-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TyKvjdQ6LitaOt0eUb2Nhlx29ZtT149IaqOpS4eTyXYpMF0K9eX2XT2+UmTWcTy5 yj++pUXAwkh+4PO45oq3IQ== 0000916641-97-000981.txt : 19971002 0000916641-97-000981.hdr.sgml : 19971002 ACCESSION NUMBER: 0000916641-97-000981 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19971001 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRESTAR FINANCIAL CORP CENTRAL INDEX KEY: 0000101880 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 540722175 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-34669 FILM NUMBER: 97689375 BUSINESS ADDRESS: STREET 1: 919 E MAIN ST STREET 2: PO BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261 BUSINESS PHONE: 8047825000 MAIL ADDRESS: STREET 1: 919 EAST MAIN STREET STREET 2: P O BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261-6665 FORMER COMPANY: FORMER CONFORMED NAME: UNITED VIRGINIA BANKSHARES INC DATE OF NAME CHANGE: 19871115 424B3 1 CRESTAR FINANCIAL CORPORATION 424B3 Filed pursuant to Rule 424(b)(3) File Number 333-34669 [AMERICAN NATIONAL BANCORP, INC. LOGO] October 1, 1997 Dear Shareholders: You are cordially invited to attend a special meeting of shareholders (the "Special Meeting") of American National Bancorp, Inc. ("American National") to be held at American National's main office located at 211 North Liberty Street, Baltimore, Maryland, on Tuesday, November 4, 1997 at 4:00 p.m. This is a very important meeting regarding your investment in American National. At the Special Meeting, you will be asked to consider and vote upon the Agreement and Plan of Reorganization, dated as of June 23, 1997, by and among American National, American National Savings Bank, F.S.B., Crestar Financial Corporation ("Crestar"), and Crestar Bank, and a related Plan of Merger (together, the "Agreement") pursuant to which American National will be acquired by Crestar (the "Holding Company Merger"). In connection with the Holding Company Merger, each share of American National Common Stock outstanding immediately prior to consummation of the Holding Company Merger (other than shares held directly by Crestar) will be converted into shares of Crestar Common Stock or, subject to certain limitations, exchanged for cash, as described in the accompanying Proxy Statement/Prospectus. Shareholders of American National who elect to receive cash rather than shares of Crestar common stock must make such election and submit certain material at or prior to the Special Meeting as discussed in more detail in the accompanying Proxy Statement/Prospectus. Consummation of the Holding Company Merger is conditional upon, among other things, receipt of all required shareholder and regulatory approvals. All regulatory approvals have been received. Your Board of Directors recommends that you vote in favor of the Agreement and the Holding Company Merger, which the Board believes is in the best interests of the shareholders of American National. The Board of Directors has received the opinion of Keefe Bruyette & Woods, Inc., American National's financial advisor, to the effect that, as of the date of such opinion and based on the considerations described therein, the consideration to be received by American National's shareholders in the Holding Company Merger is fair to them from a financial point of view. The exchange of American National Common Stock for Crestar Common Stock (other than cash paid if the cash election is made and cash paid in lieu of fractional shares) will be a tax-free transaction for federal income tax purposes. We have enclosed a Notice of the Special Meeting, a Proxy Statement/Prospectus containing a discussion of the Agreement and the Holding Company Merger and a proxy card to record your vote on the matter and a cash option election form for use if you elect to receive cash for some or all of your shares. Please complete, sign and date the enclosed proxy card and return it as soon as possible in the envelope provided. If you decide to attend the Special Meeting, you may vote your shares in person whether or not you have previously submitted a proxy. It is important to understand that the Agreement and Holding Company Merger must be approved by the holders of a majority of all outstanding shares of American National Common Stock and that the failure to vote will have the same effect as a vote against the proposal. On behalf of the Board, thank you for your attention to this important matter. Sincerely, /s/ A. Bruce Tucker ------------------------------------- A. Bruce Tucker President and Chief Executive Officer 211 N. Liberty Street o Baltimore, Maryland 21201-3978 o 410-752-0400 AMERICAN NATIONAL BANCORP, INC. 211 NORTH LIBERTY STREET BALTIMORE, MARYLAND 21201 (410) 752-0400 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON NOVEMBER 4, 1997 NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special Meeting") has been called by the Board of Directors of American National Bancorp, Inc. ("American National") and will be held at American National's main office located at 211 North Liberty Street, Baltimore, Maryland, on November 4, 1997 at 4:00 p.m. local time. A proxy card and a Proxy Statement/Prospectus for the Special Meeting are enclosed. The Special Meeting is for the purpose of considering and voting upon the following matters: 1. Proposed Transaction. To consider and vote upon the Agreement and Plan of Reorganization, dated as of June 23, 1997 among Crestar Financial Corporation ("Crestar"), Crestar Bank, American National and American National Savings Bank, F.S.B. and a related Plan of Merger (together, the "Agreement"), providing for the acquisition of American National by Crestar. The Agreement is attached to the accompanying Proxy Statement/Prospectus as Annex I. 2. Such other matters as may properly be presented for consideration at the Special Meeting. Only those holders of American National Common Stock of record at the close of business on September 19, 1997 are entitled to notice of and to vote at the Special Meeting, and any adjournment thereof. The affirmative vote of the holders of a majority of the issued and outstanding shares of American National Common Stock entitled to vote at the Special Meeting is required to approve the Agreement. By Order of the Board of Directors, /s/ Betty J. Stull Betty J. Stull, Secretary October 1, 1997 Baltimore, Maryland THE BOARD OF DIRECTORS OF AMERICAN NATIONAL RECOMMENDS THAT THE HOLDERS OF AMERICAN NATIONAL COMMON STOCK VOTE TO APPROVE THE HOLDING COMPANY MERGER PROPOSAL. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING. SHAREHOLDERS ATTENDING THE MEETING MAY PERSONALLY VOTE ON ALL MATTERS WHICH ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED. ANY PROXY MAY BE REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME. PROXY STATEMENT AMERICAN NATIONAL BANCORP, INC. Special Meeting of Shareholders to be Held on November 4, 1997 ------------ PROSPECTUS OF CRESTAR FINANCIAL CORPORATION COMMON STOCK ------------ This Proxy Statement/Prospectus is being furnished to the holders of common stock, par value $0.01 per share ("American National Common Stock"), of American National Bancorp, Inc., a Delaware corporation ("American National"), in connection with the solicitation of proxies by the American National Board of Directors (the "American National Board") for use at the Special Meeting of American National shareholders to be held at 4:00 p.m. on November 4, 1997, at American National's main office located at 211 North Liberty Street, Baltimore, Maryland (the "Special Meeting"). At the Special Meeting, shareholders of record of American National Common Stock as of the close of business on September 19, 1997 (the "Record Date"), will consider and vote upon a proposal to approve the Agreement and Plan of Reorganization, dated as of June 23, 1997, and a related Plan of Merger (together, the "Agreement"), by and among Crestar Financial Corporation, a Virginia corporation ("Crestar"), Crestar Bank, a Virginia banking corporation wholly-owned by Crestar ("Crestar Bank"), American National and American National Savings Bank, F.S.B., a federal savings bank wholly-owned by American National ("Savings Bank"), pursuant to which, among other things, American National will merge with and into Crestar (the "Holding Company Merger"). Immediately thereafter, Savings Bank will merge into Crestar Bank (the "Bank Merger") (the Holding Company Merger, and the Bank Merger are referred to together as the "Transaction"). Upon consummation of the Holding Company Merger, expected to occur no earlier than November 6, 1997 and prior to December 31, 1997, each share of American National Common Stock (other than shares held directly by Crestar) shall be converted into (upon an American National shareholder's election) either (i) $20.25 in cash (provided that in the aggregate the number of shares that may be exchanged for cash shall not exceed 40% of the number of outstanding shares of American National Common Stock immediately prior to the Effective Time of the Holding Company Merger) or (ii) a fraction of a share of common stock of Crestar, par value $5.00 per share ("Crestar Common Stock") determined in accordance with the Exchange Ratio. The "Exchange Ratio" shall be calculated as follows: (i) if the average closing price of Crestar Common Stock as reported on the New York Stock Exchange (the "NYSE") for each of the 10 trading days ending on the tenth day prior to the Effective Time of the Holding Company Merger (the "Average Closing Price") is between $30 and $50, the Exchange Ratio shall be the quotient (rounded to the nearest one-thousandth) of (A) $20.25 divided by (B) the Average Closing Price; (ii) if the Average Closing Price is $50 or greater, the Exchange Ratio shall be 0.405; and (iii) if the Average Closing Price is $30 or less, the Exchange Ratio shall be 0.675. Outstanding options to purchase American National Common Stock will be converted into options to purchase Crestar Common Stock using the same Exchange Ratio and such options will cover up to 233,116 additional shares of Crestar Common Stock. Based on the closing price of Crestar Common Stock on the NYSE on August 6, 1997, such shares and options had a market value of approximately $10.8 million. See "The Holding Company Merger -- Determination of Exchange Ratio and Exchange of Crestar Common Stock." For a description of the Agreement, which is included herein in its entirety as Annex I to this Proxy Statement/Prospectus, see "The Holding Company Merger." This Proxy Statement/Prospectus also constitutes a prospectus of Crestar in respect of the shares of Crestar Common Stock to be issued to shareholders of American National in connection with the Holding Company Merger. The outstanding shares of Crestar Common Stock are, and the shares offered hereby will be, listed on the NYSE. All information contained in this Proxy Statement/Prospectus relating to Crestar and its subsidiaries has been supplied by Crestar and all information relating to American National and its subsidiaries has been supplied by American National. This Proxy Statement/Prospectus and the accompanying proxy card are first being mailed to shareholders of American National on or about October 1, 1997. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF CRESTAR COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. The date of this Proxy Statement/Prospectus is September 23, 1997. TABLE OF CONTENTS PAGE AVAILABLE INFORMATION........................................................................................... 1 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................................................... 2 SUMMARY ....................................................................................................... 3 Parties to the Transaction............................................................................. 3 American National Special Meeting...................................................................... 4 Vote Required; Record Date............................................................................. 4 The Holding Company Merger............................................................................. 4 The Exchange Ratio..................................................................................... 4 Cash Election.......................................................................................... 5 Reasons for the Holding Company Merger; Recommendations of the American National Board................. 5 Opinion of Financial Advisor........................................................................... 6 No Dissenter's Rights.................................................................................. 6 Conditions to Consummation............................................................................. 6 Business of Crestar and American National Pending the Holding Company Merger........................... 6 Waiver and Amendment; Termination...................................................................... 6 Interests and Conflict of Interests of Certain Persons in the Holding Company Merger................... 7 Resale of Crestar Common Stock......................................................................... 7 Certain Federal Income Tax Consequences of the Transaction............................................. 7 Effective Time......................................................................................... 7 Stock Option Agreement................................................................................. 7 Market Prices Prior to Announcement of the Transaction................................................. 8 Comparative Per Share Data............................................................................. 8 COMPARATIVE PER SHARE DATA...................................................................................... 9 SELECTED FINANCIAL DATA - CRESTAR............................................................................... 10 SELECTED FINANCIAL DATA - AMERICAN NATIONAL..................................................................... 12 RECENT DEVELOPMENTS CONCERNING AMERICAN NATIONAL BANCORP, INC....................................................................... 14 AMERICAN NATIONAL SPECIAL MEETING............................................................................... 17 Vote Required.......................................................................................... 17 Recommendation......................................................................................... 18 THE HOLDING COMPANY MERGER...................................................................................... 18 Background of the Holding Company Merger............................................................... 18 Reasons for the Holding Company Merger; Recommendations of the American National Board................. 19 Opinion of Financial Advisor........................................................................... 20 Effective Time of the Holding Company Merger........................................................... 24 Determination of Exchange Ratio and Exchange of American National Common Stock for Crestar Common Stock................................................ 24 Cash Election; Election Procedures..................................................................... 25 Business of American National and Crestar Pending the Holding Company Merger........................... 25 Conditions to Consummation of the Holding Company Merger............................................... 26 Stock Option Agreement................................................................................. 27 Waiver and Amendment; Termination...................................................................... 28 Accounting Treatment................................................................................... 29
i Operations after the Holding Company Merger............................................................ 29 Interests of Certain Persons in the Holding Company Merger............................................. 29 Stock Options.......................................................................................... 30 Effect on American National Employee Benefits Plans.................................................... 31 Certain Federal Income Tax Consequences................................................................ 32 BUSINESS OF CRESTAR............................................................................................. 35 BUSINESS OF AMERICAN NATIONAL................................................................................... 35 PRICE RANGE OF AMERICAN NATIONAL COMMON STOCK AND DIVIDEND POLICY............................................................................................. 36 PRICE RANGE OF CRESTAR COMMON STOCK AND DIVIDEND POLICY............................................................................................. 37 OWNERSHIP OF AMERICAN NATIONAL COMMON STOCK BY CERTAIN BENEFICIAL OWNERS....................................................................................... 38 OWNERSHIP OF CRESTAR COMMON STOCK BY CERTAIN BENEFICIAL OWNERS.................................................................................... 40 SUPERVISION AND REGULATION OF CRESTAR........................................................................... 40 Bank Holding Companies................................................................................. 40 Capital Requirements................................................................................... 41 Limits on Dividends and Other Payments................................................................. 41 Crestar Bank........................................................................................... 42 Other Safety and Soundness Regulations................................................................. 42 DESCRIPTION OF CRESTAR CAPITAL STOCK............................................................................ 43 Common Stock........................................................................................... 43 Preferred Stock........................................................................................ 43 Rights .............................................................................................. 43 Virginia Stock Corporation Act......................................................................... 44 COMPARATIVE RIGHTS OF SHAREHOLDERS.............................................................................. 45 Capitalization......................................................................................... 45 Amendment of Articles or Bylaws........................................................................ 45 Required Shareholder Vote for Certain Actions.......................................................... 45 Director Nominations................................................................................... 46 Directors and Classes of Directors; Vacancies and Removal of Directors................................. 46 Anti-Takeover Provisions............................................................................... 47 Preemptive Rights...................................................................................... 47 Assessment............................................................................................. 47 Conversion; Redemption; Sinking Fund................................................................... 47 Liquidation Rights..................................................................................... 48 Dividends and Other Distributions...................................................................... 48 Special Meetings of Shareholders....................................................................... 48 Indemnification........................................................................................ 49 Shareholder Proposals.................................................................................. 49 Shareholder Inspection Rights; Shareholder Lists....................................................... 49 Shareholder Rights Plan................................................................................ 50 Dissenters' Rights..................................................................................... 50
ii RESALE OF CRESTAR COMMON STOCK.................................................................................. 50 EXPERTS ....................................................................................................... 50 LEGAL OPINIONS.................................................................................................. 51 OTHER MATTERS................................................................................................... 51
ANNEX I -- Agreement and Plan of Reorganization dated as of June 23, 1997 and related Holding Company Plan of Merger ANNEX II -- Stock Option Agreement dated as of June 23, 1997 ANNEX III -- Fairness Opinion of Keefe Bruyette & Woods, Inc. ANNEX IV -- American National's 1996 Annual Report to Shareholders ANNEX V -- American National's Quarterly Report on Form 10-Q for the three months ended April 30, 1997 iii AVAILABLE INFORMATION Crestar and American National are subject to the reporting and informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Reports, proxy statements and other information filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-2511 or 7 World Trade Center, Suite 1300, (13th Floor), New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC also maintains a web site that contains reports, proxy statements, information statements and other information regarding registrants that file electronically, including Crestar and American National, with the SEC at http://www.sec.gov. Such reports, proxy statements and other information also may be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005 for Crestar and at the offices of the National Association of Securities Dealers, Inc. located at 1735 K Street, N.W., Washington, D.C. 20006 for American National. As permitted by the Rules and Regulations of the SEC, this Proxy Statement/Prospectus does not contain all the information set forth in the Registration Statement on Form S-4, of which this Proxy Statement/Prospectus is a part, and exhibits thereto (together with the amendments thereto, the "Registration Statement"), which has been filed by Crestar with the SEC under the Securities Act of 1933, as amended (the "1933 Act"), with respect to Crestar Common Stock and to which reference is hereby made. No person has been authorized to give any information or to make any representation other than as contained herein in connection with the offer or proxy solicitation contained in this Proxy Statement/Prospectus, and if given or made, such information or representation must not be relied upon as having been authorized by Crestar or American National. This Proxy Statement/Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the securities to which it relates, nor does it constitute an offer to or solicitation of any person or proxy solicitation in any jurisdiction to whom it would be unlawful to make such an offer or solicitation. Neither the delivery of this Proxy Statement/Prospectus nor the distribution of any of the securities to which this Proxy Statement/Prospectus relates shall, at any time, imply that the information herein is correct as of any time subsequent to the date hereof. THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN DOCUMENTS RELATING TO CRESTAR AND AMERICAN NATIONAL THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. CRESTAR DOCUMENTS ARE AVAILABLE WITHOUT CHARGE UPON REQUEST FROM CRESTAR'S INVESTOR RELATIONS DEPARTMENT, CRESTAR FINANCIAL CORPORATION, P. O. BOX 26665, 919 EAST MAIN STREET, RICHMOND, VIRGINIA 23261-6665, (804) 782-7152. AMERICAN NATIONAL DOCUMENTS ARE AVAILABLE WITHOUT CHARGE UPON REQUEST FROM AMERICAN NATIONAL BANCORP, INC., 211 NORTH LIBERTY STREET, BALTIMORE, MARYLAND 21201, (410) 625-8633. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY OCTOBER 24, 1997. 1 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents filed by Crestar with the SEC are incorporated by reference in this Proxy Statement/Prospectus: (i) Crestar's Annual Report on Form 10-K for the year ended December 31, 1996; (ii) Crestar's Quarterly Reports on Form 10-Q for the three month periods ended March 31, 1997 and June 30, 1997; (iii) the description of Crestar Common Stock in Crestar's registration statement filed under the Exchange Act with respect to Crestar Common Stock on July 1, 1993; and the description of the Rights in Crestar's registration statement on Form 8-A filed under the Exchange Act with respect to the Rights on June 26, 1989. The following documents filed by American National with the SEC are incorporated by reference in this Proxy Statement/Prospectus: (i) American National's Annual Report on Form 10-K for the year ended July 31, 1996; (ii) American National's Quarterly Reports on Form 10-Q for the periods ended October 31, 1996, January 31, 1997, and April 30, 1997; and (iii) American National's Current Report on Form 8-K dated July 3, 1997. All documents filed by Crestar and American National pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the date of the American National Special Meeting are hereby incorporated by reference in this Proxy Statement/Prospectus and shall be deemed a part hereof from the date of filing of such documents. Any statement contained in any supplement hereto or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of the Registration Statement and this Proxy Statement/Prospectus to the extent that a statement contained herein, in any supplement hereto or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Registration Statement, this Proxy Statement/Prospectus or any supplement hereto. Also incorporated by reference herein is the Agreement and Plan of Reorganization by and among Crestar, Crestar Bank, American National and Savings Bank, dated as of June 23, 1997, which is attached to this Proxy Statement/Prospectus as Annex I, and the Stock Option Agreement by and among Crestar and American National dated as of June 23, 1997, which is attached to this Proxy Statement/Prospectus as Annex II. CERTAIN INFORMATION REGARDING AMERICAN NATIONAL As required by regulations of the Securities and Exchange Commission, certain American National documents are included (without exhibits) as annexes to this Proxy Statement/Prospectus. American National's Annual Report to its Shareholders for the fiscal year ended July 31, 1996, is included as Annex IV, and American National's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1997 is included as Annex V. Annexes IV and V (excluding any documents incorporated by reference therein or exhibits thereto) are part of this Proxy Statement/Prospectus and should be carefully reviewed for information they contain regarding American National. The documents incorporated by reference by, or included as exhibits to, either Annex IV or Annex V are not part of this Proxy Statement/Prospectus or the Registration Statement. 2 SUMMARY THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF ALL MATERIAL FACTS REGARDING CRESTAR, AMERICAN NATIONAL AND THE MATTERS TO BE CONSIDERED AT THE AMERICAN NATIONAL SPECIAL MEETING. IN THE OPINION OF CRESTAR AND AMERICAN NATIONAL, THE INFORMATION APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS, ANNEXES HERETO, AND THE DOCUMENTS REFERRED TO HEREIN, CONTAIN ALL SUCH MATERIAL FACTS. SHAREHOLDERS ARE URGED TO CAREFULLY READ ALL SUCH INFORMATION. PARTIES TO THE TRANSACTION CRESTAR. Crestar is the holding company for Crestar Bank. At June 30, 1997, Crestar had approximately $22.8 billion in total assets, $15.8 billion in total deposits and $1.9 billion in total stockholders' equity. In 1963, six Virginia banks combined to form United Virginia Bankshares Incorporated ("UVB"), a bank holding company formed under the Bank Holding Company Act of 1956 (the "BHCA"). UVB (parent company of United Virginia Bank) extended its operations into the District of Columbia by acquiring NS&T Bank, N.A. on December 27, 1985 and into Maryland by acquiring Bank of Bethesda on April 1, 1986, Loyola Federal Savings Bank, Baltimore, on December 31, 1995, and Citizens Bank on December 31, 1996. On September 1, 1987, UVB was renamed Crestar Financial Corporation. On November 14, 1996, all of Crestar's banking subsidiaries were consolidated into Crestar Bank. Crestar conducts its banking business through Crestar Bank, which serves customers through a network of 481 banking locations and 514 automated teller machines (as of June 30, 1997). Crestar Bank offers a broad range of banking services, including various types of deposit accounts and instruments, commercial and consumer loans, trust and investment management services, bank credit cards and international banking services. Crestar's subsidiary, Crestar Insurance Agency, Inc., offers a variety of personal and business insurance products. Securities brokerage and investment banking services are offered by Crestar's subsidiary, Crestar Securities Corporation. Mortgage loan origination, servicing and wholesale lending are offered by Crestar Mortgage Corporation, and investment advisory services are offered by Crestar Asset Management Company, both of which are subsidiaries of Crestar Bank. These various Crestar subsidiaries provide banking and non-banking services throughout Virginia, Maryland and Washington, D.C., as well as certain non-banking services to customers in other states. The executive offices of Crestar are located in Richmond, Virginia at Crestar Center, 919 East Main Street. Regional headquarters are located in Norfolk and Roanoke, Virginia, Washington, D.C., and Baltimore, Maryland. Crestar's principal Operations Center is located in Richmond. See "Business of Crestar." AMERICAN NATIONAL. American National is the holding company for Savings Bank. At April 30, 1997, American National had approximately $505.3 million in total assets, $329.5 million in total deposits and $45.3 million in total stockholders equity. The executive offices of American National are located at 211 North Liberty Street, Baltimore, Maryland 21201. See "Business of American National." Savings Bank is a federal savings bank through which American National conducts its banking business. Savings Bank is primarily engaged in the business of attracting deposits from the general public in its market area, which consists of Baltimore City and parts of the Maryland counties of Baltimore, Howard, Harford, Anne Arundel, and Carroll, and investing such deposits together with other funds in loans collateralized by one- to four-family residential real estate, mortgage-backed securities, and, to a lesser extent, construction and land development loans, consumer loans and investment securities. 3 AMERICAN NATIONAL SPECIAL MEETING The American National Special Meeting will be held on November 4, 1997 at 4:00 p.m. at American National's main office located at 211 North Liberty Street, Baltimore, Maryland. The purpose of the Special Meeting is to consider and vote upon a proposal to approve the Agreement, including the related Plan of Merger. See "American National Special Meeting." VOTE REQUIRED; RECORD DATE Only American National shareholders of record at the close of business on September 19, 1997 (the "Record Date") will be entitled to vote at the Special Meeting. The affirmative vote of the holders of a majority of the shares outstanding on such date is required to approve the Agreement. As of the Record Date, there were 3,613,011 shares of American National Common Stock entitled to be voted. The directors and executive officers of American National and their affiliates beneficially owned, as of the Record Date, 192,809 shares or approximately 5.3% of the outstanding shares of American National Common Stock. Six of the seven American National directors have agreed to vote their shares in favor of approval of the Agreement. The directors and executive officers of Crestar and their affiliates beneficially owned, as of the Record Date, a total of less than 1% of the outstanding shares of American National Common Stock. See "American National Special Meeting." THE HOLDING COMPANY MERGER Pursuant to the Agreement, at the Effective Time of the Holding Company Merger (as defined herein), American National will merge with and into Crestar in accordance with the Holding Company Plan of Merger whereby the separate existence of American National will cease. At the Effective Time of the Holding Company Merger, each outstanding share of American National Common Stock (other than shares held directly by Crestar, which shall be canceled without payment therefore) will be converted, based on the Exchange Ratio, into and represent the right to receive (upon an American National shareholder's election) either (i) a number of shares of Crestar Common Stock determined by the Exchange Ratio, subject to adjustment as set forth in the Agreement or (ii) $20.25 in cash (provided that the number of shares that may be exchanged for cash shall not exceed 40% of the number of outstanding shares of American National Common Stock). Cash will be paid in lieu of fractional shares of Crestar Common Stock. At the Effective Time of the Holding Company Merger, each share of American National Common Stock held by Crestar, excluding shares held in a fiduciary capacity, shall be canceled, retired and cease to exist, and no exchange or payment shall be made with respect thereto. Crestar does not directly hold any shares of American National Common Stock. Immediately following the Effective Time of the Holding Company Merger, Savings Bank will merge into Crestar Bank in accordance with the Bank Plan of Merger, and the separate existence of Savings Bank will cease. The Bank Merger is intended to qualify as an "Oakar" transaction to avoid the payment of FDIC exit and entrance fees in accordance with Section 5(d)(3) of the Federal Deposit Insurance Act ("FDIA"). THE EXCHANGE RATIO For the purpose of determining the Exchange Ratio, each share of American National Common Stock has been valued at $20.25 (the "Common Stock Price Per Share"). In the Holding Company Merger, each share of American National Common Stock (other than shares held directly by Crestar and shares to be exchanged for cash) shall be converted, based on the Exchange Ratio, into a fraction of a share of Crestar Common Stock determined in accordance with the Exchange Ratio. The "Exchange Ratio" shall be calculated as follows: (i) if the average closing price of Crestar Common Stock as reported on the NYSE for each of the 10 trading days ending on the tenth day prior to the Effective Time of the Holding Company Merger (the "Average Closing Price") is between $30 and $50, the Exchange Ratio shall be the quotient (rounded to the nearest one-thousandth) of (A) $20.25 divided by (B) the Average Closing Price; (ii) if the Average Closing Price is $50 or greater, the Exchange Ratio shall be 0.405; and (iii) if the Average Closing Price is $30 or less, the Exchange Ratio shall be 0.675. 4 Outstanding options to acquire American National Common Stock that were granted under American National's stock option plans (the "American National Options"), other than the Option held by Crestar described below, shall be converted into options to acquire Crestar Common Stock ("Crestar Options"). The exercise price per share of Crestar Common Stock under a Crestar Option shall be equal to the exercise price per share of American National Common Stock under the American National Option divided by the Exchange Ratio. The number of shares of Crestar Common Stock subject to a Crestar Option shall be equal to the number of shares of American National Common Stock subject to the American National Option multiplied by the Exchange Ratio. Except as provided in the preceding sentences regarding the price of, and number of shares of Crestar Common Stock subject to, a Crestar Option, the terms of a Crestar Option shall be the same as the terms of an American National Option. CASH ELECTION Holders of American National Common Stock will be given the option of exchanging all or any part of their shares for $20.25 cash per share of American National Common Stock. The number of shares exchanged for cash may not exceed 40% of the number of outstanding shares of American National Common Stock immediately prior to the Effective Time of the Holding Company Merger. Because the number of shares exchanged for cash may not exceed 40% of the outstanding shares of American National Common Stock, the extent to which the cash elections will be accommodated will depend upon the number of American National shareholders who elect to receive cash. Accordingly, an American National shareholder who elects to receive cash may instead receive shares of Crestar Common Stock (plus cash in lieu of fractional shares). IF AN AMERICAN NATIONAL SHAREHOLDER ELECTS TO SURRENDER SHARES FOR CASH, HE MUST FILE THE CASH OPTION FORM ACCOMPANYING THIS PROXY STATEMENT/PROSPECTUS PRIOR TO OR AT THE AMERICAN NATIONAL SPECIAL MEETING. ANY AMERICAN NATIONAL SHAREHOLDER WHO DOES NOT COMPLETE AND RETURN A CASH OPTION FORM PRIOR TO OR AT THE AMERICAN NATIONAL SPECIAL MEETING CAN ONLY RECEIVE CRESTAR COMMON STOCK IN THE HOLDING COMPANY MERGER. ONCE THE VOTE ON THE HOLDING COMPANY MERGER HAS BEEN TAKEN AT THE AMERICAN NATIONAL SPECIAL MEETING, THE CASH ELECTION IS IRREVOCABLE. THE CASH OPTION FORM MUST BE ACCOMPANIED BY THE STOCK CERTIFICATES TO BE EXCHANGED FOR CASH. See "The Holding Company Merger -- Cash Election; Election Procedures." REASONS FOR THE HOLDING COMPANY MERGER; RECOMMENDATIONS OF THE AMERICAN NATIONAL BOARD The American National Board believes that the terms of the Holding Company Merger and the Agreement are fair to, and in the best interests of, American National and its shareholders and has adopted the Agreement. In considering the terms and conditions of the Holding Company Merger, the American National Board considered, among other things: the financial terms of the Holding Company Merger; the fact that the Holding Company Merger would qualify as a tax-free reorganization; the financial condition and history of performance of Crestar; the advantage of risk diversification associated with ownership in an institution operating in a broader geographic area; the opinion of its financial advisor, Keefe Bruyette & Woods, Inc. ("Keefe Bruyette"), that the consideration to be received in the Holding Company Merger is fair to the holders of American National Common Stock from a financial point of view; and the operational and competitive benefits of the Holding Company Merger. The American National Board also considered that the historical dividends per share and net income per share of the Crestar Common Stock to be received by the holders of American National Common Stock, after giving effect to the Exchange Ratio, represent a substantial increase in the historical dividends per share and net income per share of American National Common Stock, although there can be no assurance that pro forma amounts are indicative of future dividends or income per share of Crestar Common Stock. See "The Holding Company Merger -- Background to the Holding Company Merger," " -- Reasons for the Holding Company Merger; Recommendation of the American National Board," and " -- Opinion of Financial Advisor." THE AMERICAN NATIONAL BOARD RECOMMENDS THAT THE HOLDERS OF AMERICAN NATIONAL COMMON STOCK VOTE TO APPROVE THE PROPOSED HOLDING COMPANY MERGER. 5 OPINION OF FINANCIAL ADVISOR American National has received the opinion of Keefe Bruyette that the Common Stock Price Per Share is fair to the holders of American National Common Stock from a financial point of view. Keefe Bruyette's opinion is directed only to the Common Stock Price Per Share and does not constitute a recommendation to any holders of American National Common Stock as to how such holders should vote at the American National Special Meeting or as to any other matter. American National paid Keefe Bruyette a cash fee of $50,000 upon the delivery of the fairness opinion and $50,000 when the Proxy Statement/Prospectus was mailed, and will pay Keefe Bruyette $290,000 upon consummation of the Holding Company Merger. For additional information concerning Keefe Bruyette and its opinion, see "The Holding Company Merger -- Opinion of Financial Advisor." The opinion of such firm, which sets forth the assumptions made, matters considered and limits on the review undertaken, is attached as Annex III to this Proxy Statement/Prospectus. NO DISSENTER'S RIGHTS Holders of American National Common Stock entitled to vote on the Agreement and the related Holding Company Plan of Merger do not have dissenter's rights in accordance with Delaware General Corporation Law. CONDITIONS TO CONSUMMATION Consummation of the Holding Company Merger would be accomplished by the statutory merger of American National into Crestar and consummation of the Bank Merger would be accomplished by the statutory merger of Savings Bank into Crestar Bank. The Holding Company Merger and the Bank Merger are contingent upon approvals of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the Office of Thrift Supervision (the "OTS"), and the State Corporation Commission of Virginia (the "SCC"). The Federal Reserve, the OTS and the SCC approvals have been received. The Holding Company Merger is also subject to other usual conditions, including receipt by Crestar and American National of the legal opinion of Hunton & Williams, counsel to Crestar, that the Holding Company Merger and the Bank Merger each will constitute a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). See "The Holding Company Merger -- Conditions to Consummation of the Holding Company Merger." BUSINESS OF CRESTAR AND AMERICAN NATIONAL PENDING THE HOLDING COMPANY MERGER American National has agreed to carry on its operations only in the ordinary course of business and not to take certain actions relating to the operation of its business pending consummation of the Holding Company Merger without notice to or the approval of Crestar, including the payment of cash dividends other than the regular quarterly cash dividends consistent with its practice in effect in its fiscal quarter ended April 30, 1997. Crestar has agreed that it will conduct its operations only in the ordinary course of business consistent with past practice and not to take certain actions. See "The Holding Company Merger -- Business of Crestar and American National Pending the Holding Company Merger." WAIVER AND AMENDMENT; TERMINATION Crestar and American National may amend or modify the Agreement at any time, except that, after the vote by the shareholders of Crestar and American National, no such amendment or modification may be made which reduces or changes the form and amount of consideration payable pursuant to the Agreement without further shareholder approval. If at any time before the Effective Time of the Holding Company Merger, a material term of the Agreement or Holding Company Plan of Merger is amended, the American National Board will postpone or reschedule the American National Special Meeting (or, if necessary, call additional shareholder meetings), to vote on the Agreement and Holding Company Plan of Merger, as amended, and resolicit proxies for use at such meeting. Crestar and American National each has the right, acting unilaterally, to terminate the Agreement should the Holding Company Merger not be consummated by March 31, 1998 and prior to that time upon the occurrence of certain events. See "The Holding Company Merger -- Waiver and Amendment; Termination." 6 INTERESTS AND CONFLICT OF INTERESTS OF CERTAIN PERSONS IN THE HOLDING COMPANY MERGER Certain members of American National's management and the American National Board have interests and conflicts of interest in the Holding Company Merger in addition to their interests as shareholders of American National generally. These include, among other things, provisions in the Agreement requiring Crestar to honor existing employment and severance agreements with A. Bruce Tucker, Joseph M. Solomon, James M. Uveges and Mark S. Barker, indemnification and directors and officers liability insurance coverage for American National's directors and officers, and eligibility for certain Crestar employee benefits. For additional information concerning the employment agreements, see "The Holding Company Merger -- Interests and Conflicts of Interest of Certain Persons in the Holding Company Merger." All American National Options are issued pursuant to plans previously approved by the shareholders of American National. RESALE OF CRESTAR COMMON STOCK Shares of Crestar Common Stock received in the Holding Company Merger will be freely transferable by the holders thereof, except for those shares held by those holders who may be deemed to be "affiliates" of American National or Crestar under applicable federal securities laws. See "Resale of Crestar Common Stock." CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION Each of the Holding Company Merger and the Bank Merger is intended to be a tax-free "reorganization" as defined in Section 368(a) of the Code, but the receipt of cash by an American National Shareholder for any shares of American National Common Stock or in lieu of a fractional share of Crestar Common Stock will be a taxable transaction. In the opinion of Hunton & Williams, counsel to Crestar, the Holding Company Merger and the Bank Merger each will qualify as a "reorganization" as defined in Section 368(a) of the Code. A condition to consummation of the Holding Company Merger is the receipt by Crestar and American National of substantially the same opinion from Hunton & Williams as of the Closing Date. See "The Holding Company Merger -- Certain Federal Income Tax Consequences." EFFECTIVE TIME The Holding Company Merger will become effective on the date and time specified in the Articles of Merger for the Holding Company Merger to be filed with the Delaware Secretary of State and the SCC. The Bank Merger will become effective on the date and time specified in the Articles of Merger for the Bank Merger to be filed with the OTS and the SCC. The Effective Time of the Holding Company Merger is to be not later than March 31, 1998, and is expected no earlier than November 6, 1997 and prior to December 31, 1997. STOCK OPTION AGREEMENT Crestar and American National have entered into a Stock Option Agreement, dated as of June 23, 1997 (the "Option Agreement"), pursuant to which American National issued to Crestar an option (the "Option") to purchase up to 792,000 shares of American National Common Stock at a purchase price of $16.125 per share. The Option may be exercised in whole or in part, at any time or from time to time if a Purchase Event (as defined therein) shall have occurred and be continuing. The Option Agreement provides that to the extent that it shall have not been exercised, the Option shall terminate (i) on the Effective Date of the Holding Company Merger; (ii) upon termination of the Agreement in accordance with the provisions thereof (other than a termination resulting from a willful breach by American National of certain specified covenants contained therein or, following the occurrence of a Purchase Event (as defined therein), failure of American National's shareholders to approve the Agreement by the vote required under applicable law or under American National's certificate of incorporation); or (iii) 12 months after termination of the Agreement due to a willful breach by American National of certain specified covenants contained therein or, following the occurrence of a Purchase Event (as defined therein), failure of American National shareholders to approve the Agreement by the vote required under applicable law or under American National's charter. The Option Agreement is attached hereto as Annex II. See also "The Holding Company Merger -- Stock Option Agreement." 7 MARKET PRICES PRIOR TO ANNOUNCEMENT OF THE TRANSACTION The following table discloses the price per share of Crestar Common Stock and American National Common Stock based on the last reported sales prices per share of Crestar Common Stock on the NYSE Composite Transactions Tape and of American National Common Stock on The Nasdaq National Market on June 20, 1997, the last trading day preceding the public announcement of the proposed Transaction. See "Price Range of American National Common Stock and Dividend Policy" for information concerning recent market prices of the American National Common Stock. EQUIVALENT HISTORICAL PRO FORMA CRESTAR AMERICAN NATIONAL AMERICAN NATIONAL(A) Common Stock....... $41.25 $16.125 $20.25 - ---------------- (a) The amount of the equivalent price for American National Common Stock is the product of multiplying an assumed Exchange Ratio of .491 shares of Crestar Common Stock (the result of dividing $20.25 by the last sale price of Crestar Common Stock on June 20, 1997 of $41.25) by $41.25 per share. COMPARATIVE PER SHARE DATA The following table presents historical and pro forma per share data for Crestar, and historical and equivalent pro forma per share data for American National. The pro forma combined per Crestar common share amounts give effect to the Exchange Ratio of 0.437 shares of Crestar Common Stock for each share of American National Common Stock (based on the last sale price of Crestar Common Stock on August 6, 1997 of $46.3125). The equivalent pro forma per American National common share amounts allow comparison of historical information regarding one share of American National Common Stock to the corresponding data regarding what one share of American National Common Stock will equate to in the combined corporation; such amounts are computed by multiplying the pro forma combined per Crestar common share amounts by an assumed Exchange Ratio of 0.437. As discussed in "The Merger -- Determination of Exchange Ratio and Exchange for Crestar Common Stock," the final Exchange Ratio will be determined based on the average closing price for Crestar Common Stock as reported on the New York Stock Exchange for each of the 10 trading days ending on the 10th day prior to the day of the Effective Time of the Holding Company Merger. The following table is based on the assumption that all issued and outstanding shares of American National Common Stock are converted into shares of Crestar Common Stock. Crestar's fiscal year ends December 31 and American National's fiscal year ends July 31. In the following table, American National financial data are presented consistent with the fiscal year of Crestar. Under the heading "Years Ended December 31, 1996 and 1995," American National book value per share is as of December 31, 1996 and 1995. Under the heading "Six Months Ended June 30, 1997 and 1996", American National book value per share is as of June 30, 1997 and 1996, and net income and dividend data reflect results for the six months then ended. The per share data included in the following table should be read in conjunction with the consolidated financial statements of Crestar and the consolidated financial statements of American National incorporated by reference herein and the notes accompanying all such financial statements. Data in the table has been restated to reflect the two-for-one stock split distributed by Crestar on January 24, 1997. The data presented below are not necessarily indicative of the results of operations which would have been obtained if the Holding Company Merger had been consummated in the past or which may be obtainable in the future. 8
COMPARATIVE PER SHARE DATA (UNAUDITED) SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, 1997 1996 1996 1995 1994 ---- ---- ---- ---- ---- Book Value Per Share at Period End(1,4): Crestar historical $ 17.17 $ 16.04 $ 16.20 $ 16.12 $ 14.57 American National historical 13.36 13.00 12.91 12.78 N/A Pro forma combined per Crestar common share 17.35 16.23 16.34 16.31 N/A Equivalent pro forma per American National common share 7.58 7.10 7.16 7.13 N/A Cash Dividends Declared Per Common Share(1,4): Crestar historical(2) $ .29 $ .485 $ 1.275 $ .875 $ .765 American National historical .06 -- .03 .40 .398 Pro forma combined per Crestar common share(2) .29 .485 1.275 N/A N/A Equivalent pro forma per American National common share .127 .212 .557 N/A N/A Net Income Per Share(4): Crestar historical $ 1.32 $ 1.18 $ 1.94 $ 1.92 $ 1.93 American National historical .59 .30 .25 .21 .12 Pro forma combined per Crestar common share(3) 1.30 1.17 1.92 N/A N/A Equivalent pro forma per American National common share: .57 .51 .84 N/A N/A
- ----------------------- (1) Pro forma combined book value per share and cash dividends declared per share for Crestar and American National do not reflect exercise of options to acquire shares of American National Common Stock. Options to acquire 345,357 American National common shares at an average price per share of $8.97 were outstanding at June 30, 1997. Assumed exercise of these options does not have a significant impact upon the combined stockholders' equity of Crestar and American National or the pro forma combined cash dividends declared per share. (2) Pro forma combined dividends declared per Crestar common share represent historical dividends per share declared by Crestar. During the fourth quarter of 1996, Crestar declared two cash dividends. Of the two cash dividends declared, one for $.26 per share was paid during the fourth quarter of 1996, and one for $.27 per share was paid during the first quarter of 1997. (3) Pro forma combined net income per Crestar common share represents combined net income available to common shareholders, divided by pro forma combined average primary common shares outstanding. (4) American National Bancorp, Inc. ("American National"), the holding company for American National Savings Bank, F.S.B. ("Savings Bank"), acquired 100% of the stock of the Savings Bank on October 31, 1995. Prior to October 31, 1995, American National Bankshares, M.H.C. (MHC) served as a mutual holding company for the Savings Bank. Pro forma and equivalent pro forma per share information for American National for the twelve months ended December 31, 1995 and 1994, and as of December 31, 1994, is not presented due to the October 31, 1995 initial issuance of common stock by American National. 9 SELECTED FINANCIAL DATA - CRESTAR CRESTAR FINANCIAL CORPORATION The following Crestar consolidated financial data is qualified in its entirety by the information included in the documents incorporated in this Proxy Statement/Prospectus by reference. Interim financial results, in the opinion of Crestar management, reflect all adjustments necessary for a fair presentation of the results of operations, including adjustments related to completed acquisitions. All such adjustments are of a normal nature. The results of operations for an interim period are not necessarily indicative of results that may be expected for a full year or any other interim period. See "Incorporation of Certain Information by Reference."
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ------- (Dollars in millions, except per share data) EARNINGS (1): Net interest income $ 438.0 $ 430.3 $ 866.3 $ 814.9 $ 777.9 707.3 $ 660.1 Provision for loan losses 65.7 46.7 95.9 66.3 36.5 63.3 120.8 Net interest income after provision for loan losses 372.3 383.6 770.4 748.6 741.3 644.0 539.2 Noninterest income 214.5 179.1 336.4 323.0 288.7 273.6 255.4 Noninterest expense 359.0 355.8 783.5 721.1 700.6 652.8 641.9 Income before income taxes 227.7 206.9 323.3 350.5 329.4 264.8 152.6 Income tax expense 80.2 74.9 105.0 134.6 114.3 85.2 35.4 Net income 147.6 132.0 218.3 215.9 215.2 179.6 117.2 Net income applicable to common shares 147.6 132.0 218.3 215.9 215.2 177.4 114.7 PER COMMON SHARE DATA: Net income per share (primary) 1.32 1.18 1.95 1.92 1.93 1.60 1.13 Net income per share (fully diluted) 1.32 1.18 1.94 1.92 1.93 1.60 1.12 Dividends paid 0.56 0.49 1.01 0.88 0.77 0.57 0.40 Book value 17.17 16.04 16.20 16.12 14.57 13.72 12.48 Average primary shares (thousands) 111,573 112,160 112,037 112,432 111,643 110,836 101,885 Average fully diluted shares (thousands) 111,695 112,160 112,408 112,623 111,665 111,007 102,096 SELECTED PERIOD-END BALANCES: Total assets $ 22,809.8 $ 22,663.0 $ 22,861.9 $ 22,332.6 $ 20,167.7 $ 18,924.1 $ 17,702.9 Loans (net of unearned income) 14,258.7 13,705.3 14,049.7 14,032.8 13,194.8 10,666.5 9,580.1 Allowance for loan losses 279.2 272.9 268.9 274.4 265.2 254.7 244.3 Nonperforming assets (2) 92.1 122.9 109.0 129.0 152.7 177.8 317.9 Total deposits 15,846.5 15,854.0 15,671.2 16,297.0 15,199.0 14,432.2 13,886.2 Long-term debt 819.1 696.7 659.3 671.3 715.1 604.0 334.4 Common shareholders' equity 1,900.1 1,777.1 1,779.5 1,785.6 1,601.5 1,510.1 1,339.3 Total shareholders' equity 1,900.1 1,777.1 1,779.5 1,785.6 1,601.5 1,510.1 1,384.3 AVERAGE BALANCES: Total assets $ 21,470.5 $ 21,497.4 $ 21,588.0 $ 20,435.8 $ 19,380.1 $ 17,824.2 $ 16,910.2 Loans (net of unearned income) 13,982.4 13,767.7 13,629.6 13,675.1 11,811.3 9,950.3 9,951.5 Total deposits 15,611.7 15,854.4 16,048.2 15,431.5 15,145.8 13,983.9 13,824.8 Long-term debt 843.9 707.6 689.0 695.5 588.3 463.7 308.5 Common shareholders' equity 1,814.3 1,767.8 1,776.7 1,716.7 1,561.3 1,431.1 1,211.8 Total shareholders' equity 1,814.3 1,767.8 1,776.7 1,716.7 1,561.3 1,475.0 1,256.8
10
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ------- (Dollars in millions, except per share data) RATIOS: Return on average assets $ 1.37 $ 1.23 $ 1.01 $ 1.06 $ 1.11 $ 1.01 $ 0.69 Return on average shareholders' equity 16.27 14.93 12.28 12.58 13.78 12.18 9.33 Return on average common shareholders' equity 16.27 14.93 12.28 12.58 13.78 12.39 9.47 Net interest margin (3) 4.54 4.44 4.44 4.44 4.47 4.47 4.44 Nonperforming assets to loans and foreclosed properties at period end 0.64 0.89 0.77 0.92 1.15 1.66 3.27 Net charge-offs to average loans 0.79 0.69 0.74 0.48 0.35 0.75 1.30 Allowance for loan losses to loans at period end 1.96 1.99 1.91 1.96 2.01 2.39 2.55 Allowance for loan losses to nonperforming loans at period end 483 310 330 305 254 222 133 Allowance for loan losses to nonperforming assets at period end 303 222 247 213 174 143 77 Total shareholders' equity to total assets at period end 8.33 7.84 7.78 8.00 7.94 7.98 7.82 CAPITAL RATIOS AT PERIOD END: Tier 1 risk-adjusted capital 10.7 9.2 10.5 9.3 9.9 10.9 10.7 Total risk-adjusted capital 13.5 12.1 13.4 12.3 13.1 13.3 13.5 Tier 1 leverage 9.3 7.5 8.4 7.6 7.8 7.8 7.8
- ----------------------------------- (1) Amounts may not add due to rounding. (2) Nonperforming assets include nonaccrual loans, restructured loans and foreclosed properties. (3) Net interest margin is calculated on a taxable equivalent basis, using a tax rate of 34% for 1992, and a tax rate of 35% for all other periods presented. 11 SELECTED FINANCIAL DATA - AMERICAN NATIONAL AMERICAN NATIONAL BANCORP, INC. The following American National Bancorp, Inc. consolidated financial data is qualified in its entirety by the information included in the documents included in this Proxy Statement/Prospectus. Interim financial results, in the opinion of management of American National Bancorp, Inc., reflect all adjustments necessary for a fair presentation of the results of operations. All such adjustments are of a normal recurring nature. The results of operations for an interim period are not necessarily indicative of results that may be expected for a full year or any other interim period. See "Incorporation of Certain Information by Reference."
NINE MONTHS ENDED APRIL 30, YEARS ENDED JULY 31, -------------------------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ------- (Dollars in thousands, except per share data) EARNINGS: Net interest income........................$ 11,335 $ 9,339 $ 12,865 $ 11,746 $ 11,084 $ 11,176 $ 9,806 Provision for loan losses.................. 460 562 772 3,386 1,989 3,611 2,679 Net interest income after provision for loan losses................. 10,875 8,777 12,093 8,360 9,095 7,565 7,127 Noninterest income......................... 644 615 293 940 2,117 1,690 2,390 Noninterest expense........................ 9,914 7,491 10,039 9,340 9,228 8,821 9,456 Income (loss) before income taxes.......... 1,605 1,901 2,347 (40) 1,984 434 61 Income tax provision (benefit)............. 539 614 801 (50) 695 322 (135) Income before cumulative effect of accounting change......................... 1,066 1,287 1,546 10 1,289 112 196 Cumulative effect of change in accounting for income taxes............... - - - - - 583 - Net income ................................ 1,066 1,287 1,546 10 1,289 695 196 Net income applicable to common shares............................. .30 .29 .36 - .41 N/A N/A PER COMMON SHARE DATA: Net income (per common share)..............$ .30 $ .29 $ .36 $ - $ .41 N/A N/A Dividends declared .09 N/A N/A .40 .30 N/A N/A Book value................................. 13.01 12.85 13.06 14.11 14.21 N/A N/A Average Common Share and Common Share Equivalents Outstanding (thousands)(7)................ 3,482 3,809 3,766 2,052 2,052 N/A N/A SELECTED PERIOD-END BALANCES: Total assets...............................$505,318 $449,019 $461,271 $426,174 $400,046 $303,259 $398,869 Loans (net of unearned income)............ 322,805 268,075 278,042 232,089 208,542 221,595 254,665 Allowance for loan losses................. 3,827 4,394 4,412 6,361 3,669 2,326 1,468 Nonperforming assets(5)................... 2,942 4,645 4,675 9,497 4,281 8,932 12,158 Deposits.................................. 329,516 316,502 313,083 314,613 308,989 317,711 344,586 Long-term debt............................. 44,818 18,975 27,875 11,862 21,997 16,382 23,400 Common shareholders' equity............... 45,315 49,011 47,270 28,959 29,160 21,193 20,508 Total shareholders' equity................. 45,315 49,011 47,270 28,959 29,160 21,193 20,508 AVERAGE BALANCES: Total assets.............................. $485,990 $439,454 $445,512 $417,004 $390,746 $384,216 $407,436 Loans receivable, net...................... 301,509 246,396 254,090 225,633 217,662 241,437 277,049 Deposits................................... 319,298 319,526 315,853 309,596 315,168 331,211 347,987 Long-term debt............................. 32,410 16,288 11,764 19,178 11,047 17,262 24,256 Common shareholders' equity................ 45,276 40,999 42,558 28,973 27,555 21,275 20,595 Total shareholders' equity................ 45,276 40,999 42,558 28,973 27,555 21,275 20,595
12
NINE MONTHS ENDED APRIL 30, YEARS ENDED JULY 31, ------------------------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ------- (Dollars in thousands, except per share data) RATIOS: Return on average assets (1)............... .29% .39% .35% -% .33% .18% .05% Return on average shareholders' equity (1)................. 3.14 4.18 3.63 .03 4.68 3.27 .95 Return on average common shareholders' equity (1)................. 3.14 4.18 3.63 .03 4.68 3.27 .95 Net interest margin(6)..................... 3.16 2.87 2.93 2.86 2.89 2.97 2.44 Nonperforming assets to loans and foreclosed properties at period end................. .91 1.73 1.68 4.08 2.05 4.01 4.73 Net charge-offs to average loans (1) .46 1.32 1.07 .31 .30 1.14 1.06 Allowance for loan losses to loans at period end...................... 1.19 1.64 1.59 2.74 1.76 1.05 .58 Allowance for loan losses to nonperforming loans at period end........ 136.63 103.41 112.87 73.90 101.41 30.42 15.06 Allowance for loan losses to nonperforming assets at period end 130.08 94.60 94.37 66.98 85.70 26.04 12.07 Total shareholders' equity to total assets at period end............ 8.97 10.92 10.25 6.80 7.29 5.53 5.14 CAPITAL RATIOS AT PERIOD END: Tier 1 risk-adjusted capital............... 8.26% 8.86% 8.64% 6.96% 7.16% 5.43% 4.67% Total risk-adjusted capital................ 17.37 18.64 18.20 15.29 16.01 10.18 8.39 Tier 1 leverage............................ 8.26 8.86 8.64 6.96 7.16 5.43 4.67
- -------------- (1) Annualized where appropriate (2) On October 31, 1995, American National acquired 100% of the capital stock of the Savings Bank, sold 2,182,125 shares of common stock in a subscription offering for a purchase price of $10.00 per share (the "Offering"), resulting in net proceeds of approximately $19.3 million, net of expenses. Of the net proceeds, $8.9 million was contributed to the Savings Bank. American National issued 1,798,380 shares of common stock in exchange for 927,000 shares of the Savings Bank's common stock held by public shareholders at an exchange ratio of 1.94 shares for each share of the Savings Bank's common stock. Prior to the Conversion, the Savings Bank had completed a mutual holding company reorganization in October, 1992. On November 3, 1993, the Savings Bank issued 927,000 shares to the public resulting in net proceeds of approximately $8.3 million, net of expenses and 1,165,000 shares to the Savings Bank's mutual holding company parent, American National Bankshares, M.H.C. 13 RECENT DEVELOPMENTS CONCERNING AMERICAN NATIONAL BANCORP, INC. The following tables set forth selected consolidated financial condition data for American National at July 31, 1997 and 1996 and April 30, 1997, and selected consolidated operating data for American National for the three months and twelve months ended July 31, 1997 and 1996. The Selected Consolidated Financial Condition Data and the Selected Consolidated Operating Data at and for the three months and twelve months ended July 31, 1997 and 1996 are derived from the unaudited consolidated financial statements of American National which in the opinion of management reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation.
AT AT AT JULY 31, APRIL 30, JULY 31, 1997 1997 1996 ------ ------ ----- SELECTED CONSOLIDATED FINANCIAL CONDITION DATA: (IN THOUSANDS) Total assets............................................ $502,092 $505,318 $461,271 Loans receivable, net (1)............................... 332,287 322,805 278,042 Mortgage-backed securities.............................. 101,329 102,630 100,195 Investment securities................................... 20,521 30,320 24,109 Securities available for sale........................... 28,309 30,781 40,266 Cash and cash equivalents............................... 5,468 4,358 4,508 Investments in real estate, net......................... 5,057 5,035 5,670 Investments in and advances to real estate joint venture 159 397 1,270 Deposits................................................ 329,663 329,516 313,083 Borrowed funds.......................................... 118,369 121,946 97,269 Stockholders' equity.................................... 46,860 45,315 47,270
- ---------------------------- (1) Includes loans held for sale.
FOR THE THREE MONTHS FOR THE TWELVE MONTHS ENDED JULY 31, ENDED JULY 31, ----------------- ------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- SELECTED CONSOLIDATED OPERATING DATA: (IN THOUSANDS) Interest income......................................... $9,928 $8,671 $37,751 $33,418 Interest expense........................................ 5,842 5,145 22,330 20,553 ----- ----- ------ ------ Net interest income.................................. 4,086 3,526 15,421 12,865 Provision for loan losses............................... 40 210 500 772 ------ ----- ----- ----- Net interest income after provision for loan losses.......................................... 4,046 3,316 14,921 12,093 Noninterest income: Fees and service charges............................. 239 191 805 640 Loss on sale of loans, mortgage-backed securities and investments, net.................. (9) (563) (43) (531) Other income......................................... 94 50 206 184 ------ ------ ----- ----- Total noninterest income......................... 324 (322) 968 293 Noninterest expenses: Salaries and employee benefits....................... 1,212 1,048 4,715 4,276 Net occupancy........................................ 334 320 1,320 1,341 Federal deposit insurance premiums................... 52 186 2,457 772 (Gain) Loss on investments in real estate............ (60) 90 53 390 Other................................................ 1,135 904 4,042 3,260 ------ ----- ------- ------- Total noninterest expenses....................... 2,673 2,548 12,587 10,039 ----- ----- ------ ------ Income before income taxes.............................. 1,697 446 3,302 2,347 Income tax provision.................................... 480 187 1,019 801 ----- ----- ------- ----- Net income....................................... $ 1,217 $ 259 $2,283 $1,546 ======= ===== ====== ====== Net income applicable to common shares.................. $ 0.34 $0.07 $ 0.64 N/A ======= ===== ====== ======
14
For the Three Months For the Twelve Months Ended July 31, Ended July 31, ---------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- RATIOS: Return on average assets(1)............................. .96% .23% .47% .35% Return on average shareholders' equity (1)............................. 10.58 2.16 5.02 3.63 Net interest margin..................................... 3.28 3.12 3.19 2.93 Nonperforming assets to loans and foreclosed properties at period end............................. .29 1.68 .29 1.68 Net charge-offs to average loans (1).................... .27 .28 .41 1.07 Allowance for loan losses to loans at period end.................................. 1.10 1.59 1.10 1.59 Allowance for loan losses to nonperforming loans at period end.................... 457.02 112.87 457.02 112.87 Allowance for loan losses to nonperforming assets at period end................... 378.71 94.37 378.71 94.37 Total shareholders' equity to total assets at period end........................ 9.33 10.25 9.33 10.25 CAPITAL RATIOS AT PERIOD END: Tier 1 risk-adjusted capital............................ 8.65 8.64 8.65 8.64 Total risk-adjusted capital............................. 18.28 18.20 18.28 18.20 Tier 1 leverage......................................... 8.65 8.64 8.65 8.64
- ---------------------------------- (1) Annualized where appropriate. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS FINANCIAL CONDITION: Total assets decreased $3.3 million to $502.1 million at July 31, 1997 from $505.3 million at April 30, 1997. Loans receivable increased $9.5 million due to increased originations and purchases of loans. Investment securities decreased $9.8 million due primarily to securities that were called for redemption. RESULTS OF OPERATIONS: Interest income increased by $1.3 million for the three months ended July 31, 1997 compared to the three months ended July 31, 1996 primarily due to a $46.6 million or 10.3% increase in average interest earning assets to $499.1 million for the three months ended July 31, 1997 and an increase in the yield on average interest earning assets to 7.96% for the three months ended July 31, 1997 from 7.66% for the three months ended July 31, 1996. Interest expense increased by $697,000 for the three months ended July 31, 1997 compared to the three months ended July 31, 1996 primarily due to a $45.4 million increase in average interest-bearing liabilities and an increase of 11 basis points in the average cost of funds. Noninterest income increased $646,000 primarily due to a decrease in the loss on the sale of loans, mortgage-backed and investment securities. In July 1996, the Company sold low yielding securities and reinvested the proceeds into higher yielding loans and securities. INTEREST INCOME: Interest income totalled $37.8 million for the fiscal year ended July 31, 1997, compared to $33.4 million for the fiscal year ended July 31, 1996. The $4.4 million, or 13.2%, increase in interest income was due to an increase of $44.9 million in average interest-earning assets to $483.4 million at July 31, 1997 and a 19 basis point increase in the yield on average interest-earning assets to 7.81% from 7.62%. The increase in average interest-earning assets resulted primarily from a $50.7 million, or 21.1%, increase in average mortgage loans to $291.4 million from $240.7 million and a $14.8 million, or 79.1%, increase in average investment securities to $33.5 million from $18.7 million, partially offset by a $23.6 million, or 15.2%, decrease in average mortgage-backed securities. 15 INTEREST EXPENSE: Interest expense totalled $22.3 million for the fiscal year ended July 31, 1997, compared to $20.6 million for the fiscal year ended July 31, 1996. The $1.7 million increase was due to a $41.2 million, or 10.4%, increase in average interest-bearing liabilities to $437.9 million from $396.7 million, offset partially by an 8 basis point decrease in the average cost of interest-bearing liabilities to 5.10% from 5.18%. Total average deposits increased $5.9 million, or 1.9% and total average borrowed funds increased $35.3 million, or 43.6%. The Company's provision for loan losses was $500,000 for the fiscal year ended July 31, 1997, compared to $772,000 for the fiscal year ended July 31, 1997. The decrease in the provision for loan losses reflected a reduction in nonperforming assets to $1.0 million, or .2% of total assets, at July 31, 1997 from $4.7 million, or 1.0% of total assets, at July 31, 1996. Noninterest income totalled $968,000 for the fiscal year ended July 31, 1997, compared to $293,000 for the fiscal year ended July 31, 1996. The $675,000 increase was due primarily to nominal sales of securities during the fiscal year ended July 31, 1997 as compared to the sale of low yielding securities at a loss of $572,000 during the fiscal year ended July 31, 1996. Noninterest expense increased $2.5 million to $12.6 million for the fiscal year ended July 31, 1997, up from $10.0 million for the fiscal year ended July 31, 1996. The increase was primarily due to the Federal Deposit Insurance Corporation ("FDIC") one-time special assessment to recapitalize the Savings Association Insurance Fund. On September 30, 1996, legislation was enacted and signed into law which provided a resolution to the disparity in the Bank Insurance Fund/ Savings Association Insurance Fund ("SAIF") premiums. In particular, SAIF-Insured institutions paid a one-time assessment of 65.7 cents on every $100 of deposits held at March 31, 1995. As a result of the new law, the Company paid approximately $2.1 million. The special assessment was tax deductible, therefore, the cost, net of income tax benefits, is approximately $1.4 million. The Company made a one-time charge to earnings of this amount during the fiscal quarter ended October 31, 1996. In addition, beginning January 1, 1997, the previous annual minimum premium of 23 basis points was reduced to 6.5 basis points. In addition, the increase resulted from the amortization of the 1996 Recognition and Retention Plan, an increase in professional services and additional loss recognized on the investment in a real estate joint venture. 16 AMERICAN NATIONAL SPECIAL MEETING Each copy of this Proxy Statement/Prospectus mailed to holders of American National Common Stock is accompanied by a proxy card furnished in connection with the American National Board's solicitation of proxies for use at the American National Special Meeting. The Special Meeting is scheduled to be held on November 4, 1997, at American National's main office located at 211 North Liberty Street, Baltimore, Maryland. Only holders of record of American National Common Stock at the close of business on September 19, 1997 are entitled to receive notice of and to vote at the American National Special Meeting. At the Special Meeting, shareholders will consider and vote upon the proposal to approve the Agreement. HOLDERS OF AMERICAN NATIONAL COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY TO AMERICAN NATIONAL IN THE ENCLOSED, POSTAGE-PAID ENVELOPE. FAILURE TO RETURN YOUR PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE AGREEMENT. Any holder of American National Common Stock who has delivered a proxy appointment may revoke it any time before it is voted by attending and voting in person at the meeting or by giving notice of revocation in writing or submitting a signed proxy bearing a later date to American National Bancorp, Inc., 211 North Liberty Street, Baltimore, Maryland 21201, Attention: Secretary, provided such notice or proxy is actually received by American National before the vote of shareholders. A proxy will not be revoked by death or supervening incapacity of the shareholder executing the proxy unless, before the shares are voted, notice of such death or incapacity is filed with the Secretary or other person responsible for tabulating votes on behalf of American National. The shares of American National Common Stock represented by properly executed proxies received at or prior to the Special Meeting and not subsequently revoked will be voted as directed by the shareholders submitting such proxies. IF INSTRUCTIONS ARE NOT GIVEN, PROXIES RECEIVED WILL BE VOTED FOR APPROVAL OF THE AGREEMENT AND THE PLAN OF MERGER. IF ANY OTHER MATTERS ARE PROPERLY PRESENTED FOR CONSIDERATION AT THE SPECIAL MEETING OR ANY ADJOURNMENT, THE PERSONS NAMED IN THE AMERICAN NATIONAL PROXY CARD ENCLOSED HEREWITH WILL HAVE DISCRETIONARY AUTHORITY TO VOTE ON SUCH MATTERS IN ACCORDANCE WITH THEIR BEST JUDGMENT. American National is unaware of any matter to be presented at the American National Special Meeting other than those indicated above. The cost of soliciting proxies from holders of American National Common Stock will be borne by American National. Such solicitation will be made by mail but also may be made by telephone or in person by the directors, officers and employees of American National and Savings Bank (who will receive no additional compensation for doing so). In addition to such solicitations, Regan & Associates, Inc., a proxy solicitation firm, will assist American National in soliciting proxies for the American National Special Meeting and will be paid a fee of $3,500, plus out-of-pocket expenses. American National will make arrangements with brokerage firms and other custodians, nominees and fiduciaries to send proxy materials to their principals. AMERICAN NATIONAL SHAREHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. AMERICAN NATIONAL SHAREHOLDERS ELECTING TO RECEIVE CASH FOR THEIR SHARES SHOULD FOLLOW THE INSTRUCTIONS IN THE ENCLOSED CASH OPTION FORM. VOTE REQUIRED The affirmative vote of the holders of a majority of the outstanding shares of American National Common Stock entitled to vote at the Special Meeting is required in order to approve the Agreement. A failure to return a properly executed proxy or to vote in person at the Special Meeting will have the same effect as a vote against the Agreement. As of the Record Date, there were 3,613,011 shares of American National Common Stock outstanding and entitled to vote at the American National Special Meeting, with each share being entitled to one vote. 17 As of the Record Date, the directors and executive officers of American National and their affiliates beneficially owned a total of 505,055 shares (representing approximately 12.8% of the outstanding shares of American National Common Stock), and the directors and executive officers of Crestar and their affiliates owned less than 1% of the outstanding shares of American National Common Stock. Six of the seven American National directors have agreed to vote their shares in favor of approval of the Agreement. RECOMMENDATION For the reasons described below, the American National Board has adopted the Agreement, believes the Holding Company Merger is in the best interests of American National and its shareholders and recommends that the shareholders of American National vote FOR approval of the Agreement and the Plan of Merger. In making its recommendation, the American National Board considered, among other things, the opinion of Keefe Bruyette that the Common Stock Price Per Share was fair to American National shareholders from a financial point of view. THE HOLDING COMPANY MERGER The detailed terms of the Holding Company Merger are contained in the Agreement and Plan of Reorganization, attached as Annex I to this Proxy Statement/Prospectus. The following discussion describes the material features of the proposed Holding Company Merger and the terms of the Agreement. This description is qualified by reference to the Agreement which is incorporated by reference herein. BACKGROUND OF THE HOLDING COMPANY MERGER Since its entry into the Greater Washington Region ("GWR") in 1985 by the acquisition of NS&T Bankshares in the District of Columbia and the acquisition of Bethesda Bancorporation in Maryland the following year, Crestar has sought to increase its presence in GWR and, more recently, Baltimore, by a series of strategic thrift and bank acquisitions. Since 1985, Crestar has acquired 25 banks and thrift institutions in GWR and Maryland. In 1995, Crestar acquired branches of Chase Manhattan Bank of Maryland and Loyola Federal Savings Bank in Baltimore. In 1996, Crestar acquired branches of Mellon Bank MD and Citizens Bank of Maryland. Crestar is an active acquiror of bank holding companies, commercial banks, and thrifts, and a number of its officers have as one of their principal duties contacting potential acquisition candidates. Since January 1, 1997, Crestar has made no firm offer to acquire a financial institution other than American National. In September 1996, a representative of Crestar met with the Chief Executive Officer of American National and indicated that Crestar had an interest in pursuing a business combination with American National. A follow-up meeting was held in October 1996 between representatives of Crestar and the Chief Executive Officer of American National. The Board of Directors of American National was apprised of these meetings, and the Board authorized the Executive Committee to serve as a merger and acquisitions committee, to meet with Crestar representatives and to retain a financial consultant to prepare a strategic options analysis. Although no determination was made that the Company should seek an acquisition transaction, the Board observed that the changing competitive situation in banking and financial services, on both a nationwide basis and in particular with respect to the mid-Atlantic region, had been evidenced by considerable consolidation activity in recent years. The Executive Committee thereafter met with American National's legal counsel to discuss the Board's fiduciary obligations in general and in particular in connection with a possible merger or acquisition transaction. In early January 1997, the Executive Committee of the Board met with Crestar representatives, who again reiterated Crestar's interest in an acquisition of American National. On January 16, 1997, the Board held a meeting at which the financial consultant retained by American National presented a strategic options analysis. Among other things, the analysis reviewed potential valuations on a going-forward basis assuming that American National remained independent and continued to implement its current business plan. Given this analysis and the preliminary pricing levels discussed by Crestar, the Board voted to continue discussions with Crestar. 18 In March 1997, a confidentiality agreement was entered into by American National and Crestar, pursuant to which American National began to provide due diligence information to Crestar. In April 1997, the Board of Directors of American National approved the engagement of Keefe Bruyette for the purpose of advising the Company with respect to the acquisition proposal from Crestar and related matters. In May 1997, several meetings were held between representatives of Crestar and American National culminating in a meeting on May 13, 1997 at which Crestar representatives presented an outline of the merger proposal to the Executive Committee, including pricing terms (a per share consideration of approximately $18 per share was presented). The Executive Committee concluded that the per share consideration offered was insufficient. On May 15, 1997, a special meeting of the Board of Directors was convened for the purpose of reviewing the Crestar proposal, at which meeting Keefe Bruyette was present. The Executive Committee advised the Board of its view that the price per share offered was insufficient. Following discussion, including a review of the proposal by Keefe Bruyette, the Board of Directors authorized the Executive Committee, in consultation with legal counsel and Keefe Bruyette, to inform Crestar that the price was insufficient, and, if Crestar was still interested in pursuing a merger, to continue negotiations with Crestar for the purpose of obtaining a higher price and arriving at the terms of a possible definitive merger agreement for submission to the Board of Directors. During late May and early June, American National, primarily through Keefe Bruyette, and Crestar and their respective counsel, negotiated the terms of a definitive merger agreement. On June 10 and 13, counsel to American National reviewed the terms of the proposed and revised definitive merger agreements with the Executive Committee. At the June 13 meeting, Keefe Bruyette also presented its analysis to the Executive Committee of the merger from a financial point of view. A meeting of the Board of Directors of American National was held on June 19, at which time counsel reviewed the terms of the proposed definitive merger agreement, and Keefe Bruyette provided its analysis as to the merger consideration from a financial point of view. The definitive agreement included the $20.25 merger consideration. Keefe Bruyette informed the American National Board of its opinion that the proposed merger consideration was fair from a financial point of view to the holders of American National Common Stock. Counsel to American National reviewed the history of negotiations of the transaction, and again discussed the fiduciary duties of a board of directors in general and in connection with merger and acquisition transactions. Following these presentations, and after Board discussion, by a vote of six to one the Board determined to enter into the Agreement, subject to the prompt satisfactory completion of due diligence by Crestar. From June 20 to 22, Crestar conducted its on-site due diligence review at American National's headquarters. On June 23, 1997, the Agreement was executed on behalf of American National and Crestar, and a joint press release was issued announcing the Merger. REASONS FOR THE HOLDING COMPANY MERGER; RECOMMENDATIONS OF THE AMERICAN NATIONAL BOARD The Board of Directors of American National believes that the Holding Company Merger is fair to, and in the best interests of, American National and its shareholders. Accordingly, the Board has approved and adopted the Agreement and the Plan of Merger. The Board of Directors of American National therefore recommends that shareholders vote FOR the approval and adoption of the Agreement and the Plan of Merger. In reaching its determination that the Holding Company Merger is fair to, and in the best interests of, American National and its stockholders, the Board considered a number of factors, including, without limitation, the following: (i) the Board's familiarity with and review of American National's business, operations, financial condition, earnings and prospects, including the ability to implement its business plan; (ii) the current and prospective economic environment and competitive and regulatory constraints facing financial institutions and particularly the Savings Bank; 19 (iii) the opinion of Keefe Bruyette that the Common Stock Price Per Share to be received by holders of American National Common Stock was fair to American National shareholders from a financial point of view. See "--Opinion of Financial Advisor to American National"; (iv) the expectation that the Holding Company Merger would be tax free to the shareholders of American National who elect to receive Crestar Common Stock in exchange for their shares of American National Common Stock; (v) the presentations to the Board of Directors by Keefe Bruyette with respect to the relationship of the Common Stock Price Per Share to the recent and then current market value, book value, and earnings per share of American National Common Stock and the prices and premiums paid in certain other similar transactions involving financial institutions; (vi) the Board's review of the alternative of continuing to remain independent and the analyses provided to the Board as to the range of possible values to shareholders that could potentially be obtained as an independent entity given possible levels of future earnings. In this connection, the Board was aware of certain risks of remaining independent, including, among other things, the limited potential to engage in acquisitions which could further enhance shareholder value; (vii) the history of the negotiations of the Agreement (see "--Background of the Merger"); (viii) the financial resources of Crestar and the likelihood of receiving the requisite regulatory approvals in a timely manner; (ix) the financial position and operating results of Crestar, and the prospects for future growth of the combined company; (x) the effect of the proposed Merger on the employees and customers of American National and the Savings Bank and the communities in which the Savings Bank operates; and (xi) the non-solicitation clauses and the financial impact of the option agreement and the fact that Crestar required such provisions as a condition to entering into the Agreement. THE AMERICAN NATIONAL BOARD BELIEVES THAT THE HOLDING COMPANY MERGER AND THE AGREEMENT ARE IN THE BEST INTERESTS OF, AMERICAN NATIONAL AND ITS SHAREHOLDERS. THE AMERICAN NATIONAL BOARD RECOMMENDS THAT AMERICAN NATIONAL SHAREHOLDERS VOTE FOR THE AGREEMENT AND THE PLAN OF MERGER. For information regarding interests of directors and executive officers of American National in the Holding Company Merger, see "--Interests of Certain Persons in the Holding Company Merger" and "Ownership of American National Common Stock by Certain Beneficial Owners." OPINION OF FINANCIAL ADVISOR Keefe Bruyette was retained by American National to act as its financial advisor in connection with its ongoing consideration and/or implementation of a proposal of acquisition by Crestar. Keefe Bruyette, as part of its investment banking business, is continuously engaged in the evaluation of businesses and securities in connection with mergers and acquisitions, negotiated underwriting, and distributions of listed and unlisted securities. Keefe Bruyette is familiar with the market for common stocks of publicly traded banks, savings institutions and bank and savings institution holding companies. The Board of Directors of American National selected Keefe Bruyette on the basis of the firm's reputation and its experience and expertise in transactions similar to the Merger and its prior work for and relationship with American National in connection with the October, 1995, reorganization of American National from the mutual holding company to the stock holding company structure and the concurrent offering of American National's Common Stock to the public. Except as described herein, Keefe Bruyette is not affiliated with American National, Crestar or their respective affiliates. 20 Pursuant to its engagement, Keefe Bruyette was asked to render an opinion as to the fairness from a financial point of view of the Common Stock Price Per Share to the stockholders of American National. Keefe Bruyette delivered a fairness opinion dated as of June 23, 1997 to the Board of Directors of American National that the Common Stock Price Per Share is fair to the stockholders of American National from a financial point of view. No limitations were imposed by American National upon Keefe Bruyette with respect to the investigations made or procedures followed by Keefe Bruyette in rendering its opinion. Keefe Bruyette has consented to the inclusion herein of the summary of its opinion to the Board of American National and to the entire opinion being attached hereto as Annex III. THE FULL TEXT OF THE OPINION OF KEEFE BRUYETTE, UPDATED AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS WHICH SETS FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX III TO THE PROXY STATEMENT/PROSPECTUS AND SHOULD BE READ IN ITS ENTIRETY. THE SUMMARY OF THE OPINION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPINION. SUCH OPINION DOES NOT CONSTITUTE A RECOMMENDATION BY KEEFE BRUYETTE TO ANY AMERICAN NATIONAL STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE AGREEMENT AND PLAN OF MERGER. In rendering its opinion Keefe Bruyette (i) reviewed the financial and business data supplied to it by American National including American National's prospectus dated September 11, 1995 and September 14, 1993, American National's Annual Reports, Proxy Statements and Form 10-K's for the years ended July 31, 1994, 1995 and 1996, and American National's quarterly reports on Form 10-Q for the quarters ended October 31, 1996, January 31, 1997 and April 30, 1997; (ii) reviewed Crestar's Annual Report and Form 10-K for the years ended December 31, 1995 and 1996 and Form 10-Q for the quarter ended March 31, 1997, (iii) discussed with senior management and the Board of American National and Savings Bank the possibility of obtaining other acquisition proposals, and the board's reasons for seeking affiliation and merger; (iv) discussed with senior management of Crestar the current and prospective outlook for Crestar and the reasons for seeking affiliation and merger; (v) considered historical quotations and the prices of recorded transactions in American National's Common Stock since the 1995 reorganization of American National from the mutual holding company to the stock holding company structure; and (vi) reviewed the financial and stock market data of other savings institutions, particularly in the Mid-Atlantic region of the United States, the financial and structural terms of several other recent transactions involving mergers or acquisitions of saving institutions or proposed changes of control of comparably situated companies. In rendering its opinion, Keefe Bruyette assumed and relied upon the accuracy and completeness of the information provided to it by Crestar and American National and obtained by it from public sources. In its review, with the consent of the American National Board, Keefe Bruyette did not undertake any independent verification of the information provided to it nor did it make any independent appraisal or evaluation of the assets or liabilities of American National or Crestar, or of potential or contingent liabilities of Crestar or American National. With respect to the financial information including forecasts and asset valuations received from American National, Keefe Bruyette assumed (with American National's consent) that such information had been reasonably prepared reflecting the best currently available estimates and judgments of American National's management. Keefe Bruyette also assumed that no restrictions or conditions would be imposed by regulatory authorities that would have a material adverse effect on the contemplated benefits of the Merger to American National or the ability to consummate the Merger. Keefe Bruyette's review of comparable transactions included the compilation of pending or recently completed acquisitions of savings institutions sorted into five groups. The groups were identified with characteristics similar to American National's and compiled as follows: (i) all acquisitions of savings institutions since June 30, 1996; (ii) acquisitions of savings institutions with a total transaction value between $50 million and $100 million; (iii) acquisitions of savings institutions where the target had tangible equity to assets between 8% and 12%; (iv) acquisitions where the target had assets between $300 million and $700 million; and (v) acquisitions of savings institutions where the target is located in the Mid-Atlantic region of the United States. The results of the analysis are summarized below. The proposal by Crestar to acquire American National was evaluated from a financial perspective along five industry-accepted ratios. The information in the attached table summarized the material information analyzed by Keefe Bruyette with respect to the Merger. The summary does not purport to be a complete description of the analysis performed by Keefe Bruyette and should not be construed independently of the other information considered by Keefe Bruyette in rendering its opinion. Selecting portions of Keefe Bruyette's analysis or isolating certain aspects of the comparable transactions without considering all analyses and factors could create an incomplete or potentially misleading view of the evaluation process. 21 In its analysis of comparable transactions, Keefe Bruyette evaluated each pricing ratio against the proposed pricing analysis of the Crestar acquisition of American National. Slightly more weight was given to the price to tangible book value ratio, the price to last twelve month earnings per share and the price to core deposit premium ratio. In preparing its analyses, Keefe Bruyette made numerous assumptions with respect to industry performance, business and economic conditions and other matters, many of which are beyond the control of Keefe Bruyette and American National. The analyses performed by Keefe Bruyette are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses and do not purport to be appraisals or reflect the prices at which a business may be sold. On May 15, 1997, American National engaged Keefe Bruyette to, among other things, assist American National in evaluating and advising American National relative to the merger offer from Crestar, to prepare a summary of recent merger and acquisition trends in the financial service industry, advise American National as to the structure of the proposed merger, and render an opinion as to the fairness of the consideration to be paid in any proposed merger. American National agreed to pay Keefe Bruyette for such services a fee of $50,000 upon the delivery of the fairness opinion, $50,000 upon mailing of the proxy solicitation materials and $290,000 upon consummation of the Holding Company merger. American National has also agreed to reimburse Keefe Bruyette for its reasonable out-of-pocket expenses up to $10,000. Keefe Bruyette's compensation, including the Success Fee which is contingent upon completion of the Merger, was determined by arm's-length negotiations between American National and Keefe Bruyette. American National has further agreed to indemnify Keefe Bruyette and its affiliates, and their respective directors, officers and employees and each such other person controlling Keefe Bruyette or any of its affiliates from and against any and all losses, claims, damage and liabilities, joint and several, to which such indemnified parties may become subject under any applicable federal or state law, or otherwise, and related to or arising out of the Merger or the engagement of Keefe Bruyette pursuant to, and the performance by Keefe Bruyette of the services contemplated by, American National's agreement with Keefe Bruyette. 22 SUMMARY OF SELECTED M&A TRANSACTIONS WHERE THE TARGET IS A THRIFT INSTITUTION -----------------------------------
Transaction Price to Core Tangible LTM Deposit Book EPS(a) Assets Deposits Premium ---- ------ ------ -------- ------- M&A GROUP 1 - ALL TRANSACTIONS PENDING AND TRANSACTIONS COMPLETE SINCE 6/30/96 Pending (n=48) 167.0% 24.6x 16.1% 23.4% 10.8% Completed(b) (n=88) 149.5% 19.4x 13.3% 16.5% 6.6% Crestar/ANBK Merger 161.4% 53.3x 15.5% 23.7% 11.0% M&A GROUP 2 - TRANSACTION VALUE BETWEEN $50 MILLION AND $100 MILLION Pending (n=5) 181.7% 16.8x 14.0% 18.9% 10.8% Completed(b) (n=11) 171.6% 17.4x 14.1% 21.2% 8.5% Crestar/ANBK Merger 161.4% 53.3x 15.5% 23.7% 11.0% M&A GROUP 3 - TARGET TANGIBLE EQUITY TO ASSETS IS BETWEEN 8% AND 12% Pending (n=16) 167.2% 21.3x 15.5% 22.7% 9.4% Completed(b) (n=28) 149.5% 22.4x 14.6% 17.0% 6.0% Crestar/ANBK Merger 161.4% 53.3x 15.5% 23.7% 11.0% M&A GROUP 4 - TARGET THRIFT ASSET SIZE BETWEEN $300 MILLION AND $700 MILLION Pending (n=6) 194.0% 25.3x 14.6% 19.1% 10.8% Completed(b) (n=14) 178.6% 22.6x 13.5% 16.5% 8.7% Crestar/ANBK Merger 161.4% 53.3x 15.5% 23.7% 11.0% M&A GROUP 5 - TARGET LOCATED IN THE MID-ATLANTIC REGION Pending (n=6) 187.4% 17.7x 15.5% 21.2% 11.0% Completed(b) (n=11) 165.8% 22.6x 19.3% 24.1% 9.7% Crestar/ANBK Merger 161.4% 53.3x 15.5% 23.7% 11.0%
(a) Last twelve months earnings per share. (b) Transactions completed since June 30, 1996. 23 EFFECTIVE TIME OF THE HOLDING COMPANY MERGER The Holding Company Merger is expected to be consummated no earlier than November 6, 1997 and prior to December 31, 1997. The Holding Company Merger will be effective on the date (the "Effective Date") and the time (the "Effective Time") specified in the Articles of Merger that are to be filed with the Secretary of State of Delaware and the SCC as soon as practicable following satisfaction of all the conditions to the consummation of the Holding Company Merger set forth in the Agreement. Either American National or Crestar, acting unilaterally, may terminate the Agreement if the Holding Company Merger has not been consummated by March 31, 1998. Until the Effective Time of the Holding Company Merger occurs, American National shareholders will retain their rights as shareholders to vote on matters submitted to them by the American National Board. DETERMINATION OF EXCHANGE RATIO AND EXCHANGE OF AMERICAN NATIONAL COMMON STOCK FOR CRESTAR COMMON STOCK For the purpose of determining the Exchange Ratio, each share of American National Common Stock has been valued at $20.25 (the "Common Stock Price Per Share"). In the Holding Company Merger, each share of American National Common Stock (other than shares held directly by Crestar and shares to be exchanged for cash) is to be converted into a fraction of a share of Crestar Common Stock determined in accordance with the Exchange Ratio. The "Exchange Ratio" is to be calculated as follows: (i) if the average closing price of Crestar Common Stock as reported on the NYSE for each of the 10 trading days ending on the tenth day prior to the Effective Time of the Holding Company Merger (the "Average Closing Price") is between $30 and $50, the Exchange Ratio shall be the quotient (rounded to the nearest one-thousandth) of (A) $20.25 divided by (B) the Average Closing Price; (ii) if the Average Closing Price is $50 or greater, the Exchange Ratio shall be 0.405; and (iii) if the Average Closing Price is $30 or less, the Exchange Ratio shall be 0.675. At June 30, 1997, there were 3,613,011 shares of American National Common Stock outstanding. In addition, options to purchase an additional 345,357 shares of American National Common Stock were outstanding at June 30, 1997. Based on the number of shares of American National Common Stock outstanding and the number of options to purchase American National Common Stock outstanding as of May 31, 1997, and an Exchange Ratio of .437, Crestar would issue 1,578,886 shares of Crestar Common Stock in exchange for American National Common Stock, and convert the outstanding options to purchase American National Common Stock into 150,921 outstanding options to purchase Crestar Common Stock. The aggregate number of shares of Crestar Common Stock to be issued in connection with the Holding Company Merger, and the number of options to purchase American National Common Stock that will be converted into options to purchase Crestar Common Stock, will vary to the extent that any outstanding options to purchase American National Common Stock are exercised or expire prior to the Effective Time of the Holding Company Merger. See " -- Effect on American National Employee Benefits Plans" below. Following the Effective Time of the Holding Company Merger, former holders of shares of American National Common Stock will be mailed a Letter of Transmittal by Chase Mellon Shareholder Services (the "Exchange Agent") which will set forth the procedures that should be followed for exchange of American National Common Stock for Crestar Common Stock. Shareholders of American National who receive Crestar Common Stock will be entitled to receive certificates representing the number of whole shares of Crestar Common Stock for which such shares have been submitted for exchange and cash in lieu of any fractional share interest on the basis of the Exchange Ratio. A request to receive Crestar Common Stock will be properly made only if the Exchange Agent has received a properly completed Letter of Transmittal in accordance with the procedures and within the time period set forth in the Letter of Transmittal. A Letter of Transmittal will be properly completed only if accompanied by certificates representing all shares of American National Common Stock covered thereby. AMERICAN NATIONAL SHAREHOLDERS WHO INTEND TO RECEIVE SHARES OF CRESTAR COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS. 24 CASH ELECTION; ELECTION PROCEDURES Holders of shares of American National Common Stock will be given the option of exchanging some or all of their shares for the Common Stock Price Per Shares ($20.25) in cash (subject to all applicable withholding taxes), provided that the number of shares that may be exchanged for cash may not exceed 40% of the outstanding shares of American National Common Stock immediately prior to the Effective Time of the Holding Company Merger. The cash election must be made at the time American National shareholders vote on the Holding Company Merger, and, once such vote has been taken, cash elections will be irrevocable. If the aggregate number of shares for which a cash election is made exceeds 40% of the outstanding shares of American National Common Stock immediately prior to the Effective Time of the Holding Company Merger, Crestar first will pay cash for shares submitted for cash exchange by each holder of 100 or fewer American National shares (if such holder has submitted all his shares for cash exchange) and then will pay cash for the remaining shares submitted for cash pro rata. Shares not exchanged for cash after proration will be exchanged for Crestar Common Stock at the Exchange Ratio. An election to receive cash will be properly made only if American National has received a properly completed Cash Option Form in accordance with the procedures and within the time period set forth in the form. A Cash Option Form will be properly completed only if accompanied by certificates representing all shares of American National Common Stock covered thereby. American National will hold the certificates in safekeeping pending the Effective Time of the Holding Company Merger, at which time they will be exchanged for cash by Crestar, or in the event of proration, cash and Crestar Common Stock. If the Holding Company Merger is not consummated, American National will return the certificates. AMERICAN NATIONAL SHAREHOLDERS WHO INTEND TO SURRENDER SHARES FOR CASH MUST FILE THE CASH OPTION FORM ACCOMPANYING THIS PROXY STATEMENT/PROSPECTUS PRIOR TO OR AT THE SPECIAL MEETING. ANY AMERICAN NATIONAL SHAREHOLDER WHO DOES NOT COMPLETE AND RETURN A CASH OPTION FORM PRIOR TO OR AT THE SPECIAL MEETING CAN ONLY RECEIVE CRESTAR COMMON STOCK IN THE MERGER. ONCE THE VOTE ON THE MERGER HAS BEEN TAKEN AT THE SPECIAL MEETING, THE CASH ELECTION IS IRREVOCABLE. BUSINESS OF AMERICAN NATIONAL AND CRESTAR PENDING THE HOLDING COMPANY MERGER CRESTAR. Crestar has agreed that prior to the Effective Time of the Holding Company Merger: (i) Crestar will and will cause each of its subsidiaries to conduct their respective operations only in the ordinary course of business consistent with past practice and will use its best efforts to preserve intact their respective business organizations, keep available the services of their officers and employees and maintain satisfactory relationships with licensors, suppliers, distributors, customers, clients and others having business relationships with them; (ii) Crestar shall not, and shall not permit any of its subsidiaries to, take any action, engage in any transactions or enter into any agreement which would adversely affect or delay in any material respect the ability of Crestar or American National to obtain any necessary approvals, consents or waivers of any governmental entity required for the transactions contemplated hereby or to perform its covenants and agreements on a timely basis under the Agreement; and (iii) Crestar will not issue any Crestar Common Stock except (A) under existing stock option or employee or director benefit plans in accordance with past practice and (B) in acquisitions accounted for as purchases where the stock to be issued is acquired from a third party in a manner consistent with purchase accounting treatment for the Holding Company Merger. AMERICAN NATIONAL. American National and Savings Bank have agreed that prior to the Effective Time of the Holding Company Merger, they will operate their respective businesses substantially as presently operated and only in the ordinary course and in general conformity with applicable laws and regulations, and, consistent with such operation, they will use their best efforts to preserve intact their present business organizations and relationships with persons having business dealings with them. Without limiting the generality of the foregoing, American National and Savings Bank agree that they will not, without prior notice to Crestar, and with respect to clauses (vi), (vii), (xvii) and (xviii), without Crestar's prior written consent, (i) make any change in the salaries, bonuses or title of any officer, (ii) make any change in title, salaries or bonus of any other employee, other than those permitted by current employment policies in the ordinary course of business, any of which changes shall be reported promptly to Crestar; (iii) enter into any bonus, incentive compensation, deferred compensation, profit sharing, thrift, retirement, pension, group insurance or other benefit plan or any employment, severance or consulting agreement or increase benefits under existing plans and agreements; (iv) create or otherwise become liable with respect to any indebtedness for money borrowed or purchase money indebtedness except in the ordinary course of business; (v) amend its Certificate of Incorporation or By-laws; (vi) issue or contract to issue any shares of American National capital stock or securities exchangeable for or convertible into capital stock, 25 except (y) up to 345,357 shares of American National Common Stock issuable pursuant to the American National Options outstanding as of May 31, 1997, and (z) up to 792,000 shares of American National Common Stock pursuant to the Option Agreement; (vii) purchase any shares of American National capital stock; (viii) enter into or assume any material contract or obligation, except as permitted by the Agreement; (ix) other than as provided in (a) below with respect to the work-out of nonperforming assets, waive, release, compromise or assign any right or claim involving $75,000 or more; (x) propose or take any other action which would make any representation or warranty in Section 3.1 of the Agreement untrue; (xi) introduce any new products or services or change the rate of interest on any deposit instrument to above-market interest rates; (xii) make any change in policies respecting extensions of credit or loan charge-offs; (xiii) change reserve requirement policies; (xiv) change securities portfolio policies; (xv) acquire a policy or enter into any new agreement, amendment or endorsement or make any changes relating to insurance coverage, including coverage for its directors and officers, which would result in an additional payment obligation of $50,000 or more; (xvi) propose or take any action with respect to the closing of any branches; (xvii) amend the terms of American National Options; (xviii) amend the terms of the written severance or employment agreements identified in Schedule E to the Agreement; or (xix) make any change in any tax election or accounting method or system of internal accounting controls, except as may be appropriate to conform to any change in regulatory accounting requirements or generally accepted accounting principles. American National and Savings Bank have further agreed that they will consult and cooperate with Crestar regarding all actions described in the immediately preceding paragraph, and (a) with loan portfolio management, including management and work-out of nonperforming assets, and credit review and approval procedures, including notice to Crestar's Credit Review Department Management of any new nonresidential loans in excess of $500,000, and (b) with securities portfolio and funds management, including management of interest rate risk. American National and Savings Bank have further agreed that neither American National, Savings Bank nor any of their executive officers, directors, representatives, agents or affiliates shall, directly or indirectly, solicit or initiate discussions or negotiations with any person other than Crestar concerning any merger, sale of substantial assets, tender offer, sale of shares of stock or similar transaction involving American National or Savings Bank or disclose, directly or indirectly, any information not customarily disclosed to the public concerning American National or Savings Bank, afford to any person other than Crestar access to the properties, books or records of American National or Savings Bank or otherwise assist any person who may be preparing to make or who has made such an offer, or enter into any agreement with any third party providing for a business combination transaction, equity investment or sale of a significant amount of assets, except in a situation in which a majority of the full American National Board has determined in good faith, upon advice of counsel, that such Board has a fiduciary duty to consider and respond to a bona fide proposal by a third party (which proposal was not directly or indirectly solicited by American National or Savings Bank or any of their officers, directors, representatives, agents or affiliates) and provides written notice of its intention to consider such proposal and the material terms thereof to Crestar at least five days before responding to the proposal. American National and Savings Bank will promptly communicate to Crestar the terms of any proposal which it may receive in respect to any of the foregoing transactions. CONDITIONS TO CONSUMMATION OF THE HOLDING COMPANY MERGER Consummation of the Holding Company Merger is conditioned upon the approval of the holders of a majority of the outstanding American National Common Stock entitled to vote at the American National Special Meeting. The Holding Company Merger must be approved by the Federal Reserve Board, the SCC, and the OTS, all of which approvals have been received. The obligations of American National and Crestar to consummate the Holding Company Merger are further conditioned upon (i) the accuracy of the representations and warranties of American National and Crestar contained in the Agreement, including without limitation the representation and warranty that there has been no material adverse change in the condition (financial or otherwise) of Crestar or American National since March 31, 1997 and April 30, 1997, respectively, (other than changes resulting from or attributable to: (a) changes since such date in laws or regulations, generally accepted accounting principles or interpretations of either thereof that affect the banking or savings and loan industries generally, (b) changes since such date in the general level of interest rates, and (c) any other matters agreed to by Crestar and American National); (ii) the performance of all covenants and agreements contained in the Agreement; (iii) the receipt of an opinion of Hunton & Williams, counsel to Crestar and Crestar Bank with respect to certain of the tax consequences of the Transaction described herein under "-- Certain Federal Income Tax Consequences"; (iv) the approval for listing on the NYSE of the shares of Crestar Common Stock at the Effective Time of the Holding Company Merger; (v) the receipt of opinions of counsel with respect to certain legal matters; (vii) the execution and delivery of a commitment and undertaking by each shareholder of American National who is an affiliate of American National 26 to the effect that (A) such shareholder will dispose of the shares of Crestar Common Stock received by him in connection with the Holding Company Merger only in accordance with the provisions of paragraph (d) of Rule 145 under the 1933 Act, (B) such shareholder will not dispose of any of such shares until Crestar has received, at its expense, an opinion of counsel acceptable to it that such proposed disposition is in compliance with the provisions of paragraph (d) of Rule 145 and any applicable securities laws which opinion shall be rendered promptly following counsel's receipt of such shareholder's written notice of its intent to sell shares of Crestar Common Stock and (C) the certificates representing said shares may bear a legend referring to the foregoing restrictions; and (vii) the shares of Crestar Common Stock to be issued in the Holding Company Merger shall have been duly registered under the 1933 Act and applicable state securities laws, and such registration shall not be subject to a stop order or any threatened stop order by the SEC or any applicable state securities authority. Crestar and American National may waive any condition to their obligations to consummate the Holding Company Merger except requisite approvals of Crestar and American National shareholders and regulatory authorities. STOCK OPTION AGREEMENT Crestar and American National have entered into a Stock Option Agreement, dated as of June 23, 1997 (the "Option Agreement"), pursuant to which American National issued to Crestar an option (the "Option") to purchase up to 792,000 shares of American National Common Stock at a purchase price of $16.125 per share. Crestar may exercise the Option upon the occurrence of certain events (each a "Purchase Event"). The Option Agreement provides that a Purchase Event shall mean the occurrence of any of the following events after the date of execution of the Option Agreement: (i) American National or any banking subsidiary of American National (a "Bank"), without having received Crestar's prior written consent, shall have entered into an agreement with any person to: (x) merge, consolidate or enter into any similar transaction, except as contemplated in the Agreement; (y) purchase, lease or otherwise acquire all or substantially all of the assets of American National or a Bank; or (z) purchase or otherwise acquire (including by way of merger, consolidation, share exchange or any similar transaction) securities representing 10% or more of the voting power of American National or a Bank; (ii) any person (other than American National or Savings Bank in a fiduciary capacity, or Crestar or Crestar Bank in a fiduciary capacity) shall have acquired beneficial ownership or the right to acquire beneficial ownership of 15% or more of the outstanding shares of American National Common Stock after the date of the Option Agreement; (iii) any person shall have made a bona fide proposal to American National by public announcement or written communication that is or becomes the subject of public disclosure to acquire American National or a Bank by merger, consolidation, purchase of all or substantially all of its assets or any other similar transaction, and following such bona fide proposal the shareholders of American National vote not to adopt the Agreement; or (iv) American National shall have willfully breached certain specified covenants contained in the Agreement following a bona fide proposal to American National or a Bank to acquire American National or a Bank by merger, consolidation, purchase of all or substantially all of its assets or any other similar transaction, which breach would entitle Crestar to terminate the Agreement (without regard to the cure periods provided for therein) and such breach shall not have been cured prior to the date on which Crestar shall notify American National of its intent to exercise the Option. The Option may be exercised in whole or in part, at any time or from time to time if a Purchase Event shall have occurred and be continuing and before the Option Agreement is terminated, unless Crestar shall have breached in any material respect any material covenant or representation contained in the Agreement and such breach has not been cured. The Option Agreement provides that to the extent that it shall have not been exercised, the Option shall terminate (i) on the Effective Date of the Holding Company Merger; (ii) upon the termination of the Agreement in accordance with the provisions thereof (other than a termination resulting from a willful breach by American National of certain specified covenants contained therein or, following the occurrence of a Purchase Event, failure of American National shareholders to approve the Holding Company Merger by the vote required under applicable law or under American National's Charter); or (iii) 12 months after termination of the Agreement due to a willful breach by American National of certain specified covenants contained therein or, following the occurrence of a Purchase Event, failure of American National shareholders to approve the Holding Company Merger by the vote required under applicable law or under American National's Charter. 27 Because the Option permits Crestar to purchase a significant number of shares of American National Common Stock at a purchase price below the value of American National Common Stock agreed to in calculating the Exchange Ratio ($20.25 per share), any potential acquiror triggering a Purchase Event would be required to absorb the difference between the price Crestar would pay for shares of American National Common Stock upon exercise of the Option ($16.125 per share), and the price the potential acquiror would be required to offer to better the value ($20.25 per share) of American National Common Stock agreed to by Crestar and American National. WAIVER AND AMENDMENT; TERMINATION WAIVER AND AMENDMENT. Prior to the Effective Time of the Holding Company Merger, any term or provision of the Agreement may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof and the Agreement may be amended or supplemented by written instructions duly executed by all parties hereto at any time, whether before or after the American National Special Meeting, excepting statutory requirements and requisite approvals of shareholders and regulatory authorities, provided that any such amendment or waiver executed after shareholders of American National have approved the Agreement and the Holding Company Plan of Merger shall not modify either the amount or form of the consideration to be received by such American National shareholders for their shares of American National Common Stock or otherwise materially adversely affect such shareholders without their approval. TERMINATION. The Agreement shall be terminated, and the Transaction abandoned, if the shareholders of American National shall not have given the approval of the Holding Company Merger. Notwithstanding such approval by such shareholders, the Agreement may be terminated at any time prior to the Effective Time of the Holding Company Merger, by: (i) the mutual consent of Crestar and American National, as expressed by their respective Boards of Directors; (ii) either Crestar on the one hand or American National on the other hand, as expressed by their respective Boards of Directors, if the Holding Company Merger has not occurred by March 31, 1998, provided that the failure of the Holding Company Merger to so occur shall not be due to a willful breach of any representation, warranty, covenant or agreement by the party seeking to terminate the Agreement; (iii) Crestar in writing authorized by its Board of Directors if American National or Savings Bank has, or by American National in writing authorized by its Board of Directors, if Crestar or Crestar Bank has, in any material respect, breached (A) any covenant or agreement contained therein, or (B) any representation or warranty contained in the Agreement, in any case if such breach has not been cured by the earlier of 30 days after the date on which written notice of such breach is given to the party committing such breach or the Closing Date (as defined in the Agreement); provided that it is understood and agreed that either party may terminate the Agreement on the basis of any such material breach of any representation or warranty which is not cured within 30 days of written notice thereof contained in the Agreement, notwithstanding any qualification therein relating to the knowledge of the other party; (iv) either Crestar on the one hand or American National on the other hand, as expressed by their respective Boards of Directors, in the event that any of the conditions precedent to the obligations of such parties to consummate the Holding Company Merger have not been satisfied or fulfilled or waived by the party entitled to so waive on or before the Closing Date, provided that no party shall be entitled to terminate the Agreement pursuant to this subparagraph (d) if the condition precedent or conditions precedent which provide the basis for termination can reasonably be and are satisfied within a reasonable period of time, in which case, the Closing Date shall be appropriately postponed; (v) American National, if the American National Board shall have determined in its sole discretion, exercised in good faith, that the Holding Company Merger has become inadvisable or impracticable by reason of (A) the issuance of any order, decree or advisory letter of any regulatory authority containing conditions or requirements reasonably deemed objectionable by American National (B) the institution of any litigation, proceeding or investigation (including under federal antitrust laws) to restrain or prohibit the consummation of the Transaction or to obtain other relief in connection with the Agreement, or (C) commencement of a competing offer for American National Common Stock which is significantly better than Crestar's offer, and which Crestar has certified to American National, in writing, it is unwilling to meet; (vi) Crestar, if the Crestar Board shall have determined in its sole discretion, exercised in good faith, that the Holding Company Merger, has become inadvisable or impracticable by reason of (A) the issuance of any order, decree or advisory letter of any regulatory authority containing conditions or requirements reasonably deemed objectionable by Crestar, (B) the institution of any litigation, proceeding or investigation (including under federal antitrust laws) to restrain or prohibit the consummation of the Transaction or to obtain other relief in connection with the Agreement or (C) public commencement of a competing offer for American National Common Stock which is significantly better than Crestar's offer, and which Crestar certifies to American National, in writing, it is unwilling to meet; (vii) Crestar or American National, if the Federal Reserve Board, the OTS, or the SCC deny approval of the Holding Company Merger and the time period for all appeals or requests for reconsideration has run; and (viii) Crestar, if there has been a material adverse change in the business operations or consolidated financial condition or consolidated results of operations of American National from that shown by American National's financial statements as of April 30, 1997, excluding any material or adverse changes resulting from movements in general market interest rates, changes in laws, rules and regulations of accounting principals and any other matters mutually agreed to by the parties; and (ix) American National, if there has been a material adverse change in the business operation or consolidated financial condition of Crestar from that shown 28 by Crestar's financial statements as of March 31, 1997, excluding changes resulting from movements in general market interest rates, changes in laws, rules and regulations of accounting and any other matters mutually agreed to by the parties. In the event of the termination and abandonment of the Agreement and the Holding Company Merger pursuant to the above, the Agreement, other than the provisions relating to confidentiality of information obtained by the parties and to the payment of expenses relating to the Holding Company Merger, shall become void and have no effect, without any liability on the part of any party or its directors, officers or shareholders, provided that nothing contained in the Agreement shall relieve any party from liability for any willful breach of the Agreement. ACCOUNTING TREATMENT The Merger will be accounted for as a purchase business combination. OPERATIONS AFTER THE HOLDING COMPANY MERGER After the consummation of the Holding Company Merger, Crestar will continue generally to conduct the business presently conducted by American National. INTERESTS OF CERTAIN PERSONS IN THE HOLDING COMPANY MERGER Certain members of American National's management may be deemed to have interests in the Holding Company Merger in addition to their interests as shareholders of American National generally. In each case, the American National Board was aware of their potential interests, and considered them, among other matters, in approving the Agreement and the transactions contemplated thereby. INDEMNIFICATION; LIABILITY INSURANCE. The Agreement provides that for a period of six years following the Merger, Crestar will indemnify the directors, employees and officers of American National and Savings Bank and subsidiaries thereof for events occurring prior to or subsequent to the Effective Time of the Merger, to the extent permitted under the VSCA and the Articles of Incorporation and Bylaws of Crestar. Any right to indemnification in respect of any claim asserted or made within such six-year period will continue until final disposition of such claim. Crestar will provide officers and directors liability insurance coverage to all officers and directors of American National, Savings Bank and subsidiaries thereof, whether or not any such officers or directors become part of the Crestar organization after the Holding Company Merger, to the same extent that such coverage is provided to Crestar officers and directors. EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS. Savings Bank has entered into employment agreements with Messrs. Tucker and Solomon, each dated November 24, 1993, and with Messrs. Uveges, and Barker, each dated December 1, 1995 (collectively or singularly, the "Employment Agreement(s)"). The Employment Agreement with Mr. Tucker provides for a three year term and the Employment Agreements with the other three executive officers each provide for a two year term. Pursuant to the Agreement, Crestar Bank agrees to honor the Employment Agreements in accordance with their terms. 29 In the event of certain voluntary or involuntary terminations of employment of an executive officer covered by an Employment Agreement including termination during the term of the Employment Agreement and following a change in control, the Savings Bank shall pay a severance benefit to the executive officer pursuant to the terms of the Employment Agreement. The Employment Agreements entered into with Messrs. Tucker and Solomon provide that in the event of termination of employment following a change in control, the executive shall be entitled to continued life, medical, dental and disability insurance coverage for up to three years and two years, respectively. The Employment Agreements with Messrs. Uveges and Barker provide that in the event of their termination of employment following a change in control, the Savings Bank shall, for a 24-month period, either (i) contribute the same amount as it contributed prior to such termination of employment towards the purchase for the covered executive, or (ii) cause to be continued under the Savings Bank's existing plans, life, medical, dental and disability coverage substantially identical to the coverage maintained for the executive prior to his termination. In addition, all Employment Agreements provide that the covered executives will be entitled to any benefits granted to them pursuant to any stock option plan or recognition and retention plan maintained by American National or Savings Bank. Each of the Employment Agreements provide that if payments under the Employment Agreement would cause the covered executive to have an "excess parachute payment" under Section 280G of the Code, the benefits would be reduced to an amount that would not be considered an excess parachute payment. American National has also entered into a supplemental executive agreement ("Supplemental Agreement") with each of Messrs. Tucker, Solomon, Uveges and Barker which supplements their benefits under the Employment Agreements in the event that the named executives have an excess parachute payment. The Supplemental Agreement provides that American National will pay to or on behalf of the covered executive: (i) any amounts that he would not receive under the Employment Agreement due to the reduction in benefits required by the Employment Agreement as a result of having an excess parachute payment and (ii) any excise and additional state and federal income tax that would be assessed as the result of the excess parachute payment. If their employment is terminated following the Merger and during the term of the Employment Agreements, Messrs. Tucker, Solomon, Uveges, and Barker would be entitled to a cash payments equal to approximately $555,000, $266,000, $217,000, and $163,000, respectively, under their Employment Agreements and Supplemental Agreements (estimated prior to any gross-up for excise and income taxes). EMPLOYEES - GENERALLY. Crestar has agreed on a best efforts basis to offer all qualified employees of American National or Savings Bank comparable positions within the Crestar organization, but the Agreement does not require Crestar to employ any particular officer or employee of American National or Savings Bank following the Holding Company Merger. Crestar and American National have designed a severance pay program for employees of American National and Savings Bank (other than the four executives covered by Employment Agreements, who will receive the benefits provided in such agreements) not employed by Crestar following the Holding Company Merger. An agreed upon severance will be paid to each employee if he/she remains on the job through an established date and is not offered a comparable position by Crestar. STOCK OPTIONS Employees, officers and directors of American National and Savings Bank have been granted stock options to purchase an aggregate of 345,357 shares of American National Common Stock under the 1993 Stock Option Plan for Outside Directors, the 1993 Incentive Stock Option Plan and the 1996 Stock Option Plan. Holders of outstanding American National Options shall (a) exercise the American National Options for American National Common Stock prior to the Closing Date (if such options are by their terms then exercisable) and convert such Common Stock held as of the Effective Time of the Holding Company Merger into Crestar Common Stock or (b) have the American National Options converted, in accordance with the Exchange Ratio, into options to purchase Crestar Common Stock. The exercise price per share of Crestar Common Stock under a Crestar Option shall be equal to the exercise price per share of American National Stock under an American National Option divided by the Exchange Ratio (rounded up to the nearest cent). The number of shares of Crestar Common Stock subject to a Crestar Option shall be equal to the number of shares of American National Common Stock subject to the American National Option multiplied by the Exchange Ratio (rounded down to the nearest whole share). Except as set forth above, the terms of the Crestar Options shall be the same as the terms of the American National Options. 30 RECOGNITION AND RETENTION PLANS Employees, officers and directors of American National and Savings Bank have been granted awards of restricted stock under the 1993 Recognition and Retention Plan for Outside Directors, the 1993 Employees Recognition and Retention Plan and the 1996 Recognition and Retention Plan ("Recognition Plans"). In accordance with the Agreement, at the Effective Time, outstanding shares of restricted stock shall be converted, based on the Exchange Ratio, into restricted awards of Crestar Common Stock (rounded down to the nearest whole share). Under the terms of the Recognition Plans, an employee whose employment is terminated or a director whose service is terminated following a change in control shall become immediately vested in all unvested shares of restricted stock awarded to such employee or director. In the event of the termination of Messrs. Tucker, Solomon, Uveges or Barker following the Holding Company Merger, each would vest in 20,000, 11,700, 10,850, or 10,200 shares, respectively, as a result of such termination. DEFERRED COMPENSATION PLANS The Savings Bank sponsors a supplemental deferred compensation plan for certain highly compensated employees (at the level of Vice President or higher) ("Deferral Plan") that permits such persons to defer a portion of their salaries or board fees in accordance with the provisions of the Deferral Plan for the plan year. The Deferral Plan provides that in the event of the termination of employment or service, a participant will receive his vested account as soon as practicable after such termination. None of Messrs. Tucker, Solomon, Uveges or Barker participate in the Deferral Plan. The Savings Bank also sponsors a deferred compensation plan ("Deferred Compensation Plan") for the benefit of Mr. Tucker that provides him with the opportunity to defer a portion of his compensation. In accordance with the Merger, Crestar intends to terminate the Deferred Compensation Plan. Under the terms of the Deferred Compensation Plan, Mr. Tucker's account balance, which is primarily invested in American National Common Stock, will be distributed over a 5 year period following termination of the Deferred Compensation Plan. The Deferred Compensation Plan will be amended to permit Mr. Tucker's account balance to be distributed in cash or in-kind. Based on the present value of the his account, Mr. Tucker will receive approximately $410,000 under the Deferred Compensation Plan. EFFECT ON AMERICAN NATIONAL EMPLOYEE BENEFITS PLANS The Agreement provides that all employees of American National or Savings Bank (including subsidiaries) immediately prior to the Effective Time of the Holding Company Merger who are employed by Crestar, Crestar Bank or another Crestar subsidiary immediately following the Effective Time of the Holding Company Merger ("Transferred Employees") will be covered by Crestar's employee benefit plans as to which they are eligible based on their length of service, compensation, location, job classification, and position, including, where applicable, any incentive compensation plan. Notwithstanding the foregoing, Crestar may determine to continue any of the American National or Savings Bank benefit plans for Transferred Employees in lieu of offering participation in Crestar's benefit plans providing similar benefits (e.g., medical and hospitalization benefits), to terminate any of the American National or Savings Bank benefit plans, or to merge any such benefit plans with Crestar's benefit plans. Except as specifically provided in the Agreement and as otherwise prohibited by law, Transferred Employees' service with American National or Savings Bank which is recognized by the applicable benefit plan of American National or Savings Bank at the Effective Time of the Holding Company Merger shall be recognized as service with Crestar for purposes of eligibility to participate and vesting, if applicable (but not for purposes of benefit accrual) under the corresponding Crestar benefit plan, if any, subject to applicable break-in-service rules. Crestar agrees that any pre-existing condition, limitation or exclusion in its health plans shall not apply to Transferred Employees or their covered dependents who are covered under a medical or hospitalization indemnity plan maintained by American National or Savings Bank on the date of the Holding Company Merger and who then change that coverage to Crestar's medical or hospitalization indemnity health plan at the time such Transferred Employees are first given the option to enroll in Crestar's health plans. Crestar agrees to assume the Pension Plan of Savings Bank (the "Savings Bank Pension Plan") as of the Effective Time of the Holding Company Merger. Crestar, at its option, may continue the Savings Bank Pension Plan as a frozen plan or may terminate the Savings Bank Pension Plan and pay out or annuitize benefits, or may merge the Savings Bank Pension 31 Plan into the Retirement Plan for Employees of Crestar Financial Corporation and Affiliated Corporations ("Crestar's Retirement Plan"). If the Savings Bank Pension Plan is terminated or if benefit accruals are suspended, or if the Savings Bank Pension Plan is merged into Crestar's Retirement Plan, each Transferred Employee who becomes a participant in Crestar's Retirement Plan will begin to accrue benefits under Crestar's Retirement Plan on and after the date of such termination, suspension or merger in accordance with the terms of Crestar's Retirement Plan and Crestar's Retirement Plan will recognize for purposes of eligibility to participate, vesting and eligibility for early retirement, but not for benefit accrual purposes, all Transferred Employees' service which is recognized under the Savings Bank Pension Plan as of the date of such termination, suspension or merger of the Savings Bank Pension Plan. American National sponsors an employee stock ownership plan ("ESOP"). The ESOP has an outstanding loan to purchase American National common stock, with an outstanding principal balance of $977,000 as of September 30, 1997. If the Effective Time of the Merger occurs before December 31, 1997, Crestar agrees to permit American National to prepay any regularly scheduled 1997 loan payments. Additionally, Crestar conditionally agrees that American National can make additional prepayments on the loan of up to $415,430 in order to release from the ESOP loan suspense account up to an additional 41,543 shares of American National common stock for allocation among participants' accounts, subject to the contribution and deduction limits under the tax laws. Crestar's consent to such prepayment is conditioned on an opinion of American National's benefits consultants and ERISA counsel that such prepayment will not adversely affect the qualified status of American National's ESOP, pension plan or 401(k) plan. Such payment was made on September 15, 1997. Participants in the ESOP will become 100% vested in their account balances in connection with the change in control. In addition, Crestar has agreed to allow the ESOP to be amended in order to ensure that employees terminated in connection with the Merger will be entitled to receive their 1997 contribution allocation under the ESOP. American National and Savings Bank have agreed to cooperate with Crestar in implementing any decision made by Crestar under the Agreement with respect to employee benefit plans and to provide to Crestar on or before the Effective Time of the Holding Company Merger a schedule of service credit for prospective Transferred Employees. CERTAIN FEDERAL INCOME TAX CONSEQUENCES Crestar and American National have received an opinion of Hunton & Williams, counsel to Crestar, to the effect that for federal income tax purposes (i) the Holding Company Merger and the Bank Merger each will be a reorganization under Section 368(a) of the Code, (ii) none of Crestar, American National, Crestar Bank or Savings Bank will recognize any taxable gain or loss upon consummation of the Holding Company Merger or consummation of the Bank Merger (but income may be recognized as a result of (a) the termination of the bad-debt reserve maintained by Savings Bank for federal income tax purposes and (b) other possible changes in tax accounting methods), and (iii) the Holding Company Merger will result in the tax consequences summarized below for American National shareholders who receive solely Crestar Common Stock or cash and Crestar Common Stock in exchange for American National Common Stock in the Holding Company Merger. Receipt of substantially the same opinion of Hunton & Williams as of the Closing Date is a condition to consummation of the Holding Company Merger. The opinion of Hunton & Williams is based on, and the opinion to be given as of the Closing Date will be based on, certain customary assumptions and representations regarding, among other things, the lack of previous dealings between American National and Crestar, the existing and future ownership of American National stock and Crestar stock, and the future business plans for Crestar. As described below, the federal income tax consequences to an American National shareholder will depend on whether the shareholder exchanges shares of American National Common Stock for Crestar Common Stock, cash, or a combination of Crestar Common Stock and cash and, if the shareholder exchanges any shares of American National Common Stock for cash, on whether certain related shareholders receive Crestar Common Stock or cash. The following summary does not discuss all potentially relevant federal income tax matters, consequences to any shareholders subject to special tax treatment, (for example, tax-exempt organizations and foreign persons), or consequences to shareholders who acquired their American National Common Stock through the exercise of director or employee stock options or otherwise as compensation. 32 EXCHANGE OF AMERICAN NATIONAL COMMON STOCK FOR CRESTAR COMMON STOCK A holder of shares of American National Common Stock who receives solely Crestar Common Stock in exchange for all his shares of American National Common Stock will not recognize any gain or loss on the exchange. If a shareholder receives Crestar common Stock and cash in lieu of a fractional share of Crestar Common Stock, the shareholder will recognize taxable gain or loss solely with respect to such fractional share as if the fractional share had been received and then redeemed for the cash. A shareholder who exchanges all his shares of American National Common Stock for Crestar Common Stock will have an aggregate tax basis in the shares of Crestar Common Stock (including any fractional share interest) equal to his tax basis in the shares of American National Common Stock exchanged therefor. A shareholder's holding period for shares of Crestar Common Stock (including any fractional share interest) received in the Holding Company Merger will include his holding period for the shares of American National Common Stock exchanged therefor if they are held as a capital asset at the Effective Time of the Holding Company Merger. EXCHANGE OF AMERICAN NATIONAL COMMON STOCK FOR CASH AND CRESTAR COMMON STOCK A holder of shares of American National Common Stock who receives cash for some shares of American National Common Stock and exchanges other shares of American National Common Stock for shares of Crestar Common Stock (including any fractional share interest) will recognize any gain realized up to the amount of cash received (excluding cash paid in lieu of a fractional share of Crestar Common Stock) but will not recognize any loss. If the shareholder holds his American National Common Stock as a capital asset at the time of the Holding Company Merger, the amount of gain recognized generally will be treated as capital gain. However, it is possible that such gain will be treated as dividend income, depending on a shareholder's individual circumstances. Dividend treatment would arise if, had a shareholder received shares of Crestar Common Stock instead of the cash actually received and Crestar then redeemed those shares for cash, such a redemption would be taxable as a dividend (rather than a sale) under Section 302 of the Code. A shareholder should consult his own tax advisor to determine whether gain recognized on the exchange of American National Common Stock for shares of Crestar Common Stock and cash is to be treated as capital gain, as typically will be the case, or a dividend. A shareholder's aggregate tax basis in the shares of Crestar Common Stock (including any fractional share interest) received will equal his tax basis in his shares of American National Common Stock exchanged therefor, reduced by the amount of cash received (excluding cash paid in lieu of a fractional share of Crestar Common Stock) and increased by the amount of gain recognized (including any gain treated as a dividend). A shareholder's holding period for shares of Crestar Common Stock (including any fractional share interest) received in the Holding Company Merger will include his holding period for the shares of American National Common Stock exchanged therefor if they are held as a capital asset at the Effective Time of the Holding Company Merger. If a shareholder receives cash in lieu of a fractional share of Crestar Common Stock, the shareholder will recognize gain or loss as if the fractional share had been received and then redeemed for the cash. EXCHANGE OF AMERICAN NATIONAL COMMON STOCK FOR CASH Generally, a shareholder receiving solely cash in the Holding Company Merger will recognize gain or loss equal to the difference between the amount of cash received and his tax basis in his shares of American National Common Stock surrendered in the Holding Company Merger. Such gain or loss generally will be capital gain or loss if the shares of American National Common Stock are held as a capital asset at the Effective Time of the Holding Company Merger. However, it is possible that a shareholder's receipt of cash in exchange for American National Common Stock could be treated as dividend income if the shareholder actually owns or constructively owns (under the rules of Section 318 of the Code) shares of Crestar Common Stock or constructively owns shares of American National Common Stock actually owned by another person. Such a shareholder's receipt of cash could be taxable as a dividend if the shareholder would be treated as receiving a dividend under Section 302 of the Code in either of two situations: (1) before the Holding Company Merger, American National redeemed the shareholder's shares of American National Common Stock for cash, or (2) the shareholder received shares of Crestar Common Stock in exchange for his American National Common Stock (instead of the cash actually received) and Crestar then redeemed those shares of Crestar Common Stock for cash. A shareholder should consult his own tax advisor to determine whether the exchange of American National Common Stock for cash in the Holding Company Merger is to be treated as a sale, as typically will be the case, or as a dividend. 33 Any shareholder who makes an election to receive cash for all his shares should be aware that he may, in fact, receive some Crestar Common Stock under the proration provisions of the Agreement. Such a holder should therefore be familiar with the rules, described above, that apply to a holder who receives cash and some Crestar Common Stock. THE PRECEDING DISCUSSION SUMMARIZES FOR GENERAL INFORMATION THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE HOLDING COMPANY MERGER TO AMERICAN NATIONAL SHAREHOLDERS. THE TAX CONSEQUENCES TO ANY PARTICULAR SHAREHOLDER MAY DEPEND ON THE SHAREHOLDER'S CIRCUMSTANCES. AMERICAN NATIONAL SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO FEDERAL, STATE AND LOCAL TAX CONSEQUENCES. 34 BUSINESS OF CRESTAR Crestar is the holding company for Crestar Bank, Crestar's only banking subsidiary. At June 30, 1997, Crestar had approximately $22.8 billion in total assets, $15.8 billion in total deposits, and $1.9 billion in total stockholders' equity. In 1963, six Virginia banks combined to form United Virginia Bankshares Incorporated ("UVB"), a bank holding company formed under the Bank Holding Company Act of 1956 (the "BHCA"). UVB (parent company of United Virginia Bank) extended its operations into the District of Columbia by acquiring NS&T Bank, N.A. on December 27, 1985 and into Maryland by acquiring Bank of Bethesda on April 1, 1986. On September 1, 1987, UVB became Crestar Financial Corporation. Crestar serves customers through a network of 481 banking locations and 514 automated teller machines (as of June 30, 1997). Crestar Bank offers a broad range of banking services, including various types of deposit accounts and instruments, commercial and consumer loans, trust and investment management services, bank credit cards and international banking services. Crestar's subsidiary, Crestar Insurance Agency, Inc., offers a variety of personal and business insurance products. Securities brokerage and investment banking services, including mutual funds and annuities, are offered by Crestar's subsidiary, Crestar Securities Corporation. Mortgage loan origination, servicing and wholesale lending are offered by Crestar Mortgage Corporation, and investment advisory services are offered by Crestar Asset Management Company, both of which are subsidiaries of Crestar Bank. These Crestar subsidiaries provide banking and non-banking services throughout Virginia, Maryland and Washington, D.C., as well as certain non-banking services to customers in other states. The executive offices of Crestar are located in Richmond, Virginia at Crestar Center, 919 East Main Street. Crestar's Operations Center is located in Richmond. Regional headquarters are located in Norfolk and Roanoke, Virginia, Washington, D.C., and Baltimore, Maryland. BUSINESS OF AMERICAN NATIONAL American National is a Delaware corporation that was organized in July 1995 to become the holding company for the Savings Bank. On October 31, 1995, American National acquired 100% of the capital stock of the Savings Bank, sold 2,182,125 shares of common stock in a subscription offering for a purchase price of $10.00 per share (the "Offering"), and issued 1,798,380 shares of common stock in exchange for 927,000 shares of the Savings Bank's common stock held by shareholders other than the parent holding company (together with the Offering, the "Conversion"). Prior to the Conversion, the Savings Bank had completed a mutual holding company reorganization in October 1992. On November 3, 1993, upon the consummation of the mutual holding company reorganization, the Savings Bank issued 927,000 shares to the public and 1,165,000 shares to the Savings Bank's mutual holding company parent. American National is currently registered as a savings and loan holding company with the OTS. At April 30, 1997, American National had total assets of $505.3 million, total deposits of $329.5 million, and consolidated stockholders' equity of $45.3 million. American National's executive office is located at 211 North Liberty Street, Baltimore, Maryland 21201 and its telephone number is (410) 752-0400. The Savings Bank is a federally chartered stock savings bank headquartered in Baltimore, Maryland. The Savings Bank conducts operations through 10 full-service offices in its market area consisting of Baltimore City and parts of the Maryland counties of Baltimore, Howard, Harford, Anne Arundel and Carroll. The Savings Bank is primarily engaged in the business of attracting deposits from the general public in the Saving's Bank's market area, and investing such deposits together with other funds, in loans collateralized by one- to four-family residential real estate, mortgage-backed securities, and, to a lesser extent, construction and land development loans, consumer loans and investment securities. In the past, the Savings Bank also actively originated multifamily residential real estate loans and commercial real estate loans; however, originations of such loans have decreased significantly in recent years as the Savings Bank has sought to reduce the credit risk and losses in its loan portfolio. The Savings Bank also has reduced its involvement in real estate joint ventures due to economic conditions and changes in regulatory capital requirements. For additional information concerning the business of American National, see Annexes IV and V. 35 PRICE RANGE OF AMERICAN NATIONAL COMMON STOCK AND DIVIDEND POLICY American National Common Stock is traded on The Nasdaq National Market under the symbol "ANBK." The following table sets for the periods indicated high and low trading prices of American National Common Stock as reported on The Nasdaq National Market. Price information for periods through October 31, 1995 reflects trading in the common stock of the Savings Bank.
DIVIDENDS PAID HIGH LOW PER SHARE ------ ------ --------- 1998 Three Months Ended October 31, 1997 (through September 24, 1997) $ 20.50 $19.375 $ .03 1997 Three Months Ended July 31, 1997 $ 21.00 $14.00 $ .03 Three Months Ended April 30, 1997 14.75 12.625 .03 Three Months Ended January 31, 1997 13.375 11.375 .03 Three Months Ended October 31, 1996 12.625 9.75 .03 1996 Three Months Ended July 31, 1996 10.625 9.50 .03 Three Months Ended April 30, 1996 10.25 9.50 N/A Three Months Ended January 31, 1996 10.25 9.375 N/A Three Months Ended October 30, 1995 19.50 16.50 .10 1995 Three Months Ended July 31, 1995 16.50 16.25 .10 Three Months Ended April 30, 1995 12.25 9.00 .10 Three Months Ended January 31, 1995 12.00 9.00 .10 Three Months Ended October 31, 1994 12.75 11.75 .10
On September 19, 1997, the Record Date, the outstanding shares of American National Common Stock were held by approximately 855 record holders. The closing price per share of American National Common Stock on September 19, 1997 on The Nasdaq National Market was $20.50. American National has agreed that it will declare cash dividends consistent (in terms of amount and timing of record and payment dates) with its practice in effect in its fiscal quarter ended April 30, 1997 until the Effective Time of the Holding Company Merger. See "Comparative Rights of Shareholders -- Dividends and Other Distributions." 36 PRICE RANGE OF CRESTAR COMMON STOCK AND DIVIDEND POLICY Crestar Common Stock is traded on the New York Stock Exchange under the symbol "CF." The following table sets forth the calendar periods indicated, the high and low closing prices of Crestar Common Stock as reported by the NYSE Composite Tape for the following calendar quarters and the cash dividends paid per share:
DIVIDENDS PAID HIGH LOW PER SHARE ------- ------ --------- 1997 Third Quarter (through September 24, 1997) $ 49 3/16 $ 39 1/4 $ .29 Second Quarter 42 5/8 33 5/8 .29 First Quarter 38 3/4 34 3/8 .27 1996 Fourth Quarter 37 3/4 29 .26 Third Quarter 30 11/16 26 3/16 .26 Second Quarter 29 3/16 26 5/8 .26 First Quarter 29 13/16 26 1/2 .225 1995 Fourth Quarter 30 1/2 27 1/2 .225 Third Quarter 29 3/16 23 7/8 .225 Second Quarter 24 3/4 21 9/16 .225 First Quarter 22 1/8 18 1/2 .20
The payment of future dividends will be determined by Crestar's Board of Directors in light of earnings, capital levels, cash requirements, Crestar's financial condition and that of its subsidiaries, applicable government regulations and policies and other factors deemed relevant by the Crestar Board, including the amount of dividends payable to Crestar Bank. Various federal and state laws, regulations and policies limit the ability of the Bank Subsidiaries to pay dividends to Crestar, which affects Crestar's ability to pay dividends to shareholders. See "Supervision and Regulation." Data in above table has been restated to reflect the two-for-one stock split distributed by Crestar on January 24, 1997. During the fourth quarter of 1996, two cash dividends were declared. Of the two dividends declared, one for $.26 per share was paid during the fourth quarter of 1996, and one for $.27 per share was paid during the first quarter of 1997. 37 OWNERSHIP OF AMERICAN NATIONAL COMMON STOCK BY CERTAIN BENEFICIAL OWNERS The following table sets forth certain information regarding the beneficial ownership of American National Common Stock as of September 19, 1997 by each of American National directors and by all directors and executive officers of American National as a group. AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1) DIRECT OWNERSHIP OF COMMON STOCK PERCENT OF STOCK OPTIONS TOTAL CLASS --------- ------- ----- ------- Directors: Lenwood M. Ivey 8,864 17,393 26,257 * % Jimmie T. Noble 3,637 8,768 12,405 * David L. Pippenger 13,457 23,249 36,706 * Joseph M. Solomon 29,321 48,006 77,327 2.0 Betty J. Stull 9,851 18,417 28,268 * Howard K. Thompson 24,321 39,298 63,619 1.6 A. Bruce Tucker 59,696 75,655 135,351 3.4 All Directors and Executive Officers as a group (10 persons) 192,809 309,432 502,241 12.7% - ----------------- * Less than 1% (1) For the purposes of this table, pursuant to rules promulgated under the Exchange Act, an individual is considered to "beneficially own" any shares of American National Common Stock over which he or she has or shares (a) voting power, which includes the power to vote or direct the voting of the shares; or (b) investment power, which includes the power to dispose or direct the disposition of the shares. A person also is deemed to have beneficial ownership of any shares of American National Common Stock which may be acquired within 60 days pursuant to the exercise of stock options. Unless otherwise indicated, the individuals listed in the table have sole voting power and sole investment power with respect to the indicated shares. Shares of American National Common Stock which may be acquired within 60 days of the Record Date are deemed to be outstanding shares of American National Common Stock beneficially owned by such person(s) but are not deemed to be outstanding for the purposes of computing the percentage of American National Common Stock owned by any other person. 38 American National knows of no person who beneficially owns 5% or more of the outstanding American National Common Stock as of July 31, 1997 except as disclosed: Amount and Nature Percent Name and Address of Beneficial Owners of Beneficial Ownership of Class - ------------------------------------- ----------------------- -------- John Hancock Advisers, Inc. 336,070 9.3% 101 Huntington Avenue Boston, MA 02199 Jeffrey L. Gendell 326,500 9.0 Tontine Financial Partners, L.P. 200 Park Avenue, Suite 3900 New York, NY 10166 Brandes Investment Partners, L.P. 246,770 6.8 12750 High Bluff Drive, 2nd Floor San Diego, CA 92130 Franklin Resources, Inc. 180,500 5.0 777 Mariners Island Boulevard San Mateo, CA 94404 39 OWNERSHIP OF CRESTAR COMMON STOCK BY CERTAIN BENEFICIAL OWNERS Based on Crestar's records and filings with the Securities and Exchange Commission, Crestar is not aware of any persons who are beneficial owners of 5% or more of Crestar's Common Stock, except as listed below:
NAME AND ADDRESS AMOUNT AND NATURE OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP PERCENT OF CLASS ------------------- ----------------------- ---------------- Crestar Bank as Trustee for Crestar Employees' Thrift and Profit Sharing Plan 6,629,404 shares(1) 6.03% 919 East Main Street Richmond, VA 23219 Delaware Management Holdings, Inc. 7,958,576 shares (2) 7.25% One Commerce Square Philadelphia, PA 19103
- -------------------- (1) Shares are held on behalf of Plan participants. Crestar Bank has no voting rights or any investment or dispositive power with respect to the shares. Plan information is as of December 31, 1996. (2) Shares attributed to Delaware Management Holdings, Inc. include shares held by Delaware Management Company, Inc., a mutual fund manager. Delaware Management Holdings, Inc. reports that it has sole voting power with respect to 6,130,540 shares; shared voting power with respect to no shares; sole dispositive power for 7,642,776 shares; and shared dispositive power for 315,800 shares. Delaware Management Holdings, Inc. information is as of December 31, 1996 and was obtained from a Schedule 13G filed by Delaware Management Holdings, Inc. SUPERVISION AND REGULATION OF CRESTAR Bank holding companies and banks operate in a highly regulated environment and are regularly examined by federal and state regulators. The following description briefly discusses certain provisions of federal and state laws and certain regulations and the potential impact of such provisions on Crestar and Crestar Bank. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions. BANK HOLDING COMPANIES As a bank holding company registered under the BHCA, Crestar is subject to regulation by the Federal Reserve Board. The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or nonbank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity which is so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amended Section 3(d) of the BHCA by authorizing the FRB to approve on or after September 29,1995 the acquisition by a bank holding company of more than 5% of any class of the voting shares of, or substantially all the assets of, any bank (or its holding company) located outside the state in which the operations of such acquiring bank holding company's banking subsidiaries are principally conducted on the date such company became a bank holding company, regardless of whether the acquisition would be prohibited by state law. Effective June 1, 1997, the law allows interstate bank mergers. The law also allows interstate branch acquisitions and de novo branching if permitted by the host state. These laws also permits interstate branch acquisitions and de novo branching in Virginia, Maryland and the District of Columbia by out-of-state banks if reciprocal treatment is accorded Virginia, Maryland or District of Columbia banks (as the case may be) in the state of the acquiror or entrant. 40 There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event the depository institution becomes in danger of default or in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the "cross-guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's claim for reimbursement is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. Crestar is registered under the bank holding company laws of Virginia. Accordingly, Crestar is subject to further regulation and supervision by the State Corporation Commission of Virginia. CAPITAL REQUIREMENTS The Federal Reserve Board has issued risk-based and leverage capital guidelines applicable to banking organizations it supervises. In addition, the Federal Reserve Board may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Under the risk-based capital requirements, Crestar is required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8%. At least half of the total capital is required to be "Tier 1 capital", which consists principally of common and certain qualifying preferred stockholders' equity, less certain intangibles and other adjustments. The remainder "Tier 2 capital" consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. The Tier 1 and total capital to risk-weighted asset ratios of Crestar as of June 30, 1997 were 10.7% and 13.5% respectively. In addition, a minimum leverage capital ratio (Tier 1 capital to average tangible assets) must be maintained. The guidelines provide for a minimum ratio of 3% for banks and bank holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. All other institutions are expected to maintain a leverage ratio of at least 100 to 200 basis points above the minimum. The Tier 1 capital leverage ratio of Crestar as of June 30, 1997, was 9.3%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. LIMITS ON DIVIDENDS AND OTHER PAYMENTS Crestar is a legal entity separate and distinct from Crestar Bank. Most of the revenue of Crestar comes from dividends paid by Crestar Bank. There are various limitations applicable to the payment of dividends to Crestar as well as the payment of dividends by Crestar to its shareholders. Under federal law, prior approval from the bank regulatory agencies is required if cash dividends declared by banks in any given year exceed net income for that year plus retained earnings of the two preceding years. Under these supervisory practices, at June 30, 1997, without obtaining prior regulatory approval, Crestar Bank could have paid additional dividends of approximately $295 million to Crestar. The payment of dividends by Crestar Bank, or Crestar, may also be limited by other factors, such as requirements to maintain capital above regulatory guidelines. Bank regulatory agencies have authority to prohibit any bank or holding company from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending upon the financial condition of the bank or holding company in question, could be deemed to constitute such an unsafe or unsound practice. The Federal Reserve Board has stated that, as a matter of prudent banking, a bank or bank holding company should not maintain its existing rate of cash dividends on common stock unless (1) the organization's net income available to common shareholders over the past year has been sufficient to fund fully the dividends and (2) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. 41 CRESTAR BANK Crestar Bank is supervised and regularly examined by the SCC and the Federal Reserve Bank of Richmond. Crestar Bank is also subject to various requirements and restrictions under federal and state law such as limitations on the types of services that it may offer, the nature of investments that it may make, and the amounts of loans that may be granted. Various consumer and compliance laws and regulations also affect the operations of Crestar Bank. In addition to the impact of regulation, Crestar Bank is affected significantly by actions of the Federal Reserve Board in attempting to control the money supply and the availability of credit. Crestar Bank is subject to the requirements of the Community Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an affirmative and ongoing obligation to help meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's efforts in helping to meet community credit needs currently are evaluated as part of the examination process pursuant to twelve assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open branches. Crestar Bank has attained either an "outstanding" or "satisfactory" rating on its most recent CRA performance evaluations. As an institution with deposits insured by BIF and SAIF, Crestar Bank is subject to insurance assessments imposed by the FDIC. Legislation that became effective on September 30, 1996 assessed a one-time charge on deposits insured by the Savings Association Insurance Fund (SAIF). As a result of acquisition of thrift institutions in recent years, approximately 45% of Crestar Bank's deposit base is SAIF-insured and the one-time charge assessed against Crestar Bank on an after-tax basis was approximately $22 million. This charge was recognized in Crestar's publicly announced third quarter 1996 earnings and will have the effect of significantly reducing future premiums payable by Crestar Bank into the SAIF. OTHER SAFETY AND SOUNDNESS REGULATIONS The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," as such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies. 42 DESCRIPTION OF CRESTAR CAPITAL STOCK The capital stock of Crestar consists of 200,000,000 authorized shares of Common Stock and 2,000,000 authorized shares of Preferred Stock. The shares of Preferred Stock are issuable in series, with relative rights, preferences and limitations of each series fixed by the Crestar Board. The following summary does not purport to be complete and is subject in all respects to applicable Virginia law, Crestar's Restated Articles of Incorporation (the "Crestar Articles") and Bylaws, and the Rights Agreement dated June 23, 1989 (described below) (the "Rights Agreement"). COMMON STOCK Crestar had 110,638,161 shares of Common Stock outstanding at June 30, 1997. Each share of Common Stock is entitled to one vote on all matters submitted to a vote of shareholders. Holders of Common Stock are entitled to receive dividends when and as declared by the Crestar Board out of funds legally available therefor. Dividends may be paid on the Common Stock only if all dividends on any outstanding Preferred Stock have been paid or provided for. The issued and outstanding shares of Common Stock are fully paid and non-assessable. Holders of Common Stock have no preemptive or conversion rights and are not subject to further calls or assessments by Crestar. In the event of the voluntary or involuntary dissolution, liquidation or winding up of Crestar, holders of Common Stock are entitled to receive, pro rata, after satisfaction in full of the prior rights of creditors and holders of Preferred Stock, if any, all the remaining assets of Crestar available for distribution. Directors are elected by a vote of the holders of Common Stock. Holders of Common Stock are not entitled to cumulative voting rights. Chase Mellon Shareholder Services acts as the transfer agent and registrar for the Common Stock. PREFERRED STOCK The Crestar Board is authorized to designate with respect to each new series of Preferred Stock the number of shares in each series, the dividend rates and dates of payment, voluntary and involuntary liquidation preferences, redemption prices, whether or not dividends shall be cumulative and, if cumulative, the date or dates from which the same shall be cumulative, the sinking fund provisions, if any, for redemption or purchase of shares, the rights, if any, and the terms and conditions on which shares can be converted into or exchanged for, or the rights to purchase, shares of any other class or series, and the voting rights, if any. Any Preferred Stock issued will rank prior to the Common Stock as to dividends and as to distributions in the event of liquidation, dissolution or winding up of Crestar. The ability of the Crestar Board to issue Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting powers of holders of Common Stock and, under certain circumstances, may discourage an attempt by others to gain control of Crestar. Pursuant to Crestar's Articles, the Crestar Board has designated a series of 100,000 shares of Participating Cumulative Preferred Stock, Series C (the "Series C Preferred Stock"), none of the shares of which are currently outstanding. The Series C Preferred Stock was created in connection with Crestar's shareholder rights plan which is described below. RIGHTS In 1989, pursuant to the Rights Agreement, Crestar distributed as a dividend one Right for each outstanding share of Common Stock, adjusted to one-half Right for each share of Common Stock to reflect a two-for-one stock split in the form of a stock dividend distribution in January, 1996. Each one-half Right entitles the holder to buy one one-thousandth of a share of Junior Preferred Stock at an exercise price of $57.50, subject to adjustment. Rights will become exercisable only if a person or group acquires or announces a tender offer for 10% or more of the outstanding Common Stock. When exercisable, Crestar may issue a share of Common Stock in exchange for each Right other than those held by such person or group. If a person or group acquires 30% or more of the outstanding Common Stock, each Right will entitle the holder, other than the acquiring person, upon payment of the exercise price, to acquire Series C Preferred Stock or, at the option of Crestar, Common Stock, having a value equal to twice the Right's exercise price. If Crestar is acquired in a merger or other business combination or if 50% of its earnings power is sold, each Right will entitle the holder, other than the acquiring person, to purchase securities of the surviving company having a market value equal to twice the exercise price of the Right. The Rights will expire on June 23, 1999, and may be redeemed by Crestar at any time prior to the tenth day after an announcement that a 10% position has been acquired, unless such time period has been extended by the Crestar Board. 43 Until such time as a person or group acquires or announces a tender offer for 10% or more of the Common Stock, (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, and (ii) the surrender for transfer of any certificate for Common Stock will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. Rights may not be transferred, directly or indirectly (i) to any person or group that has acquired, or obtained the right to acquire, beneficial ownership of 10% or more of the Rights (an "Acquiring Person"), (ii) to any person in connection with a transaction in which such person becomes an Acquiring Person or (iii) to any affiliate or associate of any such person. Any Right that is the subject of a purported transfer to any such person will be null and void. The Rights can be expected to have certain anti-takeover effects if an acquisition transaction not approved by the Crestar Board is proposed by a person or group. In such event, the Rights will cause substantial dilution to any person or group that acquires more than 10% of the outstanding shares of Crestar Common Stock if certain events thereafter occur without the Rights having been redeemed. For example, if thereafter such acquiring person acquires 30% of Crestar's outstanding Common Stock, or effects a business combination with Crestar, the Rights permits shareholders to acquire securities having a value equal to twice the amount of the purchase price specified in the Rights, but rights held by such "acquiring person" are void to the extent permitted by law and may not be exercised. Further, other shareholders may not transfer rights to such "acquiring person" above his 10% ownership threshold. Because of these provisions, it is unlikely that any person or group will propose an acquisition transaction that is not approved by the Crestar Board. Thus, the Rights could have the effect of discouraging acquisition transactions not approved by the Crestar Board. The Rights do not interfere with any merger or other business combination approved by the Crestar Board and shareholders because the rights are redeemable with the concurrence of a majority of the "Continuing Directors," defined as directors in office when the Rights Agreement was adopted or any person added thereafter to the Board with the approval of the Continuing Directors. VIRGINIA STOCK CORPORATION ACT The Virginia Stock Corporation Act ("VSCA") contains provisions governing "Affiliated Transactions." These provisions, with several exceptions discussed below, require approval of material acquisition transactions between a Virginia corporation and any holder of more than 10% of any class of its outstanding voting shares (an "Interested Stockholder") by the holders of at least two-thirds of the remaining voting shares. Affiliated Transactions subject to this approval requirement include mergers, share exchanges, material dispositions of corporate assets not in the ordinary course of business, any dissolution of the corporation proposed by or on behalf of an Interested Stockholder, or any reclassification, including reverse stock splits, recapitalization or merger of the corporation with its subsidiaries which increases the percentage of voting shares owned beneficially by an Interested Stockholder by more than 5%. For three years following the time that an Interested Stockholder becomes an owner of 10% of the outstanding voting shares, a Virginia corporation cannot engage in an Affiliated Transaction with such Interested Stockholder without approval of two-thirds of the voting shares other than those shares beneficially owned by the Interested Stockholder, and majority approval of the "Disinterested Directors." A Disinterested Director means, with respect to a particular Interested Stockholder, a member of the Crestar Board who was (1) a member on the date on which an Interested Stockholder became an Interested Stockholder and (2) recommended for election by, or was elected to fill a vacancy and received the affirmative vote of, a majority of the Disinterested Directors then on the Board. At the expiration of the three year period, the statute requires approval of Affiliated Transactions by two-thirds of the voting shares other than those beneficially owned by the Interested Stockholder. The principal exceptions to the special voting requirement apply to transactions proposed after the three year period has expired and require either that the transaction be approved by a majority of the corporation's Disinterested Directors or that the transaction satisfy the fair-price requirements of the statute. In general, the fair-price requirement provides that in a two-step acquisition transaction, the Interested Stockholder must pay the shareholders in the second step either the same amount of cash or the same amount and type of consideration paid to acquire the Virginia corporation's shares in the first step. None of the foregoing limitations and special voting requirements applies to a transaction with an Interested Stockholder whose acquisition of shares making such person an Interested Stockholder was approved by a majority of the Virginia corporation's Disinterested Directors. 44 These provisions were designed to deter certain takeovers of Virginia corporations. In addition, the statute provides that, by affirmative vote of a majority of the voting shares other than shares owned by any Interested Stockholder, a corporation can adopt an amendment to its articles of incorporation or bylaws providing that the Affiliated Transactions provisions shall not apply to the corporation. Crestar has not "opted out" of the Affiliated Transactions provisions. Virginia law also provides that shares acquired in a transaction that would cause the acquiring person's voting strength to meet or exceed any of three thresholds (20%, 33 1/3% or 50%) have no voting rights unless granted by a majority vote of shares not owned by the acquiring person or any officer or employee-director of the Virginia corporation. This provision empowers an acquiring person to require the Virginia corporation to hold a special meeting of shareholders to consider the matter within 50 days of its request. COMPARATIVE RIGHTS OF SHAREHOLDERS At the Effective Time of the Holding Company Merger, American National shareholders (except any American National shareholder properly electing the cash option) automatically will become shareholders of Crestar, and their rights as shareholders will be determined by Crestar's Articles of Incorporation and Bylaws. The following is a summary of the material differences in the rights of shareholders of Crestar and American National. CAPITALIZATION AMERICAN NATIONAL. American National's Certificate of Incorporation authorizes the issuance of up to 8,000,000 shares of American National Common Stock, par value $0.01 per share, of which 3,613,011 shares were issued and outstanding as of the Record Date, and up to 1,000,000 shares of serial preferred stock. American National preferred stock is issuable in series, each having such rights and preferences as American National's Board of Directors may, by adoption of an amendment of American National's Certificate of Incorporation, fix and determine. As of the Record Date, no shares of American National preferred stock were issued and outstanding. CRESTAR. Crestar's authorized capital is set forth under "Description of Crestar Capital Stock." AMENDMENT OF ARTICLES OR BYLAWS AMERICAN NATIONAL. Pursuant to the DGCL and American National's Certificate of Incorporation, American National's Certificate may be amended if the amendment is adopted by the Board of Directors and approved by a vote of the holders of a majority of the votes entitled to be cast on the amendment by each voting group entitled to vote thereon, unless a greater vote is required by law or by the Certificate. The Certificate provides that an affirmative vote of at least 80% of the outstanding voting stock entitled to vote is required to amend or repeal certain provisions of the Certificate of Incorporation, including the provision limiting voting rights, the provisions relating to approval of certain business combinations, calling special meetings, the number and classification of directors, director and officer indemnification and amendment of American National's Bylaws and Certificate of Incorporation. American National's Certificate of Incorporation and Bylaws generally provide that the American National Bylaws may be amended by a majority vote of the Board or by the vote of the holders of 80% of the outstanding voting stock of American National. CRESTAR. As permitted by the VSCA, the Crestar Articles provide that, unless a greater vote is required by law, by the Crestar Articles or by a resolution of the Crestar Board, the Crestar Articles may be amended if the amendment is adopted by the Crestar Board and approved by a vote of the holders of a majority of the votes entitled to be cast on the amendment by each voting group entitled to vote thereon. To be amended, the Article providing for a classified Board and establishing criteria for removing Directors requires the approving vote of a majority of "Disinterested Directors" and the holders of at least two-thirds of the votes entitled to be cast on the amendment. Crestar's Bylaws generally provide that the Crestar Board may, by a majority vote, amend its Bylaws. REQUIRED SHAREHOLDER VOTE FOR CERTAIN ACTIONS AMERICAN NATIONAL. Each share of American National Common Stock has the same relative rights and is identical in all respects with every other share of American National Common Stock. The holders of American National Common 45 Stock possess exclusive voting rights in American National, except to the extent that shares of American National preferred stock may have voting rights (no such shares currently are outstanding). Each holder of American National Common Stock is entitled to one vote for each share held of record on all matters submitted to a vote of holders of American National Common Stock, except as described below, and does not have cumulative voting rights in the election of Directors. CRESTAR. The VSCA generally requires the approval of a majority of a corporation's Board of Directors and the holders of more than two-thirds of all the votes entitled to be cast thereon by each voting group entitled to vote on any plan of merger or consolidation, plan of share exchange or sale of substantially all of the assets of a corporation not in the ordinary course of business. The VSCA also specifies additional voting requirements for Affiliated Transactions and transactions that would cause an acquiring person's voting power to meet or exceed specified thresholds, as discussed under "Description of Crestar Capital Stock -- Virginia Stock Corporation Act." None of the additional voting requirements contained in the American National Certificate of Incorporation or the VSCA are applicable to the Holding Company Merger. DIRECTOR NOMINATIONS AMERICAN NATIONAL. The Bylaws of American National require that shareholder nominations of persons for election as a director of American National be received in writing by the Secretary no less than 90 days prior to any meeting of the shareholders called for the election of directors; provided, however, that in the event less than 100 days' notice of the meeting is given to shareholders, nominations made by shareholders must be received by the Secretary no later than the tenth day following the day on which such notice of the date of the meeting was mailed. Such nominations shall set forth, among other things, (i) the name, age and business and residence address of the nominee and the shareholder making the nomination; (ii) the occupation of the nominee; (iii) the number of Voting Shares owned of record by the shareholder making the nomination and by the nominee; and (iv) the consent of the nominee to serve if elected. CRESTAR. The Bylaws of Crestar provide that any nomination for director made by a shareholder must be made in writing to the Secretary of Crestar not less than 15 days prior to the meeting of shareholders at which directors are to be elected. If mailed, such notice shall be sent by certified mail, return receipt requested, and shall be deemed to have been given when received by the Secretary of Crestar. A shareholder's nomination for director shall set forth (a) the name and business address of the shareholder's nominee, (b) the fact that the nominee has consented to his name being placed in nomination, (c) the name and address, as they appear on Crestar's books, of the shareholder making the nomination, (d) the class and number of shares of Crestar's stock beneficially owned by the shareholder, and (e) any material interest of the shareholder in the proposed nomination. DIRECTORS AND CLASSES OF DIRECTORS; VACANCIES AND REMOVAL OF DIRECTORS AMERICAN NATIONAL. The American National Board of Directors is divided into three classes, each as nearly equal in number as possible, with one class being elected annually. The Bylaws of American National provide that the number of directors shall be such number as the Board of Directors shall designate, except that in the absence of any such designation such number shall be seven. Any vacancy occurring on the Board of Directors may be filled by the Board of Directors, acting by vote of a majority of the directors then in office, although less than a quorum. Any director so elected to fill a vacancy shall be elected to serve until annual meeting of shareholders at which the term of office of the class to which the director has been elected expires and until such director's successor shall have been elected and qualified. Subject to the rights of the holders of preferred stock then outstanding, a director may be removed for cause upon a vote of the holders of 80% or more of the outstanding shares then entitled to vote. CRESTAR. The Crestar Articles provide that the number of Directors shall be set forth in the Bylaws, but the number of directors set forth in the Bylaws may not be increased by more than four during any 12-month period except by the affirmative vote of more than two-thirds of the votes entitled to be cast. The Bylaws provide for a Board of Directors consisting of not less than five nor more than 26 members, with the number to be fixed by the Board. The Crestar Board currently has fixed the number of directors at 17. The Crestar Board is divided into three classes, each as nearly equal in number as possible, with one class being elected annually. 46 The Crestar Articles provide that any vacancy occurring on the Crestar Board, including a vacancy resulting from an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Crestar Board. If at the time any such vacancy is filled, any person, or any associate or affiliate of such person (as those terms are defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, or any successor rule or regulation) is directly or indirectly the beneficial owner of 10% (or more) of outstanding voting shares, the vacancy shall be filled by the affirmative vote of a majority of the remaining directors in the class of directors in which the vacancy has occurred. Directors so chosen shall hold office for a term expiring at the next following annual meeting of shareholders at which directors are elected. No decrease in the number of directors constituting the Crestar Board shall shorten the term of any incumbent director. Subject to the rights of the holders of preferred stock then outstanding, any director may be removed, with cause, only by the affirmative vote of the holders of at least two-thirds of outstanding voting shares. ANTI-TAKEOVER PROVISIONS AMERICAN NATIONAL. Certain provisions of Delaware law may be deemed to have an anti-takeover effect. Among other things, Delaware law provides that a "Person" (as defined therein) who owns 15% or more of the outstanding voting stock of a Delaware corporation (an "Interested Stockholder") may not consummate a merger or other business combination transaction with such corporation at any time during the three-year period following the date such "Person" became an Interested Stockholder. The term "business combination" is defined broadly to cover a wide range of corporate transactions including mergers, sales of assets, issuances of stock, transactions with subsidiaries and the receipt of disproportionate financial benefits. The statute exempts certain specified transactions from the foregoing requirements. In addition, certain provisions in American National's Certificate of Incorporation and the Savings Bank's Charter and their respective Bylaws provide for limitations on stockholder voting rights. These provisions provide for, among other things, supermajority voting, staggered boards of directors, noncumulative voting for directors, limits on the calling of special meetings, and certain uniform price provisions for certain business combinations. In particular, American National's Certificate of Incorporation provides that beneficial owners of more than 10% of American National's outstanding Common Stock may not vote the shares owned in excess of the 10% limit. The Savings Bank's amended Federal Stock Charter also prohibits, for a period of five years from the closing of the conversion, the acquisition of, or offer to, acquire, directly or indirectly, the beneficial ownership of more than 10% of the Savings Bank's voting securities. CRESTAR. For a description of certain provisions of VSCA which may be deemed to have an anti-takeover effect, see "Description of Crestar Capital Stock -- Virginia Stock Corporation Act." PREEMPTIVE RIGHTS Neither the shareholders of Crestar nor the shareholders of American National have preemptive rights. Thus, if additional shares of Crestar Common Stock, Crestar Preferred Stock or American National Common Stock or American National Preferred Stock are issued, holders of such stock, to the extent they do not participate in such additional issuance of shares, would own proportionately smaller interests in a larger amount of outstanding capital stock. ASSESSMENT All outstanding shares of American National Common Stock are deemed to be fully paid and nonassessable. All shares of Crestar Common Stock presently issued are, and those to be issued pursuant to the Agreement will be, fully paid and nonassessable. CONVERSION; REDEMPTION; SINKING FUND Neither Crestar Common Stock nor American National Common Stock is convertible, redeemable or entitled to any sinking fund. 47 LIQUIDATION RIGHTS AMERICAN NATIONAL. In the event of the complete liquidation or dissolution of American National, the holders of American National Common Stock are entitled to receive all assets of American National available for distribution in cash or in kind, after payment or provision for payment of (i) all debts and liabilities of American National (including all savings accounts and accrued interest thereon); (ii) any accrued dividend claims; and (iii) liquidation preferences upon serial preferred stock which may be issued in the future. In the event of any liquidation, dissolution or winding up of the Savings Bank, American National, as holder of the Savings Bank's capital stock would be entitled to receive, after payment or provision for payment of all debts and liabilities of the Savings Bank (including all deposit accounts and accrued interest thereon) and after distribution of the balance in the special liquidation account to eligible account holders and supplemental eligible account holders, all assets of the Savings Bank available for distribution. CRESTAR. The VSCA generally provides that a corporation's board of directors may propose dissolution for submission to shareholders and that to be authorized, the dissolution must be approved by the holders of more than two-thirds of all votes entitled to be cast on the proposal, unless the articles of incorporation of the corporation require a greater or lesser vote. There are no provisions in the Crestar Articles which would modify the statutory requirements for dissolution under the VSCA. DIVIDENDS AND OTHER DISTRIBUTIONS AMERICAN NATIONAL. The DGCL provides that, subject to any restrictions in American National's Certificate of Incorporation, dividends may be declared from American National's surplus, or if there is no surplus, from its net profits for the fiscal year in which the dividend is declared and the preceding fiscal year. However, if American National's capital (generally defined in the DGCL as the sum of the aggregate par value of all shares of American National's capital stock, where all such shares have a par value and the board of directors has not established a higher level of capital) has been diminished to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, dividends may not be declared and paid out of such net profits until the deficiency in such capital has been repaired. CRESTAR. The VSCA generally provides that a corporation may make distributions to its shareholders unless, after giving effect to the distribution, (i) the corporation would not be able to pay its debts as they become due in the usual course of business or (ii) the corporation's total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation permit otherwise, which the Crestar Articles do not) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. These requirements are applicable to Crestar as a Virginia corporation. In addition to the limitations set forth in the VSCA, there are various regulatory requirements which are applicable to distributions by bank holding companies such as Crestar and American National. For a description of the regulatory limitations on distributions, see "Supervision and Regulation Limits on Dividends and Other Payments." SPECIAL MEETINGS OF SHAREHOLDERS AMERICAN NATIONAL. The Certificate of Incorporation of American National provides that special meetings of shareholders may be called only by the Board of Directors of American National or as otherwise provided in the Bylaws. CRESTAR. The Bylaws of Crestar provide that special meetings of the shareholders for any purpose or purposes may be called at any time by the Chairman of the Crestar Board, by the President of Crestar, or by a majority of the Crestar Board. 48 INDEMNIFICATION AMERICAN NATIONAL. The Certificate of Incorporation of American National provides that to the full extent permitted by the DGCL, American National shall indemnify a director or officer of American National who is or was a party to any proceeding by reason of the fact that he is or was such a director or officer or is or was serving at the request of American National as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. CRESTAR. The Crestar Articles provide that to the full extent permitted by the VSCA and any other applicable law, Crestar shall indemnify a director or officer of Crestar who is or was a party to any proceeding by reason of the fact that he is or was such a director or officer or is or was serving at the request of the corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. The Crestar Board is empowered, by majority vote of a quorum of disinterested directors, to contract in advance to indemnify any director or officer. SHAREHOLDER PROPOSALS AMERICAN NATIONAL. American National's Bylaws provide that any new business to be considered at the annual meeting must be submitted in writing and filed with the Secretary of American National at least 90 days before the date of the meeting; provided, however, that in the event that less than 100 days' notice of the meeting is given to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed. A shareholder's notice to the secretary shall set forth as to each matter such shareholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on American National's books, of the shareholder proposing such business; (iii) the class and number of shares of American National's capital stock that are beneficially owned by such shareholder; and (iv) any material interest of such shareholder in such business. CRESTAR. The Bylaws of Crestar provide that at any meeting of shareholders of Crestar, only that business that is properly brought before the meeting may be presented to and acted upon by the shareholders. To be properly brought before the meeting, business must be brought (a) by or at the direction of the Crestar Board or (b) by a shareholder who has given written notice of business he expects to bring before the meeting to the Secretary of Crestar not less than 15 days prior to the meeting. If mailed, such notice shall be sent by certified mail, return receipt requested, and shall be deemed to have been given when received by the Secretary of Crestar. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the meeting (a) a brief description of the business to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on Crestar's books, of the shareholder proposing such business, (c) the class and number of shares of Crestar Common Stock beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. No business shall be conducted at a meeting of shareholders except in accordance with the procedures set forth in Crestar's Bylaws. SHAREHOLDER INSPECTION RIGHTS; SHAREHOLDER LISTS AMERICAN NATIONAL. Under the DGCL, the shareholders of a Delaware corporation have substantially similar rights as those described below for shareholders of Virginia corporations. CRESTAR. The Certificate of Incorporation and Bylaws of American National and the Articles of Incorporation and Bylaws of Crestar do not contain any provisions which govern shareholder inspection rights of shareholder lists. Under the VSCA, the shareholder of a Virginia corporation is entitled to inspect and copy certain other books and records, including a list of shareholders, minutes of any meeting of the board of directors and accounting records of the corporation, if (i) the shareholder has been a shareholder of record for at least six months immediately preceding his or her written demand or is the holder of at least 5% of the corporation's outstanding shares, (ii) the shareholder's demand is made in good faith and for a proper purpose, (iii) the shareholder describes with reasonable particularity the purpose of the request and the records desired to be inspected and (iv) the records are directly connected with the stated purpose, and if he gives the corporation written notice of his demand at least five business days before the date on which he wishes to inspect and copy. The VSCA also provides that a corporation shall make available for inspection by any shareholder during usual business hours, at least 10 days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting. 49 SHAREHOLDER RIGHTS PLAN AMERICAN NATIONAL. American National does not have a shareholders' rights plan. CRESTAR. For a description of a shareholder rights plan which has been adopted by Crestar, see "Description of Crestar Capital Stock -- Rights." Each American National shareholder who elects to receive shares of Crestar Common Stock in exchange for American National Common Stock will receive one Right for each share of Crestar Common Stock received. DISSENTERS' RIGHTS AMERICAN NATIONAL. Section 262 of the DGCL provides shareholders of a Delaware corporation the right to dissent from, and obtain payment of the fair value of their shares in the event of mergers or consolidations. However, Section 262 provides that holders of shares of a Delaware corporation which are designated as a national market system security (as are shares of American National) are not entitled to dissenter's rights unless certain requirements are met. CRESTAR. The provisions of Article 15 of the VSCA which provide shareholders of a Virginia corporation the right to dissent from, and obtain payment of the fair value of their shares in the event of, mergers, consolidations and certain other corporate transactions are applicable to Crestar as a Virginia corporation. However, because Crestar has more than 2,000 record shareholders, shareholders of Crestar generally do not have rights to dissent from mergers, consolidations and certain other corporate transactions to which Crestar is a party because Article 15 of the VSCA provides that holders of shares of a Virginia corporation which has shares listed on a national securities exchange or which has at least 2,000 record shareholders are not entitled to dissenters' rights unless certain requirements are met. RESALE OF CRESTAR COMMON STOCK Crestar Common Stock has been registered under the 1933 Act, thereby allowing such shares to be traded freely and without restriction by those holders of American National Common Stock who receive such shares following consummation of the Holding Company Merger and who are not deemed to be "affiliates" (as defined under the 1933 Act, but generally including directors, certain executive officers and 10% or more shareholders) of American National or Crestar. Each holder of American National Common Stock who is deemed by American National to be an affiliate of it has entered into an agreement with Crestar prior to the Effective Date of the Holding Company Merger providing, among other things, that (A) such affiliate acknowledges and agrees to support and vote such shares of American National Common Stock beneficially owned by him to ratify and confirm the Agreement and the Holding Company Merger, (B) such affiliate acknowledges and agrees beginning 30 days prior to the Effective Date, that he will not sell, pledge, transfer or otherwise dispose of shares of American National Common Stock or Crestar Common Stock except in compliance with the applicable provisions of the 1933 Act and rules and regulations thereunder and until such time as financial results covering at least 30 days of combined operations of Crestar and American National have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies, and (C) the certificates representing said shares may bear a legend referring to the foregoing restrictions. This Proxy Statement/Prospectus does not cover any resales of Crestar Common Stock received by affiliates of American National. EXPERTS The consolidated financial statements of Crestar Financial Corporation and Subsidiaries appearing in Crestar's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, incorporated by reference herein, have been incorporated in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein and in the registration statement, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick refers to their reliance on another auditors' report with respect to amounts related to Citizens Bancorp included in the aforementioned consolidated financial statements. The consolidated financial statements of Citizens Bancorp, which have been consolidated with those of Crestar in Crestar's Annual Report on Form 10-K for the year ended December 31, 1996, have been audited by Deloitte & Touche LLP as stated in their report. The incorporation by reference herein of Crestar's Annual Report on Form 10-K for the year ended December 31, 1996, has been so incorporated in reliance upon the report of Deloitte & Touche LLP, independent auditors, given upon their authority as experts in accounting and auditing. 50 The consolidated financial statements of American National Bancorp, Inc. and Subsidiaries appearing in American National's Annual Report on Form 10-K for the fiscal year ended July 31, 1996, incorporated by reference herein, have been incorporated by reference herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated herein by reference, and upon the authority of said firm as experts in accounting and auditing. LEGAL OPINIONS The legality of the Crestar Common Stock to be issued in the Holding Company Merger will be passed on for Crestar by Hunton & Williams, Richmond, Virginia. Gordon F. Rainey, Jr., a partner in Hunton & Williams, is a director of Crestar. Certain legal matters will be passed on for American National by Luse, Lehman, Gorman, Pomerenk & Schick, Washington, D.C. A condition to consummation of the Holding Company Merger is the delivery by Hunton & Williams of an opinion concerning certain federal income tax consequences of the Holding Company Merger. See "The Holding Company Merger - -- Certain Federal Income Tax Consequences." OTHER MATTERS As of the date of this Proxy Statement/Prospectus, the American National Board does not know of any other matters to be presented for action at the American National Special Meeting other than procedural matters incident to the conduct of the meeting. In addition, shareholders may make proposals for consideration at the American National Special Meeting in accordance with the procedures specified in American National's Bylaws. If such shareholder proposals are made or any other matters not now known are properly brought before the American National Special Meeting, the persons named in the accompanying proxy will vote such proxy in accordance with the determination of a majority of the American National Board. 51 ANNEX I AGREEMENT AND PLAN OF REORGANIZATION among CRESTAR FINANCIAL CORPORATION, CRESTAR BANK, AMERICAN NATIONAL BANCORP, INC. and AMERICAN NATIONAL SAVINGS BANK, F.S.B. June 23, 1997 INDEX Page ---- ARTICLE I General 1.1. Holding Company Merger................................................................... 2 1.2. Bank Merger.............................................................................. 2 1.3. Issuance of Crestar Common Stock and Payment of Cash..................................... 2 1.4. Taking of Necessary Action............................................................... 2 ARTICLE II Effect of Transaction on Common Stock, Assets, Liabilities and Capitalization of Crestar, Crestar Bank, American National and Savings Bank 2.1. Conversion of Stock; Exchange Ratio; Cash Election....................................... 3 2.2. Manner of Exchange....................................................................... 4 2.3. No Fractional Shares..................................................................... 6 2.4. Dissenting Shares........................................................................ 6 2.5. Assets................................................................................... 6 2.6. Liabilities.............................................................................. 7 ARTICLE III Representations and Warranties 3.1. Representations and Warranties of American National...................................... 7 (a) Organization, Standing and Power................................................ 7 (b) Capital Structure............................................................... 8 (c) Authority....................................................................... 8 (d) Investments..................................................................... 10 (e) Financial Statements............................................................ 10 (f) Absence of Undisclosed Liabilities.............................................. 11 (g) Tax Matters..................................................................... 11 (h) Options, Warrants and Related Matters........................................... 12 (i) Property........................................................................ 12 (j) Additional Schedules Furnished to Crestar....................................... 13 (k) Agreements in Force and Effect.................................................. 14 (l) Legal Proceedings; Compliance with Laws......................................... 14 (m) Employee Benefit Plans.......................................................... 15 (n) Insurance....................................................................... 17 (i) (o) Loan Portfolio.................................................................. 18 (p) Absence of Changes.............................................................. 19 (q) Brokers and Finders............................................................. 19 (r) Subsidiaries.................................................................... 19 (s) Reports......................................................................... 20 (t) Environmental Matters........................................................... 20 (u) Disclosure...................................................................... 21 (v) Accounting; Tax; Regulatory Matters............................................. 22 (w) Regulatory Approvals............................................................ 22 3.2. Representations and Warranties of Crestar and Crestar Bank............................... 22 (a) Organization, Standing and Power................................................ 22 (b) Capital Structure............................................................... 22 (c) Authority....................................................................... 23 (d) Financial Statements............................................................ 24 (e) Absence of Undisclosed Liabilities.............................................. 24 (f) Absence of Changes.............................................................. 24 (g) Brokers and Finders............................................................. 25 (h) Subsidiaries.................................................................... 25 (i) Reports......................................................................... 25 (j) Tax Matters..................................................................... 25 (k) Property........................................................................ 26 (l) Agreements in Force and Effect.................................................. 26 (m) Legal Proceedings; Compliance with Laws......................................... 27 (n) Employee Benefit Plans.......................................................... 27 (o) Regulatory Approvals............................................................ 28 (p) Environmental Matters........................................................... 28 (q) Disclosure...................................................................... 29 ARTICLE IV Conduct and Transactions Prior to Effective Time of the Merger 4.1. Access to Records and Properties of Crestar, Crestar Bank, American National and Savings Bank; Confidentiality...................................... 29 4.2. Registration Statement, Proxy Statement, Shareholder Approval............................ 30 4.3. Operation of the Business of American National........................................... 31 4.4. No Solicitation.......................................................................... 32 4.5. Dividends................................................................................ 32 4.6. Regulatory Filings; Best Efforts......................................................... 33 4.7. Public Announcements..................................................................... 33 4.8. Operating Synergies; Conformance to Reserve Policies, Etc................................ 33 4.9. Crestar Rights Agreement................................................................. 34 4.10. Agreement as to Efforts to Consummate.................................................... 34 (ii) 4.11. Adverse Changes in Condition............................................................. 34 4.12. NYSE Listing............................................................................. 34 4.13. Updating of Schedules.................................................................... 34 4.14. Transactions in Crestar Common Stock..................................................... 35 4.15. Branch Closing Law....................................................................... 35 ARTICLE V Conditions of Merger 5.1. Conditions of Obligations of Crestar and Crestar Bank.................................... 35 (a) Representations and Warranties; Performance of Obligations...................... 35 (b) Authorization of Transaction.................................................... 36 (c) Opinion of Counsel.............................................................. 36 (d) The Registration Statement...................................................... 36 (e) Tax Opinion..................................................................... 36 (f) Regulatory Approvals............................................................ 37 (g) Affiliate Letters............................................................... 37 (h) NYSE Listing.................................................................... 37 (i) Acceptance by Crestar and Crestar Bank Counsel.................................. 37 5.2. Conditions of Obligations of American National and Savings Bank.......................... 37 (a) Representations and Warranties; Performance of Obligations...................... 38 (b) Authorization of Transaction.................................................... 38 (c) Opinion of Counsel.............................................................. 38 (d) The Registration Statement...................................................... 38 (e) Regulatory Approvals............................................................ 39 (f) Tax Opinion..................................................................... 39 (g) NYSE Listing.................................................................... 40 (h) Fairness Opinion................................................................ 40 (i) Acceptance by American National's Counsel....................................... 40 ARTICLE VI Closing Date; Effective Time 6.1. Closing Date............................................................................. 40 6.2. Filings at Closing....................................................................... 40 6.3. Effective Time........................................................................... 41 (iii) ARTICLE VII Termination; Survival of Representations, Warranties and Covenants; Waiver and Amendment 7.1. Termination.............................................................................. 41 7.2. Effect of Termination.................................................................... 43 7.3. Survival of Representations, Warranties and Covenants.................................... 43 7.4. Waiver and Amendment..................................................................... 43 ARTICLE VIII Additional Covenants 8.1. Indemnification of American National Officers and Directors; Liability Insurance...................................................................... 44 8.2. Employment and Severance Agreements...................................................... 44 8.3. Employee Benefit Matters................................................................. 44 8.4. Stock Options............................................................................ 46 ARTICLE IX Miscellaneous 9.1. Expenses................................................................................. 46 9.2. Entire Agreement......................................................................... 46 9.3. Descriptive Headings..................................................................... 46 9.4. Notices.................................................................................. 46 9.5. Counterparts............................................................................. 47 9.6. Governing Law............................................................................ 47 Exhibit A - Stock Option Agreement Exhibit B - Holding Company Plan of Merger of American National into Crestar Exhibit C - Bank Plan of Merger of Savings Bank into Crestar Bank Exhibit D - Opinion of Luse, Lehman, Gorman, Pomerenk & Schick, counsel to American National and Savings Bank Exhibit E - Opinion of Hunton & Williams, counsel to Crestar and Crestar Bank Exhibit F - Form of Affiliate's Undertaking (iv)
INDEX TO SCHEDULES Schedule Description -------- ----------- A-1 Securities Owned by American National and Savings Bank A-2 American National and Savings Bank Financial Statements B American National Taxes Being Contested, etc. C Salary Rates, American National Common Stock Held by Certain Employees and Directors of American National and Savings Bank, Options and Restricted Stock Awards D Notes, Bonds, Mortgages, Indentures, Licenses, Lease Agreements and Other Contracts of American National and Savings Bank E Employment Contracts and Related Matters of American National and Savings Bank F Real Estate Owned or Leased by American National and Savings Bank G Affiliates of American National H Legal Proceedings of American National I Insurance of American National J American National Loans K Certain Changes L Environmental Matters M Crestar Taxes Being Contested, etc. N American National Subsidiaries and Joint Ventures O Authority X Permitted Contracts (v) AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Agreement") dated as of June 23, 1997 among CRESTAR FINANCIAL CORPORATION, a Virginia corporation ("Crestar"), CRESTAR BANK, a Virginia banking corporation wholly-owned by Crestar ("Crestar Bank"), AMERICAN NATIONAL BANCORP, INC. a Delaware corporation (together with its subsidiaries, "American National") and AMERICAN NATIONAL SAVINGS BANK, F.S.B., a federal savings bank (together with its subsidiaries, "Savings Bank"), recites and provides: A. American National and Crestar have agreed that Crestar will acquire American National in a statutory merger in exchange for Crestar Common Stock and cash, and pursuant to a Stock Option Agreement (the "Option Agreement") attached as Exhibit A, American National has granted an option to Crestar to purchase shares of American National Common Stock in certain events. The Option Agreement shall survive execution of the Agreement for the term provided in the Option Agreement. B. The boards of directors of Crestar and American National deem it advisable to merge American National into Crestar (the "Holding Company Merger") pursuant to this Agreement and the Holding Company Plan of Merger attached as Exhibit B (the "Holding Company Plan of Merger") whereby the holders of shares of Common Stock ("American National Common Stock") of American National will receive Common Stock of Crestar ("Crestar Common Stock") and/or cash in exchange therefor. C. The boards of directors of Crestar, American National, Crestar Bank and Savings Bank deem it advisable that after the Holding Company Merger, Crestar shall cause Savings Bank to be merged into Crestar Bank (the "Bank Merger"). The boards of directors deem it advisable that the Bank Merger be accomplished by the merger of Savings Bank into Crestar Bank pursuant to this Agreement and the Plan of Merger attached as Exhibit C (the "Bank Plan of Merger"). The Holding Company Merger and the Bank Merger are referred to herein collectively as the "Transaction." D. To effectuate the foregoing, the parties desire to adopt this Agreement and the Holding Company Plan of Merger, which shall represent a plan of reorganization in accordance with the provisions of Section 368(a) of the United States Internal Revenue Code, as amended (the "Code"), and the Bank Plan of Merger, which also shall represent a plan of reorganization. NOW, THEREFORE, in consideration of the mutual benefits to be derived from this Agreement, and of the representations, warranties, conditions and promises herein contained, Crestar, Crestar Bank, American National and Savings Bank hereby adopt this Agreement whereby at the "Effective Time of the Holding Company Merger" (as defined in Article VI hereof) American National shall be merged into Crestar in accordance with the -1- Holding Company Plan of Merger. At the Effective Time of the Bank Merger (as defined in Article VI hereof), Savings Bank will merge directly into Crestar Bank in accordance with the Bank Plan of Merger. The Bank Merger is intended to qualify as an "Oakar" transaction to avoid the payment of Federal Deposit Insurance Corporation ("FDIC") exit and entrance fees in accordance with Section 5(d)(3) of the Federal Deposit Insurance Act ("FDIA"). The outstanding shares of American National Common Stock shall be converted into shares of Crestar Common Stock and/or cash as provided in this Agreement on the basis, terms and conditions contained herein and in the Holding Company Plan of Merger. At the Effective Time of the Bank Merger, the outstanding shares of Savings Bank Common Stock shall be canceled. In connection therewith, the parties hereto agree as follows: ARTICLE I General 1.1. Holding Company Merger. Subject to the provisions of this Agreement and the Holding Company Plan of Merger, at the Effective Time of the Holding Company Merger the separate existence of American National shall cease and American National shall be merged with and into Crestar ("Crestar" or the "Surviving Company"). 1.2. Bank Merger. Subject to the provisions of this Agreement and the Bank Plan of Merger, immediately following the Effective Time of the Holding Company Merger Crestar shall cause Savings Bank to merge into Crestar Bank ("Crestar Bank" or the "Surviving Bank"), which merger shall qualify as an "Oakar" transaction in accordance with Section 5(d)(3)(A) of the FDIA and the separate existence of Savings Bank shall cease. 1.3. Issuance of Crestar Common Stock and Payment of Cash. Crestar agrees that at the Effective Time of the Holding Company Merger it will issue Crestar Common Stock and/or pay cash to the extent set forth in, and in accordance with, the terms of this Agreement and the Holding Company Plan of Merger. 1.4. Taking of Necessary Action. In case at any time after the Effective Time of the Holding Company Merger any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Company and/or Surviving Bank with full title to all properties, assets, rights, approvals, immunities and franchises of American National and/or Savings Bank, the officers and directors of the Surviving Company and/or Surviving Bank shall take all such necessary action. -2- ARTICLE II Effect of Transaction on Common Stock, Assets, Liabilities and Capitalization of Crestar, Crestar Bank, American National and Savings Bank 2.1. Conversion of Stock; Exchange Ratio; Cash Election. At the Effective Time of the Holding Company Merger: (a) Conversion of Stock. Each share of American National Common Stock issued and outstanding at the Effective Time of the Holding Company Merger (other than shares held directly by Crestar, which shall be canceled without payment therefore and shares to be exchanged for cash) shall, without any action by the holder thereof, be converted into the number of shares of Crestar Common Stock determined in accordance with subsection 2.1(b). All such shares shall be validly issued, fully paid and nonassessable. (b)Exchange Ratio. Each share of American National Common Stock (other than shares held directly by Crestar and shares to be exchanged for cash) shall be converted into a fraction of a share of Crestar Common Stock, determined in accordance with the Exchange Ratio. The "Exchange Ratio" shall be calculated as follows: (i) if the Average Closing Price (as defined below) is between $30 and $50, the Exchange Ratio shall be the quotient (rounded to the nearest one-thousandth) of (A) $20.25 (the "Common Stock Price Per Share") divided by (B) the Average Closing Price; (ii) if the Average Closing Price is $50 or greater, the Exchange Ratio shall be 0.405; and (iii) if the Average Closing Price is $30 or less, the Exchange Ratio shall be 0.675. As used herein, "Average Closing Price" shall mean the average closing price of Crestar Common Stock as reported on the New York Stock Exchange for each of the 10 trading days ending on the tenth day prior to the Effective Time of the Holding Company Merger. The Exchange Ratio at the Effective Time of the Holding Company Merger shall be adjusted to reflect any consolidation, split-up, other subdivisions or combinations of Crestar Common Stock, any dividend payable in Crestar Common Stock, or any capital reorganization involving the reclassification of Crestar Common Stock subsequent to the date of this Agreement. -3- (c) Cash Election. Holders of shares of American National Common Stock will be given the option of exchanging their shares for the Common Stock Price Per Share in cash (subject to all applicable withholding taxes), provided that in the aggregate the number of shares that may be exchanged for cash shall not exceed 40% of the number of outstanding shares of American National Common Stock immediately prior to the Effective Time of the Holding Company Merger. The cash election must be made at or prior to the time American National shareholders vote on the Holding Company Merger, and once such vote has been taken, cash elections shall be irrevocable. If the aggregate number of shares for which a cash election is made exceeds 40% of the outstanding shares of American National Common Stock immediately prior to the Effective Time of the Holding Company Merger, Crestar first will pay cash for shares submitted for cash exchange by each holder of 100 or fewer American National shares (if such holder has submitted all his shares for cash exchange) and then will pay cash for the remaining shares submitted for cash pro rata. Shares not exchanged for cash after proration will be exchanged for Crestar Common Stock at the Exchange Ratio. 2.2. Manner of Exchange. (a) Shareholders who elect to exchange some or all of their shares of American National Common Stock for cash must submit to American National certificates for the shares being exchanged for cash at or prior to the meeting of American National's shareholders referred to in Section 4.2. If the Holding Company Merger is approved by American National's shareholders at this meeting, a shareholder's election to receive cash is irrevocable and American National will retain certificates for shares submitted for cash purchase until either (i) termination of this Agreement, upon which American National will return such certificates, or (ii) the Effective Time of the Holding Company Merger, when Chase Mellon Shareholder Services (the "Exchange Agent") will exchange such certificates for cash to the extent required by this Agreement and the Holding Company Plan of Merger. (b) After the Effective Time of the Holding Company Merger, each holder of a certificate for theretofore outstanding shares of American National Common Stock, upon surrender of such certificate to the Exchange Agent (unless previously surrendered to American National in connection with exercise of the cash option), accompanied by a Letter of Transmittal, shall be entitled to receive in exchange therefor the number of full shares of Crestar Common Stock for which shares of American National Common Stock shall have been exchanged or cash if the cash option is properly elected, or a combination of Crestar Common Stock and cash if the cash option is elected for part of a holder's American National shares. In the event of proration, a combination of cash and Crestar -4- Common Stock shall be issued in exchange for American National Common Stock. Until so surrendered, each outstanding certificate which, prior to the Effective Time of the Holding Company Merger, represented American National Common Stock will be deemed to evidence the right to receive either (i) the number of full shares of Crestar Common Stock into which the shares of American National Common Stock represented thereby may be converted in accordance with the Exchange Ratio or (ii) the Common Stock Price Per Share multiplied by the number of shares of American National Common Stock represented by such certificate (subject to all applicable withholding taxes) in cash if the cash option provided in subsection 2.1(c) was properly elected by a holder of American National Common Stock, or (iii) a combination thereof; and, after the Effective Time of the Holding Company Merger (unless the cash option was properly elected) will be deemed for all corporate purposes of Crestar to evidence ownership of the number of full shares of Crestar Common Stock into which the shares of American National Common Stock represented thereby were converted. (c) Until outstanding certificates formerly representing American National Common Stock are surrendered in exchange for Crestar Common Stock, no dividend payable to holders of record of Crestar Common Stock for any period as of any date subsequent to the Effective Time of the Holding Company Merger shall be paid to the holder of such outstanding certificates in respect thereof. After the Effective Time of the Holding Company Merger, there shall be no further registry of transfer on the records of American National of shares of American National Common Stock. If a certificate representing such shares is presented to Crestar, it shall be canceled and exchanged for a certificate representing shares of Crestar Common Stock as herein provided. Upon surrender of certificates of American National Common Stock in exchange for Crestar Common Stock, there shall be paid to the recordholder of the certificates of Crestar Common Stock issued in exchange therefor (i) the amount of dividends theretofore paid for such full shares of Crestar Common Stock as of any date subsequent to the Effective Time of the Holding Company Merger which have not yet been paid to a public official pursuant to abandoned property laws and (ii) at the appropriate payment date the amount of dividends with a record date after the Effective Time of the Holding Company Merger but prior to surrender and a payment date subsequent to surrender. No interest shall be payable on such dividends upon surrender of outstanding certificates. (d) At the Effective Time of the Holding Company Merger, each share of American National Common Stock held by Crestar shall be canceled, retired and cease to exist. (e) At the Effective Time of the Holding Company Merger and as provided in the Holding Company Plan of Merger, outstanding options to acquire -5- American National Common Stock that were granted under the 1993 Stock Option Plan for Outside Directors, the 1993 Stock Incentive Plan, and the 1996 Stock Option Plan ("American National Options," as defined in Section 3.1(j)(1) hereof), and which are identified on Schedule C, shall be converted, based on the Exchange Ratio, into options to acquire Crestar Common Stock ("Crestar Options"). The exercise price per share of Crestar Common Stock under a Crestar Option shall be equal to the exercise price per share of American National Common Stock under the American National Option divided by the Exchange Ratio (rounded up to the nearest cent). The number of shares of Crestar Common Stock subject to a Crestar Option shall be equal to the number of shares of American National Common Stock subject to the American National Option multiplied by the Exchange Ratio (rounded down to the nearest whole share). Except as provided in the preceding sentences regarding the price of, and number of shares of Crestar Common Stock subject to a Crestar Option, the terms of the Crestar Option shall be the same as the terms of the American National Option. (f) At the Effective Time of the Holding Company Merger and as provided in the Holding Company Plan of Merger, outstanding awards of restricted stock (including accumulated dividends payable in stock, if any) that were granted under the 1993 Recognition and Retention Plan for Outside Directors, the 1993 Employees Recognition and Retention Plan, the 1996 Recognition and Retention Plan and any other restricted stock award granted to an employee or director of American National or Savings Bank ("American National Restricted Stock Awards" as defined in Section 3.1(j)(1) hereof), and which are identified on Schedule C, shall be converted, based on the Exchange Ratio, into restricted awards of Crestar Common Stock equal to the number of shares of American National Common Stock subject to the American National Restricted Awards multiplied by the Exchange Ratio (rounded down to the nearest whole share). Except as provided in the preceding sentence, the terms of the American National Restricted Stock Awards shall not be changed. 2.3. No Fractional Shares. No certificates or scrip for fractional shares of Crestar Common Stock will be issued. In lieu thereof, Crestar will pay the value of such fractional shares in cash on the basis of the Average Closing Price. 2.4. Dissenting Shares. Holders of American National Common Stock do not have the right to demand and receive payment of the fair value of his shares of American National Common Stock in accordance with the provisions of Section 262(b)(1) of the Delaware General Corporation Law. 2.5. Assets. At the Effective Time of the Holding Company Merger, the corporate existence of American National shall be merged into and continued in Crestar as the Surviving Company. At the Effective Time of the Bank Merger, the corporate existence of -6- Savings Bank shall be merged into and continued in Crestar Bank as the Surviving Bank. All rights, franchises and interests of American National and of Savings Bank in and to any type of property and choses in action shall be transferred to and vested in the Surviving Company or the Surviving Bank, as applicable, by virtue of the Holding Company Merger and the Bank Merger without any deed or other transfer. The Surviving Company or the Surviving Bank, as applicable, without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interests, including appointments, designations and nominations, and all other rights and interests as trustee, executor, administrator, transfer agent or registrar of stocks and bonds, guardian of estates, assignee, receiver and committee, and in every other fiduciary capacity, in the same manner and to the same extent as such rights, franchises and interests were held or enjoyed by American National or Savings Bank at the Effective Time of the Holding Company Merger and the Effective Time of the Bank Merger, respectively, as provided in Section 13.1-721 of Virginia Stock Corporation Act ("VSCA") and Section 259 of the Delaware General Corporation Law with respect to the Holding Company Merger and Section 6.1-44 of the Virginia Banking Act ("VBA") with respect to the Bank Merger. 2.6. Liabilities. At the Effective Time of the Holding Company Merger, the Surviving Company shall be liable for all liabilities of American National, as provided in Section 13.1-721 of the VSCA. At the Effective Time of the Bank Merger, the Surviving Bank shall be liable for all liabilities of Savings Bank, as provided in Section 13.1-721 of the VSCA and Section 6.1-44 of the VBA. All deposits, debts, liabilities and obligations of American National and Savings Bank, accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of accounts, or records of American National or Savings Bank shall be those of the Surviving Company or the Surviving Bank, respectively, and shall not be released or impaired by the Holding Company Merger or the Bank Merger. All rights of creditors and other obligees and all liens on property of American National or of Savings Bank shall be preserved unimpaired. ARTICLE III Representations and Warranties 3.1. Representations and Warranties of American National and Savings Bank. American National and Savings Bank represent and warrant to Crestar and Crestar Bank as follows: (a) Organization, Standing and Power. American National is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business, as now being conducted and to perform this Agreement and the Holding Company Plan of Merger and to effect the transactions contemplated hereby and thereby. American National has -7- delivered to Crestar complete and correct copies of (i) its Certificate of Incorporation and (ii) its By-laws. Savings Bank is a federal savings bank duly organized, validly existing and in good standing under the laws of the United States and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted and to perform this Agreement and the Bank Plan of Merger and to effect the transactions contemplated hereby and thereby. Savings Bank's deposits are insured by the Savings Association Insurance Fund of the FDIC to the maximum extent permitted by law. Savings Bank has delivered to Crestar complete and correct copies of (i) its Charter and (ii) its By-laws. (b) Capital Structure. The authorized capital stock of American National consists of 8,000,000 shares of American National Common Stock, par value $0.01, and 1,000,000 shares of serial preferred stock. On the date hereof, 3,613,011 shares of American National Common Stock and no shares of preferred stock were outstanding. All of the outstanding shares of American National Common Stock were validly issued and are fully paid and nonassessable. The authorized capital stock of Savings Bank consists of 20,000,000 shares of Common Stock and 10,000,000 shares of Serial Preferred Stock. On the date hereof, 100 shares of Savings Bank Common Stock were outstanding and all of such outstanding shares were validly issued, fully paid and nonassessable. No shares of Serial Preferred Stock are outstanding. American National owns all of the issued and outstanding Common Stock of Savings Bank free and clear of any liens, claims, encumbrances, charges or rights of third parties of any kind whatsoever. Except as disclosed on Schedule C, American National knows of no person who beneficially owns 5% or more of the outstanding American National Common Stock as of the date hereof. (c) Authority. Subject to the approval of this Agreement and the Holding Company Plan of Merger by the shareholders of American National as contemplated by Section 4.2, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and by the Holding Company Plan of Merger have been duly and validly authorized by all necessary action on the part of American National, and this Agreement is a valid and binding obligation of American National, enforceable in accordance with its terms, except as enforceability may be limited by laws affecting the enforcement of creditors' rights generally and subject to any equitable principles limiting the -8- right to obtain specific performance. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and by the Holding Company Plan of Merger and compliance by American National with any of the provisions hereof or thereof will not (i) except as disclosed on Schedule O, conflict with or result in a breach of any provision of its Certificate of Incorporation or By-laws or a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, debenture, mortgage, indenture, license, material agreement or other material instrument or obligation to which American National is a party, or by which it or any of its properties or assets may be bound, or (ii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to American National or any of its properties or assets. No consent or approval by any governmental authority, other than compliance with applicable federal and state securities and banking laws, and regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC and the Office of Thrift Supervision ("OTS"), is required in connection with the execution and delivery by American National of this Agreement or the consummation by American National of the transactions contemplated hereby or by the Holding Company Plan of Merger. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and by the Bank Plan of Merger, as applicable, have been duly and validly authorized by all necessary action on the part of Savings Bank, and this Agreement is a valid and binding obligation of Savings Bank, enforceable in accordance with its terms except as enforceability may be limited by laws affecting insured depository institutions and similar laws affecting the enforcement of creditors' rights generally and subject to any equitable principles limiting the right to obtain specific performance. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and by the Bank Plan of Merger, as applicable, and compliance by Savings Bank with any of the provisions hereof will not (i) except as disclosed on Schedule O, conflict with or result in a breach of any provision of its Charter or By-laws or a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, debenture, mortgage, indenture, license, material agreement or other material instrument or obligation to which Savings Bank is a party, or by which it or any of its properties or assets may be bound, or (ii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Savings Bank or any of its properties or assets. No consent or approval by any governmental authority, other than compliance with applicable federal and state banking laws, and regulations of the Federal Reserve Board, the FDIC and the OTS, is required in connection with the execution and delivery by Savings Bank of this Agreement -9- or the consummation by Savings Bank of the transactions contemplated hereby or by the Bank Plan of Merger. (d) Investments. All securities owned by American National and Savings Bank of record and beneficially are free and clear of all mortgages, liens, pledges, encumbrances or any other restriction, whether contractual or statutory, which would materially impair the ability of American National or Savings Bank freely to dispose of any such security at any time, except as noted on Schedule A- 1. Any securities owned of record by American National and Savings Bank in an amount equal to 5% or more of the issued and outstanding voting securities of the issuer thereof have been noted on such Schedule A-1. There are no voting trusts or other agreements or undertakings of which American National or Savings Bank is a party with respect to the voting of such securities. With respect to all repurchase agreements to which American National or Savings Bank is a party, American National or Savings Bank has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of the collateral securing each such repurchase agreement equals or exceeds the amount of the debt secured by such collateral under such agreement. (e) Financial Statements. Schedule A-2 contains copies of the following financial statements of American National (the "American National Financial Statements"): (i) Consolidated Statements of Financial Condition as of July 31, 1996 and 1995 (audited) and as of April 30, 1997 (unaudited); (ii) Consolidated Statements of Operations for each of the three years ended July 31, 1996, 1995 and 1994 (audited) and the three months and nine months ended April 30, 1997 and 1996 (unaudited); (iii) Consolidated Statements of Changes in Stockholders' Equity for each of the three years ended July 31, 1996, 1995 and 1994 (audited) and nine months ended April 30, 1997 (unaudited); and (iv) Consolidated Statements of Cash Flows for each of the three years ended July 31, 1996, 1995 and 1994 (audited) and the nine months ended April 30, 1997 and 1996 (unaudited). Such financial statements and the notes thereto have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated unless otherwise noted in the American National Consolidated Financial Statements. Each of such consolidated statements of -10- financial condition, together with the notes thereto, presents fairly as of its date (subject in the case of unaudited interim financial statements to normal year end adjustments) the consolidated financial condition and assets and liabilities of American National. The consolidated statements of operations, changes in stockholders' equity and cash flows, together with the notes thereto, present fairly the results of consolidated operations, consolidated changes in stockholders' equity and consolidated cash flows of American National or Savings Bank for the periods indicated in accordance with generally accepted accounting principles ("GAAP"). Except as disclosed in the American National Financial Statements, and in the case of Savings Bank, compliance with and subject to the requirements of 12 C.F.R. ss. 563.134, there are no restrictions precluding American National or Savings Bank from paying dividends when, as and if declared by their respective Boards of Directors. (f) Absence of Undisclosed Liabilities. At July 31, 1996 and April 30, 1997, American National had no material obligations or liabilities (contingent or otherwise) of any nature which were not reflected in the American National Financial Statements or in the American National periodic reports filed with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "1934 Act") as of such dates, or disclosed in the notes thereto, except for those which are disclosed in Schedules specifically referred to herein or which in the aggregate are immaterial. (g) Tax Matters. Savings Bank and all other subsidiaries of American National are members of the same "affiliated group," as defined in Section 1504(a)(1) of the Code, as American National (collectively, the "American National Group"). Each member of the American National Group has filed or caused to be filed or (in the case of returns or reports not yet due) will file all tax returns and reports required to have been filed by or for them before the Effective Time of the Holding Company Merger, and all information set forth in such returns or reports is or (in the case of such returns or reports not yet due) will be accurate and complete in all material respects. Each member of the American National Group has paid or made adequate provision for, or (with respect to returns or reports not yet filed) before the Effective Time of the Holding Company Merger will pay or make adequate provision for, all taxes, additions to tax, penalties, and interest for all periods covered by those returns or reports. There are, and at the Effective Time of the Holding Company Merger will be, no unpaid taxes, additions to tax, penalties, or interest due and payable by any member of the American National Group that are or could become a lien on any asset, or otherwise materially adversely affect the business, property or financial condition, of any member of the American National Group except for -11- taxes and any such related liability being contested in good faith and disclosed in Schedule B. Each member of the American National Group has collected or withheld, or will collect or withhold before the Effective Time of the Holding Company Merger, all amounts required to be collected or withheld by it for any taxes, and all such amounts have been, or before the Effective Time of the Holding Company Merger will have been, paid to the appropriate governmental agencies or set aside in appropriate accounts for future payment when due. Each member of the American National Group is in material compliance with, and its records contain all information and documents (including, without limitation, properly completed IRS Forms W-9) necessary to comply in all material respects with, all applicable information reporting and tax withholding requirements under federal, state, and local laws, rules, and regulations, and such records identify with specificity all accounts subject to backup withholding under Section 3406 of the Code. The consolidated statements of financial condition contained in the American National Financial Statements fully and properly reflect, as of the dates thereof, the aggregate liabilities of the members of the American National Group for all accrued taxes, additions to tax, penalties and interest in accordance with GAAP. For periods ending after July 31, 1996, the books and records of each member of the American National Group fully and properly reflect their liability for all accrued taxes, additions to tax, penalties and interest in accordance with GAAP. Except as disclosed in Schedule B, no member of the American National Group has granted (nor is it subject to) any waiver of the period of limitations for the assessment of tax for any currently open taxable period, and no unpaid tax deficiency has been asserted in writing against or with respect to any member of the American National Group by any taxing authority. No member of the American National Group has made or entered into, or holds any asset subject to, a consent filed pursuant to Section 341(f) of the Code and the regulations thereunder or a "safe harbor lease" subject to former Section 168(f)(8) of the Code and the regulations thereunder. Schedule B describes all tax elections, consents and agreements affecting any member of the American National Group. To the best knowledge of American National, no American National shareholder is a "foreign person" for purposes of Section 1445 of the Code. (h) Options, Warrants and Related Matters. There are no outstanding unexercised options, warrants, calls, commitments or agreements of any character to which American National or Savings Bank is a party or by which it is bound, calling for the issuance of securities of American National or Savings Bank or any security representing the right to purchase or otherwise receive any such security, except (i) as set forth on Schedule C and (ii) the Option Agreement. (i) Property. American National and Savings Bank own (or enjoy use of under capital or operating leases) all property reflected on the American National Financial Statements as of July 31, 1996 (except property sold or -12- otherwise disposed of in the ordinary course of business). All property shown as being owned is owned free and clear of all mortgages, liens, pledges, charges or encumbrances of any nature whatsoever, except those referred to in such American National Financial Statements or the notes thereto, liens for current taxes not yet due and payable, any unfiled mechanics' liens and such encumbrances and imperfections of title, if any, as are not substantial in character or amount or otherwise materially impair American National's consolidated business operations. The leases relating to leased property are fairly reflected in such American National Financial Statements. Except for Other Real Estate Owned ("OREO"), all property and assets material to the business or operations of American National and Savings Bank are in substantially good operating condition and repair and such property and assets are adequate for the business and operations of American National and Savings Bank as currently conducted. (j) Additional Schedules Furnished to Crestar. In addition to any Schedules furnished to Crestar pursuant to other provisions of this Agreement, American National has furnished to Crestar the following Schedules which are correct and complete as of the date hereof: (1) Employees. Schedule C lists as of the date hereof (A) the names of and current annual salary rates for all present employees of American National and Savings Bank who received, respectively, $80,000 or more in aggregate compensation, whether in salary or otherwise as reported or would be reported on Form W-2, during the year ended July 31, 1996, or are presently scheduled to receive salary in excess of $60,000 during the year ending July 31, 1997; (B) the number of shares of American National Common Stock owned beneficially by each director and five highest compensated officers of American National or Savings Bank as of the date hereof, (C) the names of and the number of shares of American National Common Stock owned by each person known to American National who beneficially owns 5% or more of the outstanding American National Common Stock as of the date hereof, (D) each agreement to make stock awards granted to each person under the 1996 Stock Option Plan or any option granted to a director of American National or Savings Bank (collectively, "American National Options") naming the grantee, the number of outstanding options he owns, and the exercise price of each such American National Option and (E) the names of the recipients, the number of outstanding shares of restricted stock (and accumulated dividends payable in stock, if any), and the vesting date or dates for each American National Restricted Stock Award. -13- (2) Certain Contracts. Schedule D lists all notes, bonds, mortgages, indentures, licenses, lease agreements and other contracts and obligations to which American National or Savings Bank is an indebted party or a lessee, licensee or obligee as of the date hereof except (i) for those entered into by American National or Savings Bank in the ordinary course of its business consistent with its prior practice and (ii) that do not involve an amount remaining greater than $100,000. (3) Employment Contracts and Related Matters. Except in all cases as set forth on Schedule E, neither American National nor Savings Bank is a party to any employment contract not terminable at the option of American National or Savings Bank without liability. Except in all cases as set forth on Schedule E, neither American National nor Savings Bank is a party to (A) any retirement, profit sharing or pension plan or thrift plan or agreement or employee benefit plan (as defined in Section 3 of the Employee Retirement Income Security Act of 1974 ("ERISA")), (B) any management or consulting agreement not terminable at the option of American National or Savings Bank without liability or (C) any union or labor agreement. (4) Real Estate. Schedule F describes, as of the date hereof, all interests in real property owned, leased or otherwise claimed by American National and Savings Bank, including OREO. (5) Affiliates. Schedule G sets forth the names and number of shares of American National Common Stock owned as of the date hereof beneficially or of record by any persons American National considers to be affiliates of American National ("American National Affiliates") as that term is defined for purposes of Rule 145 under the Securities Act of 1933 (the "1933 Act"). (k) Agreements in Force and Effect. All contracts, agreements, plans, leases, policies and licenses referred to in any Schedule of American National or Savings Bank referred to herein are valid and in full force and effect, and neither American National nor Savings Bank has breached any provision of, nor is in default in any respect under the terms of, any such contract, agreement, lease, policy or license, the effect of which breach or default would have a material adverse effect upon either the financial condition, results of operations, or business of American National on a consolidated basis. (l) Legal Proceedings; Compliance with Laws. Schedule H describes all legal, administrative, arbitration or other proceeding or governmental investigation known to American National or Savings Bank pending or, to the -14- knowledge of American National's and Savings Bank's management, threatened or probable of assertion against American National or Savings Bank. Except as set forth on Schedule H, no such proceeding or investigation, if decided adversely, would have a material adverse effect on either the financial condition, results of operations or business of American National on a consolidated basis. Except as set forth in Schedule H, American National and Savings Bank have complied in all material respects with any laws, ordinances, requirements, regulations or orders applicable to its business except where noncompliance would not have a material adverse effect on either the financial condition, results of operations or business of American National on a consolidated basis. American National and Savings Bank have all licenses, permits, orders or approvals (collectively, the "Permits") of any federal, state, local or foreign governmental or regulatory body that are necessary for the conduct of its business and the absence of which would have a material adverse effect on the financial condition, results of operations or business of American National on a consolidated basis; the Permits are in full force and effect; no violations are or have been recorded in respect of any Permits nor has American National or Savings Bank received written notice of any violations; and no proceeding is pending or, to the knowledge of American National and Savings Bank, threatened to revoke or limit any Permit. Except as set forth in Schedule H, neither American National nor Savings Bank has entered into any agreements or written understandings with the Federal Reserve Board, the OTS, the FDIC or any other regulatory agency having authority over it. Neither American National nor Savings Bank is subject to any judgment, order, writ, injunction or decree which materially adversely affects, or might reasonably be expected materially adversely to affect either the financial condition, results of operations, or business of American National on a consolidated basis. (m) Employee Benefit Plans. (1) Schedule E includes a correct and complete list of, and Crestar has been furnished a true and correct copy of (or an accurate written description thereof in the case of oral agreements or arrangements) (A) all qualified pension and profit-sharing plans, all deferred compensation, consultant, severance, thrift, option, bonus and group insurance contracts and all other incentive, welfare and employee benefit plans, trust, annuity or other funding agreements, and all other agreements (including oral agreements) that are presently in effect, or have been approved prior to the date hereof, maintained for the benefit of employees or former employees of American National or Savings Bank or the dependents or beneficiaries of any employee or former employee of American National or Savings Bank, whether or not subject to ERISA (the "Employee Plans"), (B) the most recent actuarial and -15- financial reports prepared or required to be prepared with respect to any Employee Plan and (C) the most recent annual reports filed with any governmental agency, the most recent favorable determination letter issued by the Internal Revenue Service, and any open requests for rulings or determination letters, that pertain to any such Employee Plan that is intended to be qualified under Section 401(c) of the Code. Schedule E identifies each Employee Plan that is intended to be qualified under Section 401(a) of the Code and each such plan is qualified. (2) Neither American National, Savings Bank nor any employee pension benefit plan (as defined in Section 3(2) of ERISA (a "Pension Plan")) maintained or previously maintained by it, has incurred any material liability to the Pension Benefit Guaranty Corporation ("PBGC") or to the Internal Revenue Service with respect to any Pension Plan. There is not currently pending with the PBGC any filing with respect to any reportable event under Section 4043 of ERISA nor has any reportable event occurred as to which a filing is required and has not been made. (3) Full payment has been made (or proper accruals have been established) of all contributions which are required for periods prior to the Closing Date, as defined in Section 6.1 hereof, under the terms of each Employee Plan, ERISA, or a collective bargaining agreement, no accumulated funding deficiency (as defined in Section 302 of ERISA or Section 412 of the Code) whether or not waived, exists with respect to any Pension Plan (including any Pension Plan previously maintained by American National or Savings Bank), and except as set forth on Schedule E, there is no "unfunded current liability" (as defined in Section 412 of the Code) with respect to any Pension Plan. (4) No Employee Plan is a "multiemployer plan" (as defined in Section 3(37) of ERISA). Neither American National nor Savings Bank has incurred any liability under Section 4201 of ERISA for a complete or partial withdrawal from a multi-employer plan (as defined in Section 3(37) of ERISA). Neither American National nor Savings Bank has participated in or agreed to participate in, a multiemployer plan (as defined in Section 3(37) of ERISA). (5) All Employee Plans that are "employee benefit plans," as defined in Section 3(3) of ERISA, that are maintained by American National or Savings Bank or previously maintained by American National or Savings Bank comply and have been administered in compliance in all material respects with ERISA and all other applicable -16- legal requirements, including the terms of such plans, collective bargaining agreements and securities laws. Neither American National nor Savings Bank has any material liability under any such plan that is not reflected in the American National Financial Statements or on Schedule E hereto. (6) Except as set forth on Schedule E, no prohibited transaction has occurred with respect to any Employee Plan that is an "employee benefit plan" (as defined in Section 3(3) of ERISA) maintained by American National or Savings Bank or previously maintained by American National or Savings Bank that would result, directly or indirectly, in material liability under ERISA or in the imposition of a material excise tax under Section 4975 of the Code. (7) Schedule E identifies each Employee Plan that is an "employee welfare benefit plan" (as defined in Section 3(1) of ERISA) and its funding status, whether through insurance, a trust, or from an employee's general assets. The funding under each such plan does not exceed the limitations under Section 419A(b) or 419A(c) of the Code. Neither American National nor Savings Bank is subject to taxation on the income of any such plan or any such plan previously maintained by American National or Savings Bank. (8) Schedule E identifies the method of funding (including any individual accounting) for all post-retirement medical or life insurance benefits for the employees of American National and Savings Bank. Schedule E also discloses the funded status of these Employee Plans. (9) Schedule E identifies each corporate owned life insurance policy, including any key man insurance policy and policy insuring the life of any director or employee of American National or Savings Bank, and indicates for each such policy, the face amount of coverage, cash surrender value, if any, and annual premiums. (10) No trade or business is, or has ever been, treated as a single employer with American National or Savings Bank for employee benefit purposes under ERISA and the Code. (n) Insurance. All policies or binders of fire, liability, product liability, workmen's compensation, vehicular and other insurance held by or on behalf of American National or Savings Bank are described on Schedule I and are valid and enforceable in accordance with their terms, are in full force and effect, and are deemed appropriate and sufficient by American National and Savings -17- Bank. Neither American National nor Savings Bank is in default in any material respect with respect to any provision contained in any such policy or binder and has not failed to give any notice or present any claim under any such policy or binder in due and timely fashion. Neither American National nor Savings Bank has received notice of cancellation or non-renewal of any such policy or binder. Neither American National nor Savings Bank has knowledge of any material inaccuracy in any application for such policies or binders, any failure to pay premiums when due or any similar state of facts that might form the basis for termination of any such insurance. Neither American National nor Savings Bank has knowledge of any state of facts or of the occurrence of any event that is reasonably likely to form the basis for any material claim against it not fully covered (except to the extent of any applicable deductible) by the policies or binders referred to above. Neither American National nor Savings Bank has received notice from any of its insurance carriers that any insurance premiums will be materially increased in the future or that any such insurance coverage will not be available in the future on substantially the same terms as now in effect. (o) Loan Portfolio. Each loan outstanding on the books of American National and Savings Bank is in all respects what it purports to be, was made in the ordinary course of business, was not known to be uncollectible at the time it was made, accrues interest (except for loans recorded on Savings Bank's books as non-accrual) in accordance with the terms of the loan, and with respect to loans originated by Savings Bank was made in accordance with Savings Bank's standard loan policies as in effect at the time in all material respects the loan was negotiated except for loans to facilitate the sale of OREO or loans with renegotiated terms and conditions. The records of Savings Bank regarding all loans outstanding and OREO by Savings Bank on its books are accurate in all material respects and the risk classifications for the loans outstanding are, in the best judgment of the management of American National and Savings Bank, appropriate. The reserves for possible loan losses on the outstanding loans of Savings Bank, as reflected in the American National Financial Statements, have been established in accordance with generally accepted accounting principles and with the requirements of the OTS and the FDIC. In the best judgment of the management of American National and Savings Bank, such reserves are adequate as of the date hereof and will be adequate as of the Effective Time of the Holding Company Merger to absorb all known and anticipated loan losses in the loan portfolio of Savings Bank. Except as identified on Schedule J, no loan in excess of $50,000 has been classified by examiners (regulatory or internal) as "Special Mention", "Substandard", "Doubtful", "Loss", or words of similar import. Except as disclosed on Schedule F, the OREO included in any nonperforming asset of Savings Bank is recorded at the lower of cost or fair value less estimated costs to sell based on independent appraisals that comply with the requirements of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and -18- Uniform Standards of Professional Appraisal Practice. Except as identified on Schedule J, to the best knowledge of the management of American National and Savings Bank, each loan reflected as an asset on the American National Financial Statements is the legal, valid and binding obligation of the obligor and any guarantor, subject to bankruptcy, insolvency, fraudulent conveyance and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity, and no defense, offset or counterclaim has been asserted with respect to any such loan, which if successful would have a material adverse effect on the financial condition, results of operation or business of American National on a consolidated basis. (p) Absence of Changes. Except as identified on Schedule K, since April 30, 1997, there has not been any material adverse change in the aggregate assets or liabilities, earnings or business of American National, other than changes resulting from or attributable to (i) changes since such date in laws or regulations, generally accepted accounting principles or interpretations of either thereof that affect the banking or savings and loan industries generally, (ii) changes since such date in the general level of interest rates, (iii) expenses including brokers' and finders' fees disclosed in subsection 3.1(q) since such date incurred or to be incurred in connection with the transactions contemplated by this Agreement (estimated at $850,000), (iv) accruals and reserves incurred or to be incurred by American National or Savings Bank since such date pursuant to the terms of Section 4.8 hereof, or (v) any other accruals, reserves or expenses incurred or to be incurred by American National or Savings Bank since such date with Crestar's prior written consent. Since July 31, 1996, the business of American National has been conducted only in the ordinary course. (q) Brokers and Finders. Neither American National, Savings Bank nor any of their officers, directors or employees have employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated herein except for the engagement of Keefe, Bruyette & Woods, Inc., whose fee for its engagement shall not exceed approximately $390,000, excluding out-of-pocket expenses. (r) Subsidiaries; Partnerships and Joint Ventures. American National's only subsidiaries, direct or indirect, other than Savings Bank, are set forth in Schedule N. Such corporations are duly organized, validly existing and in good standing under the laws of their jurisdiction of incorporation and have all requisite corporate power and authority to own, lease and operate their properties and to carry on their business as now being conducted in all material respects. American National owns, directly or indirectly, all of the issued and outstanding common stock of its subsidiaries free and clear of any liens, claims, encumbrances, charges or rights of third parties of any kind whatsoever and is not -19- a party to any joint venture agreement or partnership except as set forth in Schedule N. (s) Reports. Since January 1, 1992, American National and Savings Bank have filed all material reports and statements, together with any amendments required to be made with respect thereto, that were required to be filed with (i) the Federal Reserve Board, (ii) the FDIC, (iii) the OTS, (iv) the SEC and (v) any other governmental or regulatory authority or agency having jurisdiction over their operations. Each of such reports and documents, including the financial statements, exhibits and schedules thereto, filed with the SEC pursuant to the 1934 Act was in form and substance in compliance in all material respects with the 1934 Act. No such report or statement, or any amendments thereto, contains any statement which, at the time and in light of the circumstances under which it was made, was false or misleading with respect to any material fact necessary in order to make the statements contained therein not false or misleading. American National is a reporting company under Section 12(g) or 15(d) of the 1934 Act and the regulations of the SEC. (t) Environmental Matters. For purposes of this subsection, the following terms shall have the indicated meaning: "Environmental Law" means any federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any governmental entity relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances. The term "Environmental Law" includes without limitation (i) the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. Section 9601, et seq; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901, et seq; the Clean Air Act, as amended, 42 U.S.C. Section 7401, et seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251, et seq; the Toxic Substances Control Act, as amended, 15 U.S.C. Section 9601, et seq; the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et seq; the Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq; and all comparable state and local laws, and (ii) any common law (including without limitation common law that may impose strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Substance. -20- "Hazardous Substance" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law, whether by type or by quantity, including any material containing any such substance as a component. Hazardous Substances include without limitation petroleum or any derivative or by-product thereof, asbestos, radioactive material, and polychlorinated biphenyls. "Loan Portfolio Properties and Other Properties Owned" means those properties owned or operated by American National or Savings Bank or any of their subsidiaries, including those properties serving as collateral for any loans made and retained by American National or Savings Bank or for which American National or Savings Bank serves in a trust relationship for the loans retained in portfolio. Except as disclosed in Schedule L, to the best knowledge of American National and Savings Bank, (i) Neither American National nor Savings Bank has been or is in violation of or liable under any Environmental Law; (ii) none of the Loan Portfolio Properties and Other Properties Owned has been or is in violation of or liable under any Environmental Law; and (iii) there are no actions, suits, demands, notices, claims, investigations or proceedings pending or threatened relating to the liability of the Loan Portfolio Properties and Other Properties Owned under any Environmental Law, including without limitation any notices, demand letters or requests for information from any federal or state environmental agency relating to any such liabilities under or violations of Environmental Law. (u) Disclosure. Except to the extent of any subsequent correction or supplement with respect thereto furnished prior to the date hereof, no written statement, certificate, schedule, list or other written information furnished by or on behalf of American National at any time to Crestar, in connection with this Agreement, when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. Each document delivered or to be delivered by American National to Crestar is or will be a true and complete copy of such document, unmodified except by another document delivered by American National. -21- (v) Accounting; Tax; Regulatory Matters. Subject to action taken by the Board of Directors of American National pursuant to or as a result of the exception clause to the first sentence of Section 4.4 hereof, American National has not taken or agreed to take any action or has any knowledge of any fact or circumstance that would prevent the Holding Company Merger or the Bank Merger from qualifying as a reorganization within the meaning of Section 368 of the Code, or materially impede or delay receipt of any approval referred to in Section 4.6. (w) Regulatory Approvals. Neither American National nor Savings Bank knows of any reason why the approvals, consents and waivers of governmental authorities referred to in Sections 5.1(f) and 5.2(e) hereof should not be obtained on a timely basis without the imposition of any condition of the type referred to in Section 5.1(f) hereof. 3.2. Representations and Warranties of Crestar and Crestar Bank. Crestar and Crestar Bank represent and warrant to American National and Savings Bank as follows: (a) Organization, Standing and Power. Crestar is a corporation duly organized, validly existing and in good standing under the laws of Virginia and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Crestar has delivered to American National complete and correct copies of its Articles of Incorporation and all amendments thereto to the date hereof and its By-laws as amended to the date hereof. Crestar Bank is a banking corporation duly organized, validly existing and in good standing under the laws of Virginia and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. (b) Capital Structure. The authorized capital stock of Crestar consists of 200,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock, of which 110,299,785 shares of Common Stock and no shares of Preferred Stock were issued and outstanding as of March 31, 1997. All of such issued and outstanding shares of Crestar Common Stock were validly issued, fully paid and nonassessable at such date. The authorized capital stock of Crestar Bank consists of 2,500,000 shares of common stock, $100 par value, of which 1,725,721 shares were issued and outstanding as of March 31, 1997. All of such shares are owned by Crestar free and clear of any liens, claims, encumbrances, charges or rights of third parties of any kind whatsoever. All such issued and outstanding shares of common stock of Crestar Bank were validly issued, fully paid and nonassessable. -22- (c) Authority. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of Crestar; and this Agreement is a valid and binding obligation of Crestar, enforceable in accordance with its terms. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and compliance by Crestar with any of the provisions hereof will not (i) conflict with or result in a breach of any provision of its Articles of Incorporation or By-laws or a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which Crestar is a party, or by which it or any of its properties or assets may be bound or (ii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Crestar or any of its properties or assets. No consent or approval by any governmental authority, other than compliance with applicable federal and state securities and banking laws, the rules of the New York Stock Exchange and regulations of the Federal Reserve Board, the OTS, the FDIC, the Maryland Bank Commissioner, and the Bureau of Financial Institutions of the State Corporation Commission of Virginia ("SCC") is required in connection with the execution and delivery by Crestar of this Agreement or the consummation by Crestar of the transactions contemplated hereby or by the Holding Company Plan of Merger. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and by the Bank Plan of Merger have been duly and validly authorized by all necessary action on the part of Crestar Bank, and this Agreement is a valid and binding obligation of Crestar Bank, enforceable in accordance with its terms. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and by the Bank Plan of Merger and compliance by Crestar Bank with any of the provisions hereof or thereof will not (i) conflict with or result in a breach of any provision of its Articles of Incorporation or By-laws or a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which Crestar Bank is a party, or by which it or any of its properties or assets may be bound, or (ii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Crestar Bank or any of its properties or assets. No consent or approval by any government authority, other than compliance with applicable federal and state securities and banking laws, and regulations of the Federal Reserve Board, the OTS, the FDIC and the SCC, is required in connection with the execution and delivery by Crestar Bank of this Agreement or the consummation by Crestar Bank of the transactions contemplated hereby or by the Bank Plan of Merger. -23- (d) Financial Statements. Crestar has on or prior to the date hereof delivered to American National copies of the following consolidated financial statements of Crestar (the "Crestar Financial Statements"): (i) Consolidated Balance Sheets as of December 31, 1996 and 1995 (audited) and as of March 31, 1997 and 1996 (unaudited); (ii) Consolidated Income Statements for each of the three years ended December 31, 1996, 1995, and 1994 (audited) and the three months ended March 31, 1997 and 1996 (unaudited); (iii) Consolidated Statements of Changes in Shareholders' Equity for each of the three years ended December 31, 1996, 1995 and 1994 (audited) and the three months ended March 31, 1997 (unaudited); and (iv) Consolidated Statements of Cash Flows for each of the three years ended December 31, 1996, 1995 and 1994 (audited) and the three months ended March 31, 1997 and 1996 (unaudited). Such consolidated financial statements and the notes thereto have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated unless otherwise noted in the Crestar Financial Statements. Each of such consolidated balance sheets, together with the notes thereto, presents fairly as of its date (subject in the case of unaudited interim financial statements to normal year end adjustments) the financial condition and assets and liabilities of Crestar. The consolidated income statements, statements of changes in shareholders' equity and statements of cash flows, together with the notes thereto, present fairly the results of operations, shareholders' equity and cash flows of Crestar for the periods indicated. Except as disclosed in the Crestar Financial Statements, there are no restrictions precluding Crestar or Crestar Bank from paying dividends when, as and if declared by their respective Board of Directors. (e) Absence of Undisclosed Liabilities. At March 31, 1997 and December 31, 1996, Crestar and its consolidated subsidiaries had no material obligations or liabilities, (contingent or otherwise) of any nature which were not reflected in the Crestar Financial Statement as of such dates, or disclosed in the notes thereto, except for those which are disclosed in Schedules specifically referred to herein or which in the aggregate are immaterial. (f) Absence of Changes. Since March 31, 1997, there has not been any material adverse change in the condition (financial or otherwise), aggregate -24- assets or liabilities, earnings or business of Crestar, other than changes resulting from or attributable to (i) changes since such date in laws or regulations, generally accepted accounting principles or interpretations of either thereof that affect the banking or savings and loan industries generally, (ii) changes since such date in the general level of interest rates, and (iii) expenses since such date incurred in connection with the transactions contemplated by this Agreement. Since March 31, 1997 the business of Crestar has been conducted only in the ordinary course. (g) Brokers and Finders. Neither Crestar, Crestar Bank nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated herein. (h) Subsidiaries. Crestar's first-tier subsidiaries are Crestar Bank, Crestar Insurance Agency, Inc., and Crestar Securities Corporation. Such corporations are duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation and have all requisite corporate power and authority to own, lease and operate their properties and to carry on their business as now being conducted in all material respects. As of the date hereof, Crestar and Crestar Bank (other than in a fiduciary capacity) do not own directly or indirectly, or have any rights to acquire, any shares of American National Common Stock, other than pursuant to the Option Agreement. (i) Reports. Since January 1, 1992, Crestar has filed all material reports and statements, together with any amendments required to be made with respect thereto, that were required to be filed with (i) the Federal Reserve Board, (ii) the FDIC, (iii) the SCC, (iv) the SEC and (v) any other governmental or regulatory authority or agency having jurisdiction over their operations. Each of such reports and documents, including the financial statements, exhibits and schedules thereto, filed with the SEC pursuant to the 1934 Act was in form and substance in compliance with the 1934 Act. No such report or statement, or any amendments thereto, contains any statement which, at the time and in light of the circumstances under which it was made, was false or misleading with respect to any material fact necessary in order to make the statements contained therein not false or misleading. (j) Tax Matters. Each of Crestar, Crestar Bank, and all other corporations that are members of the same "affiliated group," as defined in Section 1504(a)(1) of the Code, as Crestar (collectively, the "Crestar Group") has filed or caused to be filed or (in the case of returns or reports not yet due) will file all tax returns and reports required to have been filed by or for it before the Effective Time of the Holding Company Merger. Each member of the Crestar -25- Group has paid or made adequate provision for or (with respect to returns or reports not yet filed) before the Effective Time of the Holding Company Merger will pay or make adequate provision for all taxes, additions to tax, penalties, and interest for all periods covered by those returns or reports. The consolidated balance sheets contained in the Crestar Financial Statements fully and properly reflect, as of the dates thereof, the aggregate liabilities of the members of the Crestar Group for all accrued taxes, additions to tax, penalties and interest in accordance with GAAP. For periods ending after December 31, 1996, the books and records of each member of the Crestar Group fully and properly reflect its liability for all accrued taxes, additions to tax, penalties and interest in accordance with GAAP. Except as disclosed in Schedule M, no member of the Crestar Group has granted (nor is it subject to) any waiver of the period of limitations for the assessment of tax for any currently open taxable period, and no unpaid tax deficiency has been asserted in writing against or with respect to any member of the Crestar Group by any taxing authority. (k) Property. Crestar and Crestar Bank own (or enjoy use of under capital or operating leases) all property reflected on the Crestar Financial Statements as of March 31, 1997 and December 31, 1996 as being owned by them (except property sold or otherwise disposed of in the ordinary course of business). All property shown as being owned is owned free and clear of mortgages, liens, pledges, charges or encumbrances of any nature whatsoever, except those referred to in such Crestar Financial Statements or the notes thereto, liens for current taxes not yet due and payable, any unfiled mechanic's liens and such encumbrances and imperfections of title, if any, as are not substantial in character or amount or otherwise would materially impair Crestar's consolidated business operations. The leases relating to leased property are fairly reflected in such Crestar Financial Statements. All property and assets material to the business or operations of Crestar and Crestar Bank are in substantially good operating condition and repair, and such property and assets are adequate for the business and operations of Crestar and Crestar Bank. (l) Agreements in Force and Effect. All material contracts, agreements, plans, leases, policies and licenses of Crestar and Crestar Bank are valid and in full force and effect; and Crestar and Crestar Bank have not breached any material provision of, or are in default in any material respect under the terms of, any such contract, agreement, lease, policy or license, the effect of which breach or default would have a material adverse effect upon the financial condition, results of operations or business of Crestar and its subsidiaries taken as a whole. -26- (m) Legal Proceedings; Compliance with Laws. Other than as disclosed in the Notes to the Crestar Financial Statements, there is no legal, administrative, arbitration or other proceeding or governmental investigation pending, or, to the knowledge of Crestar's and Crestar Bank's management, threatened or probable of assertion which, if decided adversely, would have a material adverse effect on the financial condition, results of operations, business or prospects of Crestar on a consolidated basis. Crestar and Crestar Bank have complied with any laws, ordinances, requirements, regulations or orders applicable to their respective businesses, except where noncompliance would not have a material adverse effect on the financial condition, results of operations, business or prospects of Crestar on a consolidated basis. Crestar and Crestar Bank have all licenses, permits, orders or approvals of any federal, state, local or foreign governmental or regulatory body that are necessary for the conduct of the respective businesses of Crestar and Crestar Bank and the absence of which would have a material adverse effect on the financial condition, results of operations, business or prospects of Crestar on a consolidated basis; the Permits are in full force and effect; neither Crestar nor Crestar Bank is aware of any material violations that are or have been recorded in respect of any Permit nor has Crestar or Crestar Bank received notice of any violations; and no proceeding is pending or, to the knowledge of Crestar or Crestar Bank, threatened to revoke or limit any Permit. Neither Crestar nor Crestar Bank has entered into any agreements or written understandings with the Federal Reserve Board, the SCC, the FDIC, or any other regulatory agency having authority over it. Neither Crestar nor Crestar Bank is subject to any judgment, order, writ, injunction or decree which materially adversely affects, or might reasonably be expected to materially adversely affect, the financial condition, results of operations, business or prospects of Crestar on a consolidated basis. (n) Employee Benefit Plans. (1) Neither Crestar nor any of its subsidiaries, nor any employee benefit pension plan (as defined in Section 3(2) of ERISA (a "Pension Plan")) maintained by it, has incurred any material liability to the PBGC or to the Internal Revenue Service with respect to any Pension Plan, deferred compensation, consultant, severance, thrift, option, bonus and group insurance contract or any other incentive, welfare and employee benefit plan and agreement presently in effect, or approved prior to the date hereof, for the benefit of employees or former employees of Crestar and its subsidiaries or the dependents or beneficiaries of any employee or former employee of Crestar or any subsidiary (the "Crestar Employee Plans"). There is not currently pending with the PBGC any filing with respect to any reportable event under Section 4043 of ERISA nor has -27- any reportable event occurred as to which a filing is required and has not been made. (2) Full payment has been made (or proper accruals have been established) of all contributions which are required for periods prior to the Closing Date under the terms of each Crestar Employee Plan, ERISA, or a collective bargaining agreement, and no accumulated funding deficiency (as defined in Section 302 of ERISA or Section 412 of the Code) whether or not waived, exists with respect to any Pension Plan. (3) No Crestar Employee Plan is a "multiemployer plan" (as defined in Section 3(37) of ERISA). Neither Crestar nor Crestar Bank has incurred any material liability under Section 4201 of ERISA for a complete or partial withdrawal from a multiemployer plan (as defined in Section 3(37) of ERISA). Neither Crestar nor Crestar Bank has participated in or agreed to participate in, a multiemployer plan (as defined in Section 3(37) of ERISA). (4) All "employee benefit plans," as defined in Section 3(3) of ERISA, that are maintained by Crestar comply and have been administered in compliance in all material respects with ERISA and all other applicable legal requirements, including the terms of such plans, collective bargaining agreements and securities laws. Neither Crestar nor Crestar Bank has any material liability under any such plan that is not reflected in the Crestar Financial Statements. (5) No prohibited transaction has occurred with respect to any "employee benefit plan" (as defined in Section 3(3) of ERISA) maintained by Crestar or Crestar Bank that would result, directly or indirectly, in material liability under ERISA or in the imposition of a material excise tax under Section 4975 of the Code. (o) Regulatory Approvals. Neither Crestar nor Crestar Bank knows of any reason why the approvals, consents and waivers of governmental authorities referred to in Sections 5.1(f) and 5.2(e) hereof should not be obtained on a timely basis without the imposition of any condition of the type referred to in Section 5.1(f) hereof. (p) Environmental Matters. To the knowledge of the Manager, Environmental Compliance, of Crestar Bank, there are no actions, suits, demands, notices, claims, investigations or proceedings pending relating to the liability of properties owned or operated by Crestar Bank or any of its -28- subsidiaries excluding properties serving as collateral for loans under any Environmental Law (as defined in subsection 3.1(t)), including without limitation any notices, demand letters or requests for information from any federal or state environmental agency relating to any such liabilities under or violations of Environmental Law. (q) Disclosure. Except to the extent of any subsequent correction or supplement with respect thereto furnished prior to the date hereof, no written statement, certificate, schedule, list or other written information furnished by or on behalf of Crestar at any time to American National, in connection with this Agreement when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. Each document delivered or to be delivered by Crestar to American National is or will be a true and complete copy of such document, unmodified except by another document delivered by Crestar. ARTICLE IV Conduct and Transactions Prior to Effective Time of the Merger 4.1. Access to Records and Properties of Crestar, Crestar Bank, American National and Savings Bank; Confidentiality. Between the date of this Agreement and the Effective Time of the Holding Company Merger, each of Crestar and Crestar Bank on the one hand, and each of American National and Savings Bank on the other, agree to give to the other reasonable access to all the premises and books and records (including tax returns filed and those in preparation) of it and its subsidiaries and to cause its officers to furnish the other with such financial and operating data and other information with respect to the business and properties as the other shall from time to time request for the purposes of verifying the representations and warranties set forth herein, preparing the Registration Statement (as defined in Section 4.2) and applicable regulatory filings (as set forth in Section 4.6), and preparing unaudited financial statements of American National as of a date prior to the Effective Time of the Holding Company Merger in order to facilitate Crestar in performance of its post-Closing Date financial reporting requirements. Crestar and American National shall each maintain the confidentiality of all confidential information furnished to it by the other party hereto concerning the business, operations, and financial condition of the party furnishing such information, and shall not use any such information except in furtherance of the Transaction. If this Agreement is terminated, each party hereto shall promptly return all documents and copies of, and all workpapers containing, confidential information received from the other party hereto. The obligations of confidentiality under this Section 4.1 and the Confidentiality Agreements dated March 3, 1997 and June 16, 1997 between Crestar and American National shall survive any such termination of this Agreement and shall remain in effect, except to the extent that (a) one party shall have -29- directly or indirectly acquired the assets and business of the other party; (b) as to any particular confidential information with respect to one party, such information (i) shall become generally available to the public other than as a result of an unauthorized disclosure by the other party or (ii) was available to the other party on a nonconfidential basis prior to its disclosure by the first party; (c) disclosure by any party is required by subpoena or order of a court of competent jurisdiction or by order of a regulatory authority of competent jurisdiction; or (d) disclosure is required by the SEC or bank or thrift regulatory authorities in connection with the Transactions contemplated by this Agreement, provided that the disclosing party has, prior to such disclosure, advised the other party of the circumstances necessitating such disclosure and have reached mutually agreeable arrangements relating to such disclosure. 4.2. Registration Statement, Proxy Statement, Shareholder Approval. American National will duly call and will hold a meeting of its shareholders as soon as practicable for the purpose of approving the Holding Company Merger and will comply fully with the provisions of the 1933 Act and the 1934 Act and the rules and regulations of the SEC under such acts to the extent applicable, and the Certificate of Incorporation and By-laws of American National relating to the call and holding of a meeting of shareholders for such purpose. Subject to action taken by its Board of Directors pursuant to or as a result of the exception clause to the first sentence of Section 4.4 hereof, the Board of Directors of American National will recommend to and actively encourage shareholders that they vote in favor of the Holding Company Merger. Crestar and American National will jointly prepare the proxy statement-prospectus to be used in connection with such meeting (the "Proxy Statement- Prospectus") and Crestar will prepare and file with the SEC a Registration Statement on Form S-4 (the "Registration Statement"), of which such Proxy Statement-Prospectus shall be a part, and use its best efforts promptly to have the Registration Statement declared effective. In connection with the foregoing, Crestar will comply with the requirements of the 1933 Act, the 1934 Act, the New York Stock Exchange and the rules and regulations of the SEC under such acts with respect to the offering and sale of Crestar Common Stock in connection with the Transaction and with all applicable state Blue Sky and securities laws. The notices of such meetings and the Proxy Statement-Prospectus shall not be mailed to American National shareholders until the Registration Statement shall have become effective under the 1933 Act. American National covenants that none of the information supplied by American National and Crestar covenants that none of the information supplied by Crestar in the Proxy Statement- Prospectus will, at the time of the mailing of the Proxy Statement-Prospectus to American National shareholders, contain any untrue statement of a material fact nor will any such information omit any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading; and at all times subsequent to the time of the mailing of the Proxy Statement-Prospectus, up to and including the date of the meeting of American National shareholders to which the Proxy Statement-Prospectus relates, none of such information in the Proxy Statement-Prospectus, as amended or supplemented, will contain an untrue statement of a material fact or omit any material fact required to be stated therein in order to make the statements therein, in light of the circumstances in which they were made, not misleading. -30- American National, as the sole shareholder of Savings Bank, and Crestar, as the sole shareholder of Crestar Bank, hereby approve this Agreement and the Bank Plan of Merger. 4.3. Operation of the Business of American National and Savings Bank. American National and Savings Bank agree that from April 30, 1997 to the Effective Time of the Merger, they have operated, and they will operate, their respective businesses substantially as presently operated and only in the ordinary course and in general conformity with applicable laws and regulations, and, consistent with such operation, they will use their best efforts to preserve intact its present business organizations and its relationships with persons having business dealings with it. Without limiting the generality of the foregoing, American National and Savings Bank, from the date of this Agreement, agree that they will not, without the prior written consent of Crestar, (i) make any change in the salaries, bonuses or title of any officer; (ii) make any change in the title, salaries or bonuses of any other employee, other than those permitted by current employment policies in the ordinary course of business, any of which changes shall be reported promptly to Crestar; (iii) enter into any bonus, incentive compensation, deferred compensation, profit sharing, thrift, retirement, pension, group insurance or other benefit plan or any employment or consulting agreement or increase benefits under existing plans; (iv) create or otherwise become liable with respect to any indebtedness for money borrowed or purchase money indebtedness except in the ordinary course of business; (v) amend its Certificate of Incorporation or By-laws; (vi) issue or contract to issue any shares of American National capital stock or securities exchangeable for or convertible into capital stock except (y) up to 345,357 shares of American National Common Stock issuable pursuant to American National Options outstanding as of May 31, 1997, or (z) up to 792,000 shares of American National Common Stock pursuant to the Option Agreement; (vii) purchase any shares of American National capital stock; (viii) except as set forth in Schedule X, enter into, renew, extend or assume any material contract or obligation, including, but not limited to, any outsourcing agreements or licenses, leases or purchases of data processing products or services; (ix) other than as provided in (a) below with respect to the work-out of nonperforming assets, waive, release, compromise or assign any right or claim involving $75,000 or more; (x) propose or take any other action which would make any representation or warranty in Section 3.1 hereof untrue; (xi) introduce any new products or services or change the rate of interest on any deposit instrument to above-market interest rates; (xii) make any change in policies respecting extensions of credit or loan charge-offs; (xiii) change reserve requirement policies; (xiv) change securities portfolio policies; (xv) acquire a policy or enter into any new agreement, amendment or endorsement or make any changes relating to insurance coverage, including coverage for its directors and officers, which would result in an additional payment obligation of $50,000 or more; (xvi) propose or take any action with respect to the closing of any branches; (xvii) amend the terms of the American National Options; (xviii) amend the terms of the written severance or employment agreements identified in Schedule E; or (xix) make any change in any tax election or accounting method or system of internal accounting controls, except as may be appropriate to conform to any change in regulatory accounting requirements or generally accepted accounting principles. American National and Savings Bank further agree that, between the date of this Agreement and the Effective Time of the Holding Company Merger, -31- they will consult with Crestar regarding (a) loan portfolio management, including management and work-out of nonperforming assets, and credit review and approval procedures, including notice to Crestar's Credit Review Department Management of any new nonresidential loans in excess of $500,000, and (b) securities portfolio and funds management, including management of interest rate risk. 4.4. No Solicitation. Unless and until this Agreement shall have been terminated pursuant to its terms, neither American National, Savings Bank nor any of their executive officers, directors, representatives, agents or affiliates shall, directly or indirectly, encourage, solicit or initiate discussions or negotiations (with any person other than Crestar) concerning any merger, sale of substantial assets, tender offer, sale of shares of stock or similar Transaction involving American National or Savings Bank or disclose, directly or indirectly, any information not customarily disclosed to the public concerning American National or Savings Bank, afford to any other person access to the properties, books or records of American National or Savings Bank or otherwise assist any person preparing to make or who has made such an offer, or enter into any agreement with any third party providing for a business combination transaction, equity investment or sale of significant amount of assets, except in a situation in which a majority of the full Board of Directors of American National has determined in good faith, upon advice of counsel, that such Board has a fiduciary duty to consider and respond to a bona fide proposal by a third party (which proposal was not directly or indirectly solicited by American National or Savings Bank or any of their officers, directors, representatives, agents or affiliates) and provides written notice of its intention to consider such proposal and the material terms thereof to Crestar at least five days before responding to the proposal. American National and Savings Bank will promptly communicate to Crestar the terms of any proposal which it may receive in respect to any of the foregoing transactions. 4.5. Dividends. American National agrees that subsequent to April 30, 1997, and until the Effective Time of the Holding Company Merger, it will declare cash dividends consistent (in terms of amount and timing of record and payment dates) with its practice in effect in its fiscal quarter ending April 30, 1997. American National agrees not to pay any cash dividends in the fiscal quarter in which the closing occurs unless the Closing Date occurs after the record date for payment of the Crestar cash dividend in the Crestar quarter most closely corresponding to such American National fiscal quarter, since it is the intention of American National and Crestar that American National shareholders not be paid cash dividends both on American National Common Stock and cash dividends on Crestar Common Stock received in exchange therefor in corresponding quarters. If the Closing Date occurs after the record date for payment of Crestar's cash dividend in the Crestar quarter most closely corresponding to the American National fiscal quarter in which the closing occurs, American National may declare a cash dividend complying with the conditions of this Section 4.5 for such fiscal quarter payable to American National shareholders of record at the Effective Time of the Holding Company Merger. -32- 4.6. Regulatory Filings; Best Efforts. Crestar and American National shall jointly prepare all regulatory filings required to consummate the transactions contemplated by the Agreement and the Plan of Merger and submit the filings for approval with the Federal Reserve Board, the OTS, the FDIC, the SCC and the Maryland Banking Commissioner as soon as practicable after the date hereof. Crestar and American National shall use their best efforts to obtain approvals of such filings. 4.7. Public Announcements. Each party will consult with the other before issuing any press release or otherwise making any public statements with respect to the Transaction and shall not issue any press release or make any such public statement prior to such consultations and approval of the other party, which approval shall not be unreasonably withheld, except as may be required by law. 4.8. Operating Synergies; Conformance to Reserve Policies, Etc. Between the date hereof and the Effective Time of the Holding Company Merger, American National's and Savings Bank's management will work with Crestar Bank to achieve appropriate operating efficiencies following the Closing Date. Subject to Savings Bank's approval, which will not be unreasonably withheld, Crestar notification to Savings Bank's customers and Crestar's direct contact with customers will commence following receipt of Federal Reserve Board approval but not earlier than 60 days prior to the Closing Date. At the request of Crestar Bank and upon receipt by American National and Savings Bank of written confirmation from Crestar and Crestar Bank that there are no conditions to the obligations of Crestar and Crestar Bank under this Agreement set forth in Article V which will not be fulfilled so as to permit them to consummate the Holding Company Merger and the other transactions contemplated hereby, not more than three days before the Effective Time of the Holding Company Merger American National shall establish such additional accruals, reserves and charge-offs, through appropriate entries in its accounting books and records (provided such adjustments are in accordance with GAAP and applicable law and regulation) as may be necessary to conform American National's accounting and credit loss reserve practices and methods to those of Crestar Bank (as such practices and methods are to be applied from and after the Effective Time of the Holding Company Merger) and to Crestar Bank's plans with respect to the conduct of the business of American National and Savings Bank following the Transaction, as well as the costs and expenses relating to the consummation by American National and Savings Bank of the Transaction and the other transactions contemplated hereby. Any such accruals, reserves and charge-offs shall not be deemed to cause any representation and warranty of American National and Savings Bank to be untrue or inaccurate as of the Effective Time of the Holding Company Merger. At the same time that the accruals referred to in the two immediately preceding sentences are established, American National and Savings Bank will convey any OREO properties that are titled in its name to an American National subsidiary to be identified by Crestar. Such subsidiary will be merged into a Crestar or Crestar Bank subsidiary at the time of the Bank Merger. -33- 4.9. Crestar Rights Agreement. Crestar agrees that any rights issued pursuant to the Rights Agreement adopted by it in 1989 shall be issued with respect to each share of Crestar Common Stock issued pursuant to the terms hereof and the Holding Company Plan of Merger, regardless whether there has occurred a Distribution Date under the terms of such Rights Agreement prior to the occurrence of the Effective Time of the Holding Company Merger. 4.10. Agreement as to Efforts to Consummate. Subject to action taken by the Board of Directors of American National pursuant to or as a result of the exception clause to the first sentence of Section 4.4 hereof and to the other terms and conditions of this Agreement, each of Crestar and American National agrees to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective, as soon as practicable after the date of this Agreement, the transactions contemplated by this Agreement, including, without limitation, using reasonable effort to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated herein. Each of Crestar and American National shall use its best efforts to obtain consents of all third parties and governmental bodies necessary or desirable for the consummation of the transactions contemplated by this Agreement. 4.11. Adverse Changes in Condition. Crestar and American National each agrees to give written notice promptly to the other concerning any event or circumstance which would cause or constitute a breach of any of the representations, warranties or covenants of such party contained herein. Each of Crestar and American National shall use its best efforts to prevent or promptly to remedy the same. 4.12. NYSE Listing. If the shares of Crestar Common Stock to be issued in the Holding Company Merger are not repurchased on the open market, Crestar will file with the New York Stock Exchange a Supplemental Listing Application for the shares of Crestar Common Stock to be issued in the Holding Company Merger and have such shares approved for listing on the New York Stock Exchange prior to the Effective Time of the Merger. 4.13. Updating of Schedules. American National shall notify Crestar, and Crestar shall notify American National, of any changes, additions or events which may cause any change in or addition to any Schedules delivered by it under this Agreement, promptly after the occurrence of same and at the Closing Date by delivery of updates of all Schedules, including future quarterly and annual American National Financial Statements. No notification made pursuant to this Section 4.13 shall be deemed to cure any breach of any representation or warranty made in this Agreement or any Schedule unless Crestar or American National, as the case may be, specifically agree thereto in writing, nor shall any such notification be considered to constitute or give rise to a waiver by American National or Savings Bank on the one hand, or Crestar or Crestar Bank on the other hand of any condition set forth in this Agreement. -34- 4.14. Transactions in Crestar Common Stock. Other than the issuance or acquisition of Crestar Common Stock pursuant to Crestar employee benefit plans, or the purchase or sale of Crestar Common Stock by Crestar Bank in its capacity as trustee under Crestar employee benefit plans or in any other fiduciary capacity in which it is directed to sell or purchase Crestar Common Stock, none of Crestar, Crestar Bank, American National or Savings Bank will, directly or indirectly, purchase, publicly sell or publicly acquire any shares of Crestar Common Stock during the 10 trading days ending on the 10th day prior to the Effective Time of the Holding Company Merger. 4.15. Branch Closing Law. Crestar expects to close and relocate the business of certain Savings Bank branches in connection with the Bank Merger. If any of these closing/relocations do not constitute "relocations" as that term is defined in the Joint Policy Statement of September 2, 1993, Concerning Branch Closings issued by the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC, and instead is considered a branch closing for purposes of Section 42 of the Federal Deposit Insurance Act, American National will, following receipt of all required regulatory approvals of the Holding Company Merger, take all necessary action under Section 42 and any regulations promulgated thereunder by notifying customers and otherwise complying with the branch closing law and regulations. ARTICLE V Conditions of Merger 5.1. Conditions of Obligations of Crestar and Crestar Bank. The obligations of Crestar and Crestar Bank to perform this Agreement are subject to the satisfaction at or prior to the Effective Time of the Merger of the following conditions unless waived by Crestar and Crestar Bank. (a) Representations and Warranties; Performance of Obligations. The representations and warranties of American National and Savings Bank set forth in Section 3.l hereof shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time of the Merger as though made on and as of the Effective Time of the Merger (or on the date when made in the case of any representation and warranty which specifically relates to an earlier date); American National and Savings Bank shall have in all material respects performed all obligations required to be performed by them and satisfied all conditions required to be satisfied by them under this Agreement prior to the Effective Time of the Merger; and Crestar and Crestar Bank shall have received a certificate signed by the Chief Executive Officer and by the Chief Financial Officer of American National and Savings Bank, without personal liability, which may be to their best knowledge after due inquiry, to such effects. The foregoing notwithstanding, Crestar and Crestar Bank agree not to exercise their rights under this subsection 5.1(a) because of a breach of a representation and warranty by -35- American National or Savings Bank unless the Crestar Board of Directors, acting reasonably, concludes that any such breach could have a material adverse effect on the consolidated financial condition or consolidated results of operations of American National. (b) Authorization of Transaction. All action necessary to authorize the execution, delivery and performance of this Agreement by American National and Savings Bank and the consummation of the transactions contemplated herein (including the shareholder action referred to in Section 4.2) shall have been duly and validly taken by the Boards of Directors of American National and Savings Bank and by the shareholders of American National and Savings Bank, and American National and Savings Bank shall have full power and right to merge into Crestar and Crestar Bank, respectively, on the terms provided herein. (c) Opinion of Counsel. Crestar and Crestar Bank shall have received an opinion of Luse, Lehman, Gorman, Pomerenk & Schick, counsel to American National and Savings Bank, dated the Closing Date and satisfactory in form and substance to counsel to Crestar and Crestar Bank, in the form attached hereto as Exhibit D. (d) The Registration Statement. The Registration Statement shall be effective under the 1933 Act and Crestar shall have received all state securities laws or "blue sky" permits and other authorizations or there shall be exemptions from registration requirements necessary to offer and issue the Crestar Common Stock in connection with the Holding Company Merger, and neither the Registration Statement nor any such permit, authorization or exemption shall be subject to a stop order or threatened stop order by the SEC or any state securities authority. (e) Tax Opinion. Crestar and Crestar Bank shall have received, in form and substance satisfactory to them, an opinion of Hunton & Williams to the effect that, for federal income tax purposes, each of the Holding Company Merger and the Bank Merger will qualify as a "reorganization" under Section 368(a) of the Code, and no taxable gain will be recognized by Crestar, Crestar Bank, American National or Savings Bank (i) in the Holding Company Merger (a) upon the transfer of American National's assets to Crestar in exchange for Crestar Common Stock, cash and the assumption of American National's liabilities or (b) upon the distribution of such Crestar Common Stock and cash to American National shareholders or (ii) in the Bank Merger, (a) upon the transfer of Savings Bank's assets to Crestar Bank in exchange for the assumption of Savings Bank's liabilities and in constructive exchange for Crestar Bank common stock (but Savings Bank or Crestar Bank may be required to include certain amounts in income as a result of the termination of any bad-debt reserve -36- maintained by Savings Bank for federal income tax purposes and other possible required changes in tax accounting methods) or (b) upon the constructive distribution of such Crestar Bank common stock to Crestar. (f) Regulatory Approvals. All required approvals from federal and state regulatory authorities having jurisdiction to permit Crestar and Crestar Bank to consummate the Transaction and to issue Crestar Common Stock to American National shareholders shall have been received and shall have contained no conditions deemed in good faith to be materially disadvantageous by Crestar, including such approval necessary to consummate the Bank Merger in an "Oakar" transaction as described in Section 1.1 hereof. Notwithstanding the foregoing, no condition or requirement which does no more than subject Crestar or Crestar Bank or American National or Savings Bank to legal requirements generally applicable to entities and transactions of the same type as a matter of law or regulatory policy shall be deemed to be materially disadvantageous. (g) Affiliate Letters. Within 60 days of the date hereof, each shareholder of American National who is a American National Affiliate shall have executed and delivered a commitment and undertaking in the form of Exhibit F to the effect that (1) such shareholder will dispose of the shares of Crestar Stock received by him in connection with the Holding Company Merger only in accordance with the provisions of paragraph (d) of Rule 145 under the 1933 Act; (2) such shareholder will not dispose of any of such shares until Crestar has received, at its expense, an opinion of counsel acceptable to it that such proposed disposition will not violate the provisions of paragraph (d) of Rule 145 and any applicable securities laws which opinion shall be rendered promptly following counsel's receipt of such shareholder's written notice of its intent to sell shares of Crestar Common Stock; and (3) the certificates representing said shares may bear a legend referring to the foregoing restrictions. (h) NYSE Listing. If the shares of Crestar Common Stock to be issued in the Holding Company Merger are not repurchased on the open market, such shares to be issued in the Merger shall have been approved for listing, upon notice of issuance, on the New York Stock Exchange. (i) Acceptance by Crestar and Crestar Bank Counsel. The form and substance of all legal matters contemplated hereby and of all papers delivered hereunder shall be reasonably acceptable to counsel for Crestar and Crestar Bank. 5.2. Conditions of Obligations of American National and Savings Bank. The obligations of American National and Savings Bank to perform this Agreement are subject to the satisfaction at or prior to the Effective Time of the Merger of the following conditions unless waived by American National and Savings Bank: -37- (a) Representations and Warranties; Performance of Obligations. The representations and warranties of Crestar and Crestar Bank set forth in Section 3.2 hereof shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time of the Merger as though made on and as of the Effective Time of the Merger (or on the date when made in the case of any representation and warranty which specifically relates to an earlier date); Crestar and Crestar Bank shall have in all material respects performed all obligations required to be performed by them and satisfied all conditions required to be satisfied by them under this Agreement prior to the Effective Time of the Holding Company Merger; and American National and Savings Bank shall have received a certificate signed by the Chief Executive Officer and by the Chief Financial Officer of Crestar and Crestar Bank, without personal liability, which may be to their best knowledge after due inquiry, to such effects. The foregoing notwithstanding, American National and Savings Bank agree not to exercise their rights under this subsection 5.2(a) because of a breach of a representation and warranty by Crestar or Crestar Bank unless the American National Board of Directors, acting reasonably, concludes that any such breach could have a material adverse effect on the consolidated financial condition or consolidated results of operations of Crestar. (b) Authorization of Transaction. All action necessary to authorize the execution, delivery and performance of this Agreement by Crestar and Crestar Bank and the consummation of the transactions contemplated hereby shall have been duly and validly taken by the Boards of Directors of Crestar and Crestar Bank and the shareholders of American National and the sole shareholder of Savings Bank, and Crestar and Crestar Bank shall have full power and right to merge with American National and Savings Bank, respectively, on the terms provided herein. (c) Opinion of Counsel. American National and Savings Bank shall have received an opinion of Hunton & Williams, counsel to Crestar and Crestar Bank, dated the Closing Date and satisfactory in form and substance to counsel to American National and Savings Bank, in the form attached hereto as Exhibit E. (d) The Registration Statement. The Registration Statement shall be effective under the 1933 Act and Crestar shall have received all state securities laws or "blue sky" permits and other authorizations or there shall be exemptions from registration requirements necessary to offer and issue the Crestar Common Stock in connection with the Holding Company Merger, and neither the Registration Statement nor any such permit, authorization or exemption shall be subject to a stop order or threatened stop order by the SEC or any state securities authority. -38- (e) Regulatory Approvals. All required approvals from federal and state regulatory authorities having jurisdiction to permit American National and Savings Bank to consummate the Transaction and to permit Crestar to issue Crestar Common Stock to American National shareholders shall have been received, including such approval necessary to consummate the Bank Merger in an "Oakar" transaction as described in Section 1.1 hereof. (f) Tax Opinion. American National and Savings Bank shall have received, in form and substance reasonably satisfactory to them, an opinion of Hunton & Williams to the effect that, for federal income tax purposes, each of the Holding Company Merger and the Bank Merger will qualify as a "reorganization" under Section 368(a) of the Code; no taxable gain will be recognized by Crestar, Crestar Bank, American National or Savings Bank (i) in the Holding Company Merger (a) upon the transfer of American National's assets to Crestar in exchange for Crestar Common Stock, cash and the assumption of American National's liabilities or (b) upon the distribution of such Crestar Common Stock and cash to American National shareholders or (ii) in the Bank Merger, (a) upon the transfer of Savings Bank's assets to Crestar Bank in exchange for the assumption of Savings Bank's liabilities and in constructive exchange for Crestar Bank stock (but Savings Bank or Crestar Bank may be required to include certain amounts in income as a result of the termination of any bad-debt reserve maintained by Savings Bank for federal income tax purposes and other possible required changes in tax accounting methods) or (b) upon the constructive distribution of such Crestar Bank stock to Crestar; no taxable gain will be recognized by an American National shareholder on the exchange by such shareholder of shares of American National Common Stock solely for shares of Crestar Common Stock (including any fractional share interest) in the Holding Company Merger; an American National shareholder who receives cash and shares of Crestar Common Stock (including any fractional share interest) for shares of American National Common Stock in the Holding Company Merger pursuant to the cash election will recognize any gain realized (including any gain treated as a dividend) up to the amount of cash received (excluding cash in lieu of a fractional share of Crestar Common Stock), but will not recognize any loss; an American National shareholder's basis in Crestar Common Stock (including any fractional share interest) received in the Holding Company Merger will be the same as the shareholder's basis in the American National Common Stock surrendered in exchange therefor, decreased by the amount of any cash received (excluding cash in lieu of a fractional share of Crestar Common Stock) and increased by the amount of any gain recognized (including any gain treated as a dividend) by the shareholder; the holding period of such Crestar Common Stock (including any fractional share interest) for an American National shareholder will include the holding period of the American National Common Stock surrendered in exchange therefor, if such American National Common Stock is held as a -39- capital asset by the shareholder at the Effective Time of the Holding Company Merger; and an American National shareholder who receives cash in lieu of a fractional share of Crestar Common Stock will recognize gain or loss equal to any difference between the amount of cash received and the shareholder's basis in the fractional share interest. (g) NYSE Listing. If the shares of Crestar Common Stock to be issued in the Holding Company Merger are not repurchased on the open market, such shares to be issued in the Holding Company Merger shall have been approved for listing, upon notice of issuance, on the New York Stock Exchange. (h) Fairness Opinion. The opinion of Keefe, Bruyette & Woods, Inc., dated the date hereof, to the effect that the consideration to be received by the shareholders of American National as a result of the Holding Company Merger is fair to the shareholders of American National from a financial point of view, and shall not have been withdrawn prior to the mailing of the Proxy Statement for the meeting of shareholders of American National referred to in Section 4.2 hereof. (i) Acceptance by American National's Counsel. The form and substance of all legal matters contemplated hereby and of all papers delivered hereunder shall be acceptable to counsel for American National. ARTICLE VI Closing Date; Effective Time 6.1. Closing Date. Unless another date or place is agreed to in writing by the parties, the closing of the transactions contemplated in this Agreement shall take place at the offices of Crestar, 919 East Main Street, Richmond, Virginia, at 10:00 o'clock A.M., local time, on such date as Crestar shall designate to American National at least 10 days prior to the designated Closing Date and as reasonably acceptable to American National; provided, that the date so designated shall not be earlier than 15 days after Federal Reserve Board approval, and shall not be later than 60 days after such approval and, in no event, shall be later than March 31, 1998 (the "Closing Date"). The parties agree to use their best efforts to make the Merger effective on or before December 31, 1997, and not earlier than November 6, 1997. 6.2. Filings at Closing. Subject to the provisions of Article V, at the Closing Date, Crestar shall cause Articles of Merger relating to the Holding Company Plan of Merger to be filed in accordance with the VSCA and Articles of Merger to be filed relating to the Bank Plan of Merger in accordance with the VSCA, the Delaware Corporation Law, the rules and regulations of the OTS and the SCC, and each of Crestar and American National shall take any -40- and all lawful actions to cause the Holding Company Merger and the Bank Merger to become effective. 6.3. Effective Time. Subject to the terms and conditions set forth herein, including receipt of all required regulatory approvals, the Holding Company Merger shall become effective at the time Articles of Merger filed with the SCC are made effective (the "Effective Time of the Holding Company Merger") and the Bank Merger shall become effective at the time the Articles of Merger filed with the SCC are made effective. ARTICLE VII Termination; Survival of Representations, Warranties and Covenants; Waiver and Amendment 7.1. Termination. This Agreement shall be terminated, and the Transaction abandoned, if the shareholders of American National shall not have given the approval required by Section 4.2. Notwithstanding such approval by such shareholders, this Agreement may be terminated at any time prior to the Effective Time of the Holding Company Merger, by: (a) The mutual consent of Crestar, Crestar Bank, American National and Savings Bank, as expressed by their respective Boards of Directors; (b) Either Crestar or Crestar Bank on the one hand or American National or Savings Bank on the other hand, as expressed by their respective Boards of Directors, if the Holding Company Merger has not occurred by March 31, 1998, provided that the failure of the Holding Company Merger to so occur shall not be due to a willful breach of any representation, warranty, covenant or agreement by the party seeking to terminate this Agreement; (c) By Crestar in writing authorized by its Board of Directors if American National or Savings Bank has, or by American National in writing authorized by its Board of Directors, if Crestar or Crestar Bank has, in any material respect, breached (i) any covenant or agreement contained herein, or (ii) any representation or warranty contained herein, in any case if such breach has not been cured by the earlier of 30 days after the date on which written notice of such breach is given to the party committing such breach or the Closing Date, provided that it is understood and agreed that either party may terminate this Agreement on the basis of any such material breach of any representation or warranty which is not cured within 30 days of written notice thereof contained herein notwithstanding any qualification therein relating to the knowledge of the other party. The foregoing notwithstanding, each of Crestar on the one hand and American National on the other hand agree not to exercise its respective rights under this subsection 7.1(c) because of a breach of a representation and warranty -41- by the other (including by its subsidiary which is a party to this Agreement) unless its Board of Directors, acting reasonably, concludes that any such breach could have a material adverse effect on the consolidated financial condition or consolidated results of operations of the other; (d) Either Crestar or Crestar Bank on the one hand or American National or Savings Bank on the other hand, as expressed by their respective Boards of Directors, in the event that any of the conditions precedent to the obligations of such parties to consummate the Transaction have not been satisfied or fulfilled or waived by the party entitled to so waive on or before the Closing Date, provided that no party shall be entitled to terminate this Agreement pursuant to this subparagraph (d) if the condition precedent or conditions precedent which provide the basis for termination can reasonably be and are satisfied within a reasonable period of time, in which case, the Closing Date shall be appropriately postponed; (e) Crestar and Crestar Bank, if the Boards of Directors of Crestar and Crestar Bank shall have determined in their sole discretion, exercised in good faith, that the Transaction, has become inadvisable or impracticable by reason of (A) the issuance of any order, decree or advisory letter of regulatory authority containing conditions or requirements reasonably deemed objectionable to Crestar, (B) the threat or the institution by any governmental authority of any litigation, proceeding or investigation (including under federal antitrust laws) to restrain or prohibit the consummation of the Transaction or to obtain other relief in connection with this Agreement or an injunction has been obtained by any person restraining or prohibiting consummation of the Holding Company Merger or (C) commencement of a competing offer for American National Common Stock which is significantly better than Crestar's offer, and which Crestar certifies to American National, in writing, it is unwilling to meet; (f) American National and Savings Bank, if the Boards of Directors of American National and Savings Bank shall have determined in their sole discretion, exercised in good faith, that the Transaction has become inadvisable or impracticable by reason of (A) the issuance of any order, decree or advisory letter of regulatory authority containing conditions or requirements reasonably deemed objectionable to American National, (B) the threat or the institution by any governmental authority of any litigation, proceeding or investigation (including under federal antitrust laws) to restrain or prohibit the consummation of the Transaction or to obtain other relief in connection with this Agreement or an injunction has been obtained by any person restraining or prohibiting consummation of the Holding Company Merger, or (C) commencement of a competing offer for American National Common Stock which is significantly -42- better than Crestar's offer, and which Crestar has certified to American National, in writing, it is unwilling to meet; (g) Crestar, Crestar Bank, American National or Savings Bank, if the Federal Reserve Board, the OTS, the FDIC, the Maryland Bank Commissioner, or the SCC deny approval of the Transaction and the time period for all appeals or requests for reconsideration has run; (h) Crestar if there has been a material adverse change in the results of operations or consolidated financial condition or consolidated results of operations of American National from that shown by the American National Financial Statements as of April 30, 1997. For purposes of this paragraph (h), the term "material adverse change" shall not include the following: (i) changes resulting from movements in general market interest rates, (ii) changes in laws, rules and regulations and accounting principles, and (iii) any other matters mutually agreed to by the parties to this Agreement; (i) American National if there has been a material adverse change in the business operations or consolidated financial condition of Crestar from that shown by the Crestar Financial Statements as of March 31, 1997. For purposes of this paragraph (i), the term "material adverse change" shall not include the following: (i) changes resulting from movements in general market interest rates, (ii) changes in laws, rules and regulations and accounting principles, and (iii) any other matters mutually agreed to by the parties to this Agreement. 7.2. Effect of Termination. In the event of the termination and abandonment of this Agreement and the Transaction pursuant to Section 7.1, this Agreement, other than the provisions of Sections 4.1 (last three sentences) and 9.1, shall become void and have no effect, without any liability on the part of any party or its directors, officers or shareholders, provided that nothing contained in this Section 7.2 shall relieve any party from liability for any willful breach of this Agreement. 7.3. Survival of Representations, Warranties and Covenants. The respective representations and warranties, obligations, covenants and agreements (except for those contained in Sections 1.2, 1.3, 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 4.1 (second sentence), 8.1, 8.2, 8.3, 8.4, and 9.1, which shall survive the effectiveness of the Holding Company Merger) of Crestar, Crestar Bank, American National and Savings Bank contained herein shall expire with, and be terminated and extinguished by, the effectiveness of the Holding Company Merger. 7.4. Waiver and Amendment. Any term or provision of this Agreement may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof and this Agreement may be amended or supplemented by written instructions duly executed by all parties hereto at any time, whether before or after the meeting of American -43- National shareholders referred to in Section 4.2 hereof, excepting statutory requirements and requisite approvals of shareholders and regulatory authorities, provided that any such amendment or waiver executed after shareholders of American National have approved this Agreement and the Holding Company Plan of Merger shall not modify either the amount or form of the consideration to be received by such shareholders for their shares of American National Common Stock or otherwise materially adversely affect such shareholders without their approval. ARTICLE VIII Additional Covenants 8.1. Indemnification of American National Officers and Directors; Liability Insurance. After the Effective Time of the Holding Company Merger, Crestar agrees to provide indemnification to the directors, employees and officers of American National and Savings Bank and the subsidiaries thereof for events occurring prior to or subsequent to the Effective Time of the Holding Company Merger as if they had been directors, employees or officers of Crestar prior to the Effective Time of the Holding Company Merger, to the extent permitted under the VSCA and the Articles of Incorporation and Bylaws of Crestar as in effect as of the date of this Agreement. Such indemnification shall continue for six years after the Effective Time of the Holding Company Merger, provided that any right to indemnification in respect of any claim asserted or made within such six year period shall continue until final disposition of such claim. Crestar will provide officers and directors liability insurance coverage to all American National and Savings Bank and subsidiaries thereof directors and officers, whether or not they become part of the Crestar organization after the Effective Time of the Holding Company Merger, to the same extent it is provided to Crestar's officers and directors, provided that coverage will not extend to acts as to which notice has been given prior to the Effective Time of the Holding Company Merger. The right to indemnification and insurance provided in this Section 8.1 is intended to be for the benefit of directors, employees and officers of American National and Savings Bank and the subsidiaries thereof and as such may be personally enforced by them at law or in equity. 8.2. Employment and Severance Agreements. Crestar will honor the terms of American National's and/or Savings Bank's employment agreements with A. Bruce Tucker, Joseph M. Solomon, James M. Uveges and Mark S. Barker described on Schedule E. 8.3. Employee Benefit Matters. (a) Transferred Employees. All employees of American National or Savings Bank (including subsidiaries) immediately prior to the Effective Time of the Holding Company Merger who are employed by Crestar, Crestar Bank or another Crestar subsidiary immediately following the Effective Time of the Holding Company Merger ("Transferred Employees") will be covered by Crestar's employee benefit plans as to which they are eligible based on their length of service, compensation, job classification, and position, including, where applicable, any incentive compensation plan. Notwithstanding the foregoing, -44- Crestar may determine to continue any of the American National or Savings Bank benefit plans for Transferred Employees in lieu of offering participation in Crestar's benefit plans providing similar benefits (e.g., medical and hospitalization benefits or 401(k) or pension benefits), to terminate any of the American National or Savings Bank benefit plans, or to merge any such benefit plans with Crestar's benefit plans. Except as specifically provided in this Section 8.3 and as otherwise prohibited by law, with respect to Crestar benefit plans for which Transferred Employees are otherwise eligible, Transferred Employees' service with American National or Savings Bank which is recognized by the applicable benefit plan of American National or Savings Bank at the Effective Time of the Holding Company Merger shall be recognized as service with Crestar for purposes of eligibility to participate and vesting, if applicable (but not for purposes of benefit accrual) under the corresponding Crestar benefit plan, if any, subject to applicable break-in-service rules. (b) Health Plans. Crestar agrees that any pre-existing condition, limitation or exclusion in its health plans shall not apply to Transferred Employees or their covered dependents who are covered under a medical or hospitalization indemnity plan maintained by American National or Savings Bank on the date of the Holding Company Merger and who then change that coverage to Crestar's medical or hospitalization indemnity health plan at the time such Transferred Employees are first given the option to enroll in Crestar's health plans. (c) Pension Plans. Crestar agrees to assume the Pension Plan of Savings Bank (the "Savings Bank Pension Plan") as of the Effective Time of the Holding Company Merger. Crestar, at its option, may continue the Savings Bank Pension Plan as a frozen plan or may terminate the Savings Bank Pension Plan and pay out or annuitize benefits, or may merge the Savings Bank Pension Plan into the Retirement Plan for Employees of Crestar Financial Corporation and Affiliated Corporations ("Crestar's Retirement Plan"). If the Savings Bank Pension Plan is terminated or if benefit accruals are suspended, or if the Savings Bank Pension Plan is merged into Crestar's Retirement Plan, each Transferred Employee who becomes a participant in Crestar's Retirement Plan will begin to accrue benefits under Crestar's Retirement Plan on and after the date of such termination, suspension or merger in accordance with the terms of Crestar's Retirement Plan and Crestar's Retirement Plan will recognize for purposes of eligibility to participate, vesting and eligibility for early retirement, but not for benefit accrual purposes, all Transferred Employees' service which is recognized under the Savings Bank Pension Plan as of the date of such termination, suspension or merger of the Savings Bank Pension Plan. (d) 401(k) Plan. Transferred Employees' service with American National or Savings Bank for purposes of eligibility to participate in the Crestar Employees' Thrift and Profit Sharing Plan shall not be recognized until, if applicable, the later of January 1, 1998 (assuming the Holding Company Merger occurs in 1997) or the date the American National 401(k) Plan is frozen as to eligibility to participate and future contributions, merged or terminated. -45- (e) Cooperation. American National and Savings Bank agree to cooperate with Crestar in implementing any decision made by Crestar with respect to employee benefit plans and to provide to Crestar on or before the Effective Time of the Holding Company Merger a schedule of service credit for prospective Transferred Employees. 8.4. Stock Options. Holders of outstanding American National Options shall (a) exercise the American National Options for American National Common Stock prior to the Closing Date (if such options are by their terms then exercisable) and convert such Common Stock held as of the Effective Time of the Holding Company Merger into Crestar Common Stock or (b) have the American National Options converted into options to purchase Crestar Common Stock as set forth in subsection 2.2(e) hereof. American National agrees not to amend any outstanding option agreement to extend the period following termination of employment during which American National Options may be exercised, or, except with the consent of Crestar, to otherwise amend the terms of any outstanding option agreement. ARTICLE IX Miscellaneous 9.1. Expenses. Each party hereto shall bear and pay the costs and expenses incurred by it relating to the transactions contemplated hereby. 9.2. Entire Agreement. This Agreement contains the entire agreement among Crestar, Crestar Bank, American National and Savings Bank with respect to the Transaction and the related transactions and supersedes all prior agreements, arrangements or understandings with respect thereto (other than as specifically agreed). 9.3. Descriptive Headings. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provisions of this Agreement. 9.4. Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, addressed as follows: If to Crestar or Crestar Bank: Crestar Financial Corporation P. O. Box 26665 919 East Main Street Richmond, Virginia 23261-6665 Attention: Linda F. Rigsby Senior Vice President, and Corporate Secretary -46- Copy to: Lathan M. Ewers, Jr. Hunton & Williams 951 East Byrd Street Richmond, Virginia 23219 If to American National or Savings Bank: American National Bancorp Inc. 211 North Liberty Street Baltimore, Maryland 21201 Attention: A. Bruce Tucker, President and Chief Executive Officer Copy to: John J. Gorman Eric Luse Luse, Lehman, Gorman, Pomerenk & Schick 5335 Wisconsin Avenue,NW Washington, DC 20015 9.5. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 9.6. Governing Law. Except as may otherwise be required by the laws of the United States, this Agreement shall be governed by and construed in accordance with the laws of Virginia. -47- IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed on its behalf and its corporate seal to be hereunto affixed and attested by its officers thereunto duly authorized, all as of the day and year first above written. CRESTAR FINANCIAL CORPORATION By /s/ C. Garland Hagen ------------------------------------ Name: C. Garland Hagen Title: Corporate Executive Vice President CRESTAR BANK By /s/ C. Garland Hagen ------------------------------------ Name: C. Garland Hagen Title: Corporate Executive Vice President AMERICAN NATIONAL BANCORP, INC. By /s/ A. Bruce Tucker ------------------------------------ Name: A. Bruce Tucker Title: President and Chief Executive Officer AMERICAN NATIONAL SAVINGS BANK, F.S.B. By /s/ A. Bruce Tucker ------------------------------------ Name: A. Bruce Tucker Title: President and Chief Executive Officer -48- Howard K. Thompson - --------------------------- ------------------------------ Howard K. Thompson Jimmie T. Noble Lenwood M. Ivey A. Bruce Tucker - --------------------------- ------------------------------ Lenwood M. Ivey A. Bruce Tucker Betty J. Stull Joseph M. Solomon - --------------------------- ------------------------------ Betty J. Stull Joseph M. Solomon David L. Pippenger - --------------------------- David L. Pippenger All of the Directors of American National have signed solely above to agree to vote all their shares of American National Common Stock beneficially owned by them and with respect to which they have power to vote in favor of the Holding Company Merger and, subject to their fiduciary duties described in Section 4.4 of the Agreement, to cause the Holding Company Merger to be recommended by the Board of Directors of American National to the shareholders of American National in the proxy statement sent to shareholders in connection with such shareholders' meeting. -49- Exhibits A, D, E and F to the Agreement and Plan of Reorganization are not included in this Proxy Statement/Prospectus. Exhibit B PLAN OF MERGER OF AMERICAN NATIONAL BANCORP, INC. INTO CRESTAR FINANCIAL CORPORATION Section 1. Merger. American National BanCorp, Inc. ("American National") shall, upon the time that Articles of Merger are made effective by the State Corporation Commission of Virginia (the "Effective Time of the Holding Company Merger"), be merged (the "Holding Company Merger") into Crestar Financial Corporation ("Crestar"), which shall be the "Surviving Corporation". Section 2. Conversion of Stock. At the Effective Time of the Holding Company Merger: (i) Each share of Crestar Financial Corporation Common Stock outstanding immediately prior to the Effective Time of the Merger shall continue unchanged as an outstanding share of Common Stock of the Surviving Corporation. (ii) Subject to Section 4, each share of American National Common Stock which is issued and outstanding immediately prior to the Effective Time of the Holding Company Merger (other than shares held of record by Crestar and shares to B-1 be exchanged for cash) and which, under the terms of Section 3, is to be converted into Crestar Common Stock, shall be converted into a fraction of a share of Crestar Common Stock, determined in accordance with the Exchange Ratio. The "Exchange Ratio" shall be calculated as follows: (A) if the Average Closing Price (as defined below) is between $30 and $50, the Exchange Ratio shall be the quotient (rounded to the nearest one-thousandth) of (A) $20.25 divided by (B) the Average Closing Price; (B) if the Average Closing Price is $50 or greater, the Exchange Ratio shall be 0.405; and (C) if the Average Closing Price is $30 or less, the Exchange Ratio shall be 0.675. As used herein, "Average Closing Price" shall mean the average closing price of Crestar Common Stock as reported on the New York Stock Exchange for each of the 10 trading days ending on the tenth day prior to the Effective Time of the Holding Company Merger. B-2 The Exchange Ratio at the Effective Time of the Holding Company Merger shall be adjusted to reflect any consolidation, split-up, other subdivisions or combinations of Crestar Common Stock, any dividend payable in Crestar Common Stock, or any capital reorganization involving the reclassification of Crestar Common Stock subsequent to the date of this Agreement. (iii) Subject to Section 4, each share of American National Common Stock outstanding immediately prior to the Effective Time of the Holding Company Merger which, under the terms of Section 3, is to be converted into the right to receive cash, shall be converted into the right to receive the Price Per Share in cash (subject to all applicable withholding taxes). (iv) At the Effective Time of the Holding Company Merger, American National's transfer books shall be closed and no further transfer of American National Common Stock or Series A shall be permitted. (vi) Outstanding American National Options shall be converted into options to purchase Crestar Common Stock as set forth in subsection 2.2(e) of the Agreement and Plan of Reorganization dated June 23, 1997 among Crestar, Crestar Bank, American National and American National Savings Bank, F.S.B. (the "Agreement"). American National agrees not to amend any outstanding option agreement to extend the period following termination of employment during which B-3 American National Options may be exercised, or, except with the consent of Crestar, to otherwise amend the terms of any outstanding option agreement. Section 3. Manner of Conversion. The manner in which each outstanding share of American National Common Stock shall be converted into Crestar Common Stock or cash, as specified in Section 2 hereof, after the Effective Time of the Holding Company Merger, shall be as follows: (i) All shares for which cash elections shall have been made and for which certificates representing such shares shall have been delivered to American National subject to the terms of the Agreement at or prior to the meeting of American National shareholders at which the Holding Company Merger is considered, shall be converted into the right to receive the Price Per Share in cash. If the Holding Company Merger is approved by American National's shareholders, a shareholder's election to receive the Price Per Share in cash shall be irrevocable. American National shall retain certificates for shares submitted for cash purchase until either (i) termination of the Agreement upon which American National shall return such certificates, or (ii) the Effective Time of the Holding Company Merger, when Chase Mellon Shareholder Services (the "Exchange Agent") shall exchange such certificates for cash, at the Price Per Share, subject to Section 4. Certificates for shares of American National Common Stock shall be submitted in exchange for cash accompanied by a Letter of Transmittal (to be promptly furnished by the Exchange B-4 Agent, to American National shareholders of record as of the Effective Time of the Holding Company Merger). Until so surrendered, each outstanding certificate which prior to the Effective Time of the Holding Company Merger represented American National Common Stock shall be deemed to evidence only the right to receive the Price Per Share (less applicable withholding taxes) multiplied by the number of shares evidenced by the certificates, without interest thereon. (ii) Each share of American National Common Stock, other than shares held of record by Crestar and shares for which a cash election has been made (and are not exchanged for cash because of Section 4), shall be exchanged for shares of Crestar Common Stock as determined by the Exchange Ratio. (iii) No fractional shares of Crestar Common Stock shall be issued, but instead the value of fractional shares shall be paid in cash (subject to all applicable withholding taxes), for which purpose the Average Closing Price shall be employed. (iv) Certificates for shares of American National Common Stock shall be submitted in exchange for Crestar Common Stock and/or cash accompanied by a Letter of Transmittal (to be promptly furnished by the Exchange Agent to American National's shareholders of record as of the Effective Time of the Holding Company Merger). Until so surrendered, each outstanding certificate which, prior to the Effective Time of the Holding Company Merger, represented American National B-5 Common Stock, shall be deemed to evidence only the right to receive (a) shares of Crestar Common Stock as determined by the Exchange Ratio, or (b) in the case of shares for which cash elections shall have been made, the Price Per Share in cash (subject to all applicable withholding taxes) multiplied by the number of shares evidenced by the certificates, without interest. Until such outstanding shares formerly representing American National Common Stock are so surrendered, no dividend payable to holders of record of Crestar Common Stock as of any date subsequent to the Effective Time of the Merger shall be paid to the holder of such outstanding certificates in respect thereof. Upon such surrender, dividends accrued or declared on Crestar Common Stock shall be paid in accordance with Section 2.2 of the Agreement. Section 4. Proration of Shares Purchased with Cash. The number of shares of American National Common Stock to be exchanged for cash cannot exceed 40% of the outstanding shares of American National Common Stock immediately prior to the Effective Time of the Holding Company Merger. If the number of shares that shareholders of American National elect to exchange for cash exceed this percentage of such American National Common Stock, Crestar shall purchase all shares submitted by holders of 100 or fewer shares (if such holder has submitted all his shares for cash exchange) and then purchase shares submitted by other holders pro rata so as to require Crestar to pay cash (including payments for Dissenting Shares) for no more than 40% of the shares of American National Common Stock. A shareholder submitting shares for cash purchase, all of whose B-6 shares are not exchanged for cash because of the proration provisions of this Section 4, shall receive shares of Crestar Common Stock at the Exchange Ratio for all shares of American National Common Stock not exchanged for cash. Section 5. Dissenting Shares. Holders of American National Common Stock do not have the right to demand and receive payment of the fair value of his shares of American National Common Stock in accordance with the provisions of Section 262(b)(1) of the Delaware General Corporation Law. Section 6. Articles of Incorporation, Bylaws and Directors of the Surviving Corporation. At the Effective Time of the Holding Company Merger, there shall be no change caused by the Holding Company Merger in the Articles of Incorporation (except any change caused by the filing of Articles of Merger relating to the Holding Company Merger), By-laws, or Board of Directors of the Surviving Corporation. Section 7. Conditions to Merger. Consummation of the Merger is subject to the following conditions: (i) The approving vote of the holders of a majority of the outstanding shares of American National Common Stock entitled to vote. B-7 (ii) The approval of the Merger by the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the Maryland Banking Commissioner and the State Corporation Commission of Virginia. (iii) The satisfaction of the conditions contained in the Agreement or the waiver of such conditions by the party for whose benefit they were imposed. Section 8. Effect of the Merger. The Merger shall have the effect provided by Section 13.1-721 of the Code of Virginia and Section 261 of the Delaware General Corporation Law. Section 9. Amendment. Pursuant to Section 13.1-718(I) of the Virginia Stock Corporation Act, the Board of Directors of Crestar reserves the right to amend this Plan of Merger (with American National's consent) at any time prior to issuance of the certificate of merger by the State Corporation Commission of Virginia, provided, however, that any such amendment made subsequent to the submission of this Plan of Merger to the shareholders of American National may not: (i) alter or change the amount or kind of shares, securities, cash, property or rights to be received in exchange for or in conversion of all or any of the shares of American National Common Stock; (ii) alter or change any of the terms and conditions of this Plan of Merger if such alteration or change would adversely affect the shares of American National Common Stock; or (iii) alter or change any term of the certificate of incorporation of American National (except as provided herein). B-8 Exhibit C PLAN OF MERGER OF AMERICAN NATIONAL SAVINGS BANK, F.S.B. INTO CRESTAR BANK Section 1. American National Savings Bank, F.S.B. ("Savings Bank") shall, upon the issuance of certificates of merger by the State Corporation Commission of Virginia and the Office of Thrift Supervision (the "Effective Time of the Bank Merger"), be merged (the "Bank Merger") into Crestar Bank, which shall be the Surviving Bank. Section 2. Conversion of Stock. At the Effective Time of the Bank Merger: (i) Each share of Crestar Bank Common Stock outstanding immediately prior to the Effective Time of the Bank Merger shall continue unchanged as a share of Common Stock of the Surviving Bank. (ii) Each share of Savings Bank Common Stock outstanding immediately prior to the Effective Time of the Bank Merger shall be canceled, the transfer books of Savings Bank shall be closed, and no further transfer of Savings Bank Common Stock shall be permitted. Section 3. Articles of Incorporation, Bylaws and Directors of the Surviving Bank. At the Effective Time of the Bank Merger, there shall be no change caused by the Bank Merger in the Articles of Incorporation (except any change caused by the filing of Articles of Merger relating to the Bank Merger), Bylaws, or Board of Directors of the Surviving Bank. C-1 Section 4. Conditions to Bank Merger. Consummation of the Bank Merger is subject to the following conditions: (i) The approving vote of the sole shareholder of the outstanding shares of Savings Bank Common Stock entitled to vote. (ii) The approval of the Bank Merger by the State Corporation Commission of Virginia, the Maryland Banking Commissioner, the Board of Governors of the Federal Reserve System and the Office of Thrift Supervision. (iii) The satisfaction of the conditions contained in the Agreement and the Plan of Reorganization dated June 23, 1997 among Crestar Financial Corporation, Crestar Bank, American National Bancorp Inc. and Savings Bank, or the waiver of such conditions by the party for whose benefit they were imposed. Section 5. Effect of the Bank Merger. The Bank Merger, upon the Effective Time of the Bank Merger, shall have the effect provided by Sections 13.1-721 and 6.1-44 of the Code of Virginia. C-2 ANNEX II STOCK OPTION AGREEMENT This STOCK OPTION AGREEMENT ("Option Agreement") dated as of June 23, 1997, between AMERICAN NATIONAL BANCORP, INC. ("American National"), a Delaware corporation, and CRESTAR FINANCIAL CORPORATION ("Crestar"), a Virginia corporation, recites and provides: A. The Boards of Directors of American National and Crestar have approved an Agreement and Plan of Reorganization dated as of June 23, 1997 (the "Merger Agreement") providing for the merger (the "Merger") of American National with and into Crestar. B. As a condition to and as consideration for Crestar's entry into the Merger Agreement and to induce such entry, American National has agreed to grant to Crestar the option set forth herein to purchase authorized but unissued shares of American National Common Stock. NOW, THEREFORE, the parties agree as follows: 1. Definitions. Capitalized terms defined in the Merger Agreement and used herein shall have the same meanings as in the Merger Agreement. 2. Grant of Option. Subject to the terms and conditions set forth herein, American National hereby grants to Crestar an option (the "Option") to purchase up to 792,000 shares of American National Common Stock at an exercise price of $16.125 per share payable in cash as provided in Section 4; provided, however, that in the event American National issues or agrees to issue any shares of American National Common Stock (other than as permitted under the Merger Agreement) at a price less than $16.125 per share (as adjusted pursuant to Section 6), the exercise price shall be such lesser price. 3. Exercise of Option. (a) Unless Crestar shall have breached in any material respect any material covenant or representation contained in the Merger Agreement and such breach has not been cured, Crestar may exercise the Option, in whole or part, at any time or from time to time if a Purchase Event (as defined below) shall have occurred and be continuing; provided that to the extent the Option shall not have been exercised, it shall terminate and be of no further force and effect (i) on the Effective Date of the Merger, or (ii) upon termination of the Merger Agreement in accordance with the provisions thereof (other than a termination resulting from a willful breach by American National of any Specified Covenant or, following the occurrence of a Purchase Event, failure of American National's stockholders to approve the Merger Agreement by the vote required under applicable law or under American National's Charter), or (iii) 12 months after termination of the Merger Agreement due to a willful breach by American National of any Specified Covenant or, following the occurrence of a Purchase Event, failure of American National's stockholders to approve the Merger Agreement by the vote required under applicable law or under American National's Charter. Any exercise of the Option shall be subject to compliance with applicable provisions of law. (b) As used herein, a "Purchase Event" shall mean any of the following events or transactions occurring after the date hereof: (i) American National or any banking subsidiary of American National (a "Bank"), without having received Crestar's prior written consent, shall have entered into an agreement with any person (x) to merge or consolidate, or enter into any similar transaction, except as contemplated in the Merger Agreement, (y) to purchase, lease or otherwise acquire all or substantially all of the assets of American National or a Bank, or (z) to purchase or otherwise acquire (including by way of merger, consolidation, share exchange or any similar transaction) securities representing 10% or more of the voting power of American National or a Bank; (ii) any person (other than American National or a Bank in a fiduciary capacity, or Crestar or Crestar Bank in a fiduciary capacity) shall have acquired beneficial ownership or the right to acquire beneficial ownership of 15% or more of the outstanding shares of American National Common Stock after the date hereof (the term "beneficial ownership" for purposes of this Option Agreement having the meaning assigned thereto in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations promulgated thereunder); (iii) any person shall have made a bona fide proposal to American National by public announcement or written communication that is or becomes the subject of public disclosure to acquire American National or a Bank by merger, consolidation, purchase of all or substantially all of its assets or any other similar transaction, and following such bona fide proposal the stockholders of American National vote not to adopt the Merger Agreement; or (iv) American National shall have willfully breached any Specified Covenant following a bona fide proposal to American National or a Bank to acquire American National or a Bank by merger, consolidation, purchase of all or substantially all of its assets or any other similar transaction, which breach would entitle Crestar to terminate the Merger Agreement (without regard to the cure periods provided for therein) and such breach shall not have been cured prior to the Notice Date (as defined below). If more than one of the transactions giving rise to a Purchase Event under this Section 3(b) is undertaken or effected, then all such transactions shall give rise only 2 to one Purchase Event, which Purchase Event shall be deemed continuing for all purposes hereunder until all such transactions are abandoned. As used in this Option Agreement, "person" shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act. (c) In the event Crestar wishes to exercise the Option, it shall send to American National a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise, and (ii) a place and date not earlier than three business days nor later than 60 business days after the Notice Date for the closing of such purchase ("Closing Date"); provided that if prior notification to or approval of any federal or state regulatory agency is required in connection with such purchase, Crestar shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification period has expired or been terminated or such approval has been obtained and any requisite waiting period shall have passed. (d) As used herein, "Specified Covenant" means any covenant contained in Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.8, 4.10, 4.11, 4.13, or 6.1 of the Merger Agreement. 4. Payment and Delivery of Certificates. (A) At the closing referred to in Section 3, Crestar shall pay to American National the aggregate purchase price for the shares of American National Common Stock purchased pursuant to the exercise of the Option in immediately available funds by a wire transfer to a bank account designated by American National. (B) At such closing, simultaneously with the delivery of funds as provided in subsection (a), American National shall deliver to Crestar a certificate or certificates representing the number of shares of American National Common Stock purchased by Crestar, and Crestar shall deliver to American National a letter agreeing that Crestar will not offer to sell or otherwise dispose of such shares in violation of applicable law or the provisions of this Option Agreement. (C) Certificates for American National Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend which shall read substantially as follows: "The transfer of the shares represented by this certificate is subject to certain provisions of a Stock Option Agreement between the registered holder hereof and American National Bancorp and to resale restrictions arising under the Securities Act of 1933, as amended, a copy of which agreement is on file at the principal office of American National Bancorp. A copy of such agreement will be provided to the holder hereof without charge upon receipt by American National Bancorp of a written request." 3 It is understood and agreed that the above legend shall be removed by delivery of substitute certificate(s) without such legend if Crestar shall have delivered to American National a copy of a letter from the staff of the Commission, or an opinion of counsel, in form and substance satisfactory to American National, to the effect that such legend is not required for purposes of the Securities Act of 1933, as amended. 5. Representations. American National represents, warrants and covenants to Crestar as follows: (A) American National shall at all times maintain sufficient authorized but unissued shares of American National Common Stock so that the Option may be exercised without authorization of additional shares of American National Common Stock. (B) The shares to be issued upon due exercise, in whole or in part, of the Option, when paid for as provided herein, will be duly authorized, validly issued, fully paid and nonassessable. 6. Adjustment Upon Changes in Capitalization. In the event of any change in American National Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, exchanges of shares or the like, the type and number of shares subject to the Option, and the purchase price per share, as the case may be, shall be adjusted appropriately. In the event that any additional shares of American National Common Stock are issued or otherwise become outstanding after the date of this Option Agreement (other than pursuant to this Option Agreement), the number of shares of American National Common Stock subject to the Option shall be adjusted so that, after such issuance, it equals 19.9% of the number of shares of American National Common Stock then issued and outstanding without giving effect to any shares subject or issued pursuant to the Option. Nothing contained in this Section 6 shall be deemed to authorize American National to breach any provision of the Merger Agreement. 1. Registration Rights. If requested by Crestar, American National shall as expeditiously as possible file a registration statement on a form of general use under the Securities Act if necessary in order to permit the sale or other disposition of the shares of American National Common Stock that have been acquired upon exercise of the Option in accordance with the intended method of sale or other disposition requested by Crestar. Crestar shall provide all information reasonably requested by American National for inclusion in any registration statement to be filed hereunder. American National will use its best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 270 days from the day such registration statement first becomes effective as may be reasonably necessary to effect such sales or other dispositions. The first registration effected under this Section 7 shall be at 4 American National's expense except for underwriting commissions and the fees and disbursements of Crestar's counsel attributable to the registration of such American National Common Stock. A second registration may be requested hereunder at Crestar's expense. In no event shall American National be required to effect more than two registrations hereunder. The filing of any registration statement hereunder may be delayed for such period of time as may reasonably be required to facilitate any public distribution by American National of American National Common Stock. If requested by Crestar, in connection with any such registration, American National will become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in such underwriting agreements. Upon receiving any request from Crestar or assignee thereof under this Section 7, American National agrees to send a copy thereof to Crestar and to any assignee thereof known to American National, in each case by promptly mailing the same, postage prepaid, to the address of record of the persons entitled to receive such copies. 2. Severability. If any term, provision, covenant or restriction contained in this Option Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Option Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Option will not permit the holder to acquire the full number of shares of American National Common Stock provided in Section 2 (as adjusted pursuant to Section 6), it is the express intention of American National to allow the holder to acquire such lesser number of shares as may be permissible, without any amendment or modification hereof. 3. Miscellaneous. (a) Expenses. Except as otherwise provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. (b) Entire Agreement. Except as otherwise expressly provided herein, this Option Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereto, written or oral. The terms and conditions of this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Nothing in this Option Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Option Agreement, except as expressly provided herein. 5 (c) Assignment. Neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other person, without the express written consent of the other party, except that in the event a Purchase Event shall have occurred and be continuing Crestar may assign in whole or in part its rights and obligations hereunder; provided, however, that to the extent required by applicable regulatory authorities, Crestar may not assign its rights under the Option except in (i) a widely dispersed public distribution, (ii) a private placement in which no one party acquires the right to purchase in excess of 2% of the voting shares of American National, (iii) an assignment to a single party (e.g., a broker or investment banker) for the purpose of conducting a widely dispersed public distribution on Crestar's behalf, or (iv) any other manner approved by applicable regulatory authorities. (d) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered in the manner and to the addresses provided for in or pursuant to Section 9.4 of the Merger Agreement. (e) Counterparts. This Option Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. (f) Specific Performance. The parties agree that damages would be an inadequate remedy for a breach of the provisions of this Option Agreement by either party hereto and that this Option Agreement may be enforced by either party hereto through injunctive or other equitable relief. (g) Governing Law. This Option Agreement shall be governed by and construed in accordance with the laws of Virginia applicable to agreements made and entirely to be performed within such state and such federal laws as may be applicable. 6 IN WITNESS WHEREOF, each of the parties hereto has executed this Option Agreement as of the day and year first written above. AMERICAN NATIONAL BANCORP, INC. By: /s/ A. Bruce Tucker ------------------------------- A. Bruce Tucker President and Chief Executive Officer CRESTAR FINANCIAL CORPORATION By: /s/ C. Garland Hagen ------------------------------- C. Garland Hagen Corporate Executive Vice President 7 ANNEX III [LETTERHEAD OF KEEFE, BRUYETTE & WOODS, INC.] September 23, 1997 Board of Directors American National Bancorp, Inc. 211 N. Liberty Street Baltimore, Ohio 21201-3909 Dear Board of Directors: You have requested our opinion as an independent investment banking firm regarding the fairness, from a financial point of view, to the stockholders of American National Bancorp, Inc. ("ANBK" or the "Company"), of the consideration to be received by such stockholders in the merger (the "Merger") between the Company and Crestar Financial Corporation., a Virginia Corporation ("CF"). We have not been requested to opine as to, and our opinion does not in any manner address, the Company's underlying business decision to proceed with or effect the Merger. Pursuant to the Agreement and Plan of Reorganization, dated June 23, 1997, by and among the Company and CF (the "Agreement"), at the effective time of the Merger, CF will acquire all of the Company's issued and outstanding shares of common stock.. The holders of Company common stock will receive in exchange for each share of Company common stock shares of common stock of CF based on an Exchange Ratio which equates to a $20.25 per share price, within a certain range, for each share of Company common stock. For calculation purposes the Exchange Ratio will be calculated by dividing $20.25 per share of ANBK Common Stock by the average closing price of CF common stock as reported on the New York Stock Exchange for the ten days ending on the 10th day prior to the Effective Date ("Average Closing Price"). If CF's stock price averages between $30.00 and $50.00, the Exchange Ratio will range from .6750 to .4050, respectively. The Agreement details the provisions in the event the Average Closing Price is outside of the range. Further, holders of shares of ANBK common stock will be given the option to exchange their shares for $20.25 in cash, provided that in the aggregate, the number of shares that may be exchanged for cash shall not exceed 40% of the number of outstanding shares of ANBK common stock.. In addition, the holders of unexercised and outstanding options awarded pursuant to the Company's 1993 Stock Option Plan for Outside Directors, the 1993 Stock Incentive Plan, and the 1996 Stock Option Plan shall be converted, based on the Exchange Ratio, into options to acquire Crestar common stock. The complete terms of the proposed transaction are described in the Agreement, and this summary is qualified in its entirety by reference thereto. Keefe Bruyette & Woods, as part of its investment banking business, is regularly engaged in the evaluation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, and distributions of listed and unlisted securities. We are familiar with the market for common stocks of publicly traded banks, savings institutions and bank and savings institution holding companies. In connection with this opinion we reviewed certain financial and other business data supplied to us by the Company including (i) Annual Reports, Proxy Statements and Form 10-Ks for the years ended July 31, 1994, 1995 and 1996, (ii) Form 10-Qs for the quarters ended October 31, 1996, January 31, 1997, and April 30, 1997, and (iii) certain other information we deemed relevant. We discussed with senior management and the boards of directors of the Company and its wholly owned subsidiary, American National Savings Bank, F.S.B., the current position and prospective outlook for the Company. We considered historical quotations and the prices of recorded transactions in the Company's common stock since the Company's completion of its second step offering.. We reviewed financial and stock market data of other savings institutions, particularly in the mid-Atlantic region of the United States, and the financial and structural terms of several other recent transactions involving mergers and acquisitions of savings institutions or proposed changes of control of comparably situated companies. For CF, we reviewed the audited financial statements for the fiscal years ended December 31, 1996 and 1995, quarterly financial statements (unaudited) for the quarters ending March 31, 1996, June 30, 1996 and September 30, 1996, and certain other information deemed relevant. We discussed with senior management of CF the current position and prospective outlook for CF. For purposes of this opinion we have relied, without independent verification, on the accuracy and completeness of the material furnished to us by the Company and CF and the material otherwise made available to us, including information from published sources, and we have not made any independent effort to verify such data. With respect to the financial information, including forecasts and asset valuations we received from the Company, we assumed (with your consent) that they had been reasonably prepared reflecting the best currently available estimates and judgment of the Company's management. In addition, we have not made or obtained any independent appraisals or evaluations of the assets or liabilities, and potential and/or contingent liabilities of the Company or CF. We have further relied on the assurances of management of the Company and CF that they are not aware of any facts that would make such information inaccurate or misleading. We express no opinion on matters of a legal, regulatory, tax or accounting nature or the ability of the Merger, as set forth in the Agreement, to be consummated. In rendering our opinion, we have assumed that in the course of obtaining the necessary approvals for the Merger, no restrictions or conditions will be imposed that would have a material adverse effect on the contemplated benefits of the Merger to the Company or the ability to consummate the Merger. Our opinion is based on the market, economic and other relevant considerations as they exist and can be evaluated on the date hereof. Consistent with the engagement letter with you, we have acted as financial advisor to the Company in connection with the Merger and will receive a fee for such services, a majority of which is contingent upon the consummation of the Merger. In addition, the Company has agreed to indemnify us for certain liabilities arising out of our engagement by the Company in connection with the Merger. Based upon and subject to the foregoing, as outlined in the foregoing paragraphs and based on such other matters as we considered relevant, it is our opinion that as of the date hereof, the consideration to be received by the stockholders of the Company in the Merger is fair, from a financial point of view, to the stockholders of the Company. This opinion may not, however, be summarized, excerpted from or otherwise publicly referred to without our prior written consent, although this opinion may be included in its entirety in the proxy statement of the Company used to solicit stockholder approval of the Merger. It is understood that this letter is directed to the Board of Directors of the Company in its consideration of the Agreement, and is not intended to be and does not constitute a recommendation to any stockholder as to how such stockholder should vote with respect to the Merger. Very truly yours, /s/ Keefe, Bruyette & Woods, Inc. Keefe, Bruyette & Woods, Inc. ANNEX IV 1996 ANNUAL REPORT TO STOCKHOLDERS AMERICAN NATIONAL BANCORP, INC. TABLE OF CONTENTS Page ---- Message of President and Chief Executive Officer...........................1 Selected Consolidated Financial and Other Data.............................2 Management's Discussion and Analysis of Financial Condition and Results of Operations............................4 American National Bancorp, Inc. Common Stock and Related Matters..........15 Consolidated Financial Statements.........................................16 Notes to Financial Statements.............................................21 Independent Auditors' Report and Selected Quarterly Financial Data........50 [American National Bancorp, Inc. Letterhead] To our Stockholders: I am pleased to report that American National Bancorp, Inc. has made significant progress in the nine months following the close of its successful mutual to stock conversion on October 31, 1995. The Company sold 2,182,125 shares of common stock at $10.00 per share and minority stockholders of American National Savings Bank, F.S.B. (the "Bank") were issued 1.94 shares of Company common stock in exchange for each outstanding share of common stock of the Bank. Due to the offering and profits, stockholders' equity increased by $18.3 million to $47.3 million at July 31, 1996. Net income increased to $1.5 million from $10,000 in 1995. Net interest income for 1996 increased $1.2 million to $12.9 million compared to $11.7 million for 1995. This 9.5% increase primarily reflects growth in assets, relatively stable net interest margins and a decrease in the provision for loan losses. In 1996, assets were up $35.1 million or 8.2% to $461.3 million, and loans were up $45.9 million or 19.8% to $278.0 million. We are beginning to see the results of the Bank's efforts to expand its lending operations. Although our primary focus continues to be single-family residential loans, the Company continues to promote its auto, home equity and construction lending in order to change the mix of assets and improve earnings. Nonperforming assets decreased to $4.7 million or 1% of total assets at July 31, 1996, compared to $9.5 million or 2.2% of total assets at July 31, 1995. Our capital continues to significantly exceed all regulatory requirements and supports our firm commitment to remain a financially sound institution. Consistent with the Company's capital management program and its goal to improve Return on Equity, in June 1996, we repurchased 199,025 shares and in August 1996 we repurchased 189,074 shares of American National Bancorp's Common Stock in the open market at a cost of approximately $2.0 million and $2.3 million, respectively. Stockholders will continue to benefit from this repurchase plan as future profits are spread over fewer shares. Also, on September 19, 1996, the Board of Directors authorized the first quarterly cash dividend of three cents ($.03) per share to be paid on or about November 15, 1996 to stockholders of record as of October 31, 1996. Although the Company's returns on assets and equity are below industry norms, the Company's core earnings continue to improve with management focused on its Strategic Business Plan which targets return on equity of approximately 12% in three years. While the future course of interest rates cannot always be accurately predicted, we believe that through continued hard work, this goal is achievable. Letter to Stockholders, Continued Our goal to increase profitability has fostered our commitment to improve our delivery and our mix of services. The relocation of our largest branch at the Fallstaff Shopping Center in Pikesville, to a free standing building complete with drive-up and ATM capabilities, should open in late October, 1996. We are also building a highly visible office on a pad site of the Constant Friendship Shopping Center in Harford County, one of the Company's primary lending markets. This office should be operational by the spring of 1997. However, in late November, 1996, we will open a temporary office in the shopping center until our larger facility is completed. We anticipate that this increased exposure in Harford County will not only enhance our lending capabilities but will also be a strong source of low cost core deposits. The Company continues to grow its market share. Marketing studies confirm that customers who use the Bank's services continue to be very satisfied. The Company increased the awareness of American National Savings Bank over the past year through a very successful media campaign. This campaign contributed, in a large part, to the $45.9 million increase in loans. The Company intends to build on this success and has increased its advertising and marketing budgets for 1997. We also intend to improve customer service by investing in technology in the future. While retaining our strong customer base in the over-age 55 category, we are working to increase our market share of younger customers. Since these customers demand technology-based delivery systems, the Bank is currently reviewing potential new products including telephone banking, Internet services, and debit cards for implementation in 1997. We will also continue to focus on building competitive checking accounts and other core deposits. Recent federal legislation has been enacted to recapitalize the FDIC insurance fund. Although the one-time special assessment that the Bank is required to make will have a short term impact on its 1997 earnings, the long term effect will be to significantly reduce the Bank's future insurance expenses. With our strong capital position, improved asset quality and higher core earnings, we believe exciting opportunities lie ahead. And, with the continued support of our stockholders, customers and employees, I am confident that we will continue to provide quality service and enhance our performance. A. Bruce Tucker President and Chief Executive Officer Selected Consolidated Financial and Other Data Prior to October 31, 1995, the Company had no assets or operations. The following tables set forth certain consolidated financial and other data of the Company at and for the year ended July 31, 1996, and of the Bank at and for the years ended July 31, 1995, 1994, 1993 and 1992. This information is derived in part from and should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto presented elsewhere herein. For additional information about the Company and the Bank, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations."
At July 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Selected Consolidated Financial Condition Data: (In Thousands) Total assets........................... $461,271 $426,174 $400,046 $383,259 $ 398,863 Loans receivable, net (1)............. 278,042 232,089 208,542 221,595 254,665 Mortgage-backed securities ............ 100,195 156,775 117,597 102,478 97,179 Investment securities ................. 24,109 13,918 6,825 8,583 4,800 Securities available for sale.......... 40,266 3,030 43,600 27,141 -- Cash and cash equivalents.............. 4,902 5,360 7,109 5,112 19,134 Investments in real estate, net........ 5,670 5,828 5,623 6,282 7,476 Investments in and advances to real estate joint ventures......... 1,270 2,215 3,676 4,576 6,883 Deposits............................... 313,083 314,613 308,989 317,711 344,586 Borrowed funds......................... 97,269 78,475 58,197 40,968 29,400 Stockholders' equity................... 47,270 28,959 29,160 21,193 20,508 - ------------------------------------ (1) Includes loans held for sale. 2 At or for the Years Ended July 31, ---------------------------------------------------------------------- 1996 1 95 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Key Financial Ratios and Other Data: Performance Ratios: Return on average assets (1)(2)........ .35% --% .33% .18% .05% Return on average equity (1)(3)........ 3.63 .03 4.68 3.27 .95 Net interest rate spread (4)........... 2.44 2.48 2.56 2.73 2.06 Net interest margin (5)................ 2.93 2.87 2.89 2.97 2.44 Net interest income to noninterest expense 128.15 125.76 120.11 127.70 103.91 Net interest income after provision for loan losses to total noninterest expense 120.46 89.51 98.56 86.44 75.52 Noninterest expense to average assets.. 2.25 2.24 2.36 2.28 2.32 Quality Ratios: Nonperforming loans to total loans (6). 1.31 3.52 1.67 3.34 3.74 Nonperforming assets to total assets (7) 1.01 2.23 1.07 2.33 3.05 Allowance for loan losses to nonperforming loans.................. 112.87 73.90 101.41 30.42 15.06 Allowance for loan losses to nonperforming assets (7)............. 94.37 66.98 85.70 26.04 12.07 Equity Ratios: Stockholders' equity to assets at period end 10.25 6.80 7.29 5.53 5.14 Average stockholders' equity to average assets 9.55 6.95 7.05 5.54 5.05 Average interest-earning assets to average interest-bearing liabilities 110.54 108.04 107.84 105.16 106.34 Other Data: Number of full-service offices......... 9 9 9 9 9 Per Share Data: Book value per share................. $13.06 $14.11 $14.21 N/A N/A Earnings per share (8)............... .36 -- .41 N/A N/A Pro forma net income per share (8)... .47 N/A .67 N/A N/A Dividends declared per share......... N/A .40 .30 N/A N/A Dividend payout ratio................ N/A N/A .73 N/A N/A
- ------------------------------------ (1) Net income for the fiscal year ended July 31, 1993, includes $583,000 representing the cumulative effect of change in accounting for income taxes. (2) Return on average assets represents net income divided by average total assets. (3) Return on average equity represents net income divided by average equity. (4) Net interest rate spread represents the difference between average yield on interest-earning assets and average cost of interest-bearing liabilities. (5) Net interest margin represents net interest income as a percentage of average interest-earning assets. (6) Nonperforming loans include nonaccrual loans and accruing loans 90 days or more delinquent. (7) Nonperforming assets consist of nonperforming loans and foreclosed assets. (8) See Note 13 of Notes to Consolidated Financial Statements. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS American National Bancorp, Inc. American National Bancorp, Inc. (the "Company") is a Delaware corporation that was organized in July 1995. On October 31, 1995, the Company acquired 100% of the capital stock of American National Savings Bank, F.S.B. (the "Bank"), sold 2,182,125 shares of common stock in a subscription offering for a purchase price of $10.00 per share (the "Offering"), and issued 1,798,402 shares of common stock in exchange for 927,000 shares of the Bank's common stock held by shareholders other than American National Bankshares, M.H.C. (together with the Offering, the "Conversion"). Immediately following the Conversion, the only significant assets of the Company were the common stock of the Bank and $19.3 million of the proceeds from the Offering. The Company is registered as a savings and loan holding company with the Office of Thrift Supervision (the "OTS"). At July 31, 1996, the Company had total consolidated assets of $461.3 million, total consolidated deposits of $313.1 million, and consolidated stockholders' equity of $47.3 million. The Company's executive office is located at 211 North Liberty Street, Baltimore, Maryland 21201 and its telephone number is (410) 752-0400. American National Savings Bank, F.S.B. American National Savings Bank, F.S.B. (the "Bank") is a federally chartered stock savings bank headquartered in Baltimore, Maryland. The Bank conducts operations through nine full-service offices in its market area consisting of Baltimore City and parts of the Maryland counties of Baltimore, Howard, Harford, Anne Arundel, and Carroll. The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such deposits together with other funds, in loans collateralized by one- to four-family residential real estate, mortgage-backed securities, and, to a lesser extent, construction and land development loans, consumer loans and investment securities. In the past, the Bank also actively originated multifamily residential real estate loans and commercial real estate loans; however, originations of such loans have decreased significantly in recent years as the Bank has sought to reduce the credit risk and losses in its loan portfolio. The Bank also has reduced its involvement in real estate joint ventures due to economic conditions and changes in regulatory capital requirements. General The Company's results of operations are primarily dependent on its net interest income, which is the difference between interest income earned on its loans, mortgage-backed securities, and investment portfolios, and its cost of funds consisting of interest paid on deposits and borrowed funds. The Company's net income also is affected by its provisions for losses on loans and investments in real estate, as well as the amount of noninterest income, including fees and service charges, gains or losses on sales of loans, mortgage-backed securities, investment securities, and other noninterest income, and noninterest expense, including salary and employee benefits, net occupancy, federal deposit insurance premiums, operations of investment in real estate, other noninterest expense, and income taxes. During the fiscal years ended July 31, 1996, 1995, and 1994, net interest income constituted 97.8%, 92.6%, and 84.0% of gross earnings (i.e., net interest income and noninterest income), and noninterest income constituted 2.2%, 7.4%, and 16.0% of gross earning, respectively. Net income of the Company is also affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies, and actions of regulatory authorities. Financial Condition Total assets increased by $35.1 million, or 8.2%, to $461.3 million at July 31, 1996 from $426.2 million at July 31, 1995 due to the second step stock offering which closed October 31, 1995. Loans receivable increased by $45.9 million, or 19.8%, to $278.0 million at July 31, 1996 from $232.1 million at July 31, 1995 largely due to increased originations and purchases of loans. Securities available for sale increased $37.3 million, to $40.3 million at July 31, 1996 from $3.0 million at July 31, 1995. Mortgage-backed securities decreased $56.6 million, or 36.1%, to $100.2 million at July 31, 1996 from $156.8 million at July 31, 1995. The increase in securities available for sale and the 4 decrease in mortgage-backed securities was due primarily to the reclassification of securities to the available for sale portfolio in December 1995. In November 1995, the Financial Accounting Standards Board announced its intention to allow a one-time change in the classification of securities, providing such change was effected by December 31, 1995. Management utilized this opportunity and designated part of its mortgage-backed and investment securities portfolio as available for sale. Investment securities increased $10.2 million, or 73.2%, to $24.1 million at July 31, 1996 due to the purchase of higher yielding callable securities, offset by the transfer of securities into the available for sale portfolio in December 1995. Advances from the Federal Home Loan Bank of Atlanta increased $18.7 million, or 42.3%, to $62.8 million at July 31, 1996 from $44.1 million at July 31, 1995 in order to fund loan settlements and purchases. Total stockholders' equity increased by $18.3 million to $47.3 million at July 31, 1996 compared to $29.0 million at July 31, 1995. This increase was the result of $20.0 million of proceeds from the stock offering, net of expenses, and net income for the year of $1.5 million, partially offset by the Company's establishment of an Employee Stock Ownership Plan (the "ESOP") which borrowed $1.7 million from the proceeds, the repurchase of 5% of its outstanding shares, or 199,025 shares, in open market transactions, and an increase in the net unrealized holding loss on securities of $424,000. Results of Operations General. The Company reported net income of $1.5 million, $10,000, and $1.3 million for the fiscal years ended July 31, 1996, 1995, and 1994. The $1.5 million increase for the fiscal year ended July 31, 1996 resulted from the decrease in the provision for loan losses of $2.6 million and an increase in net interest income of $1.1 million, partially offset by a decrease in noninterest income of $647,000, an increase in noninterest expense of $699,000 and an increase in income tax expense of $647,000. Net income for the fiscal year ended July 31, 1994 included substantial gains on sales of loans, mortgage-backed securities, and investment securities, which income is not considered to be core earnings and there is no assurance that these gains will occur in future periods, or that there will not be losses on sales of loans, mortgage-backed securities, and investment securities in future periods. Net income represented a return on average assets of .35%, .00% and .33%, and a return on average equity of 3.63%, .03%, and 4.68% for the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Interest Income. Interest income totalled $33.4 million for the fiscal year ended July 31, 1996, compared to $31.0 million for the fiscal year ended July 31, 1995. The $2.4 million, or 7.9%, increase in interest income for the fiscal year ended July 31, 1996 compared to the fiscal year ended July 31, 1995 was due to an increase of $27.4 million in average interest earning assets to $438.5 million from $411.1 million and a 9 basis point increase in the yield on average interest earning assets to 7.62% from 7.53%. The increase in average interest earning assets resulted primarily from a $27.0 million, or 12.6%, increase in average mortgage loans to $240.7 million from $213.7 million and a $5.6 million, or 42.7%, increase in investment securities to $18.7 million from $13.1 million, partially offset by a $7.2 million, or 4.5%, decrease in mortgage-backed securities. Interest income totalled $31.0 million for the fiscal year ended July 31, 1995, compared to $27.3 million for the fiscal year ended July 31, 1994. The $3.7 million, or 13.6%, increase in interest income for the fiscal year ended July 31, 1995 compared to the fiscal year ended July 31, 1994 was due to a 41 basis point increase in the yield on average interest earning assets to 7.53% from 7.12%, and an increase of $27.3 million in average interest earning assets to $411.1 million from $383.8 million. The principal reason for the increase in the yield on interest-earning assets was a 98 basis point increase in the yield on average mortgage-backed securities. Such increase resulted from the upward repricing of the Bank's adjustable rate securities portfolio which, at July 31, 1995, comprised 44.0% of the Bank's portfolio of mortgage-backed securities. The yield on the Bank's average mortgage loans decreased by 10 basis points to 8.48% from 8.58%. The increase in average interest-earnings assets resulted primarily from a $7.9 million, or 3.8%, increase in average mortgage loans to $213.7 million from $205.8 million, a $20.2 million, or 14.2% increase in mortgage-backed securities to $162.2 million from $142.0 million, and a $4.9 million increase in investment securities, partially offset by a $5.7 million decrease in other interest-earnings assets. The increase in interest-earnings assets reflected management's decision to leverage the Bank's capital in order to increase net interest income. 5 Interest Expense. Interest expense totalled $20.6 million for the fiscal year ended July 31, 1996, compared to $19.2 million for the fiscal year ended July 31, 1995. The $1.4 million increase was due to a $16.2 million, or 4.3%, increase in average interest-bearing liabilities to $396.7 million from $380.5 million, and a 13 basis point increase in the average cost of interest-bearing liabilities to 5.18% form 5.05%. Total average deposits increased $6.3 million, or 2.0% and total borrowed funds increased $9.9 million, or 14.0%. Interest expense totalled $19.2 million for the fiscal year ended July 31, 1995, compared to $16.2 million for the fiscal year ended July 31, 1994. The $3.0 million increase for the fiscal year ended July 31, 1995 compared to the fiscal year ended July 31, 1994 was due to a $24.6 million, or 6.9%, increase in average interest-bearing liabilities to $380.5 million from $355.9 million, and a 49 basis point increase in the average cost of interest-bearing liabilities to 5.05% from 4.56%. The increase in average interest bearing liabilities resulted from the Bank's strategy of leveraging its capital in order to increase net interest income. In order to leverage its capital, the Bank increased its average borrowings to $70.9 million from $40.7 million. The Bank's borrowings included Federal Home Loan Bank ("FHLB") advances and securities sold under agreements to repurchase. Net Interest Income. Net interest income increased by $1.2 million, or 9.5%, to $12.9 million for the fiscal year ended July 31, 1996 from $11.7 million for the fiscal year ended July 31, 1995. The increase in net interest income was primarily due to the results of operations discussed above, which resulted in an increase in the ratio of average interest-earning assets to average interest-bearing liabilities to 110.54% from 108.04%, partially offset by a 4 basis point decrease in the Bank's interest rate spread to 2.44% from 2.48%. Net interest income increased by $662,000, or 6.0%, to $11.7 million for the fiscal year ended July 31, 1995 from $11.1 million for the fiscal year ended July 31, 1994. The increase in net interest income was primarily due to the results of operations discussed above, which resulted in an increase in the ratio of average interest-earning assets to average interest-bearing liabilities to 108.04% from 107.84%, partially offset by an 8 basis point decrease in the Bank's interest rate spread to 2.48% from 2.56%. Provision for Loan Losses. The Company maintains an allowance for loan losses based upon management's periodic evaluation of known and inherent risks in the loan portfolio, the Company's past loan loss experience, the volume and type of lending presently being conducted by the Company, adverse situations that may affect borrowers' ability to repay loans, estimated value of underlying loan collateral, current economic conditions in the Company's market area, and other relevant factors. Management calculates the general allowance for loan losses in part based on past experience, and in part based on specified percentages of loan balances. The allowance is reviewed by management and the Board of Directors, both of which believe that the Company's allowance for loan losses is reasonable and adequate to cover losses reasonably expected in its loan portfolio. Although management uses the best information available and its best judgment in providing for possible losses, no assurance can be given as to whether future adjustments may be necessary. The Company's allowance for loan losses was $4.4 million. or 1.5% of total loans receivable at July 31, 1996, compared to $6.4 million, or 2.6%, of total loans receivable at July 31, 1995. During the fiscal year ended July 31, 1996, the Company's provision for loan losses was $772,000, compared to $3.4 million for the fiscal year ended July 31, 1995. The decrease in the provision for loan losses for the fiscal year ended July 31, 1996, compared to the fiscal year ended July 31, 1995, reflected a reduction in nonperforming assets to $4.7 million, or 1.0% of total assets, at July 31, 1996 from $9.5 million, or 2.2% of total assets, at July 31, 1995. The Bank's provision for loan losses was $3.4 million for the fiscal year ended July 31, 1995, compared to $2.0 million for the fiscal year ended July 31, 1994. The increase in the provision for loan losses for the fiscal year ended July 31, 1995 was attributable to a provision of $1.6 million recorded for the quarter ended October 31, 1994, that related to developments affecting several loans that were part of the Bank's largest lending relationship at July 31, 1995. During the fiscal year ended July 31, 1995, the borrower became delinquent on these loans, and the loans were placed on nonaccrual status. The Bank has foreclosed on several of the loans comprising this lending relationship and is continuing its efforts to resolve these loans. These loans were the primary reason for the increase in the Bank's nonperforming assets to $9.5 million or 2.2% of total assets at July 31, 1995 from $4.3 million, or 1.1%, of total assets at July 31, 1994. As of July 31, 1995, the Bank's allowance for loan losses was $6.4 million, or 2.6%, of total loans receivable and 73.9% of nonperforming loans, compared to the Bank's July 31, 1994 allowance for loan losses of $3.7 million, or 1.7% of total loans receivable and 101.4% of nonperforming loans. 6 Noninterest Income. Noninterest income, consisting primarily of deposit fees, loan servicing fees and gains and losses on sales of loans, mortgage-backed securities and investments, totalled $293,000 for the fiscal year ended July 31, 1996 compared to $940,000 for the fiscal year ended July 31, 1995. The $647,000 decrease for the fiscal year ended July 31, 1996 compared to the fiscal year ended July 31, 1995 was due primarily to the sale of low yielding mortgage-backed and investment securities at a loss, and to a decrease in revenue from the Bank's subsidiary, American National Insurance Agency, Inc. Noninterest income totalled $652,000 for the fiscal year ended July 31, 1995, compared to $2.0 million for the fiscal year ended July 31, 1994. The $1.3 million decrease for the fiscal year ended July 31, 1995 compared to the fiscal year ended July 31, 1994 was due primarily to nominal sales of securities during the fiscal year ended July 31, 1995 as compared to gains of $1.1 million on the sale of mortgage-backed securities during the fiscal year ended July 31, 1994, a decrease in the gain on sales of loans of $159,000 and an increase in the loss on investments in joint ventures of $174,000. The Bank sold few securities or loans during the fiscal year ended July 31, 1995, because it held relatively few securities in its available for sale portfolio, and because of its strategy to increase its interest-earning assets. Noninterest Expense. Noninterest expense, consisting primarily of salaries and employee benefits, occupancy and equipment, federal deposit insurance premiums and losses on investments in real estate ("REO") totalled $10.0 million for the fiscal year ended July 31, 1996 compared to $9.3 million for the fiscal year ended July 31, 1995. The $700,000 increase for the fiscal year ended July 31, 1996 compared to the fiscal year ended July 31, 1995 was the result of increased advertising expense for mortgage and consumer loans and deposits, salary increases, as well as costs associated with the formation of the ESOP. Noninterest expense remained relatively stable at $9.1 million for the fiscal years ended July 31, 1995 and 1994. Decreases of $296,000 in other noninterest expense and $41,000 in loss on investments in real estate were partially offset by increases of $207,000 in salaries and employee benefits, and $67,000 in advertising expense. Income Taxes. The Company's income tax provisions (benefit) were $801,000, $(50,000), and $695,000 in the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Deposit Insurance Premiums. The deposits of federal savings banks such as the Bank are presently insured by the Savings Association Insurance Fund (the "SAIF"), which along with the Bank Insurance Fund (the "BIF"), is one of the two insurance funds administered by the Federal Deposit Insurance Corporation. Financial institutions which are members of the BIF have been experiencing substantially lower deposit insurance premiums because the BIF has achieved its required level of reserves while the SAIF has not yet achieved its required level of reserves. On September 30, 1996, legislation was enacted and signed into law which provides a resolution to the disparity in BIF/SAIF premiums. In particular, SAIF-insured institutions will pay a one-time assessment of 65.7 cents on every $100 of deposits held at March 31, 1995. Such payment is due no later than November 29, 1996. As a result of the new law the Company will be required to pay approximately $2,033,000. Assuming the special assessment is tax deductible, the cost, net of income tax benefits, will be approximately $1.34 million. The Company will make a one-time charge to earnings of this amount for the fiscal quarter ending October 31, 1996. Also, beginnning January 1, 1997, the current annual minimum premium of 23 basis points will be reduced to approximately 6.5 basis points. Average Balance Sheet The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the years indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years presented. Average balances are derived from daily average balances. 7
Years Ended July 31, --------------------------------------------------------------------------------------- 1996 1995 1994 ------------------------ --------------------------- ---------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in Thousands) Interest-earning assets: Mortgage loans (1).............. $240,713 $20,652 8.58% $213,701 $18,120 8.48% $20 ,770 $17,650 8.58% Consumer and other loans........ 13,377 1,102 8.24 11,932 916 7.68 11,892 809 6.80 Mortgage-backed securities (2).. 154,945 9,630 6.22 162,178 10,355 6.38 141,978 7,665 5.40 Investment securities (3)...... 18,749 1,255 6.70 13,139 831 6.32 8,242 432 5.24 Other (4)....................... 10,742 779 7.25 10,158 747 7.35 15,881 769 4.85 ------- ------- ----- ------- ------- ----- -------- ------- ------ Total interest-earning assets 438,526 33,418 7.62 411,108 30,969 7.53 383,763 27,325 7.12 ------- ------- ------- Noninterest-earning assets.......... 6,986 5,896 6,983 ------- ------- -------- Total assets................ $445,512 $417,004 $390,746 ======== ======== ======== Interest-bearing liabilities: Deposits: Passbook accounts............... $41,468 1,230 2.97 $43,347 1,332 3.07 $ 46,709 1,422 3.04 NOW accounts.................... 15,356 237 1.54 14,675 240 1.64 15,609 264 1.69 Money accounts.................. 45,601 1,511 3.31 51,652 2,008 3.89 59,566 1,842 3.09 Certificates of deposit......... 213,428 12,847 6.02 199,922 11,343 5.67 193,284 10,399 5.38 ------- ------- ----- ------- ------- ----- -------- ------- ------ Total deposits.............. 315,853 15,825 5.01 309,596 14,923 4.82 315,168 13,927 4.42 ------- ------- ----- ------- ------- ----- -------- ------- ------ Borrowings: Advances from Federal Home Loan Bank..................... 46,851 2,770 5.91 50,182 3,084 6.15 31,403 1,993 6.35 Securities sold under agreements to repurchase.................... 34,005 1,958 5.76 20,741 1,216 5.86 9,307 321 3.45 ------- ------- ----- ------- ------- ----- -------- ------- ------ Total borrowed funds........ 80,856 4,728 5.85 70,923 4,300 6.06 40,710 2,314 5.68 ------- ------- ----- ------- ------- ----- -------- ------- ------ Total interest-bearing liabilities 396,709 20,553 5.18 380,519 19,223 5.05 355,878 16,241 4.56 Noninterest-bearing liabilities..... 6,245 7,512 7,313 ------- ------- -------- Total liabilities....... 402,954 388,031 363,191 Stockholders' equity................ 42,558 28,973 27,555 ------- ------- -------- Total liabilities and stockholders' equity $445,512 $417,004 $390,746 ======== ======== ======== Net interest income................. $12,865 $11,746 $11,084 ======= ======= ======= Net interest rate spread (5)........ 2.44% 2.48% 2.56% ==== ===== ====== Net interest margin (6)............. 2.93% 2.86% 2.89% ==== ===== ====== Ratio of average interest-earning assets to average interest-bearing liabilities..................... 110.54% 108.04% 107.84% ====== ====== ======
- ----------------------------------------- (1) Includes nonperforming loans. (2) Includes mortgage-backed securities available for sale. Separate yields for available-for-sale portfolio are not available as the income from the available- for-sale securities has not historically been segregated from the income from the held-to-maturity securities. (3) Includes investment securities available for sale. Separate yields for available-for-sale portfolio are not available as the income from the available-for-sale securities has not historically been segregated from the income from the held-to-maturity securities. (4) Includes interest-bearing deposits in other financial institutions, federal funds sold, securities purchased under agreements to resell, Federal Home Loan Bank stock, and ground rents. (5) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (6) Net interest margin represents net interest income as a percentage of average interest-earning assets. 8 Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in average volume (changes in average volume multiplied by old rate); (ii) changes in rates (changes in rate multiplied by old average volume); and (iii) changes in rate-volume (changes in rate multiplied by the change in average volume); and (iv) the net change.
Years Ended July 31, ---------------------------------------------------------------------------------- 1996 vs. 1995 1995 vs. 1994 -------------------------------------- --------------------------------------- Increase/(Decrease) Increase/(Decrease) Due to Due to --------------------------- -------------------------- Total Total Rate/ Increase Rate/ Increase Volume Rate Volume (Decrease) Volume Rate Volume (Decrease ------ ---- ------ ---------- ------ ---- ------ --------- (In Thousands) Interest income: Mortgage loans.............. $2,291 $ 214 $ 27 $2,532 $ 681 $ (203) $ (8) $ 470 Consumer and other loans.... 111 67 8 186 3 103 1 107 Mortgage-backed securities.. (462) (276) 13 (725) 1,091 1,400 199 2,690 Investment securities....... 354 49 21 424 257 89 53 399 Other interest-earning assets 43 (10) (1) 32 (276) 397 (143) (22) ------ -------- ----- ------ ------ ------- ---- ------ Total interest-earning assets $2,337 $ 44 $ 68 $2,449 $1,756 $ 1,786 $102 $3,644 ====== ======= ==== ====== ====== ======= ==== ====== Interest expense: Passbook.................... $ (58) $ (46) $ 2 $ (102) $ (102) $ 13 $ (1) $ (90) NOW......................... 11 (13) (1) (3) (16) (9) 1 (24) Money fund.................. (235) (297) 35 (497) (244) 473 (63) 166 Certificate................. 766 691 47 1,504 357 568 19 944 Advances from FHLB.......... (205) (117) 8 (314) 1,192 (63) (38) 1,091 Reverse repurchase agreements 777 (21) (14) 742 394 225 276 895 ------ -------- ----- ------ ------ ------- ---- ------ Total interest-bearing liabilities......... $1,056 $ 197 $ 77 $1,330 $1,581 $ 1,207 $194 $2,982 ====== ======= ==== ====== ====== ======= ==== ====== Change in net interest income... $1,281 $ (153) $ (9) $1,119 $ 175 $ 579 $(92) $ 662 ====== ======== ===== ====== ====== ======= ==== ======
Asset and Liability Management-Interest Rate Sensitivity Analysis The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to positively affect net interest income. Similarly, during a period of falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net interest income. The Company's deposit accounts typically react more quickly to changes in market interest rates than interest-earning assets such as fixed rate mortgage loans, because of the relatively shorter maturities of deposits. When interest rates are rising, interest expense will increase more rapidly than interest income if a higher volume of interest-bearing liabilities than interest-earning assets reprice to higher interest rates. In a falling interest rate environment, interest income will decrease less rapidly than interest expense if a higher volume of interest-bearing liabilities than interest-earning assets reprice to lower interest rates. 9 Management seeks to manage the Company's interest rate risk exposure by monitoring the levels of interest rate sensitive assets and liabilities while maintaining an acceptable interest rate spread. To reduce the potential volatility of the Company's earnings in a changing interest rate environment, the Company invests in mortgage-backed securities that have adjustable rates and/or relatively short expected terms. At July 31, 1996, $97.4 million, or 73.0%, of the Company's $133.5 million of mortgage-backed securities had adjustable interest rates. The Company also originates adjustable-rate loans, and from time to time may purchase ARM loans. During the fiscal year ended July 31, 1996, the Company purchased $11.0 million of adjustable-rate one- to four-family mortgage loans. At July 31, 1996, $114.1 million, or 38.2%, of the Company's total loans receivable had adjustable interest rates. The Company also seeks to reduce the term of its interest-earning assets by offering fixed-rate one- to four-family mortgage loans with terms of 15 years or less. In addition, the Company manages its interest-bearing liabilities by offering competitive interest rates on deposit accounts and pricing certificates of deposit to provide customers with incentives to choose certificates of deposit with longer terms. At July 31, 1996, time deposits maturing beyond 12 months totalled $97.3 million, or 31.1%, of the Company's total deposits. At July 31, 1996, the Company's total interest-bearing liabilities maturing or repricing within one year exceeded its total interest-earning assets maturing or repricing within one year by $19.4 million, representing a cumulative one-year gap ratio of negative 4.2%. The Company's gap measures indicate that net interest income is moderately exposed to increases in interest rates. In a rising interest rate environment, the Company's net interest income may be adversely affected as liabilities would reprice to higher market rates more quickly than assets. This effect would be compounded because the prepayment speeds of the Company's long-term fixed-rate assets would decrease in a rising interest rate environment. Although the Company could reduce its exposure to interest rate risk by investing more of its assets in short-term securities and adjustable-rate mortgage-backed securities, management believes that the benefits of such a strategy would be outweighed by the loss of earnings from an increased concentration on short-term and adjustable-rate investments, which may offer lower yields. The Company's analysis of the gap between its interest-earning assets and interest-bearing liabilities within specified periods may include the effects of certain hedging techniques that may be used by the Company to manage interest rate risk, including primarily interest-rate cap agreements that the Company has from time to time entered into with national brokerage firms. An interest-rate cap agreement is an agreement pursuant to which the seller of the cap agrees to pay the buyer the difference between the actual interest rate and the strike rate set forth in the contract if the actual rate is higher than the strike rate. Pursuant to the cap agreements that the Company has used in the past and may continue to use from time to time, the Company receives variable interest payments based on the spread between the variable three month London Interbank Offered Rate ("LIBOR") and the strike rate of the caps if the variable three month LIBOR is higher than the strike rate. The premiums paid for such agreements are amortized over the life of the agreements. The interest differential received, if any, on interest rate cap agreements is recorded as an adjustment to interest expense. During the fiscal years ended July 31, 1996 and 1995, the Company did not use interest rate cap agreements. During the fiscal year ended July 31, 1994, the net effect of the Company's interest rate caps was to increase the Company's interest expense by $200,000. Although the interest rate caps have reduced the Company's net interest income in prior years, they also reduced the Company's exposure to increases in interest rates. The Company has an Asset-Liability Management Committee, which is responsible for reviewing the Company's asset and liability policies. Management presently monitors and evaluates the potential impact of interest rate movements upon the market value of portfolio equity and the level of net interest income on a quarterly basis. This evaluation is performed in compliance with OTS regulations and is compared to Board-established limits to ensure that interest rate risk is maintained within these guidelines. The Committee meets quarterly and reports quarterly to the Board of Directors on interest rate risks and trends, as well as liquidity and capital ratios and regulatory requirements. 10 Gap Table. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at July 31, 1996, that are expected to reprice or mature, based upon certain assumptions, in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the earlier of term or repricing or the contractual terms of the asset or liability.
At July 31, 1996 -------------------------------------------------------------------- Within 1-3 3-5 5-10 10-20 Over 20 1 Year Years Years Years Years Years Total ------ ----- ----- ----- ----- ----- ----- (Dollars in Thousands) Interest-earning assets: Real Estate Mortgages: Adjustable R.ate.......................... $ 85,489 $ 20,655 $ 7,935 $ -- $ -- $ -- $114,079 Fixed (1)................................. 31,310 30,017 18,905 32,772 25,083 7,209 145,296 Consumer.................................. 12,375 2,877 2,955 385 75 -- 18,667 Mortgage-backed securities................ 89,754 4,052 2,747 2,884 631 127 100,195 Investment securities..................... 5,198 -- -- 9,947 8,964 -- 24,109 Securities available for sale............. 12,976 4,756 13,976 6,085 2,453 20 40,266 Other interest-earning assets (2)......... 5,372 -- -- -- -- 4,904 10,276 -------- -------- ------- ------- ------- ------- ------- Total interest-earning assets........... 242,474 62,357 46,518 52,073 37,206 12,260 452,888 Rate sensitive liabilities: Passbook accounts......................... 32,217 4,487 2,136 1,638 296 7 40,781 NOW accounts.............................. 9,024 2,042 1,348 1,693 814 117 15,038 Money accounts............................ 32,504 4,527 2,155 1,652 299 8 41,145 Certificates of deposit................... 118,772 59,823 19,711 17,813 -- -- 216,119 Borrowings................................ 69,394 25,625 -- 1,500 750 -- 97,269 -------- -------- ------- ------- ------- ------- -------- Total interest-bearing liabilities..... 261,911 96,504 25,350 24,296 2,159 132 410,352 -------- -------- ------- ------- ------- ------- -------- Interest sensitivity gap.................... (19,437) (34,147) 21,168 27,777 35,047 12,128 42,536 ======== ======== ====== ====== ====== ====== ====== Cumulative interest-sensitivity gap......... (19,437) (53,584) (32,416) (4,639) 30,408 42,536 42,536 ======== ======== ======== ======== ====== ====== ====== Cumulative interest-sensitivity gap to total assets........................... (4.2)% (11.6)% (7.0)% (1.0)% 6.6% 9.2% Ratio of interest-earning assets to interest-bearing liabilities.............. 92.6% 64.6% 183.5% 214.3% 1723.3% 9287.9% Cumulative ratio of interest sensitive assets to interest sensitive liabilities.. 92.6% 85.0% 91.6% 98.9% 107.4% 110.4%
- ------------------------------------ (1) Includes loans held for sale. (2) Includes federal funds sold, interest-bearing deposits in other banks, Federal Home Loan Bank stock, and ground rents. The above table was prepared based on the Company's historical experience and OTS decay rate assumptions. Management believes that the assumptions used to prepare the table approximate the standards used in the savings industry, and considers the assumptions appropriate and reasonable. However, certain shortcomings are inherent in the analysis presented by the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of or lag behind changes in market interest rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Moreover, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Net Portfolio Value. The OTS has adopted a rule that incorporates an interest rate risk ("IRR") component into the risk-based capital rules. The IRR component is a dollar amount that will be deducted from total capital for the purpose of calculating an institution's risk-based capital requirement and is measured in terms of the sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV is the difference between discounted incoming and outgoing cash flows from assets, liabilities, and off-balance sheet contracts. An institution's IRR is measured as the change to its NPV as a result of a hypothetical 200 basis point change in market interest rates. A resulting change in NPV of more than 2% of the estimated market value of its assets will require the institution to deduct from its capital 50% of that excess change. The rule provides that the OTS will calculate the IRR component quarterly for each institution from the 11 institution's Thrift Financial Reports. The OTS has deferred for the present time the date on which the IRR component is to be deducted from total capital. The following table presents the Bank's NPV as of June 30, 1996, as calculated by the OTS, based on information provided to the OTS by the Bank.
Change in Change in NPV Interest Rates Net Portfolio Value as a % of in Basis Points ------------------------------------------- Estimated Market (Rate Shock) Amount $ Change % Change Value of Assets --------------- -------- -------- -------- ----------------- (Dollars in Thousands) 400 $ 20,400 $ (28,430) (58)% 5.89% 300 27,372 (21,459) (44) 4.45 200 35,111 (13,719) (28) 2.84 100 42,399 (6,432) (13) 1.33 Static 48,830 -- -- -- (100) 53,987 5,156 11 1.07 (200) 55,582 6,752 14 1.40 (300) 57,289 8,459 17 1.75 (400) 59,656 10,825 22 2.24
As shown by the table above, increases in interest rates will result in net decreases in the Bank's NPV, while decreases in interest rates will result in smaller net increases in the Bank's NPV. Because the table reflects the Bank's NPV decreasing by 2.84% if interest rates increase by 200 basis points, the Bank would be required to make a deduction from total capital for purposes of calculating the Bank's risk-based capital requirement if such decrease exceeded 2% of the estimated market value of its assets for three consecutive quarters. No capital deduction was required at July 31, 1996. As is the case with the gap table, certain shortcomings are inherent in the methodology used in the above table. Modeling changes in NPV requires the making of certain assumptions that may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the models assume that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the models assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements do provide an indication of the Bank's interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income. Liquidity and Capital Resources The Bank is required to maintain minimum levels of liquid assets as defined by OTS regulations. This requirement, which varies from time to time depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio currently is 5%. The Bank's liquidity ratio averaged 7.7% during the month of July 1996. In addition the Bank is required to maintain short term liquid assets of at least 1% of the Bank's average daily balance of net withdrawable deposit accounts and current borrowings. The Bank adjusts liquidity as appropriate to meet its asset and liability management objectives. Certain mortgage-backed securities, time deposits, federal funds sold and other assets outstanding at July 31, 1996, 1995, and 1994, that qualify for liquidity amounted to $11.9 million, $26.4 million, and $19.3 million, respectively. At July 31, 1996, the Bank was in compliance with such liquidity requirements. The Bank's primary sources of funds are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, FHLB advances and other borrowings, and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Bank manages the pricing of its deposits to maintain 12 a desired deposit balance. In addition, the Bank invests excess funds in federal funds, and other short-term interest-earning and other assets, which provide liquidity to meet lending requirements. The Company's borrowings increased to $97.3 million at July 31, 1996 and an average of $80.9 million for the fiscal year ended July 31, 1996. The $18.7 million increase was primarily in advances from the Federal Home Loan Bank of Atlanta in order to fund loan settlements and purchases. The Company's borrowings increased to an average of $70.9 million for the fiscal year ended July 31, 1995, from an average of $40.7 million for the fiscal year ended July 31, 1994. The increase in borrowings related primarily to the Company's efforts to manage its level of interest rate risk by utilizing longer-term FHLB borrowings, and leverage proceeds of the Minority Stock Offering. Although the average rate paid by the Company has exceeded the average rate paid on deposits, the Company did not use deposits to fund the growth in assets that occurred after the Minority Stock Offering because of management's belief that shorter-term deposits would adversely affect the Company's exposure to increases in interest rates, that longer-term deposits would be more expensive, and that any attempt to quickly increase deposits would be more costly than a strategic effort to grow deposits in a controlled manner over a period of time. The Company's deposits increased to $313.1 million at July 31, 1996, from an average of $309.6 million over the fiscal year ended July 31, 1995, and the Company intends to continue its strategic effort to grow its deposit base in the future as it leverages proceeds of the October 31, 1995 Offering. The Company's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Cash flows provided by operating activities were $5.2 million, $1.8 million, and $7.0 million for the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Net cash used in investing activities consisted primarily of disbursements for purchases of mortgage-backed securities, loan originations and purchases, and purchases of investment securities, offset by proceeds from the sales and repayments of mortgage-backed securities, loan principal repayments, and sales and maturities of investment securities totalled $39.6 million, $29.4 million, $21.8 million, for the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Disbursements for purchases of mortgage-backed securities totalled $42.7 million, $17.4 million, and $131.3 million for the years ended July 31, 1996, 1995, and 1994, respectively. Disbursements for loans originated and purchased were $94.4 million, $58.3 million and $43.5 million for the years ended July 31, 1996, 1995, and 1994, respectively. Disbursements for purchases of investment securities totalled $29.2 million, $7.8 million and $6.6 million for the years ended July 31, 1996, 1995 and 1994, respectively. Proceeds from the sales and repayments of mortgage-backed securities totalled $67.9 million, $18.1 million, and $89.4 million for the years ended July 31, 1996, 1995, and 1994, respectively. Proceeds from loan principal repayments totalled $40.7 million, $27.8 million, and $45.8 million for the years ended July 31, 1996, 1995 and 1994, respectively. Proceeds from the sales and maturities of investment securities totalled $12.0 million, $1.9 million and $17.0 million for the years ended July 31, 1996, 1995 and 1994, respectively. Net cash provided by financing activities consisting primarily of net activity in deposit accounts, proceeds from funding and repayments of FHLB advances, and net activity in securities sold under agreements to repurchase totalled $33.9 million, $25.8 million, and $16.7 million for the fiscal years ended July 31, 1996, 1995 and 1994, respectively. Additionally, on October 31, 1995, the Company completed its conversion to a stock holding company and received net proceeds of $19.3 million. Also, in November 1993, the Bank completed its minority stock offering and received net proceeds of $8.3 million. The net increase (decrease) in deposits was ($1.5) million, $5.6 million and $(8.7) million for the years ended July 31, 1996, 1995 and 1994, respectively. The activity in net proceeds (repayments) from FHLB advances was $18.7 million, $(6.6) million and $24.4 million for the years ended July 31, 1996, 1995 and 1994, respectively. The net increase (decrease) in securities sold under agreements to repurchase was $107,000, $26.9 million, and $(7.1) million for the years ended July 31, 1996, 1995 and 1994, respectively. Federal regulations require thrift institutions to maintain certain minimum levels of regulatory capital. The regulatory capital regulations require minimum levels of tangible and core capital of 1.5% and 3%, respectively, of adjusted total assets and risk-based capital of 8% of risk-weighted assets. The Bank was in compliance with the regulatory capital requirements with tangible, core and risk-based capital ratios of approximately 8.64%, 8.64% and 18.2%, respectively, at July 31, 1996. The Bank has other sources of liquidity, including a $95 million line of credit with the FHLB. At July 31, 1996, the Bank's FHLB advances totalled $62.8 million. 13 Impact of Inflation and Changing Prices The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of New Accounting Standards Accounting for Impairment of Long-Lived Assets. In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 is effective for fiscal years beginning after December 15, 1995. Earlier application is permitted. SFAS 121 will require, among other things, that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management adopted the provisions of SFAS 121 as of August 1, 1996, and the adoption of SFAS 121 will not have a material impact on the Company's financial statements. Mortgage Servicing Rights. In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122 Accounting for Mortgage Servicing Rights (SFAS 122). SFAS 122 is effective for years beginning after December 15, 1995. The Statement requires among other provisions, that the Company capitalize the estimated fair value of servicing rights on loans originated for sale, and amortize such amount over the estimated servicing life of the loan. The Company adopted the provisions of SFAS 122 as of August 1, 1996. Adoption of SFAS 122 will not have a material impact on the Company's financial statements. Stock-Based Compensation. In November 1995, the FASB issued Statement of Financial Accounting Standards No. 123 Accounting for Awards of Stock-Based Compensation to Employees (SFAS 123). SFAS 123 is effective for years beginning after December 15, 1995. The Statement defines a fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for an employee stock option or similar equity instrument, and for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). Under the fair value-based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value-based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Most fixed stock option plans, the most common type of stock compensation plan, have no intrinsic value at grant date, and under Opinion 25 no compensation cost is recognized for them. Compensation cost is recognized for other types of stock based compensation plans under Opinion 25, including plans with variable, usually performance-based, features. SFAS 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. Management adopted the provisions of SFAS 123 as of August 1, 1996 using the intrinsic value-based method and believes that the adoption will not have a material impact on the Company's financial statements. The Company will provide disclosure about its stock based employee compensation plans in its 1997 financial statements, as required by SFAS 123. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. In June 1996, the FASB issued Statement of Financial Accounting Standards 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 125). SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. This Statement will require, among other things, that the Company record at fair value, assets and liabilities resulting from a transfer of financial assets. The Company will adopt the provisions of SFAS 125 as of January 1, 1997, and management believes 14 that the adoption of SFAS 125 will not have a material effect on the Company's financial condition or results of operations. AMERICAN NATIONAL BANCORP, INC. COMMON STOCK AND RELATED MATTERS On October 31, 1995, the Company acquired all of the outstanding common stock of the Bank, sold 2,182,125 shares of Company common stock for a purchase price of $10.00 per share and issued 1,798,402 shares of Company common stock in exchange for the Bank's outstanding common stock held by shareholders other than American National Bankshares, M.H.C. On that date, the Company's common stock began to trade on the Nasdaq National Market using the Bank's previous symbol, "ANBK." As of September 27, 1996, the Company had 846 stockholders of record and 3,603,646 outstanding shares of common stock. This does not reflect the number of persons whose stock is in nominee or "street" name accounts through brokers. The following table sets forth the high and low trading prices of the Company's common stock subsequent to the completion of the Offering. No dividends have been declared on the Common Stock since the Offering. In September 1996, the Company's Board of Directors authorized a quarterly cash dividend of $.03 per share which will be paid on or about November 15, 1996, to stockholders of record as of October 31, 1996. Three Months Ended High Low ------------------ ---- --- January 31, 1996....................... $10.25 $9.375 April 30, 1996......................... 10.25 9.50 July 31, 1996.......................... 10.625 9.50 Payment of dividends on the Common Stock is subject to determination and declaration by the Board of Directors and depends upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, the Company's results of operations and financial condition, tax considerations and general economic conditions. 15 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION July 31, 1996 and 1995
Assets 1996 1995 ------ ---- ---- (In Thousands) Cash: On hand and due from banks $ 2,671 2,170 Interest-bearing deposits 1,837 2,240 Federal funds sold 394 950 Securities available for sale, amortized cost of $41,370, and $2,922, respectively (note 2) 40,266 3,030 Investment securities, fair value of $23,651 and $13,652, respectively (note 3) 24,109 13,918 Mortgage-backed securities, fair value of $97,627 and $152,621, respectively (notes 4 and 11) 100,195 156,775 Loans receivable, net (notes 5 and 11) 278,042 232,089 Federal Home Loan Bank stock, at cost (note 17) 3,141 2,914 Investments in real estate, net (note 6) 5,670 5,828 Investments in and advances to real estate joint ventures (note 7) 1,270 2,215 Property and equipment, net (note 8) 1,198 965 Prepaid expenses and other assets 612 624 Income taxes receivable -- 380 Deferred income taxes (note 12) 1,866 2,076 ---------- ---------- $ 461,271 426,174 ========== ========== Liabilities and Stockholders' Equity Liabilities: Deposits (note 9) $ 313,083 314,613 Securities sold under agreements to repurchase (note 10) 34,445 34,338 Advances from the Federal Home Loan Bank of Atlanta (note 11) 62,824 44,137 Drafts payable 859 1,288 Advance payments by borrowers for taxes and insurance 1,760 1,852 Accrued expenses and other liabilities 1,030 987 ---------- ---------- Total liabilities 414,001 397,215 ---------- ---------- Stockholders' equity (notes 13 and 17): Serial preferred stock, 10,000,000 shares authorized, none issued. -- -- Common stock, $1 par value, 20,000,000 shares authorized, 2,052,000 shares issued and outstanding at July 31, 1995 -- 2,052 Common stock, $.01 par value, 8,000,000 shares authorized, 3,980,500 shares issued and 3,781,475 shares outstanding at July 31, 1996 40 -- Additional paid-in capital 30,705 7,652 Unearned common stock acquired by management recognition and retention plans (77) (132) Unearned employee stock ownership plan (ESOP) shares (1,629) -- Treasury stock at cost, 199,025 shares (2,040) -- Retained income-- substantially restricted 21,970 20,662 Net unrealized holding loss on securities, net of income taxes (1,699) (1,275) ---------- ---------- Total stockholders' equity 47,270 28,959 Commitments (notes 5, 8, 13 and 14) $ 461,271 426,174 ========== ========== See accompanying notes to consolidated financial statements. 16 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS Years ended July 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- (In Thousands) Interest income: Loans receivable $ 21,754 19,036 18,459 Mortgage-backed securities 9,630 10,355 7,665 Investment securities 1,255 831 432 Other 779 747 769 --- ------- ------- Total interest income 33,418 30,969 27,325 -------- ------- ------- Interest expense: Deposits (note 9) 15,825 14,923 13,927 Borrowed funds 4,728 4,300 2,314 -------- ------- ------- Total interest expense 20,553 19,223 16,241 -------- ------- ------- Net interest income 12,865 11,746 11,084 Provision for loan losses 772 3,386 1,989 -------- ------- ------- Net interest income after provision for loan losses 12,093 8,360 9,095 -------- ------- ------- Noninterest income: Fees and service charges 640 592 630 Gain (loss) on sales of: Loans receivable, net 41 20 179 Mortgage-backed securities, net (558) (5) 1,100 Investment securities, net (14) 15 (46) Other 184 318 254 --- ------- ------- Total noninterest income 293 940 2,117 -------- ------- ------- Noninterest expenses: Salaries and employee benefits 4,276 4,066 3,859 Net occupancy 1,341 1,300 1,313 Professional services 380 399 367 Advertising 684 442 375 Federal deposit insurance premiums 772 809 831 Furniture, fixtures and equipment 324 286 282 Equity in net loss of real estate joint ventures (note 7) 193 288 114 Loss on investments in real estate (note 6) 390 330 371 Other 1,679 1,420 1,716 ----- ------- ------- Total noninterest expenses 10,039 9,340 9,228 -------- ------- ------- Income (loss) before income taxes 2,347 (40) 1,984 Income tax provision (benefit) (note 12) 801 (50) 695 -------- ------- ------- Net income $ 1,546 10 1,289 ======== ======= ======= Net income per share of common stock (note 13): From date of conversion .36 -- .41 ======= ======= ======= Proforma .47 N/A .67 === ======= === See accompanying notes to consolidated financial statements. 17 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended July 31, 1996, 1995 and 1994 Net Unearned unrealized common holding stock gains Additional acquired Unearned (losses) on Common paid-in by ESOP Treasury Retained securities, stock capital MRRP shares stock income net Total ----- ------- ---- ------ ----- ------ --- ----- (In Thousands) Balance at July 31, 1993 $ -- -- -- -- -- 21,193 -- 21,193 Unrealized holding gain on securities available for sale, net of income taxes, recognized upon adoption of Statement 115 (note 1) -- -- -- -- -- -- 924 924 Change in net unrealized holding losses on securities, net of income taxes (note 2) -- -- -- -- -- -- (2,372) (2,372) Proceeds from common stock offering, net of conversion costs (note 13) 2,025 7,409 -- -- -- (1,125) -- 8,309 Common stock acquired by management recognition and retention plan (MRRP) (note 13) 27 243 (270) -- -- -- -- -- Cash dividends declared (note 13) -- -- -- -- -- (276) -- (276) MRRP -- -- 93 -- -- -- -- 93 Net income-- 1994 -- -- -- -- -- 1,289 -- 1,289 ----- ----- ---- ----- ------ ------ ------ ------ Balance at July 31, 1994 2,052 7,652 (177) -- -- 21,081 (1,448) 29,160 Change in net unrealized gains on securities, net of income taxes (note 2) -- -- -- -- -- -- 115 115 Amortization of net unrealized holding loss (note 4) -- -- -- -- -- (58) 58 -- Cash dividends declared (note 13) -- -- -- -- -- (371) -- (371) MRRP -- -- 45 -- -- -- -- 45 Net income-- 1995 -- -- -- -- -- 10 -- 10 ----- ----- ---- ----- ------ ------ ------ ------ Balance at July 31, 1995 2,052 7,652 (132) -- -- 20,662 (1,275) 28,959 Changes in net unrealized losses on securities, net of income taxes (note 2) -- -- -- -- -- -- (570) (570) Amortization of net unrealized holding loss (note 4) -- -- -- -- -- (146) 146 -- Proceeds from common stock offering, net of expenses (note 13) (2,012) 23,052 -- -- -- -- -- 21,040 Cash dividends declared (note 13) -- -- -- -- -- (92) -- (92) MRRP -- -- 55 -- -- -- -- 55 Borrowings for employee stock ownership plan (ESOP) (note 15) -- -- -- (1,746) -- -- -- (1,746) Compensation expense-- ESOP -- 1 -- 117 -- -- -- 118 Purchase of common stock -- -- -- -- (2,040) -- -- (2,040) Net income-- 1996 -- -- -- -- -- 1,546 -- 1,546 ----- ----- ---- ----- ------ ------ ------ ------ Balance at July 31, 1996 $ 40 30,705 (77) (1,629) (2,040) 21,970 (1,699) 47,270 ===== ====== === ====== ====== ====== ====== ====== 18 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended July 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- (In Thousands) Cash flows from operating activities: Net income $ 1,546 10 1,289 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 532 483 475 Noncash compensation under stock-based benefit plans 173 45 93 Amortization of loan fees (398) (437) (727) Amortization of premiums and discounts, net 177 (38) 505 Provision for losses on loans and investments in real estate 930 3,430 2,180 (Gain) loss on sales of assets, net 531 (30) (1,232) Loans originated for sale (2,754) (3,990) (5,489) Sales of loans originated for sale 4,194 2,159 8,710 Deferred income taxes 409 (138) (7) Decrease in prepaid expenses and other assets 12 202 356 Increase in accrued expenses and other liabilities 43 163 200 Decrease (increase) in income taxes receivable 380 (112) 830 Federal Home Loan Bank stock purchases, net (227) -- -- Federal Home Loan Bank stock dividends -- -- (72) Other, net (338) 66 (77) -------- ------- ------- Net cash provided by operating activities 5,210 1,813 7,034 -------- ------- ----- Cash flows from investing activities: Sales of investment securities available for sale 969 1,015 14,016 Maturities of investment securities available for sale -- 842 1,000 Purchases of investment securities available for sale (2,000) (842) (1,409) Sales of mortgage-backed securities available for sale 56,036 3,100 49,601 Repayments of mortgage-backed securities available for sale 4,082 432 14,990 Purchases of mortgage-backed securities available for sale (10,989) (3,894) (45,156) Maturities of investment securities 11,000 -- 2,000 Purchases of investment securities (27,176) (6,983) (5,208) Repayments of mortgage-backed securities 7,741 14,569 24,800 Purchases of mortgage-backed securities (31,714) (13,470) (86,100) Loan principal repayments 40,659 27,763 45,753 Loan originations (73,671) (43,092) (37,993) Loan purchases (17,972) (11,216) -- Increase in deferred loan fees, net 515 533 388 (Continued) 19 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS 1996 1995 1994 ---- ---- ---- (In Thousands) Cash flows from investing activities, continued: Decrease in investments in real estate $ 2,960 1,151 979 Decrease in investments in and advances to real estate joint ventures 752 1,173 786 Purchases of property and equipment (764) (438) (230) -------- ------- ------- Net cash used in investing activities (39,572) (29,357) (21,783) -------- ------- ------- Cash flows from financing activities: Net (decrease) increase in deposits (1,530) 5,624 (8,722) Net increase (decrease) in securities sold under agreements to repurchase 107 26,871 (7,139) Proceeds from Federal Home Loan Bank advances 215,147 123,698 88,600 Repayment of Federal Home Loan Bank advances (196,460) (130,291) (64,232) (Decrease) increase in drafts payable (429) 111 65 (Decrease) increase in advance payments by borrowers for taxes and insurance (92) 153 47 Proceeds from common stock offering 21,040 -- 8,309 Common stock acquired by ESOP (1,746) -- -- Dividends paid on common stock (93) (371) (182) Purchase of treasury stock (2,040) -- -- -------- ------- ------- Net cash provided by financing activities 33,904 25,795 16,746 -------- ------- ------- Net (decrease) increase in cash and cash equivalents (458) (1,749) 1,997 Cash and cash equivalents at beginning of year 5,360 7,109 5,112 -------- ------- ------- Cash and cash equivalents at end of year $ 4,902 5,360 7,109 ======= ===== ===== Supplemental information: Interest paid on deposits and borrowed funds $ 20,457 19,152 16,192 Income taxes (received) paid, net $ (104) 165 (128) ======= ===== ===== Noncash activities: Loans transferred to real estate acquired through foreclosure $ 2,960 1,400 489 ======= ===== =====
20 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1996, 1995, and 1994 (1) Description of Business, Summary of Significant Accounting Policies and Other Matters Description of Business American National Bancorp, Inc. (the Company) is the holding company of American National Savings Bank, F.S.B. (the Bank). The Bank provides a full range of banking services to individual and corporate customers through its subsidiaries and branch offices in Maryland. The Bank is subject to competition from other financial and mortgage institutions. The Bank is subject to the regulations of certain agencies of the federal government and undergoes periodic examination by those agencies. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank and the Bank's subsidiaries, American National Insurance Agency, Inc. (ANIA), ANSB Corporation and National Development Corporation (NDC). ANIA acts as agent in offering annuity and mortgage life insurance products to customers of the Company. ANSB Corporation was incorporated in June 1994 for the purpose of holding investment securities for the Company. NDC is a partner in various real estate joint ventures formed for the purpose of acquiring and developing real estate for sale. All significant intercompany accounts and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and income and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of investments in real estate. In connection with these determinations, management obtains independent appraisals for significant properties and prepares fair value analyses as appropriate. Management believes that the allowances for losses on loans and investments in real estate are adequate. While management uses available information to recognize losses on loans and investments in real estate, future additions to the allowances may be necessary based on changes in economic conditions, particularly in the State of Maryland. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and investments in real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. 21 (1) Description of Business, Summary of Significant Accounting Policies and Other Matters, Continued Investment and Mortgage-Backed Securities Debt securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost. Debt and equity securities that are purchased and held principally for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings. All other debt and equity securities are considered available for sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity (net of tax effects). If a decline in value of an individual security classified as held to maturity or available for sale is judged to be other than temporary, the cost basis of that security is reduced to its fair value and the amount of the write-down is included in earnings. Fair value is determined based on bid prices published in financial newspapers or bid quotations received from securities dealers. For purposes of computing realized gains or losses on the sales of investments, cost is determined using the specific identification method. Premiums and discounts on investment and mortgage-backed securities are amortized over the term of the security using methods that approximate the interest method. On August 8, 1994 the Company transferred approximately $36.3 million of its collateralized mortgage obligations (CMOs), net of unrealized loss of approximately $1.8 million, from the available for sale portfolio to held to maturity. On that date certain accounting issues were resolved permitting the Company to transfer substantially all of these securities from the available for sale portfolio to the held to maturity portfolio as originally intended. The unrealized loss at the time of the transfer is being amortized over the remaining lives of the securities as an adjustment of yield. The unrealized loss, net of taxes, was $1.1 million at the date of transfer. The unrealized loss has been recorded as a component of stockholders' equity and is being reduced in subsequent periods through the amortization. In November 1995, the Financial Accounting Standards Board announced its intention to allow a one-time change in the classification of securities, providing such change was effected by December 31, 1995. Management utilized this opportunity and designated as available-for-sale approximately $87.1 million of investment and mortgage-backed securities previously classified as held to maturity with an unrealized loss of approximately $348,000. Loans Held for Sale Loans held for sale are carried at the lower of cost or market on an aggregate basis. Investments in and Advances to Real Estate Joint Ventures Investments in and advances to real estate joint ventures are accounted for using the equity method. The carrying values are subject to subsequent adjustment to the extent they exceed net realizable value. Interest income and fees on loans to real estate joint ventures are deferred. Such interest and fees, in excess of related capitalized interest cost, are recognized as the loans are repaid. 22 (1) Description of Business, Summary of Significant Accounting Policies and Other Matters, Continued Investments in and Advances to Real Estate Joint Ventures, continued Interest costs are capitalized based on the Company's average cost of funds and its average investment in and advances to real estate joint ventures with development in progress. Interest capitalized was approximately $56,000, $95,000, and $160,000 for the years ended July 31, 1996, 1995, and 1994, respectively. Investments in Real Estate Ground rents are carried at cost. Real estate acquired through foreclosure is recorded at the lower of cost or estimated fair value less estimated costs to sell. Management estimates fair value based on appraisals and/or cash flow analyses. Costs relating to improving such properties are capitalized and costs relating to holding such properties are charged to expense. Property and Equipment Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are recorded on a straight-line basis over the estimated useful lives of the assets or leases as appropriate. Additions and improvements are capitalized and charges for repairs and maintenance are expensed when incurred. Gains or losses on sales of property and equipment are recognized upon sale. Loans Receivable Origination and commitment fees and direct origination costs are deferred and amortized to income over the contractual lives of the related loans using the interest method. Under certain circumstances, commitment fees are recognized over the commitment period or upon expiration of the commitment. Unamortized loan fees are recognized in income when the related loans are sold or prepaid. Interest on potential problem loans is not accrued when, in the opinion of management, the full collection of principal or interest is in doubt. Any amounts ultimately collected on such loans is recorded as a reduction of principal, as interest income or combination thereof depending on management's evaluation of the recoverability of the loan principal. Provisions for loan losses are charged to operations based on management's review of the loan portfolio and analyses of the borrowers' ability to repay, past loan loss and collection experience, risk characteristics of individual loans or groups of similar loans and underlying collateral, current and prospective economic conditions and status of nonperforming loans. Loans or portions thereof are charged-off when considered, in the opinion of management, uncollectible. 23 (1) Description of Business, Summary of Significant Accounting Policies and Other Matters, Continued Provision for Loan Losses, continued The Company adopted the provisions of Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" and by Statement 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" (collectively referred to as "Statement 114") as of August 1, 1995. Statement 114 addresses the accounting by creditors for impairment of certain loans. It is generally applicable for all loans except large groups of smaller-balance homogenous loans, including residential mortgage loans and consumer installment loans that are collectively evaluated for impairment. It also applies to all loans that are restructured in a troubled debt restructuring involving a modification of terms. However, if a loan that was restructured in a troubled debt restructuring involving a modification of terms before the effective date of Statement 114 is not impaired based on the terms specified by the restructuring agreement, a creditor may continue to account for the loan in accordance with the provisions of Statement 15, "Accounting for Troubled Debt Restructurings" prior to its amendment by Statement 114. Statement 114 requires that impaired loans be measured on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are generally placed in nonaccrual status on the earlier of the date that management determines that the collection of principal and/or interest is in doubt or the date that principal or interest is 90 days or more past-due. An allocated valuation allowance, if any, is included in the Bank's allowance for credit losses. An impaired loan is charged-off when the loan, or a portion thereof, is considered uncollectible or transferred to real estate owned. The Bank recognized interest income for impaired loans consistent with its method for nonaccrual loans. Specifically, interest payments received are recognized as interest income or, if the ultimate collectibility of principal is in doubt, are applied to principal. Changes resulting from the implementation of SFAS Nos. 114 and 118 did not materially impact the financial condition or results of operations of the Company as of and for the year ended July 31, 1996. Income Taxes Deferred income taxes are recognized, with certain exceptions, for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets (including tax loss carryforwards) are recognized only to the extent that it is more likely than not that such amounts will be realized based on consideration of available evidence, including tax planning strategies and other factors. 24 (1) Summary of Significant Accounting Policies and Other Matters, Continued Income Taxes, continued A continuing exception allows qualified thrift lenders not to provide a deferred tax liability on certain bad debt reserves for tax purposes that arose in fiscal years beginning before July 31, 1988. Such bad debt reserves for the Company, which are included in retained income, amounted to approximately $11.5 million at July 31, 1996 with an income tax effect of approximately $4.4 million. As specified in legislation enacted by Congress and signed by the President on August 20, 1996, this bad debt reserve would become taxable if the Bank fails to meet certain conditions. Changes in tax laws or rates on deferred tax assets and liabilities are recognized in the period that includes the enactment date. Statement of Cash Flows For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents. Cash equivalents consist of federal funds sold and certain securities purchased under agreements to resell. Interest Rate Cap Agreements The Company may use interest rate cap agreements to hedge interest rate risk associated with its money market and short-term certificate of deposit accounts. The premiums paid for such agreements are amortized over the life of the agreements using the straight-line method. The interest differential received, if any, on interest rate cap agreements is recorded as an adjustment to interest expense. Reclassifications Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform to the 1996 presentation. 25 (2) Securities Available for Sale The amortized cost and fair value of securities available for sale are summarized as follows at July 31:
1996 Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value ---- ----- ------ ----- (In Thousands) U.S. government and agency obligations $ 7,069 -- (262) 6,807 Federal National Mortgage Association (FNMA) mortgage-backed securities 17,552 -- (654) 16,898 Federal Home Loan Mortgage Corporation (FHLMC) mortgage- backed securities 4,527 -- (166) 4,361 Government National Mortgage Association (GNMA) mortgage- backed securities 3,698 37 -- 3,735 FNMA collateralized mortgage obligations 6,510 33 (88) 6,455 FHLMC collateralized mortgage obligations 1,676 -- (4) 1,672 -------- ---- ------- ------- 41,032 70 (1,174) 39,928 Accrued interest receivable 338 -- -- 338 -------- ---- ------- ------- $ 41,370 70 (1,174) 40,266 ======== ==== ===== ======= 1995 Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value (In Thousands) FHLMC Collateralized Mortgage Obligations $ 2,909 108 -- 3,017 Accrued interest receivable 13 -- -- 13 -------- ---- ---- ------- $ 2,922 108 -- 3,030 ======== ==== ===== ======= The proceeds from the sales of securities available for sale and the gross realized gains and losses were $4.75 million, $228,000 and $800,000, respectively, for the year ended July 31, 1996, $4.1 million, $25,000 and $15,000, respectively, for the year ended July 31, 1995 and $63.6 million, $1.3 million and $221,000, respectively, for the year ended July 31, 1994. 26 (2) Securities Available for Sale, Continued A summary of maturities of securities available for sale as of July 31, 1996: Amortized cost Fair value ---- ---------- Due within 12 months $2,9893,002 Due beyond 12 months but within 5 years 19,236 18,530 Due beyond 5 years but within 10 years 5,839 5,601 Beyond 10 years 13,306 13,133 --------- -------- $ 41,370 40,266 ========= ======== (3) Investment Securities The amortized cost and fair value of investment securities are summarized as follows at July 31: 1996 Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value ---- ----- ------ ----- (In Thousands) U. S. government and agency obligations due: 1 through 5 years $ 1,500 -- (82) 1,418 5 through 10 years 9,947 -- (28) 9,919 Greater than 10 years 12,235 -- (348) 11,887 -------- ---- --- ------- 23,682 -- (458) 23,224 Accrued interest receivable 427 -- -- 427 -------- ---- ----- ------- $ 24,109 -- (458) 23,651 ======== ====== ===== ======= 1995 Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value ---- ----- ------ ----- (In Thousands) U. S. government and agency obligations due: 1 through 5 years $ 4,486 -- (133) 4,353 5 through 10 years 5,129 -- (149) 4,980 Greater than 10 years 4,000 16 -- 4,016 -------- ---- ----- ------- 13,615 16 (282) 13,349 Accrued interest receivable 303 -- -- 303 -------- ---- ----- ------- $ 13,918 16 (282) 13,652 ======== ====== ===== ======= There were no sales of investment securities held to maturity during the years ended July 31, 1996, 1995 and 1994. 27 (4) Mortgage-Backed Securities The amortized cost and fair value of mortgage-backed securities are summarized as follows at July 31: 1996 Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value ---- ----- ------ ----- (In Thousands) FNMA $ 27,623 -- (450) 27,173 FHLMC 8,222 -- (92) 8,130 FNMA Collateralized Mortgage Obligations 28,091 -- (919) 27,172 FHLMC Collateralized Mortgage Obligations 35,731 -- (1,107) 34,624 Other Collateralized Mortgage Obligations 52 -- -- 52 ---------- ----- ------- -------- 99,719 -- (2,568) 97,151 Accrued interest receivable 476 -- -- 476 ---------- ----- ------- -------- $ 100,195 -- (2,568) 97,627 ======== ====== ======= ======== 1995 Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value (In Thousands) FNMA $ 65,372 59 (1,992) 63,439 GNMA 13,710 258 (5) 13,963 FHLMC 21,359 121 (214) 21,266 FNMA Collateralized Mortgage Obligations 21,635 29 (1,152) 20,512 FHLMC Collateralized Mortgage Obligations 33,803 222 (1,481) 32,544 Other Collateralized Mortgage Obligations 142 1 -- 143 ---------- ----- -------- ---------- 156,021 690 (4,844) 151,867 Accrued interest receivable 754 -- -- 754 ---------- ----- -------- ---------- $ 156,775 690 (4,844) 152,621 ======== ====== ======= ======== There were no sales of mortgage-backed securities held to maturity during the years ended July 31, 1996, 1995 and 1994. 28 (4) Mortgage-Backed Securities, Continued A summary of maturities of mortgage-backed securities as of July 31, 1996: Amortized cost Fair value ---- ---------- Due within 12 months $ 533 533 Due beyond 12 months but within 5 years 5,378 5,217 Due beyond 5 years but within 10 years 6,939 6,651 Beyond 10 years 87,345 85,226 -------- -------- $ 100,195 97,627 ======== ======== The amortized cost of mortgage-backed securities at July 31, 1996 includes unrealized holding losses totaling approximately $1.6 million for securities transferred from the available for sale portfolio. The Company had pledged as collateral for advances under its short-term line of credit from the Federal Home Loan Bank of Atlanta, FNMA mortgage-backed securities and FHLMC and FNMA CMOs with amortized cost and fair values of $29.7 million and $28.8 million, respectively, at July 31, 1996 and FHLMC and FNMA mortgage-backed securities and FHLMC and FNMA CMOs with amortized cost and fair values of $36.5 million and $35.1 million, respectively, at July 31, 1995. In addition, FNMA and FHLMC CMOs and mortgage-backed securities were pledged as collateral for reverse repurchase agreements with amortized cost and fair values of $47.2 million and $45.6 million, respectively, at July 31, 1996; and $38.5 million and $36.8 million, respectively, at July 31, 1995. (5) Loans Receivable Substantially all of the Company's loans receivable are mortgage loans secured by residential and commercial real estate properties located in the state of Maryland. Loans are extended only after evaluation by management of customers' creditworthiness and other relevant factors on a case-by-case basis. The Company generally does not lend more than 90% of the appraised value of a property and requires private mortgage insurance on residential mortgages with loan-to-value ratios in excess of 80%. In addition, the Company generally obtains personal guarantees of repayment from borrowers and/or others for construction, commercial and multi-family residential loans and disburses the proceeds of construction and similar loans only as work progresses on the related projects. 29 (5) Loans Receivable, Continued Residential lending is generally considered to involve less risk than other forms of lending, although payment experience on these loans is dependent to some extent on economic and market conditions in the Company's primary lending area. Commercial and construction loan repayments are generally dependent on the operations of the related properties or the financial condition of its borrower or guarantor. Accordingly, repayment of such loans can be more susceptible to adverse conditions in the real estate market and the regional economy. Loans receivable are summarized as follows at July 31: 1996 1995 ---- ---- (In Thousands) First mortgage loans: One-to-four family residential $ 156,374 123,413 Multi-family residential 35,930 39,361 Commercial 37,695 38,894 Construction 23,320 5,617 Land development 14,183 10,854 FHA insured and VA guaranteed 11,974 10,372 Loans held for sale 350 1,831 ---------- ---------- Total first mortgage loans 279,826 230,342 Consumer and other loans 13,026 10,644 Second mortgage loans 3,434 1,961 Loans secured by deposit accounts 508 222 Participation in loans fully guaranteed by Agency for International Development 152 179 Accrued interest receivable 1,547 1,323 ---------- ---------- 298,493 244,671 ---------- ---------- Less: Unearned loan fees, net 1,202 1,083 Undisbursed portion of loans in process 14,837 5,138 Allowance for loan losses 4,412 6,361 ---------- ---------- 20,451 12,582 ---------- ---------- Loans receivable, net $ 278,042 232,089 ========== ========== Nonperforming and restructured loans are summarized as follows at July 31: 1996 1995 ---- ---- (In Thousands) Nonaccruing loans $ 3,773 8,437 Accruing loans 90 days or more delinquent 136 170 Restructured loans 1,636 1,870 -------- -------- $ 5,545 10,477 ======== ======== 30 (5) Loans Receivable, Continued Interest income that would have been recorded under the original terms of nonaccruing and restructured loans and the interest income actually recognized are summarized below for the years ended July 31: 1996 1995 1994 ---- ---- ---- (In Thousands) Interest income that would have been recorded $ 567 898 1,072 Interest income recognized 151 274 650 ------ ------ ------- Interest income foregone $ 416 624 422 ====== ====== ======= The Company is not committed to lend additional funds to debtors whose loans have been restructured. In addition to the loans included above as nonperforming and restructured, the Company, through its normal asset review process, has identified certain loans which management believes involve a degree of risk warranting additional attention. Included in loans at July 31, 1996 are approximately $5.5 million of such loans which, while current in required payments, have exhibited some potential weaknesses that, if not corrected, could increase the level of risk in the future. In addition, at July 31, 1996 management has identified approximately $807,000 of loans which have exhibited weaknesses in the paying capacity of the borrower or the collateral pledged which may result in a loss if such deficiencies are not corrected. Included in the Company's nonperforming loans above are certain impaired loans as defined by Statement 114. Impaired loans and the allocated valuation allowances at July 31, 1996 were: Loan Valuation balance allowance ------- --------- (In thousands) Impaired with valuation allowance $ 2,953 1,368 Impaired without valuation allowance -- -- Total impaired loans $ 2,953 1,368 ===== ===== The allocated valuation allowance for impaired loans at July 31, 1996, and activity related thereto for the year ended July 31, 1996 is included in the allowance for loan losses summary. The average recorded investment in impaired loans and the amount of interest income recognized for the year ended July 31, 1996 were (in thousands): Average recorded investment in impaired loans $ 3,988 Interest income recognized during impairment -- 31 (5) Loans Receivable, Continued Activity in the allowance for loan losses is summarized as follows for the years ended July 31: 1996 1995 1994 ---- ---- ---- (In Thousands) Balance at beginning of year $ 6,361 3,669 2,326 Provision charged to expense 772 3,386 1,989 Charge-offs (3,043) (1,033) (688) Recoveries 322 339 42 ------ ------ ----- Balance at end of year $ 4,412 6,361 3,669 ====== ====== ===== Loans serviced for others, which are not included in the Company's assets, were approximately $50.0 million, $50.3 million and $55.8 million at July 31, 1996, 1995 and 1994, respectively. A fee is charged for such servicing based on the unpaid principal balances. Commitments to extend credit are agreements to lend to customers, provided that terms and conditions established in the related contracts are met. The Company had the following contractual commitments to extend credit, exclusive of undisbursed loans in process at July 31: 1996 1995 ------------------ ------------------- Fixed Floating Fixed Floating Rate Rate Rate Rate ---- ---- ---- ---- (In Thousands) Mortgage loans $ 3,480 5,440 4,896 345 Lines of credit -- 9,219 -- 7,629 Irrevocable letters of credit -- 2,097 -- 1,895 ======= ====== ====== ======== The interest rate ranges on fixed rate mortgage loan commitments were 7.125% to 9.25% at July 31, 1996 and 6.75% to 8.875% at July 31, 1995. Commitments for mortgage loans generally expire in 60 days. Commitments under lines of credit are generally longer than one year and are subject to periodic re-evaluation and cancellation. Irrevocable letters of credit expire within two years. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The commitments may be funded from principal repayments on loans and mortgage-backed securities, excess liquidity, savings deposits and, if necessary, borrowed funds. Substantially all of the Company's commitments at July 31, 1996 and 1995 are for loans which would be secured by real estate with appraised values in excess of the commitment amounts. The Company's exposure to credit loss under these contracts in the event of nonperformance by the other parties, assuming that the collateral proves to be of no value, is represented by the contractual amount of those instruments. 32 (6) Investments in Real Estate Investments in real estate are summarized as follows at July 31: 1996 1995 ---- ---- (In Thousands) Ground rents $ 4,904 4,938 Acquired through foreclosure 766 890 Investments in real estate, net $ 5,670 5,828 ===== ===== Changes in the allowance for losses on investments in real estate are summarized as follows at July 31: 1996 1995 1994 ---- ---- ---- (In Thousands) Balance at beginning of year $ -- 8 -- Provision charged to expense 158 44 191 Charge-offs (158) (52) (183) -- -- -- Balance at end of year $ -- -- 8 ===== ==== ==== Loss on investments in real estate consists of the following for the years ended July 31: 1996 1995 1994 ---- ---- ---- (In Thousands) Operation of investments in real estate $ 232 286 180 Provision for losses on investments in real estate 158 44 191 --- ---- ----- $ 390 330 371 === ==== ===== 33 (7) Investments in and Advances to Real Estate Joint Ventures National Development Corporation is a partner in various real estate joint ventures formed for the purpose of acquiring and developing real estate for sale. Combined condensed financial information for the joint ventures is presented below as of and for the years ended July 31: 1996 1995 ---- ---- (In Thousands) Assets: Real estate under development $ 1,378 2,688 Other 204 431 ------- ----- $ 1,582 3,119 ======= ===== Liabilities: Due to American National Savings Bank, F.S.B. $701 1,618 Due to others 382 763 Partners' equity: National Development Corporation 499 738 Other -- -- ------- ----- $ 1,582 3,119 ======= ===== 1996 1995 1994 ---- ---- ---- (In Thousands) Operations Sales $ 3,085 3,234 5,270 Costs of sales 2,918 3,067 4,686 ------ ------ ------- 167 167 584 Other income 9 8 12 Other expense (415) (837) (811) ------ ------ ------- Net loss $ (239) (662) (215) 34 (8) Property and Equipment Property and equipment are summarized as follows at July 31: Estimated 1996 1995 useful lives ---- ---- ------------ (In Thousands) Leasehold improvements $ 3,133 2,920 5 - 15 years Furniture and equipment 3,233 2,701 3 - 10 years Automobiles 78 57 3 years ------- ------- 6,444 5,678 Less accumulated depreciation and amortization 5,246 4,713 ------- ------- Property and equipment, net $ 1,198 965 ======= ======= At July 31, 1996 the Company was obligated under noncancellable long-term operating leases for the main office, operations center and eight of its branch offices. The leases, five of which have renewal options, expire on various dates extending to 2007 and have aggregate minimum lease payments for succeeding fiscal years approximately as follows (in thousands): 1997 $ 1,051 1998 1,034 1999 998 2000 893 2001 800 Subsequent to 2001 1,600 ----- Total minimum lease payments $ 6,376 ===== Rent expense for the years ended July 31, 1996, 1995 and 1994 was approximately $980,000, $949,000, and $982,000, respectively. 35 (9) Deposits Deposits are summarized as follows at July 31: Weighted average rate 1996 1995 Type of -------------------- ---------------------- service 1996 1995 Amount % Amount % ------- ---- ---- ------- ----- ------ ----- (Dollars in Thousands) Certificate 6.00% 6.16% $ 216,119 69.0% $ 210,906 67.0% Noncertificate: Passbook 3.04 3.13 40,781 13.0 41,138 13.1 NOW 1.56 1.65 15,038 4.8 13,991 4.5 Money Fund 3.03 4.27 41,145 13.2 48,578 15.4 ---------- ------ ---------- ------- $ 313,083 100.0% $ 314,613 100.0% ========== ===== ========= ======= Certificate accounts maturing: Under 12 months $ 118,772 55.0% $ 108,226 51.3% 13 months to 24 months 41,271 19.1 38,388 18.2 25 months to 36 months 18,552 8.6 24,820 11.8 37 months to 48 months 10,172 4.7 13,668 6.5 49 months to 60 months 9,539 4.4 9,296 4.4 Beyond 60 months 17,813 8.2 16,508 7.8 ---------- ------ ---------- ------- $ 216,119 100.0% $ 210,906 100.0% ========== ====== ========== ======= The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $22.4 million and $21.0 million at July 31, 1996 and 1995, respectively. Interest expense on deposits is summarized as follows for the years ended July 31: 1996 1995 1994 ---- ---- ---- (In Thousands) Certificate $ 12,847 11,343 10,399 Passbook 1,230 1,332 1,422 NOW 237 240 264 Money Fund 1,511 2,008 1,842 ----- ----- ----- $ 15,825 14,923 13,927 ====== ====== ====== 36 (9) Deposits, Continued The Company may use interest rate caps in the management of its interest rate risk. Interest rate caps purchased by the Company enable it to limit its interest rate risk by transferring a portion of the risk of increasing interest rates on money fund and short-term certificate accounts to the issuer of the interest rate caps. The Company's interest rate caps provide for the Company to receive variable interest rate payments based on the spread between the variable three-month London InterBank Offered Rate (LIBOR) and the strike price of the caps if the variable three-month LIBOR is higher than the strike rate. The Company held no interest rate caps at July 31, 1996 and 1995 and held interest rate caps with a notional principal amount of $30 million at July 31, 1994. The range of the strike rates on the Company's interest rate caps was 5.5% at July 31, 1994. In the opinion of management, at July 31, 1994, the likelihood of the variable three-month LIBOR rate exceeding the strike rates during the remaining term of the interest rate caps was remote. Accordingly, the remaining premiums were charged to expense in 1994. Amortization expense was $200,000 in 1994. (10) Securities Sold Under Agreements to Repurchase The Company sells securities under agreements to repurchase (reverse repurchase agreements). These fixed-coupon reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities in the statements of financial condition. The dollar amount of securities underlying the agreements remains in the asset accounts. The securities underlying the agreements were delivered to the dealers which arranged the transactions. The dealers may have loaned such securities to other parties in the normal course of their operations and have agreed to resell to the Company either substantially identical securities or the same securities at the maturities of the agreements. The amortized cost and market values of such securities were $47.2 million and $45.6 million, respectively, as of July 31, 1996, and $38.5 million and $36.8 million, respectively, as of July 31, 1995. At July 31, 1996 and 1995 the securities sold under agreements to repurchase involved the purchase of the same securities. The weighted average interest rate of the agreements was 5.60% at July 31, 1996 and the agreements mature within one month. Certain additional information regarding securities sold under agreements to repurchase is as follows at July 31: 1996 1995 1994 ---- ---- ---- (In Thousands) Maximum amount outstanding at month-end $ 39,011 34,338 14,808 Approximate average balance 34,005 20,741 9,307 ======== ====== ======= 37 (11) Advances from the Federal Home Loan Bank of Atlanta Advances from the Federal Home Loan Bank of Atlanta (FHLBA) are summarized as follows at July 31: 1996 1995 ---- ---- (In Thousands) 5.97%-- 6.83%, due in 1995 $ -- 14,000 7.49%-- 7.55%, due in 1995 -- 5,600 4.57%-- 5.19%, due in 1996 -- 4,000 5.53%-- 6.50%, due in 1996 7,373 4,675 6.93%-- 7.46%, due in 1996 -- 4,000 4.89%-- 5.58%, due in 1997 17,550 4,000 5.84%-- 6.21%, due in 1997 10,500 1,000 6.27%-- 7.09%, due in 1997 4,476 5,112 5.45%-- 6.14%, due in 1998 9,000 -- 7.32%, due in 1998 1,000 1,000 4.64%-- 5.42%, due in 1999 10,675 -- 6.43%, due in 2006 1,500 -- 5.00%, due in 2014 750 750 --------- -------- $ 62,824 44,137 ========= ======== The Company has a $95 million credit availability agreement with the FHLBA which is secured under a blanket floating line security agreement or by mortgage-backed and investment securities specifically pledged as draws are made. Under the blanket floating lien security agreement with the FHLBA, the Company is required to maintain, as collateral for its advances, qualifying first mortgage loans or mortgage-backed securities in an amount equal to 133% of the advances. In addition, its stock in FHLBA is pledged as collateral for its advances. Interest on advances is at the FHLBA's established rate for advances with the same maturity or at the FHLBA's variable rate. (12) Income Taxes The income tax provision (benefit) is composed of the following for the years ended July 31: 1996 1995 1994 ---- ---- ---- (In Thousands) Current: Federal $ 370 126 575 State (28) (30) 127 ----- ---- ---- 342 96 702 ----- ---- --- Deferred: Federal 376 (119) (6) State 83 (27) (1) ----- ---- ---- 459 (146) (7) ----- --- ---- Income tax provision (benefit) $ 801 (50) 695 ===== ==== ==== 38 (12) Income Taxes, Continued The tax effects of temporary differences between the financial reporting basis and income tax basis of assets and liabilities relate to the following at July 31: 1996 1995 ---- ---- (In Thousands) Net unrealized holding losses on securities $ 1,056 807 Allowances for losses on loans and investments in real estate 773 948 Interest and fees on loans 279 545 Equity in net income of joint ventures, net -- 137 Other assets 336 299 ------- ------ Total deferred tax assets 2,444 2,736 Federal Home Loan Bank stock dividends 353 477 Other liabilities 225 183 ------- ------ Total deferred tax liabilities 578 660 ------- ------ $ 1,866 2,076 ======= ====== A reconciliation between the income tax (benefit) provision and the amount computed by multiplying income before income taxes by the statutory federal income tax rate of 34% is as follows for the years ended July 31: 1996 1995 1994 ---- ---- ---- (In Thousands) Federal income tax provision (benefit) at statutory rate $ 798 (14) 675 Adjustments: Bad debt deduction -- -- (66) State income taxes, net of federal income tax benefit 36 (38) 83 Other (33) 2 3 ----- ---- ---- Provision (benefit) for income taxes $ 801 (50) 695 ===== ===== ==== (13) Stockholders' Equity Conversion and Reorganization In June 1995, the Board of Directors of American National Bankshares, M.H.C. (MHC), a mutual holding company, and the Bank approved a plan of conversion and reorganization which resulted in the merger of the MHC into the Bank and the formation of a new Delaware stock chartered holding company, American National Bancorp, Inc. The conversion was completed on October 31, 1995. 39 (13) Stockholders' Equity, Continued Conversion and Reorganization, continued In the offering, 2,182,125 shares of common stock were sold at a subscription price of $10.00 per share resulting in net proceeds of approximately $19.3 million after taking into consideration the $1.7 million for the establishment of an ESOP and $782,000 in expenses. Of the net proceeds, $8.9 million was contributed to the Bank in exchange for all of its outstanding common stock. In addition to the shares sold in the offering, 927,000 shares of the Company's stock were issued in exchange for shares of the Bank's stock previously held by public shareholders at an exchange ratio of 1.94 shares for each share of the Bank's common stock resulting in 3,980,500 total shares of the Company's stock outstanding as of October 31, 1995. Federal regulations require that upon conversion from mutual to stock form of ownership, a "liquidation account" be established by restricting a portion of net worth for the benefit of eligible savings account holders who maintain their savings accounts with the Bank after conversion. In the event of complete liquidation (and only in such event), each savings account holder who continues to maintain his savings account shall be entitled to receive a distribution from the liquidation account after payment to all creditors, but before any liquidation distribution with respect to capital stock. This account will be proportionately reduced for any subsequent reduction in the eligible holders' savings accounts. At conversion the liquidation account totaled approximately $28.8 million. In July 1992, the American National Savings Association's members approved a plan of reorganization from a mutual savings association to a mutual holding company. Pursuant to the plan of reorganization the Association transferred substantially all of its assets and all of its liabilities to a new federally-chartered stock savings association which became a wholly-owned subsidiary of American National Bankshares, M.H.C. (MHC), a federal mutual holding company. The reorganization was consummated on October 29, 1992 and the Bank capitalized MHC with $10,000. On November 3, 1993, the Bank's initial public offering of commons stock was completed. On such date, 927,000 shares of common stock were issued and sold at $10.00 per share, and 1,125,000 shares of common stock were issued to the MHC. The initial public offering resulted in proceeds after expenses of the offering of approximately $8.3 million. As a part of the offering, the Bank created a management recognition and retention plan trust for employees and outside directors equal to 3% of the shares issued in the public offering or 27,000 shares of common stock at a price of $10.00 per share. The trust was designed to provide directors and officers a proprietary interest in the Bank to encourage such persons to remain with the Bank. The shares are awarded at a rate of 25 percent per year commencing one year from the date of grant. Compensation expense in the amount of the grant is being recognized pro rata over the four years during which the shares are vested and payable. 40 (13) Stockholders' Equity, Continued Stock Option Plans The Board of Directors and stockholders adopted the 1993 Incentive Stock Option Plan for officers and employees of the Company (the Stock Plan) which authorized the grant of stock options to officers and certain employees for an aggregate of 122,866 shares of authorized but unissued common stock. Options are exercisable at the market price at the time of the grant on a cumulative basis in installments at a rate of 25, 50 and 25 percent per year commencing one year from the date of grant and expire 10 years from the date of grant. All share data and option prices have been adjusted to give retroactive effect to the 1.94 exchange ratio effective October 31, 1995 in the conversion from the mutual to stock form of organization. A summary of changes in shares under option and options exercisable for the years ended July 31 is presented below: 1996 1995 ---- ---- Outstanding at beginning of year 117,046 120,926 Granted -- 5,820 Cancelled -- (9,700) ---------- ---------- Outstanding at end of year 117,046 117,046 ---------- ---------- Exercisable at end of year 87,300 27,806 ========== ========== The options outstanding are exercisable as follows at July 31, 1996: Stock Option price Expiration options per share year ------- --------- ---- 111,226 $ 5.15 2003 5,820 5.35 2004 The Board of Directors and stockholders adopted the 1993 Stock Option Plan for Outside Directors (the Directors' Plan) which authorized the grant of non-statutory stock options to outside directors for an aggregate of 51,734 shares of authorized but unissued common stock. Options are immediately exercisable at the market price at the time of the grant and expire 10 years from the date of grant. In connection with the offering, the Company granted options to purchase 49,794 shares at $5.15 per share. In fiscal 1995, the Company granted options to purchase an additional 194 shares at $5.35 per share. Net Income Per Common Share Net income per share from the date of conversion, October 31, 1995 to July 31, 1996 has been computed based on 3,766,389 weighted average shares of common stock outstanding. The pro forma net income per share for the year ended July 31, 1996 has been calculated as if the conversion had been completed on August 1, 1995. The net proceeds of the offering are assumed to have been invested at a net effective yield of 7.87%, (the approximate weighted average yield on all interest earning assets during the period from August 1, 1995 to October 31, 1995) for the period from August 1, 1995 to October 31, 1995, and income so calculated, reduced for income taxes at an assumed effective rate of 38.6%, was added to reported net income for the period to obtain the pro forma net income used in the calculations. 41 (13) Stockholders' Equity, Continued Net Income Per Common Share, continued Net income per share of common stock for the year ended July 31, 1995 and from the date of conversion, November 3, 1993 to July 31, 1994 is computed by dividing net income for the years ended July 31, 1995 and period November 1, 1993 to July 31, 1994, respectively, by 2,052,000, the number of shares of common stock issued and outstanding for the period. The pro forma net income per share for the year ended July 31, 1994 has been calculated as if the 2,052,000 shares issued had been sold on August 1, 1993. The net proceeds of the offering are assumed to have been invested at a net effective yield of 7.19%, (the approximate weighted average yield on all interest earnings assets during the period from August 1, 1993 to October 31, 1993) for the period from August 1, 1993 to November 3, 1993, and income so calculated, reduced for income taxes at an assumed effective tax rate of 38.6%, was added to reported net income for the period to obtain the pro forma net income used in the calculations. Dividends on Common Stock From January 31, 1994 to October 31, 1995 the Bank declared a quarterly cash dividend of approximately $.10 per share. Upon approval by the OTS, the MHC elected to waive receipt of its dividends on its 1,125,000 shares thereby reducing the actual dividends declared in 1996, 1995 and 1994 to $92,600, $371,000 and $276,000, respectively. The most recent dividend waiver approval by the OTS has the following terms: (i) the mutual holding company's board of directors determines that such waiver is consistent with such directors' fiduciary duties to the mutual holding company's members; (ii) for as long as the savings Bank subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company are considered as a restriction on the retained earnings of the savings Bank, which restriction, if material, is disclosed in the public financial statements of the savings Bank as a note to the financial statements; (iii) the amount of any dividend waived by the mutual holding company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with Statement of Financial Accounting Standards No. 5, where the savings Bank determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a liability; (iv) the amount of any waived dividend is considered as having been paid by the savings Bank (and the savings Bank's capital ratios adjusted accordingly) in evaluating proposed dividends under OTS capital distribution regulations; and (v) in the event the mutual holding company converts to stock form, the appraisal submitted to the OTS in connection with the conversion application takes into account the aggregate amount of the dividends waived by the mutual holding company. OTS regulations impose limitations on all capital distributions. The rule establishes three tiers of institutions. An institution that exceeds all fully phased-in capital requirements before and after a proposed distribution ("Tier 1 Institution"), may after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year; or (ii) 75% of its net income over the most recent four-quarter period. The Institution is a Tier 1 Institution and accordingly had available at July 31, 1996, approximately $9.0 million for distribution. (13) Stockholders' Equity, Continued Dividends on Common Stock, continued In addition, the OTS would prohibit a proposed capital distribution by any institution which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. In addition, FDICIA provides that, as a general rule, a financial institution may not make a capital distribution if it would be undercapitalized after making the capital distribution. Also, an institution meeting the Tier 1 capital criteria which has been notified that it needs more than normal supervision will be treated as a Tier 2 or Tier 3 Institution subject to additional capital distribution limitations unless the OTS deems otherwise. 42 (14) Pension and Other Benefit Plans Substantially all full-time employees of the Company are included in a noncontributory defined benefit pension plan. The following tables set forth the plan's funded status at April 30, 1996 and 1995, amounts recognized in the statements of financial condition as of July 31, 1996 and 1995 and the composition of net pension cost for the years ended July 31, 1996, 1995 and 1994: 1996 1995 ---- ---- (In Thousands) Actuarial present value of benefit obligation: Vested $ 1,111 1,120 Nonvested 6 13 -------- ------ Total accumulated benefit obligation $ 1,117 1,133 ======== ====== Projected benefit obligation for service rendered to date $ (1,607) (1,615) Plan assets at fair value (primarily common stocks and U.S. Government and government sponsored agency securities) 1,662 1,396 -------- ------ Plan assets greater (less) than projected benefit obligation 55 (219) Unrealized transition asset at April 1, 1987 being recognized over 26 years 81 95 Unrecognized prior service cost (118) (129) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (57) 187 -------- ------ Accrued pension cost included in other liabilities $ (39) (66) ======== ====== 1996 1995 1994 ---- ---- ---- (In Thousands) Net pension cost included the following components: Service cost-benefits earned during the period $ 101 96 109 Interest cost on projected benefit obligation 122 118 120 Actual return on plan assets (200) (68) (41) Net amortization and deferral 87 (48) (81) ---- ----- ---- Net pension cost $ 110 98 107 ===== ===== ==== (14) Pension and Other Benefit Plans, Continued In determining the actuarial present value of the projected benefit obligation the weighted average discount rate used was 8.0% in 1996 and 7.5% in 1995 and the expected long-term rate of return on assets was 8.50% in 1996 and 1995. The rate of increase of future compensation levels used was 5% in 1996 and 1995. The Company also has a 401(k) profit sharing plan covering substantially all full-time employees. Employee contributions are voluntary and the employee may elect to defer from one percent to twenty percent of base (qualifying) compensation. Employer contributions are discretionary and there were no such contributions for the fiscal years ended July 31, 1996, 1995 and 1994. (15) Employee Stock Ownership Plan (ESOP) In connection with the Conversion and Reorganization, the Company formed an ESOP. The ESOP covers employees who have completed at least one year of service and have attained the age of 21. The ESOP borrowed $1.7 million for a ten year term from the Company and purchased 174,570 shares, equal to 8% of the total number of shares issued in the offering. The Bank makes scheduled quarterly contributions to the ESOP sufficient to service the debt. The cost of shares not committed to be released is reported as a reduction in stockholders' equity. Dividends, if any, on allocated and unallocated shares are used for debt service. Shares are released to participants based on compensation. 43 In connection with the formation of the ESOP, the Company adopted Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" (SOP 93-6). SOP 93-6 requires that (1) compensation expense be recognized based on the average fair value of the ESOP shares committed to be released; (2) dividends on unallocated shares used to pay debt service be reported as reduction of debt or accrued interest payable and that dividends on allocated shares be charged to retained earnings; and (3) ESOP shares which have not been committed to be released are not considered outstanding for purposes of computing earnings per share and book value per share. Compensation expense related to the ESOP amounted to $118,000 for the year ended July 31, 1996. The fair value of unearned ESOP shares at July 31, 1996 totaled $1.6 million. The ESOP shares as of July 31, 1996 were as follows: Allocated shares 2,909 Shares earned, but unallocated 8,728 Unearned shares 162,933 ---------- 174,570 (16) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (Statement 107), requires all entities to disclose the estimated fair value of certain on- and off-balance sheet financial instruments. (16) Fair Value of Financial Instruments, Continued In many instances, the assumptions used in estimating fair values were based upon subjective assessments of market conditions and perceived risks of the financial instruments at a certain point in time. The fair value estimates can be subject to significant variability with changes in assumptions. Furthermore, these fair value estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. In addition, the tax ramifications related to the realization of unrealized gains and losses are not permitted to be considered in the estimation of fair value. Fair value estimates are based solely on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Examples would include portfolios of loans serviced for others, net fee income from the Company's subsidiaries, core deposit intangibles, mortgage banking operations, and deferred tax assets. Fair value estimates, methods and assumptions are set forth as follows for the Company's financial instruments. Cash, Investments and Mortgage-Backed Securities For cash and cash equivalents the carrying amount is a reasonable estimate of fair value. The fair value of investment and mortgage-backed securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of ground rents owned is estimated by discounting the cash flows using the current 30 year treasury bond rate. The fair value of Federal Home Loan Bank stock is estimated to be equal to its carrying amount given it is not a publicly traded equity security, it has an adjustable dividend rate, and all transactions in the stock are executed at the stated par value. 44 The following table summarizes the carrying amount and estimated fair value of securities available for sale, investment securities, mortgage-backed securities and other investments at July 31: 1996 1995 -------------------------- ------------------------ Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- (In Thousands) Securities available for sale $ 40,266 40,266 3,030 3,030 Investment securities 24,109 23,651 13,918 13,652 Mortgage-backed securities 100,195 97,627 156,775 152,621 Ground rents owned 4,903 3,863 4,938 4,025 Federal Home Loan Bank of Atlanta stock 3,141 3,141 2,914 2,914 45 (16) Fair Value of Financial Instruments, Continued Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Mortgage loans are segregated by type, including but not limited to residential, commercial, and construction. Consumer and other loans are segregated by type, including but not limited to automobile loans, home equity lines of credit and commercial. Each loan category may be segmented, as appropriate, into fixed and adjustable interest rate terms, ranges of interest rates, performing and nonperforming, and repricing frequency. The fair value of each loan portfolio is calculated by discounting both scheduled and unscheduled cash flows through the remaining contractual maturity using the origination rate that the Company would charge under current conditions to originate similar financial instruments. Unscheduled cash flows take the form of estimated prepayments and are generally based upon anticipated experience derived from current and prospective economic and interest rate environments. For certain types of loans, anticipated prepayment experience exists in published tables from securities dealers. The estimated fair value of loans held for sale is based on the terms of the related sale commitments. The fair value of significant nonperforming mortgage loans is based on recent external appraisals of related real estate collateral, or estimated cash flows and are discounted using a rate commensurate with the credit risk associated with those cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. The fair value of nonperforming consumer loans is based on the Company's historical experience with such loans. The following table represents the carrying value and estimated fair value of loans receivable at July 31: 1996 1995 -------------------------- ----------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- (In Thousands) Mortgage loans $ 242,668 237,499 214,111 206,351 Construction and land development loans 22,666 22,666 11,333 11,083 Consumer and other loans 17,120 16,891 13,006 12,560 --------- ---------- -------- ---------- 282,454 277,056 238,450 229,994 Less allowance for possible losses 4,412 -- (6,361) -- ---------- ---------- -------- ---------- Total loans $ 278,042 277,056 232,089 229,994 ========== ========== ======== ========== Deposits and Borrowings The fair value of deposits with no stated maturity, such as interest-bearing or non-interest-bearing checking accounts, passbook, money fund accounts and mortgage escrow accounts, is equal to the amount payable upon demand. The fair value of certificates of deposit is based on the lower of redemption (net of penalty) or discounted value of contractual cash flows. Discount rates for certificates of deposit are estimated using the rates currently offered by the Company for deposits of similar remaining maturities. (16) Fair Value of Financial Instruments, Continued Deposits and Borrowings, continued The fair value of advances from the FHLBA is based on the discounted value of contractual cash flows. Discount rates are estimated using the rates currently offered for advances with both similar contractual terms and remaining maturities. For securities sold under agreements to repurchase the carrying amount is a reasonable estimate of fair value, as the agreements mature within 90 days. 46 The following table represents the carrying value and estimated fair value of deposits and borrowings at July 31: 1996 1995 -------------------------- ----------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- (In Thousands) Mortgage escrow accounts and deposits with no stated maturities $ 98,724 98,724 105,559 105,559 Certificates of deposit 216,119 219,024 210,906 212,310 Securities sold under agreements to repurchase 34,445 34,420 34,338 34,338 Advances from the Federal Home Loan Bank of Atlanta 62,824 62,029 44,137 43,881 (17) Regulatory Matters The Federal Deposit Insurance Corporation, through the Savings Association Insurance Fund, insures deposits of accountholders up to $100,000. The Bank pays an annual premium to provide for this insurance. The Bank is also a member of the Federal Home Loan Bank System and is required to maintain an investment in the stock of the Federal Home Loan Bank of Atlanta equal to at least 1% of the unpaid principal balances of its residential mortgage loans, .3% of its total assets or 5% of its outstanding advances from the Bank, whichever is greater. Purchases and sales of stock are made directly with the Bank at par value. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (as defined in the regulations and as set forth in the table below, as defined) of total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of July 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. (17) Regulatory Matters, Continued The most recent notification from the Office of Thrift Supervision (OTS) categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are also presented in the table (in thousands). [GRAPHIC OMITTED] (a) Percentage of capital to average assets. (b) Percentage of capital to average assets for actual and capital adequacy purposes and percentage of capital to risk weighed assets to be well capitalized under prompt corrective action provisions. (c) Percentage of capital to risk weighted assets. 47 (18) Condensed Financial Information (Parent Company Only) Summarized financial information for the Company are as follows as of and for the year ended July 31, 1996 (in thousands): Statement of Financial Condition Cash $ 6,709 Equity in net assets of the Bank 42,261 Note receivable - Bank 1,629 ------- $ 50,599 Accrued expenses and other liabilities $ 1 -------- Stockholders' equity 50,598 ------- $ 50,599 Statement of Income Income from note receivable $ 107 Expenses 137 ------- Loss before equity in net income of subsidiary and income taxes (30) Equity in net income of subsidiary 1,564 ------- Income before income taxes 1,534 Income taxes (benefit) (12) ------- Net income $ 1,546 ======== Statement of Cash Flows Operating activities: Net income $ 1,546 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiary (1,564) Other, net 1 Net cash used in operating activities (17) ------- Investing activities: Purchase of stock of subsidiary (8,899) Loan to fund ESOP (1,746) Loan repayment 117 ------- Net cash used in investing activities (10,528) ------ Financing activities: Proceeds from common stock offering net of expenses 21,040 Common stock acquired by ESOP (1,746) Purchase of treasury stock (2,040) ------- Net cash provided by financing activities 17,254 ------- Increase in cash and equivalents 6,709 Cash and equivalents, beginning of year -- ------- Cash and equivalents, end of year $ 6,709 ======== 48 Independent Auditors' Report The Board of Directors American National Bancorp, Inc. Baltimore, Maryland: We have audited the accompanying consolidated statements of financial condition of American National Bancorp, Inc. and subsidiary (the Company) as of July 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of American National Bancorp, Inc. and subsidiary as of July 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1996, in conformity with generally accepted accounting principles. Baltimore, Maryland September 5, 1996 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of selected quarterly financial data for the years ended July 31 is as follows: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands except per share data) 1996: Interest income $ 8,171 8,252 8,324 8,671 Net interest income 2,776 3,139 3,424 3,526 Provision for loan losses 290 210 62 210 Income before provision for income taxes 285 596 1,020 446 Net income 183 431 673 259 ======= ====== ======= ====== Net income per common share (from date of conversion) $ N/A .11 .18 .07 ======= ====== ====== ====== 1995: Interest income $ 7,295 7,524 8,095 8,055 Net interest income 3,041 2,810 3,144 2,751 Provision for loan losses 1,850 300 942 294 Income (loss) before provision for income taxes (813) 537 (5) 241 Net income (loss) (480) 343 (30) 177 ======= ====== ======= ====== Net income (loss) per common share $ (.23) .17 (.02) .08 ====== ====== ====== ======
49 CORPORATE INFORMATION Annual Meeting. The Annual Meeting of Annual Report on Form 10-K. A copy of the Stockholders will be held at 4:00 p.m., on Company's Annual Report on Form 10-K for November 21, 1996, at the Company's main the fiscal year ended July 31, 1996 will be office at 211 North Liberty Street, furnished without charge to stockholders Baltimore, Maryland. upon written request to the Corporate Secretary, American National Bancorp, Inc., Stock Listing. The Company's Common Stock 211 North Liberty Street, Baltimore, trades over-the-counter on the Nasdaq Maryland 21201, (410) 752-0400. National Market under the symbol "ANBK." Branch Locations Board of Directors Howard K. Thompson, Chairman Baltimore - (410) 752-0400 A. Bruce Tucker 211 North Liberty Street Lenwood M. Ivey Baltimore, Maryland 21201 Jimmie T. Noble David L. Pippenger Towson - (410) 825-5330 Joseph M. Solomon Towson Town Center Betty J. Stull 825 Dulaney Valley Road Suite 275 Officers Baltimore, Maryland 21204 A. Bruce Tucker, President and Chief Executive Perry Hall - (410) 256-6700 Officer Perry Hall Square Shopping Center Joseph M. Solomon, Executive Vice President and 4371 Ebenezer Road Chief Operating Officer Baltimore, Maryland 21236 Mark S. Barker, Senior Vice President Howard I. Scaggs, III, Senior Vice President Pikesville - (410) 764-6841 James M. Uveges, Senior Vice President and Chief Fallstaff Shopping Center Financial Officer 6832 Reisterstown Road Susan C. Arrington, Vice President Baltimore, Maryland 21215 Linda L. Farndon, Vice President Eugene P. Helldorfer, Vice President Glen Burnie - (410) 761-4545 Robert F. Hickey, Vice President Harundale Mall Karen S. Harrity, Controller 206 Harundale Mall Mary Jayne Engelhardt, Counsel Glen Burnie, Maryland 21061 Special Counsel Ellicott City - (410) 461-1500 Luse Lehman Gorman Pomerenk & Schick, P.C. Valley Mede Plaza 5335 Wisconsin Avenue, N.W. 9469 Baltimore National Pike Washington, D.C. 20015 Ellicott City, Maryland 21043 Independent Auditor Eastpoint - (410) 285-6671 KPMG Peat Marwick LLP 7848 Eastpoint Mall 111 South Calvert Street Baltimore, Maryland 21224 Baltimore, Maryland 21202 Reisterstown/Owings Mills - (410) 526-4400 Transfer Agent 11700 Reisterstown Road Registrar and Transfer Company Reisterstown, Maryland 21136 10 Commerce Drive Cranford, New Jersey 07016-3572 Catonsville/Woodlawn - (410) 788-9214 (800) 368-5948 2 West Rolling Crossroads, Suite 110 (North Rolling Road at Johnnycake) Consolidation of Multiple Accounts. Baltimore, Maryland 21228 Stockholders who receive multiple dividend checks or quarterly reports probably have duplicate accounts with the Company. These may be consolidated into a single, more convenient account by contacting the Transfer Agent.
50 ANNEX V SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------- Form 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ COMMISSION FILE NUMBER 0-26870 ------- AMERICAN NATIONAL BANCORP, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-1943817 - ----------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 211 North Liberty Street, Baltimore, Maryland 21201-3978 - ------------------------------------------------------------------------------ (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (410)-752-0400 -------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --------- --------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value--3,613,011 shares as of May 31, 1997. AMERICAN NATIONAL BANCORP, INC. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition 1 at April 30, 1997 (unaudited) and July 31, 1996 Consolidated Statements of Operations (unaudited) 2 for the Three Months ended April 30, 1997 and 1996 and for the Nine months ended April 30, 1997 and 1996 Consolidated Statements of Cash Flows (unaudited) 3 for the Nine Months ended April 30, 1997 and 1996 Notes to Unaudited Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis 7 of Financial Condition and Results of Operations PART II. OTHER INFORMATION 12 AMERICAN NATIONAL BANCORP, INC. and SUBSIDIARY Consolidated Statements of Financial Condition (Unaudited)
Assets April 30, 1997 July 31, 1996 - ------------------------------------- -------------- ------------- (In thousands) Cash: On hand and due from banks $ 3,841 $ 2,671 Interest-bearing deposits 517 1,837 Federal funds sold 903 394 Securities available for sale 30,781 40,266 Investment securities 30,320 24,109 Mortgage-backed securities 102,630 100,195 Loans receivable, net 322,805 278,042 Federal Home Loan Bank stock, at cost 4,370 3,141 Investments in real estate, net 5,035 5,670 Investments in and advances to real estate joint ventures 397 1,270 Property and equipment, net 1,416 1,198 Prepaid expenses and other assets 511 612 Deferred income taxes 1,792 1,866 -------------- -------------- $ 505,318 $ 461,271 ============== ============== Liabilities and Stockholders' Equity - -------------------------------------- Liabilities: Deposits $ 329,516 $ 313,083 Borrowed funds 40,623 34,445 Advances from the Federal Home Loan Bank of Atlanta 81,323 62,824 Drafts payable 1,424 859 Advance payments by borrowers for taxes and insurance 5,699 1,760 Income taxes payable 275 - Accrued expenses and other liabilities 1,143 1,030 -------------- -------------- Total Liabilities 460,003 414,001 Stockholders' Equity: Serial preferred stock 1,000,000 shares authorized, none issued - - Common stock, $.01 par value, 8,000,000 shares authorized, 3,980,500 shares issued and 3,613,011 shares outstanding at April 30, 1997 40 40 Additional paid-in capital 30,636 30,705 Unearned common stock acquired by management recognition and retention plans (896) (77) Unearned employee stock ownership plan (ESOP) shares (1,489) (1,629) Treasury stock at cost, 367,489 shares and 199,025 shares at April 30, 1997 and July 31, 1996 respectively (4,145) (2,040) Retained income - substantially restricted 22,587 21,970 Net unrealized holding loss on securities, net of income taxes (1,418) (1,699) ------------- ------------- Total Stockholders' Equity 45,315 47,270 ------------- ------------- $ 505,318 $ 461,271 ============= =============
See accompanying notes to unaudited consolidated financial statements. -1- AMERICAN NATIONAL BANCORP, INC. and SUBSIDIARY Consolidated Statements of Operations (Unaudited)
Nine months ended April 30, 1997 1996 ----------- ---------- (In thousands, except per share data) Interest income: Loans receivable $ 19,144 $ 15,962 Mortgage-backed securities 6,288 7,436 Investment securities 1,817 764 Other 574 585 --------- --------- Total interest income 27,823 24,747 Interest expense: Deposits 11,562 11,930 Borrowed funds 4,926 3,478 --------- --------- Total interest expense 16,488 15,408 --------- --------- Net interest income 11,335 9,339 Provision for loan losses 460 562 --------- --------- Net interest income after provision for loan losses 10,875 8,777 Noninterest income: Fees and service charges 566 449 Gain (loss) on sales of: Loans receivable, net 24 16 Mortgage-backed securities, net (5) 30 Investment securities, net (53) (14) Other 112 134 --------- --------- Total noninterest income 644 615 Noninterest expenses: Salaries and employee benefits 3,503 3,228 Net occupancy 986 1,021 Professional services 326 286 Advertising 610 517 Federal deposit insurance premiums 2,405 586 Furniture, fixtures and equipment 345 226 Loss on investment in real estate 113 300 Equity in net loss of real estate joint ventures 363 112 Other 1,263 1,215 ---------- --------- Total noninterest expenses 9,914 7,491 ---------- --------- Income before income taxes 1,605 1,901 Income tax provision 539 614 ---------- ---------- Net income $ 1,066 $ 1,287 ========== ========== Earnings per common share $ 0.30 N/A ========== ========== Proforma earnings per common share N/A $ 0.40 ========== ========== Three months ended April 30, 1997 1996 ----------- ---------- (In thousands, except per share data) Interest income: Loans receivable $ 6,582 $ 5,508 Mortgage-backed securities 2,095 2,395 Investment securities 605 213 Other 200 208 --------- --------- Total interest income 9,482 8,324 Interest expense: Deposits 3,867 3,841 Borrowed funds 1,660 1,059 --------- --------- Total interest expense 5,527 4,900 --------- --------- Net interest income 3,955 3,424 Provision for loan losses 40 62 --------- --------- Net interest income after provision for loan losses 3,915 3,362 Noninterest income: Fees and service charges 177 157 Gain (loss) on sales of: Loans receivable, net 2 2 Mortgage-backed securities, net 59 13 Investment securities, net (53) (18) Other 25 56 --------- --------- Total noninterest income 210 210 Noninterest expenses: Salaries and employee benefits 1,176 1,077 Net occupancy 340 347 Professional services 119 103 Advertising 196 166 Federal deposit insurance premiums 24 182 Furniture, fixtures and equipment 119 79 Loss on investment in real estate 27 188 Equity in net loss of real estate joint ventures 226 - Other 422 410 ---------- --------- Total noninterest expenses 2,649 2,552 ---------- --------- Income before income taxes 1,476 1,020 Income tax provision 495 347 ---------- ---------- Net income $ 981 $ 673 ========== ========== Earnings per common share $ 0.28 $ 0.18 ========== ========== Proforma earnings per common share N/A N/A ========== ========== See accompanying notes to unaudited consolidated financial statements.
-2- AMERICAN NATIONAL BANCORP, INC. and SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited)
Nine months ended April 30, 1997 1996 ------------- ----------- (In thousands) Cash flows from operating activities: Net income $ 1,066 $ 1,287 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 405 397 Noncash compensation under stock- based benefit plans 388 114 Amortization of loan fees (315) (303) Amortization of premiums and discounts, net 276 (154) Provision for losses on loans and investments in real estate 460 720 Loss (gain) on sales of assets, net 34 (32) Loans originated for sale (4,540) (3,258) Sales of loans originated for sale 3,163 2,801 Deferred income taxes (111) 506 Decrease (increase) in prepaid expenses and other assets 101 (23) Increase (decrease) in accrued expenses and other liabilities 113 (198) Decrease (increase) in income taxes payable 275 (270) Other, net (661) 48 ---------- ---------- Net cash provided by operating activities 654 1,635 ---------- ---------- Cash flows from investing activities: Sales of investment securities available for sale 2,947 969 Purchases of investment securities available for sale - (2,000) Repayments of mortgage-backed securities available for sale 2,860 2,502 Sales of mortgage-backed securities available for sale 6,857 41,041 Purchases of mortgage-backed securities available for sale (3,164) (10,988) Maturities of investment securities 3,000 11,000 Purchases of investment securities (9,040) (13,265) Repayments of mortgage-backed securities 3,462 6,750 Purchases of mortgage-backed securities (5,984) (19,198) Loan principal repayments 34,792 31,824 Loan originations (58,231) (58,849) Loan purchases (20,751) (11,363) Increase in deferred loan fees, net 455 442 Decrease in investments in real estate 1,134 2,722 Decrease in investments in and advances to real estate joint ventures 1,236 865 Purchases of property and equipment (623) (452) Federal Home Loan Bank stock purchases, net (1,229) - ----------- ----------- Net cash used in investing activities (42,279) (18,000) ----------- ----------- (continued) -3- AMERICAN NATIONAL BANCORP, INC. and SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) Nine months ended April 30, 1997 1996 ----------- ----------- (In thousands) Cash flows from financing activities: Net increase in deposits $ 16,433 $ 1,889 Net increase (decrease) in borrowed funds 6,178 (1,617) Proceeds from Federal Home Loan Bank advances 120,276 171,597 Repayment of Federal Home Loan Bank advances (101,777) (172,751) Increase in drafts payable 565 311 Increase in advance payments by borrowers for taxes and insurance 3,939 3,562 Proceeds from issuance of common stock, net of expenses - 21,040 Proceeds from exercise of stock options 106 - Common stock acquired by ESOP - (1,746) Cash dividends paid (324) (92) Purchase of treasury stock (2,316) - Purchase of stock to fund 1996 Recognition and Retention Plan (1,096) - ----------- ----------- Net cash provided by financing activities 41,984 22,193 ----------- ---------- Net increase in cash and cash equivalents 359 5,828 Cash and cash equivalents at beginning of period 4,902 5,360 ----------- ----------- Cash and cash equivalents at end of period $ 5,261 $ 11,188 =========== =========== Supplemental information: Interest paid on deposits and borrowed funds $ 16,450 $ 15,151 Income taxes paid, net 346 297 ========== ============ Noncash activities: Loans transferred to real estate acquired through foreclosure $ 499 $ 2,363 ========== =========== See accompanying notes to unaudited consolidated financial statements.
-4- AMERICAN NATIONAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) April 30, 1997 (1) Basis of Presentation ----------------------- The accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary, in the opinion of management, to fairly reflect the Company's financial position, results of operations and cash flows for the periods presented. The statements have been prepared using the accounting policies described in the July 31, 1996 Annual Financial Statements. The results of operations for the three and nine months ended April 30, 1997 are not necessarily indicative of the results which may be expected for the entire year. (2) Principles of Consolidation ---------------------------- The consolidated financial statements include the accounts of American National Bancorp, Inc., (the "Company"), and its wholly owned subsidiary, American National Savings Bank, F.S.B. (the "Bank") and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (3) Reclassification of Prior Year's Statements ------------------------------------------- Certain amounts in the 1996 financial statements have been reclassified to conform with the 1997 presentation. (4) Securities Available For Sale ----------------------------- On August 8, 1994, the Bank transferred approximately $36.3 million of its collateralized mortgage obligations (CMO), net of unrealized loss of approximately $1.8 million, from the available for sale portfolio to held to maturity. On that date, certain accounting issues were resolved permitting the Bank to transfer substantially all of these securities from the available for sale portfolio to the held to maturity portfolio as originally intended. The unrealized loss at the time of the transfer is being amortized over the remaining lives of the securities as an adjustment of yield. The unrealized loss, net of taxes, was $1.1 million and as a component of stockholders' equity is being reduced through the amortization. (5) Earnings Per Common Share ------------------------- Earnings per share were computed by dividing net income for the three and nine months ended April 30, 1997 by the weighted average number of shares of common stock and common stock equivalents outstanding for the three months ended (3,571,856 shares) and for the nine months ended (3,574,933 shares), respectively. ESOP shares that have not been committed to be released are not considered outstanding for the computation of earnings per share in accordance with Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). Shares granted but not yet issued under the Company's stock option plans are considered common stock equivalents for earnings per share calculations. Without the one-time Federal Deposit Insurance Corporation (FDIC) special assessment, earnings per share for the nine months ended April 30, 1997 would have been income of $.68 per share. See Management's Discussion and Analysis - - Noninterest Expense. Earnings per share information for the three months ended April 30, 1996 was computed by dividing the net income for the three months ended April 30, 1996 by the weighted average number of shares of common stock outstanding during the period of 3,810,294 shares. -5- The pro forma net income per share for the nine months ended April 30, 1996 has been calculated as if the 2,182,125 shares issued had been sold on August 1, 1995. The net proceeds of the offering are assumed to have been invested at a net effective yield of 7.86%, (the approximate weighted average yield on all interest earning assets during the period from August 1, 1995 to October 31, 1995) for the period from August 1, 1995 to October 31, 1995, and income so calculated, reduced for income taxes at an assumed effective tax rate of 38.6%, was added to reported net income for the period to obtain the pro forma net income used in the calculation. (6) Dividends on Common Stock ------------------------- On April 17, 1997, the Company declared a quarterly cash dividend of $0.03 per share payable on May 16, 1997 to stockholders of record as of April 30, 1997. (7) Employee Stock Benefit Plans ---------------------------- At its Annual Meeting on November 21, 1996, stockholders approved the Company's 1996 Recognition and Retention Plan (RRP) and the 1996 Stock Option Plan (the Stock Plan). The RRP authorizes the grant of stock to directors and officers of the Company for 87,285 shares. Shares will vest at the rate of 20% of the initially awarded amount per year with the first installment being earned on the first trading day of 1998 and succeeding installments being earned on the first trading day of the following year. The Stock Plan authorized the grant of stock to directors and officers for the aggregate of 218,213 of authorized, but unissued shares. Options are exercisable at the market price at the time of grant on a cumulative basis at a rate of 20 percent per year commencing one year from the date of grant and expire 10 years from the date of grant. (8) Impact of New Accounting Standards ---------------------------------- In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (Statement 125). Statement 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. This Statement requires, among other things, that the Company record at fair value, assets and liabilities resulting from a transfer of financial assets. In December 1996, Statement 127 was issued which deferred the effective date of certain provisions of Statement 125 until January 1, 1998 related to repurchase agreements, securities, lending and similar transactions. The Company adopted the provisions of Statement 125 as of January 1, 1997 and there was no significant impact on operations as a result of the adoption of this Statement. -6- AMERICAN NATIONAL BANCORP, INC. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis covers material changes in the financial condition since July 31, 1996 and material changes in the results of operations for the three and nine months ended April 30, 1997 as compared to the same period in 1996. This discussion should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 1996 Annual Report to Stockholders. Financial Condition - ------------------- Total assets increased by $44.0 million, or 9.5%, to $505.3 million at April 30, 1997 from $461.3 million at July 31, 1996. Assets increased primarily due to an increase in mortgage loans originated and purchased. Loans receivable increased by $44.8 million, or 16.1% to $322.8 million from $278.0 million at July 31, 1996. Mortgage-backed securities increased by $2.4 million, or 2.4%, to $102.6 million at April 30, 1997, from $100.2 million at July 31, 1996. Investment securities increased by $6.2 million, or 25.8%, to $30.3 million, at April 30, 1997, from $24.1 million at July 31, 1996. Securities available for sale decreased $9.5 million, or 23.6%, to $30.8 million at April 30, 1997 from $40.3 million at July 31, 1996 due to the sale of securities. Deposits increased by $16.4 million, or 5.2%. Borrowed funds increased by $6.2 million, or 17.9%. Advances from the Federal Home Loan Bank of Atlanta increased $18.5 million, or 29.4%. The increases are due to the funding of loan originations and loan and security purchases. Total stockholders' equity decreased by $2.0 million to $45.3 million at April 30, 1997 compared to $47.3 million at July 31, 1996. This decrease was the result of the Company repurchasing 189,074 shares of common stock for $2.3 million or $12.25 per share, the purchase of 87,285 shares of common stock in the second quarter to fund the 1996 Recognition and Retention Plan which was approved by the stockholders at the November 21, 1996 annual meeting, and quarterly dividends of approximately $324,000 for the nine months ended April 30, 1997, partially offset by a decrease in the net unrealized holding loss on securities of $281,000 and net income for the nine months of $1.1 million. Results of Operations - --------------------- The consolidated earnings of the Company depend primarily on the difference between the interest earned on its loan, mortgage-backed securities and investment portfolios and the interest paid on deposits and borrowings. This difference is known as "net interest income". The Company's net income also is affected by its provision for losses on loans and investments in real estate, as well as the amount of non-interest income, including loan fees and service charges, and non-interest expense, such as salaries and employee benefits, deposit insurance premiums, occupancy and equipment costs and income taxes. Earnings of the Company also are affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. -7- Interest Income. Interest income totalled $9.5 million and $27.8 million for the three and nine months ended April 30, 1997, compared to $8.3 million and $24.7 million for the three and nine months ended April 30, 1996, respectively. The $1.2 million increase for the three months ended April 30, 1997 compared to the three months ended April 30, 1996 primarily resulted from a $46.6 million, or 10.5%, increase in average interest earning assets to $489.8 million for the three months ended April 30, 1997 and an increase in the yield on average interest earning assets to 7.7% for the three months ended April 30, 1997, from 7.5% for the three months ended April 30, 1996. The increase in average interest earning assets resulted from a $55.9 million, or 21.7%, increase in average loans to $314.2 million from $258.3 million; and a $19.2 million, or 137.1% increase in average investment securities to $33.2 million from $14.0 million, offset by a $28.3 million, or 17.8%, decrease in average mortgage-backed securities. The increase in the yield on interest- earning assets was due to increases in the weighted average yield on consumer loans and investment and mortgage-backed securities partially offset by decreases in the weighted average yield on mortgage loans and other interest- earning assets. The $3.1 million increase for the nine months ended April 30, 1997 was due to a $46.5 million, or 10.7%, increase in average interest earning assets to $478.8 million for the nine months ended April 30, 1997 and an increase of eleven (11) basis points in the yield on average interest earning assets to 7.7%. Average loans increased $55.1 million and average investment securities increased $17.5 million. These increases were offset by a decrease in average mortgage-backed securities of $26.3 million. Interest Expense. Interest expense totalled $5.5 million and $16.5 million for the three and nine months ended April 30, 1997, compared to $4.9 million and $15.4 million for the three and nine months ended April 30, 1996. The $627,000 increase for the three months ended April 30, 1997 was due to a $43.1 million increase in average interest-bearing liabilities and an increase of 9 basis points in the average cost of funds. The $1.1 million increase for the nine months ended April 30, 1997 compared to the nine months ended April 30, 1996 was due to a $42.8 million increase in average interest-bearing liabilities, offset by a decrease of 18 basis points in the average cost of funds. The Company utilized deposits, FHLB advances and other borrowings to fund loan originations and purchases of loans and securities. Net Interest Income. Net interest income totalled $4.0 million and $11.3 million for the three and nine months ended April 30, 1997 compared to $3.4 million and $9.3 million for the three and nine months ended April 30, 1996. The increase in net interest income for the three and nine months was primarily due to the results of operations discussed above, which resulted in an increase in the Company's interest rate spread to 2.78% from 2.64% for the three months and 2.70% from 2.40% for the nine months. Provision for Loan Losses. The Company maintains an allowance for loan losses based upon management's periodic evaluation of known and inherent risks in the loan portfolio, the Company's past loan loss experience, adverse situations that may affect borrowers' ability to repay loans, estimated value of underlying loan collateral, and current and expected future economic conditions. The allowance for loan losses was $3.8 million, or 1.2%, of net loans receivable, at April 30, 1997, compared to $4.4 million, or 1.6% of net loans receivable at July 31, 1996. Nonperforming assets decreased from $4.7 million, or 1.0%, of total assets at July 31, 1996, to $2.9 million, or .6% of total assets at April 30, 1997. The provision for loan losses decreased by $102,000 to $460,000 for the nine months ended April 30, 1997 from $562,000 for the nine months ended April 30, 1996. This decrease reflects the results of management's evaluations mentioned above. -8- The following table sets forth information regarding nonperforming loans, real estate owned and restructured loans within the meaning of Statement 15, at the dates indicated.
At At April 30, 1997 July 31, 1996 -------------- ------------- (Dollars in Thousands) Nonperforming loans: One to four-family residential real estate $ 806 $ 690 Multifamily residential real estate 1,487 1,580 Commercial real estate 75 1,374 Construction loans 215 - Consumer loans 218 265 -------- -------- Total nonperforming loans 2,801 3,909 Total real estate owned 141 766 -------- -------- Total nonperforming assets 2,942 4,675 Restructured loans 780 1,636 -------- -------- Total nonperforming assets and restructured loans $ 3,722 $ 6,311 ======== ======= Impaired loan balance with a valuation allowance of $498,000 and $1.4 million at April 30, 1997 and July 31, 1996, respectively $ 1,500 $ 2,953 ======== ======= Total nonperforming loans to total loans receivable .82% 1.31% Total nonperforming loans to total assets .55% .85% Total nonperforming loans and real estate owned to total assets .58% 1.01% Represents property acquired by the Company through foreclosure or deed in lieu of foreclosure. All restructured loans are performing in accordance with their restructured payment terms.
Noninterest Income. Noninterest income, consisting primarily of deposit fees, loan servicing fees, and gains and losses on sales of loans, mortgage- backed securities and investments, totalled $210,000 and $644,000 for the three and nine months ended April 30, 1997, compared to $210,000 and $615,000 for the three and nine months ended April 30, 1996. The $29,000 increase for nine months ended April 30, 1997 is due to increases in deposit fees collected partially offset by the loss on the sale of mortgage-backed and investment securities for the nine months ended April 30, 1997. Noninterest Expense. Noninterest expense, consisting primarily of salaries and employee benefits, occupancy and equipment, federal deposit insurance premiums and provision for losses on investments in real estate ("REO"), totalled $2.6 million and $9.9 million for the three and nine months ended April 30, 1997, compared to $2.6 million and $7.5 million for the three and nine months ended April 30, 1996. The increases in non-interest expense for the three months ended April 30, 1997 were the result of amortization of the 1996 Recognition and Retention Plan, an increase in professional services and additional loss recognized on the investment in a real estate joint venture, and were partially offset by a $158,000 decrease in the Federal deposit insurance premium. -9- The $2.4 million increase for the nine months ended April 30, 1997 was due to the results of changes noted above as well as the Federal Deposit Insurance Corporation ("FDIC") one-time special assessment to recapitalize the Savings Association Insurance Fund. On September 30, 1996, legislation was enacted and signed into law which provided a resolution to the disparity in the Bank Insurance Fund/ Savings Association Insurance Fund ("SAIF") premiums. In particular, SAIF-insured institutions paid a one-time assessment of 65.7 cents on every $100 of deposits held at March 31, 1995. As a result of the new law, the Company paid approximately $2.1 million. The special assessment is tax deductible, therefore, the cost, net of income tax benefits, is approximately $1.4 million. The Company has made a one-time charge to earnings of this amount for the fiscal quarter ended October 31, 1996. Also, beginning January 1, 1997, the previous annual minimum premium of 23 basis points was reduced to 6.5 basis points. Net Income. Net income was $981,000 or $.28 per share for the three months ended April 30, 1997, compared to $673,000 or $.18 per share for the three months ended April 30, 1996. The $308,000 increase in net income was primarily due to an increase in net interest income of $531,000 and a decrease in the provision for loan loss of $22,000, partially offset by increases in noninterest expense of $97,000 and income tax expense of $148,000. Net income was $1.1 million for the nine months ended April 30, 1997 compared to $1.3 million for the nine months ended April 30, 1996. The $221,000 decrease in net income was primarily due to an increase in noninterest expense of $2.4 million from the FDIC special assessment, partially offset by an increase in net interest income of $2.0 million, a decrease in the provision for loan loss of $102,000, an increase in noninterest income of $29,000, and a decrease in the income tax provision of $75,000. Without the one-time FDIC special assessment, net income for the nine months ended April 30, 1997 would have been $2.4 million, or $.68 per share. Liquidity and Capital Resources - ------------------------------- The Bank is required to maintain minimum levels of liquid assets as defined by Office of Thrift Supervision (OTS) regulations. This requirement, which varies from time to time depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio currently is 5%. The Bank's liquidity ratio averaged 3.51% during the month of April 1997 due to securities pledged against short term borrowings. The securities were released on May 30, 1997 and the Bank is currently in compliance with the liquidity ratio. In addition, the Bank is required to maintain short term liquid assets of at least 1% of the Bank's average daily balance of net withdrawable deposit accounts and current borrowings. The Bank adjusts liquidity as appropriate to meet its asset and liability management objectives. At April 30, 1997, the Bank was in compliance with such liquidity requirements. The Bank's primary sources of funds are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, FHLB advances and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Bank manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Bank invests excess funds in federal funds, and other short-term interest-earning and other assets, which provide liquidity to meet lending requirements. Regulatory capital regulations require minimum levels of tangible and core capital of 1.5% and 3%, respectively, of adjusted total assets and risk- based capital of 8% of risk-weighted assets. The Bank was in compliance with the regulatory capital requirements with tangible, core and risk-based capital ratios of approximately 8.26%, 8.26%, and 17.37%, respectively, at April 30, 1997. Also, the Bank is in the "well capitalized" category at April 30, 1997 under the regulatory framework for prompt corrective action. -10- Impact of New Accounting Standards - ---------------------------------- Stock-Based Compensation. In November 1995, the FASB issued Statement of Financial Accounting Standards No. 123 Accounting for Awards of Stock-Based Compensation to Employees (Statement 123). Statement 123 is effective for years beginning after December 15, 1995. The Statement defines a fair value- based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for an employee stock option or similar equity instrument, and for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). Under the fair value-based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value-based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Most fixed stock option plans, the most common type of stock compensation plan, have no intrinsic value at grant date, and under Opinion 25 no compensation cost is recognized for them. Compensation cost is recognized for other types of stock based compensation plans under Opinion 25, including plans with variable, usually performance-based features. Statement 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. Management adopted the provisions of Statement 123 as of August 1, 1996 using the intrinsic value-based method and believes that the adoption will not have a material impact on the Company's financial statements. The Company will provide disclosure about its stock based employee compensation plans in its 1997 financial statements, as required by Statement 123. In February 1997, the Financial Accounting Standards Board ("FASB") issued statement of Financial Accounting Standards 128, Earnings Per Share (Statement 128). Statement 128 is effective for fiscal years ending after December 15, 1997. This Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Management has not determined when it will adopt the provision of Statement 128 but believes that the adoption of Statement 128 will not have a material impact on the Company's financial statements. -11- PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- There are various claims and lawsuits in which the Company is periodically involved incidental to the Company's business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- No Form 8-K reports were filed during the period ended April 30, 1997. -12- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. AMERICAN NATIONAL BANCORP, INC. Date: June 12, 1997 By: /s/ A. Bruce Tucker -------------- ------------------------------------ A. Bruce Tucker PRESIDENT and CHIEF EXECUTIVE OFFICER Date: June 12, 1997 By: /s/ James M. Uveges -------------- ----------------------------------- James M. Uveges SENIOR VICE PRESIDENT and CHIEF FINANCIAL OFFICER -13- [X] PLEASE MARK VOTES AS IN THIS EXAMPLE REVOCABLE PROXY AMERICAN NATIONAL BANCORP, INC. SPECIAL MEETING OF STOCKHOLDERS NOVEMBER 4, 1997 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints the Board of Directors of American National Bancorp, Inc., acting as the proxy committee, with full powers of substitution, to act as attorneys and proxies for the undersigned to vote all shares of Common Stock of American National Bancorp, Inc. ("American National") which the undersigned is entitled to vote at the Special Meeting of Shareholders to be held on November 4, 1997 at 4:00 p.m., local time, at the Company's main office located at 211 North Liberty Street, Baltimore, Maryland, and at any and all adjournments thereof. The Board of Directors recommends that shareholders vote FOR Proposal 1. 1. FOR [ ] AGAINST [ ] ABSTAIN [ ] Approval and adoption of the Agreement and Plan of Reorganization dated June 23, 1997, among Crestar Financial Corporation ("Crestar"), Crestar Bank, American National Bancorp, Inc. and American National Savings Bank, FSB, providing for the acquisition of American National by Crestar, as described in the Proxy Statement/Prospectus. This proxy, when properly executed, will be voted as directed. If no direction is made, this proxy will be voted FOR Proposal 1. If any other business is properly presented at the Special Meeting, this proxy will be voted by those named in this proxy in their best judgment. At the present time, the Board of Directors knows of no other business to be presented at the meeting. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the Special Meeting or any adjournment thereof. The undersigned acknowledges receipt prior to the execution of this proxy of a Notice of Special Meeting of Shareholders dated October 1, 1997 and of a Proxy Statement/Prospectus dated September 23, 1997. Please sign exactly as your name appears hereon. When signing as attorney, executor, administrator, trustee or guardian, please give your full title. If shares are held jointly, each holder may sign, but only one signature is required. PLEASE BE SURE TO SIGN AND DATE THIS PROXY IN THE BOX BELOW. Date ------------------------ - ------------------------------------------------------------------------------- Stockholder sign above Co-holder (if any) sign above - ------------------------------------------------------------------------------- DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED. AMERICAN NATIONAL BANCORP, INC. Should the above signed be present and choose to vote at the Meeting or at any adjournments or postponements thereof, and after notification to the Secretary of the Company at the Meeting of the stockholder's decision to terminate this proxy, then the power of such attorneys and proxies shall be deemed terminated and of no further force and effect. This proxy may also be revoked by filing a written notice of revocation with the Secretary of the Company or by duly executing a proxy bearing a later date. PLEASE ACT PROMPTLY SIGN, DATE & MAIL YOUR PROXY CARD TODAY 9/25/97 USE THIS FORM ONLY IF YOU WANT TO RECEIVE CASH INSTEAD OF CRESTAR FINANCIAL CORPORATION COMMON STOCK FOR YOUR AMERICAN NATIONAL SHARES. CRESTAR FINANCIAL CORPORATION AMERICAN NATIONAL BANCORP, INC. CASH OPTION ELECTION AND LETTER OF TRANSMITTAL IMPORTANT: TO BE EFFECTIVE, THIS ELECTION FORM AND LETTER OF TRANSMITTAL MUST BE RECEIVED BY AMERICAN NATIONAL NO LATER THAN 4:00 P.M. ON NOVEMBER 4, 1997 (THE "ELECTION DEADLINE"), TOGETHER WITH CERTIFICATE(S) REPRESENTING SHARES OF AMERICAN NATIONAL COMMON STOCK TO WHICH THIS CASH OPTION ELECTION AND LETTER OF TRANSMITTAL RELATES. IF YOUR SHARES ARE HELD BY A BROKER IN "STREET NAME" AND YOU WANT TO ELECT THE CASH OPTION, YOU SHOULD CONTACT YOUR BROKER IMMEDIATELY. To American National Bancorp, Inc. 211 North Liberty Street Baltimore, MD 21201 Gentlemen: On November 4, 1997, at a Special Meeting of Shareholders ("Special Meeting"), shareholders of American National Bancorp, Inc. will consider an Agreement and Plan of Reorganization (the "Agreement") dated as of June 23, 1997, among Crestar Financial Corporation ("Crestar"), Crestar Bank ("Crestar Bank"), American National Bancorp, Inc. ("American National") and American National Savings Bank, FSB ("Savings Bank"). The Agreement provides for the merger of American National into Crestar (the "Holding Company Merger") and the conversion of American National Common Stock into Crestar Common Stock or, at the election of the American National shareholder, cash. American National Common Stock is being valued at $20.25 per share in the Holding Company Merger. The Agreement requires American National shareholders who elect to exchange all or any part of their shares of American National Common Stock in the Holding Company Merger for cash to make such election prior to the Special Meeting. Certificates for the shares being exchanged for cash must be submitted to American National at or prior to the Special Meeting. Failure to return this Cash Option Election Form accompanied by stock certificates, by the Election Deadline will result in the conversion of all shares of American National Common Stock into Crestar Common Stock, except fractional shares settled for cash. I elect the number of shares of American National Common Stock designated below for $20.25 cash per share (subject to all applicable withholding taxes). I enclose the certificates for such shares. I understand that the total number of shares of American National Common Stock that may be exchanged for cash is limited as described in the Agreement. Because the number of shares exchanged for cash may not exceed 40% of the outstanding shares of American National Common Stock, the extent to which the cash elections will be accommodated will depend on the number of holders of shares of American National Common Stock who elect to receive cash. If the aggregate of fractional shares settled for cash and shares with respect to which a cash election is made exceeds 40% of the outstanding shares of American National Common Stock, immediately prior to the Effective Time of the Holding Company Merger, Crestar first will pay cash for shares submitted for cash exchange by each holder of 100 or fewer American National shares (if such holder has submitted all his shares for cash exchange) and then will pay cash for the remaining shares submitted for cash pro rata. Shares not exchanged for cash after proration will be exchanged for Crestar Common Stock at the Exchange Ratio. I understand that if the Holding Company Merger is approved by American National shareholders, this election to receive cash is irrevocable. American National will retain the certificates for shares submitted for cash purchase in escrow until either termination of the Agreement, upon which American National promptly will return such certificates, or the Effective Time of the Holding Company Merger, when Chase Mellon Shareholder Services (the "Exchange Agent"), will exchange such certificates for cash. DESCRIPTION OF SHARES OF AMERICAN NATIONAL COMMON STOCK SUBMITTED FOR CASH
- --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Certificate # Nos. of Shares - --------------------------------------- ----------------------------------- ----------------------- - --------------------------------------- ----------------------------------- ----------------------- - -------------------------------------- ------------------------------------ ----------------------- - -------------------------------------- ------------------------------------ ----------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------- -----------------------
I (We) have, and at the Effective Time of the Holding Company Merger will have, full power and authority to sell the shares represented by the certificate(s) submitted. I (We) certify that the information provided on this form is true, and that when such shares are accepted for cash exchange by Crestar, Crestar will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and not subject to any adverse claim. I (we) am not subject to backup withholding due to notified payee underreporting. It is understood that this Election is subject to the terms, conditions and limitations set forth in the Agreement, the Proxy Statement/Prospectus and this Cash Option Election and Letter of Transmittal. HOLDERS OF AMERICAN NATIONAL COMMON STOCK SHOULD CONSULT THEIR OWN ADVISORS AS TO THE TAX CONSEQUENCES OF MAKING THIS CASH ELECTION. The undersigned, upon request, will execute and deliver any additional documents necessary or desirable to complete the exchange of shares for cash under the Agreement. The undersigned hereby constitutes and appoints the Exchange Agent as his, her or its true and lawful agent and attorney-in-fact to effect such surrender of the shares and, if necessary under the Agreement, to transfer the shares on the books of American National. The undersigned represents that he, she or it has read and agreed to all of the terms and conditions set forth herein and in the Proxy Statement/Prospectus. Delivery of the enclosed certificate(s) shall be effected, and the risk of loss and title to such certificate(s) shall pass, only upon proper delivery thereof to the Exchange Agent. All authority herein conferred shall survive the death or incapacity of the undersigned, and each of them, and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. In no event will American National, the Exchange Agent or Crestar be liable to a holder of shares of American National Common Stock for any Crestar Common Stock or dividends thereon or cash delivered in good faith to a public official pursuant to any applicable abandoned property, escheat or similar law. SIGN HERE: DATE HERE: ________________________ _____________, 1997 Please insert your Social Security or other tax _______________________ identifying number below (Signature(s) of Registered Owner(s)) Please sign ____ - ____ - ____ exactly as name appears on stock certificates(s). See Instruction 2. SPECIAL INSTRUCTIONS Fill in only if MAILING is to be made other than in the name or the address specified above. Special Mailing Instructions Mail To: Name --------------------------------------------- (Type or Print) --------------------------------------------- Address ------------------------------------- -------------------------------------------- Social Security or Taxpayer Identification Number --------------------- Fill in only if PAYMENT is to be made other than in the name(s) specified above. Special Payment Instructions Issue Check To: Name -------------------------------------- (Type or Print) -------------------------------------- Address ______________________________ -------------------------------------- Social Security or Taxpayer Identification Number ________________ IMPORTANT TAX INFORMATION PURPOSE OF FORM Use this form to report the Taxpayer Identification Number of the record owner of the account to the payer. Under Federal income tax laws, payers (i.e., Crestar) must generally withhold 31% of taxable interest, dividend, and certain other payments if you fail to furnish payers with the correct Taxpayer Identification Number (this is referred to as backup withholding). To prevent backup withholding on these payments, be sure to notify the payer of the correct Taxpayer Identification Number. You must use this form to certify that the Taxpayer Identification Number you are giving to the payer is correct and that you are not subject to backup withholding. WHAT NUMBER TO GIVE THE PAYER Give the payer the Social Security number or employer identification number of the record owner of the account. If the account belongs to you as an individual, give your Social Security number. If the account is in more than one name or is not in the name of the actual owner, give the Social Security number as follows:
TYPE OF ACCOUNT SOCIAL SECURITY NUMBER OF: --------------- ---------------------- - -- Two or more individuals including husband and The actual owner of the account, or if combined funds, wife (joint account) any one of the individuals - -- Custodian account of minor (Uniform Gift to The minor Minors Act) - -- Adult and minor (joint account) The adult, or if the minor is the only contributor, the minor - -- Account in the name of the guardian or committee The ward, minor or incompetent person for a designated ward, minor, or incompetent
SUBSTITUTE FORM W-9 Under penalties of perjury, I certify (i) that the number shown below is my correct Taxpayer Identification Number and (ii) that I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the Internal Revenue Service has notified me that I am no longer subject to backup withholding. (Note: You must strike out item (ii) above if you have been notified by the Internal Revenue Service that you are currently subject to backup withholding because of underreporting interest or dividends on your tax returns.) Tax Identification or ___________________________ Social Security Number: Signature ________________________ Date: , 1997 ----- INSTRUCTIONS FOR SUBMITTING CERTIFICATES OF AMERICAN NATIONAL COMMON STOCK 1. GENERAL. This form must be filled in, dated and signed, and accompanied by your certificate or certificates for shares of American National Common Stock prior to the Election Deadline. Proper delivery is at risk of the owner. If sent by mail, registered mail is suggested. Mail or deliver to: American National Bancorp, Inc., 211 North Liberty Street, Baltimore, Maryland, 21201, Attention: Corporate Secretary. 2. SIGNATURES. The signature (or signatures in the case of certificates owned by two or more joint holders) on the Letter of Transmittal should correspond exactly with the name(s) as written on the face of the certificates. If the certificate(s) transmitted hereby is registered in the name of two or more joint holders, all such holders must sign the Letter of Transmittal. If surrendered certificates are registered in different ways on several certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of such certificates. If the Letter of Transmittal is signed by a person other than the record holder of the certificate(s) listed, the certificate(s) must be endorsed or accompanied by appropriate stock powers, in either case signed by the record holder(s) in the name(s) that appear on the certificate(s) and the signature(s) must be guaranteed by a member of a national securities exchange or of the National Association of Securities Dealers, Inc., or a United States Commercial bank or trust company. 3. FIDUCIARIES AND REPRESENTATIVES. If a Letter of Transmittal, an endorsement or a certificate of a stock power is signed by a trustee, executor, administrator, guardian, officer of a corporation, attorney-in-fact, or other person in any representative or fiduciary capacity, the person signing, unless such person is the record holder of the shares, must give such person's full title in such capacity and appropriate evidence of authority to act in such capacity must be forwarded with the Letter of Transmittal. The certificate(s) may be surrendered by a firm acting as agent for the registered holder(s) if such firm is a member of a registered national securities exchange or of the National Association of Securities Dealers or is a commercial bank or trust company in the United States. 4. TIME IN WHICH TO SUBMIT CERTIFICATES. Certificate(s) for American National Common Stock must be submitted prior to the Special Meeting of Shareholders on November 4, 1996 at 4:00 p.m. See "The Holding Company Merger - Cash Election; Election Procedures" in the Proxy Statement/Prospectus. 5. SPECIAL PAYMENT REQUIRED. If a request is made that the check be made payable to other than the person or entity whose name is specified above, the person requesting the issuance of such check must first remit to the Exchange Agent any transfer or other taxes required by reason of such issuance, or establish the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. 6. LOST CERTIFICATES. If any certificate representing shares of American National Common Stock has been lost, stolen or destroyed, the stockholder should immediately contact American National at the telephone number set forth below. This Cash Option Election cannot be processed until such certificates have been replaced. 7. DETERMINATION OF QUESTIONS. All questions with respect to this Cash option Election and Letter of Transmittal will be determined by the Exchange Agent, whose determination shall be conclusive and binding. The Exchange Agent shall have the exclusive right to reject any and all Cash Option Elections and Letters of Transmittal not in proper form or to waive any irregularities in such Form, although it does not represent that it will do so. QUESTIONS AND REQUESTS FOR ASSISTANCE MAY BE DIRECTED TO JAMES M. UVEGES AT 410-625-8633. -----END PRIVACY-ENHANCED MESSAGE-----