This is a conforming paper copy pursuant to Rule # 901(d) of Regulation S-T.
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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
Commission file number 0-12820
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
(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 November 4,
1998 was 3,051,733.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997..........................................3
Consolidated Statements of Income for the three months
ended September 30, 1998 and 1997..............................4
Consolidated Statements of Income for the nine months
ended September 30, 1998 and 1997..............................5
Consolidated Statements of Cash Flows for the six months
ended September 30, 1998 and 1997..............................6
Notes to Consolidated Financial Statements.....................7-9
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations....................................10-16
Part II. Other Information.................................................17
SIGNATURES ..................................................................17
EXHIBITS - Financial Data Schedule...........................................18
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
September 30 December 31
1998 1997
------------ -----------
ASSETS
Cash and due from banks..............................................................$ 12,538 $ 13,386
Interest-bearing deposits in other banks............................................. 16,431 366
Investment securities:
Securities available for sale (at market value)................................... 89,152 82,466
Securities held to maturity (market value of $64,838 at
September 30, 1998 and $61,367 at December 31, 1997)........................... 63,258 60,611
--------- ---------
Total investment securities.................................................. 152,410 143,077
--------- ---------
Loans ............................................................................... 264,980 254,793
Less--
Unearned income.................................................................. (184) (343)
Reserve for loan losses.......................................................... (3,739) (3,277)
--------- ---------
Net loans.................................................................... 261,057 251,173
--------- ---------
Bank premises and equipment, at cost, less accumulated
depreciation of $6,992 in 1998 and $6,350 in 1997................................ 6,676 6,514
Accrued interest receivable and other assets........................................ 9,076 9,124
--------- ---------
Total assets.................................................................$458,188 $423,640
========= =========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing............................................$ 45,360 $ 41,755
Demand deposits -- interest bearing................................................ 50,178 52,029
Money market deposits.............................................................. 19,957 17,151
Savings deposits................................................................... 68,118 69,551
Time deposits...................................................................... 174,314 171,117
--------- ---------
Total deposits............................................................... 357,927 351,603
--------- ---------
Federal funds purchased............................................................ - 1,500
Repurchase agreements.............................................................. 30,427 18,039
Other borrowings................................................................... 13,000 -
Accrued interest payable and other liabilities..................................... 2,978 2,495
--------- ---------
Total liabilities............................................................ 404,332 373,637
--------- ---------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding................................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
3,051,733 shares outstanding at September 30, 1998 and
December 31, 1997............................................................... 3,052 3,052
Capital in excess of par value..................................................... 9,892 9,892
Retained earnings.................................................................. 39,572 36,438
Accumulated other comprehensive income -
net unrealized gains on securities available for sale............................ 1,340 621
--------- ---------
Total shareholders' equity................................................... 53,856 50,003
--------- ---------
Total liabilities and shareholders' equity...................................$458,188 $423,640
========= =========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
Three Months Ended
September 30
------------------
1998 1997
------ ------
Interest Income:
Interest and fees on loans...................................................$5,898 $5,755
Interest on federal funds sold and other..................................... 94 53
Income on investment securities:
U S Government............................................................. 629 893
Federal agencies........................................................... 1,169 836
State and municipal........................................................ 342 276
Other investments.......................................................... 112 103
------ ------
Total interest income.................................................... 8,244 7,916
------ ------
Interest Expense:
Interest on deposits:
Demand..................................................................... 295 354
Money market............................................................... 145 140
Savings.................................................................... 499 538
Time....................................................................... 2,337 2,383
Interest on fed funds and repos ............................................. 278 214
Interest on other borrowings................................................. 148 -
------ ------
Total interest expense..................................................... 3,702 3,629
------ ------
Net Interest Income............................................................ 4,542 4,287
Provision for Loan Losses...................................................... 203 262
------ ------
Net Interest Income After Provision
For Loan Losses.............................................................. 4,339 4,025
------ ------
Non-Interest Income:
Trust and investment services................................................ 513 507
Service charges on deposit accounts.......................................... 243 204
Non-deposit fees and insurance commissions................................... 83 41
Mortgage banking income...................................................... 109 62
Other income................................................................. 41 21
------ ------
Total non-interest income.................................................. 989 835
------ ------
Non-Interest Expense:
Salaries..................................................................... 1,319 1,177
Pension and other employee benefits.......................................... 279 273
Occupancy and equipment...................................................... 367 359
Postage and printing......................................................... 99 97
Core deposit intangible amortization ........................................ 112 113
Other........................................................................ 516 447
------ ------
Total non-interest expense................................................. 2,692 2,466
------ ------
Income Before Income Tax Provision............................................. 2,636 2,394
Income Tax Provision........................................................... 809 749
------ ------
Net Income.....................................................................$1,827 $1,645
====== ======
Net Income Per Common Share
Basic..........................................................................$ .60 $ .54
Diluted........................................................................$ .60 $ .54
Average Common Shares Outstanding
Basic......................................................................3,051,733 3,051,733
Diluted....................................................................3,052,257 3,051,733
The accompanying notes to consolidated financial statements are an integral part of these statements.
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
Nine Months Ended
September 30
---------------------
1998 1997
------- -------
Interest Income:
Interest and fees on loans..................................................$17,463 $16,716
Interest on federal funds sold and other.................................... 149 114
Income on investment securities:
U S Government............................................................ 2,077 3,159
Federal agencies.......................................................... 3,332 2,529
State and municipal....................................................... 933 850
Other investments......................................................... 354 307
------- -------
Total interest income.................................................... 24,308 23,675
------- -------
Interest Expense:
Interest on deposits:
Demand.................................................................... 928 1,035
Money market.............................................................. 407 426
Savings................................................................... 1,489 1,600
Time...................................................................... 6,981 7,246
Interest on fed funds purchased and repos.................................... 814 618
Interest on other borrowings................................................. 202 -
------- -------
Total interest expense................................................... 10,821 10,925
------- -------
Net Interest Income............................................................ 13,487 12,750
Provision for Loan Losses...................................................... 678 762
------- -------
Net Interest Income After Provision
For Loan Losses............................................................. 12,809 11,988
------- -------
Non-Interest Income:
Trust and investment services................................................ 1,580 1,404
Service charges on deposit accounts.......................................... 681 586
Non-deposit fees and insurance commissions................................... 211 93
Mortgage banking income...................................................... 302 143
Other income................................................................. 91 130
------- -------
Total non-interest income................................................ 2,865 2,356
------- -------
Non-Interest Expense:
Salaries..................................................................... 3,760 3,566
Pension and other employee benefits.......................................... 854 802
Occupancy and equipment...................................................... 1,272 1,026
Postage and printing......................................................... 340 323
Core deposit intangible amortization ........................................ 337 338
Other........................................................................ 1,550 1,468
------- -------
Total non-interest expense............................................... 8,113 7,523
------- -------
Income Before Income Tax Provision............................................. 7,561 6,821
Income Tax Provision........................................................... 2,322 2,095
------- -------
Net Income.....................................................................$ 5,239 $ 4,726
======= =======
Net Income Per Common Share
Basic..........................................................................$ 1.72 $ 1.49
Diluted........................................................................$ 1.72 $ 1.49
Average Common Shares Outstanding
Basic........................................................................3,051,733 3,176,208
Diluted......................................................................3,052,645 3,176,208
The accompanying notes to consolidated financial statements are an integral part of these statements.
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
Nine Months Ended
September 30
--------------------
1998 1997
------- -------
Cash Flows from Operating Activities:
Net income...................................................................$ 5,239 $ 4,726
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................................................ 678 762
Depreciation............................................................. 643 495
Core deposit intangible amortization..................................... 337 338
Net amortization (accretion) of premiums and discounts
on investment securities............................................... (46) (38)
Gain on sale of securities............................................... - (31)
Deferred income taxes benefit............................................ (248) (210)
(Increase) decrease in interest receivable............................... (398) 152
Increase in other assets................................................. (14) (21)
Increase (decrease) in interest payable.................................. 35 (225)
Increase in other liabilities............................................ 448 569
Net cash provided by operating activities................................ 6,674 6,517
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities .................... 28,918 41,855
Purchases of securities available for sale...................................(28,491) (3,000)
Purchases of securities held to maturity..................................... (8,624) -
Net increase in loans........................................................(10,562) (17,384)
Purchases of property and equipment.......................................... (805) (536)
Net cash (used in) provided by investing activities..........................(19,564) 20,935
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits....................................................... 3,127 2,473
Net increase (decrease) in time deposits..................................... 3,197 (8,083)
Net increase (decrease) in federal funds purchased
and repurchase agreements.................................................. 10,888 (6,032)
Net increase in borrowings................................................... 13,000 -
Cash dividends paid.......................................................... (2,105) (1,871)
Repurchase of stock.......................................................... - (6,240)
Net cash provided by (used in) financing activities.......................... 28,107 (19,753)
Net Increase in Cash and Cash Equivalents.................................... 15,217 7,699
Cash and Cash Equivalents at Beginning of Period............................. 13,752 14,822
Cash and Cash Equivalents at End of Period...................................$28,969 $22,521
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks....................................................$12,538 $16,022
Interest-bearing deposits in other banks................................... 16,431 699
Federal funds sold......................................................... - 5,800
-------- --------
$28,969 $22,521
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid................................................................$10,786 $11,150
Income taxes paid............................................................$ 2,150 $ 2,151
The accompanying notes to consolidated financial statements are an integral part of these statements.
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly American National Bankshares'
financial position as of September 30, 1998, 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, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. A summary of the Corporation's significant accounting policies is set
forth in Note 1 to the Consolidated Financial Statements in the Corporation's
Annual Report to Shareholders for 1997.
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.
Trading account securities, of which none were held on September 30, 1998
and December 31, 1997, are reported at fair value. Market adjustments, fees,
gains or losses and income earned on trading account securities are included in
non-interest income. Gains or losses realized from the sale of trading
securities are determined by specific identification and are included in
non-interest income. The Bank's investment policy currently prohibits trading
account securities.
Management determines the appropriate classification of securities at the
time of purchase. Securities classified as held for investment are those
securities that management intends to hold to maturity, subject to continued
credit-worthiness of the issuer, and that the Bank has the ability to hold on a
long-term basis. Accordingly, these securities are stated at cost, adjusted for
amortization of premium and accretion of discount on the level yield method.
Securities designated as available for sale have been adjusted to their
respective market values and a corresponding adjustment made to shareholders'
equity at September 30, 1998 and December 31, 1997.
3. Commitments and Contingencies
The Bank has an established credit availability in the amount of
$60,000,000 with the Federal Home Loan Bank of Atlanta. Borrowings outstanding
under this availability were $13,000,000 and none, respectively, at September
30, 1998 and December 31, 1997.
Commitments to extend credit, which amount to $72,057,000 at September 30,
1998 and $64,774,000 at December 31, 1997, represent legally binding agreements
to lend to a customer 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.
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, 1998 and December 31, 1997 the Bank had $1,080,000 and $1,500,000,
respectively, outstanding in standby letters of credit.
4. Merger and Acquisitions
On March 14, 1996, the Corporation completed the acquisition of Mutual
Savings Bank, F.S.B. (Mutual) upon the approval of the shareholders of each
company. The Corporation exchanged 879,805 common shares, at an exchange ratio
of .705 of a share of the Corporation's common stock, for Mutual's 1,248,100
common shares.
The transaction was accounted for as a pooling of interests. The financial
position and results of operations of the Corporation and Mutual were combined
and the fiscal year of Mutual was conformed to the Corporation's fiscal year.
In October 1996, the Corporation acquired the branch office of FirstSouth
Bank located in Yanceyville, North Carolina. In addition to the branch
facilities and an ATM located in Yanceyville, the Corporation acquired
$4,775,000 in loans and assumed deposits of $21,405,000. This transaction was
accounted for as a purchase. In conjunction with the Yanceyville purchase, the
Corporation recorded a core deposit intangible of $1,516,000, approximately 7%
of the deposits assumed.
5. New Accounting Pronouncements
The Corporation adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), during the first quarter
of 1998. This statement establishes standards for reporting a measure of all
changes in equity of an enterprise that result from transactions and economic
events of the period other than transactions with owners ("economic income").
SFAS No. 130 requires an enterprise to report comprehensive income in the notes
to the financial statements on an interim basis. The following is a detail of
comprehensive income for the three and nine months ended September 30, 1998:
September 30, 1998
Three Months Nine Months
Net Income $1,827,000 $5,239,000
Unrealized holding gains arising during period
(net of tax expense) 655,000 719,000
__________ __________
Total comprehensive income $1,786,000 $5,958,000
The Financial Accounting Standards Board ("FASB") also issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", in September 1997, which establishes new
standards for reporting information about operating segments in annual and
interim financial statements. This statement also requires descriptive
information about the way operating segments are determined, the products and
services provided by the segments and the nature of differences between
reportable segment measurements and those used for the consolidated entity. This
Statement is effective for years beginning after December 15, 1997. Adoption in
interim financial statements is not required until the year following initial
adoption. Once adopted, however, comparative prior period information is
required. The Corporation is evaluating the Statement and plans to adopt as
required in 1998. Adoption is not expected to have a material impact on the
Corporation.
In February, 1998, FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" ("SFAS No. 132"), an amendment of FASB Statements No. 87, 88, and 106.
This Statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures
previously required. FASB No. 132 is effective for fiscal years beginning after
December 15, 1997. The Corporation plans to adopt SFAS No. 132, as required, in
1998. Adoption is not expected to have a material impact on the Corporation.
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. The Statement specifies that changes in the fair value of
derivatives 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 15,1999, and cannot be applied
retroactively. Adoption is not expected to have a material impact on the
Corporation.
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EARNINGS and CAPITAL
The Corporation's net income for the first nine months of 1998 was
$5,239,000, an increase of 10.9% over the $4,726,000 earned during the first
nine months of 1997. On a basic and diluted per share basis, net income totaled
$1.72 for the first nine months of 1998, up 15.4% from $1.49 in the 1997 period.
On an annualized basis, return on average total assets was 1.61% for the first
nine months of 1998 compared to 1.48% for the same period in 1997. Return on
average common shareholders' equity increased to 13.57% for the first nine
months of 1998 from 12.53% for the first nine months of 1997.
The Corporation's net income for the third quarter of 1998 was $1,827,000,
an increase of 11.1% over the $1,645,000 earned during the third quarter of
1997. On a basic and diluted per share basis, net income totaled $.60 for the
quarter, up 11.1% from $.54 in 1997. On an annualized basis, return on average
total assets was 1.65% for the third quarter of 1998 compared to 1.57% for the
third quarter of 1997. Return on average common shareholders' equity increased
to 13.91% in the third quarter of 1998 from 13.66% for the third quarter of
1997.
The Corporation decreased shareholders' equity during the second quarter of
1997 with the repurchase of 228,065 shares of common stock for $6,278,000. The
7% reduction in outstanding shares of common stock during second quarter 1997
enhanced net income per share and return on equity for the first nine months of
1998 compared to the same periods in 1997.
The Corporation's growth in earnings resulted from three principal factors.
First, net interest income improved $737,000, or 5.8%, from a higher net
interest spread in the first nine months of 1998 compared to the first nine
months of 1997 (see discussion on NET INTEREST INCOME). Second, the 21.6% growth
in noninterest income in the first nine months of 1998 over the same period in
1997 demonstrates the continued success of the Corporation's expanded trust and
investment services, higher service charges and ATM fees and an increase in fees
from originating and selling fixed rate mortgage loans. Third, the Corporation
has controlled noninterest expenses which have grown less in the first nine
months of 1998 than the combined growth in net interest income and noninterest
income.
TRENDS and FUTURE EVENTS
During the first nine months of 1998, net loans increased $9,884,000 or
3.9%. The increase is the result of moderate loan demand and indicates the
continuance of a healthy local economy. The increase in loans was funded by
deposit growth, additional repurchase agreements and other borrowings. Total
investment securities and interest-bearing deposits in other banks increased
during the first nine months of 1998 by $25,398,000 or 17.7%.
Total deposits increased $6,324,000 or 1.8% during the first nine months of
1998 and repurchase agreements increased $12,388,000 or 68.7% during the same
period. Deposits were down $5,610,000, or 1.5%, and repurchase agreements were
up $2,393,000, or 15.9%, during the first nine months of 1997. The increase in
repurchase agreements reflects the trend by commercial accounts to earn higher
rates on cash balances.
During the third quarter of 1998, the Corporation declared a quarterly cash
dividend of $.24 per share, the same as the second quarter of 1998, but an
increase over the $.21 per share declared in the third quarter of 1997. The
third quarter dividend was paid on September 25, 1998 to shareholders of record
on September 11, 1998.
On September 29, 1998 the Federal Reserve Board decreased short term
interest rates by cutting federal funds by 1/4% and the major money center banks
followed by lowering the prime rate by 1/4%. On October 15, 1998 the Federal
Reserve decreased short term rates again by cutting federal funds and the
discount rate by 1/4%, and major money center banks followed by lowering the
prime rate by 1/4%. U.S. Treasury yields had already preceded the Federal
Reserve action by declining more than 1% since June 1998 in response to the
global financial crisis, losses in hedge funds and low inflation. The Federal
Reserve action in lowering interest rate was designed to stabilize financial
markets and to offset perceived deteriorating economic conditions caused by the
global financial crisis.
At the annual meeting of shareholders, held April 22, 1997, the
shareholders approved a Stock Option Plan permitting the Corporation to issue up
to a total of 150,000 shares of common stock, upon the exercise of options
granted under the plan, prior to December 31, 2006. The Plan is administered by
the Stock Option Committee of the Board of Directors which consists only of the
Company's non-employee Directors.
YEAR 2000 ISSUE
The Corporation is aware of the issues associated with the programming code
in existing computer systems as the millennium ("year 2000") approaches. The
year 2000 problem is pervasive and complex as virtually every computer operation
and many equipment systems will be affected in some way by the rollover of the
two digit year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail.
The Corporation is utilizing both internal and external resources to
identify, correct or reprogram, and test systems for year 2000 compliance. It is
anticipated that all reprogramming and testing will be completed by March
31,1999, allowing additional time for testing on reprogrammed systems. To date,
successful Year 2000 testing has been completed by most of the Corporation's
mission critical vendors, and the Corporation has tested many of these mission
critical systems. An educational process has been implemented to assist and
assure that major customers are year 2000 compliant.
Based on a preliminary study, the Corporation expects to spend
approximately $125,000 in 1998 and 1999 to modify its computer information
systems enabling proper processing of transactions relating to the year 2000 and
beyond. The amount expensed in the first nine months of 1998 was immaterial.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$13,896,000 for the first nine months of 1998 compared to $13,109,000 for the
first nine months of 1997, an increase of 6.0%. The interest rate spread
increased to 3.79% from 3.60% and the net yield on earning assets increased to
4.50% from 4.34% in the first nine months of 1998 compared to the first nine
months of 1997, respectively. These increases were due to higher yielding
interest-earning assets and lower paying interest-bearing liabilities and
because higher yielding average loan balances rose while lower yielding average
investment balances declined.
Net interest income on a fully taxable equivalent ("FTE") basis was
$4,694,000 in the third quarter of 1998 compared to $4,404,000 in the third
quarter of 1997, an increase of 6.6%. The interest rate spread increased to
3.72% from 3.69% and the net yield on earning assets increased to 4.45% from
4.41% in the third quarter of 1998 compared to the third quarter of 1997,
respectively.
The following tables demonstrate fluctuations in net interest income and
the related yields for the first nine months and third quarter of 1998 compared
to similar prior year periods.
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
For nine months ended Sept 30
1998 1997 1998 1997 1998 1997
-------- -------- ------- ------- ------ ------
Loans:
Commercial $ 74,411 $ 65,150 $ 4,967 $ 4,482 8.92% 9.20%
Mortgage 132,798 130,210 8,682 8,437 8.72 8.64
Consumer 52,510 52,742 3,839 3,826 9.77 9.70
-------- -------- ------- ------- ------ ------
Total loans 259,719 248,102 17,488 16,745 8.99 9.01
-------- -------- ------- ------- ------ ------
Investment securities:
U. S. Government 45,632 70,253 2,077 3,159 6.00 5.93
Federal agencies 69,052 51,922 3,332 2,529 6.36 6.42
State and municipal 24,022 21,252 1,317 1,180 7.23 7.32
Other investments 7,005 5,861 354 307 6.66 6.91
-------- -------- ------- ------- ------ ------
Total investment securities 145,711 149,288 7,080 7,175 6.41 6.34
-------- -------- ------- ------- ------ ------
Federal funds sold and other 3,597 2,780 149 114 5.46 5.41
-------- -------- ------- ------- ------ ------
Total interest-earning assets 409,027 400,170 24,717 24,034 8.04 7.99
-------- -------- ------- ------- ------ ------
Other non-earning assets 24,485 24,199
-------- --------
Total assets $433,512 $424,369
======== ========
Interest-bearing deposits:
Demand $ 50,551 $ 48,003 928 1,035 2.45 2.88
Money market 18,616 19,408 407 426 2.92 2.93
Savings 67,382 70,201 1,489 1,600 2.95 3.05
Time 174,652 177,809 6,981 7,246 5.34 5.45
-------- -------- ------- ------- ------ ------
Total interest-bearing deposits 311,201 315,421 9,805 10,307 4.21 4.37
Federal funds purchased 251 941 11 40 5.78 5.61
Repurchase agreements 23,785 16,570 803 578 4.51 4.66
Other borrowings 4,964 - 202 - 5.37 -
-------- -------- ------- ------- ------ ------
Total interest-bearing
liabilities 340,201 332,932 10,821 10,925 4.25 4.39
------- ------- ------ ------
Demand deposits 39,007 38,384
Other liabilities 2,834 2,743
Shareholders' equity 51,470 50,310
-------- --------
Total liabilities and
shareholders' equity $433,512 $424,369
======== ========
Interest rate spread 3.79% 3.60%
====== ======
Net interest income 13,896 13,109
======= =======
Taxable equivalent adjustment 409 359
======= =======
Net yield on earning assets 4.50% 4.34%
====== ======
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
For three months ended Sept 30
1998 1997 1998 1997 1998 1997
-------- -------- ------- ------- ------ ------
Loans:
Commercial $ 78,094 $ 64,708 $ 1,741 $ 1,511 8.84% 9.26%
Mortgage 131,591 135,138 2,846 2,930 8.65 8.67
Consumer 53,532 53,856 1,319 1,323 9.78 9.75
-------- -------- ------- ------- ------ ------
Total loans 263,217 253,702 5,906 5,764 8.94 9.05
Investment securities:
U. S. Government 41,509 59,963 629 893 5.93 5.83
Federal agencies 73,018 51,565 1,169 836 6.26 6.34
State and municipal 26,912 20,851 486 384 7.07 7.21
Other investments 6,603 5,848 112 103 6.64 6.89
-------- -------- ------- ------- ------ ------
Total investment securities 148,042 138,227 2,396 2,216 6.33 6.27
-------- -------- ------- ------- ------ ------
Federal funds sold and other 6,771 3,856 94 53 5.43 5.38
-------- -------- ------- ------- ------ ------
Total interest-earning assets 418,030 395,785 8,396 8,033 7.96 8.05
------- ------- ------ ------
Other non-earning assets 24,581 24,776
-------- --------
Total assets $442,611 $420,561
======== ========
Interest-bearing deposits:
Demand $ 49,069 $ 48,782 295 354 2.39 2.88
Money market 19,538 18,922 145 140 2.94 2.94
Savings 67,186 69,928 499 538 2.95 3.05
Time 174,504 174,679 2,337 2,383 5.31 5.41
-------- -------- ------- ------- ------ ------
Total interest-bearing deposits 310,297 312,311 3,276 3,415 4.19 4.34
Federal funds purchased - 243 - 4 - 6.44
Repurchase agreements 24,912 17,583 278 210 4.43 4.74
Other borrowings 10,985 - 148 - 5.27 -
-------- -------- ------- ------- ------ ------
Total interest-bearing
liabilities 346,194 330,137 3,702 3,629 4.24 4.36
------- ------- ------ ------
Demand deposits 40,565 39,681
Other liabilities 3,276 2,546
Shareholders' equity 52,576 48,197
-------- --------
Total liabilities and
shareholders' equity $442,611 $420,561
======== ========
Interest rate spread 3.72% 3.69%
====== ======
Net interest income 4,694 4,404
======= =======
Taxable equivalent adjustment 152 117
======= =======
Net yield on earning assets 4.45% 4.41%
====== ======
ASSET QUALITY
Nonperforming assets include loans on which interest is no longer accrued,
loans classified as troubled debt restructurings and foreclosed properties.
Nonperforming assets declined from $778,000 at December 31, 1997 to $659,000 at
September 30, 1998.
Foreclosed properties of $385,000 at September 30,1998 and December 31,
1997 include two commercial real estate properties.
Loans in a nonaccrual status at September 30, 1998 were $274,000 compared
with $393,000 at December 31, 1997. Loans on accrual status and past due 90 or
more at September 30, 1998 were $256,000 compared with $181,000 at December 31,
1997.
Total nonperforming loans and loans past due 90 days or more as a
percentage of net loans were .2% at September 30, 1998 and .2% at December 31,
1997. Total nonperforming loans and loans past due 90 days or more, on an
accrual status, are considered low by industry standards. Net charge-offs for
the first nine months of 1998 as a percentage of average loans declined to .08 %
in 1998 from .11 % in the first nine months of 1997. These charge-off ratios are
low by industry standards.
During the first nine months of 1998 the gross amount of interest income
that would have been recorded on nonaccrual loans and restructured loans at
September 30, 1998, if all such loans had been accruing interest at the original
contractual rate, was $12,000. No interest payments were recorded during the
reporting period as interest income for all such nonperforming loans.
PROVISION and RESERVE FOR LOAN LOSSES
The provision for loan losses was $678,000 for the first nine months and
$203,000 for the third quarter of 1998 versus $762,000 and $262,000,
respectively, for the 1997 periods. The reserve for loan losses totaled
$3,739,000 at September 30, 1998 an increase of 14.1% over the $3,277,000
recorded at December 31, 1997. The ratio of reserves to loans, less unearned
discount, was 1.41% at September 30, 1998 and 1.29% at December 31, 1997. In
Management's opinion, the current reserve for loan losses is adequate.
NON-INTEREST INCOME
Non-interest income for the first nine months of 1998 was $2,865,000, an
increase of 21.6% from the $2,356,000 reported in the first nine months of 1997.
The major reasons for the 1998 first nine months growth in non-interest income
were a 12.5% increase in trust and investment services to $1,580,000 due to
growth in managed investment accounts and an increase in mortgage banking income
of 111.2% to $302,000 due to increased origination and sale of fixed rate
residential mortgage loans. Service charges on deposit accounts were $681,000
for the first nine months of 1998, up 16.2% over the first nine months of 1997
while non-deposit fees and insurance commissions were up 126.9% to $211,000 due
primarily to increased non-customer ATM fees.
Non-interest income for the third quarter of 1998 was $989,000, an increase
of 18.4% from the $835,000 reported in the third quarter of 1997. The major
reasons for the 1998 third quarter growth in non-interest income were higher
service charges on deposit accounts, increased non-deposit fees, and increased
mortgage-banking income. Service charges on deposit accounts were $243,000 for
the third quarter of 1998, up 19.1% over the third quarter of 1997 while
non-deposit fees and insurance commissions were up 102.4% to $83,000 due largely
to increased non-customer ATM fees. Mortgage banking income increased 75.8% to
$109,000 in the third quarter of 1998 compared to the same quarter in 1997 due
to increased origination and sale of fixed rate residential mortgage loans.
NON-INTEREST EXPENSE
Non-interest expense for the first nine months of 1998 was $8,113,000, a
7.8% increase from the $7,523,000 reported for the same period last year.
Salaries increased 5.4% from the same period last year to $3,760,000 in 1998
while pension and other employee benefits increased 6.5% to $854,000, largely
from increased medical insurance. Occupancy and equipment expense increased
24.0% to $1,272,000 due to depreciation and maintenance on new technology
equipment and increased license fees on existing equipment. Core deposit
intangible amortization of $337,000 for the first nine months of 1998 and 1997
represents the amortization of the premium paid for deposits acquired at Gretna
in August 1995 and Yanceyville in October 1996. Other non-interest expense
increased 5.6% to $1,550,000 in the first nine months of 1998 over the same
period in 1997 due to additional sales and technology training.
Non-interest expense for the third quarter of 1998 was $2,692,000, a 9.2%
increase from the $2,466,000 reported for the same period last year. Salaries
increased to $1,319,000 in the third quarter of 1998, a 12.1% increase from the
same period last year. Additional incentive compensation of $64,000, which has
traditionally been recorded in the fourth quarter, represented 5.4% of the 12%
increase in salaries. Pension and other employee benefits and occupancy and
equipment expense increased 2.2% in the third quarter from the same period last
year. Other non-interest expense increased 15.4% to $516,000 in the third
quarter of 1998 from the same prior year period. Increased sales and technology
training of $49,000 represented 11% of the 15.4% increased other non-interest
expense.
INCOME TAX PROVISION
The income tax provision for the first nine months of 1998 was $2,322,000,
an increase of $227,000 from the $2,095,000 reported a year earlier. The
effective tax rate for the first nine months of 1998 and 1997 was 30.7%.
CAPITAL MANAGEMENT
Federal regulatory risk-based capital ratio guidelines require percentages
to be applied to various assets including off-balance-sheet assets in relation
to their perceived risk. Tier I capital includes shareholders' equity and Tier
II capital includes certain components of nonpermanent preferred stock and
subordinated debt. The Corporation has no nonpermanent preferred stock or
subordinated debt. Banks and bank holding companies must have a Tier I capital
ratio of at least 4% and a total ratio, including Tier I and Tier II capital, of
at least 8%. As of September 30, 1998 the Corporation had a ratio of 17.1% for
Tier I and a ratio of 18.3% for total capital. At December 31, 1997 these ratios
were 17.1% and 18.4%, respectively.
A cash dividend of $.24 per share was paid on 3,051,733 shares of common
stock outstanding on September 25, 1998 to shareholders of record September 11,
1998. This dividend totaled $732,400.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, interest rate risk and its
impact on net interest income is the primary market risk exposure. The
Asset/Liability Investment Committee ("ALCO") is primarily responsible for
establishing asset and liability strategies and for monitoring and controlling
liquidity and interest rate risk. ALCO uses computer simulation analysis to
measure the sensitivity of earnings and market value of equity to changes in
interest rates.
The projected changes in net interest income and market value of portfolio
equity ("MVE") to changes in interest rates are calculated and monitored by ALCO
as indicators of interest rate risk. The projected changes in net interest
income and MVE to changes in interest rates at September 30, 1998 were not
materially different from December 31, 1997.
The Corporation's net liquid assets to net liabilities ratio was 26.6% at
September 30, 1998 and 27.2% at December 31, 1997. Both of these ratios are
considered to reflect adequate liquidity for the respective periods.
Management constantly monitors and plans the Corporation's liquidity
position for future periods. Liquidity is provided from cash and due from banks,
federal funds sold, interest-bearing deposits in other banks, repayments from
loans, seasonal increases in deposits, lines of credit from two correspondent
banks and two federal agency banks and a planned structured continuous maturity
of investments. Management believes that these factors provide sufficient and
timely liquidity for the foreseeable future.
PART II
OTHER INFORMATION
Item:
1. Legal Proceedings
None
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) Exhibit 27 - Financial Data Schedule
(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 12, 1998 President and Chief Executive Officer
/s/ T. Allen Liles
-------------------------------------
T. Allen Liles
Senior Vice-President and
Date - November 12, 1998 Secretary-Treasurer (Chief Financial Officer)