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, 2001
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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 .
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Commission file number 0-12820
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AMERICAN NATIONAL BANKSHARES INC.
---------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1284688
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
628 Main Street
Danville, Virginia 24541
---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(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 .
---- -----
The number of shares outstanding of the issuer's common stock as of August 8,
2001 was 5,914,956.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000....................................................... 3
Consolidated Statements of Income for the three months
ended June 30, 2001 and 2000............................................... 4
Consolidated Statements of Income for the six months
ended June 30, 2001 and 2000............................................... 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000............................................... 6
Notes to Consolidated Financial Statements.................................... 7-10
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations..................................................... 11-17
Part II. Other Information............................................................... 18
SIGNATURES ................................................................................ 18
2
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
June 30 December 31
2001 2000
---------- -----------
ASSETS
Cash and due from banks.........................................................$ 15,734 $ 16,393
Interest-bearing deposits in other banks........................................ 379 8,678
Investment securities:
Securities available for sale (at market value)............................. 125,039 120,353
Securities held to maturity (market value of $41,744 at
June 30, 2001 and $42,920 at December 31, 2000)........................... 40,997 42,576
---------- ----------
Total investment securities................................................... 166,036 162,929
---------- ----------
Loans, net of unearned income .................................................. 367,899 339,756
Less allowance for loan losses.................................................. (5,151) (4,746)
---------- ----------
Net loans..................................................................... 362,748 335,010
---------- ----------
Bank premises and equipment, at cost, less accumulated
depreciation of $9,097 in 2001 and $8,421 in 2000............................. 7,979 7,868
Accrued interest receivable and other assets.................................... 10,668 10,511
---------- ----------
Total assets..................................................................$ 563,544 $ 541,389
========== ==========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 55,306 $ 54,496
Demand deposits -- interest bearing........................................... 55,795 58,273
Money market deposits......................................................... 39,375 32,480
Savings deposits.............................................................. 62,274 61,586
Time deposits................................................................. 230,302 219,753
---------- ----------
Total deposits................................................................ 443,052 426,588
---------- ----------
Repurchase agreements........................................................... 27,609 31,730
FHLB borrowings................................................................. 25,005 16,000
Accrued interest payable and other liabilities.................................. 3,632 3,733
---------- ----------
Total liabilities............................................................. 499,298 478,051
---------- ----------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
5,905,956 shares outstanding at June 30, 2001
and 6,063,772 shares outstanding at December 31, 2000....................... 5,906 6,064
Capital in excess of par value................................................ 9,577 9,831
Retained earnings............................................................. 47,530 47,120
Accumulated other comprehensive income -
net unrealized gains on securities available for sale....................... 1,233 323
---------- ----------
Total shareholders' equity.................................................... 64,246 63,338
---------- ----------
Total liabilities and shareholders' equity....................................$ 563,544 $ 541,389
========== ==========
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)
- ------------------------------------------------------------------------------------------------------
Three Months Ended
June 30
--------------------
2001 2000
------- -------
Interest Income:
Interest and fees on loans....................................................$ 7,714 $ 6,904
Interest on deposits in other banks........................................... 68 18
Income on investment securities:
U S Government.............................................................. - 59
Federal agencies............................................................ 1,446 1,654
State and municipal......................................................... 482 490
Other investments........................................................... 481 372
------- -------
Total interest income......................................................... 10,191 9,497
------- -------
Interest Expense:
Interest on deposits:
Demand...................................................................... 117 258
Money market................................................................ 343 194
Savings..................................................................... 288 428
Time........................................................................ 3,326 2,600
Interest on repurchase agreements............................................. 284 284
Interest on other borrowings.................................................. 214 415
------- -------
Total interest expense........................................................ 4,572 4,179
------- -------
Net Interest Income............................................................. 5,619 5,318
Provision for Loan Losses....................................................... 273 335
------- -------
Net Interest Income After Provision
For Loan Losses............................................................... 5,346 4,983
------- -------
Non-Interest Income:
Trust and investment services................................................. 660 625
Service charges on deposit accounts........................................... 365 275
Other fees and commissions.................................................... 197 145
Mortgage banking income....................................................... 107 56
Securities gains, net......................................................... 180 -
Other income.................................................................. 63 41
------- -------
Total non-interest income..................................................... 1,572 1,142
------- -------
Non-Interest Expense:
Salaries...................................................................... 1,625 1,489
Pension and other employee benefits........................................... 366 307
Occupancy and equipment....................................................... 561 498
Postage and printing.......................................................... 124 109
Core deposit intangible amortization ......................................... 113 113
Other......................................................................... 665 581
------- -------
Total non-interest expense.................................................... 3,454 3,097
------- -------
Income Before Income Tax Provision.............................................. 3,464 3,028
Income Tax Provision............................................................ 1,014 848
------- -------
Net Income......................................................................$ 2,450 $ 2,180
======= =======
- ----------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ .41 $ .36
Diluted.........................................................................$ .41 $ .36
- ----------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................5,999,771 6,103,772
Diluted.........................................................................6,030,203 6,105,111
- ------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------
Six Months Ended
June 30
--------------------
2001 2000
------- -------
Interest Income:
Interest and fees on loans.....................................................$15,424 $13,340
Interest on deposits in other banks........................................... 189 70
Income on investment securities:
U S Government.............................................................. - 168
Federal agencies............................................................ 3,011 3,303
State and municipal......................................................... 962 978
Other investments........................................................... 908 705
------- -------
Total interest income......................................................... 20,494 18,564
------- -------
Interest Expense:
Interest on deposits:
Demand...................................................................... 282 522
Money market................................................................ 734 383
Savings..................................................................... 614 855
Time........................................................................ 6,619 5,119
Interest on repurchase agreements............................................. 612 558
Interest on other borrowings.................................................. 426 692
------- -------
Total interest expense........................................................ 9,287 8,129
------- -------
Net Interest Income............................................................. 11,207 10,435
Provision for Loan Losses....................................................... 535 550
------- -------
Net Interest Income After Provision
For Loan Losses............................................................... 10,672 9,885
------- -------
Non-Interest Income:
Trust and investment services................................................. 1,320 1,317
Service charges on deposit accounts........................................... 661 525
Other fees and commissions.................................................... 384 273
Mortgage banking income....................................................... 190 118
Securities gains, net......................................................... 350 -
Other income.................................................................. 114 84
------- -------
Total non-interest income..................................................... 3,019 2,317
------- -------
Non-Interest Expense:
Salaries...................................................................... 3,255 2,951
Pension and other employee benefits........................................... 721 588
Occupancy and equipment....................................................... 1,140 1,005
Postage and printing.......................................................... 259 232
Core deposit intangible amortization ......................................... 225 225
Other......................................................................... 1,316 1,219
------- -------
Total non-interest expense.................................................... 6,916 6,220
------- -------
Income Before Income Tax Provision.............................................. 6,775 5,982
Income Tax Provision............................................................ 2,007 1,687
------- -------
Net Income......................................................................$ 4,768 $ 4,295
======= =======
- ----------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ .79 $ .70
Diluted.........................................................................$ .79 $ .70
- ----------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic...........................................................................6,021,854 6,103,756
Diluted.........................................................................6,044,298 6,110,305
- ------------------------------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------------------------------
Six Months Ended
------------------------
June 30
2001 2000
--------- ---------
Cash Flows from Operating Activities:
Net income....................................................................$ 4,768 $ 4,295
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................................................... 535 550
Depreciation................................................................ 578 501
Core deposit intangible amortization........................................ 225 225
Amortization (accretion) of premiums and discounts
on investment securities.................................................. 17 (23)
Gain on sale of securities.................................................. (350) -
Gain on sale of loans....................................................... (190) (118)
Deferred income taxes benefit............................................... (243) (212)
Increase in interest receivable............................................. (203) (492)
Increase in other assets.................................................... (320) (331)
Increase in interest payable................................................ 8 16
Decrease in other liabilities............................................... (109) (349)
--------- ---------
Net cash provided by operating activities................................... 4,716 4,062
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ..................... 39,976 10,314
Purchases of securities available for sale.................................... (41,069) (7,504)
Purchases of securities held to maturity...................................... (302) -
Net increase in loans......................................................... (28,083) (25,289)
Purchases of real estate owned................................................ (85) -
Purchases of property and equipment........................................... (689) (188)
--------- ---------
Net cash used in investing activities......................................... (30,252) (22,667)
--------- ---------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits........................................................ 5,915 1,676
Net increase in time deposits................................................. 10,549 2,336
Net (decrease) increase in repurchase agreements.............................. (4,121) 3,281
Net increase in Federal Home Loan Bank borrowings............................. 9,005 10,430
Cash dividends paid........................................................... (1,928) (1,741)
Repurchase of stock........................................................... (2,844) -
Proceeds from exercise of stock options....................................... 2 1
--------- ---------
Net cash provided by financing activities..................................... 16,578 15,983
--------- ---------
Net Decrease in Cash and Cash Equivalents....................................... (8,958) (2,622)
Cash and Cash Equivalents at Beginning of Period................................ 25,071 17,291
--------- ---------
Cash and Cash Equivalents at End of Period......................................$ 16,113 $ 14,669
========= =========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 15,734 $ 13,849
Interest-bearing deposits in other banks.................................... 379 820
--------- ---------
$ 16,113 $ 14,669
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 9,279 $ 8,114
Income taxes paid.............................................................$ 2,199 $ 1,819
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, 2001, 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, 2001 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2001.
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 2000 Annual
Report on Form 10-K.
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 the ability
of borrowers to repay loans and depositors to maintain balances.
o Changes in interest rates could reduce net interest income.
o Competitive pressures among financial institutions may increase.
o Legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses that the Corporation and
Bank are engaged in.
o New products developed or new methods of delivering products could result
in a reduction in business and income for the Corporation and Bank.
o Adverse changes may occur in the securities market.
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
$83,283,000 with the Federal Home Loan Bank of Atlanta at June 30, 2001.
Borrowings outstanding under this availability were $25,005,000 and $16,000,000
respectively, at June 30, 2001 and December 31, 2000.
Commitments to extend credit, which amount to $93,899,000 at June 30,
2001 and $85,489,000 at December 31, 2000, 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, 2001 and $800,000 commitments at
December 31, 2000 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, 2001 and December 31, 2000, the Bank had $951,000 and
$1,531,000, 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, 2001 and 2000:
Three Months Ended Six Months Ended
June 30 June 30
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- -----------
Net Income $2,450,000 $2,180,000 $4,768,000 $4,295,000
Unrealized holding gains (losses) arising
during period (net of tax expense) 79,000 122,000 910,000 (274,000)
---------- ---------- ---------- -----------
Total Comprehensive Income $2,529,000 $2,302,000 $5,678,000 $4,021,000
========== ========== ========== ===========
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 did not have a material impact on the Corporation.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". This statement revises the criteria for
accounting for securitizations, other financial-assets transfers and collateral
and introduces new disclosures. This statement is effective for fiscal years
ending after March 31, 2001. The adoption of this statement is not expected to
have a material effect on the Corporation's consolidated financial statements.
8
In June 2001 the Financial Accounting Standards Board approved Statement
of Financial Accounting Standard No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 142 requires companies
to cease amortizing goodwill that existed at June 30, 2001. The
amortization of existing goodwill will cease on December 31, 2001. Any
goodwill resulting from acquisitions completed after June 30, 2001 will not
be amortized. SFAS No. 142 also establishes a new method of testing
goodwill for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below is carrying value. The Company is in the process of
evaluating the financial statement impact of adoption of SFAS No. 142.
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.
Segment information for the three and six months ended June 30, 2001 and
2000 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, 2001
- ------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 10,191 $ - $ 8 $ (8) $ 10,191
Interest expense 4,572 - 8 (8) 4,572
Non-interest income - external customers 735 660 177 - 1,572
Non-interest income - internal customers - 13 - (13) -
Operating income before income taxes 2,891 410 2,508 (2,345) 3,464
Depreciation and amortization 382 17 3 - 402
Total assets 563,407 - 65,452 (65,315) 563,544
Capital expenditures 335 - - - 335
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 2,648 435 2,138 (2,193) 3,028
Depreciation and amortization 342 18 4 - 364
Total assets 510,927 - 60,214 (60,079) 511,062
Capital expenditures 142 - 2 - 144
Six Months Ended June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 20,494 $ - $ 14 $ (14) $ 20,494
Interest expense 9,287 - 14 (14) 9,287
Non-interest income - external customers 1,390 1,320 309 - 3,019
Non-interest income - internal customers - 27 - (27) -
Operating income before income taxes 5,845 814 4,816 (4,700) 6,775
Depreciation and amortization 764 34 5 - 803
Total assets 563,407 - 65,452 (65,315) 563,544
Capital expenditures 673 16 - - 689
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 5,187 924 4,203 (4,332) 5,982
Depreciation and amortization 691 27 8 - 726
Total assets 510,927 - 60,214 (60,079) 511,062
Capital expenditures 183 - 5 - 188
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 2001 was
$4,768,000, an increase of 11.0% over the $4,295,000 earned during the first
half of 2000. On a basic and diluted per share basis, net income totaled $.79
for the first six months of 2001, up 12.9% from $.70 in the 2000 period. On an
annualized basis, return on average total assets was 1.74% for the first half of
2001 compared to 1.72% for the same period in 2000. Return on average common
shareholders' equity was 14.79% and 14.88% for the first six months of 2001 and
2000, respectively.
The Corporation's net income for the second quarter of 2001 was
$2,450,000, an increase of 12.4% over the $2,180,000 earned during the second
quarter of 2000. On a basic and diluted per share basis, net income totaled $.41
for the quarter, up 13.9% from $.36 in 2000. On an annualized basis, return on
average total assets was 1.77% for the second quarter of 2001 compared to 1.73%
for the second quarter of 2000. Return on average common shareholders' equity
was 15.03% and 14.98% in the second quarter of 2001 and 2000,respectively.
Shareholders' equity increased $908,000 during the first half of 2001
from net income of $4,768,000, an increase of $910,000 in unrealized gains on
securities available for sale, exercise of stock options of $2,000, less
dividends paid of $1,928,000, and less repurchases of stock of $2,844,000.
The Corporation's growth in earnings resulted from two principal
factors. First, net interest income after provision for loan losses improved
$787,000, or 8.0%, for the first half of 2001 compared to the first half of 2000
from growth of $46,713,000 in average interest-earning assets and growth of
$37,996,000 in average interest-bearing liabilities in the first half of
2001compared to the first half of 2000. Second, non-interest income increased
$702,000, or 30.3%, in the second half of 2001 compared to the second half of
2000.
TRENDS and FUTURE EVENTS
During the first six months of 2001, net loans increased $27,738,000 or
8.3%. Approximately 75% of the increase in loans was originated in two recently
opened offices in Martinsville and South Boston, Virginia and through loan
participations with another bank in a nearby market. The increase in loans was
funded by increased deposits and borrowings from the Federal Home Loan Bank of
Atlanta.
Total deposits increased $16,464,000 or 3.9% during the first six
months of 2001 and repurchase agreements decreased $4,121,000 or 13.0% during
the same period. Repurchase agreements of $27,609,000 are used by commercial
accounts to earn higher yields on short-term funds and mature daily.
During the second quarter of 2001, the Corporation declared a quarterly
cash dividend of $.17 per share. This dividend was paid on June 22, 2001 to
shareholders of record on June 8, 2001.
The Federal Reserve Board ("FRB") increased short-term interest rates
by increasing the federal funds target rate by 1.75% and the discount rate by
1.50% over a period from June, 1999 to May, 2000, and major banks followed by
raising the prime lending rate by 1.75% during this same period. The increases
in interest rates in 1999 and 2000 were designed to moderate national economic
growth which could have been inflationary if left unchecked. The FRB decreased
short-term interest rates by lowering the federal funds target rate and the
discount rate by 2.75% in the first half of 2001, and the major banks followed
by decreasing the prime lending rate by 2.75%. The FRB lowered interest rates to
offset economic weaknesses which could lead to a recession.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$11,695,000 for the first six months of 2001 compared to $10,848,000 for the
first six months of 2000, an increase of 7.8%. The interest rate spread
decreased to 3.69% from 3.81%, and the net yield on earning assets decreased to
11
4.47% from 4.55% in the first six months of 2001 compared to the first six
months of 2000, respectively. Net interest income on a FTE basis increased due
to growth of $46,713,000 in average interest-earning assets while average
interest-bearing liabilities grew only $37,996,000 which overshadowed a decline
in the interest rate spread. Growth in non interest-bearing demand deposits and
retained income resulted in greater growth in average interest-earning assets
over interest-bearing liabilities. The lower interest rate spread occurred
because average-interest-bearing liabilities grew more in the higher cost areas
of time deposits, money market accounts and repurchase accounts while average
loans grew most in the commercial area which adjusted more quickly to declining
interest rates than did time deposits in the first half of 2001 compared to the
first half of 2000.
Net interest income on a FTE basis was $5,865,000 in the second quarter
of 2001 compared to $5,524,000 in the second quarter of 2000, an increase of
6.2%. The interest rate spread decreased to 3.70% from 3.83% and the net yield
on earning assets decreased to 4.46% from 4.59% in the second quarter of 2001
compared to the second quarter of 2000, respectively. The reasons for higher net
interest income on a FTE basis and for a lower interest rate spread for the
second quarter of 2001 compared to the second quarter of 2000 were similar to
the reasons previously discussed for the six month periods. The following tables
demonstrate fluctuations in net interest income and the related yields for the
first six months and second quarter of 2001 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
For six months ended June 30 Average Balance Income/Expense Yield/Rate
--------------------- ---------------------- ---------------------
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------
Loans:
Commercial $128,972 $ 92,069 $ 5,557 $ 4,163 8.62% 9.04%
Mortgage 177,887 160,089 7,563 6,698 8.50 8.37
Consumer 46,154 51,360 2,372 2,505 10.28 9.75
-------- -------- -------- -------- -------- --------
Total loans 353,013 303,518 15,492 13,366 8.78 8.81
-------- -------- -------- -------- -------- --------
Investment securities:
U. S. Government - 5,312 - 168 - 6.33
Federal agencies 93,938 102,476 3,011 3,303 6.41 6.45
State and municipal 39,281 39,989 1,338 1,365 6.81 6.83
Other investments 29,531 22,664 952 705 6.45 6.22
-------- -------- -------- -------- -------- --------
Total investment securities 162,750 170,441 5,301 5,541 6.51 6.50
-------- -------- -------- -------- -------- --------
Deposits in other banks 7,367 2,458 189 70 5.13 5.70
-------- -------- -------- -------- -------- --------
Total interest-earning assets 523,130 476,417 20,982 18,977 8.02 7.97
-------- -------- -------- --------
Other non-earning assets 26,328 23,643
-------- --------
Total assets $549,458 $500,060
======== ========
Interest-bearing deposits:
Demand $ 56,282 $ 55,659 282 522 1.00 1.88
Money market 39,404 23,095 734 383 3.73 3.32
Savings 61,547 64,926 614 855 2.00 2.63
Time 227,104 198,436 6,619 5,119 5.83 5.16
-------- -------- -------- ------- -------- --------
Total interest-bearing deposits 384,337 342,116 8,249 6,879 4.29 4.02
Repurchase agreements 28,435 24,005 612 558 4.30 4.65
Other borrowings 16,451 25,106 426 692 5.18 5.51
-------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities 429,223 391,227 9,287 8,129 4.33 4.16
-------- ------- -------- --------
Demand deposits 51,704 47,803
Other liabilities 4,034 3,302
Shareholders' equity 64,497 57,728
-------- --------
Total liabilities and
shareholders' equity $549,458 $500,060
======== ========
Interest rate spread 3.69% 3.81%
======== ========
Net interest income 11,695 10,848
======== =======
Taxable equivalent adjustment 488 413
======== =======
Net yield on earning assets 4.47% 4.55%
======== ========
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
For three months ended June 30 Average Balance Income/Expense Yield/Rate
--------------------- ---------------------- ---------------------
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------
Loans:
Commercial $133,991 $ 96,186 $ 2,815 $ 2,217 8.40% 9.22%
Mortgage 179,272 162,586 3,757 3,453 8.38 8.50
Consumer 44,955 50,752 1,176 1,247 10.46 9.83
-------- -------- -------- -------- -------- --------
Total loans 358,218 309,524 7,748 6,917 8.65 8.94
-------- -------- -------- -------- -------- --------
Investment securities:
U. S. Government - 3,624 - 59 - 6.51
Federal agencies 91,066 102,741 1,446 1,654 6.35 6.44
State and municipal 39,357 40,059 670 683 6.81 6.82
Other investments 31,324 23,858 505 372 6.45 6.24
-------- -------- -------- -------- -------- --------
Total investment securities 161,747 170,282 2,621 2,768 6.48 6.50
-------- -------- -------- -------- -------- --------
Deposits in other banks 5,852 1,189 68 18 4.65 6.06
-------- -------- -------- -------- -------- --------
Total interest-earning assets 525,817 480,995 10,437 9,703 7.94 8.07
-------- -------- -------- --------
Other non-earning assets 27,445 23,600
-------- --------
Total assets $553,262 $504,595
======== ========
Interest-bearing deposits:
Demand $ 55,554 $ 55,364 117 258 .84 1.86
Money market 39,401 23,055 343 194 3.48 3.37
Savings 61,767 64,862 288 428 1.87 2.64
Time 229,862 198,128 3,326 2,600 5.79 5.25
-------- -------- -------- ------- -------- --------
Total interest-bearing deposits 386,584 341,409 4,074 3,480 4.22 4.08
Repurchase agreements 28,117 23,870 284 284 4.04 4.76
Other borrowings 16,627 28,928 214 415 5.15 5.74
-------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities 431,328 394,207 4,572 4,179 4.24 4.24
-------- ------- -------- --------
Demand deposits 52,479 48,907
Other liabilities 4,270 3,290
Shareholders' equity 65,185 58,191
-------- --------
Total liabilities and
shareholders' equity $553,262 $504,595
======== ========
Interest rate spread 3.70% 3.83%
======== ========
Net interest income 5,865 5,524
======== =======
Taxable equivalent adjustment 246 206
======== =======
Net yield on earning assets 4.46% 4.59%
======== ========
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 $525,000 at June 30, 2001 from
$176,000 at December 31, 2000.
Foreclosed properties were $115,000 at June 30, 2001 and $30,000 at
December 31, 2000.
Loans in a non-accrual status at June 30, 2001 were $410,000 compared
with $146,000 at December 31, 2000. Loans on accrual status and past due 90 or
more at June 30, 2001 were $330,000 compared with $239,000 at December 31, 2000.
Total non-performing loans and loans past due 90 days or more as a
percentage of net loans were .20% at June 30, 2001 and .11% at December 31,
2000. 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 decreased to
.09% in 2001 from .15% in 2000. 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 .14%.
During the first six months of 2001 the gross amount of interest income
that would have been recorded on non-accrual loans and restructured loans at
June 30, 2001, if all such loans had been accruing interest at the original
contractual rate, was $21,000. 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 $535,000 for the first half and
$273,000 for the second quarter of 2001 versus $550,000 and $335,000,
respectively, for the 2000 periods. The decreased provision for loan losses
resulted from fewer loan chargeoffs in the 2001 periods. The reserve for loan
losses totaled $5,151,000 at June 30, 2001, an increase of 8.5% over the
$4,746,000 recorded at December 31, 2000. The ratio of reserves to loans, less
unearned discount, was 1.40% at June 30, 2001 and at December 31, 2000. In
Management's opinion, the current reserve for loan losses is adequate.
NON-INTEREST INCOME
Non-interest income for the first six months of 2001 was $3,019,000, an
increase of 30.3% from $2,317,000 reported in the first six months of 2000. The
major reasons for the 2001 first half growth in non-interest income were
$350,000 in gains from securities called, an increase of $136,000, or 25.9%, in
service charges on deposit accounts, an increase of $111,000, or 40.7% in other
fees and commissions, and an increase of $72,000, or 61.0%, in mortgage banking
income. Commissions from the sale of non-deposit products such as mutual funds
and annuities accounted for 79% of the growth in other fees and commissions.
Mortgage banking income increased due to lower interest rates which made
mortgage borrowing by customers more affordable and advantageous. The gains on
securities called resulted from a planned investment strategy of purchasing
discount callable U.S. Government Agency obligations in higher interest rate
environments. Without the gains on securities called, non-interest income
increased 15.2% during the first half of 2001 compared to the first half of
2000. Trust and investment services income of $1,320,000 during the first half
of 2001 was slightly ahead of the first half of 2000 because the increase in new
business exceeded the drop in the equities market which negatively impacted
asset values under management. The Bank's trust department managed accounts
whose market values approximated $353,000,000 at June 30, 2001 compared to
$352,000,000 at June 30, 2000.
Non-interest income for the second quarter of 2001 was $1,572,000, an
increase of 37.7% from $1,142,000 reported in the second quarter of 2000. The
reasons for increased non-interest income for the three months ended June 30,
2001 were similar to those for the six month period ended June 30, 2001.
15
NON-INTEREST EXPENSE
Non-interest expense for the first six months of 2001 was $6,916,000,
an 11.2% increase from the $6,220,000 reported for the same period last year.
Salaries increased 10.3% from the same period last year to $3,255,000 in 2001
while pension and other employee benefits increased 22.6% to $721,000. Occupancy
and equipment increased $135,000, or 13.4%, for the first half of 2001 from the
same period in 2000. These increases were primarily the result of the South
Boston office that opened in December 2000, merit salary increases that were
effective January 1, 2001, and higher health care and defined benefit pension
costs. Core deposit intangible amortization of $225,000 for the first half of
2001 and 2000 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 2001 was $3,454,000, a
11.5% increase from $3,097,000 reported for the second quarter of 2000. The
reasons for increased non-interest expense for the three months ended June 30,
2001 were similar to those for the six month period ended June 30, 2001.
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, was 46.6% and 45.5% for the six months ended
June 30, 2001 and 2000, 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 2001 was
$2,007,000, an increase of $320,000 from $1,687,000 reported a year earlier. The
effective tax rate for the first six months of 2001 was 29.6% compared to 28.2%
for the first half of 2000. The increase in the effective tax rate resulted from
various 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, 2001 the Corporation had a ratio of
14.64% for Tier I and a ratio of 15.88% for total capital. At December 31, 2000
these ratios were 16.02% and 17.09%, respectively.
During the second quarter of 2001, the Corporation declared and paid a
quarterly cash dividend of $.17 per share which was an increase over the $.15
per share declared and paid in the first quarter of 2001. The second quarter
dividend totaled $1,024,000
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, were 116,000 shares during
the second quarter of 2001 and have been 198,000 shares since August 16, 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
16
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, 2001 were
not materially different from December 31, 2000 and were in compliance with
established policy guidelines. Based on numerous assumptions, including no
change in the mix and no growth in assets or liabilities, net interest income
for the next twelve months is projected to increase slightly when interest rates
are higher and decrease slightly when interest rates are lower.
The Bank's net liquid assets to net liabilities ratio was 18.9% at June
30, 2001 and 21.5% at December 31, 2000. The decline in this ratio reflects
greater loan growth than deposit growth and increased pledging of securities on
large deposits; however, both of these ratios are considered to reflect adequate
liquidity for the respective periods.
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity is provided from cash and due from banks,
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.
17
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 - None
(b) Reports on Form 8-K
On May 31, 2001, the Corporation filed a current report on Form 8-K
under Item 5 to report the CEO's message to stockholders.
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, 8, 2001 President and Chief Executive Officer
/s/ T. Allen Liles
------------------
T. Allen Liles
Senior Vice-President and
Date - August 8, 2001 Secretary-Treasurer (Chief Financial Officer)
18