EX-99.2 4 d765740dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information is designed to show how the merger of American National Bankshares Inc. (“American”) and HomeTown Bankshares Corporation (“HomeTown”) might have affected historical financial statements if the merger had been completed at an earlier time and was prepared on the historical financial results reported by American and HomeTown in other public filings.

The unaudited pro forma condensed combined balance sheet data assumes that the merger took place on December 31, 2018 and combines American’s consolidated balance sheet as of December 31, 2018 with HomeTown’s consolidated balance sheet as of December 31, 2018. The unaudited pro forma condensed combined statement of income for the year ended December 31, 2018 give effect to the merger as if it occurred at the beginning of the period. The unaudited pro forma condensed combined financial statements give effect to the merger under the acquisition method of accounting.

The following unaudited pro forma condensed combined financial information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the companies been combined during this period.

The unaudited pro forma condensed combined financial statements are based on, and should be read together with, the historical consolidated financial statements and related notes of American contained in its Annual Report on Form 10-K for the year ended December 31, 2018 and of HomeTown contained in its Annual Report on Form 10-K for the year ended December 31, 2018.


AMERICAN NATIONAL BANKSHARES INC. AND HOMETOWN BANKSHARES CORPORATION

Unaudited Pro Forma Condensed Combined Balance Sheet

December 31, 2018

(dollars in thousands)

 

     American
Historical
    HomeTown
Historical
    Pro Forma
Adjustments
    Notes     Pro Forma
Combined
 

ASSETS

          

Cash and due from banks

   $ 29,587     $ 15,332     $ —         $ 44,919  

Federal funds and interest-bearing deposits in banks

     34,668       7,633       —           42,301  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total cash and cash equivalents

     64,255       22,965       —           87,220  
  

 

 

   

 

 

   

 

 

     

 

 

 

Equity securities, at fair value

     1,830       —         (1,719     (1     111  

Securities available for sale, at fair value

     332,653       44,976       88       (2     377,717  

Mortgage loans held for sale

     640       85       —           725  

Loans, net of unearned income

     1,357,476       471,462       (14,733     (3     1,814,205  

Less allowance for loan losses

     12,805       3,992       (3,992     (4     12,805  
  

 

 

   

 

 

   

 

 

     

 

 

 

Net loans

     1,344,671       467,470       (10,741       1,801,400  
  

 

 

   

 

 

   

 

 

     

 

 

 

Premises and equipment, net

     26,675       12,943       (210     (5     39,408  

Other real estate owned

     869       1,893       —           2,762  

Core deposit intangibles, net

     926       —         8,200       (6     9,126  

Goodwill

     43,872       —         34,244       (7     78,116  

Bank-owned life insurance

     18,941       8,197       —           27,138  

Restricted stock

     5,247       2,241       —           7,488  

Other assets

     22,287       4,208       792       (8 )(9)(10)      27,287  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total assets

   $ 1,862,866     $ 564,978     $ 30,654       $ 2,458,498  
  

 

 

   

 

 

   

 

 

     

 

 

 

LIABILITIES

          

Noninterest-bearing deposits

   $ 435,828     $ 117,544     $ —         $ 553,372  

Interest-bearing deposits:

          

Interest bearing transaction accounts

     234,621       107,003       —           341,624  

Money market accounts

     401,461       99,104       —           500,565  

Savings accounts

     132,360       44,720       —           177,080  

Time deposits

     354,398       123,900       724       (11     479,022  

Brokered deposits

     7,559       902       —           8,461  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total interest-bearing deposits

     1,130,399       375,629       724         1,506,752  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total deposits

     1,566,227       493,173       724         2,060,124  
  

 

 

   

 

 

   

 

 

     

 

 

 

Securities sold under agreements to repurchase

     35,243       —         —           35,243  

Other short-term borrowings

     —         6,333       —           6,333  

Long-term borrowings

     —         1,694       —           1,694  

Subordinated debt

     27,927       7,285       30       (12     35,242  

Other liabilities

     10,927       2,794       —           13,721  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities

     1,640,324       511,279       754         2,152,357  
  

 

 

   

 

 

   

 

 

     

 

 

 

Commitments and contingencies

          

SHAREHOLDERS’ EQUITY

          

Preferred stock

     —         —         —           —    

Common stock

     8,668       28,909       (26,548     (13     11,029  

Surplus

     78,172       18,228       62,661       (13     159,061  

Retained earnings

     141,537       7,024       (7,024     (13     141,537  

Accumulated other comprehensive loss, net

     (5,835     (811     811       (13     (5,835
  

 

 

   

 

 

   

 

 

     

 

 

 

Total shareholders’ equity

     222,542       53,350       29,900         305,792  
  

 

 

   

 

 

   

 

 

     

 

 

 

Noncontrolling interest

     —         349       —           349  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total shareholders’ equity

     222,542       53,699       29,900         306,141  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities and shareholders’ equity

   $ 1,862,866     $ 564,978     $ 30,654       $ 2,458,498  
  

 

 

   

 

 

   

 

 

     

 

 

 

The accompanying notes are an integral part of the unaudited pro forma condensed combined financial information. Certain reclassifications have been made to HomeTown’s balance sheet to conform with American’s presentation.


Notes to Unaudited Pro Forma Condensed Combined Balance Sheet at December 31, 2018

The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. Business combinations are accounted for under the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 805, Business Combinations, using the acquisition method of accounting. Under acquisition accounting, HomeTown’s assets and liabilities and any identifiable intangible assets are required to be stated at their estimated fair values. American engaged a competent third party valuation specialist to assist in the valuation of the major financial assets and liabilities of the acquired bank. All adjustments are based on current valuations, estimates, and assumptions. Pro forma adjustments reflected herein may vary from the actual purchase price allocation recorded based on the actual balance sheet at the acquisition date.

 

  (1)

Elimination of investment in HomeTown common stock.

 

  (2)

Fair value adjustments on securities available for sale.

 

  (3)

The interest rate portion ($4.0 million) reflects fair value based upon current interest rates for similar loans.

The larger portion ($10.7 million) of the adjustment to loans reflects the estimated credit portion of the fair value adjustment as required under ASC 805. This amount is an estimate of the contractual principal cash flows not expected to be collected over the estimated lives of these loans. It differs from the allowance for loan losses under ASC 450 using the incurred loss model, which estimated probable loan losses incurred as of the balance sheet date. Under the incurred loss model losses expected as a result of future events are not recognized. When using the expected cash flow approach these losses are considered in the valuation. Further, when estimating the present value of expected cash flows the loans are discounted using an effective interest rate, which is not considered in the incurred loss method. Accordingly, the differences in the loss methodologies and the application of a market interest rate have led to a credit loss estimate of $10.7 million.

The fair value of Purchased Credit Impaired (“PCI”) loans is determined using a combination of the income approach and the asset approach. The fair value of non-PCI loans is determined using the income approach. In the income approach, the fair value is determined based on a discounted cash flow analysis, while fair value is determined based on the estimated values of the underlying collateral in the asset approach. The key valuation assumptions developed for use in the discounted cash flow analysis are prepayment speeds, expected credit loss rates, discount rates, and foreclosure lags. For PCI loans, a yield is calculated based on the cash flows run at the acquisition date, and the yield is applied against the carrying value as projected accretion over the life of the loan. For non-revolving non-PCI loans, amortization is projected using the effective interest method. For revolving PCI loans, amortization is projected on a straight line basis.

 

  (4)

Elimination of HomeTown’s allowance for loan losses.

 

  (5)

Estimated fair value adjustment for HomeTown’s premises and equipment.

 

  (6)

Estimation of fair value of core deposit intangible (“CDI”). The estimated CDI represents the estimated future economic benefit resulting from the acquired customer balances and relationships. This value was based upon an independent appraisal at the date of the acquisition. For pro forma purposes, we are amortizing the CDI using the sum-of-the-years-digits method and an estimated life of 10 years.

 

  (7)

Estimated amount of goodwill to be recorded in the acquisition of HomeTown, less amounts allocated to the fair value of tangible and specifically identified intangible assets acquired are as follows:


Purchase Price:

  

Total consideration (purchase price)

   $ 83,250  

Net assets acquired (book value)

     53,350  
  

 

 

 

Excess of purchase price over book value

     29,900  
  

 

 

 

Fair Value Adjustments:

  

Eliminate investment in HomeTown common stock

     (1,719

Securities available for sale

     88  

Loans

     (14,733

Eliminate existing allowance for loan losses

     3,992  

Premises and equipment

     (210

Core deposit intangible

     8,200  

Deferred income tax asset

     796  

Eliminate deferred tax for investment in HomeTown common stock

     130  

Contra accrued interest receivable - loans

     (134

Deposits

     (724

Subordinated debt

     (30
  

 

 

 

Total fair value adjustments

     (4,344
  

 

 

 

Preliminary pro forma goodwill

   $ 34,244  
  

 

 

 

 

  (8)

Estimated deferred tax asset arising from the adjustments to record the assets and liabilities of HomeTown at fair value of $796,000.

 

  (9)

Elimination of deferred tax for investment in HomeTown common stock of $130,000.

 

  (10)

Contra accrued interest receivable on acquired loans of $(134,000).

 

  (11)

Fair value adjustments on deposits at current market rates for similar products. This adjustment will be accreted into income over the estimated lives of the deposits. Accretion in the pro forma was computed using the effective yield method.

 

  (12)

Fair value adjustment of subordinated debt at current interest rates for similar borrowings. This adjustment will be amortized into income over the estimated life of the debt. Estimated amortization was determined using the straight line method.

 

  (13)

Elimination of HomeTown’s shareholders’ equity as part of the acquisition accounting adjustments representing the conversion of all HomeTown common shares into American common shares at a ratio of 0.4150 American shares for each share of HomeTown.


AMERICAN NATIONAL BANKSHARES INC. AND HOMETOWN BANKSHARES CORPORATION

Unaudited Pro Forma Condensed Combined Statement of Income

For the Year Ended December 31, 2018

(dollars in thousands, except per share data)

 

     American     HomeTown      Pro Forma           Pro Forma  
   Historical     Historical      Adjustments     Notes     Combined  

Interest Income

           

Interest and fees on loans

   $ 59,966     $ 20,820      $ 2,912       (1   $ 83,698  

Interest on federal funds sold and deposits in other banks

     873       188        —           1,061  

Dividends

     321       151        —           472  

Interest and dividends on securities:

           

Taxable

     6,106       1,102        —           7,208  

Nontaxable

     1,502       229        —           1,731  
  

 

 

   

 

 

    

 

 

     

 

 

 

Total interest and dividend income

     68,768       22,490        2,912         94,170  
  

 

 

   

 

 

    

 

 

     

 

 

 

Interest Expense

           

Interest on deposits

     8,086       2,841        (448     (2     10,479  

Interest on short-term borrowings

     186       273        —           459  

Interest on long-term borrowings

     —         50        —           50  

Interest on subordinated debt

     1,402       536        (17     (3     1,921  
  

 

 

   

 

 

    

 

 

     

 

 

 

Total interest expense

     9,674       3,700        (465       12,909  
  

 

 

   

 

 

    

 

 

     

 

 

 

Net interest income

     59,094       18,790        3,377         81,261  

Provision for loan losses

     (103     561        —           458  
  

 

 

   

 

 

    

 

 

     

 

 

 

Net interest income after provision for loan losses

     59,197       18,229        3,377         80,803  

Noninterest Income

           

Trust fees and brokerage

     4,578       —          —           4,578  

Service charges on deposit accounts

     2,455       578        —           3,033  

Other service charges, commissions and fees

     2,637       1,055        —           3,692  

Mortgage banking income

     1,862       712        —           2,574  

Gains on securities, net

     123       60        —           183  

Income from Small Business Investment Companies

     637       —          —           637  

Gains on bank premises and equipment, net

     60       —          —           60  

Income from life insurance death benefit

     —         642        —           642  

Other operating income

     922       651        —           1,573  
  

 

 

   

 

 

    

 

 

     

 

 

 

Total noninterest income

     13,274       3,698        —           16,972  
  

 

 

   

 

 

    

 

 

     

 

 

 

Noninterest Expense

           

Salaries and benefits

     24,879       8,648        —           33,527  

Occupancy expenses

     4,378       1,676        —           6,054  

FDIC assessment

     537       235        —           772  

Bank franchise tax

     1,054       419        —           1,473  

Amortization of core deposit premuims

     265       —          1,552       (4     1,817  

Data processing

     2,970       1,588        —           4,558  

Other real estate owned, net

     122       614        —           736  

Merger related expenses

     872       788        (1,660     (5     —    

Other expenses

     9,169       3,116        —           12,285  
  

 

 

   

 

 

    

 

 

     

 

 

 

Total noninterest expenses

     44,246       17,084        (108       61,222  
  

 

 

   

 

 

    

 

 

     

 

 

 

Income before income taxes

     28,225       4,843        3,485         36,553  

Income tax expense

     5,646       845        732       (6     7,223  
  

 

 

   

 

 

    

 

 

     

 

 

 

Net income

   $ 22,579     $ 3,998      $ 2,753       $ 29,330  
  

 

 

   

 

 

    

 

 

     

 

 

 

Less income attributable to non-controlling interest

     —         44        —           44  
  

 

 

   

 

 

    

 

 

     

 

 

 

Net income available to common shareholders

   $ 22,579     $ 3,954      $ 2,753       $ 29,286  
  

 

 

   

 

 

    

 

 

     

 

 

 

Earnings per common share, basic

   $ 2.60     $ 0.68          $ 2.65  
  

 

 

   

 

 

        

 

 

 

Earnings per common share, diluted

   $ 2.59     $ 0.68          $ 2.65  
  

 

 

   

 

 

        

 

 

 

Weighted average shares outstanding – Basic

     8,698,014       5,805,654        (3,443,968     (7     11,059,700  

Weighted average shares outstanding – Diluted

     8,708,462       5,853,277        (3,491,591     (7     11,070,148  

The accompanying notes are an integral part of the unaudited pro forma condensed combined financial information. Certain reclassifications have been made to HomeTown’s income statement to conform with American’s presentation.


Notes to Unaudited Pro Forma Condensed Combined Statement of Income

for the Year Ended December 31, 2018

 

(1)

The level yield adjustment is the accretion of the fair value adjustments to loans over the expected life of the loans.

 

(2)

The adjustment is the accretion of the fair value adjustments to deposits over their expected life using the effective yield method.

 

(3)

The straight line adjustment is the amortization of the fair value adjustment to subordinated debt over its expected life.

 

(4)

Amount represents CDI amortization over an estimated life of 10 years using the sum-of-the-years-digits method.

 

(5)

Elimination of costs incurred in relation to the merger.

 

(6)

Amount represents income tax expense estimated at 21%.

 

(7)

Weighted average basic and diluted shares outstanding were adjusted to effect the merger.