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, 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
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AMERICAN NATIONAL BANKSHARES INC.
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(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
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Danville, Virginia 24541
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(Address of principal executive offices) (Zip Code)
(804) 792-5111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
----- -----
The number of shares outstanding of the issuer's common stock as of November 10,
1999 was 6,103,466.
AMERICAN NATIONAL BANKSHARES INC.
INDEX
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998........................................3
Consolidated Statements of Income for the three months
ended September 30, 1999 and 1998............................4
Consolidated Statements of Income for the nine months
ended September 30, 1999 and 1998............................5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998............................6
Notes to Consolidated Financial Statements.....................7-10
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations.....................................11-18
Part II. Other Information...............................................19
SIGNATURES ................................................................19
EXHIBIT - 10.1 Agreement between American National Bank and Trust Company
and James H. Johnson, Jr. dated July 31, 1999
EXHIBIT - 10.2 Agreement between American National Bank and Trust Company
and Earnest C. Jordan dated July 26, 1999
EXHIBIT - 27 Financial Data Schedule
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------------------------------
September 30 December 31
1999 1998
------------ -----------
ASSETS
Cash and due from banks.........................................................$ 12,435 $ 14,072
Interest-bearing deposits in other banks........................................ 13,895 706
Investment securities:
Securities available for sale (at market value)............................... 113,517 105,536
Securities held to maturity (market value of $43,751 at
September 30, 1999 and $59,207 at December 31, 1998)........................ 44,038 57,877
--------- ---------
Total investment securities................................................... 157,555 163,413
--------- ---------
Loans, net of unearned income .................................................. 279,308 269,519
Less allowance for loan losses.................................................. (4,063) (3,821)
--------- ---------
Net loans..................................................................... 275,245 265,698
--------- ---------
Bank premises and equipment, at cost, less accumulated
depreciation of $7,944 in 1999 and $7,164 in 1998............................. 7,938 7,603
Accrued interest receivable and other assets.................................... 10,575 8,891
--------- ---------
Total assets..................................................................$477,643 $460,383
========= =========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 44,033 $ 45,071
Demand deposits -- interest bearing........................................... 54,778 55,883
Money market deposits......................................................... 19,499 18,089
Savings deposits.............................................................. 66,551 68,621
Time deposits................................................................. 188,739 170,661
--------- ---------
Total deposits.............................................................. 373,600 358,325
--------- ---------
Repurchase agreements........................................................... 18,567 31,023
FHLB borrowings................................................................. 26,000 13,000
Accrued interest payable and other liabilities.................................. 3,062 3,174
--------- ---------
Total liabilities............................................................. 421,229 405,522
--------- ---------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par, 10,000,000 shares authorized,
6,103,466 shares outstanding at September 30, 1999 *
and 3,051,733 shares outstanding at December 31, 1998....................... 6,103 3,052
Capital in excess of par value................................................ 9,893 9,892
Retained earnings............................................................. 41,244 40,799
Accumulated other comprehensive income -
net unrealized (losses) gains on securities available for sale.............. (826) 1,118
--------- ---------
Total shareholders' equity.................................................... 56,414 54,861
--------- ---------
Total liabilities and shareholders' equity....................................$477,643 $460,383
========= =========
* - Reflects the impact of a 2-for-1 stock split effected in the form of a dividend issued July 1, 1999.
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
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Three Months Ended
September 30
---------------------
1999 1998
-------- --------
Interest Income:
Interest and fees on loans....................................................$ 5,991 $ 5,898
Interest on federal funds sold and other...................................... 94 94
Income on investment securities:
U S Government.............................................................. 141 629
Federal agencies............................................................ 1,474 1,169
State and municipal......................................................... 431 342
Other investments........................................................... 304 112
-------- --------
Total interest income..................................................... 8,435 8,244
-------- --------
Interest Expense:
Interest on deposits:
Demand...................................................................... 276 295
Money market................................................................ 125 145
Savings..................................................................... 445 499
Time........................................................................ 2,342 2,337
Interest on fed funds and repos .............................................. 191 278
Interest on other borrowings.................................................. 341 148
-------- --------
Total interest expense...................................................... 3,720 3,702
-------- --------
Net Interest Income............................................................. 4,715 4,542
Provision for Loan Losses....................................................... 120 203
-------- --------
Net Interest Income After Provision
For Loan Losses............................................................... 4,595 4,339
-------- --------
Non-Interest Income:
Trust and investment services................................................. 630 513
Service charges on deposit accounts........................................... 258 243
Non-deposit fees and insurance commissions.................................... 70 83
Mortgage banking income....................................................... 75 109
Other income.................................................................. 128 54
-------- --------
Total non-interest income................................................... 1,161 1,002
-------- --------
Non-Interest Expense:
Salaries...................................................................... 1,392 1,319
Pension and other employee benefits........................................... 238 279
Occupancy and equipment....................................................... 507 367
Postage and printing.......................................................... 103 99
Core deposit intangible amortization ......................................... 112 112
Other......................................................................... 575 529
-------- --------
Total non-interest expense.................................................. 2,927 2,705
-------- --------
Income Before Income Tax Provision.............................................. 2,829 2,636
Income Tax Provision............................................................ 841 809
-------- --------
Net Income......................................................................$ 1,988 $ 1,827
======== ========
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Net Income Per Common Share *
Basic...........................................................................$ .33 $ .30
Diluted.........................................................................$ .33 $ .30
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Average Common Shares Outstanding
Basic.........................................................................6,103,466 6,103,466
Diluted.......................................................................6,113,907 6,104,514
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* - Per share amounts have been restated to reflect the impact of a 2-for-1 stock split effected in the
form of a dividend issued July 1, 1999.
The accompanying notes to consolidated financial statements are an integral part of these statements.
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
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Nine Months Ended
September 30
---------------------
1999 1998
-------- --------
Interest Income:
Interest and fees on loans....................................................$17,787 $17,463
Interest on federal funds sold and other...................................... 113 149
Income on investment securities:
U S Government.............................................................. 691 2,077
Federal agencies............................................................ 4,070 3,332
State and municipal......................................................... 1,292 933
Other investments........................................................... 930 354
-------- --------
Total interest income..................................................... 24,883 24,308
-------- --------
Interest Expense:
Interest on deposits:
Demand...................................................................... 826 928
Money market................................................................ 367 407
Savings..................................................................... 1,333 1,489
Time........................................................................ 6,842 6,981
Interest on fed funds purchased and repos..................................... 638 814
Interest on other borrowings.................................................. 891 202
-------- --------
Total interest expense...................................................... 10,897 10,821
-------- --------
Net Interest Income............................................................. 13,986 13,487
Provision for Loan Losses....................................................... 480 678
-------- --------
Net Interest Income After Provision
For Loan Losses............................................................... 13,506 12,809
-------- --------
Non-Interest Income:
Trust and investment services................................................. 1,868 1,580
Service charges on deposit accounts........................................... 715 681
Non-deposit fees and insurance commissions................................... 209 211
Mortgage banking income....................................................... 279 302
Other income.................................................................. 262 126
-------- --------
Total non-interest income................................................... 3,333 2,900
-------- --------
Non-Interest Expense:
Salaries...................................................................... 4,055 3,760
Pension and other employee benefits........................................... 726 854
Occupancy and equipment....................................................... 1,432 1,272
Postage and printing.......................................................... 334 340
Core deposit intangible amortization ......................................... 337 337
Other......................................................................... 1,615 1,585
-------- --------
Total non-interest expense.................................................. 8,499 8,148
-------- --------
Income Before Income Tax Provision.............................................. 8,340 7,561
Income Tax Provision............................................................ 2,462 2,322
-------- --------
Net Income......................................................................$ 5,878 $ 5,239
======== ========
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Net Income Per Common Share *
Basic...........................................................................$ .96 $ .86
Diluted.........................................................................$ .96 $ .86
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Average Common Shares Outstanding
Basic.........................................................................6,103,466 6,103,466
Diluted.......................................................................6,108,773 6,105,290
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* - Per share amounts have been restated to reflect the impact of a 2-for-1 stock split effected in the
form of a dividend issued July 1, 1999.
The accompanying notes to consolidated financial statements are an integral part of these statements.
Consolidated Statements of Cash Flows
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
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Nine Months Ended
September 30
-----------------------
1999 1998
--------- ---------
Cash Flows from Operating Activities:
Net income....................................................................$ 5,878 $ 5,239
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses..................................................... 480 678
Depreciation.................................................................. 794 643
Core deposit intangible amortization.......................................... 337 337
Net amortization (accretion) of premiums and discounts
on investment securities.................................................... 79 46
Gain on sale of securities.................................................... (8) -
Gain on sale of real estate owned............................................. (63) -
Deferred income taxes benefit................................................. (190) (248)
Increase in interest receivable............................................... (203) (398)
Increase in other assets...................................................... (702) (14)
Increase in interest payable.................................................. 135 35
(Decrease) increase in other liabilities...................................... (247) 448
--------- ---------
Net cash provided by operating activities................................... 6,290 6,674
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ..................... 45,072 28,918
Purchases of securities available for sale.................................... (37,197) (28,491)
Purchases of securities held to maturity...................................... (5,033) (8,624)
Net increase in loans......................................................... (10,027) (10,562)
Proceeds from sale of other real estate owned................................. 138 -
Purchases of property and equipment........................................... (1,129) (805)
--------- ---------
Net cash used in investing activities....................................... (8,176) (19,564)
--------- ---------
Cash Flows from Financing Activities:
Net (decrease) increase in demand, money market,
and savings deposits........................................................ (2,803) 3,127
Net increase in time deposits................................................. 18,078 3,197
Net (decrease) increase in federal funds purchased
and repurchase agreements................................................... (12,456) 10,888
Net increase in borrowings.................................................... 13,000 13,000
Cash dividends paid........................................................... (2,381) (2,105)
Repurchase of stock........................................................... - -
--------- ---------
Net cash provided by financing activities................................... 13,438 28,107
--------- ---------
Net Increase in Cash and Cash Equivalents....................................... 11,552 15,217
Cash and Cash Equivalents at Beginning of Period................................ 14,778 13,752
--------- ---------
Cash and Cash Equivalents at End of Period......................................$ 26,330 $ 28,969
========= =========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 12,435 $ 12,538
Interest-bearing deposits in other banks.................................... 13,895 16,431
--------- ---------
$ 26,330 $ 28,969
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 10,762 $ 10,786
Income taxes paid.............................................................$ 2,935 $ 2,150
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, 1999, 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, 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")
and the Bank's subsidiary, ANB Mortgage 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 1998 Annual Report on Form 10-K.
On June 15, 1999, the Corporation's Board of Directors approved a
2-for-1 stock split effected in the form of a 100% stock dividend to
shareholders of record July 1, 1999 with a distribution date of July 15, 1999.
All per share data and weighted average shares have been restated as appropriate
to reflect the split.
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of the Corporation and
Bank. These forward-looking statements involve risks and uncertainties and are
based on the beliefs and assumptions of management of the Corporation and Bank
and on information available at the time these statements and disclosures were
prepared. Factors that may cause actual results to differ materially from those
expected include the following:
o General economic conditions may deteriorate and negatively impact credit
quality and deposit retention.
o Changes in interest rates could reduce net interest income.
o Competitive pressures among financial institutions may increase.
o Legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses that the Corporation and
Bank are engaged.
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.
o Year 2000 issues could erode public confidence in financial institutions or
present other risks (see separate Year 2000 Issue disclosure).
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.
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 credit availability of 15% of assets, approximately
$71,500,000 with the Federal Home Loan Bank of Atlanta at September 30, 1999.
Borrowings outstanding under this availability were $26,000,000 and $13,000,000
respectively, at September 30, 1999 and December 31, 1998.
Commitments to extend credit, which amount to $83,779,000 at September
30, 1999 and $67,466,000 at December 31, 1998, represent legally binding
agreements to lend to customers with fixed expiration dates or other termination
clauses. Since many of the commitments are expected to expire without being
funded, the total commitment amounts do not necessarily represent future
liquidity requirements.
There were $1,110,000 commitments at September 30, 1999 and $952,000
commitments 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 September 30, 1999 and December 31, 1998 the Bank had $799,000
and $682,000, respectively, in outstanding 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
("SFAS") No. 130, "Reporting Comprehensive Income", during the first quarter of
1998. This statement establishes standards for reporting a measure of all
changes in equity of an enterprise that result from transactions and economic
events of the period other than transactions with owners ("economic income").
SFAS No.
130 requires an enterprise to report comprehensive income in the notes to the
financial statements on an interim basis. The following is a detail of
comprehensive income for the three and nine months ended September 30, 1999 and
1998:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net Income $1,988,000 $1,827,000 $5,878,000 $5,239,000
Unrealized holding gains (losses) arising
during period (net of tax expense) 159,000 655,000 (1,944,000) 719,000
---------- ---------- ----------- ----------
Total comprehensive income $2,147,000 $2,482,000 $3,934,000 $5,958,000
========== ========== ========== ==========
The FASB also issued SFAS 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. 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 Post-retirement Benefits", was issued, amending FASB Statements No.
87, 88, and 106. This Statement does not change the measurement or recognition
of pension and post-retirement 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 10K.
In September 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. In
September, 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", which delays the original effective date of SFAS No. 133
until fiscal years beginning after September 15, 2000. Adoption is not expected
to have a material impact on the Corporation.
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 and 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 inter-segment sales prices
are market based.
Segment information for the three and nine months ended September 30,
1999 and 1998 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.
Three Months Ended September 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
Interest income $ 8,435 $ - $ 6 $ (6) $ 8,435
Interest expense 3,720 - 6 (6) 3,720
Non-interest income - external customers 456 630 75 - 1,161
Non-interest income - internal customers - (26) 39 (13) -
Operating income before income taxes 2,420 442 1,966 (1,999) 2,829
Depreciation and amortization 380 11 3 - 394
Total assets 477,175 - 57,288 (56,820) 477,643
Capital expenditures 552 - 3 - 555
Three Months Ended September 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
Interest income $ 8,244 $ - $ 10 $ (10) $ 8,244
Interest expense 3,702 - 10 (10) 3,702
Non-interest income - external customers 380 513 109 - 1,002
Non-interest income - internal customers - 13 - (13) -
Operating income before income taxes 2,308 326 1,830 (1,828) 2,636
Depreciation and amortization 256 12 5 - 273
Total assets 458,163 - 55,230 (55,205) 458,188
Capital expenditures 570 - - - 570
Nine Months Ended September 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
Interest income $ 24,883 $ - $ 25 $ (25) $ 24,883
Interest expense 10,897 - 25 (25) 10,897
Non-interest income - external customers 1,186 1,868 279 - 3,333
Non-interest income - internal customers - - 39 (39) -
Operating income before income taxes 7,087 1,313 5,845 (5,905) 8,340
Depreciation and amortization 1,087 33 11 - 1,131
Total assets 477,175 - 57,288 (56,820) 477,643
Capital expenditures 1,123 - 6 - 1,129
Nine Months Ended September 30, 1998
- ----------------------------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
Interest income $ 24,308 $ - $ 27 $ (27) $ 24,308
Interest expense 10,821 - 27 (27) 10,821
Non-interest income - external customers 1,018 1,580 302 - 2,900
Non-interest income - internal customers - 39 - (39) -
Operating income before income taxes 6,551 1,030 5,234 (5,254) 7,561
Depreciation and amortization 931 36 13 - 980
Total assets 458,163 - 55,230 (55,205) 458,188
Capital expenditures 799 - 6 - 805
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 1999 was
$5,878,000, an increase of 12.2% over the $5,239,000 earned during the first
nine months of 1998. On a basic and diluted per share basis, net income totaled
$.96 for the first nine months of 1999, up 11.6% from $.86 in the 1998 period.
On an annualized basis, return on average total assets was 1.69% for the first
nine months of 1999 compared to 1.61% for the same period in 1998. Return on
average common shareholders' equity increased to 14.1% for the first nine months
of 1999 from 13.57% for the first nine months of 1998.
The Corporation's net income for the third quarter of 1999 was $1,988,000,
an increase of 8.8% over the $1,827,000 earned during the third quarter of 1998.
On a basic and diluted per share basis, net income totaled $.33 for the quarter,
up 10.0% from $.30 in 1998. On an annualized basis, return on average total
assets was 1.68% for the third quarter of 1999 compared to 1.65% for the third
quarter of 1998. Return on average common shareholders' equity increased to
14.30% in the third quarter of 1999 from 13.91% for the third quarter of 1998.
Shareholders' equity increased $1,553,000 during the first nine months of
1999 from net income of $5,878,000 less dividends paid of $2,381,000 and less a
change in net unrealized gains (losses) on securities held for sale of
$1,944,000. Common stock at September 30, 1999 was increased by $3,052,000 for
the 2-for-1 stock split effected in the form of a 100% stock dividend issued
July 1, 1999 by transfer from retained earnings.
The Corporation's growth in earnings resulted from four principal factors.
First, net interest income improved $499,000, or 3.7%, for the first nine months
of 1999 compared to the first nine months of 1998 from growth in average earning
assets by $30,975,000 and related growth in average earning liabilities by
$24,295,000 (see discussion on NET INTEREST INCOME). Second, continued good
asset quality resulted in a reduction in the provision for loan losses by
$198,000, or 29.2%, for the first nine months of 1999 compared to 1998. Third,
the 14.9% growth in non-interest income in the first nine months of 1999 over
the same period in 1998 demonstrates the continued success of the Corporation's
expanded trust and investment services and other fee income areas. Fourth, the
Corporation has controlled non-interest expenses which have grown $351,000, or
4.3%, in the first nine months of 1999 over the first nine months of 1998.
TRENDS and FUTURE EVENTS
During the first nine months of 1999, net loans increased $9,547,000 or
3.6% and deposits increased $15,275,000 or 4.3%. Repurchase agreements declined
$12,456,000, but were replaced by $13,000,000 in new, longer-term FHLB
borrowings. Repurchase agreements are used by commercial accounts to earn higher
yields on short-term funds and are volatile. Total investment securities
decreased during the first nine months of 1999 by $5,858,000 or 3.6%.
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 FRB 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 term
U.S. Treasury yields had already preceded the Federal Reserve actions by
declining from September 1998 to October 1998 in response to the global
financial crisis, losses in hedge funds and low inflation. The FRB actions in
lowering interest
rates were designed to stabilize financial markets and to offset perceived
deteriorating economic conditions caused by the global financial crisis. The FRB
increased short-term interest rates by increasing federal funds 1/4% on both
June 30 and August 24, 1999 in response to stabilized global financial markets
and tight U.S. labor conditions, and major money center banks followed by
increasing the prime rate by 1/4% on both occasions. Treasury yields had already
risen in anticipation of FRB tightening.
At the annual meeting of shareholders, held April 22, 1998, the
shareholders approved a Stock Option Plan permitting the Corporation to issue up
to a total of 150,000 shares of common stock (300,000 shares to reflect the
2-for-1 stock split), 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 Corporation'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 computers and systems dependent 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 and updated systems have been 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 $103,000
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. 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
$14,558,000 for the first nine months of 1999 compared to $13,896,000 for the
first nine months of 1998, an increase of 4.8%. The interest rate spread
decreased to 3.72% from 3.79% and the net yield on earning assets decreased to
4.41% from 4.50% in the first nine months of 1999 compared to the first nine
months of 1998, respectively. These decreases were due to a larger decline in
loan yield than deposit yield as interest rates declined and from increased
reliance on more expensive FHLB borrowings. Net interest income on a FTE basis
for the first nine months of 1999 grew $662,000 over the first nine months of
1998 in the face of the yield decreases because average interest-earning assets
increased $30,975,000 while interest-bearing liabilities only grew $24,295,000.
Growth in average non-interest bearing deposits and retained income were
primarily responsible for the greater growth in interest earning assets than
interest-bearing liabilities while the $18,868,000 increase in average loans led
the average asset growth during the 1999 period.
Net interest income on a FTE basis was $4,903,000 in the third quarter of
1999 compared to $4,694,000 in the third quarter of 1998, an increase of 4.5%.
The interest rate spread decreased to 3.68% from 3.72% and the net yield on
earning assets decreased to 4.38% from 4.45% in the third quarter of 1999
compared to the third quarter of 1998, respectively. The reasons for the
increase in net interest income on a FTE basis while experiencing net yield and
spread declines for the three months ended September 30, 1999 were similar to
the those for the nine month period ended September 30, 1999.
The following tables demonstrate fluctuations in net interest income and
the related yields for the first nine months and third quarter of 1999 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 September 30
1999 1998 1999 1998 1999 1998
-------- -------- ------- ------- ---- ----
Loans:
Commercial $ 84,187 $ 74,411 $ 5,228 $ 4,967 8.28% 8.92%
Mortgage 141,137 132,798 8,714 8,682 8.23 8.72
Consumer 53,263 52,510 3,863 3,839 9.67 9.77
-------- -------- ------- ------- ---- ----
Total loans 278,587 259,719 17,805 17,488 8.52 8.99
-------- -------- ------- ------- ---- ----
Investment securities:
U. S. Government 15,194 45,632 691 2,077 6.06 6.00
Federal agencies 87,027 69,052 4,070 3,332 6.24 6.36
State and municipal 36,295 24,022 1,846 1,317 6.78 7.23
Other investments 19,924 7,005 930 354 6.22 6.66
-------- -------- ------- ------- ---- ----
Total investment securities 158,440 145,711 7,537 7,080 6.34 6.41
-------- -------- ------- ------- ---- ----
Federal funds sold and other 2,975 3,597 113 149 5.06 5.46
-------- -------- ------- ------- ---- ----
Total interest-earning assets 440,002 409,027 25,455 24,717 7.71 8.04
------- ------- ---- ----
Other non-earning assets 24,875 24,485
-------- --------
Total assets $464,877 $433,512
======== ========
Interest-bearing deposits:
Demand $ 53,953 $ 50,551 826 928 2.04 2.45
Money market 18,248 18,616 367 407 2.68 2.92
Savings 67,805 67,382 1,333 1,489 2.62 2.95
Time 180,569 174,652 6,842 6,981 5.05 5.34
-------- -------- ------- ------- ---- ----
Total interest-bearing deposits 320,575 311,201 9,368 9,805 3.90 4.21
Federal funds purchased - 251 - 11 - 5.78
Repurchase agreements 20,692 23,785 638 803 4.11 4.51
Other borrowings 23,229 4,964 891 202 5.11 5.37
-------- -------- ------- ------- ---- ----
Total interest-bearing
liabilities 364,496 340,201 10,897 10,821 3.99 4.25
------- ------- ---- ----
Demand deposits 42,075 39,007
Other liabilities 3,163 2,834
Shareholders' equity 55,143 51,470
-------- --------
Total liabilities and
shareholders' equity $464,877 $433,512
======== ========
Interest rate spread 3.72% 3.79%
==== ====
Net interest income $14,558 $13,896
======= =======
Taxable equivalent adjustment $ 572 $ 409
======= =======
Net yield on earning assets 4.41% 4.50%
==== ====
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 September 30
1999 1998 1999 1998 1999 1998
-------- -------- ------- ------- ---- ----
Loans:
Commercial $ 84,041 $ 78,094 $ 1,754 $ 1,741 8.35% 8.84%
Mortgage 143,891 131,591 2,947 2,846 8.19 8.65
Consumer 53,148 53,532 1,294 1,319 9.74 9.78
-------- -------- ------- ------- ---- ----
Total loans 281,080 263,217 5,995 5,906 8.53 8.94
-------- -------- ------- ------- ---- ----
Investment securities:
U. S. Government 9,205 41,509 141 629 6.13 5.93
Federal agencies 94,496 73,018 1,474 1,169 6.24 6.26
State and municipal 36,339 26,912 615 486 6.77 7.07
Other investments 19,506 6,603 304 112 6.23 6.64
-------- -------- ------- ------- ---- ----
Total investment securities 159,546 148,042 2,534 2,396 6.35 6.33
-------- -------- ------- ------- ---- ----
Federal funds sold and other 7,225 6,771 94 94 5.20 5.43
-------- -------- ------- ------- ---- ----
Total interest-earning assets 447,851 418,030 8,623 8,396 7.70 7.96
------- ------- ---- ----
Other non-earning assets 24,027 24,581
-------- --------
Total assets $471,878 $442,611
======== ========
Interest-bearing deposits:
Demand $ 54,212 $ 49,069 276 295 2.04 2.39
Money market 18,358 19,538 125 145 2.72 2.94
Savings 67,073 67,186 445 499 2.65 2.95
Time 186,384 174,504 2,342 2,337 5.03 5.31
-------- -------- ------- ------- ---- ----
Total interest-bearing deposits 326,027 310,297 3,188 3,276 3.91 4.19
Federal funds purchased - - - - - -
Repurchase agreements 18,167 24,912 191 278 4.21 4.43
Other borrowings 26,309 10,985 341 148 5.18 5.27
-------- -------- ------- ------- ---- ----
Total interest-bearing
liabilities 370,503 346,194 3,720 3,702 4.02 4.24
------- ------- ---- ----
Demand deposits 43,408 40,565
Other liabilities 3,071 3,276
Shareholders' equity 54,896 52,576
-------- --------
Total liabilities and
shareholders' equity $471,878 $442,611
======== ========
Interest rate spread 3.68% 3.72%
==== ====
Net interest income $ 4,903 $ 4,694
======= =======
Taxable equivalent adjustment $ 188 $ 152
======= =======
Net yield on earning assets 4.38% 4.45%
==== ====
ASSET QUALITY
Non-performing assets include loans on which interest is no longer accrued,
loans classified as troubled debt restructurings and foreclosed properties.
Non-performing assets increased to $703,000 at September 30, 1999 from $575,000
at December 31, 1998.
Foreclosed property of $310,000 at September 30,1999 declined from $385,000
at December 31, 1998 due to sale of one of two commercial real estate
properties.
Loans in a non-accrual status at September 30, 1999 were $393,000 compared
with $190,000 at December 31, 1998. Loans on accrual status and past due 90 or
more days at September 30, 1999 were $351,000 compared with $249,000 at December
31, 1998.
Total non-performing loans and loans past due 90 days or more as a
percentage of loans were .27% at September 30, 1999 and .16% at December 31,
1998. Total non-performing loans and loans past due 90 days or more, on an
accrual status, are considered low by industry standards. Net charge-offs for
the first nine months, annualized, as a percentage of average loans was .11% in
both 1999 and 1998. These charge-off ratios are low by industry standards and
less than those experienced in calendar years 1998, 1997 and 1996.
During the first nine months of 1999 the gross amount of interest income
that would have been recorded on non-accrual loans and restructured loans at
September 30, 1999, if all such loans had been accruing interest at the original
contractual rate, was $26,000. No interest payments were recorded during the
reporting period as interest income for all such non-performing loans.
PROVISION and RESERVE FOR LOAN LOSSES
The provision for loan losses was $480,000 for the first nine months and
$120,000 for the third quarter of 1999 versus $678,000 and $203,000,
respectively, for the 1998 periods. The reserve for loan losses totaled
$4,063,000 at September 30, 1999 an increase of 6.3% over the $3,821,000
recorded at December 31, 1998. The ratio of reserves to loans, less unearned
discount, was 1.45% at September 30, 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 nine months of 1999 was $3,333,000, an
increase of 14.9% from the $2,900,000 reported in the first nine months of 1998.
The major reason for the 1999 first nine months growth in non-interest income
was an 18.2% increase in trust and investment services to $1,868,000 due to
growth in managed investment accounts. Mortgage banking income declined for the
three and nine months ended September 30, 1999 compared to the 1998 periods
because higher mortgage rates have dampened the origination of fixed rate
mortgage loans which are normally sold to generate fees. Other income for the
three and nine months ended September 30, 1999 includes a gain from the sale of
real estate owned of $63,000.
Non-interest income for the third quarter of 1999 was $1,161,000, an
increase of 15.9% from the $1,002,000 reported in the third quarter of 1998. The
major reasons for the 1999 third quarter growth in non-interest income was a
22.8% increase in trust and investment services to $630,000 due to growth in
managed investment accounts and due to the aforementioned real estate owned
gain.
NON-INTEREST EXPENSE
Non-interest expense for the first nine months of 1999 was $8,499,000, a
4.3% increase from the $8,148,000 reported for the same period last year.
Salaries increased 7.8% from the same period last year to $4,055,000 in 1999
while pension and other employee benefits decreased 15.0% to $726,000,
largely from lower medical insurance expense and reduced deferred compensation
costs. Core deposit intangible amortization of $337,000 for the first nine
months of 1999 and 1998 represents the amortization of the premium paid for
deposits acquired at Gretna in August 1995 and Yanceyville in 1996.
Non-interest expense for the third quarter of 1999 was $2,927,000, an 8.2%
increase from $2,705,000 reported for the third quarter in 1998. The Bank opened
an office in Martinsville, Virginia in September, 1999. An experienced staff led
by two senior bankers was employed in the new Martinsville office, and expenses
are up, partly due to this expansion.
INCOME TAX PROVISION
The income tax provision for the first nine months of 1999 was $2,462,000,
an increase of $140,000 from $2,322,000 reported a year earlier. The effective
tax rate for the first nine months of 1999 was 29.5% compared to 30.7% for the
first nine months of 1998. The reduction in the effective tax rate resulted from
increased investment in tax exempt 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 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, 1999 the Corporation had a ratio of 16.91% for
Tier I and a ratio of 18.16% for total capital. At December 31, 1998 these
ratios were 16.79% and 18.04%, respectively.
During the third quarter of 1999, the Corporation declared and paid a
quarterly cash dividend of $.135 per share of common stock outstanding, which
totaling $824,000. The Corporation declared a 2-for-1 stock split effected in
the form of a 100% stock dividend to shareholders of record July 1, 1999. The
number of shares outstanding after the 100% stock dividend was 6,103,466 and per
share amounts have been restated to reflect the stock dividend.
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 30,1999 were not
materially different from December 31, 1998.
The Bank's net liquid assets to net liabilities ratio was 27.2% at
September 30, 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.
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
10.1 - Agreement between American National Bank and Trust
Company and James H. Johnson, Jr. dated July 31, 1999.
10.2 - Agreement between American National Bank and Trust
Company and Earnest C. Jordan dated July 26, 1999.
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 10, 1999 President and Chief Executive Officer
/s/ T. Allen Liles
---------------------------------
T. Allen Liles
Senior Vice-President and
Date - November 10, 1999 Secretary-Treasurer (Chief Financial Officer)