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, 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.
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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
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 09,
2001 was 5,831,756.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000..........................................................................3
Consolidated Statements of Income for the three months
ended September 30, 2001 and 2000..............................................................4
Consolidated Statements of Income for the nine months
ended September 30, 2001 and 2000..............................................................5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000..............................................................6
Notes to Consolidated Financial Statements.....................................................7-9
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations....................................................................10-17
Part II. Other Information...................................................................................18
SIGNATURES ..................................................................................................18
2
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------
September 30 December 31
2001 2000
------------ -----------
ASSETS
Cash and due from banks.............................................................$ 14,315 $ 16,393
Interest-bearing deposits in other banks............................................ 16,295 8,678
Investment securities:
Securities available for sale (at market value)................................... 114,453 120,353
Securities held to maturity (market value of $36,245 at
September 30, 2001 and $42,920 at December 31, 2000)............................ 35,154 42,576
--------- ---------
Total investment securities....................................................... 149,607 162,929
--------- ---------
Loans, net of unearned income ...................................................... 372,677 339,756
Less allowance for loan losses...................................................... (5,252) (4,746)
--------- ---------
Net loans......................................................................... 367,425 335,010
--------- ---------
Bank premises and equipment, at cost, less accumulated
depreciation of $9,389 in 2001 and $8,518 in 2000................................. 7,780 7,868
Accrued interest receivable and other assets........................................ 9,310 10,511
--------- ---------
Total assets......................................................................$564,732 $541,389
========= =========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing...........................................$ 60,236 $ 54,496
Demand deposits -- interest bearing............................................... 56,087 58,273
Money market deposits............................................................. 39,214 32,480
Savings deposits.................................................................. 64,130 61,586
Time deposits..................................................................... 231,343 219,753
--------- ---------
Total deposits.................................................................... 451,010 426,588
--------- ---------
Repurchase agreements............................................................... 29,326 31,730
FHLB borrowings..................................................................... 13,000 16,000
Accrued interest payable and other liabilities...................................... 4,942 3,733
--------- ---------
Total liabilities................................................................. 498,278 478,051
--------- ---------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding................................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
5,913,656 shares outstanding at September 30, 2001
and 6,063,772 shares outstanding at December 31, 2000........................... 5,914 6,064
Capital in excess of par value.................................................... 9,735 9,831
Retained earnings................................................................. 48,744 47,120
Accumulated other comprehensive income -
net unrealized gains on securities available for sale........................... 2,061 323
--------- ---------
Total shareholders' equity........................................................ 66,454 63,338
--------- ---------
Total liabilities and shareholders' equity........................................$564,732 $541,389
========= =========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
3
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- -------------------------------------------------------------------------------------------------------
Three Months Ended
September 30
--------------------
2001 2000
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Interest Income:
Interest and fees on loans....................................................$ 7,573 $ 7,326
Interest on deposits in other banks........................................... 80 26
Income on investment securities:
U S Government.............................................................. - -
Federal agencies............................................................ 1,314 1,633
State and municipal......................................................... 486 488
Other investments........................................................... 483 380
------- -------
Total interest income......................................................... 9,936 9,853
------- -------
Interest Expense:
Interest on deposits:
Demand...................................................................... 103 262
Money market................................................................ 335 229
Savings..................................................................... 298 423
Time........................................................................ 3,120 2,789
Interest on repurchase agreements ............................................ 277 415
Interest on other borrowings.................................................. 206 409
------- -------
Total interest expense........................................................ 4,339 4,527
------- -------
Net Interest Income............................................................. 5,597 5,326
Provision for Loan Losses....................................................... 252 290
------- -------
Net Interest Income After Provision
For Loan Losses............................................................... 5,345 5,036
------- -------
Non-Interest Income:
Trust and investment services................................................. 623 632
Service charges on deposit accounts........................................... 342 284
Non-deposit fees and insurance commissions.................................... 175 148
Mortgage banking income....................................................... 93 71
Securities gains, net......................................................... 10 -
Other income.................................................................. 69 51
------- -------
Total non-interest income..................................................... 1,312 1,186
------- -------
Non-Interest Expense:
Salaries...................................................................... 1,556 1,548
Pension and other employee benefits........................................... 378 307
Occupancy and equipment....................................................... 596 529
Postage and printing.......................................................... 103 101
Core deposit intangible amortization ......................................... 112 112
Other......................................................................... 693 575
------- -------
Total non-interest expense.................................................... 3,438 3,172
------- -------
Income Before Income Tax Provision.............................................. 3,219 3,050
Income Tax Provision............................................................ 928 860
------- -------
Net Income......................................................................$ 2,291 $ 2,190
======= =======
- -------------------------------------------------------------------------------------------------------
Net Income Per Common Share
Basic...........................................................................$ .39 $ .36
Diluted.........................................................................$ .39 $ .36
- -------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding
Basic...........................................................................5,912,701 6,096,685
Diluted.........................................................................5,937,451 6,096,685
- -------------------------------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
--------------------
2001 2000
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Interest Income:
Interest and fees on loans....................................................$22,997 $20,666
Interest on deposits in other banks........................................... 269 96
Income on investment securities:
U S Government.............................................................. - 168
Federal agencies............................................................ 4,325 4,936
State and municipal......................................................... 1,448 1,466
Other investments........................................................... 1,391 1,085
------- -------
Total interest income......................................................... 30,430 28,417
------- -------
Interest Expense:
Interest on deposits:
Demand...................................................................... 385 784
Money market................................................................ 1,069 612
Savings..................................................................... 912 1,278
Time........................................................................ 9,739 7,908
Interest on repurchase agreements............................................. 889 973
Interest on other borrowings.................................................. 632 1,101
------- -------
Total interest expense........................................................ 13,626 12,656
------- -------
Net Interest Income............................................................. 16,804 15,761
Provision for Loan Losses....................................................... 787 840
------- -------
Net Interest Income After Provision
For Loan Losses............................................................... 16,017 14,921
------- -------
Non-Interest Income:
Trust and investment services................................................. 1,943 1,949
Service charges on deposit accounts........................................... 1,003 809
Non-deposit fees and insurance commissions.................................... 559 421
Mortgage banking income....................................................... 283 189
Securities gains, net......................................................... 360 -
Other income.................................................................. 183 135
------- -------
Total non-interest income..................................................... 4,331 3,503
------- -------
Non-Interest Expense:
Salaries...................................................................... 4,811 4,499
Pension and other employee benefits........................................... 1,099 895
Occupancy and equipment....................................................... 1,736 1,534
Postage and printing.......................................................... 362 333
Core deposit intangible amortization ......................................... 337 337
Other......................................................................... 2,009 1,794
------- -------
Total non-interest expense.................................................... 10,354 9,392
------- -------
Income Before Income Tax Provision.............................................. 9,994 9,032
Income Tax Provision............................................................ 2,935 2,547
------- -------
Net Income......................................................................$ 7,059 $ 6,485
======= =======
- -------------------------------------------------------------------------------------------------------
Net Income Per Common Share
Basic...........................................................................$ 1.18 $ 1.06
Diluted.........................................................................$ 1.18 $ 1.06
- -------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding
Basic...........................................................................5,985,070 6,101,382
Diluted.........................................................................6,006,635 6,105,454
- -------------------------------------------------------------------------------------------------------
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)
Nine Months Ended
---------------------
September 30
2001 2000
---------------------
Cash Flows from Operating Activities:
Net income....................................................................$ 7,059 $ 6,485
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................................................. 787 840
Depreciation.............................................................. 871 764
Core deposit intangible amortization...................................... 337 337
Net amortization (accretion) of premiums and discounts
on investment securities................................................ 51 (36)
Gain on sale of securities................................................ (360) -
Gain on sale of loans..................................................... (283) (189)
Loss on sale of real estate owned......................................... 20 -
Deferred income taxes benefit............................................. (314) (306)
Decrease (increase) in interest receivable................................ 254 (748)
Increase in other assets.................................................. (102) (565)
(Decrease) increase in interest payable................................... (115) 150
Increase (decrease) in other liabilities.................................. 1,324 (494)
--------- ---------
Net cash provided by operating activities..................................... 9,529 6,238
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities...................... 57,636 12,034
Purchases of securities available for sale.................................... (41,069) (7,505)
Purchases of securities held to maturity...................................... (302) -
Net increase in loans......................................................... (32,919) (36,201)
Proceeds from sale of real estate owned....................................... 195 -
Purchases of real estate owned................................................ (85) -
Purchases of property and equipment........................................... (783) (336)
Net cash used in investing activities......................................... (17,327) (32,008)
--------- ---------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits........................................................ 12,832 10,172
Net increase in time deposits................................................. 11,590 12,711
Net (decrease) increase in repurchase agreements ............................. (2,404) 9,668
Net decrease in borrowings.................................................... (3,000) (5,000)
Cash dividends paid........................................................... (2,933) (2,653)
Repurchase of stock........................................................... (2,927) (244)
Proceeds from exercise of stock options....................................... 179 1
--------- ---------
Net cash provided by financing activities..................................... 13,337 24,655
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents............................ 5,539 (1,115)
Cash and Cash Equivalents at Beginning of Period................................ 25,071 17,291
--------- ---------
Cash and Cash Equivalents at End of Period......................................$ 30,610 $ 16,176
========= =========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 14,315 $ 12,952
Interest-bearing deposits in other banks.................................... 16,295 3,224
--------- ---------
$ 30,610 $ 16,176
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 13,741 $ 12,506
Income taxes paid.............................................................$ 2,202 $ 2,827
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
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, 2001, 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, 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 The businesses that the Corporation and Bank are engaged in may be adversely
affected by legislative or regulatory changes, including changes in
accounting standards.
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.
NEW ACCOUNTING PRONOUNCEMENTS
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.
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
7
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below is carrying value.
The Corporation had no pending acquisitions initiated before or after June
30, 2001. In addition, the Corporation has no recorded goodwill. The adoption of
SFAS No. 141 and 142 are not expected to have a material impact on the
Corporation.
COMPREHENSIVE INCOME
The following is a detail of comprehensive income for the three and nine
months ended September 30, 2001 and 2000:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net Income $2,291,000 $2,190,000 $7,059,000 $6,485,000
Unrealized holding gains (losses) arising
during period (net of tax expense) 828,000 1,005,000 1,738,000 731,000
---------- ---------- ---------- ----------
Total comprehensive income $3,119,000 $3,195,000 $8,797,000 $7,216,000
========== ========== ========== ==========
SEGMENT AND RELATED INFORMATION
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 nine months ended September 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.
8
Three Months Ended September 30, 2001
- ------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 9,936 $ - $ 10 $ (10) $ 9,936
Interest expense 4,339 - 10 (10) 4,339
Non-interest income - external customers 548 623 141 - 1,312
Non-interest income - internal customers - 14 - (14) -
Operating income before income taxes 2,954 392 2,320 (2,447) 3,219
Depreciation and amortization 385 18 2 - 405
Total assets 563,880 - 67,537 (66,685) 564,732
Capital expenditures 94 - - - 94
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
Nine Months Ended September 30, 2001
- ------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ----- ------------ -----
Interest income $ 30,430 $ - $ 24 $ (24) $ 30,430
Interest expense 13,626 - 24 (24) 13,626
Non-interest income - external customers 1,938 1,943 450 - 4,331
Non-interest income - internal customers - 41 - (41) -
Operating income before income taxes 8,799 1,206 7,136 (7,147) 9,994
Depreciation and amortization 1,149 52 7 - 1,208
Total assets 563,880 - 67,537 (66,685) 564,732
Capital expenditures 767 16 - - 783
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
9
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to focus on important factors affecting
the Corporation's financial condition and results of operations. The discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements, and supplemental financial data.
RESULTS OF OPERATIONS
NET INCOME
The Corporation's net income for the first nine months of 2001 was
$7,059,000, an increase of 8.9% over the $6,485,000 earned during the same
period of 2000. On a basic and diluted per share basis, net earnings totaled
$1.18 for the first nine months of 2001, up 11.3% from $1.06 during the same
period of 2000. On an annualized basis, return on average total assets was 1.70%
for the first nine months of 2001 compared to 1.71% for the same nine month
period in 2000. Return on average common shareholders' equity was 14.55% and
14.81% for the first nine months of 2001 and 2000, respectively.
Net income for the third quarter of 2001 totaled $2,291,000 compared to
2000's $2,190,000. Basic and diluted earnings per share totaled $0.39 in the
third quarter of 2001, compared to $0.36 in the third quarter of 2000. This
represents a gain in basic and diluted earnings per share of 8.3%. Annualized
returns on average assets and stockholders' equity for the third quarter were
1.64% and 14.07%, respectively, in 2001, compared to 2000's 1.70% and 14.73%.
The Corporation's growth in earnings resulted from several factors. Net
interest income after provision for loan losses improved $1,096,000, or 7.3%,
for the first nine months of 2001 compared to the same period in 2000 due to
overall loan and deposit growth. For the same comparative period, non-interest
income grew by $828,000, with $360,000 of the growth from non-recurring gains on
the pre-maturity call of investment securities. The increases in net income and
non-interest income were partially offset by growth in non-interest and income
tax expense.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$17,540,000 for the first nine months of 2001 compared to $16,377,000 for the
first nine months of 2000, an increase of 7.1%. The interest rate spread
decreased to 3.69% from 3.77%, and the net yield on earning assets decreased to
4.44% from 4.54% in the first nine months of 2001 compared to the first nine
months of 2000, respectively. Net interest income on a FTE basis increased due
to growth of $45,773,000 in average interest-earning assets while average
interest-bearing liabilities grew only $37,078,000, which overshadowed a decline
in the interest rate spread. 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 rapidly to declining interest
rates than did time deposits during the first nine months of 2001 compared to
same period of 2000.
Net interest income on a FTE basis was $5,845,000 in the third quarter
of 2001 compared to $5,529,000 in the third quarter of 2000, an increase of
5.7%. The interest rate spread decreased to 3.65% from 3.70% and the net yield
on earning assets decreased to 4.37% from 4.51% in the third quarter of 2001
compared to the third quarter of 2000, respectively. The reasons for higher net
interest income on a FTE basis and for a lower interest rate spread for the
third quarter of 2001 compared to the third quarter of 2000 were similar to the
reasons previously discussed for the nine month periods.
During the third quarter of 2001, the Federal Reserve decreased the target
federal funds rate two times by a total of .75% and again on October 2, 2001 by
.50% after a 2.75% decline in the first six months of 2001. Changes in the
federal funds rate generally affect other interest rates. The Wall Street
Journal prime rate has fallen from 9.50% at December 31, 2000 to 6.00% at
September 30, 2001,
10
compared to the September 30, 2000 prime rate of 9.50%. While the Corporation's
balance sheet is liability-sensitive, it has become increasingly difficult to
reduce funding costs at the same pace with the market-driven reductions in asset
yields. The resultant decrease in interest income from the lower yield on
earning assets exceeds the decrease in interest expense from lower costs of
interest-bearing liabilities.
The following tables demonstrate fluctuations in net interest income
and the related yields for the first nine months and third quarter of 2001
compared to similar prior year periods.
11
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
--------------------- -------------------- --------------------
2001 2000 2001 2000 2001 2000
-------- -------- ------- ------- ------- -------
For nine months ended September 30
Loans:
Commercial $134,601 $ 96,712 $ 8,405 $ 6,635 8.33% 9.15%
Mortgage 179,183 162,868 11,211 10,326 8.34 8.45
Consumer 44,921 50,778 3,484 3,743 10.34 9.83
-------- -------- ------- ------- ------- -------
Total loans 358,705 310,358 23,100 20,704 8.59 8.89
-------- -------- ------- ------- ------- -------
Investment securities:
U. S. Government - 3,528 - 168 - 6.35
Federal agencies 90,539 102,040 4,325 4,936 6.37 6.45
State and municipal 39,406 39,963 2,015 2,044 6.82 6.82
Other investments 30,175 23,182 1,457 1,085 6.44 6.24
-------- -------- ------- ------- ------- -------
Total investment securities 160,120 168,713 7,797 8,233 6.49 6.51
-------- -------- ------- ------- ------- ------
Deposits in other banks 8,169 2,150 269 96 4.39 5.95
-------- -------- ------- ------- ------- -------
Total interest-earning assets 526,994 481,221 31,166 29,033 7.89 8.04
------- ------- ------- -------
Other non-earning assets 26,083 23,649
-------- --------
Total assets $553,077 $504,870
======== ========
Interest-bearing deposits:
Demand $ 56,030 $ 55,701 385 784 .92 1.88
Money market 40,262 23,922 1,069 612 3.54 3.41
Savings 62,271 64,420 912 1,278 1.95 2.65
Time 228,086 198,669 9,739 7,908 5.69 5.31
-------- -------- ------- ------- ------ -------
Total interest-bearing deposits 386,649 342,712 12,105 10,582 4.17 4.12
Repurchase agreements 29,108 26,452 889 973 4.07 4.90
Other borrowings 16,331 25,846 632 1,101 5.16 5.68
-------- -------- ------- ------- ------ -------
Total interest-bearing
liabilities 432,088 395,010 13,626 12,656 4.20 4.27
------- ------- ------ -------
Demand deposits 52,221 48,196
Other liabilities 4,069 3,275
Shareholders' equity 64,699 58,389
-------- --------
Total liabilities and
shareholders' equity $553,077 $504,870
======== ========
Interest rate spread 3.69% 3.77%
======= =======
Net interest income $17,540 $16,377
======= =======
Taxable equivalent adjustment $ 736 $ 616
======= =======
Net yield on earning assets 4.44% 4.54%
======= =======
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
--------------------- -------------------- --------------------
2001 2000 2001 2000 2001 2000
-------- -------- ------- ------- ------- -------
For three months ended September 30
Loans:
Commercial $145,676 $105,894 $ 2,848 $ 2,472 7.82% 9.34%
Mortgage 181,733 168,364 3,648 3,628 8.03 8.62
Consumer 42,497 49,627 1,112 1,238 10.47 9.98
-------- -------- ------- ------- ------- -------
Total loans 369,906 323,885 7,608 7,338 8.23 9.06
-------- -------- ------- ------- ------- -------
Investment securities:
U. S. Government - - - - - -
Federal agencies 83,852 101,179 1,314 1,633 6.27 6.46
State and municipal 39,650 39,911 677 679 6.83 6.81
Other investments 31,441 24,208 505 380 6.42 6.28
-------- -------- ------- ------- ------- -------
Total investment securities 154,943 165,298 2,496 2,692 6.44 6.51
-------- -------- ------- ------- ------- ------
Deposits in other banks 9,745 1,564 80 26 3.28 6.65
-------- -------- ------- ------- ------- -------
Total interest-earning assets 534,594 490,747 10,184 10,056 7.62 8.20
------- ------- ------- -------
Other non-earning assets 25,605 23,625
-------- --------
Total assets $560,199 $514,372
======== ========
Interest-bearing deposits:
Demand $ 55,535 $ 55,785 103 262 .74 1.88
Money market 41,949 25,558 335 229 3.19 3.58
Savings 63,469 63,420 298 423 1.88 2.67
Time 230,018 199,131 3,120 2,789 5.43 5.60
-------- -------- ------- ------- ------ -------
Total interest-bearing deposits 390,971 343,894 3,856 3,703 3.95 4.31
Repurchase agreements 30,432 31,294 277 415 3.64 5.30
Other borrowings 16,093 27,311 206 409 5.12 5.99
-------- -------- ------- ------- ------ -------
Total interest-bearing
liabilities 437,496 402,499 4,339 4,527 3.97 4.50
------- ------- ------ -------
Demand deposits 53,413 48,972
Other liabilities 4,172 3,409
Shareholders' equity 65,118 59,492
-------- --------
Total liabilities and
shareholders' equity $560,199 $514,372
======== ========
Interest rate spread 3.65% 3.70%
======= =======
Net interest income $ 5,845 $ 5,529
======= =======
Taxable equivalent adjustment $ 248 $ 203
======= =======
Net yield on earning assets 4.37% 4.51%
======= =======
13
PROVISION AND RESERVE FOR LOAN LOSSES
The provision for loan losses was $787,000 for the first nine months and
$252,000 for the third quarter of 2001 versus $840,000 and $290,000,
respectively, for the 2000 periods. The decreased provision for loan losses
resulted from fewer net loan charge-offs for the first nine months of 2001,
compared to the same period in 2000. The reserve for loan losses totaled
$5,252,000 at September 30, 2001, an increase of 10.7% over the $4,746,000
recorded at December 31, 2000.
The ratio of reserves to loans, less unearned discount, was 1.41% at
September 30, 2001 and 1.40% 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 nine months of 2001 was $4,331,000,
an increase of 23.6% from $3,503,000 reported in the first nine months of 2000.
The major reasons for the 2001 growth in non-interest income were $360,000 in
gains from securities called, an increase of $194,000, or 24.0%, in service
charges on deposit accounts, an increase of $138,000, or 32.8% in other fees and
commissions, and an increase of $94,000, or 49.7%, in mortgage banking income.
Commissions from the sale of non-deposit products such as mutual funds and
annuities accounted for 80.5% of the growth in other fees and commissions.
Mortgage banking income increased due to lower interest rates that 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 13.4% during the first nine months of 2001 compared to the same period
of 2000.
Trust and investment services income of $1,943,000 during the first
nine months of 2001 was flat compared to the same period in 2000 due to the
general decline in the valuation of trust assets. The growth in new trust
business was more than offset by the drop in the equities market which
negatively impacted asset values under management. The Bank's trust department
managed accounts whose market values approximated $329,000,000 at September 30,
2001 compared to $356,000,000 at September 30, 2000.
Non-interest income for the third quarter of 2001 was $1,312,000, an
increase of 10.6% from $1,186,000 reported in the third quarter of 2000. The
reasons for increased non-interest income for the three months ended September
30, 2001 were similar to those for the nine month period ended September 30,
2001, with the exception of security gains. During the third quarter of 2001
gains from securities called was $10,000, with the remaining gains for 2001
recognized in the first and second quarter of the year.
NON-INTEREST EXPENSE
Non-interest expense for the first nine months of 2001 was $10,354,000,
a 10.2% increase from the $9,392,000 reported for the same period last year.
Salaries increased 6.9% from the same period last year to $4,811,000 in 2001
while pension and other employee benefits increased 22.8% to $1,099,000.
Occupancy and equipment increased $202,000, or 13.2%, for the first nine months
of 2001 from the same period in 2000. These increases were primarily the result
of the South Boston office that opened in December 2000, increased depreciation
expense associated with recent technology initiatives, merit salary increases
that were effective January 1, 2001, and higher health care and defined benefit
pension costs.
Core deposit intangible amortization of $337,000 for the first nine
months 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 third quarter of 2001 was $3,438,000, an
8.4% increase from $3,172,000 reported for the same period of 2000. The reasons
for increased non-interest expense for the three months ended September 30, 2001
were similar to those for the nine month period ended September 30, 2001.
14
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, was 46.6% and 45.5% for the nine months ended
September 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 nine months of 2001 was
$2,935,000, an increase of $388,000 from $2,547,000 reported a year earlier. The
effective tax rate for the first nine months of 2001 was 29.4% compared to 28.2%
for the first nine months of 2000. The increase in the effective tax rate
resulted from various adjustments.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Total assets have increased to $564,732,000 at September 30, 2001, a 4.3%
or $23,343,000 increase during the first nine months of 2001.
Net loans increased $32,415,000 or 9.7% during the first nine months of
2001. Total deposits increased $24,422,000 or 5.7% during the first nine months
of 2001 and repurchase agreements decreased $2,404,000 or 7.6% during the same
period. Repurchase agreements of $29,326,000 are used by commercial accounts to
earn higher yields on short-term funds and mature daily. An increase in deposits
and a reduction in the investment security portfolio funded the increase in
loans.
ASSET QUALITY
Non-performing assets include loans on which interest is no longer
accrued, accruing loans that are contractually past due 90 days or more as to
principal and interest payments, and loans classified as troubled debt
restructurings. Loans in a non-accrual status at September 30, 2001 were
$503,000 compared with $146,000 at December 31, 2000. Loans on accrual status
and past due 90 days or more at September 30, 2001 were $186,000 compared with
$239,000 at December 31, 2000. There were no loans classified as troubled debt
restructurings on September 30, 2001 or December 31, 2000.
Total non-performing loans as a percentage of net loans were .18% at
September 30, 2001 and .11% at December 31, 2000. Total non-performing loans are
considered low by industry standards. Net charge-offs for the first nine months,
annualized, as a percentage of average loans decreased to .12% in 2001 from .15%
in 2000. These charge-off ratios are low by industry standards. Management
considers charge-off levels of .10% to .40% to be within reasonable norms from a
historical perspective.
Properties received due to loan foreclosures were $115,000 at September
30, 2001 and $30,000 at December 31, 2000.
During the first nine months of 2001 the gross amount of interest income
that would have been recorded on non-accrual loans and restructured loans at
September 30, 2001, if all such loans had been accruing interest at the original
contractual rate, was $25,900. No interest payments were recorded as interest
income during the reporting period for all such non-performing loans.
LIQUIDITY
The Bank's net liquid assets to net liabilities ratio was 18.2% at
September 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 commercial repurchase agreements; however, both of these ratios
are considered to reflect adequate liquidity for the respective periods.
The Bank has a line of credit equal to 15% of assets with the Federal Home
Loan Bank of Atlanta that equaled approximately $84,638,000 at September 30,
2001. Borrowings outstanding under this line of credit were $13,000,000 and
$16,000,000 respectively, at September 30, 2001 and December 31, 2000.
15
Federal Home Loan Bank advances have decreased by $3,000,000 since December 31,
2000, due to a pre-maturity call of one fixed-term instrument by the Federal
Home Loan Bank.
Commitments to extend credit, which amount to $106,403,000 at September
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.
Commitments to purchase securities when issued were $3,992,000 at
September 30, 2001. There were no commitments to purchase securities when issued
at December 31, 2000.
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, 2001 and December 31, 2000, the Bank had
$1,025,702 and $1,531,000, respectively, in outstanding standby letters of
credit.
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, 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.
CAPITAL RESOURCES
The following table displays the changes in shareholders' equity from
December 31, 2000, to September 30, 2001:
Equity, December 31, 2000 $63,338,000
Net earnings 7,059,000
Exercise of stock options 179,000
Repurchase of common stock (2,927,000)
Cash dividends paid (2,933,000)
Net change in net unrealized losses on AFS securities 1,738,000
-------------
Equity, September 30, 2001 $66,454,000
=============
During the third quarter of 2001, the Corporation declared and paid a
quarterly cash dividend of $.17 per share. The dividend totaled $1,005,746 and
represented a 43.8% payout of third quarter 2001 net income.
The Corporation's Board of Directors authorized the repurchase of up to
300,000 shares of the Corporation's common stock between August 16, 2000 and
August 15, 2001, and 250,000 shares of the Corporation's common stock between
August 29,2001 and August 28, 2002. The repurchases, which may be made through
open market purchases or in privately negotiated transactions, were 2,500 shares
during the third quarter of 2001 and have been 202,466 shares since August 16,
2000.
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 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, 2001 the Corporation had a ratio of 14.86% for
Tier I and a ratio of 16.11% for total capital. At December 31, 2000 these
ratios were 16.02% and 17.09%, respectively.
16
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effective management of market risk is essential to achieving the
Corporation's objectives. Market risk reflects the risk of economic loss
resulting from adverse changes in market prices and interest rates. This risk of
loss can be reflected in diminished current market values and/or reduced
potential net interest income in future periods. The Corporation is not subject
to currency exchange risk or commodity price risk.
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, 2001 and December 31, 2000 were in
compliance with established policy guidelines. These projected changes are based
on numerous assumptions including no growth or change in the mix of assets or
liabilities. Net interest income for the next twelve months is projected to
increase slightly when interest rates are higher than current rates and decrease
slightly when interest rates are lower than current rates.
The Terrorist attacks of September 11, 2001, resulted in a tremendous
loss of life and property. Secondarily, these events interrupted the business
activities of many entities and disrupted the U.S. economy at many levels. In
the past, businesses have incurred losses as a result of catastrophes such as
hurricanes, earthquakes, and other terrorist attacks. However, the September 11
events were unprecedented in the United States in terms of the magnitude of the
losses incurred and the number of entities affected. The Corporation has not
recognized any direct losses or costs related to this event, and do not
anticipate any direct or contingent losses or costs to be recognized in the
future. Management recognizes these events will have an impact on the broad
economy and financial markets and plans to manage these risks as part of the
overall risk management process.
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 - 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 14, 2001 President and Chief Executive Officer
/s/ Brad E. Schwartz
--------------------
Brad E. Schwartz
Senior Vice-President and
Date - November 14, 2001 Secretary-Treasurer (Chief Financial Officer)