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 March 31, 1999
[ ] 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 May 13, 1999
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 March 31, 1999
and December 31, 1998...........................................3
Consolidated Statements of Income for the three months
ended March 31, 1999 and 1998...................................4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998...................................5
Notes to Consolidated Financial Statements........................6-9
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations......................10-14
Part II. Other Information...........................................15
SIGNATURES ...........................................................15
EXHIBITS - Financial Data Schedule....................................16
2
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
March 31 December 31
1999 1998
-------- -----------
ASSETS
Cash and due from banks.........................................................$ 12,367 $ 14,072
Interest-bearing deposits in other banks........................................ 19 706
Investment securities:
Securities available for sale (at market value)............................. 108,209 105,536
Securities held to maturity (market value of $47,337 at
March 31, 1999 and $59,207 at December 31, 1998).......................... 46,379 57,877
-------- --------
Total investment securities............................................. 154,588 163,413
-------- --------
Loans .......................................................................... 278,430 269,677
Less--
Unearned income............................................................. (131) (158)
Reserve for loan losses..................................................... (3,910) (3,821)
-------- --------
Net loans............................................................... 274,389 265,698
--------- --------
Bank premises and equipment, at cost, less accumulated
depreciation of $7,404 in 1999 and $7,164 in 1998............................. 7,656 7,603
Accrued interest receivable and other assets.................................... 9,312 8,891
-------- --------
Total assets................................................................. $458,331 $460,383
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 44,927 $ 45,071
Demand deposits -- interest bearing........................................... 54,770 55,883
Money market deposits......................................................... 18,212 18,089
Savings deposits.............................................................. 68,083 68,621
Time deposits................................................................. 177,236 170,661
-------- --------
Total deposits.............................................................. 363,228 358,325
-------- --------
Repurchase agreements........................................................... 19,450 31,023
FHLB borrowings................................................................. 16,540 13,000
Accrued interest payable and other liabilities.................................. 3,696 3,174
-------- --------
Total liabilities............................................................. 402,914 405,522
-------- --------
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 March 31, 1999
and December 31, 1998....................................................... 3,052 3,052
Capital in excess of par value................................................ 9,892 9,892
Retained earnings............................................................. 41,990 40,799
Accumulated other comprehensive income -
net unrealized gains on securities available for sale....................... 483 1,118
-------- --------
Total shareholders' equity.................................................. 55,417 54,861
-------- --------
Total liabilities and shareholders' equity..................................$458,331 $460,383
======== ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
3
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- ------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
----------------------
1999 1998
-------- --------
Interest Income:
Interest and fees on loans....................................................$ 5,827 $ 5,743
Interest on federal funds sold and other...................................... 6 43
Income on investment securities:
U S Government.............................................................. 344 750
Federal agencies............................................................ 1,227 1,022
State and municipal......................................................... 433 288
Other investments........................................................... 325 125
------- -------
Total interest income..................................................... 8,162 7,971
------- -------
Interest Expense:
Interest on deposits:
Demand...................................................................... 272 323
Money market................................................................ 123 127
Savings..................................................................... 442 499
Time........................................................................ 2,232 2,314
Interest on fed funds and repos............................................... 269 269
Interest on other borrowings.................................................. 234 -
------- -------
Total interest expense...................................................... 3,572 3,532
------- -------
Net Interest Income............................................................. 4,590 4,439
Provision for Loan Losses....................................................... 180 252
------- -------
Net Interest Income After Provision
For Loan Losses............................................................... 4,410 4,187
------- -------
Non-Interest Income:
Trust and investment services................................................. 624 519
Service charges on deposit accounts........................................... 217 187
Non-deposit fees and insurance commissions.................................... 71 58
Mortgage banking income....................................................... 116 104
Other income.................................................................. 54 28
------- -------
Total non-interest income................................................... 1,082 896
------- -------
Non-Interest Expense:
Salaries...................................................................... 1,325 1,206
Pension and other employee benefits........................................... 258 287
Occupancy and equipment....................................................... 454 437
Postage and printing.......................................................... 111 133
Core deposit intangible amortization ......................................... 112 112
Other......................................................................... 505 498
------- -------
Total non-interest expense.................................................. 2,765 2,673
------- -------
Income Before Income Tax Provision.............................................. 2,727 2,410
Income Tax Provision............................................................ 803 749
------- -------
Net Income......................................................................$ 1,924 $ 1,661
======= =======
- -----------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic...........................................................................$ .63 $ .54
Diluted.........................................................................$ .63 $ .54
- -----------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Basic..........................................................................3,051,733 3,051,733
Diluted........................................................................3,052,870 3,053,073
- -----------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
4
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- -----------------------------------------------------------------------------------------------------
Three Months Ended
---------------------
March 31
1999 1998
------- -------
Cash Flows from Operating Activities:
Net income....................................................................$ 1,924 $ 1,661
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................................................... 180 252
Depreciation................................................................ 240 248
Core deposit intangible amortization........................................ 112 112
Amortization (accretion) of premiums and discounts
on investment securities.................................................. 20 (26)
Gain on sale of securities.................................................. (8) -
Deferred income taxes benefit............................................... (133) (49)
Increase in interest receivable............................................. (114) (159)
Decrease in other assets.................................................... 41 13
Decrease in interest payable................................................ (28) (64)
Increase in other liabilities............................................... 550 603
------- -------
Net cash provided by operating activities................................... 2,784 2,591
------- -------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ..................... 23,836 8,198
Purchases of securities available for sale....................................(15,986) (8,994)
Purchases of securities held to maturity...................................... - (3,678)
Net increase in loans......................................................... (8,871) (4,100)
Purchases of property and equipment........................................... (293) (134)
------- -------
Net cash used in investing activities......................................... (1,314) (8,708)
------- -------
Cash Flows from Financing Activities:
Net decrease in demand, money market,
and savings deposits........................................................ (1,672) (2,465)
Net increase in time deposits................................................. 6,575 4,765
Net (decrease) increase in federal funds purchased
and repurchase agreements...................................................(11,573) 4,705
Net increase in Federal Home Loan Bank borrowings............................. 3,540 -
Cash dividends paid........................................................... (732) (641)
------- -------
Net cash (used in) provided by financing activities........................... (3,862) 6,364
------- -------
Net (Decrease) Increase in Cash and Cash Equivalents............................ (2,392) 247
Cash and Cash Equivalents at Beginning of Period................................ 14,778 13,752
------- -------
Cash and Cash Equivalents at End of Period......................................$12,386 $13,999
======= =======
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$12,367 $13,979
Interest-bearing deposits in other banks.................................... 19 20
------- -------
$12,386 $13,999
======= =======
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 3,600 $ 3,596
Income taxes paid.............................................................$ 250 $ -
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
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 March 31, 1999, the results of its operations and its
cash flows for the three months then ended. Operating results for the three
month period ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999.
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").
A summary of the Corporation's significant accounting policies is set forth in
Note 1 to the Consolidated Financial Statements in the Corporation's 1998 Annual
Report on Form 10-K.
2. Investment Securities
The Corporation 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.
Gains or losses realized from the sale of any securities held to maturity are
determined by specific identification and are included in non-interest income.
Securities which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities available for sale are reported at estimated fair value,
with unrealized gains and losses reported as a separate component of
stockholders' equity, net of tax. Gains or losses realized from the sale of
securities available for sale are determined by specific identification and are
included in non-interest income.
The Corporation does not permit the purchase or sale of trading account
securities. If such securities were permitted, market adjustments, fees, gains
or losses and income earned on trading account securities would be included in
non-interest income. Gains or losses realized from the sale of trading
securities would be determined by specific identification.
Premiums and discounts on investment securities are amortized using the
interest method.
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. As of March 31, 1999 and
December 31, 1998, there were $16,540,000 and $13,000,00, respectively,
outstanding under this availability.
Commitments to extend credit, which amount to $65,023,000 at March 31, 1999
and $67,466,000 at December 31, 1998, 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.
There were $1,998,000 in commitments at March 31, 1999 and $952,000 at
December 31, 1998 to purchase securities when issued.
Standby letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. At
March 31, 1999 and December 31, 1998 the Bank had $854,000 and $682,000,
respectively, in outstanding standby letters of credit.
6
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
("SFAS") No. 130, "Reporting Comprehensive Income", during the first quarter of
1998. This statement establishes standards for reporting a measure of all
changes in equity of an enterprise that result from transactions and economic
events of the period other than transactions with owners ("economic income").
SFAS No. 130 requires an enterprise to report comprehensive income in the notes
to the financial statements on an interim basis. The following is a detail of
comprehensive income for the quarter ended March 31, 1999 and 1998:
1999 1998
---------- ----------
Net Income $1,924,000 $1,661,000
Unrealized holding gains (losses) arising
during period (net of tax expense) (635,000) 29,000
---------- ----------
Total comprehensive income $1,289,000 $1,690,000
========== ==========
The FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", in June 1997, which establishes new
standards for reporting information about operating segments in annual and
interim financial statements. This statement also requires descriptive
information about the way operating segments are determined, the products and
services provided by the segments and the nature of differences between
reportable segment measurements and those used for the consolidated entity. The
disclosure requirements of SFAS No.131 have been adopted and are included in
Note 6 to the Consolidated Condensed Financial Statements.
In February, 1998, SFAS No. 132, "Employers' Disclosures about Pension and
Other Postretirement Benefits", was issued, amending FASB Statements No. 87, 88,
and 106. This Statement does not change the measurement or recognition of
pension and postretirement benefit plans but standardizes disclosure
requirements. The new disclosure requirements of SFAS No. 132 have been adopted
and are included in the Consolidated Financial Statements in the Corporation's
1998 Annual Report on Form 10-K.
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 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, 1999, and cannot be applied
retroactively. Adoption is not expected to have a material impact on the
Corporation.
7
6. Segment and Related Information
The Corporation adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1998. Reportable segments include
community banking and trust and investment services. Community banking involves
making loans to and generating deposits from individuals and businesses in the
markets where the Bank has offices. All assets and liabilities of the Bank are
allocated to community banking. Investment income from fixed income investments
is a major source of income in addition to loan interest income. Service charges
from deposit accounts and non-deposit fees such as automatic teller machine fees
and insurance commissions generate additional income for community banking.
Trust and investment services includes estate and trust planning and
administration and investment management for various entities. The trust and
investment services division of the Bank manages trusts, estates and purchases
equity, fixed income and mutual fund investments for customer accounts. The
trust and investment services division receives fees for investment and
administrative services. Fees are also received by this division for individual
retirement accounts managed for the community banking segment.
The accounting policies of the segments and the basis of segmentation are
the same as those described in the summary of significant accounting policies
set forth in Note 1 to the Consolidated Financial Statements in the
Corporation's 1998 Annual Report on Form 10-K. All intersegment sales prices are
market based.
Segment information for the three months ended March 31, 1999, 1998 and
1997 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.
1st Qtr 1999
- ---------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
Interest income $ 8,162 $ - $ 13 $ (13) $ 8,162
Interest expense 3,572 - 13 (13) 3,572
Non-interest income - external customers 343 624 115 - 1,082
Non-interest income - internal customers - 13 - (13) -
Operating income before income taxes 2,290 436 1,930 (1,929) 2,727
Depreciation and amortization 357 11 4 - 372
Total assets 458,616 - 56,804 (57,089) 458,331
Capital expenditures 290 - 3 - 293
8
1st Qtr 1998
- ---------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
Interest income $ 7,971 $ - $ 9 $ (9) $ 7,971
Interest expense 3,532 - 9 (9) 3,532
Non-interest income - external customers 273 519 104 - 896
Non-interest income - internal customers - 12 - (12) -
Operating income before income taxes 2,069 335 1,668 (1,662) 2,410
Depreciation and amortization 344 12 4 - 360
Total assets 432,493 - 52,339 (52,599) 432,233
Capital expenditures 132 - 2 - 134
1st Qtr 1997
- ---------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
Interest income $ 7,876 $ - $ 2 $ (2) $ 7,876
Interest expense 3,677 - 2 (2) 3,677
Non-interest income - external customers 285 427 26 - 738
Operating income before income taxes 1,969 264 1,484 (1,538) 2,179
Depreciation and amortization 266 8 2 - 276
Total assets 431,209 - 53,584 (53,893) 430,900
Capital expenditures 217 - 18 - 235
9
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 quarter of 1999 was $1,924,000,
an increase of 15.8% over the $1,661,0000 earned during the first quarter of
1998. On a basic and diluted per share basis, net income totaled $.63 for the
quarter, up 16.7% from $.54 in 1998. On an annualized basis, return on average
total assets was 1.68% for the first quarter of 1999 compared to 1.56% for the
first quarter of 1998. Return on average common shareholders' equity increased
5.5% to 13.90% in the first quarter of 1999 from 13.18% for the first quarter of
1998.
The Corporation's growth in earnings resulted from three principal factors.
First, net interest income after provision improved $223,000, or 5.3% from
growth in interest-earning assets in first quarter 1999 compared to first
quarter 1998 and from lower provision for loan losses. Second, the 20.8% growth
in noninterest income in the 1999 quarter over 1998 demonstrates the continued
success of the Corporation's expanded trust and investment services and the
increase in fees from originating and selling fixed rate mortgage loans. Third,
the Corporation has controlled noninterest expenses which have grown at a slower
3.4% pace in the first quarter of 1999 over the first quarter of 1998 as
compared to growth in combined net interest income after provision and
noninterest income of 8.0%.
TRENDS and FUTURE EVENTS
During the first quarter of 1999, net loans increased $8,691,000 or 3.3%.
The increase is the result of good loan demand and indicates the continuance of
a healthy local economy. The increase in loans was funded by increased deposits,
FHLB borrowings and maturing securities. Total investment securities declined
during the first quarter of 1999 by $8,825,000 or 5.4%. Total deposits increased
$4,903,000 or 1.4% during the first quarter of 1999 and repurchase agreements
decreased $11,573,000 or 37.3% during the same period. Repurchase agreements are
used by commercial accounts to earn higher rates on short term funds and are
volatile.
During the first quarter of 1999, the Corporation declared a quarterly cash
dividend of $.24 per share. This dividend was paid on March 26, 1999 to
shareholders of record on March 12, 1999.
On September 29, 1998 the Federal Reserve Board ("FRB") 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 and November
17, 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% on both occasions. Short and intermediate U.S.
Treasury yields had already preceded the Federal Reserve actions by declining
from June 1998 to October 1998 in response to the global financial crisis,
losses in hedge funds and low inflation. The Federal Reserve actions in lowering
interest rates were designed to stabilize financial markets and to offset
perceived deteriorating economic conditions caused by the global financial
crisis. U.S. Treasury yields have increased since December 31, 1998, but the
Federal Reserve has not moved to increase federal funds or the discount rate.
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 independent 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 computers and systems dependent
10
on computer chips will properly recognize date sensitive information when the
year changes to 2000. Systems that do not recognize such information could
generate erroneous data or cause a system to fail.
Technology hardware, software and other systems used by the Corporation are
provided by outside vendors rather than being developed in-house. These outside
vendors have been proactive in making systems Year 2000 ready, in testing
systems for Year 2000 readiness, in submitting their efforts to regulators for
review, and in supplying testing procedures for the Corporation to conduct
independent testing.
The Corporation is utilizing both internal and external resources to
identify, correct or reprogram, and test systems for Year 2000 compliance. The
Corporation's readiness plan encompasses both information technology systems and
computer chip embedded functions, such as elevators, security systems, and
building heating and cooling. A project team has installed corrected hardware
and software and tested systems for Year 2000 readiness. Additional testing of
new or updated systems will be made during 1999. To date, successful Year 2000
testing has been completed on 100% of the Corporation's mission critical
systems.
An educational process has been implemented to assist and assure that major
customers are Year 2000 ready. Approximately 95% of major customers have
responded that they are Year 2000 ready or will be Year 2000 ready in 1999. The
project team will continue to monitor readiness of customers during 1999.
Total Year 2000 project costs will be approximately $125,000 with $96,000
having been spent to date. The remaining expenditures are not expected to have a
material impact on the Corporation's results of operations, liquidity or capital
resources.
The Corporation faces a number of risks related to the Year 2000 date
change including legal risks, project management risk, financial risk and
outside vendor risk. Legal risk involves failure to meet contractual service
agreements, leading to possible punitive actions. Project management risk is
failure to adequately address Year 2000 planning and resource needs with missed
deadlines and improper allocation of resources. Financial risk relates to lost
revenue, asset quality deterioration or even business failure. Outside vendor
risk involves failure of communication systems, power or other important
services which the Corporation depends upon to operate. A contingency plan has
been established to assure readiness in the unlikely event that any critical
operating system fails prior to or after the Year 2000. The contingency plan
specifies actions to be taken by the Year 2000 project team in the event that a
critical system is not timely corrected and tested before Year 2000. Since 100%
of mission critical systems have been successfully tested to date, pre Year 2000
contingency plans are not expected to be activated. The contingency plan also
assigns responsibility for checking the proper operation of all systems on
January 1, 2000, adopts special liquidity measures to be taken before and after
Year 2000, and describes implementation of manual processes for lending, deposit
operations, and trust services in the event that systems fail. Responsibilities
and detail procedures have been established for training on manual systems.
Rehearsal sessions of manual system implementation are scheduled later in 1999
to assure readiness. The Corporation's operations center, branch office and
mortgage banking operation located at Tower Drive are equipped with a diesel
generator in the event that electric power supplies fail prior to or after Year
2000. The backup power supply has been tested and will continue to be tested.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$4,781,000 for the first quarter of 1999 compared to $4,564,000 for the first
quarter of 1998, an increase of 4.8%. Net interest income on a FTE basis
increased due to growth of $31,558,000 in average interest-earning assets while
average interest-bearing liabilities grew only $24,559,000. Growth in non
interest-bearing deposits and retained income resulted in greater growth in
average interest-earning assets over interest-bearing liabilities.
The interest rate spread decreased to 3.73% from 3.85% and the net yield on
earning assets decreased to 4.41% from 4.55% in the first quarter of 1999
compared to the first quarter of 1998, respectively. The decreased spread and
yield were a product of lower short term rates which lowered loan yields more
than deposit and interest-bearing liabilities yields.
The following table demonstrates fluctuations in net interest income and
the related yields for the first quarter of 1999 and 1998.
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
For three months ended March 31 Average Balance Income/Expense Yield/Rate
---------------------- ------------------- ---------------
1999 1998 1999 1998 1999 1998
-------- -------- ------- ------- ---- ----
Loans:
Commercial $ 82,534 $ 69,975 $ 1,691 $ 1,575 8.31% 9.00%
Mortgage 137,910 134,646 2,866 2,934 8.31 8.72
Consumer 53,289 51,720 1,277 1,243 9.72 9.61
-------- -------- ------- ------- ---- ----
Total loans 273,733 256,341 5,834 5,752 8.59 8.98
-------- -------- ------- ------- ---- ----
Investment securities:
U. S. Government 22,997 49,542 344 750 5.98 6.06
Federal agencies 78,583 63,210 1,227 1,022 6.25 6.47
State and municipal 36,393 21,914 617 404 6.78 7.37
Other investments 20,988 7,457 325 125 6.19 6.71
-------- -------- ------- ------- ---- ----
Total investment securities 158,961 142,123 2,513 2,301 6.32 6.48
-------- -------- ------- ------- ---- ----
Federal funds sold and other 495 3,167 6 43 4.85 5.43
-------- -------- ------- ------- ---- ----
Total interest-earning assets 433,189 401,631 8,353 8,096 7.75 8.06
------- ------- ---- ----
Other non-earning assets 25,608 24,457
-------- --------
Total assets $458,797 $426,088
======== ========
Interest-bearing deposits:
Demand $ 53,410 $51,580 272 323 2.07 2.50
Money market 18,647 17,724 123 127 2.68 2.87
Savings 68,278 68,062 442 499 2.63 2.93
Time 174,620 174,663 2,232 2,314 5.18 5.30
-------- -------- ------- ------- ---- ----
Total interest-bearing deposits 314,955 312,029 3,069 3,263 3.95 4.18
Federal funds purchased - 182 - 2 - 4.40
Repurchase agreements 26,493 23,280 269 267 4.12 4.59
Other borrowings 18,602 - 234 - 5.03 -
-------- -------- ------- ------- ---- ----
Total interest-bearing
liabilities 360,050 335,491 3,572 3,532 4.02 4.21
------- ------- ---- ----
Demand deposits 40,761 37,861
Other liabilities 2,596 2,336
Shareholders' equity 55,390 50,400
-------- --------
Total liabilities and
shareholders' equity $458,797 $426,088
======== ========
Interest rate spread 3.73% 3.85%
==== ====
Net interest income 4,781 4,564
======= =======
Taxable equivalent adjustment 191 125
======= =======
Net yield on earning assets 4.41% 4.55%
==== ====
12
ASSET QUALITY
Nonperforming assets include loans on which interest is no longer accrued,
loans classified as troubled debt restructurings and foreclosed properties.
Nonperforming assets increased to $790,000 at March 31, 1999 from $575,000 at
December 31, 1998.
Foreclosed properties of $385,000 at March 31,1999 and December 31, 1998
include two commercial real estate properties.
Loans in a nonaccrual status at March 31, 1999 were $405,000 compared with
$190,000 at December 31, 1998. Loans on accrual status and past due 90 or more
at March 31, 1999 were $246,000 compared with $249,000 at December 31, 1998.
Total nonperforming loans and loans past due 90 days or more as a
percentage of net loans were .2% at March 31, 1999 and .2% at December 31, 1998.
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
quarter as a percentage of average loans increased to .03% in 1999 from .02% in
the 1998 quarter. These charge-off ratios are low by industry standards.
During the first quarter of 1999 the gross amount of interest income that
would have been recorded on nonaccrual loans and restructured loans at March 31,
1999, if all such loans had been accruing interest at the original contractual
rate, was $15,000. 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 $180,000 for the first quarter of 1999
and $252,000 for the first quarter of 1998. The reserve for loan losses totaled
$3,910,000 at March 31, 1999 an increase of 2.3% over the $3,821,000 recorded at
December 31, 1998. The ratio of reserves to loans, less unearned discount, was
1.40% at March 31, 1999 and 1.42% at December 31, 1998. In Management's opinion,
the current reserve for loan losses is adequate.
NON-INTEREST INCOME
Non-interest income for the first quarter of 1999 was $1,082,000, an
increase of 20.8% from the $896,000 reported in the first quarter of 1998. The
major reasons for the 1999 first quarter growth in non-interest income were a
20.2% increase in trust and investment services to $624,000 due to growth in
managed investment accounts and an increase in mortgage income of 11.5% to
$116,000 due to increased origination and sale of fixed rate residential
mortgage loans. Service charges on deposit fees were $217,000 for the first
quarter of 1999, up 16.0% over the first quarter of 1998 while non-deposit fees
and insurance commissions were up 22.4% to $71,000 due to increased insurance
sales.
NON-INTEREST EXPENSE
Non-interest expense for the first quarter of 1999 was $2,765,000, a 3.4%
increase from the $2,673,000 reported for the same period last year. Salaries
increased 9.9% from the same period last year to $1,325,000 in 1999 due to
general pay increases, a new branch and increased incentive pay.
INCOME TAX PROVISION
The income tax provision for the first quarter of 1999 was $803,000, an
increase of $54,000 from the $749,000 reported a year earlier. The effective tax
rate for the first quarter of 1999 was 29.4% compared to 31.1% for the first
quarter of 1998. The decline in the effective tax rate resulted from increased
tax exempt interest on state and municipal securities.
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
13
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 March
31, 1999 the Corporation had a ratio of 16.70% for Tier I and a ratio of 17.95%
for total capital. At December 31, 1998 these ratios were 16.79% and 18.04%,
respectively.
A cash dividend of $.24 per share was paid on 3,051,733 shares of common
stock outstanding on March 26, 1999 to shareholders of record March 12, 1999.
This dividend totaled $732,000.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, interest rate risk and
it's 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 March 31,1999 were not materially
different from December 31, 1998.
The Bank's net liquid assets to net liabilities ratio was 22.4% at March
31, 1999 and 24.0% at December 31, 1998. 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.
14
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) Exhibits
Financial Data Schedule EX-27
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN NATIONAL BANKSHARES INC.
/s/ Charles H. Majors
---------------------------------
Charles H. Majors
Date - May 14, 1999 President and Chief Executive Officer
/s/ T. Allen Liles
---------------------------------
T. Allen Liles
Senior Vice-President and
Date - May 14, 1999 Secretary-Treasurer (Chief Financial Officer)
15