-----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, LmLivNp+6kds3C+KPa0lhtpW1CDODdLMmqzAAh3ZqXdXZJ3CqtLwMFe/4pGDL+O5 ttSHpNwNDtPDQuj3apzpWA== 0000928385-97-001717.txt : 19971030 0000928385-97-001717.hdr.sgml : 19971030 ACCESSION NUMBER: 0000928385-97-001717 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971029 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN NATIONAL BANCORP INC CENTRAL INDEX KEY: 0000948020 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 521943817 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26870 FILM NUMBER: 97702932 BUSINESS ADDRESS: STREET 1: 211 N LIBERTY ST CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4107520400 MAIL ADDRESS: STREET 1: 211 N LIBERTY ST CITY: BALTIMORE STATE: MD ZIP: 21201 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [FEE REQUIRED] For the Fiscal Year Ended July 31, 1997 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [NO FEE REQUIRED] 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 - --------------------------------------------- -------- (Address of Principal Executive Offices) Zip Code (410) 752-0400 ------------------------------- (Registrant's telephone number) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE -------------------------------------- (Title of Class) 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 twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES X NO . ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]. As of September 30, 1997, there was issued and outstanding 3,613,011 shares of the Registrant's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant, which amount includes voting stock held by officers and directors, computed by reference to the last sale price on September 30, 1997, as reported by the Nasdaq National Market, was approximately $72.9 million. PART I ------ ITEM 1. BUSINESS - ----------------- 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 1,798,375 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 net proceeds from the Offering. The Company is registered as a savings and loan holding company with the Office of Thrift Supervision (the "OTS"). The Company employs executive officers and a support staff if and as the need arises. Such personnel are provided by the Bank and are not paid separate remuneration for such services. The Company reimburses the Bank for the use of Bank personnel. The Company leases office space from and utilizes the premises, equipment and furniture of the Bank, and reimburses the Bank for rent, services, equipment, supplies and facilities provided. The Company's lending, gathering of deposits, and other operations are discussed herein on a consolidated basis, and are primarily conducted through the Bank. At July 31, 1997, the Company had total consolidated assets of $502.1 million, total consolidated deposits of $329.7 million, and consolidated stockholders' equity of $46.9 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. The Bank is a federally chartered stock savings bank headquartered in Baltimore, Maryland. The Bank conducts operations through ten 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. RECENT DEVELOPMENTS On June 23, 1997, the Company entered into an 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"), the Company and the Bank, pursuant to which, among other things, the Company will merge with and into Crestar (the "Holding Company Merger"). Immediately thereafter, the 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 the Company's 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 (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 -2- ("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. A Special Meeting of Shareholders of American National will be held on November 4, 1997 to consider and vote upon the Transaction. MARKET AREA The Company's market area comprises Baltimore City and parts of Baltimore, Howard, Harford, Anne Arundel and Carroll counties, which are part of the Baltimore metropolitan area. Baltimore City is located approximately 30 miles from Washington, D.C., and is part of the Washington-Baltimore Metropolitan Statistical Area. The Company's market area has a diverse base, although it has been significantly influenced by the federal government and the defense industry. The Federal Government continues to be one of the area's largest employers. Headquartered within the Company's market area are a number of Federal Government agencies, including the Social Security Administration and the Health Care Financing Administration. Other major employers and industries within the Company's market area include General Motors Truck and Bus Group, Pepsi-Cola Company, Black and Decker Corporation, Sweetheart Cup Company, Inc., John Hopkins University, the University of Maryland-Baltimore, McCormick and Company, Inc., Bethlehem Steel Corp., Martin Marietta Aero and Naval Systems, Northrop-Grumman, Fort Meade, Proctor and Gamble Cosmetic and Fragrance Products, The Baltimore Sun, Baltimore Gas and Electric Company, Giant Food, Inc., Bell Atlantic, Blue Cross and Blue Shield of Maryland, USF&G Corporation, Crown Central Petroleum, and The Ryland Group, Inc. The Baltimore metropolitan area also has an active tourism industry, and is home to the Baltimore Orioles professional baseball team and Oriole Park at Camden Yards, the Baltimore Ravens professional football team, the Inner Harbor, and the Baltimore Aquarium. As of 1990, the population of the Baltimore metropolitan area was approximately two million. LENDING ACTIVITIES Loan and Mortgage-Backed Securities Portfolio Composition. The principal components of the Company's loan portfolio are conventional first mortgage loans secured by one- to four-family residential real estate and, to a lesser extent, multifamily residential real estate and commercial real estate loans. At July 31, 1997, the Company's total loan portfolio totaled $349.2 million, of which $221.6 million, or 63.5%, were one- to four-family residential real estate mortgage loans, $30.2 million, or 8.7%, were multifamily residential real estate loans, and $35.1 million, or 10.0%, were commercial real estate loans. The remainder of the Company's mortgage loans at July 31, 1997, consisted of $39.6 million of construction and land development loans. To supplement its loan portfolio, the Company also invests in mortgage-backed securities that directly or indirectly provide funds principally for residential mortgage loans made to home buyers in the United States. See "--Investment Activities." Consumer loans, consisting of home-equity loans, loans collateralized by deposit accounts and other loans totaled $20.8 million, or 6.0%, of the Company's total loan portfolio. -3- Analysis of Loan and Mortgage-Backed Securities Portfolio. Set forth below are selected data relating to the composition of the Company's loan portfolio by type of loan, and mortgage-backed securities portfolio, as of the dates indicated.
AT JULY 31, ------------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------------- --------------------- ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- --------- ----------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Real estate loans: One- to four-family residential........... $221,604 63.5% $168,698 56.5% $135,616 55.4% $114,181 52.9% $107,883 47.1% Multifamily residential 30,230 8.7 35,930 12.0 39,361 16.1 38,886 18.0 43,913 19.2 Commercial............. 35,071 10.0 37,695 12.6 38,894 15.9 41,747 19.4 48,812 21.3 Construction (1)....... 39,611 11.3 37,503 12.6 16,471 6.7 9,964 4.6 16,164 7.1 -------- -------- -------- ------ -------- ------ -------- ------ -------- ----- Total real estate loans.............. 326,516 93.5 279,826 93.7 230,342 94.1 204,778 94.9 216,772 94.7 Consumer loans: Home equity............ 7,229 2.1 6,775 2.3 6,201 2.5 5,899 2.7 6,275 2.7 Other (2).............. 13,591 3.9 10,345 3.5 6,805 2.8 3,758 1.8 4,587 2.0 -------- -------- -------- ------ -------- ------ -------- ------ -------- ----- Total consumer loans............. 20,820 6.0 17,120 5.8 13,006 5.3 9,657 4.5 10,862 4.7 -------- -------- -------- ------ -------- ------ -------- ------ -------- ----- Accrued interest receivable 1,898 .5 1,547 .5 1,323 .6 1,278 .6 1,394 .6 -------- -------- -------- ------ -------- ------ -------- ------ -------- ----- Total loans receivable........ 349,234 100.0% 298,493 100.0% 244,671 100.0% 215,713 100.0% 229,028 100.0% -------- ======== -------- ====== -------- ====== -------- ====== -------- ===== Less: Undisbursed loan proceeds.............. 11,958 14,837 5,138 2,513 3,786 Unearned loan fees..... 1,342 1,202 1,083 989 1,321 Allowance for loan losses................ 3,647 4,412 6,361 3,669 2,326 -------- -------- -------- -------- -------- Total loans receivable, net... $332,287 $278,042 $232,089 $208,542 $221,595 ======== ======== ======== ======== ======== Mortgage-backed securities (3)....................... $126,563 $133,466 $159,805 $160,139 $119,815 ======== ======== ======== ======== ========
- --------------------------- (1) Includes land development loans of $20.5 million, $14.2 million, $10.9 million, $5.2 million and $9.7 million at July 31, 1997, 1996, 1995, 1994 and 1993, respectively. (2) Includes passbook loans, second mortgage loans, automobile loans and unsecured lines of credit. (3) Includes $25.2 million, $33.3 million, $3.0 million, $42.3 million and $17.9 million of mortgage-backed securities available for sale at July 31, 1997, 1996, 1995, 1994, and 1993, respectively. See Note 2 to Consolidated Financial Statements. -4- Loan Maturity Schedule. The following table sets forth the maturity or period of repricing of the Company's portfolio at July 31, 1997. Demand loans, loans having no stated schedule of repayments, and overdrafts are reported as due in one year or less. Adjustable and floating rate loans are included in the period in which interest rates are next scheduled to adjust rather than in which they mature, and fixed rate loans are included in the period in which the final contractual repayment is due.
BEYOND WITHIN 1-3 3-5 5-10 10-20 20 1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL -------- ------- ------- ------- ------- ------- -------- (IN THOUSANDS) Real estate loans: One- to four-family residential.. $ 42,978 $17,566 $43,723 $34,834 $24,355 $58,148 $221,604 Multifamily residential.......... 5,962 8,815 6,238 5,233 3,008 974 30,230 Commercial....................... 10,629 13,494 3,059 4,133 2,822 934 35,071 Construction (1)................. 32,677 6,793 141 -- -- -- 39,611 Consumer loans.................... 9,060 2,107 6,082 1,088 2,135 348 20,820 Accrued interest receivable..... 1,898 -- -- -- -- -- 1,898 -------- ------- ------- ------- ------- ------- -------- Total.......................... $103,204 $48,775 $59,243 $45,288 $32,320 $60,404 $349,234 ======== ======= ======= ======= ======= ======= ========
- ------------------------------------ (1)Includes land development loans. Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at July 31, 1997, the dollar amount of all fixed-rate and adjustable-rate loans due or scheduled next to reprice after July 31, 1998.
FIXED ADJUSTABLE TOTAL -------- ---------- -------- (IN THOUSANDS) Real estate loans: One- to four-family residential.. $119,770 $58,856 $178,626 Multifamily residential.......... 17,340 6,928 24,268 Commercial....................... 14,337 10,105 24,442 Construction (1)................. -- 6,934 6,934 Consumer loans..................... 11,760 -- 11,760 -------- ------- -------- Total.......................... $163,207 $82,823 $246,030 ======== ======= ========
- ----------------------------- (1)Includes land development loans. One- to Four-Family Residential Real Estate Loans. The Company's primary lending activity consists of the origination of one- to four-family, owner- occupied, residential mortgage loans collateralized by properties located in the Company's market area. The Company generally does not originate one- to four- family residential loans collateralized by properties outside of its market area, although from time to time the Company may purchase loans collateralized by properties outside the Company's market area if such loans satisfy the Company's internal underwriting standards. At July 31, 1997, $221.6 million, or 63.5% of the Company's total loan portfolio consisted of one- to four-family residential mortgage loans, and approximately $215.6 million, or 97.3%, of the Company's one-to four-family residential real estate loans were collateralized by real estate located in the state of Maryland. The Company's one- to four-family residential real estate loans generally are originated and underwritten according to standards that qualify such loans to be included in Freddie Mac ("FHLMC") and Fannie Mae ("FNMA") purchase and guaranty programs and that otherwise permit resale in the secondary mortgage market. The Company generally retains its adjustable rate mortgage ("ARM") originations. Whether the Company can or will sell fixed rate loans into the secondary market, however, depends on a number of factors including the yield and the term of the loan, -5- market conditions, and the Company's current interest rate gap position. For example, in the current interest rate environment, fixed rate loans with terms of less than 15 years and with above-market yields are currently retained by the Company. During the fiscal years ended July 31, 1997, 1996, and 1995, the Company sold into the secondary market $4.5 million, $4.2 million and $2.2 million of one- to four-family residential mortgage loans, generally from current period originations. From time to time, the Company may also exchange one- to four-family residential real estate loans for FNMA securities. As of July 31, 1997, the Company had no such securities in its portfolio. The Company generally retains the servicing rights on loans it has sold. The Company receives fees for these servicing activities, which include collecting and remitting loan payments, inspecting the properties and making certain insurance and tax payments on behalf of the borrowers. As of July 31, 1997, the Company serviced loans for others aggregating $49.5 million. The Company currently offers one- to four-family residential mortgage loans with terms typically ranging from 10 to 30 years, and with adjustable or fixed interest rates. One- to four-family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option. The average length of time that the Company's one- to four-family residential mortgage loans remain outstanding varies significantly depending upon trends in market interest rates and other factors. In recent years, the average maturity of the Company's mortgage loans has decreased significantly due to the volume of refinancing activity. Accordingly, estimates of the average length of one- to four-family loans that remain outstanding cannot be made with any degree of accuracy. The Company's fixed rate mortgage loans amortize on a monthly basis with principal and interest due each month. The Company's fixed rate loans are generally originated with terms ranging from 10 to 30 years. The Company also offers seven year "balloon" loans with an interest rate for the first seven years set at 25 basis points less than the Company's 10 year fixed rate loans. At the end of the first seven years the interest rate for the remaining 23 year term is set at a margin over the then current FNMA 30-day purchase price. Originations of fixed rate mortgage loans versus ARM loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, customer preference, the Company's interest rate gap position, and loan products offered by the Company's competitors. The Company's ARM loans are generally for terms of 30 years, with interest rates that adjust annually. In some instances, the Company offers three and five year ARM loans. Interest rate adjustments, are limited to 2% per year and 6% over the life of the loan. The Company's current index on its ARM loans is the one year Treasury Bill rate, plus a margin. The Company will originate ARM loans with initially discounted rates, often known as "teaser rates." The Company determines whether a borrower qualifies for an ARM loan based on the fully indexed rate of the ARM loan at the time the loan is originated. One-to four-family residential ARM loans totaled $97.9 million, or 28.0%, of the Company's total loan portfolio at July 31, 1997. During the fiscal year ended July 31, 1997, the Company purchased $20.7 million of ARM loans collateralized by one- to four-family residential real estate located primarily in Maryland. The primary purpose of offering ARM loans is to make the Company's loan portfolio more interest rate sensitive. Management believes that although ARM loans better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgage loans, the increased mortgage payments required of adjustable-rate mortgage loan borrowers in a rising interest rate environment could potentially cause an increase in delinquencies and defaults. The Company has not historically experienced a material difference in the delinquency rate between its fixed-rate and adjustable-rate one- to four-family loans. The Company's one- to four-family residential first mortgage loans customarily include due-on-sale clauses, which are provisions giving the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan. Due-on-sale clauses are an important means of adjusting the rates on the Company's fixed rate mortgage loan portfolio, and the Company has generally exercised its rights under these clauses. -6- The Company makes one- to four-family real estate loans with loan-to-value ratios of up to 95%. For one-to four-family real estate loans with loan-to-value ratios of between 80% and 90%, the Company requires the first 20% of the loan amount to be covered by private mortgage insurance. For one- to four-family residential real estate loans with loan-to-value ratios of between 90% and 95%, the Company requires the first 25% of the loan amount to be covered by private mortgage insurance. The Company requires fire and casualty insurance, as well as a title guaranty regarding good title, on all properties securing real estate loans made by the Company. Multifamily Residential Real Estate Loans. In recent years, the Company has significantly reduced its originations of multifamily residential real estate loans, and the total amount of such loans in its loan portfolio has decreased. The Company currently makes multifamily residential real estate loans only to existing or previous customers who have made timely payments on loans that are current, or to facilitate the sale of property acquired by the Company through foreclosure. Loans collateralized by multifamily residential real estate constituted approximately $30.2 million, or 8.7%, of the Company's total loan portfolio at July 31, 1997, compared to $51.9 million, or 19.9%, of the total loan portfolio at July 31, 1992. At July 31, 1997, the Company's portfolio of multifamily residential real estate loans included 5 loans with principal balances that exceeded $1.0 million. Multifamily residential real estate originations totaled .5%, 4.9%, 3.8%, and 1.0%, of total loan originations during the fiscal years ended July 31, 1997, 1996, 1995, and 1994, respectively. The Company decreased its originations of multifamily residential real estate loans to $390,000 during the fiscal year ended July 31, 1997, from $3.7 million during the fiscal year ended July 31, 1996, and conformed to the Company's strategy of originating such loans only to existing or previous customers who had made timely payments on loans. None of the multifamily originations during the fiscal year ended July 31, 1997, were loans to facilitate the sale of real estate acquired by the Company through foreclosure. The Company's multifamily real estate loans are primarily collateralized by multifamily residences, such as apartment buildings and condominium buildings. The Company also includes in its multifamily residential real estate loan portfolio loans made to investors collateralized by more than four single-family residences. Multifamily real estate loans are offered with fixed and adjustable rates and are structured in a number of different ways depending upon the circumstances of the borrower and the type of multifamily project. Fixed rate loans generally amortize over 15 to 25 years, and generally contain call provisions permitting the Company to require that the entire principal balance be repaid at the end of five to seven years. Such loans are priced as five to seven year loans. The Company's adjustable rate multifamily loans are currently offered for terms of 15 to 30 years and are often callable by the Company after five to ten years. The Company has generally not exercised call provisions of multifamily residential real estate loans that have a good payment history and are priced at market rates or higher. Interest rates adjust monthly or annually, subject to limitations, and are tied to a margin over the one year Treasury index. The Company's adjustable rate multifamily residential real estate loans currently include limitations on interest rate increases in any one year and over the life of the loan. Loans collateralized by multifamily real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multifamily real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. Commercial Real Estate Loans. In recent years, the Company has significantly reduced its originations of commercial real estate loans and the total amount of such loans in its loan portfolio. The Company currently makes commercial real estate loans only to existing or previous customers who have made timely payments on loans that are current, or to facilitate the sale of commercial real estate acquired by the Company through foreclosure. Loans secured by commercial real estate constituted approximately $35.1 million, or 10.0% of the Company's total loan portfolio at July 31, 1997, compared to $55.6 million, or 21.3% of the total loan portfolio at July 31, 1992. At July 31, 1997, the Company's portfolio of commercial real estate loans included 12 loans with principal balances that exceeded $1.0 million. Commercial real estate loan originations totaled 5.5%, 8.6% and 3.7% of total loan originations during the fiscal years ended July 31, 1997, 1996, and 1995, respectively. The Company decreased its originations of commercial real estate loans to $4.4 million during the fiscal year ended July 31, 1997, from $6.6 -7- million during the fiscal year ended July 31, 1996 and such loans conformed to the Company's strategy of originating commercial loans primarily to existing or previous customers who had made timely payments on loans. Of the Company's originations of commercial real estate loans during the fiscal year ended July 31, 1997, none was for the purpose of facilitating the sale of REO. The Company's commercial loans are secured by improved property such as shopping centers, warehouses, office buildings, and other nonresidential buildings. Commercial real estate loans currently are offered with fixed and adjustable rates and are structured in a number of different ways depending upon the circumstances of the borrower and the nature of the project. Fixed rate loans generally amortize over 15 to 25 years, and generally contain call provisions permitting the Company to require that the entire principal balance be repaid at the end of five to seven years. Such loans are priced as five to seven year loans. The Company's adjustable rate commercial real estate loans are currently offered for terms of 15 to 30 years and are often callable by the Company after 10 years. The Company has generally not exercised call provisions of commercial real estate loans that have a good payment history and are priced at market rates or higher. Interest rates adjust monthly or annually, and are tied to the one year Treasury index. The Company's adjustable rate commercial real estate loans currently include limitations on interest rate increases in any one year and over the life of the loan. Loans secured by commercial real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. Construction and Land Development Loans. The Company offers construction loans to individuals for the construction of their residence as well as to builders for the construction of one- to four-family residential units and to a much lesser extent commercial and multifamily units. In addition, the Company offers land loans, including loans to purchase developed single family lots and land acquisition and development loans to develop single family lots. At July 31, 1997 the Company's $39.6 million of construction and land development loans included $19.1 million of constructions loans and $20.5 million of land development loans. As of July 31, 1997, all construction and land loans were collateralized by properties located within the suburbs of Baltimore and Washington, D.C. Construction loans to individuals typically convert to permanent loans at the end of the construction phase. The maximum loan amount does not typically exceed 80% of appraised value, and the Company requires private mortgage insurance where the loan amount exceeds 80% of appraised value. Construction loans to individuals have a maximum construction term of one year, after which the loan may be converted to a 15 to 30 year fixed- or adjustable-rate mortgage loan at the option of the borrower. The interest rates typically float at a margin over the prime rate and adjust monthly. The loan application process requires that the builder submit accurate plans, specifications and cost projections. In addition, the Company reviews the borrower's existing financial condition, including total outstanding debt. Construction loans on speculative units are restricted and in most instances homes are required to be pre-sold before construction advances are made. Advances are made on percentage of completion basis and all construction inspections are performed by the Company's appraisers prior to disbursement. Construction loans to builders generally require the payment of interest only during the construction term. Depending upon the number of units to be built and the absorption rate as determined by the appraisal, loan terms can vary between 12 to 24 months. All recent land loan originations are secured by single family lots, although a portion of prior originations included loans for commercial purposes. The maximum loan amount generally does not exceed 75% of appraised value. Loans made to purchase developed lots have terms that are negotiated on a case-by-case basis. The Company does not make loans for speculation purposes--land loans are typically made to builders or individuals who intend to build within a three- year period. The loan application process requires that the developer submit accurate cost estimates, development and site plans and cash flow projections. In addition, the Company reviews the borrower's existing financial condition including total outstanding debt. Land acquisition and development loans generally require the developers to have the lots pre-sold to local or national builders. Depending upon the number of lots to be -8- developed and the absorption rate as determined by the appraisal, the loan term can vary between 12 to 36 months. Interest rates typically float at a margin over the prime rate and adjust monthly. Loan proceeds are advanced as land development progresses, and in all instances, the Company's appraisers inspect the property and the work completed before the Company will disburse funds. Construction and land development loans involve additional risks attributable to the fact that funds are advanced upon an appraisal of the completed project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction and land development costs, as well as the market value on the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan- to-value ratio. The Company's loans typically do not exceed 80% of the appraised value of the completed project. As a result of the foregoing, construction and land development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If the Company is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that the Company will be able to recover all of the unpaid balance of, and accrued interest on, the loan, as well as related foreclosure and holding costs. In addition, the Company may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time. Consumer Loans. To a lesser extent, the Company originates consumer loans. As of July 31, 1997, consumer loans totaled $20.8 million, or 6.0%, of the Company's total loan portfolio. The principal types of consumer loans offered by the Company are adjustable rate home equity lines of credit with terms up to 20 years, automobile loans with terms up to five years, loans secured by deposit accounts and other loans consisting primarily of 5 to 15 year fixed-rate second mortgage loans, personal loans, and checking account lines of credit. Consumer loans, other than home equity lines of credit and automobile loans, are offered primarily on a fixed rate basis with maturities generally of less than ten years. The Company's home equity and residential second mortgage loans are secured by the borrower's principal residence with a maximum loan-to-value ratio, including the principal balances of both the first and second mortgage loans, of 80% or less. At July 31, 1997, home equity loans totaled $7.2 million, or 34.7% of consumer loans, and 2.1% of the Company's total loan portfolio. At July 31, 1997, the Company had $10.1 million of contractual commitments for lines of credit. Consumer loans entail greater credit risk than do residential mortgage loans but have smaller balances and tend to have higher interest rates. See "-- Delinquencies and Classified Assets--Delinquent Loans, Nonperforming Assets and Restructured Loans" for information regarding the Company's loan loss experience and reserve policy. Loan Originations, Solicitation, Processing, and Commitments. Loan originations are derived from a number of sources such as mortgage originators employed by the Company, real estate agent referrals, existing customers, borrowers, builders, attorneys, and walk-in customers. Upon receiving a loan application, the Company obtains a credit report and employment verification to verify specific information relating to the applicant's employment, income, and credit standing. In the case of all multifamily residential and commercial real estate loans, a third party appraiser approved by the Company appraises the real estate intended to collateralize the proposed loans. The Company's internal appraisers review all third party appraisals. Either the Company's internal appraisers or a third party appraiser performs appraisals of one- to four-family residential properties. An underwriter in the Company's loan department checks the loan application file for accuracy and completeness, and verifies the information provided. Pursuant to the Company's written loan policies, all loans of less than $1.0 million are approved by the Loan Committee that meets weekly and consists of four officers of the Company, including the President and the Executive Vice President. Such policies also require that all loans of $1.0 million or more be approved by the Loan Committee consisting of three directors. For multifamily residential and commercial real estate loans the Company requires that the borrower provide operating statements, pro forma cash flow statements and, if applicable, rent rolls. In addition, the Company reviews the borrower's credit standing and expertise in owning and managing the type of property that will collateralize the loan. For construction loans, the Company requires that the borrower provide detailed construction plans and specifications, and pro forma cash flow statements. In addition, the Company considers the feasibility of the project and the pertinent experience of the borrower. Proof of fire and casualty insurance is required -9- at the time the loan is made and throughout the term of the loan. After the loan is approved, a loan commitment letter is promptly issued to the borrower. If the loan is approved, the commitment letter specifies the terms and conditions of the proposed loan including the amount of the loan, interest rate, amortization term, a brief description of the required collateral, and required insurance coverage. Commitments are typically issued for 60-day periods. The Company typically collects a commitment fee on conventional, construction, and land development loans. The Company requires a title search and, in the case of all real estate loans except home equity loans, a title guaranty. At July 31, 1997, the Company had commitments to originate $6.9 million of mortgage loans. The Company also enters into commitments to extend credit. At July 31, 1997, the Company had contractual commitments to extend credit (exclusive of undisbursed loans in process) for lines of credit and irrevocable letters of credit of $10.1 million and $1.7 million, respectively. The commitments may be funded from principal repayments of loans and mortgage-backed securities, excess liquidity, savings deposits, and, if necessary, borrowed funds. Commitments under lines of credit are generally longer than one year and are subject to periodic reevaluation and cancellation. Irrevocable letters of credit expire within two years. Because certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. -10- Origination, Purchase and Sale of Loans and Mortgage-Backed Securities. The table below shows the Company's loan origination, purchase and sale of loans and mortgage-backed securities for the years indicated.
At July 31, ---------------------------------- 1997 1996 1995 --------- ------------ --------- (In Thousands) Total loans receivable at beginning of year........................... $278,042 $232,089 $208,542 Loans originated: Real estate: One- to four-family residential.. 37,382 30,297 25,559 Multi-family residential......... 390 3,711 1,785 Commercial....................... 4,426 6,586 1,727 Construction (1)................. 31,511 30,421 12,501 Consumer: Home equity...................... 1,959 1,141 1,273 Other............................ 4,622 4,269 4,237 -------- -------- -------- Total originations............. 80,290 76,425 47,082 Loans purchased...................... 27,414 17,972 11,216 Transfer of mortgage loans to foreclosed real estate........ (543) (2,960) (1,400) Repayments........................... (48,197) (40,659) (27,763) Loan sales........................... (4,451) (4,194) (2,159) Other (2)............................ (268) (631) (3,429) -------- -------- -------- Net loan activity.................... (26,045) (30,472) (23,535) -------- -------- -------- Total loans receivable at end of year (3)................... $332,287 $278,042 $232,089 ======== ======== ======== Mortgage-backed securities at beginning of year.................. 133,466 $159,805 $160,139 Purchases............................ 9,148 42,703 17,364 Sales................................ (7,972) (56,036) (3,100) Repayments........................... (8,519) (11,823) (15,001) Other (4)............................ 440 (1,183) 403 -------- -------- -------- Mortgage-backed securities at end of year (5)................. $126,563 $133,466 $159,805 ======== ======== ========
- ------------------------------------- (1) Includes land development loans. (2) Consists of changes in the allowance for losses, undisbursed loan proceeds, unearned discounts, and net deferred fees. (3) Includes $718,000, $350,000 and $1.8 million of loans held for sale at July 31, 1997, 1996 and 1995, respectively. (4) Consists of gain (loss) on sale of securities, discount or premium amortization, changes in accrued interest receivable, and mark-to-market adjustment. (5) Includes $25.2 million, $33.3 million and $3.0 million of mortgage-backed securities available for sale at July 31, 1997, 1996 and 1995, respectively. Loan Origination Fees and Other Income. In addition to interest earned on loans, the Company generally receives fees in connection with loan originations. Such loan origination fees, net of costs to originate, are deferred and amortized using an interest method over the contractual life of the loan. Fees deferred are recognized into income immediately upon prepayment or sale of the related loan. At July 31, 1997, the Company had $1.3 million of deferred loan origination fees. Such fees vary with the volume and type of loans and commitments made and purchased, -11- principal repayments, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money. In addition to loan origination fees, the Company also receives other fees, service charges, and other income that consist primarily of deposit transaction account service charges and late charges. The Company recognized fees and service charges of $805,000, $640,000 and $592,000, for the fiscal years ended July 31, 1997, 1996, and 1995, respectively. Income received from loans serviced for others was $143,000, $146,000 and $165,000, for the fiscal years ended July 31, 1997, 1996, and 1995, respectively. Loans to One Borrower. Federally chartered savings banks, such as the Bank, are subject to the same limits on loans to a single or related group of borrowers as those applicable to national banks, which under current regulations, is limited to 15% of unimpaired capital and unimpaired surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured by readily marketable collateral (generally, financial instruments, but not real estate). The Bank's maximum loan to one borrower limit was $7.0 million at July 31, 1997. The Bank currently is in compliance with its loans-to-one-borrower limitations. The Bank's largest lending relationship at July 31, 1997, included (i) several loans originated in 1987, 1988 and 1991, collateralized by single family and multifamily residential units and two small office buildings located in the Baltimore Metropolitan area, and (ii) a fixed rate loan refinanced in 1986 with an eleven year call, collateralized by a 190 unit apartment complex located in Easton, Maryland. In 1992 the loans were restructured at market rates and consolidated into two loans as part of a bankruptcy proceeding which involved other properties of the borrower not financed by the Bank. At July 31, 1997, each of the two loans had a principal balance of $2.6 million and the aggregate amount of the two loans was $5.2 million. As of July 31, 1997, the loans were current with respect to their repayment terms and were designated as special mention. The Bank's second largest lending relationship at July 31, 1997 included an adjustable rate and two fixed rate loans collateralized by two retail shopping centers in the Baltimore Metropolitan area. The loans were originated in 1995, and in June 1996 the Bank originated a fixed rate second mortgage collateralized by one of the shopping centers. Each loan has a ten year call date. At July 31, 1997, the loans ranged from $289,000 to $3.2 million and totaled $4.3 million. As of July 31, 1997, the loans were current with respect to their repayment terms. The Bank's third largest lending relationship included the following loans to one borrower: (i) ten adjustable rate loans originated during 1987 through 1990 collateralized by one- to four-family residential properties located in the Baltimore Metropolitan area in amounts ranging from $61,000 to $609,000; and (ii) a fixed rate loan originated in 1985 with a ten year call collateralized by a multifamily apartment building in Baltimore City. The loans described in (i) above were current with respect to their repayment terms as of July 31, 1997, and had a carrying value of $2.8 million. The loan described in (ii) was restructured in 1992, at which time the Bank changed the interest rate to a one year adjustable rate at .5% below market and classified the loan as substandard. The Bank obtained an appraisal on the property described in (ii) in 1995. At July 31, 1997, the loan described in (ii) had a carrying value of $426,000, net of specific reserves of $250,000 and was current with respect to its restructured repayment terms. The Bank's fourth largest lending relationship at July 31, 1997, included an adjustable rate loan and three fixed rate loans collateralized by apartment buildings and an office building in the Baltimore Metropolitan area. The loans were originated in 1987 and 1988. In June 1994, the Bank originated a fixed rate second mortgage loan collateralized by all of the properties. As of July 31, 1997, the loans ranged from $337,000 to $1.1 million, and totaled $3.4 million. As of July 31, 1997, the loans were current with respect to their repayment terms. The Bank's fifth largest lending relationship at July 31, 1997 included four adjustable rate loans collateralized by a retail shopping center and three apartment buildings in the Baltimore Metropolitan area. The loans were originated in 1988 with a ten year call. At July 31, 1997, the loans ranged from $247,000 to $1.4 million and totaled $2.9 million. As of July 31, 1997, the loans were current with respect to their repayment terms. -12- DELINQUENCIES AND CLASSIFIED ASSETS Delinquencies. The Company's collection procedures provide that when a loan is 15 days past due, a computer-generated late charge notice is sent to the borrower requesting payment, plus a late charge. This is followed with a letter again requesting payment when the payment becomes 20 days past due. If delinquency continues, at 30 days another collection letter is sent and personal contact efforts are attempted, either in person or by telephone, to strengthen the collection process and obtain reasons for the delinquency. Also, plans to arrange a repayment plan are made. If a loan becomes 60 days past due, the loan becomes subject to possible legal action if suitable arrangements to repay have not been made. In addition, the borrower is given information which provides access to consumer counseling services, to the extent required by regulations of the Department of Housing and Urban Development. When a one- to four-family residential real estate loan continues in a delinquent status for 90 days or more, and a repayment schedule has not been made or kept by the borrower, a notice of intent to foreclose is sent to the borrower, giving 30 days to cure the delinquency. If not cured, foreclosure proceedings are initiated. For multifamily residential and commercial real estate loans, foreclosure proceedings may be initiated at the end of 30 or 60 days. Nonperforming Assets. Loans are reviewed on a regular basis and are placed on a nonaccrual status when, in the opinion of management, the collection of interest is doubtful. Mortgage loans are placed on nonaccrual status generally when either principal or interest is more than 90 days past due. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is deemed REO until such time as it is sold. When REO is acquired, it is recorded at the lower of the unpaid principal balance of the related loan or its estimated fair value, less estimated selling expenses. Valuations are periodically performed by management, and any subsequent decline in fair value is charged to operations. Net REO totaled $165,000, $766,000 and $890,000, at July 31, 1997, 1996, and 1995, respectively. Delinquent Loans, Nonperforming Assets, and Restructured Loans. The following table sets forth information regarding nonperforming loans, real estate owned by the Company, and restructured loans within the meaning of SFAS 15, at the dates indicated.
AT JULY 31, 1997 AT JULY 31, ------------------ ------------------------------------- NUMBER BALANCE 1996 1995 1994 1993 -------- --------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Nonperforming loans: One- to four-family residential real estate......... 7 $ 277 $ 1,023 $ 1,403 $ 1,164 Multifamily residential real estate................. 1 94 1,479 216 2,227 Commercial real estate.............................. 2 40 5,907 734 2,720 Construction (1).................................... 1 300 -- 996 1,350 Consumer loans...................................... 13 87 198 269 186 -------- --------- ------- ------- ------- Total nonperforming loans.......................... 24 798 8,607 3,618 7,647 Total real estate owned (2).......................... 5 165 890 663 1,285 -------- --------- ------- ------- ------- Total nonperforming assets......................... 29 963 9,497 4,281 8,932 ======== ========= ======= ======= ======= Restructured loans (3)............................... 2 776 1,870 8,864 1,713 -------- --------- ------- ------- ------- Total nonperforming assets and restructured loans.... 31 $ 1,739 $11,367 $13,145 $10,645 ======== ========= ======= ======= ======= Total nonperforming loans to total loans receivable.. .23% 3.52% 1.67% 3.34% Total nonperforming loans to total assets............ .16% 2.02% .90% 2.00% Total nonperforming loans and real estate owned to total assets................................... .19% 2.23% 1.07% 2.33%
- ----------------------------------------------------- (1) Includes land development loans. (2) Represents property acquired by the Company through foreclosure or deed in lieu of foreclosure. (3) All restructured loans are performing in accordance with their restructured payment terms. -13- During the fiscal years ended July 31, 1997, 1996 and 1995, respectively, gross interest income of $166,000, $567,000 and $898,000, would have been recorded on nonperforming and restructured loans, under their original terms, if the loans had been current throughout the period. The amount of interest income on non-accrual loans actually included in income during the same periods amounted to $94,000, $151,000 and $274,000. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 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 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. The Company's policy concerning restructured loans and loans to facilitate the sale of REO is to take a realistic approach to resolving its problem loans based on current market conditions, and to work with each borrower on a case-by- case basis. For all such loans, the Company obtains a current appraisal and reviews the borrower's and guarantor's financial statements. The review includes an analysis of the balance sheet and income statement, as well as a review of the cash flow and operating results. In addition, the Company considers the borrower's past performance. The rates and terms are then established based on the viability of the project and the cash flow generated. Classification of Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. The Company establishes a reserve for its "loss" assets, and may classify a portion of a loan as substandard and another portion of the same loan as "loss." The following table sets forth the aggregate amount of the Bank's classified assets at the dates indicated.
At July 31, --------------------------------------------- 1997 1996 1995 ------------- -------------- -------------- (In Thousands) Substandard assets (1)............... $ 4,389 $ 5,300 $ 8,757 Doubtful assets...................... -- -- -- Loss assets.......................... 312 2,411 3,909 -------- -------- -------- Total classified assets........... $ 4,701 $ 7,711 $ 12,666 ======== ======== ========
____________________________________ (1) Includes REO. One of the loans in the Bank's third largest lending relationship with a carrying value of $426,000 as of July 31, 1997 was classified substandard and $250,000 relating to such loan was classified as loss. -14- The following is a discussion of classified assets with net carrying values in excess of $500,000 as of July 31, 1997. Amounts identified below as specific reserves have been classified as "loss" in the above table. In 1995 the Bank originated a loan collateralized by two warehouse/industrial buildings in the Baltimore metropolitan area. The interest rate was fixed at 9.5% through the call date of January 1, 2001. In September 1996 the Bank classified the loan as substandard and had the collateral appraised in October 1996. The borrower filed bankruptcy in September 1996 and the Bank foreclosed on one warehouse in August 1997 and the other warehouse in October 1997. As of July 31, 1997, the loan had a carrying value of $769,000 and based on the appraised values of the collateral, no reserve was considered necessary. Other Loans of Concern. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are designated "special mention" by management. Loans designated as special mention are generally loans that, while current in required payments, have exhibited some potential weaknesses that, if not corrected, could increase the level of risk in the future. At July 31, 1997, the Bank had $6.2 million of special mention loans, including two loans to the same borrower that constituted the Bank's largest lending relationship. See "--Lending Activities--Loans to One Borrower." Allowance for Loan Losses. Management's policy is to provide for estimated losses on the Company's loan portfolio based on management's evaluation of the risk inherent in the loan portfolio. The Company regularly reviews its loan portfolio, including problem loans, to determine whether any loans require classification or the establishment of appropriate reserves or allowances for losses. Such evaluation, which includes a review of all loans of which full collectability of interest and principal may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral. Other factors considered by management include the size and risk exposure of each segment of the loan portfolio, present indicators such as delinquency rates and the borrower's current financial condition, and current economic conditions that may affect the borrower's ability to pay. Management calculates the general allowance for loan losses in part based on past experience, and in part based on specified percentages of loan balances. While both general and specific loss allowances are charged against earnings, general loan loss allowances are added back to capital, subject to a limitation of 1.25% of risk-based assets, in computing risk-based capital under OTS regulations. During the fiscal years ended July 31, 1997, 1996 and 1995, the Company added $500,000, $772,000 and $3.4 million, respectively, to the allowance for loan losses. The Company's allowance for loan losses totaled $3.6 million, $4.4 million and $6.4 million, at July 31, 1997, 1996 and 1995, respectively. 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 Baltimore City and the state of Maryland. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for losses on loans and investments in real estate. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. -15- Analysis of the Allowance For Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
Years Ended July 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (In Thousands) Total loans outstanding, net................ $349,234 $278,042 $232,089 $208,542 $221,595 Average loans outstanding................... 307,640 254,090 225,633 217,662 241,437 Allowance balances (at beginning of year)... 4,412 6,361 3,669 2,326 1,468 Provision for losses: One- to four-family residential......... 157 40 184 368 396 Multi-family residential................ 70 249 49 100 1,543 Commercial.............................. 253 482 2,589 704 1,473 Construction............................ -- -- 528 646 190 Consumer................................ 20 1 36 171 9 -------- -------- -------- -------- -------- Total provision for losses.......... 500 772 3,386 1,989 3,611 Charge-offs: One- to four-family residential......... (184) (157) (178) (8) (406) Multi-family residential................ (516) (391) (54) (202) (965) Commercial.............................. (932) (2,492) (517) -- (1,083) Construction............................ -- -- (279) (380) (460) Consumer................................ (3) (3) (5) (98) (11) -------- -------- -------- -------- -------- Total charge-offs................... (1,635) (3,043) (1,033) (688) (2,925) Recoveries.................................. 370 322 339 42 172 -------- -------- -------- -------- -------- Allowance balance (at end of year)...... $ 3,647 $ 4,412 $ 6,361 $ 3,669 $ 2,326 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of net loans receivable at end of period.. 1.10% 1.59% 2.74% 1.76% 1.05% Net loans charged off as a percent of average loans outstanding.............. .41% 1.07% .31% .30% 1.14% Ratio of allowance for loan losses to total nonperforming loans at end of period.......................... 457.02% 112.87% 73.90% 101.41% 30.42% Ratio of allowance for loan losses to nonperforming loans and REO at end of period.......................... 378.71% 94.37% 66.98% 85.70% 26.04%
Allocation of Allowance for Loan Losses. The following table sets forth the allocation of allowance for loan losses by loan category for the years indicated.
At July 31, ------------------------------------------------------------------------- 1997 1996 1995 ---------------------- ---------------------- ---------------------- % of % of % of Amount Total Loans(1) Amount Total Loans(1) Amount Total Loans(1) ------ -------------- ------ -------------- ------ -------------- (Dollars in Thousands) Balance at end of year applicable to: One- to four-family residential.. $ 541 63.5% $ 523 56.5% $ 530 55.4% Multi-family residential......... 865 8.7 1,128 12.0 1,265 16.1 Commercial....................... 1,503 10.0 2,042 12.6 3,892 15.9 Construction (2)................. 586 11.3 586 12.6 547 6.7 Consumer......................... 152 6.0 133 5.8 127 5.3 Accrued interest receivable...... -- .5 -- .5 -- .6 ------ ----- ------ ----- ------ ----- Total allowance for loan losses.................... $3,647 100.0% $4,412 100.0% $6,361 100.0% ====== ===== ====== ===== ====== =====
____________________________________ (1) Represents the percent of the Company's total loan portfolio that is composed of loans in each specific loan category. (2) Includes land development loans. -16- aw INVESTMENT ACTIVITIES General. To supplement local mortgage loan originations where available funds exceed mortgage loan demand, the Company maintains a substantial portfolio of liquid investments with low credit risk. These investments, however, are subject to interest rate risk. These investments are composed primarily of mortgage-backed securities and United States Government and agency obligations. At July 31, 1997, mortgage-backed securities totaled $126.6 million, or 25.2%, of the Company's total assets, and United States Government or an agency or sponsored corporation of the United States Government totaled $23.6 million, or 4.7%, of the Company's total assets. By investing in these types of assets, the Company's strategy has been to reduce significantly the credit risk of its asset base in exchange for lower yields than would typically be available on real estate loans. The Company's mortgage-backed securities represent interests in, or are collateralized by, pools of mortgage loans originated by private lenders that have been grouped by various governmental, government-related, or private organizations. The Company manages its interest rate risk, in part, by maintaining a substantial amount of adjustable-rate mortgage-backed securities in its investment portfolio. At July 31, 1997, $99.4 million, or 78.5%, of the Company's $126.6 million of mortgage-backed securities had adjustable interest rates ("ARM Securities"). In addition, the Bank is required under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain other investments. The Bank has generally maintained a portfolio of liquid assets that exceeds regulatory requirements. The Bank's Loan/Investment Committee meets on a regular basis to decide whether any alterations need to be made in the investment portfolio, based on market levels and conditions, current economic data, political and regulatory information, and the Bank's internal needs. Based on the parameters of the investment policy, the Bank tries to diversify its holdings through the purchase of short- and medium-term and fixed- and variable-rate instruments, which provide both an adequate return as well as some insulation from interest rate risk. All investment decisions are made by the Committee after analysis and market price cross-checks have been completed. Effective February 1992, the OTS adopted Thrift Bulletin 52 ("TB 52"). Among other things, TB 52 sets forth certain guidelines with respect to depository institutions' investment in certain "high risk mortgage securities." "High-risk mortgage securities" are defined as any mortgage derivative product that at the time of purchase, or at any subsequent date, meets any of three tests that are set forth in TB 52. High-risk mortgage securities may be purchased only in limited circumstances, and if held in a portfolio, may be reported as trading assets at market value, available-for-sale assets at the lower of cost or market value, or as held to maturity at cost. In certain circumstances, OTS examiners may seek the orderly divestiture of high-risk mortgage securities. Prior to purchasing a mortgage derivative security the Loan/Investment Committee obtains an analysis of whether the mortgage security meets any one of the three TB 52 tests, and falls into the category of "high- risk mortgage security." The Committee thereafter presents such analysis to the Board. The Bank documents no less frequently than annually whether a change in the characteristics of any mortgage derivative security in its portfolio causes such security to become a "high-risk mortgage security." As of July 31, 1997, the Bank did not hold any "high-risk mortgage securities" in its portfolio. Mortgage-Backed Securities. The Company's mortgage-backed securities include pass-through securities and CMOs. Pass-through securities provide the Company with payments consisting of both principal and interest as mortgages in the underlying mortgage pool are paid off by the borrowers. The average maturity of pass-through mortgage-backed securities varies with the maturities of the underlying mortgage instruments and with the occurrence of unscheduled prepayments of those mortgage instruments. Mortgage-backed securities also include $78.9 million of CMOs, which are debt obligations collateralized by the cash flows from mortgage loans or pools of mortgage loans. Mortgage-backed securities may be classified as, according to the issuer or guarantor; Securities that are issued by a government sponsored agency but that are not backed by the full faith and credit of the United States Government. The primary issuers of these securities include Fannie Mae ("FNMA") and Freddie Mac ("FHLMC"). FNMA is a United States Government-sponsored corporation owned entirely by private stockholders. Pass-through securities -17- issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. FHLMC issues securities representing interests in residential mortgage loans that it pools. FHLMC is a United States Government-sponsored corporation that guarantees the timely payment of interest and ultimate collection of principal, and its stock is publicly traded. At July 31, 1997, $126.6 million, or 100.0% of the Company's mortgage-backed securities, consisted of such securities. The Company's mortgage-backed securities include both fixed-rate and ARM Securities. Unlike fixed-rate mortgage-backed securities, ARM Securities have periodic adjustments in the coupons on the underlying mortgages. Management believes that the adjustable rate feature of the mortgages underlying the ARM Securities generally will help to reduce sharp changes in the value of the ARM Security in response to normal interest rate fluctuations. As the interest rates on the mortgages underlying the ARM Securities are reset periodically (generally one to twelve months but as long as five years), the yields of such securities will gradually align themselves to reflect changes in the market rates so that the market value of such securities will remain relatively constant as compared to fixed-rate instruments. Management believes that this, in turn, should cause the value of an ARM Security to fluctuate less than fixed- rate mortgage-backed securities. If the Company purchases mortgage-backed securities at a premium, mortgage foreclosures and unscheduled principal prepayments may result in some loss of the principal investment to the extent of the premium paid. On the other hand, if mortgage-backed securities are purchased at a discount, both a scheduled payment of principal and an unscheduled repayment of principal will increase current and total returns. CMOs are securities created by segregating or partitioning cash flows from mortgage pass-through securities or from pools of mortgage loans. CMOs provide a broad range of mortgage investment vehicles by tailoring cash flows from mortgages to meet the varied risk and return preferences of investors. These securities enable the issuer to "carve up" the cash flow from the underlying securities and thereby create multiple classes of securities with different maturity and risk characteristics. Each class has a specified maturity or final distribution date. In one structure, payments of principal, including any principal prepayments, on the collateral are applied to the classes in the order of their respective stated maturities or final distribution dates, so that no payment of principal will be made on any class until all classes having an earlier stated maturity or final distribution date have been paid in full. In other structures, certain classes may pay concurrently, or one or more classes may have a priority with respect to payments on the underlying collateral up to a specified amount. The Company has not and will not invest in any class with residual characteristics. Additionally, the Company will not invest in any subordinated class that is not rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization. -18- Mortgage-Backed Securities Portfolio. Set forth below are selected data relating to the composition of the Company's mortgage-backed securities portfolio as of the dates indicated.
AT JULY 31, -------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------ ------------------ ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Pass-through certificates: Adjustable................. $ 20,413 16.1% $ 25,494 19.1% $ 11,934 7.5% $ 10,863 6.8% $ 13,834 11.5% Fixed (1).................. 26,685 21.1 35,345 26.5 88,640 55.4 97,021 60.6 46,372 38.7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total pass-through certificates.......... 47,098 37.2 60,839 45.6 100,574 62.9 107,884 67.4 60,206 50.2 CMOs: Adjustable (2)............. 78,938 62.4 71,949 53.9 58,322 36.5 46,342 28.9 29,430 24.6 Fixed...................... -- -- 52 -- 142 .1 5,156 3.2 29,641 24.7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total CMOs............. 78,938 62.4 72,001 53.9 58,464 36.6 51,498 32.1 59,071 49.3 Accrued interest receivable.... 527 .4 626 0.5 767 .5 757 .5 538 .5 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total mortgage-backed securities................ $126,563 100.0% $133,466 100.0% $159,805 100.0% $160,139 100.0% $119,815 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
- ------------------------------- (1) Includes mortgage-backed securities available for sale of $16.0 million, $25.0 million, $6.0 million, and $17.9 million, at July 31, 1997, 1996, 1994 and 1993, respectively. (2) Includes CMOs available for sale of $9.2 million, $8.1 million, $3.0 million and $36.3 million at July 31, 1997, 1996, 1995 and 1994, respectively. -19- Investment Securities. The following table sets forth the carrying value of the Company's investment securities portfolio, interest-earning deposits in other institutions, federal funds sold, securities purchased under agreements to resell, and FHLB stock, at the dates indicated. At July 31, 1997, the market value of the Company's investment securities, and interest-earning deposits in other institutions, federal funds sold, and FHLB stock was approximately $30.3 million.
At July 31, ------------------------- 1997 1996 1995 ------- ------- ------- (In Thousands) Investment securities: U.S. Government and agency obligations (1)... $23,193 $30,489 $13,615 Accrued interest receivable.................. 403 615 303 ------- ------- ------- Total investment securities.............. 23,595 31,104 13,918 Interest-earning deposits in other institutions.. 2,313 1,837 2,240 Federal funds sold............................... -- 394 950 Federal Home Loan Bank stock..................... 4,194 3,141 2,914 ------- ------- ------- Total investments........................ $30,103 $36,476 $20,022 ======= ======= =======
________________________________ (1) Includes securities available for sale of $3.0 million, $6.8 million and $1.0 million at July 31, 1997, 1996 and 1995, respectively. Investment Portfolio Maturities. The following table sets forth the carrying values, annualized weighted average yield, and market values for the Company's investment securities at July 31, 1997.
AT JULY 31, 1997 ------------------------------------------------------------------------------------------------------- ONE YEAR ONE TO FIVE TO MORE THAN OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL INVESTMENT SECURITIES ------------------ ------------------ ------------------ ------------------ --------------------------- CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE VALUE YIELD (1) VALUE YIELD (1) VALUE YIELD (1) VALUE YIELD (1) VALUE VALUE YIELD (1) -------- --------- -------- --------- -------- --------- -------- --------- --------- ------- --------- (DOLLARS IN THOUSANDS) Investment securities: U.S. Government agency securities (2).... $1,500 3.80% $ -- --% $8,950 7.29% $12,743 7.86% $23,193 $23,341 7.38% Accrued interest receivable 403 -- -- -- -- -- -- 403 403 -- -- ------ -------- ------- ------- ------ ------- ------- ------- ------- ------- -------- Total................... $1,903 3.80% $ -- --% $8,950 7.29% $12,743 7.86% $23,596 $23,744 7.38% ====== ======== ======= ======= ====== ======= ======= ======= ======= ======= ======== - ---------------------------
(1) Represents annualized weighted average yield. (2) Includes securities available for sale. SOURCES OF FUNDS General. Deposits are the major source of the Company's funds for lending and other investment purposes. In addition to deposits, the Company derives funds from the amortization and prepayment of loans and mortgage-backed securities, the sale or maturity of investment securities, operations and advances from the FHLB. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes. Deposits. Consumer and commercial deposits are attracted principally from within the Company's market area through the offering of a broad selection of deposit instruments including checking and NOW accounts, savings, money market deposit, term certificate accounts and individual retirement accounts. The Company accepts deposits of $100,000 or more and offers negotiated interest rates on such deposits. Deposit account terms vary according to -20- the minimum balance required, the period of time during which the funds must remain on deposit, and the interest rate, among other factors. The maximum rate of interest which the Company must pay is not established by regulatory authority. The Company regularly evaluates its internal cost of funds, surveys rates offered by competing institutions, reviews the Company's cash flow requirements for lending and liquidity, and executes rate changes when deemed appropriate. The Company has sought to decrease the risk associated with changes in interest rates by advertising and pricing certificates of deposit to provide customers with incentives to choose certificates of deposit with longer terms. The Company typically does not obtain funds through brokers, nor does it solicit funds outside its market area. Deposit Portfolio. Savings and other deposits in the Company as of July 31, 1997, are composed of the following:
WEIGHTED PERCENTAGE AVERAGE MINIMUM OF TOTAL INTEREST RATE MINIMUM TERM CHECKING AND SAVINGS DEPOSITS AMOUNT BALANCES DEPOSITS - --------------- ------------------------ ------------------------------ ------- -------- ---------- (IN THOUSANDS) --% None Checking/demand deposit $ -- $ 3,875 1.18% accounts ("DDA") 1.96% None NOW Accounts -- 11,024 3.34 2.99% None Regular Savings 100 31,007 9.40 2.50% None Christmas Club Accounts 5 556 0.17 2.99% None Super Passbook 1,000 8,228 2.50 3.06% None Investment Manager 20,000 11,754 3.57 3.89% None Money Market 2,500 37,496 11.37 Certificates of Deposit ------------------------ 4.01% 3 months Fixed term, fixed rate 500 1,728 0.52 4.83% 6 months Fixed term, fixed rate 500 14,938 4.53 5.19% 12 months Fixed term, fixed rate 500 31,590 9.58 5.31% 12 months Fixed term, fixed rate 25,000 22,727 6.89 5.19% 13 months Fixed term, fixed rate 500 6,184 1.88 5.61% 18 months Fixed term, fixed rate 25,000 28,800 8.74 5.27% 24 months Fixed term, fixed rate 500 9,744 2.96 5.67% 30 months Fixed term, fixed rate 500 4,400 1.33 5.95% 30 months Fixed term, fixed rate 25,000 28,074 8.52 5.60% 36 months Fixed term, fixed rate 500 4,547 1.38 5.43% 48 months Fixed term, fixed rate 500 2,370 0.72 5.97% 60 months Fixed term, fixed rate 500 41,686 12.64 6.53% 84 months Fixed term, fixed rate 500 11,138 3.38 6.61% 120 months Fixed term, fixed rate 500 17,797 5.40 -------- ----- $329,663 100.0% ======== =====
-21- The following table sets forth the change in dollar amount of savings deposits in the various types of savings accounts offered by the Company between the dates indicated.
AT JULY 31, ------------------------------------------------------------------------------------------------------ 1997 1996 1995 --------------------------------- --------------------------------- -------------------------------- BALANCE PERCENT (1) CHANGE (2) BALANCE PERCENT (1) CHANGE (2) BALANCE PERCENT (1) CHANGE (2) -------- ----------- ---------- -------- ----------- ---------- -------- ----------- ---------- (DOLLARS IN THOUSANDS) Checking DDA and NOW Accounts (3).............. $ 14,899 4.5% $ (139) $ 15,038 4.8% $ 1,047 $ 13,991 4.5% $ (158) Super and regular savings.. 39,791 12.1 (990) 40,781 13.0 (357) 41,138 13.1 (5,392) Money market and investment manager (4)............ 49,250 14.9 8,105 41,145 13.2 (7,433) 48,578 15.4 (7,989) Time deposits that mature (5): within 12 months....... 130,188 39.5 11,416 118,772 37.9 10,546 108,226 34.4 21,098 within 12-36 months.... 55,405 16.8 (4,418) 59,823 19.1 (3,385) 63,208 20.1 1,523 beyond 36 months....... 40,130 12.2 2,606 37,524 12.0 (1,948) 39,472 12.5 (3,458) -------- ----- ------- -------- ----- ------- -------- ----- ------- Total deposits.. $329,663 100.0% $16,580 $313,083 100.0% $(1,530) $314,613 100.0% $ 5,624 ======== ===== ======= ======== ===== ======= ======== ===== ======= - ---------------------------
(1) Represents percentage of total deposits. (2) Represents increase (decrease) in balance from end of prior year. (3) Includes Super NOW with a minimum average balance requirement of $2,500. (4) Money market accounts require a minimum average balance of $2,000 and the investment manager accounts require a minimum average balance of $20,000. (5) Individual Retirement Accounts ("IRAs") are included in the respective certificate balances. IRAs totaled $42.8, $43.0 million and $43.1 million, as of July 31, 1997, 1996 and 1995, respectively. -22- The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated:
At July 31, ---------------------------- 1997 1996 1995 -------- -------- -------- (In Thousands) 3.01- 4.00%............... $ 81 $ 459 $ 4,541 4.01- 6.00%............... 162,227 134,910 81,782 6.01- 8.00%............... 63,411 80,716 121,866 8.01-10.00%............... 4 34 2,717 -------- -------- -------- $225,723 $216,119 $210,906 ======== ======== ========
The following table sets forth the amount and maturities of certificates of deposit at July 31, 1997.
Amount Due ----------------------------------------------------- Less Than 1-2 2-3 After One Year Years Years 3 Years Total --------- -------- -------- -------- -------- Rate (In Thousands) ---- 3.01- 4.00%........... $ 80 $ 1 $ -- $ -- $ 81 4.01- 6.00%........... 109,642 29,035 8,785 14,765 162,227 6.01- 8.00%........... 20,464 7,625 9,957 25,365 63,411 8.01-10.00%........... 2 -- 2 -- 4 -------- ------- ------- ------- -------- $130,188 $36,661 $18,744 $40,130 $225,723 ======== ======= ======= ======= ========
The following table indicates the amount of the Company's negotiable certificates of deposit of $100,000 or more by time remaining until maturity as of July 31, 1997.
Certificates Maturity Period of Deposit --------------- -------------- (In Thousands) Three months or less................... $ 5,459 Over three months through six months... 4,092 Over six months through twelve months.. 6,913 Over twelve months..................... 6,105 ------- Total................................. $22,569 =======
The following table sets forth the activity in the savings deposits of the Company for the years indicated:
Years Ended July 31, --------------------------- 1997 1996 1995 ------- -------- ------- (In Thousands) Net deposits (withdrawals)..................... $ 926 $(17,355) $(9,299) Interest credited.............................. 15,654 15,825 14,923 ------- -------- ------- Net increase (decrease) in savings deposits.. $16,580 $ (1,530) $ 5,624 ======= ======== =======
-23- BORROWINGS Deposits are the Company's primary source of funds. The Company, through its subsidiary, the Bank, also obtains funds from the FHLB and through reverse repurchase agreements. FHLB advances are collateralized by selected assets of the Company. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the OTS and the FHLB. As of July 31, 1997, the Company had a $95 million line of credit with the FHLB, and FHLB advances of $75.8 million. The maximum amount of FHLB advances to a member institution generally is reduced by borrowings from any other source. See "Regulation and Supervision--Federal Home Loan Bank System." The Company sells securities under agreements to repurchase with selected dealers (reverse repurchase agreements) as a means of obtaining short-term funds as market conditions permit. In a reverse repurchase agreement, the Company sells a fixed dollar amount of securities to a dealer under an agreement to repurchase the securities at a specific price within a specific period of time, typically not more than 180 days. Reverse repurchase agreements are treated as financings of the Company and the obligations to repurchase securities sold are reflected as a liability of the Company. The dollar amount of securities underlying the agreements remain an asset of the Company. There were $42.6 million in securities sold under agreements to repurchase at July 31, 1997. The following table sets forth certain information regarding borrowings by the Company during the periods indicated.
Years Ended July 31, ---------------------------- 1997 1996 1995 -------- -------- -------- (Dollars in Thousands) Weighted average rate paid on: Securities sold under agreements to repurchase................. 5.73% 5.71% 5.77% FHLB advances..................... 5.73 5.87 6.06 Agreements to repurchase: Maximum balance................... $46,423 $39,011 $34,338 Average balance................... 38,522 34,005 20,741 FHLB advances: Maximum balance................... 86,327 62,824 60,229 Average balance................... 77,623 46,851 50,182
SUBSIDIARIES' ACTIVITIES The Company has five indirect subsidiaries that are wholly-owned by the Bank, National Development Corporation ("NDC"), American National Insurance Agency, Inc., ("ANIA") Liberty Street, Inc. ("LSI") and Fayette Street Realty, Inc. ("FSR") which are Maryland corporations, and ANSB Corporation ("ANSB"), which is a Delaware corporation. ANIA acts as agent in offering annuity and mortgage life insurance products and mutual funds to customers of the Company. ANIA does not underwrite insurance. NDC was formed in May 1983 primarily to acquire and develop land, through joint ventures with others, for the construction of single-family residences in the Company's market area. ANSB was incorporated in June 1994 for the purpose of holding investment securities for the Company. LSI and FSR were incorporated in May 1996 for the purpose of acquiring selected real estate at foreclosure for the Company. At July 31, 1997, the Company had a $26.3 million equity investment in ANSB, a $70,000 equity loss in NDC, a $54,000 equity investment in ANIA, a $4,000 equity investment in LSI, a $400 equity investment in FSR, and loans of $243,000 to NDC, and no loans to ANIA or ANSB. For the year ended July 31, -24- 1997, NDC had net income of $613,000, ANIA had net income of $12,000, ANSB had net income of $1.2 million, LSI had a net loss of $12,000, and FSR had a net loss of $1,000. NDC has been winding down its operations, and as of July 31, 1997, it was participating in one joint venture, Quarterfield Development Partnership ("QDP") which was formed in January 1989 to purchase raw land in Anne Arundel County, Maryland. QDP has developed 136 building lots to sell to builders or to construct single family residences for sale to individuals, and as of July 31, 1997, had no lots remaining. NDC provided QDP with $1.3 million in equity, and the Company provided a $6.0 million loan, and a $2.5 million line of credit. As of July 31, 1997, QDP paid off the original $6.0 million loan and $2.5 million line of credit. COMPETITION The Company encounters strong competition both in attracting deposits and in originating real estate and other loans. Its most direct competition for deposits has historically come from commercial and savings banks, other savings associations, and credit unions in its market area. The Company expects continued strong competition from such financial institutions in the foreseeable future, including increased competition from "super-regional" banks entering the market by purchasing large banks and savings banks, as well as institutions marketing "non-traditional" investments. Many of these regional institutions have greater financial and marketing resources available to them than does the Company. The Company competes for savings deposits by offering depositors a high level of personal service and a wide range of competitively priced financial services. The competition for real estate and other loans comes principally from commercial banks, other savings institutions, and mortgage banking companies. The Company is one of a large number of institutions that compete for real estate loans in the Company's market area. This competition for loans has increased substantially in recent years. Many of the Company's competitors have substantially greater financial and marketing resources available to them than does the Company. The Company competes for real estate loans primarily through the interest rates and loan fees it charges and advertising. REGULATION AND SUPERVISION GENERAL The Bank is subject to extensive regulation, examination and supervision by the OTS, and the FDIC as the deposit insurer. The Bank is a member of the FHLB System and its deposit accounts are insured up to applicable limits by the SAIF, which is managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to test the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Company, the Bank and their operations. The Company, as a savings and loan holding company, is also required to file certain reports with, and otherwise comply with the rules and regulations of the OTS. Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. FEDERAL REGULATION OF SAVINGS INSTITUTIONS Business Activities. The activities of savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act (the "FDI Act"). The federal banking statutes, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 -25- ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") (i) restrict the solicitation of brokered deposits by savings institutions that are troubled or not well-capitalized, (ii) prohibit the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, (iii) restrict the aggregate amount of loans secured by non-residential real estate property to 400% of capital, (iv) permit savings and loan holding companies to acquire up to 5% of the voting shares of non- subsidiary savings institutions or savings and loan holding companies without prior approval, and (v) permit bank holding companies to acquire healthy savings institutions. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limits on loans to one borrower. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the Bank's unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily marketable collateral, which is defined to include certain securities and bullion, but generally does not include real estate. At July 31, 1997, the Bank is in compliance with its loans to one borrower limitations. See "Business of the Bank--Lending Activities--Loans to One Borrower." Qualified Thrift Lender Test. The HOLA requires savings institutions to meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain "qualified thrift investments," primarily residential mortgages and related investments, including certain mortgage-backed and related securities on a monthly basis in 9 out of every 12 months. A savings association that fails the QTL test must either convert to a bank charter or operate under certain restrictions. As of July 31, 1997, the Bank maintained 85.6% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Association") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of: (i) 100% of its net earnings 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 earnings for the previous four quarters; provided that the institution would not be undercapitalized, as that term is defined in the OTS Prompt Corrective Action regulations, following the capital distribution. As of July 31, 1997, the Bank had $13.4 million of capital that could be paid as dividends under such regulations. Any additional capital distributions would require prior regulatory approval. In the event the Bank's capital fell below its fully-phased in requirement or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could 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. The OTS has proposed regulations that would revise the current capital distribution restrictions. The proposal eliminates the current tiered structure and the safe-harbor percentage limitations. Under the proposal a savings institution may make a capital distribution without notice to the OTS (unless it is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2 rating, is not in troubled condition and would remain adequately capitalized (as defined by regulation) following the proposed distribution. Savings institutions that would remain adequately capitalized following the proposed distribution but do not meet the other noted requirements must notify the OTS 30 days prior to declaring a capital distribution. The OTS stated it will generally regard as permissible that amount of capital distributions that do not exceed 50% of the institution's excess regulatory capital plus net income to date during the calendar year. A savings association may not make a capital distribution without prior approval of the OTS and the FDIC if it is undercapitalized before, or as a result of, such a distribution. A savings institution will be considered in troubled condition if it has a CAMEL rating of 4 or 5, is subject to an enforcement action relating to its safety and soundness or financial viability or has been informed in writing by the OTS that it is in troubled condition. As under -26- the current rule, the OTS may object to a capital distribution if it would constitute an unsafe or unsound practice. No assurance may be given as to whether or in what form the regulations may be adopted. Liquidity. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified U.S. Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement which is currently 5%, may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flow of member institutions. The Bank's liquidity ratio averaged 6.2% during the month of July 1997. OTS regulations also require each savings institution to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1%) of the total of its net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. During the month of July 1997, the Bank's short-term liquidity ratio averaged 1.5%. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings institutions are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a quarterly basis, is computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the institution's latest quarterly thrift financial report. The Bank paid assessments of $2.5 million, $772,000 and $809,000, for the fiscal years ended July 31, 1997, 1996 and 1995, respectively. Community Reinvestment. Under the Community Reinvestment Act (the "CRA"), as implemented by OTS regulations, a savings institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA rating system identifies four levels of performance that may describe an institution's record of meeting community needs: outstanding, satisfactory, needs to improve and substantial non-compliance. The CRA also requires all institutions to make public disclosure of their CRA ratings. The CRA regulations were recently revised. Effective July 1, 1995, the OTS assesses the CRA performance of a savings institution under lending, service and investment tests, and based on such assessment, assigns an institution in one of the four above-referenced ratings. The Bank received an "Outstanding" CRA rating under the current CRA regulations in its most recent federal examination by the OTS. Transactions with Related Parties. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) or to make loans to certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. At July 31, 1997, the Bank was in compliance with the transactions with affiliates rules governed by Sections 23A and 23B. The Bank's authority to extend credit to executive officers, directors and 10% stockholders, as well as entities controlled by such persons, is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder. Among other things, these regulations generally require such loans to be made on terms substantially the -27- same as those offered to unaffiliated individuals and do not involve more than the normal risk of repayment. Regulation O also places individual and aggregate limits on the amount of loans the Bank may make to such persons based, in part, on the Bank's capital position, and requires certain approval procedures to be followed. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring enforcement action against all "institution-related parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institutions, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. Criminal penalties for most financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. The federal banking agencies have adopted a regulation and Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement the safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards set forth in the Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. The agencies also adopted additions to the Guidelines which require institutions to examine asset quality and earnings standards which, if adopted, would be added to the Guidelines. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Capital Requirements. The OTS capital regulations require savings institutions to meet three capital standards: a 1.5% tangible capital standard, a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital standard. Core capital is defined as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights ("PMSRs"). The OTS regulations also require that, in meeting the tangible ratio, leverage and risk-based capital standards, institutions must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. The activities of NDC are not permissible for national banks, and, accordingly, the Bank's investment in and extensions of credit to NDC must be excluded from regulatory capital. See "Business of the Bank--Subsidiaries' Activities." The risk-based capital standard for savings institutions requires the maintenance of Tier 2 (core) and total capital (which is defined as core capital and supplementary capital) to risk weighted assets of 4.0% and 8.0%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS believes are inherent in the type of asset. The components of Tier 1 (core) capital are equivalent to those discussed earlier under the 3.0% leverage ratio standard. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25%. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. -28- At July 31, 1997, the Bank exceeded each of the three OTS capital requirements on a fully phased-in basis. Set forth below is a summary of the Bank's compliance with the OTS capital standards as of July 31, 1997.
At July 31, 1997 ------------------- Percent of Amount Assets (1) ------- ---------- (Dollars in Thousands) Tangible capital: Capital level.......... $43,557 8.65% Requirement............ 7,544 1.50 ------- ----- Excess................. $36,013 7.15% ======= ===== Core capital: Capital level.......... $43,557 8.65% Requirement (2)........ 15,088 3.00 ------- ----- Excess................. $28,469 5.65% ======= ===== Risk-based capital: Capital level.......... $46,755 18.28% Requirement............ 20,457 8.00 ------- ----- Excess................. $26,298 10.28% ======= ===== - ------------------------
(1) Tangible and core capital levels are calculated on the basis of a percentage of total adjusted assets; risk-based capital levels are calculated on the basis of a percentage of risk-weighted assets. (2) The OTS has proposed a core capital requirement for savings associations comparable to the new requirement for national banks. The OTS proposed core capital ratio would be at least 3% of total adjusted assets for thrifts that receive the highest supervisory rating for safety and soundness, with a 4% to 5% core capital requirement for all other thrifts. PROMPT CORRECTIVE REGULATORY ACTION Under the OTS Prompt Corrective Action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has a total risk-based capital ratio of less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC The Bank is a member of the SAIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the U.S. Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings banks, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. -29- The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, ranging from .23% to .31% of deposits, based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of core capital to risk-weighted assets of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy would pay the lowest premium while institutions that are less than adequately capitalized (i.e., a core capital or core capital to risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern would pay the highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. The FDIC is authorized to increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. In September 1996, Congress enacted legislation to recapitalize the SAIF by a one-time assessment on all SAIF-insured deposits held as of March 31, 1995. The assessment was 65.7 basis points per $100 in deposits, payable on November 30, 1996. For the Bank, the assessment amounted to $2.1 million (or $1.4 million when adjusted for taxes), based on the Bank's deposits on March 31, 1995. As of January 1, 1997, pursuant to the legislation, interest payments on FICO bonds issued in the late 1980's by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation are paid jointly by Bank Insurance Fund ("BIF") -insured institutions and SAIF-insured institutions. The FICO assessment is 1.29 basis points per $100 in BIF deposits and 6.44 basis points per $100 in SAIF deposits. Beginning January 1, 2000, the FICO interest payments will be paid pro rata by banks and thrifts based on deposits (approximately 2.4 basis points per $100 in deposits). The legislation further provides that the BIF and SAIF will merge on January 1, 1999 if there are no more savings associations as of that date. Several bills have been introduced in the current Congress that would eliminate the federal thrift charter and OTS. The bills would require that all federal savings associations convert to national banks or state depository institutions by no later than January 1, 1998 in one bill and June 30, 1998 in the other and would treat all state savings associations as state banks for purposes of federal banking laws. Subject to a narrow grandfathering, all savings and loan holding companies would become subject to the same regulation as bank holding companies under the pending legislative proposals. Under such proposals, any lawful activity in which a savings association participates would be permitted for up to two years following the effective date of its conversion to the new charter, with two additional one-year extensions which may be granted at the discretion of the regulator. The legislative proposals would also abolish the OTS and transfer its functions to the federal bank regulators with respect to the institutions and to the Federal Reserve Board with respect to the regulation of holding companies. The Bank is unable to predict whether the legislation will be enacted or, given such uncertainty, determine the extent to which the legislation, if enacted, would affect its business. The Bank is also unable to predict whether the SAIF and BIF funds will eventually be merged. While the legislation has reduced the disparity between premiums paid on BIF deposits and SAIF deposits, and has relieved the thrift industry of a portion of the contingent liability represented by the FICO bonds, the premium disparity between SAIF-insured institutions, such as the Bank, and BIF-insured institutions will continue until at least January 1, 1999. Under the legislation, the Bank anticipates that its ongoing annual SAIF premiums will be approximately $210,000. FEDERAL HOME LOAN BANK SYSTEM The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances -30- (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this requirement with an investment in FHLB-Atlanta stock, at July 31, 1997, of $4.2 million. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the fiscal year ended July 31, 1997, dividends from the FHLB-Atlanta to the Bank amounted to $298,000. If dividends were reduced, or interest on future FHLB-Atlanta advances increased, the Bank's net interest income would likely also be reduced. FEDERAL RESERVE SYSTEM The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $54.0 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $54.0 million. The first $4.2 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in compliance with the foregoing requirements. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. HOLDING COMPANY REGULATION The Company is a non-diversified savings and loan holding company within the meaning of the HOLA, as amended. As such, the Company is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The Bank is required to notify the OTS 30 days before declaring any dividend to the Company. As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a QTL. See "--Federal Regulation of Savings Institutions--Qualified Thrift Lender Test" for a discussion of the QTL requirements. Upon any nonsupervisory acquisition by the Company of another savings association or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and activities authorized by OTS regulation. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and -31- managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors. Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove of the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (iii) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. FEDERAL SECURITIES LAWS The Company's Common Stock is registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. The registration under the Securities Act of 1933 (the "Securities Act") of shares of the Common Stock which were issued in connection with the mutual-to- stock conversion of American National Bankshares, M.H.C. did not cover the resale of such shares. Shares of the Common Stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company are subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. FEDERAL AND STATE TAXATION GENERAL The Company and its subsidiaries currently file a consolidated federal income tax return on a July 31 fiscal year basis. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur. The following discussion of tax matters is intended only as a summary, and while it does not purport to be a comprehensive description of all tax rules applicable to the Bank or the Company, all matters deemed material by management have been discussed. FEDERAL TAXATION Tax Bad Debt Reserves. Savings associations such as the Bank that meet certain definitional tests relating to the composition of assets and other conditions prescribed by the Internal Revenue Code (the "Code") are permitted to establish reserves for bad debts and to make annual additions thereto which may, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction for "non-qualifying loans" is computed under the experience method. For tax years beginning before December 31, 1995, the amount of the bad debt reserve deduction for "qualifying real property loans" (generally loans secured by improved real estate) may be computed under either the experience method or the percentage of taxable income method (based on an annual election). If a saving association elected the latter method, it could claim, each year, a deduction based on a percentage of taxable income, without regard to actual bad debt -32- experience. Under the experience method, the bad debt reserve deduction is an amount determined under a formula based generally upon the bad debts actually sustained by the savings and loan association over a period of years. Under recently enacted legislation, the percentage of taxable income method has been repealed for years beginning after December 31, 1995, and "large" associations, i.e., the quarterly average of the association's total assets or of the consolidated group of which it is a member, exceeds $500 million for the year, may no longer be entitled to use the experience method of computing additions to their bad debt reserve. A "large" association must use the direct write-off method for deducting bad debts, under which charge-offs are deducted and recoveries are taken into taxable income as incurred. If the Bank is not a "large" association, the Bank will continue to be permitted to use the experience method. The Bank will be required to recapture (i.e., take into income) over a six-year period its applicable excess reserves, i.e, the balance of its reserves for losses on qualifying loans and nonqualifying loans, as of the close of the last tax year beginning before January 1, 1996, over the greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988 reserves) or (b) in the case of a bank which is not a "large" association, an amount that would have been the balance of such reserves as of the close of the last tax year beginning before January 1, 1996, had the bank always computed the additions to its reserves using the experience method. Postponement of the recapture is possible for a two-year period if an association meets a minimum level of mortgage lending for 1996 and 1997. As of July 31, 1997, the Bank is not required to recapture any of its bad debt reserve. If an association ceases to qualify as a "bank" (as defined in Code Section 581) or converts to a credit union, the pre-1988 reserves and the supplemental reserve are restored to income ratably over a six-year period, beginning in the tax year the association no longer qualifies as a bank. The balance of the pre- 1988 reserves are also subject to recapture in the case of certain excess distributions to (including distributions on liquidation and dissolution), or redemptions of, shareholders. Corporate Alternative Minimum Tax. For taxable years beginning after December 31, 1986, the Internal Revenue Code of 1986, as amended (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating losses. For taxable years beginning after December 31, 1989, the adjustment to AMTI based on book income will be an amount equal to 75% of the amount by which a corporation's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Company, whether or not an Alternative Minimum Tax ("AMT") is paid. The Company does not expect to be subject to the AMT. The Company was last audited by the Internal Revenue Service for tax years through July 31, 1993. For additional information regarding taxation, see Notes 1 and 14 of Notes to the Consolidated Financial Statements. STATE AND LOCAL TAXATION Maryland Taxation. The State of Maryland generally imposes a franchise tax on thrift institutions computed at a rate of 7% of net earnings. For the purpose of the 7% franchise tax, net earnings are defined as the net income of the thrift institution as determined for federal corporate income tax purposes, plus (i) interest income from obligations of the United States, of any state, including Maryland, and of any country, municipal or public corporation authority, special district or political subdivision of any state, including Maryland, (ii) any profit realized from the sale or exchange of bonds issued by the State of Maryland or any of its political subdivisions, and (iii) any deduction for state income taxes. Delaware Taxation. As a Delaware business corporation, the Company will be required to file annual returns and pay annual fees and an annual franchise tax to the State of Delaware. These taxes and fees are not expected to be material. -33- ITEM 2. PROPERTIES - ------------------- PROPERTIES The Company conducts its business through two offices including its main office and an operations center located in Baltimore, Maryland, and seven full service branch offices located in three counties. The following table sets forth certain information concerning the main office and each branch office of the Company at July 31, 1997. The aggregate net book value of the Company's premises and equipment was $1.8 million at July 31, 1997.
Owned Lease Year or Expiration Opened Leased Date ------ ------ ----------------- MAIN OFFICE: 211 N. Liberty Street 1986 Leased March 2001 Baltimore, Maryland 21201 BRANCH OFFICES: 825 Dulaney Valley Road, #275 1959 Leased December 1999 Baltimore, Maryland 21204 4371 Ebenezer Road 1961 Leased September 2001 (1) Baltimore, Maryland 21236 6832 Reisterstown Road 1961 Leased September 2011 Baltimore, Maryland 21215 206 Harundale Mall 1962 Leased May 1999 Glen Burnie, Maryland 21061 9469 Baltimore National Pike 1990 Leased November 2000 Ellicott City, Maryland 21043 7848 Eastpoint Mall 1985 Leased March 2005 Baltimore, Maryland 21224 3476 Emmorton Road 1997 Leased July 2017 Abington, Maryland 21009 11700 Reisterstown Road 1986 Leased June 2006 Reisterstown, Maryland 21136 2 West Rolling Crossroads, #110 1987 Leased October 1997 (1) Baltimore, Maryland 21228 OPERATIONS CENTER: 5801 Moravia Boulevard 1989 Leased September 1999 Suites 5815-5817 Baltimore, Maryland 21206
____________________________________ (1) Excludes five-year renewal option. -34- ITEM 3. LEGAL PROCEEDINGS - -------------------------- There are various claims and lawsuits in which the Company and the Bank periodically are involved incident to their businesses. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ During the fourth quarter of the fiscal year covered by this report, the Company did not submit any matters to the vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER 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 19, 1997, the Company had 855 registered stockholders of record and 3,613,011 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 and dividends declared subsequent to the completion of the Offering.
Dividends Declared Three Months Ended High Low Per Share ----------------------- ------- ------- --------- January 31, 1996....... $ 10.25 $ 9.375 $ -- April 30, 1996......... 10.25 9.50 -- July 31, 1996.......... 10.625 9.50 -- October 31, 1996....... 12.625 9.75 .03 January 31, 1997....... 13.375 11.375 .03 April 30, 1997......... 14.75 12.625 .03 July 31, 1997.......... 21.00 14.00 .03
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. -35- ITEM 6. 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 years ended July 31, 1997 and 1996, and of the Bank at and for the years ended July 31, 1995, 1994 and 1993. 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, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- SELECTED CONSOLIDATED FINANCIAL CONDITION DATA: (IN THOUSANDS) Total assets................................ $502,092 $461,271 $426,174 $400,046 $383,259 Loans receivable, net (1).................. 332,287 278,042 232,089 208,542 221,595 Mortgage-backed securities.................. 101,329 100,195 156,775 117,597 102,478 Investment securities....................... 20,521 24,109 13,918 6,825 8,583 Securities available for sale............... 28,309 40,266 3,030 43,600 27,141 Cash and cash equivalents................... 5,468 4,902 5,360 7,109 5,112 Investments in real estate, net............. 5,057 5,670 5,828 5,623 6,282 Investments in and advances to real estate joint ventures.............. 159 1,270 2,215 3,676 4,576 Deposits.................................... 329,663 313,083 314,613 308,989 317,711 Borrowed funds.............................. 118,369 97,269 78,475 58,197 40,968 Stockholders' equity........................ 46,860 47,270 28,959 29,160 21,193 SELECTED CONSOLIDATED OPERATING DATA: Net interest income......................... $ 5,421 $ 12,865 $ 11,746 $ 11,084 $ 11,176 Net income.................................. 2,283 10 1,289 695 196 PER SHARE DATA: Book value per share...................... $ 13.51 $ 13.06 $ 14.11 $ 14.21 N/A Earnings per share (2).................... .64 .36 -- .41 N/A Pro forma net income per share (2)........ -- .47 N/A .67 N/A Dividends declared per share.............. .12 N/A .40 .30 N/A Dividend payout ratio..................... .19 N/A N/A .73 N/A
- ----------------------------------- (1) Includes loans held for sale. (2) See Note 13 of Notes to Consolidated Financial Statements. -36-
AT OR FOR THE YEARS ENDED JULY 31, ------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- KEY FINANCIAL RATIOS AND OTHER DATA: PERFORMANCE RATIOS: Return on average assets (1)(2)................. .47% .35% --% .33% .18% Return on average equity (1)(3)................. 5.02 3.63 .03 4.68 3.27 Net interest rate spread (4).................... 2.71 2.44 2.48 2.56 2.73 Net interest margin (5)......................... 3.19 2.93 2.87 2.89 2.97 Net interest income to noninterest expense...... 122.52 128.15 125.76 120.11 127.70 Net interest income after provision for loan losses to total noninterest expense.... 118.54 120.46 89.51 98.56 86.44 Noninterest expense to average assets........... 2.57 2.25 2.24 2.36 2.28 QUALITY RATIOS: Nonperforming loans to total loans (6).......... .23 1.31 3.52 1.67 3.34 Nonperforming assets to total assets (7)........ .19 1.01 2.23 1.07 2.33 Allowance for loan losses to nonperforming loans........................... 457.02 112.87 73.90 101.41 30.42 Allowance for loan losses to nonperforming assets (7)...................... 378.71 94.37 66.98 85.70 26.04 EQUITY RATIOS: Stockholders' equity to assets at period end.... 9.33 10.25 6.80 7.29 5.53 Average stockholders' equity to average assets.. 9.30 9.55 6.95 7.05 5.54 Average interest-earning assets to average interest-bearing liabilities........ 110.40 110.54 108.04 107.84 105.16 OTHER DATA: Number of full-service offices.................. 10 9 9 9 9
- ----------------------------------- (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. ITEM 7. 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, 1997, the Company had total consolidated assets of $502.1 million, total consolidated deposits of $329.7 million, and consolidated stockholders' equity of $46.9 million. The Company's executive office is located at 211 North Liberty Street, Baltimore, Maryland 21201 and its telephone number is (410) 752-0400. -37- 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 ten 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, 1997, 1996, and 1995, net interest income constituted 94.1%, 97.8% and 92.6%, of gross earnings (i.e., net interest income and noninterest income), and noninterest income constituted 5.9%, 2.2% and 7.4%, 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 $40.8 million at July 31, 1997 from $461.3 million at July 31, 1996 due largely to an increase in originations and purchases of loans during fiscal 1997. Loans receivable increased by $54.3 million, or 19.5%, to $332.3 million at July 31, 1997 from $278.0 million at July 31, 1996. Securities available for sale decreased $12.0 million, to $28.3 million at July 31, 1997 from $40.3 at July 31, 1996 due to the sale of mortgage-backed securities. Investment securities decreased by $3.6 million to $20.5 million at July 31, 1997 from the call of notes. Deposits increased by $16.6 million, or 5.3%, to $329.7 million at July 31, 1997 from $313.1 million at July 31, 1996. Securities sold under agreements to repurchase increased $8.2 million to $42.6 million at July 31, 1997 and advances from the Federal Home Loan Bank of Atlanta increased $12.9 million to $75.8 million at July 31, 1997. These increases were used to fund loan originations and purchases. Stockholders' equity decreased by $410,000, to $46.9 million due to the stock buyback and dividends paid, partially offset by net income for the year and a decrease in net unrealized holding loss on securities. RESULTS OF OPERATIONS General. The Company reported net income of $2.3 million, $1.5 million and $10,000, for the fiscal years ended July 31, 1997, 1996, and 1995. The $800,000 increase for the fiscal year ended July 31, 1997 resulted from the increase in net interest income of $2.6 million, a decrease in the provision for loan losses of $272,000 and an increase in noninterest income of $675,000, partially offset by an increase in noninterest expense of $2.5 million. -38- Net income represented a return on average assets of .47%, .35%, and .00% and a return on average equity of 5.02%, 3.63% and .03% for the fiscal years ended July 31, 1997, 1996 and 1995, respectively. Interest Income. Interest income totaled $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. Interest income totaled $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 Expense. Interest expense totaled $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 borrowed funds increased $35.3 million, or 43.6%. Interest expense totaled $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% from 5.05%. Total average deposits increased $6.3 million, or 2.0% and total borrowed funds increased $9.9 million, or 14.0%. Net Interest Income. Net interest income increased by $2.5 million, or 19.4%, to $15.4 million for the fiscal year ended July 31, 1997, compared to $12.9 million for the fiscal year ended July 31, 1996. The increase in net interest income was primarily due to the results of operations discussed above and an increase in the Bank's interest rate spread of 27 basis points to 2.71% from 2.44%. 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%. 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 $3.6 million. or 1.0% of total -39- loans receivable at July 31, 1997, compared to $4.4 million, or 1.5%, of total loans receivable at July 31, 1996. The Bank'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, 1996. 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. 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. 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, totaled $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 income totaled $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 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") increased $2.5 million to $12.6 million in fiscal 1997 from $10.0 million in fiscal 1996. The increase was due to an increase in equity in net loss of real estate joint ventures of $414,000 as additional loss on the investment in Quarterfield Farms Joint Venture, 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. Noninterest expense, totaled $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. Income Taxes. The Company's income tax provisions (benefit) were $1,019,000, $801,000 and $(50,000), in the fiscal years ended July 31, 1997, 1996, and 1995, respectively. The effective tax rates for 1997 and 1996 were 30.9% and 34.1%, respectively. -40- 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.
YEARS ENDED JULY 31, -------------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------- --------------------------- --------------------------- 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)...................... $291,446 $24,783 8.50% $240,713 $20,652 8.58% $213,701 $18,120 8.48% Consumer and other loans................ 16,194 1,397 8.63 13,377 1,102 8.24 11,932 916 7.68 Mortgage-backed securities (2).......... 131,390 8,364 6.37 154,945 9,630 6.22 162,178 10,355 6.38 Investment securities (3).............. 33,549 2,437 7.26 18,749 1,255 6.70 13,139 831 6.32 Other (4)............................... 10,815 770 7.12 10,742 779 7.25 10,158 747 7.35 -------- ------- ---- -------- ------- ---- -------- ------- ------ Total interest-earning assets....... 483,394 37,751 7.81 438,526 33,418 7.62 411,108 30,969 7.53 ------- ------- ------- Noninterest-earning assets.................. 6,108 6,986 5,896 -------- -------- -------- Total assets........................ $489,502 $445,512 $417,004 ======== ======== ======== Interest-bearing liabilities: Deposits: Passbook accounts....................... $ 40,328 1,221 3.03 $ 41,468 1,230 2.97 $ 43,347 1,332 3.07 NOW accounts............................ 16,088 242 1.51 15,356 237 1.54 14,675 240 1.64 Money accounts.......................... 42,039 1,388 3.30 45,601 1,511 3.31 51,652 2,008 3.89 Certificates of deposit................. 223,269 12,803 5.73 213,428 12,847 6.02 199,922 11,343 5.67 -------- ------- ---- -------- ------- ---- -------- ------- ------ Total deposits...................... 321,724 15,654 4.87 315,853 15,825 5.01 309,596 14,923 4.82 -------- ------- ---- -------- ------- ---- -------- ------- ------ Borrowings: Advances from Federal Home Loan Bank............................. 77,623 4,465 5.75 46,851 2,770 5.91 50,182 3,084 6.15 Securities sold under agreements to repurchase............................ 38,522 2,211 5.74 34,005 1,958 5.76 20,741 1,216 5.86 -------- ------- ---- -------- ------- ---- -------- ------- ------ Total borrowed funds................ 116,145 6,676 5.75 80,856 4,728 5.85 70,923 4,300 6.06 -------- ------- ---- -------- ------- ---- -------- ------- ------ Total interest-bearing liabilities.. 437,869 22,330 5.10 396,709 20,553 5.18 380,519 19,223 5.05 Noninterest-bearing liabilities............. 6,114 6,245 7,512 -------- -------- -------- Total liabilities............... 443,983 402,954 388,031 Stockholders' equity........................ 45,519 42,558 28,973 -------- -------- -------- Total liabilities and stockholders' equity........ $489,502 $445,512 $417,004 ======== ======== ======== Net interest income......................... $15,421 $12,865 $11,746 ======= ======= ======= Net interest rate spread (5)................ 2.71% 2.44% 2.48% ==== ==== ==== Net interest margin (6)..................... 3.19% 2.93% 2.86% ==== ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities............................. 110.40% 110.54% 108.04% ====== ====== ======
- -------------------------------------------- (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. -41- 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, ----------------------------------------------------------------------------------- 1997 VS. 1996 1996 VS. 1995 ------------------------------------------- -------------------------------------- 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..................... $ 4,353 $(183) $(39) $ 4,131 $2,291 $ 214 $ 27 $2,532 Consumer and other loans........... 232 52 11 295 111 67 8 186 Mortgage-backed securities......... (1,464) 234 (36) (1,266) (462) (276) 13 (725) Investment securities.............. 991 107 84 1,182 354 49 21 424 Other interest-earning assets...... 5 (14) -- (9) 43 (10) (1) 32 ------- ----- ---- ------- ------ ----- ---- ------ Total interest-earning assets.. $ 4,117 $ 196 $ 20 $ 4,333 $2,337 $ 44 $ 68 $2,449 ======= ===== ==== ======= ====== ===== ==== ====== Interest expense: Passbook........................... $ (34) $ 25 $ (1) $ (10) $ (58) $ (46) $ 2 $ (102) NOW................................ 11 (5) -- 6 11 (13) (1) (3) Money fund......................... (118) (4) -- (122) (235) (297) 35 (497) Certificate........................ 592 (609) (28) (45) 766 691 47 1,504 Advances from FHLB................. 1,820 (76) (49) 1,695 (205) (117) 8 (314) Reverse repurchase agreements...... 260 (6) (1) 253 777 (21) (14) 742 ------- ----- ---- ------- ------ ----- ---- ------ Total interest-bearing liabilities................ $ 2,531 $(675) $(79) $ 1,777 $1,056 $ 197 $ 77 $1,330 ======= ===== ==== ======= ====== ===== ==== ====== Change in net interest income.......... $ 1,586 $ 871 $ 99 $ 2,556 $1,281 $(153) $ (9) $1,119 ======= ===== ==== ======= ====== ===== ==== ======
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, -42- 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. 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, 1997, $99.4 million, or 78.5%, of the Company's $126.6 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, 1997, the Company purchased $20.7 million of adjustable-rate one- to four- family mortgage loans. At July 31, 1997, $97.9 million, or 28.0%, of the Company's one- to four family mortgage 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, 1997, time deposits maturing beyond 12 months totaled $95.5 million, or 42.3%, of the Company's total time deposits. At July 31, 1997, 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 $30.0 million, representing a cumulative one- year gap ratio of negative 6.0%. 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 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. -43- Gap Table. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at July 31, 1997, 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, 1997 ----------------------------------------------------------------------- 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 Rate.......................... $ 94,691 $ 26,990 $ 23,385 $ 5,443 $ -- $ -- $150,509 Fixed (1)................................ 29,687 35,532 25,598 35,038 26,295 6,910 159,060 Consumer.................................. 13,420 4,510 3,670 865 253 -- 22,718 Mortgage-backed securities................ 92,410 4,293 1,921 2,208 452 45 101,329 Investment securities..................... 5,820 -- -- 7,952 6,749 -- 20,521 Securities available for sale............. 12,900 8,238 3,451 1,469 2,251 -- 28,309 Other interest-earning assets (2)......... 6,508 -- -- -- -- 4,892 11,400 -------- -------- -------- ------- -------- ------- -------- Total interest-earning assets........... 255,436 79,563 58,025 52,975 36,000 11,847 493,846 Rate sensitive liabilities: Passbook accounts......................... 31,435 4,378 2,084 1,598 289 7 39,791 NOW accounts.............................. 8,940 2,022 1,336 1,679 807 115 14,899 Money accounts............................ 38,908 5,418 2,580 1,978 357 9 49,250 Certificates of deposit................... 130,188 55,405 26,774 13,356 -- -- 225,723 Borrowings................................ 75,976 29,293 11,000 1,350 750 -- 118,369 -------- -------- -------- ------- -------- ------- -------- Total interest-bearing liabilities..... 285,447 96,516 43,774 19,961 2,203 131 448,032 -------- -------- -------- ------- -------- ------- -------- Interest sensitivity gap................... (30,011) (16,953) 14,251 33,014 33,797 11,716 45,814 ======== ======== ======== ======= ======== ======= ======== Cumulative interest-sensitivity gap........ (30,011) (46,964) (32,713) 301 34,098 45,814 45,814 ======== ======== ======== ======= ======== ======= ======== Cumulative interest-sensitivity gap to total assets........................... (6.0)% (9.4)% (6.5)% .1% 6.8% 9.1% Ratio of interest-earning assets to interest-bearing liabilities.............. 89.5 82.4 132.6 265.4 1,634.1 9,043.5 Cumulative ratio of interest sensitive assets to interest sensitive liabilities.. 89.5 87.7 92.3 100.1 107.6 110.2
- --------------------------------- (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 -44- capital 50% of that excess change. The rule provides that the OTS will calculate the IRR component quarterly for each institution from the 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, 1997, 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 $17,007 $(34,291) (67)% 6.79% 300 25,680 (25,619) (50) 5.07 200 34,707 (16,591) (32) 3.28 100 43,354 (7,945) (15) 1.57 Static 51,298 -- -- -- (100) 57,920 6,622 13 1.31 (200) 60,709 9,410 18 1.86 (300) 62,362 11,063 22 2.19 (400) 64,667 13,369 26 2.65
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. 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 6.2% during the month of July 1997. 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, 1997, 1996, and 1995, that qualify for liquidity amounted to $23.5 million, $11.9 million, and $26.4 million, respectively. At July 31, 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 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 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. -45- The Company's borrowings increased to $118.4 million at July 31, 1997 and an average of $116.1 million for the fiscal year ended July 31, 1997. The $21.1 million increase was used to fund loan originations and purchases. The Company's borrowings increased to an average of $80.9 million for the fiscal year ended July 31, 1996, from an average of $70.9 million for the fiscal year ended July 31, 1995. The Company's deposits increased to $329.7 million at July 31, 1997, from an average of $315.9 million over the fiscal year ended July 31, 1996. 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 $4.0 million, $5.4 million and $1.8 million, for the fiscal years ended July 31, 1997, 1996, and 1995, respectively and are primarily determined by the aforementioned results of operations and the timing of cash receipts and disbursements. 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 totaled $39.9 million, $39.8 million and $29.4 million for the fiscal years ended July 31, 1997, 1996, and 1995, respectively. Disbursements for purchases of mortgage-backed securities totaled $9.1 million, $42.7 million and $17.4 million for the years ended July 31, 1997, 1996, and 1995, respectively. Disbursements for loans originated and purchased were $107.7 million, $94.4 million and $58.3 million for the years ended July 31, 1997, 1996, and 1995, respectively. Disbursements for purchases of investment securities totaled $11.0 million, $29.2 million and $7.8 million for the years ended July 31, 1997, 1996 and 1995, respectively. Proceeds from the sales and repayments of mortgage-backed securities totaled $16.5 million $67.9 million and $18.1 million for the years ended July 31, 1997, 1996, and 1995, respectively. Proceeds from loan principal repayments totaled $48.2 million, $40.7 million and $27.8 million for the years ended July 31, 1997, 1996 and 1995, respectively. Proceeds from the sales and maturities of investment securities totaled $18.5 million, $12.0 million and $1.9 million for the years ended July 31, 1997, 1996 and 1995, 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 totaled $36.4 million, $33.9 million and $25.8 million for the fiscal years ended July 31, 1997, 1996 and 1995, respectively. Additionally, on October 31, 1995, the Company completed its conversion to a stock holding company and received net proceeds of $19.3 million. The net increase (decrease) in deposits was $16.6 million, ($1.5) million and $5.6 million for the years ended July 31, 1997, 1996 and 1995, respectively. The activity in net proceeds (repayments) from FHLB advances was $12.9 million, $18.7 million and $(6.6) million for the years ended July 31, 1997, 1996 and 1995, respectively. The net increase in securities sold under agreements to repurchase was $8.2 million, $107,000 and $26.9 million for the years ended July 31, 1997, 1996 and 1995, 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 8.65%, 8.65% and 18.28%, respectively, at July 31, 1997. The Bank has other sources of liquidity, including a $120 million line of credit with the FHLB. At July 31, 1997, the Bank's FHLB advances totaled $75.8 million. 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. -46- IMPACT OF NEW ACCOUNTING STANDARDS Earnings Per Share. In February 1997, the FASB issued SFAS No. 128, Earnings Per Share ("SFAS 128"), which is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and replaces the presentation of primary EPS with a presentation of basic EPS. It requires dual presentation of basic and diluted EPS on the face of the consolidated statement of income and reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Earlier application is not permitted but disclosure for pro forma EPS amounts computed using the standards established by SFAS No. 128 is permitted for periods ending prior to the effective date. Adoption of SFAS No. 128 would not have a material effect on current earnings per share disclosures. Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. It does not, however, specify when to recognize or how to measure items that make up comprehensive income. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect the provisions of this statement. In June 1997, the FASB issued No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. Earlier application is encouraged. Management has not determined when it will adopt the provisions of SFAS No. 131 but believes that it will not have a material effect on the Company's financial position or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- -47- American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION July 31, 1997 and 1996
Assets 1997 1996 ------ -------- ------- (In Thousands) Cash: On hand and due from banks $ 3,155 2,671 Interest-bearing deposits 2,313 1,837 Federal funds sold -- 394 Securities available for sale, at fair value (note 2) 28,309 40,266 Investment securities, fair value of $20,669 and $23,651, respectively (note 3) 20,521 24,109 Mortgage-backed securities, fair value of $101,902 and $97,627, respectively (notes 4 and 11) 101,329 100,195 Loans receivable, net (notes 5 and 11) 332,287 278,042 Federal Home Loan Bank stock, at cost (note 17) 4,195 3,141 Investments in real estate, net (note 6) 5,057 5,670 Investments in and advances to real estate joint ventures (note 7) 159 1,270 Property and equipment, net (note 8) 1,792 1,198 Prepaid expenses and other assets 728 612 Deferred income taxes (note 12) 2,247 1,866 -------- ------- $502,092 461,271 ======== ======= Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deposits (note 9) $329,663 313,083 Securities sold under agreements to repurchase (note 10) 42,596 34,445 Advances from the Federal Home Loan Bank of Atlanta (note 11) 75,773 62,824 Drafts payable 3,076 859 Advance payments by borrowers for taxes and insurance 2,043 1,760 Income taxes payable 877 -- Accrued expenses and other liabilities 1,204 1,030 -------- ------- Total liabilities 455,232 414,001 -------- ------- Stockholders' equity (notes 13 and 17): 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 and 3,781,475 shares outstanding 40 40 Additional paid-in capital 30,677 30,705 Unearned common stock acquired by management recognition and retention plans (MRRP) (903) (77) Unearned employee stock ownership plan (ESOP) shares (1,440) (1,629) Treasury stock at cost, 367,489 and 199,025 shares at July 1997 and 1996, respectively (4,145) (2,040) Retained income -- substantially restricted 23,740 21,970 Net unrealized holding loss on securities, net of income taxes (1,109) (1,699) -------- ------- Total stockholders' equity 46,860 47,270 Commitments (notes 5, 8, 13 and 14) -------- ------- $502,092 461,271 ======== =======
See accompanying notes to consolidated financial statements. 48 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS Years ended July 31, 1997, 1996 and 1995
1997 1996 1995 -------- ------- ------- (In Thousands) Interest income: Loans receivable $26,180 21,754 19,036 Mortgage-backed securities 8,364 9,630 10,355 Investment securities 2,437 1,255 831 Other 770 779 747 ------- ------ ------ Total interest income 37,751 33,418 30,969 ------- ------ ------ Interest expense: Deposits (note 9) 15,654 15,825 14,923 Borrowed funds 6,676 4,728 4,300 ------- ------ ------ Total interest expense 22,330 20,553 19,223 ------- ------ ------ Net interest income 15,421 12,865 11,746 Provision for loan losses (note 5) 500 772 3,386 ------- ------ ------ Net interest income after provision for loan losses 14,921 12,093 8,360 ------- ------ ------ Noninterest income: Fees and service charges 805 640 592 Gain (loss) on sales of: Loans receivable, net 23 41 20 Mortgage-backed securities, net (7) (558) (5) Investment securities, net (59) (14) 15 Other 206 184 318 ------- ------ ------ Total noninterest income 968 293 940 ------- ------ ------ Noninterest expenses: Salaries and employee benefits 4,715 4,276 4,066 Net occupancy 1,320 1,341 1,300 Professional services 452 380 399 Advertising 794 684 442 Federal deposit insurance premiums 2,457 772 809 Furniture, fixtures and equipment 487 324 286 Equity in net loss of real estate joint ventures (note 7) 607 193 288 Loss on investments in real estate (note 6) 53 390 330 Other 1,702 1,679 1,420 ------- ------ ------ Total noninterest expenses 12,587 10,039 9,340 ------- ------ ------ Income (loss) before income taxes 3,302 2,347 (40) Income tax provision (benefit) (note 12) 1,019 801 (50) ------- ------ ------ Net income $ 2,283 1,546 10 ======= ====== ====== Net income per share of common stock (note 13): From date of conversion .64 .36 -- ======= ====== ====== Proforma N/A .47 N/A ======= ====== ======
See accompanying notes to consolidated financial statements. 49 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended July 31, 1997, 1996 and 1995
Unearned common Net stock unrealized Additional acquired Unearned holding Common paid-in by ESOP Treasury Retained loss on stock capital MRRP shares stock income securities Total -------- ----------- -------- --------- --------- --------- ----------- ------- (In Thousands) Balance at July 31, 1994 $ 2,052 7,652 (177) -- -- 21,081 (1,448) 29,160 Change in net unrealized loss 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 expense -- -- 45 -- -- -- -- 45 Net income -- -- -- -- -- 10 -- 10 ------- ---------- ------ -------- -------- ------ ---------- ------ Balance at July 31, 1995 2,052 7,652 (132) -- -- 20,662 (1,275) 28,959 Change in net unrealized loss 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 expense -- -- 55 -- -- -- -- 55 Borrowings for employee stock ownership plan (ESOP) (note 15) -- -- -- (1,746) -- -- -- (1,746) Compensation expense ESOP - (note 15) -- 1 -- 117 -- -- -- 118 Purchase of common stock -- -- -- -- (2,040) -- -- (2,040) Net income -- -- -- -- -- 1,546 -- 1,546 ------- ---------- ------ -------- -------- ------ ---------- ------ Balance at July 31, 1996 40 30,705 (77) (1,629) (2,040) 21,970 (1,699) 47,270 Change in net unrealized loss on securities, net of income taxes (note 2) -- -- -- -- -- -- 510 510 Amortization of net unrealized holding loss (note 4) -- -- -- -- -- (80) 80 -- Cash dividends declared (.12) (note 13) -- -- -- -- -- (433) -- (433) Common stock acquired by MRRP -- -- (1,096) -- -- -- -- (1,096) MRRP expense -- -- 270 -- -- -- -- 270 Compensation expense - ESOP (note 15) -- 77 -- 189 -- -- -- 266 Exercise of stock options -- (105) -- -- 211 -- -- 106 Purchase of common stock -- -- -- -- (2,316) -- -- (2,316) Net income -- -- -- -- -- 2,283 -- 2,283 ------- ---------- ------ -------- -------- ------ ---------- ------ Balance at July 31, 1997 $ 40 30,677 (903) (1,440) (4,145) 23,740 (1,109) 46,860 ======= ========== ====== ======== ======== ====== ========== ======
See accompanying notes to consolidated financial statements. 50 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended July 31, 1997, 1996 and 1995
1997 1996 1995 --------- -------- -------- (In Thousands) Cash flows from operating activities: Net income $ 2,283 1,546 10 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 542 532 483 Noncash compensation under stock-based benefit plans 536 173 45 Amortization of loan fees (424) (398) (437) Amortization of premiums and discounts, net 324 177 (38) Provision for losses on loans and investments in real estate 512 930 3,430 Loss (gain) on sales of assets, net 43 531 (30) Loans originated for sale (4,842) (2,754) (3,990) Sales of loans originated for sale 4,451 4,194 2,159 Deferred income taxes (844) 409 (138) (Increase) decrease in prepaid expenses and other assets (116) 12 202 Increase in accrued expenses and other liabilities 174 43 163 Decrease (increase) in income taxes receivable -- 380 (112) Increase in income taxes payable 877 -- -- Other, net 488 (338) 66 -------- ------- ------- Net cash provided by operating activities 4,004 5,437 1,813 -------- ------- ------- Cash flows from investing activities: Sales of investment securities available for sale 3,941 969 1,015 Maturities of investment securities available for sale -- -- 842 Purchases of investment securities available for sale -- (2,000) (842) Sales of mortgage-backed securities available for sale 7,972 56,036 3,100 Repayments of mortgage-backed securities available for sale 3,776 4,082 432 Purchases of mortgage-backed securities available for sale (3,164) (10,989) (3,894) Maturities and redemptions of investment securities 14,520 11,000 -- Purchases of investment securities (11,040) (27,176) (6,983) Repayments of mortgage-backed securities 4,743 7,741 14,569 Purchases of mortgage-backed securities (5,984) (31,714) (13,470) Loan principal repayments 48,197 40,659 27,763 Loan originations (75,448) (73,671) (43,092) Loan purchases (27,414) (17,972) (11,216) Increase in deferred loan fees, net 564 515 533 Federal Home Loan Bank stock purchases, net (1,054) (227) -- (Continued)
See accompanying notes to consolidated financial statements. 51 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995 ---------- --------- --------- (In Thousands) Cash flows from investing activities, continued: Decrease in investments in real estate $ 1,144 2,960 1,151 Decrease in investments in and advances to real estate joint ventures 504 752 1,173 Purchases of property and equipment (1,136) (764) (438) --------- -------- -------- Net cash used in investing activities (39,879) (39,799) (29,357) Cash flows from financing activities: Net increase (decrease) in deposits 16,580 (1,530) 5,624 Net increase in securities sold under agreements to repurchase 8,151 107 26,871 Proceeds from Federal Home Loan Bank advances 164,376 215,147 123,698 Repayment of Federal Home Loan Bank advances (151,427) (196,460) (130,291) Increase (decrease) in drafts payable 2,217 (429) 111 Increase (decrease) in advance payments by borrowers for taxes and insurance 283 (92) 153 Proceeds from common stock offering, net -- 21,040 -- Common stock acquired by ESOP -- (1,746) -- Dividends paid on common stock (433) (93) (371) Purchase of treasury stock (2,316) (2,040) -- Proceeds from exercise of options 106 -- -- Purchase of stock to fund 1996 MRRP (1,096) -- -- --------- -------- -------- Net cash provided by financing activities 36,441 33,904 25,795 --------- -------- -------- Net increase (decrease) in cash and cash equivalents 566 (458) (1,749) Cash and cash equivalents at beginning of year 4,902 5,360 7,109 --------- -------- -------- Cash and cash equivalents at end of year $ 5,468 4,902 5,360 ========= ======== ======== Supplemental information: Interest paid on deposits and borrowed funds $ 22,390 20,457 19,152 Income taxes paid (received), net $ 946 (104) 165 ========= ======== ======== Noncash activities: Loans transferred to real estate acquired through foreclosure $ 543 2,960 1,400 ========= ======== ========
See accompanying notes to consolidated financial statements. 52 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1997, 1996, and 1995 (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. 53 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 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. 54 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 $22,000, $56,000, and $95,000 for the years ended July 31, 1997, 1996 and 1995, respectively. Investments in Real Estate -------------------------- Ground rents are carried at cost. Real estate acquired through foreclosure is recorded initially at its lower of cost or estimated fair value and subsequently at the lower of cost or estimated fair value less estimated costs to sell. Management estimates fair value based on appraisals and/or discounted 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 or the date that principal or interest is 90 days or more past-due. 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. 55 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Description of Business, Summary of Significant Accounting Policies and ----------------------------------------------------------------------- Other Matters, Continued ------------------------ Provision for Loan Losses, continued ------------------------------------ In accordance with Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of Loan" (SFAS No. 114) and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan Income Recognition Disclosures" (SFAS No. 118), the Company identifies impaired loans and measures impairment (i) at the present value of expected cash flows discounted at the loan's effective interest rate; (ii) at the observable market price; or (iii) at the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, an impairment is recognized through a valuation allowance and corresponding provision for credit losses. A loan is determined to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest past-due. The Company generally considers a period of delay in payment to include delinquency up to 90 days. SFAS No. 114 does not apply to larger groups of smaller-balance homogeneous loans such as consumer installment, residential first and second mortgage loans and credit card loans. These loans are collectively evaluated for impairment. The Company's impaired loans are therefore comprised primarily of commercial loans, including commercial mortgage loans, and real estate development and construction loans. In addition, impaired loans are generally loans which management has placed in nonaccrual status since 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 recognizes 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. Income Taxes ------------ The Company and its subsidiary file a consolidated federal income tax return. 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. 56 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 1997 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. Stock-Based Compensation ------------------------ In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock Based-Compensation (SFAS No. 123). SFAS No. 123 permits companies to adopt a new fair value-based method to account for stock-based employee compensation plans or to continue using the intrinsic value method. The Company uses the intrinsic value method to account for stock-based employee compensation plans. Under this method, compensation cost is recognized for awards of shares of common stock to employees only if the quoted market price of the stock at the grant dates (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Information required by SFAS No. 123 concerning the Company's stock based compensation plans is provided in note 13. Transfers and Servicing of Financial Assets and Extinguishments of ------------------------------------------------------------------ Liabilities ----------- The Company adopted the provisions of SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125) as of January 1, 1997. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities and requires, among other things, the Company to record at fair value, assets and liabilities resulting from a transfer of financial assets. In December 1996, SFAS No. 127 was issued which deferred the effective date of certain provisions of SFAS No. 125 related to repurchase agreements, securities lending and similar transactions until January 1, 1998. The adoption of the currently effective portions of SFAS No. 125 did not have a material impact on the Company's financial statements. 57 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) Securities Available for Sale ----------------------------- The amortized cost and fair value of securities available for sale are summarized as follows at July 31:
1997 ------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value --------- ---------- ----------- ------ (In Thousands) U.S. government and agency obligations $ 3,001 -- (6) 2,995 Federal National Mortgage Association (FNMA) mortgage-backed securities 12,931 -- (207) 12,724 Federal Home Loan Mortgage Corporation (FHLMC) mortgage- backed securities 3,371 -- (52) 3,319 FNMA collateralized mortgage obligations (CMOs) 2,238 39 (6) 2,271 FHLMC CMOs 6,762 56 -- 6,818 ------- ---- ------ ------ 28,303 95 (271) 28,127 Accrued interest receivable 182 -- -- 182 ------- ---- ------ ------ $28,485 95 (271) 28,309 ======= ==== ====== ====== 1996 ------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value --------- ---------- ---------- ------ (In Thousands) U.S. government and agency obligations $ 7,069 -- (262) 6,807 FNMA 17,552 -- (654) 16,898 FHLMC 4,527 -- (166) 4,361 Government National Mortgage Association (GNMA) mortgage- backed securities 3,698 37 -- 3,735 FNMA CMOs 6,510 33 (88) 6,455 FHLMC CMOs 1,676 -- (4) 1,672 ------- ---- ------ ------ 41,032 70 (1,174) 39,928 Accrued interest receivable 338 -- -- 338 ------- ---- ------ ------ $41,370 70 (1,174) 40,266 ======= ==== ====== ======
The proceeds from the sales of securities available for sale and the gross realized gains and losses were $11.9 million, $59,000 and $125,000, respectively, for the year ended July 31, 1997, $57.0 million, $228,000 and $800,000, respectively, for the year ended July 31, 1996 and $4.1 million, $25,000 and $15,000, respectively, for the year ended July 31, 1995. 58 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) Securities Available for Sale, Continued ---------------------------------------- A summary of maturities of securities available for sale is as follows at July 31, 1997:
Amortized cost Fair Value --------- ---------- Due within 12 months $ 182 182 Due beyond 12 months but within 5 years 14,535 14,305 Due beyond 5 years but within 10 years 1,001 999 Beyond 10 years 12,767 12,823 ------- ------ $28,485 28,309 ======= ======
(3) Investment Securities --------------------- The amortized cost and fair value of investment securities are summarized as follows at July 31:
1997 -------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value --------- ---------- ------------- ------ (In Thousands) U. S. government and agency obligations due: Less than 1 year $ 1,500 -- (36) 1,464 5 through 10 years 7,951 153 -- 8,104 Greater than 10 years 10,747 59 (28) 10,778 ------- ------ ---- ------ 20,198 212 (64) 20,346 Accrued interest receivable 323 -- -- 323 ------- ------ ---- ------ $20,521 212 (64) 20,669 ======= ====== ==== ======
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 ======= ====== ==== ======
There were no sales of investment securities held to maturity during the years ended July 31, 1997, 1996 and 1995. Investment securities were pledged as collateral for reverse repurchase agreements with amortized cost and fair values of $19.7 million and $19.9 million, respectively, at July 31, 1997. 59 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) Mortgage-Backed Securities -------------------------- The amortized cost and fair value of mortgage-backed securities are summarized as follows at July 31:
1997 ----------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value ---------- ---------- -------------- ------- (In Thousands) FNMA $ 24,509 139 (236) 24,412 FHLMC 6,546 150 (55) 6,641 FNMA CMOs 27,600 297 (272) 27,625 FHLMC CMOs 42,249 659 (109) 42,799 -------- -------- ------- 100,904 1,245 (672) 101,477 Accrued interest receivable 425 -- -- 425 -------- -------- ------- ------- $101,329 1,245 (672) 101,902 ======== ======== ======= ======= 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 CMOs 28,091 -- (919) 27,172 FHLMC CMOs 35,731 -- (1,107) 34,624 Other CMOs 52 -- -- 52 -------- -------- ------- ------- 99,719 -- (2,568) 97,151 Accrued interest receivable 476 -- -- 476 -------- -------- ------- ------- $100,195 -- (2,568) 97,627 ======== ======== ======= =======
There were no sales of mortgage-backed securities held to maturity during the years ended July 31, 1997, 1996 and 1995. A summary of maturities of mortgage-backed securities as of July 31, 1997:
Amortized cost Fair value --------- ---------- Due within 12 months $ 425 425 Due beyond 12 months but within 5 years 3,212 3,238 Due beyond 5 years but within 10 years 5,560 5,484 Beyond 10 years 92,132 92,755 --------- ------- $101,329 101,902 ========= =======
The amortized cost of mortgage-backed securities at July 31, 1997 includes unrealized holding losses totaling approximately $1.5 million for securities transferred from the available for sale portfolio. 60 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) Mortgage-Backed Securities, Continued ------------------------------------- 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 $25.6 million and $25.1 million, respectively, at July 31, 1997 and 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. 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 $23.7 million and $23.3 million, respectively, at July 31, 1997; and $47.2 million and $45.6 million, respectively, at July 31, 1996. (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. 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. 61 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Loans Receivable, Continued --------------------------- Loans receivable are summarized as follows at July 31:
1997 1996 -------- ------- (In Thousands) First mortgage loans: One-to-four family residential $207,643 156,374 Multi-family residential 30,230 35,930 Commercial 35,071 37,695 Construction 19,134 23,320 Land development 20,477 14,183 FHA insured and VA guaranteed 13,243 11,974 Loans held for sale 718 350 -------- ------- Total first mortgage loans 326,516 279,826 Consumer and other loans 15,498 13,026 Second mortgage loans 4,745 3,434 Loans secured by deposit accounts 461 508 Participation in loans fully guaranteed by Agency for International Development 116 152 Accrued interest receivable 1,898 1,547 -------- ------- 349,234 298,493 -------- ------- Less: Unearned loan fees, net 1,342 1,202 Undisbursed portion of loans in process 11,958 14,837 Allowance for loan losses 3,647 4,412 -------- ------- 16,947 20,451 -------- ------- Loans receivable, net $332,287 278,042 ======== =======
Nonperforming and restructured loans are summarized as follows at July 31:
1997 1996 ------ ----- (In Thousands) Nonaccruing loans $ 765 3,773 Accruing loans 90 days or more delinquent 33 136 Restructured loans 776 1,636 ------ ----- $1,574 5,545 ====== =====
62 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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:
1997 1996 1995 ----- ---- ---- (In Thousands) Interest income that would have been recorded $ 166 567 898 Interest income recognized 94 151 274 ----- ---- ---- Interest income foregone $ 72 416 624 ===== ==== ====
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, 1997 are approximately $6.2 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, 1997 management has identified approximately $2.7 million 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. Impaired loans as defined by Statement 114 and the allocated valuation allowances at July 31 are as follows:
1997 1996 ---------------------- ---------------------- Loan Valuation Loan Valuation balance allowance balance allowance --------- --------- --------- --------- (In thousands) Impaired with valuation allowance $ 757 300 4,235 2,053 Impaired without valuation allowance 24 -- -- -- --------- --------- --------- --------- Total impaired loans $ 781 300 4,235 2,053 ========= ========= ========= =========
The allocated valuation allowance for impaired loans at July 31, 1997 and 1996, and activity related thereto for the years ended July 31, 1997 and 1996 is included in the allowance for loan losses summary. 63 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Loans Receivable, Continued --------------------------- The average recorded investment in impaired loans and the amount of interest income recognized for the years ended July 31, 1997 and 1996 were (in thousands):
1997 1996 --------- --------- Average recorded investment in impaired loans $ 3,101 5,270 Interest income recognized during impairment, all on cash basis 82 87
Activity in the allowance for loan losses is summarized as follows for the years ended July 31:
1997 1996 1995 --------- --------- --------- (In Thousands) Balance at beginning of year $ 4,412 6,361 3,669 Provision charged to expense 500 772 3,386 Charge-offs (1,635) (3,043) (1,033) Recoveries 370 322 339 --------- --------- --------- Balance at end of year $ 3,647 4,412 6,361 ========= ========= =========
Loans serviced for others, which are not included in the Company's assets, were approximately $49.5 million, $50.0 million and $50.3 million at July 31, 1997, 1996 and 1995, 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:
1997 1996 -------------------- -------------------- Fixed Floating Fixed Floating Rate Rate Rate Rate -------- -------- -------- -------- (In Thousands) Mortgage loans $ 2,637 4,221 3,480 5,440 Lines of credit -- 10,139 -- 9,219 Irrevocable letters of credit -- 1,716 -- 2,097 ======== ======== ======== ========
The interest rate ranges on fixed rate mortgage loan commitments were 6.875% to 10.5% at July 31, 1997 and 7.125% to 9.25% at July 31, 1996. 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. 64 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Loans Receivable, Continued --------------------------- Substantially all of the Company's commitments at July 31, 1997 and 1996 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. (6) Investments in Real Estate -------------------------- Investments in real estate are summarized as follows at July 31:
1997 1996 --------- --------- (In Thousands) Ground rents $ 4,892 4,904 Acquired through foreclosure 165 766 --------- --------- Investments in real estate, net $ 5,057 5,670 ========= =========
Changes in the allowance for losses on investments in real estate are summarized as follows at July 31:
1997 1996 1995 --------- --------- --------- (In Thousands) Balance at beginning of year $ -- -- 8 Provision charged to expense 12 158 44 Charge-offs (12) (158) (52) --------- --------- --------- Balance at end of year $ -- -- -- ========= ========= =========
Loss on investments in real estate consists of the following for the years ended July 31:
1997 1996 1995 --------- --------- --------- (In Thousands) Operation of investments in real estate $ 41 232 286 Provision for losses on investments in real estate 12 158 44 --------- --------- --------- $ 53 390 330 ========= ========= =========
65 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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:
1997 1996 ------- ------- (In Thousands) Assets: Real estate under development $ -- 1,378 Other 235 204 ------- ------- $ 235 1,582 Liabilities: Due to American National Savings Bank, F.S.B $ -- 701 Due to others 60 382 Partners' equity: National Development Corporation 175 499 ------- ------- $ 235 1,582 ======= =======
1997 1996 1995 ------- ------- ------- (In Thousands) Operations ---------- Sales $ 2,313 3,085 3,234 Costs of sales 2,196 2,918 3,067 ------- ------- ------- 117 167 167 Other income 4 9 8 Other expense (445) (415) (837) ------- ------- ------- Net loss $ (324) (239) (662) ======= ======= =======
66 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) Property and Equipment ---------------------- Property and equipment are summarized as follows at July 31:
Estimated 1997 1996 useful lives ------- ------- ------------ (In Thousands) Leasehold improvements $ 3,652 3,133 5 - 15 years Furniture and equipment 3,666 3,233 3 - 10 years Automobiles 78 78 3 years ------- ------- 7,396 6,444 Less accumulated depreciation and amortization 5,604 5,246 ------- ------- Property and equipment, net $ 1,792 1,198 ======= =======
At July 31, 1997 the Company was obligated under noncancelable long-term operating leases for the main office, operations center and nine of its branch offices. The leases, five of which have renewal options, expire on various dates extending to 2017 and have aggregate minimum lease payments for succeeding fiscal years approximately as follows (in thousands):
1998 $1,142 1999 1,155 2000 1,801 2001 1,062 2002 770 Subsequent to 2002 1,995 ------ Total minimum lease payments $7,925 ======
Rent expense for the years ended July 31, 1997, 1996 and 1996 was approximately $1,066,000, $980,000, and $949,000, respectively. 67 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) Deposits Deposits are summarized as follows at July 31:
Weighted average rate --------------------- 1997 1996 ---------------------- ---------------------- 1997 1996 Amount % Amount % ------- ------- --------- --------- --------- --------- (Dollars in Thousands) Certificate 5.79% 6.00% $ 225,723 68.5% $ 216,119 69.0% Noncertificate: Passbook 3.03 3.04 39,791 12.1 40,781 13.0 NOW 1.47 1.56 14,899 4.5 15,038 4.8 Money Fund 3.75 3.03 49,250 14.9 41,145 13.2 --------- --------- --------- --------- $ 329,663 100.0% $ 313,083 100.0% Certificate accounts maturing: ========= ========= ========= ========= Under 12 months $ 130,188 57.7% 118,772 55.0% 13 months to 24 months 36,661 16.2 41,271 19.1 25 months to 36 months 18,744 8.3 18,552 8.6 37 months to 48 months 9,484 4.2 10,172 4.7 49 months to 60 months 17,290 7.7 9,539 4.4 Beyond 60 months 13,356 5.9 17,813 8.2 --------- --------- --------- --------- $ 225,723 100.0% $ 216,119 100.0% ========= ========= ========= =========
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $22.6 million and $22.4 million at July 31, 1997 and 1996, respectively. Interest expense on deposits is summarized as follows for the years ended July 31:
1997 1996 1995 ------- ------ ------ (In Thousands) Certificate $12,802 12,847 11,343 Passbook 1,221 1,230 1,332 NOW 242 237 240 Money Fund 1,389 1,511 2,008 ------- ------ ------ $15,654 15,825 14,923 ======= ====== ======
68 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 $43.4 million and $43.2 million, respectively, as of July 31, 1997, and $47.2 million and $45.6 million, respectively, as of July 31, 1996. At July 31, 1997 and 1996 the securities sold under agreements to repurchase involved the purchase of the same securities. The weighted average interest rate of the agreements was 5.73% at July 31, 1997. Certain additional information regarding securities sold under agreements to repurchase is as follows at July 31:
1997 1996 1995 --------- --------- --------- (In Thousands) Maximum amount outstanding at month-end $ 46,423 39,011 34,338 Approximate average balance 38,522 34,005 20,741 ========= ========= =========
(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:
1997 1996 ------- ------- (In Thousands) 5.53% -- 6.50%, due in 1996 $ -- 7,373 4.89% -- 5.58%, due in 1997 13,550 17,550 5.84% -- 6.21%, due in 1997 -- 10,500 6.27% -- 7.09%, due in 1997 -- 4,476 5.45% -- 6.14%, due in 1998 28,443 9,000 6.21% -- 6.48%, due in 1998 5,405 -- 7.32%, due in 1998 1,000 1,000 4.64% -- 5.42%, due in 1999 5,975 10,675 6.04% -- 6.63%, due in 1999 2,300 -- 5.56% -- 6.28%, due in 2000 7,000 -- 5.29% -- 6.12%, due in 2002 10,000 -- 6.43%, due in 2006 1,350 1,500 5.00%, due in 2014 750 750 ------- ------- $75,773 62,824 ======= =======
69 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) Advances from the Federal Home Loan Bank of Atlanta, Continued -------------------------------------------------------------- The Company has a $120 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:
1997 1996 1995 ------ ------ ------ (In Thousands) Current: Federal $1,698 370 126 State 109 (28) (30) ------ ------ ------ 1,807 342 96 ------ ------ ------ Deferred: Federal $ (645) 376 (119) State (143) 83 (27) ------ ------ ------ (788) 459 (146) Income tax provision (benefit) $1,019 801 (50) ====== ====== ======
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:
1997 1996 ------ ----- (In Thousands) Net unrealized holding losses on securities $ 593 1,056 Allowances for losses on loans and investments in real estate 1,288 773 Interest and fees on loans 200 279 Other assets 544 336 ------ ----- Total deferred tax assets 2,625 2,444 Federal Home Loan Bank stock dividends 353 353 Other liabilities 25 225 ------ ----- Total deferred tax liabilities 378 578 ------ ----- $2,247 1,866 ====== =====
70 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) Income Taxes, Continued ----------------------- 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:
1997 1996 1995 ------- ----- ----- (In Thousands) Federal income tax provision (benefit) at statutory rate $1,123 798 (14) Adjustments: State income taxes, net of federal income tax benefit (22) 36 (38) Other (82) (33) 2 ------ ---- ---- Provision (benefit) for income taxes $1,019 801 (50) ====== ==== ====
(13) Stockholders' Equity -------------------- Conversion and Reorganization On June 23, 1997 American National Bancorp, Inc. and Crestar Corporation (Crestar) announced the signing of a definitive agreement under which Crestar will acquire the Company in a transaction to be accounted for under the purchase method. The merger is expected to be completed no earlier than November 6, 1997 and prior to December 31, 1997. 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 Merger, each share of American National 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: (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. 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. 71 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. 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. The Board of Directors and stockholders adopted the 1996 Stock Option Plan for directors, officers and employees of the Company which authorized the grant of stock options to directors, officers and certain employees for an aggregate of 218,213 shares of authorized but unissued common stock. Options are exercisable at the market price at the time of grant on a cumulative basis in installments at a rate of 20% per year commencing one year from the date of grant and expire ten years from the date of grant. 72 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) Stockholders' Equity, Continued ------------------------------- Information with respect to stock options is as follows for the years ended July 31, 1997 and 1996:
1997 1996 ----------------------- --------------------- Weighted Weighted average average exercise exercise Shares price Shares price ------- --------- ------- --------- Outstanding at beginning of year 117,046 5.16 117,046 5.16 Granted 142,442 11.54 -- -- Canceled 21,256 5.15 -- -- ------- --------- ------- --------- Outstanding at end of year 238,232 8.97 117,046 5.16 ------- --------- ------- --------- Exercisable at end of year 98,700 87,300 ======= =======
The weight average remaining life of options outstanding at July 31, 1997 was 8 years. The Company applies the intrinsic value method in accounting for its stock options and accordingly, no compensation cost has been recognized for its options in the financial statements. Had the Company determined compensation costs based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been increased to the pro forma amounts indicated below:
1997 1996 ------ ----- Net income: As reported $2,283 1,546 Pro forma 2,226 1,546 Net income per share: As reported .64 .36 Pro forma .62 .36
The weighted average fair value of options granted during 1997 was $2.40 on the date of grant. The fair values of the options granted were calculated using the Black-Scholes option-pricing model with the following weighted average assumptions used for the grants in 1997: risk-free interest rate of 5.80%; expected volality of 22%; expected option lives of three years and expected dividends of 1.00%. The required exclusion of the proforma compensation adjustment for stock option grants prior to the 1996 fiscal year causes the disclosed proforma net income not to be indicative of proforma net income for future periods. 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. 73 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) Stockholders' Equity, Continued ------------------------------- Net Income Per Common Share Net income per share of common stock for the year ended July 31, 1997 is computed based on 3,582,913 shares of common stock and common stock equivalents. 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 and common stock equivalents. 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. Net income per share of common stock for year ended July 31, 1995 is computed by dividing net income for the year by 2,052,000, the number of shares of common stock issued and outstanding for the year. 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 and 1995 to $92,600 and $371,000, 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, 1997, approximately $13.4 million for distribution. 74 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) Stockholders' Equity, Continued ------------------------------- Dividends on Common Stock 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. (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, 1997 and 1996, amounts recognized in the statements of financial condition as of July 31, 1997 and 1995 and the composition of net pension cost for the years ended July 31, 1997, 1996 and 1995:
1997 1996 ------- ------- (In Thousands) Actuarial present value of benefit obligation: Vested $ 1,394 1,111 Nonvested 13 6 ------- ------- Total accumulated benefit obligation $ 1,407 1,117 ======= ======= Projected benefit obligation for service rendered to date $(2,030) (1,607) Plan assets at fair value 2,062 1,662 ------- ------- Plan assets greater than projected benefit obligation 32 55 Unrealized transition asset at April 1, 1987 being recognized over 15 years 68 81 Unrecognized prior service cost (106) (118) Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions 20 (57) ------- ------- Accrued pension cost included in other liabilities $ 14 (39) ======= ======= 1997 1996 1995 ------- ------- ------- (In Thousands) Net pension cost included the following components: Service cost-benefits earned during the period $ 108 101 96 Interest cost on projected benefit obligation 132 122 118 Actual return on plan assets (279) (200) (68) Net amortization and deferral 136 87 (48) ------- ------- ------- Net pension cost $ 97 110 98 ======= ======= =======
75 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 7.5% in 1997 and 8.0% in 1996 and the expected long-term rate of return on assets was 8.5% in 1997 and 1996. The rate of increase of future compensation levels used was 5% in 1997 and 1996. 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, 1997, 1996 and 1995. (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. 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 $175,000 and $118,000 for the year ended July 31, 1997 and 1996, respectively. The fair value of unearned ESOP shares at July 31, 1997 totaled $2.8 million. The ESOP shares as of July 31 were as follows:
1997 1996 ------- ------- Allocated shares 20,881 2,909 Shares earned, but unallocated 9,652 8,728 Unearned shares 144,037 162,933 ------- ------- 174,570 174,570 ======= =======
76 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. 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. The carrying value and estimated fair value of financial instruments is summarized as follows at July 30:
1997 1996 -------------------- -------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value -------- ---------- -------- ---------- (In Thousands) Assets: Cash and interest-bearing deposits $ 5,468 5,468 4,508 4,508 Federal funds sold -- -- 394 394 Ground rents owned 4,892 4,156 4,904 3,863 Federal Home Loan Bank of Atlanta stock 4,195 4,195 3,141 3,141 Securities available for sale 28,309 28,309 40,266 40,266 Investment securities 20,521 20,669 24,109 23,651 Mortgage-backed securities 101,329 101,902 100,195 97,627 Loans receivable 332,287 338,508 278,042 277,056 Liabilities: Savings accounts 329,663 331,823 313,083 315,988 Securities sold under agreements to repuchase 42,596 42,633 34,445 34,420 Advances from the Federal Home Loan Bank of Atlanta 75,773 75,100 62,824 62,029 Advances payments by borrowers for taxes, insurance and ground rents 2,043 2,043 1,760 1,760
77 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (16) Fair Value of Financial Instruments, Continued ---------------------------------------------- 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. 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. 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. 78 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. (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. The most recent notification from the Office of Thrift Supervision (OTS) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well 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. 79 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (17) Regulatory Matters, Continued ----------------------------- The Bank's actual capital amounts and ratios are also presented in the table (in thousands).
To Be Well Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------- ------------------- ----------------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ----- ---------- ----- ---------- --------------- As of July 31, 1997: Tangible capital (a) $ 43,557 8.65% $ 7,554 1.50% $ 25,181 greater than 5% Core capital (a) 43,557 8.65% 15,108 3.00% 30,217 greater than 6 Risk-based capital (b) 46,755 18.28% 20,457 8.00% 25,571 greater than 10% As of July 31, 1996: Tangible capital (a) 39,800 8.64% $ 6,907 1.50% $ 23,022 greater than 5% Core capital (a) 39,800 8.64% 13,813 3.00% 27,626 greater than 6 Risk-based capital (b) 41,801 18.20% 18,380 8.00% 22,975 greater than 10% - ----------------------------------------------------------------------------------------------------------------------------
(a) Percentage of capital to average assets. (b) Percentage of capital to risk weighted assets. 80 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 (in thousands):
1997 1996 ------- ------- STATEMENT OF FINANCIAL CONDITION Cash $ 2,900 6,709 Equity in net assets of the Bank 43,852 40,562 Note receivable - Bank 1,440 1,629 Other receivable 209 -- ------- ------- $48,401 48,900 ======= ======= Accrued expenses and other liabilities $ 101 1 Stockholders' equity 48,300 48,899 ------- ------- $48,401 48,900 ======= ======= STATEMENT OF INCOME Income from note receivable $ 131 107 Expenses 360 137 ------- ------- Loss before equity in net income of subsidiary and income taxes (229) (30) Equity in net income of subsidiary 2,434 1,564 ------- ------- Income before income taxes 2,205 1,534 Income taxes (benefit) (78) (12) ------- ------- Net income $ 2,283 1,546 ======= =======
81 American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (18) Condensed Financial Information (Parent Company Only) -----------------------------------------------------
1997 1996 ------- ------- STATEMENT OF CASH FLOWS Operating activities: Net income $ 2,283 1,546 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiary (2,434) (1,564) Other, net (108) 1 ------- ------- Net cash used in operating activities (259) (17) ------- ------- Investing activities: Purchase of stock of subsidiary -- (8,899) Note receivable repayment (disbursement) 189 (1,746) Loan to fund ESOP -- 117 ------- ------- Net cash provided by (used in) investing activities 189 (10,528) ------- Financing activities: Puchase of stock to fund MRP (1,096) -- Dividends paid on common stock (433) -- Common stock acquired by ESOP -- (1,746) Proceeds from common stock offering net of expenses -- 21,040 Proceeds from exercise of options 106 -- Purchase of treasury stock (2,316) (2,040) ------- ------- Net cash (used in) provided by financing activities (3,739) 17,254 ------- ------- Decrease in cash and equivalents (3,809) 6,709 Cash and equivalents, beginning of year 6,709 -- ------- ------- Cash and equivalents, end of year $ 2,900 6,709 ======= =======
82 Independent Auditors' Report [KPMG Peat Marwick LLP LOGO APPEARS HERE] 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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick, LLP KPMG Peat Marwick LLP Baltimore, Maryland September 4, 1997 - -------------------------------------------------------------------------------- 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) 1997: - ---- Interest income $ 8,910 9,431 9,482 9,928 Net interest income 3,516 3,864 3,955 4,086 Provision for loan losses 210 210 40 40 Income before provision for income taxes (1,042) 1,172 1,476 1,696 Net income (688) 773 981 1,217 ======= ======= ======= ======= Net income per common share $ (.19) .22 .28 .34 ======= ======= ======= ======= 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 ======= ======= ======= =======
83 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not Applicable PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The Company's Board of Directors is currently composed of seven members. The Company's bylaws provide that approximately one-third of the directors are to be elected annually. Directors of the Company are generally elected to serve for a three year period or until their respective successors shall have been elected and shall qualify. The table below sets forth certain information, as of September 19, 1997, regarding the composition of the Company's Board of Directors, including the terms of office of Board members. Except as indicated herein, there are no arrangements or understandings between any nominee and any other person pursuant to which such nominee was selected.
Shares of Age at Positions Common Stock July 31 Held in the Director Current Term Beneficially Percent Name (1) 1997 Company Since (2) to Expire Owned (3) Of Class -------- ---- ---------------------- --------- ------------ ------------- -------- Howard K. Thompson 84 Chairman of the Board 1973 1999 63,619 * Lenwood M. Ivey 64 Director and Treasurer 1979 1999 26,257 * Betty J. Stull 67 Director and Corporate 1972 1999 28,268 * Secretary David L. Pippenger 57 Director 1989 1997 36,706 * Jimmie T. Noble 55 Director 1994 1997 12,405 A. Bruce Tucker 60 President, Chief 1981 1998 135,351 * Executive Officer and Director Joseph M. Solomon 47 Director, Executive 1990 1998 77,327 * Vice President and Chief Operating Officer
- ------------------ (*) Less than 1%. (1) The mailing address for each person listed is 211 North Liberty Street, Baltimore, Maryland 21201. Each of the persons listed is also a director of American National Savings Bank, F.S.B. (2) Reflects initial appointment to the Board of Directors of the Bank. (3) 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. -84- 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 September 19, 1997 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. The business experience of each of the above directors for at least the past five years is as follows: Howard K. Thompson is Chairman of the Board of the Company and has been Chairman of the Bank or Company since 1989. He has been a director of the Bank or Company for 24 years, and was elected Chairman in April 1989. Mr. Thompson, currently retired, is the former President of Thompson Industries, Inc. Lenwood M. Ivey is a special consultant to the Mayor's Office of Baltimore City. He is also President of The Baltimore City Foundation, a Board member of the Office of Enterprise Development, a member of the Baltimore Urban League and NAACP, and a member of the Maryland Chapter of the National Association of Community Development. Mr. Ivey is a member of the Audit, Budget and Commercial Income Producing Loan Committees. Betty J. Stull is presently retired. She has been affiliated with the Bank or Company since 1951, and is a member of the audit and executive compensation committees. David L. Pippenger is Senior Attorney for Amoco Corporation. He is chairman of the executive compensation committee and a member of the executive, audit and delinquent loan committees. Jimmie T. Noble has been a partner in the local certified public accounting firm of Sturgill and Associates since April 1994. From September 1973 to March 1994, Mr. Noble was affiliated with Grant Thornton, an international certified public accounting firm in which he became a partner in August 1980. He is chairman of the audit and budget committees, and a member of the executive compensation committee. A. Bruce Tucker is President and Chief Executive Officer of the Company and has been President of the Bank since October 1981, and was named Chief Executive Officer of the Bank in January 1985. He has been an employee of the Bank or Company since 1966. He is a member of the Neighborhood Housing Services of America, Housing Task Force on Housing Opportunities, and a Director of Harbel Housing Partnership. Joseph M. Solomon has been employed by the Bank or Company since 1972. He was elected Executive Vice President in 1985, appointed Chief Operating Officer in 1990, and elected to the Board in 1990. He is a Director and past Chairman of the Maryland League of Financial Institutions, a Director of the Maryland Mortgage Bankers Association, a Director of Baltimore Corporation for Housing Partnerships, and a Director of the Maryland Chapter, Neighborhood Housing Services of America. The following table sets forth certain information as of July 31, 1997 regarding the executive officers of the Company who are not also directors.
NAME AGE POSITION WITH THE BANK ------ --- ------------------------- Mark S. Barker............ 44 Senior Vice President Howard I. Scaggs, III..... 52 Senior Vice President James M. Uveges........... 47 Senior Vice President and Chief Financial Officer
The business experience of each of the above executive officers for at least the past five years is as follows: -85- Mark S. Barker has been employed by the Bank or Company since 1974, and presently serves as Senior Vice President of the Savings Division and Branch Operations. Mr. Barker serves as an officer or director of various community and charitable organizations. Howard I. Scaggs, III, has been employed by the Bank or Company since 1965, and presently serves as Senior Vice President of the Appraisal/Construction Division. James M. Uveges has been employed by the Bank or Company since March 1990, and presently serves as Senior Vice President/Chief Financial Officer. Prior to joining the Bank, Mr. Uveges was Senior Manager for over nine years at an international certified public accounting firm. He is a Director of the United Way of Central Maryland, and past President and member of the Central Maryland Chapter of Maryland Association of CPAs. OWNERSHIP REPORTS BY OFFICERS AND DIRECTORS The Common Stock is registered pursuant to Section 12(g) of the Exchange Act. The officers and directors of the Company and beneficial owners of greater than 10% of the Common Stock ("10% beneficial owners") are required to file reports on Forms 3, 4 and 5 with the SEC disclosing beneficial ownership and changes in beneficial ownership of the Common Stock. SEC rules require disclosure in the Company's Annual Report on Form 10-K of the failure of an officer, director or 10% beneficial owner of the Common Stock to file a Form 3, 4 or 5 on a timely basis. Based on the Company's review of such ownership reports, no officer, director or 10% beneficial owner of the Company failed to file ownership reports on a timely basis for the fiscal year ended July 31, 1997. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- DIRECTORS' COMPENSATION Cash Compensation. Members of the Boards of Directors of the Company and Bank each received $8,500 during the fiscal year ended July 31, 1997, plus $200 ($250 effective June 1997), each for each meeting attended. The Chairman of the Board received an additional $17,300. Members of the Board committees were paid $200 ($250 effective June 1997) for each meeting attended during the fiscal year ended July 31, 1997. The Company paid a total of $76,000 in directors' and committee fees for the year ended July 31, 1997. Officers who are also directors of the Company receive no additional compensation or fees for serving as directors of the Company. 1993 Directors Option Plan. In 1993, the Board of Directors of the Bank adopted the 1993 Stock Option Plan for Outside Directors (the "1993 Directors Option Plan"), which was approved by the Bank's stockholders at the 1993 Annual Meeting. Under the 1993 Directors Option Plan, options to purchase 17,054, 7,445, 11,048 and 7,445 shares of Common Stock (as adjusted) were granted to directors Thompson, Ivey, Pippenger, and Stull, respectively. Additionally, on September 19, 1996, options to purchase 608, 271, 333, 300 and 234 shares were awarded to directors Thompson, Ivey, Pippenger, Stull and Noble. The exercise price of the options is equal to the fair market value of the shares underlying such option on the date the option is granted, or $5.15 per share (as adjusted) for options granted on the date of completion of the Bank's initial stock offering, and $12.50 for options granted on September 19, 1996. All options granted under the 1993 Directors Option Plan may be exercised from time to time in whole or in part, and expire upon the earlier of 10 years following the date of grant or three years following the date the optionee ceases to be a director. As of July 31, 1997 no options awarded under the 1993 Directors Option Plan had been exercised. The duration and vesting schedule of such options were not affected by the Conversion, but the aggregate number of shares and exercise price were adjusted pursuant to the Exchange Ratio. 1993 Directors Recognition Plan. In 1993, the Board of Directors of the Bank established the 1993 Recognition and Retention Plan for Outside Directors (the "1993 Directors Recognition Plan"), which was approved by the Bank's stockholders at the 1993 Annual Meeting. Under the 1993 Directors Recognition Plan, the Bank contributed funds to the 1993 Directors Recognition Plan to enable it to acquire 17,460 shares of Common Stock (as adjusted). Awards are granted in the form of Common Stock that are restricted by the terms of the 1993 Directors Recognition Plan ("Restricted Stock"). Under the 1993 Directors Recognition Plan, 5,573, 2,434, 3,612 and 2,434 shares of Restricted Stock (as adjusted) were awarded to directors Thompson, Ivey, Pippenger, and Stull, respectively. Restricted Stock is nontransferable and nonassignable. Additionally, on September 19, 1996, 270, 121, 148, 133 and -86- 104 shares of Common Stock were awarded to directors Thompson, Ivey, Pippenger, Stull and Noble. Participants in the 1993 Directors Recognition Plan become vested in the shares of stock covered by an award, and all restrictions lapse, at a rate of 25% per year commencing one year from the date of the award; provided, however, that in the case of a Director age 70 or older, the award will become fully vested at the end of 12 months of consecutive service after the date of the award. Awards to non-employee directors become fully vested upon a director's disability, death, or following a termination of service in connection with a change in control of the Bank or the Company. The holders of Restricted Stock have the right to vote such shares during the restricted period. In the Conversion, Restricted Stock was converted into restricted shares of Common Stock of the Company pursuant to the Exchange Ratio. 1996 Stock Benefit Plans. Following approval by the Company's stockholders at the Annual Meeting of Stockholders held on November 21, 1996, the directors of the Company who are not full time employees received awards of options to purchase shares of the Company's common stock under the 1996 Stock Option Plan as follows: Mr. Thompson--21,636 options; Mr. Ivey--9,677 options; Ms. Stull-- 10,672 options; Mr. Pippenger--11,868 options; Mr. Noble--8,340 options. These directors also received an award of shares of restricted stock under the Company's 1996 Recognition and Retention Plan as follows: Mr. Thompson--8,654 shares; Mr. Ivey--3,869 shares; Ms. Stull--4,269 shares; Mr. Pippenger--4,747 shares; and Mr. Noble--3,339 shares. Vesting of these awards was to occur in five equal annual installments, provided that all awards become exercisable in the event the recipient terminates service due to normal retirement, death or disability, or in the event of a change in control of the Company. EXECUTIVE COMPENSATION The Company has not paid any compensation to its executive officers since its formation. However, the Company does reimburse the Bank for services performed on behalf of the Company by its officers. The Company does not presently anticipate paying any compensation to such persons until it becomes actively involved in the operations or acquisition of businesses other than the Bank. The following table sets forth for the fiscal years ended July 31, 1997, 1996, and 1995, certain information as to the total remuneration paid by the Company to the Chief Executive Officer and Chief Operating Officer of the Company as of July 31, 1997 ("Named Executive Officers"). -87-
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------- --------------------------------- AWARDS PAYOUTS --------------------- --------- ALL NAME AND YEAR OTHER RESTRICTED OPTIONS/ OTHER PRINCIPAL POSITION ENDED SALARY ANNUAL STOCK SARS (#) LTIP COMPENSATION (1) 7/31 (2) BONUS COMPENSATION AWARDS(3) (4) PAYOUTS (5) - ------------------- ----- -------- ----- ------------ ---------- -------- --------- ------------ A. Bruce Tucker 1997 $155,548 $-- $-- $231,763 41,795 $-- $24,991 President and Chief 1996 147,903 -- -- -- -- -- 24,991 Executive Officer 1995 140,860 -- -- -- -- -- 21,000 - ------------------- ----- -------- ----- ------------ ---------- -------- --------- ------------ Joseph M. Solomon 1997 $113,302 $-- $-- $135,538 26,666 $-- $ 6,065 Executive Vice 1996 107,907 -- -- -- -- -- 6,065 President and Chief 1995 103,757 -- -- -- -- -- 5,530 Operating Officer
- -------------- (1) No other executive officer received salary and bonuses that in the aggregate exceeded $100,000. (2) Includes amounts deferred at the election of the Named Executive Officers pursuant to the Bank's 401(k) Plan and amounts awarded pursuant to the Bank's Deferred Compensation Plan. (3) Relates to awards of 20,000 and 11,700 shares of Common Stock granted to Mr. Tucker and Mr. Solomon, respectively, pursuant to the Company's 1996 Recognition and Retention Plan in November, 1996. The market value per share of the Common Stock was $11.50 on the date of grant. Such awards vest in five equal installments, and will be 100% vested upon termination of employment due to death or disability or following a change in control. Also relates to awards of 141 and 79 shares of Common Stock granted to Mr. Tucker and Mr. Solomon, respectively, pursuant to the Company's 1993 Recognition and Retention Plan in September 1996. The market value per share of the Common Stock was $12.50 on the date of the grant. (4) Relates to options granted pursuant to the Company's 1996 Stock Option Plan in November 1996, which become exercisable in equal installments at a rate of 20% per year commencing one year from the date of grant, subject to accelerated vesting upon termination of employment due to death or disability or following a change in control. (5) Includes payments made on behalf of the Named Executive Officer pursuant to the Company's life insurance plan maintained for executive officers. The Company also provides certain members of senior management with the use of an automobile and other personal benefits which have not been included in the table. The aggregate amount of such other benefits did not exceed the lesser of $50,000 or 10% of each named person's cash compensation. Executive Compensation Committee Interlocks and Insider Participation. During the fiscal year ended July 31, 1997, directors David L. Pippenger, Chairperson Betty J. Stull and Jimmie T. Noble served on the Executive Compensation Committee. Report of the Compensation Committee on Executive Compensation. The Executive Compensation Committee evaluates the performance of the Chief Executive Officer and Chief Operating Officer, and reviews and approves increases to base compensation as well as the level of bonus, if any, to be awarded. The Executive Compensation Committee also approves any perquisites payable to such officers. In addition, the Executive Compensation Committee determines the budget for salaries for other executive officers, and reviews the report of the Chief Executive Officer regarding the allocation of compensation of such other officers. In determining whether the base salary of the Chief Executive Officer and Chief Operating Officer should be increased, the budget for other executive officers and whether to approve the Chief Executive Officer's allocation of such amounts, the Executive Compensation Committee takes into account individual performance, performance of the Company and information regarding compensation paid to executives performing similar duties for financial institutions in the Company's market area. The Executive Compensation Committee uses a peer comparison employing at least two published compensation surveys in determining the salary and benefits of the Chief Executive Officer and Chief Operating Officer. While the Executive Compensation Committee does not use strict numerical formulas to determine changes in compensation for the Chief Executive Officer and Chief Operating Officer, and while it weighs a variety of different factors in its deliberations, it has emphasized and will continue to emphasize earnings, profitability and return on average assets as factors in setting the compensation of such officers. Other nonquantitative factors considered -88- by the Committee in fiscal 1996 included general management oversight of the Company, the quality of communication with the Board of Directors, and the productivity of employees. Finally, the Committee considered the standing of the Company with customers and the community, as evidenced by the level of customer/community complaints and compliments. While each of the quantitative and nonquantitative factors described above was considered by the Committee, such factors were not assigned a specific weight in evaluating the performance of the Chief Executive Officer and Chief Operating Officer. Rather, all factors were considered, and based upon the effectiveness of such officers in addressing each of the factors, and the range of compensation paid to officers of peer institutions, the Committee approved an increase in the base salary of the Chief Executive Officer of 5%. The above report has been provided by the current members of the Executive Compensation Committee: Directors Pippenger, Stull and Noble. Employment Agreements. The Bank has entered into employment agreements with Messrs. Tucker, Solomon, Uveges and Barker. Mr. Tucker's employment agreement provides for a term of up to three years, and Messrs. Solomon, Uveges and Barker's employment agreements provide for a term of up to two years. Commencing on the first anniversary date and continuing each anniversary date thereafter, the Board of Directors may extend each agreement for an additional year such that the remaining terms shall be up to three years and two years, respectively, unless written notice of nonrenewal is given by the Board of Directors after conducting a performance evaluation. The agreements provide that the base salary of the executive will be reviewed annually. In addition to the base salary, the agreements provide that the executive is to receive all benefits provided to permanent full time employees of the Bank, including among other things, disability pay, participation in stock benefit plans and other fringe benefits applicable to executive personnel. The agreements permit the Bank to terminate the executive's employment for cause at any time. Termination for cause is defined in the employment agreements to mean termination because of the executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation or final cease-and- desist order, or material breach of the employment agreement. In the event the Bank chooses to terminate the executive's employment for reasons other than for cause, or upon the termination of the executive's employment for reasons other than a change in control, as defined, or in the event of the executive's resignation from the Bank upon (i) failure to be reelected to his current office, (ii) a material change in his functions, duties or responsibilities, (iii) relocation of his principal place of employment, (iv) the liquidation or dissolution of the Bank or the Company, or (v) a breach of the agreement by the Bank, the executive, or in the event of death, his beneficiaries, would be entitled to receive an amount equal to the greater of the remaining payments due under the remaining term of the agreement or three times the average base salary of Mr. Tucker, or two times the average base salary of Messrs. Solomon, Uveges and Barker, including bonuses and other cash compensation paid, and the amount of any benefits received pursuant to any employee benefit plans maintained by the Bank. A change in control is defined in the employment agreement generally to include (i) a plan of reorganization, merger or sale of substantially all of the assets of the Bank or the Company or similar transaction in which the Bank or the Company is not the resulting entity; (ii) certain changes in the Board of Directors of the Bank or the Company; (iii) a change of control within the meaning of the Home Owners' Loan Act and the rules and regulations thereunder; and (iv) an event that would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K. If termination, voluntary or involuntary, follows a change in control of the Company or the Bank, as defined in the agreement, the executive or, in the event of his death, his beneficiaries, would be entitled to a payment equal to the greater of (i) the payments due under the remaining term of the agreement or (ii) in the case of Mr. Tucker 2.99 times his average annual compensation over the five years preceding termination, and in the case of Messrs. Solomon, Uveges and Barker, two times average annual compensation over the five years preceding termination. The Bank would also continue the executive's life, health, and disability coverage for the remaining unexpired term of the agreement to the extent allowed by the plan or policies maintained by the Bank from time to time. Each employment agreement provides that for a period of one year following termination, the executive agrees not to compete with the Bank in any city, town or county in which the Bank maintains an office or has filed an application to establish an office. -89- Pension Plan. The Company makes available to all full-time employees who have attained the age of 21 and completed one year of service with the Company, a defined benefit noncontributory pension plan. The pension plan provides for monthly payments to or on behalf of each covered employee upon the employee's retirement at age 65. These payments are calculated in accordance with a formula based on the employee's "average monthly compensation," which is defined as the highest average of total compensation for the last five consecutive calendar years of employment. The following table illustrates annual pension benefits at age 65 under the most advantageous plan provisions available at various levels of compensation and years of service.
Years of Benefit Service ------------------------------------------------------------ Average Salary 5 10 15 20 25 30 35 - ---------------- ------ ------- ------- ------- ------- ------- ------- $ 20,000 $1,100 $ 2,200 $ 3,300 $ 4,400 $ 5,500 $ 6,600 $ 7,700 $ 30,000 1,650 3,300 4,950 6,600 8,250 9,900 11,550 $ 50,000 2,750 5,500 8,250 11,000 13,750 16,500 19,250 $ 75,000 4,125 8,250 12,375 16,500 20,625 24,750 28,875 $100,000 5,500 11,000 16,500 22,000 27,500 33,000 38,500 $125,000 6,875 13,750 20,625 27,500 34,375 41,250 48,125 $150,000 8,250 16,500 24,750 33,000 41,250 49,500 57,750
Under the Plan, the Company makes an annual contribution for the benefit of eligible employees computed on an actuarial basis. Total pension expenses for the year ended July 31, 1997, were $97,442. Employee benefits under the plan do not vest until five years of credited service. After five years, benefits under the plan are 100% vested. As of July 31, 1997, Mr. Tucker and Mr. Solomon had 31 and 25 years of creditable service, respectively, under the pension plan. 1993 Stock Option Plan. The Board of Directors of the Bank adopted the American National Savings Bank, F.S.B. 1993 Incentive Stock Option Plan (the "1993 Incentive Stock Option Plan") in connection with the Bank's initial stock offering. Senior officers and certain key employees are eligible to participate in the 1993 Incentive Stock Option Plan. The 1993 Incentive Stock Option Plan authorizes the grant of the equivalent of 122,220 stock options (as adjusted). Pursuant to the 1993 Incentive Stock Option Plan, grants may be made of (i) options to purchase Common Stock intended to qualify as incentive stock options under Section 422 of the Code, (ii) options that do not so qualify ("non- statutory options") and (iii) limited rights (described below) that are exercisable only upon a change in control of the Bank or the Company. The grant of awards under the 1993 Incentive Stock Option Plan is determined by a committee of the Board of Directors consisting of all non-employee Directors (the "Option Committee"). The Option Committee presently consists of four directors, none of whom is eligible to receive options under the 1993 Incentive Stock Option Plan. 1996 Stock Option Plan. The Board of Directors of the Company has adopted the American National Bancorp, Inc. 1996 Stock Option Plan (the "Stock Option Plan"), which has been approved by the stockholders. Certain directors, officers and employees of the Bank and the Company are eligible to participate in the Stock Option Plan. The Stock Option Plan authorizes the grant of stock options and limited rights to purchase 218,213 shares of Common Stock. Pursuant to the Stock Option Plan, grants may be made of (i) options to purchase Common Stock intended to qualify as incentive stock options under Section 422 of the Code, (ii) options that do not so qualify ("nonstatutory options") and (iii) limited rights (described below) that are exercisable only upon a change in control of the Bank or the Company. Nonemployee directors are eligible to receive only nonstatutory options. -90- Set forth below is information relating to options granted under the 1993 and 1996 Stock Option Plans to the named executive officers during the year ended July 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR ============================================================================================= INDIVIDUAL GRANTS - --------------------------------------------------------------------------------------------- PERCENT OF TOTAL OPTIONS EXERCISE OR GRANTED TO EMPLOYEES IN BASE EXPIRATION NAME OPTIONS GRANTED FY 1996 PRICE DATE - ------------------ --------------- ------------------------ -------------- ---------- A. Bruce Tucker 1,795 23.7% $12.50 9-19-06 40,000 20.1% $11.50 11-21-06 - ------------------ --------------- ------------------------ -------------- ---------- Joseph M. Solomon 1,200 15.9% $12.50 9-19-06 25,466 12.8% $11.50 11-21-06 ================== =============== ======================== ============== ==========
Set forth below is certain additional information concerning options outstanding to the named executive officers at July 31, 1997 under the 1993 and 1996 Stock Option Plans. During fiscal 1997, 3,000 options were exercised.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES ====================================================================================================== NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS AT THE-MONEY OPTIONS AT FISCAL YEAR-END YEAR-END (1) ------------------------- ------------------------- SHARES ACQUIRED VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE NAME UPON EXERCISE REALIZED (#) ($) - ------------------- --------------- -------- ------------------------- ------------------------- A. Bruce Tucker 3,000 $14,190 35,655/40,000 $498,456/$320,000 - ------------------- --------------- -------- ------------------------- ------------------------- Joseph M. Solomon -- -- 22,540/25,466 $314,629/$203,728 =================== =============== ======== ========================= =========================
- ----------------- (1) Equals the difference between the aggregate exercise price of such options and the aggregate fair market value of the shares of Common Stock that would be received upon exercise, assuming such exercise occurred on July 31, 1997, at which date the closing sales price of the Common Stock as reported on the Nasdaq National Market was $19.50. -91- PERFORMANCE GRAPH Set forth hereunder is a performance graph comparing (a) the total return on the Common Stock for the period beginning with the last trade on October 31, 1995, the first day the Common Stock traded on the Nasdaq National Market, through July 31, 1997, (b) the cumulative total return on stocks included in the Nasdaq Composite Index from the close of business on October 31, 1995, though July 31, 1997, and (c) the cumulative total return on stocks included in the Nasdaq Bank Index from the close of business on October 31, 1995, through July 31, 1997. There can be no assurance that the Company's stock performance will continue in the future with the same or similar trend depicted in the graph. The Company will not make or endorse any predictions as to future stock performance. COMPARISON OF 21 MONTH CUMULATIVE TOTAL RETURN/*/ SINCE THE COMPANY'S INITIAL OFFERING ON OCTOBER 31, 1995
American Measurement Period National NASDAQ Stock NASDAQ (Fiscal Year Covered) Bancorp, Inc. Market (U.S.) Bank Index - --------------------- --------------- ------------- ---------- Measurement Pt-10/31/1995 $100.00 $100.00 $100.00 FYE 07/31/1996 $101.00 $105.00 $112.00 FYE 07/31/1997 $197.00 $155.00 $191.00
* $100 INVESTED ON 10/31/95 IN STOCK OR INDEX- INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING JULY 31. -92- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ Persons and groups owning in excess of five percent of the Common Stock are required to file certain reports with the Securities and Exchange Commission regarding such ownership pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"). The following table sets forth, as of July 31, 1997, the shares of Common Stock beneficially owned by all directors and executive officers as a group and by each person who was the beneficial owner of more than five percent of the Common Stock. This information is based solely upon information supplied to the Company and the filings required pursuant to the Exchange Act.
AMOUNT OF SHARES OWNED AND NATURE PERCENT OF SHARES NAME AND ADDRESS OF OF BENEFICIAL OF COMMON STOCK BENEFICIAL OWNERS OWNERSHIP (1) OUTSTANDING - -------------------------------------- ------------------- ------------------ 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. 2000 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 5.00 777 Mariners Island Boulevard San Mateo, CA 94404 All Directors and Executive Officers 502,241(2) 12.7% as a Group (10 persons)
- -------------------- (1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial owner for purposes of this table, of any shares of Common Stock if he has shared voting or investment power with respect to such security, or has a right to acquire beneficial ownership at any time within 60 days from the date as of which beneficial ownership is being determined. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares. Includes all shares held directly as well as by spouses and minor children, in trust and other indirect ownership, over which shares the named individuals effectively exercise sole or shared voting and investment power. (2) Includes 309,432 shares of Common Stock underlying options granted pursuant to the American National Savings Bank, F.S.B. 1993 and 1996 Stock Option Plans. Also includes 78,128 shares of Common Stock subject to restrictions under the American National Savings Bank, F.S.B. 1996 Recognition and Retention Plan with respect to which shares the recipients have voting or investment power. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- Federal law requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, loans made to a director or executive officer in excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000) must be approved in advance by a majority of the disinterested members of the Board of Directors. The Bank provides loans to its officers, directors, and employees to purchase or refinance personal residences as well as consumer loans. Loans made to officers, directors, -93- and executive officers are made in the ordinary course of business on the same terms and conditions as the Bank would make to any other customer in the ordinary course of business. The Bank intends that all transactions between the Bank and its executive officers, directors, holders of 10% or more of the shares of any class of its common stock and affiliates thereof, will contain terms no less favorable to the Bank than could have been obtained by it in arm's-length negotiations with unaffiliated persons and will be approved by a majority of independent outside directors of the Bank not having any interest in the transaction. At July 31, 1997, the Bank had loans with an aggregate balance of $64,000 outstanding to its executive officers and directors. All such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other unfavorable features. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FROM 8-K - -------------------------------------------------------------------------- (a)(1) Financial Statements -------------------- The following information is included elsewhere in this Form 10-K. Consolidated Statements of Financial Condition as of July 31, 1997 and 1996........................................48 Consolidated Statements of Operations for the years ended July 31, 1997, 1996 and 1995........................................49 Consolidated Statements of Stockholders' Equity for the years ended July 31, 1997, 1996 and 1995..................................50 Consolidated Statements of Cash Flows for the years ended July 31, 1997, 1996 and 1995........................................51 Notes to Consolidated Financial Statements..........................53 Report of Independent Auditors......................................83 (a)(2) Financial Statement Schedules ----------------------------- All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Financial Statements. -94-
(a)(3) Exhibits Sequential Page Reference to Prior Number Where Filing or Exhibit Attached Exhibits Regulation S-K Number Attached Are Located in This Exhibit Number Document Hereto Form 10-K Report - -------------- -------- ----------------- --------------------- 2 Plan of acquisition, (2) Not Applicable reorganization, arrangement, liquidation or succession 3.1 Articles of Incorporation (1) Not Applicable 3.2 Bylaws (1) Not Applicable 4 Instruments defining the (1) Not Applicable rights of security holders, including debentures 9 Voting trust agreement None Not Applicable 10.1 1993 Incentive Stock Option Plan (1) Not Applicable 10.2 1993 Stock Option Plan (1) Not Applicable for Outside Directors 10.3 1993 Recognition and Retention Plan (1) Not Applicable for Employees 10.4 1993 Recognition and Retention Plan (1) Not Applicable for Outside Directors 10.5 Employment Agreement of A. Bruce (1) Not Applicable Tucker 10.6 Employment Agreement of (1) Not Applicable Joseph Solomon 10.7 401(k) Plan, including Amendment (1) Not Applicable 10.8 Employee Stock Ownership Plan (1) Not Applicable 10.9 1996 Stock Option Plan (3) Not Applicable 10.10 1996 Recognition and Retention Plan (3) Not Applicable 10.11 Employment Agreement of (3) Not Applicable James M. Uveges 10.12 Employment Agreement of (3) Not Applicable Mark S. Barker 11 Statement re: computation Not Not Applicable
-95-
of per share earnings Required 12 Statement re: computation Not Not Applicable of ratios Required 13 Annual Report to Security Holders None Not Applicable 16 Letter re: change in certifying None Not Applicable accountants 18 Letter re: change in accounting None Not Applicable principles 21 Subsidiaries of Registrant 21 98 22 Published report regarding None Not Applicable matters submitted to vote of security holders 23 Consents of Experts and Counsel Not Required Not Applicable 24 Power of Attorney Not Required Not Applicable 27 Financial Data Schedule 27 Not Applicable 28 Information from reports None Not Applicable furnished to state insurance regulatory authorities 99 Additional Exhibits None Not Applicable
- ----------------------------- (1) Filed as exhibits to the Registrant's Registration Statement on Form S-1 filed with the SEC on July 13, 1995, as amended on August 30, 1995. All such previously filed documents are hereby incorporated by reference in accordance with Item 601 of Regulation S-K. (2) Filed as an Exhibit to the Registrant's Current Report on Form 8-K filed with the SEC on July 3, 1997. Such document is hereby incorporated by reference in accordance with Item 601 of Regulation S-K. (3) Filed as exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1996. All such previously filed documents are hereby incorporated by reference in accordance with Item 601 of Regulation S-K. (b) Reports on Form 8-K: ------------------- On July 3, 1997, the Registrant filed a Current Report on Form 8-K reporting that it had entered into an Agreement and Plan of Reorganization with Crestar Financial Corporation ("Crestar") by and among the Registrant, the Bank, Crestar, and Crestar Bank. See "PART I-ITEM 1-Business." -96- SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN NATIONAL BANCORP, INC. Date: October 27, 1997 By: /s/ A. Bruce Tucker ------------------- A. Bruce Tucker, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: /s/ A. Bruce Tucker By: /s/ James M. Uveges -------------------- -------------------- A. Bruce Tucker, President, Chief Executive James M. Uveges, Senior Vice President and Officer and Director Chief Financial Officer (principal accounting officer) Date: October 27, 1997 Date: October 27, 1997 By: /s/ Howard K. Thompson By: /s/ Lenwood M. Ivey ----------------------- -------------------- Howard K. Thompson, Chairman of the Board Lenwood M. Ivey, Director Date: October 27, 1997 Date: October 27, 1997 By: /s/ David L. Pippenger By: /s/ Joseph M. Solomon ----------------------- ---------------------- David L. Pippenger, Director Joseph M. Solomon, Director Date: October 27, 1997 Date: October 27, 1997 By: /s/ Betty J. Stull By: /s/ Jimmie T. Noble ------------------- -------------------- Betty J. Stull, Director Jimmie T. Noble, Director Date: October 27, 1997 Date: October 27, 1997
-97- EX-21 2 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
PERCENTAGE OF STATE OF INCORPORATION PARENT SUBSIDIARY OWNERSHIP OR ORGANIZATION ------ ---------- ------------- ---------------------- American National American National Bancorp, Inc. Savings Bank, F.S.B. 100% Federal American National American National Insurance Savings Bank, F.S.B. Agency, Inc. 100% Maryland American National National Development Savings Bank, F.S.B. Corporation 100% Maryland American National ANSB Corporation 100% Delaware Savings Bank, F.S.B. American National Liberty Street, Inc. 100% Maryland Savings Bank, F.S.B. American National Fayette Street Realty, Inc. 100% Maryland Savings Bank, F.S.B.
-98- EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 YEAR JUL-31-1997 JUL-31-1997 3,155 2,313 0 0 28,309 121,850 122,571 332,287 3,647 502,092 329,663 75,976 7,200 37,443 0 0 40 44,820 502,092 26,180 10,801 770 37,751 15,654 22,330 15,421 500 (66) 12,587 3,302 3,302 0 0 2,283 .64 .64 3.19 963 301 776 6,160 4,412 1,635 370 3,647 3,647 0 3,335
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