets.
During 2003 the Corporation moved consumer loans to non-accrual after they
were past due for 90 days, versus the previous system that typically did not
place these loans on non-accrual but typically charged-off these loans when they
reached 180 days past due. New internal limits have also been placed on time and
demand loan renewals. Both of these changes, along with the changes to the risk
grading system, have increased the number of reported non-performing loans.
22
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 are
detailed in Table 11. Total non-performing loans as a percentage of net loans
were 0.81% at December 31, 2003 and 0.13% at December 31, 2002. Total
non-performing loans are considered high by management based on the
Corporation's historical average, yet remain in-line and only slightly above
industry averages.
Loans on accrual status and past due 90 days or more at December 31, 2003
were $53,000 compared with $239,000 at December 31, 2002. There were no loans
classified as troubled debt restructurings on December 31, 2003 or December 31,
2002.
Loans in a non-accrual status at December 31, 2003 were $3,262,000 compared
with $301,000 at December 31, 2002. Two commercial loan customers make up the
majority of the non-accrual loan total, and the Corporation currently believes
both customers have adequate collateral should the secondary source of repayment
need to be liquidated. The Corporation continues to work with these borrowers,
as well as others placed on non-accrual, to rectify their status.
Table 11 - Nonperforming Loans
(Amounts are in thousands, except ratios)
2003 2002 2001 2000 1999
------- -------- -------- -------- --------
Nonaccruing loans:
Real Estate $ 1,870 $ 293 $ 414 $ 65 $ 107
Commercial 1,236 - 115 67 131
Agricultural 8 8 39 14 54
Consumer 148 - - - -
------- -------- -------- -------- --------
Total nonaccruing loans 3,262 301 568 146 292
------- -------- -------- -------- --------
Restructured loans:
Total restructured loans - - - - -
------- -------- -------- -------- --------
Loans past due 90 days and accruing interest:
Real Estate - - - - 3
Commercial - 33 33 49 44
Agricultural - 1 8 14 8
Consumer 53 205 217 176 232
------- -------- -------- -------- --------
Total past due loans 53 239 258 239 287
------- -------- -------- -------- --------
Total nonperforming loans $ 3,315 $ 540 $ 826 $ 385 $ 579
======= ======== ======== ======== ========
Asset Quality Ratios:
Allowance for loan losses
to year-end net loans 1.30% 1.38% 1.42% 1.40% 1.41%
Nonperforming loans
to year-end net loans .81% .13% .22% .11% .20%
Allowance for loan losses
to nonperforming loans 1.60X 10.41X 6.46X 12.33X 7.14X
As of December 31, 2003 loans totaling $2,548,000 were considered impaired
according to Financial Accounting Statement No. 114 "Accounting by Creditors for
Impairment of a Loan" and later amended by Financial Accounting Statement No.
118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". There were $54,000 in loans in this category as of December 31,
2002. All impaired loans for 2003 and 2002 are also shown above in the
non-accrual loan total. A loan is considered impaired if it is probable that the
lender will be unable to collect all amounts due under the contractual terms of
the loan agreement
23
The gross amount of interest income that would have been recorded on
non-accrual loans for the year ending December 31, 2003, if all such loans had
been accruing interest at the original contractual rate, was $45,000.
There were eight properties held due to loan foreclosure (other real estate
owned) as of December 31, 2003 totaling $303,000, compared to one piece of
property held at December 31, 2002, for $30,000.
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
and budget model to assess the future liquidity needs of the Corporation and
manage the investment of funds.
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 21.9% at December 31, 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 that equaled approximately $96,550,000 with $75,550,000
available at December 31, 2003. Should the Bank ever desire to increase its line
of credit beyond the current 15% limit, the FHLB may allow borrowings of up to
40% of total assets once the bank meets specific eligibility and collateral
requirements. Borrowings outstanding under this line of credit were $21,000,000
and $22,000,000 respectively, at December 31, 2003 and December 31, 2002. The
Bank maintains otherwise unencumbered qualifying assets (principally 1-4 family
residential mortgage) under the terms of its collateral agreement 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. As of December 31, 2003, $89,112,000 of
1-4 family residential mortgage loans were pledged under the blanket floating
lien agreement.
The Bank has fixed-rate term borrowing contracts outstanding as of December
31, 2003, with the following final maturities:
Amount Expiration Date
---------- ---------------
$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
24
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 2003 the deposit mix changed
with average balance increases in savings accounts of $10,803,000, followed by
an increase in non-interest bearing demand deposits of $8,225,000, an increase
in money market deposit accounts of $4,924,000, an increase in interest-bearing
demand deposits of $4,006,000, and a $996,000 increase in time deposits. The
higher growth in transaction accounts was widespread in the industry, as
customers continued to place more of their funds into savings and demand deposit
accounts due to the historically low rate environment and the past several years
of disappointing equity market performance. Certificates of deposit of $100,000
or more are detailed in Table 13 and grew only slightly in 2003 from the balance
of $60,077,000 at December 31, 2002.
Table 12 - Deposits
2003 2002 2001
-------------------- -------------------- --------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- -------- -------
Demand deposits -
non-interest bearing $ 66,300 -% $ 58,075 -% $ 52,719 -%
Demand deposits - interest bearing 63,858 .35 59,852 .70 56,419 .88
Money market 47,293 1.01 42,369 1.83 41,225 3.20
Savings 80,876 .88 70,073 1.50 62,792 1.87
Time 230,070 2.83 229,074 3.76 229,050 5.51
--------- ------- --------- ------- -------- -------
$ 488,397 1.62% $459,443 2.36% $442,205 3.53%
========= ========= ========
Table 13 - Certificates of Deposit
Certificates of deposit at the end of 2003 in amounts of $100,000 or more
were classified by maturity as follows (in thousands):
3 months or less $ 12,284
Over 3 through 6 months 11,017
Over 6 through 12 months 18,007
Over 12 months 20,059
--------
$ 61,367
========
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, 2003 were commitments to extent credit, standby letters of credit, and
commitments to purchase securities. The Corporation does not have any
off-balance sheet subsidiaries or special purpose entities (in thousands).
Off-Balance Sheet Transactions December 31, 2003 December 31, 2002
---------------------------------- ----------------- -----------------
Commitments to extend credit $124,905 $107,771
Standby letters of credit 3,477 3,489
Commitments to purchase securities 700 -
Commitments to extend credit 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.
Standby letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. Those guarantees
25
are primarily issued to support public and private borrowing arrangements. The
commitments to purchase securities were made to purchase securities yet to be
issued.
The Corporation does not have any off-balance sheet subsidiaries or special
purpose entities.
CONTRACTUAL OBLIGATIONS
The following items are contractual obligations of the Corporation as of
December 31, 2003 (in thousands):
Payments Due by Period
--------------------------------------------------------
Less Than More Than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
- ----------------------- ------- --------- --------- ---------- ---------
FHLB advances $21,000 $ 3,000 $ 4,000 $ 9,000 $ 5,000
Repurchase agreements 47,035 47,035 - - -
Operating leases 466 116 154 113 84
Purchase obligations 700 - - - -
CAPITAL RESOURCES
The following table displays the changes in shareholders' equity (in
thousands), from December 31, 2002, to December 31, 2003. A more detailed
analysis of changes in capital resources is contained in the Consolidated
Changes in Shareholders Equity in the financial statements section of this 10-K.
Shareholders' Equity, December 31, 2002 $ 70,736
Net earnings 9,513
Exercise of stock options 76
Repurchase of common stock (3,128)
Cash dividends paid (4,272)
Net change in net unrealized losses on AFS securities (1,229)
Reclassification adjustment for securities gains (56)
Net Change in Minimum Pension Liability 291
---------
Shareholders' Equity, December 31, 2003 $ 71,931
=========
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, 250,000 shares between August 21, 2002 and August
19, 2003, and 250,000 shares between August 20, 2003 and August 17, 2004. During
2003, the Corporation repurchased 125,000 shares of its common stock in the open
market at an average per share price of $25.03. 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,
2003, the Corporation has purchased and retired 464,466 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.
26
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, 2003, the Corporation's Tier I and total capital
ratios were 14.85% and 15.99%, respectively. At December 31, 2002, these ratios
were 14.41% and 15.63%, 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",
"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 10.76% and 11.00% at December 31,
2003 and 2002, 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 $.75
and $.71 per share of common stock in 2003 and 2002, respectively. Cash
dividends totaled $4,272,000 and represented a 44.9% payout of 2003 net income,
compared to 43.5% in 2002. 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 11.2% of assets at December 31, 2003 and 11.7% at
December 31, 2002. Shareholders' equity was $71,931,000 at December 31, 2003 and
$70,736,000 at December 31, 2002.
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
the Nasdaq National Market was made to improve the marketability of the stock.
The total market value of American National Bankshares Inc. common stock at
December 31, 2003, at $26.08 per share (the last trade recorded on the Nasdaq
National Market during 2003) was $147,624,000, compared to $150,301,000 at
December 31, 2002 when the stock was last traded at $26.00 per share. The
decline in market capitalization is primarily due to the stock repurchase
program reducing the number of shares outstanding between year end 2002 and year
end 2003. The market value of the Corporation's common stock was 205 percent of
its book value with book value per common share at $12.71 on December 31, 2003.
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. A summary
of the Corporation's significant accounting policies is set forth in Note 1 to
the Consolidated Financial Statements in the Corporation's 2003 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.
27
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimable and (ii)
SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has three basic components: the formula
allowance, the specific allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses a historical loss view as an
indicator of future losses along with various economic factors and, as a result,
could differ from the loss incurred in the future. However, since this history
is updated with the most recent loss information, the errors that might
otherwise occur are mitigated. The specific allowance uses various techniques to
arrive at an estimate of loss for specifically identified loans. Historical loss
information, expected cash flows and fair market value of collateral are used to
estimate these losses. The unallocated allowance captures losses whose impact on
the portfolio have occurred but have yet to be recognized in either the formula
or specific allowance. The use of these values is inherently subjective and our
actual losses could be greater or less than the estimates.
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
28
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.
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.
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 accounting principals generally
accepted in the United States of America, 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.
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 9A - CONTROLS AND PROCEDURES
For the period ending December 31, 2003, 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.
29
The Audit and Compliance Committee pre-approves all audit, audit related,
and tax services on an annual basis, and in addition, authorizes individual
engagements that exceed pre-established thresholds. Any additional engagement
that falls below the pre-established thresholds must be reported by management
at the Audit and Compliance Committee meeting immediately following the
initiation of such an engagement.
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
------- ------- ------- -------
2003
----
Interest income..........................................$ 7,697 $ 7,844 $ 8,235 $ 8,402
Interest expense......................................... 2,138 2,276 2,458 2,519
------- ------- ------- -------
Net interest income.................................... 5,559 5,568 5,777 5,883
Provision for loan losses................................ 255 170 255 240
------- ------- ------- -------
Net interest income after provision.................... 5,304 5,398 5,522 5,643
Non-interest income...................................... 1,794 1,800 1,615 1,462
Non-interest expense..................................... 3,618 3,802 3,882 3,809
------- ------- ------- -------
Income before income tax provision..................... 3,480 3,396 3,255 3,296
Income tax provision..................................... 1,014 991 947 962
------- ------- ------- -------
Net income.............................................$ 2,466 $ 2,405 $ 2,308 $ 2,334
======= ======= ======= =======
Per common share:
Net income (basic).....................................$ .44 $ .42 $ .40 $ .41
Net income (diluted)...................................$ .43 $ .42 $ .40 $ .40
Cash dividends.........................................$ .19 $ .19 $ .19 $ .18
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
30
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. Schartz
- -------------------------------------------
Brad E. Schwartz
Senior Vice President, Secretary, Treasurer
& Chief Financial Officer
January 20, 2004
31
INDEPENDENT AUDITORS REPORT
To the Shareholders and Board of Directors
American National Bankshares Inc.
Danville, Virginia
We have audited the accompanying consolidated balance sheets of American
National Bankshares Inc. and subsidiary as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the two years ended December 31, 2003. 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. 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 audits 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 audits provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
National Bankshares Inc. and subsidiary as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for the two years ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
Yount, Hyde and Barbour, P.C.
Winchester, Virginia
January 15, 2004
32
INDEPENDENT AUDITORS REPORT
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
Raleigh, North Carolina
January 15, 2002
NOTE: This Report was not re-issued with the consent of Arthur Andersen, the
Corporation's independent auditor for the accompanying consolidated balance
sheet 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 the one year period
ended December 31, 2001. Arthur Andersen has ceased operations and was not
available to provide consent of re-issuance.
33
Consolidated Balance Sheets
December 31, 2003 and 2002
American National Bankshares Inc. and Subsidiary
- ----------------------------------------------------------------------------------------------------------------
2003 2002
-------------- --------------
ASSETS
Cash and due from banks ........................................................$ 16,235,473 $ 16,757,283
Interest-bearing deposits in other banks........................................ 1,651,598 6,720,335
Securities available for sale, at fair value.................................... 171,375,898 137,046,119
Securities held to maturity (market value of $37,455,348
in 2003 and $28,219,299 in 2002).............................................. 36,103,384 26,777,747
-------------- --------------
Total securities.............................................................. 207,479,282 163,823,866
-------------- --------------
Loans held for sale............................................................. 560,153 1,285,020
Loans, net of unearned income .................................................. 406,245,090 406,403,107
Less allowance for loan losses.................................................. (5,292,054) (5,622,150)
-------------- --------------
Net loans..................................................................... 400,953,036 400,780,957
-------------- --------------
Bank premises and equipment, at cost, less accumulated
depreciation of $11,807,226 in 2003 and $10,673,195 in 2002................... 7,717,896 8,167,476
Core deposit intangibles, net................................................... 934,054 1,383,870
Accrued interest receivable and other assets.................................... 8,770,209 6,940,494
-------------- ---------------
Total assets..................................................................$ 644,301,701 $ 605,859,301
============== ===============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 71,027,387 $ 69,102,211
Demand deposits -- interest bearing........................................... 69,053,315 62,679,718
Money market deposits......................................................... 59,250,981 43,830,781
Savings deposits.............................................................. 83,030,520 73,410,623
Time deposits................................................................. 219,325,638 224,539,145
-------------- ---------------
Total deposits................................................................ 501,687,841 473,562,478
-------------- ---------------
Repurchase agreements........................................................... 47,034,727 36,155,251
FHLB Borrowings................................................................. 21,000,000 22,000,000
Accrued interest payable and other liabilities.................................. 2,648,508 3,405,913
-------------- ---------------
Total liabilities............................................................. 572,371,076 535,123,642
-------------- ---------------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
5,660,419 shares outstanding at December 31, 2003 and
5,780,816 shares outstanding at December 31, 2002........................... 5,660,419 5,780,816
Capital in excess of par value................................................ 9,435,955 9,571,508
Retained earnings............................................................. 55,538,097 53,092,527
Accumulated other comprehensive income, net................................... 1,296,154 2,290,808
-------------- ---------------
Total shareholders' equity.................................................... 71,930,625 70,735,659
-------------- ---------------
Total liabilities and shareholders' equity....................................$ 644,301,701 $ 605,859,301
============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
34
Consolidated Statements of Income
For The Years Ended December 31, 2003, 2002 and 2001
American National Bankshares Inc. and Subsidiary
- -------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------ ------------ -------------
Interest Income:
Interest and fees on loans....................................$ 25,227,958 $ 27,149,521 $ 30,216,549
Interest on deposits in other banks........................... 109,903 248,270 385,019
Income on securities:
Federal agencies............................................ 2,364,821 1,941,974 2,709,097
Mortgage-backed............................................. 1,315,703 2,351,830 2,723,146
State and municipal ........................................ 1,961,091 1,887,506 1,916,297
Other investments........................................... 1,198,179 1,555,947 1,869,711
------------ ------------ ------------
Total interest income....................................... 32,177,655 35,135,048 39,819,819
------------ ------------ ------------
Interest Expense:
Interest on deposits:
Demand...................................................... 225,270 416,924 494,930
Money market................................................ 477,819 775,051 1,318,002
Savings..................................................... 712,599 1,048,564 1,176,704
Time........................................................ 6,499,902 8,606,409 12,617,362
Interest on repurchase agreements............................. 496,612 634,996 1,087,823
Interest on other borrowings.................................. 978,884 827,800 806,869
------------ ------------ ------------
Total interest expense...................................... 9,391,086 12,309,744 17,501,690
------------ ------------ ------------
Net Interest Income............................................. 22,786,569 22,825,304 22,318,129
Provision for Loan Losses....................................... 920,000 873,000 1,015,000
------------ ------------ ------------
Net Interest Income After Provision
For Loan Losses............................................... 21,866,569 21,952,304 21,303,129
------------ ------------ ------------
Non-Interest Income:
Trust and investment services................................. 2,522,840 2,515,937 2,569,125
Service charges on deposit accounts........................... 2,163,130 1,706,137 1,385,339
Other fees and commissions.................................... 913,937 816,360 749,072
Mortgage banking income....................................... 571,209 360,669 365,349
Securities gains, net......................................... 115,115 39,334 367,035
Other income.................................................. 385,622 273,281 231,998
------------ ------------ ------------
Total non-interest income..................................... 6,671,853 5,711,718 5,667,918
------------ ------------ ------------
Non-Interest Expense:
Salaries...................................................... 6,843,994 6,519,552 6,383,811
Pension and other employee benefits........................... 1,814,108 1,470,682 1,390,591
Occupancy and equipment ...................................... 2,512,588 2,459,647 2,316,282
Core deposit intangible amortization.......................... 449,816 449,816 449,816
Other ........................................................ 3,490,339 3,384,839 3,073,702
------------ ------------ ------------
Total non-interest expense.................................... 15,110,845 14,284,536 13,614,202
------------ ------------ ------------
Income Before Income Tax Provision.............................. 13,427,577 13,379,486 13,356,845
Income Tax Provision............................................ 3,914,187 3,918,191 3,941,474
------------ ------------ ------------
Net Income......................................................$ 9,513,390 $ 9,461,295 $ 9,415,371
============ ============ ============
Net Income Per Common Share:
Basic.........................................................$ 1.67 $ 1.63 $ 1.58
Diluted.......................................................$ 1.65 $ 1.62 $ 1.58
Average Common Shares Outstanding:
Basic......................................................... 5,702,625 5,800,302 5,949,811
Diluted....................................................... 5,764,127 5,850,349 5,973,153
The accompanying notes are an integral part of the consolidated financial statements.
35
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2003, 2002 and 2001
American National Bankshares Inc. and Subsidiary
Accumulated
Common Stock Capital in Other Total
------------------------- Excess of Retained Comprehensive Shareholders'
Shares Amount Par Value Earnings Income Equity
----------- ------------ ------------ ------------- -------------- -------------
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 (losses) 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 (loss), net of tax:
Change in unrealized gains (losses) 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
Net income...................................... - - - 9,513,390 - 9,513,390
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on securities
available for sale, net of tax of $(638,683).. - - - - (1,229,244)
Less: Reclassification adjustment for (gains)
losses on securities available for sale, net of
tax of $29,032................................ - - - - (56,357)
Minimum pension liability adjustment,
net of tax of ($149,882)...................... 290,947
-------------
Other comprehensive income (loss)............. (994,654) (994,654)
-------------
Comprehensive income.......................... 8,518,736
Stock repurchased and retired................... (125,000) (125,000) (206,967) (2,796,233) - (3,128,200)
Stock options exercised......................... 4,603 4,603 71,414 - - 76,017
Cash dividends declared and paid................ - - - (4,271,587) - (4,271,587)
----------- ------------ ------------ ------------- ------------- -------------
Balance, December 31, 2003..................... 5,660,419 $ 5,660,419 $ 9,435,955 $ 55,538,097 $ 1,296,154 $ 71,930,625
============ ============= ============ ============= ============= =============
The accompanying notes are an integral part of the consolidated financial statements.
36
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
American National Bankshares Inc. and Subsidiary
2003 2002 2001
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income......................................................................$ 9,513,390 $ 9,461,295 $ 9,415,371
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses..................................................... 920,000 873,000 1,015,000
Depreciation.................................................................. 1,135,160 1,143,865 1,171,113
Core deposit intangible amortization.......................................... 449,816 449,816 449,816
Amortization (accretion) of bond premiums and discounts....................... 1,062,935 295,169 74,916
Gain on sale or call of securities............................................ (115,115) (39,334) (367,035)
Gain on loans held for sale................................................... (552,527) (360,669) (365,349)
Proceeds from sales of loans held for sale.................................... 30,331,809 17,764,033 17,523,936
Originations of loans held for sale........................................... (29,054,415) (18,435,363) (17,012,797)
Loss on sale of real estate owned............................................. 6,208 1,192 19,950
(Gain) loss on sale of premises and equipment................................. (42,386) 15,618 (2,000)
Deferred income taxes provision (benefit)..................................... 395,091 48,656 (356,927)
(Increase) decrease in interest receivable.................................... (566,956) (65,834) 863,391
(Increase) decrease in other assets........................................... (872,059) (518,118) 87,036
Decrease in interest payable.................................................. (229,628) (359,459) (312,404)
Decrease (increase) in other liabilities...................................... (86,947) 23,201 (118,873)
------------- ------------- -------------
Net cash provided by operating activities..................................... 12,294,376 10,297,068 12,085,144
------------- ------------- -------------
Cash Flows from Investing Activities:
Proceeds from maturities and calls of securities available for sale........... 71,843,288 54,414,161 62,114,339
Proceeds from sales of securities available for sale.......................... 3,103,750 1,052,500 -
Proceeds from maturities and calls of securities held to maturity............. 5,677,594 6,196,585 13,644,822
Purchases of securities available for sale....................................(112,179,943) (63,531,500) (67,267,483)
Purchases of securities held to maturity...................................... (14,995,806) (3,492,307) (567,376)
Net increase in loans......................................................... (1,369,071) (31,812,761) (36,496,485)
Proceeds from sales of bank premises and equipment............................ 43,352 - -
Purchases of bank premises and equipment...................................... (686,546) (1,469,533) (1,158,129)
Proceeds from sales of other real estate owned................................ 9,913 261,126 195,050
Purchases of other real estate owned.......................................... (12,523) (10,895) -
------------- ------------- -------------
Net cash used in investing activities......................................... (48,565,992) (38,392,624) (29,535,262)
------------- ------------- -------------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits........................................................ 33,338,870 16,370,118 25,818,018
Net (decrease) increase in time deposits...................................... (5,213,507) (6,819,423) 11,605,446
Net increase (decrease) in repurchase agreements.............................. 10,879,476 8,978,493 (4,552,842)
Net (decrease) increase in FHLB borrowings.................................... (1,000,000) 9,000,000 (3,000,000)
Cash dividends paid........................................................... (4,271,587) (4,117,097) (3,924,304)
Repurchase of stock........................................................... (3,128,200) (1,048,810) (4,600,051)
Proceeds from exercise of stock options....................................... 76,017 61,244 182,037
------------- ------------- -------------
Net cash provided by financing activities..................................... 30,681,069 22,424,525 21,528,304
------------- ------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents.......................... (5,590,547) (5,671,031) 4,078,186
Cash and Cash Equivalents at Beginning of Period.............................. 23,477,618 29,148,649 25,070,463
------------- ------------- -------------
Cash and Cash Equivalents at End of Period....................................$ 17,887,071 $ 23,477,618 $ 29,148,649
============= ============= =============
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 16,235,473 $ 16,757,283 $ 14,797,926
Interest-bearing deposits in other banks.................................... 1,651,598 6,720,335 14,350,723
------------- ------------- -------------
$ 17,887,071 $ 23,477,618 $ 29,148,649
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 9,620,715 $ 12,669,203 $ 17,814,094
Income taxes paid.............................................................$ 3,630,200 $ 4,012,453 $ 4,363,234
Transfer of loans to other real estate owned..................................$ 276,992 $ 164,287 $ 87,136
Unrealized gain (loss) on securities available for sale.......................$ (1,948,000) $ 1,928,000 $ 1,494,000
The accompanying notes are an integral part of the consolidated financial statements.
37
American National Bankshares Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
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 cost or estimated fair value in the aggregate. Gains on sales of
loans are recognized at the loan closing date and are included in non-interest
income for the period.
Rate Lock Commitments
ANB Mortgage Corp. enters into commitments to originate mortgage loans
whereby the interest rate on the loan is determined prior to funding (rate lock
commitments). Rate lock commitments on mortgage loans that are intended to be
sold are considered to be derivatives. The period of time between issuance of a
loan commitment and closing and sale of the loan generally ranges from 30 to 60
days. ANB Mortgage Corp. protects itself from changes in interest rates through
the use of best efforts forward delivery commitments, by committing to sell a
loan at the time the borrower commits to an interest rate with the intent that
the buyer has assumed interest rate risk on the loan. As a result, ANB Mortgage
Corp. is not exposed to losses nor will it realize significant gains related to
its rate lock commitments due to changes in interest rates. The correlation
between the rate lock commitments and the best efforts contracts is very high
due to their similarity.
38
The market value of rate lock commitments and best efforts contracts is not
readily ascertainable with precision because rate lock commitments and best
efforts contracts are not actively traded in stand-alone markets. ANB Mortgage
Corp. determines the fair value of rate lock commitments and best efforts
contracts by measuring the change in the value of the underlying assets while
taking into consideration the probability that the rate lock commitments will
close. Because of the high correlation between rate lock commitments and best
efforts contracts, no gain or loss occurs on the rate lock commitments.
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.
The accrual of interest on all loans is discontinued at the time the loan
is 90 days delinquent unless the credit is well-secured and in process of
collection. Consumer loans are typically charged off when the loan is 120 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 collectability 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 and establishing a specific allowance 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.
39
Bank Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation and amortization. Premises and equipment are
depreciated over their estimated useful lives ranging from three years to
thirty-nine years; leasehold improvements are amortized over the lives of the
respective leases or the estimated useful life of the leasehold improvement,
which ever is less. Software is amortized over three years. Depreciation and
amortization are recorded on the straight-line method.
Costs of maintenance and repairs are charged to expense as incurred. Costs
of replacing structural parts of major units are considered individually and are
expensed or capitalized as the facts dictate. Gains and losses on routine
dispositions are reflected in current operations.
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, 2003, the Bank had $934,000
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, 2003. Core deposit intangibles are periodically
reviewed for impairment. As of December 31, 2003, 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.
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. The amount of foreclosed properties at
December 31, 2003 and 2002 were $303,000 and $30,000, respectively.
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
The Corporation has a stock option plan, which is described more fully in
Note 7. The Corporation accounts for the 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. 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):
2003 2002 2001
-------- -------- --------
Net income, as reported $ 9,513 $ 9,461 $ 9,415
Deduct: total stock-based compensation
expense determined under fair value
based method for all awards (136) (169) (160)
-------- -------- --------
Pro forma net income $ 9,377 $ 9,292 $ 9,255
======== ======== ========
Earnings per share:
Basic, as reported $ 1.67 $ 1.63 $ 1.58
Basic, pro forma $ 1.64 $ 1.60 $ 1.56
Diluted, as reported $ 1.65 $ 1.62 $ 1.58
Diluted, pro forma $ 1.63 $ 1.59 $ 1.55
40
Earnings Per Share
Basic earnings per share represent income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect 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 2003, the Corporation repurchased 125,000 shares of its common
stock, in the open market at prices between $23.95 and $26.05 per share. 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. From the inception of the
stock repurchase plan through December 31, 2003, the Corporation has purchased
and retired 464,466 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.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. Advertising and
marketing costs as of December 31, 2003, 2002 and 2001 were $170,000, $137,000,
and $156,000, respectively.
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 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. The provisions of the Statement were effective December 31, 2002.
Management currently intends to continue to account for stock-based compensation
under the intrinsic value method set forth in Accounting Principles Board
("APB") Opinion 25 and related interpretations. For this reason, the transition
guidance of SFAS No. 148 does not have an impact on the Corporation's
consolidated financial position or consolidated results of operations. The
Statement does amend existing guidance with respect to required disclosures,
regardless of the method of accounting used. The revised disclosure requirements
are presented herein.
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 recognition
requirements of the Interpretation were effective beginning January 1, 2003. The
initial adoption of the Interpretation did not materially affect the
Corporation, and management does not anticipate that the recognition
requirements of this Interpretation will have a materially adverse impact on
either the Corporation's consolidated financial position or consolidated results
of operations in the future.
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
41
financial statements. The Interpretation requires consolidation by business
enterprises of variable interest entities in cases where (a) 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 (b) 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. Management has evaluated the Corporation's
investments in variable interest entities and potential variable interest
entities or transactions. The implementation of FIN 46 did not have a
significant impact on either the Corporation's consolidated financial position
or consolidated results of operations. Interpretive guidance relating to FIN 46
is continuing to evolve and the Corporation's management will continue to assess
various aspects of consolidations and variable interest entity accounting as
additional guidance becomes available.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement is effective for contracts entered into
or modified after June 30, 2003, with certain exceptions, and for hedging
relationships designated after June 30, 2003 and is not expected to have an
impact on the Corporation's consolidated financial statements.
In May 2003, the FASB issued SFAS 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
these 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.
In November 2003, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on a new disclosure requirement related to unrealized losses on
investment securities. The new disclosure requires a table of securities which
have unrealized losses as of the reporting date. The table must distinguish
between those securities which have been in a continuous unrealized loss
position for twelve months or more and those securities which have been in a
continuous unrealized loss position for less than twelve months. The table is to
include the aggregate unrealized losses of securities whose fair values are
below book values as of the reporting date, and the aggregate fair value of
securities whose fair values are below book values as of the reporting date. In
addition to the quantitative disclosure, FASB requires a narrative discussion
that provides sufficient information to allow financial statement users to
understand the quantitative disclosures and the information that was considered
in determining whether impairment was not other-than-temporary. The new
disclosure requirements apply to fiscal years ending after December 15, 2003.
The Corporation has included the required disclosures in their consolidated
financial statements.
In December 2003, the FASB issued a revised version of SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits an
amendment of FASB Statements No. 87, 88 and 106." This Statement revises
employers' disclosures about pension plans and other postretirement benefits. It
does not change the measurement or recognition of those plans required by FASB
Statements No. 87, No. 88, and No. 106. This Statement retains the disclosure
requirements contained in the original FASB Statement No. 132, which it
replaces. However, it requires additional disclosures to those in the original
Statement 132 about the assets, obligations, cash flows, and net periodic
benefit costs of defined benefit pension plans and other defined benefit
postretirement plans. The required information should be provided separately for
pension plans and for other postretirement benefit plans. The disclosures for
earlier annual periods presented for comparative purposes are required to be
restated for (a) the percentages of each major category of plan assets held, (b)
the accumulated benefit obligation, and (c) the assumptions used in the
accounting for the plans. This Statement is effective for financial statements
with fiscal years ending after December 15, 2003. The interim-period disclosures
required by this Statement are effective for interim periods beginning after
December 15, 2003. The Corporation has included the required disclosures in its
consolidated financial statements.
42
2. Securities:
The amortized cost and estimated fair value of investments in debt and
equity securities at December 31, 2003 and 2002 were as follows (in thousands):
2003
----------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- ----------
Securities held to maturity:
Federal agencies $ 16,996 $ 100 $ 1 $ 17,095
Mortgage-backed 1,227 62 - 1,289
State and municipal 17,880 1,191 - 19,071
---------- ------- ------ ----------
Total securities held to maturity 36,103 1,353 1 37,455
---------- ------- ------ ----------
Securities available for sale:
Federal agencies 97,906 676 200 98,382
Mortgage-backed 19,693 572 65 20,200
State and municipal 31,890 933 43 32,780
Corporate bonds 12,894 751 3 13,642
Restricted stock:
FHLBA stock 1,741 - - 1,741
Federal Reserve stock 363 - - 363
Other securities 4,925 - 657 4,268
---------- ------- ------ ----------
Total securities available for sale 169,412 2,932 968 171,376
---------- ------- ------ ----------
Total securities $ 205,515 $ 4,285 $ 969 $ 208,831
========== ======= ====== ==========
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
========== ======= ====== ==========
43
The amortized cost and estimated fair value of investments in securities at
December 31, 2003, 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 $ 16,423 $ 16,443 $ 5,763 $ 5,855
Due after one year
through five years 9,255 9,851 81,854 83,352
Due after five years
through ten years 6,044 6,494 54,315 54,840
Due after ten years 3,154 3,378 7,787 7,129
Mortgage-backed securities 1,227 1,289 19,693 20,200
--------- ---------- --------- ----------
$ 36,103 $ 37,455 $ 169,412 $ 171,376
========= ========== ========= ==========
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, 2003 and 2002
are as follows:
2003 2002
----- -----
Realized gains $ 115 $ 39
Realized (losses) - -
Proceeds from the maturities, payments, and calls of securities held to
maturity were $5,678,000 and $6,197,000 in 2003 and 2002. Proceeds from the
maturities, payments, calls, and sales of securities available for sale were
$74,947,000 and $55,467,000 in 2003 and 2002. Gains from the call of securities
prior to maturity were $30,000 and gains from the sale of securities available
for sale were $85,000 in 2003. 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.
Securities with a book value of approximately $65,953,000 and $57,525,000
at December 31, 2003 and 2002 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.
The table below shows (in thousands) gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at December 31,
2003.
Less than 12 Months 12 Months or More Total
----------------------------- -------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
-------------- -------------- ------------ ------------- ------------- -------------
Federal agencies $ 36,737 $ 201 $ - $ - $ 36,737 $ 201
Mortgage-backed 6,588 65 - - 6,588 65
State and municipal 5,368 43 - - 5,368 43
Corporate bonds 534 3 - - 534 3
Preferred stock 1,668 332 2,175 325 3,843 657
-------- ----- --------- -------- -------- -----
Total $ 50,895 $ 644 $ 2,175 $ 325 $ 53,070 $ 969
======== ===== ========= ======== ======== =====
The unrealized loss position is considered temporary and is due to the
general decline in interest rates. Those issues in a unrealized loss position
for more than 12 months consists of $4,500,000 in preferred stocks. These are a
$2,000,000 FHLMC preferred 1.66% where the interest rate adjusts every 2 years
based on 2 year Treasury plus 10 basis points with a maximum rate of 11.0%; and
$2,500,000 FNMA preferred 3.54% where the interest rate adjusts every 2 years
based on 2 year Treasury less 16 basis points with a maximum rate of 11.0%. 70%
of the dividends on these issues are tax exempt. Management intends to hold
these until maturity.
44
3. Loans:
Outstanding loans, excluding loans held for sale, at December 31, 2003 and
2002 were composed of the following (in thousands):
2003 2002
---------- ----------
Real Estate loans
Construction and land development $ 12,790 $ 9,208
Secured by farmland 3,430 1,485
Secured by 1 - 4 family residential properties 136,229 129,905
Secured by multi-family (5 or more) residential properties 6,801 6,329
Secured by nonfarm, nonresidential properties 126,164 107,263
Loans to farmers 1,618 1,844
Commercial and industrial loans 91,419 113,575
Consumer loans 23,581 32,008
Loans for nonrated industrial development obligations 4,077 4,745
Deposit overdrafts 136 41
---------- ----------
Loans, net of unearned income $ 406,245 $ 406,403
========== ==========
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):
2003 2002
------- ----
Impaired loans for which an allowance
has been provided $ 2,548 $ -
Impaired loans for which no allowance
has been provided - 54
------- ----
Total impaired loans $ 2,548 $ 54
======= ====
Allowance provided for impaired loans,
included in the allowance for loan losses $ 521 $ -
======= ====
2003 2002 2001
------- ----- -----
Average balance in impaired loans $ 1,385 $ 158 $ 160
======= ===== =====
Interest income recognized $ - $ - $ -
======= ===== =====
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $714,000 and $453,000 at December 31, 2003, 2002 and 2001,
respectively. If interest on impaired and nonaccrual loans had been accrued,
such income would have approximated $45,000, $20,000 and $33,000 for 2003, 2002
and 2001, respectively.
Loans past due 90 days and still accruing interest amounted to $53,000,
$239,000, and $258,000 as of December 31, 2003, 2002 and 2001, respectively.
Properties received due to loan foreclosures were $303,000 at December 31,
2003 and $30,000 at December 31, 2002 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, 2003.
45
An analysis of the allowance for loan losses is as follows (in thousands):
2003 2002 2001
-------- -------- --------
Balance, beginning of year $ 5,622 $ 5,334 $ 4,746
Provision for loan losses charged to expense 920 873 1,015
Charge-offs (1,457) (740) (602)
Recoveries 207 155 175
-------- -------- --------
Balance, end of year $ 5,292 $ 5,622 $ 5,334
======== ======== ========
4. Premises and Equipment:
Major classifications of premises and equipment are summarized as follows
(in thousands):
As of December 31
-------------------------
2003 2002
--------- ---------
Land $ 1,603 $ 1,604
Buildings 7,670 7,375
Leasehold Improvements 878 865
Equipment 9,374 8,996
--------- ---------
19,525 18,840
Less Accumulated Depreciation (11,807) (10,673)
--------- ---------
Total Premises and Equipment, net of accumulated depreciation $ 7,718 $ 8,167
========= =========
Depreciation expense for the years ended December 31, 2003, 2002 and 2001
amounted to $1,135,000, $1,144,000 and $1,171,000, respectively.
5. Deposits:
The aggregate amount of time deposits in denominations of $100,000 or more
at December 31, 2003 and 2002 was $61,367,000 and $60,077,000, respectively.
At December 31, 2003, the scheduled maturities of CDs are as follows (in
thousands):
2004 $ 144,334
2005 38,558
2006 15,046
2007 12,794
2008 8,501
Thereafter 93
---------
$ 219,326
=========
6. Borrowings:
Short-term borrowings consist of the following at December 31, 2003 and
2002 (in thousands):
2003 2002
--------- ---------
Repurchase agreements $ 47,035 $ 36,155
Short-term FHLB borrowings - -
--------- ---------
Total $ 47,035 $ 36,155
========= =========
Weighted interest rate 1.05% 1.52%
Average for the year ended December 31:
Outstanding $ 41,168 $ 34,500
Interest rate 1.21% 1.85%
Maximum month-end outstanding $ 49,362 $ 40,091
46
Short-term borrowings consist of repurchase agreements and overnight
borrowings from the Federal Home Loan Bank of Atlanta ("FHLBA"). 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.
Under the terms of its collateral agreement with the Federal Home Loan Bank
of Atlanta, 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. As
of December 31, 2003, $89,112,000 1-4 family residential mortgage loans were
pledged under the blanket floating lien agreement. At December 31, 2003 and
2002, fixed-rate long term advances (in thousands) mature as follows:
Weighted Weighted
Due by 2003 Average Due by 2002 Average
December 31 Advance Amount Rate December 31 Advance Amount Rate
----------- -------------- -------- ----------- -------------- --------
2003 $ - - 2003 $ 1,000,000 2.14%
2004 3,000,000 2.67% 2004 3,000,000 2.67
2005 2,000,000 3.53 2005 2,000,000 3.53
2006 2,000,000 4.08 2006 2,000,000 4.08
2007 1,000,000 4.33 2007 1,000,000 4.33
2008 8,000,000 5.25 2008 8,000,000 5.25
2009 5,000,000 5.26 2009 5,000,000 5.26%
-------------- -------- -------------- --------
$ 21,000,000 4.56% $ 22,000,000 4.45%
============== ======== ============== ========
All of the above advances are at fixed rates; however at December 31, 2003
$13,000,000 of convertible advances are included in the table 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 has
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 $96,550,000 at December 31, 2003.
7. Stock Options:
The Corporation's 1997 Stock Option Plan ("Option Plan") provides for the
granting of incentive and non-qualified options to 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
2003, 2002 and 2001 were $9.30, $8.78, and $9.03, 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:
2003 2002 2001
------ ------ ------
Risk-free interest rate 3.21% 4.08% 4.52%
Expected years until exercise 5.00 5.00 5.50
Expected stock volatility 34.58% 36.76% 40.10%
At December 31, 2003, and 2002, the Corporation had 54,544 shares and
100,794 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, 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
Granted 46,450 24.00 - 26.20
Exercised (4,603) 14.00 - 17.19
Forfeited (200) 14.00
---------
Outstanding at December 31, 2003 224,037 $13.38 - 26.20
=========
47
The following table summarizes information related to stock options
outstanding on December 31, 2003:
Number of Average Life of Number of Options
Exercise Price Outstanding Options Outstanding Options Exercisable
----------------- ------------------- ------------------- -----------------
$ 13.38 - $ 26.20 224,037 6.8 years 171,937
8. Income Taxes:
The components of the Corporation's net deferred tax assets as of December
31, 2003 and December 31, 2002, were as follows (in thousands):
2003 2002
------- -------
Deferred tax assets:
Allowance for loan losses $ 1,799 $ 1,912
Deferred compensation 250 257
Core deposit intangible 405 354
Pension liability - 150
Other 22 11
------- -------
Total deferred tax assets 2,476 2,684
------- -------
Deferred tax liabilities:
Depreciation 414 388
Accretion of discount 18 20
Prepaid pension 506 111
Loan loss recapture - 81
Net unrealized gains on securities 668 1,330
Other 150 151
------- -------
Total deferred tax liabilities 1,756 2,081
------- -------
Net deferred tax assets $ 720 $ 603
======= =======
The provision for income taxes consists of the following (in thousands):
2003 2002 2001
------- ------- -------
Taxes currently payable $ 3,519 $ 3,870 $ 4,298
Deferred tax expense (benefit) 395 48 (357)
------- ------- --------
$ 3,914 $ 3,918 $ 3,941
======= ======= ========
The effective tax rates differ from the statutory federal income tax rates
due to the following items:
2003 2002 2001
------ ------ ------
Federal statutory rate 34.3% 34.2% 34.2%
Nontaxable interest income (5.0) (4.9) (4.9)
Other ( .1) - .2
------ ------ ------
29.2% 29.3% 29.5%
====== ====== ======
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.
48
2003 2002 2001
---------------------- ----------------------- ----------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- --------- ---------
Basic earnings per share 5,702,625 $ 1.67 5,800,302 $ 1.63 5,949,811 $ 1.58
Effect of dilutive securities,
stock options 61,502 50,047 23,342
--------- --------- ---------
Dilutied earnings per share 5,764,127 $ 1.65 5,850,349 $ 1.62 5,973,153 $ 1.58
========= ========= =========
Stock options on common stock which were not included in computing diluted
EPS in 2003, 2002, and 2001 because their effects were antidilutive were 453
shares, 82 shares, and 1,157 shares, respectively.
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, 2003 and 2002, the following financial instruments were
outstanding whose contract amounts represent credit risk:
2003 2002
------------- -------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 124,905,000 $ 107,771,000
Standby letters of credit $ 3,477,000 $ 3,489,000
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.
At December 31, 2003, ANB Mortgage Corp. had locked-rate commitments to
originate mortgage loans amounting to approximately $1,019,000 and loans held
for sale of $560,000. ANB Mortgage Corp. has entered into commitments, on a
best-effort basis to sell loans of approximately $1,579,000. Risks arise from
the possible inability of counterparties to meet the terms of their contracts.
ANB Mortgage Corp. does not expect any counterparty to fail to meet its
obligations.
The Corporation does not have any off-balance sheet subsidiaries or special
purpose entities.
There was $700,000 in commitments to purchase securities at December 31,
2003 and none at December 31, 2002.
49
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, 2003, (in thousands) are as follows:
Minimum Lease
Year Payments
------------------- -------------
2004 $ 116
2005 85
2006 69
2007 59
2008 54
2009 and thereafter $ 84
Rent expense under these leases for each of the years ended December 31,
2003, 2002, and 2001, were $126,000, $121,000, and $119,000, 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 $3,679,000
at December 31, 2003 and $3,098,000 at December 31, 2002.
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 2003 was 5.5% and during 2002 was
5.5%. 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, 2003, none of these loans were
restructured, nor were any related party loans charged off during 2003.
An analysis of these loans for 2003 is as follows (in thousands):
Balance, beginning of year $ 21,414
Additions 32,554
Repayments (35,157)
---------
Balance, end of year $ 18,811
=========
12. Employee Benefit Plans:
The retirement plan is a non-contributory defined benefit pension plan
which covers substantially all employees 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 Company uses October 31 as a measurement date to determine postretirement
benefit obligations. All dollar amounts are shown in thousands, unless otherwise
noted.
50
The following table sets forth the plan's status as of December 31, 2003
and 2002 (in thousands):
2003 2002
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $ 4,875 $ 4,837
Service cost 377 319
Interest cost 330 336
Plan amendments 17 -
Actuarial (gain) loss 155 274
Benefits paid (44) (891)
-------- --------
Benefit obligation at end of year $ 5,710 $ 4,875
======== ========
Accumulated benefit obligation, end of year $ 4,241 $ 3,546
Change in plan assets:
Fair value of plan assets at beginning of year $ 3,431 $ 4,360
Actual return on plan assets 587 (692)
Employer contributions 1,678 654
Benefits paid (44) (891)
-------- --------
Fair value of plan assets at end of year $ 5,652 $ 3,431
======== ========
Deferred asset (gain) loss $ (298) $ 1,037
Prepaid pension cost:
Funded status $ (58) $(1,445)
Unrecognized net actuarial (gain) loss 1,603 1,871
Unrecognized net obligation at transition - (5)
Unrecognized prior service cost (57) (96)
-------- --------
(Accrued) benefit cost included in other liabilities $ 1,488 $ 325
======== ========
Amounts recognized in the statement of financial position:
Prepaid asset $ 1,488 $ 325
Accrued benefit liability - (441)
Deferred income tax benefit - 150
Accumulated other comprehensive income, net - 291
-------- --------
Net amount recognized $ 1,488 $ 325
======== ========
Major assumptions and net periodic pension cost include the following:
2003 2002
------- -------
Components of net periodic benefit cost:
Service cost $ 377 $ 319
Interest cost 330 337
Expected return on plan assets (289) (346)
Amortization of prior service cost (22) (24)
Amortization of net obligation at transition (5) (12)
Recognized net actuarial gain 125 7
------- -------
Net periodic benefit cost $ 516 $ 281
======= =======
Weighted-average assumptions for benefit obligations:
Discount rate
Pre-retirement 6.50% 6.75%
Post-retirement 6.00% 6.00%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.00% 4.00%
51
2003 2002
------- -------
Weighted-average assumptions for net periodic benefit cost:
Discount rate
Pre-retirement 6.75% 7.00%
Post-retirement 6.00% 6.00%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.00% 4.00%
The Company selects the expected long-term rate-of-return-on-assets
assumption in consultation with their investment advisors and actuary. This rate
is intended to reflect the average rate of earnings expected to be earned on the
funds invested or to be invested to provide plan benefits. Historical
performance is reviewed, especially with respect to real rates of return (net of
inflation), for the major asset classes held or anticipated to be held by the
trust, and for the trust itself. Undue weight is not given to recent experience
that may not continue over the measurement period and higher significance is
placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not
reduced for taxes. Further, solely for this purpose, the plan is assumed to
continue in force and not terminate during the period during which assets are
invested. However, consideration is given the potential impact of current and
future investment policy, cash flow into and out of the trust, and expenses
(both investment and non-investment) typically paid from plan assets (to the
extent such expenses are not explicitly estimated within periodic cost).
2003 2002
------- -------
Information for pension plans with an accumulated
benefit obligation in excess of plan assets:
Projected benefit obligation $ 5,710 $ 4,876
Accumulated benefit obligation 4,241 3,546
Fair value of plan assets 5,652 3,431
Additional Information: Pension Benefits
-----------------------
2003 2002
------- -------
Increase in minimum liability included in other
comprehensive income $ N/A $ 441
Below is a description of the plan's assets. The plan's weighted-average
asset allocations at December 31, 2003, and December 31, 2002, by asset category
are as follows:
2003 2002
-------- --------
Asset Category
Money Market and Equivalents .1% 10.1%
Equity Securities 77.5 60.9
Debt Securities 22.4 29.0
Real Estate - -
Other - -
-------- --------
Total 100.0% 100.0%
======== ========
The Investment policy and strategies for plan assets can best be described
as a growth and income strategy. The Target allocation is for 75% of the assets
to be invested in large and mid capitalization equity securities with the
remaining 25% invested in fixed income investments. Diversification is
accomplished by limiting the holding in any one equity issuer to no more than 5%
of total equities. Exchange traded funds are used to provide diversified
exposure to the small capitalization and international equity markets. All fixed
income investments are rated as investment grade, with the majority of these
assets invested in corporate issues. The Assets are managed by the Trust
Division of American National Bank and Trust Company. No derivatives are used to
manage the assets. Equity securities do not include holdings in the Corporation.
52
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 $151,000, $136,000 and $116,000 to the 401(k) plan in 2003, 2002 and
2001, respectively. These amounts are included in pension and other employee
benefits expense for the respective years.
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 $84,000, $77,000 and $68,000 for years 2003, 2002 and 2001,
respectively.
13. Fair Value of Financial Instruments:
The estimated fair values of the Corporation's assets are as follows (in
thousands):
December 31, 2003 December 31, 2002
------------------------------ --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 17,887 $ 17,887 $ 23,478 $ 23,478
Securities, available for sale 171,376 171,376 137,046 137,046
Securities held to maturity 36,103 37,455 26,778 28,219
Loans held for sale 560 560 1,285 1,285
Loans, net of allowance 400,953 407,128 400,781 408,792
Accrued interest receivable 4,123 4,123 3,556 3,556
Financial liabilities:
Deposits $ 501,688 $ 503,409 $ 473,562 $ 474,102
Repurchase agreements 47,035 47,035 36,155 36,155
Other borrowings 21,000 22,328 22,000 24,884
Accrued interest payable 835 835 1,065 1,065
Off balance sheet instruments:
Commitments to extend credit $ - $ - $ - $ -
Standby letters of credit - 35 - 35
Rate lock commitments - - - -
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.
53
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.
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, 2003, the Corporation's Tier I and total capital
ratios were 14.85% and 15.99%, respectively. At December 31, 2002, these ratios
were 14.41% and 15.63%, respectively. The ratios for both years were well in
54
excess of the regulatory requirements. Management believes, as of December 31,
2003, 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, $4,131,000 plus an additional amount equal to the Bank's net income
for 2003 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, 2003
Total Capital
Corporation $ 74,222 15.99% $ 37,137 >8.0%
Bank 71,867 15.50% 37,092 >8.0% $ 46,364 >10.0%
Tier I Capital
Corporation 68,930 14.85% 18,569 >4.0%
Bank 67,248 14.50% 18,546 >4.0% 27,819 >6.0%
Leverage Capital
Corporation 68,930 10.76% 19,221 >3.0%
Bank 67,248 10.51% 19,194 >3.0% 31,989 >5.0%
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%
15. Segment and Related Information:
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", reportable segments include community
banking and trust and investment services. Community banking involves making
loans to and generating deposits from individuals and businesses in the markets
where the Bank has offices. All assets and liabilities of the Bank are allocated
to community banking. Investment income from fixed income investments is a major
source of income. Loan fee income, service charges from deposit accounts and
non-deposit fees such as automatic teller machine fees and insurance commissions
generate additional income for community banking. The assets, liabilities and
operating results of the Bank's two subsidiaries, ANB Mortgage Corp. and ANB
Services Corp. are included in the other segment. ANB Mortgage Corp. performs
55
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 2003, 2002 and 2001 is shown in the
following table (in thousands). The "Other" column includes corporate related
items, results of insignificant operations and, as it relates to segment profit
(loss), income and expense not allocated to reportable segments. Inter-segment
eliminations primarily consist of the Corporation's investment in the Bank and
related equity earnings.
2003
-----------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ ---------
Interest income $ 32,178 $ - $ 55 $ (55) $ 32,178
Interest expense 9,391 - 55 (55) 9,391
Non-interest income - external customers 3,314 2,523 834 - 6,671
Non-interest income - internal customers - 48 - (48) -
Operating income before income taxes 11,975 1,326 126 - 13,427
Depreciation and amortization 1,555 24 6 - 1,585
Total assets 643,863 - 1,902 (1,463) 644,302
Capital expenditures 682 3 2 - 687
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 604,482 - 2,468 (1,091) 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 572,567 - 1,209 (889) 572,887
Capital expenditures 1,141 16 1 - 1,158
56
16. Parent Company Financial Information:
Condensed parent company financial information is as follows (in
thousands):
As of December 31
----------------------
Condensed Balance Sheets 2003 2002
------------------------ -------- --------
Assets
Cash $ 1,782 $ 1,126
Assets
Cash $ 1,397 $ 1,782
Investment in Subsidiary 69,912 68,369
Other Assets 622 585
-------- --------
Total Assets $ 71,931 $ 70,736
======== ========
Liabilities $ - $ -
Shareholders' Equity 71,931 70,736
-------- --------
Total Liabilities and Shareholders' Equity $ 71,931 $ 70,736
======== ========
For the Year Ended
December 31
-------------------------------------
Condensed Statements of Income 2003 2002 2001
------------------------------ --------- --------- ---------
Dividends from Subsidiary $ 7,078 $ 6,000 $ 8,985
Income 4 10 -
Expenses 159 145 105
Income taxes (benefit) (52) - -
--------- --------- ---------
Income Before Equity in Undistributed
Earnings of Subsidiary 6,975 5,865 8,880
Equity in Undistributed Earnings
of Subsidiary 2,538 3,596 535
--------- --------- ---------
Net Income $ 9,513 $ 9,461 $ 9,415
========= ========= =========
For the Year Ended
December 31
-------------------------------------
Condensed Statements of Cash Flows 2003 2002 2001
---------------------------------- --------- --------- ---------
Cash provided by dividends received
from Subsidiary $ 7,078 $ 6,000 $ 8,985
Cash used for payment of dividends (4,272) (4,117) (3,924)
Cash used for repurchase of stock (3,128) (1,049) (4,600)
Process from exercise of options 76 61 182
Other (139) (239) (129)
--------- --------- ---------
Net (decrease) increase in cash $ (385) $ 656 $ 514
========= ========= =========
57
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 15, 2004 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 15, 2004.
/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
58