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, 1999
-----------------
Commission file number 0-12820
AMERICAN NATIONAL BANKSHARES INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1284688
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
628 Main Street
Danville, Virginia 24541
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 804-792-5111
--------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
----
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1 Par Value NASDAQ National Market
-------------------------- --------------------------------------
(Title of each class) (Name of exchange on which registered)
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. X
---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 8, 2000 was $81,576,750. The number of shares of the
Registrant's Common Stock outstanding on March 8, 2000 was 6,103,772.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 25, 2000, are incorporated by reference in Part
III of this report.
II-1
<PAGE>
<TABLE>
CROSS REFERENCE
PART I Page
----
<S> <C>
ITEM 1 - Business II 5
ITEM 2 - Properties II 6
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 6
ITEM 6 - Selected Financial Data II 7
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations II 8 - 23
ITEM 7A- Quantitative and Qualitative Disclosures about Market Risk II 15 - 17
ITEM 8 - Financial Statements and Supplementary Data
Quarterly Financial Results for 1999 and 1998 II 24
Management's Report on Financial Statements II 25
Report of Independent Public Accountants II 26
Consolidated Balance Sheets at December 31, 1999 and 1998 II 27
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1999 II 28
Consolidated Statements of Changes in Shareholders' Equity for each of the
years in the three-year period ended December 31, 1999 II 29
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1999 II 30
Notes to Consolidated Financial Statements II 31 - 43
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 8 - 9
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management I 3 - 5
ITEM 13 - Certain Relationships and Related Transactions I 10 - 12
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for reference)
Exhibit
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
10.1 Agreement between American National Bank and Trust Exhibit 4a on Form 10-K
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
II-2
<PAGE>
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
10.8 Agreement between American National Bank and Trust Exhibit 4 on Form 8-K
Company and H. Dan Davis dated March 14, 1996 filed September 27, 1995
10.9 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
10.10 Agreement between American National Bank and Trust Exhibit 10.1 on Form 10-Q
Company and James H. Johnson, Jr. dated July 31, 1999 filed November 12, 1999
10.11 Agreement between American National Bank and Trust Exhibit 10.2 on Form 10-Q
Company and Earnest C. Jordan dated July 26, 1999 filed November 12, 1999
27.0 Financial Data Schedule Exhibit 27
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 1999.
</TABLE>
II-3
<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 21, 2000 AMERICAN NATIONAL BANKSHARES INC.
By: /s/ 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 21, 2000.
/s/ Charles H. Majors
------------------------------- President and
Charles H. Majors Chief Executive Officer
/s/ Fred A. Blair Director
-------------------------------
Fred A. Blair
/s/ Lester A. Hudson, Jr. Director
-------------------------------
Lester A. Hudson, Jr.
/s/ Ben J. Davenport, Jr. Director
-------------------------------
Ben J. Davenport, Jr.
/s/ Bill Barker, Jr. Director
-------------------------------
Bill Barker, Jr.
/s/ H. Dan Davis Director
-------------------------------
H. Dan Davis
/s/ E. Budge Kent Jr. Director
-------------------------------
E. Budge Kent, Jr.
/s/ Fred B. Leggett, Jr. Director
-------------------------------
Fred B. Leggett, Jr.
/s/ Claude B. Owen, Jr. Director
-------------------------------
Claude B. Owen, Jr.
/s/ James A. Motley Director
-------------------------------
James A. Motley
/s/ Richard G. Barkhouser Director
-------------------------------
Richard G. Barkhouser
/s/ Landon R. Wyatt, Jr. Director
-------------------------------
Landon R. Wyatt, Jr.
/s/ T. Allen Liles
------------------------------- Senior Vice President
T. Allen Liles Secretary & Treasurer
II-4
<PAGE>
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 184 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. The Bank has two wholly owned
subsidiaries to make and sale mortgage loans and to offer non-deposit products
such as mutual funds and insurance.
The operations of the Bank are conducted at twelve 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,
Martinsville, 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
21, 2000, 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 2000 Annual Meeting of Shareholders.
II-5
<PAGE>
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 21, 2000 the Bank maintained twelve full service offices.
Seven are located within the City of Danville, with others located at Gretna,
Chatham, Martinsville, and Collinsville, Virginia and Yanceyville, North
Carolina. The Bank owns and operates thirteen 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.
<TABLE>
Bank Offices
- ------------
<S> <C>
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
Martinsville Office * 201 East Main Street, Martinsville, Virginia 24112
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
Martinsville Office * 201 East Main Street, Martinsville, Virginia 24112
Huffman's Car Wash * 596 West Main Street, Danville, Virginia 24541
Hillcrest Shopping Center * Highways 86 & 158, Yanceyville, North Carolina 27379
Franklin Turnpike * 2725 Franklin Turnpike, Danville, Virginia 24540
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 Center * 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
</TABLE>
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters
The Corporation's common stock is traded on the NASDAQ National Market
under the symbol "AMNB". At January 31, 2000 the Corporation had 1,406
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
the shares outstanding for 1999 and 1998.
<TABLE>
<CAPTION>
First Second Third Fourth
Market Value Quarter Quarter Quarter Quarter
- ------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
1999 Common Stock $13.00 - 16.22 $13.50 - 18.50 $15.00 - 25.00 $16.50 - 23.00
1998 Common Stock $14.38 - 16.25 $14.38 - 15.50 $13.00 - 15.50 $13.50 - 16.50
</TABLE>
<TABLE>
<CAPTION>
Per Share First Second Third Fourth
Dividends Declared Quarter Quarter Quarter Quarter Total
- ------------------ ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1999 Common Stock $ .12 $ .135 $ .135 $ .135 $ .525
1998 Common Stock $ .105 $ .12 $ .12 $ .12 $ .465
</TABLE>
II-6
<PAGE>
<TABLE>
Summary of Selected Consolidated Financial Data
(in thousands, except per share amounts)
American National Bankshares Inc. & Subsidiary
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operations Information:
Interest income:
Loans...............................................$ 23,959 $ 23,356 $ 22,441 $ 20,335 $ 18,432
Federal funds sold and other........................ 273 272 237 435 202
Investment securities............................... 9,467 9,026 9,050 9,162 7,300
--------- --------- --------- --------- ---------
Total interest income............................. 33,699 32,654 31,728 29,932 25,934
Interest expense...................................... 14,736 14,472 14,590 14,370 11,484
--------- --------- --------- --------- ---------
Net interest income................................... 18,963 18,182 17,138 15,562 14,450
Provision for loan losses............................. (670) (927) (1,100) (673) (484)
Non-interest income................................... 4,494 4,079 3,225 2,691 2,035
Non-interest expense.................................. (11,543) (11,013) (10,269) (10,167) (8,702)
--------- --------- --------- --------- ---------
Income before income taxes............................ 11,244 10,321 8,994 7,413 7,299
Income taxes.......................................... 3,320 3,123 2,725 2,381 2,283
--------- --------- --------- --------- ---------
Net income............................................$ 7,924 $ 7,198 $ 6,269 $ 5,032 $ 5,016
========= ========= ========= ========= =========
Balance Sheet Information:
Investment securities.................................$166,272 $163,413 $143,077 $175,757 $149,208
Net loans............................................. 289,606 265,698 251,173 233,509 212,684
Total deposits........................................ 385,558 358,325 351,603 361,983 327,342
Shareholders' equity.................................. 56,719 54,861 50,003 52,218 48,912
Total assets.......................................... 491,391 460,383 423,640 440,158 388,479
Per Share Information:*
Net income (basic and diluted)........................$ 1.30 $ 1.18 $ 1.00 $ .77 $ .78
Dividends............................................. .525 .465 .405 .345 .280
Book value............................................ 9.29 8.99 8.19 7.96 7.61
Ratios:
Return on average assets.............................. 1.68% 1.64% 1.47% 1.24% 1.43%
Return on average shareholders' equity................ 14.17% 13.79% 12.51% 10.12% 10.62%
Total risk-based capital/assets....................... 17.79% 18.04% 18.37% 20.66% 23.67%
Shareholders' equity/assets........................... 11.54% 11.92% 11.80% 11.86% 12.59%
Net charge-offs to average net loans.................. .13% .15% .36% .17% .09%
Allowance for loan losses to period-end
loans, net of unearned income....................... 1.41% 1.42% 1.29% 1.30% 1.28%
The financial information for 1995 has been restated to reflect the merger with Mutual Savings Bank, FSB.
* Per share amounts have been restated to reflect the impact of a 2-for-1 stock split effected in the form
of a 100% stock dividend issued to stockholders July 15, 1999, with a record date of July 1, 1999.
</TABLE>
II-7
<PAGE>
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.
The Corporation has expanded through internal growth and through mergers
and acquisitions. On March 14, 1996, the Corporation completed the merger of
Mutual Savings Bank, F.S.B. ("Mutual") with $84,718,00 in assets into the Bank.
The Mutual merger was accounted for as a pooling of interests. The Bank
completed two branch purchases in 1995 and 1996 which added $57,700,000 in
deposits and $6,925,000 in loans. The two branch purchases were accounted for as
purchases and goodwill of $4,504,000 is being amortized over ten years. The
Corporation opened new branch offices in Chatham and Martinsville, Virginia and
closed a limited service branch in Danville during 1999.
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.
Forward-looking Statements
This report contains forward-looking statements with respect to the
financial condition and results of operations and business of the Corporation
and Bank. These forward-looking statements involve risks and uncertainties and
are based on the beliefs and assumptions of management of the Corporation and
Bank and on information available at the time these statements and disclosures
were prepared. Factors that may cause actual results to differ materially from
those expected include the following:
o General economic conditions may deteriorate and negatively impact the ability
of borrowers to repay loans and depositors to maintain balances.
o Changes in interest rates could reduce net interest income.
o Competitive pressures among financial institutions may increase.
o Legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses that the Corporation and Bank
are engaged in.
o New products developed or new methods of delivering products could result in a
reduction in business and income for the Corporation and Bank.
o Adverse changes may occur in the securities market.
Stock Split
The Corporation issued a 2-for-1 stock split effected in the form of a 100%
stock dividend to shareholders of record July 1, 1999, payable on July 15, 1999.
All references to the number of common shares and all per share amounts have
been adjusted, as appropriate, to retroactively reflect the stock split.
Reclassifications
Certain prior period information has been restated to conform with 1999
presentation.
Performance Summary
The Corporation and Bank reported record profitability during 1999. Net
income of $7,924,000 for 1999 increased by $726,000 or 10.1% over net income of
$7,198,000 for 1998.
The economy of the Bank's trade area continues to be healthy as evidenced
by another year of loan growth. During 1999, net loans increased $23,908,000, or
9.0% while total deposits increased $27,233,000, or 7.6%. Total deposits and
repurchase agreements with customers increased $21,165,000, or 5.4%, during
1999.
II-8
<PAGE>
Earnings and Capital
Net income per diluted share was $1.30 in 1999, $1.18 in 1998, and $1.00 in
1997. Shareholders' equity increased $1,858,000 in 1999 from the retention of
1999 earnings which was partially offset by an increase in net unrealized losses
on securities available for sale. Shareholders' equity increased $4,858,000 in
1998 from retention of 1998 earnings and from an increase in net unrealized
gains on securities available for sale. This followed a decrease in
shareholders' equity during 1997 by $2,215,000 due to the repurchase 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. Shareholders' equity was 11.5% of assets at December 31,
1999 and 11.9% at December 31, 1998. Shareholders' equity was $56,719,000 at
December 31, 1999 and $54,861,000 at December 31, 1998. The total market value
of American National Bankshares Inc. common stock at $18.50 per share (the last
trade recorded on the NASDAQ National Market during 1999) was $112,918,000. The
market value of the Corporation's common stock was 199 percent of its book
value. Book value per common share was $9.29 at the close of 1999.
During 1999, the Corporation increased its allowance for loan losses to
$4,135,000 an increase of $314,000 or 8.2% from 1998. The allowance, as a
percentage of loans, was 1.41% at December 31, 1999 and 1.42% at December 31,
1998.
The return of net income on average total assets was 1.68% in 1999 compared
to 1.64% in 1998 and 1.47% in 1997. The return on average shareholders' equity
was 14.17% in 1999 compared to 13.79% in 1998 and 12.51% in 1997.
Trends and Future Events
The economic conditions of the Corporation's trade area remained stable
during 1999 as evidenced by another year of loan and deposit growth. The
Corporation's net loans grew at a rate of 9.0% during 1999 following a 5.8%
increase in 1998. Total deposits increased 7.6% during 1999 following a 1.9%
increase in 1998.
Net interest income on a taxable equivalent basis increased 5.1% to
$19,733,000 in 1999 after a 6.6% increase to $18,780,000 in 1998. The 1999
increase resulted from growth in average interest-earning assets of $30,354,000
and growth in average interest-earning liabilities of $23,834,000. The weighted
average yield on interest earning assets declined by .28% while the weighted
average cost of interest-bearing liabilities decreased by .20% because loan
yields fell by more than deposit yields in 1999. 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 1999, time deposits increased by $24,708,000, or 14.5%, and money
market accounts increased by $4,237,000, or 23.4%. Interest bearing demand
deposits declined $260,000, or .5%, while non-interest bearing demand deposits
increased $2,424,000 or 5.4%. Savings deposits decreased $3,876,000, or 5.6%.
Repurchase agreements which are short term investments for businesses and
individuals and are not included in deposits decreased $6,069,000, or 19.6%,
during 1999. Total deposits increased $27,233,000 or 7.6% during 1999 after
increasing $6,722,000 or 1.9% during 1998.
Pursuant to the Agreement and Plan of Reorganization by and between Mutual
and the Corporation, ANB Mortgage Corp. ("ANB Mortgage"), formerly Mutual
Mortgage of the Piedmont, Inc., was organized and began operations in 1996 as a
wholly owned subsidiary of the Bank. The primary purpose of ANB Mortgage is to
originate and sell mortgage loans. ANB Services Corp. ("ANB Services") was
formed as a wholly owned subsidiary of the Bank and began operations in late
1999 to offer non-deposit products such as mutual funds and insurance. The
financial condition and results of operations of ANB Mortgage and ANB Services
are included in the Consolidated Balance Sheets and Consolidated Statements of
Income of the Corporation.
The Corporation's stock began trading on the NASDAQ National Market on
April 23, 1999 after having been traded on the OTC Bulletin Board. The change to
NASDAQ was made to improve the marketability of the stock.
The Federal Reserve Board ("FRB") decreased short term interest rates in
late 1998 by cutting federal funds by .75% and the discount rate by .50%, and
the major banks followed by lowering the prime rate by .75%. The FRB reversed
the 1998 cuts in the later half of 1999 by increasing the aforementioned rates,
and major banks followed by raising the prime by .75%. The Federal Reserve
actions in lowering interest rates in 1998 were designed to stabilize financial
markets and to offset perceived deteriorating economic conditions caused by the
global financial crisis. The increases in interest rates in 1999 were designed
to moderate national economic growth which could be inflationary if left
unchecked.
The FDIC insures deposits of the Bank up to the limits allowed by law.
Financial institutions are assessed deposit insurance by the FDIC at an annual
rate of between 0 and .27% of insured deposits, depending on a risk
classification. Legislation was enacted in 1996 requiring FDIC insured
institutions to pay a portion of the interest on obligations issued by the
Financing Corporation ("FICO"). For the first quarter of 2000, the effective
annual FICO assessment rate was .0212% of insured deposits.
II-9
<PAGE>
As mandated by the Federal Deposit Insurance Corporation Act of 1991
("FDICIA"), the following five capital categories are identified 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.
Year 2000 Issue
The Corporation did not encounter computer or system problems from the
transition into the new millennium (Year 2000). The "Year 2000" problem was
widely publicized as the possible failure or malfunction of systems or computer
chips that improperly recognized date sensitive information when the year
changed to 2000. The Corporation is not aware of Year 2000 problems encountered
by major customers, suppliers or hardware and software vendors. No liquidity
problems or material withdrawals by depositors of the Bank were experienced
during the transition into the Year 2000.
Total Year 2000 project costs were approximately $125,000 as had previously
been estimated and disclosed. The expenditures did not have a material impact on
the Corporation's results of operations, liquidity or capital resources.
Although highly unlikely, certain Year 2000 problems could surface later
during 2000. The Corporation continues to monitor systems for possible future
disruptions and has a business resumption plan to deal with such problems.
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 1999, 1998 and 1997.
During 1999, taxable equivalent net interest income increased to
$19,733,000, up 5.1% from $18,780,000 in 1998. Taxable equivalent net interest
income for 1998 was up 6.6% from $17,622,000 recorded in 1997. The $953,000
increase in taxable equivalent net interest income during 1999 consisted of
$1,247,000 due to increases in volume, reduced by $294,000 attributable to rate.
The $1,158,000 increase in taxable equivalent net interest income during 1998
was the net result of an increase of $786,000 due to volume and $372,000
attributable to rate.
II-10
<PAGE>
<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
---------------------------- ---------------------------- ----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Commercial $ 83,620 $ 75,972 $ 65,457 $ 7,041 $ 6,687 $ 6,004 8.42% 8.80% 9.17%
Mortgage 143,281 132,965 131,004 11,773 11,539 11,366 8.22 8.68 8.68
Consumer 53,209 52,738 52,733 5,170 5,165 5,109 9.72 9.79 9.69
-------- -------- -------- -------- -------- --------
Total loans 280,110 261,675 249,194 23,984 23,391 22,479 8.56 8.94 9.02
-------- -------- -------- -------- -------- --------
Investment securities:
U. S. Government 13,130 42,813 66,821 801 2,602 4,018 6.10 6.08 6.01
Federal agencies 89,969 70,009 53,507 5,654 4,485 3,471 6.28 6.41 6.49
State and municipal 36,999 26,526 21,349 2,513 1,909 1,582 6.79 7.20 7.41
Other investments 20,071 9,048 6,155 1,244 593 425 6.20 6.55 6.90
-------- -------- -------- -------- -------- --------
Total investment securities 160,169 148,396 147,832 10,212 9,589 9,496 6.38 6.46 6.42
-------- -------- -------- -------- -------- --------
Federal funds sold and other 5,237 5,091 4,295 273 272 237 5.21 5.34 5.52
-------- -------- -------- ------- -------- --------
Total interest-earning assets 445,516 415,162 401,321 34,469 33,252 32,212 7.74 8.02 8.03
------- -------- -------- ------ ------ ------
Other non-earning assets 24,813 24,991 24,367
-------- -------- --------
Total assets $470,329 $440,153 $425,688
======== ======== ========
Deposits:
Demand $ 54,143 $ 51,116 $ 48,893 1,087 1,204 1,408 2.01 2.36 2.88
Money market 19,250 19,031 19,463 535 545 572 2.78 2.86 2.94
Savings 67,247 67,265 70,238 1,768 1,950 2,140 2.63 2.90 3.05
Time 183,707 174,123 176,403 9,284 9,260 9,590 5.05 5.32 5.44
-------- -------- -------- ------- -------- --------
Total deposits 324,347 311,535 314,997 12,674 12,959 13,710 3.91 4.16 4.35
Federal funds purchased - 188 773 - 11 44 - 5.85 5.69
Repurchase agreements 20,895 25,261 17,909 876 1,106 836 4.19 4.38 4.67
Other borrowings 23,073 7,497 - 1,186 396 - 5.14 5.28 -
-------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities 368,315 344,481 333,679 14,736 14,472 14,590 4.00 4.20 4.37
-------- -------- -------- ------- -------- -------- ------ ------ ------
Demand deposits 42,923 40,134 39,752
Other liabilities 3,175 3,334 2,128
Shareholders' equity 55,916 52,204 50,129
-------- -------- --------
Total liabilities and
Shareholders' equity $470,329 $440,153 $425,688
======== ======== ========
Interest rate spread 3.74% 3.82% 3.65%
====== ====== ======
Net interest income $ 19,733 $ 18,780 $ 17,622
======== ======== ========
Taxable equivalent adjustment $ 770 $ 598 $ 484
======== ======== ========
Net yield on earning assets 4.43% 4.52% 4.39%
====== ====== ======
</TABLE>
II-11
<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>
1999 vs. 1998 1998 vs. 1997
----------------------------- -----------------------------
Change Change
Interest Attributable to Interest Attributable to
Increase ----------------- Increase -----------------
(Decrease) Rate Volume (Decrease) Rate Volume
---------- ------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans:
Commercial $ 354 $ (299) $ 653 $ 683 $ (250) $ 933
Mortgage 234 (633) 867 173 3 170
Consumer 5 (41) 46 56 56 -
--------- ------- ------- ------- ------- --------
Total loans 593 (973) 1,566 912 (191) 1,103
--------- ------- ------- ------- ------- --------
Investment securities:
U.S. Government (1,801) 10 (1,811) (1,416) 43 (1,459)
Federal agencies 1,169 (87) 1,256 1,014 (44) 1,058
State and municipal 604 (113) 717 327 (47) 374
Other investments 651 (34) 685 168 (23) 191
--------- -------- -------- ------- -------- --------
Total investment securities 623 (224) 847 93 (71) 164
--------- -------- -------- ------- -------- --------
Federal funds sold and other 1 (7) 8 35 (8) 43
--------- -------- -------- ------- -------- --------
Total interest income 1,217 (1,204) 2,421 1,040 (270) 1,310
--------- -------- -------- ------- -------- --------
Interest expense
Deposits:
Demand (117) (185) 68 (204) (266) 62
Money market (10) (16) 6 (27) (14) (13)
Savings (182) (181) (1) (190) (101) (89)
Time 24 (472) 496 (330) (207) (123)
--------- -------- -------- ------- -------- --------
Total deposits (285) (854) 569 (751) (588) (163)
Federal funds purchased (11) - (11) (33) 1 (34)
Repurchase agreements (230) (45) (185) 270 (55) 325
Other borrowings 790 (11) 801 396 - 396
--------- -------- -------- ------- -------- --------
Total interest expense 264 (910) 1,174 (118) (642) 524
--------- -------- -------- ------- -------- --------
Net interest income $ 953 $ (294) $1,247 $1,158 $ 372 $ 786
========= ========= ======== ======= ======== ========
</TABLE>
Provision and Allowance for Loan Losses
The provision for loan losses is an amount added to the allowance 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 allowance in relation to the risks inherent
within the loan portfolio. The 1999 provision for loan losses was $670,000 and
compares with $927,000 in 1998 and $1,100,000 in 1997.
The decrease in the provision for loan losses in 1999 was influenced by
reduced net charge-offs and from growth in loans that require fewer loan loss
allowances. Net charge-offs decreased to $356,000 in 1999 from $383,000 in 1998
and $893,000 in 1997. Two commercial loans were written down $402,000 and
accounted for the high level of charge-offs in 1997. The allowance for loan
losses totaled $4,135,000 at December 31, 1999, an increase of 8.2% over
December 31, 1998. The ratio of the allowance to loans, less unearned income,
was 1.41% at December 31, 1999 and 1.42% at December 31, 1998.
The Bank's Loan Committee has responsibility for determining the level of
the allowance 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 allowance for loan
losses 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 allowance for loan losses are economic conditions,
historical losses, trends and other external factors. The sum of these elements
is the Loan Committee's recommended level of the allowance for loan losses.
II-12
<PAGE>
<TABLE>
Mangement has allocated the allowance for loan losses to loan categories as follows (in thousands):
<CAPTION>
1999 1998 1997 1996 1995
------------------ ----------------- ------------------ ------------------ -----------------
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) $1,190 47% $1,046 47% $ 873 44% $ 886 40% $ 888 43%
Real estate-
residential 167 36 151 36 129 37 128 38 146 38
Consumer 1,503 17 1,525 17 1,173 19 1,152 22 549 19
Unallocated 1,275 - 1,099 - 1,102 - 904 - 1,174 -
------- --------- ------- --------- ------- ---------- ------- --------- ------- ----------
Balance at
end of year $4,135 100% $3,821 100% $3,277 100% $3,070 100% $2,757 100%
======= ========= ======= ========= ======= ========== ======= ========= ======= ==========
</TABLE>
Management's criteria for evaluating the adequacy of its allowance for loan
losses 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 allowances are assigned to the
individual loans which present a greater risk of loan loss. The remaining loan
loss allowance 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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Allowance as percentage of outstanding loans, net of unearned income 1.41% 1.42% 1.29%
Net charge-offs as percentage of allowance 8.62 10.02 27.23
Net charge-offs as percentage of average loans, net of unearned income .13 .15 .36
Provision as percentage of net charge-offs 187.91 242.21 123.26
Provision as percentage of average loans, net of unearned income .24 .35 .44
Allowance for loan losses to nonperforming loans 14.16X 20.11X 8.34X
</TABLE>
II-13
<PAGE>
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. Increased global
competition has negatively impacted the textile industry in the area with
several plants closing due to competitive pressures or due to relocation of some
operations to foreign countries. Other important industries include farming,
tobacco processing and sales, food processing, furniture manufacturing and
sales, specialty glass manufacturing, and packaging tape production. A leading
internet retailer of children's products is opening their east coast
distribution center in Pittsylvania County in early 2000.
The local economy of the Corporation's trade area continues to remain
stable 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 allowance for loan losses is appropriate
in view of this geographic concentration.
Non-Interest Income
Non-interest income totaled $4,495,000 in 1999 compared with $4,080,000 in
1998 and $3,225,000 in 1997. This was an increase of 10.2% during 1999 after an
increase of 26.5% during 1998. 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 $2,531,000 in 1999, an increase of
$366,000, or 16.9%, from 1998. Trust and investment services fees in 1998
increased 14.7% from 1997 .The increases in 1999 and 1998 came from growth in
investments under management for customers due to a healthy equities market and
from new business.
Service charges on deposit accounts were $970,000 in 1999, an increase of
$68,000, or 7.5%, from 1998. Service charges during 1998 totaled $902,000, which
was a 14.8% increase from 1997. A change in the fee structure and additional
accounts obtained contributed to the growth in income in 1999 and 1998. Service
charge pricing on deposit accounts is typically changed annually to reflect
current costs and competition.
Non-deposit fees and insurance commissions were $287,000 in 1999, $288,000
in 1988, and $156,000 in 1997. The large increase in 1998 resulted from
non-customer ATM fees that began in September 1997 and totaled $133,000 in 1999
and $131,000 in 1998.
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 declined 22.6% to $332,000 in
1999 from $429,000 in 1998 because rising interest rates reduced refinancing
mortgage lending. Mortgage banking income in 1998 increased 95.0% from $220,000
in 1997 because of a favorable interest rate environment.
Other income was $373,000 in 1999, an increase of 26.0% from the $296,000
recorded in 1998, which in turn was an increase of 70.1% from the $174,000
recorded in 1997. Other income in 1999 included $94,000 in gains from the sale
of real estate owned and included increases in debit and credit card fees, safe
deposit box rents, and check order income. Other income in 1998 included a gain
of $104,000 from the life insurance settlement on the life of a former officer.
Non-Interest Expense
Non-interest expense of $11,543,000 in 1999, increased $529,000 or 4.8%
over $11,014,000 in 1998, which in turn increased $745,000 or 7.3% over
$10,269,000 in 1997. Non-interest expense includes salaries, pension and other
employee benefits, occupancy and equipment expense, core deposit intangible
amortization and other expenses.
Salaries of $5,575,000 in 1999 increased $448,000, or 8.7% over 1998 due to
additional compensation for new branch offices in Chatham and Martinsville and
due to increased incentive compensation. Salaries of $5,127,000 in 1998
increased $316,000, or 6.6% over 1997 due to additional incentive compensation
and merit increases.
Pension and other employee benefits totaled $955,000 in 1999, a decrease of
16.2% from the $1,140,000 recorded in 1998, which in turn was an increase of
5.9% from the $1,076,000 reported in 1997. The decline in 1999 resulted from a
decrease in supplemental retirement expense.
Occupancy and equipment expense of $1,896,000 for 1999 increased $232,000,
or 13.9% over 1998 due to additional depreciation and utilities related two new
branch offices opened in 1999. Occupancy and equipment expense increased 15.8%
to $1,664,000 in 1998 from 1997 because of higher depreciation, maintenance and
licensing fees on new technology equipment designed to improve product delivery
and increase productivity.
Core deposit intangible expense represents amortization of premiums paid
for deposits at the Yanceyville and Gretna offices which is calculated on a
straight line basis over ten years.
Other expense was $2,667,000 in 1999, an increase of 1.3% over the
$2,633,000 reported in 1998 which was an increase of 5.5% from $2,495,000
recorded in 1997. The 1998 increase primarily resulted from special sales and
service
II-14
<PAGE>
training provided to all employees and from increased trust and mortgage banking
expenses related to generating higher non-interest income.
The efficiency ratio, a productivity measure used to determine how well
non-interest expense is managed, improved slightly to 47.64% in 1999 from 48.18%
in 1998. A lower efficiency ratio indicates better expense efficiency. Leaders
in expense efficiency in the banking industry have achieved ratios in the
mid-to-high 40% range while the majority of the industry remains in the 55-65%
range.
Income Taxes
The provision for income taxes (total of current and deferred) was
$3,320,000 in 1999, compared with $3,123,000 in 1998 and $2,725,000 in 1997. 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 1999, 1998, and 1997.
Capital Management
Regulatory agencies issued risk-based capital guidelines which were fully
effective in 1992. The guidelines were established to more appropriately
consider the credit risk inherent in the assets and off-balance sheet activities
of a financial institution in the assessment of capital adequacy.
Under the guidelines, total capital has been defined as core (Tier I)
capital and supplementary (Tier II) capital. The Corporation's Tier I capital
consists primarily of shareholder's equity, while Tier II capital consists of
the allowance 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, 1999, the Corporation's Tier I and total capital
ratios were 16.57% and 17.79%, respectively. At December 31, 1998, these ratios
were 16.79% and 18.04%, respectively. The ratios for both years were well in
excess of the regulatory requirements.
The Corporation's leverage ratios (Tier 1 capital divided by average
quarterly assets less intangible assets) were 11.52% and 11.07% at December 31,
1999 and 1998, 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 1999 capital formation rate (net income less dividends
declared, divided by average shareholders' equity) was 8.4%. This compares with
8.4% in 1998 and 7.5% in 1997. 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 $.525 and $.465
per share of common stock in 1999 and 1998, 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:
o Monitoring corporate financial performance;
o Meeting liquidity requirements;
o Establishing interest rate parameters, indices, and terms for loan and deposit
products;
o Assessing and evaluating the competitive rate environment;
o Reviewing and approving investment portfolio transactions under established
policy guidelines;
o Monitoring and measuring interest rate risk.
Liquidity
Liquidity is the measure of the Corporation's ability to generate
sufficient funds to meet customer demands for loans and the withdrawal of
deposit balances. The Corporation, in its normal course of business, maintains
cash reserves and has an adequate flow of funds from loan payments and maturing
investment securities to meet present liquidity needs.
II-15
<PAGE>
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 federal agency
banks and a correspondent bank and maturing 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 1999, as shown in the
Consolidated Balance Sheets, the deposit mix changed with an increase in higher
cost time deposits of $24,708,000, an increase in demand deposits of $2,164,000,
a decline in savings deposits of $3,876,000 and an increase in money market
accounts of $4,237,000. During 1998, time deposits remained stable while
deposits subject to immediate withdrawal increased.
The Consolidated Statements of Cash Flows appearing in the financial
statement section shows a net increase in cash and cash equivalents of
$2,513,000 during 1999. This increase was the result of a combination of
$9,088,000 provided by operating activities, $32,539,000 net cash used in
investing activities, and $25,964,000 net cash provided by financing activities.
A net increase in deposits and FHLB borrowings provided cash from financing
activities while cash dividends paid and a net decrease in repurchase agreements
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 1999.
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 impacted 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.
<TABLE>
Interest Rate Sensitivity Analysis
December 31, 1999 (in thousands)
<CAPTION>
3 Months > 3 Months > 1 Year > 3 Year
or Less to 1 Year to 3 Years to 5 Years > 5 Years Total
----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Interest bearing deposits
with other banks $ 3,406 $ - $ - $ - $ - $ 3,406
Investment securities 2,836 15,264 51,149 47,656 52,014 168,919
Loans 113,290 61,375 72,755 35,213 11,108 293,741
----------- ----------- ----------- ----------- ----------- ----------
Total interest
sensitive assets 119,532 76,639 123,904 82,869 63,122 466,066
----------- ----------- ----------- ----------- ----------- ----------
Interest sensitive liabilities:
NOW and savings deposits 120,368 - - - - 120,368
Money market deposits 22,326 - - - - 22,326
Time deposits 35,742 106,993 37,350 15,240 44 195,369
Repurchase agreements and
other borrowings 24,954 - - 21,000 - 45,954
----------- ----------- ----------- ----------- ----------- ----------
Total interest
sensitive liabilites 203,390 106,993 37,350 36,240 44 384,017
----------- ----------- ----------- ----------- ----------- ----------
Interest sensitivity gap $ (83,858) $ (30,354) $ 86,554 $ 46,629 $ 63,078 $ 82,049
=========== =========== =========== =========== =========== ==========
Cumulative interest sensitivity gap $ (83,858) $(114,212) $ (27,658) $ 18,971 $ 82,049
=========== =========== =========== =========== ===========
Percentage cumulative gap
to total interest sensitive assets (18.0)% (24.5)% (5.9)% 4.1 % 17.6 %
Of the loans in the above table that either mature or can be repriced in periods over 1 year, $71,414 have adjustable rates
and $47,662 have fixed rates. Investment security prepayments were estimated using recent market information.
</TABLE>
II-16
<PAGE>
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, on page
II -16, reflects the Corporation's assets and liabilities on December 31, 1999
that will either be repriced in accordance with market rates, mature or are
estimated to mature early or prepay within the periods indicated.
Because of inherent limitations in interest rate sensitivity analysis, ALCO
uses more sophisticated interest rate risk measurement techniques. Simulation
analysis is used to subject the current repricing conditions to rising and
falling interest rates in increments and decrements of 1%, 2% and 3% to
determine how net interest income changes for the next twelve months. ALCO also
measures the effects of changes in interest rates on the MVE by discounting
future cash flows of deposits and loans using new rates at which deposits and
loans would be made to similar depositors and borrowers. Market value changes on
the investment portfolio are estimated by discounting future cash flows and
using duration analysis. Loan and investment security prepayments are estimated
using current market information. The following table shows the estimated impact
of changes in interest rates up and down 1%, 2% and 3% on net interest income
and on MVE.
Change in Net Interest Income and Market Value of Portfolio Equity
December 31, 1999 (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% $ 289 1.44 % $ (620) (1.16)%
Up 2% 243 1.21 (281) (0.53)
Up 1% 202 1.01 92 0.17
Down 1% (242) (1.20) (415) (0.78)
Down 2% (566) (2.82) (2,491) (4.68)
Down 3% (984) (4.90) (5,558) (10.44)
(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 $114,212,000
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-17
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
The following table presents information on the book and market values, maturities and taxable equivalent yields
of investment securities at the end of the last 3 years (in thousands, except yields and footnote):
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
--------------------------------- ---------------------------------- -----------------------------
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 $ 7,002 $ 7,020 6.63% $ 25,000 $ 25,075 6.00% $ 19,001 $ 19,004 6.24%
1 to 5 years - - - 7,018 7,166 6.26 32,144 32,188 6.06
--------- -------- --------- --------- --------- ---------
Total 7,002 7,020 6.63 32,018 32,241 6.06 51,145 51,192 6.13
--------- -------- --------- --------- --------- ---------
Federal Agencies:
Within 1 year - - - 2,005 2,021 6.10 5,995 5,993 5.51
1 to 5 years 62,609 62,016 6.87 41,292 42,376 6.59 37,002 37,191 6.51
6 to 10 years 10,591 10,209 6.59 10,906 11,020 6.19 17,913 17,930 6.67
After 10 years 27,449 26,513 6.20 20,511 20,573 6.00 918 922 7.20
--------- -------- --------- --------- --------- ---------
Total 100,649 98,738 6.66 74,714 75,990 6.36 61,828 62,036 6.47
--------- -------- --------- --------- --------- ---------
State and Municipal:
Within 1 year 1,599 1,601 7.54 499 503 6.40 521 520 9.24
1 to 5 years 9,789 9,853 7.88 5,326 5,516 8.21 4,297 4,412 8.42
6 to 10 years 24,008 23,541 7.41 20,848 21,690 7.44 12,247 12,535 8.19
After 10 years 4,695 4,479 7.28 8,791 9,065 7.42 5,339 5,438 8.07
--------- -------- --------- --------- --------- ---------
Total 40,091 39,474 7.51 35,464 36,774 7.54 22,404 22,905 8.23
--------- -------- --------- --------- --------- ---------
Other Investments:
Within 1 year - - - - - - - - -
1 to 5 years 9,539 9,276 6.62 6,119 6,246 6.65 3,168 3,168 6.52
6 to 10 years 8,966 8,364 6.25 10,921 10,991 6.20 2,042 2,042 7.95
After 10 years 2,672 2,634 6.16 2,482 2,501 7.12 2,490 2,490 6.96
--------- -------- --------- --------- --------- ---------
Total 21,177 20,274 6.41 19,522 19,738 6.46 7,700 7,700 7.06
--------- -------- --------- --------- --------- ---------
Total portfolio $168,919 $165,506 6.83% $161,718 $164,743 6.57% $143,077 $143,833 6.64%
========= ========= ========= ========= ========= =========
</TABLE>
II-18
<PAGE>
At December 31, 1999 securities available for sale (at amortized cost)
totaled $124,519,000 and included $7,002,000 in U. S. Government securities,
$77,016,000 in federal agencies, $19,324,000 in state and municipal, and
$21,177,000 in other securities. A net unrealized loss of $2,647,000 related to
these securities at December 31, 1999. 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 $1,695,000 related to these securities at December 31, 1998.
Securities held to maturity totaled $44,400,000 and $57,877,000 at December
31, 1999 and 1998, respectively and had respective estimated fair values of
$43,634,000 and $59,207,000. Of the amount at December 31, 1999, $23,633,000 or
53% were federal agencies and $20,767,000 or 47% were state and municipal
securities. Securities held to maturity at December 31, 1999 consisted of
$600,000 due in one year or less, $21,050,000 due after one year through five
years, $14,645,000 due in five years through ten years and $8,105,000 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, 1999 was
less than the book value by $766,000. No losses are anticipated since the
Corporation has the ability and intent to hold these securities until their
respective maturities.
Loan Portfolio
Loans, net of unearned income increased $24,222,000 or 9.0% during 1999. As
shown in schedule A below, the primary increases in types of loans in 1999 were
real estate loans secured by nonfarm, nonresidential properties and real estate
loans secured by 1 - 4 family residential properties.
The loan portfolio is diversified and consists of 60.0% mortgage loans,
24.6% commercial loans and 15.4% 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 1999 or 1998. 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 total of outstanding real estate loans at December 31, 1999 was
$176,319,000. This consisted of $108,994,000 or 61.8% in loans secured by 1-4
family residential properties, $54,170,000 or 30.7% in loans secured by
non-farm, non-residential properties, $7,317,000 or 4.2% in construction and
land development, $1,306,000 or .7% in loans secured by farmland and $4,532,000
of other real estate loans.
Nonperforming real estate loans at December 31, 1999 and 1998 were $107,000
and $58,000, respectively. There were $3,000 real estate loans on accrual status
and past due 90 days or more at December 31, 1999 and none at December 31, 1998.
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 an
allowance for loan losses, which is available to absorb losses inherent in the
loan portfolio. The allowance is increased by the provision for losses and by
recoveries from losses. Charge-offs decrease the allowance. The adequacy of the
allowance for loan losses is determined on a quarterly basis. Various factors as
defined in the previous section "Provision and Allowance for Loan Losses" are
considered in determining the adequacy of the allowance.
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 were $30,000 at December 31, 1999 and $385,000 at December
31, 1998 and 1997. Two commercial real estate foreclosed properties were sold in
1999 at a gain of $94,000 to reduce foreclosed properties.
II-19
<PAGE>
At December 31, 1999 and 1998, loans in a nonaccrual or restructured status
totaled approximately $292,000 and $190,000, respectively. As shown in schedule
C on page II -21, loans on accrual status and past due 90 days or more have
increased to $287,000 in 1999 from $249,000 in 1998. The total of nonperforming
loans and loans past due 90 days or more at December 31, 1999 was $579,000, an
increase of $140,000 from the $439,000 reported at December 31, 1998. Net
charge-offs as a percentage of average loans decreased to .13% in 1999 from .15%
in 1998. 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 .20% of total loans at December 31, 1999 and
.16% at December 31, 1998. 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>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate loans:
Construction and land development $ 7,317 $ 8,104 $ 4,442 $ 3,640 $ 5,499
Secured by farmland 1,306 1,491 1,274 1,169 1,032
Secured by 1-4 family residential
properties 108,994 95,711 94,294 90,192 81,667
Secured by multi-family (5 or more)
residential properties 4,532 2,268 1,521 772 751
Secured by nonfarm, nonresidential
properties 54,170 44,251 41,277 35,289 33,950
Loans to farmers 2,468 2,293 2,761 2,672 2,529
Commercial and industrial loans 66,459 67,154 57,971 49,247 46,902
Consumer loans 45,235 46,337 48,499 50,909 41,150
Loans for nonrated industrial
development obligations 3,236 1,895 2,398 2,565 1,901
All other loans 24 15 13 124 61
------------- ------------- ------------- ------------- -------------
Loans - net of unearned income $293,741 $269,519 $254,450 $236,579 $215,442
============= ============= ============= ============= =============
There were no foreign loans outstanding during any of the above periods.
</TABLE>
<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 $ 72,187 $ 8,885 $ 3,761 $ 84,833 28.9%
Mortgage 83,469 66,144 6,464 156,077 53.1%
Consumer 19,009 32,939 883 52,831 18.0%
--------- -------- -------- --------- ------
$ 174,665 $ 107,968 $ 11,108 $ 293,741 100.0%
========= ======== ======== ========= ======
Rate Sensitivity:
Pre-determined rate $ 20,254 $ 39,212 $ 8,450 $ 67,916 23.1%
Floating or adjustable rate 154,411 68,756 2,658 225,825 76.9%
--------- --------- --------- --------- ------
$ 174,665 $ 107,968 $ 11,108 $ 293,741 100.0%
========= ========= ======== ========= ======
Percent 59.5% 36.7% 3.8% 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.
II-20
<PAGE>
<TABLE>
C. Nonperforming loans and loans past due 90 days or more (in thousands, except ratios):
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
Real Estate $ 107 $ 58 $ 281 $ 14 $ 290
Commercial 131 132 102 - -
Agricultural 54 - 10 19 16
------ ------- ------ ------ ------
Total nonaccruing loans 292 190 393 33 306
------ ------- ------ ------ ------
Restructured loans:
Commercial - - - - -
------ ------- ------ ------ ------
Total restructured loans - - - - -
------ ------- ------- ------ ------
Total nonperforming loans $ 292 $ 190 $ 393 $ 33 $ 306
====== ======= ======= ====== ======
Loans on accrual status past due 90 days or more:
Real Estate $ 3 $ - $ - $ - $ 23
Consumer 226 235 160 241 95
Revolving credit 6 4 5 3 6
Commercial 44 3 - 225 22
Agricultural 8 7 16 10 15
------ ------- ------ ------ ------
Total past due loans $ 287 $ 249 $ 181 $ 479 $ 161
====== ======= ====== ====== ======
Asset Quality Ratios:
Allowance for loan losses
to year-end net loans 1.41% 1.42% 1.29% 1.30% 1.28%
Nonperforming loans
to year-end net loans .10% .07% .15% .01% .14%
Allowance for loan losses
to nonperforming loans 14.16%X 20.11%X 8.34X 93.03X 9.01X
</TABLE>
At December 31, 1999, the Bank had no loan concentrations (loans to borrowers
engaged in similar activities) which exceeded 10% of total loans.
II-21
<PAGE>
Summary of Loan Loss Experience
<TABLE>
An analysis of the loan loss allowance is set forth in the following table (in thousands):
<CAPTION>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $3,821 $3,277 $3,070 $2,757 $2,454
------ ------ ------ ------ ------
Charge-offs:
Commercial loans 34 68 452 9 -
Real estate loans - - - - -
Consumer loans 475 440 540 493 241
------ ------ ------ ------ ------
509 508 992 502 241
------ ------ ------ ------ ------
Recoveries:
Commercial loans 40 9 - 3 -
Real estate loans - - - - -
Consumer loans 113 116 99 114 60
------ ------ ------ ------ ------
153 125 99 117 60
------ ------ ------ ------ -------
Net charge-offs 356 383 893 385 181
Provision for loan losses 670 927 1,100 673 484
Other - - - 25 -
------ ------ ------ ------ ------
Balance at end of period $4,135 $3,821 $3,277 $3,070 $2,757
====== ====== ====== ====== ======
Percent of net charge-offs
to average net loans outstanding
during the period .13% .15% .36% .17% .09%
====== ====== ====== ====== ======
</TABLE>
The allowance for loan losses is based upon the quality of loans as
determined by management taking into consideration historical loan loss
experience, diversification of the loan portfolio, amount of secured and
unsecured loans, banking industry standards and averages, and general economic
conditions. At the time that collection of the outstanding balance of specific
loans together with related interest is considered doubtful, such loans are
placed in a nonaccuring status.
II-22
<PAGE>
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>
1999 1998 1997
------------------------- ------------------------- -------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits -
non-interest bearing $42,923 - % $40,134 - % $39,752 - %
Demand deposits - interest bearing 54,143 2.01% 51,116 2.36% 48,893 2.88%
Money market 19,250 2.78% 19,031 2.86% 19,463 2.94%
Savings 67,247 2.63% 67,265 2.90% 70,238 3.05%
Time 183,707 5.05% 174,123 5.32% 176,403 5.44%
----------- ----------- -----------
$367,270 3.45% $351,669 3.69% $354,749 3.87%
=========== =========== ===========
</TABLE>
Certificates of Deposit
Certificates of deposit at the end of 1999 in amounts of $100,000 or more were
classified by maturity as follows (in thousands):
3 months or less $ 7,563
Over 3 through 6 months 14,592
Over 6 through 12 months 14,729
Over 12 months 9,003
-----------
$45,887
===========
Return on Assets and Shareholders' Equity
<TABLE>
The following table presents certain rates of return and percentages for the past 3 years:
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Return on average assets 1.68% 1.64% 1.47%
Return on average shareholder's equity 14.17% 13.79% 12.51%
Dividend payout ratio 40.44% 39.43% 40.08%
Average shareholders' equity to
average assets 11.89% 11.86% 11.78%
</TABLE>
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.
II-23
<PAGE>
<TABLE>
Quarterly Financial Results
(in thousands, except per share amounts)
American National Bankshares Inc. and Subsidiary
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999
----
Interest income......................................... $8,816 $8,435 $8,286 $8,162
Interest expense........................................ 3,839 3,720 3,605 3,572
---------- ---------- ---------- ----------
Net interest income................................... 4,977 4,715 4,681 4,590
Provision for loan losses............................... 190 120 180 180
---------- ---------- ---------- ----------
Net interest income after provision................... 4,787 4,595 4,501 4,410
Non-interest income..................................... 1,161 1,161 1,075 1,097
Non-interest expense.................................... 3,044 2,927 2,792 2,780
---------- ---------- ---------- ----------
Income before income tax provision.................... 2,904 2,829 2,784 2,727
Income tax provision.................................... 858 841 818 803
---------- ---------- ---------- ----------
Net income............................................ $2,046 $1,988 $1,966 $1,924
========== ========== ========== ==========
Per common share:
Net income (basic).................................... $ .34 $ .33 $ .32 $ .32
Net income (diluted).................................. $ .33 $ .33 $ .32 $ .32
Cash dividends........................................ $ .135 $ .135 $ .135 $ .120
1998
----
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..................................... 1,179 1,002 992 906
Non-interest expense.................................... 2,865 2,705 2,760 2,683
---------- ---------- ---------- ----------
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 (basic).................................... $ .32 $ .30 $ .29 $ .27
Net income (diluted).................................. $ .32 $ .30 $ .29 $ .27
Cash dividends........................................ $ .120 $ .120 $ .120 $ .105
</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.
Charles H. Majors
President and Chief Executive Officer
T. Allen Liles
Senior Vice President, Secretary, Treasurer and Chief Financial Officer
January 21, 2000
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Charlotte, North Carolina,
January 21, 2000
II-26
<PAGE>
<TABLE>
Consolidated Balance Sheets
December 31, 1999 and 1998
American National Bankshares Inc. and Subsidiary
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................$ 13,885,239 $ 14,071,687
Interest-bearing deposits in other banks........................................ 3,405,705 706,245
Investment securities:
Securities available for sale (at market value)............................... 121,872,335 105,535,523
Securities held to maturity (market value of $43,634,211
in 1999 and $59,207,124 in 1998)............................................ 44,399,759 57,877,279
-------------- --------------
Total investment securities............................................... 166,272,094 163,412,802
-------------- --------------
Loans, net of unearned income .................................................. 293,740,806 269,519,281
Less allowance for loan losses.................................................. (4,134,893) (3,821,447)
-------------- --------------
Net loans..................................................................... 289,605,913 265,697,834
-------------- --------------
Bank premises and equipment, at cost, less accumulated
depreciation of $8,170,506 in 1999 and $7,164,459 in 1998..................... 8,051,550 7,603,080
Accrued interest receivable and other assets.................................... 10,170,303 8,891,186
-------------- --------------
Total assets.................................................................$ 491,390,804 $ 460,382,834
============== ==============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits -- non-interest bearing.......................................$ 47,495,400 $ 45,070,732
Demand deposits -- interest bearing........................................... 55,622,893 55,883,458
Money market deposits......................................................... 22,326,340 18,089,331
Savings deposits.............................................................. 64,744,947 68,620,629
Time deposits................................................................. 195,368,539 170,660,739
-------------- --------------
Total deposits.............................................................. 385,558,119 358,324,889
-------------- --------------
Repurchase agreements......................................................... 24,954,333 31,022,834
FHLB Borrowings............................................................... 21,000,000 13,000,000
Accrued interest payable and other liabilities................................ 3,159,802 3,174,465
-------------- --------------
Total liabilities........................................................... 434,672,254 405,522,188
-------------- --------------
Shareholders' equity:
Preferred stock, $5 par, 200,000 shares authorized,
none outstanding............................................................ - -
Common stock, $1 par,10,000,000 shares authorized,
6,103,701 shares outstanding at December 31, 1999 and
3,051,733 shares outstanding at December 31, 1998........................... 6,103,701 3,051,733
Capital in excess of par value................................................ 9,895,359 9,892,304
Retained earnings............................................................. 42,466,592 40,798,323
Accumulated other comprehensive income (loss) -
net unrealized (losses) gains on securities available for sale.............. (1,747,102) 1,118,286
-------------- --------------
Total shareholders' equity................................................ 56,718,550 54,860,646
-------------- --------------
Total liabilities and shareholders' equity................................$ 491,390,804 $ 460,382,834
============== ==============
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, 1999, 1998 and 1997
American National Bankshares Inc and Subsidiary
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans...................................$23,959,012 $23,356,412 $22,441,097
Interest on federal funds sold and other..................... 273,702 271,524 237,204
Income on investment securities:
U S Government............................................. 800,693 2,601,437 4,018,344
Federal agencies........................................... 5,653,811 4,485,157 3,470,483
State and municipal ....................................... 1,767,782 1,346,014 1,136,496
Other investments.......................................... 1,244,133 593,363 424,521
----------- ----------- -----------
Total interest income.................................... 33,699,133 32,653,907 31,728,145
----------- ----------- -----------
Interest Expense:
Interest on deposits:
Demand..................................................... 1,086,744 1,203,786 1,408,255
Money market............................................... 534,801 545,061 571,873
Savings.................................................... 1,768,148 1,949,958 2,140,158
Time....................................................... 9,283,865 9,260,295 9,589,470
Interest on fed funds and repos.............................. 876,291 1,116,315 880,392
Interest on other borrowings................................. 1,186,636 396,183 -
----------- ----------- -----------
Total interest expense..................................... 14,736,485 14,471,598 14,590,148
----------- ----------- -----------
Net Interest Income............................................ 18,962,648 18,182,309 17,137,997
Provision for Loan Losses...................................... 670,000 927,000 1,100,000
----------- ----------- -----------
Net Interest Income After Provision
For Loan Losses.............................................. 18,292,648 17,255,309 16,037,997
----------- ----------- -----------
Non-Interest Income:
Trust and investment services................................ 2,531,491 2,165,437 1,888,341
Service charges on deposit accounts.......................... 970,383 902,060 786,270
Non-deposit fees and insurance commissions................... 287,088 287,704 155,697
Mortgage banking income...................................... 332,490 428,991 220,293
Other income................................................. 373,262 295,502 174,487
----------- ----------- -----------
Total non-interest income.................................. 4,494,714 4,079,694 3,225,088
----------- ----------- -----------
Non-Interest Expense:
Salaries..................................................... 5,575,472 5,126,819 4,810,783
Pension and other employee benefits.......................... 955,164 1,140,252 1,076,144
Occupancy and equipment ..................................... 1,895,799 1,663,880 1,437,285
Core deposit intangible amortization......................... 449,816 449,816 450,179
Other ....................................................... 2,666,880 2,633,106 2,494,722
----------- ----------- -----------
Total non-interest expense................................. 11,543,131 11,013,873 10,269,113
----------- ----------- -----------
Income Before Income Tax Provision............................. 11,244,231 10,321,130 8,993,972
Income Tax Provision........................................... 3,319,881 3,122,881 2,724,780
----------- ----------- -----------
Net Income.....................................................$ 7,924,350 $ 7,198,249 $ 6,269,192
=========== =========== ===========
Net Income Per Common Share: *
Basic........................................................ $ 1.30 $ 1.18 $ 1.00
Diluted...................................................... $ 1.30 $ 1.18 $ 1.00
Average Common Shares Outstanding:
Basic........................................................ 6,103,485 6,103,466 6,289,668
Diluted...................................................... 6,118,540 6,105,318 6,289,668
* - Per share amounts have been restated to reflect the impact of a 2-for-1 stock split effected in the
form of a dividend issued July 1, 1999.
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, 1999, 1998 and 1997
American National Bankshares Inc. and Subsidiary
<CAPTION>
Accumulated
Common Stock Capital in Other Total
--------------------- Excess of Retained Comprehensive Shareholders'
Shares Amount Par Value Earnings Income (Loss) Equity
--------- ---------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 declared and paid......... - - - (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 declared and paid......... - - - (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
Net income............................... - - - 7,924,350 - 7,924,350
Change in unrealized losses on securities
available for sale, net of tax......... - - - - (2,865,388) (2,865,388)
-------------
Comprehensive income................. 5,058,962
Common stock issued in 2 for 1 stock
split.................................. 3,051,733 3,051,733 - (3,051,733) - -
Stock options exercised.................. 235 235 3,055 - - 3,290
Cash dividends declared and paid......... - - - (3,204,348) - (3,204,348)
----------- ------------ ------------ ------------- ------------- -------------
Balance, December 31, 1999............... 6,103,701 $6,103,701 $9,895,359 $42,466,592 $(1,747,102) $56,718,550
=========== ============ ============ ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
II-29
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
American National Bankshares Inc. and Subsidiary
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income....................................................................$ 7,924,350 $ 7,198,249 $ 6,269,192
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................................................. 670,000 927,000 1,100,000
Depreciation.............................................................. 1,029,875 814,870 720,446
Core deposit intangible amortization...................................... 449,816 449,816 450,179
Amortization (accretion) of premiums and discounts
on investment securities................................................ 77,488 (42,918) (56,111)
(Gain) loss on sale of securities......................................... (7,970) (18,300) (30,912)
Gain on sale of loans..................................................... (332,490) (428,991) (220,293)
Gain on sale of real estate owned......................................... (94,462) - -
Gain on sale of property and equipment.................................... (6,150) - -
Deferred income taxes benefit............................................. (211,558) (312,768) (154,749)
(Increase) decrease in interest receivable................................ (1,282) (159,538) 311,723
Increase in other assets.................................................. (394,986) (1,639) (203,721)
Increase (decrease) in interest payable................................... 176,627 (21,910) (224,020)
(Decrease) increase in other liabilities.................................. (191,290) 701,160 246,124
------------- ------------- -------------
Net cash provided by operating activities............................... 9,087,968 9,105,031 8,207,858
------------- ------------- -------------
Cash Flows from Investing Activities:
Proceeds from maturities, calls, and sales of securities ..................... 50,241,341 47,430,116 53,402,611
Purchases of securities available for sale.................................... (51,708,123) (55,738,003) (20,170,962)
Purchases of securities held to maturity...................................... (5,803,523) (11,212,515) -
Net increase in loans......................................................... (24,245,589) (15,023,315) (18,542,833)
Proceeds from sale of real estate owned....................................... 449,462 - -
Purchases of property and equipment........................................... (1,472,195) (1,903,664) (849,981)
------------- ------------- -------------
Net cash (used in) provided by investing activities......................... (32,538,627) (36,447,381) 13,838,835
------------- ------------- -------------
Cash Flows from Financing Activities:
Net increase in demand, money market,
and savings deposits........................................................ 2,525,430 7,178,345 10,271
Net increase (decrease) in time deposits...................................... 24,707,800 (456,372) (10,389,947)
Net increase in Federal Home Loan Bank borrowings............................. 8,000,000 13,000,000 -
Net (decrease) increase in federal funds purchased
and repurchase agreements................................................... (6,068,501) 11,483,870 (3,945,317)
Cash dividends paid........................................................... (3,204,348) (2,838,111) (2,512,955)
Repurchase of stock.......................................................... - - (6,278,098)
Proceeds from exercise of stock options....................................... 3,290 - -
------------- ------------- -------------
Net cash provided by (used in) financing activities......................... 25,963,671 28,367,732 (23,116,046)
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents........................... 2,513,012 1,025,382 (1,069,353)
Cash and Cash Equivalents at Beginning of Period................................ 14,777,932 13,752,550 14,821,903
------------- ------------- -------------
Cash and Cash Equivalents at End of Period......................................$ 17,290,944 $ 14,777,932 $ 13,752,550
============= ============= =============
Supplemental Schedule of Cash and Cash Equivalents:
Cash:
Cash and due from banks.....................................................$ 13,885,239 $ 14,071,687 $ 13,386,440
Interest-bearing deposits in other banks.................................... 3,405,705 706,245 366,110
------------- ------------- -------------
$ 17,290,944 $ 14,777,932 $ 13,752,550
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Interest paid.................................................................$ 14,559,858 $ 14,493,509 $ 14,814,169
Income taxes paid.............................................................$ 3,786,339 $ 2,950,000 $ 2,953,355
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, 1999, 1998 and 1997
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. ANB Mortgage Corp., a wholly owned subsidiary of the Bank,
commenced mortgage lending operations in December 1996. ANB Services Corp.,
another wholly owned subsidiary of the Bank, was formed in October 1999 to offer
non-deposit products such as mutual funds and insurance products. 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.
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.
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, consumer and commercial loans 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.
Allowance for Loan Losses
The allowance 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, amounts 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 over
estimated lives generally as follows: buildings, 10 to 50 years; and furniture
and equipment, 3 to 10 years.
II-31
<PAGE>
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, 1999,
the Bank had $2,733,000 recorded as core deposit intangibles, net of
amortization. The Bank recorded core deposit intangible amortization of
approximately $450,000 for each of the three years ended December 31, 1999.
Foreclosed Properties
Foreclosed properties are included in other assets and 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.
The Corporation issued a 2-for-1 stock split effected in the form of a 100%
stock dividend to shareholders of record July 1, 1999, payable on July 15, 1999.
All references to the number of common shares and all per share amounts have
been adjusted, as appropriate, to retroactively reflect the stock split.
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
requirements of SFAS No. 130 have been adopted and reflected in the
Corporation's Consolidated Financial Statements.
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. In June, 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", which
delays the original effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. Adoption of SFAS No. 133 is not expected to have a material
impact on the Corporation.
II-32
<PAGE>
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") No. 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use". SOP 98-1 requires capitalization of computer
software costs that meet certain criteria. The Corporation adopted the
provisions of this statement effective January 1, 1999. Implementation of this
SOP did not have a material effect on the Corporation.
2. Parent Company Financial Information:
Condensed parent company financial information is as follows (in
thousands):
As of December 31
Condensed Balance Sheets 1999 1998
- ------------------------ ------- -------
Assets:
Cash $ 211 $ 55
Investment in Subsidiary 56,024 54,806
Other Assets 484 25
------- -------
Total Assets $56,719 $54,886
======= =======
Liabilities $ - $ 25
Shareholders' Equity 56,719 54,861
------- -------
Total Liabilities and Shareholders' Equity $56,719 $54,886
======= =======
For the Year Ended
December 31
------------------------------
Condensed Statements of Income 1999 1998 1997
- ------------------------------ -------- -------- --------
Dividends from Subsidiary $ 3,857 $ 2,903 $ 8,820
Expenses (16) (44) (33)
-------- -------- --------
Income Before Equity in Undistributed
Earnings of Subsidiary 3,841 2,859 8,787
Equity in Undistributed (Distributions in
Excess of) Earnings of Subsidiary 4,083 4,339 (2,518)
-------- -------- --------
Net Income $ 7,924 $ 7,198 $ 6,269
======== ======== ========
For the Year Ended
December 31
------------------------------
Condensed Statements of Cash Flows 1999 1998 1997
- ---------------------------------- -------- -------- --------
Cash provided by dividends received
from Subsidiary $ 3,857 $ 2,903 $ 8,820
Cash used for payment of dividends (3,204) (2,838) (2,513)
Cash used for repurchase of stock - - (6,278)
Other (497) (19) (33)
-------- -------- --------
Net increase (decrease) in cash $ 156 $ 46 $ (4)
======== ======== ========
3. Mergers and Acquisitions:
On March 14, 1996, the Corporation completed the acquisition of Mutual
Savings Bank, F.S.B. ("Mutual") upon the approval of the shareholders of each
company. The transaction was accounted for as a pooling of interests.
II-33
<PAGE>
4. Investment Securities:
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1999 and 1998 were as follows (in thousands):
1999
--------------------------------------------
Amortized Estimated
Cost Gains Losses Fair Value
--------- ------- -------- -----------
Securities held to maturity:
U.S. Government $ - $ - $ - $ -
Federal agencies 23,633 15 (401) 23,247
State and municipal 20,767 115 (495) 20,387
-------- ------- -------- ---------
Total securities held
to maturity 44,400 130 (896) 43,634
-------- ------- -------- ---------
Securities available for sale:
U.S. Government 7,002 18 - 7,020
Federal agencies 77,016 103 (1,628) 75,491
State and municipal 19,324 107 (344) 19,087
Corporate bonds and other 21,177 - (903) 20,274
-------- ------- -------- ---------
Total securities
available for sale 124,519 228 (2,875) 121,872
-------- ------- -------- ---------
Total securities $168,919 $ 358 $(3,771) $ 165,506
======== ======= ======== =========
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
Corporate bonds and 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
======== ======== ======== =========
II-34
<PAGE>
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1999, 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. Corporate bonds consist of high quality debt
securities, primarily issued in the financial services industry.
Held to Maturity Available for Sale
---------------------- ----------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
Due in one year or less $ 600 $ 600 $ 8,001 $ 8,021
Due after one year
through five years 21,050 21,074 60,887 60,071
Due after five years
through ten years 14,645 14,286 28,920 27,828
Due after ten years 8,105 7,674 26,711 25,952
------- ------- -------- --------
$44,400 $43,634 $124,519 $121,872
======= ======= ======== ========
Proceeds from calls exercised by the issuers of investments in debt
securities were $8,592,000 in 1999, $14,753,000 in 1998 and $1,236,000 in 1997.
Proceeds from sales of investments in debt securities were $3,946,000 in 1999,
$0 in 1998 and $24,823,000 in 1997. The Bank recognized gains of $8,000 on sale
of securities in 1999, gains of $18,000 on called securities during 1998, and
losses of $13,000 and gains of $44,000 on sale of securities during 1997.
Investment securities with a book value of approximately $40,463,000 at
December 31, 1999 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, $28,522,000 was pledged to secure repurchase agreements.
5. Loans:
Outstanding loans at December 31, 1999 and 1998 were composed of the
following (in thousands):
1999 1998
-------- --------
Real Estate loans:
Construction and land development $ 7,317 $ 8,104
Secured by farmland 1,306 1,491
Secured by 1 - 4 family residential properties 108,994 95,711
Secured by multi-family (5 or more)
residential properties 4,532 2,268
Secured by nonfarm, nonresidential properties 54,170 44,251
Loans to farmers 2,468 2,293
Commercial and industrial loans 66,459 67,154
Consumer loans 45,235 46,337
Loans for nonrated industrial development
Obligations 3,236 1,895
All other loans 24 15
-------- --------
Loans, net of unearned income $293,741 $269,519
======== ========
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, 1999 and 1998, loans in a nonaccrual or restructured
status totaled approximately $292,000 and $190,000, respectively.
Interest income on nonaccrual loans, if recognized, is recorded on a cash
basis. For the years 1999, 1998 and 1997, the 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
$23,000, $14,000 and $18,000, respectively. No interest payments were recorded
in 1999, 1998 or 1997 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 allowance for loan losses using
methods similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional allowance for loan losses was required as of
January 1, 1995.
II-35
<PAGE>
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. As of December 31, 1999 and 1998, the Bank had
not identified any loans as impaired.
The loan portfolio is concentrated primarily in the immediate geographic
region which is the Corporation's trade area consisting of the City of Danville,
City of Martinsville, Pittsylvania and Henry Counties in Virginia, Town of
Yanceyville and the northern half of Caswell County in North Carolina. There
were no concentrations of loans to any individual, group of individuals,
businesses or industry that exceeded 10% of the outstanding loans at December
31, 1999.
An analysis of the allowance for loan losses is as follows (in thousands):
1999 1998 1997
------- ------- -------
Balance, beginning of year $3,821 $3,277 $3,070
Provision for loan losses
charged to expense 670 927 1,100
Charge-offs (509) (508) (992)
Recoveries 153 125 99
------- ------- -------
Balance, end of year $4,135 $3,821 $3,277
======= ======= =======
6. Time Deposits:
Included in time deposits are certificates of deposit in denominations of
$100,000 or more totaling $45,887,000, $32,851,000 and $32,815,000 at December
31, 1999, 1998 and 1997, respectively. Interest expense on such deposits during
1999, 1998 and 1997 was $1,556,000, $1,436,000 and $1,570,000, respectively.
7. Short-Term Borrowings:
Repurchase agreements of $24,954,000 and $31,023,000 comprised short-term
borrowings at December 31, 1999 and 1998, respectively. Repurchase agreements
are borrowings collateralized by securities of the U.S. Government or its
agencies and mature daily. In addition, the Bank has approximately $52,600,000
in credit availabilty with the FHLB at December 31, 1999 which is secured by
qualifying mortgages or other acceptable security.
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):
1999 1998 1997
------ ------ ------
Net Income:
As reported $7,924 $7,198 $6,269
Pro forma 7,623 7,036 6,240
Basic earnings per share
As reported $ 1.30 $ 1.18 $ 1.00
Pro forma 1.25 1.15 .99
II-36
<PAGE>
At December 31, 1999, 1998 and 1997, the Corporation had 300,000 shares of
its authorized but unissued common stock reserved for its incentive and
nonqualified stock option plan. These options vest from immediately to three
years and have a maximum term of ten years.
A summary of stock option transactions under the plan follows:
Option Option Price
Shares Per Share
-------- -------------
Outstanding at December 31, 1996 -
Granted 33,600 $14.00
Exercised - -
Forfeited (1,600) $14.00
--------- -------------
Outstanding at December 31, 1997 32,000 $14.00
Granted 42,000 $15.63-$18.75
Exercised - -
Forfeited (2,200) $14.00
--------- -------------
Outstanding at December 31, 1998 71,800 $14.00-$18.75
Granted 71,000 $13.69-$20.00
Exercised (235) $14.00
Forfeited (3,965) $13.69-$14.00
--------- -------------
Outstanding at December 31, 1999 138,600 $13.69-$20.00
========= =============
The following table summarizes information related to stock options
outstanding on December 31, 1999:
Number of Options Outstanding Number of Options Exercisable
Exercise Prices at December 31, 1999 at December 31, 1999
- --------------- ----------------------------- -----------------------------
$13.69 53,000 26,500
$14.00 27,600 27,600
$15.63 14,000 14,000
$17.00 6,000 3,000
$17.19 14,000 14,000
$18.75 14,000 -
$20.00 10,000 10,000
------- -------
138,600 95,100
======= =======
9. Income Taxes:
The components of the Corporation's net deferred tax assets as of December
31, 1999 and December 31, 1998, were as follows (in thousands):
December 31 December 31
----------- -----------
1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses $1,211 $1,096
Net unrealized losses on securities 900 -
Deferred compensation 269 274
Other 235 206
------- -------
2,615 1,576
Valuation allowance (171) (158)
------- -------
Total deferred tax assets 2,444 1,418
------- -------
Deferred tax liabilities:
Depreciation 251 241
Net unrealized gains on securities - 576
Accretion of discount 67 137
Other 91 117
------- -------
Total deferred tax liabilities 409 1,071
------- -------
Net deferred tax assets $2,035 $ 347
======= =======
II-37
<PAGE>
The provision for income taxes consists of the following (in thousands):
1999 1998 1997
------- ------- -------
Taxes currently payable $3,531 $3,436 $2,880
Deferred tax benefit (212) (313) (155)
------- ------- -------
$3,320 $3,123 $2,725
======= ======= =======
The effective rates of the provision differ from the statutory federal
income tax rates due to the following items:
1999 1998 1997
----- ----- -----
Federal statutory rate 34.0% 34.0% 34.0%
Non-taxable interest income (4.5) (3.8) (3.6)
Other - 0.1 (0.1)
----- ----- -----
29.5% 30.3% 30.3%
===== ===== =====
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 $86,931,000 and $67,466,000
at December 31, 1999 and 1998, 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 no commitments at December 31, 1999 and $952,000 at December 31,
1998 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, 1999 and 1998 the Bank had $1,193,000 and $682,000 in outstanding
standby letters of credit.
Management and the Corporation's counsel are not aware of any pending
litigation against the Corporation and believe that there are no contingent
liabilities outstanding that will result in a material adverse effect on the
Corporation's consolidated financial position or consolidated results of
operations.
The Bank is a member of the Federal Reserve System and is required to
maintain certain levels of its cash and due from bank balances as reserves based
on regulatory requirements. At December 31, 1999, this reserve requirement was
approximately $1,488,000.
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 $10,188,000 and $9,572,000 at December 31, 1999 and 1998, respectively. The
maximum amount of loans outstanding to the officers, directors and their
business interests at any month-end during 1999, 1998 and 1997 was approximately
4.6% 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, 1999, none
of these loans were restructured, nor were any related party loans charged off
during 1999. An analysis of these loans for 1999 is as follows (in thousands):
Balance, beginning of year $ 9,572
Additions 21,223
Repayments (20,607)
---------
Balance, end of year $ 10,188
=========
II-38
<PAGE>
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,
1999 and 1998 (in thousands):
1999 1998
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $3,920 $3,431
Service cost 233 198
Interest cost 274 240
Actuarial gain 78 175
Benefits paid (43) (124)
------- -------
Benefit obligation at end of year $4,462 $3,920
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year $4,549 $3,796
Actual return on plan assets 547 877
Employer contributions - -
Benefits paid (43) (124)
------- -------
Fair value of plan assets at end of year $5,053 $4,549
======= =======
Funded status $ 591 $ 629
Unrecognized net actuarial gain (470) (365)
Unrecognized net obligation at transition (42) (54)
Unrecognized prior service cost (168) (192)
------- -------
Prepaid benefit (asset) cost $ (89) $ 18
======= =======
Major assumptions and net periodic pension cost include the following (in
thousands):
1999 1998 1997
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 8.00
Rate of compensation increase 4.00 4.00 4.00
Components of net periodic benefit cost:
Service cost $ 233 $ 198 $ 193
Interest cost 274 240 274
Expected return on plan assets (364) (304) (303)
Amortization of prior service cost (24) (24) (24)
Amortization of net obligation at transition (12) (12) (12)
Recognized net actuarial gain - - 23
------ ------ ------
Net periodic benefit cost $ 107 $ 98 $ 151
====== ====== ======
A non-contributory deferred compensation plan was adopted in 1982 by the
Board of Directors of the Bank which covers certain key executives. The expense
for this plan was $63,000, $151,000 and $129,000 for years 1999, 1998 and 1997,
respectively.
A 401(k) savings plan was adopted in 1995 which covers substantially all
full-time employees of the Bank. The Bank matches a portion of the contribution
made by employee participants after at least one year of service. The Bank
contributed $108,000, $92,000 and $87,000 to the 401(k) plan in 1999, 1998 and
1997, respectively. These amounts are included in pension and other employee
benefits expense for the respective years.
II-39
<PAGE>
13. Fair Value of Financial Instruments:
The estimated fair values of the Corporation's assets are as follows (in
thousands):
December 31, 1999
---------------------------
Carrying Fair
Amount Value
--------- ---------
Financial assets:
Cash and federal funds sold $ 17,291 $ 17,291
Investment securities 166,272 165,506
Other 18,222 18,222
Loans, net 289,606 288,839
Financial liabilities:
Deposits $(385,558) $(384,666)
Repurchase agreements (24,954) (24,954)
Other borrowings (21,000) (20,383)
Other liabilities (3,160) (3,160)
Off balance sheet instruments:
Commitments to extend credit - -
Standby letters of credit - (15)
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)
Off balance sheet instruments:
Commitments to extend credit - -
Standby letters of credit - (9)
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.
II-40
<PAGE>
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.
Off balance sheet 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, 1999 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.
II-41
<PAGE>
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, $8,422,000 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, 1999 and
1998 these ratios were above the minimums as follows (in thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
Corporation $59,868 17.79% $26,915 >8.0% $33,643 >10.0%
Bank 59,173 17.61% 26,876 >8.0% 33,595 >10.0%
Tier I Capital
Corporation 55,733 16.57% 13,457 >4.0% 20,186 >6.0%
Bank 55,038 16.38% 13,438 >4.0% 20,157 >6.0%
Leverage Capital
Corporation 55,733 11.52% 14,508 >3.0% 24,179 >5.0%
Bank 55,038 11.39% 14,493 >3.0% 24,155 >5.0%
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%
</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. 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 1999, 1998 and 1997 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. Intersegment
eliminations primarily consist of the Corporation's investment in the Bank and
related equity earnings.
<TABLE>
1999
- -------------------------------------------------------------------------------------------------------
<CAPTION>
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Interest income $ 33,669 $ - $ 30 $ (30) $ 33,669
Interest expense 14,736 - 30 (30) 14,736
Non-interest income - external customers 1,629 2,532 334 - 4,495
Non-interest income - internal customers - 52 - (52) -
Operating income before income taxes 9,558 1,781 7,846 (7,941) 11,244
Depreciation and amortization 1,416 48 15 - 1,479
Total assets 491,151 - 57,241 (57,001) 491,391
Capital expenditures 1,466 - 6 - 1,472
</TABLE>
<TABLE>
1998
- -------------------------------------------------------------------------------------------------------
<CAPTION>
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 1,487 2,165 427 - 4,079
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
</TABLE>
<TABLE>
1997
- -------------------------------------------------------------------------------------------------------
<CAPTION>
Trust and
Community Investment Intersegment
Banking Services Other Eliminations Total
--------- ---------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Interest income $ 31,728 $ - $ 19 $ (19) $ 31,728
Interest expense 14,590 - 19 (19) 14,590
Non-interest income - external customers 1,116 1,888 221 - 3,225
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
</TABLE>
II-43
<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 25, 2000
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 25, 2000
Time: 11:30 o'clock a.m.
THE ANNUAL MEETING IS BEING HELD FOR THE FOLLOWING PURPOSES:
1. To elect three (3) directors of the Corporation to fill the vacancies created
by the expiration of the terms of the Directors of Class I.
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 10, 2000.
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 21, 2000
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 25, 2000
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 25, 2000, 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 10, 2000 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 10, 2000, the Corporation had 1,398
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 1,109,461 shares on March 10, 2000.
The number of shares of common stock, there being no other class of stock,
outstanding and entitled to vote at the Annual Shareholders' Meeting is
6,103,772. There are 1,109,461 shares held of record by Ambro and Company which
amount represents 18.1766% of the outstanding securities, and only 444,139 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.
Richard G. Barkhouser, H. Dan Davis, or Claude B. Owen, Jr., 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 three (3) directors of the Corporation to fill the vacancies created
by the expiration of the terms of the Directors of Class I.
2. To transact any other business that may properly come before the meeting or
any adjournment thereof.
ELECTION OF DIRECTORS
Three Directors of Class I are to be elected at the Annual Meeting of
Shareholders to serve until the Annual Meeting in 2003 and until their
respective successors are duly elected and qualified. Management proposes that
the three (3) nominees listed in this Proxy Statement as Directors of Class I 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.
<TABLE>
NOMINEES
Directors of Class I to be elected for a term expiring in 2003
<CAPTION>
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since January 31, 2000 of Class
- -------------------- -------- ---------------------- --------
<S> <C> <C> <C>
Willie G. Barker, Jr. (62) 1996 28,200 - Direct (1) .4620
President, Barklea, Inc.
Danville, VA, tobacco
warehouse; also
Retired President of
Dibrell Brothers, Inc.,
Danville, VA, leaf tobacco
& flowers dealer
Ben J. Davenport, Jr. (57) 1992 13,258 - Direct (1) (2) .2172
Chairman, First
Piedmont Corporation,
Chatham, VA,
waste management
James A. Motley (71) 1975 14,620 - Direct (1) (2) .2395
Retired Chairman and Chief 10,484 - Family .1718
Executive Officer of Relationship (4)
the Corporation and the
Bank
</TABLE>
I-3
<PAGE>
<TABLE>
DIRECTORS CONTINUING IN OFFICE
Directors of Class II to continue in office until 2001
<CAPTION>
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since January 31, 2000 of Class
- -------------------- -------- ---------------------- --------
<S> <C> <C> <C>
Fred A. Blair (53) 1992 3,930 - Direct (1) .0644
President, Blair 300 - Family .0049
Construction, Inc., Relationship (3)
Gretna, VA, commercial
building contractor
E. Budge Kent, Jr. (61) 1979 36,362 - Direct (1) (6) .5951
Senior Vice President of the 1,212 - Family .0198
Corporation and Senior Vice Relationship (4)
President & Trust Officer of
the Bank
Fred B. Leggett, Jr. (63) 1994 17,780 - Direct (1) (2) .2913
Retired Chairman and 6,384 - Family .1046
Chief Executive Officer, Relationship (4)
Leggett Stores, Danville, VA,
retail department stores, since
March, 1996; prior thereto,
Chairman and Chief
Executive Officer, Leggett Stores,
Danville, VA
Claude B. Owen, Jr. (54) 1984 11,432 - Direct (1) .1873
Retired Chairman & 4,200 - Family .0688
Chief Executive Officer of Relationship (4)
DIMON Incorporated, Danville, VA,
leaf tobacco & flowers dealer,
since May, 1999; prior thereto,
Chairman & Chief Executive Officer
of DIMON Incorporated, Danville, VA,
since May, 1995; prior thereto,
Chairman, President & Chief
Executive Officer, Dibrell Brothers,
Inc., Danville, VA, leaf tobacco &
flowers dealer
</TABLE>
<TABLE>
Directors of Class III to continue in office until 2002
<CAPTION>
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since January 31, 2000 of Class
- -------------------- -------- ---------------------- --------
<S> <C> <C> <C>
Richard G. Barkhouser (69) 1980 164,824 - Direct (1) 2.7004
President, Barkhouser 14,520 - Family .2379
Motors, Inc., Danville, VA, Relationship (4)
automobile dealership
</TABLE>
I-4
<PAGE>
<TABLE>
<CAPTION>
Amount of Common Stock
Director Owned Beneficially and
Name, Principal of Bank Nature of Ownership on Percent
Occupation and (Age) Since January 31, 2000 of Class
- -------------------- -------- ---------------------- --------
<S> <C> <C> <C>
H. Dan Davis (62) 1996 87,400 - Direct (1) (8) 1.4319
Senior Consultant to the 40,704 - Family .6669
Corporation and the Bank since Relationship (4)
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.
Lester A. Hudson, Jr. (60) 1984 9,804 - Direct (1) .1606
Chairman, H & E Associates,
Greenville, SC, investments,
since June, 1995; prior thereto
Vice Chairman, Wunda Weve
Carpets, Inc., Greenville, SC,
carpet manufacturer
Charles H. Majors (54) 1981 33,901 - Direct (1) (5) .5533
President and Chief 2,645 - Family .0432
Executive Officer of the Relationship (4)
Corporation and the Bank
All Executive officers and directors, 473,872 - Direct (1) (2) (7) (8) 7.7090
including nominees and directors 81,573 - Family 1.3270
named above (13 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 23,200 shares that Mr. Majors has the right to acquire through the exercise of stock options.
(6) Includes 6,700 shares that Mr. Kent has the right to acquire through the exercise of stock options.
(7) Includes 43,100 shares that Executive Officers have the right to acquire through the exercise of stock options.
(8) Includes 200 shares that Mr. Davis has 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.
</TABLE>
There exists no family relationship between any director or nominee.
Mr. Hudson is a director of American Electric Power Company, Inc. Mr.
Motley and Mr. Davenport are directors of Intertape Polymer Group Inc. The
stocks of these corporations are registered with the Securities and Exchange
Commission.
The term of Landon R. Wyatt, Jr. will expire as of the Annual Meeting of
shareholders. Mr. Wyatt will not stand for re-election pursuant to the
Directors' Retirement Policy. The number of directors of Class I will be reduced
to three.
I-5
<PAGE>
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.
<TABLE>
<CAPTION>
Name Age Principal Occupation and Business Experience
- ---- --- --------------------------------------------
<S> <C> <C>
T. Allen Liles 47 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 61 Senior Vice President of the Corporation and Senior Vice President
and Senior Loan Officer of the Bank; Officer of the Bank since 1964
</TABLE>
All executive officers serve one-year terms of office.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors held 14 Board Meetings during the year 1999. 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 Leggett, 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 1999.
Salary Committee. The Salary Committee currently consists of Messrs.
Barkhouser, Davenport, 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 1999.
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 and held no meetings
in 1999.
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.
I-6
<PAGE>
Executive officer compensation generally consists of salary, participation
in the Bank's profit sharing plan, and incentive compensation. A description of
the profit sharing plan is included in Note (2) under Executive Compensation.
Executive officers received incentive compensation in 1999 due to the attainment
of certain earnings by the Corporation. They may be eligible to receive
incentive compensation if certain earnings are attained in 2000. 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 additional compensation
from the Corporation. In 1997, the Board of Directors and the shareholders
approved the stock option plan described below under Note (3) of "Executive
Compensation".
In considering executive 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
Ben J. Davenport, Jr.
Lester A. Hudson, Jr.
Fred B. Leggett, Jr.
OTHER INFORMATION
Comparative Company Performance
The following graph compares American National Bankshares Inc.'s cumulative
total return to its shareholders with the returns of two indexes for the
five-year period ended December 31, 1999. 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.
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
American National Bankshares Inc. 100 96 82 110 120 139
Independent Bank Index 100 122 155 235 246 222
S&P 500 Index 100 138 169 225 290 351
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 1999, 1998, and 1997.
<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 1999 182,988 37,483 0 0 20,000 0 5,000
President & Chief Executive 1998 165,409 34,956 0 0 12,000 0 4,860
Officer of the Corporation 1997 153,855 19,038 0 0 200 0 4,500
and the Bank
E. Budge Kent, Jr. 1999 109,088 20,834 0 0 5,000 0 3,120
Senior Vice President of the 1998 104,088 19,252 0 0 6,000 0 3,000
Corporation; Senior Vice 1997 97,292 10,910 0 0 200 0 2,730
President and Trust Officer
of the Bank
T. Allen Liles 1999 96,276 20,618 0 0 5,000 0 2,862
Senior Vice President, Secretary, 1998 91,079 18,318 0 0 6,000 0 0
Treasurer and Chief Financial
Officer of the Corporation; Senior
Vice President, Cashier and Chief
Financial Officer of the Bank
(effective January 1, 1998)
Carl T. Yeatts 1999 107,843 21,675 0 0 5,000 0 3,120
Senior Vice President of the 1998 103,131 19,252 0 0 6,000 0 3,000
Corporation; Senior Vice 1997 89,682 10,562 0 0 200 0 2,610
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 1999, the profit-sharing (bonus) plan
provided that an amount equal to 6.50% of the Bank's net income (after
taxes, but before deducting profit sharing and its related tax effect),
less the Bank's 401(k) contributions, be paid to officers and employees who
are in the Bank's employ on December 31, 1999. Incentive compensation
represented payments to full-time officers based on the Corporation
attaining certain earnings increase and officers meeting certain strategic
goals. The total expense, paid or accrued, for the profit sharing (bonus)
plan and incentive compensation payments for the year 1999 amounted to
$683,843.
(3) The Corporation grants options pursuant to the Corporation's Stock Option
Plan approved by the shareholders at the 1997 annual meeting. Options
granted prior to July 1, 1999 have been restated to reflect the impact of a
2-for-1 stock split.
(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. An
employee may defer a portion of his or her salary, not to exceed the lesser
of 15% of compensation or $10,000. After one year of service, the Bank will
make a matching contribution in the amount of 50% of the first 6% of
compensation so deferred.
I-8
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN RESPECT OF LAST FISCAL YEAR
<CAPTION>
Potential
Realizable Value
Number of % of Total At Assumed Annual
Securities Options Exercise Rates of Stock Price
Underlying Granted to or Base Appreciation for
Options Employees in Price Vesting Expiration Option Term
--------------------
Name Granted Fiscal Year ($/Share) Date Date 5% ($) 10% ($)
- ---- ---------- ------------ --------- ------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles H. Majors 5,000 7.04% 13.69 12-31-99 04-20-09 43,040 109,072
President and Chief 5,000 7.04% 13.69 12-31-00 04-20-09 43,040 109,072
Executive Officer of the 10,000 14.08% 20.00 12-31-99 12-21-09 125,779 318,748
Corporation and the Bank
E. Budge Kent, Jr. 2,500 3.52% 13.69 12-31-99 04-20-09 21,520 54,536
Senior Vice President 2,500 3.52% 13.69 12-31-00 04-20-09 21,520 54,536
of the Corporation; Senior
Vice President and Trust
Officer of the Bank
T. Allen Liles 2,500 3.52% 13.69 12-31-99 04-20-09 21,520 54,536
Senior Vice President, Secretary, 2,500 3.52% 13.69 12-31-00 04-20-09 21,520 54,536
Treasurer and Chief Financial
Officer of the Corporation;
Senior Vice President, Cashier
and Chief Financial Officer
of the Bank
Carl T. Yeatts 2,500 3.52% 13.69 12-31-99 04-20-09 21,520 54,536
Senior Vice President, 2,500 3.52% 13.69 12-31-00 04-20-09 21,520 54,536
of the Corporation; Senior
Vice President and Senior
Loan Officer of the Bank
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
AGGREGATE OPTIONS EXERCISED IN 1999 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, 1999 (#) December 31, 1999 ($) (a)
Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles H. Majors 0 0 23,200 9,000 41,713 24,063
E. Budge Kent, Jr. 0 0 6,700 4,500 21,306 12,031
T. Allen Liles 0 0 6,500 4,500 20,406 12,031
Carl T. Yeatts 0 0 6,700 4,500 21,306 12,031
(a) Value of unexercised in-the-money options is calculated by multiplying the number of unexercised options
at December 31, 1999 by the difference in the closing price of the Corporation's common stock reported
on December 31, 1999 and the exercise price of the unexercised in-the-money options.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
I-9
<PAGE>
OPTION REPRICING
No action was taken in 1999 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 1999, was composed of Messrs.
Barkhouser, Davenport, Hudson, and Leggett. None of the members of the Salary
Committee were officers or employees of the Corporation or its subsidiaries
during 1999 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 1999, 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 salaried and regular hourly 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, 1999, 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 with years of
service limited to 35. 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, 1999 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, 1999 at normal retirement age in the following
specified compensation and years of service classifications:
Estimated Annual Retirement Benefit
5 Year
Average
Salary Years of Service
------- ----------------
15 20 25 30 35
-- -- -- -- --
$ 50,000 $11,402 $15,202 $ 19,003 $ 22,803 $ 26,604
75,000 18,714 24,952 31,190 37,128 43,666
100,000 26,027 34,702 43,378 52,053 60,729
125,000 33,339 44,452 55,565 66,678 77,791
150,000 40,652 54,202 67,753 81,303 94,854
175,000 47,964 63,952 79,940 95,928 111,916
200,000 55,277 73,702 92,128 110,553 128,979
225,000 62,589 83,452 104,315 125,178 146,041
I-10
<PAGE>
As of December 31, 1999, the Named Executive Officers have completed the
following years of credited service under the Bank's retirement plan:
Charles H. Majors 7
E. Budge Kent, Jr. 35
T. Allen Liles 2
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, 1999, 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 for 10 Years (in $) Vesting
- ---- ------------------- --------
Charles H. Majors 50,000 8
E. Budge Kent, Jr. 25,000 1
T. Allen Liles 25,000 15
Carl T. Yeatts 25,000 1
Directors' Compensation. In 1999, non-officers directors, except Mr. Davis,
received a monthly retainer of $500 and attendance fees of $300 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 1999 was
$125,500. 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.
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 1999. 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 1999, the highest aggregate amount of outstanding loans,
direct and indirect, to the directors and officers was $13,052,341 or 24% of
equity capital and this peak amount occurred on June 30, 1999.
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 1999. 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.
I-11
<PAGE>
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, 2001. 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 21, 2000
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-31-1999 DEC-31-1999 DEC-31-1999 DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 APR-01-1999 JUL-01-1999 OCT-01-1999 JAN-31-1999
<PERIOD-END> MAR-31-1999 JUN-30-1999 SEP-30-1999 DEC-31-1999 DEC-31-1999
<CASH> $12,367 $11,831 $12,435 $13,885 $13,885
<INT-BEARING-DEPOSITS> 19 210 13,895 3,406 3,406
<FED-FUNDS-SOLD> 0 0 0 0 0
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 108,209 110,238 113,517 121,872 121,872
<INVESTMENTS-CARRYING> 46,379 47,427 44,038 44,400 44,400
<INVESTMENTS-MARKET> 47,337 47,188 43,751 43,634 43,634
<LOANS> 278,299 283,411 279,308 293,741 293,741
<ALLOWANCE> 3,910 4,021 4,063 4,135 4,135
<TOTAL-ASSETS> 458,331 467,114 477,643 491,391 491,391
<DEPOSITS> 363,228 361,094 373,600 385,558 385,558
<SHORT-TERM> 3,540 5,700 0 0 0
<LIABILITIES-OTHER> 23,146 2,885 3,062 3,160 3,160
<LONG-TERM> 13,000 26,000 26,000 21,000 21,000
0 0 0 0 0
0 0 0 0 0
<COMMON> 3,052 6,103 6,103 6,104 6,104
<OTHER-SE> 52,365 48,988 50,311 50,615 50,615
<TOTAL-LIABILITIES-AND-EQUITY> 458,331 467,114 477,643 491,391 491,391
<INTEREST-LOAN> 5,827 5,969 5,991 6,172 23,959
<INTEREST-INVEST> 2,329 2,304 2,350 2,484 9,467
<INTEREST-OTHER> 6 13 94 160 273
<INTEREST-TOTAL> 8,162 8,286 8,435 8,816 33,699
<INTEREST-DEPOSIT> 3,069 3,111 3,188 3,306 12,674
<INTEREST-EXPENSE> 3,572 3,605 3,720 3,839 14,736
<INTEREST-INCOME-NET> 4,590 4,681 4,715 4,977 18,963
<LOAN-LOSSES> 180 180 120 190 670
<SECURITIES-GAINS> 8 0 0 0 8
<EXPENSE-OTHER> 2,780 2,792 2,927 3,044 11,543
<INCOME-PRETAX> 2,727 2,784 2,829 2,904 11,244
<INCOME-PRE-EXTRAORDINARY> 2,727 2,784 2,829 2,904 11,244
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 1,924 1,966 1,988 2,046 7,924
<EPS-BASIC> 0.32 0.32 0.33 0.34 1.30
<EPS-DILUTED> 0.32 0.32 0.33 0.33 1.30
<YIELD-ACTUAL> 4.41 4.44 4.38 4.48 4.43
<LOANS-NON> 405 436 393 292 292
<LOANS-PAST> 246 277 351 287 287
<LOANS-TROUBLED> 0 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0 0
<ALLOWANCE-OPEN> 3,821 3,910 4,021 4,063 3,821
<CHARGE-OFFS> 167 90 103 149 509
<RECOVERIES> 76 21 25 31 153
<ALLOWANCE-CLOSE> 3,910 4,021 4,063 4,135 4,135
<ALLOWANCE-DOMESTIC> 2,812 2,977 2,827 2,860 2,860
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 1,098 1,044 1,236 1,275 1,275
</TABLE>
