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 SEPTEMBER 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 November 10,
2000 was 6,087,772.
1
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999....................................................................3
Consolidated Statements of Income for the three months
ended September 30, 2000 and 1999........................................................4
Consolidated Statements of Income for the nine months
ended September 30, 2000 and 1999........................................................5
Consolidated Statements of Cash Flows for the nine months
ended September 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
EXHIBIT 27 - Financial Data Schedule
2
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
September 30 December 31
2000 1999
------------ -----------
ASSETS
Cash and due from banks................................................................$ 12,952 $ 13,885
Interest-bearing deposits in other banks............................................... 3,224 3,406
Investment securities:
Securities available for sale (at market value)...................................... 119,860 121,872
Securities held to maturity (market value of $42,712 at
September 30, 2000 and $43,634 at December 31, 1999)............................... 43,026 44,400
---------- ----------
Total investment securities...................................................... 162,886 166,272
---------- ----------
Loans, net of unearned income ......................................................... 329,775 293,741
Less allowance for loan losses......................................................... (4,619) (4,135)
---------- ----------
Net loans............................................................................ 325,156 289,606
---------- ----------
Bank premises and equipment, at cost, less accumulated
depreciation of $8,935 in 2000 and $8,171 in 1999.................................... 7,624 8,052
Accrued interest receivable and other assets........................................... 11,076 10,170
---------- ----------
Total assets.........................................................................$ 522,918 $ 491,391
========== ==========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing..............................................$ 54,015 $ 47,495
Demand deposits -- interest bearing.................................................. 57,998 55,623
Money market deposits................................................................ 25,428 22,326
Savings deposits..................................................................... 62,920 64,745
Time deposits........................................................................ 208,080 195,369
---------- ----------
Total deposits..................................................................... 408,441 385,558
---------- ----------
Repurchase agreements.................................................................. 34,622 24,954
FHLB borrowings........................................................................ 16,000 21,000
Accrued interest payable and other liabilities......................................... 2,816 3,160
---------- ----------
Total liabilities.................................................................... 461,879 434,672
---------- ----------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding................................................................... - -
Common stock, $1 par, 10,000,000 shares authorized,
6,087,772 shares outstanding at September 30, 2000
and 6,103,701 shares outstanding at December 31, 1999.............................. 6,088 6,104
Capital in excess of par value....................................................... 9,870 9,895
Retained earnings.................................................................... 46,097 42,467
Accumulated other comprehensive income -
net unrealized losses on securities available for sale............................. (1,016) (1,747)
---------- ----------
Total shareholders' equity......................................................... 61,039 56,719
---------- ----------
Total liabilities and shareholders' equity.........................................$ 522,918 $ 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
September 30
-------------------
2000 1999
-------- --------
Interest Income:
Interest and fees on loans....................................................$ 7,326 $ 5,991
Interest on federal funds sold and other...................................... 26 94
Income on investment securities:
U S Government.............................................................. - 141
Federal agencies............................................................ 1,633 1,474
State and municipal......................................................... 488 431
Other investments........................................................... 380 304
-------- --------
Total interest income..................................................... 9,853 8,435
-------- --------
Interest Expense:
Interest on deposits:
Demand...................................................................... 262 276
Money market................................................................ 229 125
Savings..................................................................... 423 445
Time........................................................................ 2,789 2,342
Interest on repurchase agreements............................................... 415 191
Interest on other borrowings.................................................... 409 341
-------- --------
Total interest expense........................................................ 4,527 3,720
-------- --------
Net Interest Income............................................................. 5,326 4,715
Provision for Loan Losses....................................................... 290 120
-------- --------
Net Interest Income After Provision
For Loan Losses............................................................... 5,036 4,595
-------- --------
Non-Interest Income:
Trust and investment services................................................. 632 630
Service charges on deposit accounts........................................... 284 258
Non-deposit fees and insurance commissions.................................... 148 113
Mortgage banking income....................................................... 71 75
Other income.................................................................. 51 85
-------- --------
Total non-interest income................................................... 1,186 1,161
-------- --------
Non-Interest Expense:
Salaries...................................................................... 1,548 1,392
Pension and other employee benefits........................................... 307 238
Occupancy and equipment....................................................... 529 507
Postage and printing.......................................................... 101 103
Core deposit intangible amortization ......................................... 112 112
Other......................................................................... 575 575
-------- --------
Total non-interest expense.................................................. 3,172 2,927
-------- --------
Income Before Income Tax Provision.............................................. 3,050 2,829
Income Tax Provision............................................................ 860 841
-------- --------
Net Income......................................................................$ 2,190 $ 1,988
======== ========
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Net Income Per Common Share *
Basic...........................................................................$ .36 $ .33
Diluted.........................................................................$ .36 $ .33
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Average Common Shares Outstanding
Basic...........................................................................6,096,685 6,103,466
Diluted.........................................................................6,096,685 6,113,907
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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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Nine Months Ended
September 30
----------------------
2000 1999
--------- ---------
Interest Income:
Interest and fees on loans....................................................$ 20,666 $ 17,787
Interest on federal funds sold and other...................................... 96 113
Income on investment securities:
U S Government.............................................................. 168 691
Federal agencies............................................................ 4,936 4,070
State and municipal......................................................... 1,466 1,292
Other investments........................................................... 1,085 930
--------- ---------
Total interest income..................................................... 28,417 24,883
--------- ---------
Interest Expense:
Interest on deposits:
Demand...................................................................... 784 826
Money market................................................................ 612 367
Savings..................................................................... 1,278 1,333
Time........................................................................ 7,908 6,842
Interest on repurchase agreements............................................. 973 638
Interest on other borrowings.................................................. 1,101 891
--------- ---------
Total interest expense...................................................... 12,656 10,897
--------- ---------
Net Interest Income............................................................. 15,761 13,986
Provision for Loan Losses....................................................... 840 480
--------- ---------
Net Interest Income After Provision
For Loan Losses............................................................... 14,921 13,506
--------- ---------
Non-Interest Income:
Trust and investment services................................................. 1,949 1,868
Service charges on deposit accounts........................................... 809 715
Non-deposit fees and insurance commissions.................................... 421 338
Mortgage banking income....................................................... 189 279
Other income.................................................................. 135 133
--------- ---------
Total non-interest income................................................... 3,503 3,333
--------- ---------
Non-Interest Expense:
Salaries...................................................................... 4,499 4,055
Pension and other employee benefits........................................... 895 726
Occupancy and equipment....................................................... 1,534 1,432
Postage and printing.......................................................... 333 334
Core deposit intangible amortization ......................................... 337 337
Other......................................................................... 1,794 1,615
--------- ---------
Total non-interest expense.................................................. 9,392 8,499
---------- ---------
Income Before Income Tax Provision.............................................. 9,032 8,340
Income Tax Provision............................................................ 2,547 2,462
--------- ---------
Net Income......................................................................$ 6,485 $ 5,878
========= =========
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Net Income Per Common Share *
Basic...........................................................................$ 1.06 $ .96
Diluted.........................................................................$ 1.06 $ .96
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Average Common Shares Outstanding
Basic...........................................................................6,101,382 6,103,466
Diluted.........................................................................6,105,454 6,108,773
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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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Nine Months Ended
-----------------------
September 30
2000 1999
--------- ---------
Cash Flows from Operating Activities:
Net income....................................................................$ 6,485 $ 5,878
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................................................. 840 480
Depreciation.............................................................. 764 794
Core deposit intangible amortization...................................... 337 337
Net amortization (accretion) of premiums and discounts
on investment securities................................................ (36) 79
Gain on sale of securities................................................ - (8)
Gain on sale of loans..................................................... (189) (279)
Gain on sale of real estate owned......................................... - (63)
Deferred income taxes benefit............................................. (306) (190)
Increase in interest receivable........................................... (748) (203)
Increase in other assets.................................................. (565) (702)
Increase in interest payable.............................................. 150 135
Decrease in other liabilities............................................. (494) (247)
--------- ---------
Net cash provided by operating activities............................... 6,238 6,011
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ..................... 12,034 45,072
Purchases of securities available for sale.................................... (7,505) (37,197)
Purchases of securities held to maturity...................................... - (5,033)
Net increase in loans......................................................... (36,201) (9,748)
Proceeds from sale of other real estate owned................................. - 138
Purchases of property and equipment........................................... (336) (1,129)
--------- ----------
Net cash used in investing activities....................................... (32,008) (7,897)
--------- ----------
Cash Flows from Financing Activities:
Net increase (decrease) in demand, money market,
and savings deposits........................................................ 10,172 (2,803)
Net increase in time deposits................................................. 12,711 18,078
Net increase (decrease) in repurchase agreements.............................. 9,668 (12,456)
Net (decrease) increase in borrowings.. ...................................... (5,000) 13,000
Cash dividends paid........................................................... (2,653) (2,381)
Repurchase of stock........................................................... (244) -
Proceeds from exercise of stock options...................................... 1 -
--------- ----------
Net cash provided by financing activities................................... 24,655 13,438
--------- ----------
Net (Decrease) Increase in Cash and Cash Equivalents............................ (1,115) 11,552
Cash and Cash Equivalents at Beginning of Period................................ 17,291 14,778
--------- ----------
Cash and Cash Equivalents at End of Period......................................$ 16,176 $ 26,330
========= ==========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 12,952 $ 12,435
Interest-bearing deposits in other banks.................................... 3,224 13,895
--------- ----------
$ 16,176 $ 26,330
========= ==========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 12,506 $ 10,762
Income taxes paid.............................................................$ 2,827 $ 2,935
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 September 30, 2000, the results of its operations and
its cash flows for the three and nine months then ended. Operating results for
the three and nine month periods ended September 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 National or regional 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
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.
7
3. Commitments and Contingencies
-----------------------------
The Bank had credit availability of 15% of assets, approximately
$78,400,000, with the Federal Home Loan Bank of Atlanta at September 30, 2000.
Borrowings outstanding under this availability were $16,000,000 and $21,000,000
respectively, at September 30, 2000 and December 31, 1999.
Commitments to extend credit, which amount to $89,621,000 at September
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 September 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 September 30, 2000 and December 31, 1999, the Bank had
$1,461,000 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 nine months ended September 30, 2000 and
1999:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net Income $2,190,000 $1,988,000 $6,485,000 $5,878,000
Unrealized holding gains (losses) arising
during period (net of tax expense) 1,005,000 159,000 731,000 (1,944,000)
---------- ----------- ----------- -----------
Total comprehensive income $3,195,000 $2,417,000 $7,216,000 $3,934,000
---------- ----------- ---------- -----------
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 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.
8
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 nine months ended September 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 September 30, 2000
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 9,853 $ - $ 6 $ (6) $ 9,853
Interest expense 4,527 - 6 (6) 4,527
Non-interest income - external customers 458 632 96 - 1,186
Non-interest income - internal customers - 13 - (13) -
Operating income before income taxes 2,699 405 2,170 (2,224) 3,050
Depreciation and amortization 372 (1) 4 - 375
Total assets 522,808 - 62,610 (62,500) 522,918
Capital expenditures 134 13 1 - 148
Three Months Ended September 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 8,435 $ - $ 6 $ (6) $ 8,435
Interest expense 3,720 - 6 (6) 3,720
Non-interest income - external customers 456 630 75 - 1,161
Non-interest income - internal customers - 13 - (13) -
Operating income before income taxes 2,420 442 1,966 (1,999) 2,829
Depreciation and amortization 380 11 3 - 394
Total assets 477,175 - 57,288 (56,820) 477,643
Capital expenditures 552 - 3 - 555
Nine Months Ended September 30, 2000
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 28,417 $ - $ 15 $ (15) $ 28,417
Interest expense 12,656 - 15 (15) 12,656
Non-interest income - external customers 1,310 1,949 244 - 3,503
Non-interest income - internal customers - 40 - (40) -
Operating income before income taxes 7,886 1,329 6,373 (6,556) 9,032
Depreciation and amortization 1,063 26 12 - 1,101
Total assets 522,808 - 62,610 (62,500) 522,918
Capital expenditures 317 13 6 - 336
Nine Months Ended September 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 24,883 $ - $ 25 $ (25) $ 24,883
Interest expense 10,897 - 25 (25) 10,897
Non-interest income - external customers 1 186 1,868 279 - 3,333
Non-interest income - internal customers - 39 - (39) -
Operating income before income taxes 7,087 1,313 5,845 (5,905) 8,340
Depreciation and amortization 1,087 33 11 - 1,131
Total assets 477,175 - 57,288 (56,820) 477,643
Capital expenditures 1 123 - 6 - 1,129
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 nine months of 2000 was
$6,485,000, an increase of 10.3% over the $5,878,000 earned during the first
nine months of 1999. On a basic and diluted per share basis, net income totaled
$1.06 for the first nine months of 2000, up 10.4% from $.96 in the 1999 period.
On an annualized basis, return on average total assets was 1.71% for the first
nine months of 2000 compared to 1.69% for the same period in 1999. Return on
average common shareholders' equity increased to 14.81% for the first nine
months of 2000 from 14.10% for the first nine months of 1999.
The Corporation's net income for the third quarter of 2000 was
$2,190,000, an increase of 10.2% over the $1,988,000 earned during the third
quarter of 1999. On a basic and diluted per share basis, net income totaled $.36
for the quarter, up 9.1% from $.33 in 1999. On an annualized basis, return on
average total assets was 1.70% for the third quarter of 2000 compared to 1.68%
for the third quarter of 1999. Return on average common shareholders' equity
increased to 14.73% in the third quarter of 2000 from 14.30% for the third
quarter of 1999.
Shareholders' equity increased $4,320,000 during the first nine months
of 2000 from net income of $6,485,000, less dividends paid of $2,653,000 and
stock repurchases of $243,000, plus a reduction in net unrealized losses on
securities held for sale of $731,000.
The Corporation's growth in earnings resulted from two principal
factors. First, net interest income improved $1,775,000, or 12.7%, for the first
nine months of 2000 compared to the first nine months 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 nine months of 2000
compared to the first nine months of 1999 (see discussion on NET INTEREST
INCOME). Second, the 5.1% growth in non-interest income in the first nine 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 nine months of 2000, net loans increased $35,550,000
or 12.3%. 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 increased deposits and repurchase agreements, retained
income and maturing investments.
The Bank received approval during the third quarter of 2000 to open its
thirteenth office at 3229 Halifax Road, South Boston, Virginia. The South Boston
office is expected to open in November, 2000.
Total deposits increased $22,883,000 or 5.9% during the first nine
months of 2000 and repurchase agreements increased $9,668,000 or 38.7% during
the same period. Repurchase agreements of $29,622,000 are used by commercial
accounts to earn higher yields on short-term funds and mature daily while
$5,000,000 of repurchase agreements are with a broker and mature in one month.
During the third quarter of 2000, the Corporation declared a quarterly
cash dividend of $.15 per share. This dividend was paid on September 22, 2000 to
shareholders of record on September 8, 2000.
The Corporation's Board of Directors authorized the repurchase of up to
300,000 shares of the Corporation's common stock between August 16, 2000 and
August 15, 2001. The repurchases which may be made through open market purchases
or in privately negotiated transactions totaled 16,000 shares during the third
quarter of 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
$16,377,000 for the first nine months of 2000 compared to $14,558,000 for the
first nine months of 1999, an increase of 12.5%. The interest rate spread
increased to 3.77% from 3.72%, and the net yield on earning assets increased to
4.54% from 4.41% in the first nine months of 2000 compared to the first nine
months of 1999, respectively. Higher net interest income for the first nine
months of 2000 was primarily the result of $41,219,000 growth in average
interest-earning assets while average interest-bearing liabilities grew only
$30,514,000 from the first nine months of 1999. The increased interest rate
spread of .05% in the first nine months 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 $5,529,000 in the third quarter
of 2000 compared to $4,903,000 in the third quarter of 1999, an increase of
12.8%. The interest rate spread increased to 3.70% from 3.68% and the net yield
on earning assets increased to 4.51% from 4.38% in the third quarter of 2000
compared to the third quarter of 1999, respectively. The following tables
demonstrate fluctuations in net interest income and the related yields for the
first nine months and third 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 three months ended September 30
Loans:
Commercial $105,894 $ 84,041 $ 2,472 $ 1,754 9.34% 8.35%
Mortgage 168,364 143,891 3,628 2,947 8.62 8.19
Consumer 49,627 53,148 1,238 1,294 9.98 9.74
-------- -------- ------- ------- ------ ------
Total loans 323,885 281,080 7,338 5,995 9.06 8.53
-------- -------- ------- ------- ------ ------
Investment securities:
U. S. Government - 9,205 - 141 - 6.13
Federal agencies 101,179 94,496 1,633 1,474 6.46 6.24
State and municipal 39,911 36,339 679 615 6.81 6.77
Other investments 24,208 19,506 380 304 6.28 6.23
-------- -------- ------- ------- ------ ------
Total investment securities 165,298 159,546 2,692 2,534 6.51 6.35
-------- -------- ------- ------- ------ ------
Federal funds sold and other 1,564 7,225 26 94 6.65 5.20
-------- -------- ------- ------- ------ ------
Total interest-earning assets 490,747 447,851 10,056 8,623 8.20 7.70
------- ------- ------ ------
Other non-earning assets 23,625 24,027
-------- --------
Total assets $514,372 $471,878
======== ========
Interest-bearing deposits:
Demand $ 55,785 $ 54,212 262 276 1.88 2.04
Money market 25,558 18,358 229 125 3.58 2.72
Savings 63,420 67,073 423 445 2.67 2.65
Time 199,131 186,384 2,789 2,342 5.60 5.03
-------- -------- ------- ------- ------ ------
Total interest-bearing deposits 343,894 326,027 3,703 3,188 4.31 3.91
Repurchase agreements 31,294 18,167 415 191 5.30 4.21
Other borrowings 27,311 26,309 409 341 5.99 5.18
-------- -------- ------- ------- ------ ------
Total interest-bearing
liabilities 402,499 370,503 4,527 3,720 4.50 4.02
------- ------- ------ ------
Demand deposits 48,972 43,408
Other liabilities 3,409 3,071
Shareholders' equity 59,492 54,896
-------- --------
Total liabilities and
shareholders' equity $514,372 $471,878
======== ========
Interest rate spread 3.70% 3.68%
====== ======
Net interest income 5,529 4,903
======= =======
Taxable equivalent adjustment 203 188
======= =======
Net yield on earning assets 4.51% 4.38%
====== ======
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 nine months ended September 30
Loans:
Commercial $ 96,712 $ 84,187 $ 6,635 $ 5,228 9.15% 8.28%
Mortgage 162,868 141,137 10,326 8,714 8.45 8.23
Consumer 50,778 53,263 3,743 3,863 9.83 9.67
-------- -------- ------- ------- ------ ------
Total loans 310,358 278,587 20,704 17,805 8.89 8.52
-------- -------- ------- ------- ------ ------
Investment securities:
U. S. Government 3,528 15,194 168 691 6.35 6.06
Federal agencies 102,040 87,027 4,936 4,070 6.45 6.24
State and municipal 39,963 36,295 2,044 1,846 6.82 6.78
Other investments 23,182 19,924 1,085 930 6.24 6.22
-------- -------- ------- ------- ------ ------
Total investment securities 168,713 158,440 8,233 7,537 6.51 6.34
-------- -------- ------- ------- ------ ------
Federal funds sold and other 2,150 2,975 96 113 5.95 5.06
-------- -------- ------- ------- ------ ------
Total interest-earning assets 481,221 440,002 29,033 25,455 8.04 7.71
------- ------- ------ ------
Other non-earning assets 23,649 24,875
-------- --------
Total assets $504,870 $464,877
======== ========
Interest-bearing deposits:
Demand $ 55,701 $ 53,953 784 826 1.88 2.04
Money market 23,922 18,248 612 367 3.41 2.68
Savings 64,420 67,805 1,278 1,333 2.65 2.62
Time 198,669 180,569 7,908 6,842 5.31 5.05
-------- -------- ------- ------- ------ ------
Total interest-bearing deposits 342,712 320,575 10,582 9,368 4.12 3.90
Repurchase agreements 26,452 20,692 973 638 4.90 4.11
Other borrowings 25,846 23,229 1,101 891 5.68 5.11
-------- -------- ------- ------- ------ ------
Total interest-bearing
liabilities 395,010 364,496 12,656 10,897 4.27 3.99
------- ------- ------ ------
Demand deposits 48,196 42,075
Other liabilities 3,275 3,163
Shareholders' equity 58,389 55,143
-------- --------
Total liabilities and
shareholders' equity $504,870 $464,877
======== ========
Interest rate spread 3.77% 3.72%
====== ======
Net interest income 16,377 14,558
======= =======
Taxable equivalent adjustment 616 572
======= =======
Net yield on earning assets 4.54% 4.41%
====== ======
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 $570,000 at September 30, 2000
from $322,000 at December 31, 1999.
Foreclosed properties were $30,000 at September 30, 2000 and December
31, 1999.
Loans in a non-accrual status at September 30, 2000 were $540,000
compared with $292,000 at December 31, 1999. Loans on accrual status and past
due 90 or more at September 30, 2000 were $97,000 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 September 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 nine months, annualized, as a percentage of average loans increased to
.15% in 2000 from .11% 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 nine months of 2000, the gross amount of interest
income that would have been recorded on non-accrual loans and restructured loans
at September 30, 2000, if all such loans had been accruing interest at the
original contractual rate, was $30,500. 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 $840,000 for the first nine months
and $290,000 for the third quarter of 2000 versus $480,000 and $120,000,
respectively, for the 1999 periods. The increased provision for loan losses
provided reserves for additional loans which grew 12.3% in the first nine months
of 2000 compared to 3.6% in the first nine months of 1999. The reserve for loan
losses totaled $4,619,000 at September 30, 2000, an increase of 11.7% over the
$4,135,000 recorded at December 31, 1999. The ratio of reserves to loans, less
unearned discount, was 1.40% at September 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 nine months of 2000 was $3,503,000,
an increase of 5.1% from the $3,333,000 reported in the first nine months of
1999. The major reasons for the 2000 first nine months growth in non-interest
income was a 4.3% increase in trust and investment services to $1,949,000,and
growth in service charges and other fees of 16.8% to $1,230,000. Mortgage
banking income declined 32.3% to $189,000 due to higher interest rates that have
dampened home mortgage lending and related loan sales.
Non-interest income for the third quarter of 2000 was $1,186,000, an
increase of 2.2% from $1,161,000 reported in the third quarter of 1999. The
reasons for increased non-interest income for the three months ended September
30, 2000 were increased service charges on deposit accounts and greater
non-deposit fees. Growth in trust and investment services income slowed during
the third quarter of 2000 because a declining stock market reduced the
appreciation in certain trust accounts. Other income declined in the third
quarter of 2000 compared to the third quarter of 1999 because the 1999 third
quarter included $63,000 of gains from the sale of REO.
NON-INTEREST EXPENSE
Non-interest expense for the first nine months of 2000 was $9,392,000,
a 10.5% increase from the $8,499,000 reported for the same period last year.
Salaries increased 10.9% from the same period last year to $4,499,000 in 2000
while pension and other employee benefits increased 23.3% to $895,000. Occupancy
and equipment increased $102,000, or 7.1%, for the first nine months 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
intangible amortization of $337,000 for the first nine months 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 third quarter of 2000 was $3,172,000, an
8.4% increase from $2,927,000 reported for the third quarter of 1999. The
reasons for increased non-interest expense for the
15
three months ended September 30, 2000 were similar to those for the nine month
period ended September 30, 2000.
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, was 45.5% and 45.6% for the nine month periods
ended September 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 nine months of 2000 was
$2,547,000, an increase of $85,000 from $2,462,000 reported a year earlier. The
effective tax rate for the first nine months of 2000 was 28.2% compared to 29.5%
for the first nine months 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 September 30, 2000 the Corporation had a ratio of
15.91% for Tier I and a ratio of 17.00% for total capital. At December 31, 1999
these ratios were 16.57% and 17.79%, respectively.
During the third quarter of 2000, the Corporation declared and paid a
quarterly cash dividend of $.15 per share which was the same as the $.15 per
share declared and paid in the second quarter of 2000. The third quarter
dividend totaled $913,000.
The Corporation's Board of Directors authorized the repurchase of up to
300,000 shares of the Corporation's common stock between August 16, 2000 and
August 15, 2001. The repurchases which may be made through open market purchases
or in privately negotiated transactions totaled 16,000 shares during the third
quarter of 2000.
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 September 30, 2000
were not materially different from December 31, 1999.
The Bank's net liquid assets to net liabilities ratio was 20.8% at
September 30, 2000 and 25.8% at December 31, 1999. Both of these ratios are
considered to reflect adequate liquidity for the respective periods. The decline
in the net liquid assets to net liabilities ratio at September 30, 2000 resulted
from greater growth in loans than deposits and repurchase agreements which
reduced net liquid assets.
Management 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 - November 10, 2000 President and Chief Executive Officer
/s/ T. Allen Liles
---------------------------------------------
T. Allen Liles
Senior Vice-President and
Date - November 10, 2000 Secretary-Treasurer (Chief Financial Officer)
17