Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information is designed to show how the merger of American National Bankshares Inc. (“American”) and HomeTown Bankshares Corporation (“HomeTown”) might have affected historical financial statements if the merger had been completed at an earlier time and was prepared on the historical financial results reported by American and HomeTown in other public filings.
The unaudited pro forma condensed combined balance sheet data assumes that the merger took place on December 31, 2018 and combines American’s consolidated balance sheet as of December 31, 2018 with HomeTown’s consolidated balance sheet as of December 31, 2018. The unaudited pro forma condensed combined statement of income for the year ended December 31, 2018 give effect to the merger as if it occurred at the beginning of the period. The unaudited pro forma condensed combined financial statements give effect to the merger under the acquisition method of accounting.
The following unaudited pro forma condensed combined financial information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the companies been combined during this period.
The unaudited pro forma condensed combined financial statements are based on, and should be read together with, the historical consolidated financial statements and related notes of American contained in its Annual Report on Form10-K for the year ended December 31, 2018 and of HomeTown contained in its Annual Report on Form10-K for the year ended December 31, 2018.
AMERICAN NATIONAL BANKSHARES INC. AND HOMETOWN BANKSHARES CORPORATION
Unaudited Pro Forma Condensed Combined Balance Sheet
December 31, 2018
(dollars in thousands)
American Historical | HomeTown Historical | Pro Forma Adjustments | Notes | Pro Forma Combined | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Cash and due from banks | $ | 29,587 | $ | 15,332 | $ | — | $ | 44,919 | ||||||||||||
Federal funds and interest-bearing deposits in banks | 34,668 | 7,633 | — | 42,301 | ||||||||||||||||
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Total cash and cash equivalents | 64,255 | 22,965 | — | 87,220 | ||||||||||||||||
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Equity securities, at fair value | 1,830 | — | (1,719 | ) | (1 | ) | 111 | |||||||||||||
Securities available for sale, at fair value | 332,653 | 44,976 | 88 | (2 | ) | 377,717 | ||||||||||||||
Mortgage loans held for sale | 640 | 85 | — | 725 | ||||||||||||||||
Loans, net of unearned income | 1,357,476 | 471,462 | (14,733 | ) | (3 | ) | 1,814,205 | |||||||||||||
Less allowance for loan losses | 12,805 | 3,992 | (3,992 | ) | (4 | ) | 12,805 | |||||||||||||
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Net loans | 1,344,671 | 467,470 | (10,741 | ) | 1,801,400 | |||||||||||||||
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Premises and equipment, net | 26,675 | 12,943 | (210 | ) | (5 | ) | 39,408 | |||||||||||||
Other real estate owned | 869 | 1,893 | — | 2,762 | ||||||||||||||||
Core deposit intangibles, net | 926 | — | 8,200 | (6 | ) | 9,126 | ||||||||||||||
Goodwill | 43,872 | — | 34,244 | (7 | ) | 78,116 | ||||||||||||||
Bank-owned life insurance | 18,941 | 8,197 | — | 27,138 | ||||||||||||||||
Restricted stock | 5,247 | 2,241 | — | 7,488 | ||||||||||||||||
Other assets | 22,287 | 4,208 | 792 | (8 | )(9)(10) | 27,287 | ||||||||||||||
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Total assets | $ | 1,862,866 | $ | 564,978 | $ | 30,654 | $ | 2,458,498 | ||||||||||||
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LIABILITIES | ||||||||||||||||||||
Noninterest-bearing deposits | $ | 435,828 | $ | 117,544 | $ | — | $ | 553,372 | ||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||
Interest bearing transaction accounts | 234,621 | 107,003 | — | 341,624 | ||||||||||||||||
Money market accounts | 401,461 | 99,104 | — | 500,565 | ||||||||||||||||
Savings accounts | 132,360 | 44,720 | — | 177,080 | ||||||||||||||||
Time deposits | 354,398 | 123,900 | 724 | (11 | ) | 479,022 | ||||||||||||||
Brokered deposits | 7,559 | 902 | — | 8,461 | ||||||||||||||||
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Total interest-bearing deposits | 1,130,399 | 375,629 | 724 | 1,506,752 | ||||||||||||||||
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Total deposits | 1,566,227 | 493,173 | 724 | 2,060,124 | ||||||||||||||||
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Securities sold under agreements to repurchase | 35,243 | — | — | 35,243 | ||||||||||||||||
Other short-term borrowings | — | 6,333 | — | 6,333 | ||||||||||||||||
Long-term borrowings | — | 1,694 | — | 1,694 | ||||||||||||||||
Subordinated debt | 27,927 | 7,285 | 30 | (12 | ) | 35,242 | ||||||||||||||
Other liabilities | 10,927 | 2,794 | — | 13,721 | ||||||||||||||||
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Total liabilities | 1,640,324 | 511,279 | 754 | 2,152,357 | ||||||||||||||||
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Commitments and contingencies | ||||||||||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Preferred stock | — | — | — | — | ||||||||||||||||
Common stock | 8,668 | 28,909 | (26,548 | ) | (13 | ) | 11,029 | |||||||||||||
Surplus | 78,172 | 18,228 | 62,661 | (13 | ) | 159,061 | ||||||||||||||
Retained earnings | 141,537 | 7,024 | (7,024 | ) | (13 | ) | 141,537 | |||||||||||||
Accumulated other comprehensive loss, net | (5,835 | ) | (811 | ) | 811 | (13 | ) | (5,835 | ) | |||||||||||
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Total shareholders’ equity | 222,542 | 53,350 | 29,900 | 305,792 | ||||||||||||||||
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Noncontrolling interest | — | 349 | — | 349 | ||||||||||||||||
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Total shareholders’ equity | 222,542 | 53,699 | 29,900 | 306,141 | ||||||||||||||||
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Total liabilities and shareholders’ equity | $ | 1,862,866 | $ | 564,978 | $ | 30,654 | $ | 2,458,498 | ||||||||||||
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The accompanying notes are an integral part of the unaudited pro forma condensed combined financial information. Certain reclassifications have been made to HomeTown’s balance sheet to conform with American’s presentation.
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet at December 31, 2018
The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. Business combinations are accounted for under the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 805,Business Combinations, using the acquisition method of accounting. Under acquisition accounting, HomeTown’s assets and liabilities and any identifiable intangible assets are required to be stated at their estimated fair values. American engaged a competent third party valuation specialist to assist in the valuation of the major financial assets and liabilities of the acquired bank. All adjustments are based on current valuations, estimates, and assumptions. Pro forma adjustments reflected herein may vary from the actual purchase price allocation recorded based on the actual balance sheet at the acquisition date.
(1) | Elimination of investment in HomeTown common stock. |
(2) | Fair value adjustments on securities available for sale. |
(3) | The interest rate portion ($4.0 million) reflects fair value based upon current interest rates for similar loans. |
The larger portion ($10.7 million) of the adjustment to loans reflects the estimated credit portion of the fair value adjustment as required under ASC 805. This amount is an estimate of the contractual principal cash flows not expected to be collected over the estimated lives of these loans. It differs from the allowance for loan losses under ASC 450 using the incurred loss model, which estimated probable loan losses incurred as of the balance sheet date. Under the incurred loss model losses expected as a result of future events are not recognized. When using the expected cash flow approach these losses are considered in the valuation. Further, when estimating the present value of expected cash flows the loans are discounted using an effective interest rate, which is not considered in the incurred loss method. Accordingly, the differences in the loss methodologies and the application of a market interest rate have led to a credit loss estimate of $10.7 million.
The fair value of Purchased Credit Impaired (“PCI”) loans is determined using a combination of the income approach and the asset approach. The fair value ofnon-PCI loans is determined using the income approach. In the income approach, the fair value is determined based on a discounted cash flow analysis, while fair value is determined based on the estimated values of the underlying collateral in the asset approach. The key valuation assumptions developed for use in the discounted cash flow analysis are prepayment speeds, expected credit loss rates, discount rates, and foreclosure lags. For PCI loans, a yield is calculated based on the cash flows run at the acquisition date, and the yield is applied against the carrying value as projected accretion over the life of the loan. Fornon-revolvingnon-PCI loans, amortization is projected using the effective interest method. For revolving PCI loans, amortization is projected on a straight line basis.
(4) | Elimination of HomeTown’s allowance for loan losses. |
(5) | Estimated fair value adjustment for HomeTown’s premises and equipment. |
(6) | Estimation of fair value of core deposit intangible (“CDI”). The estimated CDI represents the estimated future economic benefit resulting from the acquired customer balances and relationships. This value was based upon an independent appraisal at the date of the acquisition. For pro forma purposes, we are amortizing the CDI using thesum-of-the-years-digits method and an estimated life of 10 years. |
(7) | Estimated amount of goodwill to be recorded in the acquisition of HomeTown, less amounts allocated to the fair value of tangible and specifically identified intangible assets acquired are as follows: |
Purchase Price: | ||||
Total consideration (purchase price) | $ | 83,250 | ||
Net assets acquired (book value) | 53,350 | |||
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Excess of purchase price over book value | 29,900 | |||
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Fair Value Adjustments: | ||||
Eliminate investment in HomeTown common stock | (1,719 | ) | ||
Securities available for sale | 88 | |||
Loans | (14,733 | ) | ||
Eliminate existing allowance for loan losses | 3,992 | |||
Premises and equipment | (210 | ) | ||
Core deposit intangible | 8,200 | |||
Deferred income tax asset | 796 | |||
Eliminate deferred tax for investment in HomeTown common stock | 130 | |||
Contra accrued interest receivable - loans | (134 | ) | ||
Deposits | (724 | ) | ||
Subordinated debt | (30 | ) | ||
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Total fair value adjustments | (4,344 | ) | ||
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Preliminary pro forma goodwill | $ | 34,244 | ||
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(8) | Estimated deferred tax asset arising from the adjustments to record the assets and liabilities of HomeTown at fair value of $796,000. |
(9) | Elimination of deferred tax for investment in HomeTown common stock of $130,000. |
(10) | Contra accrued interest receivable on acquired loans of $(134,000). |
(11) | Fair value adjustments on deposits at current market rates for similar products. This adjustment will be accreted into income over the estimated lives of the deposits. Accretion in the pro forma was computed using the effective yield method. |
(12) | Fair value adjustment of subordinated debt at current interest rates for similar borrowings. This adjustment will be amortized into income over the estimated life of the debt. Estimated amortization was determined using the straight line method. |
(13) | Elimination of HomeTown’s shareholders’ equity as part of the acquisition accounting adjustments representing the conversion of all HomeTown common shares into American common shares at a ratio of 0.4150 American shares for each share of HomeTown. |
AMERICAN NATIONAL BANKSHARES INC. AND HOMETOWN BANKSHARES CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 2018
(dollars in thousands, except per share data)
American | HomeTown | Pro Forma | Pro Forma | |||||||||||||||||
Historical | Historical | Adjustments | Notes | Combined | ||||||||||||||||
Interest Income | ||||||||||||||||||||
Interest and fees on loans | $ | 59,966 | $ | 20,820 | $ | 2,912 | (1 | ) | $ | 83,698 | ||||||||||
Interest on federal funds sold and deposits in other banks | 873 | 188 | — | 1,061 | ||||||||||||||||
Dividends | 321 | 151 | — | 472 | ||||||||||||||||
Interest and dividends on securities: | ||||||||||||||||||||
Taxable | 6,106 | 1,102 | — | 7,208 | ||||||||||||||||
Nontaxable | 1,502 | 229 | — | 1,731 | ||||||||||||||||
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Total interest and dividend income | 68,768 | 22,490 | 2,912 | 94,170 | ||||||||||||||||
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Interest Expense | ||||||||||||||||||||
Interest on deposits | 8,086 | 2,841 | (448 | ) | (2 | ) | 10,479 | |||||||||||||
Interest on short-term borrowings | 186 | 273 | — | 459 | ||||||||||||||||
Interest on long-term borrowings | — | 50 | — | 50 | ||||||||||||||||
Interest on subordinated debt | 1,402 | 536 | (17 | ) | (3 | ) | 1,921 | |||||||||||||
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Total interest expense | 9,674 | 3,700 | (465 | ) | 12,909 | |||||||||||||||
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Net interest income | 59,094 | 18,790 | 3,377 | 81,261 | ||||||||||||||||
Provision for loan losses | (103 | ) | 561 | — | 458 | |||||||||||||||
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Net interest income after provision for loan losses | 59,197 | 18,229 | 3,377 | 80,803 | ||||||||||||||||
Noninterest Income | ||||||||||||||||||||
Trust fees and brokerage | 4,578 | — | — | 4,578 | ||||||||||||||||
Service charges on deposit accounts | 2,455 | 578 | — | 3,033 | ||||||||||||||||
Other service charges, commissions and fees | 2,637 | 1,055 | — | 3,692 | ||||||||||||||||
Mortgage banking income | 1,862 | 712 | — | 2,574 | ||||||||||||||||
Gains on securities, net | 123 | 60 | — | 183 | ||||||||||||||||
Income from Small Business Investment Companies | 637 | — | — | 637 | ||||||||||||||||
Gains on bank premises and equipment, net | 60 | — | — | 60 | ||||||||||||||||
Income from life insurance death benefit | — | 642 | — | 642 | ||||||||||||||||
Other operating income | 922 | 651 | — | 1,573 | ||||||||||||||||
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Total noninterest income | 13,274 | 3,698 | — | 16,972 | ||||||||||||||||
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Noninterest Expense | ||||||||||||||||||||
Salaries and benefits | 24,879 | 8,648 | — | 33,527 | ||||||||||||||||
Occupancy expenses | 4,378 | 1,676 | — | 6,054 | ||||||||||||||||
FDIC assessment | 537 | 235 | — | 772 | ||||||||||||||||
Bank franchise tax | 1,054 | 419 | — | 1,473 | ||||||||||||||||
Amortization of core deposit premuims | 265 | — | 1,552 | (4 | ) | 1,817 | ||||||||||||||
Data processing | 2,970 | 1,588 | — | 4,558 | ||||||||||||||||
Other real estate owned, net | 122 | 614 | — | 736 | ||||||||||||||||
Merger related expenses | 872 | 788 | (1,660 | ) | (5 | ) | — | |||||||||||||
Other expenses | 9,169 | 3,116 | — | 12,285 | ||||||||||||||||
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Total noninterest expenses | 44,246 | 17,084 | (108 | ) | 61,222 | |||||||||||||||
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Income before income taxes | 28,225 | 4,843 | 3,485 | 36,553 | ||||||||||||||||
Income tax expense | 5,646 | 845 | 732 | (6 | ) | 7,223 | ||||||||||||||
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Net income | $ | 22,579 | $ | 3,998 | $ | 2,753 | $ | 29,330 | ||||||||||||
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Less income attributable tonon-controlling interest | — | 44 | — | 44 | ||||||||||||||||
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Net income available to common shareholders | $ | 22,579 | $ | 3,954 | $ | 2,753 | $ | 29,286 | ||||||||||||
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Earnings per common share, basic | $ | 2.60 | $ | 0.68 | $ | 2.65 | ||||||||||||||
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Earnings per common share, diluted | $ | 2.59 | $ | 0.68 | $ | 2.65 | ||||||||||||||
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Weighted average shares outstanding – Basic | 8,698,014 | 5,805,654 | (3,443,968 | ) | (7 | ) | 11,059,700 | |||||||||||||
Weighted average shares outstanding – Diluted | 8,708,462 | 5,853,277 | (3,491,591 | ) | (7 | ) | 11,070,148 |
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial information. Certain reclassifications have been made to HomeTown’s income statement to conform with American’s presentation.
Notes to Unaudited Pro Forma Condensed Combined Statement of Income
for the Year Ended December 31, 2018
(1) | The level yield adjustment is the accretion of the fair value adjustments to loans over the expected life of the loans. |
(2) | The adjustment is the accretion of the fair value adjustments to deposits over their expected life using the effective yield method. |
(3) | The straight line adjustment is the amortization of the fair value adjustment to subordinated debt over its expected life. |
(4) | Amount represents CDI amortization over an estimated life of 10 years using thesum-of-the-years-digits method. |
(5) | Elimination of costs incurred in relation to the merger. |
(6) | Amount represents income tax expense estimated at 21%. |
(7) | Weighted average basic and diluted shares outstanding were adjusted to effect the merger. |