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This is a conforming paper copy pursuant to Rule # 901(d) of Regulation S-T.
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 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)
Registrant's telephone number, including area code: 804-792-5111
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class
Common Stock ($1.00 Par Value)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 19, 1998
Common Stock ($1.00 Par Value) 3,051,733 Shares
State the aggregate market value of the voting stock held by non-affiliates
of the registrant
Aggregate market value of voting Based upon the price of the most
stock held by non-affiliates recent sale known to management as of
$79,564,745 March 19, 1998
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1 - BUSINESS
American National Bankshares Inc. ("the Corporation") is a one-bank holding
company which was organized under the laws of the State of Virginia in 1984. On
September 1, 1984, the Corporation acquired all of the outstanding capital stock
of American National Bank and Trust Company ("the Bank"), a National Banking
Association chartered in 1909 under the laws of the United States. The Bank is
the only subsidiary of the Corporation. At March 19, 1998 the Corporation
employed 181 persons.
American National Bank and Trust Company
The Bank has been operating as a commercial bank in Danville, Virginia
since its organization in 1909. On March 14, 1996, the Corporation completed the
acquisition of Mutual Savings Bank, F.S.B. ("Mutual") and Mutual was merged with
and into American National Bank and Trust Company. In this transaction the
Corporation exchanged 879,798 common shares, at an exchange ratio of .705 of a
share of the Corporation's common stock, for each of Mutual's 1,248,100 common
shares.
The operations of the Bank are conducted at eleven offices located
throughout the Bank's trade area, which includes the City of Danville, City of
Martinsville, Pittsylvania and Henry Counties in Virginia, Town of Yanceyville
and the northern half of Caswell County in North Carolina. Eight of these
offices are located in Danville, one office each in Collinsville, Virginia,
Gretna, Virginia and Yanceyville, North Carolina. The Bank received approval to
establish an office in Chatham, Virginia with an anticipated opening date in
late 1998. The Bank also has nine automated teller machines at various
locations in the trade area. The Bank offers all services normally offered by a
full-service commercial bank, including commercial and individual demand and
time deposit accounts, commercial and individual loans and trust services.
Competition
The Bank's primary service area is generally defined as the City of
Danville, City of Martinsville, Pittsylvania and Henry Counties in Virginia,
Town of Yanceyville and the northern half of Caswell County in North Carolina.
Vigorous competition exists in this service area. The Bank competes not only
with other commercial banks but also with diversified financial institutions,
money market and mutual funds, and mortgage and finance companies. As of March
19, 1998, there were approximately 17 banks operating in this service area.
American National Bank and Trust Company is the largest bank operating solely in
this service area. No new banks or savings and loan associations have been
chartered in the Danville area in the past five years. Several branch offices of
existing banks have been opened in this trade area in the past two years.
Supervision and Regulation
The Corporation is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("the Act") and is registered as such with the Board
of Governors of the Federal Reserve System ("the Federal Reserve Board"). As a
bank holding company, the Corporation is required to file with the Federal
Reserve Board an annual report and such other information as may be required.
The Federal Reserve Board may also make examinations of the Corporation.
The operations of the Bank are subject to federal statutes and to
regulations of the Comptroller of the Currency, the Federal Reserve Board and
the Federal Deposit Insurance Corporation, which insures the Bank's deposits.
The primary supervisory authority over the Bank is the Comptroller of the
Currency, which regularly examines such areas as reserves, loans, investments,
management practices and other aspects of the Bank's operations. These
examinations are designed primarily for the protection of the Bank's depositors.
In addition to these regular examinations, the Bank must furnish the Comptroller
periodic reports containing a full and accurate statement of its affairs.
As a national bank, the Bank is a member of the Federal Reserve System and
is affected by general fiscal and monetary policies of the Federal Reserve
Board. The techniques used by the Federal Reserve Board include setting the
reserve requirements of member banks and establishing the discount rate on
member bank borrowings.
Government Monetary Policies and Economic Controls
The policies of the Federal Reserve Board have a direct effect on the
amount of bank loans and deposits and the interest rates charged and paid
thereon. While current economic conditions, the policies of the Federal Reserve
Board (and other regulatory authorities) designed to deal with these conditions
and the impact of such conditions and policies upon the future business and
earnings of the Bank cannot accurately be predicted, they can materially affect
the revenues and income of commercial banks.
Foreign Operations
The Corporation does not engage in any foreign operations.
Executive Officers
This information is included under Part III Item 12(b) below.
ITEM 2 - PROPERTIES
The principal executive offices of the Corporation as well as the principal
executive offices of the Bank are located at 628 Main Street, Danville,
Virginia. As of March 19, 1998 the Bank maintained seven full service branches
located within the City of Danville at 1013 South Main Street, 1081 Riverside
Drive, 239 Nor-Dan Drive, 1407 South Boston Road, 2016 West Main Street, 600
West Main Street and 103 Tower Drive. Full service branches are also located at
109 Main Street, Gretna, Virginia, 2484 Virginia Avenue, Collinsville, Virginia
and 173 Main Street, Yanceyville, North Carolina. The Bank owns and operates
nine Automated Teller Machines ("ATMs"). Four ATMs are located on branch office
properties. Other ATMs are located at Piedmont Mall, Piedmont Drive in Danville,
at Danville Regional Medical Center, 142 South Main Street, Danville,the Express
Mart, Inc., U. S. Highway 29, Tightsqueeze, Virginia, Hillcrest Shopping Center,
Highway 86, Yanceyville, North Carolina and Liberty Fair Mall, 240 Commonwealth
Boulevard, Martinsville, Virginia.
All property is owned by the Bank with the exception of 2016 West Main
Street, Danville, the ATM locations at Piedmont Mall, the Express Mart, Inc.,
Hillcrest Shopping Center, Liberty Fair Mall and Danville Regional Medical
Center. Both the land and building at 2016 West Main Street are leased and the
space occupied at Piedmont Mall, the Express Mart, Inc., Hillcrest Shopping
Center, Liberty Fair Mall and the Danville Regional Medical Center are leased.
The Bank also owns a parking lot for its employees fronting on Ridge Street in
close proximity to the main office and owns approximately 2.5 acres of land on
Piedmont Drive in Danville, opposite of Piedmont Mall for future expansion of
its retail banking operations. The Bank owns a lot at 13880 U.S. Highway 29,
Chatham, Virginia, to establish a new branch in late 1998. There are no
mortgages or liens against any property of the Bank or the Corporation.
ITEM 3 - LEGAL PROCEEDINGS
There are no legal actions or proceedings pending to which the Corporation
is a party.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Corporation's common stock is not traded on any stock exchange but is
listed on the OTC (Over The Counter) Bulletin Board under the symbol "AMNB". At
March 19, 1998 the Corporation had 1,460 shareholders. The tables below present
the high and low sales' prices known to management for the Corporation's common
stock and dividends declared for the past two years. Market value and dividends
are shown per share and are based on 3,279,798 and 3,051,733 shares outstanding
at December 31, 1996 and 1997, respectively.
First Second Third Fourth
Market Value Quarter Quarter Quarter Quarter
1997 Common Stock $23.50 - 24.75 $23.50 - 27.00 $26.25 - 28.25 $27.25 - 32.00
1996 Common Stock $26.00 - 30.00 $23.00 - 27.00 $23.25 - 26.00 $24.00 - 26.38
Per Share First Second Third Fourth
Dividends Declared Quarter Quarter Quarter Quarter Total
1997 Common Stock $ .18 $ .21 $ .21 $ .21 $ .81
1996 Common Stock $ .15 $ .18 $ .18 $ .18 $ .69
ITEM 6 - SELECTED FINANCIAL DATA
Summary of Selected Consolidated Financial Data
(in thousands, except per share amounts)
American National Bankshares Inc & Subsidiary
1997 1996 1995 1994 1993
Operations Information:
Interest income:
Loans.................................................$ 22,441 $ 20,335 $ 18,432 $ 14,923 $ 14,182
Federal funds sold and other.......................... 237 435 202 210 362
Investment securities................................. 9,050 9,162 7,300 6,701 7,549
----------- ----------- ----------- ----------- -----------
Total interest income............................... 31,728 29,932 25,934 21,834 22,093
Interest expense........................................ 14,590 14,370 11,484 8,919 9,716
----------- ----------- ----------- ----------- -----------
Net interest income..................................... 17,138 15,562 14,450 12,915 12,377
Provision for loan losses............................... (1,100) (673) (484) (272) (214)
Non-interest income..................................... 3,201 2,691 2,035 2,122 2,011
Non-interest expense.................................... (10,245) (10,167) (8,702) (8,150) (7,586)
----------- ----------- ----------- ----------- -----------
Income before income taxes.............................. 8,994 7,413 7,299 6,615 6,588
Income taxes............................................ 2,725 2,381 2,283 2,106 2,023
----------- ----------- ----------- ----------- -----------
Net income.............................................. $ 6,269 $ 5,032 $ 5,016 $ 4,509 $ 4,565
=========== =========== =========== =========== ===========
Balance Sheet Information:
Investment securities...................................$143,077 $175,757 $149,208 $122,509 $127,526
Net loans............................................... 251,173 233,509 212,684 188,034 177,130
Total deposits.......................................... 351,603 361,983 327,342 282,791 283,322
Shareholders' equity.................................... 50,003 52,218 48,912 45,045 42,815
Total assets............................................ 423,640 440,158 388,479 337,355 327,908
Per Share Information:
Net income.............................................. $ 1.99 $ 1.54 $ 1.56 $ 1.40 $ 1.42
Dividends............................................... .81 .69 .56 .75 .47
Book value.............................................. 16.39 15.92 15.22 14.02 13.32
Ratios:
Return on average assets................................ 1.47% 1.24% 1.43% 1.37% 1.41%
Return on average shareholders' equity.................. 12.51% 10.12% 10.62% 10.13% 11.15%
Total risk-based capital/assets......................... 18.37% 20.66% 23.67% 25.98% 26.35%
Leverage capital/assets................................. 11.80% 11.86% 12.59% 13.35% 13.06%
Net charge-offs to average net loans.................... .36% .17% .09% .04% .09%
Reserve for loan losses to period-end
loans, net of unearned income......................... 1.29% 1.30% 1.28% 1.29% 1.26%
The financial information for years 1993 through 1995 has been restated to reflect the merger with Mutual Savings Bank, FSB.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
American National Bankshares Inc. (the Corporation) was organized in 1984
for the purpose of acquiring all of the outstanding shares of American National
Bank and Trust Company (the Bank). The Bank was chartered and opened for
business in February 1909. Under an agreement and plan of merger, the Bank was
acquired by the Corporation on September 1, 1984.
On March 14, 1996, the Corporation completed the merger of Mutual Savings
Bank, F.S.B. (Mutual) into the Bank, 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 each outstanding
share of Mutual 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
addition, all prior periods presented have been restated to give effect to the
merger.
In March 1996 the shareholders of the Corporation approved an amendment to
the articles of incorporation to increase the number of authorized shares of the
Corporation's common stock from 3,000,000 shares to 10,000,000 shares.
On August 25, 1996 the Corporation entered into an agreement with
FirstSouth Bank of Burlington, North Carolina to purchase the branch office and
associated ATM of FirstSouth Bank located in Yanceyville, (Caswell County) North
Carolina. This acquisition was completed October 25, 1996. The transaction was
accounted for as a purchase.
Performance Summary
The Corporation and Bank reported record profitability during 1997. Net
income of $6,269,000 for 1997 increased by $1,237,000 or 25% over net income of
$5,032,000 for 1996. Net income for 1996 was adversely affected by costs
associated with the merger of Mutual and a one time FDIC assessment against
Mutual deposits to recapitalize the SAIF fund. Net income for 1997 exceeded 1996
operating income of $5,935,000 (which excludes the effect of the merger costs
and FDIC assessment and related tax effects) by $334,000, or 6%.
The economy of the Bank's trade area continues to be healthy as evidenced
by another year of strong loan demand. During 1997, net loans increased
$17,663,000, or 8%. Total deposits declined $10,380,000 during 1997, or 3%, as
the Bank executed a planned strategy to reduce high cost time deposits.
Earnings and Capital
On a per common share basis, net income (based on average shares
outstanding of 3,144,834 in 1997, 3,267,038 for 1996 and 3,213,641 for 1995) was
$1.99 in 1997, $1.54 in 1996, and $1.56 in 1995. The Corporation decreased
shareholders' equity during 1997 by $2,215,000 or 4% through the repurchase of
228,065 shares of common stock for $6,278,000. The reduction from stock
repurchase was offset by retention of 1997 earnings of $3,756,000 and an
increase in net unrealized gains on "available for sale" securities of $307,000.
This followed an increase in capital of $3,306,000 or 7%, in 1996. The increase
in 1996 resulted from retention of 1996 earnings of $2,889,000, proceeds of
$731,000 from exercise of stock options less a reduction of $314,000 in net
unrealized gains on "available for sale" securities. Shareholders' equity was
11.8% of assets at December 31, 1997 and 11.9% at December 31, 1996.
Shareholders' equity was $50,003,000 at December 31, 1997 and $52,218,000 at
December 31, 1996. The total market value of American National Bankshares Inc.
common stock at $31.00 per share (the last trade recorded on the OTC Bulletin
Board during 1997) was $94,604,000. The market value of the Corporation's common
stock was 189 percent of its book value. Book value per common share was $16.39
at the close of 1997.
During 1997, the Corporation increased its reserve for loan losses to
$3,277,000 an increase of $207,000 or 7% from 1996. The reserve, as a percentage
of loans, was 1.29% at December 31, 1997 and 1.30% at December 31, 1996.
The return of net income on average total assets was 1.47% in 1997 compared
to 1.24% in 1996 and 1.43% in 1995. The return of operating earnings on average
total assets (which excludes the effect of the merger and FDIC assessment and
related tax effects) was 1.47% in 1997, 1.46% in 1996 and 1.47% in 1995.
The return on average shareholders' equity was 12.51% in 1997 compared to
10.12% in 1996 and 10.62% in 1995. The return on average shareholders' equity
(excluding the effect of the merger and FDIC assessment and related tax effects)
was 11.94% in 1996 and 10.91% in 1995.
Mergers and Acquisitions
On March 14, 1996 American National Bankshares Inc. exchanged .705 of a
share of its common stock for each share of Mutual common stock. Based on
American National Bankshares stock price as of February 27, 1996 of $27, the
transaction represented an exchange value of approximately $19.04 for each share
of Mutual common stock. The purchase price was 1.69 times Mutual's June 30, 1995
book value. The merger was accounted for as a pooling of interests.
At the consummation of the merger on March 14, 1996, Mutual had total
assets of $84,718,000, total deposits of $67,996,000 and shareholders' equity of
$15,958,000. The Corporation had approximately 1,492 shareholders at December
31, 1996.
On October 25, 1996 the Bank purchased the branch office and associated ATM
of FirstSouth Bank located in Yanceyville, (Caswell County) North Carolina. The
Bank assumed $21,405,000 in deposits and purchased $4,775,000 in loans as well
as the building, furniture, fixtures and equipment. The Bank paid a premium of
$1,516,000, approximately 7% of the deposits assumed. The transaction was
accounted for as a purchase and the premium was recorded as a core deposit
intangible asset. The Yanceyville branch office is approximately 12 miles from
the City of Danville and Management views this as a natural expansion of the
Corporation's market area. The Bank already serves many customers who work in
the greater Danville area but reside in Yanceyville and Caswell County.
Trends and Future Events
The economic conditions of the Corporation's trade area have continued to
be healthy during 1997 as evidenced by another year of strong loan demand. The
Corporation's net loans grew at a rate of 8% during 1997 following a 10%
increase in 1996. Total deposits declined 3% during 1997 following an increase
in 1996 as the Bank executed a planned strategy to reduce high cost time
deposits.
The weighted average yield on interest earning assets increased and the
weighted average cost of interest-bearing liabilities decreased during 1997 due
to a shift in balances from investments to loans, due to higher yielding
investments and due to lower yields paid on interest-bearing liabilities. As a
result of the Corporation's asset and liability repricing strategy and increased
loan demand, the Corporation was able to increase its net interest income
(interest income less interest expense) by 10%. Although management believes the
Corporation has positioned itself to continue to maintain this level of net
interest income into the near future, increased competition and slowing loan and
deposit growth could negatively impact net interest income.
During 1997, time deposits decreased by $10,390,000 or 6% as a result of
the Bank strategy to decrease higher cost deposits. Interest bearing demand
deposits increased $5,253,000 or 11%, and non-interest bearing demand deposits
decreased by $137,000 or less than 1%. Money market deposits declined by
$4,659,000, or 21%, as certain commercial accounts switched to higher yielding
repurchase agreements and as individuals transferred balances to less
restrictive interest bearing demand accounts. Repurchase agreements which are
not included in deposits increased $2,980,000, or 20%, during 1997. Total
deposits decreased $10,380,000 or 3% during 1997 after increasing $34,640,000 or
11% during 1996. The increase in total deposits during 1996 included $21,405,000
in deposits assumed in the Yanceyville acquisition. The increase in deposits
during 1996, excluding the Yanceyville acquisition, was 4%.
Pursuant to the Agreement and Plan of Reorganization by and between Mutual
and the Corporation, Mutual Mortgage of the Piedmont, Inc. was organized in 1996
as a wholly owned subsidiary of American National Bank and Trust Company. The
primary purpose of this organization is to originate and sell mortgage loans.
Mutual Mortgage of the Piedmont, Inc. began operations on December 2, 1996. Its
main office is located in the Bank's branch office building at 103 Tower Drive.
The financial condition and results of operations of the Mortgage Company are
included in the Consolidated Balance Sheets and Consolidated Statements of
Income of the Corporation.
On February 1, 1996, the Federal Reserve Bank ("FRB") lowered its discount
rate by 1/4% and the major money center banks followed by lowering their prime
rate by 1/4% on the same day. The major money center banks increased their prime
rate 1/4% on March 26, 1997 in response to slightly higher U.S. Treasury bill
and bond yields. Long term U.S. Treasury yields have declined almost 1% since
March 1997 in response to the Asian financial crisis and due to low inflation.
As mandated by the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the FDIC adopted regulations effective January 1, 1993, for the
transition from a flat-rate insurance assessment system to a risk-based system
by January 1, 1994. Pursuant to these regulations, the Bank's deposit insurance
assessment was set at the lowest allowable rate of $.23 per $100 of deposits for
the year 1994. The assessment rate was $.04 per $100 of deposits in 1995,
reduced to a minimum $2,000 in 1996 and set at $.01 per $100 of deposits in
1997. In addition to the minimum assessment for American National Bank and Trust
Company, a one time charge to recapitalize the SAIF fund of the FDIC in the
amount of $350,000 was made against the deposits of Mutual during 1996. The Bank
must also pay "OAKAR" premiums on the continuing deposits of Mutual. "OAKAR"
premiums were assessed at an annual rate of $.17 per $100 of Mutual deposits in
1996 and $.06 per $100 of Mutual deposits in 1997.
Among other things, FDICIA identifies five capital categories for insured
depository institutions: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". FDICIA requires the federal banking regulators to take prompt
corrective action with respect to insured depository institutions that do not
meet minimum capital requirements.
The FRB has adopted regulations establishing relevant capital requirements
for banks. Under the regulations, a well capitalized institution must have a
Tier I risk-based capital ratio of at least six percent, a total risk-based
capital ratio of at least ten percent and a leverage ratio of at least five
percent and not be subject to a capital directive order. Under these guidelines,
the Bank has always been and continues to be considered well capitalized.
Certain statements contained above in this section are forward-looking
statements that involve a number of risks and uncertainties. In addition to the
factors discussed above regarding the local economy and the expansion of the
Corporation's market area are other factors that could cause actual results to
differ materially. The factors include business conditions, development of new
products and services, interest rate trends, future legislation, regulatory
controls and the risks described from time to time in the Corporation's SEC
reports.
Year 2000 Issue
The Corporation is aware of the issues associated with the programming code
in existing computer systems as the millenium (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 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 efforts will be complete by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Corporation's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000.
Based on preliminary study, the corporation expects to spend approximately
$125,000 from 1998 through 1999 to modify its computer information systems
enabling proper processing of transactions related to the year 2000 and beyond.
The amount expensed in 1997 was immaterial.
Net Interest Income
Net interest income, the most significant component of earnings, is the
excess of interest income over interest expense. For analytical purposes, net
interest income is adjusted to a taxable equivalent basis to recognize the
income tax savings on tax-exempt assets, such as state and municipal securities.
A tax rate of 34% was used in adjusting interest on tax-exempt securities and
loans to a fully taxable equivalent basis for the years 1997, 1996 and 1995.
During 1997, taxable equivalent net interest income increased to
$17,622,000, up 10% from $15,978,000 in 1996. Taxable equivalent net interest
income for 1996 was up 8% from $14,729,000 recorded in 1995. The $1,644,000
increase in taxable equivalent net interest income during 1997 consisted of
$1,427,000 due to increases in volume and $217,000 attributable to rate. The
$1,249,000 increase in taxable equivalent net interest income during 1996 was
the net result of an increase of $1,101,000 due to volume and $148,000
attributable to rate.
_______________________________________________________________________________
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):
Average Balance Interest Income/Expense Average Yield/Rate
----------------------------- ------------------------- -----------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- -------- -------- ------- ------- ------- ------ ------ ------
Loans:
Commercial $ 65,457 $ 59,385 $ 59,828 $ 6,004 $ 5,553 $ 5,325 9.17% 9.35% 8.90%
Mortgage 131,004 118,223 107,955 11,366 10,300 9,551 8.68 8.71 8.85
Consumer 52,733 46,227 38,096 5,109 4,532 3,604 9.69 9.80 9.46
-------- -------- -------- ------- ------- -------
Total loans 249,194 223,835 205,879 22,479 20,385 18,480 9.02 9.11 8.98
-------- -------- -------- ------- ------- -------
Investment securities:
U. S. Government 66,821 101,138 71,290 4,018 6,022 3,860 6.01 5.95 5.41
Federal agencies 53,507 26,984 35,703 3,471 1,712 2,315 6.49 6.34 6.48
State and municipal 21,349 18,363 12,340 1,582 1,354 926 7.41 7.37 7.50
Other investments 6,155 6,357 6,172 425 440 430 6.90 6.92 6.97
-------- -------- -------- ------- ------- -------
Total investment securities 147,832 152,842 125,505 9,496 9,528 7,531 6.42 6.23 6.00
-------- -------- -------- ------- ------- -------
Federal funds sold and other 4,295 8,121 3,350 237 435 202 5.52 5.36 6.03
-------- -------- -------- ------- ------- -------
Total interest-earning assets 401,321 384,798 334,734 32,212 30,348 26,213 8.02 7.89 7.83
-------- -------- -------- ------- ------- -------
Other non-earning assets 24,367 21,905 17,053
-------- -------- --------
Total assets $425,688 $406,703 $351,787
======== ======== ========
Deposits:
Demand $ 48,893 $ 43,012 $ 36,892 1,408 1,246 1,085 2.88 2.90 2.94
Money market 19,463 21,414 21,480 572 638 695 2.94 2.98 3.24
Savings 70,238 65,764 69,727 2,140 2,013 2,171 3.05 3.06 3.11
Time 176,403 172,390 136,725 9,590 9,670 7,193 5.44 5.61 5.26
-------- -------- -------- ------- ------- -------
Total deposits 314,997 302,580 264,824 13,710 13,567 11,144 4.35 4.48 4.21
Federal funds purchased 773 190 1,618 44 11 99 5.69 5.79 6.12
Repurchase agreements 17,909 16,757 5,877 836 792 241 4.67 4.73 4.10
-------- -------- -------- ------- ------- -------
Total interest-bearing
liabilities 333,679 319,527 272,319 14,590 14,370 11,484 4.37 4.50 4.22
-------- -------- -------- ------- ------- -------
Demand deposits 39,752 34,723 29,303
Other liabilities 2,128 2,739 2,919
Shareholders' equity 50,129 49,714 47,246
-------- -------- --------
Total liabilities and
Shareholders' equity $425,688 $406,703 $351,787
======== ======== ========
Interest rate spread 3.65% 3.39% 3.61%
===== ===== =====
Net interest income $17,622 $15,978 $14,729
======= ======= =======
Taxable equivalent adjustment $ 484 $ 416 $ 280
======= ======= =======
Net yield on earning assets 4.39% 4.15% 4.40%
===== ===== =====
Changes in Net Interest Income (Rate/Volume Analysis)
Net interest income is the product of the volume of average earning assets
and the average rates earned, less the volume of average interest-bearing
liabilities and the average rates paid. The portion of change relating to both
rate and volume is allocated to each of the rate and volume changes based on the
relative change in each category. The following table analyzes the changes in
both rate and volume components of net interest income on a taxable equivalent
basis for the past two years (in thousands):
1997 vs. 1996 1996 vs. 1995
----------------------------- -----------------------------
Interest Change Interest Change
Increase Attributable to Increase Attributable to
(Decrease) Rate Volume (Decrease) Rate Volume
Interest income
Loans:
Commercial $ 451 $(108) $ 559 $ 228 $ 268 $ (40)
Mortgage 1,066 (67) 1,133 749 (147) 896
Consumer 577 (62) 639 928 135 793
------- ------ ------- -------- ------ ------
Total loans 2,094 (237) 2,331 1,905 256 1,649
------- ------ ------- -------- ------ -------
Investment securities:
U.S. Government (2,004) 59 (2,063) 2,162 416 1,746
Federal agencies 1,759 39 1,720 (603) (49) (554)
State and municipal 228 7 221 428 (16) 444
Other investments (15) (1) (14) 10 (3) 13
-------- ------ -------- -------- ------ -------
Total investment securities (32) 104 (136) 1,997 348 1,649
-------- ------ -------- -------- ------ -------
Federal funds sold and other (198) 13 (211) 233 (25) 258
-------- ------ -------- -------- ------ -------
Total interest income 1,864 (120) 1,984 4,135 579 3,556
-------- ------ -------- -------- ------ -------
Interest expense
Deposits:
Demand 162 (7) 169 161 (17) 178
Money market (66) (9) (57) (57) (55) (2)
Savings 127 (9) 136 (158) (36) (122)
Time (80) (302) 222 2,477 502 1,975
-------- ------ -------- -------- ------ -------
Total deposits 143 (327) 470 2,423 394 2,029
Federal funds purchased 33 - 33 (88) (5) (83)
Repurchase agreements 44 (10) 54 551 42 509
-------- ------ -------- -------- ------ -------
Total interest expense 220 (337) 557 2,886 431 2,455
======== ====== ======== ======== ====== =======
Net interest income $ 1,644 $ 217 $1,427 $ 1,249 $ 148 $1,101
======== ====== ======== ======== ====== =======
Provision and Reserve for Loan Losses
The provision for loan losses is an amount added to the reserve against
which loan losses are charged. The amount of the provision is determined by
Management based upon its assessment of the size and quality of the loan
portfolio and the adequacy of the reserve in relation to the risks inherent
within the loan portfolio. The 1997 provision for loan losses was $1,100,000 and
compares with $673,000 in 1996 and $484,000 in 1995.
The increase in the provision for loan losses was influenced by increased
charge-offs and growth in loans. During recent years, the Bank has experienced
unusually low levels of charge-offs. Net charge-offs increased to $893,000 in
1997 from $385,000 in 1996 because two commercial loans were written down
$402,000 prior to acceptance of $385,000 in real estate collateral. The Bank is
vigorously attempting to market the real estate owned through real estate
agents. The reserve for loan losses totaled $3,277,000 at December 31, 1997, an
increase of 7% over December 31, 1996. The ratio of reserve to loans, less
unearned discount, was 1.29% at December 31, 1997 and 1.30% at December 31,
1996.
The Bank's Loan Committee has responsibility for determining the level of
the reserve for loan losses, subject to the review of the Board of Directors.
The Loan Committee has taken economic factors, as well as any other external
events that may affect the value and collectability of the loan portfolio, into
consideration when making its assessment and recommendation.
The methodology used to determine the level of the loan loss reserve on a
quarterly basis includes the identification of losses from a review of the
Corporation's loan "Watch" list. In addition to these identifiable potential
losses, an experience factor for each major category of loans is applied against
the remaining portion of the loans considered to have no more than a normal risk
of collectability. Additional factors considered in determining the level of the
loan loss reserve are economic conditions, historical losses, trends and other
external factors. The sum of these elements is the Loan Committee's recommended
level of the reserve for loan losses.
If the existing level of the loan loss reserve is below the Loan
Committee's recommended level of the reserve at the close of an interim period,
an increase sufficient to eliminate the deficiency is recorded in the current
period provision for loan losses. If the existing level of the reserve exceeds
the recommended level at the close of an interim period, no adjustment is made
to the provision for loan losses if loan growth is expected.
The economy of the Corporation's trade area, which includes the City of
Danville, City of Martinsville, Pittsylvania and Henry Counties in Virginia,
Town of Yanceyville and the northern half of Caswell County in North Carolina,
is dependent primarily on the success of Danville's largest employer (a textile
manufacturing firm), tobacco farming (the major crop of rural Pittsylvania and
Caswell County), tobacco marketing and processing, furniture manufacturing and
Danville's second largest employer, a tire manufacturing plant. Textile
manufacturing, tobacco farming and tobacco processing have been subjected to
external market pressures in recent years but have continued to be prosperous.
The local economy of the Corporation's trade area continues to be strong at
this time and the Corporation's loan losses have not been significant in recent
years; however, an inherent risk to the loan portfolio exists if a significant
decline occurs in any of these industries along with a corresponding reduction
in employment. Management believes the reserve for loan losses is appropriate in
view of this geographic concentration.
The adoption in 1995, of Statement of Financial Accounting Standards Nos.
114 and 118, which address accounting by creditors for loan impairment, did not
have a significant impact on the provision for loan losses.
Mangement has allocated the reserve for loan losses to loan categories as
follows (in thousands):
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
Commercial (including
commercial real estate) $ 873 44% $ 886 40% $ 888 43% $ 858 42% $ 913 38%
Real estate-
residential 129 37 128 38 146 38 121 39 114 42
Consumer 1,173 19 1,152 22 549 19 291 19 275 20
Unallocated 1,102 - 904 - 1,174 - 1,184 - 954 -
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Balance at
end of year $3,277 100% $3,070 100% $2,757 100% $2,454 100% $2,256 100%
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
Management's criteria for evaluating the adequacy of its loan loss reserve
includes individual evaluation of significant loans and overall portfolio
analyses for more homogeneous, smaller balance loan portfolios. Based on
management's evaluation, estimated loan loss reserves are assigned to the
individual loans which present a greater risk of loan loss. The remaining loan
loss reserve is allocated to the remaining loans on an overall portfolio basis
based on historical loss experience. The assessed risk of loan loss is higher in
the commercial and agricultural loan categories as these categories contain
loans which are more significant to the Corporation and to the individual
borrowers, thereby exposing the Corporation to a greater risk of loss in the
event of downturns in the financial position of individual borrowers. The
remaining loan categories are typically for lesser amounts and are distributed
over a much larger population of borrowers, thereby reducing the Corporation's
risk of loan loss.
_______________________________________________________________________________
Loan Losses - Ratios
1997 1996 1995
------- ------- -------
Reserve as percentage of outstanding loans, net of unearned income 1.29% 1.30% 1.28%
Net charge-offs as percentage of reserve 27.23% 12.58% 6.58%
Net charge-offs as percentage of average loans, net of unearned income .36% .17% .09%
Provision as percentage of net charge-offs 123.26% 174.40% 266.92%
Provision as percentage of average loans, net of unearned income .44% .30% .24%
Reserve for loan losses to nonperforming loans 8.34X 93.03X 9.01X
_______________________________________________________________________________
Non-Interest Income
Non-interest income totaled $3,201,000 in 1997 compared with $2,691,000 in
1996 and $2,035,000 in 1995. This was an increase of 19% during 1997 after an
increase of 32% during 1996 and a 4% decrease in 1995. The major components of
non-interest income are trust department income, service charges on deposit
accounts, non-deposit fees and insurance commissions and other income.
The trust department services have been expanded in both corporate and
personal trusts and other fiduciary accounts during the past three years and the
income from the administration of several large estates during this period has
caused some fluctuation in the department's income. The trust department
reported income of $1,888,000 in 1997, a decrease of less than 1% from the
$1,896,000 in 1996 which in turn was a 41% increase from the $1,343,000 reported
in 1995. Beginning in 1995 the trust department expanded its investment
services, including asset allocation, offered to corporate and personal trusts
and other fiduciary accounts. The 41% increase in trust department income during
1996 resulted primarily from the closing of several large estates and from new
business booked in 1996.
Service charges on deposit accounts were $786,000 in 1997, an increase of
31% over $601,000 reported in 1995, which was a 34% increase over the $448,000
recorded for 1995. The increases in 1996 and 1997 were caused in part by the
increase in deposit accounts of $36,295,000 from the acquisition of the Gretna
branch office in August 1995 and $21,410,000 from the acquisition of the
Yanceyville branch office in October 1996. The remaining increases in both years
were attributable to growth in demand deposit accounts and a price increase in
April 1997.
Non-deposit fees and insurance commissions were $156,000 in 1997, an
increase of 47% from the $106,000 reported in 1996 which was off from $114,000
reported in 1995. The large increase in 1997 resulted from renewed focus on
insurance sales and strong loan demand.
Other income was $371,000 in 1997, an increase of $283,000 from the $88,000
recorded in 1996, which in turn was a decrease of 32% from the $130,000 recorded
in 1995. The increase in other income in 1997 resulted primarily from $220,000
of fees from originating and selling fixed rate mortgage loans through a wholly
owned subsidiary of the Bank. There were no fees from loan sales prior to 1997
as the new operation was started in December 1996. Other income also included
gains on sales of securities which were $31,000 in 1997, $0 in 1996 and $46,000
in 1995.
Non-Interest Expense
Non-interest expense totaled $10,245,000 in 1997, an increase of $78,000 or
1% over the $10,167,000 in 1996, which in turn was an increase of $1,465,000 or
17% over the $8,702,000 recorded for 1995. Non-interest expense includes
salaries, pension and other employee benefits, occupancy and equipment expense,
FDIC insurance expense, postage and printing, merger related expense and other
expenses. Excluding $1,406,000 in 1996 and $140,000 in 1995 of non-interest
costs associated with the Mutual merger and the one time FDIC assessment, 1997
non-interest expense increased $1,484,000 or 17% over 1996 while 1996
non-interest expense increased $199,000 or 2% over 1995.
Salaries totaled $4,811,000 for 1997, an increase of 18% over 1996.
Salaries increased $276,000, or 7% of the 18% increase for 1997, from inclusion
of a full year of salaries in 1997 at the Yanceyville branch office purchased on
October 25,1996 and at Mutual Mortgage of the Piedmont, Inc. which began
operations in late 1996. Salaries totaled $4,083,000 in 1996, an increase of 8%
over $3,787,000 reported for 1995.
Pension and other employee benefits totaled $1,076,000 in 1997, an increase
of 18% from the $913,000 recorded in 1996, which in turn was a decrease of 15%
over the $1,073,000 reported in 1995. The percentage increase in 1997 over 1996
approximated the percentage increase in salaries in 1997. In 1996 the pension
plan of Mutual was terminated and a distribution made to the employees. All
employees of Mutual were then added to the Corporation's pension plan. The
decrease in 1996 resulted primarily from a gain recorded on the curtailment and
settlement of Mutual's pension plan.
The total occupancy and equipment expense was $1,437,000 for 1997, an
increase of 19% over $1,212,000 reported for 1996. This, in turn, was an
increase of 16% over $1,044,000 recorded in 1995. The increases in 1997 and 1996
were primarily the cumulative result of adding the Gretna branch office in
August 1995, the Yanceyville branch office in October 1996, and Mutual Mortgage
of the Piedmont, Inc. in December 1996 along with the 1996 move of the
operations departments into the renovated upper two floors of the Tower Drive
branch office.
FDIC insurance expense decreased 83% to $78,000 in 1997 from $467,000 in
1996 which was up 15% from $407,000 in 1995. The FDIC reduced the deposit
insurance assessment rate in 1997 for deposits held by American National Bank
and Trust Company to $.01 per $100 of deposits and to a flat $2,000 in 1996 from
$.04 per $100 of deposits in 1995. The Bank is assessed a higher rate on
deposits assumed from Mutual, and the Mutual assessment rate has decreased from
$.23 per $100 of deposits in 1995 to $.17 per $100 in 1996 to $.06 per $100 in
1997. In 1996 the Bank paid a one-time $350,000 FDIC charge on the Mutual
deposits to recapitalize the SAIF fund. The $350,000 assessment was offset
partially by lower ongoing deposit premiums, but still resulted in higher a FDIC
insurance expense in 1996.
Postage and printing expense was $429,000 in 1997, an increase of 8% from
the $397,000 recorded in 1996, which in turn was an increase of 40% from the
$284,000 recorded in 1995. The increases in 1997 and 1996 were primarily related
to the two branch offices purchased in 1995 and 1996 and the mortgage operation
started in 1996.
Merger-related expense for 1996 was $1,056,000. This included non-recurring
items such as legal services, financial advisory services, accounting services,
regulatory fees, data conversion costs, signage and other expense. Also included
were losses on securities held by Mutual at the time of the merger which were
not compatible with the Corporation's investment program. During 1995, $140,000
was recorded in merger-related expenses. There were no merger related expenses
recorded in 1997.
Core deposit intangible expense represents amortization of premiums paid
for deposits at the Yanceyville and Gretna offices. The increase to $450,000 in
1997 from $318,000 in 1996 and $103,000 in 1995 represents a full year of
amortization for both offices which is calculated on a straight line basis over
ten years.
Other expenses were $1,964,000 in 1997, an increase of 14% over the
$1,721,000 reported in 1996. Other expenses in 1996 decreased 8% from the
$1,865,000 recorded in 1995. The increase of $243,000 in 1997 reflects
additional franchise tax of $78,000, higher audit expense of $61,000 from
special projects, and increases from the two newly acquired branches and the new
mortgage operation.
Income Taxes
The provision for income taxes (total of current and deferred) was
$2,725,000 in 1997, compared with $2,381,000 in 1996 and $2,283,000 in 1995. In
each year, the Corporation was subject to a Federal tax rate of 34%. The major
difference between the statutory rate and the effective rate results from income
which is not taxable for Federal income tax purposes. The primary non-taxable
income is that of state and municipal securities and industrial revenue bonds or
loans. The significant increase in the 1997 provision for income taxes reflects
higher income before income taxes in 1997.
Capital Management
Regulatory agencies issued risk-based capital guidelines which were fully
effective in 1992. The guidelines were established to more appropriately
consider the credit risk inherent in the assets and off-balance sheet activities
of a financial institution in the assessment of capital adequacy.
Under the guidelines, total capital has been defined as core (Tier I)
capital and supplementary (Tier II) capital. The Bank's Tier I capital consists
primarily of stockholder's equity, while Tier II capital consists of the reserve
for loan losses. The definition of assets has been modified to include items on
and off the balance sheet, with each item being assigned a "risk-weight" for the
determination of the ratio of capital to risk-adjusted assets.
The guidelines require that total capital (Tier I and Tier II) of 8% be
held against total risk-adjusted assets, at least half of which (4%) must be
Tier I capital. At December 31, 1997, the Bank's Tier I and Total capital ratios
were 17.14% and 18.37%, respectively. At December 31, 1996, these ratios were
19.42% and 20.66%, respectively. The ratios for both years were well in excess
of the regulatory requirements.
The Corporation's leverage ratios (shareholders' equity divided by year-end
assets) were 11.80% and 11.86% at December 31, 1997 and 1996, respectively. The
leverage ratio has a regulatory minimum of 3%, with most institutions required
to maintain a ratio 100 to 200 basis points above the 3% minimum depending upon
risk profiles and other factors.
The Corporation's 1997 capital formation rate (net income less dividends
declared, divided by average shareholders' equity) was 7.5%. This compares with
5.6% in 1996 and 6.8% in 1995. These ratios evidence the Corporation's
attainment of its goal of meeting future capital requirements by retaining a
portion of operating earnings while providing steadily increasing cash
dividends.
Prior to 1996 the Corporation paid cash dividends on a semi-annual basis.
In 1996 the Corporation began paying dividends on a quarterly basis and the
Board of Directors declared regular quarterly dividends totaling $.81 and $.69
per share of common stock in 1997 and 1996,respectively.
The Board of Directors reviews the Corporation's dividend policy regularly
and increases dividends when justified by earnings after considering future
capital needs.
Asset and Liability Management
The Corporation's primary objectives for asset and liability management are
to identify opportunities to maximize net interest income while ensuring
adequate liquidity and carefully managing interest rate risk. The
Asset/Liability Investment Committee ("ALCO"), which is primarily composed of
executive officers, is responsible for:
Monitoring corporate financial performance;
Meeting liquidity requirements;
Establishing interest rate paramaters, indices, and terms for loan and
deposit products;
Assessing and evaluating the competitive rate environment;
Reviewing and approving investment portfolio transactions under established
policy guidelines;
Monitoring and measuring interest rate risk.
Liquidity
Liquidity is the measure of the Corporation's ability to generate
sufficient funds to meet customer demands for loans and the withdrawal of
deposit balances. The Corporation, in its normal course of business, maintains
cash reserves and has an adequate flow of funds from maturing loans and
investment securities to meet present liquidity needs.
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity is provided from cash and amounts 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.
Expansion of the Corporation's earning assets is based largely on the
growth of deposits from individuals and small and medium size businesses. These
deposits are more stable in number and size than large denomination certificates
of deposit. In addition, the Corporation's customers have relatively stable
requirements for funds.
The Corporation's major source of funds and liquidity is its deposit base.
The mix of the deposit base (time deposits versus demand, money market and
savings) is constantly subject to change. During 1997, as shown in the
consolidated balance sheets, the deposit mix changed with a planned decline in
higher cost time deposits of $10,390,000, an increase in demand deposits of
$5,116,000 and a decline in savings and money market accounts of $5,106,000.
During 1996, time deposits and deposits subject to immediate withdrawal
increased.
The Consolidated Statement of Cash Flows appearing in the financial
statement section shows a net decrease in cash and cash equivalents of
$1,069,000 during 1997. This decrease was the result of a combination of
$8,428,000 provided by operating activities, $13,619,000 net cash provided by
investing activities, and $23,116,000 used in financing activities. Financing
activity uses included a decline in deposits, decreases in federal funds
purchased and repurchase agreements, repurchase of stock and cash dividends
paid. The cash provided by operating and investing activities, more than
adequately supplied the Corporation's liquidity needs at all times during the
year.
Liquidity strategies are implemented and monitored by ALCO on a day to day
basis. The Committee uses a simulation model to assess the future liquidity
needs of the Corporation and manage the investment of funds.
Interest Rate Risk
Interest rate risk refers to the exposure of the Corporation's earnings and
market value of portfolio equity ("MVE") to changes in interest rates. The
magnitude of the change in earnings and MVE resulting from interest rate changes
is controlled by the time remaining to maturity on fixed-rate obligations, the
contractual ability to adjust rates prior to maturity, competition, the general
level of interest rates and customer actions.
There are several common sources of interest rate risk that must be
effectively managed if there is to be minimal impact on the Corporation's
earnings and capital. Repricing risk arises largely from timing differences in
the pricing of assets and liabilities. Reinvestment risk refers to the
reinvestment of cash flows from interest payments and maturing assets at lower
or higher rates. Basis risk exists when different yield curves or pricing
indices do not change at precisely the same time or in the same magnitude such
that assets and liabilities with the same maturity are not all affected equally.
Yield curve risk refers to unequal movements in interest rate across a full
range of maturities.
In determining the appropriate level of interest rate risk, ALCO reviews
the changes in net interest income and MVE given various changes in interest
rates. The Corporation also considers the most likely interest rate scenarios,
local economics, liquidity needs, business strategies, and other factors in
determining the appropriate levels of interest rate risk. To effectively measure
and manage interest rate risk, interest rate sensitivity and simulation analysis
are used to determine the impact on net interest income and MVE from changes in
interest rates.
Interest rate sensitivity analysis presents the amount of assets and
liabitiies that are estimated to reprice through specified periods if there are
not changes in balance sheet mix. The interest rate sensitivity table, page 15,
reflects the Corporation's assets and liabilities on December 31, 1997 that will
either be repriced in accordance with market rates, mature or are estimated to
mature early or prepay within the periods indicated.
Interest Rate Sensitivity Analysis
December 31, 1997 (in thousands)
Over 3 Over 6
3 Months Months Over 1
Months - 6 - 12 Year - Over 5
or Less Months Months 5 Years Years Total
--------- --------- --------- --------- --------- ---------
Interest sensitive assets:
Interest bearing deposits
with other banks $ 366 $ - $ - $ - $ - $ 366
Investment securities 6,348 5,987 15,148 83,460 32,134 143,077
Loans 116,862 24,387 39,933 71,939 1,672 254,793
--------- --------- --------- --------- --------- ---------
Total interest
sensitive assets 123,576 30,374 55,081 155,399 33,806 398,236
--------- --------- --------- --------- --------- ---------
Interest sensitive liabilities:
NOW and savings deposits 121,580 - - - - 121,580
Money market deposits 17,151 - - - - 17,151
Time deposits 39,619 29,886 37,587 63,980 45 171,117
Federal funds purchased and
repurchase agreements 19,539 - - - - 19,539
--------- --------- --------- --------- --------- ---------
Total interest
sensitive liabilites 197,889 29,886 37,587 63,980 45 329,387
--------- --------- --------- --------- --------- ---------
Interest sensitivity gap $(74,313) $ 488 $ 17,494 $ 91,419 $ 33,761 $ 68,849
========= ========= ========= ========= ========= =========
Cumulative interest sensitivity gap $(74,313) $(73,825) $(56,331) $ 35,088 $ 68,849
========= ========= ========= ========= =========
Percentage cumulative gap
to total interest sensitive assets (18.7%) (18.5%) (14.1%) 8.8% 17.3%
Of the loans in the above table that either mature or can be repriced in
periods over 1 year, $33,483 have adjustable rates and $44,572 have fixed rates.
Loan and investment security prepayments were estimated using recent market
information.
_______________________________________________________________________________
Because of inherent limitations in interest rate sensitivity analysis, ALCO
uses more sophisticated interest rate risk measurement techniques. Simulation
analysis is used to subject the current repricing conditions to rising and
falling interest rates in increments and decrements of 1%, 2% and 3% to
determine how net interest income changes for the next twelve months. ALCO also
measures the effects of changes in interest rates on the MVE by discounting
future cash flows of deposits and loans using new rates at which deposits and
loans would be made to similar depositors and borrowers. Market value changes on
the investment portfolio are estimated by discounting future cash flows and
using duration analysis. Loan and investment security prepayments are estimated
using current market information. The following table shows the estimated impact
of changes in interest rates up and down 1%, 2% and 3% on net interest income
and on MVE.
Change in Net Interest Income and Market Value of Portfolio Equity
December 31, 1997 (in thousands)
Change in Change in Change in Market Value
Interest Net Interest Income (1) of Portfolio Equity (2)
Rates Amount Percent Amount Percent
- - - --------- -------- --------- -------- ---------
Up 3% $ (65) (.38%) $ (325) (.64%)
Up 2% 179 1.05 414 .81
Up 1% 167 .98 267 .53
Down 1% (44) (.26) 1,109 2.18
Down 2% (166) (.97) 218 .43
Down 3% (488) (2.86) (1,172) (2.30)
(1) Represents the difference between estimated net interest income for the
next 12 months in the new interest rate environment and the current interest
rate environment.
(2) Represents the difference between market value of portfolio equity in
the new interest rate environment and the current interest rate environment, and
then tax effected at a 34% tax rate.
______________________________________________________________________________
The negative one year cumulative interest sensitivity gap of $56,331,000 in
the interest rate sensitivity analysis normally implies that the Corporation's
net interest income would rise if rates decline and fall if rates increase. The
simulation analysis presents a more accurate picture since certain rate indices
that reprice deposits do not change as rapidly as changes in the prime or
indices that reprice many loans.
While the Corporation cannot predict future interest rates or their effects
on MVE or net interest income, the above analysis indicates that a change in
interest rates of plus or minus 3% is unlikely to have a material adverse effect
on net interest income and MVE in future periods. Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, prepayments and deposit
run-offs and should not be relied upon as indicative of actual results. Certain
limitations are inherent in such computations. Certain assets and liabilities
may react differently then projected to changes in market interest rates. The
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while rates on other types of
assets and liabilities may lag behind changes in market interest rates. Certain
assets, such as adjustable rate mortgage loans, generally have features which
restrict changes in their interest rate on a short term basis and over the life
of the asset. In the event of a change in interest rates, loan prepayments and
early deposit withdrawal levels could deviate significantly from those assumed
in making the calculations set forth above. Additionally, credit risk may
increase if an interest rate increase adversely affects the ability of many
borrowers to service their debt.
INVESTMENT PORTFOLIO
The following table presents information on the book and market values, maturities and taxable equivalent yields of
investment securities at the end of the last 3 years (in thousands, except yields and footnote):
1997 1996 1995
-------------------------------- -------------------------------- --------------------------------
Taxable Taxable Taxable
Book Market Equivalent Book Market Equivalent Book Market Equivalent
Value Value Yield Value Value Yield Value Value Yield
-------- -------- ---------- -------- -------- ---------- -------- -------- ----------
U.S. Government:
Within 1 year $ 19,001 $ 19,004 6.24% $ 32,073 $ 32,060 5.69% $ 29,055 $ 29,124 5.60%
1 to 5 years 32,144 32,188 6.06 62,907 62,922 6.18 64,923 65,091 6.00
-------- -------- -------- -------- -------- --------
Total 51,145 51,192 6.13 94,980 94,982 6.02 93,978 94,215 5.88
-------- -------- -------- -------- -------- --------
Federal Agencies:
Within 1 year 5,995 5,993 5.51 750 750 3.98 1,452 1,455 4.28
1 to 5 years 37,002 37,191 6.51 30,075 30,115 6.32 17,601 17,319 5.30
6 to 10 years 17,913 17,930 6.67 21,103 21,022 6.67 14,375 14,145 6.57
After 10 years 918 922 7.20 930 936 7.24 811 818 7.02
-------- -------- -------- -------- -------- --------
Total 61,828 62,036 6.47 52,858 52,823 6.47 34,239 33,737 5.94
-------- -------- -------- -------- -------- --------
State and Municipal:
Within 1 year 521 520 9.24 744 748 9.47 885 903 7.91
1 to 5 years 4,297 4,412 8.42 3,119 3,178 7.79 3,208 3,272 8.38
6 to 10 years 12,247 12,535 8.19 11,318 11,502 7.78 7,963 8,122 8.02
After 10 years 5,339 5,438 8.07 6,836 6,857 7.71 3,600 3,600 7.57
-------- -------- -------- -------- -------- --------
Total 22,404 22,905 8.23 22,017 22,285 7.82 15,656 15,897 7.93
-------- -------- -------- -------- -------- --------
Other Investments:
Within 1 year - - - - - - 10 10 5.50
1 to 5 years 3,168 3,168 6.52 427 427 6.52 2,076 2,097 6.21
6 to 10 years 2,042 2,042 7.95 2,998 2,998 6.97 1,920 2,016 6.69
After 10 years 2,490 2,490 6.96 2,477 2,477 7.12 1,329 1,329 7.07
-------- -------- -------- -------- -------- --------
Total 7,700 7,700 7.06 5,902 5,902 7.01 5,335 5,452 6.63
-------- -------- -------- -------- -------- --------
Total portfolio $143,077 $143,833 6.64% $175,757 $175,992 6.38% $149,208 $149,301 6.14%
At December 31, 1997, securities available for sale (at amortized cost)
totaled $81,526,000 and included $35,033,000 in U. S. Government securities,
$28,950,000 in federal agencies, $9,914,000 in state and municipal and
$7,629,000 in other securities. A net unrealized gain of $621,000 related to
these securities was recorded at December 31, 1997. At December 31, 1996
securities available for sale (at amortized cost) totaled $86,896,000 and
included $53,753,000 in U. S. Government securities, $18,175,000 in federal
agencies, $9,061,000 in state and municipal, and $5,907,000 in other securities.
In 1996 the Corporation recorded a net unrealized gain of $314,000 on these
securities.
Securities held to maturity totaled $60,611,000 and $88,386,000 at December
31, 1997 and 1996, respectively and had respective estimated fair values of
$61,367,000 and $88,621,000. Of the amount at December 31, 1997, $15,935,000, or
26%, were U. S. Government direct obligations, $32,610,000 or 54% were federal
agencies and $12,066,000 or 20% were state and municipal securities. Securities
held to maturity at December 31, 1997 consisted of $7,372,000 due in one year or
less, $28,280,000 due after one year through five years, $22,880,000 due in five
years through ten years and $2,079,000 due after ten years. The state and
municipal securities were diversified among many different issues and
localities. All investments by the Corporation in state and municipal securities
were rated "A" or better.
The market value of securities held to maturity at December 31, 1997
exceeded the book value by $756,000. No losses are anticipated since the
Corporation has the ability and intent to hold these securities until their
respective maturities.
_______________________________________________________________________________
Loan Portfolio
Total gross loans increased $17,754,000 or 7% during 1997. As shown in
schedule A below, the primary increases in types of loans were commercial and
industrial loans, real estate loans secured by nonfarm, nonresidential
properties and real estate loans secured by 1 - 4 family residential properties.
The loan portfolio is diversified and consists of 52% mortgage loans, 27%
commercial loans and 21% consumer loans.
Note 10 of the Consolidated Financial Statements presents related party
loan activity. A substantial portion of the loan additions and payments result
from floorplan activity by two automobile dealerships owned separately by two of
the Corporation's Directors.
The Corporation does not participate in highly leveraged lending
transactions, as defined by the bank regulators and there are no loans of this
nature recorded in the loan portfolio. The Corporation has no foreign loans in
its portfolio.
Real Estate Loans
Commercial real estate loans have received considerable attention in recent
years by the bank regulators and the news media. The concerns have been in real
estate values in certain areas of the country and the quality of banks'
commercial real estate portfolios. It is difficult to measure commercial real
estate values within the Corporation's trade area due to the light sales
activity. Commercial real estate values did not escalate to levels seen in other
areas of the state and country during the ten years prior to the last recession
and management has not detected a significant change in values within the
Corporation's trade area during 1997 or 1996. Management has confined its real
estate lending to its trade area and has always taken a conservative approach in
its lending practice to maintain equity in real estate loans.
The Corporation is conforming to the real estate appraisal guidelines set
forth by the Comptroller of the Currency.
The total of outstanding real estate loans at December 31, 1997 was
$143,096,000. This consisted of $94,472,000 or 66% in loans secured by 1-4
family residential properties, $41,368,000 or 29% in loans secured by non-farm,
non-residential properties, $4,458,000 or 3% in construction and land
development, $1,276,000 or 1% in loans secured by farmland and $1,522,000 of
other real estate loans.
Nonperforming real estate loans at December 31, 1997 and 1996 were $281,000
and $14,000, respectively. There were no real estate loans on accrual status and
past due 90 days or more at December 31, 1997 or at December 31, 1996.
Asset Quality
The Corporation identifies specific credit exposures through its periodic
analysis of the loan portfolio and monitors general exposures from economic
trends, market values and other external factors. The Corporation maintains a
reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio. The reserve is increased by the provision for losses and by
recoveries from losses. Charge-offs decrease the reserve. The adequacy of the
reserve for loan losses is determined on a quarterly basis. Various factors as
defined in the previous section "Provision and Reserve for Loan Losses" are
considered in determining the adequacy of the reserve.
Loans, other than consumer, are generally placed on nonaccrual status when
any portion of principal or interest is 90 days past due or collectability is
uncertain. Unless loans are in the process of collection, income recognized on
consumer loans is discontinued and the loans are charged off after a delinquency
of 90 days. Under the Corporation's policy a nonaccuring loan may be restored to
accrual status when none of its principal and interest is due and unpaid and the
Corporation expects repayment of the remaining contractual principal and
interest or when it otherwise becomes well secured and in the process of
collection.
Nonperforming assets include loans on which interest is no longer accrued,
loans classified as troubled debt restructurings and foreclosed properties.
Foreclosed properties of $385,000 at December 31, 1997 include two commercial
real estate properties. There were no foreclosed properties held at the close of
1996.
At December 31, 1997 and 1996, loans in a nonaccrual or restructured status
totaled approximately $393,000 and $33,000, respectively. As shown in schedule C
below, loans on accrual status and past due 90 days or more have decreased
during 1997 by $298,000 from $479,000 reported in 1996 to $181,000 in 1997. The
total of nonperforming loans and loans past due 90 days or more at December 31,
1997 was $574,000, an increase of $62,000 from the $512,000 shown at December
31, 1996. The increase in loans outstanding contributed to the increase in
nonperforming loans and loans past due 90 days or more. Net charge-offs as a
percentage of average loans increased from .17% in 1996 to .36% in 1997,
primarily as a result of two commercial real estate loan chargeoffs. Management
considers a charge-off level of .36% to be within reasonable norms from a
historical perspective.
Management has in place an aggressive program to control loan
delinquencies, and the level of past due loans and nonperforming loans is
considered to be within an acceptable range. Total nonperforming loans and loans
past due 90 days or more represent .23% of total loans at December 31, 1997 and
.22% at December 31, 1996. Total nonperforming loans and past due loans 90 days
or more on an accrual status is considered low by industry standards.
A. The following table presents the year-end balances of loans, classified
by type (in thousands):
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Real estate loans:
Construction and land development $ 4,458 $ 3,640 $ 5,499 $ 4,130 $ 2,244
Secured by farmland 1,276 1,169 1,032 872 716
Secured by 1-4 family residential
properties 94,472 90,495 81,667 75,691 76,742
Secured by multi-family (5 or more)
residential properties 1,522 772 751 518 126
Secured by nonfarm, nonresidential
properties 41,368 35,289 33,950 29,003 30,973
Loans to farmers 2,761 2,672 2,529 2,173 1,768
Commercial and industrial loans 57,980 49,247 46,902 41,804 32,215
Loans to individuals for personal
expenditures 48,545 51,066 42,063 36,027 36,049
Loans for nonrated industrial
development obligations 2,398 2,565 1,901 2,155 2,528
All other loans 13 124 61 255 11
-------- -------- -------- -------- --------
Total loans $254,793 $237,039 $216,355 $192,628 $183,372
======== ======== ======== ======== ========
There were no foreign loans outstanding during any of the above periods.
_______________________________________________________________________________
B. An analysis of the loan maturity and interest rate sensitivity is as
follows:
Remaining Maturities or First Repricing Opportunities
(in thousands)
-----------------------------------------------------
Over 1 Over
1 Year Year to Five
or Less 5 Years Years Total Percent
-------- -------- ------ -------- -------
Commercial, financial
and agricultural $ 67,795 $ 1,481 $ 7 $ 69,283 27.2%
Mortgage 90,268 38,257 4,822 133,347 52.3%
Consumer 18,675 32,780 708 52,163 20.5%
-------- -------- ------ -------- ------
$176,738 $ 72,518 $5,537 $254,793 100.0%
======== ======== ====== ======== ======
Rate Sensitivity:
Pre-determined rate 19,162 39,111 5,461 63,734 25.0%
Floating or adjustable rate 157,576 33,407 76 191,059 75.0%
-------- -------- ------ -------- ------
176,738 72,518 5,537 254,793 100.0%
======== ======== ====== ======== ======
Percent 69.4% 28.4% 2.2% 100.0%
Certain short term loans and demand loans within the commercial, financial
and agricultural classifications are anticipated to be curtailed prior to any
renewal. Normally these loans are expected to be paid within one year and all
such loans have been classified within the one year category. Any rollovers
allowed depend upon the Bank's loan policy after a reappraisal of the borrower's
creditworthiness at the date of maturity.
C. Nonperforming loans and loans past due 90 days or more (in thousands,
except ratios):
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Nonaccruing loans:
Real Estate $281 $ 14 $290 $ 36 $445
Commercial 102 - - 40 73
Agricultural 10 19 16 - -
------ ------ ------ ------ ------
Total nonaccruing loans 393 33 306 76 518
------ ------ ------ ------ ------
Restructured loans:
Commercial - - - 109 256
------ ------ ------ ------ ------
Total restructured loans - - - 109 256
====== ====== ====== ====== ======
Total nonperforming loans $393 $ 33 $306 $185 $774
====== ====== ====== ====== ======
Loans on accrual status past
due 90 days or more:
Real Estate $ - $ - $ 23 $ - $ -
Consumer 160 241 95 112 108
Revolving credit 5 3 6 1 -
Commercial - 225 22 - -
Agricultural 16 10 15 - -
====== ====== ====== ====== ======
Total past due loans $181 $479 $161 $113 $108
====== ====== ====== ====== ======
Asset Quality Ratios:
Reserve for loan losses
to year-end net loans 1.29% 1.30% 1.28% 1.29% 1.26%
Nonperforming loans
to year-end net loans .15% .01% .14% .10% .43%
Reserve for loan losses
to nonperforming loans 8.34X 93.03X 9.01X 13.26X 2.91X
At December 31, 1997, the Bank had no loan concentrations (loans to
borrowers engaged in similar activities) which exceeded 10% of total loans.
Summary of Loan Loss Experience
An analysis of the reserve for losses is set forth in the following table (in thousands):
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Balance at beginning of period $3,070 $2,757 $2,454 $2,256 $2,194
------ ------ ------ ------ ------
Charge-offs:
Commercial loans 452 9 - 5 80
Real estate loans - - - 14 11
Consumer loans 540 493 241 112 113
------ ------ ------ ------ ------
992 502 241 131 204
------ ------ ------ ------ ------
Recoveries:
Commercial loans - 3 - - -
Real estate loans - - - 4 -
Consumer loans 99 114 60 53 52
------ ------ ------ ------ ------
99 117 60 57 52
------ ------ ------ ------ ------
Net charge-offs 893 385 181 74 152
Provision for loan losses 1,100 673 484 272 214
Other - 25 - - -
------ ------ ------ ------ ------
Balance at end of period $3,277 $3,070 $2,757 $2,454 $2,256
====== ====== ====== ====== ======
Percent of net charge-offs
to average net loans outstanding
during the period .36% .17% .09% .04% 0.09%
======= ======= ======= ======= =======
The reserve for loan losses is based upon the quality of loans as
determined by management taking into consideration historical loan loss
experience, diversification of the loan portfolio, amount of secured and
unsecured loans, banking industry standards and averages, and general economic
conditions. At the time that collection of the outstanding balance of specific
loans together with related interest is considered doubtful, such loans are
placed in a nonaccuring status.
_______________________________________________________________________________
Deposits
The following table presents the average balances of deposits and the
average rates paid on those deposits for the past 3 years (in thousands):
1997 1996 1995
-------------------- --------------------- ---------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------- -------- --------- --------- --------- ---------
Demand deposits -
non-interest bearing $ 39,752 -% $ 34,723 -% $ 29,303 -%
Demand deposits - interest bearing 48,893 2.88% 43,012 2.90% 36,892 2.94%
Money market 19,463 2.94% 21,414 2.98% 21,480 3.24%
Savings 70,238 3.05% 65,764 3.06% 69,727 3.11%
Time 176,403 5.44% 172,390 5.61% 136,725 5.26%
-------- -------- --------
$354,749 4.35% $337,303 4.48% $294,127 4.21%
======== ======== ========
Certificates of Deposit
Certificates of deposit at the end of 1997 in amounts of $100,000
or more were classified by maturity as follows (in thousands):
3 months or less $ 6,106
Over 3 through 6 months 4,800
Over 6 through 12 months 6,979
Over 12 months 14,930
-------
$32,815
=======
Return on Assets and
Shareholders' Equity
The following table presents certain rates of return and
percentages for the past 3 years:
1997 1996 1995 1994
------ ------ ------ ------
Return on average assets 1.47% 1.24% 1.43% 1.37%
Return on average shareholder's equity 12.51% 10.12% 10.62% 10.13%
Dividend payout ratio 40.08% 44.97% 36.00% 50.16%
Average shareholders' equity to
average assets 11.78% 12.22% 13.43% 13.53%
_______________________________________________________________________________
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from most industrial companies
that have significant investments in fixed assets. Due to this fact, the effects
of inflation on the Corporation's balance sheet are minimal, meaning that there
are no substantial increases or decreases in net purchasing power over time. The
most significant effect of inflation is on other expenses which tend to rise
during periods of general inflation.
Management feels that the most significant impact on financial results is
changes in interest rates and the Corporation's ability to react to those
changes. As discussed previously, management is attempting to measure, monitor
and control interest rate risk.
Quarterly Financial Results
(in thousands, except per share amounts)
American National Bankshares Inc. and Subsidiary
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1997
Interest income....................................... $8,053 $7,916 $7,883 $7,876
Interest expense...................................... 3,665 3,629 3,619 3,677
-------- -------- -------- --------
Net interest income................................. 4,388 4,287 4,264 4,199
Provision for loan losses............................. 338 262 257 243
-------- -------- -------- --------
Net interest income after provision................. 4,050 4,025 4,007 3,956
Non-interest income................................... 845 835 783 738
Non-interest expense.................................. 2,722 2,466 2,542 2,515
-------- -------- -------- --------
Income before income tax provision.................. 2,173 2,394 2,248 2,179
Income tax provision.................................. 630 749 704 642
-------- -------- -------- --------
Net income.......................................... $1,543 $1,645 $1,544 $1,537
======== ======== ======== ========
Per common share:
Net Income.......................................... $ .50 $ .54 $ .48 $ .47
Cash dividends...................................... $ .21 $ .21 $ .21 $ .18
1996
Interest income....................................... $7,958 $7,607 $7,182 $7,185
Interest expense...................................... 3,827 3,587 3,480 3,476
-------- -------- -------- --------
Net interest income................................. 4,131 4,020 3,702 3,709
Provision for loan losses............................. 255 165 122 131
-------- -------- -------- --------
Net interest income after provision................. 3,876 3,855 3,580 3,578
Non-interest income................................... 642 678 761 610
Non-interest expense.................................. 2,272 2,496 2,086 3,313
-------- -------- -------- --------
Income before income tax provision.................. 2,246 2,037 2,255 875
Income tax provision.................................. 669 4 697 1,011
-------- -------- -------- --------
Net income.......................................... $1,577 $2,033 $1,558 $ (136)
======== ======== ======== ========
Per common share:
Net Income.......................................... $ .48 $ .62 $ .48 $ (.04)
Cash dividends...................................... $ .18 $ .18 $ .18 $ .15
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
American National Bankshares Inc.:
We have audited the accompanying consolidated balance sheets of American
National Bankshares Inc. (a Virginia corporation) and Subsidiary as of December
31, 1997 and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
National Bankshares Inc. and Subsidiary as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/Arthur Andersen LLP
Greensboro, North Carolina,
February 6, 1998
Consolidated Balance Sheets
December 31, 1997 and 1996
American National Bankshares Inc. and Subsidiary
1997 1996
------------- -------------
ASSETS
Cash and due from banks ........................................................$ 13,386,440 $ 14,622,925
Interest-bearing deposits in other banks........................................ 366,110 198,978
Investment securities:
Securities available for sale (at market value)............................... 82,466,034 87,370,469
Securities held to maturity (market value of $61,367,264
in 1997 and $88,621,066 in 1996)............................................ 60,610,993 88,386,136
------------- -------------
Total investment securities............................................... 143,077,027 175,756,605
------------- -------------
Loans .......................................................................... 254,792,918 237,039,181
Less
Unearned income............................................................. (343,211) (460,156)
Reserve for loan losses..................................................... (3,277,179) (3,069,624)
------------- -------------
Net loans............................................................... 251,172,528 233,509,401
------------- -------------
Bank premises and equipment, at cost, less accumulated
depreciation of $6,349,589 in 1997 and $6,147,665 in 1996..................... 6,514,286 6,384,751
Accrued interest receivable and other assets.................................... 9,123,469 9,685,018
------------- -------------
Total assets............................................................$423,639,860 $440,157,678
============= =============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 41,754,876 $ 41,891,451
Demand deposits -- interest bearing........................................... 52,029,224 46,776,481
Money market deposits......................................................... 17,151,352 21,810,145
Savings deposits.............................................................. 69,550,353 69,997,457
Time deposits................................................................. 171,117,111 181,507,058
------------- -------------
Total deposits 351,602,916 361,982,592
------------- -------------
Federal funds purchased......................................................... 1,500,000 8,425,000
Repurchase agreements........................................................... 18,038,964 15,059,281
Accrued interest payable and other liabilities.................................. 2,495,215 2,473,111
------------- -------------
Total liabilities....................................................... 373,637,095 387,939,984
------------- -------------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par,10,000,000 shares authorized,
3,051,733 and 3,279,798 shares outstanding in 1997 and 1996................. 3,051,733 3,279,798
Capital in excess of par value.................................................. 9,892,304 10,631,585
Retained earnings............................................................... 36,438,185 37,992,700
Net unrealized gains ........................................................... 620,543 313,611
------------- -------------
Total shareholders' equity.............................................. 50,002,765 52,217,694
------------- -------------
Total liabilities and shareholders' equity..............................$423,639,860 $440,157,678
============= =============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
Consolidated Statements of Income
For The Years Ended December 31, 1997, 1996 and 1995
American National Bankshares Inc and Subsidiary
1997 1996 1995
Interest Income:
Interest and fees on loans.........................................$ 22,441,097 $ 20,334,588 $ 18,431,601
Interest on federal funds sold and other........................... 237,204 434,674 201,787
Income on investment securities:
U S Government.................................................. 4,018,344 6,022,023 3,860,228
Federal agencies................................................ 3,470,483 1,711,974 2,315,000
State and municipal ............................................ 1,136,496 988,159 694,565
Other investments............................................... 424,521 440,374 430,192
------------ ------------ ------------
Total interest income......................................... 31,728,145 29,931,792 25,933,373
------------ ------------ ------------
Interest Expense:
Interest on deposits:
Demand.......................................................... 1,408,255 1,245,678 1,084,850
Money market.................................................... 571,873 637,954 695,495
Savings......................................................... 2,140,158 2,012,717 2,170,799
Time............................................................ 9,589,470 9,670,514 7,192,868
Interest on short-term borrowed funds.............................. 880,392 803,099 339,672
------------ ------------ ------------
Total interest expense......................................... 14,590,148 14,369,962 11,483,684
------------ ------------ ------------
Net Interest Income.................................................. 17,137,997 15,561,830 14,449,689
Provision for Loan Losses............................................ 1,100,000 673,291 483,930
------------ ------------ ------------
Net Interest Income After Provision
For Loan Losses.................................................... 16,037,997 14,888,539 13,965,759
------------ ------------ ------------
Non-Interest Income:
Trust and investment services...................................... 1,888,341 1,896,266 1,343,015
Service charges on deposit accounts................................ 786,270 600,606 447,898
Non-deposit fees and insurance commissions......................... 155,697 106,015 113,842
Other income....................................................... 370,667 88,355 130,296
------------ ------------ ------------
Total non-interest income...................................... 3,200,975 2,691,242 2,035,051
------------ ------------ ------------
Non-Interest Expense:
Salaries........................................................... 4,810,783 4,083,106 3,786,607
Pension and other employee benefits................................ 1,076,144 912,935 1,073,453
Occupancy and equipment ........................................... 1,437,285 1,211,974 1,044,086
FDIC insurance .................................................... 77,801 466,663 406,624
Postage and printing............................................... 429,128 397,409 283,591
Core deposit intangible amortization............................... 450,179 317,961 102,774
Merger related .................................................... - 1,055,695 140,000
Other ............................................................. 1,963,680 1,721,321 1,865,076
------------ ------------ ------------
Total non-interest expense..................................... 10,245,000 10,167,064 8,702,211
------------ ------------ ------------
Income Before Income Tax Provision................................... 8,993,972 7,412,717 7,298,599
Income Tax Provision................................................. 2,724,780 2,380,529 2,282,836
------------ ------------ ------------
Net Income...........................................................$ 6,269,192 $ 5,032,188 $ 5,015,763
============ ============ ============
Net Income Per Common Share, based on weighted
average shares outstanding of 3,144,834 for 1997,
3,267,038 for 1996 and 3,213,641 for 1995.......................... $1.99 $1.54 $1.56
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS of CHANGES
in SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
American National Bankshares Inc. and Subsidiary
Common Stock Capital in Net Total
______________________ Excess of Retained Unrealized Shareholders'
Shares Amount Par Value Earnings Gains(Losses) Equity
--------- ---------- ----------- ------------ -------------- -------------
Balance, December 31, 1994.................... 3,213,641 $3,213,641 $ 9,966,711 $31,893,574 $ (28,641) $45,045,285
Net income.................................... - - - 5,015,763 - 5,015,763
Cash dividends, at $.56 per share............. - - - (1,344,000) - (1,344,000)
Cash dividens declared
by merged company........................ - - - (461,640) - (461,640)
Net unrealized gain........................... - - - - 656,708 656,708
----------- ---------- ----------- ------------ ----------- -------------
Balance, December 31, 1995.................... 3,213,641 3,213,641 9,966,711 35,103,697 628,067 48,912,116
MSB fiscal year to calendar year adjustment:
Net income.................................. - - - 235,485 - 235,485
Cash dividends.............................. - - - (115,610) - (115,610)
Exercise of stock options..................... 66,270 66,270 668,192 - - 734,462
Cash paid for fractional shares............... (113) (113) (3,318) - - (3,431)
Net income.................................... - - - 5,032,188 - 5,032,188
Cash dividends, at $.69 per share............. - - - (2,263,060) - (2,263,060)
Net unrealized loss........................... - - - - (314,456) (314,456)
----------- ---------- ------------ ----------- ----------- -------------
Balance, December 31, 1996.................... 3,279,798 3,279,798 10,631,585 37,992,700 313,611 52,217,694
Stock repurchase.............................. (228,065) (228,065) (739,281) (5,310,752) - (6,278,098)
Net income.................................... - - - 6,269,192 - 6,269,192
Cash dividends, at $.81 per share............. - - - (2,512,955) - (2,512,955)
Net unrealized gain........................... - - - - 306,932 306,932
----------- ------------- ------------ ------------ ---------- -------------
Balance, December 31, 1997.................... 3,051,733 $ 3,051,733 $ 9,892,304 $36,438,185 $ 620,543 $50,002,765
=========== ============ ============ ============ ========== =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
American National Bankshares Inc. and Subsidiary
1997 1996 1995
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income....................................................................$ 6,269,192 $ 5,032,188 $ 5,015,763
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses............................................... 1,100,000 673,291 483,930
Depreciation............................................................ 720,446 562,299 575,649
Core deposit intangible amortization.................................... 450,179 317,961 102,774
Amortization (accretion) of premiums and discounts
on investment securities.............................................. (56,111) 36,737 (2,340)
(Gain) loss on sale of securities....................................... (30,912) 338,103 (24,037)
Gain on sale of property and equipment.................................. - (32,015) -
Deferred income taxes benefit........................................... (154,749) (61,225) (79,218)
Reconciliation of fiscal year of merged company to calendar year........ - (379,006) -
Decrease (increase) in interest receivable.............................. 311,723 (227,123) (1,001,503)
(Increase) decrease in other assets..................................... (203,721) (112,123) 42,021
(Decrease) increase in interest payable................................. (224,020) 522,644 389,520
Increase (decrease) in other liabilities................................ 246,124 (324,563) 269,762
------------- ------------- -------------
Net cash provided by operating activities................................. 8,428,151 6,347,168 5,772,321
------------- ------------- -------------
Cash Flows from Investing Activities:
Acquisition of branch operations.............................................. - 14,866,883 30,716,425
Proceeds from maturities, calls, and sales of securities ..................... 53,402,611 56,166,496 34,211,253
Purchases of securities available for sale.................................... (20,170,962) (28,709,857) (2,733,960)
Purchases of securities held to maturity...................................... - (53,916,004) (57,278,228)
Net increase in loans......................................................... (18,763,126) (16,108,172) (22,985,274)
Proceeds from sale of property and equipment.................................. - 158,047 -
Purchases of property and equipment........................................... (849,981) (993,541) (488,557)
------------- ------------- -------------
Net cash provided by (used in) investing activities........................... 13,618,542 (28,536,148) (18,558,341)
------------- ------------- -------------
Cash Flows from Financing Activities:
Net increase (decrease) in demand, money market,
and savings deposits........................................................ 10,271 8,929,414 (22,181,491)
Net (decrease) increase in time deposits...................................... (10,389,947) 3,186,875 30,558,646
Repayments on Federal Home Loan Bank advances................................. - - (1,500,000)
Net (decrease) increase in federal funds purchased
and repurchase agreements................................................... (3,945,317) 13,912,246 3,467,240
Cash dividends paid........................................................... (2,512,955) (2,263,060) (1,805,640)
Cash paid in lieu of fractional shares........................................ - (3,431) -
Repurchase of stock........................................................... (6,278,098) - -
Proceeds from exercise of stock options....................................... - 460,000 -
------------- ------------- -------------
Net cash (used in) provided by financing activities........................... (23,116,046) 24,222,044 8,538,755
------------- ------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents.......................... (1,069,353) 2,033,064 (4,247,265)
Cash and Cash Equivalents at Beginning of Period.............................. 14,821,903 12,788,839 17,036,104
------------- ------------- -------------
Cash and Cash Equivalents at End of Period....................................$ 13,752,550 $ 14,821,903 $ 12,788,839
============= ============= =============
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 13,386,440 $ 14,622,925 $ 10,394,143
Interest-bearing deposits in other banks.................................... 366,110 198,978 1,294,696
Federal funds sold.......................................................... - - 1,100,000
------------- ------------- -------------
$ 13,752,550 $ 14,821,903 $ 12,788,839
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Interest paid................................................................$ 14,814,169 $ 13,746,911 $ 11,220,366
Income taxes paid............................................................$ 2,953,355 $ 2,600,939 $ 2,326,530
The accompanying notes to consolidated financial statements are an integral part of these statements.
Notes To Consolidated Financial Statements
December 31, 1997, 1996 and 1995
American National Bankshares Inc. and Subsidiary
1. Summary of Accounting Policies:
Consolidation
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").
The Bank offers a wide variety of retail, commercial and trust banking services
through its offices located in the trade area of the City of Danville, Virginia,
the Counties of Pittsylvania and Henry in Virginia and the County of Caswell in
North Carolina. Mutual Mortgage of the Piedmont, Inc., a wholly owned subsidiary
of the Bank, commenced mortgage lending operations in December 1996. All
significant intercompany transactions and accounts are eliminated in
consolidation.
Investment Securities
The Bank classifies investment securities in one of three categories: held
to maturity, available for sale and trading.
Debt securities acquired with both the intent and ability to be held to
maturity are classified as held to maturity and reported at amortized cost.
Gains or losses realized from the sale of any securities held to maturity are
determined by specific identification and are included in non-interest income.
Securities which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities available for sale are reported at estimated fair value,
with unrealized gains and losses reported as a separate component of
shareholders' 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 December 31, 1997
and 1996, 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.
During the fourth quarter of 1995, the Bank transferred $2,631,000 of
securities which were previously classified as held to maturity to the available
for sale category. The Financial Accounting Standards Board ("FASB") provided
enterprises the opportunity to make a one time reassessment of the
classification of all investment securities held at that time, such that the
reclassification of any security from the held to maturity category would not
call into question the enterprise's intent to hold other debt securities to
maturity in the future. Management anticipates that this classification will
allow more flexibility in the day-to-day management of the overall portfolio
than the prior classification.
Loans
Loans are stated at the principal amount outstanding, net of unearned
income. Mortgage and commercial loans accrue interest on the unpaid balance of
the loans. Consumer loans made prior to April 1, 1994 earn interest on the level
yield method based on the daily outstanding balance. Consumer loans made
subsequent to April 1, 1994 accrue interest on the unpaid balance of the loans.
The net amount of nonrefundable loan origination fees and direct costs
associated with the lending process are deferred and amortized to interest
income over the contractual lives of the loans using the effective interest
method.
Reserve for Loan Losses
The reserve for loan losses is an estimate of losses inherent in the loan
portfolio as determined by management taking into consideration historical loan
loss experience, diversification of the loan portfolio, amount of secured and
unsecured loans, banking industry standards and averages, and general economic
conditions. Ultimate losses may vary from current estimates. These estimates are
reviewed periodically and as adjustments become necessary, they are reported in
earnings in the periods in which they become reasonably estimable.
Bank Premises and Equipment
Additions and major replacements are added to bank premises and equipment
at cost. Maintenance and repair costs are charged to expense when incurred.
Premises and equipment are depreciated over their estimated useful lives using
primarily accelerated methods.
Intangible Assets
Premiums paid on acquisitions of deposits (core deposit intangibles) are
included in other assets in the "Consolidated Balance Sheets". Such assets are
being amortized on a straight line basis over 10 years. At December 31, 1997,
the Bank had $3,633,000 recorded as core deposit intangibles, net of
amortization. For the years ended December 31, 1997, 1996 and 1995, the Bank
recorded core deposit intangible amortization of approximately $450,000,
$318,000 and $103,000, respectively.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statements of Cash Flows
Cash and cash equivalents include cash and amounts due from banks and
federal funds sold. Generally, federal funds are purchased and sold for one-day
periods.
Income Taxes
Deferred income taxes are provided where different accounting methods have
been used for reporting income for income tax and for financial reporting
purposes.
Earnings Per Share
The Corporation adopted FASB Statement No. 128, "Earnings Per Share", in
1997. This statement requires the dual presentation of basic and diluted
earnings per share which are equal for the Corporation for all periods
presented. No restatement of prior periods was required.
New Accounting Pronouncements
In June 1997, FASB Statement No. 130, "Reporting Comprehensive Income", was
issued and establishes standards for reporting and displaying comprehensive
income and its components. This statement requires comprehensive income and its
components, as recognized under the accounting standards, to be displayed in a
financial statement with the same prominence as other financial statements. The
Corporation plans to adopt the Statement, as required, beginning in 1998 and its
impact is not expected to be material.
The 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.
2. Parent Company Financial Information:
Condensed parent company financial information is as follows (in thousands):
As of December 31
Condensed Balance Sheets 1997 1996
Assets:
Investment in Subsidiary $49,969 $52,180
Other Assets 34 38
------- -------
Total Assets $50,003 $52,218
======= =======
Shareholders' Equity $50,003 $52,218
======= =======
For the Year Ended
December 31
Condensed Statements of Income 1997 1996 1995
Dividends from Subsidiary $8,820 $2,283 $1,806
Expenses (33) (2) (1)
------- ------- -------
Income Before Equity in Undistributed
Earnings of Subsidiary 8,787 2,281 1,805
Equity in Undistributed (Distibutions in
Excess of)Earnings of Subsidiary 2,518 2,751 3,211
------- ------- -------
Net Income $6,269 $5,032 $5,016
======= ======= =======
For the Year Ended
December 31
Condensed Statements of Cash Flows 1997 1996 1995
Cash provided by dividends received
from Subsidiary $8,820 $2,283 $1,806
Cash used for payment of dividends (2,513) (2,263) (1,806)
Cash used for repurchase of stock (6,278) - -
Other (33) (11) (1)
------- ------- -------
Net increase (decrease) in cash $ (4) $ 9 $ (1)
======= ======= ======
3. Mergers 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 approximately 879,805 common shares, at an
exchange ratio of .705 of a share of the Corporation's common stock, for each of
Mutual's 1,248,100 common shares (which includes the exercise of all outstanding
stock options).
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
addition, all prior periods presented were restated to give effect to the
merger.
In August 1995, the Corporation acquired the branch office of Crestar Bank
in Gretna, Virginia. In addition to the branch facilities at Gretna, the
Corporation acquired $2,150,000 in loans and assumed deposits of $36,295,000.
This transaction was accounted for as a purchase.
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.
4. Investment Securities:
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1997 and 1996 were as follows (in thousands):
1997
----------------------------------------------
Amortized Estimated
Cost Gains Losses Fair Value
---------- ------- -------- ------------
Securities held to maturity:
U.S. Government $ 15,935 $ 47 $ - $ 15,982
Federal agencies 32,610 262 (54) 32,818
State and municipal 12,066 503 (2) 12,567
-------- ------ ------- --------
Total securities held
to maturity 60,611 812 (56) 61,367
-------- ------ ------- --------
Securities available for sale:
U.S. Government 35,033 177 - 35,210
Federal agencies 28,950 313 (45) 29,218
State and municipal 9,914 424 - 10,338
Other 7,629 75 (4) 7,700
-------- ------ ------- --------
Total securities
available for sale 81,526 989 (49) 82,466
-------- ------ ------- --------
Total securities $142,137 $1,801 $ (105) $143,833
======== ====== ======= ========
1996
----------------------------------------------
Amortized Estimated
Cost Gains Losses Fair Value
---------- ------- -------- ------------
Securities held to maturity:
U.S. Government $ 40,948 $ 52 $ (49) $ 40,951
Federal agencies 34,615 102 (136) 34,581
State and municipal 12,823 291 (25) 13,089
-------- ------ ------- --------
Total securities held
to maturity 88,386 445 (210) 88,621
-------- ------ ------- --------
Securities available for sale:
U.S. Government 53,753 290 (10) 54,033
Federal agencies 18,175 189 (122) 18,242
State and municipal 9,061 171 (38) 9,194
Other 5,907 28 (33) 5,902
-------- ------ ------- --------
Total securities
available for sale 86,896 678 (203) 87,371
-------- ------ ------- --------
Total securities $175,282 $1,123 $ (413) $175,992
======== ====== ======= ========
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1997, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Held to Maturity Available for Sale
------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------- ------------ ---------- ------------
Due in one year or less $ 7,372 $ 7,373 $18,100 $18,145
Due after on year
through five years 28,280 28,627 47,873 48,332
Due after five years
through ten years 22,880 23,185 8,991 9,321
Due after ten years 2,079 2,182 6,562 6,668
------- ------- ------- -------
$60,611 $61,367 $81,526 $82,466
======= ======= ======= =======
Proceeds from calls exercised by the issuers of investments in debt
securities were $1,236,000 in 1997, $1,804,000 in 1996 and $2,045,000 in 1995.
Proceeds from sales of investments in debt securities were $24,823,000 in 1997,
$19,234,000 in 1996 and $9,021,000 in 1995. The Bank recognized losses of
$13,000 and gains of $44,000 on sale of securities during 1997, losses of
$592,000 and gains of $254,000 on sale of securities during 1996 and gains of
$61,000 and losses of $37,000 on sales of securities during 1995.
Investment securities with a book value of approximately $31,742,000 at
December 31, 1997 were pledged to secure deposits of the U. S. Government, state
and political sub-divisions and for other purposes as required by law. Of this
amount, $19,789,000 was pledged to secure repurchase agreements.
5. Loans:
Outstanding loans at December 31, 1997 and 1996 were composed of the
following (in thousands):
1997 1996
Real Estate loans:
Construction and land development $ 4,458 $ 3,640
Secured by farmland 1,276 1,169
Secured by 1 - 4 family residential properties 94,472 90,495
Secured by multi-family (5 or more)
residential properties 1,522 772
Secured by nonfarm, nonresidential properties 41,368 35,289
Loans to farmers 2,761 2,672
Commercial and industrial loans 57,980 49,247
Loans to individuals for personal expenditures 48,545 51,066
Loans for nonrated industrial development
obligations 2,398 2,565
All other loans 13 124
-------- --------
Total loans $254,793 $237,039
======== ========
Loans, other than consumer, are generally placed on nonaccrual status when
any portion of principal or interest is 90 days past due or collectability is
uncertain. Unless loans are in the process of collection, income recognition on
consumer loans is discontinued and the loans are charged off after a delinquency
of 90 days. At December 31, 1997, 1996 and 1995, loans in a nonaccrual or
restructured status totaled approximately $393,000, $33,000 and $306,000,
respectively.
Interest income on nonaccrual loans, if recognized, is recorded on a cash
basis. For the years 1997, 1996 and 1995, the gross amount of interest income
that would have been recorded on nonaccrual loans and restructured loans at
December 31, if all such loans had been accruing interest at the original
contractual rate, was $18,000, $40,000 and $25,000, respectively. No interest
payments were recorded in 1997, 1996 or 1995 as interest income for all such
nonperforming loans.
Under the Corporation's policy a nonaccruing loan may be restored to
accrual status when none of its principal and interest is due and unpaid and the
Corporation expects repayment of the remaining contractual principal and
interest or when it otherwise becomes well secured and in the process of
collection.
As of January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which was amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". SFAS No. 114, as amended, requires that impaired loans be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, or as a practical expedient, at the loan's
observable market price or the fair value of the collateral, if the loan is
collateral-dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance. The Bank had previously measured the reserve for loan losses using
methods similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional reserve for loan losses was required as of
January 1, 1995.
For purposes of applying SFAS No. 114, commercial loans on nonaccrual
status are evaluated for impairment on an individual basis. Management assesses
the current economic condition and the historical repayment patterns of the
creditor in determining whether delays in repayment on the loans are considered
to be insignificant shortfalls or indicators of impairment. Those loans for
which management considers it probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan agreement are
considered to be impaired. All loans made by the Bank other than commercial
loans are excluded from the scope of SFAS No. 114 as they are considered
smaller-balance homogeneous loans that are collectively evaluated for
impairment. Interest income is recognized on impaired loans in the same manner
as loans on nonaccrual status.
The Bank did not identify any loans as impaired at December 31, 1997.
The loan portfolio is concentrated primarily in the immediate geographic
region which is the Corporation's trade area consisting of the City of Danville,
City of Martinsville, Pittsylvania and Henry Counties in Virginia, Town of
Yanceyville and the northern half of Caswell County in North Carolina. There
were no concentrations of loans to any individual, group of individuals,
businesses or industry that exceeded 10% of the outstanding loans at December
31, 1997.
An analysis of the reserve for loan losses is as follows (in thousands):
1997 1996 1995
Balance, beginning of year $3,070 $2,757 $2,454
Provision for loan losses
charged to expense 1,100 673 484
Charge-offs (992) (502) (241)
Recoveries 99 117 60
Other - 25 -
------ ------ ------
Balance, end of year $3,277 $3,070 $2,757
====== ====== ======
6. Time Deposits:
Included in time deposits are certificates of deposit in denominations of
$100,000 or more totaling $32,815,000, $34,472,000 and $28,654,000 at December
31, 1997, 1996 and 1995, respectively. Interest expense on such deposits during
1997, 1996 and 1995 was $1,570,000, $1,392,000 and $788,000, respectively.
7. Stock Options:
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS No. 123 is effective for fiscal years beginning after December
15, 1995. SFAS No.123 encourages companies to adopt the fair value method for
compensation expense recognition related to employee stock options. Existing
accounting requirements of Accounting Principles Board Opinion No. 25 (APB No.
25) use the intrinsic value method in determining compensation expense, which
represents the excess of the market price of stock over the exercise price on
the measurement date. The Corporation elected to remain under APB No. 25 for
accounting for stock options.
During 1997, the Corporation granted 16,800 stock options to all full time
employees of the Corporation. The options have a vesting period of one year and
are exercisable for nine years from the vesting date. Under APB No. 25, the
Corporation recognizes compensation expense for the excess of the market value
of the options over the exercise price on the date of grant. The options have an
exercise price of $28. As the exercise price of the options exceeded the market
price of the Corporation's stack at the date of grant, no compensation expense
has been recognized. At December 31, 1997, 800 shares had been forfeited and the
remaining 16,000 shares were outstanding.
8. Income Taxes:
The components of the Corporation's net deferred tax assets as of December
31, 1997 and December 31, 1996, were as follows (in thousands):
December 31
1997 1996
Deferred tax assets:
Reserve for loan losses $ 911 $ 840
Deferred compensation 247 219
Other 201 150
------- -------
1,359 1,209
Valuation allowance (136) (121)
------- -------
Total deferred tax assets 1,223 1,088
Deferred tax liabilities:
Depreciation 230 211
Net unrealized gains 320 162
Accretion of discount 211 173
Prepaid pension 39 75
Other 132 173
------- -------
Total deferred tax liabilities 932 794
======= =======
Net deferred tax assets $ 291 $ 294
======= =======
The provision for income taxes consists of the following (in thousands):
1997 1996 1995
Taxes currently payable $2,880 $2,442 $2,362
Deferred tax benefit (155) (61) (79)
------- ------- -------
$2,725 $2,381 $2,283
======= ======= =======
The effective rates of the provision differ from the statutory federal
income tax rates due to the following items:
1997 1996 1995
Federal statutory rate 34.0% 34.0% 34.0%
Non-taxable interest income (3.6) (3.6) (3.5)
Non-deductible merger expenses - 2.3 .8
Other ( .1) ( .6) --
----- ----- -----
30.3% 32.1% 31.3%
===== ===== =====
9. Commitments and Contingent Liabilities:
The consolidated financial statements do not reflect various commitments
and contingent liabilities which arise in the normal course of business to meet
the financing needs of customers. These include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit, interest rate and liquidity risk in excess of the amount
recognized in the consolidated balance sheets. The extent of the Bank's
involvement in various commitments or contingent liabilities is expressed by the
contract or notional amounts of such instruments.
Commitments to extend credit, which amounted to $64,774,000 and $65,030,000
at December 31, 1997 and 1996, 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.
There were no commitments at December 31, 1997 or December 31, 1996 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
December 31, 1997 and 1996 the Bank had $1,500,000 and $705,000 in outstanding
standby letters of credit.
Management and the Corporation's counsel are not aware of any pending
litigation against the Corporation and believe that there are no contingent
liabilities outstanding that will result in a material adverse effect on the
Corporation's consolidated financial position or consolidated results of
operations.
The Bank is a member of the Federal Reserve System and is required to
maintain certain levels of its cash and due from bank balances as reserves based
on regulatory requirements. At December 31, 1997, this reserve requirement was
approximately $4,658,000.
10. Related Party Transactions:
The Directors provide the Bank with substantial amounts of business, and
many are among its largest depositors and borrowers. The total amount of loans
outstanding to the executive officers, directors and their business interests
was $11,825,000, $14,025,000 and $13,845,000 at December 31, 1997, 1996 and
1995, respectively. The maximum amount of loans outstanding to the officers,
directors and their business interests at any month-end during 1997, 1996 and
1995 was approximately 6.8% of gross loans. Management believes that all such
loans are made on substantially the same terms, including interest rates, as
those prevailing at the time for comparable loans to similar, unrelated
borrowers, and do not involve more than a normal risk of collectability. As of
December 31, 1997, none of these loans were restructured, nor were any related
party loans charged off during 1997. An analysis of these loans for 1997 is as
follows (in thousands):
Balance, beginning of year $14,025
Additions 19,153
Repayments (21,353)
--------
Balance, end of year $11,825
========
11. Employee Benefit Plans:
The Bank's retirement plan is a non-contributory defined benefit pension
plan which covers substantially all employees of the Bank who are 21 years of
age or older and who have had at least one year of service. Advanced funding is
accomplished by using the actuarial cost method known as the collective
aggregate cost method.
The following table sets forth the plan's funded status as of December 31,
1997 and 1996 (in thousands):
1997 1996
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $2,138 in 1997 and
$2,518 in 1996 $(2,248) $(2,604)
======= =======
Projected benefit obligation at December 31 $(3,431) $(3,913)
Plan assets at fair value 3,796 3,782
Plan assets greater than (less than) projected -------- --------
benefit obligation 365 (131)
Unrecognized net asset, at date of adoption,
being recognized over 16.4 years (67) (79)
Unrecognized net loss 34 666
Unrecognized prior service cost (216) (240)
-------- --------
Prepaid pension cost included in other assets $ 116 $ 216
======== ========
Net periodic pension cost for 1997 and 1996, based on the above valuation
included the following components (in thousands):
1997 1996
Service cost - benefits earned during
the period $ 193 $ 125
Interest cost on projected benefit
obligation 274 186
Actual return (gain) loss on plan assets (1,058) (601)
Net amortization and deferral 742 370
------- ------
Net periodic pension cost $ 151 $ 80
======= ======
During 1997 and 1996, a rate of increase in future compensation levels of
4.0%, and a discount rate of 7.0% were used in determining the actuarial present
value of the projected benefit obligation. The expected long-term rate of return
on assets was 8.00% in 1997 and 6.25% in 1996.
Pension expense was $151,000, $80,000 and $185,000, for years 1997, 1996
and 1995, respectively.
During 1996, Mutual's non-contributory defined benefit pension plan was
terminated and settled with payments to Mutual employees. As a result of this
transaction, the Bank recorded a net curtailment and settlement gain of $102,000
during 1996. For the year ended December 31, 1995, the Bank recorded pension
expense of $86,000 related to this plan.
A non-contributory deferred compensation plan was adopted in 1982 by the
Board of Directors of the Bank which covers certain key executives. This plan is
being funded primarily by insurance and the expense was $128,000, $122,000 and
$168,000 for years 1997, 1996 and 1995.
A 401-(k) savings plan was adopted in 1995 which covers substantially all
full-time employees of the Bank who have at least one year of service. The Bank
matches a portion of the contribution made by employee participants. The Bank
contributed $87,000 in 1997 and $83,000 in 1996. These amounts are included in
pension and other employee benefits expense for the respective years.
12. Fair Value of Financial Instruments:
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
December 31, 1997
Carrying Fair
Amount Value
Financial assets:
Cash and federal funds sold $ 13,752 $ 13,752
Investment securities 143,077 143,833
Other 15,638 15,638
Loans, net 251,173 251,805
Financial liabilities:
Deposits $(351,603) $(352,156)
Federal funds purchased and
repurchase agreements (19,539) (19,539)
Unrecognized financial instruments:
Commitments to extend credit - -
Standby letters of credit - -
December 31, 1996
Carrying Fair
Amount Value
Financial assets:
Cash and federal funds sold $ 14,822 $ 14,822
Investment securities 175,757 175,992
Other 16,070 16,070
Loans, net 233,509 235,121
Financial liabilities:
Deposits $(361,983) $(362,937)
Federal funds purchased and
repurchase agreements (23,484) (23,484)
Unrecognized financial instruments:
Commitments to extend credit $ - -
Standby letters of credit - (11)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate
that value:
Cash and federal funds sold
The carrying amount is a reasonable estimate of fair value.
Investment securities and other
For marketable securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes. For other securities held as
investments, fair value equals market price, if available. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
Other Assets
The carrying amount is a reasonable estimate of fair value.
Loans
Due to the repricing characteristics of revolving credit lines, home equity
loans and adjustable demand loans, the carrying amount of these loans is a
reasonable estimate of fair value. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. Prepayment rates are taken into consideration in the
calculation.
Deposits
The fair value of demand deposits, savings deposits, and money market
deposits equals the carrying value. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the future cash flows using
the current rates at which similar deposit instruments would be offered to
depositors for the same remaining maturities at current rates.
Federal funds purchased and repurchase agreements
The carrying amount is a reasonable estimate of fair value.
Unrecognized financial instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged (if any) to enter into agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. At December 31, 1997 no fees were charged for commitments to
extend credit and all such commitments were subject to current market rates;
therefore, no fair value has been estimated for these commitments.
The fair value of letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
13. Dividend Restrictions and Capital:
The approval of the Comptroller of the Currency is required if the total of
all dividends declared by a national bank in any calendar year exceeds the
bank's net income, as defined, for that year combined with its retained net
income for the preceding two calendar years. Under this formula, the Bank can
distribute as dividends, without the approval of the Comptroller of the
Currency, $353,000 plus an additional amount equal to the Bank's net income for
1998 up to the date of any dividend declaration.
Effective March 14, 1996, the shareholders of the Corporation approved an
amendment to the articles of incorporation to increase the number of authorized
shares of the Corporation's common stock from 3,000,000 shares to 10,000,000
shares.
The Bank is required by the Federal Reserve Board and the Comptroller of
the Currency to maintain certain capital to assets ratios. At December 31, 1997
and 1996 these ratios were above the minimums prescribed for holding companies
and banks, as follows (in thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- ------- --------- -------
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $49,026 18.37% $21,353 >8.0% $26,691 >10.0%
Tier I Capital
(to Risk Weighted Assets) 45,749 17.14% 10,676 >4.0% 16,015 >6.0%
Tier I Capital
(to Average Assets) 45,749 10.74% 12,779 >3.0% 21,298 >5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $50,891 20.66% 19,703 >8.0% 24,628 >10.0%
Tier I Capital
(to Risk Weighted Assets) 47,821 19.42% 9,851 >4.0% 14,777 >6.0%
Tier I Capital
(to Average Assets) 47,821 11.05% 12,980 >3.0% 21,663 >5.0%
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is included in Item 12(b) below.
ITEM 11 - EXECUTIVE COMPENSATION
REPORT OF SALARY COMMITTEE ON EXECUTIVE COMPENSATION
The Salary Committee of the Board of Directors, which is composed of four
independent outside directors, is responsible for making recommendations to the
Board of Directors concerning compensation. The Salary Committee considers a
variety of factors and criteria in arriving at its recommendations for
compensation of executive officers.
In making its recommendations regarding compensation, the Committee
attempts to align the interests of the Bank's executive officers with those of
the shareholders. The Committee believes that increases in dividends and net
equity improve shareholder market value and, accordingly, compensation should be
structured to enhance the long-term profitability of the Bank.
Officer compensation generally consists of salary and participation in the
Bank's profit sharing plan. A description of the profit sharing plan is included
in Note (2) under Executive Compensation. Full-time employees received certain
incentive compensation in 1997 due to the attainment of certain earnings by the
Corporation. Certain officers may be eligible to receive incentive compensation
if certain earnings are attained in 1998. Certain key executive officers are
eligible to participate in the Executive Compensation Continuation Plan
described below under "Deferred Compensation Plan". H. Dan Davis is subject to
the employment agreement described below under "Employment Agreement". All
compensation is paid by the Bank and no officer receives an additional
compensation from the Corporation. In 1997, the Board of Directors and the
shareholders approved the stock option plan described below under note (3) of
"Executive Compensation".
In considering officer compensation (other than the Chief Executive
Officer), the Committee receives and considers recommendations from the Chief
Executive Officer. The Committee conducts an annual evaluation of the
performance and effectiveness of the Chief Executive Officer. The Chief
Executive Officer's compensation then is determined by the Committee after
consideration of the Bank's performance and the resulting benefit to the
shareholders.
Salary Committee,
Richard G. Barkhouser
B. Carrington Bidgood
Lester A. Hudson, Jr.
Fred B. Leggett, Jr.
OTHER INFORMATION
Comparative Company Performance
The following graph compares American National Bankshares Inc.'s cumulative
total return to its shareholders with the returns of two indexes for the
five-year period ended December 31, 1997. The two indexes are the S & P 500
Total Return published by Standard & Poor's Corporation and the Independent
Community Bank Index, consisting of 23 independent banks located in the states
of Florida, Georgia, North Carolina, South Carolina, Tennessee and Virginia. The
Independent Community Bank Index is published by the Carson Medlin Company.
1992 1993 1994 1995 1996 1997
American National Bankshares Inc 100 113 122 118 101 134
Independent Bank Index 100 125 153 208 248 358
S & P 500 Index 100 110 111 153 189 251
EXECUTIVE COMPENSATION
Annual Compensation Long-Term Compensation
Awards Payouts
Name and Other Restricted Stock Long-Term All
Principal Bonus Annual Stock Options/ Incentive Other
Position Year Salary(1) (2) Compensation Awards SARs(3) Payouts Comp.(4)
Charles H. Majors 1997 153,855 23,538 N/A N/A 100 N/A 33,528
President & Chief 1996 144,071 14,882 N/A N/A N/A N/A 31,309
Executive Officer 1995 118,665 27,479 N/A N/A N/A N/A 28,780
H. Dan Davis 1997 116,478 4,400 N/A N/A 100 N/A 14,870
Executive Vice Pres. 1996 114,248 N/A N/A N/A N/A N/A 0
of the Corporation; 1995 100,011 N/A N/A N/A N/A N/A 32,085
Sr. Vice President
of the Bank
(Retired December 31, 1997)
E. Budge Kent, Jr. 1997 97,292 13,640 N/A N/A 100 N/A 18,721
Sr. Vice President & 1996 90,623 9,253 N/A N/A N/A N/A 16,975
Asst. Secretary of the 1995 77,584 17,676 N/A N/A N/A N/A 15,757
Corporation; Sr. Vice
President & Trust
Officer of the Bank
David Hyler 1997 94,510 13,172 N/A N/A 100 N/A 19,926
Sr. Vice President, 1996 87,173 8,819 N/A N/A N/A N/A 43,925
Secretary & Treasurer 1995 73,675 16,722 N/A N/A N/A N/A 55,039
of the Corporation;
Sr. Vice President &
Chief Financial Officer
of the Bank
(Retired December 31, 1997)
Carl T. Yeatts 1997 89,682 13,172 N/A N/A 100 N/A 18,721
Sr. Vice President 1996 85,747 8,819 N/A N/A N/A N/A 16,975
of the Corporation; 1995 72,786 16,722 N/A N/A N/A N/A 15,757
Sr. Vice President
& Sr. Loan Officer
of the Bank
(1) Includes salary deferrals contributed by the employee to the 401(k) Plan,
fees to Mr. Davis as director of Mutual and compensation and fees for
service as officer and director of Mutual Service Corporation, and taxable
compensation for term life insurance over $50,000.
(2) Includes matching contributions to the 401(k) Plan made by the Bank. Also
includes accrued payments of profit-sharing (bonus) and incentive
compensation participations. In 1997, the profit-sharing (bonus) plan
provided that an amount equal to 6.50% of the Bank's net income (after
taxes, but before deducting profit sharing and its related tax effect),
less the Bank's 401(k) contributions, be paid to officers and employees who
are in the Bank's employ on December 31, 1997. Incentive compensation
represented payments to full-time employees based on the Corporation
attaining certain earnings increase. The total expense, paid or accrued,
for the profit sharing (bonus) plan and incentive compensation payments for
the year 1997 amounted to $483,553.
(3) Pursuant to the Corporation's Stock Option Plan approved by the
shareholders at the 1997 annual meeting, on September 16, 1997, the
Corporation granted each full-time employee an option for 100 shares of
stock in the Corporation. The exercise price is $28 per share. The options
vest on September 16, 1998 and may be exercised through September 15, 2007,
subject to certain conditions. Utilizing the Black-Scholes valuation
method, a value of $9.43 per share was determined for the options.
(4) All Other Compensation includes amounts set aside or accrued by the Bank
for the Retirement Plan and Executive Compensation Continuation Plan. For
1995, it includes amounts set aside or accrued by Mutual Savings Bank,
F.S.B. for Mr. Davis' benefit under the Mutual Retirement Plan and the
Mutual Employee Stock Ownership Plan.
(5) The Bank provided life insurance and disability insurance benefits for all
full-time officers and employees and hospitalization insurance for such
individuals on a contributory basis and the aggregate of personal benefits
paid for by the Bank for all such individuals did not exceed $5,000 each in
1997.
(6) In 1997, each non-officer director received a monthly retainer fee of $500
and attendance fees of $200 for each regular Board meeting and $400 for
each Committee meeting attended. The aggregate total amount paid for the
year 1997 was $117,800. Non-officer directors are excluded from the Bank's
retirement plan and, therefore, do not qualify for pension benefits.
(7) Prior to the merger on March 14, 1996, Mr. Davis exercised options on
29,900 shares of Mutual Savings Bank, F.S.B. which had been granted to Mr.
Davis in 1987.
Retirement Plan
The Bank's retirement plan is a non-contributory defined benefit pension
plan which covers substantially all employees of the Bank who are 21 years of
age or older and who have had at least one year of service. Advanced funding is
accomplished by using the actuarial cost method known as the collective
aggregate cost method.
As of December 31, 1997, the normal retirement benefit formula was 1.3% per
year of service times compensation plus .65% per year of service times
compensation in excess of social security covered compensation. At normal
retirement, the monthly benefit is calculated based on any consecutive five-year
period which will produce the highest average rate of basic monthly
compensation. Bonuses are not included in the definition of compensation. Cash
benefits under the plan generally commence on retirement at age 65, death, or
termination of employment. Partial vesting of the retirement benefits under the
plan occurs after three years of service and full vesting occurs after seven
years of service with the Bank.
The estimated annual benefits at retirement for the six executive officers
as of December 31, 1997 are as follows:
Name of Individual Estimated Annual
Benefit at Retirement
- - - -------------------------------------------------------------------------------------------------------
Charles H. Majors, $ 46,425
President and Chief Executive Officer of the Corporation and the Bank
H. Dan Davis, 3,778*
Executive Vice President of the Corporation
and Senior Vice President of the Bank
(Retired December 31, 1997)
E. Budge Kent, Jr., 52,214
Senior Vice President and Asst. Secretary of the Corporation
and Senior Vice President and Trust Officer of the Bank
Carl T. Yeatts, 49,484
Senior Vice President of the Corporation
and Senior Vice President and Senior Loan Officer of the Bank
Gilmer D. Jefferson, 39,914*
Senior Vice President and Asst. Treasurer of the Corporation
and Senior Vice President of the Bank
(Retired December 31, 1997)
David Hyler, 37,738*
Senior Vice President and Secretary & Treasurer of the Corporation
and Senior Vice President and Chief Financial Officer of the Bank
(Retired December 31, 1997)
----------
$ 229,553
----------
*Retired December 31, 1997 and these individuals elected to take their share in a lump sum prior to
December 31, 1997.
Deferred Compensation Plan
The Board of Directors of the Bank adopted the Executive Compensation
Continuation Plan, a non-contributory deferred compensation plan, in 1982. Under
the plan, certain key executives who, in the opinion of the Directors, are
making substantial contributions to the overall growth and success of the Bank
and who must be retained in order to expand and continue satisfactory long term
growth are eligible to receive benefits afforded by the plan.
Under agreements with eligible key executives pursuant to this plan, if any
such executive dies or retires while employed by the Bank, such executive or his
designated beneficiary will receive annual payments commencing at death or
retirement and continuing for a period of 10 years. As of December 31, 1997,
Gilmer D. Jefferson and David Hyler are each entitled to a vested annual benefit
of $25,000 under the plan beginning in 1998. Charles H. Majors is entitled to an
annual benefit of $50,000 under the plan. E. Budge Kent, Jr. and Carl T. Yeatts
are entitled to an annual benefit of $25,000 each under the plan and the above
executive officers as a group (5) are entitled to annual benefits of $150,000
under the plan. A portion of the related costs of the plan are expected to be
recovered through life insurance policies purchased by the bank on the key
executives Premiums in the aggregate amount of $25,857 were paid in 1997.
Employment Agreement
Pursuant to the terms of the Agreement and Plan of Reorganization between
the Corporation and Mutual Savings Bank, F.S.B., the Corporation entered into an
employment agreement with H. Dan Davis, effective March 14, 1996, to serve as
Executive Vice President of the Corporation, Senior Vice President of the Bank
and President and Chief Executive Officer of Mutual Mortgage of the Piedmont,
Inc. for a term of two years at an annual salary of $110,000. During this
two-year term, Mr. Davis has the right to elect to become a senior consultant to
the Corporation and the Bank with a monthly payment of $5,500 for a period
expiring March 14, 2003.
Mr. Davis made such election and retired as an officer, effective December
31, 1997. As a senior consultant, Mr. Davis is responsible for carrying out such
advisory or consulting duties and responsibilities as may be requested of him
from time to time by the Chief Executive Officer or the Board of Directors of
the Corporation. As a senior consultant, Mr. Davis also will be restricted as to
employment by other financial institutions in competition with the Corporation
or the Bank.
401(k) Plan
Effective July 1, 1995, the Bank adopted a 401(k) Plan which covers
substantially all full-time employees who are 21 years of age or older and who
have had at least one year of service. An employee may defer a portion of his or
her salary, not to exceed the lesser of 15% of compensation or $9,500. The Bank
will make a matching contribution in the amount of 50% of the first 6.0% of
compensation so deferred.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) INFORMATION AS TO VOTING SECURITIES
The Board of Directors has set March 13, 1998 as the record date for the
determination of shareholders entitled to notice of and to vote at the Annual
Meeting. Shareholders of record on that date will be entitled to vote on the
matters described herein. As of March 13, 1998, the Corporation had 1,460
shareholders of record. No one individual or entity owns directly and indirectly
more than 5% of the outstanding Corporation Common Stock except Ambro and
Company, the nominee name in which American National Bank and Trust Company (the
"Bank"), the corporation's banking subsidiary, registers securities it holds in
a fiduciary capacity, which held 598,123 shares (19.5995%) on March 13, 1998.
The number of shares of common stock, there being no other class of stock,
outstanding and entitled to vote at the Annual Shareholders' Meeting is
3,051,733. There are 598,123 shares held of record by Ambro and Company which
amount represents 19.5995% of the outstanding securities, and only 354,623 of
these shares may be voted by the existing co-fiduciaries. The remaining shares
may not be voted by the Bank but co-fiduciaries may be qualified for the sole
purpose of voting all or a portion of the shares at the Annual Meeting.
(b) DIRECTORS
Certain information with regard to their ownership of the common stock of
the Corporation and memberships on various committees of the Board of Directors
of the Corporation, are set forth below.
Director Amount of Common Stock Owned
Name, Principal of Bank Beneficially and Nature of Percent
Occupation and (Age) Since Ownership on March 14, 1997 of Class
- - - -----------------------------------------------------------------------------------------------------------------
Willie G. Barker, Jr. (60) 1996 14,100 - Direct (1) .4620
Retired President of
Dibrell Brothers, Inc.,
Danville, VA, leaf tobacco and
flowers, since June, 1993;
prior thereto, Consultant to DIMON
Incorporated, Danville, VA, leaf
tobacco & flowers since May, 1995;
prior thereto, Consultant to Dibrell
Brothers, Incorporated, Danville, VA,
leaf tobacco & flowers since June, 1993;
prior thereto, President and Chief
Operating Officer of Dibrell Brothers,
Incorporated
Richard G. Barkhouser (67) 1980 82,412 - Direct (1) 2.7005
President, Barkhouser 7,260 - Family .2379
Motors, Inc., Danville, Relationship (4)
VA, automobile dealership
B. Carrington Bidgood (73) 1975 32,436 - Direct (1) 1.0629
Retired Senior Vice 1,200 - Family .0393
President, Dibrell Relationship (4)
Brothers, Inc., Danville,
VA, leaf tobacco & flowers
Fred A. Blair (51) 1992 1,854 - Direct (1) .0608
President, Blair 225 - Family .0074
Construction, Inc., Relationship (3)
Gretna, VA, commercial
building contractor
Ben J. Davenport, Jr. (55) 1992 4,056 - Direct (1)(2) .1330
Chairman, First Piedmont
Corporation, Chatham, VA,
waste management
Director Amount of Common Stock Owned
Name, Principal of Bank Beneficially and Nature of Percent
Occupation and (Age) Since Ownership on March 13, 1998 of Class
- - - ------------------------------------------------------------------------------------------------------------------
H. Dan Davis (60) 1996 43,600 - Direct (1) 1.4287
Senior Consultant to the Corporation 20,352 - Family .6669
Corporation and the Bank since January, Relationship (4)
1998; prior thereto
Executive Vice President of the
Corporation and Senior Vice President
of the Bank since March, 1996; prior thereto,
President and Chief Executive
Officer of Mutual Savings Bank,
F.S.B. since January, 1995; prior
thereto, President and Chief
Operations Officer of Mutual
Savings Bank, F.S.B.
Lester A. Hudson, Jr. (58) 1984 4,902 - Direct (1) .1606
Chairman, H & E Associates,
Greenville, SC, investments,
since June, 1995; prior thereto
Vice Chairman, Wunda Weve
Carpets, Inc., Greenville, SC, carpet
manufacturer, since August, 1993;
prior thereto Chairman, Wunda
Weve Carpets, Inc.
E. Budge Kent, Jr. (59) 1979 7,411 - Direct (1) .2428
Senior Vice President & 316 - Family .0104
Assistant Secretary of Relationship (4)
the Corporation and Senior Vice
President & Trust Officer of the Bank
Fred B. Leggett, Jr. (61) 1994 8,361 - Direct (1)(2) .2740
Retired Chairman and 3,192 - Family .1046
Chief Executive Officer, Relationship (4)
Leggett Stores, Danville,
VA, retail department stores, since
March, 1996; prior thereto,
Chairman and Chief Executive
Officer, Leggett Stores,
Danville, VA, since December,
1994; prior thereto, Executive Vice
President, Leggett Stores
Charles H. Majors (52) 1981 4,066 - Direct (1) .1332
President and Chief 1,062 - Family .0348
Executive Officer of Relationship (4)
the Corporation and
the Bank since January, 1994;
prior thereto President of the
Corporation and the Bank
Director Amount of Common Stock Owned
Name, Principal of Bank Beneficially and Nature of Percent
Occupation and (Age) Since Ownership on March 14, 1997 of Class
- - - -------------------------------------------------------------------------------------------------------------------
James A. Motley (69) 1975 7,510 - Direct (1)(2) .2461
Retired Chairman and Chief 5,242 - Family .1716
Executive Officer of Relationship (4)
the Corporation and the Bank since
January, 1994; prior thereto
Chairman and Chief Executive
Officer of the Corporation
and the Bank since January,
1993; prior thereto President
of the Corporation and the Bank
Claude B. Owen, Jr. (52) 1984 5,716 - Direct (1) .1873
Chairman & Chief 2,100 - Family .0688
Executive Officer of Relationship (4)
DIMON Incorporated, Danville, VA,
leaf tobacco & flowers, since
May, 1995; prior
thereto, Chairman, President &
Chief Executive Officer,
Dibrell Brothers, Inc.,
Danville, VA, leaf
tobacco & flowers,
since July, 1993;
prior thereto,
Chairman & Chief Executive
Officer, Dibrell Brothers, Inc.
Landon R. Wyatt, Jr. (72) 1965 4,540 - Direct (1) .1486
President, Wyatt Buick 9,070 - Family .2968
Sales Co., Danville, VA, Relationship (4)
automobile dealership
All Executive officers and directors, 236,469 - Direct (1)(2) 7.7487
including nominees and directors 50,019 - Family 1.6390
named above (15 in group) Relationship (3)(4)
(1) Individual exercises sole voting and investment power over shares held.
(2) Shared voting and investment power.
(3) Sole voting and investment power as custodian for minor children.
(4) Can exercise no voting or investment power.
All of the above nominees and directors have been engaged in the
occupations listed during the last five years.
There exists no family relationship between any director or nominee.
Mr. Owen is a director of DIMON Incorporated and Richfood Holdings Inc. Mr.
Hudson is a director of American Electric Power Company, Inc. Mr. Motley and Mr.
Davenport are directors of Intertape Polymer Group Inc. The stock of these
corporations is registered with the Securities and Exchange Commission.
EXECUTIVE OFFICERS
Mr. Charles H. Majors and Mr. E. Budge Kent, Jr., together with
the two senior vice presidents listed below, are the executive officers of the
Corporation and the Bank.
Name Age Principal Occupation and Business Experience
- - - --------------------------------------------------------------------------------
T. Allen Liles 45 Senior Vice President, Secretary, Treasurer and Chief
Financial Officer of the Corporation and Senior Vice
President, Cashier and Chief Financial Officer of the
Bank; Officer of the Bank since 1997
Carl T. Yeatts 59 Senior Vice President of the Corporation and Senior
Vice President and Senior Loan Officer of the Bank;
Officer of the Bank since 1964
All executive officers serve one-year terms of office.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors held 13 Board Meetings during the year 1997. These
meetings were either the Corporation Board Meetings and/or the Bank Board
Meetings. In addition to meeting as a group to review the Corporation and Bank's
business, certain members of the Board are appointed to serve on various
standing committees. Among those committees are the Audit and Compliance
Committee, Salary Committee and Directors' Nominating Committee. All incumbent
directors attended more than 75% of the aggregate of all meetings of the Board
of Directors and Committees on which they served.
Audit and Compliance Committee
The Audit and Compliance Committee, which currently consists of Messrs.
Barker, Blair, and Motley, reviews significant audit, accounting, and compliance
principles, policies and practices, meets with the Corporation and Bank's
independent auditors to discuss the results of their annual audit and reviews
the performance of the internal auditing and compliance functions. The Audit and
Compliance Committee held four meetings in 1997.
Salary Committee
The Salary Committee currently consists of Messrs. Barkhouser, Bidgood,
Hudson and Leggett. The Salary Committee makes recommendations to the Board of
Directors for officers' compensation and promotions, directors' fees and related
personnel matters. The Salary Committee held four meetings in 1997.
Directors' Nominating Committee
The Committee's function is to search for potential qualified directors, to
review the qualifications of potential directors as suggested by Directors,
Management, Shareholders and others, and to make recommendations to the entire
Board for nominations of such individuals to the shareholders. A shareholder may
recommend nominees for director by writing to the President of the Corporation
and providing the proposed nominee's full name, address, qualifications and
other relevant biographical information. Members of the present committee are
Messrs. Barkhouser, Owen and Wyatt. The Directors' Nominating Committee held one
meeting in 1997.
(c) There are no arrangements known to the registrant, the operation of
which may at a subsequent date result in control of the registrant.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of and Transactions with Management
Some of the directors and officers of the Corporation and the companies
with which they are associated were customers of, and had banking transactions
with, the Bank in the ordinary course of the Bank's business during 1997. All
loans and commitments to loan included in such transactions were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and, in
the opinion of the management of the Bank, do not involve more than a normal
risk of collectibility or present other unfavorable features.
During the year 1997, the highest aggregate amount of outstanding loans,
direct and indirect, to the directors and officers was $15,037,076 or 32% of
equity capital and this peak amount occurred on May 31, 1997.
Also, refer to FOOTNOTE 10 of the Financial Statements and Supplementary
Data.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report:
Page Number or Incorporation
Exhibit by Reference to
2.1 Agreement and Plan of Reorganization, dated Exhibit 2.1 on Form 8-K
as of September 26, 1995, by and between filed September 27, 1995
American National Bankshares Inc. and Mutual
Savings Bank, F.S.B.
2.2 Plan of Merger, dated as of September 26, Exhibit 2.2 on Form 8-K
1995, by and between American National Bank filed September 27, 1995
and Trust Company and Mutual Savings Bank,
F.S.B.
3.1 Amended and Restated Articles of Exhibit 4.1 on Form S-3
Incorporation dated August 20, 1997 filed August 20, 1997
3.2 Amended Bylaws dated August 20, 1997 Exhibit 4.2 on Form S-3
filed August 20, 1997
10.1 Agreement between American National Bank Exhibit 4a. on Form 10-K
and Trust Company and James A. Motley dated filed March 28, 1994
August 26, 1982, as amended August 11, 1987
10.2 Agreement between American National Bank and Filed herewith
Trust Company and Charles H. Majors dated
June 12, 1997
10.3 Agreement between American National Bank and Filed herewith
Trust Company and E. Budge Kent, Jr. dated
June 12, 1997
10.4 Agreement between American National Bank and Filed herewith
Trust Company and David Hyler dated June 12,
1997
10.5 Agreement between American National Bank and Filed herewith
Trust Company and Gilmer D. Jefferson dated
June 12, 1997
10.6 Agreement between American National Bank and Filed herewith
Trust Company and Carl T. Yeatts dated
June 12, 1997
10.7 American National Bankshares Inc. Stock Exhibit 4.3 on Form S-8
Option Plan dated August 19, 1997 filed September 17, 1997
27.0 Financial Data Schedule Exhibit 27
99.1 Text of joint press release, dated September Exhibit 99.1 on Form 8-K
26, 1995, issued by American National filed September 27, 1995
Bankshares Inc. and Mutual Savings Bank,
F.S.B.
99.2 American National Bankshares Inc. Dividend Exhibit 99 on Form S-3
Reinvestment Plan dated August 19, 1997 filed August 20, 1997
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
BY: /s/ T. Allen Liles Senior Vice President,
---------------------------------------------- Secretary & Treasurer
T. Allen Liles
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 17, 1998.
/s/ Charles H. Majors President and
- - - --------------------------------------------------- Chief Executive Officer
Charles H. Majors
/s/ B. Carrington Bidgood Director
- - - ---------------------------------------------------
B. Carrington Bidgood
/s/ Fred A. Blair Director
- - - ---------------------------------------------------
Fred A. Blair
/s/ Lester A. Hudson, Jr. Director
- - - ---------------------------------------------------
Lester A. Hudson, Jr.
/s/ Ben J. Davenport, Jr. Director
- - - ---------------------------------------------------
Ben J. Davenport, Jr.
/s/ Bill Barker, Jr. Director
- - - ---------------------------------------------------
Bill Barker, Jr.
/s/ H. Dan Davis Director
- - - ---------------------------------------------------
H. Dan Davis
/s/ E. Budge Kent, Jr. Director
- - - ---------------------------------------------------
E. Budge Kent, Jr.
/s/ Fred B. Leggett, Jr. Director
- - - ---------------------------------------------------
Fred B. Leggett, Jr.
/s/ Claude B. Owen, Jr. Director
- - - ---------------------------------------------------
Claude B. Owen, Jr.
/s/ James A. Motley Director
- - - ---------------------------------------------------
James A. Motley
/s/ Richard G. Barkhouser Director
- - - ---------------------------------------------------
Richard G. Barkhouser
/s/ Landon R. Wyatt, Jr. Director
- - - ---------------------------------------------------
Landon R. Wyatt, Jr.
/s/ T. Allen Liles Senior Vice President
- - - --------------------------------------------------- Secretary & Treasurer
T. Allen Liles