CROSS REFERENCE
Page
INDEX | | | | | PAGE | ITEM 1 - | | 3 | | ITEM 1A | | 8 | | ITEM 1B | Unresolved Staff Comments | None | ITEM 2 - | | 11 | ITEM 3 - | | 12 | ITEM 4 - | | 12 | | | | | ITEM 5 - | | 12 | ITEM 6 - | | 15 | ITEM 7 - Management's | | 16 | ITEM 7A - | | 23 | ITEM 8 - | Financial Statements and Supplementary Data | | | | 35 | | | 36 | | | 37 | | | 40 | | | 41 | | | 42 | | | 43 | | | 44 | ITEM 9 - | Changes in and disagreements withDisagreements With Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with accountants on accounting | None | | ITEM 9A | | 36 | | ITEM 9B | Other Information | None | | | PART III | | | ITEM 10 - | Directors, and Executive Officers of the Registrant and Corporate Governance | * | ITEM 11 - | Executive Compensation | * | ITEM 12 - | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | * | ITEM 13 - | Certain Relationships and Related Transactions, and Director Independence | * | | ITEM 14 | Principal Accounting Fees and Services | * | | | | | ITEM 14 - 15 | Exhibits and Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for reference)
Exhibits
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3.1 Amended and Restated Articles of Incorporation Exhibit 4.1 on Form S-3
dated August 20, 1997 filed August 20, 1997
3.2 Amended Bylaws dated March 20, 2001 Exhibit 4.2 on Form 8-K
filed April 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 10.3 on Form 10-K
Company and E. Budge Kent, Jr. dated June 12, 1997 filed March 27, 1998
| 71 |
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10.3 American National Bankshares Inc. Stock Option Plan dated Exhibit 4.3 on form S-8
August 19, 1997 filed September 17, 1997
10.4 Agreement between American National Bank and Trust Exhibit 4 on Form 10-K
Company and H. Dan Davis dated March 14, 1996 filed September 27, 1995
10.5 Agreement between American National Bankshares Inc., Exhibit 10.6 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 Company and filed March 25, 2002
Brad E. Schwartz dated December 18, 2001
10.10 Agreement between American National Bank and Trust Exhibit 10.7 on Form 10-K
Company and Charles H. Majors dated January 1, 2002 filed March 25, 2002
99.2 American National Bankshares Inc. Dividend Reinvestment Exhibit 99 on Form S-3
Plan dated August 19, 1997 filed August 20, 1997
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 2001.
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* TheCertain information required by Item 10 is incorporated herein by reference to the information that appears under the headings "Election“Election of Directors"Directors,” “Election of Directors – Board Members Serving on Other Publicly Traded Company Boards of Directors,” “Election of Directors – Board of Directors and "SectionCommittees - The Audit and Compliance Committee,” “Section 16(a) Beneficial Ownership Reporting Compliance"Compliance,” “Report of the Audit and Compliance Committee,” and “Code of Conduct” in the Registrant'sRegistrant’s Proxy Statement for the April 20022009 Annual Meeting of Shareholders. The information required by Item 401 of regulation S-K on executive officers is disclosed herein.
The information required by Item 11 is incorporated herein by reference to the information that appears under the headings "Board Committees“Compensation Discussion and Compensation", "Report of Human ResourcesAnalysis,” “Compensation Committee Interlocks and CompensationInsider Participation,” and “Compensation Committee on
Executive Compensation", " Executive Compensation", and "Certain Agreements
with Executive Officers"Report” in the Registrant'sRegistrant’s Proxy Statement for the April
20022009 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"heading “Security Ownership” in the Registrant'sRegistrant’s Proxy Statement for the April 20022009 Annual Meeting of Shareholders. The information required by Item 201(d) of Regulation S-K is disclosed herein. See Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” The information required by Item 13 is incorporated herein by reference to the information that appears under the heading "Interestheadings “Related Party Transactions” and “Election of Management in
Certain Transactions"'Direectors - Board Independence" in the Registrant's Proxy Statement for the April,
20022009 Annual Meeting of Shareholders.
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SIGNATURES
PursuantThe information required by Item 14 is incorporated herein by reference to the requirementsinformation that appears under the heading “Independent Public Accountants” in the Registrant’s Proxy Statement for the 2009 Annual Meeting 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 19, 2002 AMERICAN NATIONAL BANKSHARES INC.
By: /s/ Brad E. Schwartz
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Senior Vice President, Secretary & Treasurer
PursuantShareholders.
Forward-Looking Statements
This report contains forward-looking statements with respect to the requirementsfinancial condition, results of the Securitiesoperations and Exchange Actbusiness of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 19, 2002.
/s/ Charles H. Majors President and
- ----------------------------------- Chief Executive Officer
Charles H. Majors
/s/ Fred A. Blair Director
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Fred A. Blair
/s/ Lester A. Hudson, Jr. Director
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Lester A. Hudson, Jr.
/s/ Ben J. Davenport, Jr. Director
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Ben J. Davenport, Jr.
/s/ Willie G. Barker, Jr. Director
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Willie G. Barker, Jr.
/s/ H. Dan Davis Director
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H. Dan Davis
/s/ E. Budge Kent, Jr. Director
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E. Budge Kent, Jr.
/s/ Fred B. Leggett, Jr. Director
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Fred B. Leggett, Jr.
/s/ Claude B. Owen, Jr. Director
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Claude B. Owen, Jr.
/s/ James A. Motley Director
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James A. Motley
/s/ Richard G. Barkhouser Director
- -----------------------------------
Richard G. Barkhouser
/s/ Brad E. Schwartz Senior Vice President
- ----------------------------------- Secretary & Treasurer
Brad E. Schwartz
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ITEM 1 - Business American National Bankshares Inc. (the "Corporation"and its wholly owned subsidiary, American National Bank and Trust Company (collectively referred to as the “Company”). These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available to management at the time these statements and disclosures were prepared. Forward-looking statements are subject to numerous assumptions, estimates, risks, and uncertainties that could cause actual conditions, events, or results to differ materially from those stated or implied by such forward-looking statements. A variety of factors, some of which are discussed in more detail in Item 1A – Risk Factors, may affect the operations, performance, business strategy, and results of the Company. Those factors include but are not limited to the following: | · | Financial market volatility including the level of interest rates could affect the values of financial instruments and the amount of net interest income earned; |
| · | General economic or business conditions, either nationally or in the market areas in which the Company does business, may be less favorable than expected, resulting in deteriorating credit quality, reduced demand for credit, or a weakened ability to generate deposits; |
| · | Competition among financial institutions may increase and competitors may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than the Company; |
| · | Businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards; |
| · | The ability to retain key personnel; and |
| · | The failure of assumptions underlying the allowance for loan losses. |
American National Bankshares Inc. is a one-bank holding company which was organized under the laws of the StateCommonwealth of Virginia in 1984. On September 1, 1984, the CorporationAmerican National Bankshares Inc. acquired all of the outstanding capital stock of American National Bank and Trust Company, (the "Bank"), a National Banking
Associationnational banking association chartered in 1909 under the laws of the United States. The Bank is
the only subsidiary of the Corporation. At December 31, 2001 the Corporation
employed 205 persons (FTE).
American National Bank and Trust Company The Bank has been operating asis the only banking subsidiary of American National Bankshares Inc. In April 2006, AMNB Statutory Trust I, a commercialDelaware statutory trust (the “Trust”) and a wholly owned subsidiary of American National Bankshares Inc., was formed for the purpose of issuing preferred securities (the “Trust Preferred Securities”) in a private placement pursuant to an applicable exemption from registration. Proceeds from the securities were used to fund the acquisition of Community First Financial Corporation (“Community First”). In April 2006, the Company finalized the acquisition of Community First and acquired 100% of its preferred and common stock through a merger transaction. Community First was a bank holding company headquartered in Danville,Lynchburg, Virginia,
since its organization in 1909. The Bank has expanded through internal growth and through mergersits subsidiary, Community First Bank, operated four banking offices serving the city of Lynchburg and acquisitions. On March 14, 1996, the Corporation
completedBedford, Nelson, and Amherst Counties. The Company entered into the merger of Mutual Savings Bank, F.S.B. ("Mutual")agreement with $84,718,000
in assetsCommunity First because it believed the merger to be consistent with its expansion strategy to target entry into the Bank.strong markets that logically extend its existing footprint. The Mutual merger was accounted for as a pooling of
interests. The Bank completed two retail office purchases in 1995 and 1996 that
added $57,700,000 in deposits and $6,925,000 in loans. The two acquisitions were
accounted for as purchases and related core deposit intangible assets of
$4,504,000 are being amortized over ten years. The Bank opened retail banking
offices in Chatham and Martinsville, Virginia and closed a limited service
retail office in Danville during 1999 andCompany had previously opened a branch office in South
Boston, Virginia during 2000. In March 2002, the Bank opened their fourteenth
retailfull service banking office in southern Henry County.
The Bank has two wholly owned subsidiaries to makethe Lynchburg area and sell mortgage loans
and to offer non-deposit investment products such as mutual funds and insurance.was considering opening additional offices in that area.
The operations of the BankCompany are conducted at fourteentwenty banking offices located
throughout the Bank's trade area, which includes the Cities of Danville and Martinsville, Town of South Boston, Pittsylvania, Henry,one loan production office serving Southern and Halifax Counties inCentral Virginia Town of Yanceyville and the northern halfportion of Caswell County inCentral North Carolina. Seven of these offices are located in Danville, one office each in
Gretna, Chatham, Martinsville, Collinsville, southern Henry County, and South
Boston, Virginia and Yanceyville, North Carolina. The Bank also has fifteen
automated teller machines at various locations in the trade area. The Bank
offers all services normally offered by a full-service commercial bank,
including commercial and 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, mortgage and
insurance finance companies. As of March 19, 2002, there were approximately 17
banks operating in this service area. American National Bank and Trust Company provides a full array of financial products and services, including commercial, mortgage, and consumer banking; trust and investment services; and insurance. Services are also provided through twenty-four ATMs, “AmeriLink” Internet banking, and 24-hour “Access American” telephone banking.
Competition and Markets
Vigorous competition exists in the Company’s service area. The Company competes not only with national, regional, and community banks, but also with many other types of financial institutions, including without limitation, savings banks, finance companies, mutual and money market fund providers, brokerage firms, insurance companies, credit unions, and mortgage companies. The Company has the largest deposit market share in the City of Danville, as well as in the City of Danville and Pittsylvania County.
County, combined. The Southern Virginia market, in which the Company has a significant presence, is under economic pressure. The region’s economic base has historically been weighted toward the manufacturing sector. Increased global competition has negatively impacted the textile industry and several manufacturers have closed plants due to competitive pressures or the relocation of some operations to foreign countries. Other important industries include farming, tobacco processing and sales, food processing, furniture manufacturing and sales, specialty glass manufacturing, and packaging tape production. Companies within these industries, especially furniture manufacturing, have also closed plants for reasons similar to those noted above. Additional declines in manufacturing production and unemployment could negatively impact the ability of certain borrowers to repay loans. Also, the current economic and credit crisis, which is resulting in rising unemployment and increasing bankruptcies, foreclosures and bank failures nationally, may further intensify the economic pressure in our markets.
Supervision and Regulation
The CorporationCompany is extensively regulated under both federal and state law. The following information describes certain aspects of that regulation applicable to the Company and does not purport to be complete. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Company are impossible to determine with any certainty. A change in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on the business, operations, and earnings of the Company.
American National Bankshares Inc.
American National Bankshares Inc. is qualified as a bank holding company (“BHC”) within the meaning of the Bank Holding Company Act of 1956, ("the Act"as amended (the “BHC Act”), and is registered as such with the Board of Governors of the Federal Reserve System ("the Federal Reserve Board"(the “FRB”). As a bank holding company, the CorporationAmerican National Bankshares Inc. is required to file various reports and additional information with the Federal
Reserve Board an annual reportFRB and suchis also subject to examinations by the FRB.
The BHC Act prohibits, with certain exceptions, a BHC from acquiring beneficial ownership or control of more than 5% of the voting shares of any company, including a bank, without the FRB’s prior approval and from engaging in any activity other informationthan those of banking, managing or controlling banks or other subsidiaries authorized under the BHC Act, or furnishing services to or performing services for its subsidiaries. Among the permitted activities is the ownership of shares of any company the activities of which the FRB determines to be so closely related to banking or managing or controlling banks as to be proper incident thereto.
Under FRB policy, a BHC is expected to serve as a source of financial and managerial strength to its subsidiary banks and to commit resources to support those banks. This support may be required.
The Federal Reserve Boardrequired at times when the BHC may also make examinationsnot have the resources to provide it. Under this policy, a BHC is expected to stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial adversity and to maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks.
Under the Gramm-Leach-Bliley Act, a BHC may elect to become a financial holding company and thereby engage in a broader range of financial and other activities than are permissible for traditional BHC’s. In order to qualify for the election, all of the Corporation.
The operationsdepository institution subsidiaries of the BHC must be well capitalized, well managed, and have achieved a rating of “satisfactory” or better under the Community Reinvestment Act (the “CRA”). Financial holding companies are permitted to engage in activities that are “financial in nature” or incidental or complementary thereto as determined by the FRB. The Gramm-Leach-Bliley Act identifies several activities as “financial in nature,” including insurance underwriting and sales, investment advisory services, merchant banking and underwriting, and dealing or making a market in securities. American National Bankshares Inc. has not elected to become a financial holding company.
American National Bank are subject to federal statutes and to
regulations of the Comptroller of the Currency, the Federal Reserve BoardTrust Company
American National Bank and the Federal Deposit Insurance Corporation, which insures the Bank's deposits.
The primary supervisory authority over the BankTrust Company 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 afederally chartered national bank the Bankand is a member of the Federal Reserve SystemSystem. It is subject to federal regulation by the Office of the Comptroller of the Currency (the “OCC”), the FRB, and isthe Federal Deposit Insurance Corporation (“FDIC”).
Depository institutions, including American National Bank and Trust Company, are subject to extensive federal and state regulations that significantly affect their business and activities. Regulatory bodies have broad authority to implement standards and initiate proceedings designed to prohibit deposit institutions from engaging in unsafe and unsound banking practices. The standards relate generally to operations and management, asset quality, interest rate exposure, and capital. The agencies are authorized to take action against institutions that fail to meet such standards.
As with other financial institutions, the earnings of American National Bank and Trust Company are affected by general fiscaleconomic conditions and by the monetary policies of the Federal Reserve
Board.FRB. The techniques used by the Federal Reserve Board includeFRB exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, 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 BoardFRB have a direct effectimpact on the
amount of bank loansloan and depositsdeposit growth and the interest rates charged and paid thereon. While theseThey also impact the source and cost of funds and the rates of return on investments. Changes in the FRB’s monetary policies can materially affecthave had a significant impact on the revenuesoperating results of American National Bank and income of
commercial banks,Trust Company and other financial institutions and are expected to continue to do so in the future; however, the exact impact of such conditions and policies upon the future business and earnings of the Bank cannot accurately be predicted.
Foreign Operations
Dividend Restrictions and Capital Requirements
For information regarding the limitation on bank dividends and risk-based capital requirements, refer to Note 18 of the consolidated financial statements. Additional information may be found in the Shareholder’s Equity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FDIC Insurance
American National Bank and Trust Company’s deposits are currently insured up to the following amounts per insured depositor by the Deposit Insurance Fund of the FDIC:
| · | $250,000 for accounts other than retirement accounts and noninterest-bearing transaction accounts; |
| · | $250,000 for retirement accounts; and |
| · | Unlimited coverage for noninterest-bearing transaction accounts, which applies to deposits in institutions such as American National Bank and Trust Company that are participating in the FDIC’s Temporary Liquidity Guarantee Program. For FDIC coverage purposes, interest-bearing checking accounts with an interest rate of 0.50% or less are included in the definition of noninterest-bearing transaction accounts. |
Effective January 1, 2010, the standard FDIC coverage limit per depositor will return to the prior amount of $100,000 for all deposit categories except for retirement accounts, which will continue to be insured up to $250,000 per insured depositor.
On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (“TLG Program”) to strengthen confidence and encourage liquidity in the banking system. The Corporation doesTLG Program consists of two components: a temporary guarantee of newly-issued senior unsecured debt the (“Debt Guarantee Program”) and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC-insured institutions the (“Transaction Account Guarantee Program”). The Company is participating in the Transaction Account Guarantee Program but is not engageparticipating in the Debt Guarantee Program where it has the option of issuing certain non-guaranteed senior unsecured debt.
Under federal law, deposits and certain claims for administrative expenses and employee compensation against insured depository institutions are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any foreign operations.
Executive Officers
This information is incorporatedreceiver appointed by regulatory authorities. Such priority creditors would include the FDIC. Under the risk-based deposit premium assessment system of the FDIC, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories (referred to as Risk Categories I, II, III and IV) determined by reference to its capital levels and supervisory ratings. The assessment rates in 2008 ranged, on an annual basis, from 5 to 43 basis points, depending on the Registrant's Proxy
Statementinsured institution’s risk category as described above. Commencing in 2009, assessment rates increased by 7 basis points in each risk category for the first quarter of 2009. Further, for institutions such as American National Bank and Trust Company that have elected to provide unlimited FDIC coverage for noninterest-bearing transaction accounts, an additional assessment at the annual rate of 10 basis points is due in 2009 for the amount of balances in non-interest bearing transaction accounts that exceed the existing coverage limit of $250,000 for deposit accounts other than retirement accounts and noninterest-bearing transaction accounts.
Under a revised assessment schedule effective April 2002 Annual Meeting1, 2009, The FDIC has set new initial base assessment rates that range, on an annual basis, from 12 to 45 basis points per $100 of Shareholders.
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assessable deposits, depending on the insured institution’s risk category as described above. These initial base assessment rates are subject to possible adjustments, including (1) for all risk categories, a potential increase for unsecured liabilities and potential decrease for long-term unsecured debt and (2) for all risk categories, other than Risk Category I, a potential increase for brokered deposits.
In February 2009, The FDIC proposed that an emergency special assessment up to 20 basis points per $100 of deposits be collected from all insured institutions in September 2009 and further proposed that additional special assessments of up to 10 basis points each be collected as considered necessary thereafter to maintain public confidence in federal deposit insurance.
The level of FDIC insurance premium assessments in 2007 and 2008 for American National Bank and Trust Company was reduced by a cumulative total of $499,000 though application of a one-time premium assessment credit that resulted from the provisions of the Federal Deposit Insurance Reform Act of 2005. The Federal Deposit Insurance Corporation Improvement Act
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal banking agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” as defined by the law. Under regulations established by the federal banking agencies a “well capitalized” institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 capital ratio of a least 4%, a total capital ratio of at least 8%, and a leverage ratio of at least 4%, or 3% in some cases. Management believes, as of December 31, 2008 and 2007, that the Company met the requirements for being classified as “well capitalized.”
As required by FDICIA, the federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to, among other things, internal controls and information systems, internal audit systems, loan documentation, credit underwriting, and interest rate exposure. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. In addition, the agencies adopted regulations that authorize, but do not require, an institution which has been notified that it is not in compliance with safety and soundness standard to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the prompt corrective action provisions described above.
Community Reinvestment and Consumer Protection Laws In connection with its lending activities, the Company is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Community Reinvestment Act. The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. Furthermore, such assessment is also required of banks that have applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch. In the case of a BHC applying for approval to acquire a bank or BHC, the record of each subsidiary bank of the applicant BHC is subject to assessment in considering the application. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.” The Company was rated “outstanding” in its most recent CRA evaluation.
Anti-Money Laundering Legislation The Company is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. Among other things, these laws and regulations require the Company to take steps to prevent the use of the Company for facilitating the flow of illegal or illicit money, to report large currency transactions, and to file suspicious activity reports. The Company is also required to carry out a comprehensive anti-money laundering compliance program. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and BHC acquisitions.
Emergency Economic Stabilization Act of 2008
In accordance with its stated purpose of restoring liquidity and stability to the financial system of the United States, the Emergency Economic Stabilization Act of 2008 established the Troubled Asset Relief Program (“TARP”), under which the United States Department of the Treasury (“UST”) is authorized to purchase preferred stock from qualified financial institutions. The Company meets the requirements to be considered a qualified financial institution. Under TARP, for organizations like the Company, the federal government’s purchase limitation is generally defined as 3% of risk-weighted assets, or about $18 million for the Company. The terms of the preferred stock generally provide that:
| · | Cumulative dividends will be paid at a rate of 5% for the first five years and 9% thereafter; |
| · | Any increase in the dividend rate paid on common stock during the first three years will require the consent of the UST; |
| · | Any repurchase of common stock will require the consent of the UST; |
| · | Conditions and limitations will be placed on executive compensation; and |
| · | UST will receive warrants, with a term of 10 years, to purchase a number of shares of common stock having an aggregate market price equal to 15% of the preferred stock amount on the day of investment. |
After considering the appropriateness of applying under UST’s capital purchase program, the Company has elected not to participate. The Company believes it has sufficient capital to meet the growth plans and credit needs of the communities it serves without government support.
Employees
At December 31, 2008, the Company employed 258 full-time equivalent persons. The relationship with employees is considered to be good.
Internet Access to Company Documents
The Company provides access to its Securities and Exchange Commission (the “SEC”) filings through a link on the Investor Relations page of the Company’s website at www.amnb.com. Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
Executive Officers of the Registrant
The following lists, as of December 31, 2008, the named executive officers of the registrant, their ages, and their positions. Name Age Position | Charles H. Majors | 63 | President and Chief Executive Officer of the Company. |
| Neal A. Petrovich * | 46 | Senior Vice President, Chief Financial Officer, Treasurer and Secretary of American National Bankshares Inc.; Executive Vice President, Chief Financial Officer, and Cashier of American National Bank and Trust Company since November 2005; prior thereto, Senior Vice President, Chief Financial Officer and Cashier of American National Bank and Trust Company since May 2004; prior thereto, Senior Vice President of SouthTrust Bank. |
| Jeffrey V. Haley | 48 | Senior Vice President of American National Bankshares Inc.; President of Trust and Financial Services and Executive Vice President of American National Bank and Trust Company since July 2008; prior thereto, Executive Vice President and Chief Operating Officer of American National Bank and Trust Company since November 2005; prior thereto, Senior Vice President and Chief Administrative Officer of American National Bank and Trust Company. |
| R. Helm Dobbins | 57 | Senior Vice President of American National Bankshares Inc.; Executive Vice President and Chief Credit Officer of American National Bank and Trust Company since November 2005; prior thereto, Senior Vice President and Chief Credit Officer of American National Bank and Trust Company since June 2003; Executive Vice President and Chief Credit Officer of Citizens Bank and Trust Co. from 1998 to 2003. |
| S. Cabell Dudley, Jr. | 63 | Senior Vice President of American National Bankshares Inc. since December 2008; Executive Vice President and Chief Lending Officer of American National Bank and Trust Company since July 2008; prior thereto Senior Vice President and Commercial Relationship Manager since March 2006, prior thereto Senior Vice President of Wachovia Bank. |
| Dabney T. P. Gilliam, Jr. | 54 | Senior Vice President of American National Bankshares Inc. since December 2008; Executive Vice President and Chief Administration Officer of American National Bank and Trust Company since July 2008; prior thereto Senior Vice President of American National Bank and Trust Company since February 2007; prior thereto Chief Financial Officer of RACO, Inc. from January 2006 to February 2007; prior thereto Senior Vice President, Senior Loan Officer and Chief Banking Officer of American National Bank and Trust Company. |
| * Mr. Petrovich resigned from the Company in February 2009. |
The Company’s business is subject to interest rate risk and variations in interest rates may negatively affect financial performance.
Changes in the interest rate environment may reduce the Company’s profits. It is expected that the Company will continue to realize income from the differential or “spread” between the interest earned on loans, securities, and other interest earning assets, and interest paid on deposits, borrowings and other interest bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest earning assets and interest bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. Management cannot ensure that it can minimize the Company’s interest rate risk. While an increase in the general level of interest rates may increase the loan yield and the net interest margin, it may adversely affect the ability of certain borrowers with variable rate loans to pay the interest and principal of their obligations. Accordingly, changes in levels of market interest rates could materially and adversely affect the net interest spread, asset quality, loan origination volume, and overall profitability of the Company. The Company faces strong competition from financial services companies and other companies that offer banking services which could negatively affect the Company’s business.
Increased competition may result in reduced business for the Company. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that the Company offers in its service area. These competitors include national, regional, and community banks. The Company also faces competition from many other types of financial institutions, including without limitation, savings banks, finance companies, mutual and money market fund providers, brokerage firms, insurance companies, credit unions, and mortgage companies. In particular, competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns.
Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain loans and deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. If the Company is unable to attract and retain banking customers, it may be unable to continue to grow loan and deposit portfolios and its results of operations and financial condition may otherwise be adversely affected.
Changes in economic conditions could materially and negatively affect the Company’s business.
The Company’s business is directly impacted by factors such as economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond the Company’s control. A deterioration in economic conditions, whether caused by national or local concerns, especially within the Company’s market area, could result in the following consequences, any of which could hurt business materially: loan delinquencies may increase; problem assets and foreclosures may increase; demand for products and services may decrease; low cost or noninterest bearing deposits may decrease; and collateral for loans, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans.
Trust and Investment Services fee revenue is largely dependent on the fair market value of assets under care and on trading volumes in the brokerage business. General economic conditions and their subsequent effect on the securities markets tend to act in correlation. When general economic conditions deteriorate, consumer and corporate confidence in securities markets erodes, and Trust and Investment Service revenues are negatively impacted as asset values and trading volumes decrease.
A downturn in the real estate market could materially and negatively affect the Company’s business.
A downturn in the real estate market could negatively affect the Company’s business because significant portions of its loans are secured by real estate (approximately 81% as of December 31, 2008). The ability to recover on defaulted loans by selling the real estate collateral could then be diminished and the Company would be more likely to suffer losses on defaulted loans.
Substantially all of the Company’s real property collateral is located in its market area. If there is a significant decline in real estate values, especially in our market area, the collateral for loans would provide significantly less security. Real estate values could be affected by, among other things, an economic slowdown and an increase in interest rates. The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Company’s prospects.
The Company currently depends heavily on the services of a number of key management personnel. The loss of key personnel could materially and adversely affect the results of operations and financial condition. The Company’s success also depends in part on the ability to attract and retain additional qualified management personnel. Competition for such personnel is strong in the banking industry and the Company may not be successful in attracting or retaining the personnel it requires.
The Company is subject to extensive regulation which could adversely affect its business.
The Company’s operations are subject to extensive regulation by federal, state, and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of the Company’s operations. Because the Company’s business is highly regulated, the laws, rules, and regulations applicable to it are subject to regular change. There are currently proposed laws, rules, and regulations that, if adopted, would impact the Company’s operations. There can be no assurance that these proposed laws, rules, and regulations, or any other laws, rules, or regulations, will not be adopted in the future, which could (i) make compliance much more difficult and expensive, (ii) restrict the ability to originate, broker or sell loans, or accept certain deposits, (iii) further limit or restrict the amount of commissions, interest, or other charges earned on loans originated by the Company, or (iv) otherwise adversely affect the Company’s business or prospects for business. The primary source of the Company’s income from which it pays dividends is the receipt of dividends from its subsidiary bank.
The availability of dividends from the Company is limited by various statutes and regulations. It is possible, depending upon the financial condition of the subsidiary bank and other factors, that the Office of the Comptroller of the Currency could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event American National Bank and Trust Company was unable to pay dividends to American National Bankshares Inc., the holding company would likely have to reduce or stop paying common stock dividends. The Company’s failure to pay dividends on its common stock could have a material adverse effect on the market price of the common stock.
A limited trading market exists for the Company’s common stock which could lead to price volatility.
The Company’s common stock is approved for quotation on the NASDAQ Global Select Market, but the trading volume has generally been modest. The limited trading market for the common stock may cause fluctuations in the stock’s market value to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. In addition, even if a more active market in the Company’s common stock develops, management cannot ensure that such a market will continue or that shareholders will be able to sell their shares.
The allowance for loan losses may not be adequate to cover actual losses.
In accordance with accounting principles generally accepted in the United States, an allowance for loan losses is maintained to provide for loan losses. The allowance for loan losses may not be adequate to cover actual credit losses, and future provisions for credit losses could materially and adversely affect operating results. The allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating, and other conditions, including changes in interest rates, all of which are beyond the Company’s control; and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review the Company’s loans and allowance for loan losses. While management believes that the allowance for loan losses is adequate to cover current losses, it cannot make assurances that it will not further increase the allowance for loan losses or that regulators will not require it to increase this allowance. Either of these occurrences could adversely affect earnings.
The allowance for loan losses requires management to make significant estimates that affect the financial statements. Due to the inherent nature of this estimate, management cannot provide assurance that it will not significantly increase the allowance for loan losses which could materially and adversely affect earnings. The Company is exposed to operational risk.
The Company is exposed to many types of operational risks, including reputation, legal, and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, clerical or record-keeping errors, and errors resulting from faulty or disabled computer or telecommunications systems.
Negative public opinion can result from the actual or alleged conduct in any number of activities, including lending practices, corporate governance, and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect the Company’s ability to attract and retain customers and can expose it to litigation and regulatory action.
Certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company’s necessary dependence upon automated systems to record and process its transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is the Company) and to the risk that the Company’s (or its vendors’) business continuity and data security systems prove to be inadequate.
Changes in accounting standards could impact reported earnings.
From time to time there are changes in the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can materially impact how the Company records and reports its financial condition and results of operations. In some instances, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
The Company’s information systems may experience an interruption or breach in security. The Company relies heavily on communications and information systems to conduct business. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in the Company’s relationship management, general ledger, deposit, loan, and other systems. While the Company has policies and procedures designed to prevent or limit the effect of such failure, interruption, or security breach, there can be no assurance that they will not occur or, if they do occur, that they will be adequately addressed. Any such occurrences could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the company to civil litigation and possible financial liability, any of which could have a material adverse affect on the Company’s financial condition and results of operations.
Recent Negative Developments in the Financial Industry and Credit Markets May Adversely Affect the Company’s Operations and Results.
Negative developments in the latter half of 2007 and during 2008 in the credit and securitization markets have resulted in uncertainty in the financial markets in general with the expectation of the general economic downturn continuing into 2009. Loan portfolio quality has deteriorated at many institutions, and the Company also has experienced some deterioration. In addition, the value of real estate collateral supporting many home mortgages, including mortgages held by the Company, has declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets. As a result, the potential exists for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations. Negative developments in the financial industry and credit markets, and the impact of new legislation in response to those developments, may negatively impact the Company’s operations by restricting its business operations, including its ability to originate or sell loans, and adversely impact its financial performance. In addition, these risks could affect the value of the Company’s loan portfolio as well as the value of its investment portfolio, which would also negatively affect its financial performance.
As of December 31, 2008, the Company maintained twenty banking offices located in Danville, Pittsylvania County, Martinsville, Henry County, Halifax County, Lynchburg, Bedford County, Campbell County, and Nelson County in Virginia and Caswell County in North Carolina. The Company also operates a loan production office in Greensboro, North Carolina.
The principal executive offices of the Corporation as well as the principal
executive offices of the BankCompany are located at 628 Main Street in the business district of Danville, Virginia. As of March 19, 2002This building, owned by the Bank maintained fourteen full service
offices. Seven are located within the City of Danville, with othersCompany, was originally constructed in 1973 and has three floors totaling approximately 27,000 square feet.
The Company owns a building located at Gretna, Chatham, Martinsville, southern Henry County, Collinsville, and South
Boston, Virginia and Yanceyville, North Carolina. The Bank owns and operates
fifteen Automated Teller Machines ("ATMs"). The Bank also owns approximately 2.5
acres of land103 Tower Drive in Danville, for future expansion of itsVirginia. This three-story facility serves as a retail banking operations.office and houses certain of the Company’s finance, administrative, and operations staff.
The Company owns an office building on 203 Ridge Street, Danville, Virginia, which is leased to Bankers Insurance, LLC. The Company has a minority ownership interest in Bankers Insurance, LLC.
The Company purchased an office building in 2008 at 445 Mount Cross Road in Danville, Virginia where it consolidated two banking offices in January 2009 and gained additional administrative space.
The Company owns eleven other retail office locations for a total of fifteen owned buildings. There are no mortgages or liens against any of the properties owned by the Company. The Company operates twenty-four Automated Teller Machines (“ATMs”) on owned or leased facilities. The Company leases seven of the retail office locations and a storage warehouse.
There are no material pending legal proceedings to which the Company is a party or to which the property of the BankCompany is subject.
No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company through a solicitation of proxies 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
otherwise.
The Corporation'sCompany’s common stock is traded on the NASDAQ NationalGlobal Select Market under the symbol "AMNB".“AMNB.” At December 31, 20012008, the CorporationCompany had 1,3771,662 shareholders of record. The tables below presentfollowing table presents the high and low sales'closing sales prices
known to management for the Corporation'sCompany’s common stock and dividends declared for the past two years. Market value
| Market Price of the Company’s Common Stock | | | | | | | | | | | | | | | | | | | Closing Price | | | Dividends | | | 2008 | | High | | | Low | | | Per Share | | | 4th quarter | | $ | 18.25 | | | $ | 14.01 | | | $ | 0.23 | | | 3rd quarter | | | 18.20 | | | | 15.80 | | | | 0.23 | | | 2nd quarter | | | 22.00 | | | | 17.45 | | | | 0.23 | | | 1st quarter | | | 22.64 | | | | 18.65 | | | | 0.23 | | | | | | | | | | | | | $ | 0.92 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Closing Price | | | Dividends | | | 2007 | | High | | | Low | | | Per Share | | | 4th quarter | | $ | 22.76 | | | $ | 19.40 | | | $ | 0.23 | | | 3rd quarter | | | 22.96 | | | | 20.50 | | | | 0.23 | | | 2nd quarter | | | 23.08 | | | | 22.15 | | | | 0.23 | | | 1st quarter | | | 23.68 | | | | 22.02 | | | | 0.22 | | | | | | | | | | | | | $ | 0.91 | |
The table below presents share repurchase activity during the quarter ended December 31, 2008. | | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Program | | | Maximum Number of Shares That May Yet Be Purchased Under the Program | | | | | | | | | | | | | | | | | October 1-31, 2008 | | | 4,500 | | | $ | 16.03 | | | | 4,500 | | | | 92,350 | | | November 1-30, 2008 | | | 1,100 | | | | 17.07 | | | | 1,100 | | | | 91,250 | | | December 1-31, 2008 | | | 1,500 | | | | 17.05 | | | | 1,500 | | | | 89,750 | | | | | | 7,100 | | | $ | 16.40 | | | | 7,100 | | | | | | | | | | | | | | | | | | | | | | | |
Stock Compensation Plans
The Company maintains the 2008 Stock Incentive Plan (“2008 Plan”), which is designed to attract and dividends are shownretain qualified personnel in key positions, provide employees with a proprietary interest in the Company as an incentive to contribute to the success of the Company, and reward employees for outstanding performance and the attainment of targeted goals. The 2008 Plan was adopted by the Board of Directors of the Company on February 19, 2008 and approved by the stockholders on April 22, 2008 at the Company’s 2008 Annual Meeting. The 2008 Plan provides for the granting of restricted stock awards and incentive and non-statutory options to employees and directors on a periodic basis, at the discretion of the Board or a Board designated committee. The 2008 Plan authorized the issuance of up to 500,000 shares of common stock. The 2008 Plan replaced the Company’s stock option plan that was approved by the shareholders at the 1997 Annual Meeting, which plan terminated in 2006 (the “1997 Option Plan”).
The 2008 Plan is administered by a Committee of the Board of Directors of the Company comprised of independent directors. Under the 2008 Plan, the Committee determines which employees will be granted restricted stock awards and options, whether such options will be incentive or non-statutory options, the number of shares subject to each option, whether such options may be exercised by delivering other shares of common stock, and when such options become exercisable. In general, the per share and are
basedexercise price of an incentive stock option must be at least equal to the fair market value of a share of common stock on the date the option is granted. Restricted stock would be granted under terms and conditions established by the Committee.
Stock options become vested and exercisable in the manner specified by the Committee. Each stock option or portion thereof shall be exercisable at any time on or after it vests and is exercisable until ten years after its date of grant. As of December 31, 2008, 159,610 shares outstandingremain exercisable under the 1997 Option Plan and 14,750 shares are exercisable under the 2008 Plan. There were 59,000 stock options awarded in 2008. All options granted in 2008 had multi-year vesting schedules to enhance employee retention.
| | | December 31, 2008 | | | | | Number of Shares to be Issued Upon Exercise of Outstanding Options | | | Weighted-Average Per Share Exercise Price of Outstanding Options | | | Number of Shares Remaining Available for Future Issuance Under Stock Compensation Plans | | | | | | | | | | | | | | Equity compensation plans approved by shareholders | | | 218,610 | | | $ | 20.31 | | | | 441,000 | | | Equity compensation plans not approved by shareholders | | | - | | | | - | | | | - | | | Total | | | 218,610 | | | $ | 20.31 | | | | 441,000 | |
Comparative Stock Performance
The following graph compares the Company’s cumulative total return to its shareholders with the returns of two indexes for 2001the five-year period ended December 31, 2008. The cumulative total return was calculated taking into consideration changes in stock price, cash dividends, stock dividends, and 2000.stock splits since December 31, 2003. The indexes are the NASDAQ Composite Index; the SNL Bank $500 Million-$1Billlion Index, which includes bank holding companies with assets of $500 million to $1 billion and is published by SNL Financial, LC.
American National Bankshares Inc.  | | | Period Ending | | | Index | | 12/31/03 | | | 12/31/04 | | | 12/31/05 | | | 12/31/06 | | | 12/31/07 | | | 12/31/08 | | | American National Bankshares Inc. | | | 100.00 | | | | 95.98 | | | | 95.46 | | | | 99.37 | | | | 88.72 | | | | 79.51 | | | NASDAQ Composite | | | 100.00 | | | | 108.59 | | | | 110.08 | | | | 120.56 | | | | 132.39 | | | | 78.72 | | | SNL Bank $500M-$1B | | | 100.00 | | | | 113.32 | | | | 118.18 | | | | 134.41 | | | | 107.71 | | | | 69.02 | |
The following table sets forth selected financial data for the Company for the last five years: | (in thousands, except per share amounts and ratios) | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | Results of Operations: | | | | | | | | | | | | | | | | | Interest income | | $ | 42,872 | | | $ | 48,597 | | | $ | 45,070 | | | $ | 32,479 | | | $ | 30,120 | | | Interest expense | | | 15,839 | | | | 19,370 | | | | 16,661 | | | | 8,740 | | | | 7,479 | | | Net interest income | | | 27,033 | | | | 29,227 | | | | 28,409 | | | | 23,739 | | | | 22,641 | | | Provision for loan losses | | | 1,620 | | | | 403 | | | | 58 | | | | 465 | | | | 3,095 | | | Noninterest income | | | 7,913 | | | | 8,822 | | | | 8,458 | | | | 7,896 | | | | 6,510 | | | Noninterest expense | | | 22,124 | | | | 21,326 | | | | 20,264 | | | | 17,079 | | | | 15,011 | | | Income before income tax provision | | | 11,202 | | | | 16,320 | | | | 16,545 | | | | 14,091 | | | | 11,045 | | | Income tax provision | | | 3,181 | | | | 4,876 | | | | 5,119 | | | | 4,097 | | | | 3,032 | | | Net income | | $ | 8,021 | | | $ | 11,444 | | | $ | 11,426 | | | $ | 9,994 | | | $ | 8,013 | | | | | | | | | | | | | | | | | | | | | | | | | Period-end Balances: | | | | | | | | | | | | | | | | | | | | | | Securities | | $ | 140,816 | | | $ | 157,149 | | | $ | 162,621 | | | $ | 165,629 | | | $ | 188,163 | | | Loans, net of unearned income | | | 571,110 | | | | 551,391 | | | | 542,228 | | | | 417,087 | | | | 407,269 | | | Deposits | | | 589,138 | | | | 581,221 | | | | 608,528 | | | | 491,651 | | | | 485,272 | | | Assets | | | 789,184 | | | | 772,288 | | | | 777,720 | | | | 623,503 | | | | 619,065 | | | Shareholders' equity | | | 102,300 | | | | 101,511 | | | | 94,992 | | | | 73,419 | | | | 71,000 | | | Shareholders' equity - tangible (a) | | | 77,757 | | | | 76,591 | | | | 69,695 | | | | 73,287 | | | | 70,516 | | | | | | | | | | | | | | | | | | | | | | | | | Per Share Information: | | | | | | | | | | | | | | | | | | | | | | Earnings - basic | | $ | 1.32 | | | $ | 1.86 | | | $ | 1.91 | | | $ | 1.83 | | | $ | 1.43 | | | Earnings - diluted | | | 1.31 | | | | 1.86 | | | | 1.90 | | | | 1.81 | | | | 1.42 | | | Dividends | | | 0.92 | | | | 0.91 | | | | 0.87 | | | | 0.83 | | | | 0.79 | | | Book value | | | 16.81 | | | | 16.59 | | | | 15.42 | | | | 13.49 | | | | 12.86 | | | Book value - tangible (a) | | | 12.78 | | | | 12.52 | | | | 11.31 | | | | 13.47 | | | | 12.77 | | | | | | | | | | | | | | | | | | | | | | | | | Ratios: | | | | | | | | | | | | | | | | | | | | | | Return on average assets | | | 1.02 | % | | | 1.48 | % | | | 1.51 | % | | | 1.61 | % | | | 1.26 | % | | Return on average shareholders' equity | | | 7.79 | | | | 11.69 | | | | 12.72 | | | | 13.95 | | | | 11.15 | | | Return on average tangible equity (b) | | | 10.60 | | | | 16.09 | | | | 16.60 | | | | 14.35 | | | | 11.72 | | | Net interest margin - taxable equivalent | | | 3.87 | | | | 4.24 | | | | 4.20 | | | | 4.17 | | | | 3.90 | | | Average shareholders' equity / average assets | | | 13.10 | | | | 12.65 | | | | 11.85 | | | | 11.57 | | | | 11.34 | | | Dividend payout ratio | | | 69.89 | | | | 48.82 | | | | 45.58 | | | | 45.39 | | | | 55.13 | | | Net charge-offs to average loans | | | 0.21 | | | | 0.05 | | | | 0.10 | | | | 0.56 | | | | 0.10 | | | Allowance for loan losses to period-end loans | | | 1.37 | | | | 1.34 | | | | 1.34 | | | | 1.46 | | | | 1.96 | | | Nonperforming assets to total assets | | | 0.91 | | | | 0.42 | | | | 0.45 | | | | 0.72 | | | | 1.35 | | | | | | | | | | | | | | | | | | | | | | | | | (a) - Excludes goodwill and other intangible assets. | | | | | | | | | | | | | | | | | | | (b) - Excludes amortization expense, net of tax, of intangible assets. | | | | | | | | | | | | | |
ITEM 7 - ----------- ------- -------- ---------
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 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
-------- -------- -------- -------- --------
Operations Information:
Interest income:
Loans..............................................$ 30,217 $ 28,300 $ 23,959 $ 23,356 $ 22,441
Interest on deposits in other banks................ 385 179 273 272 237
Investment securities.............................. 9,218 10,127 9,467 9,026 9,050
-------- -------- -------- -------- --------
Total interest income............................ 39,820 38,606 33,699 32,654 31,728
Interest expense..................................... 17,502 17,343 14,736 14,472 14,590
-------- -------- -------- -------- --------
Net interest income.................................. 22,318 21,263 18,963 18,182 17,138
Provision for loan losses............................ 1,015 1,020 670 927 1,100
Non-interest income.................................. 5,668 4,771 4,493 4,079 3,225
Non-interest expense................................. 13,614 12,923 11,542 11,013 10,269
-------- -------- -------- -------- --------
Income before income taxes........................... 13,357 12,091 11,244 10,321 8,994
Income taxes......................................... 3,942 3,415 3,320 3,123 2,725
-------- -------- -------- -------- --------
Net income...........................................$ 9,415 $ 8,676 $ 7,924 $ 7,198 $ 6,269
======== ======== ======== ======== ========
Balance Sheet Information:
Investment securities................................$156,791 $162,929 $166,272 $163,413 $143,077
Net loans............................................ 370,259 335,010 289,606 265,698 251,173
Total deposits....................................... 464,012 426,588 385,558 358,325 351,603
Shareholders' equity................................. 65,397 63,338 56,719 54,861 50,003
Total assets......................................... 572,887 541,389 491,391 460,383 423,640
Per Share Information:*
Net income (basic and diluted).......................$ 1.58 $ 1.42 $ 1.30 $ 1.18 $ 1.00
Dividends............................................ .660 .585 .525 .465 .405
Book value........................................... 11.23 10.45 9.29 8.99 8.19
Ratios:
Return on average assets............................. 1.69% 1.70% 1.68% 1.64% 1.47%
Return on average shareholders' equity............... 14.49% 14.74% 14.17% 13.79% 12.51%
Average shareholder's equity/average assets.......... 11.68% 11.54% 11.89% 11.86% 11.78%
Total risk-based capital/assets...................... 15.56% 17.09% 17.79% 18.04% 18.37%
Dividend payout ratio................................ 41.68% 41.07% 40.44% 39.43% 40.08%
Net charge-offs to average net loans................. .12% .13% .13% .15% .36%
Allowance for loan losses to period-end
loans, net of unearned income...................... 1.42% 1.40% 1.41% 1.42% 1.29%
* Per share amounts have been restated to reflect the impact of a 2-for-1 stock split effected in the form
of a 100% stock dividend issued to stockholders July 15, 1999, with a record date of July 1, 1999.
7
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The purpose of this discussion is to focus on important factors affectingsignificant changes in the Corporation's financial condition and results of operations.operations of the Company during the past three years. The discussion and analysis should be read in conjunction with the consolidated financial
statementsare intended to supplement and related notes to assisthighlight information contained in the evaluationaccompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K. Financial institutions acquired by the Company during the past three years and accounted for as purchases are reflected in the financial position and results of operations of the Corporation's
2001 performance.
RESULTS OF OPERATIONS
NET INCOME
Company since the date of their acquisition.
RECLASSIFICIATION
In certain circumstances, reclassifications have been made to prior period information to conform to the 2008 presentation.
CRITICAL ACCOUNTING POLICIES
The Corporation reported record profitability during 2001. Net income
foraccounting and reporting policies followed by the year ended December 31, 2001 was $9,415,000, an increase of 8.5% overCompany conform with U.S. generally accepted accounting principles (“GAAP”) and they conform to general practices within the $8,676,000 earned duringbanking industry. The Company’s critical accounting policies, which are summarized below, relate to (1) the same period of 2000. On a basic and diluted per
share basis, net earnings 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
assets (net income as a percentage of average total assets) and return on
shareholders' equity (net income as a percentage of average common shareholders'
equity). The Corporation's returns on average assets were 1.69%, 1.70% and 1.68%
for the years ended December 31, 2001, 2000 and 1999, respectively. The returns
on average shareholders' equity were 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 provisionallowance for loan losses improved $1,060,000, or 5.24%,
for 2001 comparedand (2) goodwill impairment. A summary of the Company’s significant accounting policies is set forth in Note 1 to the same period in 2000 dueConsolidated Financial Statements.
The financial information contained within the Company’s financial statements is, to overall loan and deposit
growth. Non-interest income grew by $896,000 with $369,000a significant extent, financial information that is based on measures of the growthfinancial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from non-recurring gainsone previously acceptable method to another method.
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
The allowance for loan losses is an estimate of the losses inherent in the loan portfolio at the balance sheet date. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards (“SFAS”) 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses on impaired loans be accrued based on the pre-maturity calldifferences between the value of investment securities.
NET INTEREST INCOME
Net interest income,collateral, present value of future cash flows, or values observable in the Corporation's primary sourcesecondary market, and the loan balance.
The Company’s allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of revenue,these components is the excessdetermined based upon estimates that can and do change. The formula allowance uses a historical loss view as an indicator of interest income over interest expense. Net interest income is
influenced by a number offuture losses along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries; trends in volume and terms of loans; effects of changes in underwriting standards; experience of lending staff and economic conditions; and portfolio concentrations. In the volumeformula allowance, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of interest-earning
assetsloans. The adjusted loss factor is multiplied by the period-end balances for each risk-grade category. The formula allowance is calculated for a range of outcomes. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. The unallocated allowance includes estimated losses whose impact on the portfolio has yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective and interest-bearing liabilitiesactual losses could be greater or less than the estimates.
The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance-sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the interest rates earnedperiod-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included in other liabilities.
Goodwill Impairment
The Company tests goodwill on earning
assetsan annual basis or more frequently if events or circumstances indicate that there may have been impairment. If the carrying amount of goodwill exceeds its implied fair value, the Company would recognize an impairment loss in an amount equal to that excess. The goodwill impairment test requires management to make judgments in determining the assumptions used in the calculations. The goodwill impairment testing conducted by the Company in 2008 indicated that goodwill is not impaired and is properly recorded in the interest rates paid to obtain funding to support the assets. For
analytical purposes,financial statements.
NON-GAAP PRESENTATIONS
The analysis of net interest income in this document is adjusted toperformed on a taxable equivalent basis to recognizefacilitate performance comparisons among various taxable and tax-exempt assets.
EXECUTIVE OVERVIEW
American National Bankshares Inc. is the holding company of American National Bank and Trust Company, a community bank serving Southern and Central Virginia and the northern portion of Central North Carolina with twenty banking offices and a loan production office.
American National Bank and Trust Company provides a full array of financial products and services, including commercial, mortgage, and consumer banking; trust and investment services; and insurance. Services are also provided through twenty-four ATMs, “AmeriLink” Internet banking, and 24-hour “Access American” telephone banking.
Additional information is available on the Company’s website at www.amnb.com. The shares of American National Bankshares Inc. are traded on the NASDAQ Global Select Market under the symbol “AMNB.”
The Company’s mission, vision, and guiding principles are as follows:
Mission We provide quality financial services with exceptional customer service.
Vision We will enhance the value of our shareholders’ investment by being our communities’ preferred provider of relationship-based financial services.
Guiding Principles To achieve our vision and carry out our mission, we: | · | operate a sound, efficient, and highly profitable company, |
| · | identify and respond to our internal and external customers’ needs and expectations in an ever changing financial services environment, |
| · | provide quality sales and quality service to our customers, |
| · | produce profitable growth, |
| · | provide an attractive return for our shareholders, |
| · | furnish positive leadership for the well-being of all communities we serve, |
| · | continuously develop a challenging and rewarding work environment for our employees, and |
| · | conduct our work with integrity and professionalism. |
RESULTS OF OPERATIONS
Net Interest Income
Net interest income tax savingsis the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, primarily deposits. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities. A tax rate of 34%35% was used in adjusting interest on tax-exempt securities and loansassets to a fully taxable equivalent basis. The
difference between rates earned on interest-earningNet interest income divided by average earning assets (with an adjustment
madeis referred to tax-exempt income to provide comparability with taxable income, i.e. the
"FTE" adjustment) and the cost of the supporting funds is measured byas the net interest margin. The FTE-adjusted net interest margin isspread represents the primary measure used in
evaluatingdifference between the effectiveness of the management ofaverage rate earned on earning assets and the liabilities funding those assets.average rate paid on interest bearing liabilities.
Net interest income decreased $2,226,000, or 7.4% from 2007 to 2008, following a $757,000, or 2.6% increase in 2007 from 2006 levels. The FTE-adjusteddecrease in 2008 was primarily due to an 8.7% decline in the net interest margin from 4.24% in 2007 to 3.87% in 2008, the effect of which was 4.39%partially offset by a 1.6% increase in 2001, 4.54%the level of average interest earning assets. The increase in 2000 and 4.43% in 1999. The fifteen basis point decrease in
margin during 20012007 was primarily due to balance sheet growth including the resultacquisition of U.S. monetary policy. During
2001,Community First Financial Corporation in April 2006. Additionally, purchase accounting adjustments from 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 ratesCommunity First acquisition had a negativepositive impact on net interest income in 2001.2007. Payoffs of acquired loans accounted for under American Institute of Certified Public Accountants Statement of Position 03-3 resulted in $571,000 of interest income in 2007. Interest income related to the valuation of other loans acquired from Community First was $536,000 in 2008 and 2007. Similarly, interest expense related to the valuation of acquired deposits was $0 and $88,000 in 2008 and 2007, respectively. The Wall
Street Journal prime rate fellnet interest margin decreased from 9.50%4.24% in 2007 to 3.87% in 2008, after increasing from 4.20% in 2006, due primarily to the fact that loans, the largest component of earning assets, reprice 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 samea much faster pace with the
market-driven reductions in asset yields. The resultant decreasethan deposits in interest incomebearing liabilities. During 2008, the Federal Open Market Committee of the Federal Reserve Board reduced the intended federal funds rate seven times from 4.25% to 0.25%. This had a dramatic effect on the lower yield on earning assets exceededCompany’s net interest margin.
To meet its funding needs for the decrease in interestCommunity First acquisition, the Company issued $20,619,000 of Trust Preferred Securities during the second quarter of 2006. Interest expense from lower costsassociated with these securities was $1,373,000 for 2008 and 2007 and $1,007,000 for 2006.
The lower interest
rate spread occurred because average-interest-bearing liabilities grew more in
the higher cost areasfollowing presentation is an analysis 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 and rates, on a taxable equivalent basis, for the years 2001, 2000, and 1999.2006 through 2008. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans, if recognized, is recorded on a cash basis or when the loan returns to accrual status.
| Table 1 - Net Interest Income Analysis | | (in thousands, except yields and rates) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Balance | | | | | | Interest Income/Expense | | | Average Yield/Rate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | 2008 | | | 2007 | | | 2006 | | | 2008 | | | 2007 | | | 2006 | | | Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial | | $ | 91,117 | | | $ | 89,673 | | | $ | 84,676 | | | $ | 5,515 | | | $ | 6,980 | | | $ | 6,481 | | | | 6.05 | % | | | 7.78 | % | | | 7.65 | % | | Real Estate | | | 467,508 | | | | 449,683 | | | | 416,530 | | | | 29,712 | | | | 33,621 | | | | 29,813 | | | | 6.36 | | | | 7.48 | | | | 7.16 | | | Consumer | | | 8,774 | | | | 10,420 | | | | 12,287 | | | | 795 | | | | 975 | | | | 1,152 | | | | 9.06 | | | | 9.36 | | | | 9.38 | | | Total loans | | | 567,399 | | | | 549,776 | | | | 513,493 | | | | 36,022 | | | | 41,576 | | | | 37,446 | | | | 6.35 | | | | 7.56 | | | | 7.29 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Federal agencies | | | 45,660 | | | | 68,521 | | | | 94,589 | | | | 2,215 | | | | 3,032 | | | | 3,745 | | | | 4.85 | | | | 4.42 | | | | 3.96 | | | Mortgage-backed | | | 47,997 | | | | 25,406 | | | | 21,197 | | | | 2,433 | | | | 1,255 | | | | 988 | | | | 5.07 | | | | 4.94 | | | | 4.66 | | | State and municipal | | | 45,573 | | | | 46,069 | | | | 46,735 | | | | 2,505 | | | | 2,530 | | | | 2,624 | | | | 5.50 | | | | 5.49 | | | | 5.61 | | | Other | | | 6,141 | | | | 7,484 | | | | 11,059 | | | | 277 | | | | 438 | | | | 621 | | | | 4.51 | | | | 5.85 | | | | 5.62 | | | Total securities | | | 145,371 | | | | 147,480 | | | | 173,580 | | | | 7,430 | | | | 7,255 | | | | 7,978 | | | | 5.11 | | | | 4.92 | | | | 4.60 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits in other banks | | | 9,239 | | | | 13,431 | | | | 12,922 | | | | 301 | | | | 679 | | | | 620 | | | | 3.26 | | | | 5.06 | | | | 4.80 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest earning assets | | | 722,009 | | | | 710,687 | | | | 699,995 | | | | 43,753 | | | | 49,510 | | | | 46,044 | | | | 6.06 | | | | 6.97 | | | | 6.58 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nonearning assets | | | 63,859 | | | | 62,952 | | | | 57,807 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 785,868 | | | $ | 773,639 | | | $ | 757,802 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Demand | | $ | 109,492 | | | $ | 107,834 | | | $ | 105,320 | | | | 803 | | | | 1,550 | | | | 1,513 | | | | 0.73 | | | | 1.44 | | | | 1.44 | | | Money market | | | 53,659 | | | | 52,843 | | | | 48,124 | | | | 1,011 | | | | 1,429 | | | | 1,180 | | | | 1.88 | | | | 2.70 | | | | 2.45 | | | Savings | | | 61,620 | | | | 66,246 | | | | 77,445 | | | | 331 | | | | 845 | | | | 963 | | | | 0.54 | | | | 1.28 | | | | 1.24 | | | Time | | | 258,773 | | | | 261,286 | | | | 255,856 | | | | 10,135 | | | | 11,711 | | | | 9,693 | | | | 3.92 | | | | 4.48 | | | | 3.79 | | | Total deposits | | | 483,544 | | | | 488,209 | | | | 486,745 | | | | 12,280 | | | | 15,535 | | | | 13,349 | | | | 2.54 | | | | 3.18 | | | | 2.74 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Customer repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | agreements | | | 52,264 | | | | 48,088 | | | | 40,970 | | | | 1,377 | | | | 1,841 | | | | 1,384 | | | | 2.63 | | | | 3.83 | | | | 3.38 | | | Other short-term borrowings | | | 9,818 | | | | 346 | | | | 1,240 | | | | 252 | | | | 19 | | | | 69 | | | | 2.57 | | | | 5.49 | | | | 5.56 | | | Long-term borrowings | | | 34,235 | | | | 32,245 | | | | 31,847 | | | | 1,930 | | | | 1,975 | | | | 1,859 | | | | 5.64 | | | | 6.12 | | | | 5.84 | | | Total interest bearing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | liabilities | | | 579,861 | | | | 568,888 | | | | 560,802 | | | | 15,839 | | | | 19,370 | | | | 16,661 | | | | 2.73 | | | | 3.40 | | | | 2.97 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest bearing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | demand deposits | | | 98,157 | | | | 102,003 | | | | 102,117 | | | | | | | | | | | | | | | | | | | | | | | | | | | Other liabilities | | | 4,933 | | | | 4,894 | | | | 5,059 | | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders' equity | | | 102,917 | | | | 97,854 | | | | 89,824 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | shareholders' equity | | $ | 785,868 | | | $ | 773,639 | | | $ | 757,802 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate spread | | | | | | | | | | | | | | | | | | | | | | | | | | | 3.33 | % | | | 3.57 | % | | | 3.61 | % | | Net interest margin | | | | | | | | | | | | | | | | | | | | | | | | | | | 3.87 | % | | | 4.24 | % | | | 4.20 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income (taxable equivalent basis) | | | | | | | | 27,914 | | | | 30,140 | | | | 29,383 | | | | | | | | | | | | | | | Less: Taxable equivalent adjustment | | | | | | | | | | | | 881 | | | | 913 | | | | 974 | | | | | | | | | | | | | | | Net interest income | | | | | | | | | | | | | | $ | 27,033 | | | $ | 29,227 | | | $ | 28,409 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 2 presents the dollar amount of changes in interest income and interest expense, and distinguishes between the changes related to increases or
decreasesresulting from fluctuations in average outstanding balances of interest-earninginterest earning assets and interest-bearinginterest bearing liabilities (volume), and the changes related to increases or
decreasesresulting from fluctuations in average interest rates on such assets and liabilities (rate). 8
Table 1 - Net Interest Income Analysis
The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included in average
balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis (in thousands, except rates):
Average Balance Interest Income/Expense Average Yield/Rate
------------------------------ ------------------------------ ---------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- -------- ------- ------- -------
Loans:
Commercial $139,094 $100,298 $ 83,620 $ 11,188 $ 9,273 $ 7,041 8.04% 9.25% 8.42%
Mortgage 179,682 165,260 143,281 14,622 14,101 11,773 8.14 8.53 8.22
Consumer 43,609 50,218 53,209 4,541 4,977 5,170 10.41 9.91 9.72
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total loans 362,385 315,776 280,110 30,351 28,351 23,984 8.38 8.98 8.56
-------- -------- -------- -------- -------- -------- ------- ------- -------
Investment securities:
U. S. Government - 2,641 13,130 - 168 801 - 6.36 6.10
Federal agencies 42,698 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 2,677 2,708 2,513 6.83 6.80 6.79
Other investments 30,947 23,420 20,071 1,959 1,464 1,244 6.33 6.25 6.20
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total investment securities 156,481 167,370 160,169 10,068 10,890 10,212 6.43 6.51 6.38
-------- -------- -------- -------- -------- -------- ------- ------- -------
Deposits in other banks 11,726 2,879 5,237 385 179 273 3.28 6.22 5.21
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total interest-earning assets 530,592 486,025 445,516 40,804 39,420 34,469 7.69 8.11 8.02
-------- -------- -------- ------- ------- -------
Other non-earning assets 25,841 24,269 24,813
-------- -------- --------
Total assets $556,433 $510,294 $470,329
======== ======== ========
Deposits:
Demand $ 56,419 $ 56,141 $ 54,143 495 1,035 1,087 .88 1.84 2.01
Money market 41,225 24,861 19,250 1,318 865 535 3.20 3.48 2.78
Savings 62,792 63,739 67,247 1,177 1,671 1,768 1.87 2.62 2.63
Time 229,050 202,890 183,707 12,617 11,095 9,284 5.51 5.47 5.05
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total deposits 389,486 347,631 324,347 15,607 14,666 12,674 4.01 4.22 3.91
Repurchase agreements 29,814 27,608 20,895 1,088 1,362 876 3.65 4.93 4.19
Other borrowings 15,491 23,397 23,073 807 1,315 1,186 5.21 5.62 5.14
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total interest-bearing
liabilities 434,791 398,636 368,315 17,502 17,343 14,736 4.03 4.35 4.00
-------- -------- -------- -------- -------- -------- ------- ------- -------
Demand deposits 52,719 49,126 42,923
Other liabilities 3,941 3,654 3,175
Shareholders' equity 64,982 58,878 55,916
-------- -------- --------
Total liabilities and
Shareholders' equity $556,433 $510,294 $470,329
======== ======== ========
Interest rate spread 3.66% 3.76% 4.02%
======= ======= =======
Net interest income $ 23,302 $ 22,077 $ 19,733
======== ======== ========
Taxable equivalent adjustment $ 984 $ 814 $ 770
======== ======== ========
Net yield on earning assets 4.39% 4.54% 4.43%
======= ======= =======
Changes attributable to both volume and rate have been allocated proportionately.
| Table 2 - Changes in Net Interest Income (Rate / Volume Analysis) | | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | 2008 vs. 2007 | | | 2007 vs. 2006 | | | | | | | | Change | | | | | | Change | | | | | Increase | | | Attributable to | | | Increase | | | Attributable to | | | Interest income | | (Decrease) | | | Rate | | | Volume | | | (Decrease) | | | Rate | | | Volume | | | Loans: | | | | | | | | | | | | | | | | | | | | Commercial | | $ | (1,465 | ) | | $ | (1,576 | ) | | $ | 111 | | | $ | 499 | | | $ | 111 | | | $ | 388 | | | Real Estate | | | (3,909 | ) | | | (5,200 | ) | | | 1,291 | | | | 3,808 | | | | 1,367 | | | | 2,441 | | | Consumer | | | (180 | ) | | | (30 | ) | | | (150 | ) | | | (177 | ) | | | (2 | ) | | | (175 | ) | | Total loans | | | (5,554 | ) | | | (6,806 | ) | | | 1,252 | | | | 4,130 | | | | 1,476 | | | | 2,654 | | | Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | Federal agencies | | | (817 | ) | | | 270 | | | | (1,087 | ) | | | (713 | ) | | | 404 | | | | (1,117 | ) | | Mortgage-backed | | | 1,178 | | | | 34 | | | | 1,144 | | | | 267 | | | | 62 | | | | 205 | | | State and municipal | | | (25 | ) | | | 2 | | | | (27 | ) | | | (94 | ) | | | (57 | ) | | | (37 | ) | | Other securities | | | (161 | ) | | | (90 | ) | | | (71 | ) | | | (183 | ) | | | 25 | | | | (208 | ) | | Total securities | | | 175 | | | | 216 | | | | (41 | ) | | | (723 | ) | | | 434 | | | | (1,157 | ) | | Deposits in other banks | | | (378 | ) | | | (201 | ) | | | (177 | ) | | | 59 | | | | 34 | | | | 25 | | | Total interest income | | | (5,757 | ) | | | (6,791 | ) | | | 1,034 | | | | 3,466 | | | | 1,944 | | | | 1,522 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | Demand | | | (747 | ) | | | (770 | ) | | | 23 | | | | 37 | | | | 1 | | | | 36 | | | Money market | | | (418 | ) | | | (440 | ) | | | 22 | | | | 249 | | | | 127 | | | | 122 | | | Savings | | | (514 | ) | | | (459 | ) | | | (55 | ) | | | (118 | ) | | | 24 | | | | (142 | ) | | Time | | | (1,576 | ) | | | (1,464 | ) | | | (112 | ) | | | 2,018 | | | | 1,808 | | | | 210 | | | Total deposits | | | (3,255 | ) | | | (3,133 | ) | | | (122 | ) | | | 2,186 | | | | 1,960 | | | | 226 | | | Customer repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | agreements | | | (464 | ) | | | (613 | ) | | | 149 | | | | 457 | | | | 198 | | | | 259 | | | Other borrowings | | | 188 | | | | (427 | ) | | | 615 | | | | 66 | | | | 95 | | | | (29 | ) | | Total interest expense | | | (3,531 | ) | | | (4,173 | ) | | | 642 | | | | 2,709 | | | | 2,253 | | | | 456 | | | Net interest income | | $ | (2,226 | ) | | $ | (2,618 | ) | | $ | 392 | | | $ | 757 | | | $ | (309 | ) | | $ | 1,066 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest income is generated from a variety of sources, including fee-based deposit services, trust and investment services, mortgage banking, and retail brokerage. Noninterest income also includes net gains or losses on sales, calls, or impairment of investment securities.
Noninterest income was $7,913,000 in 2008, down 10.3% from 2007, resulting primarily from decreases in trust fees, service charges on deposit accounts, mortgage banking income, brokerage, income from investment in insurance companies, and losses of $450,000 on securities.
Noninterest income was $8,822,000 in 2007, up 4.3% over 2006. Increases in trust fees, mortgage banking income, brokerage, and other fee income were partially offset by decreases in deposit account service charges and by a $362,000 impairment charge on securities.
Fees from the management of trusts, estates, and asset management accounts totaled $3,467,000 in 2008, down from $3,578,000 in 2007 and up from $3,374,000 in 2006. These changes were due primarily to market value decline or appreciation in the securities markets as a substantial proportion of these fees are earned as a percentage of the account balances.
Service charges on deposits accounts decreased 8.2% in 2008 and 4.6% in 2007, primarily due to reduced customer overdraft activity.
Other fees and commissions primarily include income generated from the Company’s debit card, ATM, safe deposit box, merchant credit card, and wire transfer services. Insurance commission revenue is also included in this category. Other fees and commissions were $ 857,000 in 2008, $786,000 in 2007, and $744,000 in 2006. The increase in both 2008 and 2007 is primarily the result of growth in debit card revenue due to increased customer debit card activity.
Mortgage banking income represents fees from originating and selling residential mortgage loans. Mortgage banking income was $788,000 in 2008, $954,000 in 2007, and $709,000 in 2006. Changes in interest rates directly impact the volume of loansmortgage activity and, in turn, the amount of mortgage banking fee income earned. Securities are sold from time to time for balance sheet management purposes or because an investment no longer meets the Company’s policy requirements. Net losses on sales or calls of securities were $450,000 in 2008, resulting from $51,000 in gains and $501,000 in losses. Net gains on sales or calls of securities were $135,000 in 2007 and $62,000 in 2006.
During 2008, the Company sold all remaining shares it held in Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock, resulting in a loss of $501,000 which is referenced above. In December 2007, the Company recorded a $362,000 impairment charge relating to its holdings of FHLMC and FNMA preferred stock. The impairment charges are recorded as a reduction of noninterest income.
Other noninterest income was $496,000 in 2008, $650,000 in 2007, and $496,000 in 2006. The 2008 decline resulted primarily from a $138,000 reduction in revenue from the Company’s investments in Bankers Insurance, LLC and Virginia Title Center, LLC. The 2007 increase was largely the result of increased dividend revenue from the tax-equivalent interestCompany’s two insurance company investments. Additionally, a full year of revenue from the Company’s bank owned life insurance (“BOLI”) policies increased this income on loanscategory by $3,752,000, while$34,000 in 2007.
| Table 3 - Noninterest income | | (in thousands) | | | | | | | | | | | | | | | Years Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | | | | | | | | | | | | Trust fees | | $ | 3,467 | | | $ | 3,578 | | | $ | 3,374 | | | Service charges on deposit accounts | | | 2,324 | | | | 2,531 | | | | 2,654 | | | Other fees and commissions | | | 857 | | | | 786 | | | | 744 | | | Mortgage banking income | | | 788 | | | | 954 | | | | 709 | | | Brokerage fees | | | 431 | | | | 550 | | | | 419 | | | Securities gains (losses), net | | | (450 | ) | | | 135 | | | | 62 | | | Impairment of securities | | | - | | | | (362 | ) | | | - | | | Investment in insurance companies | | | 142 | | | | 280 | | | | 220 | | | Bank owned life insurance | | | 136 | | | | 134 | | | | 100 | | | Check order charges | | | 129 | | | | 127 | | | | 113 | | | Other | | | 89 | | | | 109 | | | | 63 | | | | | $ | 7,913 | | | $ | 8,822 | | | $ | 8,458 | |
Noninterest expense consists primarily of personnel, occupancy, equipment, and other expenses. Noninterest expense was $22,124,000 in 2008, up 3.7% over 2007, due primarily to increased health insurance costs and provision for unfunded lending commitments. Noninterest expense was $21,326,000 in 2007, up 5.2% over 2006, due primarily to increased staff levels and a full year of expenses associated with the decline in rates on new and existing
loans reduced the same number by $1,752,000. The net effectApril 2006 Community First acquisition.
Personnel expenses comprise over half of the volumeCompany’s noninterest expense. Combined salary and benefits expense increased 2.9% in 2008 when compared to 2007. Employee insurance costs represent 73% of the 2008 increase. Personnel expenses increased 3.4% in 2007 when compared to 2006. Combined higher staff levels and a full year of the expenses associated with the Community First acquisition were partially offset by a reduction in profit sharing and incentive compensation expense. Profit sharing and incentive expense was $0 in 2008, $287,000 in 2007, and $867,000 in 2006.
Occupancy and equipment expense increased form $3,527,000 in 2007 to $3,701,000 in 2008, an increase of 4.9%. The increase was primarily due to increases in software maintenance and depreciation. Occupancy and equipment expense increased from $2,977,000 in 2006 to $3,527,000 in 2007, an increase of 18.5%. The increase was due in large part to a full year of expenses associated with the general rate declineCommunity First acquisition, increased building maintenance costs, the expenses of two new branch offices, and costs related to new technology for check processing and network security.
Bank franchise tax equivalent interest incomeexpense was $694,000 in 2008, compared with $663,000 in 2007 and $651,000 in 2006. This expense is based in large part on loans by $2,000,000. Had rates been more stablethe level of shareholders’ equity.
Core deposit intangible expense was $377,000 in 2001, interest income on
loans would have been greater. Interest income2008 and 2007, and $414,000 in 2006. The 2008 and 2007 expense consists entirely of amortization of the core deposit intangible asset from the Community First acquisition; beginning April 2006, this asset is being amortized on a tax-equivalentstraight-line basis declined $822,000 on investment securities dueover ninety-nine months. Core deposit intangible expense in 2006 also includes amortization of the core deposit intangible asset arising from a 1996 branch purchase.
Other noninterest expense consists of a variety of expenses including those related to declinesprofessional services, advertising and marketing, FDIC assessment, telephone systems, ATM and Internet banking services, trust services, supplies, Federal Reserve services, and provision for unfunded lending commitments. Other noninterest expense totaled $4,559,000 in both volume2008, $4,322,000 in 2007, and yields on investment securities. The Corporation did recognize a pre-tax gain of
$367,000$4,196,000 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 interest2006. Other noninterest expense increased by a net amount5.5% in 2008, and was largely the result 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 fundingthe provision for unfunded lending commitments of $297,000 over the amount in 2007. Other noninterest expense increased 3.0% in 2007, and was largely the result of higher trust service costs dueand a full year of expenses associated with the acquisition of Community First.
| Table 4 - Noninterest expense | | | (in thousands) | | | | | | | | | | | | | | | | Years Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | | | | | | | | | | | | Salaries | | $ | 9,792 | | | $ | 9,688 | | | $ | 9,520 | | | Employee benefits | | | 3,001 | | | | 2,749 | | | | 2,506 | | | Occupancy and equipment | | | 3,701 | | | | 3,527 | | | | 2,977 | | | Bank franchise tax | | | 694 | | | | 663 | | | | 651 | | | Core deposit intangible amortization | | | 377 | | | | 377 | | | | 414 | | | Telephone | | | 433 | | | | 395 | | | | 361 | | | Provision for unfunded lending commitments | | | 324 | | | | 27 | | | | 123 | | | Stationery and printing supplies | | | 306 | | | | 335 | | | | 395 | | | Trust services contracted | | | 278 | | | | 237 | | | | 187 | | | Postage | | | 245 | | | | 273 | | | | 240 | | | ATM and VISA network fees | | | 243 | | | | 329 | | | | 303 | | | Director fees | | | 225 | | | | 205 | | | | 194 | | | Advertising and marketing | | | 203 | | | | 300 | | | | 267 | | | Legal | | | 194 | | | | 119 | | | | 148 | | | Internet banking fees | | | 193 | | | | 194 | | | | 173 | | | FDIC assessment | | | 180 | | | | 87 | | | | 84 | | | Regulatory assessments | | | 179 | | | | 187 | | | | 170 | | | Automobile | | | 174 | | | | 147 | | | | 103 | | | Auditing | | | 173 | | | | 168 | | | | 142 | | | Loan expenses | | | 140 | | | | 108 | | | | 67 | | | Contributions | | | 118 | | | | 120 | | | | 138 | | | Dues and subscriptions | | | 113 | | | | 106 | | | | 108 | | | Courier service | | | 107 | | | | 106 | | | | 97 | | | Correspondent bank fees | | | 86 | | | | 161 | | | | 161 | | | Other | | | 645 | | | | 718 | | | | 735 | | | | | $ | 22,124 | | | $ | 21,326 | | | $ | 20,264 | |
Income Taxes
Income taxes on 2008 earnings amounted to volume$3,181,000, resulting in an effective tax rate of $1,633,000. Time deposits did not decline28.4%, compared to 29.9% in 2001 due2007 and 30.9% in 2006. The Company was subject to a peakstatutory, blended, Federal tax rate of 34.1% in time deposit
rates2008, 34.4% in 2007, and 34.4% in 2006. The major difference between the statutory rate and the effective rate results from mid-year 2000 to early 2001 coupled with the delayed re-pricing
periodincome that is not taxable for Federal income tax purposes. The primary non-taxable income is that of these deposits. Due to the short-term naturestate and municipal securities and industrial revenue bonds or loans.
Impact of theInflation and Changing Prices
The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The most significant effect of inflation is on noninterest expenses that tend to rise during periods of inflation. Changes in interest rates have a greater impact on a financial institution’s profitability than do the time deposits,effects of higher costs for goods and services. Through its balance sheet management practices, the Corporation anticipates re-pricing a majority ofCompany has the ability to react to those changes and measure and monitor 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
-------------------------------- -------------------------------
Interest Change Interest Change
Increase Attributable to Increase Attributable to
------------------- ------------------
(Decrease) Rate Volume (Decrease) Rate Volume
---------- -------- -------- ---------- -------- --------
Interest income
Loans:
Commercial $ 1,915 $(1,323) $ 3,238 $ 2,232 $ 735 $ 1,497
Mortgage 521 (672) 1,193 2,328 467 1,861
Consumer (436) 243 (679) (193) 102 (295)
-------- -------- -------- -------- -------- --------
Total loans 2,000 (1,752) 3,752 4,367 1,304 3,063
-------- -------- -------- -------- -------- --------
Investment securities:
U.S. Government (168) (84) (84) (633) 33 (666)
Federal agencies (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
Other investments 495 19 476 220 11 209
-------- -------- -------- -------- -------- --------
Total investment securities (822) (201) (621) 678 196 482
-------- -------- -------- -------- -------- --------
Deposits in other banks 206 (119) 325 (94) 46 (140)
-------- -------- -------- -------- -------- --------
Total interest income 1,384 (2,072) 3,456 4,951 1,546 3,405
-------- -------- -------- -------- -------- --------
Interest expense
Deposits:
Demand (540) (545) 5 (52) (91) 39
Money market 453 (75) 528 330 153 177
Savings (494) (470) (24) (97) (5) (92)
Time 1,522 82 1,440 1,811 797 1,014
-------- -------- -------- -------- -------- --------
Total deposits 941 (1,008) 1,949 1,992 854 1,138
Repurchase agreements (274) (376) 102 486 172 314
Other borrowings (508) (90) (418) 129 112 17
-------- -------- -------- -------- -------- --------
Total interest expense 159 (1,474) 1,633 2,607 1,138 1,469
-------- -------- -------- -------- -------- --------
Net interest income $ 1,225 $ (598) $ 1,823 $ 2,344 $ 408 $ 1,936
======== ======== ======== ======== ======== ========
MARKET RISK MANAGEMENT
As the holding company for a commercial bank, the Corporation's primary
component ofinterest rate and liquidity risk.
Effectively managing market risk is essential to achieving the Company’s financial objectives. Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. The Company is generally not subject to currency exchange risk or commodity price risk. The Company’s primary market risk exposure is interest rate volatility. The Corporation's primary
objectives for managing interestrisk; however, market risk also includes liquidity risk. Both are discussed below.
Interest Rate Risk Management Interest rate volatility are to identify opportunities
to maximizerisk and its impact on net interest income while ensuring adequate liquidity and carefully
managingis a primary market risk exposure. The Company manages its exposure to fluctuations in interest rate risk. Therates through policies approved by its Asset/Liability Investment Committee ("ALCO"(“ALCO”), and Board of Directors, both of which is primarily composedreceive and review periodic reports of executive officers, is responsible for:
o Monitoring corporate financial performance;
o Meeting liquidity requirements;
o Establishingthe Company’s interest rate parameters, indices, and terms for loan and
deposit products;
o Assessing and evaluatingrisk position. The Company uses simulation analysis to measure the competitive rate environment;
o Reviewing and approving investment portfolio transactions under established
policy guidelines;
o Monitoring and measuring interest rate risk.
Interest rate risk refers to the exposuresensitivity of the Corporation'sprojected 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,Simulation takes into account current balance sheet volumes and the general level of interest ratesscheduled repricing dates 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 pricingmaturities 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 orIt incorporates numerous assumptions including growth, changes 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 amountmix of assets and liabilities, that are estimatedprepayments, and average rates earned and paid. Based on this information, management uses the model to reprice through specified periods if there are
not changes inproject net interest income under multiple interest rate scenarios.
A balance sheet mix. is considered asset sensitive when its earning assets (loans and securities) reprice faster or to a greater extent than its liabilities (deposits and borrowings). An asset sensitive balance sheet will produce more net interest income when interest rates rise and less net interest income when they decline. Based on the Company’s simulation analysis, management believes the Company’s interest sensitivity position at December 31, 2008 is asset sensitive.
The interest rate sensitivity analysisposition at December 31, 2008 is illustrated in Table 3 reflects the Corporation'sfollowing table. The carrying amounts of assets and liabilities on December 31, 2001
that will either be repricedare presented in accordance with market rates, mature or are
estimated to mature early or prepay within the periods indicated (in thousands):
Table 3 - Interest Rate Sensitivity Analysis
3 Months > 3 Months > 1 Year > 3 Year
or Less to 1 Year to 3 Years to 5 Years > 5 Years Total
-------- ---------- ---------- ---------- --------- --------
Interest sensitive assets:
Interest bearing deposits
with other banks $ 14,351 $ - $ - $ - $ - $ 14,351
Investment securities 21,796 15,746 47,170 45,995 24,100 154,807
Loans 102,874 146,039 114,255 10,128 2,297 375,593
---------- --------- -------- -------- -------- --------
Total interest
sensitive assets 139,021 161,785 161,425 56,123 26,397 544,751
---------- --------- -------- -------- -------- --------
Interest sensitive liabilities:
NOW and savings deposits 127,055 - - - - 127,055
Money market deposits 47,025 - - - - 47,025
Time deposits 52,122 119,188 44,012 16,037 - 231,359
Repurchase agreements and
other borrowings 27,177 - 3,000 - 10,000 40,177
---------- --------- -------- -------- -------- --------
Total interest
sensitive liabilities 253,379 119,188 47,012 16,037 10,000 445,616
---------- --------- -------- -------- -------- --------
Interest sensitivity gap $(114,358) $ 42,597 $114,413 $ 40,086 $ 16,397 $ 99,135
========== ========= ======== ======== ======== ========
Cumulative interest sensitivity gap $(114,358) $(71,761) $ 42,652 $ 82,738 $ 99,135
========== ========= ======== ======== ========
Percentage cumulative gap
to total interest sensitive assets (21.0)% (13.2)% 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, $70,340 have adjustable rates
and $56,340 have fixed rates. Investment security prepayments were estimated using recent market information.
Because of inherent limitations in interest rate sensitivity analysis, ALCO
uses more sophisticated interest rate risk measurement techniques. Simulation
analysis is usedthey are expected to subject the current repricing conditions to rising and
falling interest rates in increments and decrements of 1%, 2% and 3% to
determine how net interest income changes for the next twelve months. ALCO also
measures the effects of changes in interest rates on the Market Value of Equity
(MVE) by discounting future cash flows of deposits and loans using new rates at
which deposits and loans would be made to similar depositors and borrowers.
Market value changes on the investment portfolio are estimated by discounting
future cash flows and using duration analysis. Loan and investment security
prepayments are estimated using current market information. reprice or mature.| Table 5 - Interest Rate Sensitivity Gap Analysis | | December 31, 2008 | | | (dollars in thousands) | | | | | | | | Within | | | > 1 Year | | | > 3 Year | | | | | | | | | | | 1 Year | | | to 3 Years | | | to 5 Years | | | > 5 Years | | | Total | | | Interest sensitive assets: | | | | | | | | | | | | | | | | | Interest bearing deposits | | | | | | | | | | | | | | | | | with other banks | | $ | 1,112 | | | $ | - | | | $ | 8,000 | | | $ | - | | | $ | 9,112 | | | Securities | | | 15,116 | | | | 41,839 | | | | 16,802 | | | | 67,059 | | | | 140,816 | | | Loans (1) | | | 347,594 | | | | 99,879 | | | | 73,248 | | | | 52,153 | | | | 572,874 | | | Total interest | | | | | | | | | | | | | | | | | | | | | | sensitive assets | | | 363,822 | | | | 141,718 | | | | 98,050 | | | | 119,212 | | | | 722,802 | | | | | | | | | | | | | | | | | | | | | | | | | Interest sensitive liabilities: | | | | | | | | | | | | | | | | | | | | | | Checking and savings deposits | | | 175,756 | | | | - | | | | - | | | | - | | | | 175,756 | | | Money market deposits | | | 56,615 | | | | - | | | | - | | | | - | | | | 56,615 | | | Time deposits | | | 181,352 | | | | 49,873 | | | | 29,839 | | | | - | | | | 261,064 | | | Customer repurchase agreements | | | 51,741 | | | | - | | | | - | | | | - | | | | 51,741 | | | Federal Home Loan Bank advances | | | 7,850 | | | | 5,000 | | | | 8,000 | | | | 787 | | | | 21,637 | | | Trust preferred capital notes | | | - | | | | - | | | | 20,619 | | | | - | | | | 20,619 | | | Total interest | | | | | | | | | | | | | | | | | | | | | | sensitive liabilities | | | 473,314 | | | | 54,873 | | | | 58,458 | | | | 787 | | | | 587,432 | | | | | | | | | | | | | | | | | | | | | | | | | Interest sensitivity gap | | $ | (109,492 | ) | | $ | 86,845 | | | $ | 39,592 | | | $ | 118,425 | | | $ | 135,370 | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative interest sensitivity gap | | $ | (109,492 | ) | | $ | (22,647 | ) | | $ | 16,945 | | | $ | 135,370 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage cumulative gap | | | | | | | | | | | | | | | | | | | | | | to total interest sensitive assets | | | (15.1 | ) % | | | (3.1 | ) % | | | 2.3 | % | | | 18.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1) Loans include loans held for sale and are net of unearned income. | | | | | | |
Table 46 shows the estimated impact of changes in interest rates up and down 1%, 2% and 3% on net interest income and on MVE as of December 31, 2001 (in thousands).
The negative one year cumulative2008, assuming gradual and parallel changes in interest sensitivity gaprates, and consistent levels of $77,182,000 inassets and liabilities. Net interest income for the following twelve months is projected to increase when interest rates are higher than current rates. Due to the current low interest rate sensitivity analysis normally implies that the Corporation's
netenvironment, no measurement was considered necessary for a further decline in 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 periodrates.
| Table 6 - Estimated Changes in Net Interest Income | | | (dollars in thousands) | | | | | | | | | | | | | December 31, 2008 | | | Change in | | Changes in | | | Interest | | Net interest Income (1) | | | Rates | | Amount | | | Percent | | | | | | | | | | | Up 3.0% | | $ | 2,460 | | | | 9.3 | % | | Up 2.0% | | | 2,210 | | | | 8.3 | | | Up 1.0% | | | 1,443 | | | | 5.4 | | | Up 0.5% | | | 836 | | | | 3.2 | | | No change | | | - | | | | - | | | | | | | | | | | | | (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. |
Table of time as changes in the prime rate or other indices that reprice loans.
11
Table 4 - Change in Net Interest Income and Market Value of Portfolio Equity
Changes in Changes in Market Value
Change in Net Interest Income (1) of Portfolio Equity (2)
Interest ----------------------- ------------------------
Rates Amount Percent Amount Percent
- --------- -------- -------- --------- ----------
Up 3% $ 2,398 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.
While the CorporationContents Management cannot predict future interest rates or their effects
on MVE or net interest income, the analysis indicates that a change in interest
rates of plus or minus 3% is unlikely to have a material adverseexact effect on net interest income and MVE in future periods.income. Computations of prospectivefuture 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
assetsAssets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Also, the methodology used estimates variousInterest rate shifts may not be parallel. Changes in interest rates of withdrawal for
money market deposits, savings, and checking accounts, which may vary
significantly from actual experience.
The Corporation is also subject to prepayment risk, particularly in falling
interest rate environments or in environments where the slope of the yield curve
is relatively flat or negative. Such changes in the interest rate environment can cause substantial changes in the levelamount of prepayments of loans and mortgage-backed securities, which may alsoin turn affect the Corporation'sCompany’s interest rate sensitivity gap position. Additionally, credit risk may increaserise 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
Liquidity Risk Management
Liquidity is the largest contributorability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Corporation's non-interest income. Fees fromCompany’s ability to meet the daily cash flow requirements of its customers, whether they are borrowers requiring funds to meet their credit needs or depositors desiring to withdraw funds. Additionally, the parent company requires cash for various operating needs including dividends to shareholders, stock repurchases, the servicing of debt, and the payment of general corporate expenses. The Company manages its exposure to fluctuations in interest rates through policies approved by the ALCO and Board of Directors, both of which receive periodic reports of the Company’s interest rate risk position. The Company uses a simulation and budget model to assist in the management of trusts, estatesthe future liquidity needs of the Company.
Liquidity sources include cash and investments totaled $2,569,000amounts due from banks, deposits in 2001,other banks, loan repayments, increases in deposits, lines of credit from the Federal Home Loan Bank of Atlanta (“FHLB”), federal funds lines of credit from two correspondent banks, and maturities and sales of securities. Management believes that these sources provide sufficient and timely liquidity.
The Company has a decreaseline of $89,000, or 3.3%, from
2000. Trustcredit with the FHLB, equal to 30% of the Company’s assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans and investment services feeshome equity lines of credit. In addition, the Company pledges as collateral its capital stock in 2000 increased 5.0% from 1999. and deposits with the FHLB. Borrowings under the line were $21,637,000 at December 31, 2008 and $16,137,000 at December 31, 2007.
The decrease in 2001 resulted primarily from declinesCompany had fixed-rate term borrowing contracts with the FHLB as of December 31, 2008, with the following final maturities: | Amount | | Expiration Date | | | $5,000,000 | | 2009 | | | 8,000,000 | | 2011 | | | 787,000 | | 2014 | | | | | |
The Company has federal funds lines of credit established with two other banks in the equity markets, which
reduced portfolio value-based management fees. The 2000 increase came from a
combinationamounts of growth in investments under management for customers due to a
healthy equities market$15,000,000 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$5,000,000, and additional accounts obtained contributedhas access 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 lossFederal Reserve Bank’s discount window. There were no amounts outstanding under these facilities at December 31, 2008 or 2007.
BALANCE SHEET ANALYSIS
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 SECURITIES
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
fixedgenerates 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 asprovides a source of liquidity, and is used to meet collateral requirements. The investmentsecurities portfolio consists primarily of two components, investment securities
held to maturityhigh quality investments. Federal agency, mortgage-backed, 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, 2001 total investment securities at carrying value were
$156,791,000, a decline of 3.8% from year-end 2000. Securities of U.S.
government agencies represented 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 other
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.
As of December 31, 2001, there was a net unrealized gain of $1,984,000
related to the available for sale investment portfolio compared to $489,000 at
year-end 2000. The market value of securities held to maturity at December 31,
2001 was more than the book value by $680,000.
The state and municipal securities were diversified among many different
issuescomprise the majority of the portfolio.During 2008, the Company sold all remaining shares it held in FNMA and localities. FHLMC preferred stock.
The following table presents information on the amortized cost, maturities, and taxable equivalent yields of securities at the end of the last three years.
| Table 7 - Securities Portfolio | | | (in thousands, except yields) | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | | 2008 | | 2007 | | | 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable | | | | | | Taxable | | | | | | Taxable | | | | | Amortized | | | Equivalent | | | Amortized | | | Equivalent | | | Amortized | | | Equivalent | | | | | Cost | | | Yield | | | Cost | | | Yield | | | Cost | | | Yield | | | Federal Agencies: | | | | | | | | | | | | | | | | | | | | Within 1 year | | $ | 8,240 | | | | 4.58 | % | | $ | 4,000 | | | | 3.46 | % | | $ | 36,969 | | | | 3.92 | % | | 1 to 5 years | | | 29,719 | | | | 4.95 | | | | 45,170 | | | | 4.79 | | | | 45,432 | | | | 4.62 | | | 5 to 10 years | | | 5,372 | | | | 5.15 | | | | 6,180 | | | | 5.46 | | | | 6,706 | | | | 4.67 | | | Over 10 years | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | Total | | | 43,331 | | | | 4.91 | | | | 55,350 | | | | 4.77 | | | | 89,107 | | | | 4.34 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed: | | | | | | | | | | | | | | | | | | | | | | | | | | Within 1 year | | | 746 | | | | 3.91 | | | | 108 | | | | 3.43 | | | | - | | | | - | | | 1 to 5 years | | | 3,435 | | | | 4.95 | | | | 3,461 | | | | 4.33 | | | | 4,460 | | | | 4.51 | | | 5 to 10 years | | | 12,730 | | | | 4.81 | | | | 14,411 | | | | 4.85 | | | | 8,345 | | | | 4.83 | | | Over 10 years | | | 28,482 | | | | 5.08 | | | | 27,674 | | | | 5.34 | | | | 6,805 | | | | 5.06 | | | Total | | | 45,393 | | | | 4.97 | | | | 45,654 | | | | 5.10 | | | | 19,610 | | | | 4.84 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | State and Municipal: | | | | | | | | | | | | | | | | | | | | | | | | | | Within 1 year | | | 4,549 | | | | 5.04 | | | | 4,025 | | | | 5.60 | | | | 1,330 | | | | 6.69 | | | 1 to 5 years | | | 23,127 | | | | 4.99 | | | | 24,443 | | | | 4.97 | | | | 23,036 | | | | 5.15 | | | 5 to 10 years | | | 9,302 | | | | 5.99 | | | | 11,679 | | | | 5.63 | | | | 16,550 | | | | 5.16 | | | Over 10 years | | | 6,615 | | | | 6.19 | | | | 7,878 | | | | 5.73 | | | | 5,179 | | | | 6.03 | | | Total | | | 43,593 | | | | 5.39 | | | | 48,025 | | | | 5.31 | | | | 46,095 | | | | 5.30 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | Within 1 year | | | 1,485 | | | | 3.32 | | | | - | | | | - | | | | 1,005 | | | | 6.06 | | | 1 to 5 years | | | - | | | | - | | | | 1,485 | | | | 3.32 | | | | 1,485 | | | | 3.32 | | | 5 to 10 years | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | Over 10 years | | | 3,899 | | | | 2.35 | | | | 4,994 | | | | 6.56 | | | | 6,401 | | | | 6.21 | | | Total | | | 5,384 | | | | 2.62 | | | | 6,479 | | | | 5.82 | | | | 8,891 | | | | 5.71 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total portfolio | | $ | 137,701 | | | | 4.99 | % | | $ | 155,508 | | | | 5.08 | % | | $ | 163,703 | | | | 4.74 | % |
Table 5 details the 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
of Contents
Loans
The Corporation's lending activities are its principal sourceloan portfolio consists primarily of income. Loans, net of unearned income increased $35,837,000 or 10.5% during 2001commercial and increased $46,015,000 or 15.7% from 1999 to 2000. The decline in 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 2001 wereresidential real estate loans, secured by nonfarm, nonresidential propertiescommercial loans to small and commercialmedium-sized businesses, construction and industrialland development loans, and home equity loans. Management considersAverage loans increased $17,623,000, or 3.2%, from 2007 to 2008. Average loans increased $36,283,000, or 7.1%, from 2006 to 2007. The 2007 increase was due largely to the loan portfolio diversified and it consistsacquisition of 62.1%Community First, which occurred in April 2006.
Period-end loans increased $19,719,000, or 3.6%, from December 31, 2007 to December 31, 2008. The increase was primarily due to growth in commercial real estate securedand home equity loans.
Loans held for sale are loans 28.3% commercialoriginated and agriculturalin process of being sold to the secondary market. These loans are sold servicing released and 9.6% consumer loans as oftotaled $1,764,000 at December 31, 2001, as detailed2008, and $1,368,000 at December 31, 2007.
The following table provides loan balances, percentage of portfolio (excluding loans held for sale), and the percentage change since December 31, 2007 of loans outstanding by geographic region. The loans are allocated to the region in Table 6.
which they were originated. In some circumstances, loans may be originated in one region for borrowers located in other regions. | Table 8 - Loans by Geographic Region | | | | | | | | | | | | | | | December 31, 2008 | | | | | | (dollars in thousands) | | Balance | | | Percentage of Portfolio | | | Percentage Change in Balance Since December 31, 2007 | | | | | | | | | | | | | | Danville region | | $ | 218,292 | | | | 38.2 | % | | | 5.9 | % | | Central region | | | 161,933 | | | | 28.4 | | | | 7.2 | | | | | | | | | | | | | | | | | Southside region: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Martinsville and Henry County | | | 111,788 | | | | 19.6 | | | | 3.4 | | | Halifax and Pittsylvania County | | | 61,415 | | | | 10.7 | | | | (2.8 | ) | | Greensboro area | | | 17,682 | | | | 3.1 | | | | (23.3 | ) | | | | | | | | | | | | | | | | Total loans | | $ | 571,110 | | | | 100.0 | % | | | | | | | | | | | | | | | | | | |
The CorporationCompany does not participate in highly leveraged lending transactions, as defined by the bank regulatorsregulations, and there are no loans of this nature recorded in the loan portfolio. The CorporationCompany 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
LoansWhile there were no concentrations of 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 individual, group of individuals, business, or industry that exceeded 10% of total loans at December 31, 2008 or 2007, loans to lessors of nonresidential buildings represented 13.7% of total loans at December 31, 2008 and 11.0% at December 31, 2007; the lessees and lessors are engaged in a variety of industries.
Table 9 illustrates loans by type.
| Table 9 - Loans | | | | | | | | | | | | | | | | | | | | | | December 31, | | | (in thousands) | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | | | | | | | | | | | | | | | | | | Real estate: | | | | | | | | | | | | | | | | | Construction and land development | | $ | 63,361 | | | $ | 69,803 | | | $ | 69,404 | | | $ | 50,092 | | | $ | 34,101 | | | Commercial real estate | | | 207,160 | | | | 198,332 | | | | 186,639 | | | | 142,968 | | | | 147,653 | | | Residential real estate | | | 136,480 | | | | 133,899 | | | | 131,126 | | | | 94,405 | | | | 91,672 | | | Home equity | | | 57,170 | | | | 48,313 | | | | 52,531 | | | | 42,178 | | | | 42,620 | | | Total real estate | | | 464,171 | | | | 450,347 | | | | 439,700 | | | | 329,643 | | | | 316,046 | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 98,546 | | | | 91,028 | | | | 91,511 | | | | 76,735 | | | | 75,847 | | | Consumer | | | 8,393 | | | | 10,016 | | | | 11,017 | | | | 10,709 | | | | 15,376 | | | | | | | | | | | | | | | | | | | | | | | | | Total loans | | $ | 571,110 | | | $ | 551,391 | | | $ | 542,228 | | | $ | 417,087 | | | $ | 407,269 | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the maturity schedule of selected loan types (in thousands).
| Table 10 - Maturities of Selected Loan Types | | | December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial | | | | | | | | | | | and | | | Real Estate | | | | | (in thousands) | | Industrial (1) | | | Construction | | | Total | | | | | | | | | | | | | | 1 year or less | | $ | 63,928 | | | $ | 42,949 | | | $ | 106,877 | | | 1 to 5 years (2) | | | 29,994 | | | | 14,838 | | | | 44,832 | | | After 5 years (2) | | | 4,624 | | | | 5,574 | | | | 10,198 | | | Total | | $ | 98,546 | | | $ | 63,361 | | | $ | 161,907 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1) includes agricultural loans. | | | | | | | | | | | | | | (2) Of the loans due after one year, $48,578 have predetermined interest rates and $6,452 have floating or | | | adjustable interest rates. |
Allowance for Loan Losses, Asset Quality, and Credit Risk Management
The purpose 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 and 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 probable losses inherent in the loan portfolio. The Bank'sallowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.
The Company uses certain practices to manage its credit risk. These practices include (a) appropriate lending limits for loan officers, (b) a loan approval process, (c) careful underwriting of loan requests, including analysis of borrowers, collateral, and market risks, (d) regular monitoring of the portfolio, including diversification by type and geography, (e) review of loans by a Loan Review department which operates independently of loan production, (f) regular meetings of a Credit Committee has responsibilityto discuss portfolio and policy changes, and (g) regular meetings of an Asset Quality Committee which reviews the status of individual loans.
The Company’s lenders are responsible for determiningassigning risk ratings to loans using the parameters set forth in the Company’s Credit Policy. The risk ratings are reviewed for accuracy, on a sample basis, by the Company’s Loan Review department, which operates independently of loan production. These risk ratings are used in calculating the level of the allowance for loan losses, subject to the reviewlosses.
Calculations of the allowance for loan losses are prepared quarterly by the Loan Review department. The calculations are reviewed for adequacy each quarter by the Company’s Credit Committee, Audit and Compliance Committee, and Board of Directors. Among otherIn determining the adequacy of the allowance for loan losses, factors which are considered include the Committee on a quarterly basis considers the
Corporation'sCompany’s historical loss experience,experience; the size and composition of the loan portfolio,portfolio; loan risk ratings; nonperforming loans; impaired loans; other problem credits; the value and adequacy of collateral and guarantors, non-performing
credits including impaired loans and the Corporation's loan "Watch" list,guarantors; and national and local economic conditions.
The economyCompany’s allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change. The formula allowance uses a historical loss view as an indicator of future losses along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries; trends in volume and terms of loans; effects of changes in underwriting standards; experience of lending staff and economic conditions; and portfolio concentrations. In the formula allowance, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The adjusted loss factor is multiplied by the period-end balances for each risk-grade category. The formula allowance is calculated for a range of outcomes. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. The unallocated allowance includes estimated losses whose impact on the portfolio has yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective and actual losses could be greater or less than the estimates.
No single statistic, formula, or measurement determines the adequacy of the Corporation's trade area,allowance. Management makes difficult, subjective, and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans (the allocated allowance). The entire allowance is used to absorb credit losses inherent in the loan portfolio, including identified and unidentified losses.
The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period. Furthermore, management cannot provide assurance that, in any particular period, the Company will not have sizeable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factors at the time, including economic conditions, industry trends, and ongoing internal and external examination processes. The allowance is subject to regulatory examinations and determinations as to adequacy, which includesmay take into account such factors as the City of
Danville, City of Martinsville, Town of South Boston, Pittsylvania, Henry and
Halifax Counties in Virginia, Town of Yanceyvillemethodology used to calculate the allowance and the northern halfsize of Caswell Countythe allowance in North Carolina, is heavily dependent on manufacturing. While
diversificationcomparison to peer banks.
The Southern Virginia market, in which the Company has occurred in manufacturing in recent years, an apparel/home
fashions textile firm and a tire manufacturing plant in Danville employ a significant workforce.presence, is under economic pressure. The region’s economic base has historically been weighted toward the manufacturing sector. Increased global competition has negatively impacted the textile industry in the area withand several manufacturers have closed plants closing due to competitive pressures or due tothe 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. Companies within these industries, especially furniture manufacturing, have also closed plants for reasons similar to those noted above. Additional declines in manufacturing production and unemployment could negatively impact the ability of certain borrowers to repay loans. Also, the current economic and credit crisis, which is resulting in rising unemployment and increasing bankruptcies, foreclosures and bank failures nationally, may further intensify the economic pressure in our markets.
The local economyallowance for loan losses was $7,824,000 at December 31, 2008, compared with $7,395,000 and $7,264,000 at December 31, 2007 and 2006, respectively. The allowance for loan losses as a percentage of loans at each of these dates was 1.37%, 1.34%, and 1.34%, respectively. The provision for loan losses was $1,620,000 in 2008, $403,000 in 2007, and $58,000 in 2006.
Loans charged-off net of recoveries totaled $1,191,000 in 2008, $272,000 in 2007, and $501,000 in 2006. One residential construction and development loan, secured by undeveloped and partially-developed land in the Triad area of North Carolina, accounted for $575,000 of the Corporation's trade area
continues to remain stable at this timenet charge-offs in 2008. Table 14 presents the Company’s loan loss and recovery experience for 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, thepast five years.
The allowance for loan losses is an estimate. The sumallocated to loan types based upon historical loss factors; risk grades on individual loans; portfolio analyses 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. Thesesmaller balance, homogenous loans; and qualitative factors. Qualitative 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 and $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 considers these charge-off ratios lower than those of
their peer banks, who generally consider charge-off levels of .10% to .40% to be
within reasonable norms from a historical perspective. Table 10 presents the
Corporation's loan loss and recovery experience (in thousands) for the past five
years.
The allowance for loan losses totaled $5,334,000 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 estatedelinquencies, nonaccrual loans, and the overall conditionloss rates; trends in volume and terms of the Corporation's trade areas. Management
believes that the allowance for loan losses is adequate to absorb any inherent
losses on existing loans, effects of changes in the Corporation's loan portfolio at December 31,
2001.
17
Table 8 - Allocation of Allowance for Loan Losses
Management has allocated the allowance for loan losses to loan categories as follows (in thousands):
2001 2000 1999 1998 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
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
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 - Summary 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 - - -
Consumer 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 average net loans outstanding
during the period .12% .13% .13% .15% .36%
====== ====== ====== ====== ======
ASSET QUALITY AND NON-PERFORMING LOANS
The Corporation identifies specific credit exposures through its
periodic analysisrisk selection, underwriting standards, and lending policies; experience of the loan portfoliolending officers and monitors general exposures fromother lending staff; national and local economic trends market values and other external factors. The Corporation
maintains an allowance for loan losses, which is available to absorb losses
inherent inconditions; and concentrations of credit. Table 12 summarizes the loan portfolio. The allowance is increased by the provision for
losses and by recoveries from losses. Charge-offs decrease the allowance. The
adequacyallocation of the allowance for loan losses for the past five years. A loan is determinedconsidered impaired when, based on a quarterly basis.
Various factors as defined incurrent information and events, it is probable that the previous section "Allowance and Provision for
Loan Losses" are considered in determiningCompany will be unable to collect the adequacy of the allowance.
Loans, other than consumer, are generally placed on non-accrual status
when any portionscheduled payments of principal or interest is 90 days pastwhen due or collectability
is uncertain. Unless loans are inaccording to the process of collection, income recognized
on consumer loans is discontinued and the loans are charged off after a
delinquency of 90 days. Under the Corporation's policy a non-accruing loan may
be restored to accrual status when none of its principal and interest is due and
unpaid and the Corporation expects repaymentcontractual terms of the remaining contractual
principal and interest or when it otherwise becomes well secured and in the
processloan agreement. The following table shows loans that were considered impaired as of collection.
Non-performing year end.
| Table 11 - Impaired Loans | | | | | | | | | | | | | | | | | | | | | | December 31, | | | (in thousands) | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | | | | | | | | | | | | | | | | | | Not on nonaccrual status | | $ | 1,921 | | | $ | 2,255 | | | $ | 262 | | | $ | 537 | | | $ | 1,007 | | | On nonaccrual status | | | 1,271 | | | | 1,310 | | | | 1,114 | | | | 2,995 | | | | 5,303 | | | | | | | | | | | | | | | | | | | | | | | | | Total impaired loans | | $ | 3,192 | | | $ | 3,565 | | | $ | 1,376 | | | $ | 3,532 | | | $ | 6,310 | |
| Table 12 - Allocation of Allowance for Loan Losses | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | | | $ | | % (1) | | $ | | % (1) | | $ | | % (1) | | $ | | % (1) | | $ | | % (1) | | | Commercial | | | | | | | | | | | | | | | | | | | | | | (including | | | | | | | | | | | | | | | | | | | | | | commercial | | | | | | | | | | | | | | | | | | | | | | real estate) | $ 5,163 | | 62 | % | $ 5,056 | | 62 | % | $ 4,467 | | 61 | % | $ 3,897 | | 64 | % | $ 5,927 | | 61 | % | | | | | | | | | | | | | | | | | | | | | | | | Residential | | | | | | | | | | | | | | | | | | | | | | real estate | 2,335 | | 37 | | 1,852 | | 36 | | 2,119 | | 37 | | 1,462 | | 33 | | 1,231 | | 35 | | | | | | | | | | | | | | | | | | | | | | | | | Consumer | 326 | | 1 | | 443 | | 2 | | 521 | | 2 | | 653 | | 3 | | 816 | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | Unallocated | - | | - | | 44 | | - | | 157 | | - | | 97 | | - | | 8 | | - | | | | | | | | | | | | | | | | | | | | | | | | | Total | $ 7,824 | | 100 | % | $ 7,395 | | 100 | % | $ 7,264 | | 100 | % | $ 6,109 | | 100 | % | $ 7,982 | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | (1) Represents the percentage of loans in each category to total loans. | |
| Table 13 - Asset Quality Ratios | | | | | | | | | | | | | | | | | | | | | As of or for the Years Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | | | | | | | | | | | | | | | | | | Allowance to loans* | | | 1.37 | % | | | 1.34 | % | | | 1.34 | % | | | 1.46 | % | | | 1.96 | % | | Net charge-offs to year-end allowance | | | 15.23 | | | | 3.68 | | | | 6.90 | | | | 38.27 | | | | 5.07 | | | Net charge-offs to average loans | | | 0.21 | | | | 0.05 | | | | 0.10 | | | | 0.56 | | | | 0.10 | | | Nonperforming assets to total assets* | | | 0.91 | | | | 0.42 | | | | 0.45 | | | | 0.72 | | | | 1.35 | | | Nonperforming loans to loans* | | | 0.50 | | | | 0.48 | | | | 0.63 | | | | 1.02 | | | | 1.99 | | | Provision to net charge-offs | | | 136.02 | | | | 148.16 | | | | 11.58 | | | | 19.89 | | | | 764.20 | | | Provision to average loans | | | 0.29 | | | | 0.07 | | | | 0.01 | | | | 0.11 | | | | 0.77 | | | Allowance to nonperforming loans* | | | 275.01 | | | | 280.22 | | | | 212.09 | | | | 142.97 | | | | 98.39 | | | | | | | | | | | | | | | | | | | | | | | | | * - at year end | | | | | | | | | | | | | | | | | | | | |
| Table 14 - Summary of Loan Loss Experience | | | (in thousands) | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | 7,395 | | | $ | 7,264 | | | $ | 6,109 | | | $ | 7,982 | | | $ | 5,292 | | | | | | | | | | | | | | | | | | | | | | | | | Allowance from acquisition | | | - | | | | - | | | | 1,598 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | Charge-offs: | | | | | | | | | | | | | | | | | | | | | | Construction and land development | | | 1,007 | | | | - | | | | 1 | | | | - | | | | - | | | Commercial real estate | | | 61 | | | | 54 | | | | 136 | | | | 2,249 | | | | - | | | Residential real estate | | | 196 | | | | 140 | | | | 163 | | | | 35 | | | | 85 | | | Home equity | | | 62 | | | | 19 | | | | - | | | | - | | | | 44 | | | Total real estate | | | 1,326 | | | | 213 | | | | 300 | | | | 2,284 | | | | 129 | | | Commercial and industrial | | | 63 | | | | 103 | | | | 354 | | | | 76 | | | | 169 | | | Consumer | | | 175 | | | | 199 | | | | 259 | | | | 217 | | | | 357 | | | Total charge-offs | | | 1,564 | | | | 515 | | | | 913 | | | | 2,577 | | | | 655 | | | | | | | | | | | | | | | | | | | | | | | | | Recoveries: | | | | | | | | | | | | | | | | | | | | | | Construction and land development | | | 71 | | | | - | | | | 1 | | | | - | | | | - | | | Commercial real estate | | | 101 | | | | 15 | | | | 98 | | | | 46 | | | | 49 | | | Residential real estate | | | 3 | | | | 3 | | | | 11 | | | | 3 | | | | - | | | Home equity | | | - | | | | 1 | | | | 1 | | | | - | | | | - | | | Total real estate | | | 175 | | | | 19 | | | | 111 | | | | 49 | | | | 49 | | | Commercial and industrial | | | 18 | | | | 50 | | | | 108 | | | | 11 | | | | 45 | | | Consumer | | | 180 | | | | 174 | | | | 193 | | | | 179 | | | | 156 | | | Total recoveries | | | 373 | | | | 243 | | | | 412 | | | | 239 | | | | 250 | | | | | | | | | | | | | | | | | | | | | | | | | Net charge-offs | | | 1,191 | | | | 272 | | | | 501 | | | | 2,338 | | | | 405 | | | Provision for loan losses | | | 1,620 | | | | 403 | | | | 58 | | | | 465 | | | | 3,095 | | | Balance at end of period | | $ | 7,824 | | | $ | 7,395 | | | $ | 7,264 | | | $ | 6,109 | | | $ | 7,982 | |
Nonperforming 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 any loans classified as troubled debt restructuringsrestructurings. Nonperforming assets include nonperforming loans and are detailed in Table 11. Loans in a non-accrual statusforeclosed real estate. Nonperforming loans represented 0.91% of total loans at December 31, 2001
were $568,000 compared with $146,0002008, up from 0.48% at December 31, 2000. Loans on accrual
status and past due 90 days or more at December 31, 2001 were $258,000 compared
with $239,000 at December 31, 2000.2007. There were no loans classified as troubled debt restructurings onat the end of any of the years presented in the table.
| Table 15 - Nonperforming Assets | | | (in thousands) | | | | | December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | Nonaccrual loans: | | | | | | | | | | | | | | | | | Real estate | | $ | 2,730 | | | $ | 2,488 | | | $ | 3,195 | | | $ | 4,098 | | | $ | 7,005 | | | Commercial | | | 73 | | | | 107 | | | | 151 | | | | 12 | | | | 853 | | | Agricultural | | | - | | | | - | | | | - | | | | - | | | | 12 | | | Consumer | | | 42 | | | | 44 | | | | 79 | | | | 107 | | | | 243 | | | Total nonaccrual loans | | | 2,845 | | | | 2,639 | | | | 3,425 | | | | 4,217 | | | | 8,113 | | | | | | | | | | | | | | | | | | | | | | | | | Restructured loans | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | Loans past due 90 days | | | | | | | | | | | | | | | | | | | | | | and accruing interest: | | | | | | | | | | | | | | | | | | | | | | Real estate | | | - | | | | - | | | | - | | | | 46 | | | | - | | | Commercial | | | - | | | | - | | | | - | | | | 10 | | | | - | | | Agricultural | | | - | | | | - | | | | - | | | | - | | | | - | | | Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | Total past due loans | | | - | | | | - | | | | - | | | | 56 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | Total nonperforming loans | | | 2,845 | | | | 2,639 | | | | 3,425 | | | | 4,273 | | | | 8,113 | | | | | | | | | | | | | | | | | | | | | | | | | Foreclosed real estate | | | 4,311 | | | | 632 | | | | 99 | | | | 188 | | | | 221 | | | | | | | | | | | | | | | | | | | | | | | | | Total nonperforming assets | | $ | 7,156 | | | $ | 3,271 | | | $ | 3,524 | | | $ | 4,461 | | | $ | 8,334 | | | | | | | | | | | | | | | | | | | | | | | |
Deposits
The Company’s deposits consist primarily of checking, money market, savings, and consumer time deposits. Average deposits decreased 8,511,000, or 1.4%, in 2008 after increasing $1,350,000, or 0.2%, in 2007. Period-end deposits increased $ $7,917,000, or 1.4%, from December 31, 2001 or2007 to December 31, 2000.2008. The gross amountincrease in period-end deposits is attributed primarily to a special interest bearing demand deposit rate arrangement with a municipality.
During 2008, demand deposits increased $7,853,000, or 3.9%, money market deposits increased $6,361,000, or 12.7%, while savings deposits declined $2,776,000, or 4.5% and certificates of interest income that would have been recordeddeposit declined $3,521,000, or 1.3%, as customers sought higher-yielding accounts.
| Table 16 - Deposits | | (in thousands, except rates) | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | | | Average | | | | | | Average | | | | | | Average | | | Average | | | | | Balance | | | Rate | | | Balance | | | Rate | | | Balance | | | Rate | | | | | | | | | | | | | | | | | | | | | | | Demand deposits - | | | | | | | | | | | | | | | | | | | | noninterest bearing | | $ | 98,157 | | | | - | % | | $ | 102,003 | | | | - | % | | $ | 102,117 | | | | - | % | | Demand deposits - | | | | | | | | | | | | | | | | | | | | | | | | | | interest bearing | | | 109,492 | | | | 0.73 | | | | 107,834 | | | | 1.44 | | | | 105,320 | | | | 1.44 | | | Money market | | | 53,659 | | | | 1.88 | | | | 52,843 | | | | 2.70 | | | | 48,124 | | | | 2.45 | | | Savings | | | 61,620 | | | | 0.54 | | | | 66,246 | | | | 1.28 | | | | 77,445 | | | | 1.24 | | | Time | | | 258,773 | | | | 3.92 | | | | 261,286 | | | | 4.48 | | | | 255,856 | | | | 3.79 | | | | | $ | 581,701 | | | | 2.11 | % | | $ | 590,212 | | | | 2.63 | % | | $ | 588,862 | | | | 2.27 | % | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 17 - Certificates of Deposit of $100,000 or More | | | (in thousands) | | | | | | | | | Certificates of deposit at December 31, 2008 in amounts of $100,000 or more were classified by maturity as follows: | | | | | | | | 3 months or less | | $ | 19,666 | | | Over 3 through 6 months | | | 25,405 | | | Over 6 through 12 months | | | 19,086 | | | Over 12 months | | | 43,029 | | | | | $ | 107,186 | |
Borrowed Funds
In addition to internal deposit generation, the Company also relies 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 recorded as interest income during the
reporting period for all such non-performing loans.
Management has in place an aggressive program to control loan
delinquencies, and the level of past due loans and non-performing loans is
considered to be within an acceptable range. Total non-performing loansborrowed funds as a percentagesupplemental source of net loans were .22% at December 31, 2001 and .11% at December 31,
2000. Total non-performing loans are 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
Table 11 - Nonperforming Loans
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Nonaccruing loans:
Real Estate $414 $ 65 $107 $ 58 $281
Commercial 115 67 131 132 102
Agricultural 39 14 54 - 10
---- ---- ---- ---- ----
Total nonaccruing loans 568 146 292 190 393
---- ---- ---- ---- ----
Restructured loans:
Total restructured loans - - - - -
---- ---- ---- ---- ----
Total nonperforming loans $568 $146 $292 $190 $393
==== ==== ==== ==== ====
Loans on accrual status past
due 90 days or more:
Real Estate $ - $ - $ 3 $ - $ -
Consumer 217 176 232 239 165
Commercial 33 49 44 3 -
Agricultural 8 14 8 7 16
---- ---- ---- ---- ----
Total past due loans $258 $239 $287 $249 $181
==== ==== ==== ==== ====
Asset Quality Ratios:
Allowance for loan losses
to year-end net loans 1.42% 1.40% 1.41% 1.42% 1.29%
Nonperforming loans
to year-end net loans .15% .04% .10% .07% .15%
Allowance for loan losses
to nonperforming loans 9.39X 32.51X 14.16X 20.11X 8.34X
At 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.
LIQUIDITY
Liquidity is the measurefunding. Borrowed funds consist 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 fundsrepurchase agreements, overnight borrowings 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 $85,861,000and longer-term FHLB advances, and trust preferred capital notes. Customer repurchase agreements are borrowings collateralized by securities of the U.S. Government or its agencies and mature daily. The Company considers these accounts to be stable sources of funds, as they represent customer sweep accounts. The securities underlying these agreements remain under the Company’s control. The following table presents information pertaining to the Company’s short-term borrowed funds.
| Table 18 - Short-Term Borrowings | | | (dollars in thousands) | | | | | | | | | | | | | December 31, | | | | | 2008 | | | 2007 | | | | | | | | | | | Customer repurchase agreements | | $ | 51,741 | | | $ | 47,891 | | | FHLB overnight borrowings | | | 7,850 | | | | 7,200 | | | Total | | $ | 59,591 | | | $ | 55,091 | | | | | | | | | | | | | Weighted interest rate | | | 1.75 | % | | | 3.78 | % | | | | | | | | | | | | Average for the year ended: | | | | | | | | | | Outstanding | | $ | 62,082 | | | $ | 48,435 | | | Interest rate | | | 2.62 | % | | | 3.84 | % | | | | | | | | | | | | Maximum month-end outstanding | | $ | 81,598 | | | $ | 55,091 | |
Shareholders’ Equity
The Company’s goal with capital management is to generate attractive returns on equity and pay a high rate of dividends while maintaining capital sufficient to be classified as “well capitalized” under regulatory capital ratios and to support growth.
Shareholders’ equity was $102,300,000 at December 31, 2001. Borrowings outstanding under this line of credit were $13,000,0002008 and $16,000,000 respectively,$101,511,000 at December 31, 20012007. This increase was largely the result of net income but was partially offset by dividends, stock repurchases and the effect of changes in unfunded pension liability.
Shareholders’ equity was $101,511,000 at December 31, 2000. Federal
Home Loan Bank advances have decreased by $3,000,000 since2007 and $94,992,000 at December 31, 2000,
due to a pre-maturity call2006. This increase was largely the result of one fixed-term instrumentnet income and comprehensive income. These increases were partially offset by the Federal Home Loan
Bank.
DEPOSITS
dividends and stock repurchases.
The Corporation's major sourceCompany declared and paid quarterly dividends totaling $0.92, $0.91, and $0.87 per share 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 change. 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 to 2000, except growth in transaction accounts were higher as customers
placed more of their deposits into liquid money market, savings, and demand
deposit accounts. Certificates of deposit of $100,000 or more are detailed in
Table 13.
Table 12 - Deposits
2001 2000 1999
-------------------- -------------------- --------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- -------- -------
Demand deposits -
non-interest bearing $ 52,719 -% $ 49,126 -% $ 42,923 -%
Demand deposits - interest bearing 56,419 .88% 56,141 1.84% 54,143 2.01%
Money market 41,225 3.20% 24,861 3.48% 19,250 2.78%
Savings 62,792 1.87% 63,739 2.62% 67,247 2.63%
Time 229,050 5.51% 202,890 5.47% 183,707 5.05%
-------- ------- -------- ------- -------- -------
$442,205 3.70% $396,757 3.70% $367,270 3.45%
======== ======== ======== -------
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 capital adequacy depends on a number of factors such
as asset quality, liquidity, earnings performance, and changing competitive
conditions and economic forces. The adequacy of the Corporation's capital is
reviewed by management on an ongoing basis. Management seeks to maintain a
structure that will ensure an adequate level of capital to support anticipated
asset growth and absorb potential losses.
The Corporation's Board of Directors authorized the repurchase of up to
300,000 shares of the Corporation's common stock between August 16, 2000 and
August 15, 2001, 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 2008, 2007, and 2006, respectively. Cash dividends in 2008 totaled $5,606,000 and represented a 69.9% payout of 2008 net income, compared to 48.8% in 2007 and 45.6% in 2006.
One measure of a financial institution’s capital level is the open marketratio of shareholders’ equity to assets. Shareholders’ equity was 12.96% of assets at prices between $14.63December 31, 2008 and $19.00 per share. During 2000,13.14% at December 31, 2007. In addition to this measurement, banking regulators have defined minimum regulatory capital ratios that the Corporation repurchased 40,000 shares ofCompany and 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.
Regulatory agencies issued risk-based capital guidelinesbanking subsidiary are required to more
appropriately consider the creditmaintain. These ratios take into account risk inherent infactors identified by those regulatory authorities associated with the assets and off-balance sheet activities of a financial institution in the assessment of capital
adequacy. Federal regulatory risk-based capital ratioinstitutions. The guidelines require percentages, toor “risk weights,” be applied to variousthose assets including off-balance-sheetand off-balance sheet assets in relation to their perceived risk. Under the guidelines, total capital has
been defined as core (Tier I) capital and supplementary (Tier II) capital. The
Corporation'sstrength is measured in two tiers. Tier I capital consists primarily of shareholder'sshareholder’s equity and trust preferred capital notes, while Tier II capital consists of thequalifying allowance for loan losses. The definition“Total” capital is the total of assets has been modified to include items onTier I and off the balance sheet, with
each item being assigned a "risk-weight" for the determination of the ratioTier II capital. Another regulatory indicator of capital to risk-adjustedadequacy is the leverage ratio, which is computed by dividing Tier I capital by average quarterly assets less intangible assets.
The regulatory guidelines require that minimum 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, 2001,2008, the Corporation'sCompany’s Tier I and total capital ratios were 14.32%16.67% and 15.56%17.92%, respectively. At December 31, 2000,2007, these ratios were 16.02%17.03% and 17.09%18.28%, respectively. The ratios for both years were well in
excess ofexceeded the regulatory requirements. 21
The Company’s leverage ratios were 13.04% and 12.98% at December 31, 2008 and 2007, respectively. The leverage ratio has a regulatory minimum of 4%, with most institutions required to maintain a ratio of 4-5%, depending upon risk profiles and other factors.
As mandated by the Federal Deposit Insurance Corporation Act of 1991
("FDICIA"),bank regulations, the following five capital categories are identified for insured depository institutions: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized"“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and "critically
undercapitalized". FDICIA requires“critically undercapitalized.” These regulations require 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,Management believes, as of December 31, 2008 and 2007, that the Corporation andCompany met the Bank have always been and continuerequirements to be considered well“well capitalized.”
CONTRACTUAL OBLIGATIONS
The Corporation's leverage ratios (Tier 1 capital divided by average
quarterly assets less intangible assets) were 10.96% and 11.59% atfollowing items are contractual obligations of the Company as of December 31, 20012008 (in thousands):
| | | Payments Due By Period | | | | | | | | | | | | | | | | | | | | | | Total | | | Under 1 Year | | | 1-3 Years | | | 3-5 Years | | | More than 5 years | | | | | | | | | | | | | | | | | | | | Time deposits | | $ | 261,064 | | | $ | 181,352 | | | $ | 49,873 | | | $ | 29,839 | | | $ | - | | | FHLB borrowings | | | 21,637 | | | | 12,850 | | | | - | | | | 8,000 | | | | 787 | | | Repurchase agreements | | | 51,741 | | | | 51,741 | | | | - | | | | - | | | | - | | | Operating leases | | | 702 | | | | 296 | | | | 325 | | | | 79 | | | | 2 | | | Trust preferred capital notes | | | 20,619 | | | | - | | | | - | | | | - | | | | 20,619 | |
OFF-BALANCE SHEET ACTIVITIES
The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. Other than AMNB Statutory Trust I, formed in 2006 to issue Trust Preferred Securities, the Company does not have any off-balance sheet subsidiaries. Refer to Note 12 of the Consolidated Financial Statements for a discussion of AMNB Statutory Trust I. Off-balance sheet transactions were as follows (in thousands):
| | | December 31, | | | Off-Balance Sheet Transactions | | 2008 | | | 2007 | | | | | | | | | | | Commitments to extend credit | | $ | 146,399 | | | $ | 144,301 | | | Standby letters of credit | | | 2,858 | | | | 6,222 | | | Mortgage loan rate-lock commitments | | | 2,031 | | | | 2,215 | |
Commitments to extend credit to customers represent legally binding agreements 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 funding requirements. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and 2000, respectively. private borrowing arrangements.
| Table 19 - Quarterly Financial Results | | | (in thousands, except per share amounts) | | | | | | | | | | | | | | | | | | | Fourth | | | Third | | | Second | | | First | | | 2008 | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | | | | | | | | | | | | | | | Interest income | | $ | 10,225 | | | $ | 10,599 | | | $ | 10,788 | | | $ | 11,260 | | | Interest expense | | | 3,503 | | | | 3,743 | | | | 4,058 | | | | 4,535 | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 6,722 | | | | 6,856 | | | | 6,730 | | | | 6,725 | | | Provision for loan losses | | | 600 | | | | 280 | | | | 600 | | | | 140 | | Net interest income after provision for loan losses | | | 6,122 | | | | 6,576 | | | | 6,130 | | | | 6,585 | | | | | | | | | | | | | | | | | | | | | Noninterest income | | | 1,875 | | | | 2,062 | | | | 1,841 | | | | 2,135 | | | Noninterest expense | | | 5,547 | | | | 5,485 | | | | 5,643 | | | | 5,449 | | | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 2,450 | | | | 3,153 | | | | 2,328 | | | | 3,271 | | | Income taxes | | | 767 | | | | 929 | | | | 519 | | | | 966 | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 1,683 | | | $ | 2,224 | | | $ | 1,809 | | | $ | 2,305 | | | | | | | | | | | | | | | | | | | | | Per common share: | | | | | | | | | | | | | | | | | | Net income - basic | | $ | 0.28 | | | $ | 0.36 | | | $ | 0.30 | | | $ | 0.38 | | | Net income - diluted | | | 0.28 | | | | 0.36 | | | | 0.30 | | | | 0.38 | | | Cash dividends | | | 0.23 | | | | 0.23 | | | | 0.23 | | | | 0.23 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fourth | | | Third | | | Second | | | First | | | 2007 | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | | | | | | | | | | | | | | | | | | | Interest income | | $ | 12,300 | | | $ | 12,293 | | | $ | 12,106 | | | $ | 11,898 | | | Interest expense | | | 4,842 | | | | 4,947 | | | | 4,823 | | | | 4,758 | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 7,458 | | | | 7,346 | | | | 7,283 | | | | 7,140 | | | Provision for loan losses | | | 100 | | | | - | | | | - | | | | 303 | | Net interest income after provision for loan losses | | | 7,358 | | | | 7,346 | | | | 7,283 | | | | 6,837 | | | | | | | | | | | | | | | | | | | | | Noninterest income | | | 1,903 | | | | 2,276 | | | | 2,431 | | | | 2,212 | | | Noninterest expense | | | 5,329 | | | | 5,379 | | | | 5,448 | | | | 5,170 | | | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 3,932 | | | | 4,243 | | | | 4,266 | | | | 3,879 | | | Income taxes | | | 1,157 | | | | 1,309 | | | | 1,235 | | | | 1,175 | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 2,775 | | | $ | 2,934 | | | $ | 3,031 | | | $ | 2,704 | | | | | | | | | | | | | | | | | | | | | Per common share: | | | | | | | | | | | | | | | | | | Net income - basic | | $ | 0.45 | | | $ | 0.48 | | | $ | 0.49 | | | $ | 0.44 | | | Net income - diluted | | | 0.45 | | | | 0.48 | | | | 0.49 | | | | 0.44 | | | Cash dividends | | | 0.23 | | | | 0.23 | | | | 0.23 | | | | 0.22 | |
Disclosure Controls and Procedures The leverage ratio has a regulatory minimumCompany’s management, including the Chief Executive Officer and Interim Principal Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 3%1934), with most institutionsas amended (the “Exchange Act”) as of December 31, 2007. Based on this evaluation, the Chief Executive Officer and Interim Principal Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to maintain a ratio one to two percent abovebe disclosed by the 3% minimum depending upon risk profilesCompany in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and other factors.
The Board of Directors declared regular quarterly dividends totaling
$.66reported within the time periods specified in SEC rules and $.585 per share of common stockforms. There were no significant changes 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 atCompany’s internal controls over financial reporting that occurred during the quarter ended 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 trading2008 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Management of the stock. The total market
valueCompany is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control is designed to provide reasonable assurance regarding the reliability of American National Bankshares Inc. common stock at $18.70 per share (the
last trade recorded onfinancial reporting and the NASDAQ National Market during 2001) was $108,871,000,
comparedpreparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management regularly monitors its internal control over financial reporting, and actions are taken to $87,925,000 at December 31, 2000 whencorrect deficiencies as they are identified.
Under the stock was last traded at
$14.50 per share. The market valuesupervision and with the participation of management, including the principal executive officer and interim principal financial officer, the Company conducted an evaluation of the Corporation's common stockeffectiveness of internal control over financial reporting. This assessment 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 that tend to rise
during periods of general inflation.
Management feels that the most significant impact on financial results
is changes in interest rates and the Corporation's ability to react to those
changes. As discussed previously, management is attempting to measure, monitor
and control interest rate risk.
Forward-looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements made by or on behalf of the Corporation.
These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptionsframework in Internal Control – Integrated Framework issued by the Committee of managementSponsoring Organizations of the Corporation and Bank andTreadway Commission. Based on information available atthis evaluation under the time these statements and disclosures were
prepared. Factorsframework in Internal Control – Integrated Framework, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2008, as such term is defined in Exchange Act Rules 13a-15(f).
Because of its inherent limitations, internal control over financial reporting may cause actual results to differ materially from those
expected include the following:
o General economic conditions may deteriorate and negatively impact the abilitynot prevent or detect misstatements. Further, because 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 conditions, internal control effectiveness may vary over time.
The Company’s independent registered public accounting standards, may adversely affectfirm, Yount, Hyde and Barbour, P.C., has audited the businesses thatCompany’s internal control over financial reporting as of December 31, 2008, as stated in their report included herein. Yount, Hyde and Barbour, P.C. also audited 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)
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001
----
Interest income...........................$ 9,390 $ 9,936 $10,191 $10,303
Interest expense.......................... 3,876 4,339 4,572 4,715
------- ------- ------- -------
Net interest income..................... 5,514 5,597 5,619 5,588
Provision for loan losses................. 228 252 273 262
------- ------- ------- -------
Net interest income after provision..... 5,286 5,345 5,346 5,326
Non-interest income....................... 1,349 1,308 1,568 1,443
Non-interest expense...................... 3,272 3,434 3,450 3,458
------- ------- ------- -------
Income before income tax provision...... 3,363 3,219 3,464 3,311
Income tax provision...................... 1,007 928 1,014 993
------- ------- ------- -------
Net income..............................$ 2,356 $ 2,291 $ 2,450 $ 2,318
======= ======= ======= =======
Per common share:
Net income (basic)........................$ .40 $ .39 $ .41 $ .38
Net income (diluted)......................$ .40 $ .39 $ .41 $ .38
Cash dividends............................$ .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.......................... 4,687 4,527 4,179 3,950
------- ------- ------- -------
Net interest income..................... 5,502 5,326 5,318 5,117
Provision for loan losses................. 180 290 335 215
------- ------- ------- -------
Net interest income after provision..... 5,322 5,036 4,983 4,902
Non-interest income....................... 1,270 1,185 1,141 1,175
Non-interest expense...................... 3,533 3,171 3,096 3,123
------- ------- ------- -------
Income before income tax provision...... 3,059 3,050 3,028 2,954
Income tax provision...................... 868 860 848 839
------- ------- ------- -------
Net 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..........................$ .150 $ .150 $ .150 $ .135
23
MANAGEMENT'S REPORT ON
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The followingCompany’s consolidated financial statements and related notes to
consolidated financial statementsas of American National Bankshares Inc. and
Subsidiary were prepared by Management which has the primary responsibility for the integrityyear ended December 31, 2008.
/s/ Charles H. Majors Charles H. Majors President and Chief Executive Officer
/s/ Charles H. Majors Charles H. Majors Interim Principal Financial Officer
March 10, 2009
To 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
/s/ Brad E. Schwartz
- ----------------------------------------------
Brad E. Schwartz
Senior Vice President, Secretary and Treasurer
January 15, 2002
24
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To Shareholders American National Bankshares Inc.:
Danville, Virginia
We have audited the accompanying consolidated balance sheets of American National Bankshares Inc. (a Virginia corporation) and Subsidiarysubsidiaries as of December 31, 20012008 and 2000,2007, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001.2008. These financial statements are the responsibility of the Corporation'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditingthe standards generally
accepted inof the United States.Public Company Accounting Oversight Board (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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American National Bankshares Inc. and Subsidiarysubsidiaries as of December 31, 20012008 and 2000,2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20012008, in conformity with accounting
principlesU.S. generally accepted accounting principles.
We have also audited, in accordance with the United States.
Arthur Andersen LLP
Raleigh, North Carolina,
January 15, 2002
25
Consolidated Balance Sheets
December 31, 2001 and 2000
American National Bankshares Inc. and Subsidiary
- ------------------------------------------------------------------------------------------------------
2001 2000
--------------- --------------
ASSETS
Cash and due from banks ............................................$ 14,797,926 $ 16,392,313
Interest-bearing deposits in other banks............................ 14,350,723 8,678,150
Investment securities:
Securities available for sale..................................... 127,316,666 120,353,348
Securities held to maturity (market value of $30,154,043
in 2001 and $42,919,727 in 2000)................................ 29,474,139 42,575,797
--------------- --------------
Total investment securities....................................... 156,790,805 162,929,145
--------------- --------------
Loans, net of unearned income ...................................... 375,592,960 339,756,374
Less allowance for loan losses...................................... (5,334,456) (4,746,429)
-------------- --------------
Net loans.......................................................... 370,258,504 335,009,945
-------------- --------------
Bank premises and equipment, at cost, less accumulated
depreciation of $9,651,610 in 2001 and $8,518,452 in 2000.......... 7,857,426 7,868,410
Accrued interest receivable and other assets......................... 8,831,772 10,510,858
-------------- --------------
Total assets.......................................................$ 572,887,156 $ 541,388,821
============== ==============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing............................$ 58,573,035 $ 54,495,780
Demand deposits -- interest bearing................................ 61,404,626 58,272,932
Money market deposits.............................................. 47,024,615 32,480,105
Savings deposits................................................... 65,650,939 61,586,380
Time deposits...................................................... 231,358,568 219,753,122
-------------- --------------
Total deposits..................................................... 464,011,783 426,588,319
-------------- --------------
Repurchase agreements................................................ 27,176,758 31,729,600
FHLB Borrowings...................................................... 13,000,000 16,000,000
Accrued interest payable and other liabilities....................... 3,301,342 3,732,619
-------------- --------------
Total liabilities.................................................. 507,489,883 478,050,538
-------------- --------------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none 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.................. 5,821,956 6,063,772
Capital in excess of par value....................................... 9,588,502 9,831,428
Retained earnings.................................................... 48,677,761 47,119,966
Accumulated other comprehensive income -
net unrealized gains on securities available for sale,
net of taxes of $674,361 in 2001 and $166,455 in 2000.............. 1,309,054 323,117
-------------- --------------
Total shareholders' equity......................................... 65,397,273 63,338,283
-------------- --------------
Total liabilities and shareholders' equity.........................$ 572,887,156 $ 541,388,821
============== ==============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
26
Consolidated Statements of Income
For The Years Ended December 31, 2001, 2000 and 1999
American National Bankshares Inc. and Subsidiary
- -----------------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------- --------------- --------------
Interest Income:
Interest and fees on loans...........................................$ 30,216,549 $ 28,300,030 $ 23,959,012
Interest on deposits in other banks.................................. 385,019 179,215 273,702
Income on investment securities:
U S Government..................................................... - 167,977 800,693
Federal agencies................................................... 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
Other investments.................................................. 1,869,711 1,464,462 1,244,133
-------------- -------------- --------------
Total interest income.............................................. 39,819,819 38,606,559 33,699,133
-------------- -------------- --------------
Interest Expense:
Interest on deposits:
Demand............................................................. 494,930 1,034,845 1,086,744
Money market....................................................... 1,318,002 865,024 534,801
Savings............................................................ 1,176,704 1,671,108 1,768,148
Time............................................................... 12,617,362 11,094,637 9,283,865
Interest on repurchase agreements.................................... 1,087,823 1,362,104 876,291
Interest on other borrowings......................................... 806,869 1,315,507 1,186,636
-------------- -------------- --------------
Total interest expense............................................. 17,501,690 17,343,225 14,736,485
-------------- -------------- --------------
Net Interest Income.................................................. 22,318,129 21,263,334 18,962,648
Provision for Loan Losses............................................ 1,015,000 1,020,000 670,000
-------------- -------------- --------------
Net Interest Income After Provision
For Loan Losses.................................................... 21,303,129 20,243,334 18,292,648
-------------- -------------- --------------
Non-Interest Income:
Trust and investment services........................................ 2,569,125 2,657,802 2,531,491
Service charges on deposit accounts.................................. 1,385,339 1,113,548 970,383
Other fees and commissions........................................... 749,072 591,724 464,045
Mortgage banking income.............................................. 365,349 240,390 332,490
Securities gains (losses)standards of the Public Company Accounting Oversight Board (United States), net....................................... 367,035 (1,751) 7,970
Other income......................................................... 231,998 169,747 186,835
-------------- -------------- --------------
Total non-interest income.......................................... 5,667,918 4,771,460 4,493,214
-------------- -------------- --------------
Non-Interest Expense:
Salaries............................................................. 6,383,811 6,071,352 5,575,472
Pension and other employee benefits.................................. 1,390,591 1,154,352 955,164
Occupancy and equipment ............................................. 2,316,282 2,184,099 1,894,299
Core deposit intangible amortization................................. 449,816 449,816 449,816
Other ............................................................... 3,073,702 3,063,880 2,666,880
-------------- -------------- --------------
Total non-interest expense......................................... 13,614,202 12,923,499 11,541,631
-------------- -------------- --------------
Income Before Income Tax Provision................................... 13,356,845 12,091,295 11,244,231
Income Tax Provision................................................. 3,941,474 3,414,930 3,319,881
-------------- -------------- --------------
Net Income...........................................................$ 9,415,371 $ 8,676,365 $ 7,924,350
============== ============== ==============
Net Income Per Common Share: *
Basic................................................................$ 1.58 $ 1.42 $ 1.30
Diluted..............................................................$ 1.58 $ 1.42 $ 1.30
Average Common Shares Outstanding:
Basic................................................................ 5,949,811 6,096,037 6,103,485
Diluted.............................................................. 5,973,153 6,101,415 6,118,540
* 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.
27
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999
American National Bankshares Inc. and Subsidiary
Accumulated
Common Stock Capital in Other Total
------------------------- Excess of Retained Comprehensive Shareholders'
Shares Amount Par Value Earnings Income (Loss) Equity
----------- ------------ ------------ ------------- ------------- -------------
Balance, December 31, 1998............ 3,051,733 $ 3,051,733 $ 9,892,304 $ 40,798,323 $ 1,118,286 $ 54,860,646
Net income............................ - - - 7,924,350 - 7,924,350
Change in unrealized losses on
securities available for sale,
net of tax of $(1,476,108).......... - - - - (2,865,388) (2,865,388)
-------------
Comprehensive income................ 5,058,962
Common stock issued in 2 for 1 stock
split............................... 3,051,733 3,051,733 - (3,051,733) - -
Stock options exercised............... 235 235 3,055 - - 3,290
Cash dividends declared and paid...... - - - (3,204,348) - (3,204,348)
----------- ------------ ------------ ------------- ------------ -------------
Balance, December 31, 1999.............6,103,701. 6,103,701 9,895,359 42,466,592 (1,747,102) 56,718,550
Net income............................ - - - 8,676,365 - 8,676,365
Change in unrealized gains on
securities available for sale,
net of tax of $1,066,477............ - - - - 2,070,219 2,070,219
-------------
Comprehensive income................ 10,746,584
Stock repurchased and retired......... (40,000) (40,000) (64,854) (459,334) - (564,188)
Stock options exercised............... 71 71 923 - - 994
Cash dividends declared and paid...... - - - (3,563,657) - (3,563,657)
----------- ------------ ------------ ------------- ------------ -------------
Balance, December 31, 2000............ 6,063,772 6,063,772 9,831,428 47,119,966 323,117 63,338,283
Net income............................ - - - 9,415,371 - 9,415,371
Change in unrealized gains on
securities available for sale,
net of tax of $507,906.............. - - - - 985,937 985,937
-------------
Comprehensive income................ 10,401,308
Stock repurchased and retired......... (254,366) (254,366) (412,413) (3,933,272) - (4,600,051)
Stock options exercised............... 12,550 12,550 169,487 - - 182,037
Cash dividends declared and paid...... - - - (3,924,304) - (3,924,304)
----------- ------------- ------------ ------------- ------------ -------------
Balance, December 31, 2001............ 5,821,956 $ 5,821,956 $ 9,588,502 $ 48,677,761 $ 1,309,054 $ 65,397,273
=========== ============ ============ ============= ============ =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
28
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 and 1999
American National Bankshares Inc. and Subsidiary
2001 2000 1999
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income...........................................................$ 9,415,371 $ 8,676,365 $ 7,924,350
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses............................................ 1,015,000 1,020,000 670,000
Depreciation......................................................... 1,171,113 1,116,688 1,029,875
Core deposit intangible amortization................................. 449,816 449,816 449,816
Amortization (accretion) of premiums and discounts
on investment securities........................................... 74,916 (49,789) 77,488
(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 real estate owned............................. 19,950 - (94,462)
Gain on sale of property and equipment............................... (2,000) - (6,150)
Deferred income taxes benefit........................................ (356,927) (415,002) (211,558)
Decrease (increase) in interest receivable........................... 863,391 (529,596) (1,282)
Decrease (increase) in other assets.................................. 87,036 (697,250) (394,986)
(Decrease) increase in interest payable.............................. (312,404) 284,949 176,627
(Decrease) increase in other liabilities............................. (118,873) 287,868 (191,290)
------------- ------------- -------------
Net cash provided by operating activities............................ 11,574,005 9,905,410 9,087,968
------------- ------------- -------------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ............ 75,759,161 14,261,280 50,241,341
Purchases of securities available for sale........................... (67,267,483) (7,504,500) (51,708,123)
Purchases of securities held to maturity............................. (567,376) (229,097) (5,803,523)
Net increase in loans................................................ (35,985,346) (46,183,642) (24,245,589)
Proceeds from sale of real estate owned.............................. 195,050 - 449,462
Purchases of real estate owned....................................... - (215,000) -
Purchases of property and equipment.................................. (1,158,129) (933,548) (1,472,195)
------------- ------------- --------------
Net cash used in investing activities................................ (29,024,123) (40,804,507) (32,538,627)
------------- ------------- --------------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits............................................... 25,818,018 16,645,617 2,525,430
Net increase in time deposits........................................ 11,605,446 24,384,583 24,707,800
Net (decrease) increase in FHLB borrowings........................... (3,000,000) (5,000,000) 8,000,000
Net (decrease) increase in repurchase agreements..................... (4,552,842) 6,775,267 (6,068,501)
Cash dividends paid.................................................. (3,924,304) (3,563,657) (3,204,348)
Repurchase of stock.................................................. (4,600,051) (564,188) -
Proceeds from exercise of stock options.............................. 182,037 994 3,290
------------- ------------- -------------
Net cash provided by financing activities............................ 21,528,304 38,678,616 25,963,671
------------- ------------- -------------
Net Increase in Cash and Cash Equivalents............................ 4,078,186 7,779,519 2,513,012
Cash and Cash Equivalents at Beginning of Period..................... 25,070,463 17,290,944 14,777,932
------------- ------------- -------------
Cash and Cash Equivalents at End of Period...........................$ 29,148,649 $ 25,070,463 $ 17,290,944
============= ============= =============
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks..............................................$ 14,797,926 $ 16,392,313 $ 13,885,239
Interest-bearing deposits in other banks............................. 14,350,723 8,678,150 3,405,705
------------- ------------- -------------
$ 29,148,649 $ 25,070,463 $ 17,290,944
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Interest paid........................................................$ 17,814,094 $ 17,058,276 $ 14,559,858
Income taxes paid....................................................$ 4,363,234 $ 3,788,800 $ 3,786,339
Transfer of loans to other real estate owned.........................$ 87,136 $ - $ -
The accompanying notes to consolidated financial statements are an integral part of these statements.
29
American National Bankshares Inc. and Subsidiary
subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2009 expressed an unqualified opinion on the effectiveness of American National Bankshares Inc. and subsidiaries’ internal control over financial reporting.
 Winchester, Virginia March 10, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders American National Bankshares Inc. Danville, Virginia
We have audited American National Bankshares Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. American National Bankshares Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, American National Bankshares Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of income, changes in shareholders’ equity and cash flows of American National Bankshares Inc. and subsidiaries and our report dated March 10, 2009 expressed an unqualified opinion.
Winchester, Virginia March 10, 2009
| | | Consolidated Balance Sheets | | | December 31, 2008 and 2007 | | | (Dollars in thousands, except share and per share data) | | | | | | | | | | | ASSETS | | 2008 | | | 2007 | | | Cash and due from banks | | $ | 14,986 | | | $ | 18,155 | | | Interest-bearing deposits in other banks | | | 9,112 | | | | 149 | | | | | | | | | | | | | Securities available for sale, at fair value | | | 133,695 | | | | 145,159 | | | Securities held to maturity (fair value of $7,391 | | | | | | | | | | in 2008 and $12,250 in 2007) | | | 7,121 | | | | 11,990 | | | Total securities | | | 140,816 | | | | 157,149 | | | | | | | | | | | | | Loans held for sale | | | 1,764 | | | | 1,368 | | | | | | | | | | | | | Loans, net of unearned income | | | 571,110 | | | | 551,391 | | | Less allowance for loan losses | | | (7,824 | ) | | | (7,395 | ) | | Net loans | | | 563,286 | | | | 543,996 | | | | | | | | | | | | | Premises and equipment, net | | | 17,431 | | | | 13,348 | | | Other real estate owned | | | 4,311 | | | | 632 | | | Goodwill | | | 22,468 | | | | 22,468 | | | Core deposit intangibles, net | | | 2,075 | | | | 2,452 | | | Accrued interest receivable and other assets | | | 12,935 | | | | 12,571 | | | Total assets | | $ | 789,184 | | | $ | 772,288 | | | | | | | | | | | | | LIABILITIES and SHAREHOLDERS' EQUITY | | | | | | | | | | Liabilities: | | | | | | | | | | Demand deposits -- noninterest bearing | | $ | 95,703 | | | $ | 99,231 | | | Demand deposits -- interest bearing | | | 116,132 | | | | 104,751 | | | Money market deposits | | | 56,615 | | | | 50,254 | | | Savings deposits | | | 59,624 | | | | 62,400 | | | Time deposits | | | 261,064 | | | | 264,585 | | | Total deposits | | | 589,138 | | | | 581,221 | | | | | | | | | | | | | Short-term borrowings: | | | | | | | | | | Customer repurchase agreements | | | 51,741 | | | | 47,891 | | | Other short-term borrowings | | | 7,850 | | | | 7,200 | | | Long-term borrowings | | | 13,787 | | | | 8,937 | | | Trust preferred capital notes | | | 20,619 | | | | 20,619 | | | Accrued interest payable and other liabilities | | | 3,749 | | | | 4,909 | | | Total liabilities | | | 686,884 | | | | 670,777 | | | | | | | | | | | | | Shareholders' equity: | | | | | | | | | | Preferred stock, $5 par, 200,000 shares authorized, | | | | | | | | | | none outstanding | | | - | | | | - | | | Common stock, $1 par, 10,000,000 shares authorized, | | | | | | | | | | 6,085,628 shares outstanding at December 31, 2008 and | | | | | | | | | | 6,118,717 shares outstanding at December 31, 2007 | | | 6,086 | | | | 6,119 | | | Capital in excess of par value | | | 26,491 | | | | 26,425 | | | Retained earnings | | | 71,090 | | | | 69,409 | | | Accumulated other comprehensive (loss), net | | | (1,367 | ) | | | (442 | ) | | Total shareholders' equity | | | 102,300 | | | | 101,511 | | | Total liabilities and shareholders' equity | | $ | 789,184 | | | $ | 772,288 | | | | | | | | | | | | | The accompanying notes are an integral part of the consolidated financial statements. | | | | | |
| | | Consolidated Statements of Income | | | For the Years Ended December 31, 2008, 2007, and 2006 | | | (Dollars in thousands, except share and per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | Interest and Dividend Income: | | | | | | | | | | | Interest and fees on loans | | $ | 35,941 | | | $ | 41,499 | | | $ | 37,361 | | | Interest and dividends on securities: | | | | | | | | | | | | | | Taxable | | | 4,795 | | | | 4,409 | | | | 5,034 | | | Tax-exempt | | | 1,621 | | | | 1,690 | | | | 1,743 | | | Dividends | | | 214 | | | | 320 | | | | 312 | | | Other interest income | | | 301 | | | | 679 | | | | 620 | | | Total interest and dividend income | | | 42,872 | | | | 48,597 | | | | 45,070 | | | Interest Expense: | | | | | | | | | | | | | | Interest on deposits | | | 12,280 | | | | 15,535 | | | | 13,349 | | | Interest on short-term borrowings | | | 1,629 | | | | 1,860 | | | | 1,453 | | | Interest on long-term borrowings | | | 557 | | | | 602 | | | | 852 | | | Interest on trust preferred capital notes | | | 1,373 | | | | 1,373 | | | | 1,007 | | | Total interest expense | | | 15,839 | | | | 19,370 | | | | 16,661 | | | Net Interest Income | | | 27,033 | | | | 29,227 | | | | 28,409 | | | Provision for Loan Losses | | | 1,620 | | | | 403 | | | | 58 | | | Net Interest Income after Provision for Loan Losses | | | 25,413 | | | | 28,824 | | | | 28,351 | | | Noninterest Income: | | | | | | | | | | | | | | Trust fees | | | 3,467 | | | | 3,578 | | | | 3,374 | | | Service charges on deposit accounts | | | 2,324 | | | | 2,531 | | | | 2,654 | | | Other fees and commissions | | | 857 | | | | 786 | | | | 744 | | | Mortgage banking income | | | 788 | | | | 954 | | | | 709 | | | Brokerage fees | | | 431 | | | | 550 | | | | 419 | | | Securities gains (losses), net | | | (450 | ) | | | 135 | | | | 62 | | | Impairment of securities | | | - | | | | (362 | ) | | | - | | | Other | | | 496 | | | | 650 | | | | 496 | | | Total noninterest income | | | 7,913 | | | | 8,822 | | | | 8,458 | | | Noninterest Expense: | | | | | | | | | | | | | | Salaries | | | 9,792 | | | | 9,688 | | | | 9,520 | | | Employee benefits | | | 3,001 | | | | 2,749 | | | | 2,506 | | | Occupancy and equipment | | | 3,701 | | | | 3,527 | | | | 2,977 | | | Bank franchise tax | | | 694 | | | | 663 | | | | 651 | | | Core deposit intangible amortization | | | 377 | | | | 377 | | | | 414 | | | Other | | | 4,559 | | | | 4,322 | | | | 4,196 | | | Total noninterest expense | | | 22,124 | | | | 21,326 | | | | 20,264 | | | Income Before Income Taxes | | | 11,202 | | | | 16,320 | | | | 16,545 | | | Income Taxes | | | 3,181 | | | | 4,876 | | | | 5,119 | | | Net Income | | $ | 8,021 | | | $ | 11,444 | | | $ | 11,426 | | | | | | | | | | | | | | | | | Net Income Per Common Share: | | | | | | | | | | | | | | Basic | | $ | 1.32 | | | $ | 1.86 | | | $ | 1.91 | | | Diluted | | $ | 1.31 | | | $ | 1.86 | | | $ | 1.90 | | | Average Common Shares Outstanding: | | | | | | | | | | | | | | Basic | | | 6,096,649 | | | | 6,139,095 | | | | 5,986,262 | | | Diluted | | | 6,105,154 | | | | 6,161,825 | | | | 6,020,071 | | | | | | | | | | | | | | | | | The accompanying notes are an integral part of the consolidated financial statements. | | | | | |
| | | Consolidated Statements of Changes in Shareholders' Equity | | | For the Years Ended December 31, 2008, 2007, and 2006 | | | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | Common Stock | | | Capital in | | | | | | Other | | | Total | | | | | | | | | | | Excess of | | | Retained | | | Comprehensive | | | Shareholders' | | | | | Shares | | | Amount | | | Par Value | | | Earnings | | | Income (Loss) | | | Equity | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2005 | | | 5,441,758 | | | $ | 5,442 | | | $ | 9,588 | | | $ | 59,109 | | | $ | (720 | ) | | $ | 73,419 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | - | | | | - | | | | - | | | | 11,426 | | | | - | | | | 11,426 | | | Change in unrealized losses on securities | | | | | | | | | | | | | | | | | | | | | | | | | | available for sale, net of tax, $32 | | | - | | | | - | | | | - | | | | - | | | | 58 | | | | | | | Less: Reclassification adjustment for gains | | | | | | | | | | | | | | | | | | | | | | | on securities available for sale, net of | | | | | | | | | | | | | | | | | | | | | | | | | | tax, $(21) | | | - | | | | - | | | | - | | | | - | | | | (41 | ) | | | | | | Other comprehensive income | | | | | | | | | | | | | | | | | | | 17 | | | | 17 | | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 11,443 | | | Adjustment to initially apply FASB statement | | | | | | | | | | | | | | | | | | | | | | | No. 158, net of tax, $(789) | | | - | | | | - | | | | - | | | | - | | | | (1,465 | ) | | | (1,465 | ) | | Issuance of common stock in exchange | | | | | | | | | | | | | | | | | | | | | | | | | | for net assets acquisition | | | 746,944 | | | | 747 | | | | 16,799 | | | | - | | | | - | | | | 17,546 | | | Stock repurchased and retired | | | (39,100 | ) | | | (39 | ) | | | (132 | ) | | | (741 | ) | | | - | | | | (912 | ) | | Stock options exercised | | | 12,263 | | | | 12 | | | | 159 | | | | - | | | | - | | | | 171 | | | Cash dividends declared, $0.87 per share | | | - | | | | - | | | | - | | | | (5,210 | ) | | | - | | | | (5,210 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2006 | | | 6,161,865 | | | | 6,162 | | | | 26,414 | | | | 64,584 | | | | (2,168 | ) | | | 94,992 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | - | | | | - | | | | - | | | | 11,444 | | | | - | | | | 11,444 | | | Change in unrealized gains on securities | | | | | | | | | | | | | | | | | | | | | | | | | | available for sale, net of tax, $874 | | | - | | | | - | | | | - | | | | - | | | | 1,622 | | | | | | | Add: Reclassification adjustment for losses | | | | | | | | | | | | | | | | | | | | | | | on impairment of securities, net of tax, $127 | | | | | | | | | | | | | | | | 235 | | | | | | | Less: Reclassification adjustment for gains | | | | | | | | | | | | | | | | | | | | | | | on securities available for sale, net of | | | | | | | | | | | | | | | | | | | | | | | | | | tax, $(47) | | | - | | | | - | | | | - | | | | - | | | | (88 | ) | | | | | | Change in unfunded penson liability, | | | | | | | | | | | | | | | | | | | | | | | | | | net of tax, $(23) | | | | | | | | | | | | | | | | | | | (43 | ) | | | | | | Other comprehensive income | | | | | | | | | | | | | | | | | | | 1,726 | | | | 1,726 | | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 13,170 | | | Stock repurchased and retired | | | (61,900 | ) | | | (62 | ) | | | (265 | ) | | | (1,032 | ) | | | - | | | | (1,359 | ) | | Stock options exercised | | | 18,752 | | | | 19 | | | | 276 | | | | - | | | | - | | | | 295 | | | Cash dividends declared, $0.91 per share | | | - | | | | - | | | | - | | | | (5,587 | ) | | | - | | | | (5,587 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2007 | | | 6,118,717 | | | | 6,119 | | | | 26,425 | | | | 69,409 | | | | (442 | ) | | | 101,511 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | - | | | | - | | | | - | | | | 8,021 | | | | - | | | | 8,021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in unrealized gains on securities | | | | | | | | | | | | | | | | | | | | | | | | | | available for sale, net of tax, $359 | | | - | | | | - | | | | - | | | | - | | | | 665 | | | | | | | Add: Reclassification adjustment for losses | | | | | | | | | | | | | | | | | | | | | | | on securities available for sale, net of | | | | | | | | | | | | | | | | | | | | | | | | | | tax, $157 | | | - | | | | - | | | | - | | | | - | | | | 293 | | | | | | | Change in unfunded penson liability, | | | | | | | | | | | | | | | | | | | | | | | | | | net of tax, $(1,015) | | | | | | | | | | | | | | | | | | | (1,883 | ) | | | | | | Other comprehensive loss | | | | | | | | | | | | | | | | | | | (925 | ) | | | (925 | ) | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 7,096 | | | Change in pension plan measurement date, | | | | | | | | | | | | (75 | ) | | | | | | | (75 | ) | | net of tax, $(40) | | | | | | | | | | | | | | | | | | | | | | | | | | Stock repurchased and retired | | | (46,150 | ) | | | (46 | ) | | | (199 | ) | | | (659 | ) | | | - | | | | (904 | ) | | Stock options exercised | | | 13,061 | | | | 13 | | | | 206 | | | | - | | | | - | | | | 219 | | | Stock compensation expense | | | - | | | | - | | | | 59 | | | | - | | | | - | | | | 59 | | | Cash dividends declared, $0.92 per share | | | - | | | | - | | | | - | | | | (5,606 | ) | | | - | | | | (5,606 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2008 | | | 6,085,628 | | | $ | 6,086 | | | $ | 26,491 | | | $ | 71,090 | | | $ | (1,367 | ) | | $ | 102,300 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | The accompanying notes are an integral part of the consolidated financial statements. | | | | | | | | | |
| | | Consolidated Statements of Cash Flows | | | For the Years Ended December 31, 2008, 2007, and 2006 | | | (Dollars in thousands) | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | Cash Flows from Operating Activities: | | | | | | | | | | | Net income | | $ | 8,021 | | | $ | 11,444 | | | $ | 11,426 | | | Adjustments to reconcile net income to net | | | | | | | | | | | | | | cash provided by operating activities: | | | | | | | | | | | | | | Provision for loan losses | | | 1,620 | | | | 403 | | | | 58 | | | Depreciation | | | 1,358 | | | | 1,178 | | | | 993 | | | Core deposit intangible amortization | | | 377 | | | | 377 | | | | 414 | | | Net amortization (accretion) of bond premiums and discounts | | | (253 | ) | | | (188 | ) | | | (51 | ) | | Net loss (gain) on sale or call of securities | | | 450 | | | | (135 | ) | | | (62 | ) | | Impairment of securities | | | - | | | | 362 | | | | - | | | Gain on sale of loans held for sale | | | (669 | ) | | | (733 | ) | | | (434 | ) | | Proceeds from sales of loans held for sale | | | 29,642 | | | | 31,451 | | | | 15,673 | | | Originations of loans held for sale | | | (29,369 | ) | | | (30,424 | ) | | | (16,187 | ) | | Net loss (gain) on sale of foreclosed real estate | | | 20 | | | | (6 | ) | | | (7 | ) | | Net change in valuation allowance on foreclosed real estate | | | 70 | | | | - | | | | 10 | | | Net loss (gain) on sale of premises and equipment | | | 7 | | | | (8 | ) | | | - | | | Stock-based compensation expense | | | 59 | | | | - | | | | - | | | Deferred income tax (benefit) expense | | | 691 | | | | (67 | ) | | | 732 | | | Net change in interest receivable | | | 398 | | | | 316 | | | | (54 | ) | | Net change in other assets | | | (3,852 | ) | | | 699 | | | | (1,369 | ) | | Net change in interest payable | | | (373 | ) | | | 39 | | | | 429 | | | Net change in other liabilities | | | (862 | ) | | | (257 | ) | | | (703 | ) | | Net cash provided by operating activities | | | 7,335 | | | | 14,451 | | | | 10,868 | | | | | | | | | | | | | | | | | Cash Flows from Investing Activities: | | | | | | | | | | | | | | Proceeds from sales of securities available for sale | | | 1,098 | | | | 1,070 | | | | 503 | | | Proceeds from maturities and calls of securities available for sale | | | 40,255 | | | | 54,965 | | | | 57,920 | | | Proceeds from maturities and calls of securities held to maturity | | | 4,893 | | | | 1,884 | | | | 4,491 | | | Purchases of securities available for sale | | | (28,636 | ) | | | (49,763 | ) | | | (51,716 | ) | | Net (increase) decrease in loans | | | (24,970 | ) | | | (9,933 | ) | | | 10,278 | | | Proceeds from sale of premises and equipment | | | - | | | | 25 | | | | 324 | | | Purchases of premises and equipment | | | (5,448 | ) | | | (2,105 | ) | | | (1,045 | ) | | Proceeds from sales of other real estate owned | | | 317 | | | | 30 | | | | 421 | | | Increase in other real estate owned | | | (26 | ) | | | (59 | ) | | | (230 | ) | | Cash paid in acquisition | | | - | | | | - | | | | (17,087 | ) | | Cash acquired in acquisition | | | - | | | | - | | | | 2,956 | | | Net cash (used in) provided by investing activities | | | (12,517 | ) | | | (3,886 | ) | | | 6,815 | | | | | | | | | | | | | | | | | Cash Flows from Financing Activities: | | | | | | | | | | | | | | Net change in demand, money market, | | | | | | | | | | | | | | and savings deposits | | | 11,438 | | | | (17,884 | ) | | | (9,915 | ) | | Net change in time deposits | | | (3,521 | ) | | | (9,423 | ) | | | (15,180 | ) | | Net change in customer repurchase agreements | | | 3,850 | | | | 14,523 | | | | (3,835 | ) | | Net change in other short-term borrowings | | | 650 | | | | 7,200 | | | | (2,151 | ) | | Net change in long-term borrowings | | | 4,850 | | | | (6,150 | ) | | | (2,500 | ) | | Net change in trust preferred capital notes | | | - | | | | - | | | | 20,619 | | | Cash dividends paid | | | (5,606 | ) | | | (5,587 | ) | | | (5,210 | ) | | Repurchase of stock | | | (904 | ) | | | (1,359 | ) | | | (912 | ) | | Proceeds from exercise of stock options | | | 219 | | | | 295 | | | | 171 | | | Net cash provided by (used in) financing activities | | | 10,976 | | | | (18,385 | ) | | | (18,913 | ) | | | | | | | | | | | | | | | | Net Increase (Decrease) in Cash and Cash Equivalents | | | 5,794 | | | | (7,820 | ) | | | (1,230 | ) | | | | | | | | | | | | | | | | Cash and Cash Equivalents at Beginning of Period | | | 18,304 | | | | 26,124 | | | | 27,354 | | | | | | | | | | | | | | | | | Cash and Cash Equivalents at End of Period | | $ | 24,098 | | | $ | 18,304 | | | $ | 26,124 | | | | | | | | | | | | | | | | | The accompanying notes are an integral part of the consolidated financial statements. | | | | | | | | | | | | | | | | | | | | | | | |
Notes to Consolidated Financial Statements December 31, 2001, 20002008, 2007, and 1999
1. 2006
Note 1 – Summary of Significant Accounting Policies:
Policies
Nature of Operations and Consolidation
The consolidated financial statements include the amounts and results of
operationsaccounts of American National Bankshares Inc. ("the Corporation") and its wholly owned subsidiary, American National Bank and Trust Company ("(collectively referred to as the Bank"“Company”). TheAmerican National 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, in December 1996. ANB Services Corp., another wholly owned
subsidiary of the Bank, was formed in October 1999 to offerand trust and investment services which also include non-deposit products such as mutual funds and insurance products. All significant inter-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 as either held to
maturity or available for 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 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 to provide for inherent losses in the loan
portfolio. Among other factors considered are the Bank's historical loss
experience, the size and composition of the loan portfolio, the value and
adequacy of collateral and guarantors, non-performing credits including impaired
loans and the Corporation's loan "Watch" list, and national and local economic
conditions. 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 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 can be reasonably
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 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, 2001,
the
30
Bank had $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, 2001. Core
deposit intangibles are periodically reviewed for impairment. As of December 31,
2001, no impairment had been identified.
Foreclosed Properties
Foreclosed properties are included in other assets and represent other
real estate that has been acquired through loan foreclosures or deeds received
in lieu of loan payments. Generally, such properties are appraised 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
policies.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted accounting principlesin the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of foreclosed real estate.
In April 2006, AMNB Statutory Trust I, a Delaware statutory trust (the “Trust”) and a wholly owned subsidiary of the Company was formed for the purpose of issuing preferred securities (the “Trust Preferred Securities”) in a private placement pursuant to an applicable exemption from registration. Proceeds from the securities were used to fund the acquisition of Community First Financial Corporation which occurred in April 2006. Refer to Note 12 for further details concerning this variable interest entity.
All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the Trust, as detailed in Note 12.
Cash and Cash Equivalents
Cash includes cash on hand and cash with correspondent banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash with original maturities of three months or less and are subject to an insignificant risk of change in value. Cash and cash equivalents are carried at cost.
Securities
The Company classifies securities as either held to maturity or available for sale.
Debt securities that management has both the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost.
Securities which may be used to meet liquidity needs arising from deposit and loan fluctuations or changes in market conditions are classified as available for sale. Securities available for sale are reported at estimated fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized impairment losses. In estimating other than temporary impairment losses, management considers (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for anticipated recovery in fair value. Gains or losses realized from the sale of securities available for sale are recorded on the trade date and are determined using the specific identification method.
The Company does not permit the purchase or sale of trading account securities. Due to the nature and restrictions placed on the Company’s investment in common stock of the Federal Home Loan Bank of Atlanta (“FHLB”) and the Federal Reserve Bank, these securities have been classified as restricted equity securities and carried at cost. Loans Held for Sale
Secondary market mortgage loans are designated as held for sale at the time of their origination. These loans are pre-sold with servicing released and the Company does not retain any interest after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government-sponsored enterprises (conforming loans). In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at estimated fair value in the aggregate. Gains on sales of loans are recognized at the loan closing date and are included in noninterest income for the period.
Derivative Loan Commitments
The Company enters into mortgage loan commitments whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheets with net changes in their fair values recorded in other expenses. Derivative loan commitments resulted in income of $9,000 for 2008, $21,000 in expense for 2007, and $10,000 in income for 2006.
The period of time between issuance of a loan commitment and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery contracts, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed the interest rate risk on the loan. As a result, the Company is not generally exposed to significant losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.
The market value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the estimated value of the underlying assets while taking into consideration the probability that the loan will be funded.
Loans
The Company grants mortgage, commercial, and consumer loans to customers. A substantial portion of the loan portfolio is secured by real estate. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Company’s market area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balance adjusted for the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
The accrual of interest on loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Loans are typically charged off when the loan is 120 days past due, unless secured and in process of collection. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.
Interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Substandard and doubtful risk graded commercial, commercial real estate, and construction loans equal to or greater than $100,000 on an unsecured basis, and equal to or greater than $250,000 on a secured basis are reviewed for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment and establishing a specific allowance include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Generally, large groups of smaller balance homogeneous loans are collectively evaluated for impairment. The Company’s policy for recognizing interest income on impaired loans is consistent with its nonaccrual policy.
Accounting for Certain Loans or Debt Securities Acquired in a Transfer
In January 2005, American Institute of Certified Public Accountants Statement of Position (“SOP”) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, was adopted for loan acquisitions. SOP 03-3 requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of SOP 03-3. SOP 03-3 limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments. Refer to Note 5 for disclosures required under SOP 03-3.
Allowance for Loan Losses
The allowance for loan losses is management’s estimate of probable credit losses that are inherent in the loan portfolio at the balance sheet date. Increases to the allowance are made by charges to the provision for loan losses, which is reflected in the Consolidated Statements of Income. Loan balances deemed to be uncollectible are charged-off against the allowance. Recoveries of previously charged-off amounts are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the loan portfolio in light of historical charge-off experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. The allowance for loan losses has three basic components: the formula allowance, the specific allowance, and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses along with various economic factors and, as a result, could differ from the loss incurred in the future. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. The unallocated allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Actual losses could be greater or less than the estimates.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment are depreciated over their estimated useful lives ranging from three years to thirty-nine years; leasehold improvements are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever is less. Software is generally amortized over three years. Depreciation and amortization are recorded on the straight-line method.
Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate. Gains and losses on routine dispositions are reflected in current operations.
Goodwill and Intangible Assets
The Company adopted Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets, in January 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Branch acquisition transactions were outside the scope of SFAS 142 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS 142. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives ranging from 8.25 years to 10 years.
Trust Assets
Securities and other property held by the trust and investment services segment in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements.
Foreclosed Real Estate
Foreclosed real estate represents real estate that has been acquired through loan foreclosures or deeds received in lieu of loan payments. Generally, such properties are appraised at the time acquired, and 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 and are reflected in operations.
Income Taxes
The Company uses the balance sheet method to account for deferred income tax assets and liabilities. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Stock-Based Compensation
The Company’s initial stock option plan terminated on December 31, 2006, which provided for the granting of incentive and non-statutory options to employees on a periodic basis. The Company’s stock options had an exercise price equal to or greater than the fair value of the stock on the date of grant. Effective January 1, 2006, the Company adopted SFAS 123R, Share Based Payment, using the modified prospective method and as such, results for prior periods have not been restated. SFAS 123R requires public companies to recognize compensation expense related to stock-based compensation awards, such as stock options and restricted stock, in their income statements over the period during which an employee is required to provide service in exchange for such award.
In April 2008, the stockholders approved the 2008 Stock Incentive Plan which makes available 500,000 shares to be used to grant restricted stock awards and stock options in the form of incentive stock options and non-statutory stock options to participants. The plan will terminate on February 18, 2018, unless terminated sooner by the board of directors.
Earnings Per Share
Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect the impact of additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company consist solely of outstanding stock options, and are determined using the treasury method.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and changes in the funded status of a defined benefit postretirement plan, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The components of accumulated other comprehensive income (loss), net of tax, included in the equity section of the balance sheets are as follows (in thousands):
| | | December 31, | | | | | 2008 | | | 2007 | | | | | | | | | | | Unrealized gains on securities available for sale | | $ | 2,024 | | | $ | 1,066 | | | Unfunded pension liability | | | (3,391 | ) | | | (1,508 | ) | | Total accumulated other comprehensive income (loss) | | $ | (1,367 | ) | | $ | (442 | ) |
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred, and were $203,000, $300,000, and $267,000 in 2008, 2007, and 2006, respectively.
Reclassifications
Certain reclassifications have been made in prior years'years financial statements to conform to classifications used in the current year.
New
Recent Accounting Pronouncements.
Pronouncements
In June 1998,September 2006, the Financial Accounting Standards Board (FASB)(“FASB”) reached a consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, (“EITF Issue 06-4”). In March 2007, the FASB reached a consensus on EITF Issue 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements, (“EITF Issue 06-10”). Both of these standards require a company to recognize an obligation over an employee’s service period based upon the substantive agreement with the employee such as the promise to maintain a life insurance policy or provide a death benefit postretirement. The Company adopted the provisions of these standards effective January 1, 2008. The adoption of these standards was not material to the consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 133, "Accounting157”). SFAS 157 defines fair value, establishes a framework for Derivative Instrumentsmeasuring fair value in generally accepted accounting principles, and Hedging Activities", which
establishes accounting and reporting standards requiring balance sheet
recognition of all derivative instrumentsexpands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 was not material to the consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 133 was
subsequently amended159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this Statement is to improve financial reporting by SFAS No. 137providing entities with the opportunity to mitigate volatility in June 1999reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by SFAS No. 138 in June
2000. The statement, as amended, specifies that changes inthis Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value of
derivative instruments be recognized currentlyoption has been elected in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows
derivative gainsat each subsequent reporting date. The fair value option may be applied instrument by instrument and losses to offset related results on hedged itemsis irrevocable. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, with early adoption available in the
income statement. Companies must formally document, designate and assess the
effectiveness of transactions utilizing hedge accounting. Adoption of this
standard oncertain circumstances. The Company adopted SFAS 159 effective January 1, 2001, did2008. The Company decided not have a material impact onto report any existing financial assets or liabilities at fair value that are not already reported, thus the Corporation.
In September 2000, the FASB 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. The adoption of this statement did not have a material effectimpact on the Corporation's
consolidated financial statements.
In June 2001December 2007, the FASB approvedissued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS 141(R”). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations",160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (“SFAS 160”). The Standard will significantly change the financial accounting and reporting of noncontrolling (or minority) interests in consolidated financial statements. SFAS 160 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008, with early adoption prohibited. The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements, at this time.
In November 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. Implementation of SAB 109 by the Company on January 1, 2008, did not have a material impact on its consolidated financial statements.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simplified method discussed in SAB 107 for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. The staff noted that it understands that detailed information about employee exercise patterns may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. Implementation of SAB 110 by the Company on January 1, 2008, did not have a material impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133” (“SFAS No. 161”). SFAS No. 161 requires that an entity provide enhanced disclosures related to derivative and hedging activities. SFAS No. 161 is effective for the Company on January 1, 2009. The Company does not expect the implementation of SFAS 161 to have a material impact on its consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets". Assets” (“SFAS No. 141 prospectively prohibits142”). The intent of FSP No. 142-3 is to improve the poolingconsistency between the useful life of interest
31
method of accounting for business combinations initiated after June
30, 2001. Undera recognized intangible asset under SFAS No. 142 goodwill has an indefinite life and will no longer
be amortized. SFAS No. 142 also establishes a new methodthe period of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduceexpected cash flows used to measure the fair value of the assets under SFAS No. 141(R). FSP No. 142-3 is effective for the Company on January 1, 2009, and applies prospectively to intangible assets that are acquired individually or with 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.group of other assets in business combinations and asset acquisitions. The adoption of SFASFSP No. 141 and 142142-3 is not expected to have a material impact on the Corporation.
2. ParentCompany’s consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Management does not expect the adoption of the provisions of SFAS No. 162 to have any impact on the consolidated financial statements.
In September 2008, the FASB issued FASB Staff Position (“FSP”) 133-1 and FASB Interpretations (“FIN”) 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP 133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4 require a seller of credit derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of financial statements to assess their potential effect on its financial position, financial performance and cash flows. The disclosures required by FSP 133-1 and FIN 45-4 will be effective for the Company on December 31, 2008 and are not expected to have a material impact on the consolidated financial statements.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Information:
Condensed parent companyAsset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 in determining the fair value of a financial informationasset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have material impact on the Company’s consolidated financial statements.
In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” FSP No. FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures about transfers of financial assets and interests in variable interest entities. The FSP is effective for interim and annual periods ending after December 15, 2008. Since the FSP requires only additional disclosures concerning transfers of financial assets and interest in variable interest entities, adoption of the FSP did not affect the Company’s financial condition, results of operations or cash flows.
In January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance. The FSP is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. The FSP was effective as follows (in
thousands):
As of December 31, -----------------
Condensed Balance Sheets 2001 2000
- ------------------------ ------- -------
Assets2008 and did not have a material impact on the consolidated financial statements.
Note 2 – Restrictions on Cash $ 1,126 $ 612
Investment in Subsidiary 63,791 62,270
Other Assets 480 456
------- -------
Total Assets $65,397 $63,338
======= =======
Liabilities $ - $ -
Shareholders' Equity 65,397 63,338
------- -------
Total Liabilities and Shareholders' Equity $65,397 $63,338
======= =======
ForAmounts Due From Banks
The Company is a member of the Year EndedFederal Reserve System and is required to maintain certain levels of its cash and cash equivalents as reserves based on regulatory requirements. This reserve requirement was approximately $7,795,000 at December 31, -----------------------------
Condensed Statements of Income 2001 2000 1999
- ------------------------------ -------- -------- -------
Dividends from Subsidiary $ 8,985 $ 4,640 $ 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 Ended2008 and $7,368,000 at December 31, ------------------------------
Condensed Statements2007.
The Company maintains cash accounts in other commercial banks. The amount on deposit with correspondent institutions at December 31, 2008 did not exceed the insurance limits of Cash Flows 2001 2000 1999the Federal Deposit Insurance Corporation.
Note 3 - ---------------------------------- -------- -------- --------
Cash provided by dividends received
from Subsidiary $ 8,985 $ 4,640 $ 3,857
Cash used for payment of dividends (3,924) (3,564) (3,204)
Cash used for repurchase of stock (4,600) (564) -
Other 53 (111) (497)
-------- -------- --------
Net increase in cash $ 514 $ 401 $ 156
======== ========= ========
32
3. Investment Securities:
Securities
The amortized cost and estimated fair value of investments in debt and equity securities at December 31, 20012008 and 20002007 were as follows (in thousands):
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
======== ======= ====== ========
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
======== ======= ====== ========
33
follows:
| | | December 31, 2008 | | | (in thousands) | | Amortized | | | Unrealized | | | Unrealized | | | Estimated | | | | | Cost | | | Gains | | | Losses | | | Fair Value | | | Securities available for sale: | | | | | | | | | | | | | | Debt securities: | | | | | | | | | | | | | | Federal agencies | | $ | 43,331 | | | $ | 2,093 | | | $ | 8 | | | $ | 45,416 | | | Mortgage-backed | | | 45,139 | | | | 1,040 | | | | 496 | | | | 45,683 | | | State and municipal | | | 36,726 | | | | 653 | | | | 74 | | | | 37,305 | | | Corporate | | | 1,485 | | | | 3 | | | | 96 | | | | 1,392 | | | Equity securities: | | | | | | | | | | | | | | | | | | FHLB stock - restricted | | | 2,362 | | | | - | | | | - | | | | 2,362 | | | Federal Reserve stock - restricted | | | 1,429 | | | | - | | | | - | | | | 1,429 | | | Other | | | 108 | | | | - | | | | - | | | | 108 | | | Total securities available for sale | | | 130,580 | | | | 3,789 | | | | 674 | | | | 133,695 | | | | | | | | | | | | | | | | | | | | | Securities held to maturity: | | | | | | | | | | | | | | | | | | Mortgage-backed | | | 254 | | | | 10 | | | | - | | | | 264 | | | State and municipal | | | 6,867 | | | | 261 | | | | 1 | | | | 7,127 | | | Total securities held to maturity | | | 7,121 | | | | 271 | | | | 1 | | | | 7,391 | | | Total securities | | $ | 137,701 | | | $ | 4,060 | | | $ | 675 | | | $ | 141,086 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2007 | | | (in thousands) | | Amortized | | | Unrealized | | | Unrealized | | | Estimated | | | | | Cost | | | Gains | | | Losses | | | Fair Value | | | Securities available for sale: | | | | | | | | | | | | | | | | | | Debt securities: | | | | | | | | | | | | | | | | | | Federal agencies | | $ | 55,350 | | | $ | 1,059 | | | $ | 33 | | | $ | 56,376 | | | Mortgage-backed | | | 45,346 | | | | 565 | | | | 97 | | | | 45,814 | | | State and municipal | | | 36,343 | | | | 258 | | | | 113 | | | | 36,488 | | | Corporate | | | 1,485 | | | | - | | | | 40 | | | | 1,445 | | | Equity securities: | | | | | | | | | | | | | | | | | | FHLB stock - restricted | | | 2,125 | | | | - | | | | - | | | | 2,125 | | | Federal Reserve stock - restricted | | | 1,429 | | | | - | | | | - | | | | 1,429 | | | FNMA and FHLMC preferred stock | | | 1,346 | | | | 42 | | | | - | | | | 1,388 | | | Other | | | 94 | | | | - | | | | - | | | | 94 | | | Total securities available for sale | | | 143,518 | | | | 1,924 | | | | 283 | | | | 145,159 | | | | | | | | | | | | | | | | | | | | | Securities held to maturity: | | | | | | | | | | | | | | | | | | Mortgage-backed | | | 308 | | | | 11 | | | | - | | | | 319 | | | State and municipal | | | 11,682 | | | | 256 | | | | 7 | | | | 11,931 | | | Total securities held to maturity | | | 11,990 | | | | 267 | | | | 7 | | | | 12,250 | | | Total securities | | $ | 155,508 | | | $ | 2,191 | | | $ | 290 | | | $ | 157,409 | | | | | | | | | | | | | | | | | | | |
The amortized cost and estimated fair value of investments in debt
securities at December 31, 2001,2008, by contractual maturity, are shown below (in
thousands).in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because mortgage-backed securities have both known principal repayment terms as well as unknown principal repayments due to potential borrower pre-payments, it is difficult to accurately predict the final maturity of these investments. The majority of mortgage-backedMortgage-backed securities held
have a stated final maturity of greater than ten yearsare shown separately.
| | | Available for Sale | | | | Held to Maturity | | | | | Amortized | | | Estimated | | | | Amortized | | | Estimated | | | (in thousands) | | Cost | | | Fair Value | | | | Cost | | | Fair Value | | | | | | | | | | | | | | | | | | Due in one year or less | | $ | 13,734 | | | $ | 13,826 | | | | $ | 540 | | | $ | 544 | | | Due after one year | | | | | | | | | | | | | | | | | | | through five years | | | 50,309 | | | | 52,578 | | | | | 2,538 | | | | 2,604 | | | Due after five years | | | | | | | | | | | | | | | | | | | through ten years | | | 10,884 | | | | 11,107 | | | | | 3,789 | | | | 3,979 | | | Due after ten years | | | 6,615 | | | | 6,602 | | | | | - | | | | - | | | Equity securities | | | 3,899 | | | | 3,899 | | | | | - | | | | - | | | Mortgage-backed securities | | | 45,139 | | | | 45,683 | | | | | 254 | | | | 264 | | | | | $ | 130,580 | | | $ | 133,695 | | | | $ | 7,121 | | | $ | 7,391 | |
Gross realized gains 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 $ 1,500 $ 1,510 $ 10,527 $ 10,542
Due after one year
through five years 8,214 8,570 55,078 56,121
Due after five years
through ten years 12,062 12,246 15,360 15,767
Due after ten years 531 539 7,429 7,310
Mortgage-backed Securities 7,167 7,289 36,939 37,577
-------- -------- -------- --------
$ 29,474 $ 30,154 $125,333 $127,317
======== ======== ======== ========
Proceedslosses from the maturities and callscall of all 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 maturities
and callssale of securities available for sale were $53,240,000, resulting in gross
realized gains of $368,000 and gross realized losses of $1,000. Principal
repayments on securities available for sale were $8,874,000. Proceeds from the
maturities and calls of securities held to maturity in 2000 were $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 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 securities available for sale were
$25,028,000, resulting in gross realized gains of $8,000. Principal repayments
on securities available for sale were $5,938,000.
Investment securitiesas follows (in thousands): 0; | | | For the Years Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | Realized gains | | $ | 51 | | | $ | 135 | | | $ | 62 | | | Realized losses | | | (501 | ) | | | - | | | | - | |
Securities with a bookcarrying value of approximately $57,320,000$90,683,000 and $85,313,000, at December 31, 20012008 and 2007, respectively, were pledged to secure public deposits, of the U. S. Government, state
and political subdivisionsrepurchase agreements, and for other purposes as required by law. Of this
amount, $35,622,000 was pledged to secure repurchase agreements.
Corporate bonds consist of high qualityinvestment grade debt securities, primarily issued in theby financial services industry.
companies.
The Federal Reserve Act limits amountstable below shows estimated fair value and gross unrealized losses, aggregated by investment category and length 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 bankstime that individual securities have been 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 loansa continuous unrealized loss position, at December 31, 20012008. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security’s market value exceeded its amortized cost on other days during the past twelve-month period.
| | | Total | | | Less than 12 Months | | | 12 Months or More | | | (in thousands) | | Estimated Fair Value | | | Unrealized Loss | | | Estimated Fair Value | | | Unrealized Loss | | | Estimated Fair Value | | | Unrealized Loss | | | Federal agencies | | $ | 1,583 | | | $ | 8 | | | $ | 1,583 | | | $ | 8 | | | $ | - | | | $ | - | | | Mortgage-backed | | | 4,484 | | | | 496 | | | | 3,468 | | | | 472 | | | | 1,016 | | | | 24 | | | State and municipal | | | 3,581 | | | | 75 | | | | 3,581 | | | | 75 | | | | - | | | | - | | | Corporate | | | 389 | | | | 96 | | | | - | | | | - | | | | 389 | | | | 96 | | | Total | | $ | 10,037 | | | $ | 675 | | | $ | 8,632 | | | $ | 555 | | | $ | 1,405 | | | $ | 120 | |
Management evaluates securities for other than temporary impairment quarterly, and 2000 were composedmore frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the following (in thousands):
2001 2000
-------- --------
Real Estate loans
Constructionissuer, and land development $ 10,282 $ 9,284
Secured by farmland 1,110 1,616
Secured by 1 - 4 family residential properties 126,860 121,449
Secured by multi-family (5 or more) residential properties 6,385 5,023
Secured by nonfarm, nonresidential properties 88,648 67,312
Loansthe intent and ability of the Company to farmers 1,452 1,625
Commercial and industrial loans 98,324 83,428
Consumer loans 36,077 44,389
Loans for nonrated industrial development obligations 6,436 5,590
All other loans 19 40
-------- --------
Loans, net of unearned income $375,593 $339,756
======== ========
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 areretain its investment in the processissuer for a period of collection, income recognition
on consumer loans is discontinuedtime sufficient to allow for anticipated recovery in fair value. The unrealized losses are attributable to interest rate changes and not credit concerns of the loans are charged off after a
delinquencyissuer. The Company has the intent and ability to hold these securities for the time necessary to recover the amortized cost.
The table below shows gross unrealized losses and 2000, loansfair value, aggregated by investment category and length of time that individual securities have been in a nonaccrual or
restructured status totaled approximately $568,000 and $146,000, respectively.
Interest income on nonaccrual loans, if recognized, is recorded on a
cash basis. For the years 2001, 2000 and 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 and $23,000, respectively. No interest payments were
recorded in 2001, 2000 or 1999 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.
Properties received due to loan foreclosures were $117,000continuous unrealized loss position, at December 31, 2001 and $30,000 at December 31, 2000 and are recorded as other assets on the
Statement of Condition.
The Bank measures impaired2007.
| | | Total | | | Less than 12 Months | | | 12 Months or More | | | (in thousands) | | Estimated Fair Value | | | Unrealized Loss | | | Estimated Fair Value | | | Unrealized Loss | | | Estimated Fair Value | | | Unrealized Loss | | | Federal agencies | | $ | 7,459 | | | $ | 33 | | | $ | - | | | $ | - | | | $ | 7,459 | | | $ | 33 | | | Mortgage-backed | | | 10,194 | | | | 97 | | | | 3,508 | | | | 35 | | | | 6,686 | | | | 62 | | | State and municipal | | | 17,858 | | | | 120 | | | | 2,087 | | | | 12 | | | | 15,771 | | | | 108 | | | Corporate | | | 1,445 | | | | 40 | | | | - | | | | - | | | | 1,445 | | | | 40 | | | Total | | $ | 36,956 | | | $ | 290 | | | $ | 5,595 | | | $ | 47 | | | $ | 31,361 | | | $ | 243 | |
Note 4 – Loans
Loans, excluding loans 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 valueheld for sale, were comprised of the collateral, if thefollowing:
| | | December 31, | | | (in thousands) | | 2008 | | | 2007 | | | | | | | | | | | Construction and land development | | $ | 63,361 | | | $ | 69,803 | | | Commercial real estate | | | 207,160 | | | | 198,332 | | | Residential real estate | | | 136,480 | | | | 133,899 | | | Home equity | | | 57,170 | | | | 48,313 | | | Total real estate | | | 464,171 | | | | 450,347 | | | | | | | | | | | | | Commercial and industrial | | | 98,546 | | | | 91,028 | | | Consumer | | | 8,393 | | | | 10,016 | | | Total loans | | $ | 571,110 | | | $ | 551,391 | | | | | | | | | | | |
Net deferred loan is collateral-dependent. When the measure of the
impaired loan is less than the recorded investmentcosts included in the above loan the impairmentcategories are $244,000 for 2008 and $171,000 for 2007.
The following is recorded through a valuation allowance.
Commercial loans onsummary of information pertaining to impaired and nonaccrual statusloans:
| | | December 31, | | | (in thousands) | | 2008 | | | 2007 | | | | | | | | | | | Impaired loans with a valuation allowance | | $ | 2,545 | | | $ | 3,092 | | | Impaired loans without a valuation allowance | | | 647 | | | | 473 | | | Total impaired loans | | $ | 3,192 | | | $ | 3,565 | | | | | | | | | | | | | Allowance provided for impaired loans, | | | | | | | | | | included in the allowance for loan losses | | $ | 1,164 | | | $ | 1,499 | | | | | | | | | | | | | Nonaccrual loans excluded from the | | | | | | | | | | impaired loan disclosure | | $ | 1,574 | | | $ | 1,329 | |
| | | Years Ended December 31, | | | (in thousands) | | 2008 | | | 2007 | | | 2006 | | | | | | | | | | | | | | Average balance in impaired loans | | $ | 4,829 | | | $ | 2,540 | | | $ | 2,534 | | | | | | | | | | | | | | | | | Interest income recognized on impaired loans | | $ | 152 | | | $ | 262 | | | $ | 121 | | | | | | | | | | | | | | | | | Interest income recognized on nonaccrual loans | | $ | - | | | $ | - | | | $ | - | | | | | | | | | | | | | | | | | Loans past due 90 days and still accruing interest | | $ | - | | | $ | - | | | $ | - | | | | | | | | | | | | | | | |
No additional funds 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 consideredcommitted to be insignificant shortfalls or
indicatorsadvanced in connection with impaired loans.
Note 5 – Accounting for Certain Loans Acquired in a Transfer
The Company acquired loans for which management considerspursuant to the acquisition of Community First Financial Corporation (“Community First”) in April 2006. In accordance with SOP 03-3, at acquisition the Company reviewed each loan to determine whether there was evidence of deterioration of credit quality since origination and if it was probable that the Bankit will be unable to collect all amounts due according to the loan’s contractual termsterms. When both conditions existed, the Company accounted for each loan individually, considered expected prepayments, and estimated the amount and timing of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each loan. The Company determined the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted into interest income (nonaccretable difference). The remaining amount, representing the excess of the loan’s cash flows expected to be collected over the amount paid, is accreted into interest income over the remaining life of the loan agreement are considered(accretable yield).
Over the life of the loan, the Company continues to estimate cash flows expected to be impaired. Allcollected. The Company evaluates at the balance sheet date whether the present value of its loans made bydetermined using the Bank other than commercialeffective interest rates has decreased and if so, establishes a valuation allowance for the loan. Valuation allowances for acquired loans subject to SOP 03-3 reflect only those losses incurred after acquisition – that is, the present value of cash flows expected at acquisition that are collectively evaluatednot expected to be collected. Valuation allowances are established only subsequent to acquisition of the loans. For loans that are not accounted for impairment. Interest incomeas debt securities, the present value of any subsequent increase in the loan’s or pool’s actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan. For any remaining increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on impaireda prospective basis over the loan’s remaining life. The Company does not have any such loans that were accounted for as debt securities.
Loans that were acquired in the same manner
as loans on nonaccrual status. AsCommunity First acquisition, for which there was evidence of December 31, 2001deterioration of credit quality since origination and 2000, the Bankfor which it was probable that all contractually required payments would not be made had not identified any loans as impaired.
The loan portfolio is concentrated primarily in the immediate
geographic region. There were no concentrationsan outstanding balance of loans to any individual,
group of individuals, businesses or industry that exceeded 10% of the
outstanding loans$665,000 and a carrying amount $344,000 at December 31, 2001.
An analysis2008 and an outstanding balance of $1,010,000 and a carrying amount of $582,000 at December 31, 2007.
The carrying amount of these loans is included in the balance sheet amount of loans receivable at December 31, 2008 and 2007. These loans are not included in the impaired loan amounts disclosed in Note 4.
(in thousands) | | Accretable Yield | | | Balance at December 31, 2006 | | $ | 692 | | | Accretion | | | (52 | ) | Reclassifications from nonaccretable difference | | | 1 | | | Disposals | | | (530 | ) | | Balance at December 31, 2007 | | | 111 | | | Accretion | | | (20 | ) | | Disposals | | | (46 | ) | | Balance at December 31, 2008 | | $ | 45 | | | | | | | |
Note 6 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
Changes in the allowance for loan losses and the reserve for unfunded lending commitments for each of the years in the three-year period ended December 31, 2008, are presented below:
| | | Years Ended December 31, | | | (in thousands) | | 2008 | | | 2007 | | | 2006 | | | Allowance for Loan Losses | | | | | | | | | | | Balance, beginning of year | | $ | 7,395 | | | $ | 7,264 | | | $ | 6,109 | | | Allowance acquired in merger | | | - | | | | - | | | | 1,598 | | | Provision for loan losses | | | 1,620 | | | | 403 | | | | 58 | | | Charge-offs | | | (1,564 | ) | | | (515 | ) | | | (913 | ) | | Recoveries | | | 373 | | | | 243 | | | | 412 | | | Balance, end of year | | $ | 7,824 | | | $ | 7,395 | | | $ | 7,264 | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | Reserve for Unfunded Lending Commitments | | | | | | | | | | | | | | Balance, beginning of year | | $ | 151 | | | $ | 123 | | | $ | - | | | Provision for unfunded commitments | | | 324 | | | | 28 | | | | 123 | | | Balance, end of year | | $ | 475 | | | $ | 151 | | | $ | 123 | |
The reserve for unfunded loan commitments is as follows (in
thousands):
2001 2000 1999
-------- -------- --------
Balance, beginning of year $ 4,746 $ 4,135 $ 3,821
Provision for loan losses charged to expense 1,015 1,020 670
Charge-offs (602) (567) (509)
Recoveries 175 158 153
-------- -------- --------
Balance, end of year $ 5,334 $ 4,746 $ 4,135
======== ======== ========
5.included in other liabilities.
Note 7 – Premises and Equipment:
Equipment
Major classifications of premises and equipment are summarized as follows:
| (in thousands) | | December 31, | | | | | 2008 | | | 2007 | | | | | | | | | | | Land | | $ | 3,977 | | | $ | 3,977 | | | Buildings | | | 15,686 | | | | 11,573 | | | Leasehold improvements | | | 535 | | | | 492 | | | Furniture and equipment | | | 14,383 | | | | 13,210 | | | | | | 34,581 | | | | 29,252 | | | Accumulated depreciation | | | (17,150 | ) | | | (15,904 | ) | | Premises and equipment, net | | $ | 17,431 | | | $ | 13,348 | |
Depreciation expense for the years ended December 31, 2008, 2007, and 2006 was $1,358,000, $1,178,000 and $993,000, respectively.
The Company has entered into operating leases for several of its branch and ATM facilities. The minimum annual rental payments under these leases at December 31, 2008 are as follows:
| (in thousands) | | Minimum Lease | | | Year | | Payments | | | 2009 | | $ | 296 | | | 2010 | | | 228 | | | 2011 | | | 97 | | | 2012 | | | 58 | | | 2013 | | | 21 | | | 2014 and after | | | 2 | | | | | $ | 702 | |
Rent expense for the years ended December 31, 2008, 2007, and 2006 was $329,000, $353,000, and $308,000, respectively.
Note 8– Goodwill and Other Intangible Assets In January 2002, the Company adopted SFAS 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer subject to amortization, but is subject to at least an annual assessment for impairment by applying a fair value test. A fair value-based test was performed during the third quarter of 2008 that determined the market value of the Company’s shares exceeds the consolidated carrying value, including goodwill; therefore, there has been no impairment recognized in the value of goodwill. The changes in the carrying amount of goodwill for the year ended December 31, 2008, are 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
| | | Amount | | | Balance as of January 1, 2008 | | $ | 22,468 | | | Goodwill recorded during year | | | - | | | Impairment losses | | | - | | | Balance as of December 31, 2008 | | $ | 22,468 | |
Core deposit intangibles resulting from the Community First acquisition in April 2006 were $3,112,000 and are being amortized over 99 months. Goodwill and intangible assets are as follow (in thousands):
| | | Gross Carrying Value | | | Accumulated Amortization | | | Net Carrying Value | | | December 31, 2008 | | | | | | | | | | | Amortizable core deposit intangibles | | $ | 3,112 | | | $ | 1,037 | | | $ | 2,075 | | | Goodwill | | | 22,468 | | | | - | | | | 22,468 | | | | | | | | | | | | | | | | | December 31, 2007 | | | | | | | | | | | | | | Amortizable core deposit intangibles | | $ | 3,112 | | | $ | 660 | | | $ | 2,452 | | | Goodwill | | | 22,468 | | | | - | | | | 22,468 | |
Amortization expense of core deposit intangibles for the years ended December 31, 2008, 2007, and 2006 totaled $377,000, $377,000, and $414,000, respectively. As of December 31, 2008, the estimated future amortization expense of core deposit intangibles is as follows (in thousands):
Year | | Amount | | | 2009 | | $ | 377 | | | 2010 | | | 377 | | | 2011 | | | 377 | | | 2012 | | | 377 | | | 2013 | | | 377 | | | Thereafter | | | 190 | |
Note 9 - Deposits
The aggregate amount of time deposits are certificates of deposit in denominations of $100,000 or more totaling $63,436,000 and $56,361,000 at December 31, 20012008 and 2000,2007 was $107,186,000 and $101,212,000 respectively. Interest expense on such deposits during 2001, 2000 and
1999 was $3,539,000, $2,781,000 and $1,566,000, respectively.
35
7. Borrowings:
Repurchase agreements of $27,177,000 and $31,730,000 comprised short-term
borrowings at
At December 31, 20012008, the scheduled maturities of certificates of deposits (included in “time” deposits on the Consolidated Balance Sheet) were as follows (in thousands):
| Year | | Amount | | | 2009 | | $ | 181,352 | | | 2010 | | | 34,780 | | | 2011 | | | 15,093 | | | 2012 | | | 10,878 | | | 2013 | | | 18,961 | | | | | $ | 261,064 | |
Note 10 – Short-term Borrowings
Short-term borrowings consist of customer repurchase agreements, overnight borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”), and 2000, respectively. RepurchaseFederal Funds purchased. Customer repurchase agreements are borrowings collateralized by securities of the U.S. Government or its agencies andagencies. They mature daily. The interest rates are generally fixed but may be changed at the discretion of the Company. The securities underlying these agreements remain under the Corporation'sCompany’s control. FHLB overnight borrowings contain floating interest rates that may change daily at the discretion of the FHLB. Federal Funds purchased are unsecured overnight borrowings from other financial institutions. Short-term borrowings consisted of the following as of December 31, 2008 and 2007 (in thousands):
| | | 2008 | | | 2007 | | | | | | | | | | | Customer repurchase agreements | | $ | 51,741 | | | $ | 47,891 | | | FHLB overnight borrowings | | | 7,850 | | | | 7,200 | | | | | $ | 59,591 | | | $ | 55,091 | | | | | | | | | | | |
Note 11 – Long-term Borrowings
Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans and home equity lines of credit. In addition, the Company pledges as collateral its capital stock in the FHLB and deposits with the FHLB. The maximum balance of repurchase agreements at
any month-end during 2001 was $32,318,000 and during 2000 was $35,381,000.
The BankCompany has a line of credit with the FHLB equal to 15%30% of the BanksCompany’s assets, withsubject to the Federal Home Loan Bankamount of Atlanta that equaled approximately $85,861,000 atcollateral pledged. As of December 31, 2001. Long-term borrowings outstanding under this line2008, $107,834,000 in 1-4 family residential mortgage loans and $57,170,000 in home equity lines of credit were $13,000,000pledged under the blanket floating lien agreement which covers both short-term and $16,000,000 respectively, atlong-term borrowings. Long-term borrowings consisted of the following fixed rate, long term advances as of December 31, 20012008 and 2007 (in thousands):
| | | Due by December 31 | | 2008 Advance Amount | | | Weighted Average Rate | | Due by December 31 | | 2007 Advance Amount | | | Weighted Average Rate | | | | | | | | | | | | | | | | | | 2009 | | $ | 5,000 | | | | 5.26 | % | 2008 | | $ | 3,000 | | | | 5.51 | % | | 2011 | | | 8,000 | | | | 2.93 | | 2009 | | | 5,000 | | | | 5.26 | | | 2014 | | | 787 | | | | 3.78 | | 2014 | | | 937 | | | | 3.78 | | | | | $ | 13,787 | | | | 3.82 | % | | | $ | 8,937 | | | | 5.19 | % | | | | | | | | | | | | | | | | | | | |
Note 12 – Trust Preferred Capital Notes
On April 7, 2006, AMNB Statutory Trust I, a Delaware statutory trust and a newly formed, wholly owned subsidiary of the Company, issued $20,000,000 of preferred securities in a private placement pursuant to an applicable exemption from registration. The Trust Preferred Securities mature on June 30, 2036, but may be redeemed at the Company’s option beginning on June 30, 2011. The securities require quarterly distributions by the Trust to the holder of the Trust Preferred Securities at a fixed rate of 6.66%. Effective June 30, 2011, the rate will reset quarterly at the three-month LIBOR plus 1.35%. Distributions are cumulative and will accrue from the date of original issuance, but may be deferred by the Company from time to time for up to twenty consecutive quarterly periods. The Company has guaranteed the payment of all required distributions on the Trust Preferred Securities. The proceeds of the Trust Preferred Securities received by the Trust, along with proceeds of $619,000 received by the Trust from the issuance of common securities by the Trust to the Company, were used to purchase $20,619,000 of the Company’s junior subordinated debt securities (the “Trust Preferred Capital Notes”), issued pursuant to a Junior Subordinated Indenture entered into between the Company and Wilmington Trust Company, as trustee. The proceeds of the Trust Preferred Capital Notes were used to fund the cash portion of the merger consideration to the former shareholders of Community First in connection with the Company’s acquisition of that company, and for general corporate purposes. In accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, the Corporation did not eliminate through consolidation the Corporation’s $619,000 equity investment in AMNB Statutory Trust I. Instead, the Corporation reflected this equity investment in the “Accrued interest receivable and other assets” line item in the consolidated balance sheets.
Note 13 – Stock-Based Compensation
The Company’s 1997 Stock Option Plan (“1997 Option Plan”) provided for the granting of incentive and non-statutory options to employees on a periodic basis, at the discretion of the Board or a Board designated committee. The 1997 Option Plan authorized the issuance of up to 300,000 shares of common stock. There were no options granted since 2004, and, effective December 31, 2000. The Federal Home Loan Bank2006, no further options may be granted under this plan.
Effective January 1, 2006, the Company adopted SFAS 123R, Share Based Payment, using the modified prospective method and as such, results for prior periods have not been restated. All options under the 1997 Option Plan were fully vested prior to January 1, 2006; therefore, adoption of Atlanta hasSFAS 123R resulted in no compensation expense. There was no tax benefit associated with stock option activity during 2008, 2007, or 2006. Under SFAS 123R, a company may only recognize tax benefits for stock options that ordinarily will result in a tax deduction when the option is exercised (“non-statutory” options). The Company has no non-statutory stock options.
The 2008 Stock Incentive Plan (“2008 Option Plan”) was adopted by the Board of early
terminationDirectors of these advancesthe Company on February 19, 2008 and approved by the stockholders on April 22, 2008. The 2008 Option Plan provides for the granting of restricted stock awards and incentive and non-statutory options to employees and directors on a periodic basis, at the discretion of the Board or aftera Board designated committee. The 2008 Option Plan authorized the early conversion option dateissuance of each advance contract.
The Corporation had three advances outstanding atup to 500,000 shares of common stock. SFAS 123(R) requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the year ended 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:
Thethe Company uses the intrinsic value methodrecognized $59,000 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
------ ------ ------
Net Income:
As reported $9,415 $8,676 $7,924
Pro forma 9,255 8,369 7,623
Basic Earnings per share:
As reported $ 1.58 $ 1.42 $ 1.30
Pro forma 1.56 1.38 1.25
Diluted 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 $6.62, 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
------ ------ ------
Risk-free interest rate 4.52% 6.17% 5.29%
Expected years until exercise 5.50 5.50 5.50
Expected stock volatility 40.10% 47.95% 38.32%
36
At December 31, 2001, and 2000, the Corporation had 148,550 shares and
148,300 shares, respectively, of its authorized 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.
options.
A summary of stock option transactions underis as follows:
| | | Option Shares | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value ($000) | | | Outstanding at December 31, 2007 | | | 174,871 | | | $ | 21.15 | | | | | | | Granted | | | 59,000 | | | | 17.00 | | | | | | | Exercised | | | (13,061 | ) | | | 16.83 | | | | | | | Forfeited | | | ( 2,200 | ) | | | 18.86 | | | | | | | Outstanding at December 31, 2008 | | | 218,610 | | | $ | 20.31 | | 5.4 years | | $ | 91 | | | Exercisable at December 31, 2008 | | | 174,360 | | | $ | 21.15 | | 4.2 years | | $ | 91 | |
The aggregate intrinsic value of stock option in the plan follows:
Option Option Price
Shares Per Share
--------- --------------
Outstanding attable above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on 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 at2008. This amount changes based on changes in the market value of the Company’s stock.
The total proceeds of the in-the-money options exercised during the year ended December 31, 1999 138,600 $13.69 - 20.00
Granted 17,400 $13.25 - 15.50
Exercised (71) $14.00
Forfeited (4,229) $13.69 - 14.00
---------
Outstanding at2008 and 2007 was $219,000 and $295,000, respectively. Total intrinsic value of options exercised during years ended 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 at2008, 2007, and 2006 was $51,000, $110,000, and $114,000, respectively.
As of December 31, 2001 151,450 $13.38 - 20.00
==========
2008, there was $176,000 unrecognized compensation expense. There was no unrecognized compensation expense as of December 31, 2007. Compensation expense related to stock options was $59,000 in 2008, $0 in 2007 and 2006.
The following table summarizes information related to stock options outstanding on December 31, 2001:
Number2008:
| Options Outstanding | | | Options Exercisable | | Range of Exercise Prices | | | Number of Outstanding Options | | | Weighted-Average Remaining Contractual Life | | | Weighted-Average Exercise Price | | | Number of Options Exercisable | | | Weighted-Average Exercise Price | | | $ | 13.38 to 15.00 | | | | 25,789 | | | 0.3 yrs | | | $ | 13.69 | | | | 25,789 | | | $ | 13.69 | | | 15.01 to 20.00 | | | | 99,794 | | | | 6.7 | | | | 17.64 | | | | 55,544 | | | | 18.15 | | | 20.01 to 25.00 | | | | 54,400 | | | | 5.8 | | | | 24.18 | | | | 54,400 | | | | 24.18 | | | 25.01 to 26.20 | | | | 38,627 | | | | 4.8 | | | | 26.18 | | | | 38,627 | | | | 26.18 | | | | | | | | 218,610 | | | 5.4 yrs | | | $ | 20.31 | | | | 174,360 | | | $ | 21.15 | |
The fair value of Numbereach stock option granted in 2008 was estimated on the date of Options
Exercise Price Outstanding Options Outstanding Options Exercisable
- ----------------- ------------------- ------------------- -----------------
$13.38 - $20.00 151,450 8.3grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table for the year ended December 31, 2008.
| | 2008 | | | Dividend yield | | | 5.41 | % | | Expected life in years | | | 6.6 | | | Expected volatility | | | 18.10 | % | | Risk-free interest rate | | | 1.77 | % | | Weighted average fair value per option granted | | | $3.98 | |
The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.
Note 14 – Income Taxes The Company files income tax returns in the U.S. federal jurisdiction and the states of Virginia and North Carolina. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years 151,450
9.prior to 2005. The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes:Taxes, on January 1, 2007, with no impact on the consolidated financial statements. The components of the Corporation'sCompany’s net deferred tax assets as of
December 31, 2001 and December 31, 2000, were as follows (in thousands):
2001 2000
------- -------
Deferred tax assets:
Allowance for loan losses $ 1,814 $ 1,431
Deferred compensation 266 279
Core deposit intangible 303 252
Other 21 45
------- -------
Total deferred tax assets 2,404 2,007
Deferred tax liabilities:
Depreciation 265 256
Net unrealized gains on securities 674 166
Accretion of discount 14 106
Loan loss recapture 143 -
Other 51 71
------- -------
Total deferred tax liabilities 1,147 599
------- -------
Net deferred tax assets $ 1,257 $ 1,408
======= =======
follows:
| (in thousands) | | December 31, | | | | | 2008 | | | 2007 | | | Deferred tax assets: | | | | | | | | Allowance for loan losses | | $ | 2,675 | | | $ | 2,476 | | | Accrued pension benefit | | | - | | | | 243 | | | Nonaccrual loan interest | | | 165 | | | | 175 | | | Deferred compensation | | | 211 | | | | 217 | | | Preferred stock impairment, net of valuation allowance | | | - | | | | 294 | | | Allowance for off balance sheet items | | | 166 | | | | - | | | Loans | | | 373 | | | | 607 | | | Other | | | 50 | | | | 7 | | | Total deferred tax assets | | | 3,640 | | | | 4,019 | |
| | | | | | | | | Deferred tax liabilities: | | | | | | | | Depreciation | | | 1,005 | | | | 806 | | | Accretion of discounts on securities | | | 33 | | | | 33 | | | Core deposit intangibles | | | 508 | | | | 535 | | | Deferred loan fees | | | 86 | | | | 60 | | | Net unrealized gains on securities | | | 1,090 | | | | 574 | | | Prepaid pension expense | | | 240 | | | | - | | | Pension liability | | | 1,826 | | | | 812 | | | Other | | | 52 | | | | 178 | | | Total deferred tax liabilities | | | 4,840 | | | | 2,998 | | | Net deferred tax assets (liabilities) | | $ | (1,200 | ) | | $ | 1,021 | |
The provision for income taxes consists of the following (in thousands):
2001 2000 1999
-------- -------- --------
Taxes currently payable $ 4,298 $ 3,830 $ 3,532
Deferred tax benefit (357) (415) (212)
-------- -------- --------
$ 3,941 $ 3,415 $ 3,320
======== ======== ========
37
following:
| (in thousands) | | Years Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | Taxes currently payable | | $ | 2,490 | | | $ | 4,943 | | | $ | 4,387 | | | Deferred tax expense (benefit) | | | 691 | | | | (67 | ) | | | 732 | | | | | $ | 3,181 | | | $ | 4,876 | | | $ | 5,119 | |
The effective tax rates differ from the statutory federal income tax rates due to the following items:
2001 2000 1999
----- ----- -----
Federal statutory rate 34.2% 34.0% 34.0%
Nontaxable interest
| | | Years Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | Federal statutory rate | | | 34.1 | % | | | 34.4 | % | | | 34.4 | % | | Nontaxable interest income | | | (4.9 | ) | | | (3.5 | ) | | | (3.7 | ) | | Other | | | 0.8 | | | | (1.0 | ) | | | 0.2 | | | Effective rate | | | 28.4 | % | | | 29.9 | % | | | 30.9 | % |
Note 15 – Earnings Per Share
The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of potentially dilutive common stock. Potentially dilutive common stock had no effect on income (4.9) (4.7) (4.5)
Other .2 (1.1) -
----- ----- -----
29.5% 28.2% 29.5%
===== ===== =====
10. Commitmentsavailable to common shareholders.
| | | Years Ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | | | Shares | | | Per Share Amount | | | Shares | | | Per Share Amount | | | Shares | | | Per Share Amount | | | Basic earnings per share | | | 6,096,649 | | | $ | 1.32 | | | | 6,139,095 | | | $ | 1.86 | | | | 5,986,262 | | | $ | 1.91 | | Effect of dilutive securities - stock options | | | 8,505 | | | | (.01 | ) | | | 22,730 | | | | - | | | | 33,809 | | | | (.01 | ) | | Diluted earnings per share | | | 6,105,154 | | | $ | 1.31 | | | | 6,161,825 | | | $ | 1.86 | | | | 6,020,071 | | | $ | 1.90 | |
Stock options on common stock which were not included in computing diluted EPS in 2008, 2007, and Contingent Liabilities:
2006, because their effects were antidilutive averaged 118,640 shares, 89,277 shares, and 88,177 shares, respectively.
Note 16 – Off-Balance Sheet Activities
The consolidatedCompany is party to credit-related financial statements do not reflect various
commitments and contingent liabilities which ariseinstruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instrumentsSuch commitments involve, to varying degrees, elements of credit and interest rate and liquidity risk in excess of the amount recognized in the Consolidated Balance Sheets. The extentCompany evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if applicable, is based on management's credit evaluation of the Bank's involvement in various commitments or contingent liabilitiescustomer.
The Company's exposure to credit loss is expressedrepresented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
The following off-balance sheet financial instruments were outstanding whose contract or notional amounts of such instruments.
represent credit risk:
| | | December 31, | | | (in thousands) | | 2008 | | | 2007 | | | | | | | | | | | Commitments to extend credit | | $ | 146,399 | | | $ | 144,301 | | | Standby letters of credit | | | 2,858 | | | | 6,222 | | | Mortgage loan rate lock commitments | | | 2,031 | | | | 2,215 | | | | | | | | | | | |
Commitments to extend credit which amounted to $121,062,000 and
$85,489,000 at December 31, 2001 and 2000, respectively, represent legally
bindingare agreements to lend to a customer withas long as there is no violation of any condition established in the contract. These commitments generally consist of unused portions of lines of credit issued to customers. Commitments generally have fixed expiration dates or other termination clauses.clauses and may require payment of a fee. Since manysome of the commitments are expected to expire without being funded,drawn upon, the total commitment amounts do not necessarily represent future liquiditycash requirements.
There were no commitments to purchase securities when issued at
December 31, 2001 and 2000.
Standby letters of credit are conditional commitments issued by the Bank guaranteeingCompany to guarantee the performance of a customer to a third party. Those guaranteesletters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
At December 31, 20012008, the Company had entered into commitments, on a best-effort basis, to sell loans of approximately $3,787,000. These commitments include mortgage loan commitments and 2000loans held for sale. Risks arise from the Bank had $1,000,000 and
$1,531,000 in outstanding standby letterspossible inability of credit. There were no commercial
letterscounterparties to meet the terms of credit at 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. This reserve requirement was approximately
$2,190,000 at December 31, 2001 and $1,821,000 at December 31, 2000.
11.their contracts.
Note 17 – Related Party Transactions:
The Corporation's Directors provideLoans
In the Bank with substantial amountsordinary course of business, and manyloans are among its largest depositors and borrowers. The
maximum amount of loans outstandinggranted to theexecutive officers, directors, and their business interests at any month-end during 2001, 2000 and 1999 was approximately
4.5% of total loans.related entities. Management believes that all such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to similar, unrelated borrowers, and do not involve more than a normal risk of collectability.collectability or present other unfavorable features. As of December 31, 2001,2008, none of these loans were restructured, nor were any related party loans charged off
during 2001.
past due, or on nonaccrual status.
An analysis of these loans for 20012008 is as follows (in thousands):
Balance, beginning of year $ 14,793
Additions 20,618
Repayments (22,554)
---------
Balance, end of year $ 12,857
=========
12.
| Balance at December 31, 2007 | | $ | 20,282 | | | Additions | | | 22,216 | | | Repayments | | | (22,703 | ) | | Balance at December 31, 2008 | | $ | 19,795 | |
Note 18 – Employee Benefit Plans:
Plans
Defined Benefit Plan
The Bank's retirement plan isCompany maintains 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. 38
Prior to 2008, the Company used October 31 as a measurement date to determine postretirement benefit obligations. The requirement under SFAS 158 to measure plan assets and benefit obligations as of the date of the employers’ fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.
The following table sets forth the plan's funded status and related disclosures as required by SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R):
| | | As of and for the Years Ended December 31, | | | (in thousands) | | 2008 | | | 2007 | | | 2006 | | | Change in Benefit Obligation: | | | | | | | | | | | Projected benefit obligation at beginning of year | | $ | 8,923 | | | $ | 7,038 | | | $ | 7,225 | | | Service cost | | | 843 | | | | 656 | | | | 621 | | | Interest cost | | | 600 | | | | 418 | | | | 351 | | | Plan amendments | | | - | | | | - | | | | 101 | | | Actuarial loss (gain) | | | (627 | ) | | | 987 | | | | 6 | | | Benefits paid | | | (157 | ) | | | (176 | ) | | | (1,266 | ) | | Projected benefit obligation at end of year | | | 9,582 | | | | 8,923 | | | | 7,038 | | | | | | | | | | | | | | | | | Change in Plan Assets: | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | | 8,230 | | | | 7,070 | | | | 6,056 | | | Actual return on plan assets | | | (2,888 | ) | | | 1,336 | | | | 780 | | | Employer contributions | | | 5,000 | | | | - | | | | 1,500 | | | Benefits paid | | | (158 | ) | | | (176 | ) | | | (1,266 | ) | | Fair value of plan assets at end of year | | | 10,184 | | | | 8,230 | | | | 7,070 | | | | | | | | | | | | | | | | | Funded Status at End of Year | | $ | 602 | | | $ | (693 | ) | | $ | 32 | | | | | | | | | | | | | | | | | Amounts Recognized in the Consolidated Balance Sheets | | | | | | | | | | | | | | Other assets (liabilities) | | $ | 602 | | | $ | (693 | ) | | $ | 32 | | | | | | | | | | | | | | | | | Amounts Recognized in Accumulated Other Comprehensive Income | | | | | | | | | | | | | | Net actuarial loss | | $ | 5,205 | | | $ | 2,308 | | | $ | 2,243 | | | Prior service cost | | | 13 | | | | 12 | | | | 11 | | | Deferred income tax benefit | | | (1,827 | ) | | | (812 | ) | | | (789 | ) | | Amount recognized | | $ | 3,391 | | | $ | 1,508 | | | $ | 1,465 | |
| | | As of and for the Years Ended December 31, | | | (in thousands) | | 2008 | | | 2007 | | | 2006 | | | Components of Net Periodic Benefit Cost | | | | | | | | | | | | | | Service cost | | $ | 723 | | | $ | 656 | | | $ | 621 | | | Interest cost | | | 515 | | | | 418 | | | | 351 | | | Expected return on plan assets | | | (657 | ) | | | (564 | ) | | | (521 | ) | | Amortization of prior service cost | | | (1 | ) | | | (1 | ) | | | (23 | ) | | Recognized net actuarial loss | | | 112 | | | | 150 | | | | 211 | | | Net periodic benefit cost | | $ | 692 | | | $ | 659 | | | $ | 639 | |
| Adjustment to Retained Earnings Due to Change in Measurement Date | | | | | | | | | | | Service cost | | $ | 121 | | | | N/A | | | | N/A | | | Interest cost | | | 86 | | | | N/A | | | | N/A | | | Expected return on plan assets | | | (110 | ) | | | N/A | | | | N/A | | | Recognized net actuarial loss | | | 18 | | | | N/A | | | | N/A | | | Net periodic benefit cost | | $ | 115 | | | | N/A | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income | | | | | | | | | | | | | | Net actuarial loss | | $ | 2,897 | | | $ | 65 | | | $ | 2,243 | | | Prior service cost | | | - | | | | - | | | | 11 | | | Amortization of prior service cost | | | 1 | | | | 1 | | | | - | | | Total recognized in other comprehensive income | | $ | 2,898 | | | $ | 66 | | | $ | 2,254 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Recognized in Net Periodic Benefit Cost, Retained Earnings and Other Comprehensive Income | | $ | 3,705 | | | $ | 725 | | | $ | 2,893 | |
| | | | | | | | | | | | Weighted-Average Assumptions at End of Year | | | | | | | | | | | Discount rate used for net periodic pension cost | | | 6.00 | % | | | 6.00 | % | | | 5.75 | % | | Discount rate used for disclosure | | | 6.00 | % | | | 6.00 | % | | | 6.00 | % | | Expected return on plan assets | | | 8.00 | % | | | 8.00 | % | | | 8.00 | % | | Rate of compensation increase | | | 4.00 | % | | | 4.00 | % | | | 4.00 | % | | | | | | | | | | | | | | | | N/A – not applicable | | | | | | | | | | | | |
The accumulated benefit obligation as of December 31, 20012008, 2007, and 20002006 was $6,942,364, $6,499,448, and $4,971,000 respectively. The plan sponsor selects the expected long-term rate-of-return-on-assets assumption in consultation with their investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate during the period in which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).
Below is a description of the plan’s assets. The plan’s weighted-average asset allocations by asset category are as follows:
| Asset Category | | December 31, 2008 | | | October 31, 2007 | | | Fixed Income | | | 24.8 | % | | | 25.0 | % | | Equity | | | 34.0 | | | | 63.7 | | | Mutual Funds | | | 5.5 | | | | - | | | Cash and Accrued Income | | | 35.7 | | | | - | | | Other | | - | | | | 11.3 | | | Total | | | 100.0 | % | | | 100.0 | % |
The investment policy and strategy for plan assets can best be described as a growth and income strategy. Diversification is accomplished by limiting the holding of any one equity issuer to no more than 5% of total equities. Exchange traded funds are used to provide diversified exposure to the small capitalization and international equity markets. All fixed income investments are rated as investment grade, with the majority of these assets invested in corporate issues. The assets are managed by the Company’s Trust and Investment Services Division. No derivatives are used to manage the assets. Equity securities do not include holdings in the Company.
Projected benefit payments for the years 2009 to 2018 are as follows (in thousands):
2001 2000
-------- --------
Change
| Year | | Amount | | | 2009 | | $ | 57 | | | 2010 | | | 85 | | | 2011 | | | 204 | | | 2012 | | | 248 | | | 2013 | | | 290 | | | 2014-2018 | | | 2,224 | |
The Company does not anticipate making a contribution in benefit obligation:
Benefit obligation at beginning of year $ 4,122 $ 4,462
Service cost 274 238
Interest cost 309 322
Actuarial (gain) loss 262 (83)
Benefits paid (130) (817)
-------- --------
Benefit obligation at end of year $ 4,837 $ 4,122
======== ========
Change in2009.
Defined Contribution Plan
The Company maintains a 401(k) savings plan assets:
Fair value of plan assets at beginning of year $ 4,453 $ 5,053
Actual return on plan assets (237) 151
Employer contributions 274 66
Benefits paid (130) (817)
-------- --------
Fair value of plan assets at end of year $ 4,360 $ 4,453
======== ========
Funded status $ (477) $ 331
Unrecognized net actuarial (gain) loss 566 (288)
Unrecognized net obligation at transition (17) (30)
Unrecognized prior service cost (120) (144)
-------- --------
Accrued benefit cost included in other liabilities $ (48) $ (131)
======== ========
Major assumptions and net periodic pension cost include the following:
Weighted-average assumptions: 2001 2000 1999
------- ------- -------
Discount rate:
Post-retirement 6.00% 6.00% 6.00%
Pre-retirement 7.00 7.50 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
Interest cost 309 322 274
Expected return on plan assets (356) (404) (364)
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
======= ======= =======
In 1982, the Board of Directorsthat covers substantially all full-time employees of the Bank adoptedCompany. The Company matches a portion of the contribution made by employee participants after at least one year of service. The Company contributed $263,000, $273,000, and $245,000 to the 401(k) plan in 2008, 2007, and 2006, respectively. These amounts are included employee benefits expense for the respective years.
Deferred Compensation Arrangements
The Company maintains deferred compensation agreements with certain key officerscurrent and former employees 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'officers’ remaining periodperiods 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 planthese agreements was $68,000, $110,000$33,000, $55,000, and $63,000$60,000 for years 2001, 20002008, 2007, and 1999,2006, respectively.
A 401(k) savings
Profit Sharing and Incentive Arrangements
The Company maintains a cash profit sharing plan was adopted in 1995 that covers substantially allfor full-time employees ofbased on the Bank.Company’s performance and a cash incentive compensation plan for officers based on the Company’s performance and individual officer goals. 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 and $108,000total amount charged to the 401(k) plan in 2001, 2000 and
1999, respectively. These amounts are included in pension and other employee
benefitssalary expense for these plans was $0, $287,000, and $867,000 for the respective years.
39
13.years 2008, 2007, and 2006, respectively.
Note 19 – Fair Value of Financial Instruments:
Instruments
The Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In February 2008, the FASB issued Staff Position No. 157-2 (“FSP 157-2”) which delayed the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 defers the effective date of SFAS 157 for such nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Thus, the Company has only partially applied SFAS 157. Those items affected by FSP 157-2 include other real estate owned (OREO), goodwill and core deposit intangibles.
In October of 2008, the FASB issued Staff Position No. 157-3 (“FSP 157-3”) to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements were not issued. SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under SFAS 157 based on these two types of inputs are as follows:
| Level 1 – | | Valuation is based on quoted prices in active markets for identical assets and liabilities. | | | | | | Level 2 – | | Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. | | | | | | Level 3 – | | Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. |
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). Federal Reserve Bank and Federal Home Loan Bank stocks are carried at cost since no ready market exists and there is no quoted market value. The Company is required to own stock in these companies as long as it is a member. Therefore, they have been excluded from the table below. The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008 (in thousands):
| | | | | | Fair Value Measurements at December 31, 2008 Using | | | | | Balance as of December 31, | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | | Description | | 2008 | | | Level 1 | | | Level 2 | | | Level 3 | | | Assets | | | | | | | | | | | | | | Securities available for sale | | $ | 129,904 | | | $ | - | | | $ | 129,904 | | | $ | - | | | Mortgage loan derivative contracts | | | 9 | | | | - | | | | 9 | | | | - | | | | | | | | | | | | | | | | | | | |
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:
Loans held for sale: Loans held for sale are carried at market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the year ended December 31, 2008. Gains and losses on the sale of loans are recorded within income from mortgage banking on the Consolidated Statements of Income.
Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period (in thousands):
| | | | | | Carrying Value at December 31, 2008 | | | | | Balance as of December 31, | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | | Description | | 2008 | | | Level 1 | | | Level 2 | | | Level 3 | | | Assets | | | | | | | | | | | | | | Loans held for sale | | $ | 1,764 | | | $ | - | | | $ | 1,764 | | | $ | - | | | Impaired loans, net of valuation allowance | | | 1,381 | | | | - | | | | 600 | | | | 781 | |
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107, Disclosures About Fair Value of Financial Instruments, excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The estimated fair values of the Corporation'sCompany’s assets are as follows
(in thousands):
December 31, 2001
---------------------
Carrying Fair
Amount Value
-------- --------
Financial assets:
Cash and due 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 lettersfollows: | | | December 31, 2008 | | | December 31, 2007 | | | (in thousands) | | Carrying | | | Estimated Fair | | | Carrying | | | Estimated Fair | | | | | Amount | | | Value | | | Amount | | | Value | | | Financial assets: | | | | | | | | | | | | | | Cash and due from banks | | $ | 24,098 | | | $ | 24,098 | | | $ | 18,304 | | | $ | 18,304 | | | Securities available for sale * | | | 129,904 | | | | 129,904 | | | | 141,605 | | | | 141,605 | | | Securities held to maturity | | | 7,121 | | | | 7,391 | | | | 11,990 | | | | 12,250 | | | Loans held for sale | | | 1,764 | | | | 1,764 | | | | 1,368 | | | | 1,368 | | | Loans, net of allowance | | | 563,286 | | | | 575,970 | | | | 543,996 | | | | 550,458 | | | Accrued interest receivable | | | 3,110 | | | | 3,110 | | | | 3,547 | | | | 3,547 | | | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | | | | Deposits | | $ | 589,138 | | | $ | 591,159 | | | $ | 581,221 | | | $ | 581,726 | | | Repurchase agreements | | | 51,741 | | | | 51,741 | | | | 47,891 | | | | 47,891 | | | Other borrowings | | | 21,637 | | | | 21,630 | | | | 16,137 | | | | 15,850 | | | Trust preferred capital notes | | | 20,619 | | | | 18,258 | | | | 20,619 | | | | 20,155 | | | Accrued interest payable | | | 1,272 | | | | 1,272 | | | | 1,722 | | | | 1,722 | | | | | | | | | | | | | | | | | | | | | * - Excludes restricted stock | | | | | | | | | | | | | | | | |
Table 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
Accrued interest receivable and other assets 10,511 10,511
Loans, net 335,010 335,392
Financial liabilities:
Deposits $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
Contents The following methods and assumptions were used to estimateby the Company in estimating fair value of each class ofdisclosures for financial instruments for which it is practical to
estimate that value:
instruments:
Cash and due from banks.cash equivalents. The carrying amount is a reasonable estimate of fair value.
Investment securities. For marketable securities held for investment purposes,
fair
Securities. 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.
Loans. Due to the repricing characteristics of revolving credit lines, home
equity loans and adjustable demand loans, theThe 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 andrestricted stock approximates fair value.
Loans held for the
same remaining maturities.
Accrued interest receivable and other assets.sale. The carrying amount is a reasonable estimate of fair value.
Deposits.
Loans. For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans are estimated based upon discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Accrued interest receivable. The carrying amount is a reasonable estimate of fair value.
Deposits. The fair value of demand deposits, savings deposits, and money market deposits equals the carrying value. The fair value of fixed-rate certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposit instruments would be offered to depositors for the same remaining maturities at current rates.
maturities.
Repurchase agreements.agreements. The carrying amount is a reasonable estimate of fair value.
40
Other liabilities.borrowings. The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the interest rates for similar types of borrowing arrangements.
Trust preferred capital notes. Fair value is calculated by discounting the future cash flows using the estimated current interest rates at which similar securities would be issued.
Accrued interest payable. The carrying amount is a reasonable estimate of fair value.
Off balance
Off-balance sheet instruments. The fair value of commitments to extend credit is
estimated using the fees currently charged (if any) to enter into agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. At December 31, 2001 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.instruments. 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. 14.At December 31, 2008 and 2007, the fair value of off balance sheet instruments was deemed immaterial, and therefore was not included in the table above. The various off-balance sheet instruments were discussed in Note 16.
The Company assumes interest rate risk (the risk that interest rates will change) in its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rates change and that change may be either favorable or unfavorable to the Company.
Note 20 – 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.
Capital
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 BankCompany’s bank subsidiary can distribute as dividends to American National Bankshares Inc., without the approval of the Comptroller of the Currency, $4,711,000 plus an$1,784,000 as of December 31, 2008.
The Company (on a consolidated basis) and its bank subsidiary 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 amount equaldiscretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are subject to qualitative judgments by the Bank's net incomeregulators concerning components, risk weighting, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Under the guidelines, total capital is defined as core (Tier I) capital and supplementary (Tier II) capital. The Company’s Tier I capital consists primarily of shareholders' equity and trust preferred capital notes, while Tier II capital also includes the allowance for 2002 uploan losses subject to certain limits. The definition of assets has been modified to include items on and off the datebalance sheet, with each item being assigned a "risk-weight" for the determination of any dividend declaration.
the ratio of capital to risk-adjusted assets. Management believes, as of December 31, 2008 and 2007, that the Company met the requirements to be considered “well capitalized.”
The following table provides summary information regarding regulatory capital (in thousands):
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
As of December 31, 2001
- -----------------------
Total Capital
Corporation $67,187 15.56% $34,544 >8.0%
Bank 65,260 15.13% 34,505 >8.0% $43,131 >10.0%
Tier I Capital
Corporation 61,853 14.32% 17,272 >4.0%
Bank 60,569 14.04% 17,253 >4.0% 25,879 > 6.0%
Leverage Capital
Corporation 61,853 10.96% 16,927 >3.0%
Bank 60,569 10.75% 16,903 >3.0% 28,172 > 5.0%
As of December 31, 2000
- -----------------------
Total Capital
Corporation 64,787 17.09% 30,333 >8.0%
Bank 63,713 16.82% 30,296 >8.0% 37,870 >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%
Leverage Capital
Corporation 60,731 11.59% 15,725 >3.0%
Bank 59,663 11.39% 15,711 >3.0% 26,185 > 5.0%
41
15.capital:
| | | | | | | | To Be Well | | | | | | | Minimum | | Capitalized Under | | | | | | | Capital | | Prompt Corrective | | (in thousands) | | Actual | | | Requirement | | Action Provisions | | | | Amount | | | Ratio | | | Amount | | Ratio | | Amount | | Ratio | | December 31, 2008 | | | | | | | | | | | | | | | | Total Capital | | | | | | | | | | | | | | | | Company | | $ | 106,573 | | | | 17.92 | % | | $ | 47,576 | | >8.0% | | | | | | Bank | | | 91,686 | | | | 15.42 | | | | 47,565 | | >8.0 | | $ | 59,457 | | >10.0% | | | | | | | | | | | | | | | | | | | | | | Tier I Capital | | | | | | | | | | | | | | | | | | | | Company | | | 99,124 | | | | 16.67 | | | | 23,788 | | >4.0 | | | | | | | Bank | | | 85,144 | | | | 14.32 | | | | 23,783 | | >4.0 | | | 35,674 | | >6.0 | | | | | | | | | | | | | | | | | | | | | | Leverage Capital | | | | | | | | | | | | | | | | | | | | Company | | | 99,124 | | | | 13.04 | | | | 30,408 | | >4.0 | | | | | | | Bank | | | 85,144 | | | | 11.23 | | | | 30,333 | | >4.0 | | | 37,916 | | >5.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2007 | | | | | | | | | | | | | | | | | | | | Total Capital | | | | | | | | | | | | | | | | | | | | Company | | $ | 104,179 | | | | 18.28 | % | | $ | 45,593 | | >8.0% | | | | | | | Bank | | | 93,961 | | | | 16.49 | | | | 45,581 | | >8.0 | | $ | 56,976 | | >10.0% | | | | | | | | | | | | | | | | | | | | | | Tier I Capital | | | | | | | | | | | | | | | | | | | | Company | | | 97,033 | | | | 17.03 | | | | 22,797 | | >4.0 | | | | | | | Bank | | | 87,806 | | | | 15.41 | | | | 22,791 | | >4.0 | | | 34,186 | | >6.0 | | | | | | | | | | | | | | | | | | | | | | Leverage Capital | | | | | | | | | | | | | | | | | | | | Company | | | 97,033 | | | | 12.98 | | | | 29,912 | | >4.0 | | | | | | | Bank | | | 87,806 | | | | 11.76 | | | | 29,862 | | >4.0 | | | 37,328 | | >5.0 |
Note 21 – Segment and Related Information:
The Corporation adoptedInformation
In accordance with SFAS No. 131, "DisclosuresDisclosures About Segments of an Enterprise and Related Information"Information, in 1998. Reportablereportable 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.businesses. All assets and liabilities of the BankCompany are allocated to community banking. Investment income from fixedsecurities is also allocated to the community banking segment. Loan fee income, investments
is a major source of income in addition to loan interest income. Serviceservice charges from deposit accounts, and non-deposit fees such as automaticautomated teller machine fees and insurance commissions generate additional income for community banking.
Trust and investment services includesinclude estate andplanning, trust planning andaccount administration, and investment management, for various entities. The trust and investmentretail brokerage. Investment management services division of the Bank manages trusts, estates and purchasesinclude purchasing 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 and 1999 is
Amounts shown in the following table (in thousands). The "Other"“Other” column includes activities of American National Bankshares Inc. The “Other” column also 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'sAmerican National Bankshares Inc.’s investment in theAmerican National Bank and Trust Company and related equity earnings.
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 as of and for the years ended December 31, 2008, 2007, and 2006, is shown in the following table: | | | 2008 | | | (in thousands) | | | | | Trust and | | | | | | | | | | | | | | Community | | | Investment | | | | | | Intersegment | | | | | | | | Banking | | | Services | | | Other | | | Eliminations | | | Total | | | Interest income | | $ | 42,836 | | | $ | - | | | $ | 129 | | | $ | (93 | ) | | $ | 42,872 | | | Interest expense | | | 14,559 | | | | - | | | | 1,373 | | | | (93 | ) | | | 15,839 | | | Noninterest income - external customers | | | 3,957 | | | | 3,899 | | | | 57 | | | | - | | | | 7,913 | | | Operating income before income taxes | | | 10,951 | | | | 1,791 | | | | (1,540 | ) | | | - | | | | 11,202 | | | Depreciation and amortization | | | 1,710 | | | | 23 | | | | 2 | | | | - | | | | 1,735 | | | Total assets | | | 788,435 | | | | - | | | | 749 | | | | - | | | | 789,184 | | | Capital expenditures | | | 5,423 | | | | 25 | | | | - | | | | - | | | | 5,448 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | (in thousands) | | | | | | Trust and | | | | | | | | | | | | | | | | | Community | | | Investment | | | | | | | Intersegment | | | | | | | | | Banking | | | Services | | | Other | | | Eliminations | | | Total | | | Interest income | | $ | 48,597 | | | $ | - | | | $ | - | | | $ | - | | | $ | 48,597 | | | Interest expense | | | 17,997 | | | | - | | | | 1,373 | | | | - | | | | 19,370 | | | Noninterest income - external customers | | | 4,623 | | | | 4,128 | | | | 71 | | | | - | | | | 8,822 | | | Operating income before income taxes | | | 15,615 | | | | 2,234 | | | | (1,529 | ) | | | - | | | | 16,320 | | | Depreciation and amortization | | | 1,528 | | | | 25 | | | | 2 | | | | - | | | | 1,555 | | | Total assets | | | 771,518 | | | | - | | | | 770 | | | | - | | | | 772,288 | | | Capital expenditures | | | 2,087 | | | | 18 | | | | - | | | | - | | | | 2,105 | |
| | | 2006 | | | | | | | | Trust and | | | | | | | | | | | | | | Community | | | Investment | | | | | | Intersegment | | | | | | | | Banking | | | Services | | | Other | | | Eliminations | | | Total | | | Interest income | | $ | 45,060 | | | $ | - | | | $ | 10 | | | $ | - | | | $ | 45,070 | | | Interest expense | | | 15,629 | | | | - | | | | 1,032 | | | | - | | | | 16,661 | | | Noninterest income - external customers | | | 4,623 | | | | 3,793 | | | | 42 | | | | - | | | | 8,458 | | | Operating income before income taxes | | | 15,747 | | | | 1,963 | | | | (1,165 | ) | | | - | | | | 16,545 | | | Depreciation and amortization | | | 1,383 | | | | 22 | | | | 2 | | | | - | | | | 1,407 | | | Total assets | | | 777,001 | | | | - | | | | 719 | | | | - | | | | 777,720 | | | Capital expenditures | | | 1,044 | | | | 1 | | | | - | | | | - | | | | 1,045 | | | | | | | | | | | | | | | | | | | | | | | |
Note 22 – Parent Company Financial Information
Condensed Parent Company financial information is as follows (in thousands):
| | | December 31, | | | | Condensed Balance Sheets | | 2008 | | | 2007 | | | | | | | | | Cash | | $ | 13,356 | | | $ | 8,619 | | | | Investment in subsidiaries | | | 108,320 | | | | 112,903 | | | | Other assets | | | 1,311 | | | | 671 | | | | Total Assets | | $ | 122,987 | | | $ | 122,193 | | | | | | | | | | | | | | | Trust preferred capital notes | | $ | 20,619 | | | $ | 20,619 | | | | Other liabilities | | | 68 | | | | 63 | | | | Shareholders’ equity | | | 102,300 | | | | 101,511 | | | | Total Liabilities and Shareholders’ Equity | | $ | 122,987 | | | $ | 122,193 | | |
| | | Years Ended December 31, | | | Condensed Statements of Income | | 2008 | | | 2007 | | | 2006 | | | | | | | | | | | | | | Dividends from subsidiary | | $ | 12,000 | | | $ | 12,000 | | | $ | 7,900 | | | Other income | | | 150 | | | | 86 | | | | 52 | | | Expenses | | | 1,689 | | | | 1,615 | | | | 1,217 | | | Income taxes (benefit) | | | (523 | ) | | | (520 | ) | | | (396 | ) | | Income before equity in undistributed | | | | | | | | | | | | | | earnings of subsidiary | | | 10,984 | | | | 10,991 | | | | 7,131 | | | Equity (deficit) in undistributed earnings of subsidiary | | | (2,963 | ) | | | 453 | | | | 4,295 | | | Net Income | | $ | 8,021 | | | $ | 11,444 | | | $ | 11,426 | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | Condensed Statements of Cash Flows | | 2008 | | | 2007 | | | 2006 | | | Cash provided by dividends received | | | | | | | | | | | | | | from subsidiary | | $ | 12,000 | | | $ | 12,000 | | | $ | 7,900 | | | Cash used for payment of dividends | | | (5,606 | ) | | | (5,587 | ) | | | (5,210 | ) | | Cash used for repurchase of stock | | | (904 | ) | | | (1,359 | ) | | | (912 | ) | | Proceeds from exercise of options | | | 219 | | | | 295 | | | | 171 | | | Other | | | (972 | ) | | | (1,182 | ) | | | 1,535 | | | Net increase in cash | | $ | 4,737 | | | $ | 4,167 | | | $ | 3,484 | |
Note 23 – Concentrations of Credit Risk
Substantially all the Company’s loans are made within its market area, which includes Southern and Central Virginia and the northern portion of Central North Carolina. The ultimate collectability of the Company’s loan portfolio and the ability to realize the value of any underlying collateral, if necessary, are impacted by the economic conditions of the market area. Loans secured by real estate were $464,171,000, or 81% of the loan portfolio, at December 31, 2008, and $450,347,000, or 82% of the loan portfolio, at December 31, 2007. Loans secured by commercial real estate represented the largest portion of loans at $207,160,000 at December 31, 2008, and $198,332,000 at December 31, 2007, 36% and 36%, respectively of total loans. While there were no concentrations of loans to any individual, group of individuals, business, or industry that exceeded 10% of total loans at December 31, 2008 or 2007, loans to lessors of nonresidential buildings represented 13.7% of total loans at December 31, 2008 and 11.0% at December 31, 2007; the lessees and lessors are engaged in a variety of industries.
Note 24 – Supplemental Cash Flow Information
| (Dollars in thousands) | | For the Years ended December 31, | | | | | 2008 | | | 2007 | | | 2006 | | | | | | | | | | | | | | Supplemental Schedule of Cash and Cash Equivalents: | | | | | | | | | | | Cash and due from banks | | $ | 14,986 | | | $ | 18,155 | | | $ | 24,375 | | | Interest-bearing deposits in other banks | | | 9,112 | | | | 149 | | | | 1,749 | | | | | $ | 24,098 | | | $ | 18,304 | | | $ | 26,124 | | | | | | | | | | | | | | | | | Supplemental Disclosure of Cash Flow Information: | | | | | | | | | | | | | | Cash paid for: | | | | | | | | | | | | | | Interest on deposits and borrowed funds | | $ | 16,289 | | | $ | 19,332 | | | $ | 14,906 | | | Income taxes | | | 2,936 | | | | 3,790 | | | | 3,738 | | | Noncash investing and financing activities: | | | | | | | | | | | | | | Transfer of loans to other real estate owned | | | 4,060 | | | | 498 | | | | 115 | | | Unrealized gain (loss) on securities available for sale | | | 1,474 | | | | 2,723 | | | | 8 | | | Change in unfunded pension liability | | | 2,898 | | | | 66 | | | | - | | | | | | | | | | | | | | | | | Transactions related to the merger acquisition: | | | | | | | | | | | | | | Increase in assets and liabilities | | | | | | | | | | | | | | Cash and due from banks | | $ | - | | | $ | - | | | $ | 2,956 | | | Securities | | | - | | | | - | | | | 8,020 | | | Loans, net | | | - | | | | - | | | | 134,217 | | | Premises and equipment, net | | | - | | | | - | | | | 4,930 | | | Goodwill and core deposit intangibles | | | - | | | | - | | | | 25,580 | | | Accrued interest receivable and other assets | | | - | | | | - | | | | 5,481 | | | Demand deposits--noninterest bearing | | | - | | | | - | | | | 21,376 | | | Demand deposits--interest bearing | | | - | | | | - | | | | 120,596 | | | Borrowings | | | - | | | | - | | | | 2,500 | | | Accrued interest payable and other liabilities | | | - | | | | - | | | | 2,079 | | | Issuance of common stock | | | - | | | | - | | | | 17,546 | |
(a)(1) Financial Statements. See Item 8 for reference. (a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X have been included in the Notes to the Consolidated Financial Statements. (a)(3) Exhibits. The exhibits required by Item 601of Regulation S-K are listed below.
2001
--------------------------------------------------------------- | | Exhibit # | | Location | | | | | 3.1 | Amended and Restated Articles of Incorporation Dated August 20, 1997 | Exhibit 4.1 on Form S-3 filed August 20, 1997 | | | | | 3.2 | | Exhibit 3.2 on Form 8-K filed November 19, 2008 | | | | | 10.1 | Deferred Compensation Agreement between American National Bank and Trust Company, and Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ --------
Interest income $ 39,820 $ - $Charles H. Majors dated December 31, 2008 | Filed herewith | | | | | 10.2 | Executive Severance Agreement between American National Bankshares Inc., American National Bank and Trust Company, and Charles H. Majors dated December 31, 2008 | Filed herewith | | | | | 10.3 | Executive Severance Agreement between American National Bankshares Inc., American National Bank and Trust Company, and Jeffrey V. Haley dated December 31, 2008 | Filed herewith | | | | | 10.4 | Executive Severance Agreement between American National Bankshares Inc., American National Bank and Trust Company, and R. Helm Dobbins dated December 31, 2008 | Filed herewith | | | | | 10.5 | Executive Severance Agreement between American National Bankshares Inc., American National Bank and Trust Company, and Dabney T. P. Gilliam, Jr. dated December 31, 2008 | Filed herewith | | | | | 10.6 | Executive Severance Agreement between American National Bankshares Inc., American National Bank and Trust Company, and S. Cabell Dudley, Jr. dated December 31, 2008 | Filed herewith | | | | | 10. 7 | | Exhibit 99.0 to Form S-8 filed on May 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
Depreciation2008 | | | | | 11.1 | Refer to EPS calculation in the Notes to Financial Statements | Filed herewith | | | | | 21.1 | Subsidiaries of the registrant | Filed herewith | | | | | 31.1 | Section 302 Certification of Charles H. Majors, President and amortization 1,586 25 10 - 1,621
Total assets 572,820 - 67 - 572,887
Capital expenditures 1,141 16 1 - 1,158
|
2000
---------------------------------------------------------------
TrustCEOFiled herewith | | | | | 31.2 | Section 302 Certification of Charles H. Majors, President and Interim Principal Financial Officer | Filed herewith | | | | | 32.1 | Section 906 Certification of Charles H. Majors, President and Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ --------
Interest income $ 38,606 $ - $ 22 $ (22) $ 38,606
Interest expense 17,343 - 22 (22) 17,343
Non-interest income - external customers 1,772 2,658 341 - 4,771
Non-interest income - internal customers - 54 - (54) -
Operating income before income taxes 10,588 1,791 (288) - 12,091
DepreciationCEO | Filed herewith | | | | | 32.2 | Section 906 Certification of Charles H. Majors, President and amortization 1,516 40 Interim Principal Financial Officer | Filed herewith |
SIGNATURES
Pursuant to the requirements of Section 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 11, - 1,567
Total assets 541,273 - 116 - 541,389
Capital expenditures 906 19 9 - 934
2009 | AMERICAN NATIONAL BANKSHARES INC. |
By: /s/ Charles H. Majors President and Chief Executive Officer
Pursuant to the requirements of the Securities 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 11, 2009.
1999
---------------------------------------------------------------
Trust| /s/ Charles H. Majors | | President 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 1,627 2,532 334 - 4,493
Non-interest income - internal customers - 52 - (52) -
Operating income before income taxes 9,558 1,781 (95) - 11,244
Depreciation Chief Executive Officer | | Charles H. Majors | | and amortization 1,416 48 15 - 1,479
Total assets 491,151 - 240 - 491,391
Capital expenditures 1,466 - 6 - 1,472
Interim Principal Financial Officer | | | | | /s/ Fred A. Blair | | Director | | Fred A. Blair | | | | | | | /s/ Frank C. Crist, Jr. | | Director | | Frank C. Crist, Jr., D.D.S. | | | | | | | /s/ Ben J. Davenport, Jr. | | Director | | Ben J. Davenport, Jr. | | | | | | | /s/ H. Dan Davis | | Director | | H. Dan Davis | | | | | | | /s/ Michael P. Haley | | Director | | Michael P. Haley | | | | | | | /s/ Charles S. Harris | | Director | | Charles S. Harris | | | | | | | /s/ Lester A. Hudson, Jr. | | Director | | Lester A. Hudson, Jr., Ph.D. | | | | | | | /s/ E. Budge Kent, Jr. | | Director | | E. Budge Kent, Jr. | | | | | | | /s/ Fred B. Leggett, Jr. | | Director | | Fred B. Leggett, Jr. | | | | | | | /s/ Franklin W. Maddux | | Director | | Franklin W. Maddux, M.D. | | | | | | | /s/ Martha W. Medley | | Director | | Martha W. Medley | | | | | | | /s/ Claude B. Owen, Jr. | | Director | | Claude B. Owen, Jr. | | | | | | | /s/ James R. Jefferson | | Assistant Treasurer and | | James R. Jefferson | | Interim Principal Accounting Officer |
42
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