-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GkhZ8t8ewjns0XM3EYOGVPTefkqatPiq7SjE2nHBv7JpiHhdm0L7VRPnG03ezNBZ G0qf5HEPqD/y8sEXUdtS4Q== 0000741516-98-000014.txt : 19981113 0000741516-98-000014.hdr.sgml : 19981113 ACCESSION NUMBER: 0000741516-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN NATIONAL BANKSHARES INC CENTRAL INDEX KEY: 0000741516 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541284688 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12820 FILM NUMBER: 98744848 BUSINESS ADDRESS: STREET 1: 628 MAIN ST STREET 2: PO BOX 191 CITY: DANVILLE STATE: VA ZIP: 24543 BUSINESS PHONE: 8047925111 MAIL ADDRESS: STREET 1: 628 MAIN STREET CITY: DANVILLE STATE: VA ZIP: 24541 10-Q 1 10-Q FOR SEPTEMBER 31, 1998 This is a conforming paper copy pursuant to Rule # 901(d) of Regulation S-T. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number 0-12820 AMERICAN NATIONAL BANKSHARES INC. (Exact name of registrant as specified in its charter) VIRGINIA 54-1284688 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 628 Main Street Danville, Virginia 24541 (Address of principal executive offices) (Zip Code) (804) 792-5111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . The number of shares outstanding of the issuer's common stock as of November 4, 1998 was 3,051,733. AMERICAN NATIONAL BANKSHARES INC. INDEX Part I. Financial Information Page No. Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997..........................................3 Consolidated Statements of Income for the three months ended September 30, 1998 and 1997..............................4 Consolidated Statements of Income for the nine months ended September 30, 1998 and 1997..............................5 Consolidated Statements of Cash Flows for the six months ended September 30, 1998 and 1997..............................6 Notes to Consolidated Financial Statements.....................7-9 Item 2. Management's Discussion and Analysis of the Financial Condition and Results of Operations....................................10-16 Part II. Other Information.................................................17 SIGNATURES ..................................................................17 EXHIBITS - Financial Data Schedule...........................................18 Consolidated Balance Sheets American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited)
September 30 December 31 1998 1997 ------------ ----------- ASSETS Cash and due from banks..............................................................$ 12,538 $ 13,386 Interest-bearing deposits in other banks............................................. 16,431 366 Investment securities: Securities available for sale (at market value)................................... 89,152 82,466 Securities held to maturity (market value of $64,838 at September 30, 1998 and $61,367 at December 31, 1997)........................... 63,258 60,611 --------- --------- Total investment securities.................................................. 152,410 143,077 --------- --------- Loans ............................................................................... 264,980 254,793 Less-- Unearned income.................................................................. (184) (343) Reserve for loan losses.......................................................... (3,739) (3,277) --------- --------- Net loans.................................................................... 261,057 251,173 --------- --------- Bank premises and equipment, at cost, less accumulated depreciation of $6,992 in 1998 and $6,350 in 1997................................ 6,676 6,514 Accrued interest receivable and other assets........................................ 9,076 9,124 --------- --------- Total assets.................................................................$458,188 $423,640 ========= ========= LIABILITIES and SHAREHOLDERS' EQUITY Liabilities: Demand deposits -- non-interest bearing............................................$ 45,360 $ 41,755 Demand deposits -- interest bearing................................................ 50,178 52,029 Money market deposits.............................................................. 19,957 17,151 Savings deposits................................................................... 68,118 69,551 Time deposits...................................................................... 174,314 171,117 --------- --------- Total deposits............................................................... 357,927 351,603 --------- --------- Federal funds purchased............................................................ - 1,500 Repurchase agreements.............................................................. 30,427 18,039 Other borrowings................................................................... 13,000 - Accrued interest payable and other liabilities..................................... 2,978 2,495 --------- --------- Total liabilities............................................................ 404,332 373,637 --------- --------- Shareholders' equity: Preferred stock, $5 par, 200,000 shares authorized, none outstanding................................................................ - - Common stock, $1 par, 10,000,000 shares authorized, 3,051,733 shares outstanding at September 30, 1998 and December 31, 1997............................................................... 3,052 3,052 Capital in excess of par value..................................................... 9,892 9,892 Retained earnings.................................................................. 39,572 36,438 Accumulated other comprehensive income - net unrealized gains on securities available for sale............................ 1,340 621 --------- --------- Total shareholders' equity................................................... 53,856 50,003 --------- --------- Total liabilities and shareholders' equity...................................$458,188 $423,640 ========= ========= The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited)
Three Months Ended September 30 ------------------ 1998 1997 ------ ------ Interest Income: Interest and fees on loans...................................................$5,898 $5,755 Interest on federal funds sold and other..................................... 94 53 Income on investment securities: U S Government............................................................. 629 893 Federal agencies........................................................... 1,169 836 State and municipal........................................................ 342 276 Other investments.......................................................... 112 103 ------ ------ Total interest income.................................................... 8,244 7,916 ------ ------ Interest Expense: Interest on deposits: Demand..................................................................... 295 354 Money market............................................................... 145 140 Savings.................................................................... 499 538 Time....................................................................... 2,337 2,383 Interest on fed funds and repos ............................................. 278 214 Interest on other borrowings................................................. 148 - ------ ------ Total interest expense..................................................... 3,702 3,629 ------ ------ Net Interest Income............................................................ 4,542 4,287 Provision for Loan Losses...................................................... 203 262 ------ ------ Net Interest Income After Provision For Loan Losses.............................................................. 4,339 4,025 ------ ------ Non-Interest Income: Trust and investment services................................................ 513 507 Service charges on deposit accounts.......................................... 243 204 Non-deposit fees and insurance commissions................................... 83 41 Mortgage banking income...................................................... 109 62 Other income................................................................. 41 21 ------ ------ Total non-interest income.................................................. 989 835 ------ ------ Non-Interest Expense: Salaries..................................................................... 1,319 1,177 Pension and other employee benefits.......................................... 279 273 Occupancy and equipment...................................................... 367 359 Postage and printing......................................................... 99 97 Core deposit intangible amortization ........................................ 112 113 Other........................................................................ 516 447 ------ ------ Total non-interest expense................................................. 2,692 2,466 ------ ------ Income Before Income Tax Provision............................................. 2,636 2,394 Income Tax Provision........................................................... 809 749 ------ ------ Net Income.....................................................................$1,827 $1,645 ====== ====== Net Income Per Common Share Basic..........................................................................$ .60 $ .54 Diluted........................................................................$ .60 $ .54 Average Common Shares Outstanding Basic......................................................................3,051,733 3,051,733 Diluted....................................................................3,052,257 3,051,733 The accompanying notes to consolidated financial statements are an integral part of these statements.
Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited)
Nine Months Ended September 30 --------------------- 1998 1997 ------- ------- Interest Income: Interest and fees on loans..................................................$17,463 $16,716 Interest on federal funds sold and other.................................... 149 114 Income on investment securities: U S Government............................................................ 2,077 3,159 Federal agencies.......................................................... 3,332 2,529 State and municipal....................................................... 933 850 Other investments......................................................... 354 307 ------- ------- Total interest income.................................................... 24,308 23,675 ------- ------- Interest Expense: Interest on deposits: Demand.................................................................... 928 1,035 Money market.............................................................. 407 426 Savings................................................................... 1,489 1,600 Time...................................................................... 6,981 7,246 Interest on fed funds purchased and repos.................................... 814 618 Interest on other borrowings................................................. 202 - ------- ------- Total interest expense................................................... 10,821 10,925 ------- ------- Net Interest Income............................................................ 13,487 12,750 Provision for Loan Losses...................................................... 678 762 ------- ------- Net Interest Income After Provision For Loan Losses............................................................. 12,809 11,988 ------- ------- Non-Interest Income: Trust and investment services................................................ 1,580 1,404 Service charges on deposit accounts.......................................... 681 586 Non-deposit fees and insurance commissions................................... 211 93 Mortgage banking income...................................................... 302 143 Other income................................................................. 91 130 ------- ------- Total non-interest income................................................ 2,865 2,356 ------- ------- Non-Interest Expense: Salaries..................................................................... 3,760 3,566 Pension and other employee benefits.......................................... 854 802 Occupancy and equipment...................................................... 1,272 1,026 Postage and printing......................................................... 340 323 Core deposit intangible amortization ........................................ 337 338 Other........................................................................ 1,550 1,468 ------- ------- Total non-interest expense............................................... 8,113 7,523 ------- ------- Income Before Income Tax Provision............................................. 7,561 6,821 Income Tax Provision........................................................... 2,322 2,095 ------- ------- Net Income.....................................................................$ 5,239 $ 4,726 ======= ======= Net Income Per Common Share Basic..........................................................................$ 1.72 $ 1.49 Diluted........................................................................$ 1.72 $ 1.49 Average Common Shares Outstanding Basic........................................................................3,051,733 3,176,208 Diluted......................................................................3,052,645 3,176,208 The accompanying notes to consolidated financial statements are an integral part of these statements.
Consolidated Statements of Cash Flows American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited)
Nine Months Ended September 30 -------------------- 1998 1997 ------- ------- Cash Flows from Operating Activities: Net income...................................................................$ 5,239 $ 4,726 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses................................................ 678 762 Depreciation............................................................. 643 495 Core deposit intangible amortization..................................... 337 338 Net amortization (accretion) of premiums and discounts on investment securities............................................... (46) (38) Gain on sale of securities............................................... - (31) Deferred income taxes benefit............................................ (248) (210) (Increase) decrease in interest receivable............................... (398) 152 Increase in other assets................................................. (14) (21) Increase (decrease) in interest payable.................................. 35 (225) Increase in other liabilities............................................ 448 569 Net cash provided by operating activities................................ 6,674 6,517 Cash Flows from Investing Activities: Proceeds from maturities, calls, and sales of securities .................... 28,918 41,855 Purchases of securities available for sale...................................(28,491) (3,000) Purchases of securities held to maturity..................................... (8,624) - Net increase in loans........................................................(10,562) (17,384) Purchases of property and equipment.......................................... (805) (536) Net cash (used in) provided by investing activities..........................(19,564) 20,935 Cash Flows from Financing Activities: Net increase in demand, money market, and savings deposits....................................................... 3,127 2,473 Net increase (decrease) in time deposits..................................... 3,197 (8,083) Net increase (decrease) in federal funds purchased and repurchase agreements.................................................. 10,888 (6,032) Net increase in borrowings................................................... 13,000 - Cash dividends paid.......................................................... (2,105) (1,871) Repurchase of stock.......................................................... - (6,240) Net cash provided by (used in) financing activities.......................... 28,107 (19,753) Net Increase in Cash and Cash Equivalents.................................... 15,217 7,699 Cash and Cash Equivalents at Beginning of Period............................. 13,752 14,822 Cash and Cash Equivalents at End of Period...................................$28,969 $22,521 Supplemental Schedule of Cash and Cash Equivalents: Cash: Cash and due from banks....................................................$12,538 $16,022 Interest-bearing deposits in other banks................................... 16,431 699 Federal funds sold......................................................... - 5,800 -------- -------- $28,969 $22,521 ======== ======== Supplemental Disclosure of Cash Flow Information: Interest paid................................................................$10,786 $11,150 Income taxes paid............................................................$ 2,150 $ 2,151 The accompanying notes to consolidated financial statements are an integral part of these statements.
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly American National Bankshares' financial position as of September 30, 1998, the results of its operations and its cash flows for the three and nine months then ended. Operating results for the three and nine month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. A summary of the Corporation's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Corporation's Annual Report to Shareholders for 1997. 2. Investment Securities The Bank classifies investment securities in one of three categories: held to maturity, available for sale and trading. Debt securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost. Securities which may be used to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital and investment requirements, or unforeseen changes in market conditions, including interest rates, market values or inflation rates, are classified as available for sale. Securities available for sale are reported at estimated fair value, with unrealized gains and losses reported as a separate component of stockholders' equity, net of tax. Gains or losses realized from the sale of securities available for sale are determined by specific identification and are included in non-interest income. Trading account securities, of which none were held on September 30, 1998 and December 31, 1997, are reported at fair value. Market adjustments, fees, gains or losses and income earned on trading account securities are included in non-interest income. Gains or losses realized from the sale of trading securities are determined by specific identification and are included in non-interest income. The Bank's investment policy currently prohibits trading account securities. Management determines the appropriate classification of securities at the time of purchase. Securities classified as held for investment are those securities that management intends to hold to maturity, subject to continued credit-worthiness of the issuer, and that the Bank has the ability to hold on a long-term basis. Accordingly, these securities are stated at cost, adjusted for amortization of premium and accretion of discount on the level yield method. Securities designated as available for sale have been adjusted to their respective market values and a corresponding adjustment made to shareholders' equity at September 30, 1998 and December 31, 1997. 3. Commitments and Contingencies The Bank has an established credit availability in the amount of $60,000,000 with the Federal Home Loan Bank of Atlanta. Borrowings outstanding under this availability were $13,000,000 and none, respectively, at September 30, 1998 and December 31, 1997. Commitments to extend credit, which amount to $72,057,000 at September 30, 1998 and $64,774,000 at December 31, 1997, represent legally binding agreements to lend to a customer with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements. Standby letters of credit are conditional commitments issued by the Bank guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. At September 30, 1998 and December 31, 1997 the Bank had $1,080,000 and $1,500,000, respectively, outstanding in standby letters of credit. 4. Merger and Acquisitions On March 14, 1996, the Corporation completed the acquisition of Mutual Savings Bank, F.S.B. (Mutual) upon the approval of the shareholders of each company. The Corporation exchanged 879,805 common shares, at an exchange ratio of .705 of a share of the Corporation's common stock, for Mutual's 1,248,100 common shares. The transaction was accounted for as a pooling of interests. The financial position and results of operations of the Corporation and Mutual were combined and the fiscal year of Mutual was conformed to the Corporation's fiscal year. In October 1996, the Corporation acquired the branch office of FirstSouth Bank located in Yanceyville, North Carolina. In addition to the branch facilities and an ATM located in Yanceyville, the Corporation acquired $4,775,000 in loans and assumed deposits of $21,405,000. This transaction was accounted for as a purchase. In conjunction with the Yanceyville purchase, the Corporation recorded a core deposit intangible of $1,516,000, approximately 7% of the deposits assumed. 5. New Accounting Pronouncements The Corporation adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), during the first quarter of 1998. This statement establishes standards for reporting a measure of all changes in equity of an enterprise that result from transactions and economic events of the period other than transactions with owners ("economic income"). SFAS No. 130 requires an enterprise to report comprehensive income in the notes to the financial statements on an interim basis. The following is a detail of comprehensive income for the three and nine months ended September 30, 1998: September 30, 1998 Three Months Nine Months Net Income $1,827,000 $5,239,000 Unrealized holding gains arising during period (net of tax expense) 655,000 719,000 __________ __________ Total comprehensive income $1,786,000 $5,958,000 The Financial Accounting Standards Board ("FASB") also issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", in September 1997, which establishes new standards for reporting information about operating segments in annual and interim financial statements. This statement also requires descriptive information about the way operating segments are determined, the products and services provided by the segments and the nature of differences between reportable segment measurements and those used for the consolidated entity. This Statement is effective for years beginning after December 15, 1997. Adoption in interim financial statements is not required until the year following initial adoption. Once adopted, however, comparative prior period information is required. The Corporation is evaluating the Statement and plans to adopt as required in 1998. Adoption is not expected to have a material impact on the Corporation. In February, 1998, FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits" ("SFAS No. 132"), an amendment of FASB Statements No. 87, 88, and 106. This Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures previously required. FASB No. 132 is effective for fiscal years beginning after December 15, 1997. The Corporation plans to adopt SFAS No. 132, as required, in 1998. Adoption is not expected to have a material impact on the Corporation. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards requiring balance sheet recognition of all derivative instruments at fair value. The Statement specifies that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows derivative gains and losses to offset related results on hedged items in the income statement. Companies must formally document, designate and assess the effectiveness of transactions utilizing hedge accounting. The statement is effective for fiscal years beginning after June 15,1999, and cannot be applied retroactively. Adoption is not expected to have a material impact on the Corporation. AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EARNINGS and CAPITAL The Corporation's net income for the first nine months of 1998 was $5,239,000, an increase of 10.9% over the $4,726,000 earned during the first nine months of 1997. On a basic and diluted per share basis, net income totaled $1.72 for the first nine months of 1998, up 15.4% from $1.49 in the 1997 period. On an annualized basis, return on average total assets was 1.61% for the first nine months of 1998 compared to 1.48% for the same period in 1997. Return on average common shareholders' equity increased to 13.57% for the first nine months of 1998 from 12.53% for the first nine months of 1997. The Corporation's net income for the third quarter of 1998 was $1,827,000, an increase of 11.1% over the $1,645,000 earned during the third quarter of 1997. On a basic and diluted per share basis, net income totaled $.60 for the quarter, up 11.1% from $.54 in 1997. On an annualized basis, return on average total assets was 1.65% for the third quarter of 1998 compared to 1.57% for the third quarter of 1997. Return on average common shareholders' equity increased to 13.91% in the third quarter of 1998 from 13.66% for the third quarter of 1997. The Corporation decreased shareholders' equity during the second quarter of 1997 with the repurchase of 228,065 shares of common stock for $6,278,000. The 7% reduction in outstanding shares of common stock during second quarter 1997 enhanced net income per share and return on equity for the first nine months of 1998 compared to the same periods in 1997. The Corporation's growth in earnings resulted from three principal factors. First, net interest income improved $737,000, or 5.8%, from a higher net interest spread in the first nine months of 1998 compared to the first nine months of 1997 (see discussion on NET INTEREST INCOME). Second, the 21.6% growth in noninterest income in the first nine months of 1998 over the same period in 1997 demonstrates the continued success of the Corporation's expanded trust and investment services, higher service charges and ATM fees and an increase in fees from originating and selling fixed rate mortgage loans. Third, the Corporation has controlled noninterest expenses which have grown less in the first nine months of 1998 than the combined growth in net interest income and noninterest income. TRENDS and FUTURE EVENTS During the first nine months of 1998, net loans increased $9,884,000 or 3.9%. The increase is the result of moderate loan demand and indicates the continuance of a healthy local economy. The increase in loans was funded by deposit growth, additional repurchase agreements and other borrowings. Total investment securities and interest-bearing deposits in other banks increased during the first nine months of 1998 by $25,398,000 or 17.7%. Total deposits increased $6,324,000 or 1.8% during the first nine months of 1998 and repurchase agreements increased $12,388,000 or 68.7% during the same period. Deposits were down $5,610,000, or 1.5%, and repurchase agreements were up $2,393,000, or 15.9%, during the first nine months of 1997. The increase in repurchase agreements reflects the trend by commercial accounts to earn higher rates on cash balances. During the third quarter of 1998, the Corporation declared a quarterly cash dividend of $.24 per share, the same as the second quarter of 1998, but an increase over the $.21 per share declared in the third quarter of 1997. The third quarter dividend was paid on September 25, 1998 to shareholders of record on September 11, 1998. On September 29, 1998 the Federal Reserve Board decreased short term interest rates by cutting federal funds by 1/4% and the major money center banks followed by lowering the prime rate by 1/4%. On October 15, 1998 the Federal Reserve decreased short term rates again by cutting federal funds and the discount rate by 1/4%, and major money center banks followed by lowering the prime rate by 1/4%. U.S. Treasury yields had already preceded the Federal Reserve action by declining more than 1% since June 1998 in response to the global financial crisis, losses in hedge funds and low inflation. The Federal Reserve action in lowering interest rate was designed to stabilize financial markets and to offset perceived deteriorating economic conditions caused by the global financial crisis. At the annual meeting of shareholders, held April 22, 1997, the shareholders approved a Stock Option Plan permitting the Corporation to issue up to a total of 150,000 shares of common stock, upon the exercise of options granted under the plan, prior to December 31, 2006. The Plan is administered by the Stock Option Committee of the Board of Directors which consists only of the Company's non-employee Directors. YEAR 2000 ISSUE The Corporation is aware of the issues associated with the programming code in existing computer systems as the millennium ("year 2000") approaches. The year 2000 problem is pervasive and complex as virtually every computer operation and many equipment systems will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Corporation is utilizing both internal and external resources to identify, correct or reprogram, and test systems for year 2000 compliance. It is anticipated that all reprogramming and testing will be completed by March 31,1999, allowing additional time for testing on reprogrammed systems. To date, successful Year 2000 testing has been completed by most of the Corporation's mission critical vendors, and the Corporation has tested many of these mission critical systems. An educational process has been implemented to assist and assure that major customers are year 2000 compliant. Based on a preliminary study, the Corporation expects to spend approximately $125,000 in 1998 and 1999 to modify its computer information systems enabling proper processing of transactions relating to the year 2000 and beyond. The amount expensed in the first nine months of 1998 was immaterial. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis was $13,896,000 for the first nine months of 1998 compared to $13,109,000 for the first nine months of 1997, an increase of 6.0%. The interest rate spread increased to 3.79% from 3.60% and the net yield on earning assets increased to 4.50% from 4.34% in the first nine months of 1998 compared to the first nine months of 1997, respectively. These increases were due to higher yielding interest-earning assets and lower paying interest-bearing liabilities and because higher yielding average loan balances rose while lower yielding average investment balances declined. Net interest income on a fully taxable equivalent ("FTE") basis was $4,694,000 in the third quarter of 1998 compared to $4,404,000 in the third quarter of 1997, an increase of 6.6%. The interest rate spread increased to 3.72% from 3.69% and the net yield on earning assets increased to 4.45% from 4.41% in the third quarter of 1998 compared to the third quarter of 1997, respectively. The following tables demonstrate fluctuations in net interest income and the related yields for the first nine months and third quarter of 1998 compared to similar prior year periods. The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis. (In thousands, except rates):
Interest Average Balance Income/Expense Yield/Rate For nine months ended Sept 30 1998 1997 1998 1997 1998 1997 -------- -------- ------- ------- ------ ------ Loans: Commercial $ 74,411 $ 65,150 $ 4,967 $ 4,482 8.92% 9.20% Mortgage 132,798 130,210 8,682 8,437 8.72 8.64 Consumer 52,510 52,742 3,839 3,826 9.77 9.70 -------- -------- ------- ------- ------ ------ Total loans 259,719 248,102 17,488 16,745 8.99 9.01 -------- -------- ------- ------- ------ ------ Investment securities: U. S. Government 45,632 70,253 2,077 3,159 6.00 5.93 Federal agencies 69,052 51,922 3,332 2,529 6.36 6.42 State and municipal 24,022 21,252 1,317 1,180 7.23 7.32 Other investments 7,005 5,861 354 307 6.66 6.91 -------- -------- ------- ------- ------ ------ Total investment securities 145,711 149,288 7,080 7,175 6.41 6.34 -------- -------- ------- ------- ------ ------ Federal funds sold and other 3,597 2,780 149 114 5.46 5.41 -------- -------- ------- ------- ------ ------ Total interest-earning assets 409,027 400,170 24,717 24,034 8.04 7.99 -------- -------- ------- ------- ------ ------ Other non-earning assets 24,485 24,199 -------- -------- Total assets $433,512 $424,369 ======== ======== Interest-bearing deposits: Demand $ 50,551 $ 48,003 928 1,035 2.45 2.88 Money market 18,616 19,408 407 426 2.92 2.93 Savings 67,382 70,201 1,489 1,600 2.95 3.05 Time 174,652 177,809 6,981 7,246 5.34 5.45 -------- -------- ------- ------- ------ ------ Total interest-bearing deposits 311,201 315,421 9,805 10,307 4.21 4.37 Federal funds purchased 251 941 11 40 5.78 5.61 Repurchase agreements 23,785 16,570 803 578 4.51 4.66 Other borrowings 4,964 - 202 - 5.37 - -------- -------- ------- ------- ------ ------ Total interest-bearing liabilities 340,201 332,932 10,821 10,925 4.25 4.39 ------- ------- ------ ------ Demand deposits 39,007 38,384 Other liabilities 2,834 2,743 Shareholders' equity 51,470 50,310 -------- -------- Total liabilities and shareholders' equity $433,512 $424,369 ======== ======== Interest rate spread 3.79% 3.60% ====== ====== Net interest income 13,896 13,109 ======= ======= Taxable equivalent adjustment 409 359 ======= ======= Net yield on earning assets 4.50% 4.34% ====== ======
The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis. (In thousands, except rates):
Interest Average Balance Income/Expense Yield/Rate For three months ended Sept 30 1998 1997 1998 1997 1998 1997 -------- -------- ------- ------- ------ ------ Loans: Commercial $ 78,094 $ 64,708 $ 1,741 $ 1,511 8.84% 9.26% Mortgage 131,591 135,138 2,846 2,930 8.65 8.67 Consumer 53,532 53,856 1,319 1,323 9.78 9.75 -------- -------- ------- ------- ------ ------ Total loans 263,217 253,702 5,906 5,764 8.94 9.05 Investment securities: U. S. Government 41,509 59,963 629 893 5.93 5.83 Federal agencies 73,018 51,565 1,169 836 6.26 6.34 State and municipal 26,912 20,851 486 384 7.07 7.21 Other investments 6,603 5,848 112 103 6.64 6.89 -------- -------- ------- ------- ------ ------ Total investment securities 148,042 138,227 2,396 2,216 6.33 6.27 -------- -------- ------- ------- ------ ------ Federal funds sold and other 6,771 3,856 94 53 5.43 5.38 -------- -------- ------- ------- ------ ------ Total interest-earning assets 418,030 395,785 8,396 8,033 7.96 8.05 ------- ------- ------ ------ Other non-earning assets 24,581 24,776 -------- -------- Total assets $442,611 $420,561 ======== ======== Interest-bearing deposits: Demand $ 49,069 $ 48,782 295 354 2.39 2.88 Money market 19,538 18,922 145 140 2.94 2.94 Savings 67,186 69,928 499 538 2.95 3.05 Time 174,504 174,679 2,337 2,383 5.31 5.41 -------- -------- ------- ------- ------ ------ Total interest-bearing deposits 310,297 312,311 3,276 3,415 4.19 4.34 Federal funds purchased - 243 - 4 - 6.44 Repurchase agreements 24,912 17,583 278 210 4.43 4.74 Other borrowings 10,985 - 148 - 5.27 - -------- -------- ------- ------- ------ ------ Total interest-bearing liabilities 346,194 330,137 3,702 3,629 4.24 4.36 ------- ------- ------ ------ Demand deposits 40,565 39,681 Other liabilities 3,276 2,546 Shareholders' equity 52,576 48,197 -------- -------- Total liabilities and shareholders' equity $442,611 $420,561 ======== ======== Interest rate spread 3.72% 3.69% ====== ====== Net interest income 4,694 4,404 ======= ======= Taxable equivalent adjustment 152 117 ======= ======= Net yield on earning assets 4.45% 4.41% ====== ======
ASSET QUALITY Nonperforming assets include loans on which interest is no longer accrued, loans classified as troubled debt restructurings and foreclosed properties. Nonperforming assets declined from $778,000 at December 31, 1997 to $659,000 at September 30, 1998. Foreclosed properties of $385,000 at September 30,1998 and December 31, 1997 include two commercial real estate properties. Loans in a nonaccrual status at September 30, 1998 were $274,000 compared with $393,000 at December 31, 1997. Loans on accrual status and past due 90 or more at September 30, 1998 were $256,000 compared with $181,000 at December 31, 1997. Total nonperforming loans and loans past due 90 days or more as a percentage of net loans were .2% at September 30, 1998 and .2% at December 31, 1997. Total nonperforming loans and loans past due 90 days or more, on an accrual status, are considered low by industry standards. Net charge-offs for the first nine months of 1998 as a percentage of average loans declined to .08 % in 1998 from .11 % in the first nine months of 1997. These charge-off ratios are low by industry standards. During the first nine months of 1998 the gross amount of interest income that would have been recorded on nonaccrual loans and restructured loans at September 30, 1998, if all such loans had been accruing interest at the original contractual rate, was $12,000. No interest payments were recorded during the reporting period as interest income for all such nonperforming loans. PROVISION and RESERVE FOR LOAN LOSSES The provision for loan losses was $678,000 for the first nine months and $203,000 for the third quarter of 1998 versus $762,000 and $262,000, respectively, for the 1997 periods. The reserve for loan losses totaled $3,739,000 at September 30, 1998 an increase of 14.1% over the $3,277,000 recorded at December 31, 1997. The ratio of reserves to loans, less unearned discount, was 1.41% at September 30, 1998 and 1.29% at December 31, 1997. In Management's opinion, the current reserve for loan losses is adequate. NON-INTEREST INCOME Non-interest income for the first nine months of 1998 was $2,865,000, an increase of 21.6% from the $2,356,000 reported in the first nine months of 1997. The major reasons for the 1998 first nine months growth in non-interest income were a 12.5% increase in trust and investment services to $1,580,000 due to growth in managed investment accounts and an increase in mortgage banking income of 111.2% to $302,000 due to increased origination and sale of fixed rate residential mortgage loans. Service charges on deposit accounts were $681,000 for the first nine months of 1998, up 16.2% over the first nine months of 1997 while non-deposit fees and insurance commissions were up 126.9% to $211,000 due primarily to increased non-customer ATM fees. Non-interest income for the third quarter of 1998 was $989,000, an increase of 18.4% from the $835,000 reported in the third quarter of 1997. The major reasons for the 1998 third quarter growth in non-interest income were higher service charges on deposit accounts, increased non-deposit fees, and increased mortgage-banking income. Service charges on deposit accounts were $243,000 for the third quarter of 1998, up 19.1% over the third quarter of 1997 while non-deposit fees and insurance commissions were up 102.4% to $83,000 due largely to increased non-customer ATM fees. Mortgage banking income increased 75.8% to $109,000 in the third quarter of 1998 compared to the same quarter in 1997 due to increased origination and sale of fixed rate residential mortgage loans. NON-INTEREST EXPENSE Non-interest expense for the first nine months of 1998 was $8,113,000, a 7.8% increase from the $7,523,000 reported for the same period last year. Salaries increased 5.4% from the same period last year to $3,760,000 in 1998 while pension and other employee benefits increased 6.5% to $854,000, largely from increased medical insurance. Occupancy and equipment expense increased 24.0% to $1,272,000 due to depreciation and maintenance on new technology equipment and increased license fees on existing equipment. Core deposit intangible amortization of $337,000 for the first nine months of 1998 and 1997 represents the amortization of the premium paid for deposits acquired at Gretna in August 1995 and Yanceyville in October 1996. Other non-interest expense increased 5.6% to $1,550,000 in the first nine months of 1998 over the same period in 1997 due to additional sales and technology training. Non-interest expense for the third quarter of 1998 was $2,692,000, a 9.2% increase from the $2,466,000 reported for the same period last year. Salaries increased to $1,319,000 in the third quarter of 1998, a 12.1% increase from the same period last year. Additional incentive compensation of $64,000, which has traditionally been recorded in the fourth quarter, represented 5.4% of the 12% increase in salaries. Pension and other employee benefits and occupancy and equipment expense increased 2.2% in the third quarter from the same period last year. Other non-interest expense increased 15.4% to $516,000 in the third quarter of 1998 from the same prior year period. Increased sales and technology training of $49,000 represented 11% of the 15.4% increased other non-interest expense. INCOME TAX PROVISION The income tax provision for the first nine months of 1998 was $2,322,000, an increase of $227,000 from the $2,095,000 reported a year earlier. The effective tax rate for the first nine months of 1998 and 1997 was 30.7%. CAPITAL MANAGEMENT Federal regulatory risk-based capital ratio guidelines require percentages to be applied to various assets including off-balance-sheet assets in relation to their perceived risk. Tier I capital includes shareholders' equity and Tier II capital includes certain components of nonpermanent preferred stock and subordinated debt. The Corporation has no nonpermanent preferred stock or subordinated debt. Banks and bank holding companies must have a Tier I capital ratio of at least 4% and a total ratio, including Tier I and Tier II capital, of at least 8%. As of September 30, 1998 the Corporation had a ratio of 17.1% for Tier I and a ratio of 18.3% for total capital. At December 31, 1997 these ratios were 17.1% and 18.4%, respectively. A cash dividend of $.24 per share was paid on 3,051,733 shares of common stock outstanding on September 25, 1998 to shareholders of record September 11, 1998. This dividend totaled $732,400. MARKET RISK MANAGEMENT The effective management of market risk is essential to achieving the Corporation's objectives. As a financial institution, interest rate risk and its impact on net interest income is the primary market risk exposure. The Asset/Liability Investment Committee ("ALCO") is primarily responsible for establishing asset and liability strategies and for monitoring and controlling liquidity and interest rate risk. ALCO uses computer simulation analysis to measure the sensitivity of earnings and market value of equity to changes in interest rates. The projected changes in net interest income and market value of portfolio equity ("MVE") to changes in interest rates are calculated and monitored by ALCO as indicators of interest rate risk. The projected changes in net interest income and MVE to changes in interest rates at September 30, 1998 were not materially different from December 31, 1997. The Corporation's net liquid assets to net liabilities ratio was 26.6% at September 30, 1998 and 27.2% at December 31, 1997. Both of these ratios are considered to reflect adequate liquidity for the respective periods. Management constantly monitors and plans the Corporation's liquidity position for future periods. Liquidity is provided from cash and due from banks, federal funds sold, interest-bearing deposits in other banks, repayments from loans, seasonal increases in deposits, lines of credit from two correspondent banks and two federal agency banks and a planned structured continuous maturity of investments. Management believes that these factors provide sufficient and timely liquidity for the foreseeable future. PART II OTHER INFORMATION Item: 1. Legal Proceedings None 2. Changes in securities None 3. Defaults upon senior securities None 4. Results of votes of security holders None 5. Other information None 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN NATIONAL BANKSHARES INC. /s/ Charles H. Majors ------------------------------------- Charles H. Majors Date - November 12, 1998 President and Chief Executive Officer /s/ T. Allen Liles ------------------------------------- T. Allen Liles Senior Vice-President and Date - November 12, 1998 Secretary-Treasurer (Chief Financial Officer) EX-27 2 FDS FOR SEPTEMBER 30, 1998
9 0000741516 American National Bankshares Inc. 1000 3-MOS 6-MOS 9-MOS YEAR DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998 JAN-01-1998 APR-01-1998 JUL-01-1998 JAN-01-1998 MAR-31-1998 JUN-30-1998 SEP-30-1998 SEP-30-1998 13,979 13,043 12,538 12,538 20 80 16,431 16,431 0 0 0 0 0 0 0 0 86,311 84,352 89,152 89,152 61,311 60,715 63,258 63,258 62,227 61,685 64,838 64,838 258,779 260,455 264,980 264,980 3,465 3,637 3,739 3,739 432,233 430,555 458,188 458,188 353,903 347,629 357,927 357,927 0 6,025 0 0 27,278 21,795 33,405 33,405 0 3,000 13,000 13,000 0 0 0 0 0 0 0 0 3,052 3,052 3,052 3,052 48,000 49,054 50,804 50,804 432,233 430,555 458,188 458,188 5,743 5,822 5,898 17,463 2,185 2,259 2,252 6,696 43 12 94 149 7,971 8,093 8,244 24,308 3,263 3,266 3,276 9,805 3,532 3,587 3,702 10,821 4,439 4,506 4,542 13,487 252 223 203 678 0 0 0 0 2,673 2,748 2,692 8,113 2,410 2,515 2,636 7,561 2,410 2,515 2,636 7,561 0 0 0 0 0 0 0 0 1,661 1,751 1,827 5,239 .54 .58 .60 1.72 .54 .58 .60 1.72 4.55 4.55 4.45 4.50 107 99 274 274 205 38 256 256 0 0 0 0 0 0 0 0 3,277 3,465 3,637 3,277 103 78 132 313 39 27 31 97 3,465 3,637 3,739 3,739 2,416 2,511 2,441 2,441 0 0 0 0 1,049 1,126 1,298 1,298
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