SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number: 0-12820
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AMERICAN NATIONAL BANKSHARES INC.
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(Exact name of registrant as specified in its charter)
Virginia 54-1284688
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
628 Main Street
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Danville, Virginia 24541
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(Address of principal executive offices) (Zip Code)
(804) 792-5111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
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The number of shares outstanding of the issuer's common stock as of August 7,
2000 was 6,103,722.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999....................................................................3
Consolidated Statements of Income for the three months
ended June 30, 2000 and 1999.............................................................4
Consolidated Statements of Income for the six months
ended June 30, 2000 and 1999.............................................................5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999.............................................................6
Notes to Consolidated Financial Statements..............................................7-10
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations..............................................................11-16
Part II. Other Information...........................................................................17
SIGNATURES ............................................................................................17
EXHIBITS - Financial Data Schedule.....................................................................18
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
June 30 December 31
2000 1999
---------- -----------
ASSETS
Cash and due from banks................................................................$ 13,849 $ 13,885
Interest-bearing deposits in other banks............................................... 820 3,406
Investment securities:
Securities available for sale (at market value)...................................... 119,467 121,872
Securities held to maturity (market value of $42,827 at
June 30, 2000 and $43,634 at December 31, 1999).................................... 43,603 44,400
---------- ----------
Total investment securities...................................................... 163,070 166,272
---------- ----------
Loans, net of unearned income ......................................................... 318,926 293,741
Less allowance for loan losses......................................................... (4,463) (4,135)
---------- ----------
Net loans............................................................................ 314,463 289,606
---------- ----------
Bank premises and equipment, at cost, less accumulated
depreciation of $8,671 in 2000 and $8,171 in 1999.................................... 7,739 8,052
Accrued interest receivable and other assets........................................... 11,121 10,170
---------- ----------
Total assets.........................................................................$ 511,062 $ 491,391
========== ==========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing..............................................$ 49,942 $ 47,495
Demand deposits -- interest bearing.................................................. 54,246 55,623
Money market deposits................................................................ 23,552 22,326
Savings deposits..................................................................... 64,125 64,745
Time deposits........................................................................ 197,705 195,369
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Total deposits..................................................................... 389,570 385,558
---------- ----------
Repurchase agreements.................................................................. 28,235 24,954
FHLB borrowings........................................................................ 31,430 21,000
Accrued interest payable and other liabilities......................................... 2,827 3,160
---------- ----------
Total liabilities.................................................................... 452,062 434,672
---------- ----------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding................................................................... - -
Common stock, $1 par, 10,000,000 shares authorized,
6,103,772 shares outstanding at June 30, 2000
and 6,103,701 shares outstanding at December 31, 1999.............................. 6,104 6,104
Capital in excess of par value....................................................... 9,896 9,895
Retained earnings.................................................................... 45,021 42,467
Accumulated other comprehensive income -
net unrealized losses on securities available for sale............................. (2,021) (1,747)
---------- ----------
Total shareholders' equity......................................................... 59,000 56,719
---------- ----------
Total liabilities and shareholders' equity.........................................$ 511,062 $ 491,391
========== ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
3
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
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Three Months Ended
June 30
-------------------
2000 1999
-------- --------
Interest Income:
Interest and fees on loans....................................................$ 6,904 $ 5,969
Interest on federal funds sold and other...................................... 18 13
Income on investment securities:
U S Government.............................................................. 59 206
Federal agencies............................................................ 1,654 1,369
State and municipal......................................................... 49 428
Other investments........................................................... 372 301
-------- --------
Total interest income..................................................... 9,497 8,286
-------- --------
Interest Expense:
Interest on deposits:
Demand...................................................................... 258 278
Money market................................................................ 194 119
Savings..................................................................... 428 446
Time........................................................................ 2,600 2,268
Interest on repurchase agreements............................................... 284 178
Interest on other borrowings.................................................... 415 316
-------- --------
Total interest expense........................................................ 4,179 3,605
-------- --------
Net Interest Income............................................................. 5,318 4,681
Provision for Loan Losses....................................................... 335 180
-------- --------
Net Interest Income After Provision
For Loan Losses............................................................... 4,983 4,501
-------- --------
Non-Interest Income:
Trust and investment services................................................. 625 614
Service charges on deposit accounts........................................... 275 240
Other fees and commissions.................................................... 145 111
Mortgage banking income....................................................... 56 88
Other income.................................................................. 41 22
-------- --------
Total non-interest income................................................... 1,142 1,075
-------- --------
Non-Interest Expense:
Salaries...................................................................... 1,489 1,338
Pension and other employee benefits........................................... 307 230
Occupancy and equipment....................................................... 498 471
Postage and printing.......................................................... 109 120
Core deposit intangible amortization ......................................... 113 113
Other......................................................................... 581 520
-------- --------
Total non-interest expense.................................................. 3,097 2,792
-------- --------
Income Before Income Tax Provision.............................................. 3,028 2,784
Income Tax Provision............................................................ 848 818
-------- --------
Net Income......................................................................$ 2,180 $ 1,966
======== ========
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Net Income Per Common Share *
Basic...........................................................................$ .36 $ .32
Diluted.........................................................................$ .36 $ .32
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Average Common Shares Outstanding
Basic...........................................................................6,103,772 6,103,466
Diluted.........................................................................6,105,111 6,105,837
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* - 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.
4
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
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Six Months Ended
June 30
----------------------
2000 1999
--------- ---------
Interest Income:
Interest and fees on loans....................................................$ 13,340 $ 11,796
Interest on federal funds sold and other...................................... 70 19
Income on investment securities:
U S Government.............................................................. 168 550
Federal agencies............................................................ 3,303 2,596
State and municipal......................................................... 978 861
Other investments........................................................... 705 626
--------- ---------
Total interest income..................................................... 18,564 16,448
--------- ---------
Interest Expense:
Interest on deposits:
Demand...................................................................... 522 550
Money market................................................................ 383 242
Savings..................................................................... 855 888
Time........................................................................ 5,119 4,500
Interest on repurchase agreements............................................. 558 447
Interest on other borrowings.................................................. 692 550
--------- ---------
Total interest expense...................................................... 8,129 7,177
--------- ---------
Net Interest Income............................................................. 10,435 9,271
Provision for Loan Losses....................................................... 550 360
--------- ---------
Net Interest Income After Provision
For Loan Losses............................................................... 9,885 8,911
--------- ---------
Non-Interest Income:
Trust and investment services................................................. 1,317 1,238
Service charges on deposit accounts........................................... 525 457
Other fees and commissions.................................................... 273 225
Mortgage banking income....................................................... 118 204
Other income.................................................................. 84 48
--------- ---------
Total non-interest income................................................... 2,317 2,172
--------- ---------
Non-Interest Expense:
Salaries...................................................................... 2,951 2,663
Pension and other employee benefits........................................... 588 488
Occupancy and equipment....................................................... 1,005 925
Postage and printing.......................................................... 232 231
Core deposit intangible amortization ......................................... 225 225
Other......................................................................... 1,219 1,040
--------- ---------
Total non-interest expense.................................................. 6,220 5,572
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Income Before Income Tax Provision.............................................. 5,982 5,511
Income Tax Provision............................................................ 1,687 1,621
--------- ---------
Net Income......................................................................$ 4,295 $ 3,890
========= =========
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Net Income Per Common Share *
Basic...........................................................................$ .70 $ .64
Diluted.........................................................................$ .70 $ .64
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Average Common Shares Outstanding
Basic...........................................................................6,103,756 6,103,466
Diluted.........................................................................6,110,305 6,106,082
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* - 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.
5
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
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Six Months Ended
-----------------------
June 30
2000 1999
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Cash Flows from Operating Activities:
Net income....................................................................$ 4,295 $ 3,890
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................................................. 550 360
Depreciation.............................................................. 501 512
Core deposit intangible amortization...................................... 225 225
Net amortization (accretion) of premiums and discounts
on investment securities................................................ (23) 49
Gain on sale of securities................................................ - (8)
Gain on sale of loans..................................................... (118) (204)
Deferred income taxes benefit............................................. (212) (179)
Increase in interest receivable........................................... (492) (116)
Increase in other assets.................................................. (331) (308)
Increase in interest payable.............................................. 16 119
Decrease in other liabilities............................................. (349) (408)
--------- ---------
Net cash provided by operating activities............................... 4,062 3,932
--------- ----------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ..................... 10,314 30,783
Purchases of securities available for sale.................................... (7,504) (23,230)
Purchases of securities held to maturity...................................... - (5,033)
Net increase in loans......................................................... (25,289) (13,848)
Purchases of property and equipment........................................... (188) (574)
--------- ----------
Net cash used in investing activities....................................... (22,667) (11,902)
--------- ----------
Cash Flows from Financing Activities:
Net increase (decrease) in demand, money market,
and savings deposits........................................................ 1,676 (9,653)
Net increase in time deposits................................................. 2,336 12,422
Net increase (decrease) in federal funds purchased
and repurchase agreements................................................... 3,281 (14,679)
Net increase in borrowings.................................................... 10,430 18,700
Cash dividends paid........................................................... (1,741) (1,557)
Proceeds from exercise of stock options...................................... 1 -
--------- ----------
Net cash provided by financing activities................................... 15,983 5,233
--------- ----------
Net Decrease in Cash and Cash Equivalents....................................... (2,622) (2,737)
Cash and Cash Equivalents at Beginning of Period................................ 17,291 14,778
--------- ----------
Cash and Cash Equivalents at End of Period......................................$ 14,669 $ 12,041
========= ==========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 13,849 $ 11,831
Interest-bearing deposits in other banks.................................... 820 210
--------- ----------
$ 14,669 $ 12,041
========= ==========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 8,114 $ 7,059
Income taxes paid.............................................................$ 1,819 $ 2,093
The accompanying notes to consolidated financial statements are an integral part of these statements.
6
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly American National Bankshares'
financial position as of June 30, 2000, the results of its operations and its
cash flows for the three and six months then ended. Operating results for the
three and six month periods ended June 30, 2000 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2000.
The consolidated financial statements include the amounts and results of
operations of American National Bankshares Inc. ("the Corporation") and its
wholly owned subsidiary, American National Bank and Trust Company ("the Bank")
and the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. A
summary of the Corporation's significant accounting policies is set forth in
Note 1 to the Consolidated Financial Statements in the Corporation's 1999 Annual
Report on Form 10-K.
On June 15, 1999, the Corporation's Board of Directors approved a 2-for-1
stock split effected in the form of a 100% stock dividend to shareholders of
record July 1, 1999 with a distribution date of July 15, 1999. All per share
data and weighted average shares have been restated as appropriate to reflect
the split.
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of the Corporation and
Bank. These forward-looking statements involve risks and uncertainties and are
based on the beliefs and assumptions of management of the Corporation and Bank
and on information available at the time these statements and disclosures were
prepared. Factors that may cause actual results to differ materially from those
expected include the following:
o General economic conditions may deteriorate and negatively impact credit
quality and deposit retention.
o Changes in interest rates could reduce net interest income.
o Competitive pressures among financial institutions may increase.
o Legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses that the Corporation and
Bank are engaged in.
o New products developed or new methods of delivering products could result
in a reduction in business and income for the Corporation and Bank.
o Adverse changes may occur in the securities market.
2. Investment Securities
---------------------
The Bank classifies investment securities in one of three categories: held
to maturity, available for sale and trading.
Debt securities acquired with both the intent and ability to be held to
maturity are classified as held to maturity and reported at amortized cost.
Securities which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities available for sale are reported at estimated fair value,
with unrealized gains and losses reported as a separate component of
stockholders' equity, net of tax. Gains or losses realized from the sale of
7
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.
3. Commitments and Contingencies
-----------------------------
The Bank had credit availability of 15% of assets, approximately
$76,588,000 with the Federal Home Loan Bank of Atlanta at June 30, 2000.
Borrowings outstanding under this availability were $31,430,000 and $21,000,000
respectively, at June 30, 2000 and December 31, 1999.
Commitments to extend credit, which amount to $93,764,000 at June 30, 2000
and $86,931,000 at December 31, 1999, represent legally binding agreements to
lend to customers with fixed expiration dates or other termination clauses.
Since many of the commitments are expected to expire without being funded, the
total commitment amounts do not necessarily represent future liquidity
requirements.
There were no commitments at June 30, 2000 and December 31, 1999 to
purchase securities when issued.
Standby letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. At
June 30, 2000 and December 31, 1999, the Bank had $1,467,000 and $1,193,000,
respectively, in outstanding standby letters of credit.
4. New Accounting Pronouncements
-----------------------------
The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", during the first quarter of
1998. This statement establishes standards for reporting a measure of all
changes in equity of an enterprise that result from transactions and economic
events of the period other than transactions with owners ("economic income").
SFAS No. 130 requires an enterprise to report comprehensive income in the notes
to the financial statements on an interim basis. The following is a detail of
comprehensive income for the three and six months ended June 30, 2000 and 1999:
Three Months Ended Six Months Ended
June 30 June 30
------------------------ -------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net Income $2,180,000 $1,966,000 $4,295,000 $3,890,000
Unrealized holding gains (losses) arising
during period (net of tax expense) 122,000 (1,468,000) (274,000) (2,103,000)
---------- ----------- ----------- -----------
Total comprehensive income $2,302,000 $ 498,000 $4,021,000 $1,787,000
---------- ----------- ---------- -----------
The FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", in June 1997, which establishes new
standards for reporting information about operating segments in annual and
interim financial statements. This statement also requires descriptive
information about the way operating segments are determined, the products and
services provided by the segments and the nature of differences between
reportable segment measurements and those used for the consolidated entity. The
disclosure requirements of SFAS No.131 have been adopted and are included in
Note 5 to the Consolidated Condensed Financial Statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards requiring balance sheet recognition of all derivative instruments at
fair value. SFAS No. 133 was subsequently amended by
8
SFAS No. 137 in June 1999 and by SFAS No. 138 in June 2000. The statement, as
amended, specifies that changes in the fair value of derivative instruments be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows derivative gains and losses
to offset related results on hedged items in the income statement. Companies
must formally document, designate and assess the effectiveness of transactions
utilizing hedge accounting. The statement is effective for fiscal years
beginning after June 15, 2000. Adoption is not expected to have a material
impact on the Corporation.
5. Segment and Related Information
-------------------------------
The Corporation adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1998. Reportable segments include
community banking and trust and investment services. Community banking involves
making loans to and generating deposits from individuals and businesses in the
markets where the Bank has offices. All assets and liabilities of the Bank are
allocated to community banking. Investment income from fixed income investments
is a major source of income in addition to loan interest income. Service charges
from deposit accounts and non-deposit fees such as automatic teller machine fees
and insurance commissions generate additional income for community banking.
Trust and investment services includes estate and trust planning and
administration and investment management for various entities. The trust and
investment services division of the Bank manages trusts, estates and purchases
equity, fixed income and mutual fund investments for customer accounts. The
trust and investment services division receives fees for investment and
administrative services. Fees are also received by this division for individual
retirement accounts managed for the community banking segment.
The accounting policies of the segments and the basis of segmentation are
the same as those described in the summary of significant accounting policies
set forth in Note 1 to the Consolidated Financial Statements in the
Corporation's 1999 Annual Report on Form 10-K. All inter-segment sales prices
are market based.
Segment information for the three and six months ended June 30, 2000 and
1999 is shown in the following table (in thousands). The "Other" column includes
corporate related items, results of insignificant operations and, as it relates
to segment profit (loss), income and expense not allocated to reportable
segments.
9
Three Months Ended June 30, 2000
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 9,497 $ - $ 3 $ (3) $ 9,497
Interest expense 4,179 - 3 (3) 4,179
Non-interest income - external customers 443 624 75 - 1,142
Non-interest income - internal customers - 14 - (14) -
Operating income before income taxes 2,625 435 2,138 (2,170) 3,028
Depreciation and amortization 342 18 4 - 364
Total assets 510,927 - 58,669 (58,534) 511,062
Capital expenditures 142 - 2 - 144
Three Months Ended June 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 8,286 $ - $ 6 $ (6) $ 8,286
Interest expense 3,605 - 6 (6) 3,605
Non-interest income - external customers 372 614 89 - 1,075
Non-interest income - internal customers - 13 - (13) -
Operating income before income taxes 2,377 435 1,949 (1,977) 2,784
Depreciation and amortization 370 11 4 - 385
Total assets 466,956 - 56,045 (55,887) 467,114
Capital expenditures 281 - - - 281
Six Months Ended June 30, 2000
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 18,564 $ - $ 9 $ (9) $ 18,564
Interest expense 8,129 - 9 (9) 8,129
Non-interest income - external customers 852 1,317 148 - 2,317
Non-interest income - internal customers - 27 - (27) -
Operating income before income taxes 5,164 924 4,203 (4,309) 5,982
Depreciation and amortization 691 27 8 - 726
Total assets 510,927 - 58,669 (58,534) 511,062
Capital expenditures 183 - 5 - 188
Six Months Ended June 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 16,448 $ - $ 19 $ (19) $ 16,448
Interest expense 7,177 - 19 (19) 7,177
Non-interest income - external customers 730 1,238 204 - 2,172
Non-interest income - internal customers - 26 - (26) -
Operating income before income taxes 4,667 871 3,879 (3,906) 5,511
Depreciation and amortization 707 22 8 - 737
Total assets 466,956 - 56,045 (55,887) 467,114
Capital expenditures 571 - 3 - 574
10
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EARNINGS and CAPITAL
The Corporation's net income for the first six months of 2000 was
$4,295,000, an increase of 10.4% over the $3,890,000 earned during the first
half of 1999. On a basic and diluted per share basis, net income totaled $.70
for the first six months of 2000, up 9.4% from $.64 in the 1999 period. On an
annualized basis, return on average total assets was 1.72% for the first half of
2000 compared to 1.69% for the same period in 1999. Return on average common
shareholders' equity increased to 14.88% for the first six months of 2000 from
14.00% for the first half of 1999.
The Corporation's net income for the second quarter of 2000 was $2,180,000,
an increase of 10.9% over the $1,966,000 earned during the second quarter of
1999. On a basic and diluted per share basis, net income totaled $.36 for the
quarter, up 12.5% from $.32 in 1999. On an annualized basis, return on average
total assets was 1.73% for the second quarter of 2000 compared to 1.69% for the
second quarter of 1999. Return on average common shareholders' equity increased
to 14.98% in the second quarter of 2000 from 14.08% for the second quarter of
1999.
Shareholders' equity increased $2,281,000 during the first half of 2000
from net income of $4,295,000, less dividends paid of $1,740,000 and less a
change in net unrealized losses on securities held for sale of $274,000.
The Corporation's growth in earnings resulted from two principal factors.
First, net interest income improved $1,164,000, or 12.6%, for the first half of
2000 compared to the first half of 1999 from growth in average interest-earning
assets and a higher interest rate spread between average interest-earning assets
and liabilities in the first half of 2000 compared to the first half of 1999
(see discussion on NET INTEREST INCOME). Second, the 6.7% growth in non-interest
income in the first six months of 2000 over the same period in 1999 demonstrates
the continued success of the Corporation's expanded trust and investment
services and other fee income areas.
TRENDS and FUTURE EVENTS
During the first six months of 2000, net loans increased $24,857,000 or
8.6%. The increase in loans was primarily the result of loans made in two
offices opened in Martinsville and Chatham, Virginia in 1999. The increase in
loans was funded by borrowings from the Federal Home Loan Bank of Atlanta,
increased deposits and repurchase agreements, retained income and maturing
investments.
Total deposits increased $4,012,000 or 1.0% during the first six months of
2000 and repurchase agreements increased $3,281,000 or 13.1% during the same
period. Repurchase agreements of $23,235,000 are used by commercial accounts to
earn higher yields on short-term funds and mature daily while $5,000,000
repurchase agreements are with a broker and mature in one month.
During the second quarter of 2000, the Corporation declared a quarterly
cash dividend of $.15 per share. This dividend was paid on June 23, 2000 to
shareholders of record on June 9, 2000.
The Corporation's stock began trading on the NASDAQ National Market on
April 23, 1999 after having been traded on the OTC Bulletin Board for many
years. The change to NASDAQ was made to improve the marketability of the stock.
The Federal Reserve Board ("FRB") increased short term interest rates in
the later half of 1999 by raising federal funds by .75% and the discount rate by
.50%, and the major banks followed by increasing the prime rate by .75%. The
prime rate, federal funds and the discount rate have increased 1.00% since
December 31, 1999. The Federal Reserve actions in raising interest rates in 1999
and 2000 were designed to moderate national economic growth which could be
inflationary if left unchecked.
11
YEAR 2000 ISSUE
The Corporation did not encounter computer or system problems from the
transition into the new millennium (Year 2000). The "Year 2000" problem was
widely publicized as the possible failure or malfunction of systems or computer
chips that improperly recognized date sensitive information when the year
changed to 2000. The Corporation is not aware of Year 2000 problems encountered
by major customers, suppliers or hardware and software vendors. No liquidity
problems or material withdrawals by depositors of the Bank were experienced
during the transition into the Year 2000.
Total Year 2000 project costs were approximately $125,000 as had previously
been estimated and disclosed. The expenditures did not have a material impact on
the Corporation's results of operations, liquidity or capital resources.
Although highly unlikely, certain Year 2000 problems could surface later
during 2000. The Corporation continues to monitor systems for possible future
disruptions and has a business resumption plan to deal with such problems.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$10,848,000 for the first six months of 2000 compared to $9,655,000 for the
first six months of 1999, an increase of 12.4%. The interest rate spread
increased to 3.81% from 3.75%, and the net yield on earning assets increased to
4.55% from 4.43% in the first six months of 2000 compared to the first six
months of 1999, respectively. Higher net interest income for the first half of
2000 was primarily the result of $40,414,000 growth in average interest-earning
assets while average interest-bearing liabilities grew only $29,783,000 from the
first half of 1999. The increased interest rate spread of .06% in the first half
of 2000 from the same period in1999 also contributed to higher net interest
income. The greater growth in average interest-earning assets than
interest-bearing liabilities was possible because of higher non interest-bearing
demand deposits, reduced non-earning assets and retained income. The higher
interest rate spread resulted from additional focus on pricing of loans and
deposits and from higher short-term interest rates as loan yields rose faster
than deposit yields.
Net interest income on a FTE basis was $5,524,000 in the second quarter of
2000 compared to $4,874,000 in the second quarter of 1999, an increase of 13.3%.
The interest rate spread increased to 3.83% from 3.76% and the net yield on
earning assets increased to 4.59% from 4.44% in the second quarter of 2000
compared to the second quarter of 1999, respectively. The following tables
demonstrate fluctuations in net interest income and the related yields for the
first six months and second quarter of 2000 compared to similar prior year
periods.
12
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):
Interest
Average Balance Income/Expense Yield/Rate
--------------------- ------------------- -----------------
2000 1999 2000 1999 2000 1999
-------- -------- ------- ------- ------ ------
For six months ended June 30
Loans:
Commercial $ 92,069 $ 84,252 $ 4,163 $ 3,474 9.04% 8.25%
Mortgage 160,089 139,737 6,698 5,767 8.37 8.25
Consumer 51,360 53,309 2,505 2,569 9.75 9.64
-------- -------- ------- ------- ------ ------
Total loans 303,518 277,298 13,366 11,810 8.81 8.52
-------- -------- ------- ------- ------ ------
Investment securities:
U. S. Government 5,312 18,238 168 550 6.33 6.03
Federal agencies 102,476 83,231 3,303 2,596 6.45 6.24
State and municipal 39,989 36,273 1,365 1,231 6.83 6.79
Other investments 22,664 20,136 705 626 6.22 6.22
-------- -------- ------- ------- ------ ------
Total investment securities 170,441 157,878 5,541 5,003 6.50 6.34
-------- -------- ------- ------- ------ ------
Federal funds sold and other 2,458 827 70 19 5.70 4.59
-------- -------- ------- ------- ------ ------
Total interest-earning assets 476,417 436,003 18,977 16,832 7.97 7.72
------- ------- ------ ------
Other non-earning assets 23,643 25,405
-------- --------
Total assets $500,060 $461,408
======== ========
Interest-bearing deposits:
Demand $ 55,659 $ 53,821 522 550 1.88 2.04
Money market 23,095 18,192 383 242 3.32 2.66
Savings 64,926 68,178 855 888 2.63 2.60
Time 198,436 177,613 5,119 4,500 5.16 5.07
-------- -------- ------- ------- ------ ------
Total interest-bearing deposits 342,116 317,804 6,879 6,180 4.02 3.89
Repurchase agreements 24,005 21,976 558 447 4.65 4.07
Other borrowings 25,106 21,664 692 550 5.51 5.08
-------- -------- ------- ------- ------ ------
Total interest-bearing
liabilities 391,227 361,444 8,129 7,177 4.16 3.97
------- ------- ------ ------
Demand deposits 47,803 41,398
Other liabilities 3,302 2,980
Shareholders' equity 57,728 55,586
-------- --------
Total liabilities and
shareholders' equity $500,060 $461,408
======== ========
Interest rate spread 3.81% 3.75%
====== ======
Net interest income 10,848 9,655
======= =======
Taxable equivalent adjustment 413 384
======= =======
Net yield on earning assets 4.55% 4.43%
====== ======
13
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):
Interest
Average Balance Income/Expense Yield/Rate
--------------------- ------------------- -----------------
2000 1999 2000 1999 2000 1999
-------- -------- ------- ------- ------ ------
For three months ended June 30 Loans:
Commercial $ 96,186 $ 85,960 $ 2,217 $ 1,783 9.22% 8.30%
Mortgage 162,586 141,545 3,453 2,901 8.50 8.20
Consumer 50,752 53,328 1,247 1,292 9.83 9.69
-------- -------- ------- ------- ------ ------
Total loans 309,524 280,833 6,917 5,976 8.94 8.51
-------- -------- ------- ------- ------ ------
Investment securities:
U. S. Government 3,624 13,531 59 206 6.51 6.09
Federal agencies 102,741 87,827 1,654 1,369 6.44 6.23
State and municipal 40,059 36,154 683 614 6.82 6.79
Other investments 23,858 19,315 372 301 6.24 6.23
-------- -------- ------- ------- ------ ------
Total investment securities 170,282 156,827 2,768 2,490 6.50 6.35
-------- -------- ------- ------- ------ ------
Federal funds sold and other 1,189 1,090 18 13 6.06 4.77
-------- -------- ------- ------- ------ ------
Total interest-earning assets 480,995 438,750 9,703 8,479 8.07 7.73
------- ------- ------ ------
Other non-earning assets 23,600 25,253
-------- --------
Total assets $504,595 $464,003
======== ========
Interest-bearing deposits:
Demand $ 55,364 $ 54,228 258 278 1.86 2.05
Money market 23,055 17,743 194 119 3.37 2.68
Savings 64,862 68,079 428 446 2.64 2.62
Time 198,128 180,574 2,600 2,268 5.25 5.02
-------- -------- ------- ------- ------ ------
Total interest-bearing deposits 341,409 320,624 3,480 3,111 4.08 3.88
Repurchase agreements 23,870 17,509 284 178 4.76 4.07
Other borrowings 28,928 24,692 415 316 5.74 5.12
-------- -------- ------- ------- ------ ------
Total interest-bearing
liabilities 394,207 362,825 4,179 3,605 4.24 3.97
------- ------- ------ ------
Demand deposits 48,907 42,382
Other liabilities 3,290 2,931
Shareholders' equity 58,191 55,865
-------- --------
Total liabilities and
shareholders' equity $504,595 $464,003
======== ========
Interest rate spread 3.83% 3.76%
====== ======
Net interest income 5,524 4,874
======= =======
Taxable equivalent adjustment 206 193
======= ======
Net yield on earning assets 4.59% 4.44%
====== ======
14
ASSET QUALITY
Non-performing assets include loans on which interest is no longer accrued,
loans classified as troubled debt restructurings and foreclosed properties.
Non-performing assets increased to $412,000 at June 30, 2000 from $322,000 at
December 31, 1999.
Foreclosed properties were $30,000 at June 30, 2000 and December 31, 1999.
Loans in a non-accrual status at June 30, 2000 were $382,000 compared with
$292,000 at December 31, 1999. Loans on accrual status and past due 90 or more
at June 30, 2000 were $227,000 compared with $287,000 at December 31, 1999.
Total non-performing loans and loans past due 90 days or more as a
percentage of net loans were .19% at June 30, 2000 and .20% at December 31,
1999. Total non-performing loans and loans past due 90 days or more, on an
accrual status, are considered low by industry standards. Net charge-offs for
the first six months, annualized, as a percentage of average loans increased to
.15% in 2000 from .12% in 1999. These charge-off ratios are low by industry
standards. Average net charge-offs as a percentage of average loans for the past
three calendar years was .22%.
During the first six months of 2000 the gross amount of interest income
that would have been recorded on non-accrual loans and restructured loans at
June 30, 2000, if all such loans had been accruing interest at the original
contractual rate, was $16,500. No interest payments were recorded during the
reporting period as interest income for all such non-performing loans.
PROVISION and RESERVE FOR LOAN LOSSES
The provision for loan losses was $550,000 for the first half and $335,000
for the second quarter of 2000 versus $360,000 and $180,000, respectively, for
the 1999 periods. The increased provision for loan losses provided reserves for
increased loans which grew 8.6% in the first half of 2000 compared to 5.2% in
the first half of 1999. The reserve for loan losses totaled $4,463,000 at June
30, 2000, an increase of 7.9% over the $4,135,000 recorded at December 31, 1999.
The ratio of reserves to loans, less unearned discount, was 1.40% at June 30,
2000 and 1.41% at December 31, 1999. In Management's opinion, the current
reserve for loan losses is adequate.
NON-INTEREST INCOME
Non-interest income for the first six months of 2000 was $2,317,000, an
increase of 6.7% from the $2,172,000 reported in the first six months of 1999.
The major reasons for the 2000 first half growth in non-interest income was a
6.4% increase in trust and investment services to $1,317,000,and growth in
service charges and other fees of 17.0% to $798,000. Mortgage banking income
declined 42.2% to $118,000 due to higher interest rates that have dampened home
mortgage lending and related loan sales.
Non-interest income for the second quarter of 2000 was $1,142,000, an
increase of 6.2% from $1,075,000 reported in the second quarter of 1999. The
reasons for increased non-interest income for the three months ended June 30,
2000 were similar to those for the six month period ended June 30, 2000.
NON-INTEREST EXPENSE
Non-interest expense for the first six months of 2000 was $6,220,000, an
11.6% increase from the $5,572,000 reported for the same period last year.
Salaries increased 10.8% from the same period last year to $2,951,000 in 2000
while pension and other employee benefits increased 20.5% to $588,000. Occupancy
and equipment increased $80,000, or 8.6%, for the first half of 2000 from the
same period in 1999. These increases were primarily the result of the
Martinsville office that opened in the late third quarter of 1999 and merit
increases to employees that were effective January 1, 2000. Core deposit
15
intangible amortization of $225,000 for the first half of 2000 and 1999
represents the amortization of the premium paid for deposits acquired at the
Gretna office in 1995 and Yanceyville office in 1996.
Non-interest expense for the second quarter of 2000 was $3,097,000, a 10.9%
increase from $2,792,000 reported for the second quarter of 1999. The reasons
for increased non-interest expense for the three months ended June 30, 2000 were
similar to those for the six month period ended June 30, 2000.
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, was 45.5% and 45.1% for the six months ended
June 30, 2000 and 1999, respectively. A lower efficiency ratio generally
indicates better 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.
INCOME TAX PROVISION
The income tax provision for the first six months of 2000 was $1,687,000,
an increase of $66,000 from $1,621,000 reported a year earlier. The effective
tax rate for the first six months of 2000 was 28.2% compared to 29.4% for the
first half of 1999. The reduction in the effective tax rate resulted from
increased investment in tax exempt securities and other adjustments.
CAPITAL MANAGEMENT
Federal regulatory risk-based capital ratio guidelines require percentages
to be applied to various assets including off-balance-sheet assets in relation
to their perceived risk. Tier I capital includes shareholders' equity and Tier
II capital includes certain components of nonpermanent preferred stock and
subordinated debt. The Corporation has no nonpermanent preferred stock or
subordinated debt. Banks and bank holding companies must have a Tier I capital
ratio of at least 4% and a total ratio, including Tier I and Tier II capital, of
at least 8%. As of June 30, 2000 the Corporation had a ratio of 16.11% for Tier
I and a ratio of 17.25% for total capital. At December 31, 1999 these ratios
were 16.57% and 17.79%, respectively.
During the second quarter of 2000, the Corporation declared and paid a
quarterly cash dividend of $.15 per share which was an increase over the $.135
per share declared and paid in the first quarter of 2000. The second quarter
dividend totaled $916,000.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, interest rate risk and its
impact on net interest income is the primary market risk exposure. The
Asset/Liability Investment Committee ("ALCO") is primarily responsible for
establishing asset and liability strategies and for monitoring and controlling
liquidity and interest rate risk. ALCO uses computer simulation analysis to
measure the sensitivity of earnings and market value of equity to changes in
interest rates.
The projected changes in net interest income and market value of portfolio
equity ("MVE") to changes in interest rates are calculated and monitored by ALCO
as indicators of interest rate risk. The projected changes in net interest
income and MVE to changes in interest rates at June 30, 2000 were not materially
different from December 31, 1999.
The Bank's net liquid assets to net liabilities ratio was 22.1% at June 30,
2000 and 25.8% at December 31, 1999. Both of these ratios are considered to
reflect adequate liquidity for the respective periods.
Management constantly monitors and plans the Corporation's liquidity
position for future periods. Liquidity is provided from cash and due from banks,
federal funds sold, interest-bearing deposits in other banks, repayments from
loans, seasonal increases in deposits, lines of credit from two correspondent
banks and two federal agency banks and a planned structured continuous maturity
of investments. Management believes that these factors provide sufficient and
timely liquidity for the foreseeable future.
16
PART II
OTHER INFORMATION
Item:
1. Legal Proceedings
The nature of the business of the Corporation's banking subsidiary
ordinarily results in a certain amount of litigation. The subsidiary of the
Corporation is involved in various legal proceedings, all of which are
considered incidental to the normal conduct of business. Management believes
that the liabilities arising from these proceedings will not have a material
adverse effect on the consolidated financial position or consolidated results of
operations of the Corporation.
2. Changes in securities
None
3. Defaults upon senior securities
None
4. Results of votes of security holders
None
5. Other information
None
6. Exhibits and Reports on Form 8-K
(a) Exhibits - Financial Data Schedule EX-27
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN NATIONAL BANKSHARES INC.
/s/ Charles H. Majors
---------------------------------------------
Charles H. Majors
Date - August 7, 2000 President and Chief Executive Officer
/s/ T. Allen Liles
---------------------------------------------
T. Allen Liles
Senior Vice-President and
Date - August 7, 2000 Secretary-Treasurer (Chief Financial Officer)
17