SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
This Amendment No. 1 to Form 10-K filed with the Commission on March 25, 2002
adds Exhibit 99.3 confirming that the Corporation has recieved certain required
representations from Arthur Andersen LLP in a letter dated March 28, 2002.
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20002001
-----------------
Commission file number 0-12820
AMERICAN NATIONAL BANKSHARES INC.
---------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1284688
-------- ----------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
628 Main Street
Danville, Virginia 24541
------------------- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 804-792-5111434-792-5111
--------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
----
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1 Par Value NASDAQ National Market
-------------------------- -------------------------------------------------------------------------
(Title of each class) (Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-------- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
--------
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 9, 20018, 2002 was $90,202,290.$102,377,858. The number of shares of the
Registrant's Common Stock outstanding on March 9, 20018, 2002 was 6,030,772.5,822,356.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 24, 200123, 2002 are incorporated by reference in Part
III of this report.
II-11
CROSS REFERENCE
Page
PART I
Page
----
ITEM 1 - Business II 5
ITEM 2 - Properties II 6
ITEM 3 - Legal Proceedings
There are no legal actions or proceedings pending to which the Corporation is a party.
ITEM 4 - Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters II 6
ITEM 6 - Selected Financial Data II 7
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations II 8
- 24
ITEM 7A-7A - Quantitative and Qualitative Disclosures about Market Risk II 15 - 1810
ITEM 8 - Financial Statements and Supplementary Data
Quarterly Financial Results for 2001 and 2000 and 1999 II 2523
Management's Report on Financial Statements II 2624
Report of Independent Public Accountants II 2725
Consolidated Balance Sheets at December 31, 2001 and 2000 and 1999 II 2826
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2000 II 292001 27
Consolidated Statements of Changes in Shareholders' Equity for each
of the years in the three-year period ended December 31, 2000 II 302001 28
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2000 II 312001 29
Notes to Consolidated Financial Statements II 32 - 4330
ITEM 9 - Changes in and disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with accountants on accounting and financial disclosure.
PART III
ITEM 10 - Directors and Executive Officers of the Registrant I 3 - 5*
ITEM 11 - Executive Compensation I 8 - 9*
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management I 3 - 5*
ITEM 13 - Certain Relationships and Related Transactions I 9 - 11*
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for reference)
ExhibitExhibits
- --------
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 AugustMarch 20, 19972001 Exhibit 4.2 on Form S-38-K
filed August 20, 1997April 3, 2001
10.1 Agreement between American National Bank and Exhibit 4a on Form 10-K
Trust Company and James A. Motley dated filed March 28, 1994
August 26, 1982, as amended August 11, 1987
10.2 Agreement between American National Bank and Trust Exhibit 10.210.3 on Form 10-K
Company and Charles H. MajorsE. Budge Kent, Jr. dated June 12, 1997 filed March 27, 1998
2
10.3 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
II-2
10.4 Agreement between American National Bank and Trust Exhibit 10.4 on Form 10-K
Company and David Hyler dated June 12, 1997 filed March 27, 1998
10.5 Agreement between American National Bank and Trust Exhibit 10.5 on Form 10-K
Company and Gilmer D. Jefferson dated June 12, 1997 filed March 27, 1998
10.6 Agreement between American National Bank and Trust Exhibit 10.6 on Form 10-K
Company and Carl T. Yeatts dated June 12, 1997 filed March 27, 1998
10.7 American National Bankshares Inc. Stock Option Plan dated Exhibit 4.3 on form S-8
August 19, 1997 filed September 17, 1997
10.810.4 Agreement between American National Bank and Trust Exhibit 4 on Form 10K10-K
Company and H. Dan Davis dated March 14, 1996 filed September 27, 1995
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
Charles H. Majors dated December 18, 2001
10.6 Agreement between American National Bankshares Inc., Exhibit 10.6 on Form 10-K
American National Bank and Trust Company and filed March 25, 2002
E. Budge Kent, Jr. dated December 18, 2001
10.7 Agreement between American National Bankshares Inc., Exhibit 10.6 on Form 10-K
American National Bank and Trust Company and filed March 25, 2002
Dabney T. P. Gilliam, Jr. dated December 18, 2001
10.8 Agreement between American National Bankshares Inc., Exhibit 10.6 on Form 10-K
American National Bank and Trust Company and filed March 25, 2002
Jeffrey V. Haley dated December 18, 2001
10.9 Agreement between American National Bankshares Inc., Exhibit 10.6 on Form 10-K
American National Bank and Trust Exhibit 10.1 on Form 10-Q
Company and T. Allen Lilesfiled March 25, 2002
Brad E. Schwartz dated June 1, 1998 filed August 13, 1998December 18, 2001
10.10 Agreement between American National Bank and Trust Exhibit 10.110.7 on Form 10-Q10-K
Company and JamesCharles H. Johnson, Jr.Majors dated July 31, 1999January 1, 2002 filed November 12, 1999
10.11 Agreement between American National Bank and Trust Exhibit 10.2 on Form 10-Q
Company and Earnest C. Jordan dated July 26, 1999 filed November 12, 1999March 25, 2002
99.2 American National Bankshares Inc. Dividend Reinvestment Exhibit 99 on Form S-3
Plan dated August 19, 1997 filed August 20, 1997
99.3 Confirmation of Arthur Andersen LLP's Representations Exhibit 99.3 on Form 10-K/A
filed March 29, 2002
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 2000.2001.
II-3- --------------
* The information required by Item 10 is incorporated herein by reference to
the information that appears under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the April 2002 Annual Meeting of
Shareholders.
The information required by Item 11 is incorporated herein by reference to
the information that appears under the headings "Board Committees and
Compensation", "Report of Human Resources and Compensation Committee on
Executive Compensation", " Executive Compensation", and "Certain Agreements
with Executive Officers" in the Registrant's Proxy Statement for the April
2002 Annual Meeting of Shareholders.
The information required by Item 12 is incorporated herein by reference to
the information that appears under the headings "Security Ownership of
Certain Beneficial Owners" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement for the April 2002 Annual
Meeting of Shareholders.
The information required by Item 13 is incorporated herein by reference to
the information that appears under the heading "Interest of Management in
Certain Transactions"' in the Registrant's Proxy Statement for the April,
2002 Annual Meeting of Shareholders.
3
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 20, 200119, 2002 AMERICAN NATIONAL BANKSHARES INC.
By: /s/ T. Allen Liles
-------------------------Brad E. Schwartz
---------------------------------------
Senior Vice President, Secretary & Treasurer
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 20, 2001.19, 2002.
/s/ Charles H. Majors President and
- ----------------------------------- Chief Executive Officer
Charles H. Majors
/s/ Fred A. Blair Director
- -----------------------------------
Fred A. Blair
/s/ Lester A. Hudson, Jr. Director
- -----------------------------------
Lester A. Hudson, Jr.
/s/ Ben J. Davenport, Jr. Director
- -----------------------------------
Ben J. Davenport, Jr.
/s/ BillWillie G. Barker, Jr. Director
- -----------------------------------
BillWillie G. Barker, Jr.
/s/ H. Dan Davis Director
- -----------------------------------
H. Dan Davis
/s/ E. Budge Kent, Jr. Director
- -----------------------------------
E. Budge Kent, Jr.
/s/ Fred B. Leggett, Jr. Director
- -----------------------------------
Fred B. Leggett, Jr.
/s/ Claude B. Owen, Jr. Director
- -----------------------------------
Claude B. Owen, Jr.
/s/ James A. Motley Director
- -----------------------------------
James A. Motley
/s/ Richard G. Barkhouser Director
- -----------------------------------
Richard G. Barkhouser
/s/ T. Allen LilesBrad E. Schwartz Senior Vice President
- ----------------------------------- Secretary & Treasurer
T. Allen Liles
II-4Brad E. Schwartz
4
ITEM 1 - Business
American National Bankshares Inc. ("the Corporation"(the "Corporation") is a one-bank holding
company, which was 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"(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, 20002001 the Corporation
employed 197205 persons (FTE).
American National Bank and Trust Company
The Bank has been operating as a commercial bank in Danville, Virginia
since its organization in 1909. The Bank has expanded through internal growth
and through mergers and acquisitions. On March 14, 1996, the Corporation
completed the acquisitionmerger 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 Mutual was merged with1996 that
added $57,700,000 in deposits and into American National$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 Trust Company.Martinsville, Virginia and closed a limited service
retail office in Danville during 1999 and opened a branch office in South
Boston, Virginia during 2000. In March 2002, the Bank opened their fourteenth
retail banking office in southern Henry County.
The Bank has two wholly owned subsidiaries to make and salesell mortgage loans
and to offer non-deposit investment products such as mutual funds and insurance.
The operations of the Bank are conducted at thirteenfourteen offices located
throughout the Bank's trade area, which includes the Cities of Danville and
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. 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 fourteenfifteen
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 individual demand and time deposit accounts, commercial
and individual loans and trust services.
Competition
The Bank's primary service area is generally defined as the Cities of
Danville and 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, money market and mutual funds, and mortgage and
insurance finance companies. As of March 20, 2001,19, 2002, there were approximately 17
banks operating in this service area. American National Bank and Trust Company
has the largest deposit market share in Danville and Pittsylvania County. No new banks or
savings and loan associations have been chartered in the Danville area in the
past five years. Several branch offices of existing banks have been opened in
this trade area in the past two years.
Supervision and Regulation
The Corporation is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("the Act") and is registered as such with the Board
of Governors of the Federal Reserve System ("the Federal Reserve Board"). As a
bank holding company, the Corporation is required to file with the Federal
Reserve Board an annual report and such other information as may be required.
The Federal Reserve Board may also make examinations of the Corporation.
The operations of the Bank are subject to federal statutes and to
regulations of the Comptroller of the Currency, the Federal Reserve Board and
the Federal Deposit Insurance Corporation, which insures the Bank's deposits.
The primary supervisory authority over the Bank is the Comptroller of the
Currency, which regularly examines such areas as reserves, loans, investments,
regulatory compliance, information systems, management practices and other
aspects of the Bank's operations. These examinations are designed primarily for
the protection of the Bank's depositors. In addition to these regular
examinations, the Bank must furnish the Comptroller periodic reports containing
a full and accurate statement of its affairs.
As a national bank, the Bank is a member of the Federal Reserve System and
is affected by general fiscal and monetary policies of the Federal Reserve
Board. The techniques used by the Federal Reserve Board include setting the
reserve requirements of member banks and establishing the discount rate on
member bank borrowings.
Government Monetary Policies and Economic Controls
The policies of the Federal Reserve Board have a direct effect on the
amount of bank loans and deposits and the interest rates charged and paid
thereon. While current economic conditions,these policies can materially affect the policiesrevenues and income of
the Federal Reserve
Board (and other regulatory authorities) designed to deal with these conditions
andcommercial banks, the impact of such conditions and policies upon the future
business and earnings of the Bank cannot accurately be predicted, they can materially affect
the revenues and income of commercial banks.predicted.
Foreign Operations
The Corporation does not engage in any foreign operations.
Executive Officers
This information is incorporated by reference to the Registrant's Proxy
Statement for the 2000April 2002 Annual Meeting of Shareholders.
II-55
ITEM 2 - PROPERTIES
The principal executive offices of the Corporation as well as the principal
executive offices of the Bank are located at 628 Main Street, Danville,
Virginia. As of March 20, 200119, 2002 the Bank maintained thirteenfourteen full service
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 owns and operates
fourteenfifteen Automated Teller Machines ("ATMs"). The Bank owns a parking lot for its employees fronting
on Ridge Street in close proximity to the main office. The Bank also owns approximately 2.5
acres of land on Piedmont Drive in Danville opposite of
Piedmont Mall for future expansion of its retail banking operations.
There are no mortgages or liens against any property of the Bank or the
Corporation.
BANK OFFICES
Main Office 628 Main Street, Danville, Virginia 24541
Airport Office 1407 South Boston Road, Danville, Virginia 24540
Chatham Office 13880 U.S. Highway 29, Chatham, Virginia 24531
Collinsville Office 2484 Virginia Avenue, Collinsville, Virginia 24078
Gretna Office 109 Main Street, Gretna, Virginia 24557
Martinsville Office * 201 East Main Street, Martinsville, Virginia 24112
Nor-Dan Office 239 Nor-Dan Drive, Danville, Virginia 24540
Riverside Office 1081 Riverside Drive, Danville, Virginia 24540
South Boston Office * 3229 Halifax Road, South Boston, Virginia 24592
South Main Office 1013 South Main Street, Danville, Virginia 24541
Tower Drive Office 103 Tower Drive, Danville, Virginia 24540
West Main Office * 2016 West Main Street, Danville, Virginia 24541
Yanceyville Office 173 Main Street, Yanceyville, North Carolina 27379
220 South Office * 3810 Greensboro Road, Ridgeway, Virginia 24148
ATM LOCATIONS
Drive-Up
Airport Office 1407 South Boston Road, Danville, Virginia 24540
Chatham Office 13880 U.S. Highway 29, Chatham, Virginia 24531
Collinsville Office 2484 Virginia Avenue, Collinsville, Virginia 24078
Franklin Turnpike * 2725 Franklin Turnpike, Danville, Virginia 24540
Hillcrest Shopping Center * Highways 86 & 158, Yanceyville, North Carolina 27379
Huffman's Car Wash * 596 West Main Street, Danville, Virginia 24541
Martinsville Office * 201 East Main Street, Martinsville, Virginia 24112
Riverside Office 1081 Riverside Drive, Danville, Virginia 24540
South Boston Office * 3229 Halifax Road, South Boston, Virginia 24592
220 South Office * 3810 Greensboro Road, Ridgeway, Virginia 24148
Walk-Up
Danville Regional Medical Center * 142 South Main Street, Danville, Virginia 24541
Liberty Fair Mall * 240 Commonwealth Boulevard, Martinsville, Virginia 24112
Nor-Dan Office 239 Nor-Dan Drive, Danville, Virginia 24540
Piedmont Mall * 325 Piedmont Drive, Danville, Virginia 24540
West Main Office * 2016 West Main Street, Danville, Virginia 24541
* Leased
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 JanuaryDecember 31, 2001 the Corporation had 1,406
shareholders.1,377
shareholders of record. The tables below present the high and low 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 2001 and 2000.
6
Market Price of the Corporation's Common Stock
NASDAQ closing price Dividends
--------------------- declared
2001 Low High per share
- ----------- ------- -------- ---------
4th quarter $17.500 $19.100 $ .170
3rd quarter $17.750 $19.400 $ .170
2nd quarter $18.250 $20.938 $ .170
1st quarter $14.250 $25.000 $ .150
---------
$ .660
=========
2000 and 1999.
First Second Third Fourth
Market Value Quarter Quarter Quarter Quarter
- - - - - ------------ ------- ------- ------- -------
2000 Common Stock $11.00 - 18.00 $12.13 - 15.38 $ 9.00 - 16.00 $11.50 - 14.50
1999 Common Stock $13.00 - 16.22 $13.50 - 18.50 $15.00 - 25.00 $16.50 - 23.00
Per Share First Second Third Fourth
Dividends Declared Quarter Quarter Quarter Quarter Total
- - - - - ------------------ ------- ------- ------- ------- -----
2000 Common Stock $ .135 $ .15 $ .15 $ .15 $ .585
1999 Common Stock $ .120 $ .135 $ .135 $ .135 $ .525
II-6
Low High
- ----------- ------- --------
4th quarter $11.500 $14.500 $ .150
3rd quarter $ 9.000 $16.000 $ .150
2nd quarter $12.125 $15.375 $ .150
1st quarter $11.000 $18.000 $ .135
---------
$ .585
=========
Summary of Selected Consolidated Financial Data
(in thousands, except per share amounts)
American National Bankshares Inc. & Subsidiary
2001 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Operations Information:
Interest income:
Loans.................................................Loans..............................................$ 30,217 $ 28,300 $ 23,959 $ 23,356 $ 22,441
$ 20,335
Federal funds sold and other..........................Interest on deposits in other banks................ 385 179 273 272 237
435
Investment securities.................................securities.............................. 9,218 10,127 9,467 9,026 9,050
9,162
--------- --------- --------- --------- ----------------- -------- -------- -------- --------
Total interest income...............................income............................ 39,820 38,606 33,699 32,654 31,728
29,932
Interest expense........................................expense..................................... 17,502 17,343 14,736 14,472 14,590
14,370
--------- --------- --------- --------- ----------------- -------- -------- -------- --------
Net interest income.....................................income.................................. 22,318 21,263 18,963 18,182 17,138
15,562
Provision for loan losses............................... (1,020) (670) (927) (1,100) (673)losses............................ 1,015 1,020 670 927 1,100
Non-interest income..................................... 4,778 4,494income.................................. 5,668 4,771 4,493 4,079 3,225
2,691
Non-interest expense.................................... (12,930) (11,543) (11,013) (10,269) (10,167)
--------- --------- --------- --------- ---------expense................................. 13,614 12,923 11,542 11,013 10,269
-------- -------- -------- -------- --------
Income before income taxes..............................taxes........................... 13,357 12,091 11,244 10,321 8,994
7,413
Income taxes............................................taxes......................................... 3,942 3,415 3,320 3,123 2,725
2,381
--------- --------- --------- --------- ----------------- -------- -------- -------- --------
Net income..............................................income...........................................$ 9,415 $ 8,676 $ 7,924 $ 7,198 $ 6,269
$ 5,032
========= ========= ========= ========= ================= ======== ======== ======== ========
Balance Sheet Information:
Investment securities...................................securities................................$162,929156,791 $162,929 $166,272 $163,413 $143,077
$175,757
Net loans...............................................loans............................................ 370,259 335,010 289,606 265,698 251,173
233,509
Total deposits..........................................deposits....................................... 464,012 426,588 385,558 358,325 351,603
361,983
Shareholders' equity....................................equity................................. 65,397 63,338 56,719 54,861 50,003
52,218
Total assets............................................assets......................................... 572,887 541,389 491,391 460,383 423,640 440,158
Per Share Information:*
Net income (basic and diluted).................................................$ 1.58 $ 1.42 $ 1.30 $ 1.18 $ 1.00
$ .77
Dividends...............................................Dividends............................................ .660 .585 .525 .465 .405
.345
Book value..............................................value........................................... 11.23 10.45 9.29 8.99 8.19
7.96
Ratios:
Return on average assets................................assets............................. 1.69% 1.70% 1.68% 1.64% 1.47%
1.24%
Return on average shareholders' equity..................equity............... 14.49% 14.74% 14.17% 13.79% 12.51%
10.12%Average shareholder's equity/average assets.......... 11.68% 11.54% 11.89% 11.86% 11.78%
Total risk-based capital/assets.........................assets...................... 15.56% 17.09% 17.79% 18.04% 18.37%
20.66%
Shareholders' equity/assets............................. 11.70% 11.54% 11.92% 11.80% 11.86%Dividend payout ratio................................ 41.68% 41.07% 40.44% 39.43% 40.08%
Net charge-offs to average net loans....................loans................. .12% .13% .13% .15% .36% .17%
Allowance for loan losses to period-end
loans, net of unearned income.........................income...................... 1.42% 1.40% 1.41% 1.42% 1.29% 1.30%
* Per share amounts have been restated to reflect the impact of a 2-for-1 stock split effected in the form
of a 100% stock dividend issued to stockholders July 15, 1999, with a record date of July 1, 1999.
II-77
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION andAND ANALYSIS ofOF FINANCIAL CONDITION
andAND RESULTS ofOF OPERATIONS
- - - - - --------------------------------------------------------------------------------
American National Bankshares Inc. ("the Corporation") was organized in 1984
for theOVERVIEW
The purpose of acquiring all ofthis discussion is to focus on important factors affecting
the outstanding shares of American National
Bank and Trust Company ("the Bank"). The Bank was chartered and opened for
business in February 1909. Under an agreement and plan of merger, the Bank was
acquired by the Corporation on September 1, 1984.
The Corporation has expanded through internal growth and through mergers
and acquisitions. On March 14, 1996, the Corporation completed the merger of
Mutual Savings Bank, F.S.B. ("Mutual") with $84,718,00 in assets into the Bank.
The Mutual merger was accounted for as a pooling of interests. The Bank
completed two branch purchases in 1995 and 1996 which added $57,700,000 in
deposits and $6,925,000 in loans. The two branch purchases were accounted for as
purchases and goodwill of $4,504,000 is being amortized over ten years. The Bank
opened branch offices in Chatham and Martinsville, Virginia and closed a limited
service branch in Danville during 1999 and opened a branch office in South
Boston, Virginia during 2000.
Forward-looking Statements
This report contains forward-looking statements with respect to theCorporation's financial condition and results of operationsoperations. The discussion
and businessanalysis should be read in conjunction with the consolidated financial
statements and related notes to assist in the evaluation of the Corporation
and Bank. These forward-looking statements involve risks and uncertainties and
are based on the beliefs and assumptions of management of the Corporation and
Bank and on information available at the time these statements and disclosures
were prepared. Factors that may cause actual results to differ materially from
those expected include the following:
- - - - - - General economic conditions may deteriorate and negatively impact the ability
of borrowers to repay loans and depositors to maintain balances.
- - - - - - Changes in interest rates could reduce net interest income.
- - - - - - Competitive pressures among financial institutions may increase.
- - - - - - Legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses that the Corporation and
Bank are engaged in.
- - - - - - New products developed or new methods of delivering products could result in a
reduction in business and income for the Corporation and Bank.
- - - - - - Adverse changes may occur in the securities market.
Stock SplitCorporation's
2001 performance.
RESULTS OF OPERATIONS
NET INCOME
The Corporation issued a 2-for-1 stock split effected in the form of a 100%
stock dividend to shareholders of record July 1, 1999, payable on July 15, 1999.
All references to the number of common shares and all per share amounts have
been adjusted, as appropriate, to retroactively reflect the stock split.
Reclassifications
Certain prior period information has been restated to conform with 2000
presentation.
Performance Summary
The Corporation and Bank reported record profitability during 2000.2001. Net income
of $8,676,000 for 2000 increased by $752,000 or 9.5% over net income of
$7,924,000 for 1999.
The economy of the Bank's trade area continues to be stable as evidenced by
another year of loan growth. During 2000, net loans increased $45,404,000, or
15.7% while total deposits increased $41,030,000, or 10.6%. Total deposits and
repurchase agreements with customers increased $47,806,000, or 11.6%, during
2000. Approximately 66.5% of loan growth and 33.3% of deposit growth during 2000
occurred in the three new locations opened in 1999 and in 2000.
II-8
Earnings and Capital
Net income per diluted shareended December 31, 2001 was $1.42 in 2000, $1.30 in 1999, and $1.18 in
1998. Shareholders' equity increased $6,619,000 in 2000 from the retention of
2000 earnings and from$9,415,000, an increase inof 8.5% over
the $8,676,000 earned during the same period of 2000. On a basic and diluted per
share basis, net unrealized gainsearnings totaled $1.58 for the year ended December 31, 2001, up
11.3% from $1.42 per share during the same period of 2000.
Two important and commonly used measures of profitability are return on
securities
available for sale. Shareholders' equity increased $1,858,000 in 1999 from
retentionassets (net income as a percentage of 1999 earnings which was partially offset by an increase in net
unrealized lossesaverage total assets) and return on securities available for sale. This followed an increase in
shareholders' equity (net income as a percentage of $4,858,000 in 1998 fromaverage common shareholders'
equity). The Corporation's returns on average assets were 1.69%, 1.70% and 1.68%
for the retention of 1998 earnings
and from an increase in net unrealized gains on securities available for sale.
Shareholders' equity was 11.7% of assets atyears ended December 31, 2001, 2000 and 11.5% at
December 31, 1999. Shareholders' equity was $63,338,000 at December 31, 2000 and
$56,719,000 at December 31, 1999.1999, respectively. The total market value of American National
Bankshares Inc. common stock at $14.50 per share (the last trade recorded on the
NASDAQ National Market during 2000) was $87,925,000. The market value of the
Corporation's common stock was 139 percent of its book value. Book value per
common share was $10.45 at the close of 2000.
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. The repurchases which may be made through open market purchases
or in privately negotiated transactions totaled 40,000 shares during 2000.
The return of net income on average total assets was 1.70% in 2000 compared
to 1.68% in 1999 and 1.64% in 1998. The returnreturns
on average shareholders' equity waswere 14.49%, 14.74% and 14.17% for the last
three years.
The Corporation's growth in earnings resulted from several factors. Net
interest income after provision for loan losses improved $1,060,000, or 5.24%,
for 2001 compared to the same period in 2000 compareddue to 14.17% in 1999 and 13.79% in 1998.
Trends and Future Events
The economic conditions of the Corporation's trade area remained stable
during 2000 as evidenced by another year ofoverall loan and deposit
growth. The
Corporation's net loansNon-interest income grew at a rate of 15.7% during 2000 following a 9.0%
increase in 1999. Total deposits increased 10.6% during 2000 following a 7.6%
increase in 1999.
Net interest income on a taxable equivalent basis increased 11.9% to
$22,077,000 in 2000 after a 5.1% increase to $19,733,000 in 1999. The 2000
increase resulted from growth in average interest-earning assets of $40,509,000
and growth in average interest-earning liabilities of $30,321,000. The weighted
average yield on interest earning assets increased by .37% while the weighted
average cost of interest-bearing liabilities increased by .35% because loan
yields increased by more than interest-bearing liability yields in 2000.
Although Management believes the Corporation has positioned itself to continue
to maintain this level of net interest income into the near future, increased
competition and slowing loan and deposit growth could negatively impact net
interest income.
During 2000, time deposits increased by $24,384,000, or 12.5%, and money
market accounts increased by $10,154,000, or 45.5%. Interest bearing demand
deposits increased $2,650,000, or 4.8%, while non-interest bearing demand
deposits increased $7,001,000 or 14.7%. Savings deposits decreased $3,159,000,
or 4.9%. Repurchase agreements which are short term investments for businesses
and individuals and are not included in deposits increased $6,776,000, or 27.2%,
during 2000. Total deposits increased $41,030,000 or 10.6% during 2000 after
increasing $27,233,000 or 7.6% during 1999.
ANB Mortgage Corp. ("ANB Mortgage"), formerly Mutual Mortgage$896,000 with $369,000 of the Piedmont, Inc., was organized and began operations in 1996 as a wholly owned
subsidiary of the Bank to originate and sell mortgage loans. ANB Services Corp.
("ANB Services") was formed as a wholly owned subsidiary of the Bank and began
operations in late 1999 to offer non-deposit products such as mutual funds and
insurance. The financial condition and results of operations of ANB Mortgage and
ANB Services are included in the Consolidated Balance Sheets and Consolidated
Statements of Income of the Corporation.
The Corporation's stock began tradinggrowth from
non-recurring gains on the NASDAQ National Market on
April 23, 1999 after having been traded on the OTC Bulletin Board. The change to
NASDAQ was made to improve the marketabilitypre-maturity call of the stock.
The Federal Reserve Board ("FRB") increased short-term interest rates by
increasing the federal funds target rate by 1.75% and the discount rate by 1.50%
over a period from August, 1999 to May, 2000, and major banks followed by
raising the prime lending rate by 1.75% during this same period. The increases
in interest rates in 1999 and 2000 were designed to moderate national economic
growth which could have been inflationary if left unchecked. The FRB decreased
short-term interest rates by lowering the federal funds target rate and the
discount rate by 1.00% in early 2001, and the major banks followed by decreasing
the prime lending rate by 1.00%. The FRB lowered interest rates to offset
perceived economic weaknesses which seemed to be developing in the national and
world economy.
The FDIC insures deposits of the Bank up to the limits allowed by law.
Financial institutions are assessed deposit insurance by the FDIC at an annual
rate of between 0 and .27% of insured deposits, depending on a risk
classification. Legislation was enacted in 1996 requiring FDIC insured
institutions to pay a portion of the interest on obligations issued by the
Financing Corporation ("FICO"). For the second quarter of 2000, the effective
annual FICO assessment rate was .0202% of insured deposits.
II-9
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.
Federal banking regulations have established relevant capital requirements
for bank holding companies and subsidiary banks. Under the regulations, well
capitalized institutions must have Tier I risk-based capital ratios of at least
six percent, total risk-based capital ratios of at least ten percent and
leverage ratios of at least five percent 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.
Year 2000 Issue
The Corporation did not encounter computer or system problems from the
transition into the new millennium ("Year 2000"). The Year 2000 problem was
widely publicized as the possible failure or malfunction of systems or computer
chips that improperly recognized date sensitive information when the year
changed to 2000. The Corporation is not aware of Year 2000 problems encountered
by major customers, suppliers or hardware and software vendors. No liquidity
problems or material withdrawals by depositors of the Bank were experienced
during the transition into the Year 2000.
Total Year 2000 project costs, primarily incurred before 2000, were
approximately $125,000 as had previously been estimated and disclosed. The
expenditures did not have a material impact on the Corporation's results of
operations, liquidity or capital resources.
Net Interest Incomeinvestment securities.
NET INTEREST INCOME
Net interest income, the most significant componentCorporation's primary source of earnings,revenue, is
the excess of interest income over interest expense. Net interest income is
influenced by a number of factors, including the volume of interest-earning
assets and interest-bearing liabilities and the interest rates earned on earning
assets and the interest rates paid to obtain funding to support the assets. For
analytical purposes, net interest income is adjusted to a taxable equivalent
basis to recognize the income tax savings on tax-exempt assets, such as state
and municipal securities. A tax rate of 34% was used in adjusting interest on
tax-exempt securities and loans to a fully taxable equivalent basis. The
difference between rates earned on interest-earning assets (with an adjustment
made to tax-exempt income to provide comparability with taxable income, i.e. the
"FTE" adjustment) and the cost of the supporting funds is measured by the net
interest margin.
The FTE-adjusted net interest margin is the primary measure used in
evaluating the effectiveness of the management of earning assets and the
liabilities funding those assets. The FTE-adjusted net interest margin was 4.39%
in 2001, 4.54% in 2000 and 4.43% in 1999. The fifteen basis point decrease in
margin during 2001 was primarily the result of U.S. monetary policy. During
2001, the Federal Reserve decreased the target federal funds rate eleven times
by a total of 4.75%. The unprecedented, rapid decline in the target federal
funds rate and the related effect on the prime lending rate and U.S. Treasury
security rates had a negative impact on net interest income in 2001. The Wall
Street Journal prime rate fell from 9.50% at January 1, 2001 to 4.75% at
December 31, 2001.
While the Corporation's balance sheet is liability-sensitive, it became
increasingly difficult to reduce funding costs at the same pace with the
market-driven reductions in asset yields. The resultant decrease in interest
income from the lower yield on earning assets exceeded the decrease in interest
expense from lower costs of interest-bearing liabilities. The lower interest
rate spread occurred because average-interest-bearing liabilities grew more in
the higher cost areas of time deposits, money market accounts and repurchase
accounts while average loans grew most in the commercial area, which adjusted
more rapidly to declining interest rates than did time deposits during 2001
compared to same period of 2000. Table 1 demonstrates fluctuations in net
interest income and the related yields for the years 2001, 2000, 1999 and 1998.
During 2000, taxable equivalent net1999.
Table 2 presents the dollar amount of changes in interest income increased to
$22,077,000, up 11.9% from $19,733,000 in 1999. Taxable equivalent netand
interest income for 1999 was up 5.1% from $18,780,000 recorded in 1998. The $2,344,000
increase in taxable equivalent net interest income during 2000 consisted of
$1,929,000 dueexpense, and distinguishes between the changes related to increases or
decreases in volumeaverage outstanding balances of interest-earning assets and
$415,000 attributable to rate. The
$953,000 increase in taxable equivalent net interest income during 1999 was the
net result of an increase of $1,247,000 due to volume, reduced by $294,000
attributable to rate. The Bank emphasized profitable deposit pricing in 2000 as
the deposit yield increased only .31% to 4.22% while the prime rateinterest-bearing liabilities (volume), and the federal funds targetchanges related to increases or
decreases in average interest rates increased 1%on such assets and the loan yield increased .42% to
8.98%liabilities (rate).
II-108
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. (Inbasis (in thousands, except rates):
Average Balance Interest Income/Expense Average Yield/Rate
------------------------------ ------------------------------ ---------------------------------------------------
2001 2000 1999 19982001 2000 1999 19982001 2000 1999 1998
-------- -------- -------- -------- -------- -------- ------ ------ ------------- ------- -------
Loans:
Commercial $139,094 $100,298 $ 83,620 $ 75,97211,188 $ 9,273 $ 7,041 $ 6,6878.04% 9.25% 8.42%
8.80%
Mortgage 179,682 165,260 143,281 132,96514,622 14,101 11,773 11,5398.14 8.53 8.22
8.68
Consumer 43,609 50,218 53,209 52,7384,541 4,977 5,170 5,16510.41 9.91 9.72 9.79
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total loans 362,385 315,776 280,110 261,67530,351 28,351 23,984 23,3918.38 8.98 8.56 8.94
-------- -------- -------- -------- -------- -------- ------- ------- -------
Investment securities:
U. S. Government - 2,641 13,130 42,813- 168 801 2,602- 6.36 6.10
6.08
Federal agencies 101,513 89,969 70,009 6,550 5,654 4,485 6.45 6.28 6.4142,698 64,784 54,536 2,709 4,231 3,481 6.34 6.53 6.38
Mortgage-backed 43,628 36,729 35,433 2,723 2,319 2,173 6.24 6.31 6.13
State and municipal 39,208 39,796 36,999 26,5262,677 2,708 2,513 1,9096.83 6.80 6.79
7.20
Other investments 30,947 23,420 20,071 9,0481,959 1,464 1,244 5936.33 6.25 6.20 6.55
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total investment securities 156,481 167,370 160,169 148,39610,068 10,890 10,212 9,5896.43 6.51 6.38 6.46
-------- -------- -------- -------- -------- -------- Federal funds sold and------- ------- -------
Deposits in other banks 11,726 2,879 5,237 5,091385 179 273 2723.28 6.22 5.21 5.34
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total interest-earning assets 530,592 486,025 445,516 415,16240,804 39,420 34,469 33,2527.69 8.11 7.74 8.02
-------- -------- -------- ------ ------ ------------- ------- -------
Other non-earning assets 25,841 24,269 24,813 24,991
-------- -------- --------
Total assets $556,433 $510,294 $470,329 $440,153
======== ======== ========
Deposits:
Demand $ 56,419 $ 56,141 $ 54,143 $ 51,116495 1,035 1,087 1,204.88 1.84 2.01
2.36
Money market 41,225 24,861 19,250 19,0311,318 865 535 5453.20 3.48 2.78
2.86
Savings 62,792 63,739 67,247 67,2651,177 1,671 1,768 1,9501.87 2.62 2.63
2.90
Time 229,050 202,890 183,707 174,12312,617 11,095 9,284 9,2605.51 5.47 5.05 5.32
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total deposits 389,486 347,631 324,347 311,53515,607 14,666 12,674 12,9594.01 4.22 3.91
4.16
Federal funds purchased - - 188 - - 11 - - 5.85
Repurchase agreements 29,814 27,608 20,895 25,2611,088 1,362 876 1,1063.65 4.93 4.19
4.38
Other borrowings 15,491 23,397 23,073 7,497807 1,315 1,186 3965.21 5.62 5.14
5.28-------- -------- -------- -------- -------- -------- ------- ------- -------
Total interest-bearing
liabilities 434,791 398,636 368,315 344,48117,502 17,343 14,736 14,4724.03 4.35 4.00
4.20-------- -------- -------- -------- -------- -------- ------- ------ ------ ------------- -------
Demand deposits 52,719 49,126 42,923
40,134
Other liabilities 3,941 3,654 3,175
3,334
Shareholders' equity 64,982 58,878 55,916 52,204
-------- -------- --------
Total liabilities and
Shareholders' equity $556,433 $510,294 $470,329 $440,153
======== ======== ========
Interest rate spread 3.66% 3.76% 3.74% 3.82%
====== ====== ======4.02%
======= ======= =======
Net interest income $ 23,302 $ 22,077 $ 19,733 $ 18,780
======== ======== ========
Taxable equivalent adjustment $ 984 $ 814 $ 770 $ 598
======== ======== ========
Net yield on earning assets 4.39% 4.54% 4.43%
4.52%
====== ====== ============= ======= =======
II-11The growth in the volume of loans increased the tax-equivalent interest
income on loans by $3,752,000, while the decline in rates on new and existing
loans reduced the same number by $1,752,000. The net effect of the volume
increase and the general rate decline increased tax equivalent interest income
on loans by $2,000,000. Had rates been more stable in 2001, interest income on
loans would have been greater. Interest income on a tax-equivalent basis
declined $822,000 on investment securities due to declines in both volume and
yields on investment securities. The Corporation did recognize a pre-tax gain of
$367,000 in the non-interest income category as primarily U.S. Government Agency
securities with pre-maturity call features purchased at a discount to their face
value were called by the issuing agencies. The resulting decline in outstanding
securities was the primary contributor in the reduction of investment securities
interest income.
Total interest expense increased by a net amount of $159,000 in 2001, with
a decrease of $1,474,000 due to lower rate funding costs in all categories
except time deposits offset by an increase in funding costs due to volume of
$1,633,000. Time deposits did not decline in 2001 due to a peak in time deposit
rates from mid-year 2000 to early 2001 coupled with the delayed re-pricing
period of these deposits. Due to the short-term nature of the majority of the
time deposits, the Corporation anticipates re-pricing a majority of its time
deposits in 2002 to lower market-based rates.
9
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):
2001 vs. 2000 2000 vs. 1999
1999 vs. 1998
--------------------------------------------------------------- -------------------------------
Interest Change Interest Change
Increase Attributable to Increase Attributable to
------------------------------------- ------------------
(Decrease) Rate Volume (Decrease) Rate Volume
---------- --------------- -------- ---------- --------------- --------
Interest income
Loans:
Commercial $2,232$ 1,915 $(1,323) $ 3,238 $ 2,232 $ 735 $1,497 $ 354 $ (299) $ 6531,497
Mortgage 521 (672) 1,193 2,328 467 1,861
234 (633) 867
Consumer (436) 243 (679) (193) 102 (295)
5 (41) 46
------- ------- ------- ------- ------- --------------- -------- -------- -------- -------- --------
Total loans 2,000 (1,752) 3,752 4,367 1,304 3,063
593 (973) 1,566
------- ------- ------- ------- ------- --------------- -------- -------- -------- -------- --------
Investment securities:
U.S. Government (168) (84) (84) (633) 33 (666)
(1,801) 10 (1,811)
Federal agencies 896 154 742 1,169 (87) 1,256(1,522) (118) (1,404) 750 82 668
Mortgage-backed 404 (27) 431 146 65 81
State and municipal (31) 9 (40) 195 5 190
604 (113) 717
Other investments 495 19 476 220 11 209
651 (34) 685
------- ------- ------- ------- ------- --------------- -------- -------- -------- -------- --------
Total investment securities (822) (201) (621) 678 203 475 623 (224) 847
------- ------- ------- ------- ------- -------
Federal funds sold and196 482
-------- -------- -------- -------- -------- --------
Deposits in other banks 206 (119) 325 (94) 46 (140)
1 (7) 8
------- ------- ------- ------- ------- --------------- -------- -------- -------- -------- --------
Total interest income 1,384 (2,072) 3,456 4,951 1,553 3,398 1,217 (1,204) 2,421
------- ------- ------- ------- ------- -------1,546 3,405
-------- -------- -------- -------- -------- --------
Interest expense
Deposits:
Demand (540) (545) 5 (52) (91) 39
(117) (185) 68
Money market 453 (75) 528 330 153 177
(10) (16) 6
Savings (494) (470) (24) (97) (5) (92)
(182) (181) (1)
Time 1,522 82 1,440 1,811 797 1,014
24 (472) 496
------- ------- ------- ------- ------- --------------- -------- -------- -------- -------- --------
Total deposits 941 (1,008) 1,949 1,992 854 1,138
(285) (854) 569
Federal funds purchased - - - (11) - (11)
Repurchase agreements (274) (376) 102 486 172 314
(230) (45) (185)
Other borrowings (508) (90) (418) 129 112 17
790 (11) 801
------- ------- ------- ------- ------- --------------- -------- -------- -------- -------- --------
Total interest expense 159 (1,474) 1,633 2,607 1,138 1,469
264 (910) 1,174
------- ------- ------- ------- ------- --------------- -------- -------- -------- -------- --------
Net interest income $2,344 $ 415 $1,9291,225 $ 953(598) $ (294) $1,247
======= ======= ======= ======= ======= =======1,823 $ 2,344 $ 408 $ 1,936
======== ======== ======== ======== ======== ========
Provision and AllowanceMARKET RISK MANAGEMENT
As the holding company for Loan Losses
The provision for loan losses is an amount added to the allowance against
which loan losses are charged. The amount of the provision is determined by
Management based upon its assessment of the size and quality of the loan
portfolio and the adequacy of the allowance in relation to the risks inherent
within the loan portfolio. The 2000 provision for loan losses was $1,020,000 and
compares with $670,000 in 1999 and $927,000 in 1998.
The increase in the provision for loan losses in 2000 was influenced by a 15.7% increase in loans and by slightly higher net charge-offs. Net charge-offs
increased to $409,000 in 2000 from $356,000 in 1999 and $383,000 in 1998. The
allowance for loan losses totaled $4,746,000 at December 31, 2000, an increase
of 14.8% over December 31, 1999. The ratio of the allowance to loans, less
unearned income, was 1.40% at December 31, 2000 and 1.41% at December 31, 1999.
The Bank's Loan Committee has responsibility for determining the level of
the allowance for loan losses, subject to the review of the Board of Directors.
The Loan Committee has taken economic factors, as well as any other external
events that may affect the value and collectability of the loan portfolio, into
consideration when making its assessment and recommendation.
The methodology used to determine the level of the allowance for loan
losses on a quarterly basis includes the identification of losses from a review
ofcommercial bank, the Corporation's loan "Watch" list. In addition to these identifiable
potential losses, an experience factor for each major categoryprimary
component of loansmarket risk is applied against the remaining portion of the loans considered to have no more
than a normal risk of collectability. Additional factors considered in
determining the level of the allowance for loan losses are identified impaired
loans, economic conditions, historical losses, uncertainties regarding new
markets, trends and other external factors that existed at the balance sheet
date. The sum of these elements is the Loan Committee's recommended level of the
allowance for loan losses.
II-12
Management has allocated the allowance for loan losses to loan categories as
follows (in thousands):
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- ------------------
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) $1,691 50% $1,190 46% $1,046 47% $ 873 44% $ 886 40%
Real estate-
residential 177 37 167 39 151 36 129 37 128 38
Consumer 1,304 13 1,503 15 1,525 17 1,173 19 1,152 22
Unallocated 1,574 - 1,275 - 1,099 - 1,102 - 904 -
----- ---- ----- ---- ----- ---- ----- ---- --- ----
Balance at
end of year $4,746 100% $4,135 100% $3,821 100% $3,277 100% $3,070 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Management's criteria for evaluating the adequacy of its allowance for loan
losses includes individual evaluation of significant loans and overall portfolio
analyses for more homogeneous, smaller balance loan portfolios. Based on
management's evaluation, estimated loan loss allowances are assigned to the
individual loans which present a greater risk of loan loss. The remaining loan
loss allowance is allocated to the remaining loans on an overall portfolio basis
based on historical loss experience. The assessed risk of loan loss is higher in
the commercial and consumer loan categories as these categories contain loans
which are more significant to the Corporation and to the individual borrowers,
thereby exposing the Corporation to a greater risk of loss in the event of
downturns in the financial position of individual borrowers. The remaining loan
categories are typically for lesser amounts and are distributed over a much
larger population of borrowers, thereby reducing the Corporation's risk of loan
loss.
- - - - - ------------------------------------------------------------------------------------------------------------------------------------
Loan Losses - Ratios
2000 1999 1998
---- ---- ----
Allowance as percentage of outstanding loans, net of unearned income 1.40% 1.41% 1.42%
Net charge-offs as percentage of allowance 8.60 8.62 10.02
Net charge-offs as percentage of average loans, net of unearned income .13 .13 .15
Provision as percentage of net charge-offs 250.00 187.91 242.21
Provision as percentage of average loans, net of unearned income .32 .24 .35
Allowance for loan losses to nonperforming loans 32.51X 14.16X 20.11X
II-13
The economy of the Corporation's trade area, which includes the City of
Danville, City of Martinsville, Town of South Boston, Pittsylvania, Henry and
Halifax Counties in Virginia, Town of Yanceyville and the northern half of
Caswell County in North Carolina, is heavily dependent on manufacturing. While
diversification has occurred in manufacturing in recent years, an apparel/home
fashions textile firm and a tire manufacturing plant in Danville employ a
significant workforce. Increased global competition has negatively impacted the
textile industry in the area with several plants closing due to competitive
pressures or due to relocation of some operations to foreign countries. Other
important industries include farming, tobacco processing and sales, food
processing, furniture manufacturing and sales, specialty glass manufacturing,
and packaging tape production.
The local economy of the Corporation's trade area continues to remain
stable at this time and the Corporation's loan losses have not been significant
in recent years; however, an inherent risk to the loan portfolio exists if a
significant decline occurs in manufacturing along with a corresponding reduction
in employment. Management believes the allowance for loan losses is appropriate
in view of the risks inherent in Corporation's geographic region at the balance
sheet date.
Non-Interest Income
Non-interest income totaled $4,778,000 in 2000 compared with $4,495,000 in
1999 and $4,080,000 in 1998. This was an increase of 6.3% during 2000 after an
increase of 10.2% during 1999. The major components of non-interest income are
trust and investment services, service charges on deposit accounts, other fees
and insurance commissions, mortgage banking income and other income.
Trust and investment services which includes fees from management of
trusts, estates and investments totaled $2,658,000 in 2000, an increase of
$127,000, or 5.0%, from 1999. Trust and investment services fees in 1999
increased 16.9% from 1998. The increase in 2000 primarily resulted from new
business and the 1999 increase came from a combination of growth in investments
under management for customers due to a healthy equities market and from new
business.
Service charges on deposit accounts were $1,114,000 in 2000, an increase of
$144,000, or 14.8%, from 1999. Service charges during 1999 totaled $970,000,
which was a 7.5% increase from 1998. A change in the fee structure and
additional accounts obtained contributed to the growth in income in 2000 and
1999. Service charge pricing on deposit accounts is typically changed annually
to reflect current costs and competition.
Other fees and insurance commissions were $592,000 in 2000, $464,000 in
1999, and $427,000 in 1998. The increase in 2000 resulted primarily from the
addition of brokerage investment services. Non customer ATM fees, debit and
credit card fees, safe deposit box rents, brokerage investment commissions and
insurance commissions represent most of the income in this category.
Mortgage banking income represents fees from originating and selling
residential mortgage loans through a wholly owned subsidiary of the Bank which
began operations in December 1996. Mortgage banking income declined to $240,000
in 2000 from $332,000 in 1999 after peaking at $429,000 in 1998. Low
intermediate and long-term interest rates in 1998 encouraged heavy mortgage
refinancing and purchase activity by borrowers. As interest rates rose in 1999
and again in 2000, mortgage lending declined as fewer borrowers qualified for
loans or desired loans at higher rates.
Other income was $174,000 in 2000, a decline of 11.2% from the $196,000
recorded in 1999, which in turn was an increase of 25.6% from $156,000 recorded
in 1998. Other income in 1999 included $94,000 in gains from the sale of real
estate owned, and 1998 other income included a gain of $104,000 from a life
insurance settlement. Check order income and dividends from equity investments
in two insurance companies account for over 90% of 2000 other income.
Non-Interest Expense
Non-interest expense of $12,930,000 in 2000, increased $1,387,000, or
12.0%, over $11,543,000 in 1999, which in turn increased $529,000, or 4.8%, over
$11,014,000 in 1998. Non-interest expense includes salaries, pension and other
employee benefits, occupancy and equipment expense, core deposit intangible
amortization and other expenses.
Salaries of $6,071,000 in 2000 increased $496,000, or 8.9%, over 1999 due
primarily to additional compensation for new branch offices in South Boston for
one quarter and Martinsville for a full year versus four months in 1999 and due
to merit increases. Salaries of $5,575,000 in 1999 increased $448,000, or 8.7%,
over 1998 due to new branch offices in Chatham and Martinsville and due to
increased incentive compensation and merit increases.
Pension and other employee benefits totaled $1,154,000 in 2000, an increase
of 20.8% from the $955,000 recorded in 1999, which in turn was a decrease of
16.2% from the $1,140,000 reported in 1998. The decline in 1999 resulted from a
decrease in supplemental retirement expense.
Occupancy and equipment expense of $2,189,000 for 2000 increased $293,000,
or 15.5%, over $1,896,000 recorded in 1999 which increased 13.9% from $1,664,000
recorded in 1998. The higher occupancy and equipment expense resulted from the
addition of three new branches in 1999 and 2000 and from higher depreciation,
maintenance and licensing fees on new technology equipment designed to improve
product delivery and increase productivity.
II-14
Core deposit intangible expense represents amortization of premiums paid
for deposits at the Yanceyville and Gretna offices which is calculated on a
straight line basis over ten years.
Other expense was $3,066,000 in 2000, an increase of 15.0% over the
$2,667,000 reported in 1999 which increased from $2,633,000 recorded in 1998.
The 2000 increase primarily resulted from expenses related to three new branches
opened in 1999 and 2000 and from related income growth.
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, was 46.5%, 45.8%, and 46.2% for 2000, 1999, and
1998, respectively. A lower efficiency ratio indicates more favorable expense
efficiency. Leaders in expense efficiency in the banking industry have achieved
ratios in the mid-to-high 40% range while the majority of the industry remains
in the 55-65% range. The efficiency ratio is calculated by dividing non-interest
expense, excluding intangible amortization, by the sum of taxable equivalent net
interest income and non-interest income.
Income Taxes
The provision for income taxes (total of current and deferred) was
$3,415,000 in 2000, compared with $3,320,000 in 1999 and $3,123,000 in 1998. In
each year, the Corporation was subject to a Federal tax rate of 34%. The major
difference between the statutory rate and the effective rate results from income
which 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. Refer to Note 8 of the Consolidated Financial Statements for a
reconciliation of the statutory Federal income tax rate of 34% to the effective
tax rates for 2000, 1999, and 1998.
Capital Management
Regulatory agencies issued risk-based capital guidelines which were fully
effective in 1992. The guidelines were established 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.
Under the guidelines, total capital has been defined as core (Tier I)
capital and supplementary (Tier II) capital. The Corporation's Tier I capital
consists primarily of shareholder's equity, while Tier II capital consists of
the allowance for loan losses. The definition of assets has been modified to
include items on and off the balance sheet, with each item being assigned a
"risk-weight" for the determination of the ratio of capital to risk-adjusted
assets.
The guidelines require that total capital (Tier I and 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, 2000, the Corporation's Tier I and total capital
ratios were 16.02% and 17.09%, respectively. At December 31, 1999, these ratios
were 16.57% and 17.79%, respectively. The ratios for both years were well in
excess of the regulatory requirements.
The Corporation's leverage ratios (Tier 1 capital divided by average
quarterly assets less intangible assets) were 11.59% and 11.52% at December 31,
2000 and 1999, respectively. The leverage ratio has a regulatory minimum of 3%,
with most institutions required to maintain a ratio 100 to 200 basis points
above the 3% minimum depending upon risk profiles and other factors.
The Corporation's 2000 capital formation rate (net income less dividends
declared, divided by average shareholders' equity) was 8.7%. This compares with
8.4% in 1999 and in 1998. These ratios evidence the Corporation's attainment of
its goal of meeting future capital requirements by retaining a portion of
operating earnings while providing steadily increasing cash dividends.
Prior to 1996 the Corporation paid cash dividends on a semi-annual basis.
In 1996 the Corporation began paying dividends on a quarterly basis and the
Board of Directors declared regular quarterly dividends totaling $.585 and $.525
per share of common stock in 2000 and 1999, respectively.
The Board of Directors reviews the Corporation's dividend policy regularly
and increases dividends when justified by earnings after considering future
capital needs.
Asset and Liability Managementvolatility. The Corporation's primary
objectives for asset and liability managementmanaging 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 primarily composed of executive officers, is responsible for:
- - - - - -o Monitoring corporate financial performance;
- - - - - -o Meeting liquidity requirements;
- - - - - -o Establishing interest rate parameters, indices, and terms for loan and
deposit products;
- - - - - -o Assessing and evaluating the competitive rate environment;
- - - - - -o Reviewing and approving investment portfolio transactions under established
policy guidelines;
- - - - - -o Monitoring and measuring interest rate risk.
II-15
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.
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity is provided from cash and amounts due from banks,
federal funds sold, interest-bearing deposits in other banks, repayments from
loans, seasonal increases in deposits, lines of credit from two federal agency
banks and a correspondent bank and maturing investments. Management believes
that these factors provide sufficient and timely liquidity for the foreseeable
future.
Expansion of the Corporation's earning assets is based largely on the
growth of deposits from individuals and small and medium size businesses. These
deposits are more stable in number and size than large denomination certificates
of deposit. In addition, the Corporation's customers have relatively stable
requirements for funds.
The Corporation's major source of funds and liquidity is its deposit base.
The mix of the deposit base (time deposits versus demand, money market and
savings) is constantly subject to change. During 2000, as shown in the
Consolidated Balance Sheets, the deposit mix changed with an increase in higher
cost time deposits of $24,384,000, an increase in demand deposits of $9,651,000,
a decline in savings deposits of $3,159,000 and an increase in money market
accounts of $10,154,000. Deposit mix trends in 1999 were similar to 2000, except
growth in money market and demand deposits were higher in 2000 than in 1999.
The Consolidated Statements of Cash Flows appearing in the financial
statement section shows a net increase in cash and cash equivalents of
$7,780,000 during 2000. This increase was the result of a combination of
$9,905,000 provided by operating activities, $40,804,000 net cash used in
investing activities, and $38,679,000 net cash provided by financing activities.
A net increase in deposits and repurchase agreements provided cash from
financing activities while cash dividends paid, repurchase of stock and a
reduction in FHLB borrowings used net cash in financing activities. The cash
provided by operating and financing activities, more than adequately supplied
the Corporation's liquidity needs at all times during 2000.
Liquidity strategies are implemented and monitored by ALCO on a day to day
basis. The Committee uses a simulation model to assess the future liquidity
needs of the Corporation and manage the investment of funds.
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
10
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, interest rate sensitivity and
simulation analysis are used to determine the impact on net interest income and
MVE from changes in interest rates.
Interest rate sensitivity analysis presents the amount of assets and
liabilities that are estimated to reprice through specified periods if there are
not changes in balance sheet mix. The interest rate sensitivity table, below,analysis in
Table 3 reflects the Corporation's assets and liabilities on December 31, 20002001
that will either be repriced in accordance with market rates, mature or are
estimated to mature early or prepay within the periods indicated.
II-16
indicated (in thousands):
Table 3 - Interest Rate Sensitivity Analysis
December 31, 2000 (in thousands)
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 $ 8,67814,351 $ - $ - $ - $ - $ 8,67814,351
Investment securities 4,760 40,040 37,417 42,095 38,128 162,44021,796 15,746 47,170 45,995 24,100 154,807
Loans 137,460 63,691 92,556 35,202 10,847 339,756102,874 146,039 114,255 10,128 2,297 375,593
---------- --------- --------- --------- --------- --------- ----------------- -------- -------- --------
Total interest
sensitive assets 150,898 103,731 129,973 77,297 48,975 510,874139,021 161,785 161,425 56,123 26,397 544,751
---------- --------- --------- --------- --------- --------- ----------------- -------- -------- --------
Interest sensitive liabilities:
NOW and savings deposits 119,859127,055 - - - - 119,859127,055
Money market deposits 32,48047,025 - - - - 32,48047,025
Time deposits 38,153 111,850 59,479 10,265 6 219,75352,122 119,188 44,012 16,037 - 231,359
Repurchase agreements and
other borrowings 31,73027,177 - 3,000 13,000 - 47,73010,000 40,177
---------- --------- --------- --------- --------- --------- ----------------- -------- -------- --------
Total interest
sensitive liabilities 222,222 111,850 62,479 23,265 6 419,822253,379 119,188 47,012 16,037 10,000 445,616
---------- --------- --------- --------- --------- --------- ----------------- -------- -------- --------
Interest sensitivity gap $(71,324)$(114,358) $ (8,119)42,597 $114,413 $ 67,49440,086 $ 54,03216,397 $ 48,969 $ 91,05299,135
========== ========= ========= ========= ========= ========= ================= ======== ======== ========
Cumulative interest sensitivity gap $(71,324) $(79,443) $(11,949)$(114,358) $(71,761) $ 42,08342,652 $ 91,05282,738 $ 99,135
========== ========= ========= ========= ========= ================= ======== ========
Percentage cumulative gap
to total interest sensitive assets (14.0)(21.0)% (15.6)(13.2)% (2.3)% 8.2 % 17.8 %7.8% 15.2% 18.2%
Of the loans in the above table that either mature or can be repriced in periods over 1 year, $92,283$70,340 have adjustable rates
and $46,322$56,340 have fixed rates. Investment security prepayments were estimated using recent market information.
Because of inherent limitations in interest rate sensitivity analysis, ALCO
uses more sophisticated interest rate risk measurement techniques. Simulation
analysis is used to subject the current repricing conditions to rising and
falling interest rates in increments and decrements of 1%, 2% and 3% to
determine how net interest income changes for the next twelve months. ALCO also
measures the effects of changes in interest rates on the MVEMarket Value of Equity
(MVE) by discounting future cash flows of deposits and loans using new rates at
which deposits and loans would be made to similar depositors and borrowers.
Market value changes on the investment portfolio are estimated by discounting
future cash flows and using duration analysis. Loan and investment security
prepayments are estimated using current market information. The following tableTable 4 shows the
estimated impact of changes in interest rates up and down 1%, 2% and 3% on net
interest income and on MVE.
Change in Net Interest Income and Market ValueMVE as of Portfolio Equity December 31, 20002001 (in thousands)
Changes.
The negative one year cumulative interest sensitivity gap of $77,182,000 in
Changesthe interest rate sensitivity analysis normally implies that the Corporation's
net interest income would rise if rates decline and fall if rates increase. The
simulation analysis presents a more accurate picture since certain rate indices
that reprice deposits do not change with the same magnitude over the same period
of time as changes in Market Value
Change in Net Interest Income (1) of Portfolio Equity (2)
Interest ----------------------- -----------------------
Rates Amount Percent Amount Percent
--------- ------ ------- ------ -------
Up 3% $ 150 .70 % $ 5 .01 %
Up 2% 199 .92 439 .68
Up 1% 141 .65 537 .84
Down 1% (358) (1.66) (1,347) (2.10)
Down 2% (809) (3.75) (3,561) (5.54)
Down 3% (1,370) (6.35) (6,374) (9.92)the prime rate or other indices that reprice loans.
11
Table 4 - Change in Net Interest Income and Market Value of Portfolio Equity
Changes in Changes in Market Value
Change in Net Interest Income (1) of Portfolio Equity (2)
Interest ----------------------- ------------------------
Rates Amount Percent Amount Percent
- --------- -------- -------- --------- ----------
Up 3% $ 2,398 10.48 % $ 12,391 15.73 %
Up 2% 1,679 7.34 7,685 9.75
Up 1% 867 3.79 3,609 4.58
Down 1% (960) (4.20) (3,035) (3.85)
Down 2% (2,045) (8.94) (5,364) (6.81)
Down 3% (2,994) (13.09) (7,185) (9.12)
(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.
II-17
The negative one year cumulative interest sensitivity gap of $79,443,000 in
the interest rate sensitivity analysis normally implies that the Corporation's
net interest income would rise if rates decline and fall if rates increase. The
simulation analysis presents a more accurate picture since certain rate indices
that reprice deposits do not change with the same magnitude over the same period
of time as changes in the prime or indices that reprice many loans.
While the Corporation cannot predict future interest rates or their effects
on MVE or net interest income, the above 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. InAlso, the eventmethodology used estimates various rates of a change in interest rates, loan prepaymentswithdrawal for
money market deposits, savings, and early
deposit withdrawal levels could deviatechecking accounts, which may vary
significantly from those assumedactual experience.
The Corporation is also subject to prepayment risk, particularly in makingfalling
interest rate environments or in environments where the calculations set forth above.slope of the yield curve
is relatively flat or negative. Such changes in the interest rate environment
can cause substantial changes in the level of prepayments of loans, which may
also affect the Corporation's interest rate sensitivity gap position.
Additionally, credit risk may increase if an interest rate increase adversely
affects the ability of many borrowers to service their debt.
Non-Interest Income
Non-interest income totaled $5,668,000 in 2001 compared with $4,771,000
in 2000 and $4,493,000 in 1999. This was an increase of 18.8% during 2001 after
an increase of 6.2% during 2000. The major components of non-interest income are
trust and investment services, service charges on deposit accounts, securities
gains or losses, other fees and insurance commissions, mortgage banking income
and other income.
Trust and investment services revenue is the largest contributor to the
Corporation's non-interest income. Fees from the management of trusts, estates
and investments totaled $2,569,000 in 2001, a decrease of $89,000, or 3.3%, from
2000. Trust and investment services fees in 2000 increased 5.0% from 1999. The
decrease in 2001 resulted primarily from declines in the equity markets, which
reduced portfolio value-based management fees. The 2000 increase came from a
combination of growth in investments under management for customers due to a
healthy equities market and from new business.
Service charges on deposit accounts were $1,385,000 in 2001, an
increase of $272,000, or 24.4%, from 2000. Service charges during 2000 totaled
$1,114,000, which was a 14.8% increase from 1999. A change in the fee structure
and additional accounts obtained contributed to the growth in income in 2001 and
2000. Service charge pricing on deposit accounts is typically changed annually
to reflect current costs and competition.
Securities gains grew to $367,000 in 2001 and compares favorably to a loss
of $2,000 in 2000 and a gain of $8,000 in 1999. These gains were primarily the
result of pre-maturity calls of U.S. Government Agency investment securities.
The Corporation strategically purchased a large volume of these securities in
2000 at a discount to their par value, and these discounts were then recognized
as gains at the pre-maturity call date.
12
Other fees and insurance commissions were $749,000 in 2001, $592,000 in
2000, and $464,000 in 1999. Non-customer ATM fees, debit and credit card fees,
safe deposit box rent, brokerage investment commissions and insurance
commissions represent most of the income in this category. The increase in 2001
resulted primarily from the additional earnings at the Bank's brokerage
subsidiary, ANB Services Corporation.
Mortgage banking income represents fees from originating and selling
residential mortgage loans through a wholly owned subsidiary of the Bank, which
began operations in December 1996. Mortgage banking income increased to $365,000
in 2001 from $240,000 in 2000. Mortgage banking income decreased to $240,000 in
2000 from $332,000 in 1999. Low intermediate and long-term interest rates in
2001 and 1999 encouraged heavy mortgage refinancing and purchase activity by
borrowers. As interest rates rose in 1999 and again in 2000, mortgage lending
declined as fewer borrowers qualified for loans or desired loans at higher
rates.
Other income was $232,000 in 2001, an increase of 36.7% from the
$170,000 recorded in 2000, which in turn was a decrease of 9.1% from $187,000
recorded in 1999. Other income in 1999 included $94,000 in gains from the sale
of real estate owned. Check order income and dividends from equity investments
in a title agency account for the majority of other income.
Non-Interest Expense
Non-interest expense for 2001 was $13,614,000, a 5.3% increase from the
$12,923,000 reported in 2000, which in turn increased $1,382,000 or 12.0%, over
$11,542,000 in 1999. Non-interest expense includes salaries, pension and other
employee benefits, occupancy and equipment expense, core deposit intangible
amortization and other expenses.
Salaries of $6,384,000 in 2001 increased only $312,000, or 5.1%, over
2000 due primarily to a full year of staffing the South Boston office coupled
with merit increases. Salaries of $6,071,000 in 2000 increased $496,000, or
8.9%, over 1999 due to new branch offices in South Boston and Martinsville,
increased incentive compensation and merit increases.
Pension and other employee benefits totaled $1,391,000 in 2001, an
increase of 20.5% from the $1,154,000 recorded in 2000, which in turn was an
increase of 20.9% from the $955,000 reported in 1999. The increases in both
years are due to increased premiums on medical insurance and higher pension
costs. While some of the increase is due to increased staffing, the majority of
the increases are due to the recent trend of health care insurance expenses
increasing at a much higher rate than overall inflation.
Occupancy and equipment expense of $2,316,000 for 2001 increased $132,000,
or 6.1%, over $2,184,000 recorded in 2000, which increased 15.3% from $1,894,000
recorded in 1999. The higher occupancy and equipment expense in 2001 resulted
from the South Boston office that opened in December 2000 and from higher
depreciation, maintenance and licensing fees on new technology equipment and
software designed to improve product delivery and increase productivity.
Core deposit intangible expense represents amortization of premiums
paid for deposits at the Yanceyville and Gretna offices that is calculated on a
straight-line basis over ten years.
Other expense was $3,074,000 in 2001, an increase of 0.3% over the
$3,064,000 reported in 2000, which increased from $2,667,000 recorded in 1999.
The minimal increase in 2001 was the result of management's continued focus on
controlling overhead expenses. The 2000 increase primarily resulted from
expenses related to offices opened in 1999 and 2000 and from related income
growth.
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, was 47.6%, 48.1%, and 47.7% for 2001, 2000, and
1999, respectively. A lower efficiency ratio indicates more favorable expense
efficiency. Leaders in expense efficiency in the banking industry have achieved
ratios in the mid-to-high 40% range while the majority of the industry remains
in the 55-65% range. The efficiency ratio is calculated by dividing non-interest
expense by the sum of taxable equivalent net interest income and non-interest
income.
INCOME TAX PROVISION
Applicable income taxes on 2001 earnings amounted to $3,941,000, resulting
in an effective tax rate of 29.5% compared to $3,415,000, or 28.2% in 2000, and
$3,320,000, or 29.5% in 1999. In each year, the Corporation was subject to a
Federal tax rate of 34%. 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 increase in the effective
tax rate for 2001 as compared to 2000 was a result of the decrease 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.
13
Financial Condition, Liquidity and Capital Resources
Investment PortfolioSECURITIES
The investment 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 investment portfolio plays
a primary role in the management of interest rate sensitivity and generates
substantial interest income. In addition, the portfolio serves as a source of
liquidity and is used to meet collateral requirements.
The investment portfolio consists of two components, investment securities
held to maturity and investment securities available for sale. Securities are
classified as held to maturity based on management's intent and the
Corporation's ability, at the time of purchase, to hold such securities to
maturity. These securities are carried at amortized cost. Securities which may
be sold in response to changes in market interest rates, changes in securities'
prepayment risk, increases in loan demand, general liquidity needs, and other
similar factors are classified as available for sale and are carried at
estimated fair value.
At December 31, 20002001 total investment securities available for sale (at amortized cost)
totaled $119,864,000 and included $77,506,000 in federalat carrying value were
$156,791,000, a decline of 3.8% from year-end 2000. Securities of U.S.
government agencies $18,270,000
inrepresented 21.4% of the total securities portfolio,
mortgage securities issued by U.S. government corporations were 28.5%,
obligations of state and municipal subdivisions were 25.0%, and $24,088,000other
investments were 25.1%. The decline in U.S. government agency and corporations
since 2000 is due to a large volume of these securities being called prior to
their stated maturity date. Proceeds from these securities were used to fund
loan growth and to fund additional mortgage and other investment securities.
AAs of December 31, 2001, there was a net unrealized gain of $489,000$1,984,000
related to these securities at December 31, 2000. At December
31, 1999, securitiesthe available for sale (at amortized cost) totaled $124,519,000
and included $7,002,000 in U.S. Governmentinvestment portfolio compared to $489,000 at
year-end 2000. The market value of securities $77,016,000 in federal
agencies, $19,324,000 in state and municipal and $21,177,000 in other
securities. A net unrealized loss of $2,647,000 related to these securities at
December 31, 1999.
Securities held to maturity totaled $42,576,000 and $44,400,000 at December
31, 2000 and 1999, respectively and had respective estimated fair values of
$42,920,000 and $43,634,000. Of the amount at December 31, 2000, $21,958,000 or
51.6% were federal agencies and $20,618,000 or 48.4% were state and municipal
securities. Securities held to maturity at December 31,
2000 consisted of
$10,855,000 due in one year or less, $13,337,000 due after one year through five
years, $12,534,000 due in five years through ten years and $5,850,000 due after
ten years.2001 was more than the book value by $680,000.
The state and municipal securities were diversified among many different
issues and localities. The market value of securities held to maturity at December 31, 2000 was
more thanTable 5 details the book value by $344,000. No losses are anticipated since the
Corporation has the ability and intent to hold these securities until their
respective maturities.Corporation's investment security
portfolio.
14
Table 5 - Investment Portfolio
This table presents information on the book value, maturities and taxable equivalent yields of investment securities
at the end of the last 3 years (in thousands, except yields):
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Taxable Taxable Taxable
Book Equivalent Book Equivalent Book Equivalent
Value Yield Value Yield Value Yield
-------- ---------- -------- ---------- -------- ----------
U.S. Government:
Within 1 year $ - -% $ - -% $ 7,002 6.63%
1 to 5 years - - - - - -
-------- --------- -------- --------- -------- --------
Total - - - - 7,002 6.63
-------- --------- -------- --------- -------- --------
Federal Agencies:
Within 1 year - - 20,514 7.08 - -
1 to 5 years 28,192 5.35 42,842 6.83 54,249 6.87
5 to 10 years 5,000 6.12 2,000 6.84 6,979 6.59
Over 10 years - - - - - -
-------- --------- -------- -------- -------- --------
Total 33,192 5.47 65,356 6.91 61,228 6.86
-------- --------- -------- -------- -------- --------
Mortgage-backed:
Within 1 year 1,881 6.87 3 7.08 - -
1 to 5 years 4,141 6.72 8,095 6.77 8,360 6.74
5 to 10 years 6,175 6.19 2,080 6.62 3,612 6.59
Over 10 years 31,909 6.25 23,930 6.20 27,449 6.20
-------- --------- -------- -------- -------- --------
Total 44,106 6.31 34,108 6.36 39,421 6.35
-------- --------- -------- -------- -------- --------
State and Municipal:
Within 1 year 1,501 7.89 2,210 7.76 1,599 7.54
1 to 5 years 17,310 7.33 12,080 7.64 9,789 7.88
5 to 10 years 19,324 7.54 22,352 7.44 24,008 7.41
Over 10 years 531 7.79 2,246 7.39 4,695 7.28
-------- --------- -------- -------- -------- --------
Total 38,666 7.46 38,888 7.52 40,091 7.51
-------- --------- -------- -------- -------- --------
Other Investments:
Within 1 year 10,525 2.10 2,045 6.29 - -
1 to 5 years 17,790 6.50 9,056 6.77 9,539 6.62
5 to 10 years 3,098 6.32 7,557 6.23 8,966 6.25
Over 10 years 7,430 5.51 5,430 6.36 2,672 6.16
-------- --------- -------- -------- -------- --------
Total 38,843 5.10 24,088 6.47 21,177 6.41
-------- --------- -------- -------- -------- --------
Total portfolio $154,807 6.11% $162,440 6.87% $168,919 6.83%
======== ========= ======== ======== ======== ========
Loan Portfolio
The Corporation's lending activities are its principal source of
income. Loans, net of unearned income increased $35,837,000 or 10.5% during 2001
and increased $46,015,000 or 15.7% duringfrom 1999 to 2000. As shownThe decline in schedule A on page II-20, the
percentage of loan growth in 2001 is attributable to general economic conditions
and to some extent the 2000 growth was accelerated by the Corporation's entry
into the Martinsville market in 1999.
The primary increases in types of loans in 20002001 were real estate loans secured by 1 - 4 family residential properties, real estate loans
secured by nonfarm, nonresidential properties and commercial and industrial
loans. TheManagement considers the loan portfolio is diversified and it consists of
60.2%
mortgage62.1% real estate secured loans, 26.7%28.3% commercial and agricultural loans and
13.1%9.6% consumer loans.
Note 10loans as of the Consolidated Financial Statements presents related party
loan activity. A substantial portion of the loan additions and payments result
from floorplan activity by two automobile dealerships owned separately by two of
the Corporation's Directors.December 31, 2001, as detailed in Table 6.
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.
15
Table 6 - Loans
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Real estate loans:
Construction and land development $ 10,282 $ 9,284 $ 7,317 $ 8,104 $ 4,442
Secured by farmland 1,110 1,616 1,306 1,491 1,274
Secured by 1-4 family residential
properties 126,860 121,449 108,994 95,711 94,294
Secured by multi-family (5 or more)
residential properties 6,385 5,023 4,532 2,268 1,521
Secured by nonfarm, nonresidential
properties 88,648 67,312 54,170 44,251 41,277
Loans to farmers 1,452 1,625 2,468 2,293 2,761
Commercial and industrial loans 98,324 83,428 66,459 67,154 57,971
Consumer loans 36,077 44,389 45,235 46,337 48,499
Loans for nonrated industrial
development obligations 6,436 5,590 3,236 1,895 2,398
All other loans 19 40 24 15 13
-------- -------- -------- -------- --------
Loans - net of unearned income $375,593 $339,756 $293,741 $269,519 $254,450
======== ======== ======== ======== ========
There were no foreign loans outstanding during any of the above periods. Amounts represent
year-end balances, classified by type (in thousands).
Table 7 - Scheduled Loan Maturities
Commercial
and Real Estate
Agricultural Construction Total
------------ ------------ ---------
Fixed Rate:
1 year of Less $ 1,014 $ 1 $ 1,015
1-5 years 12,646 1,446 14,092
After 5 years 4,292 30 4,322
--------- --------- ---------
Total 17,952 1,477 19,429
Variable Rate:
1 year of Less 67,630 8,219 75,849
1-5 years 19,081 586 19,667
After 5 years 1,549 - 1,549
--------- --------- ---------
Total 88,260 8,805 97,065
Total Loans Commercial real estateand Leases (1) $ 106,212 $ 10,282 $ 116,494
========= ========= =========
(1) This table excludes:
Real Estate Mortgage Loans $ 223,003
Consumer Loans 36,077
Other Loans 19
---------
$ 259,099
=========
16
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is to provide for losses inherent in the loan
portfolio. The Bank's Loan Committee has responsibility for determining the
level of the allowance for loan losses, subject to the review of the Board of
Directors. Among other factors, the Committee on a quarterly basis considers the
Corporation's historical loss experience, the size and composition of the loan
portfolio, the value and adequacy of collateral and guarantors, non-performing
credits including impaired loans have received considerable attention in recent
years by the bank regulators and the news media.Corporation's loan "Watch" list, and
national and local economic conditions.
The concerns have been in real
estate values in certain areaseconomy of the country and the quality of banks'
commercial real estate portfolios. It is difficult to measure commercial real
estate values within the Corporation's trade area, which includes the City of
Danville, City of Martinsville, Town of South Boston, Pittsylvania, Henry and
Halifax Counties in Virginia, Town of Yanceyville and the northern half of
Caswell County in North Carolina, is heavily dependent on manufacturing. While
diversification has occurred in manufacturing in recent years, an apparel/home
fashions textile firm and a tire manufacturing plant in Danville employ a
significant workforce. Increased global competition has negatively impacted the
textile industry in the area with several plants closing due to the lightcompetitive
pressures or due to relocation of some operations to foreign countries. Other
important industries include farming, tobacco processing and sales, activity. Commercial real estate values did not escalate to levels seen in other
areasfood
processing, furniture manufacturing and sales, specialty glass manufacturing,
and packaging tape production. The local economy of the state and country during the ten years prior to the last recession
and management has not detected a significant change in values within the Corporation's trade area
continues to remain stable at this time and the Corporation's loan losses have
not been significant in recent years; however, an inherent risk to the loan
portfolio exists if significant declines continue in the manufacturing sector
along with a corresponding reduction in employment.
There are additional risks of future loan losses that cannot be precisely
quantified or attributed to particular loans or classes of loans. Since those
factors include general economic trends as well as conditions affecting
individual borrowers, the allowance for loan losses is an estimate. The sum of
these elements is the Loan Committee's recommended level of the allowance for
loan losses. The unallocated portion of the allowance is based on loss factors
that cannot be associated with specific loans or loan categories. These factors
include management's subjective evaluation of such conditions as credit quality
trends, collateral values, portfolio concentrations, specific industry
conditions in the regional economy, regulatory examination results, internal
audit and loan review findings, recent loss experiences in particular portfolio
segments, etc. The unallocated portion of the allowance for losses reflects
management's attempt to ensure that the overall reserve appropriately reflects a
margin for the imprecision necessarily inherent in estimates of credit losses.
The allowance is also subject to regulatory examinations and determination
as to adequacy, which may take into account such factors as the methodology used
to calculate the allowance and the size of the allowance in comparison to peer
banks identified by regulatory agencies.
In 2001, the Corporation accrued $1,015,000 in provision for loan losses
compared to $1,020,000 in 2000 and $670,000 in 1999. The provision for loan
losses in 2001 was influenced by a 10.5% increase in loans in 2001 and by
slightly higher net charge-offs. Over the past several years, the Corporation
has substantially increased its portfolio of commercial loans. The risks
associated with increasing the volume of commercial and commercial real estate
loans resulted in an increase in the provision for loan losses for 2001 and 2000
when compared to years prior to 2000. While the Corporation continues to
increase its commercial loan portfolio, the portfolio also continues to become
"more seasoned", allowing management to better assess the risk associated with
the portfolio.
Loans charged off during 2001 amounted to $602,000 compared to $567,000 in
2000 orand $509,000 in 1999. Recoveries amounted to $175,000, $158,000, and
$153,000 in 2001, 2000, and 1999, respectively. Net charge-offs increased to
$427,000 in 2001 from $409,000 in 2000 and $356,000 in 1999. The ratio of net
charge-offs to average outstanding loans was .12% in 2001, .13% in 2000, and
.13% in 1999. Management has confined itsconsiders these charge-off ratios lower than those of
their peer banks, who generally consider charge-off levels of .10% to .40% to be
within reasonable norms from a historical perspective. Table 10 presents the
Corporation's loan loss and recovery experience (in thousands) for the past five
years.
The allowance for loan losses totaled $5,334,000 at December 31, 2001,
an increase of 12.4% over December 31, 2000. The ratio of the allowance to
loans, less unearned income, was 1.42% at December 31, 2001 and 1.40% at
December 31, 2000. The increase in the allowance is supported by the allowance
methodology listed above, the growth in the total loan portfolio, with primary
consideration given to the growth in commercial and commercial real estate
lendingloans, and the overall condition of the Corporation's trade areas. Management
believes that the allowance for loan losses is adequate to its trade area and has always taken a conservative approachabsorb any inherent
losses on existing loans in its lending practice to maintain equity in real estate loans.
II-18the Corporation's loan portfolio at December 31,
2001.
17
INVESTMENT PORTFOLIO
The following table presents information onTable 8 - Allocation of Allowance for Loan Losses
Management has allocated the book and market values,
maturities and taxable equivalent yields of investment securities at the end of
the last 3 yearsallowance for loan losses to loan categories as follows (in thousands, except yields and footnote)thousands):
- - - - - -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 ---------------------------------- ---------------------------------- ----------------------------------
Taxable Taxable Taxable
Book Market Equivalent Book Market Equivalent Book Market Equivalent
Value Value Yield Value Value Yield Value Value Yield
--------- --------- ---------- --------- --------- ---------- --------- --------- ----------1997
----------------- ----------------- ----------------- ----------------- ------------------
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
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
U.S. Government:
Within 1
Commercial (including
commercial real estate) $2,005 55% $1,691 50% $1,190 46% $1,046 47% $ 873 44%
Real estate-
residential 236 35 177 37 167 39 151 36 129 37
Consumer 1,276 10 1,304 13 1,503 15 1,525 17 1,173 19
Unallocated 1,817 - 1,574 - 1,275 - 1,099 - 1,102 -
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Balance at
end of year $$5,334 100% $4,746 100% $4,135 100% $3,821 100% $3,277 100%
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
Management's criteria for evaluating the adequacy of its allowance for loan losses includes individual evaluation of
significant loans and overall portfolio analyses for more homogeneous, smaller balance loan portfolios. Based on management's
evaluation, estimated loan loss allowances are assigned to the individual loans which present a greater risk of loan loss. The
remaining loan loss allowance is allocated to the remaining loans on an overall portfolio basis based on historical loss experience.
The assessed risk of loan loss is higher in the commercial and consumer loan categories as these categories contain loans which are
more significant to the Corporation and to the individual borrowers, thereby exposing the Corporation to a greater risk of loss in
the event of downturns in the financial position of individual borrowers. The remaining loan categories are typically for lesser
amounts and are distributed over a much larger population of borrowers, thereby reducing the Corporation's risk of loan loss.
Table 9 - $Loan Loss Ratios
2001 2000 1999
------- ------- -------
Allowance as percentage of outstanding loans, net of unearned income 1.42% 1.40% 1.41%
Net charge-offs as percentage of allowance 8.00 8.60 8.62
Net charge-offs as percentage of average loans, net of unearned income .12 .13 .13
Provision as percentage of net charge-offs 237.72 250.00 187.91
Provision as percentage of average loans, net of unearned income .28 .32 .24
Allowance for loan losses to nonperforming loans 9.39X 32.51X 14.16X
18
Table 10 - - % $ 7,002 $ 7,020 6.63 % $ 25,000 $ 25,075 6.00 %
1 to 5 yearsSummary of Loan Loss Experience
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Balance at beginning of period $4,746 $4,135 $3,821 $3,277 $3,070
------ ------ ------ ------ ------
Charge-offs:
Commercial loans 141 141 34 68 452
Real estate loans 59 9 - - -
Consumer loans 402 417 475 440 540
------ ------ ------ ------ ------
602 567 509 508 992
------ ------ ------ ------ ------
Recoveries:
Commercial loans 75 32 40 9 -
Real estate loans 3 1 - - -
7,018 7,166 6.26
--------- --------- -------- -------- -------- ---------
Total - - - 7,002 7,020 6.63 32,018 32,241 6.06
--------- --------- -------- -------- -------- ---------
Federal Agencies:
Within 1 year 20,517 20,583 7.08 - - - 2,005 2,021 6.10
1Consumer loans 97 125 113 116 99
------ ------ ------ ------ ------
175 158 153 125 99
------ ------ ------ ------ ------
Net charge-offs 427 409 356 383 893
Provision for loan losses 1,015 1,020 670 927 1,100
------ ------ ------ ------ ------
Balance at end of period $5,334 $4,746 $4,135 $3,821 $3,277
====== ====== ====== ====== ======
Percent of net charge-offs
to 5 years 50,937 51,357 6.82 62,609 62,016 6.87 41,292 42,376 6.59
6 to 10 years 4,080 4,079 6.73 10,591 10,209 6.59 10,906 11,020 6.19
After 10 years 23,930 23,849 6.20 27,449 26,513 6.20 20,511 20,573 6.00
-------- -------- -------- -------- -------- --------
Total 99,464 99,868 6.72 100,649 98,738 6.66 74,714 75,990 6.36
-------- -------- -------- -------- -------- --------
State and Municipal:
Within 1 year 2,210 2,216 7.76 1,599 1,601 7.54 499 503 6.40
1 to 5 years 12,080 12,247 7.64 9,789 9,853 7.88 5,326 5,516 8.21
6 to 10 years 22,352 22,822 7.44 24,008 23,541 7.41 20,848 21,690 7.44
After 10 years 2,246 2,275 7.39 4,695 4,479 7.28 8,791 9,065 7.42
-------- -------- -------- -------- -------- --------
Total 38,888 39,560 7.52 40,091 39,474 7.51 35,464 36,774 7.54
-------- -------- -------- -------- -------- --------
Other Investments:
Within 1 year 2,045 2,048 6.29 - - - - - -
1 to 5 years 9,056 9,008 6.77 9,539 9,276 6.62 6,119 6,246 6.65
6 to 10 years 7,557 7,359 6.23 8,966 8,364 6.25 10,921 10,991 6.20
After 10 years 5,430 5,430 6.36 2,672 2,634 6.16 2,482 2,501 7.12
-------- -------- -------- -------- -------- --------
Total 24,088 23,845 6.47 21,177 20,274 6.41 19,522 19,738 6.46
-------- -------- -------- -------- -------- --------
Total portfolio $162,440 $163,273 6.87 % $168,919 $165,506 6.83 % $161,718 $164,743 6.57 %
======== ======== ======== ======== ======== ========average net loans outstanding
during the period .12% .13% .13% .15% .36%
====== ====== ====== ====== ======
II-19
The total of outstanding real estate loans at December 31, 2000 was
$204,684,000. This consisted of $121,449,000 or 59.3% in loans secured by 1-4
family residential properties, $67,312,000 or 32.9% in loans secured by
non-farm, non-residential properties, $9,284,000 or 4.5% in construction and
land development, $1,616,000 or .8% in loans secured by farmland and $5,023,000
of other real estate loans.
Nonperforming real estate loans at December 31, 2000 and 1999 were $65,000
and $107,000, respectively. There were no real estate loans on accrual status
and past due 90 days or more at December 31, 2000 and $3,000 at December 31,
1999.
Asset QualityASSET QUALITY AND NON-PERFORMING LOANS
The Corporation identifies specific credit exposures through its
periodic analysis of the loan portfolio and monitors general exposures from
economic trends, market values and other external factors. The Corporation
maintains an allowance for loan losses, which is available to absorb losses
inherent in the loan portfolio. The allowance is increased by the provision for
losses and by recoveries from losses. Charge-offs decrease the allowance. The
adequacy of the allowance for loan losses is determined on a quarterly basis.
Various factors as defined in the previous section "Provision"Allowance and AllowanceProvision for
Loan Losses" are considered in determining the adequacy of the allowance.
Loans, other than consumer, are generally placed on nonaccrualnon-accrual status
when any portion of principal or interest is 90 days past due or collectability
is uncertain. Unless loans are in the process of collection, income recognized
on consumer loans is discontinued and the loans are charged off after a
delinquency of 90 days. Under the Corporation's policy a nonaccruingnon-accruing loan may
be restored to accrual status when none of its principal and interest is due and
unpaid and the Corporation expects repayment of the remaining contractual
principal and interest or when it otherwise becomes well secured and in the
process of collection.
Nonperforming assetsNon-performing loans include loans on which interest is no longer accrued,
accruing loans that are contractually past due 90 days or more as to principal
and interest payments, and loans classified as troubled debt restructurings and
foreclosed properties.
Foreclosed properties were $30,000, $30,000 and $385,000are detailed in Table 11. Loans in a non-accrual status at December 31, 2000,
1999 and 1998, respectively.
At2001
were $568,000 compared with $146,000 at December 31, 2000 and 1999, loans in a nonaccrual or restructured status
totaled approximately $146,000 and $292,000, respectively. As shown in schedule
C on page II-22, loans2000. Loans on accrual
status and past due 90 days or more have
decreased to $239,000 in 2000 from $287,000 in 1999. The total of nonperforming
loans and loans past due 90 days or more at December 31, 2000 was $385,000, a
decrease of $194,000 from the $579,000 reported2001 were $258,000 compared
with $239,000 at December 31, 1999. Net
charge-offs2000. There were no loans classified as a percentagetroubled
debt restructurings on December 31, 2001 or December 31, 2000.
The gross amount of averageinterest income that would have been recorded on
non-accrual loans and restructured loans for the year ending December 31, 2001,
if all such loans had been accruing interest at the original contractual rate,
was $33,000. No interest payments were .13% in 2000 and 1999.
Management considers charge-off levels of .10% to .40% to be within reasonable
norms from a historical perspective.recorded as interest income during the
reporting period for all such non-performing loans.
Management has in place an aggressive program to control loan
delinquencies, and the level of past due loans and nonperformingnon-performing loans is
considered to be within an acceptable range. Total nonperformingnon-performing loans andas a
percentage of net loans past due 90 days or more represent .11% of total loanswere .22% at December 31, 20002001 and .20%.11% at December 31,
1999.2000. Total nonperformingnon-performing loans and past due loans 90 days
or more on an accrual status isare considered low by industry standards.
Properties received due to loan foreclosures were $117,000 at December 31,
2001 and $30,000 at December 31, 2000.
19
A. The following table presents the year-end balances of loans, classified by type (in thousands):Table 11 - Nonperforming Loans
2001 2000 1999 1998 1997
1996
-------- -------- -------- -------- --------
Real estate loans:
Construction and land development $ 9,284 $ 7,317 $ 8,104 $ 4,442 $ 3,640
Secured by farmland 1,616 1,306 1,491 1,274 1,169
Secured by 1-4 family residential
properties 121,449 108,994 95,711 94,294 90,192
Secured by multi-family (5 or more)
residential properties 5,023 4,532 2,268 1,521 772
Secured by nonfarm, nonresidential
properties 67,312 54,170 44,251 41,277 35,289
Loans to farmers 1,625 2,468 2,293 2,761 2,672
Commercial and industrial loans 83,428 66,459 67,154 57,971 49,247
Consumer loans 44,389 45,235 46,337 48,499 50,909
Loans for nonrated industrial
development obligations 5,590 3,236 1,895 2,398 2,565
All other loans 40 24 15 13 124
-------- -------- -------- -------- --------
Loans - net of unearned income $339,756 $293,741 $269,519 $254,450 $236,579
======== ======== ======== ======== ========
There were no foreign loans outstanding during any of the above periods.
II-20
B. An analysis of the loan maturity and interest rate sensitivity is as follows:
Remaining Maturities or First Repricing Opportunities
(in thousands)
------------------------------------------------------------
Over 1 Over
1 Year Year to Five
or Less 5 Years Years Total Percent
-------- -------- ------- -------- -------
Commercial, financial
and agricultural $ 94,014 $ 19,304 $ 3,636 $116,954 34.4%
Mortgage 88,896 79,109 6,571 174,576 51.4%
Consumer 18,241 29,345 640 48,226 14.2%
-------- -------- ------- -------- ------
$201,151 $127,758 $10,847 $339,756 100.0%
======== ======== ======= ======== ======
Rate Sensitivity:
Pre-determined rate $ 19,687 $ 38,038 $ 8,284 $ 66,009 19.4%
Floating or adjustable rate 181,464 89,720 2,563 273,747 80.6%
-------- -------- ------- -------- ------
$201,151 $127,758 $10,847 $339,756 100.0%
======== ======== ======= ======== ======
Percent 59.2% 37.6% 3.2% 100.0%
Certain short term loans and demand loans within the commercial, financial
and agricultural classifications are anticipated to be curtailed prior to any
renewal. Normally these loans are expected to be paid within one year and all
such loans have been classified within the one year category. Any rollovers
allowed depend upon the Bank's loan policy after a reappraisal of the borrower's
creditworthiness at the date of maturity.
II-21
C. Nonperforming loans and loans past due 90 days or more (in thousands, except ratios):
2000 1999 1998 1997 1996
------ ------ ------ ------ ---------- ---- ---- ---- ----
Nonaccruing loans:
Real Estate $414 $ 65 $107 $ 58 $281
$ 14
Commercial 115 67 131 132 102
-
Agricultural 39 14 54 - 10 19
---- ---- ---- ---- ----
Total nonaccruing loans 568 146 292 190 393 33
---- ---- ---- ---- ----
Restructured loans:
Commercial - - - - -
---- ---- ---- ---- ----
Total restructured loans - - - - -
---- ---- ---- ---- ----
Total nonperforming loans $568 $146 $292 $190 $393 $ 33
==== ==== ==== ==== ====
Loans on accrual status past
due 90 days or more:
Real Estate $ - $ - $ 3 $ - $ -
$ -
Consumer 169 226 235 160 241
Revolving credit 7 6 4 5 3217 176 232 239 165
Commercial 33 49 44 3 -
225
Agricultural 8 14 8 7 16 10
---- ---- ---- ---- ----
Total past due loans $258 $239 $287 $249 $181 $479
==== ==== ==== ==== ====
Asset Quality Ratios:
Allowance for loan losses
to year-end net loans 1.42% 1.40% 1.41% 1.42% 1.29% 1.30%
Nonperforming loans
to year-end net loans .15% .04% .10% .07% .15% .01%
Allowance for loan losses
to nonperforming loans 32.51% X 14.16% X 20.11% X9.39X 32.51X 14.16X 20.11X 8.34X
93.03XAt December 31, 2001, the Bank had no loan concentrations (loans to borrowers engaged in
similar activities) which exceeded 10% of total loans. Amounts are in thousands, except ratios.
AtLIQUIDITY
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, a correspondent bank and maturing
investments. Management believes that these factors provide sufficient and
timely liquidity for the foreseeable future.
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity strategies are implemented and monitored by the Bank's
Asset/Liability Investment Committee (ALCO). The Committee uses a simulation
model to assess the future liquidity needs of the Corporation and manage the
investment of funds.
The Bank has a line of credit equal to 15% of assets with the Federal Home
Loan Bank of Atlanta that equaled approximately $85,861,000 at December 31,
2001. Borrowings outstanding under this line of credit were $13,000,000 and
$16,000,000 respectively, at December 31, 2001 and December 31, 2000. Federal
Home Loan Bank advances have decreased by $3,000,000 since December 31, 2000,
due to a pre-maturity call of one fixed-term instrument by the Bank had no loan concentrations (loansFederal Home Loan
Bank.
DEPOSITS
The Corporation's major source of funds and liquidity is its deposit
base. Table 12 presents the average balances of deposits and the average rates
paid on those deposits for the past 3 years (in thousands). Expansion of the
Corporation's earning assets is based largely on the growth of deposits from
individuals and small and medium size businesses. These deposits are more stable
in number and size than large denomination certificates of deposit. In addition,
the Corporation's customers have relatively stable requirements for funds.
20
The mix of the deposit base (time deposits versus demand, money market and
savings) is constantly subject to borrowers engagedchange. During 2001, as shown in the
Consolidated Balance Sheets, the deposit mix changed with an increase in money
market accounts of $14,545,000, followed by an increase in higher cost time
deposits of $11,605,000, an increase in demand deposits of $7,209,000, and an
increase in savings deposits of $4,065,000. Deposit mix trends in 2001 were
similar activities) which exceeded 10%to 2000, except growth in transaction accounts were higher as customers
placed more of total loans.
II-22
their deposits into liquid money market, savings, and demand
deposit accounts. Certificates of deposit of $100,000 or more are detailed in
Table 13.
Summary of Loan Loss Experience
An analysis of the loan loss allowance is set forth in the following table (in
thousands):Table 12 - Deposits
2001 2000 1999
1998 1997 1996
------ ------ ------ ------ ------
Balance at beginning of period $4,135 $3,821 $3,277 $3,070 $2,757
------ ------ ------ ------ ------
Charge-offs:
Commercial loans 141 34 68 452 9
Real estate loans 9 - - - -
Consumer loans 417 475 440 540 493
------ ------ ------ ------ ------
567 509 508 992 502
------ ------ ------ ------ ------
Recoveries:
Commercial loans 32 40 9 - 3
Real estate loans 1 - - - -
Consumer loans 125 113 116 99 114
------ ------ ------ ------ ------
158 153 125 99 117
------ ------ ------ ------ ------
Net charge-offs 409 356 383 893 385
Provision for loan losses 1,020 670 927 1,100 673
Other - - - - 25
------ ------ ------ ------ ------
Balance at end of period $4,746 $4,135 $3,821 $3,277 $3,070
====== ====== ====== ====== ======
Percent of net charge-offs
to average net loans outstanding
during the period .13% .13% .15% .36% .17%
====== ====== ====== ====== ======
The allowance for loan losses is based upon the quality of loans as
determined by management taking into consideration historical loan loss
experience, diversification of the loan portfolio, amount of secured and
unsecured loans, banking industry standards and averages, and general economic
conditions. At the time that collection of the outstanding balance of specific
loans together with related interest is considered doubtful, such loans are
placed in a nonaccuring status.
II-23
Deposits
The following table presents the average balances of deposits and the average
rates paid on those deposits for the past 3 years (in thousands):
2000 1999 1998
----------------------- ----------------------- ------------------------------------------- -------------------- --------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------- --------- --------- --------- --------- ----------------- ------- -------- ------- -------- -------
Demand deposits -
non-interest bearing $ 52,719 -% $ 49,126 - %-% $ 42,923 - % $ 40,134 - %-%
Demand deposits - interest bearing 56,419 .88% 56,141 1.84% 54,143 2.01%
51,116 2.36%
Money market 41,225 3.20% 24,861 3.48% 19,250 2.78%
19,031 2.86%
Savings 62,792 1.87% 63,739 2.62% 67,247 2.63%
67,265 2.90%
Time 229,050 5.51% 202,890 5.47% 183,707 5.05%
174,123 5.32%
-------- ------- -------- ------- -------- -------
$442,205 3.70% $396,757 3.70% $367,270 3.45%
$351,669 3.69%======== ======== ======== ========-------
Table 13 - Certificates of Deposit
Certificates of deposit at the end of 2001 in amounts of $100,000 or more were classified by maturity as follows (in thousands):
3 months or less $11,302
Over 3 through 6 months 19,766
Over 6 through 12 months 17,369
Over 12 months 14,999
-------
$63,436
=======
CAPITAL RESOURCES
The assessment of depositcapital 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, and 250,000 shares of the Corporation's common stock between
August 29, 2001 and August 28, 2002. During 2001, the Corporation repurchased
254,366 shares of its common stock, in the open market at prices between $14.63
and $19.00 per share. During 2000, the endCorporation repurchased 40,000 shares of
2000its common stock, in amountsthe open market at prices between $13.00 and $15.50 per
share. Since the inception of $100,000 orthe stock repurchase plan the Corporation has
purchased and retired 294,366 shares of its common stock.
Regulatory agencies issued risk-based capital guidelines to more
were
classified by maturityappropriately 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 follows (in thousands):
3 months or less $ 8,426
Over 3 through 6 months 30,141
Over 6 through 12 months 14,766
Over 12 months 3,028
-------
$56,361
=======
Returncore (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 Assets and Shareholders' Equity
The following table presents certain rates of return and percentagesoff the balance sheet, with
each item being assigned a "risk-weight" for the past 3 years: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, 2001, the Corporation's Tier I and total capital
ratios were 14.32% and 15.56%, respectively. At December 31, 2000, these ratios
were 16.02% and 17.09%, respectively. The ratios for both years were well in
excess of the regulatory requirements.
21
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 10.96% and 11.59% at December 31,
2001 and 2000, 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
$.66 and $.585 per share of common stock in 2001 and 2000, respectively. Cash
dividends totaled $3,924,000 and represented a 41.7% payout of 2001 net income,
compared to 41.1% in 2000. 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 11.4% of assets at December 31, 2001 and 11.7% at
December 31, 2000. Shareholders' equity was $65,397,000 at December 31, 2001 and
$63,338,000 at December 31, 2000.
The Corporation's stock began trading on the NASDAQ National Market on
April 23, 1999 1998
------ ------ ------
Returnafter having been traded on average assets 1.70% 1.68% 1.64%
Returnthe OTC Bulletin Board. The change to
NASDAQ was made to improve the marketability of the stock. The total market
value of American National Bankshares Inc. common stock at $18.70 per share (the
last trade recorded on average shareholder's equity 14.74% 14.17% 13.79%
Dividend payout ratio 41.07% 40.44% 39.43%
Average shareholders' equitythe NASDAQ National Market during 2001) was $108,871,000,
compared to average assets 11.54% 11.89% 11.86%$87,925,000 at December 31, 2000 when the stock was last traded at
$14.50 per share. The market value of the Corporation's common stock was 167
percent of its book value with book value per common share at $11.23 on December
31, 2001.
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 whichthat 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.
II-24Forward-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.
22
Table 14 - Quarterly Financial Results
American National Bankshares Inc. and Subsidiary
(in thousands, except per share amounts)
American National Bankshares Inc. and Subsidiary
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
2000
----------- ------- ------- -------
2001
----
Interest income....................................... $10,189income...........................$ 9,390 $ 9,936 $10,191 $10,303
Interest expense.......................... 3,876 4,339 4,572 4,715
------- ------- ------- -------
Net interest income..................... 5,514 5,597 5,619 5,588
Provision for loan losses................. 228 252 273 262
------- ------- ------- -------
Net interest income after provision..... 5,286 5,345 5,346 5,326
Non-interest income....................... 1,349 1,308 1,568 1,443
Non-interest expense...................... 3,272 3,434 3,450 3,458
------- ------- ------- -------
Income before income tax provision...... 3,363 3,219 3,464 3,311
Income tax provision...................... 1,007 928 1,014 993
------- ------- ------- -------
Net income..............................$ 2,356 $ 2,291 $ 2,450 $ 2,318
======= ======= ======= =======
Per common share:
Net income (basic)........................$ .40 $ .39 $ .41 $ .38
Net income (diluted)......................$ .40 $ .39 $ .41 $ .38
Cash dividends............................$ .170 $ .170 $ .170 $ .150
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000
----
Interest income...........................$10,189 $ 9,853 $ 9,497 $ 9,067
Interest expense......................................expense.......................... 4,687 4,527 4,179 3,950
------- ------- ------- ---------------
Net interest income.................................income..................... 5,502 5,326 5,318 5,117
Provision for loan losses.............................losses................. 180 290 335 215
------- ------- ------- -------
Net interest income after provision.................provision..... 5,322 5,036 4,983 4,902
Non-interest income................................... 1,275 1,186 1,142income....................... 1,270 1,185 1,141 1,175
Non-interest expense.................................. 3,538 3,172 3,097expense...................... 3,533 3,171 3,096 3,123
------- ------- ------- -------
Income before income tax provision..................provision...... 3,059 3,050 3,028 2,954
Income tax provision..................................provision...................... 868 860 848 839
------- ------- ------- -------
Net income.......................................... income..............................$ 2,191 $ 2,190 $ 2,180 $ 2,115
======= ======= ======= =======
Per common share:
Net income (basic)................................... ......................$ .36 $ .36 $ .36 $ .35
Net income (diluted)................................. ....................$ .36 $ .36 $ .36 $ .35
Cash dividends.......................................dividends..........................$ .150 $ .150 $ .150 $ .150 $ .135
1999
----
Interest income........................................ $ 8,816 $ 8,435 $ 8,286 $ 8,162
Interest expense....................................... 3,839 3,720 3,605 3,572
------- ------- ------- -------
Net interest income.................................. 4,977 4,715 4,681 4,590
Provision for loan losses.............................. 190 120 180 180
------- ------- ------- -------
Net interest income after provision.................. 4,787 4,595 4,501 4,410
Non-interest income.................................... 1,161 1,161 1,075 1,097
Non-interest expense................................... 3,044 2,927 2,792 2,780
------- ------- ------- -------
Income before income tax provision................... 2,904 2,829 2,784 2,727
Income tax provision................................... 858 841 818 803
------- ------- ------- -------
Net income........................................... $ 2,046 $ 1,988 $ 1,966 $ 1,924
======= ======= ======= =======
Per common share:
Net income (basic)................................... $ .34 $ .33 $ .32 $ .32
Net income (diluted)................................. $ .33 $ .33 $ .32 $ .32
Cash dividends....................................... $ .135 $ .135 $ .135 $ .120
II-2523
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 judgement.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 Arthur
Andersen LLP, 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 Arthur Andersen LLP 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
T. Allen Liles/s/ Brad E. Schwartz
- ----------------------------------------------
Brad E. Schwartz
Senior Vice President, Secretary and Treasurer
and Chief Financial Officer
February 7, 2001
II-26January 15, 2002
24
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
- - - -
- --------------------------------------------------------------------------------
To American National Bankshares Inc.:
We have audited the accompanying consolidated balance sheets of
American National Bankshares Inc. (a Virginia corporation) and Subsidiary as of
December 31, 20002001 and 1999,2000, 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, 2000.2001. 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 1999, and
the consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 20002001 in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Charlotte,Raleigh, North Carolina,
February 7, 2001
II-27January 15, 2002
25
Consolidated Balance Sheets
December 31, 20002001 and 19992000
American National Bankshares Inc. and Subsidiary
- - - - - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2001 2000
1999
---------------------------- --------------
ASSETS
Cash and due from banks ....................................................................................................$ 14,797,926 $ 16,392,313 $ 13,885,239
Interest-bearing deposits in other banks........................................banks............................ 14,350,723 8,678,150 3,405,705
Investment securities:
Securities available for sale (at market value)...............................sale..................................... 127,316,666 120,353,348 121,872,335
Securities held to maturity (market value of $30,154,043
in 2001 and $42,919,727 in 2000 and $43,634,211 in 1999)............................................2000)................................ 29,474,139 42,575,797
44,399,759
----------------------------- --------------
Total investment securities...................................................securities....................................... 156,790,805 162,929,145
166,272,094
----------------------------- --------------
Loans, net of unearned income ........................................................................................ 375,592,960 339,756,374 293,740,806
Less allowance for loan losses..................................................losses...................................... (5,334,456) (4,746,429) (4,134,893)
-------------- --------------
Net loans.....................................................................loans.......................................................... 370,258,504 335,009,945 289,605,913
-------------- --------------
Bank premises and equipment, at cost, less accumulated
depreciation of $9,651,610 in 2001 and $8,518,452 in 2000 and $8,170,506 in 1999.....................2000.......... 7,857,426 7,868,410 8,051,550
Accrued interest receivable and other assets....................................assets......................... 8,831,772 10,510,858 10,170,303
-------------- --------------
Total assets..................................................................assets.......................................................$ 572,887,156 $ 541,388,821 $ 491,390,804
============== ==============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................bearing............................$ 58,573,035 $ 54,495,780 $ 47,495,400
Demand deposits -- interest bearing...........................................bearing................................ 61,404,626 58,272,932 55,622,893
Money market deposits.........................................................deposits.............................................. 47,024,615 32,480,105
22,326,340
Savings deposits..............................................................deposits................................................... 65,650,939 61,586,380
64,744,947
Time deposits.................................................................deposits...................................................... 231,358,568 219,753,122 195,368,539
-------------- --------------
Total deposits................................................................deposits..................................................... 464,011,783 426,588,319 385,558,119
-------------- --------------
Repurchase agreements.........................................................agreements................................................ 27,176,758 31,729,600
24,954,333
FHLB Borrowings...............................................................Borrowings...................................................... 13,000,000 16,000,000 21,000,000
Accrued interest payable and other liabilities................................liabilities....................... 3,301,342 3,732,619 3,159,802
-------------- --------------
Total liabilities.............................................................liabilities.................................................. 507,489,883 478,050,538 434,672,254
-------------- --------------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................outstanding................................................... - -
Common stock, $1 par,10,000,000 shares authorized,
5,821,956 shares outstanding at December 31, 2001 and
6,063,772 shares outstanding at December 31, 2000 and
6,103,701 shares outstanding at December 31, 1999...........................2000.................. 5,821,956 6,063,772 6,103,701
Capital in excess of par value................................................value....................................... 9,588,502 9,831,428
9,895,359
Retained earnings.............................................................earnings.................................................... 48,677,761 47,119,966 42,466,592
Accumulated other comprehensive income (loss) -
net unrealized gains (losses) on securities available for sale..............sale,
net of taxes of $674,361 in 2001 and $166,455 in 2000.............. 1,309,054 323,117 (1,747,102)
-------------- --------------
Total shareholders' equity....................................................equity......................................... 65,397,273 63,338,283 56,718,550
-------------- --------------
Total liabilities and shareholders' equity....................................equity.........................$ 572,887,156 $ 541,388,821 $ 491,390,804
============== ==============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
II-2826
Consolidated Statements of Income
For The Years Ended December 31, 2001, 2000 1999 and 19981999
American National Bankshares Inc. and Subsidiary
- - - - - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
1998
-------------- ----------------------------- --------------
Interest Income:
Interest and fees on loans....................................................loans...........................................$ 30,216,549 $ 28,300,030 $ 23,959,012
$ 23,356,412
Interest on federal funds sold and other......................................deposits in other banks.................................. 385,019 179,215 273,702 271,524
Income on investment securities:
U S Government..............................................................Government..................................................... - 167,977 800,693
2,601,437
Federal agencies............................................................ 6,550,271 5,653,811 4,485,157agencies................................................... 2,709,097 4,231,105 3,480,986
Mortgage-backed.................................................... 2,723,146 2,319,166 2,172,825
State and municipal ....................................................................................................... 1,916,297 1,944,604 1,767,782
1,346,014
Other investments...........................................................investments.................................................. 1,869,711 1,464,462 1,244,133 593,363
-------------- -------------- --------------
Total interest income.....................................................income.............................................. 39,819,819 38,606,559 33,699,133 32,653,907
-------------- -------------- --------------
Interest Expense:
Interest on deposits:
Demand......................................................................Demand............................................................. 494,930 1,034,845 1,086,744
1,203,786
Money market................................................................market....................................................... 1,318,002 865,024 534,801
545,061
Savings.....................................................................Savings............................................................ 1,176,704 1,671,108 1,768,148
1,949,958
Time........................................................................Time............................................................... 12,617,362 11,094,637 9,283,865 9,260,295
Interest on repurchase agreements.............................................agreements.................................... 1,087,823 1,362,104 876,291 1,116,315
Interest on other borrowings..................................................borrowings......................................... 806,869 1,315,507 1,186,636 396,183
-------------- -------------- --------------
Total interest expense......................................................expense............................................. 17,501,690 17,343,225 14,736,485 14,471,598
-------------- -------------- --------------
Net Interest Income.............................................................Income.................................................. 22,318,129 21,263,334 18,962,648 18,182,309
Provision for Loan Losses.......................................................Losses............................................ 1,015,000 1,020,000 670,000 927,000
-------------- -------------- --------------
Net Interest Income After Provision
For Loan Losses...............................................................Losses.................................................... 21,303,129 20,243,334 18,292,648 17,255,309
-------------- -------------- --------------
Non-Interest Income:
Trust and investment services.................................................services........................................ 2,569,125 2,657,802 2,531,491 2,165,437
Service charges on deposit accounts...........................................accounts.................................. 1,385,339 1,113,548 970,383 902,060
Other fees and commissions.....................................................commissions........................................... 749,072 591,724 464,045
427,235
Mortgage banking income.......................................................income.............................................. 365,349 240,390 332,490
428,991Securities gains (losses), net....................................... 367,035 (1,751) 7,970
Other income.................................................................. 174,417 196,305 155,971income......................................................... 231,998 169,747 186,835
-------------- -------------- --------------
Total non-interest income................................................... 4,777,881 4,494,714 4,079,694income.......................................... 5,667,918 4,771,460 4,493,214
-------------- -------------- --------------
Non-Interest Expense:
Salaries......................................................................Salaries............................................................. 6,383,811 6,071,352 5,575,472 5,126,819
Pension and other employee benefits...........................................benefits.................................. 1,390,591 1,154,352 955,164 1,140,252
Occupancy and equipment ...................................................... 2,188,769 1,895,799 1,663,880............................................. 2,316,282 2,184,099 1,894,299
Core deposit intangible amortization..........................................amortization................................. 449,816 449,816 449,816
Other ........................................................................ 3,065,631............................................................... 3,073,702 3,063,880 2,666,880 2,633,106
-------------- -------------- --------------
Total non-interest expense.................................................. 12,929,920 11,543,131 11,013,873expense......................................... 13,614,202 12,923,499 11,541,631
-------------- -------------- --------------
Income Before Income Tax Provision..............................................Provision................................... 13,356,845 12,091,295 11,244,231
10,321,130
Income Tax Provision............................................................Provision................................................. 3,941,474 3,414,930 3,319,881 3,122,881
-------------- -------------- --------------
Net Income......................................................................Income...........................................................$ 9,415,371 $ 8,676,365 $ 7,924,350 $ 7,198,249
============== ============== ==============
Net Income Per Common Share: *
Basic......................................................................... $1.42 $1.30 $1.18
Diluted....................................................................... $1.42 $1.30 $1.18Basic................................................................$ 1.58 $ 1.42 $ 1.30
Diluted..............................................................$ 1.58 $ 1.42 $ 1.30
Average Common Shares Outstanding:
Basic.........................................................................Basic................................................................ 5,949,811 6,096,037 6,103,485
6,103,466
Diluted.......................................................................Diluted.............................................................. 5,973,153 6,101,415 6,118,540
6,105,318
* - Per share amounts have been restated to reflect the impact of a 2-for-1 stock split effected in the form of a dividend
issued July 1, 1999.
The accompanying notes to consolidated financial statements are an integral part of these statements.
II-2927
CONSOLIDATED STATEMENTSConsolidated Statements of CHANGESChanges in SHAREHOLDERS' EQUITYShareholders' Equity
For the Years Ended December 31, 2001, 2000 1999 and 19981999
American National Bankshares Inc. and Subsidiary
Accumulated
Common Stock Accumulated
------------------------- Capital in Other Total
------------------------- Excess of Retained Comprehensive Shareholders'
Shares Amount Par Value Earnings Income (Loss) Equity
----------- ----------- ----------- ------------ ------------ ------------- ------------- -------------
Balance, December 31, 1997................1998............ 3,051,733 $ 3,051,733 $ 9,892,304 $36,438,185 $ 620,543 $50,002,765
Net income................................ - - - 7,198,249 - 7,198,249
Change in unrealized gains on securities
available for sale, net of tax.......... - - - - 497,743 497,743
------------
Comprehensive income.................. 7,695,992
Cash dividends declared and paid.......... - - - (2,838,111) - (2,838,111)
---------- ----------- ----------- ------------ ----------- ------------
Balance, December 31, 1998................ 3,051,733 3,051,733 9,892,304 40,798,323 $ 1,118,286 $ 54,860,646
Net income................................income............................ - - - 7,924,350 - 7,924,350
Change in unrealized losses on
securities available for sale,
net of tax..........tax of $(1,476,108).......... - - - - (2,865,388) (2,865,388)
-------------------------
Comprehensive income..................income................ 5,058,962
Common stock issued in 2 for 1 stock
split...................................split............................... 3,051,733 3,051,733 - (3,051,733) - -
Stock options exercised...................exercised............... 235 235 3,055 - - 3,290
Cash dividends declared and paid..........paid...... - - - (3,204,348) - (3,204,348)
---------- ----------- ----------- ------------ ----------- ------------ ------------- ------------ -------------
Balance, December 31, 1999................ 6,103,7011999.............6,103,701. 6,103,701 9,895,359 42,466,592 (1,747,102) 56,718,550
Net income................................income............................ - - - 8,676,365 - 8,676,365
Change in unrealized gains on
securities available for sale,
net of tax..........tax of $1,066,477............ - - - - 2,070,219 2,070,219
-------------------------
Comprehensive income..................income................ 10,746,584
Stock repurchase..........................repurchased and retired......... (40,000) (40,000) (64,854) (459,334) - (564,188)
Stock options exercised...................exercised............... 71 71 923 - - 994
Cash dividends declared and paid..........paid...... - - - (3,563,657) - (3,563,657)
---------- ----------- ----------- ----------- ----------- ------------ ------------ ------------- ------------ -------------
Balance, December 31, 2000................2000............ 6,063,772 6,063,772 9,831,428 47,119,966 323,117 63,338,283
Net income............................ - - - 9,415,371 - 9,415,371
Change in unrealized gains on
securities available for sale,
net of tax of $507,906.............. - - - - 985,937 985,937
-------------
Comprehensive income................ 10,401,308
Stock repurchased and retired......... (254,366) (254,366) (412,413) (3,933,272) - (4,600,051)
Stock options exercised............... 12,550 12,550 169,487 - - 182,037
Cash dividends declared and paid...... - - - (3,924,304) - (3,924,304)
----------- ------------- ------------ ------------- ------------ -------------
Balance, December 31, 2001............ 5,821,956 $ 6,063,7725,821,956 $ 9,831,428 $47,119,9669,588,502 $ 323,117 $63,338,283
========== =========== =========== ===========48,677,761 $ 1,309,054 $ 65,397,273
=========== ============ ============ ============= ============ =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
II-3028
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 1999 and 19981999
American National Bankshares Inc. and Subsidiary
2001 2000 1999 1998
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income....................................................................income...........................................................$ 9,415,371 $ 8,676,365 $ 7,924,350 $ 7,198,249
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................................................losses............................................ 1,015,000 1,020,000 670,000
927,000
Depreciation..............................................................Depreciation......................................................... 1,171,113 1,116,688 1,029,875 814,870
Core deposit intangible amortization......................................amortization................................. 449,816 449,816 449,816
Amortization (accretion) of premiums and discounts
on investment securities................................................securities........................................... 74,916 (49,789) 77,488
(42,918)(Gain) loss on sale of securities.................................... (367,035) 1,751 (7,970)
Gain on sale of mortgage loans....................................... (365,349) (240,390) (332,490)
Loss (gain) on sale of securities......................................... 1,751 (7,970) (18,300)
Gain on sale of loans..................................................... (240,390) (332,490) (428,991)
Gain on sale of real estate owned.........................................owned............................. 19,950 - (94,462) -
Gain on sale of property and equipment....................................equipment............................... (2,000) - (6,150) -
Deferred income taxes benefit.............................................benefit........................................ (356,927) (415,002) (211,558)
(312,768)
IncreaseDecrease (increase) in interest receivable...........................................receivable........................... 863,391 (529,596) (1,282)
(159,538)
IncreaseDecrease (increase) in other assets..................................................assets.................................. 87,036 (697,250) (394,986)
(1,639)
Increase (decrease)(Decrease) increase in interest payable...................................payable.............................. (312,404) 284,949 176,627
(21,910)
Increase (decrease)(Decrease) increase in other liabilities..................................liabilities............................. (118,873) 287,868 (191,290) 701,160
------------- ------------- -------------
Net cash provided by operating activities.................................activities............................ 11,574,005 9,905,410 9,087,968 9,105,031
------------- ------------- -------------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ................................ 75,759,161 14,261,280 50,241,341 47,430,116
Purchases of securities available for sale...................................sale........................... (67,267,483) (7,504,500) (51,708,123) (55,738,003)
Purchases of securities held to maturity.....................................maturity............................. (567,376) (229,097) (5,803,523) (11,212,515)
Net increase in loans........................................................loans................................................ (35,985,346) (46,183,642) (24,245,589) (15,023,315)
Proceeds from sale of real estate owned......................................owned.............................. 195,050 - 449,462 -
Purchases of real estate owned...............................................owned....................................... - (215,000) - -
Purchases of property and equipment..........................................equipment.................................. (1,158,129) (933,548) (1,472,195)
(1,903,664)
------------- ------------- ---------------------------
Net cash used in investing activities........................................activities................................ (29,024,123) (40,804,507) (32,538,627)
(36,447,381)
------------- ------------- ---------------------------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits.......................................................deposits............................................... 25,818,018 16,645,617 2,525,430
7,178,345
Net increase (decrease) in time deposits.....................................deposits........................................ 11,605,446 24,384,583 24,707,800 (456,372)
Net (decrease) increase in FHLB borrowings...................................borrowings........................... (3,000,000) (5,000,000) 8,000,000
13,000,000
Net (decrease) increase (decrease) in federal funds purchased
and repurchase agreements..................................................agreements..................... (4,552,842) 6,775,267 (6,068,501)
11,483,870
Cash dividends paid..........................................................paid.................................................. (3,924,304) (3,563,657) (3,204,348)
(2,838,111)
Repurchase of stock..........................................................stock.................................................. (4,600,051) (564,188) - -
Proceeds from exercise of stock options......................................options.............................. 182,037 994 3,290 -
------------- ------------- -------------
Net cash provided by financing activities....................................activities............................ 21,528,304 38,678,616 25,963,671 28,367,732
------------- ------------- -------------
Net Increase in Cash and Cash Equivalents.......................................Equivalents............................ 4,078,186 7,779,519 2,513,012 1,025,382
Cash and Cash Equivalents at Beginning of Period................................Period..................... 25,070,463 17,290,944 14,777,932 13,752,550
------------- ------------- -------------
Cash and Cash Equivalents at End of Period......................................Period...........................$ 29,148,649 $ 25,070,463 $ 17,290,944 $ 14,777,932
============= ============= =============
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................banks..............................................$ 14,797,926 $ 16,392,313 $ 13,885,239
$ 14,071,687
Interest-bearing deposits in other banks....................................banks............................. 14,350,723 8,678,150 3,405,705 706,245
------------- ------------- -------------
$ 29,148,649 $ 25,070,463 $ 17,290,944 $ 14,777,932
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................paid........................................................$ 17,814,094 $ 17,058,276 $ 14,559,858
$ 14,493,509
Income taxes paid.............................................................paid....................................................$ 4,363,234 $ 3,788,800 $ 3,786,339 $ 2,950,000
Transfer of loans to other real estate owned..................................owned.........................$ 87,136 $ - $ - $ 385,000
The accompanying notes to consolidated financial statements are an integral part of these statements.
II-3129
American National Bankshares Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2001, 2000 1999 and 1998
American National Bankshares Inc. and Subsidiary1999
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, Town of South Boston, 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, commenced secondary market
mortgage lending
operations in December 1996. 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 intercompanyinter-company
transactions and accounts are eliminated in consolidation.
Cash and Due From Banks
Cash includes cash on hand and cash with 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.
Investment Securities
The Corporation classifies investment securities in one of three
categories:as either held to
maturity or available for sale and trading.sale.
Debt securities acquired with both the intent and ability to be held to
maturity are classified as held to maturity and reported 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 reported as a separate component of
shareholders' equity,accumulated other comprehensive
income, net of tax. Gains or losses realized from the sale of securities
available for sale are determined by specific identification and are included in
non-interest income.
The Corporation does not permit the purchase or sale of trading account
securities.
Premiums and discounts on investment securities are amortized using the
interest method.
Loans
Loans are stated at the principal amount outstanding, net of unearned
income. Mortgage, consumer and commercial loans accrue interest on the unpaid
balance of the loans. The net amount of nonrefundable loan origination fees and
direct costs associated with the lending process are deferred and amortized to
interest income over the contractual lives of the loans using the effective
interest method.
Allowance for Loan Losses
The allowance for loan losses is an estimate ofto provide for inherent losses inherent in the loan
portfolio as determined by management taking into consideration identified
impaired loans,portfolio. Among other factors considered are the Bank's historical loan loss
experience, diversificationthe size and composition of the loan portfolio, amountsthe value and
adequacy of securedcollateral and unsecuredguarantors, non-performing credits including impaired
loans banking industry standards
and averages,the Corporation's loan "Watch" list, and national and local economic
conditions. There are additional risks of losses that cannot be precisely
quantified or attributed to particular loans or classes of loans. Since those
risks include general economic conditions.trends as well as conditions affecting individual
borrowers, the allowance for loan losses is an estimate. 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 amount of the allowance in comparison to peer banks identified
by regulatory agencies. Ultimate losses may vary from current estimates. These
estimates are reviewed periodically and as adjustments become necessary, they
are reported in earnings in the periods in which they becomecan be reasonably
estimable.estimated.
Bank Premises and Equipment
Additions and major replacements are added to bank premises and
equipment at cost. Maintenance and repair costs are charged to expense when
incurred. Premises and equipment are depreciated using primarily accelerated methods over their estimated lives
generally as follows: buildings, 10 to 50 years; leasehold improvements, 5 to 15
years; and furniture and equipment, 3 to 10 years.
Intangible Assets
Premiums paid on acquisitions of deposits (core deposit intangibles) are
included in other assets in the "Consolidated Balance Sheets". Such assets are
being amortized on a straight-line basis over 10 years. At December 31, 2000,2001,
the
30
Bank had $2,284,000$1,834,000 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, 2000.2001. Core
deposit intangibles are periodically reviewed for impairment. As of December 31,
2000,2001, no impairment had been identified.
II-32
Foreclosed Properties
Foreclosed properties are included in other assets and represent other
real estate that has been acquired through loan or in-substance foreclosures or deeds received
in lieu of loan payments. Generally, such properties are appraised annually, and
they are recorded at the lower of cost or fair value less estimated selling
costs. When appropriate, adjustments to cost are charged or credited to the
allowance for foreclosed properties.
Income Taxes
The Corporation uses the asset and liability method to account for
income taxes. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
financial reporting basis and the income tax basis of the Corporation's assets
and liabilities at enacted tax rates expected to be in effect when such amounts
are realized or settled.
Earnings Per Share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" requires the dual presentation of basic and diluted earnings per share.
Diluted earnings per share, which considers the effect of dilutive stock
options, are equal to basic earnings per share for the Corporation for all
periods presented.
Shareholders' Equity
During 2001, the Corporation repurchased 254,366 shares of its common
stock, in the open market at prices between $14.63 and $19.00 per share. During
2000, the Corporation repurchased 40,000 shares of its common stock, in the open
market at prices between $13.00 and $15.50 per share. Since the inception of the
stock repurchase plan the Corporation has purchased and retired 294,366 shares
of its common stock.
The Corporation issued a 2-for-1 stock split effected in the form of a 100%
stock dividend to shareholders of record July 1, 1999, payable on July 15, 1999.
All references to the number of common shares and all per share amounts have
been adjusted, as appropriate, to retroactively reflect the stock split.
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, are reported as a separate component of the equity section of
the statement of condition, such items, along with net income, are components of
comprehensive income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Income Taxes
The Corporation uses the asset and liability method to account for income
taxes. The objective of the asset and liability method is to establish deferred
tax assets and liabilities for the temporary differences between the financial
reporting basis and the income tax basis of the Corporation's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled.
Earnings Per Share
The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share", in 1998. This statement requires the
dual presentation of basic and diluted earnings per share which are equal for
the Corporation for all periods presented. No restatement of prior periods was
required.
The Corporation issued a 2-for-1 stock split effected in the form of a 100%
stock dividend to shareholders of record July 1, 1999, payable on July 15, 1999.
All references to the number of common shares and all per share amounts have
been adjusted, as appropriate, to retroactively reflect the stock split.
Reclassifications
Certain reclassifications have been made in prior years' financial
statements to conform to classifications used in the current year.
New Accounting Pronouncements.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pension and
Other Postretirement Benefits", was issued, amending FASB Statements No. 87, 88,
and 106. This Statement does not change the measurement or recognition of
pension and postretirement benefit plans but standardizes disclosure
requirements. The new disclosure requirements of SFAS No. 132 have been adopted
and are included in Note 11 to the Consolidated Financial Statements.
In June 1998, the FASBFinancial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards requiring balance sheet
recognition of all derivative instruments at fair value. SFAS No. 133 was
subsequently amended by SFAS No. 137 in June 1999 and by SFAS No. 138 in June
2000. The statement, as amended, specifies that changes in the fair value of
derivative instruments be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows
derivative gains and losses to offset related results on hedged items in the
income statement. Companies must formally document, designate and assess the
effectiveness of transactions utilizing hedge accounting. The statement is effective for fiscal years beginning after June 15,
2000. Adoption isof this
standard on January 1, 2001, did not expected to have a material impact on the Corporation.
In September 2000, the Financial Accounting Standards BoardFASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". This
statement revises the criteria for accounting for securitizations, other
financial-assets transfers and collateral and introduces new disclosures. This statement is effective for fiscal years
ending after March 31, 2001. The
adoption of this statement isdid not expected to have a material effect on the Corporation's
consolidated financial statements.
II-33In June 2001 the FASB approved Statement of Financial Accounting Standard
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 prospectively prohibits the pooling of
interest
31
method of accounting for business combinations initiated after June
30, 2001. Under SFAS No. 142 goodwill has an indefinite life and will no longer
be amortized. SFAS No. 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The Corporation had no pending acquisitions initiated
before or after June 30, 2001. In addition, the Corporation has no recorded
goodwill. The adoption of SFAS No. 141 and 142 is not expected to have a
material impact on the Corporation.
2. Parent Company Financial Information:
Condensed parent company financial information is as follows (in
thousands):
As of December 31
-----------------
Condensed Balance Sheets 2001 2000 1999
- - - -
- ------------------------ -------- --------------- -------
Assets
Cash $ 6121,126 $ 211612
Investment in Subsidiary 63,791 62,270 56,024
Other Assets 480 456
484
-------- --------------- -------
Total Assets $ 63,338 $ 56,719
======== ========$65,397 $63,338
======= =======
Liabilities $ - $ -
Shareholders' Equity 65,397 63,338
56,719
-------- --------------- -------
Total Liabilities and ShareholdersShareholders' Equity $65,397 $63,338
======= =======
For the Year Ended
December 31
-----------------------------
Condensed Statements of Income 2001 2000 1999
- ------------------------------ -------- -------- -------
Dividends from Subsidiary $ 63,3388,985 $ 56,7194,640 $ 3,857
Expenses (105) (140) (16)
-------- -------- --------
Income Before Equity in Undistributed
Earnings of Subsidiary 8,880 4,500 3,841
Equity in Undistributed Earnings
of Subsidiary 535 4,176 4,083
-------- -------- --------
Net Income $ 9,415 $ 8,676 $ 7,924
======== ======== ========
For the Year Ended
December 31
Condensed Statements of Income 2000 1999 1998
- - - - - ------------------------------ --------- --------- --------
Dividends from Subsidiary $ 4,640 $ 3,857 $ 2,903
Expenses (140) (16) (44)
Income Before Equity in Undistributed
Earnings of Subsidiary 4,500 3,841 2,859
Equity in Undistributed Earnings
of Subsidiary 4,176 4,083 4,339
--------- --------- ---------
Net Income $ 8,676 $ 7,924 $ 7,198
========= ========= =========
For the Year Ended
December 31
Condensed Statements of Cash Flows 2001 2000 1999
1998
- - - - - ---------------------------------- --------- --------- ----------------- -------- --------
Cash provided by dividends received
from Subsidiary $ 8,985 $ 4,640 $ 3,857 $ 2,903
Cash used for payment of dividends (3,924) (3,564) (3,204) (2,838)
Cash used for repurchase of stock (4,600) (564) -
-
Other 53 (111) (497)
(19)
--------- --------- ----------------- -------- --------
Net increase in cash $ 514 $ 401 $ 156
$ 46
================== ========= =========
II-34========
32
3. Investment Securities:
The amortized cost and estimated fair value of investments in debt
securities at December 31, 20002001 and 19992000 were as follows (in thousands):
2000
----------------------------------------
Amortized Estimated
Cost Gains Losses Fair Value
--------- ------ ------ ----------
Securities held to maturity:
U.S. Government $ - $ - $ - $ -
Federal agencies 21,958 66 (69) 21,955
State and municipal 20,618 369 (22) 20,965
--------- ------ ------- --------
Total securities held
to maturity 42,576 435 (91) 42,920
--------- ------ ------- --------
Securities available for sale:
U.S. Government - - - -
Federal agencies 77,506 662 (255) 77,913
State and municipal 18,270 384 (59) 18,595
Corporate bonds and other 24,088 38 (281) 23,845
--------- ------ ------- --------
Total securities
available for sale 119,864 1,084 (595) 120,353
--------- ------ ------- --------
Total securities $ 162,440 $1,519 $ (686) $163,273
========= ======
2001
------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Securities held to maturity:
Federal agencies $ 1,994 $ 119 $ - $ 2,113
Mortgage-backed 7,167 122 - 7,289
State and municipal 20,313 467 28 20,752
-------- ------- ------ --------
Total securities held to maturity 29,474 708 28 30,154
-------- ------- ------ --------
Securities available for sale:
Federal agencies 31,198 496 190 31,504
Mortgage-backed 36,939 638 - 37,577
State and municipal 18,353 543 1 18,895
Corporate bonds and other 38,843 633 135 39,341
-------- ------- ------ --------
Total securities available for sale $125,333 2,310 326 127,317
-------- ------- ------ --------
Total securities $154,807 $ 3,018 $ 354 $157,471
======== ======= ========
1999
-----------------------------------------
Amortized Estimated
Cost Gains Losses Fair Value
--------- ------ ------ ----------
Securities held to maturity:
U.S. Government $ - $ - $ - $ -
Federal agencies 23,633 15 (401) 23,247
State and municipal 20,767 115 (495) 20,387
--------- ------ -------- --------
Total securities held
to maturity 44,400 130 (896) 43,634
--------- ------ -------- --------
Securities available for sale:
U.S. Government 7,002 18 - 7,020
Federal agencies 77,016 103 (1,628) 75,491
State and municipal 19,324 107 (344) 19,087
Corporate bonds and other 21,177 - (903) 20,274
--------- ------ -------- --------
Total securities
available for sale 124,519 228 (2,875) 121,872
--------- ------ -------- --------
Total securities $ 168,919 $ 358 $(3,771) $165,506
========= ====== ========
2000
------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Securities held to maturity:
Federal agencies $ 12,001 $ 34 $ 11 $ 12,024
Mortgage-backed 9,957 32 58 9,931
State and municipal 20,618 369 22 20,965
-------- ------- ------ --------
Total securities held to maturity 42,576 435 91 42,920
-------- ------- ------ --------
Securities available for sale:
Federal agencies 53,355 462 112 53,705
Mortgage-backed 24,151 200 143 24,208
State and municipal 18,270 384 59 18,595
Corporate bonds and other 24,088 38 281 23,845
-------- ------- ------ --------
Total securities available for sale 119,864 1,084 595 120,353
-------- ------- ------ --------
Total securities $162,440 $ 1,519 $ 686 $163,273
======== ======= ====== ========
II-35
33
The amortized cost and estimated fair value of investments in debt
securities at December 31, 2000,2001, 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. Corporate bonds consistBecause 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 high quality debtthese investments. The majority of mortgage-backed securities primarily issued in the financial services industry.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 $ 10,8551,500 $ 10,8911,510 $ 13,91710,527 $ 13,95610,542
Due after one year
through five years 13,337 13,487 58,736 59,1258,214 8,570 55,078 56,121
Due after five years
through ten years 12,534 12,744 21,455 21,51612,062 12,246 15,360 15,767
Due after ten years 5,850 5,798 25,756 25,756531 539 7,429 7,310
Mortgage-backed Securities 7,167 7,289 36,939 37,577
-------- -------- -------- --------
$ 42,57629,474 $ 42,920 $119,864 $120,35330,154 $125,333 $127,317
======== ======== ======== ========
Proceeds from the maturities and calls exercised byof securities held to maturity in
2001 were $10,855,000. Principal repayments on securities held to maturity were
$2,790,000. There were no realized gains or losses. Proceeds from the issuersmaturities
and calls of investmentssecurities available for sale were $53,240,000, resulting in debtgross
realized gains of $368,000 and gross realized losses of $1,000. Principal
repayments on securities available for sale were $65,000$8,874,000. Proceeds from the
maturities and calls of securities held to maturity in 2000 $8,592,000were $610,000.
Principal repayments on securities held to maturity were $1,665,000. There were
no realized gains or losses. Proceeds from the maturities and calls of
securities available for sale were $8,050,000, resulting in gross realized
losses of $2,000. Principal repayments on securities available for sale were
$3,936,000. Proceeds from the maturities and calls of securities held to
maturity in 1999 and $14,753,000 in 1998.were $15,010,000. Principal repayments on securities held to
maturity were $4,265,000. There were no realized gains or losses. Proceeds from
the maturities, calls and sales of investmentssecurities available for sale were
$25,028,000, resulting in debt securities were $0 in 2000,
$3,946,000 in 1999 and $0 in 1998. The Bank recognized losses of $2,000 on
called securities during 2000,gross realized gains of $8,000$8,000. Principal repayments
on securities available for sale of securities in 1999,
and gains of $18,000 on called securities during 1998.were $5,938,000.
Investment securities with a book value of approximately $54,002,000$57,320,000 at
December 31, 20002001 were pledged to secure deposits of the U. S. Government, state
and political sub-divisionssubdivisions and for other purposes as required by law. Of this
amount, $39,786,000$35,622,000 was pledged to secure repurchase agreements. Corporate bonds
consist of high quality debt securities, primarily issued in the financial
services industry.
The Federal Reserve Act limits amounts of, and requires collateral on,
extensions of credit by American National Bank and Trust Company insured Bank
subsidiary to American National Bankshares Inc., and with certain exceptions its
non-bank affiliates. There are also restrictions on the amounts of investment by
such banks in stocks and other subsidiaries of American National Bankshares Inc.
and such affiliates and restrictions on the acceptance of their securities as
collateral for loans by such banks. As of December 31, 2001, American National
Bankshares Inc. was in compliance with these requirements.
4. Loans:
Outstanding loans at December 31, 20002001 and 19992000 were composed of the
following (in thousands):
2001 2000 1999
-------- --------
Real Estate loans
Construction and land development $ 9,28410,282 $ 7,3179,284
Secured by farmland 1,110 1,616 1,306
Secured by 1 - 4 family residential properties 126,860 121,449 108,994
Secured by multi-family (5 or more) residential properties 6,385 5,023 4,532
Secured by nonfarm, nonresidential properties 88,648 67,312 54,170
Loans to farmers 1,452 1,625 2,468
Commercial and industrial loans 98,324 83,428 66,459
Consumer loans 36,077 44,389 45,235
Loans for nonrated industrial development obligations 6,436 5,590 3,236
All other loans 19 40 24
-------- --------
Loans, net of unearned income $375,593 $339,756 $293,741
======== ========
34
Loans, other than consumer, are generally placed on nonaccrual status
when any portion of principal or interest is 90 days past due or collectability
is uncertain. Unless loans are in the process of collection, income recognition
on consumer loans is discontinued and the loans are charged off after a
delinquency of 90 days. At December 31, 20002001 and 1999,2000, loans in a nonaccrual or
restructured status totaled approximately $146,000$568,000 and $292,000,$146,000, respectively.
Interest income on nonaccrual loans, if recognized, is recorded on a
cash basis. For the years 2001, 2000 1999 and 1998,1999, the gross amount of interest
income that would have been recorded on nonaccrual loans and restructured loans,
if all such loans had been accruing interest at the original contractual rate,
was $33,000, $15,000 $23,000 and $14,000,$23,000, respectively. No interest payments were
recorded in 2001, 2000 1999 or 19981999 as interest income for all such nonperforming
loans.
Under the Corporation's policy a nonaccruing loan may be restored to
accrual status when none of its principal and interest is due and unpaid and the
Corporation expects repayment of the remaining contractual principal and
interest or when it otherwise becomes well secured and in the process of
collection.
AsProperties received due to loan foreclosures were $117,000 at December 31,
2001 and $30,000 at December 31, 2000 and are recorded as other assets on the
Statement of January 1, 1995, theCondition.
The Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which was amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". SFAS No. 114, as amended, requires thatmeasures impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral, if the loan is collateral-dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance.
The Bank had previously measured the allowance for loan losses using
methods similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional allowance for loan losses was required as of
January 1, 1995.
II-36
For purposes of applying SFAS No. 114, commercialCommercial loans on nonaccrual status are evaluated for impairment on an
individual basis. Management assesses the current economic condition and the
historical repayment patterns of the creditor in determining whether delays in
repayment on the loans are considered to be insignificant shortfalls or
indicators of impairment. Those loans for which management considers it probable
that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement are considered to be impaired. All loans
made by the Bank other than commercial loans are excluded from the scope of SFAS No. 114 as they are considered
smaller-balance homogeneous loans that are collectively evaluated for
impairment. Interest income is recognized on impaired loans in the same manner
as loans on nonaccrual status. As of December 31, 20002001 and 1999,2000, the Bank had
not identified any loans as impaired.
The loan portfolio is concentrated primarily in the immediate
geographic region which is the Corporation's trade area consisting of the Cities of
Danville and Martinsville, Town of South Boston, and Pittsylvania, Henry, and
Halifax Counties in Virginia, Town of Yanceyville and the northern half of
Caswell County in North Carolina.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, 2000.2001.
An analysis of the allowance for loan losses is as follows (in
thousands):
2001 2000 1999 1998
-------- -------- --------
Balance, beginning of year $ 4,746 $ 4,135 $ 3,821 $ 3,277
Provision for loan losses charged to expense 1,015 1,020 670
927
Charge-offs (602) (567) (509)
(508)
Recoveries 175 158 153 125
-------- -------- --------
Balance, end of year $ 5,334 $ 4,746 $ 4,135 $ 3,821
======== ======== ========
5. Premises and Equipment:
Major classifications of premises and equipment are summarized as follows
(in thousands):
As of December 31
-------------------
2001 2000
-------- --------
Land $ 1,583 $ 1,583
Buildings 7,213 7,176
Leasehold Improvements 537 239
Equipment 8,176 7,388
-------- --------
17,509 16,386
Less Accumulated Depreciation (9,652) (8,518)
-------- --------
Total Premises and Equipment, net of accumulated depreciation $ 7,857 $ 7,868
======== ========
6. Time Deposits:
Included in time deposits are certificates of deposit in denominations
of $100,000 or more totaling $56,361,000, $45,887,000$63,436,000 and $32,851,000$56,361,000 at December 31, 2000, 19992001
and 1998,2000, respectively. Interest expense on such deposits during 2001, 2000 and
1999 was $3,539,000, $2,781,000 and 1998 was $2,781,000, $1,566,000, and $1,436,000, respectively.
6. Short-Term35
7. Borrowings:
Repurchase agreements of $31,730,000$27,177,000 and $24,954,000$31,730,000 comprised short-term
borrowings at December 31, 20002001 and 1999,2000, respectively. Repurchase agreements
are borrowings collateralized by securities of the U.S. Government or its
agencies and mature daily. In addition,The securities underlying these agreements remain
under the Corporation's control. The maximum balance of repurchase agreements at
any month-end during 2001 was $32,318,000 and during 2000 was $35,381,000.
The Bank has a line of credit equal to 15% of the Banks assets or
approximately $81,140,000, in credit availability with the
FHLBFederal Home Loan Bank of Atlanta that equaled approximately $85,861,000 at
December 31, 2000 which is secured by qualifying mortgages2001. Long-term borrowings outstanding under this line of credit
were $13,000,000 and $16,000,000 respectively, at December 31, 2001 and December
31, 2000. The Federal Home Loan Bank of Atlanta has the option of early
termination of these advances on or other acceptable security.
7.after the early conversion option date of
each advance contract.
The Corporation had three advances outstanding at December 31, 2001, as
follows:
Advance Maturity Early Conversion Interest
Amount Date Option Date Rate
- ---------- ----------- ---------------- --------
$3,000,000 June 2008 June 2003 5.51%
$5,000,000 August 2008 August 2001 5.09%
$5,000,000 April 2009 April 2004 5.26%
8. Stock Options:
The Company uses the intrinsic value method in determining compensation
expense for stock options, which represents the excess of the market price of
stock over the exercise price on the measurement date. Since the exercise price
of all options granted was equal to or exceeded the market value of the stock at
the date of grant, no compensation expense has been recognized.
The following table reflects the pro forma net income and earnings per
share had the Corporation elected to adopt the fair value approach of SFAS No.
123 (in thousands, except per share data):
2001 2000 1999
1998
------- ------- ------------- ------ ------
Net Income:
As reported $ 8,676 $ 7,924 $ 7,198$9,415 $8,676 $7,924
Pro forma 9,255 8,369 7,623
7,036Basic Earnings per shareshare:
As reported $ 1.58 $ 1.42 $ 1.30
$ 1.18
Pro forma 1.371.56 1.38 1.25
1.15Diluted Earnings per share:
As reported $ 1.58 $ 1.42 $ 1.30
Pro forma 1.55 1.38 1.24
The weighted average fair values of options at their grant date during
2001, 2000 and 1999 were $9.03, $7.25 and 1998 were $7.25, $6.62, and $7.53, 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.
2001 2000 1999 1998
------ ------ ------
Risk-free interest rate 4.52% 6.17% 5.29% 5.41%
Expected years until exercise 5.50 5.50 5.50
Expected stock volatility 40.10% 47.95% 38.32%
15.59%
II-3736
At December 31, 2000,2001, and 1999,2000, the Corporation had 300,000148,550 shares and
148,300 shares, respectively, of its authorized but unissued common stock reserved for its
incentive and nonqualified stock option plan. These options vest from
immediately to three years and have a maximum term of ten years.
A summary of stock option transactions under the plan follows:
Option Option Price
Shares Per Share
--------- --------------
Outstanding at December 31, 1997 32,000 $14.00
Granted 42,000 $15.63 - 18.75
Exercised - -
Forfeited (2,200) $14.00
--------- --------------
Outstanding at December 31, 1998 71,800 $14.00 - 18.75
Granted 71,000 $13.69 - 20.00
Exercised (235) $14.00
Forfeited (3,965) $13.69 - 14.00
---------
--------------
Outstanding at December 31, 1999 138,600 $13.69 - 20.00
Granted 17,400 $13.25 - 15.50
Exercised (71) $14.00
Forfeited ( 4,229)(4,229) $13.69 - 14.00
--------- --------------
Outstanding at December 31, 2000 151,700 $13.25 - 20.00
========= ==============Granted 23,800 $16.50
Exercised (12,550) $13.25 - 17.19
Forfeited (11,500) $13.56 - 18.75
----------
Outstanding at December 31, 2001 151,450 $13.38 - 20.00
==========
The following table summarizes information related to stock options
outstanding on December 31, 2000:2001:
Number of Average Life of Number of Options
Exercise Price Outstanding Number ofOptions Outstanding Options Exercisable
Exercise Prices at December 31, 2000 at December 31, 2000
- ----------------- ------------------- ------------------- -----------------
$13.38 - - - - --------------- ----------------------------- -----------------------------
$13.25 3,000 3,000
13.38 10,000 10,000
13.69 51,500 51,500
14.00 24,800 24,800
15.50 4,400 4,400
15.63 14,000 14,000
17.00 6,000 6,000
17.19 14,000 14,000
18.75 14,000 14,000
20.00 10,000 10,000
------- -------
151,700 151,700
======= =======
8.$20.00 151,450 8.3 years 151,450
9. Income Taxes:
The components of the Corporation's net deferred tax assets as of
December 31, 20002001 and December 31, 1999,2000, were as follows (in thousands):
2001 2000
1999
------- ---------------
Deferred tax assets:
Allowance for loan losses $ 1,4311,814 $ 1,211
Net unrealized losses on securities - 9001,431
Deferred compensation 266 279
269Core deposit intangible 303 252
Other 297 23521 45
------- --------
2,007 2,615
Valuation allowance - (171)
------- --------
Total deferred tax assets 2,404 2,007 2,444
------- --------
Deferred tax liabilities:
Depreciation 265 256 251
Net unrealized gains on securities 674 166 -
Accretion of discount 14 106
67Loan loss recapture 143 -
Other 51 71
91
------- ---------------
Total deferred tax liabilities 1,147 599
409
------- ---------------
Net deferred tax assets $ 1,257 $ 1,408
$ 2,035
======= ========
II-38
=======
The provision for income taxes consists of the following (in thousands):
2001 2000 1999 1998
-------- -------- --------
Taxes currently payable $ 4,298 $ 3,830 $ 3,532
$ 3,436
Deferred tax benefit (357) (415) (212) (313)
-------- -------- --------
$ 3,941 $ 3,415 $ 3,320
$ 3,123
======== ======== ========
37
The effective tax rates of the provision differ from the statutory federal income tax rates
due to the following items:
2001 2000 1999
1998
------ ------ ----------- ----- -----
Federal statutory rate 34.0%34.2% 34.0% 34.0%
Nontaxable interest income (4.9) (4.7) (4.5)
(3.8)
Other .2 (1.1) -
.1
------ ------ ----------- ----- -----
29.5% 28.2% 29.5%
30.3%
====== ====== ======
9.===== ===== =====
10. Commitments and Contingent Liabilities:
The consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business to meet the financing needs of customers. These include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit, interest rate and liquidity risk in excess
of the amount recognized in the Consolidated Balance Sheets. The extent of the
Bank's involvement in various commitments or contingent liabilities is expressed
by the contract or notional amounts of such instruments.
Commitments to extend credit, which amounted to $85,489,000$121,062,000 and
$86,931,000$85,489,000 at December 31, 20002001 and 1999,2000, respectively, represent legally
binding agreements to lend to a customer with fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire
without being funded, the total commitment amounts do not necessarily represent
future liquidity requirements.
There were $800,000 inno commitments to purchase securities when issued at
December 31, 20002001 and none at December 31, 1999.2000.
Standby letters of credit are conditional commitments issued by the
Bank guaranteeing the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. At December 31, 20002001 and 19992000 the Bank had $1,531,000$1,000,000 and
$1,193,000$1,531,000 in outstanding standby letters of credit. CommercialThere were no commercial
letters of credit amounted toat December 31, 2001 and $60,000 at December 31, 2000.
Management and the Corporation's counsel are not aware of any pending
litigation against the Corporation and believe that there are no contingent
liabilities outstanding that will result in a material adverse effect on the
Corporation's consolidated financial position or consolidated results of
operations.
The Bank is a member of the Federal Reserve System and is required to
maintain certain levels of its cash and due from bank balances as reserves based
on regulatory requirements. At December 31, 2000, thisThis reserve requirement was approximately
$1,821,000.
10.$2,190,000 at December 31, 2001 and $1,821,000 at December 31, 2000.
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
total amount of loans
outstanding to the executive officers, directors and their business interests
was $14,793,000 and $10,188,000 at December 31, 2000 and 1999, respectively. The
maximum amount of loans outstanding to the officers, directors and their
business interests at any month-end during 2001, 2000 1999 and 19981999 was approximately
4.5% of grosstotal loans. 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, 2000,2001, none
of these loans were restructured, nor were any related party loans charged off
during 2000.2001.
An analysis of these loans for 20002001 is as follows (in thousands):
Balance, beginning of year $ 10,18814,793
Additions 27,85720,618
Repayments (23,252)(22,554)
---------
Balance, end of year $ 14,79312,857
=========
11.12. Employee Benefit Plans:
The Bank's retirement plan is a non-contributory defined benefit pension
plan which covers substantially all employees of the Bank who are 21 years of
age or older and who have had at least one year of service. Advanced funding is
accomplished by using the actuarial cost method known as the collective
aggregate cost method.
II-3938
The following table sets forth the plan's funded status as of December 31,
20002001 and 19992000 (in thousands):
2001 2000 1999
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 4,4624,122 $ 3,9204,462
Service cost 274 238 233
Interest cost 309 322
274
Actuarial gain(gain) loss 262 (83) 78
Benefits paid (130) (817) (43)
-------- --------
Benefit obligation at end of year $ 4,1224,837 $ 4,4624,122
======== ========
Change in plan assetsassets:
Fair value of plan assets at beginning of year $ 5,0534,453 $ 4,5495,053
Actual return on plan assets (237) 151 547
Employer contributions 274 66 -
Benefits paid (130) (817) (43)
-------- --------
Fair value of plan assets at end of year $ 4,4534,360 $ 5,0534,453
======== ========
Funded status $ 331(477) $ 591331
Unrecognized net actuarial gain(gain) loss 566 (288) (470)
Unrecognized net obligation at transition (17) (30) (42)
Unrecognized prior service cost (120) (144) (168)
-------- --------
Prepaid assetAccrued benefit cost included in other liabilities $ (131)(48) $ (89)(131)
======== ========
Major assumptions and net periodic pension cost include the following (in
thousands):following:
Weighted-average assumptions: 2001 2000 1999
1998
------ ------ ------------- ------- -------
Discount rate:
Post-retirement 6.00% 6.00% 6.00%
Pre-retirement 7.00 7.50 7.00 7.00
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 4.00 4.00 4.00
Components of net periodic benefit cost:
Service cost $ 274 $ 238 $ 233
$ 198
Interest cost 309 322 274 240
Expected return on plan assets (356) (404) (364) (304)
Amortization of prior service cost (24) (24) (24)
Amortization of net obligation at transition (12) (12) (12)
Recognized net actuarial gain - (12) -
-
------ ------ ------------- ------- -------
Net periodic benefit cost $ 191 $ 108 $ 107
$ 98
====== ====== ======
A non-contributory deferred compensation plan was adopted in======= ======= =======
In 1982, by the Board of Directors of the Bank which coversadopted deferred compensation
agreements with certain key executives.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 $68,000, $110,000 $63,000 and $151,000$63,000 for years 2001, 2000 1999 and 1998,1999,
respectively.
A 401(k) savings plan was adopted in 1995 whichthat 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 $116,000, $110,000 $108,000 and $92,000$108,000 to the 401(k) plan in 2001, 2000 1999 and
1998,1999, respectively. These amounts are included in pension and other employee
benefits expense for the respective years.
II-4039
12.13. Fair Value of Financial Instruments:
The estimated fair values of the Corporation's assets are as follows
(in thousands):
December 31, 2000
------------------------2001
---------------------
Carrying Fair
Amount Value
--------- ----------------- --------
Financial assets:
Cash and federal funds solddue from banks $ 29,149 $ 29,149
Investment securities 156,791 157,471
Accrued interest receivable and other assets 8,831 8,831
Loans, net 370,259 377,182
Financial liabilities:
Deposits $464,012 $466,455
Repurchase agreements 27,177 27,177
Other borrowings 13,000 13,656
Other liabilities 3,301 3,301
Off balance sheet instruments:
Commitments to extend credit - -
Standby letters of credit - 10
December 31, 2000
---------------------
Carrying Fair
Amount Value
-------- --------
Financial assets:
Cash and due from banks $ 25,071 $ 25,071
Investment securities 162,929 163,273
OtherAccrued interest receivable and other assets 10,511 10,511
Loans, net 335,010 335,392
Financial liabilities:
Deposits $ 426,588 $ 425,900$426,588 $425,900
Repurchase agreements 31,730 31,730
Other borrowings 16,000 16,034
Other liabilities 3,733 3,733
Off balance sheet instruments:
Commitments to extend credit - -
Standby letters of credit - 20
December 31, 1999
------------------------
Carrying Fair
Amount Value
--------- ---------
Financial assets:
Cash and federal funds sold $ 17,291 $ 17,291
Investment securities 166,272 165,506
Other 10,170 10,170
Loans, net 289,606 288,839
Financial liabilities:
Deposits $ 385,558 $ 384,666
Repurchase agreements 24,954 24,954
Other borrowings 21,000 20,383
Other liabilities 3,160 3,160
Off balance sheet instruments:
Commitments to extend credit - -
Standby letters of credit - 15
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 federal funds solddue from banks. The carrying amount is a reasonable estimate of fair
value.
Investment securities and othersecurities. For marketable securities held for investment purposes,
fair values are based on quoted market prices or dealer quotes. For other
securities held as investments, fair value equals market price, if available. If
a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Other Assets
The carrying amount is a reasonable estimate of fair value.
LoansLoans. Due to the repricing characteristics of revolving credit lines, home
equity loans and adjustable demand loans, the carrying amount of these loans is
a reasonable estimate of fair value. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Prepayment rates are taken into consideration in the
calculation.
II-41
DepositsAccrued interest receivable and other assets. 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-maturityfixed-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.
Federal funds purchased and repurchase agreementsRepurchase agreements. The carrying amount is a reasonable estimate of fair
value.
40
Other Liabilitiesliabilities. The carrying amount is a reasonable estimate of fair value.
Off balance sheet instrumentsinstruments. 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. At December 31, 20002001 no fees were
charged for commitments 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.
13.14. 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.
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, 2001, the Corporation's Tier I and total capital
ratios were 14.32% and 15.56%, respectively. At December 31, 2000, these ratios
were 16.02% and 17.09%, respectively. The ratios for both years were well in
excess of the regulatory requirements. Management believes, as of December 31,
2001, 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, $8,259,000$4,711,000 plus an additional amount equal to the Bank's net income
for 20002002 up to the date of any dividend declaration.
Quantitative measures established by regulation to ensureThe following table provides summary information regarding regulatory
capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital to average assets. At December 31, 2000 and
1999 these ratios were above the minimums as follows (in thousands):
To Be Well
Minimum Capitalized Under
For
Capital Prompt Corrective
Actual Adequacy Purposes:Requirement Action Provisions:
-------------------- -------------------- --------------------Provisions
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- --------- -------- --------- -------- ---------------- ------ ------- ------ ------- ------
As of December 31, 2000:2001
- -----------------------
Total Capital
Corporation $64,787$67,187 15.56% $34,544 >8.0%
Bank 65,260 15.13% 34,505 >8.0% $43,131 >10.0%
Tier I Capital
Corporation 61,853 14.32% 17,272 >4.0%
Bank 60,569 14.04% 17,253 >4.0% 25,879 > 6.0%
Leverage Capital
Corporation 61,853 10.96% 16,927 >3.0%
Bank 60,569 10.75% 16,903 >3.0% 28,172 > 5.0%
As of December 31, 2000
- -----------------------
Total Capital
Corporation 64,787 17.09% $30,33330,333 >8.0%
Bank 63,713 16.82% 30,296 >8.0% $37,87037,870 >10.0%
Tier I Capital
Corporation 60,731 16.02% 15,167 >4.0%
Bank 59,663 15.75% 15,148 >4.0% 22,722 >6.0%> 6.0%
Leverage Capital
Corporation 60,731 11.59% 15,725 >3.0%
Bank 59,663 11.39% 15,711 >3.0% 26,185 >5.0%
As of December 31, 1999:
Total Capital
Corporation $59,868 17.79% $26,915 >8.0%
Bank 59,173 17.61% 26,876 >8.0% $33,595 >10.0%
Tier I Capital
Corporation 55,733 16.57% 13,457 >4.0%
Bank 55,038 16.38% 13,438 >4.0% 20,157 >6.0%
Leverage Capital
Corporation 55,733 11.52% 14,508 >3.0%
Bank 55,038 11.39% 14,493 >3.0% 24,155 >5.0%> 5.0%
II-4241
14.15. Segment and Related Information:
The Corporation adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1998. Comparable prior period
information is presented. 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 in addition to loan interest 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.
Trust and investment services includes estate and trust planning and
administration and investment management for various entities. The trust and
investment services division of the Bank manages trusts, estates and purchases
equity, fixed income and mutual fund investments for customer accounts. The
trust and investment services division receives fees for investment and
administrative services. Fees are also received by this division for individual
retirement accounts managed for the community banking segment.
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 2001, 2000 1999 and 19981999 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. Intersegment
eliminations primarily consist of the Corporation's investment in the Bank and
related equity earnings.
2000
- - - - - ----------------------------------------------------------------------------------------------------------------
2001
---------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ --------
Interest income $ 39,820 $ - $ 30 $ (30) $ 39,820
Interest expense 17,502 - 30 (30) 17,502
Non-interest income - external customers 2,509 2,569 590 - 5,668
Non-interest income - internal customers - 54 - (54) -
Operating income before income taxes 11,697 1,656 4 - 13,357
Depreciation and amortization 1,586 25 10 - 1,621
Total assets 572,820 - 67 - 572,887
Capital expenditures 1,141 16 1 - 1,158
2000
---------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ --------
Interest income $ 38,606 $ - $ 22 $ (22) $ 38,606
Interest expense 17,343 - 22 (22) 17,343
Non-interest income - external customers 1,7791,772 2,658 341 - 4,7784,771
Non-interest income - internal customers - 54 - (54) -
Operating income before income taxes 10,588 1,791 8,528 (8,816)(288) - 12,091
Depreciation and amortization 1,516 40 11 - 1,567
Total assets 541,273 - 64,135 (64,019)116 - 541,389
Capital expenditures 906 19 9 - 934
1999
- - - - - ----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -------------
Interest income $ 33,669 $ - $ 30 $ (30) $ 33,669
Interest expense 14,736 - 30 (30) 14,736
Non-interest income - external customers 1,6291,627 2,532 334 - 4,4954,493
Non-interest income - internal customers - 52 - (52) -
Operating income before income taxes 9,558 1,781 7,846 (7,941)(95) - 11,244
Depreciation and amortization 1,416 48 15 - 1,479
Total assets 491,151 - 57,241 (57,001)240 - 491,391
Capital expenditures 1,466 - 6 - 1,472
1998
- - - - - ---------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 32,654 $ - $ 38 $ (38) $ 32,654
Interest expense 14,472 - 38 (38) 14,472
Non-interest income - external customers 1,487 2,165 427 - 4,079
Non-interest income - internal customers - 52 - (52) -
Operating income before income taxes 8,958 1,400 7,205 (7,242) 10,321
Depreciation and amortization 1,205 42
18 - 1,265
Total assets 460,657 - 56,529 (56,803) 460,383
Capital expenditures 1,898 - 6 - 1,904
II-43
American National Bankshares Inc.
628 Main Street
Post Office Box 191
Danville, Virginia 24543
Notice of Annual Meeting of Shareholders
To be held April 24, 2001
NOTICE is hereby given that the Annual Meeting of Shareholders of American
National Bankshares Inc. (the "Corporation") will be held as follows:
Place: The Wednesday Club
1002 Main Street
Danville, VA 24541
Date: April 24, 2001
Time: 11:30 a.m.
THE ANNUAL MEETING IS BEING HELD FOR THE FOLLOWING PURPOSES:
1. To elect four (4) directors of the Corporation to fill the vacancies
created by the expiration of the terms of the Directors of Class II.
2. To transact any other business that may properly come before the
meeting or any adjournment thereof.
The record date for the determination of shareholders entitled to notice of and
to vote at the Annual Meeting is the close of business on March 9, 2001.
IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE MEETING.
ACCORDINGLY, PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. IF YOU DO
ATTEND THE ANNUAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN
PERSON.
Sincerely,
Charles H. Majors
President and Chief Executive Officer
Dated: March 22, 2001
I-1
American National Bankshares Inc.
628 Main Street
P. O. Box 191
Danville, Virginia 24543
Proxy Statement
Annual Meeting of Shareholders
To be held April 24, 2001
INTRODUCTION
This Proxy Statement is furnished in conjunction with the solicitation by
the Board of Directors of American National Bankshares Inc. (the "Corporation")
of the accompanying proxy to be used at the Annual Meeting of Shareholders of
the Corporation and at any adjournments thereof. The meeting will be held on
Tuesday, April 24, 2001, 11:30 a.m., at The Wednesday Club, 1002 Main Street,
Danville, Virginia, for the purposes set forth below and in the Notice of Annual
Meeting of Shareholders. Shares represented by properly executed proxy, if such
proxies are received in time and not revoked, will be voted at the Annual
Meeting as set forth therein.
INFORMATION AS TO VOTING SECURITIES
The Board of Directors has set March 9, 2001 as the record date for the
determination of shareholders entitled to notice of and to vote at the Annual
Meeting. Only shareholders of record on that date will be entitled to vote on
the matters described herein. As of March 9, 2001, the Corporation had 1,385
shareholders of record. To the Corporation's knowledge, no one individual or
entity owns directly or indirectly more than 5% of the Corporation's common
stock ("the Common Stock") except Ambro and Company, the nominee name in which
American National Bank and Trust Company (the "Bank"), the Corporation's banking
subsidiary, registers securities it holds in a fiduciary capacity, which held
1,195,151 shares on March 9, 2001.
The number of shares of the Common Stock, there being no other class of
stock, outstanding and entitled to vote at the Annual Shareholders' Meeting is
6,030,772. There are 1,195,151 shares held of record by Ambro and Company which
amount represents 19.8175% of the outstanding securities, and only 431,666 of
these shares may be voted by the existing co-fiduciaries. The remaining shares
may not be voted by the Bank but co-fiduciaries may be qualified for the sole
purpose of voting all or a portion of the shares at the Annual Meeting.
A majority of the votes entitled to be cast on matters to be considered at
the Annual Meeting constitutes a quorum. If a share is represented for any
purpose at the Annual Meeting, it is deemed to be present for quorum purposes
for all matters considered at the Annual Meeting. Abstentions and shares held of
record by a broker or its nominee ("Broker Shares") that are voted on any matter
are included in determining the number of votes present or represented at the
Annual Meeting. Broker Shares that are not voted on any matter at the Annual
Meeting will not be included in determining whether a quorum is present.
Directors are elected by a plurality of the votes cast by holders of the Common
Stock at a meeting at which a quorum is present. Votes that are withheld and
Broker Shares that are not voted in the election of directors will not be
included in determining the number of votes cast.
This proxy statement and the enclosed form of proxy were first mailed to
shareholders on or about March 22, 2001.
VOTING OF PROXIES
If the enclosed proxy is properly executed, dated, returned and not
revoked, it will be voted in accordance with the specification made by the
shareholder. If a specification is not made, it will be voted "FOR" the
proposals set forth below and in the notice of Annual Meeting of Shareholders.
Shareholder's may revoke their proxy by delivering a written notice of
revocation to the Corporation at its principal office to the attention of T.
Allen Liles, Secretary, at any time before the proxy is exercised or by
attending the meeting and voting in person. Richard G. Barkhouser, H. Dan Davis,
or James A. Motley, or any of them, will act as proxies on behalf of the Board
of Directors.
I-2
EXPENSES OF SOLICITATION
The Corporation will pay the cost of preparing, assembling and mailing this
Proxy Statement and the enclosed material. Proxies may also be solicited
personally or by telephone by the Corporation and the Bank's officers without
additional compensation.
PURPOSES OF THE ANNUAL MEETING
As set forth in the Notice of Annual Meeting of Shareholders, the Board of
Directors is seeking proxies in connection with the following proposals to be
set forth before the shareholders:
1. To elect four (4) directors of the Corporation to fill the vacancies
created by the expiration of the terms of the Directors of Class II.
2. To transact any other business that may properly come before the
meeting or any adjournment thereof.
ELECTION OF DIRECTORS
Four Directors of Class II are to be elected at the Annual Meeting of
Shareholders to serve until the Annual Meeting in 2004 and until their
respective successors are duly elected and qualified. Management proposes that
the four (4) nominees listed in this Proxy Statement as Directors of Class II be
elected.
The nominees for whom the persons named as proxies intend to vote as
directors, unless otherwise indicated on the form of proxy, and certain
information with regard to their ownership of the Common Stock and memberships
on various committees of the Board of Directors of the Corporation, are set
forth below.
NOMINEES
Directors of Class II to be elected for a term expiring in 2004
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since January 31, 2001 of Class
-------------------- -------- ---------------------- --------
Fred A. Blair (54) 1992 4,082 - Direct (1) .0673
President, Blair Construction, Inc., 300 - Family Relationship (3) .0049
Gretna, VA, commercial building
contractor
E. Budge Kent, Jr. (62) 1979 41,897 - Direct (1)(6) .6897
Senior Vice President of the 1,262 - Family Relationship (4) .0208
Corporation and Executive Vice
President & Chief Trust & Investment
Officer of the Bank
Fred B. Leggett, Jr. (64) 1994 18,509 - Direct (1)(2) .3052
Retired Chairman and Chief Executive 12,768 - Family Relationship (4) .2106
Officer, Leggett Stores, Danville, VA,
retail department stores
Claude B. Owen, Jr. (55) 1984 11,432 - Direct (1) .1885
Retired Chairman & Chief Executive 4,200 - Family Relationship (4) .0693
Officer of DIMON Incorporated, Danville, VA,
leaf tobacco dealer, since May, 1999;
prior thereto, Chairman & Chief Executive
Officer of DIMON Incorporated, Danville, VA
I-3
DIRECTORS CONTINUING IN OFFICE
Directors of Class III to continue in office until 2002
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since January 31, 2001 of Class
-------------------- -------- ---------------------- --------
Richard G. Barkhouser (70) 1980 164,824 - Direct (1) 2.7182
President, Barkhouser Motors, Inc., 14,520 - Family Relationship (4) .2395
Danville, VA, automobile dealership
H. Dan Davis (63) 1996 87,400 - Direct (1)(8) 1.4413
Senior Consultant to the Corporation 40,704 - Family Relationship (4) .6712
and the Bank since January, 1998;
prior thereto, Executive Vice President
of the Corporation and Senior Vice
President of the Bank
Lester A. Hudson, Jr. (61) 1984 9,804 - Direct (1) .1617
Professor of Management, Clemson University,
Clemson, SC, since January, 1998; prior
thereto, Chairman, H & E Associates, Greenville,
SC, investments
Charles H. Majors (55) 1981 53,590 - Direct (1)(5) .8777
President and Chief Executive Officer 2,856 - Family Relationship (4) .0468
of the Corporation and the Bank
Directors of Class I to continue in office until 2003
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since January 31, 2001 of Class
-------------------- -------- ---------------------- --------
Willie G. Barker, Jr. (63) 1996 28,200 - Direct (1) .4651
President, Barklea, Inc., Danville, VA,
tobacco warehouse
Ben J. Davenport, Jr. (58) 1992 21,884 - Direct (1)(2) .3609
Chairman, First Piedmont Corporation,
Chatham, VA, waste management
James A. Motley (72) 1975 14,620 - Direct (1)(2) .2411
Retired Chairman and Chief Executive 10,484 - Family Relationship (4) .1729
Officer of the Corporation and the Bank
All Named Executive Officers and 519,681 - Direct (1)(2)(7)(8) 8.4644
directors including nominees and 87,222 - Family Relationship (3)(4) 1.4207
directors named above (13 in group)
(1) Individual exercises sole voting and investment power over shares held.
(2) Shared voting and investment power.
I-4
(3) Sole voting and investment power as custodian for minor children.
(4) Can exercise no voting or investment power.
(5) Includes 42,200 shares that Mr. Majors has the right to acquire through
the exercise of stock options.
(6) Includes 11,200 shares that Mr. Kent has the right to acquire through
the exercise of stock options.
(7) Includes 75,600 shares that the Named Executive Officers have the right
to acquire through the exercise of stock options.
(8) Includes 200 shares that Mr. Davis has the right to acquire through the
exercise of stock options.
All of the above nominees and directors have been engaged in the
occupations listed during the last five years.
There exists no family relationship between any director or nominee.
Mr. Hudson is a director of American Electric Power Company, Inc. Mr.
Davenport is a director of Intertape Polymer Group Inc.
EXECUTIVE OFFICERS
Mr. Charles H. Majors and Mr. E. Budge Kent, Jr., together with the two
senior vice presidents listed below, were the executive officers of the
Corporation and the Bank as of December 31, 2000.
Name Age Principal Occupation and Business Experience
---- --- --------------------------------------------
T. Allen Liles 48 Senior Vice President, Secretary, Treasurer and Chief Financial
Officer of the Corporation and Senior Vice President, Cashier and
Chief Financial Officer of the Bank; Officer of the Bank since 1997
Carl T. Yeatts 62 Senior Vice President of the Corporation and Senior Vice President
and Senior Loan Officer of the Bank; Officer of the Bank since 1964
All executive officers serve one-year terms of office.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors held 14 Board Meetings during the year 2000. These
meetings were either the Corporation Board Meetings and/or the Bank Board
Meetings. In addition to meeting as a group to review the Corporation's and the
Bank's business, certain members of the Board are appointed to serve on various
standing committees. Among those committees are the Audit and Compliance
Committee, Salary Committee and Directors' Nominating Committee. All incumbent
directors attended more than 75% of the aggregate of all meetings of the Board
of Directors and Committees on which they served.
Audit and Compliance Committee. The Audit and Compliance Committee, which
currently consists of Messrs. Barker, Blair, and Leggett, reviews significant
audit, accounting, and compliance principles, policies and practices, meets with
the Corporation's and Bank's independent auditors to discuss the results of
their annual audit and reviews the performance of the internal auditing and
compliance functions. The Audit and Compliance Committee held four meetings in
2000.
Salary Committee. The Salary Committee currently consists of Messrs.
Barkhouser, Davenport, and Hudson. The Salary Committee approves compensation of
certain officers and makes recommendations to the Board of Directors for other
officers' compensation and promotions, directors' fees, and related personnel
matters. The Salary Committee held two meetings in 2000.
Directors' Nominating Committee. The Committee's function is to search for
potential qualified directors, to review the qualifications of potential
directors as suggested by directors, management, shareholders and others, and to
make recommendations to the entire Board for nominations of such individuals to
the shareholders. A shareholder may recommend nominees for director by complying
with any applicable provisions of the Corporation's bylaws and by writing to the
President of the Corporation and providing the proposed nominee's full name,
address, qualifications and other relevant biographical information. Members of
the present committee are Messrs. Barkhouser, Owen and Leggett. The Directors'
Nominating Committee held two meetings in 2000.
I-5
REPORT OF SALARY COMMITTEE ON EXECUTIVE COMPENSATION
The Salary Committee of the Board of Directors, which is composed of three
independent outside directors, is responsible for making recommendations to the
Board of Directors concerning compensation of the Chief Executive Officer and
for approving the compensation of the other executive officers. The Salary
Committee considers a variety of factors and criteria in arriving at its
decisions and recommendations for compensation of executive officers.
In making its decisions and recommendations regarding compensation, the
Committee attempts to align the interests of the Bank's executive officers with
those of the shareholders. The Committee believes that increases in earnings per
share, dividends, and net equity improve shareholder market value and,
accordingly, compensation should be structured to enhance the profitability of
the Corporation and the total return to the shareholders.
Executive officer compensation generally consists of salary, participation
in the Bank's profit sharing plan, and incentive compensation. The profit
sharing and incentive compensation plans are approved by the Board of Directors,
upon recommendation by the Salary Committee. A description of the profit sharing
plan is included in Note (2) under Executive Compensation. Executive officers
received incentive compensation in 2000 due to the attainment of certain
earnings by the Corporation. They may be eligible to receive incentive
compensation if certain earnings are attained in 2001. Certain key executive
officers are eligible to participate in the Executive Compensation Continuation
Plan described below under "Deferred Compensation Plan". All compensation is
paid by the Bank and no officer receives additional compensation from the
Corporation. In 1997, the Board of Directors and the shareholders approved the
stock option plan described below under Note (3) of "Executive Compensation".
In considering executive officer compensation (other than the Chief
Executive Officer), the Committee receives and considers recommendations from
the Chief Executive Officer. The Committee conducts an annual evaluation of the
performance and effectiveness of the Chief Executive Officer. The Chief
Executive Officer's compensation then is recommended to the Board of Directors
by the Committee after consideration of the Bank's performance and the resulting
benefit to the shareholders.
Salary Committee
Richard G. Barkhouser
Ben J. Davenport, Jr.
Lester A. Hudson, Jr.
REPORT OF AUDIT AND COMPLIANCE COMMITTEE
The primary function of the Audit and Compliance Committee of the Board of
Directors is to assist the Board in fulfilling its oversight responsibilities by
reviewing the financial information, which will be provided to the shareholders
and others, the systems of internal controls, which management and the Board of
Directors have established, and the audit and compliance process. The Committee
strives to provide an open avenue of communication between the Board of
Directors, management, the internal auditors, the compliance officers, and the
independent accountants.
Each of the three Directors who serve on the Audit and Compliance Committee
satisfy the definition of independent director under rules established by the
National Association of Securities Dealers, Inc. listing standards. The Board of
Directors adopted a written charter for the Committee in June, 2000, which is
attached to this proxy statement as Exhibit A. The Committee held four meetings
in 2000.
The Audit and Compliance Committee has reviewed and discussed with
management the Corporation's audited consolidated financial statements as of and
for the year ended December 31, 2000. The Committee has discussed with Arthur
Andersen LLP, the Corporation's independent accountants during calendar year
2000, the matters required to be discussed by Statement of Auditing Standards
No. 61, Communications with Audit Committees, as amended, by the Auditing
Standards Board of the American Institute of Certified Public Accountants. The
Committee received from Arthur Andersen LLP and reviewed the written disclosures
and the letter required by Independence Standard No. 1 and has discussed with
Arthur Andersen LLP their independence. Arthur Andersen LLP performed services
for auditing the Corporation's 2000 annual report and reviewing the
Corporation's quarterly reports on Form 10-Q. The fees for such services
amounted to $76,500 and the fees for other services, primarily tax related,
amounted to $13,300.
I-6
Based on the reviews and discussions referred to above, the Audit and
Compliance Committee recommended to the Board of Directors that the
Corporation's audited consolidated financial statements be included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2000
and be filed with the U. S. Securities and Exchange Commission.
Audit and Compliance Committee
Willie G. Barker, Jr.
Fred A. Blair
Fred B. Leggett, Jr.
OTHER INFORMATION
Comparative Company Performance
The following graph compares the Corporation's cumulative total return to
its shareholders with the returns of three indexes for the five-year period
ended December 31, 2000. The three indexes are the Standard & Poor's 500 Stock
Index, the NASDAQ Index, and the Carson Medlin Company's Independent Index,
consisting of 23 independent banks located in the states of Florida, Georgia,
North Carolina, South Carolina, Tennessee, West Virginia, and Virginia.
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
American National
Bankshares Inc. 100 85 114 125 144 118
Independent Bank Index 100 128 193 204 185 191
S&P 500 Index 100 123 164 211 255 232
NASDAQ Index 100 123 151 213 395 238
I-7
Executive Compensation
The following tables set forth the annual and long-term compensation
awarded to, earned by, or paid to executive officers of the Corporation and the
Bank ("Named Executive Officers") during 2000, 1999, and 1998.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
-------------------------------------- ----------------------- -------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Salary (1) Bonus (2) Compensation Awards Options/ Payouts Compensation
Principal Position Year ($) ($) ($) ($) SARS(#)(3) ($) ($)(4)
- - - - - ------------------ ---- ---------- --------- ------------ ---------- ---------- ------- ------------
Charles H. Majors 2000 197,477 37,932 0 0 10,000 0 5,100
President & Chief Executive 1999 182,988 37,483 0 0 20,000 0 5,000
Officer of the Corporation and 1998 165,409 34,956 0 0 12,000 0 4,860
the Bank
E. Budge Kent, Jr. 2000 110,899 20,895 0 0 0 0 3,240
Senior Vice President of the 1999 109,088 20,834 0 0 5,000 0 3,120
Corporation; Senior Vice President 1998 104,088 19,252 0 0 6,000 0 3,000
and Trust Officer of the Bank
T. Allen Liles 2000 100,630 19,349 0 0 0 0 3,000
Senior Vice President, Secretary, 1999 96,276 20,618 0 0 5,000 0 2,862
Treasurer and Chief Financial 1998 91,079 18,318 0 0 6,000 0 0
Officer of the Corporation; Senior
Vice President, Cashier and Chief
Financial Officer of the Bank
Carl T. Yeatts 2000 110,899 22,200 0 0 0 0 3,240
Senior Vice President of the 1999 107,843 21,675 0 0 5,000 0 3,120
Corporation; Senior Vice 1998 103,131 19,252 0 0 6,000 0 3,000
President and Senior Loan
Officer of the Bank
(1) Includes salary deferrals contributed by the employee to the 401(k) Plan
and taxable compensation for term life insurance over $50,000.
(2) Includes accrued payments of profit sharing (bonus) and incentive
compensation participations. In 2000, the profit-sharing (bonus) plan
provided that an amount equal to 6.50% of the Bank's net income (after
taxes, but before deducting profit sharing and its related tax effect),
less the Bank's 401(k) contributions, be paid to officers and employees who
are in the Bank's employ on December 31, 2000. Incentive compensation
represented payments to full-time officers based on the Corporation
attaining certain earnings increase and officers meeting certain strategic
goals. The total expense, paid or accrued, for the profit sharing (bonus)
plan and incentive compensation payments for the year 2000 amounted to
$723,912.
(3) The Corporation grants options pursuant to the Corporation's Stock Option
Plan approved by the shareholders at the 1997 annual meeting. Options
granted prior to July 1, 1999 have been restated to reflect the impact of a
2-for-1 stock split.
(4) Includes matching contributions to the 401(k) Plan made by the Bank.
Effective July 1, 1995, the Bank adopted a 401(k) Plan which covers
substantially all full-time employees who are 21 years of age or older. An
employee may defer a portion of his or her salary, not to exceed the lesser
of 15% of compensation or $10,500. After one year of service, the Bank will
make a matching contribution in the amount of 50% of the first 6% of
compensation so deferred.
I-8
OPTION GRANTS IN RESPECT OF LAST FISCAL YEAR
Potential
Realizable Value
Number of % of Total at Assumed Annual
Securities Options Exercise Rates of Stock Price
Underlying Granted to or Base Appreciation for
Options Employees in Price Vesting Expiration Optional Term
--------------------
Name Granted Fiscal Year ($/Share) Date Date 5% ($) 10% ($)
---- ---------- ----------- --------- ------- ---------- ------ -------
Charles H. Majors 10,000 57.47% 13.38 12-31-00 12-19-10 84,115 213,163
President & Chief
Executive Officer of the
Corporation and the Bank
AGGREGATE OPTIONS EXERCISED IN 2000 AND
YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options at Options at
Acquired on Value December 31, 2000 (#) December 31, 2000 ($) (a)
Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------ ------------ ----------- ------------- ----------- -------------
Charles H. Majors 0 0 42,200 0 19,475 0
E. Budge Kent, Jr. 0 0 11,200 0 4,163 0
T. Allen Liles 0 0 11,000 0 4,063 0
Carl T. Yeatts 0 0 11,200 0 4,163 0
(a) Value of unexercised in-the-money options is calculated by multiplying the
number of unexercised options at December 31, 2000 by the difference in the
closing price of the Corporation's common stock reported on December 31,
2000 and the exercise price of the unexercised in-the-money options.
Option Repricing
No action was taken in 2000 to lower the exercise price of an option held
by the Named Executive Officers.
Salary Committee
Interlocks and Insider Participation
The Salary Committee of the Bank, during 2000, was composed of Messrs.
Barkhouser, Davenport, and Hudson. Mr. Leggett served as a member of the
committee from January 1 until April 25, 2000. None of the members of the Salary
Committee were officers or employees of the Corporation or its subsidiaries
during 2000 or in prior years.
None of the executive officers of the Corporation or Bank served as a
member of the Board of Directors or as a member of the Compensation Committee
(or other Board Committee performing equivalent functions) of another entity
during 2000, which entity had an executive officer serving on the Board of
Directors or as a member of the Salary Committee of the Corporation or the Bank.
Consequently, there are no interlocking relationships between the Corporation or
Bank and other entities that might affect the determination of the compensation
of executive officers of the Corporation or Bank.
I-9
Pension Plan Table
The following table illustrates the estimated annual benefits payable to an
employee retiring on December 31, 2000 at normal retirement age in the following
specified compensation and years of service classifications:
5 Year Years of Service
Average
Salary 15 20 25 30 35
- - - - - ------ -- -- -- -- --
$ 50,000 $ 11,203 $ 14,937 $ 18,671 $ 22,406 $ 26,140
75,000 18,515 24,687 30,859 37,031 43,202
100,000 25,828 34,437 43,046 51,656 60,265
125,000 33,140 44,187 55,234 66,281 77,327
150,000 40,453 53,937 67,421 80,906 94,390
175,000 47,765 63,687 79,609 95,531 111,452
200,000 55,078 73,437 91,796 110,156 128,515
225,000 62,390 83,187 103,984 124,781 145,577
250,000 69,703 92,937 116,171 139,406 162,640
275,000 77,015 102,687 128,359 154,031 179,702
As of December 31, 2000, the Named Executive Officers have completed the
following years of credited service under the Bank's retirement plan:
Charles H. Majors 8
E. Budge Kent, Jr. 36
T. Allen Liles 3
Carl T. Yeatts 36
Retirement Plan. The Bank's retirement plan is a non-contributory defined
benefit pension plan which covers salaried and regular hourly employees of the
Bank who are 21 years of age or older and who have had at least one year of
service. Advanced funding is accomplished by using the actuarial cost method
known as the collective aggregate cost method.
As of December 31, 2000, the normal retirement benefit formula was 1.3% per
year of service times compensation plus .65% per year of service times
compensation in excess of social security covered compensation with years of
service limited to 35. At normal retirement, the monthly benefit is calculated
based on any consecutive five-year period which will produce the highest average
rate of basic monthly compensation. Basic monthly compensation includes salary
but excludes incentive and bonus compensation. Annual compensation at December
31, 2000 was also limited to $170,000 by Internal Revenue regulations. Cash
benefits under the plan generally commence on retirement at age 65, death, or
termination of employment. Partial vesting of the retirement benefits under the
plan occurs after three years of service and full vesting occurs after seven
years of service.
Deferred Compensation Plan. The Board of Directors of the Bank adopted the
Executive Compensation Continuation Plan, a non-contributory deferred
compensation plan, in 1982. Under the plan, certain key executives who, in the
opinion of the Board of Directors, are making substantial contributions to the
overall growth and success of the Bank and who must be retained in order to
expand and continue satisfactory long term growth are eligible to receive
benefits afforded by the plan.
I-10
Under agreements with eligible key executives pursuant to this plan, if any
such executive dies or retires while employed by the Bank, such executive or his
designated beneficiary will receive annual payments commencing at death or
retirement and continuing for 10 years. Retirement age under existing agreements
begins on or after age 62.
As of December 31, 2000, the Named Executive Officers or their designated
beneficiaries are eligible to receive the following annual retirement benefits
for ten years after meeting the age requirement of 62:
Annual Benefit Years to
Name for 10 Years (in $) Vesting
---- ------------------- -------
Charles H. Majors 50,000 7
E. Budge Kent, Jr. 25,000 0
T. Allen Liles 25,000 14
Carl T. Yeatts 25,000 0
Directors' Compensation. In 2000, non-officer directors, except Mr. Davis,
received a monthly retainer of $500 and attendance fees of $400 for each Board
meeting and Committee meeting attended. The aggregate total amount paid to
non-officer directors, excluding Mr. Davis, for the year 2000 was $146,800. Mr.
Davis was a Named Executive Officer in previous years but elected to become a
senior consultant and retire as an officer, effective December 31, 1997. Mr.
Davis can receive $5,500 per month through March, 2003 for services as a
consultant. No additional compensation is paid to Mr. Davis for service on the
Board of Directors or for attending Committee meetings. Non-officer directors
are excluded from the Bank's retirement plan and, therefore, do not qualify for
pension benefits.
Indebtedness of and Transactions with Management
Some of the directors and officers of the Corporation and the companies
with which they are associated were customers of, and had banking transactions
with, the Bank in the ordinary course of the Bank's business during 2000. All
loans and commitments to loan included in such transactions were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and, in
the opinion of the management of the Bank, do not involve more than a normal
risk of collectibility or present other unfavorable features.
During the year 2000, the highest aggregate amount of outstanding loans,
direct and indirect, to the directors and officers was $17,793,000 or 23% of
equity capital and this peak amount occurred on December 31, 2000.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Corporation's executive officers and directors, and persons who own more
than 10% of the Common Stock, to file reports of ownership and changes in
ownership on Forms 3, 4, and 5 with the SEC and the Nasdaq National Market.
Executive officers, directors, and owners of more than 10% of the Common Stock
are required by regulation to furnish the Corporation with copies of all Forms
3, 4, and 5 they file.
Based solely on the Corporation's review of the copies of such forms it has
received and written representations from certain reporting persons who were not
required to file a Form 5 for 2000, the Corporation believes that all of its
directors and executive officers complied with all Section 16(a) filing
requirements applicable to them with respect to transactions during 2000. To the
Corporation's knowledge, there were no owners of more than 10% of the common
stock.
Independent Public Accountants
The Board of Directors of the Corporation, pursuant to the recommendation
of its Audit and Compliance Committee, selected Arthur Andersen, LLP,
independent public accountants, to audit the financial statements of the
Corporation and the Bank for the year 2000. Arthur Andersen, LLP was first
engaged by the Bank in 1978 as its independent public accountant.
A representative of Arthur Andersen, LLP will be present at the
shareholders' meeting and this representative will have an opportunity to make a
statement if he so desires. He will be available to respond to appropriate
questions.
I-11
Shareholder Proposals
Under the regulations of the Securities and Exchange Commission, any
shareholder desiring to make a proposal to be acted upon at next year's annual
meeting of shareholders must present such proposal to the Corporation at its
principal office in Danville, Virginia, not later than November 26, 2001, in
order for such proposal to be considered for inclusion in the Corporation's
proxy statement.
In addition to any other applicable requirements, for business to be
properly brought before next year's Annual Meeting by a shareholder, even if the
proposal is not to be included in the Corporation's proxy statement, the
Corporation's bylaws provide that the shareholder must give notice in writing to
the Secretary of the Corporation not later than January 27, 2002. As to each
such matter, the notice must contain (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (ii) the name, record address of, and
class, series and number of shares beneficially owned by, the shareholder
proposing such business and (iii) any material interest of the shareholder in
such business.
Other Business
The Board of Directors knows of no other matters which may properly be
brought before the Annual Meeting. However, if any other matters should properly
come before the Annual Meeting, it is the intention of the persons named in the
enclosed form of proxy to vote such proxy in accordance with their best judgment
on such matters.
By Order of the Board of Directors
Charles H. Majors
President and Chief Executive Officer
March 22, 2001
I-12
Appendix A
AMERICAN NATIONAL BANKSHARES INC.
AUDIT AND COMPLIANCE COMMITTEE CHARTER
Purpose
The Audit and Compliance Committee (the "Committee") is a committee of the Board
of Directors. Its primary function is to assist the board in fulfilling its
oversight responsibilities by reviewing the financial information, which will be
provided to the shareholders and others, the systems of internal controls, which
Management and the Board of Directors have established, and the audit and
compliance process. In doing so, it is the responsibility of the Committee to
provide an open avenue of communication between the Board of Directors,
Management, the internal auditors, the compliance officers and the independent
accountants.
Organization
1. The Committee shall be appointed annually by the Board of Directors.
2. The Committee shall consist of at least three members.
3. Only independent directors may be members of the Committee. An
independent director is a director who meets the independence and
experience requirements of the NASDAQ Stock Market, Inc.
4. At least one member of the Committee shall have a background in financial
reporting, accounting or auditing, or other comparable experience or
background which results in the individual's financial sophistication,
including being or having been a Chief Executive Officer, Chief Financial
Officer, or other senior officer with financial oversight responsibilities
(however, the lack of any such member shall not invalidate or otherwise
affect the actions taken by the Committee).
5. The Committee shall appoint one of the members of the Committee as
Chairman. It is the responsibility of the Chairman to schedule and preside
at all meetings of the Committee and to insure that the Committee has a
written agenda for its meetings.
In meeting its responsibilities, the Committee shall:
A. General
1. Have the power to conduct or authorize investigations into any matters
within the Committee's scope of responsibilities. The Committee shall have
unrestricted access to members of Management and relevant information. The
Committee may retain independent counsel, accountants or others to assist
it in the conduct of any investigation.
2. Meet four times per year or more frequently as circumstances require.
3. Report Committee actions to the Board of Directors with recommendations,
as the Committee may deem appropriate.
4. Review and assess annually the Committee's formal charter and recommend to
the Board of Directors any needed revisions thereto.
5. Meet at least annually with the independent accountants, the internal
auditors and Management in separate sessions to discuss any matters that
the Committee believes should be discussed privately with the Committee.
6. Provide for inclusion in the Company's proxy statement or other SEC filings
of any report from the Committee required by applicable laws and
regulations and stating among other things whether the Committee has:
- Reviewed and discussed the audited financial statements with
management.
- Discussed with the independent auditors the matters required to be
discussed by SAS 61.
- Received disclosures from the auditors regarding the auditors'
independence as required by Independence Standards Board Standard
No. I and discussed with the auditors their independence.
I-13
- Recommend to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K.
B. Internal Controls and Risk Assessment
1. Review and evaluate the effectiveness of the Company's process for
assessing significant risks or exposures and the steps Management has taken
to monitor and control such risks to the Company.
2. Consider and review with Management the internal audit and compliance
functions and the independent accountants.
3. Assess the effectiveness of or weaknesses in the Company's internal
controls including the status and adequacy of information systems
and security.
4. Review any related significant findings and recommendations of the
independent accountants, the internal auditors and compliance officers
together with Management's responses including the timetable for
implementation of recommendations to correct weaknesses in the internal
controls.
5. Receive periodic information from the independent accountants regarding the
independence of the independent accountants, discuss such information with
the independent accountants, and, if so determined by the Committee,
recommend that the Board take appropriate actions to satisfy itself of the
independent accountants' independence.
6. Instruct the independent accountants to communicate directly to the
Committee any serious difficulties or disputes with Management. The
independent accountants are responsible to the Committee and, ultimately,
to the Board of Directors.
C. Internal Audit and Compliance
1. Evaluate the internal audit and compliance processes for establishing the
annual internal audit and compliance plans and the appropriate focus on
risk.
2. Evaluate the audit and compliance scope and role of internal audit and
compliance.
3. Consider and review with Management:
- Significant findings and Management's response including the
timetable for implementation to correct weaknesses.
- Any difficulties encountered in the course of audits and compliance
reviews such as restrictions on the scope of work or access to
information.
- Any changes required in the planned scope of audits and compliance
reviews.
- The internal audit and compliance budgets.
- The evaluation of the audit and compliance staff.
D. Compliance with Laws and Regulations
1. Ascertain whether the Company has an effective process for determining
risks and exposure from asserted and unasserted litigation and claims from
noncompliance with laws and regulations.
2. Review with the Company's general counsel and others, as necessary, any
legal, tax, or regulatory matters that may have a material impact on
Company operations and the financial statements.
3. Discuss with Management, the internal auditors, the compliance officers and
the Company's independent accountants the status and adequacy of management
information systems including the significant risks and major controls over
such risks.
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E. Financial Reporting
1. Insure that the independent accountants review the Company's quarterly
financial statements prior to the filing of its Form 10Q.
2. Advise Management, based upon its review and discussion, whether anything
has come to the Committee's attention that causes it to believe that the
audited financial statements included in the company's Form 10-K contain an
untrue statement of material fact or omit to state a necessary material
fact.
3. Review with Management and the independent accountants at the completion of
the annual examination:
- The Company's annual financial statements and related footnotes.
- The independent accountants' audit of the financial statements and
their report.
- Any significant changes required in the independent accountant's
audit plan.
- Any difficulties or disputes with Management encountered during the
audit.
- The Company's accounting principles.
- Other matters related to conduct, which should be communicated to the
Committee under generally accepted auditing standards.
F. External Auditor
1. Recommend to the Board of Directors the independent accountants to be
selected, approve compensation of the independent accountants and review
and, if appropriate, recommend to the Board of Directors the discharge of
the independent accountants.
2. Review the scope and approach of the annual audit with the independent
accountants.
3. Assess the independent accountant's process for identifying and responding
to key audit and internal control risks.
G. Compliance with Codes of Ethical Conduct
1. Review and monitor, as appropriate, with the independent accountants the
administration of and compliance with, the Company's code of conduct and
the Foreign Corrupt Practices Act.
While the Committee has the responsibilities and the powers set forth in this
Charter, it is not the duty of the Committee to plan or conduct audits or to
determine that the Company's financial statements are complete and accurate and
are in accordance with generally accepted accounting principles. This is the
responsibility of Management and the independent accountants. Nor is it the duty
of the Committee to conduct investigations, to resolve disagreements, if any,
between Management and the independent accountants or to assure compliance with
laws and regulations and the Company's code of conduct.
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