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, 1998
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
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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 9, 1999
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Common Stock ($1.00 Par Value) 3,051,733 Shares
State the aggregate market value of the voting stock held by non-affiliates of
the registrant
Aggregate market value of voting Based upon the price of the most
stock held by non-affiliates recent sale known to management as of
-------------------------------- -------------------------------------
$81,404,000 March 9, 1999
DOCUMENTS INCORPORATED BY REFERENCE
None
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CROSS REFERENCE
Page
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PART I
ITEM 1 - Business II 4
ITEM 2 - Properties II 5
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 Registrant's Common Equity and Related
Stockholder Matters II 5
ITEM 6 - Selected Financial Data II 6
ITEM 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations II 7 - 24
ITEM 7A- Quantitative and Qualitative Disclosures about Market
Risk II 15 - 18
ITEM 8 - Financial Statements and Supplementary Data
Report of Independent Public Accountants II 26
Consolidated Balance Sheets at December 31, 1998 and
1997 II 27
Consolidated Statements of Income for each of the years
in the three-year period ended December 31, 1998 II 28
Consolidated Statements of Changes in Shareholders'
Equity for each of the years in the three-year period
ended December 31, 1998 II 29
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31, 1998 II 30
Notes to Consolidated Financial Statements II 31 - 43
Quarterly Financial Results for 1998 and 1997 II 24
ITEM 9 - Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
There have been no changes in or disagreements with
accountants on accounting and financial disclosure.
PART III
ITEM 10 - Directors and Executive Officers of the Registrant I 3 - 6
ITEM 11 - Executive Compensation I 6, 8 - 11
ITEM 12 - Security Ownership of Certain Beneficial Owners and
Management I 3 - 5
ITEM 13 - Certain Relationships and Related Transactions I 10 - 12, II 39
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for reference)
Exhibit
2.1 Agreement and Plan of Reorganization, dated as of Exhibit 2.1 on Form 8-K
September 26, 1995, by and between American National filed September 27, 1995
Bankshares Inc. and Mutual Savings Bank, F.S.B.
2.2 Plan of Merger, dated as of September 26, 1995, by Exhibit 2.2 on form 8-K
and between American National Bank and Trust filed September 27, 1995
Company and Mutual Savings Bank, F.S.B.
3.1 Amended and Restated Articles of Incorporation Exhibit 4.1 on Form S-3
dated August 20, 1997 filed August 20, 1997
3.2 Amended Bylaws dated August 20, 1997 Exhibit 4.2 on Form S-3
filed August 20, 1997
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10.1 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
10.2 Agreement between American National Bank and Trust Exhibit 10.2 on Form 10-K
Company and Charles H. Majors dated June 12, 1997 filed March 27, 1998
10.3 Agreement between American National Bank and Trust Exhibit 10.3 on Form 10-K
Company and E. Budge Kent, Jr. dated June 12, 1997 filed March 27, 1998
10.4 Agreement between American National Bank and Trust Exhibit 10.4 on Form 10-K
Company and David Hyler dated June 12, 1997 filed March 27, 1998
10.5 Agreement between American National Bank and Trust Exhibit 10.5 on Form 10-K
Company and Gilmer D. Jefferson dated June 12, 1997 filed March 27, 1998
10.6 Agreement between American National Bank and Trust Exhibit 10.6 on Form 10-K
Company and Carl T. Yeatts dated June 12, 1997 filed March 27, 1998
10.7 American National Bankshares Inc. Stock Option Plan dated Exhibit 4.3 on form S-8
August 19, 1997 filed September 17, 1997
10.1 Agreement between American National Bank and Trust Exhibit 10.1 on Form 10-Q
Company and T. Allen Liles dated June 1, 1998 filed August 13, 1998
27.0 Financial Data Schedule Exhibit 27
99.1 Text of joint press release, dated September Exhibit 99.1 on Form 8-K
26, 1995, issued by American National Bankshares filed September 27, 1995
Inc. and Mutual Savings Bank, F.S.B.
99.2 American National Bankshares Inc. Dividend Reinvestment Exhibit 99 on Form S-3
Plan dated August 19, 1997 filed August 20, 1997
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
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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 December 31, 1999 the Corporation
employed 179 persons (FTE).
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. Seven of these
offices are located in Danville, one office each in Gretna, Chatham, and
Collinsville, Virginia and Yanceyville, North Carolina. The Bank also has eleven
automated teller machines at various locations in the trade area. The Bank
offers all services normally offered by a full-service commercial bank,
including commercial and individual demand and time deposit accounts, commercial
and individual loans and trust services.
Competition
The Bank's primary service area is generally defined as the City of
Danville, City of Martinsville, Pittsylvania and Henry Counties in Virginia,
Town of Yanceyville and the northern half of Caswell County in North Carolina.
Vigorous competition exists in this service area. The Bank competes not only
with other commercial banks but also with diversified financial institutions,
money market and mutual funds, and mortgage and finance companies. As of March
22, 1999, there were approximately 17 banks operating in this service area.
American National Bank and Trust Company has the largest market share in
Danville and Pittsylvania County. No new banks or savings and loan associations
have been chartered in the Danville area in the past five years. Several branch
offices of existing banks have been opened in this trade area in the past two
years.
Supervision and Regulation
The Corporation is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("the Act") and is registered as such with the Board
of Governors of the Federal Reserve System ("the Federal Reserve Board"). As a
bank holding company, the Corporation is required to file with the Federal
Reserve Board an annual report and such other information as may be required.
The Federal Reserve Board may also make examinations of the Corporation.
The operations of the Bank are subject to federal statutes and to
regulations of the Comptroller of the Currency, the Federal Reserve Board and
the Federal Deposit Insurance Corporation, which insures the Bank's deposits.
The primary supervisory authority over the Bank is the Comptroller of the
Currency, which regularly examines such areas as reserves, loans, investments,
management practices and other aspects of the Bank's operations. These
examinations are designed primarily for the protection of the Bank's depositors.
In addition to these regular examinations, the Bank must furnish the Comptroller
periodic reports containing a full and accurate statement of its affairs.
As a national bank, the Bank is a member of the Federal Reserve System and
is affected by general fiscal and monetary policies of the Federal Reserve
Board. The techniques used by the Federal Reserve Board include setting the
reserve requirements of member banks and establishing the discount rate on
member bank borrowings.
Government Monetary Policies and Economic Controls
The policies of the Federal Reserve Board have a direct effect on the
amount of bank loans and deposits and the interest rates charged and paid
thereon. While current economic conditions, the policies of the Federal Reserve
Board (and other regulatory authorities) designed to deal with these conditions
and the impact of such conditions and policies upon the future business and
earnings of the Bank cannot accurately be predicted, they can materially affect
the revenues and income of commercial banks.
Foreign Operations
The Corporation does not engage in any foreign operations.
Executive Officers
This information is incorporated by reference to the Registrant's Proxy
Statement for the 1999 Annual Meeting of Shareholders.
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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 12, 1999 the Bank maintained eleven full service offices.
Seven are located within the City of Danville, with others located at Gretna,
Chatham, and Collinsville, Virginia and Yanceyville, North Carolina. The Bank
owns and operates eleven Automated Teller Machines ("ATMs"). The Bank owns a
parking lot for its employees fronting on Ridge Street in close proximity to the
main office. The Bank also owns 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.
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Bank Offices
Main Office 628 Main Street, Danville, Virginia 24541
Nor-Dan Office 239 Nor-Dan Drive, Danville, Virginia 24540
Riverside Office 1081 Riverside Drive, Danville, Virginia 24540
South Boston Road Office 1407 South Boston Road, Danville, Virginia 24540
South Main Office 1013 South Main Street, Danville, Virginia 24541
Tower Drive Office 103 Tower Drive, Danville, Virginia 24540
West Main Office* 2016 West Main Street, Danville, Virginia 24541
Chatham Office 13880 U.S. Highway 29, Chatham, Virginia 24531
Collinsville Office 2484 Virginia Avenue, Collinsville, Virginia 24078
Gretna Office 109 Main Street, Gretna, Virginia 24557
Yanceyville Office 173 Main Street, Yanceyville, North Carolina 27379
ATM LOCATIONS
Drive-Up
Riverside Office 1081 Riverside Drive, Danville, Virginia 24540
South Boston Road Office 1407 South Boston Road, Danville, Virginia 24540
Chatham Office 13880 U.S. Highway 29, Chatham, Virginia 24531
Collinsville Office 2484 Virginia Avenue, Collinsville, Virginia 24078
Huffman's Car Wash* 596 West Main Street, Danville, Virginia 24541
Hillcrest Shopping Center* Highways 86 & 158, Yanceyville, North Carolina 27379
Walk-Up
Nor-Dan Office 239 Nor-Dan Drive, Danville, Virginia 24540
West Main Office 2016 West Main Street, Danville, Virginia 24541
Danville Regional Medical Ctr* 142 South Main Street, Danville, Virginia 24541
Piedmont Mall* 325 Piedmont Drive, Danville, Virginia 24540
Liberty Fair Mall* 240 Commonwealth Boulevard, Martinsville, Virginia 24112
* Leased
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ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters
The Corporation's common stock is not traded on any stock exchange but is
listed on the OTC (Over The Counter) Bulletin Board under the symbol "AMNB". At
March 12, 1999 the Corporation had 1,411 shareholders. The tables below present
the high and low sales' prices known to management for the Corporation's common
stock and dividends declared for the past two years. Market value and dividends
are shown per share and are based on 3,051,733 shares outstanding for 1997 and
1998.
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First Second Third Fourth
Market Price Quarter Quarter Quarter Quarter
- ------------ ------- ------- ------- -------
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1998 Common Stock $28.75 - 32.50 $28.75 - 31.00 $26.00 - 31.00 $27.00 - 33.00
1997 Common Stock $23.50 - 24.75 $23.50 - 27.00 $26.25 - 28.25 $27.25 - 32.00
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<CAPTION>
Per Share First Second Third Fourth
Dividends Declared Quarter Quarter Quarter Quarter Total
- ------------------ ------- ------- ------- ------- -----
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1998 Common Stock $ .21 $ .24 $ .24 $ .24 $ .93
1997 Common Stock $ .18 $ .21 $ .21 $ .21 $ .81
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Summary of Selected Consolidated Financial Data
(in thousands, except per share amounts)
American National Bankshares Inc & Subsidiary
<CAPTION>
1998 1997 1996 1995 1994
Operations Information: ----------- ----------- ----------- ----------- -----------
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Interest income:
Loans............................................ $ 23,356 $ 22,441 $ 20,335 $ 18,432 $ 14,923
Federal funds sold and other..................... 272 237 435 202 210
Investment securities............................ 9,026 9,050 9,162 7,300 6,701
----------- ----------- ----------- ----------- -----------
Total interest income.......................... 32,654 31,728 29,932 25,934 21,834
Interest expense................................... 14,472 14,590 14,370 11,484 8,919
----------- ----------- ----------- ----------- -----------
Net interest income................................ 18,182 17,138 15,562 14,450 12,915
Provision for loan losses.......................... (927) (1,100) (673) (484) (272)
Non-interest income................................ 4,029 3,201 2,691 2,035 2,122
Non-interest expense............................... (10,963) (10,245) (10,167) (8,702) (8,150)
----------- ----------- ----------- ----------- -----------
Income before income taxes......................... 10,321 8,994 7,413 7,299 6,615
Income taxes....................................... 3,123 2,725 2,381 2,283 2,106
----------- ----------- ----------- ----------- -----------
Net income......................................... $ 7,198 $ 6,269 $ 5,032 $ 5,016 $ 4,509
=========== =========== =========== =========== ===========
Balance Sheet Information:
Investment securities.............................. $163,413 $143,077 $175,757 $149,208 $122,509
Net loans.......................................... 265,698 251,173 233,509 212,684 188,034
Total deposits..................................... 358,325 351,603 361,983 327,342 282,791
Shareholders' equity............................... 54,861 50,003 52,218 48,912 45,045
Total assets....................................... 460,383 423,640 440,158 388,479 337,355
Per Share Information:*
Net income (basic and diluted)..................... $ 2.36 $ 1.99 $ 1.54 $ 1.56 $ 1.40
Dividends.......................................... .93 .81 .69 .56 .75
Book value......................................... 17.98 16.39 15.92 15.22 14.02
Ratios:
Return on average assets........................... 1.64% 1.47% 1.24% 1.43% 1.37%
Return on average shareholders' equity............. 13.79% 12.51% 10.12% 10.62% 10.13%
Total risk-based capital/assets.................... 18.04% 18.37% 20.66% 23.67% 25.98%
Shareholders' equity/assets........................ 11.92% 11.80% 11.86% 12.59% 13.35%
Net charge-offs to average net loans............... .15% .36% .17% .09% .04%
Reserve for loan losses to period-end
loans, net of unearned income.................... 1.42% 1.29% 1.30% 1.28% 1.29%
The financial information for years 1994 through 1995 has been restated to reflect the merger with Mutual Savings Bank, FSB.
* Per share amounts are based on average shares outstanding.
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MANAGEMENT'S DISCUSSION and
ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
American National Bankshares Inc. ("the Corporation") was organized in 1984
for the purpose of acquiring all of the outstanding shares of American National
Bank and Trust Company ("the Bank"). The Bank was chartered and opened for
business in February 1909. Under an agreement and plan of merger, the Bank was
acquired by the Corporation on September 1, 1984.
On March 14, 1996, the Corporation completed the merger of Mutual Savings
Bank, F.S.B. ("Mutual") into the Bank, upon the approval of the shareholders of
each company. The Corporation exchanged 879,805 common shares, at an exchange
ratio of .705 of a share of the Corporation's common stock for each outstanding
share of Mutual common stock, for Mutual's 1,248,100 common
shares.
The transaction was accounted for as a pooling of interests. The financial
position and results of operations of the Corporation and Mutual were combined
and the fiscal year of Mutual was conformed to the Corporation's fiscal year. In
addition, all prior periods presented have been restated to give effect to the
merger.
In March 1996 the shareholders of the Corporation approved an amendment to
the articles of incorporation to increase the number of authorized shares of the
Corporation's common stock from 3,000,000 shares to 10,000,000 shares.
On August 25, 1996 the Corporation entered into an agreement with
FirstSouth Bank of Burlington, North Carolina to purchase the branch office and
associated ATM of FirstSouth Bank located in Yanceyville, (Caswell County) North
Carolina. This acquisition was completed October 25, 1996. The transaction was
accounted for as a purchase.
Performance Summary
The Corporation and Bank reported record profitability during 1998. Net
income of $7,198,000 for 1998 increased by $929,000 or 15% over net income of
$6,269,000 for 1997.
The economy of the Bank's trade area continues to be healthy as evidenced
by another year of positive loan demand. During 1998, net loans increased
$14,525,000, or 6% while total deposits increased $6,722,000, or 2%. Total
deposits and repurchase agreements with customers increased $19,706,000, or 5%,
during 1998.
Earnings and Capital
Net income per diluted share was $2.36 in 1998, $1.99 in 1997, and $1.54 in
1996. Shareholders' equity increased $4,858,000 in 1998 from the retention of
1998 earnings and from an increase in net unrealized gains on securities
available for sale. Shareholders' equity decreased during 1997 by $2,215,000 or
4% through the repurchase of 228,065 shares of common stock for $6,278,000. The
reduction from stock repurchase was offset by retention of 1997 earnings and an
increase in net unrealized gains on securities available for sale. This followed
an increase in capital of $3,306,000 or 7%, in 1996 from retention of 1996
earnings of $2,889,000, proceeds of $731,000 from exercise of stock options less
a reduction of $314,000 in net unrealized gains on securities available for
sale. Shareholders' equity was 11.9% of assets at December 31, 1998 and 11.8% at
December 31, 1997. Shareholders' equity was $54,861,000 at December 31, 1998 and
$50,003,000 at December 31, 1997. The total market value of American National
Bankshares Inc. common stock at $33.00 per share (the last trade recorded on the
OTC Bulletin Board during 1998) was $100,707,000. The market value of the
Corporation's common stock was 184 percent of its book value. Book value per
common share was $17.98 at the close of 1998.
During 1998, the Corporation increased its reserve for loan losses to
$3,821,000, an increase of $544,000 or 17% from 1997. The reserve, as a
percentage of loans, was 1.42% at December 31, 1998 and 1.29% at December 31,
1997.
The return of net income on average total assets was 1.64% in 1998 compared
to 1.47% in 1997 and 1.24% in 1996. The return on average shareholders' equity
was 13.79% in 1998 compared to 12.51% in 1997 and 10.12% in 1996.
Mergers and Acquisitions
On March 14, 1996 American National Bankshares Inc. exchanged .705 of a
share of its common stock for each share of Mutual common stock. Based on
American National Bankshares stock price as of February 27, 1996 of $27, the
transaction represented an exchange value of approximately $19.04 for each share
of Mutual common stock. The purchase price was 1.69 times Mutual's June 30, 1995
book value. The merger was accounted for as a pooling of interests. At the
consummation of the merger on March 14, 1996, Mutual had total assets of
$84,718,000, total deposits of $67,996,000 and shareholders' equity of
$15,958,000.
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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 1998 as evidenced by another year of positive loan and deposit
growth. The Corporation's net loans grew at a rate of 6% during 1998 following
an 8% increase in 1997. Total deposits increased 2% during 1998 following a 3%
decline in 1997. The Bank executed a planned strategy to reduce high cost time
deposits during 1997.
The weighted average yield on interest earning assets remained stable and
the weighted average cost of interest-bearing liabilities decreased during 1998
due to growth in loans, due to higher yielding investments and due to lower
yields paid on interest-bearing liabilities. As a result of the Corporation's
asset and liability strategies and increased loan demand, the Corporation was
able to increase its net interest income (interest income less interest expense)
by 6%. Although Management believes the Corporation has positioned itself to
continue to maintain this level of net interest income into the near future,
increased competition and slowing loan and deposit growth could negatively
impact net interest income.
During 1998, time deposits decreased by $456,000 and savings deposits
decreased by $930,000 as falling interest rates and an increasing stock market
attracted investment funds. Interest bearing demand deposits increased
$3,854,000 or 7%, and non-interest bearing demand deposits increased $3,316,000
or 8%. Money market deposits increased $938,000, or 5%. Repurchase agreements
which are short term investments for businesses and individuals and not included
in deposits increased $12,984,000, or 72%, during 1998. Total deposits increased
$6,722,000 or 2% during 1998 after decreasing $10,380,000 or 3% during 1997.
Pursuant to the Agreement and Plan of Reorganization by and between Mutual
and the Corporation, Mutual Mortgage of the Piedmont, Inc. ("Mutual Mortgage")
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 began operations on December 2, 1996. Its main
office is located in the Bank's branch office building at 103 Tower Drive. The
financial condition and results of operations of Mutual Mortgage are included in
the Consolidated Balance Sheets and Consolidated Statements of Income of the
Corporation.
On September 29, 1998 the Federal Reserve Board ("FRB") decreased short
term interest rates by cutting federal funds by 1/4% and the major money center
banks followed by lowering the prime rate by 1/4%. On October 15 and
November 17, 1998 the Federal Reserve decreased short term rates again by
cutting federal funds and the discount rate by 1/4%, and major money center
banks followed by lowering the prime rate by 1/4% on both occasions. Short and
intermediate U.S. Treasury yields had already preceded the Federal Reserve
actions by declining more than 1% from June 1998 to October 1998 in response to
the global financial crisis, losses in hedge funds and low inflation. The
Federal Reserve actions in lowering interest rates were designed to stabilize
financial markets and to offset perceived deteriorating economic conditions
caused by the global financial crisis.
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 reduced to a minimum $2,000 in 1996 and set at approximately $.01
per $100 of deposits in 1997 and 1998. In addition to the minimum assessment for
American National Bank and Trust Company, a one time charge to recapitalize the
SAIF fund of the FDIC in the amount of $350,000 was made against the deposits of
Mutual during 1996. The Bank must also pay "OAKAR" premiums on the continuing
deposits of Mutual. "OAKAR" premiums were assessed at an annual rate of $.17 per
$100 of Mutual deposits in 1996 and approximately $.06 per $100 of Mutual
deposits in 1997 and 1998.
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.
Federal banking regulations have established relevant capital requirements
for bank holding companies and subsidiary banks. Under the regulations, well
capitalized institutions must have Tier I risk-based capital ratios of at least
six percent, total risk-based capital ratios of at least ten percent and
leverage ratios of at least five percent and not be subject to capital directive
orders. Under these guidelines, the Corporation and the Bank have always been
and continue to be considered well capitalized.
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Certain statements contained above in this section are forward-looking
statements that involve a number of risks and uncertainties. In addition to the
factors discussed above regarding the local economy and the expansion of the
Corporation's market area are other factors that could cause actual results to
differ materially. The factors include business conditions, development of new
products and services, interest rate trends, future legislation, regulatory
controls and the risks described from time to time in the Corporation's SEC
reports.
Year 2000 Issue
The Corporation is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation and
many equipment systems will be affected in some way by the rollover of the two
digit year value to 00. The issue is whether computers and systems dependent on
computer chips will properly recognize date sensitive information when the year
changes to 2000. Systems that do not recognize such information could generate
erroneous data or cause a system to fail.
Technology hardware, software and other systems used by the Corporation are
provided by outside vendors rather than being developed in-house. These outside
vendors have been proactive in making systems Year 2000 ready, in testing
systems for Year 2000 readiness, in submitting their efforts to regulators for
review, and in supplying testing procedures for the Corporation to conduct
independent testing.
The Corporation is utilizing both internal and external resources to
identify, correct or reprogram, and test systems for Year 2000 compliance. The
Corporation's readiness plan encompasses both information technology systems and
computer chip embedded functions, such as elevators, security systems, and
building heating and cooling. A project team is in the latter stages of
installing corrected hardware and software and testing systems for Year 2000
readiness. It is anticipated that all Year 2000 corrections and testing will be
completed by March 31, 1999, allowing additional time for testing new systems or
updated systems during 1999. To date, successful Year 2000 testing has been
completed on 95% of the Corporation's mission critical systems.
An educational process has been implemented to assist and assure that major
customers are Year 2000 ready. Approximately 80% of major customers have
responded that they are Year 2000 ready or will be Year 2000 ready in 1999. The
project team will continue to monitor readiness of new customers and customers
who have not responded to inquiries during 1999.
Total Year 2000 project costs will be approximately $125,000 with $30,000
having been spent through December 31, 1998. The remaining expenditures are not
expected to have a material impact on the Corporation's results of operations,
liquidity or capital resources.
The Corporation faces a number of risks related to the Year 2000 date
change including legal risks, project management risk, financial risk and
outside vendor risk. Legal risk involves failure to meet contractual service
agreements, leading to possible punitive actions. Project management risk is
failure to adequately address Year 2000 planning and resource needs with missed
deadlines and improper allocation of resources. Financial risk relates to lost
revenue, asset quality deterioration or even business failure. Outside vendor
risk involves failure of communication systems, power or other important
services which the Corporation depends upon to operate. A contingency plan has
been established to assure readiness in the unlikely event that any critical
operating system fails prior to or after the Year 2000. The contingency plan
specifies actions to be taken by the Year 2000 project team in the event that a
critical system is not timely corrected and tested before Year 2000. Since 95%
of mission critical systems have been successfully tested to date, pre Year 2000
contingency plans are not expected to be activated. The contingency plan also
assigns responsibility for checking the proper operation of all systems on
January 1, 2000, adopts special liquidity measures to be taken before and after
Year 2000, and describes implementation of manual processes for lending, deposit
operations, and trust services in the event that systems fail. Responsibilities
and detail procedures have been established for training on manual systems.
Rehearsal sessions of manual system implementation are scheduled in 1999 to
assure readiness. The Corporation's operations center, branch office and
mortgage banking operation located at Tower Drive are equipped with a diesel
generator in the event that electric power supplies fail prior to or after Year
2000. The backup power supply has been tested and will continue to be tested.
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 1998, 1997 and 1996.
II-9
<PAGE>
During 1998, taxable equivalent net interest income increased to
$18,780,000, up 7% from $17,622,000 in 1997. Taxable equivalent net interest
income for 1997 was up 10% from $15,978,000 recorded in 1996. The $1,158,000
increase in taxable equivalent net interest income during 1998 consisted of
$786,000 due to increases in volume and $372,000 attributable to rate. The
$1,644,000 increase in taxable equivalent net interest income during 1997 was
the net result of an increase of $1,427,000 due to volume and $217,000
attributable to rate.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
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):
<CAPTION>
Average Balance Interest Income/Expense Average Yield/Rate
----------------------------- ------------------------- --------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- -------- -------- ------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Commercial $ 75,972 $ 65,457 $ 59,385 $ 6,687 $ 6,004 $ 5,553 8.80 % 9.17 % 9.35 %
Mortgage 132,965 131,004 118,223 11,539 11,366 10,300 8.68 8.68 8.71
Consumer 52,738 52,733 46,227 5,165 5,109 4,532 9.79 9.69 9.80
-------- -------- -------- ------- ------- -------
Total loans 261,675 249,194 223,835 23,391 22,479 20,385 8.94 9.02 9.11
-------- -------- -------- ------- ------- -------
Investment securities:
U. S. Government 42,813 66,821 101,138 2,602 4,018 6,022 6.08 6.01 5.95
Federal agencies 70,009 53,507 26,984 4,485 3,471 1,712 6.41 6.49 6.34
State and municipal 26,526 21,349 18,363 1,909 1,582 1,354 7.20 7.41 7.37
Other investments 9,048 6,155 6,357 593 425 440 6.55 6.90 6.92
-------- -------- -------- ------- ------- -------
Total investment securities 148,396 147,832 152,842 9,589 9,496 9,528 6.46 6.42 6.23
-------- -------- -------- ------- ------- -------
Federal funds sold and other 5,091 4,295 8,121 272 237 435 5.34 5.52 5.36
-------- -------- -------- ------- ------- -------
Total interest-earning assets 415,162 401,321 384,798 33,252 32,212 30,348 8.02 8.03 7.89
-------- -------- -------- ------- ------- -------
Other non-earning assets 24,991 24,367 21,905
-------- -------- --------
Total assets $440,153 $425,688 $406,703
======== ======== ========
Deposits:
Demand $ 51,116 $ 48,893 $ 43,012 1,204 1,408 1,246 2.36 2.88 2.90
Money market 19,031 19,463 21,414 545 572 638 2.86 2.94 2.98
Savings 67,265 70,238 65,764 1,950 2,140 2,013 2.90 3.05 3.06
Time 174,123 176,403 172,390 9,260 9,590 9,670 5.32 5.44 5.61
-------- -------- -------- ------- ------- -------
Total deposits 311,535 314,997 302,580 12,959 13,710 13,567 4.16 4.35 4.48
Federal funds purchased 188 773 190 11 44 11 5.85 5.69 5.79
Repurchase agreements 25,261 17,909 16,757 1,106 836 792 4.38 4.67 4.73
Other borrowings 7,497 - - 396 - - 5.28 - -
-------- -------- -------- ------- ------- -------
Total interest-bearing
liabilities 344,481 333,679 319,527 14,472 14,590 14,370 4.20 4.37 4.50
-------- -------- -------- ------- ------- ------- ------ ------ -------
Demand deposits 40,134 39,752 34,723
Other liabilities 3,334 2,128 2,739
Shareholders' equity 52,204 50,129 49,714
-------- -------- --------
Total liabilities and
Shareholders' equity $440,153 $425,688 $406,703
======== ======== ========
Interest rate spread 3.82 % 3.65 % 3.39 %
====== ====== =======
Net interest income $18,780 $17,622 $15,978
======= ======= =======
Taxable equivalent adjustment $ 598 $ 484 $ 416
======= ======= =======
Net yield on earning assets 4.52 % 4.39 % 4.15 %
====== ====== =======
</TABLE>
II-10
<PAGE>
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):
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
------------------------------- --------------------------------
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 $ 683 $(250) $ 933 $ 451 $ (108) $ 559
Mortgage 173 3 170 1,066 (67) 1,133
Consumer 56 56 - 577 (62) 639
------- ------ ------- ------- -------- -------
Total loans 912 (191) 1,103 2,094 (237) 2,331
------- ------ ------- ------- -------- -------
Investment securities:
U.S. Government (1,416) 43 (1,459) (2,004) 59 (2,063)
Federal agencies 1,014 (44) 1,058 1,759 39 1,720
State and municipal 327 (47) 374 228 7 221
Other investments 168 (23) 191 (15) (1) (14)
-------- ------ ------- ------- -------- -------
Total investment securities 93 (71) 164 (32) 104 (136)
-------- ------ ------- ------- -------- -------
Federal funds sold and other 35 (8) 43 (198) 13 (211)
-------- ------ ------- ------- -------- -------
Total interest income 1,040 (270) 1,310 1,864 (120) 1,984
-------- ------ ------- ------- -------- -------
Interest expense
Deposits:
Demand (204) (266) 62 162 (7) 169
Money market (27) (14) (13) (66) (9) (57)
Savings (190) (101) (89) 127 (9) 136
Time (330) (207) (123) (80) (302) 222
-------- ------ ------- ------- -------- -------
Total deposits (751) (588) (163) 143 (327) 470
Federal funds purchased (33) 1 (34) 33 - 33
Repurchase agreements 270 (55) 325 44 (10) 54
Other borrowings 396 - 396 - - -
-------- ------ ------- ------- -------- -------
Total interest expense (118) (642) 524 220 (337) 557
-------- ------ ------- ------- -------- -------
Net interest income $ 1,158 $ 372 $ 786 $1,644 $ 217 $1,427
======== ====== ======= ======= ======== =======
</TABLE>
II-11
<PAGE>
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 1998 provision for loan losses was $927,000 and
compares with $1,100,000 in 1997 and $673,000 in 1996.
The decrease in the provision for loan losses in 1998 was influenced by
reduced charge-offs and slower growth in loans. Net charge-offs decreased to
$383,000 in 1998 from $893,000 in 1997. Net charge-offs in 1997 were up 132%
from $385,000 in 1996 because two commercial loans were written down $402,000
prior to acceptance of $385,000 in real estate collateral. The Bank is marketing
the real estate owned through real estate agents. The reserve for loan losses
totaled $3,821,000 at December 31, 1998, an increase of 17% over December 31,
1997. The ratio of reserve to loans, less unearned discount, was 1.42% at
December 31, 1998 and 1.29% at December 31, 1997.
The Bank's Loan Committee has responsibility for determining the level of
the reserve for loan losses, subject to the review of the Board of Directors.
The Loan Committee has taken economic factors, as well as any other external
events that may affect the value and collectability of the loan portfolio, into
consideration when making its assessment and recommendation.
The methodology used to determine the level of the loan loss reserve on a
quarterly basis includes the identification of losses from a review of the
Corporation's loan "Watch" list. In addition to these identifiable potential
losses, an experience factor for each major category of loans is applied against
the remaining portion of the loans considered to have no more than a normal risk
of collectability. Additional factors considered in determining the level of the
loan loss reserve are economic conditions, historical losses, trends and other
external factors. The sum of these elements is the Loan Committee's recommended
level of the reserve for loan losses.
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 heavily dependent on manufacturing. While diversification has occurred in
manufacturing in recent years, an apparel/home fashions textile firm and a tire
manufacturing plant in Danville employ a significant workforce. Other important
industries include farming, tobacco processing and sales, food processing,
furniture manufacturing and sales, specialty glass manufacturing, and packaging
tape production.
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 manufacturing along with a corresponding reduction in
employment. Management believes the reserve for loan losses is appropriate in
view of this geographic concentration.
II-12
<PAGE>
<TABLE>
Mangement has allocated the reserve for loan losses to loan categories as follows (in thousands):
<CAPTION>
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
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>
Commercial (including
commercial real estate) $1,046 47% $ 873 44% $ 886 40% $ 888 43% $ 858 42%
Real estate-
residential 151 36 129 37 128 38 146 38 121 39
Consumer 1,525 17 1,173 19 1,152 22 549 19 291 19
Unallocated 1,099 - 1,102 - 904 - 1,174 - 1,184 -
Balance at
end of year $3,821 100% $3,277 100% $3,070 100% $2,757 100% $2,454 100%
======= ======== ====== ======== ====== ======== ====== ======== ====== ========
</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 consumer 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.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
Loan Losses - Ratios
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Reserve as percentage of outstanding loans, net of unearned income 1.42% 1.29% 1.30%
Net charge-offs as percentage of reserve 10.02 27.23 12.58
Net charge-offs as percentage of average loans, net of unearned income .15 .36 .17
Provision as percentage of net charge-offs 242.21 123.26 174.40
Provision as percentage of average loans, net of unearned income .35 .44 .30
Reserve for loan losses to nonperforming loans 20.11X 8.34X 93.03X
</TABLE>
II-13
<PAGE>
Non-Interest Income
Non-interest income totaled $4,029,000 in 1998 compared with $3,201,000 in
1997 and $2,691,000 in 1996. This was an increase of 26% during 1998 after an
increase of 19% during 1997 and a 32% increase in 1996. The major components of
non-interest income are trust and investment services, service charges on
deposit accounts, non-deposit fees and insurance commissions, mortgage banking
income and other income.
Trust and investment services which includes fees from management of
trusts, estates and investments totaled $2,165,000 in 1998, an increase of
$277,000, or 15%, from 1997. The increase in 1998 came from growth in
investments under management for customers due to a healthy equities market and
from new business. Fees from the closing of several large estates in 1996 were
not repeated in 1997, resulting in no increase in trust and investment fees in
1997 over 1996.
Service charges on deposit accounts were $902,000 in 1998, an increase of
$116,0000, or 15%, from 1997. Service charges during 1997 totaled $786,000,
which was a 31% increase from 1996. A change in the fee structure and additional
accounts obtained contributed to the growth in income in 1998 and 1997. Service
charge pricing on deposit accounts is typically changed annually to reflect
current costs and competition.
Non-deposit fees and insurance commissions were $288,000 in 1998, an
increase of 85% from the $156,000 reported in 1997 which was up from $106,000
reported in 1996. The large increases in 1998 and 1997 resulted from
non-customer ATM fees that began in September 1997 and totaled $131,000 in 1998
and from increasing insurance sales.
Mortgage banking income represents fees from originating and selling
residential mortgage loans through a wholly owned subsidiary of the Bank which
began in December 1996. Mortgage banking income increased 95% to $429,000 in
1998 from $220,000 in 1997 because of a favorable interest rate environment
which positively impacted mortgage loan originations and from fine tuning and
expansion of mortgage production operations.
Other income was $245,000 in 1998, an increase of 63% from the $150,000
recorded in 1997, which in turn was an increase of 70% from the $88,000 recorded
in 1996. Other income in 1998 included $104,000 in gain from insurance
settlement on the life of a former officer. Other income also includes gains on
the sale of securities which were $18,000 in 1998, $31,000 in 1997 and none in
1996.
Non-Interest Expense
Non-interest expense of $10,964,000 in 1998, increased $719,000 or 7% over
$10,245,000 in 1997, which in turn increased $78,000 or 1% over $10,167,000 in
1996. 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 $5,127,000 for 1998, an increase of $316,000, or 7% over
1997. The increase in 1998 salaries includes additional incentive compensation
of $208,000 due to increased profits. Salaries of $4,811,000 in 1997 increased
$728,000, or 18% over 1996. Salaries increased $276,000, or 7% of the 18%
increase for 1997, from inclusion of a full year of salaries in 1997 at the
Yanceyville branch office purchased on October 25,1996 and at Mutual Mortgage
which began operations in late 1996.
Pension and other employee benefits totaled $1,140,000 in 1998, an increase
of 6% over the $1,076,000 recorded in 1997, which in turn was an increase of 18%
from the $913,000 reported in 1996. The percentage increases in 1998 and 1997
approximate the percentage increases in salaries in 1998 and 1997.
The total occupancy and equipment expense was $1,664,000 for 1998, an
increase of 16% over $1,437,000 reported for 1997. This, in turn, was an
increase of 19% over $1,212,000 recorded in 1996. The increase in 1998 reflects
higher depreciation, maintenance and licensing fees on technology equipment of
approximately $1,215,000 purchased during 1998 to improve product delivery
systems and increase productivity. The increase in 1997 was primarily the
cumulative result of adding the Yanceyville branch office in October 1996 and
Mutual Mortgage in December 1996.
FDIC insurance expense decreased to $74,000 in 1998 from $78,000 in 1997
which was down 83% from $467,000 in 1996. The FDIC reduced the deposit insurance
assessment rate in 1996 and 1997 but assessed the Bank a one-time $350,000 FDIC
charge on the Mutual deposits to recapitalize the SAIF fund in
1996.
Postage and printing expense was $448,000 in 1998, an increase of 4% from
the $429,000 recorded in 1997, which in turn was an increase of 8% from the
$397,000 recorded in 1996. The increase in 1997 was primarily related to the
branch office purchased and the mortgage operation started in 1996.
Core deposit intangible expense represents amortization of premiums paid
for deposits at the Yanceyville and Gretna offices. The increase to $450,000 in
1998 and 1997 from $318,000 in 1996 represents a full year of amortization for
both offices which is calculated on a straight line basis over ten years.
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 and signage. Also included were losses on
II-14
<PAGE>
securities held by Mutual at the time of the merger which were not compatible
with the Corporation's investment program. There were no merger related expenses
recorded in 1998 and 1997.
Other expense was $2,061,000 in 1998, an increase of 5% over the $1,964,000
reported in 1997. The increase of $97,000 in 1998 primarily resulted from
special sales and service training provided to all employees and from increased
trust and mortgage banking expenses related to generating higher non-interest
income. Other expenses in 1997 increased 14% from the $1,721,000 recorded in
1996. The increase of $243,000 in 1997 reflects additional franchise tax of
$78,000, higher professional services of $61,000 from special projects, and
increases from the newly acquired branch and the new mortgage operation.
Income Taxes
The provision for income taxes (total of current and deferred) was
$3,123,000 in 1998, compared with $2,725,000 in 1997 and $2,381,000 in 1996. 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. Refer to Note 9 of the Consolidated Financial Statements for a
reconciliation of the statutory Federal income tax rate of 34% to the effective
tax rates for 1998, 1997, and 1996.
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 Corporation's Tier I capital
consists primarily of shareholder'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, 1998, the Corporation's Tier I and Total capital
ratios were 16.79% and 18.04%, respectively. At December 31, 1997, these ratios
were 17.14% and 18.37%, respectively. The ratios for both years were well in
excess of the regulatory requirements.
The Corporation's leverage ratios (shareholders' equity divided by year-end
assets) were 11.07% and 10.74% at December 31, 1998 and 1997, 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 1998 capital formation rate (net income less dividends
declared, divided by average shareholders' equity) was 8.4%. This compares with
7.5% in 1997 and 5.6% in 1996. 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 $.93 and $.81
per share of common stock in 1998 and 1997, respectively.
The Board of Directors reviews the Corporation's dividend policy regularly
and increases dividends when justified by earnings after considering future
capital needs.
Asset and Liability Management
The Corporation's primary objectives for asset and liability management are
to identify opportunities to maximize net interest income while ensuring
adequate liquidity and carefully managing interest rate risk. The
Asset/Liability Investment Committee ("ALCO"), which is primarily composed of
executive officers, is responsible for:
Monitoring corporate financial performance;
Meeting liquidity requirements;
Establishing interest rate parameters, indices, and terms for loan and
deposit products;
Assessing and evaluating the competitive rate environment;
Reviewing and approving investment portfolio transactions under established
policy guidelines;
Monitoring and measuring interest rate risk.
II-15
<PAGE>
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 loan payments and maturing
investment securities to meet present liquidity needs.
Management monitors and plans the Corporation's liquidity position for
future periods. Liquidity is provided from cash and amounts due from banks,
federal funds sold, interest-bearing deposits in other banks, repayments from
loans, seasonal increases in deposits, lines of credit from two correspondent
banks and two federal agency banks and a planned structured continuous maturity
of investments. Management believes that these factors provide sufficient and
timely liquidity for the foreseeable future.
Expansion of the Corporation's earning assets is based largely on the
growth of deposits from individuals and small and medium size businesses. These
deposits are more stable in number and size than large denomination certificates
of deposit. In addition, the Corporation's customers have relatively stable
requirements for funds.
The Corporation's major source of funds and liquidity is its deposit base.
The mix of the deposit base (time deposits versus demand, money market and
savings) is constantly subject to change. During 1998, as shown in the
Consolidated Balance Sheets, the deposit mix changed with a decline in higher
cost time deposits of $456,000, an increase in demand deposits of $7,170,000, a
decline in savings deposits of $930,000 and an increase in money market accounts
of $938,000. During 1997, time deposits declined while deposits subject to
immediate withdrawal remained stable.
The Consolidated Statements of Cash Flows appearing in the financial
statement section shows a net increase in cash and cash equivalents of
$1,025,000 during 1998. This increase was the result of a combination of
$9,105,000 provided by operating activities, $36,448,000 net cash used in
investing activities, and $28,368,000 net cash provided by financing activities.
A net increase in deposits, repurchase agreements and FHLB borrowings provided
cash from financing activities while cash dividends paid used net cash in
financing activities. The cash provided by operating and financing activities,
more than adequately supplied the Corporation's liquidity needs at all times
during 1998.
Liquidity strategies are implemented and monitored by ALCO on a day to day
basis. The Committee uses a simulation model to assess the future liquidity
needs of the Corporation and manage the investment of funds.
Interest Rate Risk
Interest rate risk refers to the exposure of the Corporation's earnings and
market value of portfolio equity ("MVE") to changes in interest rates. The
magnitude of the change in earnings and MVE resulting from interest rate changes
is controlled by the time remaining to maturity on fixed-rate obligations, the
contractual ability to adjust rates prior to maturity, competition, the general
level of interest rates and customer actions.
There are several common sources of interest rate risk that must be
effectively managed if there is to be minimal impact on the Corporation's
earnings and capital. Repricing risk arises largely from timing differences in
the pricing of assets and liabilities. Reinvestment risk refers to the
reinvestment of cash flows from interest payments and maturing assets at lower
or higher rates. Basis risk exists when different yield curves or pricing
indices do not change at precisely the same time or in the same magnitude such
that assets and liabilities with the same maturity are not all affected equally.
Yield curve risk refers to unequal movements in interest rates across a full
range of maturities.
In determining the appropriate level of interest rate risk, ALCO reviews
the changes in net interest income and MVE given various changes in interest
rates. The Corporation also considers the most likely interest rate scenarios,
local economics, liquidity needs, business strategies, and other factors in
determining the appropriate levels of interest rate risk. To effectively measure
and manage interest rate risk, interest rate sensitivity and simulation analysis
are used to determine the impact on net interest income and MVE from changes in
interest rates.
Interest rate sensitivity analysis presents the amount of assets and
liabilities that are estimated to reprice through specified periods if there are
not changes in balance sheet mix. The interest rate sensitivity table, below,
reflects the Corporation's assets and liabilities on December 31, 1998 that will
either be repriced in accordance with market rates, mature or are estimated to
mature early or prepay within the periods indicated.
II-16
<PAGE>
<TABLE>
Interest Rate Sensitivity Analysis
December 31, 1998 (in thousands)
<CAPTION>
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 $ 706 $ -- $ -- $ -- $ -- $ 706
Investment securities 19,651 5,608 18,743 73,000 46,411 163,413
Loans 110,138 24,644 43,242 85,663 5,990 269,677
--------- --------- --------- --------- --------- ---------
Total interest
sensitive assets 130,495 30,252 61,985 158,663 52,401 433,796
--------- --------- --------- --------- --------- ---------
Interest sensitive liabilities:
NOW and savings deposits 124,504 -- -- -- -- 124,504
Money market deposits 18,089 -- -- -- -- 18,089
Time deposits 37,644 29,628 42,158 61,194 37 170,661
Repurchase agreements and
other borrowings 31,023 -- -- 13,000 -- 44,023
--------- --------- --------- --------- --------- ---------
Total interest
sensitive liabilites 211,260 29,628 42,158 74,194 37 357,277
--------- --------- --------- --------- --------- ---------
Interest sensitivity gap $ (80,765) $ 624 $ 19,827 $ 84,469 $ 52,364 $ 76,519
========= ========= ========= ========= ========= =========
Cumulative interest sensitivity gap $ (80,765) $ (80,141) $ (60,314) $ 24,155 $ 76,519
========= ========= ========= ========= =========
Percentage cumulative gap
to total interest sensitive assets (18.6)% (18.5)% (13.9)% 5.6 % 17.6 %
</TABLE>
Of the loans in the above table that either mature or can be repriced in
periods over 1 year, $46,664 have adjustable rates and $44,989 have fixed rates.
Investment security prepayments were estimated using recent market information.
- --------------------------------------------------------------------------------
Because of inherent limitations in interest rate sensitivity analysis, ALCO
uses more sophisticated interest rate risk measurement techniques. Simulation
analysis is used to subject the current repricing conditions to rising and
falling interest rates in increments and decrements of 1%, 2% and 3% to
determine how net interest income changes for the next twelve months. ALCO also
measures the effects of changes in interest rates on the MVE by discounting
future cash flows of deposits and loans using new rates at which deposits and
loans would be made to similar depositors and borrowers. Market value changes on
the investment portfolio are estimated by discounting future cash flows and
using duration analysis. Loan and investment security prepayments are estimated
using current market information. The following table shows the estimated impact
of changes in interest rates up and down 1%, 2% and 3% on net interest income
and on MVE.
II-17
<PAGE>
Change in Net Interest Income and Market Value of Portfolio Equity
December 31, 1998 (in thousands)
Changes in Changes in Market Value
Change in Net Interest Income (1) of Portfolio Equity (2)
Interest ----------------------- -----------------------
Rates Amount Percent Amount Percent
- ---------- --------------------------------------------------------
Up 3% $ 2,562 14.43 % $ 1,044 1.90 %
Up 2% 1,772 9.98 1,434 2.61
Up 1% 854 4.81 1,192 2.17
Down 1% (581) (3.27) (831) (1.51)
Down 2% (1,257) (7.08) (2,672) (4.87)
Down 3% (1,806) (10.17) (4,516) (8.23)
(1) Represents the difference between estimated net interest income for the next
12 months in the new interest rate environment and the current interest rate
environment.
(2) Represents the difference between market value of portfolio equity in the
new interest rate environment and the current interest rate environment, and
then adjusted for income taxes using a 34% tax rate.
The negative one year cumulative interest sensitivity gap of $60,314,000 in
the interest rate sensitivity analysis normally implies that the Corporation's
net interest income would rise if rates decline and fall if rates increase. The
simulation analysis presents a more accurate picture since certain rate indices
that reprice deposits do not change with the same magnitude over the same period
of time as changes in the prime or indices that reprice many loans.
While the Corporation cannot predict future interest rates or their effects
on MVE or net interest income, the above analysis indicates that a change in
interest rates of plus or minus 3% is unlikely to have a material adverse effect
on net interest income and MVE in future periods. Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, prepayments and deposit
run-offs and should not be relied upon as indicative of actual results. Certain
limitations are inherent in such computations. Certain assets and liabilities
may react differently than projected to changes in market interest rates. The
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while rates on other types of
assets and liabilities may lag behind changes in market interest rates. In the
event of a change in interest rates, loan prepayments and early deposit
withdrawal levels could deviate significantly from those assumed in making the
calculations set forth above. Additionally, credit risk may increase if an
interest rate increase adversely affects the ability of many borrowers to
service their debt.
INVESTMENT PORTFOLIO
The investment portfolio consists primarily of securities for which an
active market exists. The Bank's policy is to invest primarily in securities of
the U. S. Government and its agencies and in other high grade fixed income
securities to minimize credit risk.
II-18
<PAGE>
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):
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
--------------------------------- ---------------------------------- ----------------------------------
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 $ 25,000 $25,075 6.00 % $ 19,001 $19,004 6.24 % $ 32,073 $ 32,060 5.69 %
1 to 5 years 7,018 7,166 6.26 32,144 32,188 6.06 62,907 62,922 6.18
--------- ---------- ---------- --------- --------- ---------
Total 32,018 32,241 6.06 51,145 51,192 6.13 94,980 94,982 6.02
--------- ---------- ---------- --------- --------- ---------
Federal Agencies:
Within 1 year 2,005 2,021 6.10 5,995 5,993 5.51 750 750 3.98
1 to 5 years 41,292 42,376 6.59 37,002 37,191 6.51 30,075 30,115 6.32
6 to 10 years 10,906 11,020 6.19 17,913 17,930 6.67 21,103 21,022 6.67
After 10 years 20,511 20,573 6.00 918 922 7.20 930 936 7.24
--------- --------- ---------- --------- --------- ---------
Total 74,714 75,990 6.36 61,828 62,036 6.47 52,858 52,823 6.47
--------- --------- ---------- --------- --------- ---------
State and Municipal:
Within 1 year 499 503 6.40 521 520 9.24 744 748 9.47
1 to 5 years 5,326 5,516 8.21 4,297 4,412 8.42 3,119 3,178 7.79
6 to 10 years 20,848 21,690 7.44 12,247 12,535 8.19 11,318 11,502 7.78
After 10 years 8,791 9,065 7.42 5,339 5,438 8.07 6,836 6,857 7.71
--------- --------- ---------- --------- --------- ---------
Total 35,464 36,774 7.54 22,404 22,905 8.23 22,017 22,285 7.82
--------- --------- ---------- --------- --------- ---------
Other Investments:
Within 1 year -- -- -- -- -- -- -- -- --
1 to 5 years 6,119 6,246 6.65 3,168 3,168 6.52 427 427 6.52
6 to 10 years 10,921 10,991 6.20 2,042 2,042 7.95 2,998 2,998 6.97
After 10 years 2,482 2,501 7.12 2,490 2,490 6.96 2,477 2,477 7.12
--------- --------- ---------- --------- --------- --------
Total 19,522 19,738 6.46 7,700 7,700 7.06 5,902 5,902 7.01
--------- --------- ---------- --------- --------- --------
Total portfolio $161,718 $164,743 6.57 % $143,077 $143,833 6.64 % $175,757 $175,992 6.38 %
========= ========= ========= ========= ========= =========
</TABLE>
II-19
<PAGE>
At December 31, 1998 securities available for sale (at amortized cost)
totaled $103,841,000 and included $19,030,000 in U. S. Government securities,
$49,843,000 in federal agencies, $15,446,000 in state and municipal, and
$19,522,000 in other securities. A net unrealized gain of $1,118,000 related to
these securities at December 31, 1998. At December 31, 1997, securities
available for sale (at amortized cost) totaled $81,526,000 and included
$35,033,000 in U. S. Government securities, $28,950,000 in federal agencies,
$9,914,000 in state and municipal and $7,629,000 in other securities. A net
unrealized gain of $621,000 related to these securities at December 31, 1997.
Securities held to maturity totaled $57,877,000 and $60,611,000 at December
31, 1998 and 1997, respectively and had respective estimated fair values of
$59,207,000 and $61,367,000. Of the amount at December 31, 1998, $12,988,000, or
22%, were U. S. Government direct obligations, $24,871,000 or 43% were federal
agencies and $20,018,000 or 35% were state and municipal securities. Securities
held to maturity at December 31, 1998 consisted of $14,992,000 due in one year
or less, $22,647,000 due after one year through five years, $13,515,000 due in
five years through ten years and $6,723,000 due after ten years. The state and
municipal securities were diversified among many different issues and
localities.
The market value of securities held to maturity at December 31, 1998
exceeded the book value by $1,330,000. No losses are anticipated since the
Corporation has the ability and intent to hold these securities until their
respective maturities.
Loan Portfolio
Total gross loans increased $14,884,000 or 6% during 1998. As shown in
schedule A below, the primary increases in types of loans were construction and
land development loans, real estate loans secured by nonfarm, nonresidential
properties, real estate loans secured by 1 - 4 family residential properties,
and commercial and industrial loans.
The loan portfolio is diversified and consists of 56% mortgage loans, 26%
commercial loans and 18% consumer loans.
Note 11 of the Consolidated Financial Statements presents related party
loan activity. A substantial portion of the loan additions and payments result
from floorplan activity by two automobile dealerships owned separately by two of
the Corporation's Directors.
The Corporation does not participate in highly leveraged lending
transactions, as defined by the bank regulators and there are no loans of this
nature recorded in the loan portfolio. The Corporation has no foreign loans in
its portfolio.
Real Estate Loans
Commercial real estate loans have received considerable attention in recent
years by the bank regulators and the news media. The concerns have been in real
estate values in certain areas of the country and the quality of banks'
commercial real estate portfolios. It is difficult to measure commercial real
estate values within the Corporation's trade area due to the light sales
activity. Commercial real estate values did not escalate to levels seen in other
areas of the state and country during the ten years prior to the last recession
and management has not detected a significant change in values within the
Corporation's trade area during 1998 or 1997. Management has confined its real
estate lending to its trade area and has always taken a conservative approach in
its lending practice to maintain equity in real estate loans.
The Corporation is conforming to the real estate appraisal guidelines set
forth by the Comptroller of the Currency.
The total of outstanding real estate loans at December 31, 1998 was
$151,825,000. This consisted of $95,711,000 or 63% in loans secured by 1-4
family residential properties, $44,251,000 or 29% in loans secured by non-farm,
non-residential properties, $8,104,000 or 5% in construction and land
development, $1,491,000 or 1% in loans secured by farmland and $2,268,000 of
other real estate loans.
Nonperforming real estate loans at December 31, 1998 and 1997 were $58,000
and $281,000, respectively. There were no real estate loans on accrual status
and past due 90 days or more at December 31, 1998 or at December 31, 1997.
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.
II-20
<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 recognized on
consumer loans is discontinued and the loans are charged off after a delinquency
of 90 days. 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.
Nonperforming assets include loans on which interest is no longer accrued,
loans classified as troubled debt restructurings and foreclosed properties.
Foreclosed properties of $385,000 at December 31, 1998 and 1997 include two
commercial real estate properties. There were no foreclosed properties held at
the close of 1996.
At December 31, 1998 and 1997, loans in a nonaccrual or restructured status
totaled approximately $190,000 and $393,000, respectively. As shown in schedule
C below, loans on accrual status and past due 90 days or more have increased to
$249,000 in 1998 from $181,000 in 1997. The total of nonperforming loans and
loans past due 90 days or more at December 31, 1998 was $439,000, a decrease of
$135,000 from the $574,000 reported at December 31, 1997. Net charge-offs as a
percentage of average loans decreased to .15% in 1998 from .36% in 1997. Two
commercial real estate loan charge-offs resulted in the higher 1997 ratio.
Management considers charge-off levels of .10% to .40% to be within reasonable
norms from a historical perspective.
Management has in place an aggressive program to control loan
delinquencies, and the level of past due loans and nonperforming loans is
considered to be within an acceptable range. Total nonperforming loans and loans
past due 90 days or more represent .16% of total loans at December 31, 1998 and
.23% at December 31, 1997. Total nonperforming loans and past due loans 90 days
or more on an accrual status is considered low by industry standards.
<TABLE>
A. The following table presents the year-end balances of loans, classified by type (in thousands):
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Real estate loans:
Construction and land development $ 8,104 $ 4,458 $ 3,640 $ 5,499 $ 4,130
Secured by farmland 1,491 1,276 1,169 1,032 872
Secured by 1-4 family residential
properties 95,711 94,472 90,495 81,667 75,691
Secured by multi-family (5 or more)
residential properties 2,268 1,522 772 751 518
Secured by nonfarm, nonresidential
properties 44,251 41,368 35,289 33,950 29,003
Loans to farmers 2,293 2,761 2,672 2,529 2,173
Commercial and industrial loans 67,154 57,980 49,247 46,902 41,804
Loans to individuals for personal
expenditures 46,494 48,545 51,066 42,063 36,027
Loans for nonrated industrial
development obligations 1,895 2,398 2,565 1,901 2,155
All other loans 15 13 124 61 255
------- -------- ------- ------- -------
Total loans $269,676 $254,793 $237,039 $216,355 $192,628
======== ======== ======== ======== ========
There were no foreign loans outstanding during any of the above periods.
</TABLE>
II-21
<PAGE>
<TABLE>
B. An analysis of the loan maturity and interest rate sensitivity is as follows:
<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 $ 74,117 $ 5,558 $ 225 $ 79,900 29.6%
Mortgage 84,794 46,660 5,040 136,494 50.6%
Consumer 19,113 33,445 725 53,283 19.8%
--------- --------- ------- --------- --------
$178,024 $85,663 $5,990 $269,677 100.0%
========= ========= ======= ========= ========
Rate Sensitivity:
Pre-determined rate 19,490 39,093 5,896 64,479 23.9%
Floating or adjustable rate 158,534 46,570 94 205,198 76.1%
--------- --------- ------- --------- --------
178,024 85,663 5,990 269,677 100.0%
========= ========= ======= ========= ========
Percent 66.0% 31.8% 2.2% 100.0%
</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.
<TABLE>
C. Nonperforming loans and loans past due 90 days or more (in thousands, except ratios):
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
Real Estate $ 58 $281 $ 14 $290 $ 36
Commercial 132 102 - - 40
Agricultural - 10 19 16 -
------ ------ ------ ------ ------
Total nonaccruing loans 190 393 33 306 76
------ ------ ------ ------ ------
Restructured loans:
Commercial - - - - 109
------ ------ ------ ------ ------
Total restructured loans - - - - 109
====== ====== ====== ====== ======
Total nonperforming loans $190 $393 $ 33 $306 $185
====== ====== ====== ====== ======
Loans on accrual status past due 90 days or more:
Real Estate $ - $ - $ - $ 23 $ -
Consumer 235 160 241 95 112
Revolving credit 4 5 3 6 1
Commercial 3 - 225 22 -
Agricultural 7 16 10 15 -
====== ====== ====== ====== ======
Total past due loans $249 $181 $479 $161 $113
====== ====== ====== ====== ======
Asset Quality Ratios:
Reserve for loan losses
to year-end net loans 1.42% 1.29% 1.30% 1.28% 1.29%
Nonperforming loans
to year-end net loans .07% .15% .01% .14% .10%
Reserve for loan losses
to nonperforming loans 8.34X 8.34X 93.03X 9.01X 13.26X
</TABLE>
At December 31, 1998, the Bank had no loan concentrations (loans to
borrowers engaged in similar activities) which exceeded 10% of total loans.
II-22
<PAGE>
Summary of Loan Loss Experience
<TABLE>
An analysis of the reserve for losses is set forth in the following table (in thousands):
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $3,277 $3,070 $2,757 $2,454 $2,256
-------- -------- -------- -------- --------
Charge-offs:
Commercial loans 68 452 9 - 5
Real estate loans - - - - 14
Consumer loans 440 540 493 241 112
-------- -------- -------- -------- --------
508 992 502 241 131
-------- -------- -------- -------- --------
Recoveries:
Commercial loans 9 - 3 - -
Real estate loans - - - - 4
Consumer loans 116 99 114 60 53
-------- ------- -------- -------- --------
125 99 117 60 57
-------- ------- -------- -------- --------
Net charge-offs 383 893 385 181 74
Provision for loan losses 927 1,100 673 484 272
Other - - 25 - -
-------- ------- -------- -------- --------
Balance at end of period $3,821 $3,277 $3,070 $2,757 $2,454
======== ======= ======== ======== ========
Percent of net charge-offs
to average net loans outstanding
during the period .15% .36% .17% .09% 0.04%
======== ======= ======== ======== ========
</TABLE>
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 nonaccruing status.
Deposits
<TABLE>
The following table presents the average balances of deposits and the average rates paid on those deposits
for the past 3 years (in thousands):
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits -
non-interest bearing $ 40,134 - % $ 39,752 - % $ 34,723 - %
Demand deposits - interest bearing 51,116 2.36% 48,893 2.88% 43,012 2.90%
Money market 19,031 2.86% 19,463 2.94% 21,414 2.98%
Savings 67,265 2.90% 70,238 3.05% 65,764 3.06%
Time 174,123 5.32% 176,403 5.44% 172,390 5.61%
--------- --------- ---------
$351,669 3.69% $354,749 3.87% $337,303 4.02%
========= ========= =========
</TABLE>
Certificates of Deposit
Certificates of deposit at the end of 1998 in amounts of $100,000 or more
were classified by maturity as follows (in thousands):
3 months or less $ 8,590
Over 3 through 6 months 5,239
Over 6 through 12 months 5,508
Over 12 months 13,514
-------
$32,851
=======
Return on Assets and
Shareholders' Equity
The following table presents certain rates of return and percentages for
the past 3 years:
1998 1997 1996
------ ------ ------
Return on average assets 1.64% 1.47% 1.24%
Return on average shareholder's equity 13.79% 12.51% 10.12%
Dividend payout ratio 39.43% 40.08% 44.97%
Average shareholders' equity to
average assets 11.86% 11.78% 12.22%
II-23
<PAGE>
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from most industrial companies
that have significant investments in fixed assets. Due to this fact, the effects
of inflation on the Corporation's balance sheet are minimal, meaning that there
are no substantial increases or decreases in net purchasing power over time. The
most significant effect of inflation is on other expenses which tend to rise
during periods of general inflation.
Management feels that the most significant impact on financial results is
changes in interest rates and the Corporation's ability to react to those
changes. As discussed previously, management is attempting to measure, monitor
and control interest rate risk.
<TABLE>
Quarterly Financial Results
(in thousands, except per share amounts)
American National Bankshares Inc. and Subsidiary
<CAPTION>
Fourth Third Second First
1998 Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income....................................... $8,346 $8,244 $8,093 $7,971
Interest expense...................................... 3,651 3,702 3,587 3,532
------- ------- ------- -------
Net interest income................................. 4,695 4,542 4,506 4,439
Provision for loan losses............................. 249 203 223 252
------- ------- ------- -------
Net interest income after provision................. 4,446 4,339 4,283 4,187
Non-interest income................................... 1,164 989 980 896
Non-interest expense.................................. 2,850 2,692 2,748 2,673
------- ------- ------- -------
Income before income tax provision.................. 2,760 2,636 2,515 2,410
Income tax provision.................................. 801 809 764 749
------- ------- ------- -------
Net income.......................................... $1,959 $1,827 $1,751 $1,661
======= ======= ======= =======
Per common share:
Net income.......................................... $ .64 $ .60 $ .58 $ .54
Cash dividends...................................... $ .24 $ .24 $ .24 $ .21
1997
Interest income....................................... $8,053 $7,916 $7,883 $7,876
Interest expense...................................... 3,665 3,629 3,619 3,677
------- ------- ------- -------
Net interest income................................. 4,388 4,287 4,264 4,199
Provision for loan losses............................. 338 262 257 243
------- ------- ------- -------
Net interest income after provision................. 4,050 4,025 4,007 3,956
Non-interest income................................... 845 835 783 738
Non-interest expense.................................. 2,722 2,466 2,542 2,515
------- ------- ------- -------
Income before income tax provision.................. 2,173 2,394 2,248 2,179
Income tax provision.................................. 630 749 704 642
------- ------- ------- -------
Net income.......................................... $1,543 $1,645 $1,544 $1,537
======= ======= ======= =======
Per common share:
Net income.......................................... $ .50 $ .54 $ .48 $ .47
Cash dividends...................................... $ .21 $ .21 $ .21 $ .18
</TABLE>
II-24
<PAGE>
MANAGEMENT'S REPORT ON
FINANCIAL STATEMENTS
The following consolidated financial statements and related notes to
consolidated financial statements of American National Bankshares Inc. and
Subsidiary were prepared by Management which has the primary responsibility for
the integrity of the financial information. The statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and include amounts that are based on Management's best estimates
and judgement. Financial information elsewhere in this Annual Report is
presented on a basis consistent with that in the financial statements.
In meeting its responsibility for the fair presentation of the financial
statements, Management relies on the Corporation's comprehensive system of
internal accounting controls. This system provides reasonable assurance that
assets are safeguarded and transactions are recorded to permit the preparation
of appropriate financial information. The system of internal controls is
characterized by an effective control-oriented environment within the
Corporation which is augmented by written policies and procedures, internal
audits and the careful selection and training of qualified personnel.
The functioning of the accounting system and related internal accounting
controls is under the general oversight of the Audit and Compliance Committee of
the Board of Directors which is comprised of three outside directors. The
accounting system and related controls are reviewed by an extensive program of
internal audits. The Audit and Compliance Committee meets regularly with the
internal auditors to review their work and ensure that they are properly
discharging their responsibilities. In addition, the Committee reviews and
approves the scope and timing of the internal audits and any findings with
respect to the system of internal controls. The Audit and Compliance Committee
also meets periodically with representatives of Arthur Andersen LLP, the
Corporation's independent public accountants, to discuss the results of their
audit as well as other audit and financial matters. Reports of examinations
conducted by the Office of the Comptroller of the Currency are also reviewed by
the committee members.
The responsibility of Arthur Andersen LLP is limited to an expression of
their opinion as to the fairness of the financial statements presented. Their
opinion is based on an audit conducted in accordance with generally accepted
auditing standards as described in the second paragraph of their report.
/s/ Charles H. Majors
President and Chief Executive Officer
/s/ T. Allen Liles
Senior Vice President, Secretary, Treasurer and Chief Financial Officer
January 21, 1999
II-25
<PAGE>
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To 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, 1998 and 1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Charlotte, North Carolina,
January 21, 1999
II-26
<PAGE>
<TABLE>
Consolidated Balance Sheets
December 31, 1998 and 1997
American National Bankshares Inc. and Subsidiary
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Cash and due from banks ..................................................... $ 14,071,687 $ 13,386,440
Interest-bearing deposits in other banks .................................... 706,245 366,110
Investment securities:
Securities available for sale (at market value)............................ 105,535,523 82,466,034
Securities held to maturity (market value of $59,207,124
in 1998 and $61,367,264 in 1997)......................................... 57,877,279 60,610,993
------------- -------------
Total investment securities............................................ 163,412,802 143,077,027
------------- -------------
Loans ....................................................................... 269,676,596 254,792,918
Less
Unearned income.......................................................... (157,315) (343,211)
Reserve for loan losses.................................................. (3,821,447) (3,277,179)
------------- -------------
Net loans............................................................ 265,697,834 251,172,528
------------- -------------
Bank premises and equipment, at cost, less accumulated
depreciation of $7,164,459 in 1998 and $6,349,589 in 1997 ................. 7,603,080 6,514,286
Accrued interest receivable and other assets ................................ 8,891,186 9,123,469
------------- -------------
Total assets......................................................... $460,382,834 $423,639,860
============= =============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.................................... $ 45,070,732 $ 41,754,876
Demand deposits -- interest bearing........................................ 55,883,458 52,029,224
Money market deposits...................................................... 18,089,331 17,151,352
Savings deposits........................................................... 68,620,629 69,550,353
Time deposits.............................................................. 170,660,739 171,117,111
------------- -------------
Total deposits ..................................................... 358,324,889 351,602,916
------------- -------------
Federal funds purchased.................................................... -- 1,500,000
Repurchase agreements...................................................... 31,022,834 18,038,964
FHLB Borrowings............................................................ 13,000,000 --
Accrued interest payable and other liabilities............................. 3,174,465 2,495,215
------------- -------------
Total liabilities.................................................... 405,522,188 373,637,095
------------- -------------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding......................................................... -- --
Common stock, $1 par,10,000,000 shares authorized,
3,051,733 shares outstanding in 1998 and 1997 ........................... 3,051,733 3,051,733
Capital in excess of par value............................................. 9,892,304 9,892,304
Retained earnings.......................................................... 40,798,323 36,438,185
Accumulated other comprehensive income -
net unrealized gains on securities available for sale ................... 1,118,286 620,543
------------- -------------
Total shareholders' equity........................................... 54,860,646 50,002,765
------------- -------------
Total liabilities and shareholders' equity........................... $460,382,834 $423,639,860
============= =============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
II-27
<PAGE>
<TABLE>
Consolidated Statements of Income
For The Years Ended December 31, 1998, 1997 and 1996
American National Bankshares Inc. and Subsidiary
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans........................................... $23,356,412 $22,441,097 $20,334,588
Interest on federal funds sold and other............................. 271,524 237,204 434,674
Income on investment securities:
U S Government..................................................... 2,601,437 4,018,344 6,022,023
Federal agencies................................................... 4,485,157 3,470,483 1,711,974
State and municipal ............................................... 1,346,014 1,136,496 988,159
Other investments.................................................. 593,363 424,521 440,374
----------- ----------- -----------
Total interest income............................................ 32,653,907 31,728,145 29,931,792
----------- ----------- -----------
Interest Expense:
Interest on deposits:
Demand............................................................. 1,203,786 1,408,255 1,245,678
Money market....................................................... 545,061 571,873 637,954
Savings............................................................ 1,949,958 2,140,158 2,012,717
Time............................................................... 9,260,295 9,589,470 9,670,514
Interest on fed funds and repos...................................... 1,116,315 880,392 803,099
Interest on other borrowings......................................... 396,183 -- -
----------- ----------- -----------
Total interest expense........................................... 14,471,598 14,590,148 14,369,962
----------- ------------ -----------
Net Interest Income.................................................... 18,182,309 17,137,997 15,561,830
Provision for Loan Losses.............................................. 927,000 1,100,000 673,291
----------- ----------- -----------
Net Interest Income After Provision
For Loan Losses...................................................... 17,255,309 16,037,997 14,888,539
----------- ----------- -----------
Non-Interest Income:
Trust and investment services........................................ 2,165,437 1,888,341 1,896,266
Service charges on deposit accounts.................................. 902,060 786,270 600,606
Non-deposit fees and insurance commissions........................... 287,704 155,697 106,015
Mortgage banking income.............................................. 428,991 220,293 --
Other income......................................................... 245,238 150,374 88,355
----------- ----------- -----------
Total non-interest income.......................................... 4,029,430 3,200,975 2,691,242
----------- ----------- -----------
Non-Interest Expense:
Salaries............................................................. 5,126,819 4,810,783 4,083,106
Pension and other employee benefits.................................. 1,140,252 1,076,144 912,935
Occupancy and equipment ............................................. 1,663,880 1,437,285 1,211,974
FDIC insurance ...................................................... 73,911 77,801 466,663
Postage and printing................................................. 447,609 429,128 397,409
Core deposit intangible amortization................................. 449,816 450,179 317,961
Merger related ...................................................... -- -- 1,055,695
Other ............................................................... 2,061,322 1,963,680 1,721,321
----------- ----------- -----------
Total non-interest expense......................................... 10,963,609 10,245,000 10,167,064
----------- ----------- -----------
Income Before Income Tax Provision..................................... 10,321,130 8,993,972 7,412,717
Income Tax Provision................................................... 3,122,881 2,724,780 2,380,529
----------- ----------- -----------
Net Income............................................................. $ 7,198,249 $ 6,269,192 $ 5,032,188
=========== =========== ===========
Net Income Per Common Share:
Basic................................................................ $ 2.36 $ 1.99 $ 1.54
Diluted.............................................................. $ 2.36 $ 1.99 $ 1.54
Average Common Shares Outstanding:
Basic................................................................ 3,051,733 3,144,834 3,267,038
Diluted.............................................................. 3,052,659 3,144,834 3,267,038
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
II-28
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS of CHANGES
in SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
American National Bankshares Inc. and Subsidiary
<CAPTION>
Common Stock Accumulated
------------------------- Capital in Other Total
Excess of Retained Comprehensive Shareholders'
Shares Amount Par Value Earnings Income Equity
----------- ----------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995............... 3,213,641 $3,213,641 $9,966,711 $35,223,572 $ 628,067 $49,031,991
Net income............................... -- -- -- 5,032,188 -- 5,032,188
Change in unrealized gains on securities
available for sale, net of tax......... -- -- -- -- (314,456) (314,456)
--------------
Comprehensive income..................... 4,717,732
Exercise of stock options................ 66,270 66,270 668,192 -- -- 734,462
Cash paid for fractional shares.......... (113) (113) (3,318) -- -- (3,431)
Cash dividends, at $.69 per share........ -- -- -- (2,263,060) -- (2,263,060)
------------ ----------- ----------- ------------ ------------- --------------
Balance, December 31, 1996............... 3,279,798 3,279,798 10,631,585 37,992,700 313,611 52,217,694
Net income............................... -- -- -- 6,269,192 -- 6,269,192
Change in unrealized gains on securities
available for sale, net of tax......... -- -- -- -- 306,932 306,932
--------------
Comprehensive income..................... 6,576,124
Stock repurchase......................... (228,065) (228,065) (739,281) (5,310,752) - (6,278,098)
Cash dividends, at $.81 per share........ -- -- -- (2,512,955) - (2,512,955)
------------ ----------- ----------- ------------ ------------- --------------
Balance, December 31, 1997............... 3,051,733 3,051,733 9,892,304 36,438,185 620,543 50,002,765
Net income............................... -- -- -- 7,198,249 -- 7,198,249
Change in unrealized gains on securities
available for sale, net of tax......... -- -- -- -- 497,743 497,743
--------------
Comprehensive income..................... 7,695,992
Cash dividends, at $.93 per share........ -- -- -- (2,838,111) -- (2,838,111)
------------ ----------- ----------- -------------- ------------ --------------
Balance, December 31, 1998............... 3,051,733 $3,051,733 $9,892,304 $40,798,323 $ 1,118,286 $54,860,646
============ =========== =========== ============== ============ ==============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
II-29
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
American National Bankshares Inc. and Subsidiary
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................................. $ 7,198,249 $ 6,269,192 $ 5,032,188
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses........................................... 927,000 1,100,000 673,291
Depreciation........................................................ 814,870 720,446 562,299
Core deposit intangible amortization................................ 449,816 450,179 317,961
Amortization (accretion) of premiums and discounts
on investment securities.......................................... (42,918) (56,111) 36,737
(Gain) loss on sale of securities................................... (18,300) (30,912 338,103
Gain on sale of loans............................................... (428,991) (220,293) --
Gain on sale of real estate owned................................... -- -- --
Gain on sale of property and equipment.............................. -- -- (32,015)
Deferred income taxes benefit....................................... (312,768) (154,749) (61,225)
Reconciliation of fiscal year of merged company to calendar year.... -- -- (379,006)
(Increase) decrease in interest receivable.......................... (159,538) 311,723 (227,123)
Increase in other assets............................................ (1,639) (203,721) (112,123)
(Decrease) increase in interest payable............................. (21,910) (224,020) 522,644
Increase (decrease) in other liabilities............................ 701,160 246,124 (324,563)
------------- ------------- -------------
Net cash provided by operating activities........................... 9,105,031 8,207,858 6,347,168
------------- ------------- -------------
Cash Flows from Investing Activities:
Acquisition of branch operations........................................ -- -- 14,866,883
Proceeds from maturities, calls, and sales of securities ............... 47,430,116 53,402,611 56,166,496
Purchases of securities available for sale.............................. (55,738,003) (20,170,962) (28,709,857)
Purchases of securities held to maturity................................ (11,212,515) -- (53,916,004)
Net increase in loans................................................... (15,023,315) (18,542,833) (16,108,172)
Proceeds from sale of property and equipment............................ -- -- 158,047
Purchases of property and equipment..................................... (1,903,664) (849,981) (993,541)
------------- ------------- -------------
Net cash (used in) provided by investing activities..................... (36,447,381) 13,838,835 (28,536,148)
------------- ------------- -------------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits.................................................. 7,178,345 10,271 8,929,414
Net (decrease) increase in time deposits................................ (456,372) (10,389,947) 3,186,875
Net increase in Federal Home Loan Bank borrowings....................... 13,000,000 -- --
Net increase (decrease) in federal funds purchased
and repurchase agreements............................................. 11,483,870 (3,945,317) 13,912,246
Cash dividends paid..................................................... (2,838,111) (2,512,955) (2,263,060)
Cash paid in lieu of fractional shares.................................. -- -- (3,431)
Repurchase of stock..................................................... -- (6,278,098) --
Proceeds from exercise of stock options................................. -- -- 460,000
------------- ------------- --------------
Net cash provided by (used in) financing activities..................... 28,367,732 (23,116,046) 24,222,044
------------- ------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents..................... 1,025,382 (1,069,353) 2,033,064
Cash and Cash Equivalents at Beginning of Period.......................... 13,752,550 14,821,903 12,788,839
------------- ------------- --------------
Cash and Cash Equivalents at End of Period................................ $ 14,777,932 $ 13,752,550 $ 14,821,903
============= ============= ==============
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks............................................... $ 14,071,687 $ 13,386,440 $ 14,622,925
Interest-bearing deposits in other banks.............................. 706,245 366,110 198,978
------------- ------------- --------------
$ 14,777,932 $ 13,752,550 $ 14,821,903
============= ============= ==============
Supplemental Disclosure of Cash Flow Information:
Interest paid........................................................... $ 14,493,509 $ 14,814,169 $ 13,746,911
Income taxes paid....................................................... $ 2,950,000 $ 2,953,355 $ 2,600,939
Transfer of loans to other real estate owned............................ $ 385,000 $ -- $ --
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
II-30
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 Corporation classifies investment securities in one of three
categories: held to maturity, available for sale and trading.
Debt securities acquired with both the intent and ability to be held to
maturity are classified as held to maturity and reported at amortized cost.
Gains or losses realized from the sale of any securities held to maturity are
determined by specific identification and are included in non-interest income.
Securities which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities available for sale are reported at estimated fair value,
with unrealized gains and losses reported as a separate component of
shareholders' equity, net of tax. Gains or losses realized from the sale of
securities available for sale are determined by specific identification and are
included in non-interest income.
The Corporation does not permit the purchase or sale of trading account
securities. If such securities were permitted, market adjustments, fees, gains
or losses and income earned on trading account securities would be included in
non-interest income. Gains or losses realized from the sale of trading
securities would be determined by specific identification and included in
non-interest income.
Premiums and discounts on investment securities are amortized using the
interest method.
Loans
Loans are stated at the principal amount outstanding, net of unearned
income. Mortgage and commercial loans accrue interest on the unpaid balance of
the loans. Consumer loans made prior to April 1, 1994 earn interest on the level
yield method based on the daily outstanding balance. Consumer loans made
subsequent to April 1, 1994 accrue interest on the unpaid balance of the loans.
The net amount of nonrefundable loan origination fees and direct costs
associated with the lending process are deferred and amortized to interest
income over the contractual lives of the loans using the effective interest
method.
Reserve for Loan Losses
The reserve for loan losses is an estimate of losses inherent in the loan
portfolio as determined by management taking into consideration historical loan
loss experience, diversification of the loan portfolio, amount of secured and
unsecured loans, banking industry standards and averages, and general economic
conditions. Ultimate losses may vary from current estimates. These estimates are
reviewed periodically and as adjustments become necessary, they are reported in
earnings in the periods in which they become reasonably estimable.
Bank Premises and Equipment
Additions and major replacements are added to bank premises and equipment
at cost. Maintenance and repair costs are charged to expense when incurred.
Premises and equipment are depreciated using primarily accelerated methods
II-31
<PAGE>
over estimated lives generally as follows: buildings, 10 to 50 years; and
furniture and equipment, 3 to 10 years.
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, 1998,
the Bank had $3,183,000 recorded as core deposit intangibles, net of
amortization. For the years ended December 31, 1998, 1997 and 1996, the Bank
recorded core deposit intangible amortization of approximately $450,000,
$450,000 and $318,000, respectively.
Foreclosed Properties
Foreclosed properties are included in other assets, and they represent
other real estate that has been acquired through loan or in-substance
foreclosures or deeds received in lieu of loan payments. Generally, such
properties are appraised annually, and they are recorded at the lower of cost or
fair value less estimated selling costs. When appropriate, adjustments to cost
are charged or credited to the allowance for foreclosed properties.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
Deferred income taxes are provided where different accounting methods have
been used for reporting income for income tax and for financial reporting
purposes.
Earnings Per Share
The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share", in 1998. This statement requires the
dual presentation of basic and diluted earnings per share which are equal for
the Corporation for all periods presented. No restatement of prior periods was
required.
New Accounting Pronouncements
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued
which establishes standards for reporting and displaying comprehensive income
and its components. This statement requires comprehensive income and its
components, as recognized under the accounting standards, to be displayed in a
financial statement with the same prominence as other financial statements. The
disclosure requirements of SFAS No. 130 have been included in the Corporation's
Consolidated Statements of Changes in Shareholders' Equity.
The FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", in June 1997, which establishes new
standards for reporting information about operating segments in annual and
interim financial statements. This statement also requires descriptive
information about the way operating segments are determined, the products and
services provided by the segments and the nature of differences between
reportable segment measurements and those used for the consolidated entity. The
disclosure requirements of SFAS No.131 have been adopted and are included in
Note 15 to the Consolidated Financial Statements.
In February, 1998, SFAS No. 132, "Employers' Disclosures about Pension and
Other Postretirement Benefits", was issued, amending FASB Statements No. 87, 88,
and 106. This Statement does not change the measurement or recognition of
pension and postretirement benefit plans but standardizes disclosure
requirements. The new disclosure requirements of SFAS No. 132 have been adopted
and are included in Note 12 to the Consolidated Financial Statements.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards requiring balance sheet recognition of all derivative instruments at
fair value. The statement specifies that changes in the fair value of derivative
instruments be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows derivative
gains and losses to offset related results on hedged items in the income
statement. Companies must formally document, designate and assess the
effectiveness of transactions utilizing hedge accounting. The statement is
effective for fiscal years beginning after June 15, 1999, and cannot be applied
retroactively. Adoption is not expected to have a material impact on the
Corporation.
II-32
<PAGE>
2. Parent Company Financial Information:
Condensed parent company financial information is as follows (in
thousands):
As of December 31
-----------------
Condensed Balance Sheets 1998 1997
------------------------ ---- ----
Assets:
Investment in Subsidiary $54,831 $49,969
Other Assets 30 34
------- -------
Total Assets $54,861 $50,003
======= =======
Shareholders' Equity $54,861 $50,003
======= =======
For the Year Ended
December 31
-----------------------
Condensed Statements of Income 1998 1997 1996
------------------------------ ---- ---- ----
Dividends from Subsidiary $2,903 $8,820 $2,283
Expenses (44) (33) (2)
------ ------ ------
Income Before Equity in Undistributed
Earnings of Subsidiary 2,859 8,787 2,281
Equity in Undistributed (Distributions in
Excess of) Earnings of Subsidiary 4,339 (2,518) 2,751
------ ------ ------
Net Income $7,198 $6,269 $5,032
====== ====== ======
For the Year Ended
December 31
------------------------
Condensed Statements of Cash Flows 1998 1997 1996
---------------------------------- ---- ---- ----
Cash provided by dividends received
from Subsidiary $2,903 $8,820 $2,283
Cash used for payment of dividends (2,838) (2,513) 2,263)
Cash used for repurchase of stock -- (6,278) --
Other (19) (33) (11)
------ ------ ------
Net increase (decrease) in cash $ 46 $ ( 4) $ 9
====== ====== ======
3. Mergers and Acquisitions:
On March 14, 1996, the Corporation completed the acquisition of Mutual
Savings Bank, F.S.B. ("Mutual") upon the approval of the shareholders of each
company. The Corporation exchanged approximately 879,805 common shares, at an
exchange ratio of .705 of a share of the Corporation's common stock, for each of
Mutual's 1,248,100 common shares (which includes the exercise of all outstanding
stock options).
The transaction was accounted for as a pooling of interests. The financial
position and results of operations of the Corporation and Mutual were combined
and the fiscal year of Mutual was conformed to the Corporation's fiscal year. In
addition, all prior periods presented were restated to give effect to the
merger.
In 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.
II-33
<PAGE>
4. Investment Securities:
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1998 and 1997 were as follows (in thousands):
1998
-----------------------------------------------
Amortized Estimated
Cost Gains Losses Fair Value
------------ -------- -------- ----------
Securities held to maturity:
U.S. Government $ 12,988 $ 33 $ -- $ 13,021
Federal agencies 24,871 598 -- 25,469
State and municipal 20,018 713 (14) 20,717
------------ -------- -------- ----------
Total securities held
to maturity 57,877 1,344 (14) 59,207
------------ -------- -------- ----------
Securities available for sale:
U.S. Government 19,030 190 -- 19,220
Federal agencies 49,843 689 (11) 50,521
State and municipal 15,446 633 (22) 16,057
Other 19,522 230 (14) 19,738
------------ -------- -------- ----------
Total securities
available for sale 103,841 1,742 (47) 105,536
------------ -------- -------- ----------
Total securities $161,718 $3,086 $ (61) $164,743
============ ======== ======== ==========
1997
----------------------------------------------
Amortized Estimated
Cost Gains Losses Fair Value
----------- -------- -------- ----------
Securities held to maturity:
U.S. Government $ 15,935 $ 47 $ -- $ 15,982
Federal agencies 32,610 262 (54) 32,818
State and municipal 12,066 503 (2) 12,567
---------- -------- -------- ----------
Total securities held
to maturity 60,611 812 (56) 61,367
---------- -------- -------- ----------
Securities available for sale:
U.S. Government 35,033 177 -- 35,210
Federal agencies 28,950 313 (45) 29,218
State and municipal 9,914 424 -- 10,338
Other 7,629 75 (4) 7,700
---------- -------- -------- ----------
Total securities
available for sale 81,526 989 (49) 82,466
---------- -------- -------- ----------
Total securities $142,137 $1,801 $ (105) $143,833
========== ======== ======== ==========
II-34
<PAGE>
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1998, 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 $ 14,992 $ 15,042 $ 12,512 $ 12,557
Due after one year
through five years 22,647 23,305 37,108 37,999
Due after five years
through ten years 13,515 13,984 29,160 29,717
Due after ten years 6,723 6,876 25,061 25,263
========== =========== ========== ==========
$ 57,877 $ 59,207 $103,841 $105,536
========== =========== ========== ==========
Proceeds from calls exercised by the issuers of investments in debt
securities were $14,753,000 in 1998, $1,236,000 in 1997 and $1,804,000 in 1996.
Proceeds from sales of investments in debt securities were $0 in 1998,
$24,823,000 in 1997 and $19,234,000 in 1996. The Bank recognized gains of
$18,000 on called securities during 1998, losses of $13,000 and gains of $44,000
on sale of securities during 1997 and losses of $592,000 and gains of $254,000
on sales of securities during 1996.
Investment securities with a book value of approximately $49,989,000 at
December 31, 1998 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, $37,537,000 was pledged to secure repurchase agreements.
5. Loans:
Outstanding loans at December 31, 1998 and 1997 were composed of the
following (in thousands):
1998 1997
---- ----
Real Estate loans:
Construction and land development $ 8,104 $ 4,458
Secured by farmland 1,491 1,276
Secured by 1 - 4 family residential properties 95,711 94,472
Secured by multi-family (5 or more)
residential properties 2,268 1,522
Secured by nonfarm, nonresidential properties 44,251 41,368
Loans to farmers 2,293 2,761
Commercial and industrial loans 67,154 57,980
Loans to individuals for personal expenditures 46,494 48,545
Loans for nonrated industrial development
obligations 1,895 2,398
All other loans 15 13
-------- --------
Total loans $269,676 $254,793
======== ========
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, 1998, 1997 and 1996, loans in a nonaccrual or
restructured status totaled approximately $190,000, $393,000 and $33,000,
respectively.
Interest income on nonaccrual loans, if recognized, is recorded on a cash
basis. For the years 1998, 1997 and 1996, the
II-35
<PAGE>
gross amount of interest income that would have been recorded on nonaccrual
loans and restructured loans, if all such loans had been accruing interest at
the original contractual rate, was $14,000, $18,000 and $40,000, respectively.
No interest payments were recorded in 1998, 1997 or 1996 as interest income for
all such nonperforming loans.
Under the Corporation's policy a nonaccruing loan may be restored to
accrual status when none of its principal and interest is due and unpaid and the
Corporation expects repayment of the remaining contractual principal and
interest or when it otherwise becomes well secured and in the process of
collection.
As of January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which was amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". SFAS No. 114, as amended, requires that impaired loans be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, or as a practical expedient, at the loan's
observable market price or the fair value of the collateral, if the loan is
collateral-dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance. The Bank had previously measured the reserve for loan losses using
methods similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional reserve for loan losses was required as of
January 1, 1995.
For purposes of applying SFAS No. 114, commercial loans on nonaccrual
status are evaluated for impairment on an individual basis. Management assesses
the current economic condition and the historical repayment patterns of the
creditor in determining whether delays in repayment on the loans are considered
to be insignificant shortfalls or indicators of impairment. Those loans for
which management considers it probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan agreement are
considered to be impaired. All loans made by the Bank other than commercial
loans are excluded from the scope of SFAS No. 114 as they are considered
smaller-balance homogeneous loans that are collectively evaluated for
impairment. Interest income is recognized on impaired loans in the same manner
as loans on nonaccrual status.
The Bank did not identify any loans as impaired at December 31, 1998.
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, 1998.
An analysis of the reserve for loan losses is as follows (in thousands):
1998 1997 1996
---- ---- ----
Balance, beginning of year $3,277 $3,070 $2,757
Provision for loan losses
charged to expense 927 1,100 673
Charge-offs (508) (992) (502)
Recoveries 125 99 117
Other -- -- 25
------ ------ ------
Balance, end of year $3,821 $3,277 $3,070
====== ====== ======
6. Time Deposits:
Included in time deposits are certificates of deposit in denominations of
$100,000 or more totaling $32,851,000, $32,815,000 and $34,472,000 at December
31, 1998, 1997 and 1996, respectively. Interest expense on such deposits during
1998, 1997 and 1996 was $1,436,000, $1,570,000 and $1,392,000, respectively.
7. Short-Term Borrowings:
Short-Term borrowings at December 31, 1998 and 1997 were composed of the
following (in thousands):
As of December 31
-----------------
1998 1997
---- ----
Federal funds purchased $ -- $ 1,500
Repurchase agreements 31,023 18,039
------- -------
Total short-term borrowings $31,023 $19,539
======= =======
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. Repurchase agreements are borrowings collateralized by
securities of the U.S. Government or its agencies and mature daily.
II-36
<PAGE>
8. Stock Options:
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS No. 123 is effective for fiscal years beginning after December
15, 1995. SFAS No.123 encourages companies to adopt the fair value method for
compensation expense recognition related to employee stock options. Existing
accounting requirements of Accounting Principles Board Opinion No. 25 (APB No.
25) use the intrinsic value method in determining compensation expense, which
represents the excess of the market price of stock over the exercise price on
the measurement date. The Corporation elected to remain under APB No. 25 for
accounting for stock options. Since the exercise price of all options granted
was equal to or exceeded the market value of the stock at the date of grant, no
compensation expense has been recognized.
The following table reflects pro forma net income and earnings per share
had the Corporation elected to adopt the fair value approach of SFAS No. 123 (in
thousands, except per share data):
1998 1997
---- ----
Net Income:
As reported $7,198 $6,269
Pro forma 7,036 6,240
Basic earnings per share
As reported $ 2.36 $ 1.99
Pro forma 2.31 1.98
At December 31, 1998 and 1997, the Corporation had 150,000 shares of its
authorized but unissued common stock reserved for its incentive and nonqualified
stock option plan.
A summary of stock option transactions under the plan follows:
Option Option Price
Shares Per Share
------ ------------
Outstanding at December 31, 1996 -- --
Granted 16,800 $28.00
Exercised -- --
Forfeited 800 28.00
------ -------------
Outstanding at December 31, 1997 16,000 $28.00
Granted 21,000 $31.25-$37.50
Exercised -- --
Forfeited 1,100 $28.00
------ -------------
Outstanding at December 31, 1998 35,900 $28-$37.50
====== =============
The following table summarizes information related to stock options
outstanding on December 31, 1998:
Exercise Number of Options Outstanding Number of Options Exercisable
Prices at December 31, 1998 at December 31, 1998
-------- ----------------------------- -----------------------------
$28.00 14,900 14,900
$31.25 7,000 7,000
$34.375 7,000 --
$37.50 7,000 --
II-37
<PAGE>
9. Income Taxes:
The components of the Corporation's net deferred tax assets as of December
31, 1998 and December 31, 1997, were as follows (in thousands):
December 31 December 31
----------- -----------
1998 1997
---- ----
Deferred tax assets:
Reserve for loan losses $1,096 $ 911
Deferred compensation 274 247
Other 196 201
------ ------
1,566 1,359
Valuation allowance (153) (136)
------ ------
Total deferred tax assets 1,413 1,223
------ ------
Deferred tax liabilities:
Depreciation 241 230
Net unrealized gains 576 320
Accretion of discount 137 211
Other 117 171
------ ------
Total deferred tax liabilities 1,071 932
------ ------
Net deferred tax assets $ 342 $ 291
====== ======
The provision for income taxes consists of the following (in thousands):
1998 1997 1996
---- ---- ----
Taxes currently payable $3,436 $2,880 $2,442
Deferred tax benefit (313) (155) (61)
------ ------ -- ---
$3,123 $2,725 $2,381
====== ====== ======
The effective rates of the provision differ from the statutory federal
income tax rates due to the following items:
1998 1997 1996
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
Non-taxable interest income (3.8) (3.6) (3.6)
Non-deductible merger expenses -- -- 2.3
Other .1 ( .1) ( .6)
----- ----- -----
30.3% 30.3% 32.1%
===== ===== =====
10. 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 $67,466,000 and $64,774,000
at December 31, 1998 and 1997, respectively, 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 $952,000 in commitments at December 31, 1998 and none at
December 31, 1997 to purchase securities when issued.
Standby letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. At
December 31, 1998 and 1997 the Bank had $682,000 and $1,500,000 in outstanding
standby letters of credit.
II-38
<PAGE>
Management and the Corporation's counsel are not aware of any pending
litigation against the Corporation and believe that there are no contingent
liabilities outstanding that will result in a material adverse effect on the
Corporation's consolidated financial position or consolidated results of
operations.
The Bank is a member of the Federal Reserve System and is required to
maintain certain levels of its cash and due from bank balances as reserves based
on regulatory requirements. At December 31, 1998, this reserve requirement was
approximately $5,946,000.
11. 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 $9,572,000 and $11,825,000 at December 31, 1998 and 1997, respectively. The
maximum amount of loans outstanding to the officers, directors and their
business interests at any month-end during 1998, 1997 and 1996 was approximately
4.0% 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, 1998, none
of these loans were restructured, nor were any related party loans charged off
during 1998. An analysis of these loans for 1998 is as follows (in thousands):
Balance, beginning of year $11,825
Additions 18,204
Repayments (20,457)
-------
Balance, end of year $ 9,572
=======
12. 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,
1998 and 1997 (in thousands):
1998 1997
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,431 $ 3,913
Service cost 198 193
Interest cost 240 274
Actuarial gain 175 145
Benefits paid (124) (1,094)
-------- --------
Benefit obligation at end of year $ 3,920 $ 3,431
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 3,796 $ 3,782
Actual return on plan assets 877 1,058
Employer contributions -- 50
Benefits paid (124) (1,094)
-------- --------
Fair value of plan assets at end of year $ 4,549 $ 3,796
======== ========
Funded status $ 629 $ 365
Unrecognized net actuarial gain (365) 34
Unrecognized net obligation at transition (54) (67)
Unrecognized prior service cost (192) (216)
-------- --------
Prepaid benefit cost $ 18 $ 116
======== ========
II-39
<PAGE>
Major assumptions and net periodic pension cost include the following (in
thousands):
1998 1997 1996
---- ---- ----
Weighted-average assumptions:
Discount rate:
Post-retirement 6.00% 6.00% 6.00%
Pre-retirement 7.00 7.00 7.00
Expected return on plan assets 8.00 8.00 6.25
Rate of compensation increase 4.00 4.00 4.00
Components of net periodic benefit cost:
Service cost $ 198 $ 193 $ 125
Interest cost 240 274 186
Expected return on plan assets (304) (303) (204)
Amortization of prior service cost (24) (24) (24)
Amortization of net obligation at transition (12) (12) (12)
Recognized net actuarial gain -- 23 9
------ ------ ------
Net periodic benefit cost $ 98 $ 151 $ 80
====== ====== ======
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.
A non-contributory deferred compensation plan was adopted in 1982 by the
Board of Directors of the Bank which covers certain key executives. This plan is
being funded primarily by insurance and the expense was $151,000, $129,000 and
$122,000 for years 1998, 1997 and 1996.
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 $92,000, $87,000 and $83,000 in 1998, 1997 and 1996, respectively.
These amounts are included in pension and other employee benefits expense for
the respective years.
13. Fair Value of Financial Instruments:
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
December 31, 1998
------------------------
Carrying Fair
Amount Value
Financial assets: ---------- ----------
Cash and federal funds sold $ 14,778 $ 14,778
Investment securities 163,413 164,743
Other 16,494 16,494
Loans, net 265,698 266,882
Financial liabilities:
Deposits $(358,325) $(360,117)
Repurchase agreements (31,023) (31,023)
Other borrowings (13,000) (13,432)
Other liabilities (3,174) (3,174)
Unrecognized financial instruments:
Commitments to extend credit -- --
Standby letters of credit -- (9)
II-40
<PAGE>
December 31, 1997
------------------------
Carrying Fair
Amount Value
Financial assets: ---------- ----------
Cash and federal funds sold $ 13,752 $ 13,752
Investment securities 143,077 143,833
Other 15,638 15,638
Loans, net 251,173 251,805
Financial liabilities:
Deposits $(351,603) $(352,156)
Federal funds purchased and
repurchase agreements (19,539) (19,539)
Unrecognized financial instruments:
Commitments to extend credit $ -- $ --
Standby letters of credit -- (19)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate
that value:
Cash and federal funds sold
The carrying amount is a reasonable estimate of fair value.
Investment securities and other
For marketable securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes. For other securities held as
investments, fair value equals market price, if available. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
Other Assets
The carrying amount is a reasonable estimate of fair value.
Loans
Due to the repricing characteristics of revolving credit lines, home equity
loans and adjustable demand loans, the carrying amount of these loans is a
reasonable estimate of fair value. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. Prepayment rates are taken into consideration in the
calculation.
Deposits
The fair value of demand deposits, savings deposits, and money market
deposits equals the carrying value. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the future cash flows using
the current rates at which similar deposit instruments would be offered to
depositors for the same remaining maturities at current rates.
Federal funds purchased and repurchase agreements
The carrying amount is a reasonable estimate of fair value.
Other Liabilities
The carrying amount is a reasonable estimate of fair value.
II-41
<PAGE>
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, 1998 no fees were charged for commitments to
extend credit. All such commitments were subject to current market rates and
pose no known credit exposure. As a result, 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.
14. 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, $1,821,000 plus an additional amount equal to the Bank's net income
for 1999 up to the date of any dividend declaration.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital to average assets. At December 31, 1998 and
1997 these ratios were above the minimums as follows (in thousands).
<TABLE>
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, 1998:
Total Capital
Corporation $54,326 18.04% $24,097 >8.0% $30,122 >10.0%
Bank 54,271 18.02% 24,095 >8.0% 30,119 >10.0%
Tier I Capital
Corporation 50,560 16.79% 12,049 >4.0% 18,073 >6.0%
Bank 50,505 16.77% 12,048 >4.0% 18,071 >6.0%
Leverage Capital
Corporation 50,560 11.07% 13,701 >3.0% 22,835 >5.0%
Bank 50,505 11.06% 13,700 >3.0% 22,833 >5.0%
As of December 31, 1997:
Total Capital
Corporation $49,026 18.37% $21,353 >8.0% $26,691 >10.0%
Bank 48,992 18.36% 21,351 >8.0% 26,688 >10.0%
Tier I Capital
Corporation 45,749 17.14% 10,676 >4.0% 16,015 >6.0%
Bank 45,715 17.13% 10,675 >4.0% 16,013 >6.0%
Leverage Capital
Corporation 45,749 10.74% 12,779 >3.0% 21,298 >5.0%
Bank 45,715 10.73% 12,778 >3.0% 21,297 >5.0%
</TABLE>
II-42
<PAGE>
15. Segment and Related Information:
The Corporation adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1998. Comparable prior period
information is presented for 1997 and 1996. Reportable segments include
community banking and trust and investment services. Community banking involves
making loans to and generating deposits from individuals and businesses in the
markets where the Bank has offices. All assets and liabilities of the Bank are
allocated to community banking. Investment income from fixed income investments
is a major source of income in addition to loan interest income. Service charges
from deposit accounts and non-deposit fees such as automatic teller machine fees
and insurance commissions generate additional income for community banking.
Trust and investment services includes estate and trust planning and
administration and investment management for various entities. The trust and
investment services division of the Bank manages trusts, estates and purchases
equity, fixed income and mutual fund investments for customer accounts. The
trust and investment services division receives fees for investment and
administrative services. Fees are also received by this division for individual
retirement accounts managed for the community banking segment.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. All intersegment sales prices
are market based.
Segment information for the years 1998, 1997 and 1996 is shown in the
following table (in thousands). The "Other" column includes corporate related
items, results of insignificant operations and, as it relates to segment profit
(loss), income and expense not allocated to reportable segments.
<TABLE>
<CAPTION>
1998
- ------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Interest income $ 32,654 $ -- $ 38 $ (38) $ 32,654
Interest expense 14,472 -- 38 (38) 14,472
Non-interest income - external customers 1,437 2,165 427 -- 4,029
Non-interest income - internal customers -- 52 - (52) --
Operating income before income taxes 8,958 1,400 7,205 (7,242) 10,321
Depreciation and amortization 1,205 42 18 -- 1,265
Total assets 460,657 -- 56,529 (56,803) 460,383
Capital expenditures 1,898 -- 6 -- 1,904
1997
- ------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
Interest income $ 31,728 $ -- $ 19 $ (19) $ 31,728
Interest expense 14,590 -- 19 (19) 14,590
Non-interest income - external customers 1,092 1,888 221 -- 3,201
Operating income before income taxes 7,829 1,299 6,168 (6,302) 8,994
Depreciation and amortization 1,126 30 15 -- 1,171
Total assets 423,921 -- 50,619 (50,900) 423,640
Capital expenditures 832 -- 18 -- 850
1996
- ------------------------------------------------------------------------------------------------------
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
Interest income $ 29,932 $ -- $ -- $ -- $ 29,932
Interest expense 14,370 -- -- -- 14,370
Non-interest income - external customers 795 1,896 -- -- 2,691
Operating income before income taxes 6,111 1,379 4,957 (5,034) 7,413
Depreciation and amortization 867 12 1 -- 880
Total assets 440,549 -- 52,667 (53,058) 440,158
Capital expenditures 967 -- 27 -- 994
</TABLE>
II-43
<PAGE>
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 22, 1999 AMERICAN NATIONAL BANKSHARES INC.
By: /s/ T. Allen Liles
--------------------------------------------
T. Allen Liles
Senior Vice President, Secretary & Treasurer
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 22, 1999.
/s/ Charles H. Majors
-------------------------------
Charles H. Majors President and
Chief Executive Officer
/s/ B. Carrington Bidgood
-------------------------------
B. Carrington Bidgood Director
/s/ Fred A. Blair
-------------------------------
Fred A. Blair Director
/s/ Lester A. Hudson, Jr.
-------------------------------
Lester A. Hudson, Jr. Director
/s/ Ben J. Davenport, Jr.
-------------------------------
Ben J. Davenport, Jr. Director
/s/ Bill Barker, Jr.
-------------------------------
Bill Barker, Jr. Director
/s/ H. Dan Davis
-------------------------------
H. Dan Davis Director
/s/ E. Budge Kent, Jr.
-------------------------------
E. Budge Kent, Jr. Director
/s/ Fred B. Leggett, Jr.
-------------------------------
Fred B. Leggett, Jr. Director
/s/ Claude B. Owen, Jr.
-------------------------------
Claude B. Owen, Jr. Director
/s/ James A. Motley
--------------------------------
James A. Motley Director
/s/ Richard G. Barkhouser
--------------------------------
Richard G. Barkhouser Director
/s/ Landon R. Wyatt, Jr.
--------------------------------
Landon R. Wyatt, Jr. Director
/s/ T. Allen Liles
--------------------------------
T. Allen Liles Senior Vice President
Secretary & Treasurer
II-44
<PAGE>
AMERICAN NATIONAL BANKSHARES INC.
628 Main Street
Post Office Box 191
Danville, Virginia 24543
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held April 27, 1999
NOTICE is hereby given that the Annual Meeting of Shareholders of American
National Bankshares Inc. ("the Corporation") will be held as follows:
Place: The Wednesday Club
1002 Main Street
Danville, VA 24541
Date: April 27, 1999
Time: 11:30 a.m.
THE ANNUAL MEETING IS BEING HELD FOR THE FOLLOWING PURPOSES:
1. To elect four (4) directors of the Corporation to fill the vacancies
created by the expiration of the terms of the Directors of Class III.
2. To transact any other business that may properly come before the
meeting or any adjournment thereof.
The record date for the determination of shareholders entitled to notice of and
to vote at the Annual Meeting is the close of business on March 12, 1999.
IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE MEETING.
ACCORDINGLY, PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. IF YOU DO
ATTEND THE ANNUAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN
PERSON.
Sincerely,
Charles H. Majors
President and Chief Executive Officer
Dated: March 22, 1999
I-1
<PAGE>
AMERICAN NATIONAL BANKSHARES INC.
628 Main Street
P. O. Box 191
Danville, Virginia 24543
PROXY STATEMENT
Annual Meeting of Shareholders
To be held April 27, 1999
INTRODUCTION
This Proxy Statement is furnished in conjunction with the solicitation by
the Board of Directors of American National Bankshares Inc. ("the Corporation")
of the accompanying proxy to be used at the Annual Meeting of Shareholders of
the Corporation and at any adjournments thereof. The meeting will be held on
Tuesday, April 27, 1999, 11:30 a.m. at The Wednesday Club, 1002 Main Street,
Danville, Virginia, for the purposes set forth below and in the Notice of Annual
Meeting of Shareholders. Shares represented by properly executed proxy, if such
proxies are received in time and not revoked, will be voted at the Annual
Meeting as set forth therein. Any shareholder may attend the Annual Meeting,
revoke the proxy and vote in person.
INFORMATION AS TO VOTING SECURITIES
The Board of Directors has set March 12, 1999 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 12, 1999, the Corporation had 1,411
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 578,570 shares (18.9587%) on March 12,
1999.
The number of shares of common stock, there being no other issued class of
stock, outstanding and entitled to vote at the Annual Shareholders' Meeting is
3,051,733. There are 578,570 shares held of record by Ambro and Company which
amount represents 18.9587% of the outstanding securities, and only 349,557 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.
CUMULATIVE VOTING
Shareholders of the Corporation shall not have cumulative voting rights.
VOTING OF PROXIES
If the enclosed proxy is properly executed, dated, returned and not
revoked, it will be voted in accordance with the specification made by the
shareholder. If a specification is not made, it will be voted "FOR" the
proposals set forth below and in the notice of Annual Meeting of Shareholders.
Fred B. Leggett, Jr., Claude B. Owen, Jr., or Fred A. Blair, or any of them,
will act as proxies on behalf of the Board of Directors.
I-2
<PAGE>
EXPENSES OF SOLICITATION
The Corporation will pay the cost of preparing, assembling and mailing this
Proxy Statement and the enclosed material. Proxies may also be solicited
personally or by telephone by the Corporation and the Bank's officers without
additional compensation.
PURPOSES OF THE ANNUAL MEETING
As set forth in the Notice of Annual Meeting of Shareholders, the Board of
Directors is seeking proxies in connection with the following proposals to be
set forth before the shareholders:
1. To elect four (4) directors of the Corporation to fill the vacancies
created by the expiration of the terms of the Directors of Class III.
2. To transact any other business that may properly come before the meeting
or any adjournment thereof.
ELECTION OF DIRECTORS
Four Directors of Class III are to be elected at the Annual Meeting of
Shareholders to serve until the Annual Meeting in 2002 and until their
respective successors are duly elected and qualified. Management proposes that
the four (4) nominees listed in this Proxy Statement as Directors of Class III
be elected.
The nominees for whom the persons named as proxies intend to vote as
directors, unless otherwise indicated on the form of proxy, and 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.
NOMINEES
Directors of Class III to be elected for a term expiring in 2002
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since March 12, 1999 of Class
Richard G. Barkhouser (68) 1980 82,412 - Direct (1) 2.6958
President, Barkhouser 7,260 - Family .2375
Motors, Inc., Danville, Relationship (4)
VA, automobile dealership
H. Dan Davis (61) 1996 43,600 - Direct (1) 1.4262
Senior Consultant to the 20,352 - Family .6657
Corporation and the Bank Relationship (4)
since January, 1998; prior
thereto, Executive Vice
President of the Corporation
and Senior Vice President of
the Bank since March, 1996;
prior thereto, President and
Chief Executive Officer of
Mutual Savings Bank, F.S.B
since January, 1995; prior
thereto, President and Chief
Operations Officer of Mutual
Savings Bank, F.S.B
Lester A. Hudson, Jr. (59) 1984 4,902 - Direct (1) .1604
Chairman, H & E Associates,
Greenville, SC, investments,
since June, 1995; prior
thereto Vice Chairman, Wunda
Weve Carpets, Inc.,
Greenville, SC, carpet
manufacturer
I-3
<PAGE>
Charles H. Majors (53) 1981 7,230 - Direct (1)(5) .2365
President and Chief 1,247 - Family .0408
Executive Officer of Relationship (4)
the Corporation and
the Bank
DIRECTORS CONTINUING IN OFFICE
Directors of Class I to continue in office until 2000
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since March 12, 1999 of Class
Willie G. Barker, Jr. (61) 1996 14,100 - Direct (1) .4621
Retired President of
Dibrell Brothers, Inc.,
Danville, VA, leaf
tobacco and flowers
Ben J. Davenport, Jr. (56) 1992 6,430 - Direct (1)(2) .2103
Chairman, First
Piedmont Corporation,
Chatham, VA,
waste management
James A. Motley (70) 1975 7,310 - Direct (1)(2) .2391
Retired Chairman and Chief 5,242 - Family .1715
Executive Officer of Relationship (4)
the Corporation and the
Bank
Landon R. Wyatt, Jr. (73) 1965 4,540 - Direct (1) .1485
President, Wyatt Buick 9,070 - Family .2968
Sales Co., Danville, VA, Relationship (4)
automobile dealership
Directors of Class II to continue in office until 2001
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since March 12, 1999 of Class
Fred A. Blair (52) 1992 1,909 - Direct (1) .0624
President, Blair 225 - Family .0074
Construction, Inc., Relationship (3)
Gretna, VA, commercial
building contractor
E. Budge Kent, Jr. (60) 1979 15,649 - Direct (1)(6) .5119
Senior Vice President 679 - Family .0222
of the Corporation and Relationship (4)
Senior Vice President &
Trust Officer of the
Bank
Fred B. Leggett, Jr. (62) 1994 8,623 - Direct (1)(2) .2821
Retired Chairman and 3,192 - Family .1044
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
I-4
<PAGE>
Claude B. Owen, Jr. (53) 1984 5,716 - Direct (1) .1870
Chairman & Chief 2,100 - Family .0687
Executive Officer of Relationship (4)
DIMON Incorporated,
Danville, VA, leaf tobacco,
since May, 1995; prior
thereto, Chairman, President
& Chief Executive Officer,
Dibrell Brothers, Inc.,
Danville, VA, leaf tobacco
& flowers
All Executive officers and directors, 224,064 - Direct (1)(2)(7) 7.3295
including nominees and directors 49,927 - Family 1.6332
named above (14 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.
(5) Includes 2,100 shares that Mr. Majors has the right to acquire through
the exercise of stock options.
(6) Includes 1,100 shares that Mr. Kent has the right to acquire through
the exercise of stock options.
(7) Includes 5,300 shares that the Named Executive Officers have the right
to acquire through the exercise of stock options.
All of the above nominees and directors have been engaged in the
occupations listed during the last five years.
There exists no family relationship between any director or nominee.
Mr. Owen is a director of DIMON Incorporated and Richfood Holdings Inc. Mr.
Hudson is a director of American Electric Power Company, Inc. Mr. Motley and Mr.
Davenport are directors of Intertape Polymer Group Inc. The stock of these
corporations is registered with the Securities and Exchange Commission.
EXECUTIVE OFFICERS
Mr. Charles H. Majors and Mr. E. Budge Kent, Jr., together with the two
senior vice presidents listed below, are the executive officers of the
Corporation and the Bank.
Principal Occupation and
Name Age Business Experience
- ---- --- ------------------------------------------------
T. Allen Liles 46 Senior Vice President, Secretary, Treasurer
and Chief Financial Officer of the Corporation
and Senior Vice President, Cashier and Chief
Financial Officer of the Bank; Officer of the
Bank since 1997
Carl T. Yeatts 60 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.
I-5
<PAGE>
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors held 14 Board Meetings during the year 1998. These
meetings were either the Corporation Board Meetings and/or the Bank Board
Meetings. In addition to meeting as a group to review the Corporation and Bank's
business, certain members of the Board are appointed to serve on various
standing committees. Among those committees are the Audit and Compliance
Committee, Salary Committee and Directors' Nominating Committee. All incumbent
directors attended more than 75% of the aggregate of all meetings of the Board
of Directors and Committees on which they served.
Audit and Compliance Committee. The Audit and Compliance Committee, which
currently consists of Messrs. Barker, Blair and Motley, reviews significant
audit, accounting, and compliance principles, policies and practices, meets with
the Corporation and Bank's independent auditors to discuss the results of their
annual audit and reviews the performance of the internal auditing and compliance
functions. The Audit and Compliance Committee held four meetings in 1998.
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 1998.
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 two meetings in 1998.
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 profits, dividends,
and net equity improve shareholder market value and, accordingly, compensation
should be structured to enhance the long-term profitability of the Bank.
Officer compensation generally consists of salary and participation in the
Bank's profit sharing plan. A description of the profit sharing plan is included
in Note (2) under the Summary Compensation Table. Certain officers received
incentive compensation in 1998 due to the attainment of certain earnings by the
Corporation. Certain officers may be eligible to receive incentive compensation
if certain earnings are attained in 1999. Certain key executive officers are
eligible to participate in the Executive Compensation Continuation Plan
described below under "Deferred Compensation Plan". All compensation is paid by
the Bank and no officer receives an additional compensation from the
Corporation. In 1997, the Board of Directors and the shareholders approved the
stock option plan described below under Note (3) of the Summary Compensation
Table.
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.
I-6
<PAGE>
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, 1998. The two indexes are the S & P 500
Total Return published by Standard & Poor's Corporation and the Independent
Community Bank Index, consisting of 23 independent banks located in the states
of Florida, Georgia, North Carolina, South Carolina, Tennessee, West Virginia,
and Virginia. The Independent Community Bank Index is published by the Carson
Medlin Company.
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
American National Bankshares Inc. 100 108 104 89 118 130
Independent Bank Index 100 119 151 191 280 296
S & P 500 Index 100 101 139 171 228 294
I-7
<PAGE>
EXECUTIVE COMPENSATION
The following tables set forth the annual and long-term compensation
awarded to, earned by, or paid to executive officers of the Corporation and the
Bank ("Named Executive Officers") during 1998, 1997 and 1996.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
----------------------------------- ---------------------- -------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Salary(1) Bonus(2) Compensation Awards Options/ Payouts Compensation
Principal Position Year ($) ($) ($) ($) SARS(#)(3) ($) ($)(4)
- ------------------ ---- --------- -------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles H. Majors 1998 165,409 34,956 -- -- 6,000 -- 4,860
President & Chief Executive 1997 153,855 19,038 -- -- 100 -- 4,500
Officer 1996 144,071 10,670 -- -- -- -- 4,212
E. Budge Kent, Jr. 1998 104,088 19,252 -- -- 3,000 -- 3,000
Senior Vice President of the 1997 97,292 10,910 -- -- -- 100 2,730
Corporation; Senior Vice 1996 90,623 6,634 -- -- -- -- 2,619
President and Trust Officer
of the Bank
T. Allen Liles 1998 91,079 18,318 -- -- 3,000 -- --
Senior Vice President, Secretary,
Treasurer and Chief Financial
Officer of the Corporation; Senior
Vice President, Cashier and Chief
Financial Officer of the Bank
(effctive January 1, 1998)
Carl T. Yeatts 1998 103,131 19,252 -- -- 3,000 -- 3,000
Senior Vice President of the 1997 89,682 10,562 -- -- 100 -- 2,610
Corporation; Senior Vice 1996 85,747 6,323 -- -- -- -- 2,496
President and Senior Loan
Officer of the Bank
</TABLE>
(1) Includes salary deferrals contributed by the employee to the 401(k)
Plan and taxable compensation for term life insurance over $50,000.
(2) Includes accrued payments of profit sharing (bonus) and incentive
compensation participations. In 1998, 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 at quarter end. Incentive
compensation represented payments to full-time employees based on the
Corporation attaining certain earnings increase. The total expense,
paid or accrued, for the profit sharing (bonus) plan and incentive
compensation payments for the year 1998 amounted to $501,817.
(3) The Corporation grants options pursuant to the Corporation's Stock
Option Plan approved by the shareholders at the 1997 annual meeting.
(4) Includes matching contributions to the 401(k) Plan made by the Bank.
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 $10,000. The Bank will make a matching
contribution in the amount of 50% of the first 6% of compensation
so deferred.
I-8
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
Option Grants in Respect of Last Fiscal Year
<CAPTION>
Potential
Realizable Value
Number of % of Total At Assumed Annual
Securities Options Exercise Rates of Stock Price
Underlying Granted to or Base Appreciation for
Options Employees in Price Vesting Expiration Option Term
Name Granted Fiscal Year ($/Share) Date Date 5% ($) 10% ($)
- ---- ---------- ------------- --------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Charles H. Majors 2,000 9.52% 31.25 12/31/98 2/17/08 39,306 99,609
President and Chief 2,000 9.52% 34.38 12/31/99 2/17/08 33,046 93,349
Executive Officer 2,000 9.52% 37.50 12/31/00 2/17/08 26,806 87,109
E. Budge Kent, Jr. 1,000 4.76% 31.25 12/31/98 2/17/08 19,653 49,804
Senior Vice President 1,000 4.76% 34.38 12/31/99 2/17/08 16,523 46,674
of the Corporation; Senior 1,000 4.76% 37.50 12/31/00 2/17/08 13,403 43,554
Vice President and Trust
Officer of the Bank
T. Allen Liles 1,000 4.76% 31.25 12/31/98 2/17/08 19,653 49,804
Senior Vice President, Secretary, 1,000 4.76% 34.38 12/31/99 2/17/08 16,523 46,674
Treasurer and Chief Financial 1,000 4.76% 37.50 12/31/00 2/17/08 13,403 43,554
</TABLE>
<TABLE>
AGGREGATE OPTIONS EXERCISED IN 1998 AND
YEAR-END OPTION VALUES
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options at Options at
Acquired on Value December 31, 1998 (#) December 31, 1998 ($) (a)
Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------ ------------ ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles H. Majors -- -- 2,100 4,000 4,000 --
E. Budge Kent, Jr. -- -- 1,100 2,000 2,250 --
T. Allen Liles -- -- 1,000 2,000 1,750 --
Carl T. Yeatts -- -- 1,100 2,000 2,250 --
</TABLE>
(a) Value of unexercised in-the-money options is calculated by multiplying the
number of unexercised options at December 31, 1998 by the difference in the
closing price of the Corporation's common stock reported on December 31,
1998 and the exercise price of the unexercised in-the-money options.
- --------------------------------------------------------------------------------
I-9
<PAGE>
OPTION REPRICING
No action was taken in 1998 to lower the exercise price of an option held
by the Named Executive Officers.
SALARY COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION
The Salary Committee of the Bank, during 1998, was composed of Messrs.
Barkhouser, Bidgood, Hudson, and Leggett. None of the members of the Salary
Committee were officers or employees of the Corporation or its subsidiaries
during 1998 or in prior years.
None of the executive officers of the Corporation or Bank served as a
member of the Board of Directors or as a member of the Compensation Committee
(or other Board Committee performing equivalent functions) of another entity
during 1998, which entity had an executive officer serving on the Board of
Directors or as a member of the Salary Committee of the Corporation or the Bank.
Consequently, there are no interlocking relationships between the Corporation or
Bank and other entities that might affect the determination of the compensation
of executive officers of the Corporation or Bank.
Retirement Plan. The Bank's retirement plan is a non-contributory defined
benefit pension plan which covers substantially all employees of the Bank who
are 21 years of age or older and who have had at least one year of service.
Advanced funding is accomplished by using the actuarial cost method known as the
collective aggregate cost method.
As of December 31, 1998, 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. Basic monthly compensation includes salary but excludes incentive
and bonus compensation. Annual compensation at December 31, 1998 was also
limited to $160,000 by Internal Revenue regulations. 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.
The following table illustrates the estimated annual benefits payable to an
employee retiring on December 31, 1998 at normal retirement age in the following
specified compensation and years of service classifications:
Estimated Annual Retirement Benefit
5 Year Years of Service
Average ----------------
Salary 15 20 25 30 35
-------- -- -- -- -- --
$ 50,000 $11,583 $15,444 $19,305 $ 23,166 $ 27,027
75,000 18,896 25,194 31,493 37,791 44,090
100,000 26,208 34,944 43,680 52,416 61,152
125,000 33,521 44,694 55,868 67,041 78,215
150,000 40,833 54,444 68,055 81,666 95,277
175,000 48,146 64,194 80,243 96,291 112,340
200,000 55,458 73,944 92,430 110,916 129,402
I-10
<PAGE>
As of December 31, 1998, the Named Executive Officers have completed the
following years of credited service under the Bank's retirement Plan:
Charles H. Majors 6
E. Budge Kent, Jr. 35
T. Allen Liles 1
Carl T. Yeatts 35
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 Board of 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 10 years. Retirement age under existing agreements
begins on or after age 62.
As of December 31, 1998, the Named Executive Officers or their designated
beneficiaries are eligible to receive the following annual retirement benefits
for ten years after meeting the age requirement of 62:
Annual Benefit Years to
Name or 10 Years(in $) Vesting
---- ----------------- --------
Charles H. Majors 50,000 9
E. Budge Kent, Jr. 25,000 2
T. Allen Liles 25,000 16
Carl T. Yeatts 25,000 2
Directors' Compensation. In 1998, non-officer directors, except Mr. Davis,
received a monthly retainer of $500 and attendance fees of $200 for each regular
Board meeting and $400 for each Committee meeting attended. The aggregate total
amount paid to non-officer directors, excluding Mr. Davis, for the year 1998 was
$101,900. Mr. Davis was a Named Executive Officer in previous years but elected
to become a senior consultant and retire as an officer, effective December 31,
1997. Mr. Davis can receive $5,500 per month through March 2003 for services as
a consultant. No additional compensation is paid to Mr. Davis for service on the
Board of Directors or for attending Committee meetings. Non-officer directors
are excluded from the Bank's retirement plan and, therefore, do not qualify for
pension benefits.
I-11
<PAGE>
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 1998. 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 1998, the highest aggregate amount of outstanding loans,
direct and indirect, to the directors and officers was $10,402,841 or 21% of
equity capital and this peak amount occurred on January 31, 1998.
Independent Public Accountants
The Board of Directors of the Corporation, pursuant to the recommendation
of its Audit and Compliance Committee, selected Arthur Andersen, LLP,
independent public accountants, to audit the financial statements of the
Corporation and the Bank for the year 1998. Arthur Andersen, LLP was first
engaged by the Bank in 1978 as its independent public accountant.
A representative of Arthur Andersen, LLP will be present at the
shareholders' meeting and this representative will have an opportunity to make a
statement if he so desires. He will be available to respond to appropriate
questions.
Shareholder Proposals
Any shareholder proposal intended to be presented at next year's Annual
Meeting must be received at the principal office of the Corporation (Post Office
Box 191, Danville, Virginia 24543) for inclusion in the proxy statement for the
2000 annual meeting not later than January 3, 2000. The proposals should be
mailed to the Corporation by Certified Return Receipt Requested mail.
Other Business
The Board of Directors knows of no other matters which may properly be
brought before the Annual Meeting. However, if any other matters should properly
come before the Annual Meeting, it is the intention of the persons named in the
enclosed form of proxy to vote such proxy in accordance with their best judgment
on such matters.
By Order of the Board of Directors
Charles H. Majors
President and Chief Executive Officer
March 22, 1999
I-12
<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-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 APR-01-1998 JUL-01-1998 OCT-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-01-1998 DEC-31-1998 DEC-31-1998
<CASH> $13,979 $13,043 $12,538 $14,072 $14,072
<INT-BEARING-DEPOSITS> 20 80 16,431 706 706
<FED-FUNDS-SOLD> 0 0 0 0 0
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 86,311 84,352 89,152 105,536 105,536
<INVESTMENTS-CARRYING> 61,311 60,715 63,258 57,877 57,877
<INVESTMENTS-MARKET> 62,227 61,685 64,838 59,207 59,207
<LOANS> 258,779 260,455 264,980 269,677 269,677
<ALLOWANCE> 3,465 3,637 3,739 3,821 3,821
<TOTAL-ASSETS> 432,233 430,555 458,188 460,383 460,383
<DEPOSITS> 353,903 347,629 357,927 358,325 358,325
<SHORT-TERM> 0 6,025 0 0 0
<LIABILITIES-OTHER> 27,278 21,795 33,405 34,197 34,197
<LONG-TERM> 0 3,000 13,000 13,000 13,000
0 0 0 0 0
0 0 0 0 0
<COMMON> 3,052 3,052 3,052 3,052 3,052
<OTHER-SE> 48,000 49,054 50,804 51,809 51,809
<TOTAL-LIABILITIES-AND-EQUITY> 432,233 430,555 458,188 460,383 460,383
<INTEREST-LOAN> 5,743 5,822 5,898 5,893 23,356
<INTEREST-INVEST> 2,185 2,259 2,252 2,330 9,026
<INTEREST-OTHER> 43 12 94 123 272
<INTEREST-TOTAL> 7,971 8,093 8,244 8,346 32,654
<INTEREST-DEPOSIT> 3,263 3,266 3,276 3,154 12,959
<INTEREST-EXPENSE> 3,532 3,587 3,702 3,651 14,472
<INTEREST-INCOME-NET> 4,439 4,506 4,542 4,695 18,182
<LOAN-LOSSES> 252 223 203 249 927
<SECURITIES-GAINS> 0 0 0 0 18
<EXPENSE-OTHER> 2,673 2,748 2,692 2,850 10,963
<INCOME-PRETAX> 2,410 2,515 2,636 2,760 10,321
<INCOME-PRE-EXTRAORDINARY> 2,410 2,515 2,636 2,760 10,321
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 1,661 1,751 1,827 1,959 7,198
<EPS-PRIMARY> .54 .58 .60 .64 2.36
<EPS-DILUTED> .54 .58 .60 .64 2.36
<YIELD-ACTUAL> 4.55 4.55 4.45 4.53 4.52
<LOANS-NON> 107 99 274 190 190
<LOANS-PAST> 205 38 256 249 249
<LOANS-TROUBLED> 0 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0 0
<ALLOWANCE-OPEN> 3,277 3,465 3,637 3,739 3,277
<CHARGE-OFFS> 103 78 132 195 508
<RECOVERIES> 39 27 31 28 125
<ALLOWANCE-CLOSE> 3,465 3,637 3,739 3,821 3,821
<ALLOWANCE-DOMESTIC> 2,416 2,511 2,441 2,722 2,722
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 1,049 1,126 1,298 1,099 1,099
</TABLE>
