-----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, E7fARK9/tfR9OjJORq+/G2YRWrFG8dks1Uu5K2OGxck4prvRcBnF8GbN6mbj5YGj vSJKdYgieiSRKFPpYCWXhA== 0000741516-01-500019.txt : 20010813 0000741516-01-500019.hdr.sgml : 20010813 ACCESSION NUMBER: 0000741516-01-500019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 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: 1934 Act SEC FILE NUMBER: 000-12820 FILM NUMBER: 1704021 BUSINESS ADDRESS: STREET 1: 628 MAIN ST CITY: DANVILLE STATE: VA ZIP: 24543 BUSINESS PHONE: 8047925111 MAIL ADDRESS: STREET 1: 628 MAIN STREET CITY: DANVILLE STATE: VA ZIP: 24543 10-Q 1 june200110q.txt 10-Q AMERICAN NATIONAL BANKSHARES INC 06/30/2001 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 June 30, 2001 -------------- [ ] 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 August 8, 2001 was 5,914,956. AMERICAN NATIONAL BANKSHARES INC. INDEX
Page No. Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000....................................................... 3 Consolidated Statements of Income for the three months ended June 30, 2001 and 2000............................................... 4 Consolidated Statements of Income for the six months ended June 30, 2001 and 2000............................................... 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000............................................... 6 Notes to Consolidated Financial Statements.................................... 7-10 Item 2. Management's Discussion and Analysis of the Financial Condition and Results of Operations..................................................... 11-17 Part II. Other Information............................................................... 18 SIGNATURES ................................................................................ 18
2 Consolidated Balance Sheets American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ----------------------------------------------------------------------------------------------------------
June 30 December 31 2001 2000 ---------- ----------- ASSETS Cash and due from banks.........................................................$ 15,734 $ 16,393 Interest-bearing deposits in other banks........................................ 379 8,678 Investment securities: Securities available for sale (at market value)............................. 125,039 120,353 Securities held to maturity (market value of $41,744 at June 30, 2001 and $42,920 at December 31, 2000)........................... 40,997 42,576 ---------- ---------- Total investment securities................................................... 166,036 162,929 ---------- ---------- Loans, net of unearned income .................................................. 367,899 339,756 Less allowance for loan losses.................................................. (5,151) (4,746) ---------- ---------- Net loans..................................................................... 362,748 335,010 ---------- ---------- Bank premises and equipment, at cost, less accumulated depreciation of $9,097 in 2001 and $8,421 in 2000............................. 7,979 7,868 Accrued interest receivable and other assets.................................... 10,668 10,511 ---------- ---------- Total assets..................................................................$ 563,544 $ 541,389 ========== ========== LIABILITIES and SHAREHOLDERS' EQUITY Liabilities: Demand deposits -- non-interest bearing.......................................$ 55,306 $ 54,496 Demand deposits -- interest bearing........................................... 55,795 58,273 Money market deposits......................................................... 39,375 32,480 Savings deposits.............................................................. 62,274 61,586 Time deposits................................................................. 230,302 219,753 ---------- ---------- Total deposits................................................................ 443,052 426,588 ---------- ---------- Repurchase agreements........................................................... 27,609 31,730 FHLB borrowings................................................................. 25,005 16,000 Accrued interest payable and other liabilities.................................. 3,632 3,733 ---------- ---------- Total liabilities............................................................. 499,298 478,051 ---------- ---------- Shareholders' equity: Preferred stock, $5 par, 200,000 shares authorized, none outstanding............................................................ - - Common stock, $1 par, 10,000,000 shares authorized, 5,905,956 shares outstanding at June 30, 2001 and 6,063,772 shares outstanding at December 31, 2000....................... 5,906 6,064 Capital in excess of par value................................................ 9,577 9,831 Retained earnings............................................................. 47,530 47,120 Accumulated other comprehensive income - net unrealized gains on securities available for sale....................... 1,233 323 ---------- ---------- Total shareholders' equity.................................................... 64,246 63,338 ---------- ---------- Total liabilities and shareholders' equity....................................$ 563,544 $ 541,389 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 3
Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ------------------------------------------------------------------------------------------------------
Three Months Ended June 30 -------------------- 2001 2000 ------- ------- Interest Income: Interest and fees on loans....................................................$ 7,714 $ 6,904 Interest on deposits in other banks........................................... 68 18 Income on investment securities: U S Government.............................................................. - 59 Federal agencies............................................................ 1,446 1,654 State and municipal......................................................... 482 490 Other investments........................................................... 481 372 ------- ------- Total interest income......................................................... 10,191 9,497 ------- ------- Interest Expense: Interest on deposits: Demand...................................................................... 117 258 Money market................................................................ 343 194 Savings..................................................................... 288 428 Time........................................................................ 3,326 2,600 Interest on repurchase agreements............................................. 284 284 Interest on other borrowings.................................................. 214 415 ------- ------- Total interest expense........................................................ 4,572 4,179 ------- ------- Net Interest Income............................................................. 5,619 5,318 Provision for Loan Losses....................................................... 273 335 ------- ------- Net Interest Income After Provision For Loan Losses............................................................... 5,346 4,983 ------- ------- Non-Interest Income: Trust and investment services................................................. 660 625 Service charges on deposit accounts........................................... 365 275 Other fees and commissions.................................................... 197 145 Mortgage banking income....................................................... 107 56 Securities gains, net......................................................... 180 - Other income.................................................................. 63 41 ------- ------- Total non-interest income..................................................... 1,572 1,142 ------- ------- Non-Interest Expense: Salaries...................................................................... 1,625 1,489 Pension and other employee benefits........................................... 366 307 Occupancy and equipment....................................................... 561 498 Postage and printing.......................................................... 124 109 Core deposit intangible amortization ......................................... 113 113 Other......................................................................... 665 581 ------- ------- Total non-interest expense.................................................... 3,454 3,097 ------- ------- Income Before Income Tax Provision.............................................. 3,464 3,028 Income Tax Provision............................................................ 1,014 848 ------- ------- Net Income......................................................................$ 2,450 $ 2,180 ======= ======= - ---------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic...........................................................................$ .41 $ .36 Diluted.........................................................................$ .41 $ .36 - ---------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Basic...........................................................................5,999,771 6,103,772 Diluted.........................................................................6,030,203 6,105,111 - ------------------------------------------------------------------------------------------------------ The accompanying notes to consolidated financial statements are an integral part of these statements. 4
Consolidated Statements of Income American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - ------------------------------------------------------------------------------------------------------
Six Months Ended June 30 -------------------- 2001 2000 ------- ------- Interest Income: Interest and fees on loans.....................................................$15,424 $13,340 Interest on deposits in other banks........................................... 189 70 Income on investment securities: U S Government.............................................................. - 168 Federal agencies............................................................ 3,011 3,303 State and municipal......................................................... 962 978 Other investments........................................................... 908 705 ------- ------- Total interest income......................................................... 20,494 18,564 ------- ------- Interest Expense: Interest on deposits: Demand...................................................................... 282 522 Money market................................................................ 734 383 Savings..................................................................... 614 855 Time........................................................................ 6,619 5,119 Interest on repurchase agreements............................................. 612 558 Interest on other borrowings.................................................. 426 692 ------- ------- Total interest expense........................................................ 9,287 8,129 ------- ------- Net Interest Income............................................................. 11,207 10,435 Provision for Loan Losses....................................................... 535 550 ------- ------- Net Interest Income After Provision For Loan Losses............................................................... 10,672 9,885 ------- ------- Non-Interest Income: Trust and investment services................................................. 1,320 1,317 Service charges on deposit accounts........................................... 661 525 Other fees and commissions.................................................... 384 273 Mortgage banking income....................................................... 190 118 Securities gains, net......................................................... 350 - Other income.................................................................. 114 84 ------- ------- Total non-interest income..................................................... 3,019 2,317 ------- ------- Non-Interest Expense: Salaries...................................................................... 3,255 2,951 Pension and other employee benefits........................................... 721 588 Occupancy and equipment....................................................... 1,140 1,005 Postage and printing.......................................................... 259 232 Core deposit intangible amortization ......................................... 225 225 Other......................................................................... 1,316 1,219 ------- ------- Total non-interest expense.................................................... 6,916 6,220 ------- ------- Income Before Income Tax Provision.............................................. 6,775 5,982 Income Tax Provision............................................................ 2,007 1,687 ------- ------- Net Income......................................................................$ 4,768 $ 4,295 ======= ======= - ---------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic...........................................................................$ .79 $ .70 Diluted.........................................................................$ .79 $ .70 - ---------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Basic...........................................................................6,021,854 6,103,756 Diluted.........................................................................6,044,298 6,110,305 - ------------------------------------------------------------------------------------------------------ The accompanying notes to consolidated financial statements are an integral part of these statements. 5
Consolidated Statements of Cash Flows American National Bankshares Inc. and Subsidiary (In Thousands) (Unaudited) - --------------------------------------------------------------------------------------------------------
Six Months Ended ------------------------ June 30 2001 2000 --------- --------- Cash Flows from Operating Activities: Net income....................................................................$ 4,768 $ 4,295 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses................................................... 535 550 Depreciation................................................................ 578 501 Core deposit intangible amortization........................................ 225 225 Amortization (accretion) of premiums and discounts on investment securities.................................................. 17 (23) Gain on sale of securities.................................................. (350) - Gain on sale of loans....................................................... (190) (118) Deferred income taxes benefit............................................... (243) (212) Increase in interest receivable............................................. (203) (492) Increase in other assets.................................................... (320) (331) Increase in interest payable................................................ 8 16 Decrease in other liabilities............................................... (109) (349) --------- --------- Net cash provided by operating activities................................... 4,716 4,062 --------- --------- Cash Flows from Investing Activities: Proceeds from maturities, calls, and sales of securities ..................... 39,976 10,314 Purchases of securities available for sale.................................... (41,069) (7,504) Purchases of securities held to maturity...................................... (302) - Net increase in loans......................................................... (28,083) (25,289) Purchases of real estate owned................................................ (85) - Purchases of property and equipment........................................... (689) (188) --------- --------- Net cash used in investing activities......................................... (30,252) (22,667) --------- --------- Cash Flows from Financing Activities: Net increase in demand, money market, and savings deposits........................................................ 5,915 1,676 Net increase in time deposits................................................. 10,549 2,336 Net (decrease) increase in repurchase agreements.............................. (4,121) 3,281 Net increase in Federal Home Loan Bank borrowings............................. 9,005 10,430 Cash dividends paid........................................................... (1,928) (1,741) Repurchase of stock........................................................... (2,844) - Proceeds from exercise of stock options....................................... 2 1 --------- --------- Net cash provided by financing activities..................................... 16,578 15,983 --------- --------- Net Decrease in Cash and Cash Equivalents....................................... (8,958) (2,622) Cash and Cash Equivalents at Beginning of Period................................ 25,071 17,291 --------- --------- Cash and Cash Equivalents at End of Period......................................$ 16,113 $ 14,669 ========= ========= Supplemental Schedule of Cash and Cash Equivalents: Cash: Cash and due from banks.....................................................$ 15,734 $ 13,849 Interest-bearing deposits in other banks.................................... 379 820 --------- --------- $ 16,113 $ 14,669 ========= ========= Supplemental Disclosure of Cash Flow Information: Interest paid.................................................................$ 9,279 $ 8,114 Income taxes paid.............................................................$ 2,199 $ 1,819 The accompanying notes to consolidated financial statements are an integral part of these statements. 6
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 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 June 30, 2001, the results of its operations and its cash flows for the three and six months then ended. Operating results for the three and six month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The consolidated financial statements include the amounts and results of operations of American National Bankshares Inc. ("the Corporation") and its wholly owned subsidiary, American National Bank and Trust Company ("the Bank") and the Bank's two subsidiaries, ANB Mortgage Corp. and ANB Services Corp. A summary of the Corporation's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Corporation's 2000 Annual Report on Form 10-K. This report contains forward-looking statements with respect to the financial condition, results of operations and business of the Corporation and Bank. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Corporation and Bank and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ materially from those expected include the following: o General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances. o Changes in interest rates could reduce net interest income. o Competitive pressures among financial institutions may increase. o Legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses that the Corporation and Bank are engaged in. 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. 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. The Corporation does not permit the purchase or sale of trading account securities. Premiums and discounts on investment securities are amortized using the interest method. 7 3. Commitments and Contingencies ----------------------------- The Bank had credit availability of 15% of assets, approximately $83,283,000 with the Federal Home Loan Bank of Atlanta at June 30, 2001. Borrowings outstanding under this availability were $25,005,000 and $16,000,000 respectively, at June 30, 2001 and December 31, 2000. Commitments to extend credit, which amount to $93,899,000 at June 30, 2001 and $85,489,000 at December 31, 2000, represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements. There were no commitments at June 30, 2001 and $800,000 commitments at December 31, 2000 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 June 30, 2001 and December 31, 2000, the Bank had $951,000 and $1,531,000, respectively, in outstanding standby letters of credit. 4. 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 six months ended June 30, 2001 and 2000:
Three Months Ended Six Months Ended June 30 June 30 ----------------------- ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ----------- Net Income $2,450,000 $2,180,000 $4,768,000 $4,295,000 Unrealized holding gains (losses) arising during period (net of tax expense) 79,000 122,000 910,000 (274,000) ---------- ---------- ---------- ----------- Total Comprehensive Income $2,529,000 $2,302,000 $5,678,000 $4,021,000 ========== ========== ========== ===========
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards requiring balance sheet recognition of all derivative instruments at fair value. SFAS No. 133 was subsequently amended by SFAS No. 137 in June 1999 and by SFAS No. 138 in June 2000. The statement, as amended, specifies that changes in the fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows derivative gains and losses to offset related results on hedged items in the income statement. Companies must formally document, designate and assess the effectiveness of transactions utilizing hedge accounting. The statement is effective for fiscal years beginning after June 15, 2000. Adoption did not have a material impact on the Corporation. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". This statement revises the criteria for accounting for securitizations, other financial-assets transfers and collateral and introduces new disclosures. This statement is effective for fiscal years ending after March 31, 2001. The adoption of this statement is not expected to have a material effect on the Corporation's consolidated financial statements. 8 In June 2001 the Financial Accounting Standards Board approved Statement of Financial Accounting Standard No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill will cease on December 31, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below is carrying value. The Company is in the process of evaluating the financial statement impact of adoption of SFAS No. 142. 5. Segment and Related Information ------------------------------- The Corporation adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", in 1998. Reportable segments include community banking and trust and investment services. Community banking involves making loans to and generating deposits from individuals and businesses in the markets where the Bank has offices. All assets and liabilities of the Bank are allocated to community banking. Investment income from fixed income investments is a major source of income in addition to loan interest income. Service charges from deposit accounts and non-deposit fees such as automatic teller machine fees and insurance commissions generate additional income for community banking. Trust and investment services includes estate and trust planning and administration and investment management for various entities. The trust and investment services division of the Bank manages trusts, estates and purchases equity, fixed income and mutual fund investments for customer accounts. The trust and investment services division receives fees for investment and administrative services. Fees are also received by this division for individual retirement accounts managed for the community banking segment. Segment information for the three and six months ended June 30, 2001 and 2000 is shown in the following table (in thousands). The "Other" column includes corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments. 9 Three Months Ended June 30, 2001 - ------------------------------------------------------------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ----- ------------ ----- Interest income $ 10,191 $ - $ 8 $ (8) $ 10,191 Interest expense 4,572 - 8 (8) 4,572 Non-interest income - external customers 735 660 177 - 1,572 Non-interest income - internal customers - 13 - (13) - Operating income before income taxes 2,891 410 2,508 (2,345) 3,464 Depreciation and amortization 382 17 3 - 402 Total assets 563,407 - 65,452 (65,315) 563,544 Capital expenditures 335 - - - 335
Three Months Ended June 30, 2000 - ------------------------------------------------------------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ----- ------------ ----- Interest income $ 9,497 $ - $ 3 $ (3) $ 9,497 Interest expense 4,179 - 3 (3) 4,179 Non-interest income - external customers 443 624 75 - 1,142 Non-interest income - internal customers - 14 - (14) - Operating income before income taxes 2,648 435 2,138 (2,193) 3,028 Depreciation and amortization 342 18 4 - 364 Total assets 510,927 - 60,214 (60,079) 511,062 Capital expenditures 142 - 2 - 144 Six Months Ended June 30, 2001 - ------------------------------------------------------------------------------------------------------------------------ Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ----- ------------ ----- Interest income $ 20,494 $ - $ 14 $ (14) $ 20,494 Interest expense 9,287 - 14 (14) 9,287 Non-interest income - external customers 1,390 1,320 309 - 3,019 Non-interest income - internal customers - 27 - (27) - Operating income before income taxes 5,845 814 4,816 (4,700) 6,775 Depreciation and amortization 764 34 5 - 803 Total assets 563,407 - 65,452 (65,315) 563,544 Capital expenditures 673 16 - - 689
Six Months Ended June 30, 2000 - ------------------------------------------------------------------------------------------------------------------------
Trust and Community Investment Intersegment Banking Services Other Eliminations Total --------- ---------- ----- ------------ ----- Interest income $ 18,564 $ - $ 9 $ (9) $ 18,564 Interest expense 8,129 - 9 (9) 8,129 Non-interest income - external customers 852 1,317 148 - 2,317 Non-interest income - internal customers - 27 - (27) - Operating income before income taxes 5,187 924 4,203 (4,332) 5,982 Depreciation and amortization 691 27 8 - 726 Total assets 510,927 - 60,214 (60,079) 511,062 Capital expenditures 183 - 5 - 188 10
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 six months of 2001 was $4,768,000, an increase of 11.0% over the $4,295,000 earned during the first half of 2000. On a basic and diluted per share basis, net income totaled $.79 for the first six months of 2001, up 12.9% from $.70 in the 2000 period. On an annualized basis, return on average total assets was 1.74% for the first half of 2001 compared to 1.72% for the same period in 2000. Return on average common shareholders' equity was 14.79% and 14.88% for the first six months of 2001 and 2000, respectively. The Corporation's net income for the second quarter of 2001 was $2,450,000, an increase of 12.4% over the $2,180,000 earned during the second quarter of 2000. On a basic and diluted per share basis, net income totaled $.41 for the quarter, up 13.9% from $.36 in 2000. On an annualized basis, return on average total assets was 1.77% for the second quarter of 2001 compared to 1.73% for the second quarter of 2000. Return on average common shareholders' equity was 15.03% and 14.98% in the second quarter of 2001 and 2000,respectively. Shareholders' equity increased $908,000 during the first half of 2001 from net income of $4,768,000, an increase of $910,000 in unrealized gains on securities available for sale, exercise of stock options of $2,000, less dividends paid of $1,928,000, and less repurchases of stock of $2,844,000. The Corporation's growth in earnings resulted from two principal factors. First, net interest income after provision for loan losses improved $787,000, or 8.0%, for the first half of 2001 compared to the first half of 2000 from growth of $46,713,000 in average interest-earning assets and growth of $37,996,000 in average interest-bearing liabilities in the first half of 2001compared to the first half of 2000. Second, non-interest income increased $702,000, or 30.3%, in the second half of 2001 compared to the second half of 2000. TRENDS and FUTURE EVENTS During the first six months of 2001, net loans increased $27,738,000 or 8.3%. Approximately 75% of the increase in loans was originated in two recently opened offices in Martinsville and South Boston, Virginia and through loan participations with another bank in a nearby market. The increase in loans was funded by increased deposits and borrowings from the Federal Home Loan Bank of Atlanta. Total deposits increased $16,464,000 or 3.9% during the first six months of 2001 and repurchase agreements decreased $4,121,000 or 13.0% during the same period. Repurchase agreements of $27,609,000 are used by commercial accounts to earn higher yields on short-term funds and mature daily. During the second quarter of 2001, the Corporation declared a quarterly cash dividend of $.17 per share. This dividend was paid on June 22, 2001 to shareholders of record on June 8, 2001. The Federal Reserve Board ("FRB") increased short-term interest rates by increasing the federal funds target rate by 1.75% and the discount rate by 1.50% over a period from June, 1999 to May, 2000, and major banks followed by raising the prime lending rate by 1.75% during this same period. The increases in interest rates in 1999 and 2000 were designed to moderate national economic growth which could have been inflationary if left unchecked. The FRB decreased short-term interest rates by lowering the federal funds target rate and the discount rate by 2.75% in the first half of 2001, and the major banks followed by decreasing the prime lending rate by 2.75%. The FRB lowered interest rates to offset economic weaknesses which could lead to a recession. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis was $11,695,000 for the first six months of 2001 compared to $10,848,000 for the first six months of 2000, an increase of 7.8%. The interest rate spread decreased to 3.69% from 3.81%, and the net yield on earning assets decreased to 11 4.47% from 4.55% in the first six months of 2001 compared to the first six months of 2000, respectively. Net interest income on a FTE basis increased due to growth of $46,713,000 in average interest-earning assets while average interest-bearing liabilities grew only $37,996,000 which overshadowed a decline in the interest rate spread. Growth in non interest-bearing demand deposits and retained income resulted in greater growth in average interest-earning assets over interest-bearing liabilities. The lower interest rate spread occurred because average-interest-bearing liabilities grew more in the higher cost areas of time deposits, money market accounts and repurchase accounts while average loans grew most in the commercial area which adjusted more quickly to declining interest rates than did time deposits in the first half of 2001 compared to the first half of 2000. Net interest income on a FTE basis was $5,865,000 in the second quarter of 2001 compared to $5,524,000 in the second quarter of 2000, an increase of 6.2%. The interest rate spread decreased to 3.70% from 3.83% and the net yield on earning assets decreased to 4.46% from 4.59% in the second quarter of 2001 compared to the second quarter of 2000, respectively. The reasons for higher net interest income on a FTE basis and for a lower interest rate spread for the second quarter of 2001 compared to the second quarter of 2000 were similar to the reasons previously discussed for the six month periods. The following tables demonstrate fluctuations in net interest income and the related yields for the first six months and second quarter of 2001 compared to similar prior year periods. 12 The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis. (In thousands, except rates):
Interest For six months ended June 30 Average Balance Income/Expense Yield/Rate --------------------- ---------------------- --------------------- 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- Loans: Commercial $128,972 $ 92,069 $ 5,557 $ 4,163 8.62% 9.04% Mortgage 177,887 160,089 7,563 6,698 8.50 8.37 Consumer 46,154 51,360 2,372 2,505 10.28 9.75 -------- -------- -------- -------- -------- -------- Total loans 353,013 303,518 15,492 13,366 8.78 8.81 -------- -------- -------- -------- -------- -------- Investment securities: U. S. Government - 5,312 - 168 - 6.33 Federal agencies 93,938 102,476 3,011 3,303 6.41 6.45 State and municipal 39,281 39,989 1,338 1,365 6.81 6.83 Other investments 29,531 22,664 952 705 6.45 6.22 -------- -------- -------- -------- -------- -------- Total investment securities 162,750 170,441 5,301 5,541 6.51 6.50 -------- -------- -------- -------- -------- -------- Deposits in other banks 7,367 2,458 189 70 5.13 5.70 -------- -------- -------- -------- -------- -------- Total interest-earning assets 523,130 476,417 20,982 18,977 8.02 7.97 -------- -------- -------- -------- Other non-earning assets 26,328 23,643 -------- -------- Total assets $549,458 $500,060 ======== ======== Interest-bearing deposits: Demand $ 56,282 $ 55,659 282 522 1.00 1.88 Money market 39,404 23,095 734 383 3.73 3.32 Savings 61,547 64,926 614 855 2.00 2.63 Time 227,104 198,436 6,619 5,119 5.83 5.16 -------- -------- -------- ------- -------- -------- Total interest-bearing deposits 384,337 342,116 8,249 6,879 4.29 4.02 Repurchase agreements 28,435 24,005 612 558 4.30 4.65 Other borrowings 16,451 25,106 426 692 5.18 5.51 -------- -------- -------- ------- -------- -------- Total interest-bearing liabilities 429,223 391,227 9,287 8,129 4.33 4.16 -------- ------- -------- -------- Demand deposits 51,704 47,803 Other liabilities 4,034 3,302 Shareholders' equity 64,497 57,728 -------- -------- Total liabilities and shareholders' equity $549,458 $500,060 ======== ======== Interest rate spread 3.69% 3.81% ======== ======== Net interest income 11,695 10,848 ======== ======= Taxable equivalent adjustment 488 413 ======== ======= Net yield on earning assets 4.47% 4.55% ======== ======== 13
The following is an analysis of net interest income, on a taxable equivalent basis. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans if recognized is recorded on a cash basis. (In thousands, except rates):
Interest For three months ended June 30 Average Balance Income/Expense Yield/Rate --------------------- ---------------------- --------------------- 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- Loans: Commercial $133,991 $ 96,186 $ 2,815 $ 2,217 8.40% 9.22% Mortgage 179,272 162,586 3,757 3,453 8.38 8.50 Consumer 44,955 50,752 1,176 1,247 10.46 9.83 -------- -------- -------- -------- -------- -------- Total loans 358,218 309,524 7,748 6,917 8.65 8.94 -------- -------- -------- -------- -------- -------- Investment securities: U. S. Government - 3,624 - 59 - 6.51 Federal agencies 91,066 102,741 1,446 1,654 6.35 6.44 State and municipal 39,357 40,059 670 683 6.81 6.82 Other investments 31,324 23,858 505 372 6.45 6.24 -------- -------- -------- -------- -------- -------- Total investment securities 161,747 170,282 2,621 2,768 6.48 6.50 -------- -------- -------- -------- -------- -------- Deposits in other banks 5,852 1,189 68 18 4.65 6.06 -------- -------- -------- -------- -------- -------- Total interest-earning assets 525,817 480,995 10,437 9,703 7.94 8.07 -------- -------- -------- -------- Other non-earning assets 27,445 23,600 -------- -------- Total assets $553,262 $504,595 ======== ======== Interest-bearing deposits: Demand $ 55,554 $ 55,364 117 258 .84 1.86 Money market 39,401 23,055 343 194 3.48 3.37 Savings 61,767 64,862 288 428 1.87 2.64 Time 229,862 198,128 3,326 2,600 5.79 5.25 -------- -------- -------- ------- -------- -------- Total interest-bearing deposits 386,584 341,409 4,074 3,480 4.22 4.08 Repurchase agreements 28,117 23,870 284 284 4.04 4.76 Other borrowings 16,627 28,928 214 415 5.15 5.74 -------- -------- -------- ------- -------- -------- Total interest-bearing liabilities 431,328 394,207 4,572 4,179 4.24 4.24 -------- ------- -------- -------- Demand deposits 52,479 48,907 Other liabilities 4,270 3,290 Shareholders' equity 65,185 58,191 -------- -------- Total liabilities and shareholders' equity $553,262 $504,595 ======== ======== Interest rate spread 3.70% 3.83% ======== ======== Net interest income 5,865 5,524 ======== ======= Taxable equivalent adjustment 246 206 ======== ======= Net yield on earning assets 4.46% 4.59% ======== ======== 14
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 $525,000 at June 30, 2001 from $176,000 at December 31, 2000. Foreclosed properties were $115,000 at June 30, 2001 and $30,000 at December 31, 2000. Loans in a non-accrual status at June 30, 2001 were $410,000 compared with $146,000 at December 31, 2000. Loans on accrual status and past due 90 or more at June 30, 2001 were $330,000 compared with $239,000 at December 31, 2000. Total non-performing loans and loans past due 90 days or more as a percentage of net loans were .20% at June 30, 2001 and .11% at December 31, 2000. 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 six months, annualized, as a percentage of average loans decreased to .09% in 2001 from .15% in 2000. These charge-off ratios are low by industry standards. Average net charge-offs as a percentage of average loans for the past three calendar years was .14%. During the first six months of 2001 the gross amount of interest income that would have been recorded on non-accrual loans and restructured loans at June 30, 2001, if all such loans had been accruing interest at the original contractual rate, was $21,000. 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 $535,000 for the first half and $273,000 for the second quarter of 2001 versus $550,000 and $335,000, respectively, for the 2000 periods. The decreased provision for loan losses resulted from fewer loan chargeoffs in the 2001 periods. The reserve for loan losses totaled $5,151,000 at June 30, 2001, an increase of 8.5% over the $4,746,000 recorded at December 31, 2000. The ratio of reserves to loans, less unearned discount, was 1.40% at June 30, 2001 and at December 31, 2000. In Management's opinion, the current reserve for loan losses is adequate. NON-INTEREST INCOME Non-interest income for the first six months of 2001 was $3,019,000, an increase of 30.3% from $2,317,000 reported in the first six months of 2000. The major reasons for the 2001 first half growth in non-interest income were $350,000 in gains from securities called, an increase of $136,000, or 25.9%, in service charges on deposit accounts, an increase of $111,000, or 40.7% in other fees and commissions, and an increase of $72,000, or 61.0%, in mortgage banking income. Commissions from the sale of non-deposit products such as mutual funds and annuities accounted for 79% of the growth in other fees and commissions. Mortgage banking income increased due to lower interest rates which made mortgage borrowing by customers more affordable and advantageous. The gains on securities called resulted from a planned investment strategy of purchasing discount callable U.S. Government Agency obligations in higher interest rate environments. Without the gains on securities called, non-interest income increased 15.2% during the first half of 2001 compared to the first half of 2000. Trust and investment services income of $1,320,000 during the first half of 2001 was slightly ahead of the first half of 2000 because the increase in new business exceeded the drop in the equities market which negatively impacted asset values under management. The Bank's trust department managed accounts whose market values approximated $353,000,000 at June 30, 2001 compared to $352,000,000 at June 30, 2000. Non-interest income for the second quarter of 2001 was $1,572,000, an increase of 37.7% from $1,142,000 reported in the second quarter of 2000. The reasons for increased non-interest income for the three months ended June 30, 2001 were similar to those for the six month period ended June 30, 2001. 15 NON-INTEREST EXPENSE Non-interest expense for the first six months of 2001 was $6,916,000, an 11.2% increase from the $6,220,000 reported for the same period last year. Salaries increased 10.3% from the same period last year to $3,255,000 in 2001 while pension and other employee benefits increased 22.6% to $721,000. Occupancy and equipment increased $135,000, or 13.4%, for the first half of 2001 from the same period in 2000. These increases were primarily the result of the South Boston office that opened in December 2000, merit salary increases that were effective January 1, 2001, and higher health care and defined benefit pension costs. Core deposit intangible amortization of $225,000 for the first half of 2001 and 2000 represents the amortization of the premium paid for deposits acquired at the Gretna office in 1995 and Yanceyville office in 1996. Non-interest expense for the second quarter of 2001 was $3,454,000, a 11.5% increase from $3,097,000 reported for the second quarter of 2000. The reasons for increased non-interest expense for the three months ended June 30, 2001 were similar to those for the six month period ended June 30, 2001. The efficiency ratio, a productivity measure used to determine how well non-interest expense is managed, was 46.6% and 45.5% for the six months ended June 30, 2001 and 2000, respectively. A lower efficiency ratio generally indicates better expense efficiency. Leaders in expense efficiency in the banking industry have achieved ratios in the mid-to-high 40% range while the majority of the industry remains in the 55-65% range. INCOME TAX PROVISION The income tax provision for the first six months of 2001 was $2,007,000, an increase of $320,000 from $1,687,000 reported a year earlier. The effective tax rate for the first six months of 2001 was 29.6% compared to 28.2% for the first half of 2000. The increase in the effective tax rate resulted from various adjustments. 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 June 30, 2001 the Corporation had a ratio of 14.64% for Tier I and a ratio of 15.88% for total capital. At December 31, 2000 these ratios were 16.02% and 17.09%, respectively. During the second quarter of 2001, the Corporation declared and paid a quarterly cash dividend of $.17 per share which was an increase over the $.15 per share declared and paid in the first quarter of 2001. The second quarter dividend totaled $1,024,000 The Corporation's Board of Directors authorized the repurchase of up to 300,000 shares of the Corporation's common stock between August 16, 2000 and August 15, 2001. The repurchases, which may be made through open market purchases or in privately negotiated transactions, were 116,000 shares during the second quarter of 2001 and have been 198,000 shares since August 16, 2000. 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 16 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 June 30, 2001 were not materially different from December 31, 2000 and were in compliance with established policy guidelines. Based on numerous assumptions, including no change in the mix and no growth in assets or liabilities, net interest income for the next twelve months is projected to increase slightly when interest rates are higher and decrease slightly when interest rates are lower. The Bank's net liquid assets to net liabilities ratio was 18.9% at June 30, 2001 and 21.5% at December 31, 2000. The decline in this ratio reflects greater loan growth than deposit growth and increased pledging of securities on large deposits; however, both of these ratios are considered to reflect adequate liquidity for the respective periods. Management monitors and plans the Corporation's liquidity position for future periods. Liquidity is provided from cash and due from banks, interest-bearing deposits in other banks, repayments from loans, 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. 17 PART II OTHER INFORMATION Item: 1. Legal Proceedings The nature of the business of the Corporation's banking subsidiary ordinarily results in a certain amount of litigation. The subsidiary of the Corporation is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Corporation. 2. Changes in securities None 3. Defaults upon senior securities None 4. Results of votes of security holders None 5. Other information None 6. Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K On May 31, 2001, the Corporation filed a current report on Form 8-K under Item 5 to report the CEO's message to stockholders. 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 - August, 8, 2001 President and Chief Executive Officer /s/ T. Allen Liles ------------------ T. Allen Liles Senior Vice-President and Date - August 8, 2001 Secretary-Treasurer (Chief Financial Officer) 18 -----END PRIVACY-ENHANCED MESSAGE-----