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 MARCH 31,June 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 May 8,August 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 March 31,June 30, 1998
and December 31, 1997...................................................31997.......................................3
Consolidated Statements of Income for the three months
ended March 31,June 30, 1998 and 1997...........................................41997................................4
Consolidated Statements of Income for the six months
ended June 30, 1998 and 1997................................5
Consolidated Statements of Cash Flows for the threesix months
ended March 31,June 30, 1998 and 1997...........................................51997................................6
Notes to Consolidated Financial Statements..............................6-8Statements..................7-9
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations.....................................9-13Operations...............................10-16
Part II. Other Information.................................................14Information.................................................17
SIGNATURES ..................................................................14
EXHIBITS -..................................................................17
EXHIBIT 10.1 Agreement between American National Bank and Trust Company
and T. Allen Liles dated June 1, 1998..............18-21
EXHIBIT 27 Financial Data Schedule...........................................15Schedule........................................22
Consolidated Balance Sheets
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
March 31June 30 December 31
1998 1997
----------------- -----------
ASSETS
Cash and due from banks........................................................banks.............................................$ 13,97913,043 $ 13,386
Interest-bearing deposits in other banks....................................... 20banks............................ 80 366
Investment securities:
Securities available for sale (at market value).............................. 86,311.................. 84,352 82,466
Securities held to maturity (market value of $62,227$61,685 at
March 31,June 30, 1998 and $61,367 at December 31, 1997)........................... 61,311............... 60,715 60,611
--------- --------------------
Total investment securities............................................ 147,622securities................................. 145,067 143,077
--------- --------------------
Loans ......................................................................... 258,779.............................................................. 260,455 254,793
Less--
Unearned income............................................................ (293)income................................................. (224) (343)
Reserve for loan losses.................................................... (3,465)losses......................................... (3,637) (3,277)
--------- --------------------
Net loans.............................................................. 255,021loans................................................... 256,594 251,173
--------- --------------------
Bank premises and equipment, at cost, less accumulated
depreciation of $6,598$6,832 in 1998 and $6,350 in 1997............................ 6,4001997............... 6,267 6,514
Accrued interest receivable and other assets................................... 9,191assets....................... 9,504 9,124
--------- --------------------
Total assets...........................................................assets................................................$432,233430,555 $423,640
========= ====================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing......................................bearing...........................$ 40,57639,880 $ 41,755
Demand deposits -- interest bearing.......................................... 51,890bearing............................... 48,538 52,029
Money market deposits........................................................ 18,029deposits............................................. 18,568 17,151
Savings deposits............................................................. 67,526deposits.................................................. 66,664 69,551
Time deposits................................................................ 175,882deposits..................................................... 173,979 171,117
--------- --------------------
Total deposits......................................................... 353,903deposits.............................................. 347,629 351,603
--------- ------------------- -----------
Federal funds purchased......................................................purchased........................................... - 1,500
Repurchase agreements........................................................ 24,244agreements............................................. 19,360 18,039
Other borrowings.................................................. 9,025 -
Accrued interest payable and other liabilities............................... 3,034liabilities.................... 2,435 2,495
--------- ------------------- -----------
Total liabilities...................................................... 381,181liabilities........................................... 378,449 373,637
--------- ------------------- -----------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding...........................................................outstanding............................................... - -
Common stock, $1 par, 10,000,000 shares authorized,
3,051,733 shares outstanding at March 31,June 30, 1998 and
December 31, 1997..........................................................1997.............................................. 3,052 3,052
Capital in excess of par value...............................................value.................................... 9,892 9,892
Retained earnings............................................................ 37,458earnings................................................. 38,477 36,438
Accumulated other comprehensive income -
net unrealized gains on securities available for sale...................... 650sale........... 685 621
--------- ------------------- -----------
Total shareholders' equity............................................. 51,052equity.................................. 52,106 50,003
--------- ------------------- -----------
Total liabilities and shareholders' equity.............................equity..................$432,233430,555 $423,640
========= =================== ===========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
Consolidated Statements of Income
American National Bankshares Inc. and Subsidiary
(In Thousands)
(Unaudited)
- -----------------------------------------------------------------------------------------------------
Three Months Ended
March 31
---------------------June 30
------------------
1998 1997
------ ------
Interest Income:
Interest and fees on loans....................................................$ 5,822 $ 5,609
Interest on federal funds sold and other...................................... 12 37
Income on investment securities:
U S Government.............................................................. 698 1,010
Federal agencies............................................................ 1,141 843
State and municipal......................................................... 303 282
Other investments........................................................... 117 102
------- -------
Total interest income..................................................... 8,093 7,883
------- -------
Interest Expense:
Interest on deposits:
Demand...................................................................... 310 342
Money market................................................................ 135 140
Savings..................................................................... 491 534
Time........................................................................ 2,330 2,401
Interest on fed funds and repos .............................................. 267 202
Interest on other borrowings.................................................. 54 -
------- -------
Total interest expense...................................................... 3,587 3,619
------- -------
Net Interest Income............................................................. 4,506 4,264
Provision for Loan Losses....................................................... 223 257
------- -------
Net Interest Income After Provision
For Loan Losses............................................................... 4,283 4,007
------- -------
Non-Interest Income:
Trust and investment services................................................. 548 470
Service charges on deposit accounts........................................... 251 197
Non-deposit fees and insurance commissions................................... 70 25
Mortgage banking income....................................................... 89 55
Other income.................................................................. 22 36
------- -------
Total non-interest income................................................... 980 783
------- -------
Non-Interest Expense:
Salaries...................................................................... 1,235 1,211
Pension and other employee benefits........................................... 288 258
Occupancy and equipment....................................................... 468 320
Postage and printing.......................................................... 108 114
Core deposit intangible amortization ......................................... 113 112
Other......................................................................... 536 527
------- -------
Total non-interest expense.................................................. 2,748 2,542
------- -------
Income Before Income Tax Provision.............................................. 2,515 2,248
Income Tax Provision............................................................ 764 704
------- -------
Net Income......................................................................$ 1,751 $ 1,544
======= =======
- -----------------------------------------------------------------------------------------------------
Net Income Per Common Share
Basic........................................................................... $ .58 $ .48
Diluted......................................................................... $ .58 $ .48
- -----------------------------------------------------------------------------------------------------
Average Common Shares Outstanding
Basic...........................................................................3,051,733 3,199,599
Diluted.........................................................................3,052,505 3,199,599
- -----------------------------------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------------------------------
Six Months Ended
June 30
--------------------
1998 1997
-------- --------
Interest Income:
Interest and fees on loans....................................................$ 5,74311,565 $ 5,35210,961
Interest on federal funds sold and other...................................... 43 2455 61
Income on investment securities:
U S Government.............................................................. 750 1,2561,448 2,266
Federal agencies............................................................ 1,022 8502,163 1,693
State and municipal......................................................... 288 292591 574
Other investments........................................................... 125 102
------- -------242 204
-------- --------
Total interest income..................................................... 7,971 7,876
------- -------16,064 15,759
-------- --------
Interest Expense:
Interest on deposits:
Demand...................................................................... 323 339633 681
Money market................................................................ 127 146262 286
Savings..................................................................... 499 528990 1,062
Time........................................................................ 2,314 2,4624,644 4,863
Interest on short-term borrowed funds......................................... 269 202
------- -------fed funds purchased and repos..................................... 536 404
Interest on other borrowings.................................................. 54 -
-------- --------
Total interest expense.................................................... 3,532 3,677
------- -------expense...................................................... 7,119 7,296
-------- --------
Net Interest Income............................................................. 4,439 4,1998,945 8,463
Provision for Loan Losses....................................................... 252 243
------- -------475 500
-------- --------
Net Interest Income After Provision
For Loan Losses............................................................... 4,187 3,956
------- -------8,470 7,963
-------- --------
Non-Interest Income:
Trust and investment services................................................. 519 4271,067 897
Service charges on deposit accounts........................................... 187 185438 382
Non-deposit fees and insurance commissions................................... 58 27128 52
Mortgage income............................................................... 104 26banking income....................................................... 193 81
Other income.................................................................. 28 73
------- -------50 109
-------- --------
Total non-interest income................................................. 896 738
------- -------income................................................... 1,876 1,521
-------- --------
Non-Interest Expense:
Salaries...................................................................... 1,206 1,1782,441 2,389
Pension and other employee benefits........................................... 287 271575 529
Occupancy and equipment....................................................... 437 347905 667
Postage and printing.......................................................... 133 112241 226
Core deposit intangible amortization ......................................... 112 113225 225
Other......................................................................... 498 494
------- -------1,034 1,021
-------- --------
Total non-interest expense................................................ 2,673 2,515
------- -------expense.................................................. 5,421 5,057
-------- --------
Income Before Income Tax Provision.............................................. 2,410 2,1794,925 4,427
Income Tax Provision............................................................ 749 642
------- -------1,513 1,346
-------- --------
Net Income......................................................................$ 1,6613,412 $ 1,537
======= =======3,081
======== ========
- -----------------------------------------------------------------------------------------------------
Net Income Per Common Share
Basic........................................................................... $1.12 $ .54.95
Diluted......................................................................... $1.12 $ .47
Diluted.........................................................................$ .54 $ .47.95
- -----------------------------------------------------------------------------------------------------
Average Common Shares Outstanding
Basic.........................................................................3,051,733 3,279,798
Diluted.......................................................................3,053,073 3,279,798Basic...........................................................................3,051,733 3,239,477
Diluted.........................................................................3,053,845 3,239,477
- -----------------------------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ThreeSix Months Ended
------------------------
March 31---------------------
June 30
1998 1997
---------- ------------------ --------
Cash Flows from Operating Activities:
Net income....................................................................$ 1,6613,412 $ 1,5373,081
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................................................. 252 243
Depreciation.............................................................. 248 163losses................................................... 475 500
Depreciation................................................................ 482 326
Core deposit intangible amortization...................................... 112 113
Amortizationamortization........................................ 225 225
Net amortization (accretion) of premiums and discounts
on investment securities................................................ (26) (12)securities.................................................. (40) (27)
Gain on sale of securities................................................securities.................................................. - (23)(31)
Deferred income taxes benefit............................................. (49) (59)benefit............................................... (181) (157)
(Increase) decrease in interest receivable................................ (159) 128
Decreasereceivable.................................. (341) 183
(Increase) decrease in other assets.................................................. 13 172assets......................................... (117) 50
Decrease in interest payable.............................................. (64) (123)
Increasepayable................................................ (59) (141)
(Decrease) increase in other liabilities............................................. 603 1,053liabilities.................................... (1) 183
--------- ---------
Net cash provided by operating activities................................. 2,591 3,1923,855 4,192
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ..................... 8,198 19,89915,488 36,174
Purchases of securities available for sale.................................... (8,994)(12,985) -
Purchases of securities held to maturity...................................... (3,678)(4,355) -
Net increase in loans......................................................... (4,100) (10,488)(5,896) (16,903)
Purchases of property and equipment........................................... (134) (235) (416)
--------- ---------
Net cash (used in) provided by investing activities.......................... (8,708) 9,176activities......................... (7,983) 18,855
--------- ---------
Cash Flows from Financing Activities:
Net decrease in demand, money market,
and savings deposits........................................................ (2,465) (418)(6,836) (4,958)
Net increase (decrease) in time deposits...................................... 4,765 (2,299)2,862 (6,063)
Net increase (decrease)decrease in federal funds purchased
and repurchase agreements................................................... 4,705 (7,957)(179) (5,416)
Net increase in borrowings.................................................... 9,025 -
Cash dividends paid........................................................... (641) (590)(1,373) (1,231)
Repurchase of stock........................................................... - (6,240)
--------- ---------
Net cash provided by (used in) financing activities........................... 6,364 (11,264)activities......................... 3,499 (23,908)
--------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents............................ 247 1,104Equivalents........................ (629) (861)
Cash and Cash Equivalents at Beginning of Period................................Period............................ 13,752 14,822
--------- ---------
Cash and Cash Equivalents at End of Period......................................Period..................................$ 13,99913,123 $ 15,92613,961
========= =========
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 13,97913,043 $ 10,47113,816
Interest-bearing deposits in other banks.................................... 20 105
Federal funds sold.......................................................... - 5,35080 145
--------- ---------
$ 13,99913,123 $ 15,92613,961
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 3,5967,129 $ 3,8007,437
Income taxes paid.............................................................$ -1,400 $ -1,358
AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly American National Bankshares'
financial position as of March 31,June 30, 1998, 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 periodperiods ended March 31,June 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 March 31,June 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'
investmentequity at March 31,June 30, 1998 and December 31, 1997.
3. Commitments and Contingencies
The Bank has an established credit availability in the amount of
$29,000,000$60,000,000 with the Federal Home Loan Bank of Atlanta. As of March 31,Borrowings outstanding
under this availability were $9,025,000 and $0, respectively, at June 30, 1998
and December 31, 1997, there were no borrowings outstanding under this availability.1997.
Commitments to extend credit, which amount to $70,242,000$63,389,000 at March 31,June 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
March 31,June 30, 1998 and December 31, 1997 the Bank had $1,323,000$1,056,000 and $1,500,000,
respectively, in outstanding standby letters of credit.
4. Merger and Acquisitions
On March 14, 1996, the Corporation completed the acquisition of Mutual
Savings Bank, F.S.B. (Mutual) upon the approval of the shareholders of each
company. The Corporation exchanged 879,805 common shares, at an exchange ratio
of .705 of a share of the Corporation's common stock, for Mutual's 1,248,100
common shares.
The transaction was accounted for as a pooling of interests. The financial
position and results of operations of the Corporation and Mutual were combined
and the fiscal year of Mutual was conformed to the Corporation's fiscal year.
In October 1996, the Corporation acquired the branch office of FirstSouth
Bank located in Yanceyville, North Carolina. In addition to the branch
facilities and an ATM located in Yanceyville, the Corporation acquired
$4,775,000 in loans and assumed deposits of $21,405,000. This transaction was
accounted for as a purchase. In conjunction with the Yanceyville purchase, the
Corporation recorded a core deposit intangible of $1,516,000, approximately 7%
of the deposits assumed.
5. New Accounting Pronouncements
The Corporationcorporation 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 quarterthree and six months ended March 31,June 30, 1998:
June 30, 1998
Three Months Six Months
Net Income $1,660,568$1,751,000 $3,412,000
Unrealized holding gains arising during period
(net of tax expense of $15,182) 29,472expense) 35,000 64,000
---------- ----------
Total comprehensive income $1,690,040
==========$1,786,000 $3,476,000
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 June 1997, which establishes new
standards for reporting information about operating segments in annual and
interim financial statements. This statement also requires descriptive
information about the way operating segments are determined, the products and
services provided by the segments and the nature of differences between
reportable segment measurements and those used for the consolidated entity. 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.
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 1998 was
$3,412,000, an increase of 10.7% over the $3,081,0000 earned during the first
half of 1997. On a basic and diluted per share basis, net income totaled $1.12
for the first six months of 1998, up 17.9% from $.95 in the 1997 period. On an
annualized basis, return on average total assets was 1.59% for the first half of
1998 compared to 1.45% for the same period in 1997. Return on average common
shareholders' equity increased to 13.40% for the first six months of 1998 from
12.00% for the first half of 1997.
The Corporation's net income for the second quarter of 1998 was $1,661,000,$1,751,000,
an increase of 8.1%13.4% over the $1,537,0000$1,544,0000 earned during the first quarter of
1997. On a basic and diluted per share basis, net income totaled $.54$.58 for the
quarter, up 14.9%20.8% from $.47$.48 in 1997. On an annualized basis, return on average
total assets was 1.56%1.62% for the firstsecond quarter of 1998 compared to 1.43%1.46% for the
firstsecond quarter of 1997. Return on average common shareholders' equity increased
12.6% to 13.18%13.60% in the first quarter of 1998 from 11.7%12.30% for the first 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 half and second
quarter of 1998 compared to the first quarter ofsame periods in 1997.
The Corporation's growth in earnings resulted from three principal factors.
First, net interest income improved $240,000,$482,000, or 5.7% from a higher net interest
spread in the first quartersix months of 1998 compared to the first quartersix months of 1997
(see discussion on NET INTEREST INCOME). Second, the 21.4%23.3% growth in noninterest
income in the first six months of 1998 quarter over the same period in 1997 demonstrates
the continued success of the Corporation's expanded trust and investment
services, higher service charges and theATM fees and an increase in fees from
originating and selling fixed rate mortgage loans. Third, the Corporation has
controlled noninterest expenses which have grown at a slower 6.3% paceless in the first quartersix months of
1998 overthan the first quarter of 1997 as compared tocombined growth in combined net interest income and noninterest income of 8.1%.income.
TRENDS and FUTURE EVENTS
During the first quartersix months of 1998, net loans increased $3,848,000$5,421,000 or
1.5%2.2%. 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
higher deposits
and increased repurchase agreements.borrowings from the Federal Home Loan Bank of Atlanta. Total investment
securities increased during the first quartersix months of 1998 by $4,545,000$1,990,000 or 3.2%1.4%.
Total deposits increased $2,300,000decreased $3,974,000 or .7%1.1% during the first quartersix months of
1998 and repurchase agreements increased $6,205,000$1,321,000 or 34.4%7.3% during the same
period. Historically, deposits have been flat or down in the first quartersix months of
the year. The increase in repurchase agreements reflects the trend by commercial
accounts to earn higher rates on cash balances.
During the firstsecond quarter of 1998, the Corporation declared a quarterly
cash dividend of $.24 per share which was an increase over the $.21 per share. Thisshare
declared and in the first quarter of 1998. The second quarter dividend was paid
on March 27,June 26, 1998 to shareholders of record on March 13,June 8, 1998.
On March 26, 1997 the Federal Reserve Board increased short term interest
rates by 1/4% and the major money center banks followed by raising the prime
rate by 1/4%. U.S. Treasury yields have declined almost 1% since March 1997 in
response to the Asian financial crisis and due to low inflation.
At the annual meeting of shareholders, held April 22, 1997, the
shareholders approved a Stock Option Plan permitting the Corporation to issue up
to a total of 150,000 shares of common stock, upon the exercise of options
granted under the plan, prior to December 31, 2006. The Plan is administered by
the Stock Option Committee of the Board of Directors which consists only of the
Company's independent non-employee Directors.
YEAR 2000 ISSUE
The Corporation is aware of the issues associated with the programming code
in existing computer systems as the millennium ("year 2000") approaches. The
year 2000 problem is pervasive and complex as virtually every computer operation
and many equipment systems will be affected in some way by the rollover of the
two digit year value to 00. The issue is whether 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 most testing will be completed by
December 31,1998, allowing additional time for testing on reprogrammed systems.
To date, confirmations have been received from the Corporation's primary
processing vendors that plans are being developed to address processing of
transaction in the year 2000. An educational process is plannedhas 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 first quartersix months of 1998 was immaterial.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was
$4,564,000$9,202,000 for the first quartersix months of 1998 compared to $4,322,000$8,705,000 for the first
quartersix months of 1997, an increase of 5.6%5.7%. The interest rate spread increased to
3.86%3.85% from 3.52%3.59% and the net yield on earning assets increased to 4.55% from
4.26%4.32% in the first quartersix months of 1998 compared to the first quartersix months of 1997,
respectively. These increases were due to higher yields on loans and investments
and lower yields on interest-bearing liabilities and because higher yielding
loan balances rose while lower yielding investment balances declined. The
percentage increase in the interest rate spread was higher than the percentage
increase in net interest income and the net yield on earning assets because
average interest earning assets declined $4,740,000increased $1,683,000 while interest-bearing
liabilities only declined $1,658,000.increased $2,801,000. Average shareholders' equity was down $2,169,000$442,000
in first quarterhalf of 1998 compared to first quarterhalf of 1997 due to the stock repurchase
in second quarter 1997.
Net interest income on a fully taxable equivalent ("FTE") basis was
$4,638,000 in the second quarter of 1998 compared to $4,383,000 in the second
quarter of 1997, an increase of 5.8%. The interest rate spread increased to
3.84% from 3.65% and the net yield on earning assets increased to 4.55% from
4.39% in the second quarter of 1998 compared to the second quarter of 1997,
respectively.
The following tables demonstrate fluctuations in net interest income and
the related yields for the first six months and second 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):
For six months ended June 30
Interest
Average Balance Income/Expense Yield/Rate
------------------------ ------------------------ ----------------------------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- ------ -------------- -------- -------- -------- -------- --------
Loans:
Commercial $ 69,97572,554 $ 62,84864,798 $ 1,5753,226 $ 1,434 9.00% 9.13%2,971 8.89% 9.17%
Mortgage 134,646 126,490 2,934 2,697 8.72 8.53133,411 128,660 5,836 5,507 8.75 8.56
Consumer 51,720 51,656 1,243 1,231 9.61 9.5351,990 52,157 2,520 2,503 9.69 9.60
-------- -------- -------- -------- ------ ------
Total loans 256,341 240,994 5,752 5,362257,955 245,615 11,582 10,981 8.98 8.908.94
-------- -------- -------- -------- ------ ------
Investment securities:
U. S. Government 49,542 83,665 750 1,256 6.0647,727 75,484 1,448 2,266 6.07 6.00
Federal agencies 63,210 52,343 1,022 850 6.4767,036 52,103 2,163 1,693 6.45 6.50
State and municipal 21,914 21,784 404 40522,554 21,456 831 796 7.37 7.447.42
Other investments 7,457 5,900 125 1027,209 5,892 242 204 6.71 6.92
-------- -------- -------- -------- ------ ------
Total investment securities 142,123 163,692 2,301 2,613144,526 154,935 4,684 4,959 6.48 6.396.40
-------- -------- -------- -------- ------ ------
Federal funds sold and other 2,974 1,492 43 24 5.78 6.431,983 2,231 55 61 5.55 5.47
-------- -------- -------- -------- ------ ------
Total interest-earning assets 401,438 406,178 8,096 7,999404,464 402,781 16,321 16,001 8.07 7.887.95
-------- -------- ------ ------
Other non-earning assets 24,650 24,25524,422 23,522
-------- --------
Total assets $426,088 $430,433$428,886 $426,303
======== ========
Interest-bearing deposits:
Demand $ 51,58051,305 $ 47,620 323 339 2.50 2.8547,607 633 681 2.47 2.86
Money market 17,724 20,219 127 146 2.8718,147 19,656 262 286 2.89 2.91
Savings 68,062 70,380 499 52867,481 70,340 990 1,062 2.93 3.003.02
Time 174,663 181,290 2,314 2,462 5.30 5.43174,727 179,400 4,644 4,863 5.32 5.42
-------- -------- -------- -------- ------ ------
Total interest-bearing deposits 312,029 319,509 3,263 3,475 4.18311,660 317,003 6,529 6,892 4.19 4.35
Federal funds purchased 182 1,538 2 21 4.40 5.46379 1,297 11 36 5.80 5.55
Repurchase agreements 23,280 16,102 267 181 4.59 4.5023,213 16,056 525 368 4.52 4.58
Other borrowings 1,905 - 54 - 5.67 -
-------- -------- -------- -------- ------ ------
Total interest-bearing
liabilities 335,491 337,149 3,532 3,677 4.21337,157 334,356 7,119 7,296 4.22 4.36
-------- -------- ------ ------
Demand deposits 37,861 38,16238,156 37,724
Other liabilities 2,336 2,5532,650 2,858
Shareholders' equity 50,400 52,56950,923 51,365
-------- --------
Total liabilities and
shareholders' equity $426,088 $430,433$428,886 $426,303
======== ========
Interest rate spread 3.86% 3.52%3.85% 3.59%
====== ======
Net interest income 4,564 4,3229,202 8,705
======== ========
Taxable equivalent adjustment 125 123257 242
======== ========
Net yield on earning assets 4.55% 4.26%4.32%
====== ======
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):
For three months ended June 30
Interest
Average Balance Income/Expense Yield/Rate
------------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- --------
Loans:
Commercial $ 74,366 $ 67,044 $ 1,651 $ 1,537 8.88% 9.17%
Mortgage 132,961 130,491 2,902 2,810 8.73 8.61
Consumer 52,219 52,661 1,277 1,272 9.78 9.66
-------- -------- -------- -------- ------ ------
Total loans 259,546 250,196 5,830 5,619 8.98 8.98
-------- -------- -------- -------- ------ ------
Investment securities:
U. S. Government 45,932 67,392 698 1,010 6.08 5.99
Federal agencies 70,819 51,866 1,141 843 6.44 6.50
State and municipal 23,186 21,132 427 391 7.37 7.40
Other investments 6,964 5,885 117 102 6.72 6.93
-------- -------- -------- -------- ------ ------
Total investment securities 146,901 146,275 2,383 2,346 6.49 6.42
-------- -------- -------- -------- ------ ------
Federal funds sold and other 884 2,584 12 37 5.43 5.73
-------- -------- -------- -------- ------ ------
Total interest-earning assets 407,331 399,055 8,225 8,002 8.08 8.02
-------- -------- ------ ------
Other non-earning assets 24,412 23,167
-------- --------
Total assets $431,743 $422,222
======== ========
Interest-bearing deposits:
Demand $ 51,033 $ 47,593 310 342 2.43 2.87
Money market 18,566 19,098 135 140 2.91 2.93
Savings 66,907 70,300 491 534 2.94 3.04
Time 174,790 177,198 2,330 2,401 5.33 5.42
-------- -------- --------- -------- ------ ------
Total interest-bearing deposits 311,296 314,189 3,266 3,417 4.20 4.35
Federal funds purchased 574 1,058 9 15 6.27 5.67
Repurchase agreements 23,148 16,010 258 187 4.46 4.67
Other borrowings 3,860 - 54 - 5.60 -
-------- -------- --------- -------- ------ ------
Total interest-bearing
liabilities 338,878 331,257 3,587 3,619 4.23 4.37
--------- -------- ------ ------
Demand deposits 38,545 37,290
Other liabilities 2,835 3,458
Shareholders' equity 51,485 50,217
-------- --------
Total liabilities and
shareholders' equity $431,743 $422,222
======== ========
Interest rate spread 3.84% 3.65%
====== ======
Net interest income 4,638 4,383
========= ========
Taxable equivalent adjustment 132 119
========= ========
Net yield on earning assets 4.55% 4.39%
====== ======
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 $492,000$484,000 at
March 31,June 30, 1998.
Foreclosed properties of $385,000 at March 31,1998June 30,1998 and December 31, 1997
include two commercial real estate properties.
Loans in a nonaccrual status at March 31,June 30, 1998 were $107,000$99,000 compared with
$393,000 at December 31, 1997. Loans on accrual status and past due 90 or more
at March 31,June 30, 1998 were $205,000$38,000 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 .1% at March 31,June 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 quarterfirst
six months of 1998 as a percentage of average loans declined to .02%.04 % in 1998
from .04%.06 % in the 1997 quarter.first half of 1997. These charge-off ratios are low by
industry standards.
During the first quartersix months of 1998 the gross amount of interest income
that would have been recorded on nonaccrual loans and restructured loans at March 31,June
30, 1998, if all such loans had been accruing interest at the original
contractual rate, was $3,000.$5,000. 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 $252,000$475,000 for the first half and $223,000
for the second quarter of 1998 versus $500,000 and $243,000$257,000, respectively, for
the first quarter of 1997.1997 periods. The reserve for loan losses totaled $3,465,000$3,637,000 at March 31,June 30,
1998 an increase of 5.7%11.0% over the $3,277,000 recorded at December 31, 1997. The
ratio of reserves to loans, less unearned discount, was 1.34%1.40% at March 31,June 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 quartersix months of 1998 was $896,000,$1,876,000, an
increase of 21.4%23.3% from the $738,000$1,521,000 reported in the first quartersix months of 1997.
The major reasons for the 1998 first quarterhalf growth in non-interest income were a
21.5%19.0% increase in trust and investment services to $519,000$1,067,000 due to growth in
managed investment accounts and an increase in mortgage banking income of 300%138.3%
to $104,000$193,000 due to increased origination and sale of fixed rate residential
mortgage loans. Service charges on deposit accounts were $438,000 for the first
six months of 1998, up 14.7% over the first half of 1997 while non-deposit fees
and insurance commissions were up 146.2% to $128,000 due primarily to increased
non-customer ATM fees.
Non-interest income for the second quarter of 1998 was $980,000, an
increase of 25.2% from the $783,000 reported in the second quarter of 1997. The
major reasons for the 1998 second quarter growth in non-interest income were a
16.6% increase in trust and investment services to $548,000 due to growth in
managed investment accounts and an increase in mortgage banking income of 61.8%
to $89,000 due to increased origination and sale of fixed rate residential
mortgage loans. Service charges on deposit fees were $187,000$251,000 for the firstsecond
quarter of 1998, up 1.1%27.4% over the firstsecond quarter of 1997 while non-deposit fees
and insurance commissions were up 114.8%180.0% to $58,000$70,000 due largely to increased
non-customer ATM fees.
NON-INTEREST EXPENSE
Non-interest expense for the first quartersix months of 1998 was $2,673,000,$5,421,000, a
6.3%7.2% increase from the $2,515,000$5,057,000 reported for the same period last year.
Salaries increased 2.4%2.2% from the same period last year to $1,206,000$2,441,000 in 1998
while pension and other employee benefits increased 5.9%8.7% to $287,000.$575,000, largely
from increased medical insurance. Occupancy and equipment expense increased
25.9%35.7% to $905,000 due to depreciation and maintenance on new technology
equipment primarily related to
technology.and increased license fees on existing equipment. Core deposit
intangible amortization of $112,000 and $113,000$225,000 for the first quarterhalf of 1998 and 1997 respectively,
represents the amortization of the premium paid for deposits acquired at Gretna
in August 1995 and Yanceyville in 1996. Other non-interest expense increased
.8%1.3% to $498,000$1,034,000 in the first half of 1998.
Non-interest expense for the second quarter of 1998.
1998 was $2,748,000, a 8.1%
increase from the $2,542,000 reported for the same period last year. Salaries
increased 2.0% from the same period last year to $1,235,000 for the first six
months of 1998 while pension and other employee benefits increased 11.6% to
$288,000. Occupancy and equipment expense increased 46.3% due to new equipment
and higher license fees, primarily related to technology. Other non-interest
expense increased 1.7% to $536,000 in the second quarter of 1998 from the same
prior year period.
INCOME TAX PROVISION
The income tax provision for the first quartersix months of 1998 was $749,000,$1,513,000,
an increase of $107,000$167,000 from the $642,000$1,346,000 reported a year earlier. The
effective tax rate for the first quartersix months of 1998 was 31.1%30.7% compared to 29.5%30.4%
for the first quarterhalf of 1997.
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 March 31,June 30, 1998 the Corporation had a ratio of 17.0%17.4% for Tier I
and a ratio of 18.2%18.7% for total capital. At December 31, 1997 and 1996 these
ratios were 17.1% and 18.4%, respectively. A cash dividend of $.21$.24 per share was
paid on 3,051,733 shares of common stock outstanding on March 27,June 26, 1998 to
shareholders of record March 13,June 8, 1998. This dividend totaled $641,000.$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
it's impact on net interest income is the primary market risk exposure. The
Asset/Liability Investment Committee ("ALCO") is primarily responsible for
establishing asset and liability strategies and for monitoring and controlling
liquidity and interest rate risk. ALCO uses computer simulation analysis to
measure the sensitivity of earnings and market value of equity to changes in
interest rates.
The projected changes in net interest income and market value of portfolio
equity ("MVE") to changes in interest rates are calculated and monitored by ALCO
as indicators of interest rate risk. The projected changes in net interest
income and MVE to changes in interest rates at March 31,1998June 30,1998 were not materially
different from December 31, 1997.
The Corporation's net liquid assets to net liabilities ratio was 26.9%25.2% at
March 31,June 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) ExhibitsExhibit 10.1 - Agreement between American National Bank and Trust
Company and T. Allen Liles dated June 1, 1998.
(b) Exhibit 27 - Financial Data Schedule EX-27
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN NATIONAL BANKSHARES INC.
/s/ Charles H. Majors
----------------------------------------------------------------------
Charles H. Majors
Date - May 11,June 13, 1998 President and Chief Executive Officer
/s/ T. Allen Liles
---------------------------------
T. Allen Liles
Senior Vice-President and
Secretary-Treasurer
Date - May 11,June 13, 1998 Secretary-Treasurer (Chief Financial Officer)