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, 1996 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 18, 1997
Common Stock ($1.00 Par Value) 3,279,798 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
$70,848,291 March 18, 1997
<PAGE>
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 18, 1997 the
Corporation employed 172 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 also
has eight automated teller machines and one under construction, 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 18, 1997, 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.
<PAGE>
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 18, 1997 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 eight Automated Teller Machines (ATMs).
Four ATMs are located on branch office properties. Other ATMs are located
at Piedmont Mall, Piedmont Drive in Danville, the Express Mart, Inc., U. S.
Route 29, Tightsqueeze, Virginia, Hillcrest Shopping Center, Highway 86,
Yanceyville, North Carolina and Liberty Fair Mall, 240 Commonwealth
Boulevard, Martinsville, Virginia. An additional ATM in under construction at
Danville Regional Medical Center, 142 South Main Street, Danville, Virginia
and is scheduled to open in April 1997.
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. The Bank recently
purchased approximately 2.5 acres of land on Piedmont Drive in Danville,
opposite of Piedmont Mall for future expansion of its retail banking
operations. There are no mortgages or liens against any property of the
Bank or the Corporation.
<PAGE>
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. At March 18, 1997
the Corporation had 1,492 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 2,400,000 shares outstanding for 1995
and 3,279,798 shares outstanding in 1996.
First Second Third Fourth
Market Value Quarter Quarter Quarter Quarter
1996 Common
Stock $26.00 - 30.00 $23.00 - 27.00 $23.25 - 26.00 $24.00 - 26.38
1995 Common
Stock $26.00 - 30.50 $27.00 - 30.50 $27.00 - 30.50 $28.00 - 31.00
Per Share First Second Third Fourth
Dividends Declared Quarter Quarter Quarter Quarter Total
1996 Common Stock $ .15 $ .18 $ .18 $ .18 $ .69
1995 Common Stock $ - $ .27 $ - $ .29 $ .56
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Summary of Selected Consolidated Financial Data
(in thousands, except per share amounts)
American National Bankshares Inc. & Subsidiary
<S> <C> <C> <C> <C> <C>
Operations Information: 1996 1995 1994 1993 1992
Interest income:
Loans...................................... $20,335 $18,432 $14,923 $14,182 $15,264
Federal funds sold and other............... 435 202 210 362 546
Investment securities...................... 9,162 7,300 6,701 7,549 8,212
Total interest income.................... 29,932 25,934 21,834 22,093 24,022
Interest expense............................. 14,370 11,484 8,919 9,716 12,403
Net interest income.......................... 15,562 14,450 12,915 12,377 11,619
Provision for loan losses.................... -673 -484 -272 -214 -328
Non-interest income.......................... 2,691 2,035 2,122 2,011 1,930
Non-interest expense......................... -10,167 -8,702 -8,150 -7,586 -6,969
Income before income taxes................... 7,413 7,299 6,615 6,588 6,252
Income taxes................................. 2,381 2,283 2,106 2,023 1,705
Net income................................... $5,032 $5,016 $4,509 $4,565 $4,547
Balance Sheet Information:
Investment securities........................$175,757 $149,208 $122,509 $127,526 $127,199
Net loans.................................... 233,509 212,684 188,034 177,130 170,756
Total deposits............................... 361,983 327,342 282,791 283,322 279,936
Stockholders' equity......................... 52,218 48,912 45,045 42,815 39,706
Total assets................................. 440,158 388,479 337,355 327,908 321,966
Per Share Information:*
Net income................................... $1.54 $1.56 $1.40 $1.42 $1.41
Dividends.................................... 0.69 0.56 0.75 0.47 0.66
Book value................................... 15.92 15.22 14.02 13.32 12.36
Ratios:
Return on average assets..................... 1.24% 1.43% 1.37% 1.41% 1.45%
Return on average stockholders' equity....... 10.12% 10.62% 10.13% 11.15% 11.83%
Total risk-based capital/assets.............. 20.66% 23.67% 25.98% 26.35% 25.46%
Leverage capital/assets...................... 11.86% 12.59% 13.35% 13.06% 12.33%
Net charge-offs to average net loans......... 0.17% 0.09% 0.04% 0.09% 0.08%
Reserve for loan losses to period-end
loans, net of unearned income.............. 1.30% 1.28% 1.29% 1.26% 1.27%
The financial information for years 1992 through 1995 have been restated to
reflect the merger with Mutual Savings Bank, FSB.
* Per share amounts are based on average shares outstanding and have been
restated to reflect a 2 for 1 stock split declared on April 21, 1992.
</TABLE>
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table presents the Corporation's average assets, liabilities and
stockholders' equity for each of the past three years:
<TABLE>
<CAPTION>
Average Assets 1996 1995 1994
<S> <C> <C> <C>
Cash and Due from Banks.................................... $11,409,120 $9,322,378 $8,245,996
Interest bearing deposits in banks......................... 2,930,000 1,030,365 3,381,614
Federal Funds Sold........................................ 5,190,725 2,304,986 1,251,972
Investment Securities:
Securities available for sale .......................... 65,704,169 24,669,842 2,101,414
Securities held to maturity ............................ 86,778,356 100,724,656 121,096,571
Average investment securities.......................... 152,482,525 125,394,498 123,197,985
Loans..................................................... 224,522,000 207,332,084 188,742,078
Less:
Unearned income..................................... -687,322 -1,453,250 -3,283,029
Reserve for loan losses............................. -2,885,116 -2,603,052 -2,344,121
Average net loans................................... 220,949,562 203,275,782 183,114,928
Bank Premises and Equipment............................... 5,982,379 5,453,911 5,120,807
Accrued Interest Receivable and Other Assets.............. 7,757,752 5,004,586 4,564,781
Average assets.......................................$406,702,063 $351,786,506 $328,878,083
Average Liabilities and Stockholders' Equity
Liabilities:
Demand deposits -- non-interest bearing.................. $34,722,021 $29,302,934 $25,856,656
Demand deposits -- interest bearing..................... 43,011,619 36,891,955 33,769,778
Money market deposits................................... 21,413,902 21,479,689 25,786,931
Savings deposits........................................ 65,764,273 69,727,044 81,710,544
Time deposits........................................... 172,390,463 136,725,314 113,137,565
Average deposits.................................. 337,302,278 294,126,936 280,261,474
Federal funds purchased................................. 174,139 1,071,810 663,397
Advances from Federal Home Loan Bank 15,574 545,668 216,140
Securities sold under repurchase agreements............. 16,756,659 5,877,593 370,334
Accrued interest payable and other liabilities.......... 2,739,142 2,918,601 2,875,742
Average liabilities............................... 356,987,792 304,540,608 284,387,087
Stockholders' Equity:
Common stock............................................ 3,267,038 3,213,641 3,213,641
Capital in excess of par value.......................... 10,644,345 9,966,711 9,966,711
Retained earnings........................................ 35,856,269 33,971,265 31,313,081
Net unrealized (losses) gains............................ -53,381 94,281 -2,437
Average stockholders' equity......................... 49,714,271 47,245,898 44,490,996
Average liabilities and stockholders' equity..........$406,702,063 $351,786,506 $328,878,083
</TABLE>
<PAGE>
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 stockholders 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's 1996 operating income (which excludes the effect
of cost associated with the merger of Mutual, a one time FDIC assessment
against Mutual deposits to recapitalize the SAIF fund and all related
income tax effects on the merger cost and the assessment) was $5,935,000,
an increase of $779,000 or 15% over the $5,156,000 recorded for 1995. The
1996 income established a new high in earnings for the history of the
Bank and the Corporation. The net income for 1996 (including the effect
of cost associated with the merger and other related non-recurring costs
stated above) was $5,032,000, an increase of $16,000 or .3% over the
$5,016,000 recorded for the year 1995.
The economy of the Bank's trade area continues to be healthy as
evidenced by another year of strong loan demand and deposit growth.
During 1996, net loans increased by a total of $20,825,000 or 10%,
including the loans from the Yanceyville branch acquisition. Excluding
the acquired Yanceyville loans of $4,775,000, the percentage increase was
8%. Total deposits increased during 1996 by $34,640,000 or 11% including
the Yanceyville acquisition. Excluding the Yanceyville acquisition of
$21,405,000 in deposits, the increase was $13,230,000 or 4% over the
prior year. In addition to deposits, the Company increased its
repurchase agreements by $5,487,000 or 57%. No repurchase agreements
were acquired from the Yanceyville branch purchase.
Earnings and Capital
On a per common share basis, net income (based on average shares
outstanding of 3,267,038 for 1996 and 3,213,641 for 1995 and 1994) was
$1.54 in 1996, $1.56 in 1995, and $1.40 in 1994. The Corporation
increased its capital during 1996 by $3,306,000 or 7% through the
retention of $2,889,000 in earnings, an increase of $66,000 in common
stock outstanding, $665,000 in capital in excess of par value less a
reduction of $314,000 in net unrealized gains on "available for sale"
securities. This followed an increase in capital of $3,867,000 or 9%, in
1995. The increase in 1995 resulted from a combined increase in retained
earnings of $3,210,000 and a $657,000 increase in net unrealized gains on
securities. Stockholders' equity was 11.9% of assets at December 31, 1996
and 12.6% at December 31, 1995. Stockholders'equity was $52,218,000 at
December 31, 1996 and $48,912,000 at December 31, 1995. This was an
increase of $3,306,000 or 7% over the prior year-end. The total market
value of American National Bankshares Inc. common stock at $24.00 per
share (the last trade recorded on the OTC Bulletin Board during 1996) was
$78,715,000. The market value of the Corporation's common stock was 151
percent of its book value. Book value per common share was $15.92 at the
close of 1996.
During 1996, the Corporation increased its reserve for loan losses
to $3,070,000 an increase of $313,000 or 11% from 1995. The reserve, as
a percentage of loans, was 1.30% at December 31, 1996 and 1.28% at
December 31, 1995.
The return of operating earnings on average total assets (excluding
the effect of one-time costs associated with the merger and the related
tax effect on those costs) was 1.46% in 1996. The return of net income
on average total assets (including the effect of one-time costs
associated with the merger and the related tax effect on those costs) was
1.24% in 1996. This compares with 1.43% in 1995 and 1.37% in 1994. The
return on average stockholders' equity (excluding the one-time merger
related cost mentioned above) was 11.94% in 1996. The return on average
stockholders' equity (including the one-time merger related cost
mentioned above) was 10.12% in 1996. This compares with 10.62% in 1995
and 10.13% in 1994.
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.
<PAGE>
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
stockholders' equity of $15,958,000. As a result of the merger, the
Corporation had approximately 1,492 stockholders 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 the year 1996 as evidenced by another year
of strong loan demand and deposit growth. The Corporation's net loans
grew at a rate of 10% during 1996. The indicated strong loan demand is
expected to continue into 1997.
The weighted average yield on interest earning assets and the
weighted average cost of deposits increased during 1996 due to a
combination of increased volume in both assets and deposits and an
increase in rates of loans and deposits. 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 8%. Management believes the
Corporation has positioned itself to continue to maintain this level of
net interest income into the near future.
During 1996, time deposits increased by $16,838,000 or 10%.
Interest bearing demand deposits increased $5,175,000 or 12% and non-
interest bearing demand deposits increased by $9,313,000 or 29%. Money
market deposits declined by $598,000 or 3% and savings deposits increased
by $3,913,000 or 6%. Total deposits increased $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. The Mortgage Company 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. No other changes have
taken place in these two rates during 1996 or the first two months of
1997. No change in these rates has been indicated in early 1997 and
Management does not expect a major shift of funds within the Bank's
deposit categories in 1997.
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. During the year
1995 the assessment rate was further reduced to $.04 per $100 of
deposits. During the year 1996, the assessment was reduced to a minimum
of $500 for each quarter. 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 Corporation must also
pay "OAKAR" premiums on the continuing deposits of Mutual. During the
first three quarters of 1996 "OAKAR" premiums were assessed at an annual
rate of $.23 per $100 of deposits.
The premium paid for the fourth quarter was refunded by the FDIC, making
an effective rate of $.17 per $100 of deposits for the year 1996.
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.
<PAGE>
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 1996, 1995 and 1994.
During 1996, taxable equivalent net interest income increased to
$15,978,000, up 8% from $14,729,000 in 1995. Taxable equivalent net
interest income for 1995 was up 11% from the $13,240,000 recorded in
1994. The $1,249,000 increase in taxable equivalent net interest income
during 1996 consisted of $1,101,000 due to increases in volume and
$148,000 due to increases in rates. The $1,489,000 increase in taxable
equivalent net interest income during 1995 was the net result of an
increase of $824,000 due to volume and $665,000 due to increases in rate.
Due to the reduced availability of qualified tax exempt investments
and loans, a reduction in the ratio of tax exempt income to taxable
income is expected in future years.
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):
<TABLE>
<CAPTION>
Average Balance Interest Income/Expense Average Yield/Rate
1996 1995 1994 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
Loans:
Commercial $ 59,385 $ 59,828 $ 53,299 $ 5,553 $ 5,325 $ 4,089 9.35 % 8.90 % 7.67 %
Mortgage 118,223 107,955 101,054 10,300 9,551 8,036 8.71 8.85 7.95
Installment 46,227 38,096 31,106 4,532 3,604 2,899 9.80 9.46 9.32
Total loans 223,835 205,879 185,459 20,385 18,480 15,024 9.11 8.98 8.10
Investment securities:
U. S. Government 101,138 71,290 68,058 6,022 3,860 3,204 5.95 5.41 4.71
Federal agencies 26,984 35,703 37,363 1,712 2,315 2,405 6.34 6.48 6.44
State and municipal 18,363 12,340 11,595 1,354 926 901 7.37 7.50 7.77
Other investments 6,357 6,172 6,204 440 430 415 6.92 6.97 6.69
Total investment securities 152,842 125,505 123,220 9,528 7,531 6,925 6.23 6.00 5.62
Federal funds sold and other 8,121 3,350 4,634 435 202 210 5.36 6.03 4.53
Total interest-earning assets 384,798 334,734 313,313 30,348 26,213 22,159 7.89 7.83 7.07
Other non-earning assets 21,905 17,053 15,565
Total assets $406,703 $351,787 $328,878
Interest expense
Deposits:
Demand $43,012 $36,892 $33,770 1,246 1,085 830 2.90 2.94 2.46
Money market 21,414 21,480 25,787 638 695 689 2.98 3.24 2.67
Savings 65,764 69,727 81,710 2,013 2,171 2,444 3.06 3.11 2.99
Time 172,390 136,725 113,138 9,670 7,193 4,904 5.61 5.26 4.33
Total deposits 302,580 264,824 254,405 13,567 11,144 8,867 4.48 4.21 3.49
Federal funds purchased 190 1,618 880 11 99 40 5.79 6.12 4.55
Repurchase agreements 16,757 5,877 370 792 241 12 4.73 4.10 3.24
Total interest-bearing
liabilities 319,527 272,319 255,655 14,370 11,484 8,919 4.50 4.22 3.49
Demand deposits 34,723 29,303 25,856
Other liabilities 2,739 2,919 2,876
Stockholders' equity 49,714 47,246 44,491
Total liabilities and
stockholders' equity $406,703 $351,787 $328,878
Interest rate spread 3.39 % 3.61 % 3.58 %
Net interest income $15,978 $14,729 $13,240
Taxable equivalent adjustment $416 $280 $325
Net yield on earning assets 4.15 % 4.40 % 4.23 %
</TABLE>
<PAGE>
<TABLE>
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):
<CAPTION>
1996 vs. 1995 1995 vs. 1994
--------------------------------------- ---------------------------------------
Interest Change Interest Change
Increase Attributable to Increase Attributable to
(Decrease) Rate Volume (Decrease) Rate Volume
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans:
Commercial $228 $268 -$40 $1,236 $700 $536
Mortgage 749 -147 896 1,515 943 572
Installment 928 135 793 705 44 661
Total loans 1,905 256 1,649 3,456 1,687 1,769
Investment securities:
U.S. Government 2,162 416 1,746 656 498 158
Federal agencies -603 -49 -554 -90 18 -108
State and municipal 428 -16 444 25 -32 57
Other investments 10 -3 13 15 17 -2
Total investment securitie 1,997 348 1,649 606 501 105
Federal funds sold and other 233 -25 258 -8 59 -67
Total interest income 4,135 579 3,556 4,054 2,247 1,807
Interest expense
Deposits:
Demand 161 -17 178 255 173 82
Money market -57 -55 -2 6 132 -126
Savings -158 -36 -122 -273 97 -370
Time 2,477 502 1,975 2,289 1,159 1,130
Total deposits 2,423 394 2,029 2,277 1,561 716
Federal funds purchased -88 -5 -83 59 17 42
Repurchase agreements 551 42 509 229 4 225
Total interest expense 2,886 431 2,455 2,565 1,582 983
Net interest income $1,249 $148 $1,101 $1,489 $665 $824
</TABLE>
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 1996 provision for loan losses was $673,000 and compares with
$484,000 in 1995 and $272,000 in 1994.
The reserve for loan losses totaled $3,070,000 at December 31, 1996,
an increase of 11% over December 31, 1995. The increase in the reserve
for loan losses during 1996 of $313,000 consists of the provision of
$673,000 less net charge-offs of $360,000. The ratio of reserve to
loans, less unearned discount, was 1.30% at December 31, 1996 and 1.28%
at December 31, 1995.
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.
<PAGE>
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.
<TABLE>
Management has allocated the reserve for loan losses to loan categories as follows (in thousands):
<CAPTION>
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-
construction loans $48 2 % $47 3 % $45 2 % $41 1 % $40 2 %
Real estate-
mortgage loans 381 54 351 56 336 55 315 59 308 59
Commercial and
agricultural loans 1,745 22 1,570 23 1,505 23 1,378 19 1,339 20
Installment loans 801 22 700 18 489 20 449 21 436 19
Unallocated 95 0 89 0 79 0 73 0 71 0
Balance at
end of year $3,070 100 % $2,757 100 % $2,454 100 % $2,256 100 % $2,194 100 %
</TABLE>
<TABLE>
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.
<CAPTION>
Loan Losses - Ratios
1996 1995 1994
<S> <C> <C> <C>
Reserve as percentage of outstanding loans, net of unearned income 1.30% 1.28% 1.29%
Net charge-offs as percentage of reserve 12.58% 6.58% 3.01%
Net charge-offs as percentage of average loans, net of unearned in 0.17% 0.09% 0.04%
Provision as percentage of net charge-offs 174.40% 266.92% 367.30%
Provision as percentage of average loans, net of unearned income 0.30% 0.24% 0.15%
Reserve for loan losses to nonperforming loans 93.03X 9.01X 13.26X
</TABLE>
<PAGE>
Non-Interest Income
Non-interest income totaled $2,691,000 in 1996 compared with
$2,035,000 in 1995 and $2,122,000 in 1994. This was an increase of 32%
during 1996 and a reduction of 4% during 1995. During 1994, non-interest
income increased $111,000 or 6% from the 1993 level. 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 $1,896,000 in 1996, an
increase of 41% from the $1,343,000 in 1995 which in turn was a 4%
decrease from the $1,396,000 reported in 1994. 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 $601,000 in 1996, an
increase of 34% over $448,000 reported in 1995, which was a 25% increase
over the $359,000 recorded for 1994. The increases in 1996 and 1995 were
caused in part by the increase in deposit accounts of $36,295,000 from
the acquisition of the Gretna branch office and $21,410,000 from the
acquisition of the Yanceyville branch office. The remaining increases in
both years were attributable to growth in existing deposit accounts and
new accounts.
Non-deposit fees and insurance commissions were $106,000 in 1996, a
decrease of 7% from the $114,000 reported in 1995. During 1995 non-
deposit fees and insurance commissions decreased 11% from $128,000
reported in 1994. Decreases in 1995 and 1996 resulted primarily from a
corresponding decrease in the volume of new loans which carry fees and
insurance commissions. Due to market conditions the Bank was not able to
sustain the same volume of this type of new loans during 1995 and 1996.
Other income was $88,000 in 1996, a decrease of 32% from the
$130,000 recorded in 1995, which in turn was a decrease of 45% from the
$238,000 recorded in 1994. Other income for 1994 included $43,000 in
gains on sales of securities and $126,000 in a gain on sale of real
estate. The year 1995 included $46,000 in gains on sales of securities
and no gains on sale of real estate. There were no gains on sales of
securities recorded in other income during 1996.
Non-Interest Expense
Non-interest expense totaled $10,167,000 in 1996, an increase of
$1,465,000 or 17% over the $8,702,000 in 1995, which in turn was an
increase of $551,000 or 7% over the $8,151,000 recorded for 1994. 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.
Salaries totaled $4,083,000 for 1996, an increase of 8% over 1995.
The increase in 1996 included the addition of employees from the
acquisition of the Yanceyville branch office and the opening of Mutual
Mortgage of the Piedmont, Inc.. Salaries totaled $3,787,000 in 1995, an
increase of 8% over $3,520,000 reported for 1994. The increase in 1995
included the addition of employees from the acquisition of the Gretna
branch office.
Pension and other employee benefits totaled $913,000 in 1996, a
decrease of 15% from the $1,073,000 recorded in 1995, which in turn was
an increase of 17% over the $918,000 reported in 1994. 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. In
1995 both the pension plan and the executive deferred compensation plan
were amended and employees from the Gretna acquisition were added to the
pension plan.
The total occupancy and equipment expense was $1,212,000 for 1996,
an increase of 16% over $1,044,000 reported for 1995. This, in turn, was
an increase of 1% over $1,034,000 recorded in 1994. The increase of 16%
in 1996 was primarily the cumulative result of adding the Gretna branch
office in 1995 and the Yanceyville branch office in 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 was $467,000 in 1996, an increase of 15% from
the $407,000 recorded in 1995. The 1995 FDIC insurance expense was a
decrease of 36% from the $637,000 shown in 1994. The decrease in 1995
resulted from a reduction, at mid-year, in the premium required by the
FDIC for American National Bank and Trust Company, from $.23 per one
hundred of deposits to $.04 per one hundred of deposits. The FDIC
further reduced the premiums in 1996 for deposits held by American
National Bank and Trust Company to the minimum of $500 per quarter. At
the same time the Corporation was required to pay premiums on deposits
held by Mutual, at the time of the merger, at a rate of $.23 per one
hundred of deposits. In 1996 the Corporation also had to pay to the FDIC
a one-time assessment of $350,000 against the Mutual deposits to
recapitalize the SAIF fund. This assessment was the primary cause of the
15% increase in FDIC insurance expense for the year 1996.
Postage and printing expense was $397,000 in 1996, an increase of
40% from the $284,000 recorded in 1995, which in turn was an increase of
9% from the $260,000 recorded in 1994. The increase in 1996 was
primarily from an increase in deposits and loans which included increases
from the acquisition of the Gretna branch office in 1995 and the
Yanceyville branch office in 1996 and postage and printing indirectly
related to the merger of Mutual into the Corporation.
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
<PAGE>
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 1994.
Other expenses were $2,039,000 in 1996, an increase of 4% from the
$1,968,000 reported in 1995. Other expenses in 1995 increased 10% over
the $1,782,000 recorded in 1994. Other expenses in 1995 included an
increase in consulting fees for general operational and planning purposes
and $103,000 of amortization expense of core deposit intangibles related
to the Gretna acquisition. In 1996 other expenses included $318,000 of
amortization expense of core deposit intangibles related to both the
Gretna acquisition and the Yanceyville acquisition.
Income Taxes
The provision for income taxes (total of current and deferred) was
$2,381,000 in 1996, compared with $2,283,000 in 1995 and $2,106,000 in
1994. 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 increase in the
1996 provision for income taxes, compared to the 1995 provision, results
primarily from an increase in taxable income caused by increases in pre-
tax income.
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, 1996, the Bank's Tier I and Total
capital ratios were 19.42% and 20.66%, respectively. At December 31,
1995, these ratios were 22.42% and 23.67%, respectively. The ratios for
both years were well in excess of the regulatory requirements.
The Corporation's leverage ratios (stockholders' equity divided by
year-end assets) were 11.86% and 12.59% at December 31, 1996 and 1995,
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 1996 capital formation rate (net income less
dividends declared, divided by average stockholders' equity) was 5.3%.
This compares with 6.8% in 1995 and 5.1% in 1994. 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 $.69 per share of common stock.
The Board of Directors reviews the Corporation's dividend policy
regularly and increases dividends when justified by earnings after
considering future capital needs.
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 constantly monitors and plans the Corporation's liquidity
position for future periods. Liquidity is provided from cash and due
from banks, federal funds sold, interest-bearing deposits in other banks,
repayments from loans, seasonal increases in deposits, lines of credit
from two correspondent banks and two federal agency banks and a planned
structured continuous maturity of investments. Management believes that
these factors provide sufficient and timely liquidity for the foreseeable
future.
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 this deposit base (time deposits versus demand, money
market and savings) is constantly subject to change. During 1996, as
shown in the consolidated balance sheets, this mix remained relatively
stable with time deposits increasing $ 16,838,000 during 1996 and other
deposits subject to immediate withdrawal such as demand, money market and
savings increasing by $17,803,000. During 1995 the consolidated
statements of cash flows indicated a trend to time deposits. During 1995
time deposits increased by $30,559,000 while demand, money market and
savings decreased by $22,181,000.
The 1996 Consolidated Statement of Cash Flows appearing in the
financial statement section shows a net increase in cash and cash
equivalents of $2,033,000 during the past year. This increase was the
result of a combination of $6,347,000 provided by operating activities,
$28,536,000 net cash used by investing activities (primarily used to
purchase securities with the proceeds of assumed deposits from the
Yanceyville, North Carolina acquisition and the reinvestment of certain
Mutual securities), and $24,222,000 provided by financing activities,
which consisted of increases in deposit accounts, an increase in federal
funds purchased and repurchase agreements and proceeds from the exercise
<PAGE>
of stock options, less cash dividends paid.
It is the policy of the Bank to schedule maturities of investments
through a laddered structure which provides sources of liquidity on a
periodic basis in each year. The cash provided by operating and
financing activities, in addition to the cash provided by maturing of
investments, more than adequately supplied the Corporation's liquidity
needs at all times during the year.
Liquidity strategies are implemented and monitored by the
Corporation's Asset Liability/Investment Committee on a day to day basis.
The activities of the Committee are reported to and reviewed by the
Board of Directors. The Committee uses a simulation model to assess the
future liquidity needs of the Corporation and manage the investment of
funds and net interest income. The Corporation's ability to reprice both
assets and liabilities, as well as its policy to schedule maturities of
investments, give it flexibility in its control over liquidity needs.
The following interest rate sensitivity table reflects the
Corporation's assets and liabilities on December 31, 1996 that will
either be repriced in accordance with market rates or mature within the
periods indicated. The Corporation monitors and manages its interest
rate risk position with the objectives of increasing earnings and
minimizing adverse changes in net interest income. The objectives are
attained through a policy of maintaining a relatively balanced
interest-sensitive ratio. The optimum position for the least risk to the
Corporation is a ratio of 1.00. Although management attempts to maintain
a ratio close to 1.00, in a declining interest rate market it is more
desirable to have a ratio below 1.00, permitting the Corporation to
reprice more liabilities than assets. In a rising interest rate market,
however, it is more advantageous to have a ratio greater than 1.00,
allowing the Corporation to reprice a greater amount of assets than
liabilities.
Although the ratios shown below do not appear as balanced, it should
be recognized that the Corporation's interest-sensitive position changes
quickly as a result of management decisions and market conditions. No
prepayment assumptions are reflected in the table. The table shows the
sensitivity of the Corporation's balance sheet at one point in time and
is not necessarily indicative of its position on other dates.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
December 31, 1996 (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
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Interest bearing deposits
with other banks $199 $0 $0 $0 $0 $199
Investment securities:
Available for sale 499 2,257 5,012 62,769 16,834 87,371
Held to maturity 7,008 5,755 13,036 33,759 28,828 88,386
Commercial loans 47,842 1,453 8,311 821 917 59,344
Mortgage loans 31,823 19,073 34,777 28,700 11,314 125,687
Consumer loans 6,596 4,145 7,925 32,686 656 52,008
Total interest
sensitive assets 93,967 32,683 69,061 158,735 58,549 412,995
Interest sensitive liabilities:
NOW and savings deposits 116,774 0 0 0 0 116,774
Money market deposits 21,810 0 0 0 0 21,810
Time deposits 39,591 28,889 40,464 72,488 76 181,508
Federal funds purchased and
repurchase agreements 23,484 0 0 0 0 23,484
Total interest
sensitive liabilites 201,659 28,889 40,464 72,488 76 343,576
Interest sensitivity gap -$107,692 3,794 28,597 86,247 58,473 $69,419
Cumulative interest sensitivity gap -$103,898 -$75,301 $10,946 $69,419
Percentage cumulative gap
to total interest sensitive assets -26 % -25 % -18 % 3 % 17 %
Of the loans in the above table that either mature or can be repriced in periods over 1 year, $30,792 have
adjustable rates and $44,302 have fixed rates.
</TABLE>
<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
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):
1996 1995 1994
----------------------------- ---------------------------- ---------------------------
Taxable Taxable Taxable
Book Market Equivalent Book Market Equivalent Book Market Equivalent
Value Value Yield Value Value Yield Value Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government:
Within 1 year $32,073 $32,060 5.69 % $29,055 $29,124 5.60 % $29,059 $28,590 4.11 %
1 to 5 years 62,907 62,922 6.18 64,923 65,091 6.00 36,893 35,719 5.75
Total 94,980 94,982 6.02 93,978 94,215 5.88 65,952 64,309 5.03
Federal Agencies:
Within 1 year 750 750 3.98 1,452 1,455 4.28 1,591 1,493 4.18
1 to 5 years 30,075 30,115 6.32 17,601 17,319 5.30 19,470 18,275 5.14
6 to 10 years 21,103 21,022 6.67 14,375 14,145 6.57 15,909 14,932 6.51
After 10 years 930 936 7.24 811 818 7.02 909 853 6.89
Total 52,858 52,823 6.47 34,239 33,737 5.94 37,879 35,553 5.53
State and Municipal:
Within 1 year 744 748 9.47 885 903 7.91 712 699 9.01
1 to 5 years 3,119 3,178 7.79 3,208 3,272 8.38 2,562 2,516 9.17
6 to 10 years 11,318 11,502 7.78 7,963 8,122 8.02 6,360 6,246 8.42
After 10 years 6,836 6,857 7.71 3,600 3,600 7.57 2,862 2,810 8.79
Total 22,017 22,285 7.82 15,656 15,897 7.93 12,496 12,271 8.67
Other Investments:
Within 1 year -- - - 10 10 5.50 - - -
1 to 5 years 427 427 6.52 2,076 2,097 6.21 2,417 2,296 6.10
6 to 10 years 2,998 2,998 6.97 1,920 2,016 6.69 2,226 2,115 6.52
After 10 years 2,477 2,477 7.12 1,329 1,329 7.07 1,539 1,462 6.93
Total 5,902 5,902 7.01 5,335 5,452 6.63 6,182 5,873 6.47
Total $175,757 $175,992 6.38 % $149,208 $149,301 6.14 % $122,509 $118,006 5.59 %
Portfolio
</TABLE>
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. A net unrealized gain of
$314,000 related to these securities was recorded at December 31, 1996.
At December 31, 1995 securities available for sale (at amortized cost)
totaled $50,154,000 and included $38,783,000 in U. S. Government
securities, $2,500,000 in federal agencies, $5,319,000 in state and
municipal, and $3,552,000 in other securities. In 1995 the Corporation
recorded a net unrealized gain of $628,000 on these securities.
Securities held to maturity totaled $88,386,000 and $98,102,000 at
December 31, 1996 and 1995, respectively and had respective estimated
fair values of $88,621,000 and $98,196,000. Of the amount at December
31, 1996, $40,948,000, or 46%, were U. S. Government direct obligations,
$34,615,000 or 39% were federal agencies and $12,823,000 or 15% were
state and municipal securities. Securities held to maturity at December
31, 1996 consisted of $7,746,000 due in one year or less, $62,366,000
due after one year through five years, $9,172,000 due in five years
through ten years and $7,611,000 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 the total investment portfolio at December 31,
1996 exceeded the book value by $235,000. No losses are anticipated
since the Corporation has the ability and intent to hold these securities
until their respective maturities. The maturities of the investment
portfolio are laddered in a consistent pattern to meet the Corporation's
liquidity needs of future years.
Loan Portfolio
Total gross loans increased $20,684,000 or 10% during 1996. As
shown in schedule A below, the primary increases in types of loans were
commercial and industrial loans, loans to individuals for personal
expenditures, 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 55% mortgage
loans, 23% commercial loans and 22% consumer loans.
Note 9 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
<PAGE>
a significant change in values within the Corporation's trade area during
1996 or 1995. 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 Bank has not
experienced any commercial real estate charge-offs in recent years.
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, 1996 was
$131,365,000. This consisted of $90,495,000 or 69% in loans secured by 1-
4 family residential properties, $35,289,000 or 27% in loans secured by
non-farm, non-residential properties, $3,640,000 or 3% in construction
and land development, $1,169,000 or 1% in loans secured by farmland and
$772,000 of other real estate loans.
Nonperforming real estate loans at December 31, 1996 and 1995 were
$14,000 and $290,000, respectively. There were no real estate loans on
accrual status and past due 90 days or more at December 31, 1996. At
December 31, 1995 real estate loans on accrual status and past due 90
days or more totaled $23,000.
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. There were no foreclosed properties held at the close of 1996
and 1995.
At December 31, 1996 and 1995, loans in a nonaccrual or restructured
status totaled approximately $33,000 and $306,000, respectively. As
shown in schedule C below, loans on accrual status and past due 90 days
or more have increased during 1996 by $318,000 from $161,000 reported in
1995 to $479,000 in 1996. The total of nonperforming loans and loans
past due 90 days or more at December 31, 1996 was $512,000, an increase
of $45,000 from the $467,000 shown at December 31, 1995. An increase in
the volume of loans, as well as attempts to become more competitive in
automobile financing, caused past due loans and net loan charge-offs to
increase during 1996.
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 .2% of total loans at
December 31, 1996 and .2% at December 31, 1995. Total nonperforming
loans and past due loans 90 days or more on an accrual status is
considered low by industry standards.
<TABLE>
<CAPTION>
A. The following table presents the year-end balances of loans, classified by type (in thousands):
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Real estate loans:
Construction and land development $3,640 $5,499 $4,130 $2,244 $2,937
Secured by farmland 1,169 1,032 872 716 745
Secured by 1-4 family residential
properties 90,495 81,667 75,691 76,742 76,545
Secured by multi-family (5 or more)
residential properties 772 751 518 126 255
Secured by nonfarm, nonresidential
properties 35,289 33,950 29,003 30,973 26,400
Loans for purchasing or carrying sec 0 0 0 0 40
Loans to farmers 2,672 2,529 2,173 1,768 2,066
Commercial and industrial loans 49,247 46,902 41,804 32,215 33,584
Loans to individuals for personal
expenditures 51,066 42,063 36,027 36,049 30,494
Loans for nonrated industrial
development obligations 2,565 1,901 2,155 2,528 3,666
All other loans 124 61 255 11 121
Total loans $237,039 $216,355 $192,628 $183,372 $176,853
</TABLE>
There were no foreign loans outstanding during any of the above periods.
<PAGE>
B. An analysis of the loan maturity and interest rate sensitivity is as follow
<TABLE>
<CAPTION>
Remaining Maturities or First Repricing Opportunities
(in thousands)
Over 1 Over
1 Year Year to Five
or Less 5 Years Years Total Percent
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $54,827 $821 $56 $55,704 23%
Real estate constructi 3,640 - - 3,640 2%
Real estate mortgage 91,327 28,700 5,660 125,687 53%
Consumer 18,665 32,686 657 52,008 22%
$168,459 $62,207 $6,373 $237,039 100%
Rate Sensitivity:
Pre-determined rate 18,355 38,507 5,795 62,657 26%
Floating or adjustable 150,104 23,700 578 174,382 74%
168,459 62,207 6,373 237,039 100%
Percent 71% 26% 3% 100%
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
Real Estate $14 $290 $36 $445 $533
Commercial 0 0 40 73 185
Agricultural 19 16 0 0 0
Total nonaccruing loans 33 306 76 518 718
Restructured loans:
Commercial 0 0 109 256 332
Total restructured loans 0 0 109 256 332
Total nonperforming loans $33 $306 $185 $774 $1,050
Loans on accrual status past
due 90 days or more:
Real Estate $0 $23 $0 $0 $28
Installment 241 95 112 108 61
Revolving credit 3 6 1 0 0
Commercial 225 22 0 0 0
Agricultural 10 15 0 0 0
Total past due loans $479 $161 $113 $108 $89
Asset Quality Ratios:
Reserve for loan losses
to year-end net loans 1.30% 1.28% 1.29% 1.26% 1.27%
Nonperforming loans
to year-end net loans 0.01% 0.14% 0.10% 0.43% 0.61%
Reserve for loan losses
to nonperforming loans 93.03X 9.01X 13.26X 2.91X 2.09X
</TABLE>
At December 31, 1996, the Bank had no loan concentrations (loans to borrowers
engaged in similar activities) which exceeded 10% of total loans, other than as
shown in Table A on previous page.
<PAGE>
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
An analysis of the reserve for losses is set forth in the following table (in thousands):
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,757 $2,454 $2,256 $2,194 $2,004
Charge-offs:
Commercial loans 9 0 5 80 24
Real estate loans 0 0 14 11 23
Installment loans 493 241 112 113 120
502 241 131 204 167
Recoveries:
Commercial loans 3 0 0 0 0
Real estate loans 0 0 4 0 0
Installment loans 114 60 53 52 29
117 60 57 52 29
Net charge-offs 385 181 74 152 138
Provision for loan losses 673 484 272 214 328
Other 25 0 0 0 0
Balance at end of period $3,070 $2,757 $2,454 $2,256 $2,194
Percent of net charge-offs
to average net loans outstanding
during the period 0.17% 0.09% 0.04% 0.09% 0.08%
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.
</TABLE>
<PAGE>
Deposits
<TABLE>
The following table presents the average amount of deposits and the average rate paid on those deposits for the past 3 years
(in thousands):
<CAPTION>
1996 1995 1994
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Demand deposits -
non-interest bearing $34,723 - % $29,303 - % $25,856 - %
Demand deposit - interest bearing 43,012 2.90% 36,892 2.94% 33,770 2.46%
Money market 21,414 2.98% 21,480 3.24% 25,787 2.67%
Savings 65,764 3.06% 69,727 3.11% 81,710 2.99%
Time 172,390 5.61% 136,725 5.26% 113,138 4.33%
$337,303 4.48% $294,127 4.21% $280,261 3.49%
</TABLE>
Certificates of Deposit
Certificates of deposit at the end of 1996 in amounts of $100,000
or more were classified by maturity as follows (in thousands):
3 months or less $5,812
Over 3 through 6 months 5,541
Over 6 through 12 months 7,114
Over 12 months 16,005
$34,472
Return on Assets and
Stockholders' Equity
The following table presents certain rates of return and
percentages for the past 3 years:
1996 1995 1994
Return on average assets 1.24% 1.43% 1.37%
Return on average stockholder's equ 10.12% 10.62% 10.13%
Dividend payout ratio 44.97% 36.00% 50.16%
Average stockholders' equity to
average assets 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 maintain an essentially balanced position between interest
sensitive assets and liabilities in order to protect against wide
interest rate fluctuations.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Financial Results
(in thousands, except per share amounts)
American National Bankshares Inc. and Subsid
Fourth Third Second First
1996 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
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.............................. $0.48 $0.62 $0.48 -$0.04
Cash dividends.......................... $0.18 $0.18 $0.18 $0.15
1995
Interest income........................... $7,169 $6,641 $6,171 $5,952
Interest expense.......................... 3,385 3,015 2,634 2,449
Net interest income..................... 3,784 3,626 3,537 3,503
Provision for loan losses................. 110 160 121 93
Net interest income after provision..... 3,674 3,466 3,416 3,410
Non-interest income....................... 444 539 554 498
Non-interest expense...................... 2,533 2,021 2,083 2,065
Income before income tax provision...... 1,585 1,984 1,887 1,843
Income tax provision...................... 490 625 584 584
Net income.............................. $1,095 $1,359 $1,303 $1,259
Per common share:
Net Income.............................. $0.34 $0.42 $0.41 $0.39
Cash dividends.......................... $0.25 $0.04 $0.24 $0.03
</TABLE>
<PAGE>
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, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. 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, 1996
and 1995, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Greensboro, North Carolina,
January 15, 1997.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1996 and 1995
American National Bankshares Inc. and Subsidiary
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks ........................................ $14,622,925 $10,394,143
Interest-bearing deposits in other banks........................ 198,978 1,294,696
Federal funds sold ............................................. 0 1,100,000
Investment securities:
Securities available for sale (at market value)............... 87,370,469 51,105,690
Securities held to maturity (market value of $88,621,066
in 1996 and $98,195,684 in 1995)............................ 88,386,136 98,101,877
Total investment securities............................... 175,756,605 149,207,567
Loans .......................................................... 237,039,181 216,355,333
Less--
Unearned income............................................. -460,156 -913,753
Reserve for loan losses..................................... -3,069,624 -2,757,401
Net loans............................................... 233,509,401 212,684,179
Bank premises and equipment, at cost, less accumulated
depreciation of $6,147,665 in 1996 and $5,649,988 in 1995..... 6,384,751 5,837,775
Accrued interest receivable and other assets.................... 9,685,018 7,960,483
Total assets............................................ $440,157,678 $388,478,843
LIABILITIES and STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing....................... $41,891,451 $32,577,952
Demand deposits -- interest bearing........................... 46,776,481 41,601,855
Money market deposits......................................... 21,810,145 22,408,567
Savings deposits.............................................. 69,997,457 66,084,475
Time deposits ................................................ 181,507,058 164,669,538
Total deposits.......................................... 361,982,592 327,342,387
Federal funds purchased....................................... 8,425,000 0
Repurchase agreements......................................... 15,059,281 9,572,035
Accrued interest payable and other liabilities................ 2,473,111 2,652,305
Total liabilities....................................... 387,939,984 339,566,727
Stockholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................ - -
Common stock, $1 par,10,000,000 shares authorized,
3,279,798 and 3,213,641 shares outstanding in 1996 and 1995. 3,279,798 3,213,641
Capital in excess of par value................................ 10,631,585 9,966,711
Retained earnings............................................. 37,992,700 35,103,697
Net unrealized gains ......................................... 313,611 628,067
Total stockholders' equity.............................. 52,217,694 48,912,116
Total liabilities and stockholders' equity.............. $440,157,678 $388,478,843
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
For The Years Ended December 31, 1996, 1995 and 1994
American National Bankshares Inc. and Subsidiary
1996 1995 1994
<S> <C> <C>
Interest Income:
Interest and fees on loans..................... $20,334,588 $18,431,601 $14,922,579
Interest on federal funds sold and other....... 434,674 201,787 210,302
Income on investment securities:
U. S. Government............................. 6,022,023 3,860,228 3,203,707
Federal agencies............................. 1,711,974 2,315,000 2,404,794
State and municipal ......................... 988,159 694,565 678,055
Other investments............................ 440,374 430,192 414,768
Total interest income...................... 29,931,792 25,933,373 21,834,205
Interest Expense:
Interest on deposits:
Demand....................................... 1,245,678 1,084,850 829,520
Money market................................. 637,954 695,495 689,315
Savings...................................... 2,012,717 2,170,799 2,444,627
Time......................................... 9,670,514 7,192,868 4,903,718
Interest on short-term borrowed funds.......... 803,099 339,672 52,043
Total interest expense..................... 14,369,962 11,483,684 8,919,223
Net Interest Income.............................. 15,561,830 14,449,689 12,914,982
Provision for Loan Losses........................ 673,291 483,930 271,802
Net Interest Income After Provision
For Loan Losses................................ 14,888,539 13,965,759 12,643,180
Non-Interest Income:
Trust department income........................ 1,896,266 1,343,015 1,396,072
Service charges on deposit accounts............ 600,606 447,898 359,150
Non-deposit fees and insurance commissions..... 106,015 113,842 128,167
Other income................................... 88,355 130,296 238,342
Total non-interest income.................. 2,691,242 2,035,051 2,121,731
Non-Interest Expense:
Salaries....................................... 4,083,106 3,786,607 3,520,037
Pension and other employee benefits............ 912,935 1,073,453 918,131
Occupancy and equipment expense................ 1,211,974 1,044,086 1,033,543
FDIC insurance expense......................... 466,663 406,624 636,986
Postage and printing........................... 397,409 283,591 259,748
Merger related expense......................... 1,055,695 140,000 0
Other expenses................................. 2,039,282 1,967,850 1,782,145
Total non-interest expense................. 10,167,064 8,702,211 8,150,590
Income Before Income Tax Provision............... 7,412,717 7,298,599 6,614,321
Income Tax Provision............................. 2,380,529 2,282,836 2,105,682
Net Income....................................... $5,032,188 $5,015,763 $4,508,639
Net Income Per Common Share, based on weighted
average shares outstanding of 3,267,038 for 199
and 3,213,641 for 1995 and 1994.................. $1.54 $1.56 $1.40
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS of CHANGES in STOCKHOLDERS' EQUITY
FOR the YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
American National Bankshares Inc. and Subsidiary
Common Stock Capital in Net Total
Excess of Retained Unrealized Stockholders'
Shares Amount Par Value Earnings Gains (Losses) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.................. 3,213,641 $3,213,641 $9,966,711 $29,634,185 $0 $42,814,537
Net income.................................. 0 0 0 4,508,639 0 4,508,639
Cash dividends, at $.75 per share........... 0 0 0 -1,800,000 0 -1,800,000
Cash dividends declared by merged company 0 0 0 -461,640 0 -461,640
ESOP loan payments.......................... 0 0 0 12,390 0 12,390
Net unrealized loss......................... 0 0 0 - -28,641 -28,641
Balance, December 31, 1994.................. 3,213,641 3,213,641 9,966,711 31,893,574 -28,641 45,045,285
Net income.................................. 0 0 0 5,015,763 0 5,015,763
Cash dividends, at $.56 per share........... 0 0 0 -1,344,000 0 -1,344,000
Cash dividends declared by merged company 0 0 0 * -461,640 0 -461,640
Net unrealized gain......................... 0 0 0 0 656,708 656,708
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................................ 0 0 0 235,485 0 235,485
Cash dividends............................ 0 0 0 -115,610 0 -115,610
Exercise of stock options................... 66,270 66,270 668,192 0 0 734,462
Cash paid for fractional shares............. -113 -113 -3,318 0 0 -3,431
Net income.................................. 0 0 0 5,032,188 0 5,032,188
Cash dividends, at $.69 per share.......... 0 0 0 -2,263,060 0 -2,263,060
Net unrealized loss......................... 0 0 0 0 -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
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
American National Bankshares Inc. and Subsidiary
1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income............................................................... $5,032,188 $5,015,763 $4,508,639
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses............................................ 673,291 483,930 271,802
Depreciation......................................................... 562,299 575,649 513,192
Amortization of intangibles.......................................... 317,961 102,774 0
Amortization of premiums and (discounts)
on investment securities........................................... 36,737 -2,340 96,219
Loss (gain) on sale of securities.................................... 338,103 -24,037 -42,673
Gain on sale of property and equipment............................... -32,015 0 0
Gain on sale of real estate owned.................................... 0 0 -126,029
Federal Home Loan Bank stock dividends............................... 0 0 -10,300
Deferred income taxes benefit........................................ -61,225 -79,218 -133,869
Reconciliation of fiscal year of merged company to calendar year..... -379,006 - 0
Increase in interest receivable...................................... -227,123 -1,001,503 -353,418
(Increase) decrease in other assets.................................. -112,123 42,021 163,255
Increase in interest payable......................................... 522,644 389,520 5,489
(Decrease) increase in other liabilities............................. -324,563 269,762 158,341
Net cash provided by operating activities............................ 6,347,168 5,772,321 5,050,648
Cash Flows from Investing Activities:
Acquisition of branch operations....................................... 14,866,883 30,716,425 0
Proceeds from maturities, calls, and sales of securities .............. 56,166,496 34,211,253 48,693,621
Purchases of securities available for sale............................. -28,709,857 -2,733,960 0
Purchases of securities held to maturity............................... -53,916,004 -57,278,228 -43,913,715
Net increase in loans.................................................. -16,108,172 -22,985,274 -11,175,700
Purchases of property and equipment.................................... -993,541 -488,557 -643,347
Proceeds from sale of real estate owned................................ 0 0 194,500
Proceeds from sale of property and equipment........................... 158,047 0 40,000
Net cash used in investing activities.................................. -28,536,148 -18,558,341 -6,804,641
Cash Flows from Financing Activities:
Net increase (decrease) in demand, money market, and savings deposits.. 8,929,414 -22,181,491 -3,242,487
Net increase in certificates of deposit................................ 3,186,875 30,558,646 2,711,500
Borrowings (repayments) from Federal Home Loan Bank.................... 0 -1,500,000 1,500,000
Net increase in federal funds purchased
and repurchase agreements.......................................... 13,912,246 3,467,240 6,104,795
Cash dividends paid.................................................... -2,263,060 -1,805,640 -2,261,640
Cash paid in lieu of fractional shares................................. -3,431 - 0
Proceeds from exercise of stock options................................ 460,000 - -
Net cash provided by financing activities.............................. 24,222,044 8,538,755 4,812,168
Net Increase (Decrease) in Cash and Cash Equivalents................... 2,033,064 -4,247,265 3,058,175
Cash and Cash Equivalents at Beginning of Period....................... 12,788,839 17,036,104 13,977,929
Cash and Cash Equivalents at End of Period............................. $14,821,903 $12,788,839 $17,036,104
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks................................................ $14,622,925 $10,394,143 $10,030,326
Federal funds sold..................................................... 0 1,100,000 4,650,000
Interest-bearing deposits in other banks............................... 198,978 1,294,696 2,355,778
$14,821,903 $12,788,839 $17,036,104
Supplemental Disclosure of Cash Flow Information:
Interest paid.......................................................... $13,746,911 $11,220,366 $8,903,826
Income taxes paid...................................................... $2,600,939 $2,326,530 $2,262,255
</TABLE>
<PAGE>
Notes To Consolidated Financial Statements
December 31, 1996, 1995 and 1994
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 stockholders' equity, net of tax.
Gains or losses realized from the sale of securities available for sale
are determined by specific identification and are included in non-
interest income.
Trading account securities, of which none were held on December 31,
1996 and 1995, 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
classifications.
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 installment 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, 1996, the Bank had $4,083,000 recorded as core deposit
intangibles, net of amortization. For the years ended December 31, 1996
and 1995, the Bank recorded amortization expense of $318,000 and
$103,000, respectively. No amortization expense was recorded during 1994.
Income and Expense Recognition
The Bank utilizes the accrual method of accounting in recognizing
items of income and expense.
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
<PAGE>
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.
Statement 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 have been provided where different accounting
methods have been used for reporting income for income tax and for
financial reporting purposes.
New Accounting Pronouncements
During 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". This statement establishes accounting standards for long-lived
assets, certain identifiable intangibles and goodwill related to those
assets to be held and to be disposed of. The statement requires such
assets to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Any resulting impairment loss is required to be reported in
the period in which the recognition criteria are first applied and met.
The Bank adopted the provisions of the statement on January 1, 1996. The
implementation did not have a material impact on the consolidated
financial position or consolidated results of operations.
During 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights" and SFAS No. 123, "Accounting for Stock Based
Compensation". The Bank adopted the provisions of these statements on
January 1, 1996. The adoption of these statements did not have a
material impact on the Bank's consolidated financial position or
consolidated results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", which provides accounting and reporting standards for such
transactions based on consistent application of a financial components
approach. This approach recognizes the financial and servicing assets an
entity controls and the liabilities it has incurred, as well as
derecognizes financial assets when control has been surrendered and
liabilities when they are extinguished. The statement requires that
liabilities and derivatives incurred or obtained by transferors as part
of a transfer of financial assets be initially measured at fair value, if
practicable. It also requires that servicing assets and other retained
interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of
transfer. In December 1996, the FASB issued SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125."
This statement allows the implementation of certain provisions of SFAS
No. 125 to be deferred for one year. American National Bank adopted SFAS
No. 125, as amended by SFAS No. 127, effective January 1, 1997. The
implementation of the statements did not have a material impact on the
Bank's consolidated financial position or consolidated results of
operations.
2. Parent Company Financial Information:
Condensed parent company financial information is as follows (in
thousands):
As of December 31
Condensed Balance Sheets 1996 1995
Assets:
Investment in Subsidiary $52,180 $48,889
Other Assets 38 23
Total Assets $52,218 $48,912
======= =======
Stockholders' Equity $52,218 $48,912
======= =======
For the Year Ended
December 31
Condensed Statements of Income 1996 1995 1994
Dividends from Subsidiary $2,283 $1,806 $2,266
Expenses (2) (1) (1)
Income Before Equity in Undistributed
Earnings of Subsidiary 2,281 1,805 2,265
Equity in Undistributed Earnings
of Subsidiary 2,751 3,211 2,244
Net Income $5,032 $5,016 $4,509
====== ====== ======
For the Year Ended
December 31
Condensed Statements of Cash Flows 1996 1995 1994
Cash provided by dividends received
from Subsidiary $2,283 $1,806 $2,266
Cash used for payment of dividends (2,263) (1,806) (2,261)
Other (11) (1) (1)
Net increase (decrease) in cash $ 9 $ (1) $ 4
====== ====== ======
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
stockholders 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.
<PAGE>
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, 1996 and 1995 were as follows (in thousands):
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
1995
Amortized Estimated
Cost Gains Losses Fair Value
Securities held to maturity:
U.S. Government $54,347 $306 -$70 $54,583
Federal agencies 30,738 284 -745 30,277
State and municipal 10,227 341 -27 10,541
Other 2,790 40 -35 2,795
Total securities held
to maturity 98,102 971 -877 98,196
Securities available for sale:
U.S. Government 38,783 848 0 39,631
Federal agencies 2,500 3 -43 2,460
State and municipal 5,319 115 -1 5,433
Other 3,552 32 -3 3,581
Total securities
available for sale 50,154 998 -47 51,105
Total securities $148,256 $1,969 -$924 $149,301
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1996, 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 $25,799 $25,791 $7,747 $7,768
Due after on year
through five years 33,759 33,874 62,366 62,769
Due after five years
through ten years 26,192 26,295 9,172 9,227
Due after ten years 2,636 2,661 7,611 7,607
$88,386 $88,621 $86,896 $87,371
Proceeds from calls exercised by the issuers of investments in debt
securities were $1,804,000 in 1996, $2,045,000 in 1995 and $6,905,000 in
1994. Proceeds from sales of investments in debt securities were
$19,234,000 in 1996, $9,021,000 in 1995 and $543,000 in 1994. The Bank
recognized losses of $592,000 and gains of $254,000 on sales of
securities during 1996 and gains of $61,000 and losses of $37,000 on
sales of securities during 1995 and gains of $43,000 and no losses on
sales of securities in 1994.
Investment securities with a book value of approximately $42,708,000
at December 31, 1996 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, $30,716,000 was pledged to secure
repurchase agreements.
5. Loans:
Outstanding loans at December 31, 1996 and 1995 were composed of the
following (in thousands):
1996 1995
Real Estate loans:
Construction and land development $ 3,640 $ 5,499
Secured by farmland 1,169 1,032
Secured by 1 - 4 family
residential properties 90,495 81,667
Secured by multi-family (5 or more)
residential properties 772 751
Secured by nonfarm,
nonresidential properties 35,289 33,950
Loans to farmers 2,672 2,529
Commercial and industrial loans 49,247 46,902
Loans to individuals for personal
expenditures 51,066 42,063
Loans for nonrated industrial development
obligations 2,565 1,901
All other loans 124 61
Total loans $237,039 $216,355
======== ========
<PAGE>
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,
1996, 1995 and 1994, loans in a nonaccrual or restructured status totaled
approximately $33,000, $306,000 and $184,000, respectively.
Interest income on nonaccrual loans, if recognized, is recorded on a
cash basis. For the years 1996, 1995 and 1994, 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 $40,000, $25,000 and
$20,000, respectively. No interest payments were recorded in 1996, 1995
or 1994 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.
During 1996, the Bank did not identify any loans as impaired.
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, 1996.
An analysis of the reserve for loan losses is as follows (in
thousands):
1996 1995 1994
Balance, beginning of year $2,757 $2,454 $2,256
Provision for loan losses
charged to expense 673 484 272
Charge-offs (502) (241) (131)
Recoveries 117 60 57
Other 25 - -
Balance, end of year $3,070 $2,757 $2,454
====== ====== ======
6. Time Deposits:
Included in time deposits are certificates of deposit in
denominations of $100,000 or more totaling $34,472,000, $28,654,000 and
$16,573,000 at December 31, 1996, 1995 and 1994, respectively. Interest
expense on such deposits during 1996, 1995 and 1994 was $1,392,000,
$788,000 and $468,000, respectively.
7. Income Taxes:
The components of the Corporation's net deferred tax assets as of
December 31, 1996 and December 31, 1995, were as follows (in thousands):
December 31 December 31
1996 1995
Deferred tax assets:
Reserve for loan losses $ 840 $697
Deferred compensation 219 184
Other 150 301
1,209 1,182
Valuation allowance (121) (194)
Total deferred tax assets 1,088 988
Deferred tax liabilities:
Depreciation 211 195
Net unrealized gains 162 324
Prepaid pension 75 91
Other 346 131
Total deferred tax liabilities 794 741
Net deferred tax assets $ 294 $247
==== ===
<PAGE>
The provision for income taxes consists of the following (in thousands):
1996 1995 1994
Taxes currently payable $2,442 $2,362 $2,240
Deferred tax benefit (61) (79) (134)
$2,381 $2,283 $2,106
====== ====== ======
The effective rates of the provision differ from the statutory federal
income tax rates due to the following items:
1996 1995 1994
Federal statutory rate 34.0% 34.0% 34.0%
Non-taxable interest income (3.6) (3.5) (3.2)
Non-deductible merger expenses 2.3 .8 --
Other ( .6) -- 1.0
32.1% 31.3% 31.8%
===== ===== =====
8. 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 $65,030,000 and
$33,967,000 at December 31, 1996 and 1995, 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, 1996 to purchase
securities when issued. Commitments to purchase securities when issued
amounted to $3,250,000 at December 31, 1995.
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, 1996 and 1995 the Bank had $705,000 and
$632,000 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 and
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, 1996, this
reserve requirement was approximately $3,942,000.
9. 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 $14,025,000, $13,845,000 and $12,527,000 at
December 31, 1996, 1995 and 1994, respectively. The maximum amount of
loans outstanding to the officers, directors and their business interests
at any month-end during 1996, 1995 and 1994 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, 1996, none of these loans were restructured, nor were
any related party loans charged off during 1996. An analysis of these
loans for 1996 is as follows (in thousands):
Balance, beginning of year $12,106
Additions 24,236
Repayments (24,119)
Other changes (related to
changes in directors'
related party interests) 1,802
Balance, end of year $14,025
======
10. 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, 1996 and 1995 (in thousands):
1996 1995
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $2,518 in 1996 and
$2,190 in 1995 $(2,604) $(2,218)
======= =======
Projected benefit obligation at December 31 $(3,913) $(3,100)
Plan assets at fair value 3,782 3,271
Plan assets greater than (less than) projected
benefit obligation (131) 171
Unrecognized net asset, at date of adoption,
being recognized over 16.4 years (79) (91)
Unrecognized net loss 666 447
Unrecognized prior service cost (240) (264)
Prepaid pension cost included in other assets $ 216 $ 263
======= =======
<PAGE>
Net periodic pension cost for 1996 and 1995, based on the above
valuation included the following components (in thousands):
1996 1995
Service cost - benefits earned during
the period $125 $106
Interest cost on projected benefit
obligation 186 169
Actual return (gain) loss on plan assets (601) (752)
Net amortization and deferral 370 (662)
Net periodic pension cost $ 80 $185
==== ====
During 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. During 1995, a rate of
increase in future compensation levels of 4.0%, and a discount rate of
6.0% were used in determining the actuarial present value of the
projected benefit obligation. The expected long-term rate of return on
assets was 6.25% in 1996 and 1995.
Pension plan cost were $80,000, $185,000 and $150,000, for years
1996, 1995 and 1994, respectively. Additional pension expense of $95,000
was recognized in 1994 related to lump-sum settlements of accrued benefit
obligations.
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 years ended December
31, 1995 and 1994, the Bank recorded pension expense of $86,000 and
$112,000 respectively, related to this plan.
Presently the Bank has no postretirement benefits that are not
charged to expense during the years that the employees render service.
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 is
provided on a current basis.
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 $83,000 in 1996 and $41,000
in 1995. These amounts are included in pension and other employee
benefits expense for the respective years.
11. Fair Value of Financial Instruments:
The estimated fair values of the Corporation's financial instruments
are as follows (in thousands):
December 31, 1996 December 31, 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Cash and federal funds sold $ 14,822 $ 14,822 $ 12,789 $ 12,789
Investment securities 175,757 175,992 149,208 149,301
Other 16,070 16,070 13,798 13,798
Loans, net 233,509 235,121 212,684 220,405
Financial liabilities:
Deposits $(361,983) $(362,937) $(327,342) $(327,496)
Federal funds purchased and
repurchase agreements (23,484) (23,484) (9,572) (9,572)
Unrecognized financial instruments:
Commitments to extend credit$ (65,030) -- $ (33,967) --
Standby letters of credit (705) (11) (632) (10)
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
For short-term instruments, the carrying amount is a reasonable
estimate of fair value.
<PAGE>
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.
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. The interest
rates used to discount future cash flows are those in effect at period-
end or an average of such for the 10 working days surrounding that date.
The fair value of non-performing loans represents an estimate by
Management after considering the collectability of each loan, taking into
account the financial position of the borrower, the value of supporting
collateral and the portion of the reserve for loan losses allocated to
each of these loans.
Deposits
The fair value of demand deposits, savings deposits, and money
market deposits is the amount payable on demand at the reporting date.
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.
Repurchase Agreements
The fair value of repurchase agreements is estimated by discounting
the future cash flows using the current rates at which similar repurchase
agreements would be offered to depositors for the same remaining
maturities at current rates.
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, 1996 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.
12. 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, $5,864,000 plus an additional amount
equal to the Bank's net income for 1997 up to the date of any
dividend declaration.
Effective March 14, 1996, the stockholders 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, 1996 and 1995 these ratios were above the minimums
prescribed for holding companies and banks, as follows (in thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
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% 19,703 >8.0%
Tier I Capital
(to Average Assets) 47,821 11.76% 16,268 >4.0% 32,536 >8.0%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) 47,999 23.67% 16,223 >8.0% 20,279 >10.0%
Tier I Capital
(to Risk Weighted Assets) 45,461 22.42% 8,112 >4.0% 16,223 >8.0%
Tier I Capital
(to Average Assets) 45,461 12.92% 14,071 >4.0% 28,143 >8.0%
</TABLE>
ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
<PAGE>
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 below in Note (2) under Executive
Compensation. Officers and other employees may be eligible to
receive certain incentive compensation if certain earnings are
attained in 1997. Certain key executive officers are eligible to
participate in the Executive Compensation Continuation Plan described
below under "Deferred Compensation Plan". Mr. Davis is subject to
the employment agreement described below under "Employment
Agreement". All compensation is paid by the Bank and no officer
receives any additional compensation from the Corporation. There are
no stock options currently offered to employees. The Board of
Directors has approved a stock option plan which the shareholders are
being asked to approve at the Annual Meeting. See "Approval of
American National Bankshares Inc. Stock Option Plan" immediately
above this report.
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, 1996. The two
indexes are the S & P 500 Total Return published by Standard & Poor's
Corporation and the Independent Community Bank Index, consisting of
21 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.
<TABLE>
<CAPTION>
FIVE YEAR PERFORMANCE INDEX
1991 1992 1993 1994 1995 1996
____ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
American National Bankshares, Inc. 100 160 181 195 188 161
Independent Bank Index 100 130 163 197 268 313
S & P 500 Index 100 108 118 120 165 203
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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 Payouts Comp.(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles H. 1996 144,071 14,882 N/A N/A N/A N/A 31,309
Majors 1995 118,665 27,479 N/A N/A N/A N/A 28,780
President 1994 108,140 23,095 N/A N/A N/A N/A 41,437
& Chief
Executive
Officer
H. Dan 1996 114,248 N/A N/A N/A N/A N/A .00
Davis 1995 100,011 N/A N/A N/A N/A N/A 32,085(7)
Executive 1994 100,663 N/A N/A N/A N/A N/A 4,572(7)
Vice Pres.
of the
Corporation;
Sr. Vice
President
of the Bank
(effective March 15, 1996)
____________________________________
</TABLE>
(1) Includes salary deferrals contributed by the employee to the 401(k)
Plan, fees as director of Mutual and compensation and fees for
service as officer and director of Mutual Service Corporation.
(2) Includes matching contributions to the 401(k) Plan made by the Bank.
Also includes accrued payments of profit-sharing (bonus)
participations. In 1996, 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, 1996. The total expense,
paid or accrued, for the profit sharing (bonus) plan for the year
1996 amounted to $343,117.
(3) All Other Compensation includes amounts set aside or accrued by the
Bank for the Retirement Plan and Executive Compensation Continuation
Plan.
(4) 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 1996.
(5) In 1996, 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 1996 was $137,000. Non-officer directors are
excluded from the Bank's retirement plan and, therefore, do not
qualify for pension benefits.
(6) 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.
<PAGE>
As of December 31, 1996, 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, 1996 are as follows:
Estimated Annual Benefit
Name of Individual at Retirement
Charles H. Majors $ 43,195
President and
Chief Executive
Officer of the
Corporation and
the Bank
H. Dan Davis 8,711
Executive Vice President
of the Corporation and
Senior Vice President
of the Bank
E. Budge Kent, Jr., 49,845
Senior Vice President
and Asst. Secretary
of the Corporation
and Senior Vice
President and Trust
Officer of the Bank
Carl T. Yeatts, 47,046
Senior Vice President
of the Corporation
and Senior Vice
President and Senior
Loan Officer of the Bank
Gilmer D. Jefferson, 45,298
Senior Vice President
and Asst. Treasurer
of the Corporation
and Senior Vice
President of the Bank
David Hyler, 37,294
Senior Vice President
and Secretary & Treasurer
of the Corporation and
Senior Vice President
and Chief Financial
Officer of the Bank ____________
$ 231,389
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. Charles H. Majors is
entitled to an annual benefit of $50,000 under the plan. E. Budge Kent, Jr.,
Gilmer D. Jefferson, Carl T. Yeatts and David Hyler are entitled to an annual
benefit of $25,000 each under the plan and the current executive officers as a
group (5) are entitled to annual benefits of $150,000 under the plan. Premiums
in the aggregate amount of $20,402 were paid in 1996.
<PAGE>
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 at a monthly salary of
$5,500 for a period expiring March 14, 2003. As a senior consultant, Mr. Davis
will be 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 of 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 14, 1997 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 14, 1997, the Corporation
had 1,484 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 772,783
shares (23.5619%) on March 14, 1997.
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 3,279,798. There are 772,783 shares held of record by Ambro and Company
which amount represents 23.5619% of the outstanding securities, and only
388,031 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.
<PAGE>
(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.
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since March 14, 1997 of Class
Willie G. Barker, Jr. (59) 1996 14,100 - Direct (1) .4299
Retired President of
Dibrell Brothers, Inc.,
Danville, VA, leaf
tobacco and flowers,
since June, 1993;
prior to,
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
Ben J. Davenport, Jr. (54) 1992 3,309 - Direct (1)(2) .1009
Chairman, First
Piedmont Corporation,
Chatham, VA,
waste management
James A. Motley (68) 1975 7,810 - Direct (1)(2) .2381
Retired Chairman and Chief 5,242 - Family .1598
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
Landon R. Wyatt, Jr. (71) 1965 4,540 - Direct (1) .1384
President, Wyatt Buick 9,070 - Family .2765
Sales Co., Danville, VA, Relationship (4)
automobile dealership
Fred A. Blair (50) 1992 1,842 - Direct (1) .0562
President, Blair 225 - Family .0069
Construction, Inc., Relationship (3)
Gretna, VA, commercial
building contractor
<PAGE>
H. Dan Davis (59) 1996 63,882 - Direct (1)(2) 1.9477
Executive Vice President 352 - Family .0107
of the Corporation and Relationship (4)
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.
E. Budge Kent, Jr. (58) 1979 6,800 - Direct (1) .2073
Senior Vice President & 241 - Family .0073
Assistant Secretary of Relationship (4)
the Corporation and
Senior Vice President &
Trust Officer of the
Bank
Fred B. Leggett, Jr. (60) 1994 8,304 - Direct (1)(2) .2532
Retired Chairman and 3,192 - Family .0073
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
Claude B. Owen, Jr. (51) 1984 5,716 - Direct (1) .1743
Chairman & Chief 2,100 - Family .0640
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.
<PAGE>
Richard G. Barkhouser (66) 1980 82,412 - Direct (1) 2.5127
President, Barkhouser 7,260 - Family .2214
Motors, Inc., Danville, Relationship (4)
VA, automobile
dealership
B. Carrington Bidgood (72) 1975 32,436 - Direct (1) .9890
Retired Senior Vice 1,200 - Family .0366
President, Dibrell Relationship (4)
Brothers, Inc., Danville,
VA, leaf tobacco & flowers
Lester A. Hudson, Jr. (57) 1984 4,902 - Direct (1) .1495
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., since
Nov., 1991; prior
thereto Chairman, President
and Chief Executive Officer
of Wunda Weve Carpets, Inc.
Charles H. Majors (51) 1981 3,928 - Direct (1) .1198
President and Chief 800 - Family .0244
Executive Officer of Relationship (4)
the Corporation and
the Bank since
January, 1994;
prior thereto
President of the Corporation
and the Bank since January,
1993; prior thereto Clement
& Wheatley, Attorneys-at-Law,
Danville, VA
All Executive officers and directors, 262,093 - Direct (1)(2) 7.9911
including nominees and directors 31,591 - Family .9632
named above (16 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.
<PAGE>
EXECUTIVE OFFICERS
Mr. Charles H. Majors, Mr. H. Dan Davis and Mr. E. Budge Kent, Jr.,
together with the three senior vice presidents listed below, are the
executive officers of the Corporation and the Bank.
Principal Occupation and
Name Age Business Experience
David Hyler 64 Senior Vice President and
Secretary & Treasurer of
the Corporation and Senior
Vice President and
Chief Financial
Officer of the Bank;
Officer of the Bank since
1969
Gilmer D. Jefferson 59 Senior Vice President and
Assistant Treasurer of the
Corporation and Senior Vice
President and Cashier of
the Bank; Officer of the
Bank since 1963
Carl T. Yeatts 58 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 12 Board Meetings during the year 1996.
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
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 Committee
The Audit Committee, which currently consists of
Messrs. Barker, Blair, and Motley, reviews significant audit and accounting
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 functions. The Audit
Committee held three meetings in 1996.
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 two meetings in 1996.
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 1996.
<PAGE>
(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 1996. 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 1996, the highest aggregate amount of outstanding loans,
direct and indirect, to the directors and officers was $15,217,230 or 31% of
equity capital and this peak amount occurred on March 31, 1996.
Also, refer to FOOTNOTE 9 of the Financial Statements and Supplementary
Data.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report:
EXHIBIT INDEX
Page Number or
Incorporation
Exhibit by Reference to
1 Articles of Incorporation and By-Laws Exhibit III on Form
S-14
Registration
Statement
filed April 4, 1985
2. Financial Data Schedule Exhibit 27
3 a. Agreement between American National Bank and Exhibit 4a on Form 10-K
Trust Company and James A. Motley dated filed March 28, 1994
August 26, 1982, as amended August 11, 1987
b. Agreement between American National Bank and Exhibit 4b on Form 10-K
Trust Company and Charles H. Majors dated filed March 28, 1994
February 22, 1993
c. Agreement between American National Bank and Exhibit 4c on Form 10-K
Trust Company and E. Budge Kent, Jr. dated filed March 28, 1994
August 31, 1982, as amended August 11, 1987
d. Agreement between American National Bank and Exhibit 4d on Form 10-K
Trust Company and David Hyler dated filed March 28, 1994
August 31, 1982, as amended August 11, 1987
e. Agreement between American National Bank and Exhibit 4e on Form 10-K
Trust Company and Gilmer D. Jefferson dated filed March 28, 1994
August 25, 1982, as amended August 11, 1987
f. Agreement between American National Bank and Exhibit 4f on Form 10-K
Trust Company and Carl T. Yeatts dated filed March 28, 1994
August 26, 1982, as amended August 11, 1987
4. Agreement and Plan of Reorganization, dated as Exhibit 2.1 on Form8-K
of September 26, 1995, by and between American filed September 27,1995
National Bankshares Inc. and Mutual Savings
Bank, F.S.B.
5. Plan of Merger, dated as of September 26, 1995, Exhibit 2.2 on Form8-K
by and between American National Bank and filed September 27, 1995
Trust Company and Mutual Savings Bank, F.S.B.
6. Text of joint press release, dated September Exhibit 99.1 on Form8-K
26, 1995, issued by American National filed September 27,1995
Bankshares Inc. and Mutual Savings Bank, F.S.B.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
1996.
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.
March 18, 1997 AMERICAN NATIONAL BANKSHARES INC.
By: /s/ David Hyler
___________________________________
Senior Vice President, Secretary & Treasurer
<PAGE>
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 28, 1997.
/s/ Charles H. Majors President and
__________________________ Chief Executive
Officer
/s/ B. Carrington Bidgood
__________________________ Director
/s/ Lester A. Hudson, Jr.
__________________________ Director
/s/ Ben J. Davenport, Jr.
__________________________ Director
/s/ Bill Barker, Jr.
__________________________ Director
/s/ H. Dan Davis
__________________________ Director
/s/ E. Budge Kent, Jr.
__________________________ Director
/s/ Claude B. Owen, Jr.
__________________________ Director
/s/ James A. Motley
__________________________ Director
/s/ Richard G. Barkhouser
__________________________ Director
/s/ Landon R. Wyatt, Jr.
__________________________ Director
/s/ David Hyler
__________________________ Senior Vice
President
Secretary &
Treasurer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1996 APR-01-1996 JUL-01-1996 OCT-01-1996
JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
DEC-31-1996
<CASH> 11039 9570 12902 14623
14623
<INT-BEARING-DEPOSITS> 2485 3261 208 199
199
<FED-FUNDS-SOLD> 6300 5000 7560 0
0
<TRADING-ASSETS> 0 0 0 0
0
<INVESTMENTS-HELD-FOR-SALE> 69279 78762 84520 87370
87370
<INVESTMENTS-CARRYING> 70888 66389 70996 88386
88386
<INVESTMENTS-MARKET> 71090 66093 70859 88621
88621
<LOANS> 221967 222832 225513 237039
237039
<ALLOWANCE> 2800 2882 2981 3070
3070
<TOTAL-ASSETS> 393983 398640 414975 440158
440158
<DEPOSITS> 332124 331137 337896 361983
361983
<SHORT-TERM> 0 0 0 8425
8425
<LIABILITIES-OTHER> 13197 18632 26476 17532
17532
<LONG-TERM> 0 0 0 0
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 3280 3280 3280 3280
3280
<OTHER-SE> 45382 45591 47323 48938
48938
<TOTAL-LIABILITIES-AND-EQUITY> 393983 398640 414975 440158
440158
<INTEREST-LOAN> 4957 4917 5209 5252
20335
<INTEREST-INVEST> 2127 2101 2325 2609
9162
<INTEREST-OTHER> 68 131 38 198
435
<INTEREST-TOTAL> 7152 7149 7572 8059
29932
<INTEREST-DEPOSIT> 3349 3340 3345 3533
13567
<INTEREST-EXPENSE> 3476 3480 3587 3827
14370
<INTEREST-INCOME-NET> 3676 3669 3985 4232
15562
<LOAN-LOSSES> 131 122 165 255
673
<SECURITIES-GAINS> (338) 0 0 0
(338)
<EXPENSE-OTHER> 3313 2086 2496 2272
10167
<INCOME-PRETAX> 875 2255 2037 2246
7413
<INCOME-PRE-EXTRAORDINARY> 875 2255 2037 2246
7413
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (136) 1558 2033 1577
5032
<EPS-PRIMARY> (.04) .48 .62 .48
1.54
<EPS-DILUTED> (.04) .48 .62 .48
1.54
<YIELD-ACTUAL> 3.96 4.03 4.00 4.04
4.04
<LOANS-NON> 321 41 116 33
33
<LOANS-PAST> 214 300 285 479
479
<LOANS-TROUBLED> 0 0 0 0
0
<LOANS-PROBLEM> 0 0 0 0
0
<ALLOWANCE-OPEN> 2782 2800 2882 2981
2782
<CHARGE-OFFS> 122 72 123 185
502
<RECOVERIES> 9 32 56 20
117
<ALLOWANCE-CLOSE> 2800 2882 2981 3070
3070
<ALLOWANCE-DOMESTIC> 2711 2793 2892 2975
2975
<ALLOWANCE-FOREIGN> 0 0 0 0
0
<ALLOWANCE-UNALLOCATED> 89 89 89 95
95
</TABLE>
