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
ITEM 2
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.
ITEM 5
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.
II-6
II-7
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS
- --------------------------------------------------------------------------------
American National Bankshares Inc. ("the Corporation") was organized in 1984 for the purpose of acquiring all of the outstanding shares of American National Bank and Trust Company ("the Bank"). The Bank was chartered and opened for business in February 1909. Under an agreement and plan of merger, the Bank was acquired by the Corporation on September 1, 1984. 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
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
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
II-11
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):
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
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.
II-13
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
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
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.
II-16
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
II-18
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
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.
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
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
Summary of Loan Loss Experience
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
Deposits
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
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
II-24
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
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
II-27
II-28
II-29
II-30
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
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
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
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):
-------------------------------------------- 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 ======== ======= ======== =========
-------------------------------------------- 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
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
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
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
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
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
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
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
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).
II-42
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.
II-43
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
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
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.
I-3
I-4
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
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.
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
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
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.
(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
I-9
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
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
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