-----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, E2bqIVZHPttdkKrVqw7VmEmJ1j1LnVZMYc6Hu1ciXlLHRqrYPXQ0ivRs83r4FJfv 91mImOHruCqlZ5CAfqBgOA== 0000943374-96-000063.txt : 19961107 0000943374-96-000063.hdr.sgml : 19961107 ACCESSION NUMBER: 0000943374-96-000063 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961106 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26870 FILM NUMBER: 96655001 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-K 1 7/31/96 FORM 10-K FOR AMERICAN NATIONAL 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, 1996 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 27, 1996, there was issued and outstanding 3,603,646 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 27, 1996, as reported by the Nasdaq National Market, was approximately $45.0 million. DOCUMENTS INCORPORATED BY REFERENCE 1. Annual Report to Stockholders for the fiscal year ended July 30, 1996 (Parts II and IV). 2. Proxy Statement for the November 21, 1996 Annual Meeting of Stockholders (Part III). PAGE 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, 1996, the Company had total consolidated assets of $461.3 million, total consolidated deposits of $313.1 million, and consolidated stockholders' equity of $47.3 million. The Company's executive office is located at 211 North Liberty Street, Baltimore, Maryland 21201 and its telephone number is (410) 752-0400. American National Savings Bank, F.S.B. The Bank is a federally chartered stock savings bank headquartered in Baltimore, Maryland. The Bank conducts operations through nine full-service offices in its market area consisting of Baltimore City and parts of the Maryland counties of Baltimore, Howard, Harford, Anne Arundel, and Carroll. The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such deposits together with other funds, in loans collateralized by one- to four- family residential real estate, mortgage-backed securities, and, to a lesser extent, construction and land development loans, consumer loans and investment securities. In the past, the Bank also actively originated multifamily residential real estate loans and commercial real estate loans; however, originations of such loans have decreased significantly in recent years as the Bank has sought to reduce the credit risk and losses in its loan portfolio. The Bank also has reduced its involvement in real estate joint ventures due to economic conditions and changes in regulatory capital requirements. 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, PAGE USF&G Corporation, PHH 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, 1996, the Company's total loan portfolio totalled $298.5 million, of which $168.7 million, or 56.5%, were one- to four-family residential real estate mortgage loans, $35.9 million, or 12.0%, were multifamily residential real estate loans, and $37.7 million, or 12.6%, were commercial real estate loans. The remainder of the Company's mortgage loans at July 31, 1996, consisted of $37.5 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 totalled $17.1 million, or 5.8%, of the Company's total loan portfolio. PAGE 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, ----------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------------- ----------------- ------------------ ------------------ ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in Thousands) Real estate loans: One- to four-family residential $168,698 56.5% $135,616 55.4% $114,181 52.9% $107,883 47.1% $121,167 46.4% Multifamily residential 35,930 12.0 39,361 16.1 38,886 18.0 43,913 19.2 51,858 19.9 Commercial 37,695 12.6 38,894 15.9 41,747 19.4 48,812 1.3 55,559 21.3 Construction (1) 37,503 12.6 16,471 6.7 9,964 4.6 16,164 7.1 17,062 6.5 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total real estate loans 279,826 93.7 230,349 4.1 204,778 94.9 216,772 94.7 245,646 94.1 Consumer loans: Home equity 6,775 2.3 6,201 2.5 5,899 2.7 6,275 2.7 8,411 3.2 Other (2) 10,345 3.5 6,805 2.8 3,758 1.8 4,587 2.0 5,152 2.0 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total consumer loans 17,120 5.8 13,006 5.3 9,657 4.5 10,862 4.7 13,563 5.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Accrued interest receivable 1,547 .5 1,323 .6 1,278 .6 1,394 .6 1,710 .7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans receivable 298,493 100.0% 244,671 100.0% 215,713 100.0% 229,028 100.0% 260,919 100.0% -------- ----- -------- ------ -------- ----- -------- ----- -------- ----- ----- ------ ----- ----- ----- Less: Undisbursed loan proceeds 14,837 5,138 2,513 3,786 3,215 Unearned loan fees 1,202 1,083 989 1,321 1,571 Allowance for loan losses 4,412 6,361 3,669 2,326 1,468 -------- -------- -------- -------- -------- Total loans receivable, net $278,042 $232,089 $208,542 $221,595 $254,665 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Mortgage-backed securities (3) $133,466 $159,805 $160,139 $119,815 $ 97,179 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ___________________________________ __ (1) Includes land development loans of $14.2 million, $10.9 million, $5.2 million, $9.7 million and $14.1 million at July 31, 1996, 1995, 1994, 1993 and 1992, respectively. (2) Includes passbook loans, second mortgage loans, automobile loans and unsecured lines of credit. (3) Includes $33.3 million, $3.0 million, $42.3 million and $17.9 million of mortgage-backed securities available for sale at July 31, 1996, 1995, 1994, and 1993, respectively. See Note 2 to Consolidated Financial Statements.
Loan Maturity Schedule. The following table sets forth the maturity or period of repricing of the Company's portfolio at July 31, 1996. 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 $46,464 $15,366 $10,070 $25,594 $23,151 $48,053 $168,698 Multifamily residential 13,179 12,625 1,668 5,569 2,374 515 35,930 Commercial 9,162 13,708 4,619 2,926 5,451 1,829 37,695 Construction (1) 29,499 5,661 2,343 37,503 Consumer loans 7,342 4,239 4,478 726 335 17,120 Accrued interest receivable 1,547 1,547 ------- ------- ------- ------- ------- ------- -------- Total $107,193 $51,599 $20,835 $34,815 $30,976 $53,075 $298,493 ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- ------- ------- -------- _____________________________________ (1) Includes land development loans.
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at July 31, 1996, the dollar amount of all fixed-rate and adjustable-rate loans due or scheduled next to reprice after July 31, 1997.
Fixed Adjustable Total -------- ---------- -------- (In Thousands) Real estate loans: One- to four-family residential $101,548 $20,686 $122,234 Multifamily residential 11,926 10,825 22,751 Commercial 17,926 10,607 28,533 Construction (1) 8,004 8,004 Consumer loans 9,409 369 9,778 -------- ---------- -------- Total $140,809 $50,491 $191,300 -------- ---------- -------- -------- ---------- -------- _____________________________ (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, 1996, $168.7 million, or 56.5% of the Company's total loan portfolio consisted of one- to four-family residential mortgage loans, and approximately $160.6 million, or 95.2%, 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 PAGE 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, 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, 1996, 1995, and 1994, the Company sold into the secondary market $4.2 million, $2.2 million and $8.7 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, 1996, 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, 1996, the Company serviced loans for others aggregating $50.0 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 $57.8 million, or 19.4%, of the Company's total loan portfolio at July 31, 1996. During the fiscal year ended July 31, 1996, the Company purchased $10.9 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. PAGE 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 $35.9 million, or 12.0%, of the Company's total loan portfolio at July 31, 1996, compared to $51.9 million, or 19.9%, of the total loan portfolio at July 31, 1992. At July 31, 1996, 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 totalled 4.9%, 3.8%, and 1.0%, of total loan originations during the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Although the Company increased its originations of multifamily residential real estate loans to $3.7 million during the fiscal year ended July 31, 1996, from $1.8 million during the fiscal year ended July 31, 1995, such loans constituted only 4.9% of originations over the year, 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, 1996, 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 $37.7 million, or 12.6% of the Company's total loan portfolio at July 31, 1996, compared to $55.6 million, or 21.3% of the total loan portfolio at July 31, 1992. At July 31, 1996, 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 totalled 8.6%, 3.7% and 2.0% of total loan originations during the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Although the Company PAGE increased its originations of commercial real estate loans to $6.6 million during the fiscal year ended July 31, 1996, from $1.7 million during the fiscal year ended July 31, 1995, such loans conformed to the Company's strategy of originating commercial loans only 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, 1996, $1.5 million 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, 1996, the Company's $37.5 million of construction and land development loans included $23.3 million of constructions loans and $14.2 million of land development loans. As of July 31, 1996, 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 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, 1996, consumer loans totalled $17.1 million, or 5.8%, 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, 1996, home equity loans totalled $6.8 million, or 39.8% of consumer loans, and 2.3% of the Company's total loan portfolio. At July 31, 1996, the Company had $9.2 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 PAGE 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 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, 1996, the Company had commitments to originate $8.9 million of mortgage loans. The Company also enters into commitments to extend credit. At July 31, 1996, the Company had contractual commitments to extend credit (exclusive of undisbursed loans in process) for lines of credit and irrevocable letters of credit of $9.2 million and $2.1 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. 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, -------------------------------- 1996 1995 1994 -------- -------- -------- (In Thousands) Total loans receivable at beginning of year $232,089 $208,542 $221,595 Loans originated: Real estate: One- to four-family residential 30,297 25,559 34,752 Multi-family residential 3,711 1,785 448 Commercial 6,586 1,727 855 Construction (1) 30,421 12,501 4,082 Consumer: Home equity 1,141 1,273 496 Other 4,269 4,237 2,849 -------- -------- -------- Total originations 76,425 47,082 43,482 Loans purchased 17,972 11,216 Transfer of mortgage loans to foreclosed real estate (2,960) (1,400) (489) Repayments (40,659) (27,763) (45,753) Loan sales (4,194) (2,159) (8,710) Other (2) (631) (3,429) (1,583) -------- -------- -------- Net loan activity (30,472) (23,535) (13,053) -------- -------- -------- Total loans receivable at end of year (3) $278,042 $232,089 $208,542 -------- -------- -------- -------- -------- -------- Mortgage-backed securities at beginning of year $159,805 $160,139 $119,815 Purchases 42,703 17,364 131,256 Sales. . . (56,036) (3,100) (49,601) Repayments (11,823) (15,001) (39,790) Other (4) (1,183) 403 (1,541) -------- -------- -------- Mortgage-backed securities at end of year (5) $133,466 $159,805 $160,139 -------- -------- -------- -------- -------- -------- _____________________________________ (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 $350,000 and $1.8 million of loans held for sale at July 31, 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 $33.3 million, $3.0 million and $42.3 million of mortgage-backed securities available for sale at July 31, 1996, 1995 and 1994, 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, 1996, the Company had $1.2 million of deferred loan origination fees. Such fees vary with the volume and type of loans and commitments made and PAGE purchased, 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 $640,000, $592,000, and $630,000 for the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Income received from loans serviced for others was $146,000, $165,000, and $188,000, for the fiscal years ended July 31, 1996, 1995, and 1994, 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 $5.8 million at July 31, 1996. The Bank currently is in compliance with its loans-to-one- borrower limitations. The Bank's largest lending relationship at July 31, 1996, 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, 1996, the loans had a principal balance of $2.6 million and $2.7 million, and the aggregate amount of the two loans was $5.3 million. As of July 31, 1996, 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, 1996 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, 1996, the loans ranged from $295,000 to $3.2 million and totalled $4.4 million. As of July 31, 1996, 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) six 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 $68,000 to $554,000; (ii) a fixed rate loan originated in 1985 with a ten year call collateralized by a multifamily apartment building in Baltimore City; and (iii) a fixed rate loan originated in 1988 with a call date of December 31, 1996 collateralized by office and retail space in Baltimore. The loans described in (i) above were current with respect to their repayment terms as of July 31, 1996, and had a carrying value of $2.2 million. The loans described in (ii) and (iii) were restructured in 1992, at which time the Bank changed the interest rate to a one year adjustable rate at .5% below market and classified such loans as substandard. The Bank obtained appraisals on the properties described in (ii) and (iii) in 1995. At July 31, 1996, the loan described in (ii) had a carrying value of $436,000, net of specific reserves of $250,000, the loan described in (iii) had a carrying value of $161,000, net of specific reserves of $435,000, and both of the loans described in (ii) and (iii) were current with respect to their restructured repayment terms. The Bank's fourth largest lending relationship at July 31, 1996, 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, 1996, the loans ranged from $346,000 to $1.2 million, and totalled $3.5 million. As of July 31, 1996, the loans were current with respect to their repayment terms. The Bank's fifth largest lending relationship at July 31, 1996 included four adjustable rate loans collateralized by a retail shopping center and three apartment buildings in the Baltimore Metropolitan area. The PAGE loans were originated in 1988 with a ten year call. At July 31, 1996, the loans ranged from $252,000 to $1.5 million and totalled $2.9 million. As of July 31, 1996, the loans were current with respect to their repayment terms. 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 totalled $766,000, $890,000, and $655,000, at July 31, 1996, 1995, and 1994, respectively. PAGE 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, 1996 At July 31, ---------------- ----------------------------------------- Number Balance 1995 1994 1993 1992 ------ ------- ------- ------- ------- -------- (Dollars in Thousands) Nonperforming loans: One- to four-family residential real estate 12 $ 690 $ 1,023 $ 1,403 $ 1,164 $ 3,099 Multifamily residential real estate 5 1,580 1,479 216 2,227 4,879 Commercial real estate 2 1,374 5,907 734 2,720 1,606 Construction (1) 996 1,350 Consumer loans 8 265 198 269 186 164 ------ ------- ------- ------- ------- -------- Total nonperforming loans 27 3,909 8,607 3,618 7,647 9,748 Total real estate owned (2) 7 766 890 663 1,285 2,410 ------ ------- ------- ------- ------- -------- Total nonperforming assets 34 4,675 9,497 4,281 8,932 12,158 ------ ------- ------- ------- ------- -------- ------ ------- ------- ------- ------- -------- Restructured loans (3) 3 1,636 1,870 8,864 1,713 1,731 ------ ------- ------- ------- ------- -------- Total nonperforming assets and restructured loans 37 $6,311 $11,367 $13,145 $10,645 $13,889 ------ ------- ------- ------- ------- -------- ------ ------- ------- ------- ------- -------- Total nonperforming loans to total loans receivable 1.31% 3.52% 1.67% 3.34% 3.74% Total nonperforming loans to total assets 0.85% 2.02% .90% 2.00% 2.44% Total nonperforming loans and real estate owned to total assets 1.01% 2.23% 1.07% 2.33% 3.05% ____________________________________ (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.
During the fiscal years ended July 31, 1996, 1995 and 1994, respectively, gross interest income of $567,000, $898,000, and $1.1 million 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 $151,000, $274,000 and $650,000. The Company adopted the provisions of Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" and by Statement 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" (collectively referred to as "Statement 114") as of August 1, 1995. Statement 114 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. PAGE 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, -------------------------------- 1996 1995 1994 -------- -------- -------- (In Thousands) Substandard assets (1) $ 5,300 $ 8,757 $ 12,671 Doubtful assets Loss assets 2,411 3,909 929 Total classified assets $ 7,711 $ 12,666 $ 13,600 ____________________________________ (1) Includes REO.
Two of the loans in the Bank's third largest lending relationship, with a carrying value of $597,000 as of July 31, 1996, were classified substandard, and $685,000 relating to such loans was classified as loss. Such loans are described above in " Lending Activities Loans to One Borrower." The following is a discussion of other classified assets with net carrying values in excess of $250,000 as of July 31, 1996. Amounts identified below as specific reserves have been classified as "loss" in the above table. In 1986 the Bank granted a 30-year fixed rate loan collateralized by office and retail space in Baltimore. In August 1993, the Bank restructured the loan from a fixed rate to a one-year adjustable rate at .5% below market rates. As of July 31, 1996, the collateral property was approximately 75% rented. The collateral was last appraised in 1995. As of July 31, 1996, a total of $450,000 had been charged-off, and the loan had a carrying value of $693,000, net of specific reserves of $750,000. The loan is current under the restructured terms. In 1987 the Bank originated a loan collateralized by ten multifamily residential units located in Baltimore. In February 1992, due to periodic delinquencies, the Bank modified the monthly payments by reducing the interest rate to 8.0%. As of July 31, 1996, a total of $41,000 had been charged-off, and the loan was carried at $354,000. As of July 31, 1996, the loan was current as restructured. In 1987 and 1990, the Bank granted an adjustable rate loan and a fixed rate second mortgage loan collateralized by a 95-unit apartment building located in Baltimore, Maryland. In April 1995, the Bank classified the loans as substandard due to payment delinquencies. The borrowers have signed a contract to sell the property and it is expected to settle by December 31, 1996. At July 31, 1996, a total of $111,000 had been charged off and the loans had an aggregate carrying value of $957,000, net of a specific reserve of $498,000. 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 PAGE 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, 1996, the Bank had $5.5 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, 1996, 1995 and 1994, the Company added $772,000 million, $3.4 million, and $2.0 million, respectively, to the allowance for loan losses. The Company's allowance for loan losses totalled $4.4 million, $6.4 million and $3.7 million, at July 31, 1996, 1995 and 1994, 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. PAGE 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, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ (In Thousands) Total loans outstanding, net $ 278,042 $ 232,089 $ 208,542 $ 221,595 $ 254,665 Average loans outstanding 254,090 225,633 217,662 241,437 277,049 Allowance balances (at beginning of year) 6,361 3,669 2,326 1,468 1,729 Provision for losses: One- to four-family residential 40 184 368 396 15 Multi-family residential 249 49 100 1,543 1,488 Commercial 482 2,589 704 1,473 854 Construction 528 646 190 300 Consumer 1 36 171 9 22 ------------ ------------ ------------ ------------ ------------ Total provision for losses 772 3,386 1,989 3,611 2,679 Charge-offs: One- to four-family residential (157) (178) (8) (406) (28) Multi-family residential (391) (54) (202) (965) (2,146) Commercial (2,492) (517) (1,083) (752) Construction (279) (380) (460) Consumer (3) (5) (98) (11) (14) ------------ ------------ ------------ ------------ ------------ Total charge-offs (3,043) (1,033) (688) (2,925) (2,940) Recoveries 322 339 42 172 ------------ ------------ ------------ ------------ ------------ Allowance balance (at end of year) $ 4,412 $ 6,361 $ 3,669 $ 2,326 $ 1,468 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Allowance for loan losses as a percent of net loans receivable at end of period 1.59% 2.74% 1.76% 1.05% .58% Net loans charged off as a percent of average loans outstanding 1.07% .31% .30% 1.14% 1.06% Ratio of allowance for loan losses to total nonperforming loans at end of period 112.87% 73.90% 101.41% 30.42% 15.06% Ratio of allowance for loan losses to nonperforming loans and REO at end of period 94.37% 66.98% 85.70% 26.04% 12.07%
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, ---------------------------------------------------------------------------- 1996 1995 1994 ------------------------- --------------------- -------------------------- % 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 $ 523 56.5% $ 530 55.4% $ 509 52.9% Multi-family residential 1,128 12.0 1,265 16.1 970 18.0 Commercial 2,042 12.6 3,892 15.9 1,796 19.4 Construction (2) 586 12.6 547 6.7 298 4.6 Consumer 133 5.8 127 5.3 96 4.5 Accrued interest receivable - .5 .6 .6 -------- ------ ------ ----- ------ ----- Total allowance for loan losses $ 4,412 100.0% $6,361 100.0% $3,669 100.0% -------- ------ ------ ----- ------ ----- -------- ------ ------ ----- ------ ----- ____________________________________ (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.
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, 1996, mortgage-backed securities totalled $133.5 million, or 28.9%, of the Company's total assets, and United States Government or an agency or sponsored corporation of the United States Government totalled $31.1 million, or 6.7%, 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, 1996, $97.4 million, or 73.0%, of the Company's $133.5 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, 1996, 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 $72.0 million of CMOs, which are debt obligations collateralized by the cash flows from mortgage loans or pools of mortgage loans. PAGE Mortgage-backed securities may be classified into the following principal categories, according to the issuer or guarantor: (i) Securities that are backed by the full faith and credit of the United States Government. Ginnie Mae ("GNMA"), the principal United States Government guarantor of such securities, is a wholly owned United States Government corporation within HUD. GNMA is authorized to guarantee, with the full faith and credit of the United States, the timely payment of principal and interest, but not of market value, on securities issued by approved institutions and backed by pools of FHA-insured or VA-guaranteed mortgages. At July 31, 1996, $3.7 million, or 2.8%, of the Company's mortgage-backed securities consisted of such securities. (ii) 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 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, 1996, $129.7 million, or 97.2% of the Company's mortgage-backed securities, consisted of such securities. (iii) Securities that represent interests in, or are collateralized by, pools consisting principally of residential mortgage loans created by non-governmental issuers. These securities generally offer a higher rate of interest than the other two types of mortgage-backed securities because there are no direct government guarantees of payment as in the former securities, although certain credit enhancements may exist. Securities issued by certain private organizations may not be readily marketable. Private mortgage-backed securities purchased by the Company must be rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization. At July 31, 1996, $52,000 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. PAGE 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. 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, ----------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------------- ----------------- ------------------ ------------------ ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in Thousands) Pass-through certificates: Adjustable $ 25,494 19.1% $ 11,934 7.5% $ 10,863 6.8% $ 13,834 11.5% $ 1,366 1.4% Fixed (1) 35,345 26.5 88,640 55.4 97,021 60.6 46,372 38.7 83,111 85.5 Total pass-through certificates 60,839 45.6 100,574 62.9 107,884 67.4 60,206 50.2 84,477 86.9 CMOs: Adjustable (2) 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 11,957 12.3 Total CMOs 72,001 53.9 58,464 36.6 51,498 32.1 59,071 49.3 11,957 12.3 Accrued interest receivable 626 0.5 767 .5 757 .5 538 .5 745 .8 Total mortgage-backed securities $133,466 100.0% $159,805 100.0% $160,139 100.0% $119,815 100.0% $ 97,179 100.0% ___________________________________ __ (1) Includes mortgage-backed securities available for sale of $25.0 million, $6.0 million, and $17.9 million, at July 31, 1996, 1994 and 1993, respectively. (2) Includes CMOs available for sale of $8.1 million, $3.0 million and $36.3 million at July 31, 1996, 1995 and 1994, respectively.
PAGE 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, 1996, the market value of the Company's investment securities, and interest-earning deposits in other institutions, federal funds sold, and FHLB stock was approximately $36.4 million.
At July 31, -------------------------------- 1996 1995 1994 -------- -------- -------- (In Thousands) Investment securities: U.S. Government and agency obligations (1) $ 30,489 $ 13,615 $ 7,701 Accrued interest receivable 615 303 181 -------- -------- -------- Total investment securities 31,104 13,918 7,882 Interest-earning deposits in other institutions 1,837 2,240 2,360 Federal funds sold 394 950 1,343 Federal Home Loan Bank stock 3,141 2,914 2,914 -------- -------- -------- Total investments $ 36,476 $ 20,022 $ 14,499 -------- -------- -------- -------- -------- -------- ________________________________ (1) Includes securities available for sale of $6.8 million and $1.0 million at July 31, 1996 and 1994, 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, 1996.
At July 31, 1996 ----------------------------------------------------------------------------------------------------------- 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 3.86% $ 14,814 7.08% $14,175 7.80% $30,489 $30,031 7.26% Accrued interest receivable 615 615 615 Total $ 615 % $ 1,500 3.86% $ 14,814 7.08% $14,175 7.80% $31,104 $30,646 7.26% ____________________________________ (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 PAGE to 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, 1996, are composed of the following:
Weighted Percentage Average Minimum of Total Interest Rate Minimum Term Amount Balances Deposits - ------------- ------------ --------- ----------- -------- (In Thousands) % None Checking/demand deposit $ $ 3,094 0.99% accounts ("DDA") 1.94 None NOW Accounts 11,944 3.81 2.99 None Regular Savings 100 30,786 9.83 2.50 None Christmas Club Accounts 5 549 0.18 2.99 None Super Passbook 1,000 9,446 3.02 3.06 None Investment Manager 20,000 15,001 4.79 2.96 None Money Market 2,500 26,144 8.35 Certificates of Deposit 4.86 3 months Fixed term, fixed rate 500 8,218 2.62 4.95 6 months Fixed term, fixed rate 500 17,617 5.63 5.14 12 months Fixed term, fixed rate 500 26,673 8.52 5.24 12 months Fixed term, fixed rate 25,000 21,574 6.89 5.15 13 months Fixed term, fixed rate 500 3,663 1.17 5.80 18 months Fixed term, fixed rate 25,000 13,790 4.40 5.51 24 months Fixed term, fixed rate 500 11,265 3.60 5.69 30 months Fixed term, fixed rate 500 4,424 1.41 5.94 30 months Fixed term, fixed rate 25,000 27,449 8.77 5.33 36 months Fixed term, fixed rate 500 4,865 1.55 5.39 48 months Fixed term, fixed rate 500 3,248 1.04 6.30 60 months Fixed term, fixed rate 500 46,947 15.00 6.56 84 months Fixed term, fixed rate 500 9,794 3.13 6.63 120 months Fixed term, fixed rate 500 16,592 5.30 ---------- ------ $ 313,083 100.00% ---------- ------ ---------- ------
PAGE 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, ---------------------------------------------------------------------------------------------------- 1996 1995 1994 -------------------------------- -------------------------------- ------------------------------- Balance Percent(1) Change(2) Balance Percent(1) Change(2) Balance Percent(1) Change(2) ------- ---------- --------- ------- ---------- --------- ------- ---------- --------- (Dollars in Thousands) Checking DDA and NOW Accounts (3) $ 15,038 4.8% $ 1,047 $ 13,991 4.5% $ (158) $ 14,149 4.6% $ (1,425) Super and regular savings 40,781 13.0 (357) 41,138 13.1 (5,392) 46,530 15.1 (512) Money market and investment manager (4) 41,145 13.2 (7,433) 48,578 15.4 (7,989) 56,567 18.3 (6,749) Time deposits that mature (5): within 12 months 118,772 37.9 10,546 108,226 34.4 21,098 87,128 28.2 1,358 within 12-36 months 59,823 19.1 (3,385) 63,208 20.1 1,523 61,685 19.9 214 beyond 36 months 37,524 12.0 (1,948) 39,472 12.5 (3,458) 42,930 13.9 (1,608) -------- ----- -------- -------- ------ -------- --------- ----- -------- Total deposits $313,083 100.0% $(1,530) $314,613 100.0% $ 5,624 $ 308,989 100.0% $ (8,722) -------- ----- -------- -------- ------ -------- --------- ----- -------- -------- ----- -------- -------- ------ -------- --------- ----- -------- ____________________________________ (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 $43.0 million, $43.1 million, and $43.9 million, as of July 31, 1996, 1995 and 1994, respectively.
The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated:
At July 31, -------------------------------- 1996 1995 1994 -------- -------- -------- (In Thousands) 3.01- 4.00% $ 459 $ 4,541 $ 49,044 4.01- 6.00% 134,910 81,782 81,291 6.01- 8.00% 80,716 121,866 52,050 8.01-10.00% 34 2,717 9,358 -------- -------- -------- $216,119 $210,906 $191,743 -------- -------- -------- -------- -------- --------
The following table sets forth the amount and maturities of certificates of deposit at July 31, 1996.
Amount Due ------------------------------------------------ Less Than 1-2 2-3 After One Year Years Years 3 Years Total ---------- ----- ----- ------- -------- Rate (In Thousands) 3.01- 4.00% $ 127 $ 92 $ 1 $ 239 $ 459 4.01- 6.00% 89,391 21,567 11,364 12,588 134,910 6.01- 8.00% 29,224 19,608 7,187 24,697 80,716 8.01-10.00% 30 4 34 $118,772 $41,271 $18,552 $37,524 $216,119
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, 1996.
Certificates Maturity Period of Deposit ------------ (In Thousands) Three months or less $5,069 Over three months through six months 3,344 Over six months through twelve months 5,203 Over twelve months 8,803 Total $22,419
The following table sets forth the activity in the savings deposits of the Company for the years indicated:
Years Ended July 31, ------------------------------------ 1996 1995 1994 -------- ------- -------- (In Thousands) Net withdrawals $(17,355) $(9,299) $(22,649) Interest credited 15,825 14,923 13,927 -------- ------- -------- Net increase (decrease) in savings deposits $ (1,530) $ 5,624 $ (8,722) -------- ------- -------- -------- ------- --------
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, 1996, the Company had a $95 million line of credit with the FHLB, and FHLB advances of $62.8 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 $34.4 million in securities sold under agreements to repurchase at July 31, 1996. The following table sets forth certain information regarding borrowings by the Company during the periods indicated.
Years Ended July 31, ------------------------------- 1996 1995 1994 ------- ------- -------- (Dollars in Thousands) Weighted average rate paid on: Securities sold under agreements to repurchase 5.71% 5.77% 3.45% FHLB advances 5.87 6.06 6.35 Agreements to repurchase: Maximum balance $39,011 $34,338 $14,808 Average balance 34,005 20,741 9,307 FHLB advances: Maximum balance 62,824 60,229 50,730 Average balance 46,851 50,182 31,403
Subsidiaries' Activities The Company has four indirect subsidiaries that are wholly-owned by the Bank, National Development Corporation ("NDC"), American National Insurance Agency, Inc. ("ANIA") and Liberty Street, Inc. ("LSI"), 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 was incorporated in May 1996 for the purpose of acquiring selected real estate at foreclosure for the Company. At July 31, 1996, the Company had a $23.3 million equity investment in ANSB, a $457,000 equity loss in NDC, a $42,000 equity investment in ANIA, a $73,000 equity investment in LSI, and loans of $1.3 million to NDC, $780,000 to NDC's joint venture Quarterfield Development Partnership ("QDP"), and no loans to ANIA or ANSB. PAGE For the year ended July 31, 1996, NDC had a net loss of $196,000, ANIA had a net loss of $2,000, ANSB had net income of $2.2 million, and LSI had a net loss of $1,000. NDC has been winding down its operations, and as of July 31, 1996, it was participating in one joint venture, 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, 1996, had 10 lots, of which 5 were under contract. 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, 1996, QDP paid off the original $6.0 million loan. QDP also owed the Company $701,000 under the $2.5 million line of credit. The line of credit was extended and expires on December 31, 1996, unless extended by the Company. The amount outstanding under the line of credit fluctuates regularly, and has been as high as $1.6 million and as low as $700,000 during the fiscal year ended July 31, 1996. Competition As of June 30, 1994, 27 commercial banks, 69 credit unions, and 59 savings institutions maintained 568 branch offices in the Company's market area. 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. As of June 30, 1994, the Company held approximately 1.4% of all deposits held by commercial banks, credit unions, and savings associations in the Company's market area. 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. PAGE 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 ("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, 1996, 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, 1996, the Bank maintained 86.1% 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, 1996, the Bank had $9.0 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. 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 PAGE liquidity ratio averaged 7.7% during the month of July 1996. 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 1996, the Bank's short-term liquidity ratio averaged 1.6%. 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 $772,000, $809,000, and $831,000 for the fiscal years ended July 31, 1996, 1995 and 1994, 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, 1996, 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 require such loans to be made on terms substantially the 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 PAGE 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 a proposed rule which proposes 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. The OTS regulatory capital rule also incorporates an interest rate risk component. Savings associations with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200-basis point increase or decrease in market interest rates, divided by the estimated economic value of the association's assets. In calculating its total capital under the risk-based rule, a savings association whose measured interest rate risk exposure exceeds 2%, must deduct an interest rate component equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the institution's assets. The OTS has deferred for the present time, the date on which the interest rate component is to be deducted from total capital. A savings association with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. The rule also provides that the Director of the OTS may waive or defer an institution's interest rate risk component on a case-by- PAGE case basis. The Bank would be required to make a deduction from total capital for purposes of calculating the Bank's risk-based capital requirement if such capital reduction were required at July 31, 1996. At July 31, 1996, 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, 1996.
At July 31, 1996 -------------------- Percent of Amount Assets (1) ------ ----------- (Dollars in Thousands) Tangible capital: Capital level $39,800 8.64% Requirement 6,907 1.50 Excess $32,893 7.14% Core capital: Capital level $39,800 8.64% Requirement (2) 13,813 3.00 Excess $25,987 5.64% Risk-based capital: Capital level $41,801 18.20% Requirement 18,380 8.00 Excess $23,421 10.20% (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 PAGE 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. 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 will be 65.7 basis points per $100 in deposits, payable on November 30, 1996. For the Bank, the assessment is expected to be $2.1 million (or $1.4 million when adjusted for taxes), based on the Bank's deposits on March 31, 1995 of $314.2 million. In addition, beginning January 1, 1997, pursuant to the legislation, interest payments on bonds ("FICO Bonds") issued in the late 1980's by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation will be paid jointly by BIF- insured institutions and SAIF-insured institutions. The FICO assessment will be 1.29 basis points per $100 in BIF deposits and 6.44 basis points per $100 in SAIF deposits. Also beginning January 31, 1997, the current annual minimum premium of 23 basis points will be reduced to approximately 6.44 basis points. 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 BIF and SAIF will be merged on January 1, 1999, provided the bank and saving association charters are merged by that date. In that event, pro-rata FICO sharing will begin on January 1, 1999. 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 (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, 1996, of $3.1 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, 1996, dividends from the FHLB-Atlanta to the Bank amounted to $212,000. 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 PAGE 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 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 PAGE 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 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, 1996, 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 PAGE 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. 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, 1996. The aggregate net book value of the Company's premises and equipment was $1.2 million at July 31, 1996.
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 1959 Leased December 1999 #275 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 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.
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 The section titled "Common Stock and Related Matters" of the 1996 Annual Report to Stockholders is incorporated herein by reference. No other sections of such Annual Report are incorporated herein by this reference. ITEM 6. Selected Financial Data The section titled "Selected Consolidated Financial and Other Data" of the 1996 Annual Report to Stockholders is incorporated herein by reference. No other sections of such Annual Report are incorporated herein by this reference. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 1996 Annual Report to Stockholders is incorporated herein by reference. No other sections of such Annual Report are incorporated herein by this reference. ITEM 8. Financial Statements and Supplementary Data The sections titled "Consolidated Statements of Financial Condition," "Consolidated Statements of Operations," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" of the 1996 Annual Report to Stockholders are incorporated herein by reference. 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 Information concerning the Directors of the Registrant is incorporated herein by reference from the Registrant's definitive Proxy Statement dated October 18, 1996 (the "Proxy Statement"). ITEM 11. Executive Compensation Information concerning the Executive Compensation of the Registrant is incorporated herein by reference from the Registrant's Proxy Statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain owners and management is incorporated herein by reference from the section titled "Voting Securities and Principal Holders Thereof" of Registrant's Proxy Statement. ITEM 13. Certain Relationships and Related Transactions Information concerning relationships and transactions is incorporated herein by reference from the section titled "Certain Transactions with the Company" of the Registrant's Proxy Statement. PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on From 8-K (a)(1) Financial Statements The following information appearing in the Registrant's 1996 Annual Report is incorporated by reference as Exhibit 13 to this Annual Report on Form 10-K. Page in Annual Report Annual Report Sections Report of Independent Auditors 51 Consolidated Statements of Financial Condition as of July 31, 1996 and 1995 17 Consolidated Statements of Operations for the years ended July 31, 1996, 1995 and 1994 18 Consolidated Statements of Stockholders' Equity for the years ended July 31, 1996, 1995 and 1994 19 Consolidated Statements of Cash Flows for the years ended July 31, 1996, 1995 and 1994 20 Notes to Consolidated Financial Statements 22 (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. (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, (1) 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 (1) Not Applicable 10.2 1993 Stock Option Plan (1) Not Applicable for Outside Directors 10.3 1993 Recognition and (1) Not Applicable Retention Plan for Employees 10.4 1993 Recognition and (1) Not Applicable Retention Plan for Outside Directors 10.5 Employment Agreement of (1) Not Applicable A. Bruce 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 10.9 41 10.10 1996 Recognition and 10.10 53 Retention Plan 10.11 Employment Agreement of 10.11 62 James M. Uveges 10.12 Employment Agreement of 10.12 76 Mark S. Barker 11 Statement re: computation Not Not Applicable of per share earnings Required 12 Statement re: computation Not Not Applicable of ratios Required 13 Annual Report to Security 13 91 16 Letter re: change in certifying None Not Applicable accountants 18 Letter re: change in accounting None Not Applicable principles 21 Subsidiaries of Registrant 21 162 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 Not Required 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. (b) Reports on Form 8-K: The Registrant has not filed a Current Report on Form 8-K during the year ended July 31, 1996. PAGE 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: 10/28/96 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, James M. Uveges, Senior Vice Chief Executive President and Chief and Director Financial Officer (principal accounting officer) Date: 10/28/96 Date: 10/28/96 By: /s/ Howard K. Thompson By: /s/ Lenwood M. Ivey Howard K. Thompson, Chairman Lenwood M. Ivey, Director of the Board Date: 10/28/96 Date: 10/28/96 By: /s/ David L. Pippinger By: /s/ Joseph M. Solomon David L. Pippinger, Director Joseph M. Solomon, Director Date: 10/28/96 Date: 10/28/96 By: /s/ Betty J. Stull By: /s/ Jimmie T. Noble Betty J. Stull, Director Jimmie T. Noble, Director Date: 10/28/96 Date: 10/28/96 EX-13 2 ANNUAL REPORT 1996 ANNUAL REPORT TO STOCKHOLDERS AMERICAN NATIONAL BANCORP, INC. TABLE OF CONTENTS Page Message of President and Chief Executive Officer . . . . . . . . . . 1 Selected Consolidated Financial and Other Data . . . . . . . . . . . 3 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . 5 American National Bancorp, Inc. Common Stock and Related Matters . .16 Consolidated Financial Statements. . . . . . . . . . . . . . . . . .17 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . .22 Independent Auditors' Report and Selected Quarterly Financial Data .51 [American National Bancorp, Inc. Letterhead] To our Stockholders: I am pleased to report that American National Bancorp, Inc. has made significant progress in the nine months following the close of its successful mutual to stock conversion on October 31, 1995. The Company sold 2,182,125 shares of common stock at $10.00 per share and minority stockholders of American National Savings Bank, F.S.B. (the "Bank") were issued 1.94 shares of Company common stock in exchange for each outstanding share of common stock of the Bank. Due to the offering and profits, stockholders' equity increased by $18.3 million to $47.3 million at July 31, 1996. Net income increased to $1.5 million from $10,000 in 1995. Net interest income for 1996 increased $1.2 million to $12.9 million compared to $11.7 million for 1995. This 9.5% increase primarily reflects growth in assets, relatively stable net interest margins and a decrease in the provision for loan losses. In 1996, assets were up $35.1 million or 8.2% to $461.3 million, and loans were up $45.9 million or 19.8% to $278.0 million. We are beginning to see the results of the Bank's efforts to expand its lending operations. Although our primary focus continues to be single-family residential loans, the Company continues to promote its auto, home equity and construction lending in order to change the mix of assets and improve earnings. Nonperforming assets decreased to $4.7 million or 1% of total assets at July 31, 1996, compared to $9.5 million or 2.2% of total assets at July 31, 1995. Our capital continues to significantly exceed all regulatory requirements and supports our firm commitment to remain a financially sound institution. Consistent with the Company's capital management program and its goal to improve Return on Equity, in June 1996, we repurchased 199,025 shares and in August 1996 we repurchased 189,074 shares of American National Bancorp's Common Stock in the open market at a cost of approximately $2.0 million and $2.3 million, respectively. Stockholders will continue to benefit from this repurchase plan as future profits are spread over fewer shares. Also, on September 19, 1996, the Board of Directors authorized the first quarterly cash dividend of three cents ($.03) per share to be paid on or about November 15, 1996 to stockholders of record as of October 31, 1996. Although the Company's returns on assets and equity are below industry norms, the Company's core earnings continue to improve with management focused on its Strategic Business Plan which targets return on equity of approximately 12% in three years. While the future course of interest rates cannot always be accurately predicted, we believe that through continued hard work, this goal is achievable. Letter to Stockholders, Continued Our goal to increase profitability has fostered our commitment to improve our delivery and our mix of services. The relocation of our largest branch at the Fallstaff Shopping Center in Pikesville, to a free standing building complete with drive-up and ATM capabilities, should open in late October, 1996. We are also building a highly visible office on a pad site of the Constant Friendship Shopping Center in Harford County, one of the Company's primary lending markets. This office should be operational by the spring of 1997. However, in late November, 1996, we will open a temporary office in the shopping center until our larger facility is completed. We anticipate that this increased exposure in Harford County will not only enhance our lending capabilities but will also be a strong source of low cost core deposits. The Company continues to grow its market share. Marketing studies confirm that customers who use the Bank's services continue to be very satisfied. The Company increased the awareness of American National Savings Bank over the past year through a very successful media campaign. This campaign contributed, in a large part, to the $45.9 million increase in loans. The Company intends to build on this success and has increased its advertising and marketing budgets for 1997. We also intend to improve customer service by investing in technology in the future. While retaining our strong customer base in the over-age 55 category, we are working to increase our market share of younger customers. Since these customers demand technology-based delivery systems, the Bank is currently reviewing potential new products including telephone banking, Internet services, and debit cards for implementation in 1997. We will also continue to focus on building competitive checking accounts and other core deposits. Recent federal legislation has been enacted to recapitalize the FDIC insurance fund. Although the one-time special assessment that the Bank is required to make will have a short term impact on its 1997 earnings, the long term effect will be to significantly reduce the Bank's future insurance expenses. With our strong capital position, improved asset quality and higher core earnings, we believe exciting opportunities lie ahead. And, with the continued support of our stockholders, customers and employees, I am confident that we will continue to provide quality service and enhance our performance. A. Bruce Tucker President and Chief Executive Officer Selected Consolidated Financial and Other Data Prior to October 31, 1995, the Company had no assets or operations. The following tables set forth certain consolidated financial and other data of the Company at and for the year ended July 31, 1996, and of the Bank at and for the years ended July 31, 1995, 1994, 1993 and 1992. This information is derived in part from and should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto presented elsewhere herein. For additional information about the Company and the Bank, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations."
At July 31, -------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Selected Consolidated Financial Condition Data: (In Thousands) Total assets $461,271 $426,174 $400,046 $383,259 $398,863 Loans receivable, net (1) 278,042 232,089 208,542 221,595 254,665 Mortgage-backed securities 100,195 156,775 117,597 102,478 97,179 Investment securities 24,109 13,918 6,825 8,583 4,800 Securities available for sale 40,266 3,030 43,600 27,141 Cash and cash equivalents 4,902 5,360 7,109 5,112 19,134 Investments in real estate, net 5,670 5,828 5,623 6,282 7,476 Investments in and advances to real estate joint ventures 1,270 2,215 3,676 4,576 6,883 Deposits 313,083 314,613 308,989 317,711 344,586 Borrowed funds 97,269 78,475 58,197 40,968 29,400 Stockholders' equity 47,270 28,959 29,160 21,193 20,508 ____________________________________ (1) Includes loans held for sale.
At or for the Years Ended July 31, --------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- -------- Key Financial Ratios and Other Data: Performance Ratios: Return on average assets (1)(2) .35% % .33% .18% .05% Return on average equity (1)(3) 3.63 .03 4.68 3.27 .95 Net interest rate spread (4) 2.44 2.48 2.56 2.73 2.06 Net interest margin (5) 2.93 2.87 2.89 2.97 2.44 Net interest income to noninterest expense 128.15 125.76 120.11 127.70 103.91 Net interest income after provision for loan losses to total noninterest expense 120.46 89.51 98.56 86.44 75.52 Noninterest expense to average assets 2.25 2.24 2.36 2.28 2.32 Quality Ratios: Nonperforming loans to total loans (6) 1.31 3.52 1.67 3.34 3.74 Nonperforming assets to total assets (7) 1.01 2.23 1.07 2.33 3.05 Allowance for loan losses to nonperforming loans 112.87 73.90 101.41 30.42 15.06 Allowance for loan losses to nonperforming assets (7) 94.37 66.98 85.70 26.04 12.07 Equity Ratios: Stockholders' equity to assets at period end 10.25 6.80 7.29 5.53 5.14 Average stockholders' equity to average assets 9.55 6.95 7.05 5.54 5.05 Average interest-earning assets to average interest-bearing liabilities 110.54 108.04 107.84 105.16 106.34 Other Data: Number of full-service offices 9 9 9 9 9 Per Share Data: Book value per share $13.06 $14.11 $14.21 N/A N/A Earnings per share (8) .36 .41 N/A N/A Pro forma net income per share (8) .47 N/A .67 N/A N/A Dividends declared per share N/A .40 .30 N/A N/A Dividend payout ratio N/A N/A .73 N/A N/A ____________________________________ (1) Net income for the fiscal year ended July 31, 1993, includes $583,000 representing the cumulative effect of change in accounting for income taxes. (2) Return on average assets represents net income divided by average total assets. (3) Return on average equity represents net income divided by average equity. (4) Net interest rate spread represents the difference between average yield on interest-earning assets and average cost of interest-bearing liabilities. (5) Net interest margin represents net interest income as a percentage of average interest-earning assets. (6) Nonperforming loans include nonaccrual loans and accruing loans 90 days or more delinquent. (7) Nonperforming assets consist of nonperforming loans and foreclosed assets. (8) See Note 13 of Notes to Consolidated Financial Statements. /TABLE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS American National Bancorp, Inc. American National Bancorp, Inc. (the "Company") is a Delaware corporation that was organized in July 1995. On October 31, 1995, the Company acquired 100% of the capital stock of American National Savings Bank, F.S.B. (the "Bank"), sold 2,182,125 shares of common stock in a subscription offering for a purchase price of $10.00 per share (the "Offering"), and issued 1,798,402 shares of common stock in exchange for 927,000 shares of the Bank's common stock held by shareholders other than American National Bankshares, M.H.C. (together with the Offering, the "Conversion"). Immediately following the Conversion, the only significant assets of the Company were the common stock of the Bank and $19.3 million of the proceeds from the Offering. The Company is registered as a savings and loan holding company with the Office of Thrift Supervision (the "OTS"). At July 31, 1996, the Company had total consolidated assets of $461.3 million, total consolidated deposits of $313.1 million, and consolidated stockholders' equity of $47.3 million. The Company's executive office is located at 211 North Liberty Street, Baltimore, Maryland 21201 and its telephone number is (410) 752-0400. American National Savings Bank, F.S.B. American National Savings Bank, F.S.B. (the "Bank") is a federally chartered stock savings bank headquartered in Baltimore, Maryland. The Bank conducts operations through nine full-service offices in its market area consisting of Baltimore City and parts of the Maryland counties of Baltimore, Howard, Harford, Anne Arundel, and Carroll. The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such deposits together with other funds, in loans collateralized by one- to four- family residential real estate, mortgage-backed securities, and, to a lesser extent, construction and land development loans, consumer loans and investment securities. In the past, the Bank also actively originated multifamily residential real estate loans and commercial real estate loans; however, originations of such loans have decreased significantly in recent years as the Bank has sought to reduce the credit risk and losses in its loan portfolio. The Bank also has reduced its involvement in real estate joint ventures due to economic conditions and changes in regulatory capital requirements. General The Company's results of operations are primarily dependent on its net interest income, which is the difference between interest income earned on its loans, mortgage-backed securities, and investment portfolios, and its cost of funds consisting of interest paid on deposits and borrowed funds. The Company's net income also is affected by its provisions for losses on loans and investments in real estate, as well as the amount of noninterest income, including fees and service charges, gains or losses on sales of loans, mortgage-backed securities, investment securities, and other noninterest income, and noninterest expense, including salary and employee benefits, net occupancy, federal deposit insurance premiums, operations of investment in real estate, other noninterest expense, and income taxes. During the fiscal years ended July 31, 1996, 1995, and 1994, net interest income constituted 97.8%, 92.6%, and 84.0% of gross earnings (i.e., net interest income and noninterest income), and noninterest income constituted 2.2%, 7.4%, and 16.0% of gross earning, respectively. Net income of the Company is also affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies, and actions of regulatory authorities. Financial Condition Total assets increased by $35.1 million, or 8.2%, to $461.3 million at July 31, 1996 from $426.2 million at July 31, 1995 due to the second step stock offering which closed October 31, 1995. Loans receivable increased by $45.9 million, or 19.8%, to $278.0 million at July 31, 1996 from $232.1 million at July 31, 1995 largely due to increased originations and purchases of loans. Securities available for sale increased $37.3 million, to $40.3 million at July 31, 1996 from $3.0 million at July 31, 1995. Mortgage-backed securities decreased $56.6 million, or 36.1%, to $100.2 million at July 31, 1996 from $156.8 million at July 31, 1995. The increase in securities available for sale and the decrease in mortgage-backed securities was due primarily to the reclassification of securities to the available for sale portfolio in December 1995. In November 1995, the Financial Accounting Standards Board announced its intention to allow a one-time change in the classification of securities, providing such change was effected by December 31, 1995. Management utilized this opportunity and designated part of its mortgage-backed and investment securities portfolio as available for sale. Investment securities increased $10.2 million, or 73.2%, to $24.1 million at July 31, 1996 due to the purchase of higher yielding callable securities, offset by the transfer of securities into the available for sale portfolio in December 1995. Advances from the Federal Home Loan Bank of Atlanta increased $18.7 million, or 42.3%, to $62.8 million at July 31, 1996 from $44.1 million at July 31, 1995 in order to fund loan settlements and purchases. Total stockholders' equity increased by $18.3 million to $47.3 million at July 31, 1996 compared to $29.0 million at July 31, 1995. This increase was the result of $20.0 million of proceeds from the stock offering, net of expenses, and net income for the year of $1.5 million, partially offset by the Company's establishment of an Employee Stock Ownership Plan (the "ESOP") which borrowed $1.7 million from the proceeds, the repurchase of 5% of its outstanding shares, or 199,025 shares, in open market transactions, and an increase in the net unrealized holding loss on securities of $424,000. Results of Operations General. The Company reported net income of $1.5 million, $10,000, and $1.3 million for the fiscal years ended July 31, 1996, 1995, and 1994. The $1.5 million increase for the fiscal year ended July 31, 1996 resulted from the decrease in the provision for loan losses of $2.6 million and an increase in net interest income of $1.1 million, partially offset by a decrease in noninterest income of $647,000, an increase in noninterest expense of $699,000 and an increase in income tax expense of $647,000. Net income for the fiscal year ended July 31, 1994 included substantial gains on sales of loans, mortgage-backed securities, and investment securities, which income is not considered to be core earnings and there is no assurance that these gains will occur in future periods, or that there will not be losses on sales of loans, mortgage-backed securities, and investment securities in future periods. Net income represented a return on average assets of .35%, .00% and .33%, and a return on average equity of 3.63%, .03%, and 4.68% for the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Interest Income. Interest income 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 income totaled $31.0 million for the fiscal year ended July 31, 1995, compared to $27.3 million for the fiscal year ended July 31, 1994. The $3.7 million, or 13.6%, increase in interest income for the fiscal year ended July 31, 1995 compared to the fiscal year ended July 31, 1994 was due to a 41 basis point increase in the yield on average interest earning assets to 7.53% from 7.12%, and an increase of $27.3 million in average interest earning assets to $411.1 million from $383.8 million. The principal reason for the increase in the yield on interest-earning assets was a 98 basis point increase in the yield on average mortgage-backed securities. Such increase resulted from the upward repricing of the Bank's adjustable rate securities portfolio which, at July 31, 1995, comprised 44.0% of the Bank's portfolio of mortgage-backed securities. The yield on the Bank's average mortgage loans decreased by 10 basis points to 8.48% from 8.58%. The increase in average interest-earnings assets resulted primarily from a $7.9 million, or 3.8%, increase in average mortgage loans to $213.7 million from $205.8 million, a $20.2 million, or 14.2% increase in mortgage-backed securities to $162.2 million from $142.0 million, and a $4.9 million increase in investment securities, partially offset by a $5.7 million decrease in other interest-earnings assets. The increase in interest- earning assets reflected management's decision to leverage the Bank's capital in order to increase net interest income. Interest Expense. 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% form 5.05%. Total average deposits increased $6.3 million, or 2.0% and total borrowed funds increased $9.9 million, or 14.0%. Interest expense totaled $19.2 million for the fiscal year ended July 31, 1995, compared to $16.2 million for the fiscal year ended July 31, 1994. The $3.0 million increase for the fiscal year ended July 31, 1995 compared to the fiscal year ended July 31, 1994 was due to a $24.6 million, or 6.9%, increase in average interest-bearing liabilities to $380.5 million from $355.9 million, and a 49 basis point increase in the average cost of interest-bearing liabilities to 5.05% from 4.56%. The increase in average interest bearing liabilities resulted from the Bank's strategy of leveraging its capital in order to increase net interest income. In order to leverage its capital, the Bank increased its average borrowings to $70.9 million from $40.7 million. The Bank's borrowings included Federal Home Loan Bank ("FHLB") advances and securities sold under agreements to repurchase. Net Interest Income. Net interest income increased by $1.2 million, or 9.5%, to $12.9 million for the fiscal year ended July 31, 1996 from $11.7 million for the fiscal year ended July 31, 1995. The increase in net interest income was primarily due to the results of operations discussed above, which resulted in an increase in the ratio of average interest-earning assets to average interest-bearing liabilities to 110.54% from 108.04%, partially offset by a 4 basis point decrease in the Bank's interest rate spread to 2.44% from 2.48%. Net interest income increased by $662,000, or 6.0%, to $11.7 million for the fiscal year ended July 31, 1995 from $11.1 million for the fiscal year ended July 31, 1994. The increase in net interest income was primarily due to the results of operations discussed above, which resulted in an increase in the ratio of average interest-earning assets to average interest-bearing liabilities to 108.04% from 107.84%, partially offset by an 8 basis point decrease in the Bank's interest rate spread to 2.48% from 2.56%. Provision for Loan Losses. The Company maintains an allowance for loan losses based upon management's periodic evaluation of known and inherent risks in the loan portfolio, the Company's past loan loss experience, the volume and type of lending presently being conducted by the Company, adverse situations that may affect borrowers' ability to repay loans, estimated value of underlying loan collateral, current economic conditions in the Company's market area, and other relevant factors. Management calculates the general allowance for loan losses in part based on past experience, and in part based on specified percentages of loan balances. The allowance is reviewed by management and the Board of Directors, both of which believe that the Company's allowance for loan losses is reasonable and adequate to cover losses reasonably expected in its loan portfolio. Although management uses the best information available and its best judgment in providing for possible losses, no assurance can be given as to whether future adjustments may be necessary. The Company's allowance for loan losses was $4.4 million. or 1.5% of total loans receivable at July 31, 1996, compared to $6.4 million, or 2.6%, of total loans receivable at July 31, 1995. During the fiscal year ended July 31, 1996, the Company's provision for loan losses was $772,000, compared to $3.4 million for the fiscal year ended July 31, 1995. The decrease in the provision for loan losses for the fiscal year ended July 31, 1996, compared to the fiscal year ended July 31, 1995, reflected a reduction in nonperforming assets to $4.7 million, or 1.0% of total assets, at July 31, 1996 from $9.5 million, or 2.2% of total assets, at July 31, 1995. The Bank's provision for loan losses was $3.4 million for the fiscal year ended July 31, 1995, compared to $2.0 million for the fiscal year ended July 31, 1994. The increase in the provision for loan losses for the fiscal year ended July 31, 1995 was attributable to a provision of $1.6 million recorded for the quarter ended October 31, 1994, that related to developments affecting several loans that were part of the Bank's largest lending relationship at July 31, 1995. During the fiscal year ended July 31, 1995, the borrower became delinquent on these loans, and the loans were placed on nonaccrual status. The Bank has foreclosed on several of the loans comprising this lending relationship and is continuing its efforts to resolve these loans. These loans were the primary reason for the increase in the Bank's nonperforming assets to $9.5 million or 2.2% of total assets at July 31, 1995 from $4.3 million, or 1.1%, of total assets at July 31, 1994. As of July 31, 1995, the Bank's allowance for loan losses was $6.4 million, or 2.6%, of total loans receivable and 73.9% of nonperforming loans, compared to the Bank's July 31, 1994 allowance for loan losses of $3.7 million, or 1.7% of total loans receivable and 101.4% of nonperforming loans. 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 $293,000 for the fiscal year ended July 31, 1996 compared to $940,000 for the fiscal year ended July 31, 1995. The $647,000 decrease for the fiscal year ended July 31, 1996 compared to the fiscal year ended July 31, 1995 was due primarily to the sale of low yielding mortgage-backed and investment securities at a loss, and to a decrease in revenue from the Bank's subsidiary, American National Insurance Agency, Inc. Noninterest income totaled $652,000 for the fiscal year ended July 31, 1995, compared to $2.0 million for the fiscal year ended July 31, 1994. The $1.3 million decrease for the fiscal year ended July 31, 1995 compared to the fiscal year ended July 31, 1994 was due primarily to nominal sales of securities during the fiscal year ended July 31, 1995 as compared to gains of $1.1 million on the sale of mortgage-backed securities during the fiscal year ended July 31, 1994, a decrease in the gain on sales of loans of $159,000 and an increase in the loss on investments in joint ventures of $174,000. The Bank sold few securities or loans during the fiscal year ended July 31, 1995, because it held relatively few securities in its available for sale portfolio, and because of its strategy to increase its interest-earning assets. Noninterest Expense. Noninterest expense, consisting primarily of salaries and employee benefits, occupancy and equipment, federal deposit insurance premiums and losses on investments in real estate ("REO") 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. Noninterest expense remained relatively stable at $9.1 million for the fiscal years ended July 31, 1995 and 1994. Decreases of $296,000 in other noninterest expense and $41,000 in loss on investments in real estate were partially offset by increases of $207,000 in salaries and employee benefits, and $67,000 in advertising expense. Income Taxes. The Company's income tax provisions (benefit) were $801,000, $(50,000), and $695,000 in the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Deposit Insurance Premiums. The deposits of federal savings banks such as the Bank are presently insured by the Savings Association Insurance Fund (the "SAIF"), which along with the Bank Insurance Fund (the "BIF"), is one of the two insurance funds administered by the Federal Deposit Insurance Corporation. Financial institutions which are members of the BIF have been experiencing substantially lower deposit insurance premiums because the BIF has achieved its required level of reserves while the SAIF has not yet achieved its required level of reserves. On September 30, 1996, legislation was enacted and signed into law which provides a resolution to the disparity in BIF/SAIF premiums. In particular, SAIF-insured institutions will pay a one-time assessment of 65.7 cents on every $100 of deposits held at March 31, 1995. Such payment is due no later than November 29, 1996. As a result of the new law the Company will be required to pay approximately $2,033,000. Assuming the special assessment is tax deductible, the cost, net of income tax benefits, will be approximately $1.34 million. The Company will make a one-time charge to earnings of this amount for the fiscal quarter ending October 31, 1996. Also, beginnning January 1, 1997, the current annual minimum premium of 23 basis points will be reduced to approximately 6.5 basis points. Average Balance Sheet The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the years indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years presented. Average balances are derived from daily average balances.
Years Ended July 31, ---------------------------------------------------------------------------------------------------- 1996 1995 1994 -------------------------------- -------------------------------- ------------------------------ Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ------- ------- -------- ------- -------- -------- ------ (Dollars in Thousands) Interest-earning assets: Mortgage loans (1) $240,713 $20,652 8.58% $213,701 $18,120 8.48% $205,770 $17,650 8.58% Consumer and other loans 13,377 1,102 8.24 11,932 916 7.68 11,892 809 6.80 Mortgage-backed securities (2) 154,945 9,630 6.22 162,178 10,355 6.38 141,978 7,665 5.40 Investment securities (3) 18,749 1,255 6.70 13,139 831 6.32 8,242 432 5.24 Other (4) 10,742 779 7.25 10,158 747 7.35 15,881 769 4.85 -------- -------- ----- -------- ------- ------ -------- ------- ----- Total interest- earning assets 438,526 33,418 7.62 411,108 30,969 7.53 383,763 27,325 7.12 Noninterest-earning assets 6,986 5,896 6,983 -------- -------- -------- Total assets $445,512 $417,004 $390,746 -------- -------- -------- -------- -------- -------- Interest-bearing liabilities: Deposits: Passbook accounts $ 41,468 1,230 2.97 $ 43,347 1,332 3.07 $ 46,709 1,422 3.04 NOW accounts 15,356 237 1.54 14,675 240 1.64 15,609 264 1.69 Money accounts 45,601 1,511 3.31 51,652 2,008 3.89 59,566 1,842 3.09 Certificates of deposit 213,428 12,847 6.02 199,922 11,343 5.67 193,284 10,399 5.38 -------- -------- ----- -------- ------- ------ -------- ------- ----- Total deposits 315,853 15,825 5.01 309,596 14,923 4.82 315,168 13,927 4.42 -------- -------- ----- -------- ------- ------ -------- ------- ----- Borrowings: Advances from Federal Home Loan Bank 46,851 2,770 5.91 50,182 3,084 6.15 31,403 1,993 6.35 Securities sold under agreements to repurchase 34,005 1,958 5.76 20,741 1,216 5.86 9,307 321 3.45 -------- -------- ----- -------- ------- ------ -------- ------- ----- Total borrowed funds 80,856 4,728 5.85 70,923 4,300 6.06 40,710 2,314 5.68 -------- -------- ----- -------- ------- ------ -------- ------- ----- Total interest-bearing liabilities 396,709 20,553 5.18 380,519 19,223 5.05 355,878 16,241 4.56 Noninterest-bearing liabilities 6,245 7,512 7,313 -------- -------- -------- Total liabilities 402,954 388,031 363,191 Stockholders' equity 42,558 28,973 27,555 -------- -------- -------- Total liabilities and stockholders' equity $445,512 $417,004 $390,746 -------- -------- -------- -------- -------- -------- Net interest income $12,865 $11,746 $11,084 ------- ------- ------- ------- ------- ------- Net interest rate spread (5) 2.44% 2.48% 2.56% ----- ----- ----- ----- ----- ----- Net interest margin (6) 2.93% 2.86% 2.89% ----- ----- ----- ----- ----- ----- Ratio of average interest- earning assets to average interest-bearing liabilities 110.54% 108.04% 107.84% ------ ------ ------ ------ ------ ------ _________________________________________ (1) Includes nonperforming loans. (2) Includes mortgage-backed securities available for sale. Separate yields for available-for-sale portfolio are not available as the income from the available-for-sale securities has not historically been segregated from the income from the held-to-maturity securities. (3) Includes investment securities available for sale. Separate yields for available-for-sale portfolio are not available as the income from the available-for-sale securities has not historically been segregated from the income from the held-to-maturity securities. (4) Includes interest-bearing deposits in other financial institutions, federal funds sold, securities purchased under agreements to resell, Federal Home Loan Bank stock, and ground rents. (5) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (6) Net interest margin represents net interest income as a percentage of average interest-earning assets.
Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. For each category of interest-earning assets and interest- bearing liabilities, information is provided on changes attributable to (i) changes in average volume (changes in average volume multiplied by old rate); (ii) changes in rates (changes in rate multiplied by old average volume); and (iii) changes in rate-volume (changes in rate multiplied by the change in average volume); and (iv) the net change.
Years Ended July 31, -------------------------------- -------------------------------------- 1996 vs. 1995 1995 vs. 1994 -------------------------------- -------------------------------------- Increase/(Decrease) Increase/(Decrease) Due to Total Due to Total Rate/ Increase Rate/ Increase Volume Rate Volume (Decrease) Volume Rate Volume (Decrease) ------ ---- ------ -------- ------ ---- ------ -------- (In Thousands) Interest income: Mortgage loans $2,291 $214 $27 $2,532 $681 $(203) $(8) $ 470 Consumer and other loans 111 67 8 186 3 103 1 107 Mortgage-backed securities (462) (276) 13 (725) 1,091 1,400 199 2,690 Investment securities 354 49 21 424 257 89 53 399 Other interest-earning assets 43 (10) (1) 32 (276) 397 (143) (22) ------ ---- ----- -------- ------ ------ ----- -------- Total interest-earning assets $2,337 $44 $68 $2,449 $1,756 $1,786 $102 $3,644 ------ ---- ----- -------- ------ ------ ----- -------- ------ ---- ----- -------- ------ ------ ----- -------- Interest expense: Passbook $(58) $(46) $2 $(102) $(102) $13 $(1) $(90) NOW 11 (13) (1) (3) (16) (9) 1 (24) Money fund (235) (297) 35 (497) (244) 473 (63) 166 Certificate 766 691 47 1,504 357 568 19 944 Advances from FHLB (205) (117) 8 (314) 1,192 (63) (38) 1,091 Reverse repurchase agreements 777 (21) (14) 742 394 225 276 895 ------ ---- ----- -------- ------ ------ ----- -------- Total interest-bearing liabilities $1,056 $197 $77 $1,330 $1,581 $1,207 $194 $2,982 ------ ---- ----- -------- ------ ------ ----- -------- ------ ---- ----- -------- ------ ------ ----- -------- Change in net interest income $1,281 $(153) $(9) $1,119 $175 $579 $(92) $ 662 ------ ---- ----- -------- ------ ------ ----- -------- ------ ---- ----- -------- ------ ------ ----- --------
Asset and Liability Management-Interest Rate Sensitivity Analysis The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to positively affect net interest income. Similarly, during a period of falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net interest income. The Company's deposit accounts typically react more quickly to changes in market interest rates than interest-earning assets such as fixed rate mortgage loans, because of the relatively shorter maturities of deposits. When interest rates are rising, interest expense will increase more rapidly than interest income if a higher volume of interest-bearing liabilities than interest-earning assets reprice to higher interest rates. In a falling interest rate environment, interest income will decrease less rapidly than interest expense if a higher volume of interest-bearing liabilities than interest-earning assets reprice to lower interest rates. Management seeks to manage the Company's interest rate risk exposure by monitoring the levels of interest rate sensitive assets and liabilities while maintaining an acceptable interest rate spread. To reduce the potential volatility of the Company's earnings in a changing interest rate environment, the Company invests in mortgage-backed securities that have adjustable rates and/or relatively short expected terms. At July 31, 1996, $97.4 million, or 73.0%, of the Company's $133.5 million of mortgage-backed securities had adjustable interest rates. The Company also originates adjustable-rate loans, and from time to time may purchase ARM loans. During the fiscal year ended July 31, 1996, the Company purchased $11.0 million of adjustable-rate one- to four-family mortgage loans. At July 31, 1996, $114.1 million, or 38.2%, of the Company's total loans receivable had adjustable interest rates. The Company also seeks to reduce the term of its interest-earning assets by offering fixed-rate one- to four-family mortgage loans with terms of 15 years or less. In addition, the Company manages its interest-bearing liabilities by offering competitive interest rates on deposit accounts and pricing certificates of deposit to provide customers with incentives to choose certificates of deposit with longer terms. At July 31, 1996, time deposits maturing beyond 12 months totaled $97.3 million, or 31.1%, of the Company's total deposits. At July 31, 1996, the Company's total interest-bearing liabilities maturing or repricing within one year exceeded its total interest- earning assets maturing or repricing within one year by $19.4 million, representing a cumulative one-year gap ratio of negative 4.2%. The Company's gap measures indicate that net interest income is moderately exposed to increases in interest rates. In a rising interest rate environment, the Company's net interest income may be adversely affected as liabilities would reprice to higher market rates more quickly than assets. This effect would be compounded because the prepayment speeds of the Company's long-term fixed-rate assets would decrease in a rising interest rate environment. Although the Company could reduce its exposure to interest rate risk by investing more of its assets in short- term securities and adjustable-rate mortgage-backed securities, management believes that the benefits of such a strategy would be outweighed by the loss of earnings from an increased concentration on short-term and adjustable-rate investments, which may offer lower yields. The Company's analysis of the gap between its interest-earning assets and interest-bearing liabilities within specified periods may include the effects of certain hedging techniques that may be used by the Company to manage interest rate risk, including primarily interest- rate cap agreements that the Company has from time to time entered into with national brokerage firms. An interest-rate cap agreement is an agreement pursuant to which the seller of the cap agrees to pay the buyer the difference between the actual interest rate and the strike rate set forth in the contract if the actual rate is higher than the strike rate. Pursuant to the cap agreements that the Company has used in the past and may continue to use from time to time, the Company receives variable interest payments based on the spread between the variable three month London Interbank Offered Rate ("LIBOR") and the strike rate of the caps if the variable three month LIBOR is higher than the strike rate. The premiums paid for such agreements are amortized over the life of the agreements. The interest differential received, if any, on interest rate cap agreements is recorded as an adjustment to interest expense. During the fiscal years ended July 31, 1996 and 1995, the Company did not use interest rate cap agreements. During the fiscal year ended July 31, 1994, the net effect of the Company's interest rate caps was to increase the Company's interest expense by $200,000. Although the interest rate caps have reduced the Company's net interest income in prior years, they also reduced the Company's exposure to increases in interest rates. The Company has an Asset-Liability Management Committee, which is responsible for reviewing the Company's asset and liability policies. Management presently monitors and evaluates the potential impact of interest rate movements upon the market value of portfolio equity and the level of net interest income on a quarterly basis. This evaluation is performed in compliance with OTS regulations and is compared to Board-established limits to ensure that interest rate risk is maintained within these guidelines. The Committee meets quarterly and reports quarterly to the Board of Directors on interest rate risks and trends, as well as liquidity and capital ratios and regulatory requirements. Gap Table. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at July 31, 1996, that are expected to reprice or mature, based upon certain assumptions, in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the earlier of term or repricing or the contractual terms of the asset or liability.
At July 31, 1996 --------------------------------------------------------------------------- Within 1-3 3-5 5-10 10-20 Over 20 1 Year Years Years Years Years Years Total ------- ------- ------ ------- ------ ------ -------- (Dollars in Thousands) Interest-earning assets: Real Estate Mortgages: Adjustable Rate $85,489 $20,655 $7,935 $ $ $ $114,079 Fixed (1) 31,310 30,017 18,905 32,772 25,083 7,209 145,296 Consumer 12,375 2,877 2,955 385 75 18,667 Mortgage-backed securities 89,754 4,052 2,747 2,884 631 127 100,195 Investment securities 5,198 9,947 8,964 24,109 Securities available for sale 12,976 4,756 13,976 6,085 2,453 20 40,266 Other interest-earning assets (2) 5,372 4,904 10,276 ------- ------- ------ ------- ------ ------ -------- Total interest-earning assets 242,474 62,357 46,518 52,073 37,206 12,260 452,888 Rate sensitive liabilities: Passbook accounts 32,217 4,487 2,136 1,638 296 7 40,781 NOW accounts 9,024 2,042 1,348 1,693 814 117 15,038 Money accounts 32,504 4,527 2,155 1,652 299 8 41,145 Certificates of deposit 118,772 59,823 19,711 17,813 216,119 Borrowings 69,394 25,625 1,500 750 97,269 ------- ------- ------ ------- ------ ------ -------- Total interest-bearing liabilities 261,911 96,504 25,350 24,296 2,159 132 410,352 ------- ------- ------ ------- ------ ------ -------- Interest sensitivity gap (19,437) (34,147) 21,168 27,777 35,047 12,128 42,536 ------- ------- ------ ------- ------ ------ -------- ------- ------- ------ ------- ------ ------ -------- Cumulative interest- sensitivity gap (19,437) (53,584) (32,416) (4,639) 30,408 42,536 42,536 ------- ------- ------ ------- ------ ------ -------- ------- ------- ------ ------- ------ ------ -------- Cumulative interest- sensitivity gap to total assets (4.2)% (11.6)% (7.0)% (1.0)% 6.6% 9.2% Ratio of interest-earning assets to interest-bearing liabilities 92.6% 64.6% 183.5% 214.3% 1723.3% 9287.9% Cumulative ratio of interest sensitive assets to interest sensitive liabilities 92.6% 85.0% 91.6% 98.9% 107.4% 110.4% ____________________________________ (1) Includes loans held for sale. (2) Includes federal funds sold, interest-bearing deposits in other banks, Federal Home Loan Bank stock, and ground rents.
The above table was prepared based on the Company's historical experience and OTS decay rate assumptions. Management believes that the assumptions used to prepare the table approximate the standards used in the savings industry, and considers the assumptions appropriate and reasonable. However, certain shortcomings are inherent in the analysis presented by the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of or lag behind changes in market interest rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Moreover, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Net Portfolio Value. The OTS has adopted a rule that incorporates an interest rate risk ("IRR") component into the risk-based capital rules. The IRR component is a dollar amount that will be deducted from total capital for the purpose of calculating an institution's risk-based capital requirement and is measured in terms of the sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV is the difference between discounted incoming and outgoing cash flows from assets, liabilities, and off-balance sheet contracts. An institution's IRR is measured as the change to its NPV as a result of a hypothetical 200 basis point change in market interest rates. A resulting change in NPV of more than 2% of the estimated market value of its assets will require the institution to deduct from its capital 50% of that excess change. The rule provides that the OTS will calculate the IRR component quarterly for each institution from the institution's Thrift Financial Reports. The OTS has deferred for the present time the date on which the IRR component is to be deducted from total capital. The following table presents the Bank's NPV as of June 30, 1996, as calculated by the OTS, based on information provided to the OTS by the Bank.
Change in Change in NPV Interest Rates Net Portfolio Value as a % of in Basis Points ------------------------------------ Estimated Market (Rate Shock) Amount $ Change % Change Value of Assets (Dollars in Thousands) 400 $20,400 $(28,430) (58)% 5.89% 300 27,372 (21,459) (44) 4.45 200 35,111 (13,719) (28) 2.84 100 42,399 (6,432) (13) 1.33 Static 48,830 (100) 53,987 5,156 11 1.07 (200) 55,582 6,752 14 1.40 (300) 57,289 8,459 17 1.75 (400) 59,656 10,825 22 2.24
As shown by the table above, increases in interest rates will result in net decreases in the Bank's NPV, while decreases in interest rates will result in smaller net increases in the Bank's NPV. Because the table reflects the Bank's NPV decreasing by 2.84% if interest rates increase by 200 basis points, the Bank would be required to make a deduction from total capital for purposes of calculating the Bank's risk-based capital requirement if such decrease exceeded 2% of the estimated market value of its assets for three consecutive quarters. No capital deduction was required at July 31, 1996. As is the case with the gap table, certain shortcomings are inherent in the methodology used in the above table. Modeling changes in NPV requires the making of certain assumptions that may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the models assume that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the models assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements do provide an indication of the Bank's interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income. Liquidity and Capital Resources The Bank is required to maintain minimum levels of liquid assets as defined by OTS regulations. This requirement, which varies from time to time depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio currently is 5%. The Bank's liquidity ratio averaged 7.7% during the month of July 1996. In addition the Bank is required to maintain short term liquid assets of at least 1% of the Bank's average daily balance of net withdrawable deposit accounts and current borrowings. The Bank adjusts liquidity as appropriate to meet its asset and liability management objectives. Certain mortgage-backed securities, time deposits, federal funds sold and other assets outstanding at July 31, 1996, 1995, and 1994, that qualify for liquidity amounted to $11.9 million, $26.4 million, and $19.3 million, respectively. At July 31, 1996, the Bank was in compliance with such liquidity requirements. The Bank's primary sources of funds are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, FHLB advances and other borrowings, and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Bank manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Bank invests excess funds in federal funds, and other short-term interest-earning and other assets, which provide liquidity to meet lending requirements. The Company's borrowings increased to $97.3 million at July 31, 1996 and an average of $80.9 million for the fiscal year ended July 31, 1996. The $18.7 million increase was primarily in advances from the Federal Home Loan Bank of Atlanta in order to fund loan settlements and purchases. The Company's borrowings increased to an average of $70.9 million for the fiscal year ended July 31, 1995, from an average of $40.7 million for the fiscal year ended July 31, 1994. The increase in borrowings related primarily to the Company's efforts to manage its level of interest rate risk by utilizing longer-term FHLB borrowings, and leverage proceeds of the Minority Stock Offering. Although the average rate paid by the Company has exceeded the average rate paid on deposits, the Company did not use deposits to fund the growth in assets that occurred after the Minority Stock Offering because of management's belief that shorter-term deposits would adversely affect the Company's exposure to increases in interest rates, that longer-term deposits would be more expensive, and that any attempt to quickly increase deposits would be more costly than a strategic effort to grow deposits in a controlled manner over a period of time. The Company's deposits increased to $313.1 million at July 31, 1996, from an average of $309.6 million over the fiscal year ended July 31, 1995, and the Company intends to continue its strategic effort to grow its deposit base in the future as it leverages proceeds of the October 31, 1995 Offering. The Company's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Cash flows provided by operating activities were $5.2 million, $1.8 million, and $7.0 million for the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Net cash used in investing activities consisted primarily of disbursements for purchases of mortgage-backed securities, loan originations and purchases, and purchases of investment securities, offset by proceeds from the sales and repayments of mortgage-backed securities, loan principal repayments, and sales and maturities of investment securities totalled $39.6 million, $29.4 million, $21.8 million, for the fiscal years ended July 31, 1996, 1995, and 1994, respectively. Disbursements for purchases of mortgage-backed securities totalled $42.7 million, $17.4 million, and $131.3 million for the years ended July 31, 1996, 1995, and 1994, respectively. Disbursements for loans originated and purchased were $94.4 million, $58.3 million and $43.5 million for the years ended July 31, 1996, 1995, and 1994, respectively. Disbursements for purchases of investment securities totalled $29.2 million, $7.8 million and $6.6 million for the years ended July 31, 1996, 1995 and 1994, respectively. Proceeds from the sales and repayments of mortgage-backed securities totalled $67.9 million, $18.1 million, and $89.4 million for the years ended July 31, 1996, 1995, and 1994, respectively. Proceeds from loan principal repayments totalled $40.7 million, $27.8 million, and $45.8 million for the years ended July 31, 1996, 1995 and 1994, respectively. Proceeds from the sales and maturities of investment securities totalled $12.0 million, $1.9 million and $17.0 million for the years ended July 31, 1996, 1995 and 1994, respectively. Net cash provided by financing activities consisting primarily of net activity in deposit accounts, proceeds from funding and repayments of FHLB advances, and net activity in securities sold under agreements to repurchase totalled $33.9 million, $25.8 million, and $16.7 million for the fiscal years ended July 31, 1996, 1995 and 1994, respectively. Additionally, on October 31, 1995, the Company completed its conversion to a stock holding company and received net proceeds of $19.3 million. Also, in November 1993, the Bank completed its minority stock offering and received net proceeds of $8.3 million. The net increase (decrease) in deposits was ($1.5) million, $5.6 million and $(8.7) million for the years ended July 31, 1996, 1995 and 1994, respectively. The activity in net proceeds (repayments) from FHLB advances was $18.7 million, $(6.6) million and $24.4 million for the years ended July 31, 1996, 1995 and 1994, respectively. The net increase (decrease) in securities sold under agreements to repurchase was $107,000, $26.9 million, and $(7.1) million for the years ended July 31, 1996, 1995 and 1994, respectively. Federal regulations require thrift institutions to maintain certain minimum levels of regulatory capital. The regulatory capital regulations require minimum levels of tangible and core capital of 1.5% and 3%, respectively, of adjusted total assets and risk-based capital of 8% of risk-weighted assets. The Bank was in compliance with the regulatory capital requirements with tangible, core and risk-based capital ratios of approximately 8.64%, 8.64% and 18.2%, respectively, at July 31, 1996. The Bank has other sources of liquidity, including a $95 million line of credit with the FHLB. At July 31, 1996, the Bank's FHLB advances totaled $62.8 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. Impact of New Accounting Standards Accounting for Impairment of Long-Lived Assets. In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 is effective for fiscal years beginning after December 15, 1995. Earlier application is permitted. SFAS 121 will require, among other things, that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management adopted the provisions of SFAS 121 as of August 1, 1996, and the adoption of SFAS 121 will not have a material impact on the Company's financial statements. Mortgage Servicing Rights. In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122 Accounting for Mortgage Servicing Rights (SFAS 122). SFAS 122 is effective for years beginning after December 15, 1995. The Statement requires among other provisions, that the Company capitalize the estimated fair value of servicing rights on loans originated for sale, and amortize such amount over the estimated servicing life of the loan. The Company adopted the provisions of SFAS 122 as of August 1, 1996. Adoption of SFAS 122 will not have a material impact on the Company's financial statements. Stock-Based Compensation. In November 1995, the FASB issued Statement of Financial Accounting Standards No. 123 Accounting for Awards of Stock-Based Compensation to Employees (SFAS 123). SFAS 123 is effective for years beginning after December 15, 1995. The Statement defines a fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for an employee stock option or similar equity instrument, and for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). Under the fair value-based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value-based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Most fixed stock option plans, the most common type of stock compensation plan, have no intrinsic value at grant date, and under Opinion 25 no compensation cost is recognized for them. Compensation cost is recognized for other types of stock based compensation plans under Opinion 25, including plans with variable, usually performance-based, features. SFAS 123 requires that an employer's financial statements include certain disclosures about stock- based employee compensation arrangements regardless of the method used to account for them. Management adopted the provisions of SFAS 123 as of August 1, 1996 using the intrinsic value-based method and believes that the adoption will not have a material impact on the Company's financial statements. The Company will provide disclosure about its stock based employee compensation plans in its 1997 financial statements, as required by SFAS 123. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. In June 1996, the FASB issued Statement of Financial Accounting Standards 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 125). SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. This Statement will require, among other things, that the Company record at fair value, assets and liabilities resulting from a transfer of financial assets. The Company will adopt the provisions of SFAS 125 as of January 1, 1997, and management believes that the adoption of SFAS 125 will not have a material effect on the Company's financial condition or results of operations. AMERICAN NATIONAL BANCORP, INC. COMMON STOCK AND RELATED MATTERS On October 31, 1995, the Company acquired all of the outstanding common stock of the Bank, sold 2,182,125 shares of Company common stock for a purchase price of $10.00 per share and issued 1,798,402 shares of Company common stock in exchange for the Bank's outstanding common stock held by shareholders other than American National Bankshares, M.H.C. On that date, the Company's common stock began to trade on the Nasdaq National Market using the Bank's previous symbol, "ANBK." As of September 27, 1996, the Company had 846 stockholders of record and 3,603,646 outstanding shares of common stock. This does not reflect the number of persons whose stock is in nominee or "street" name accounts through brokers. The following table sets forth the high and low trading prices of the Company's common stock subsequent to the completion of the Offering. No dividends have been declared on the Common Stock since the Offering. In September 1996, the Company's Board of Directors authorized a quarterly cash dividend of $.03 per share which will be paid on or about November 15, 1996, to stockholders of record as of October 31, 1996.
Three Months Ended High Low ------------------ ------ ------ January 31, 1996 $10.25 $9.375 April 30, 1996 10.25 9.50 July 31, 1996 10.625 9.50
Payment of dividends on the Common Stock is subject to determination and declaration by the Board of Directors and depends upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, the Company's results of operations and financial condition, tax considerations and general economic conditions. American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION July 31, 1996 and 1995
Assets 1996 1995 ------- -------- (In Thousands) Cash: On hand and due from banks $2,671 2,170 Interest-bearing deposits 1,837 2,240 Federal funds sold 394 950 Securities available for sale, amortized cost of $41,370, and $2,922, respectively (note 2) 40,266 3,030 Investment securities, fair value of $23,651 and $13,652, respectively (note 3) 24,109 13,918 Mortgage-backed securities, fair value of $97,627 and $152,621, respectively (notes 4 and 11) 100,195 156,775 Loans receivable, net (notes 5 and 11) 278,042 232,089 Federal Home Loan Bank stock, at cost (note 17) 3,141 2,914 Investments in real estate, net (note 6) 5,670 5,828 Investments in and advances to real estate joint ventures (note 7) 1,270 2,215 Property and equipment, net (note 8) 1,198 965 Prepaid expenses and other assets 612 624 Income taxes receivable - 380 Deferred income taxes (note 12) 1,866 2,076 ------- -------- 461,271 426,174 ------- -------- ------- -------- Liabilities and Stockholders' Equity Liabilities: Deposits (note 9) $313,083 314,613 Securities sold under agreements to repurchase (note 10) 34,445 34,338 Advances from the Federal Home Loan Bank of Atlanta (note 11) 62,824 44,137 Drafts payable 859 1,288 Advance payments by borrowers for taxes and insurance 1,760 1,852 Accrued expenses and other liabilities 1,030 987 ------- -------- Total liabilities 414,001 397,215 ------- -------- Stockholders' equity (notes 13 and 17): Serial preferred stock, 10,000,000 shares authorized, none issued. - - Common stock, $1 par value, 20,000,000 shares authorized, 2,052,000 shares issued and outstanding at July 31, 1995 - 2,052 Common stock, $.01 par value, 8,000,000 shares authorized, 3,980,500 shares issued and 3,781,475 shares outstanding at July 31, 1996 40 - Additional paid-in capital 30,705 7,652 Unearned common stock acquired by management recognition and retention plans (77) (132) Unearned employee stock ownership plan (ESOP) shares (1,629) - Treasury stock at cost, 199,025 shares (2,040) - Retained income - substantially restricted 21,970 20,662 Net unrealized holding loss on securities, net of income taxes (1,699) (1,275) ------- -------- Total stockholders' equity 47,270 28,959 -------- -------- Commitments (notes 5, 8, 13 and 14) $461,271 426,174 ------- -------- ------- --------
American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS Years ended July 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------- ------- (In Thousands) Interest income: Loans receivable $21,754 19,036 18,459 Mortgage-backed securities 9,630 10,355 7,665 Investment securities 1,255 831 432 Other 779 747 769 Total interest income 33,418 30,969 27,325 Interest expense: Deposits (note 9) 15,825 14,923 13,927 Borrowed funds 4,728 4,300 2,314 Total interest expense 20,553 19,223 16,241 Net interest income 12,865 11,746 11,084 Provision for loan losses 772 3,386 1,989 Net interest income after provision for loan losses 12,093 8,360 9,095 Noninterest income: Fees and service charges 640 592 630 Gain (loss) on sales of: Loans receivable, net 41 20 179 Mortgage-backed securities, net (558) (5) 1,100 Investment securities, net (14) 15 (46) Other 184 318 254 Total noninterest income 293 940 2,117 Noninterest expenses: Salaries and employee benefits 4,276 4,066 3,859 Net occupancy 1,341 1,300 1,313 Professional services 380 399 367 Advertising 684 442 375 Federal deposit insurance premiums 772 809 831 Furniture, fixtures and equipment 324 286 282 Equity in net loss of real estate joint ventures (note 7) 193 288 114 Loss on investments in real estate (note 6) 390 330 371 Other 1,679 1,420 1,716 Total noninterest expenses 10,039 9,340 9,228 Income (loss) before income taxes 2,347 (40) 1,984 Income tax provision (benefit) (note 12) 801 (50) 695 Net income $ 1,546 10 1,289 Net income per share of common stock (note 13): From date of conversion .36 - .41 Pro forma .47 N/A .67 American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended July 31, 1996, 1995 and 1994
Net Unearned unrealized common holding stock gains Additional acquired Unearned (losses) on Common paid-in by ESOP Treasury Retained securities, stock capital MRRP shares stock income net Total (In Thousands) Balance at July 31, 1993 $ - - - - - 21,193 - 21,193 Unrealized holding gain on securities available for sale, net of income taxes, recognized upon adoption of Statement 115 (note 1) - - - - - - 924 924 Change in net unrealized holding losses on securities, net of income taxes (note 2) - - - - - - (2,372) (2,372) Proceeds from common stock offering, net of conversion costs (note 13) 2,025 7,409 - - - (1,125) - 8,309 Common stock acquired by management recognition and retention plan (MRRP) (note 13) 27 243 (270) - - - - - Cash dividends declared (note 13) - - - - - (276) - (276) MRRP - - 93 - - - - 93 Net income - 1994 - - - - - 1,289 - 1,289 Balance at July 31, 1994 2,052 7,652 (177) - - 21,081 (1,448) 29,160 Change in net unrealized gains on securities, net of income taxes (note 2) - - - - - - 115 115 Amortization of net unrealized holding loss (note 4) - - - - - (58) 58 - Cash dividends declared (note 13) - - - - - (371) - (371) MRRP - - 45 - - - - 45 Net income - 1995 - - - - - 10 - 10 Balance at July 31, 1995 2,052 7,652 (132) - - 20,662 (1,275) 28,959 Changes in net unrealized losses on securities, net of income taxes (note 2) - - - - - - (570) (570) Amortization of net unrealized holding loss (note 4) - - - - - (146) 146 - Proceeds from common stock offering, net of expenses (note 13) (2,012) 23,052 - - - - - 21,040 Cash dividends declared (note 13) - - - - - (92) - (92) MRRP - - 55 - - - - 55 Borrowings for employee stock ownership plan (ESOP) (note 15) - - - (1,746) - - - (1,746) Compensation expense - ESOP - 1 - 117 - - - 118 Purchase of common stock - - - - (2,040) - - (2,040) Net income - 1996 - - - - - 1,546 - 1,546 Balance at July 31, 1996 $ 40 30,705 (77) (1,629) (2,040) 21,970 (1,699) 47,270
American National Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended July 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------- ------- (In Thousands) Cash flows from operating activities: Net income $ 1,546 10 1,289 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 532 483 475 Noncash compensation under stock-based benefit plans 173 45 93 Amortization of loan fees (398) (437) (727) Amortization of premiums and discounts, net 177 (38) 505 Provision for losses on loans and investments in real estate 930 3,430 2,180 (Gain) loss on sales of assets, net 531 (30) (1,232) Loans originated for sale (2,754) (3,990) (5,489) Sales of loans originated for sale 4,194 2,159 8,710 Deferred income taxes 409 (138) (7) Decrease in prepaid expenses and other assets 12 202 356 Increase in accrued expenses and other liabilities 43 163 200 Decrease (increase) in income taxes receivable 380 (112) 830 Federal Home Loan Bank stock purchases, net (227) - - Federal Home Loan Bank stock dividends - - (72) Other, net (338) 66 (77) ------- ------ ------- Net cash provided by operating activities 5,210 1,813 7,034 ------- ------ ------- Cash flows from investing activities: Sales of investment securities available for sale 969 1,015 14,016 Maturities of investment securities available for sale - 842 1,000 Purchases of investment securities available for sale (2,000) (842) (1,409) Sales of mortgage-backed securities available for sale 56,036 3,100 49,601 Repayments of mortgage-backed securities available for sale 4,082 432 14,990 Purchases of mortgage-backed securities available for sale (10,989) (3,894) (45,156) Maturities of investment securities 11,000 - 2,000 Purchases of investment securities (27,176) (6,983) (5,208) Repayments of mortgage-backed securities 7,741 14,569 24,800 Purchases of mortgage-backed securities (31,714)(13,470) (86,100) Loan principal repayments 40,659 27,763 45,753 Loan originations (73,671)(43,092) (37,993) Loan purchases (17,972)(11,216) - Increase in deferred loan fees, net 515 533 388 Decrease in investments in real estate $2,960 1,151 979 Decrease in investments in and advances to real estate joint ventures 752 1,173 786 Purchases of property and equipment (764) (438) (230) Net cash used in investing activities (39,572)(29,357) (21,783) Cash flows from financing activities: Net (decrease) increase in deposits (1,530) 5,624 (8,722) Net increase (decrease) in securities sold under agreements to repurchase 107 26,871 (7,139) Proceeds from Federal Home Loan Bank advances 215,147 123,698 88,600 Repayment of Federal Home Loan Bank advances (196,460)(130,291) (64,232) (Decrease) increase in drafts payable (429) 111 65 (Decrease) increase in advance payments by borrowers for taxes and insurance (92) 153 47 Proceeds from common stock offering 21,040 - 8,309 Common stock acquired by ESOP (1,746) - - Dividends paid on common stock (93) (371) (182) Purchase of treasury stock (2,040) - - Net cash provided by financing activities 33,904 25,795 16,746 Net (decrease) increase in cash and cash equivalents (458) (1,749) 1,997 Cash and cash equivalents at beginning of year 5,360 7,109 5,112 Cash and cash equivalents at end of year $ 4,902 5,360 7,109 Supplemental information: Interest paid on deposits and borrowed funds $20,457 19,152 16,192 Income taxes (received) paid, net $ (104) 165 (128) Noncash activities: Loans transferred to real estate acquired through foreclosure $ 2,960 1,400 489
American National Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1996, 1995, and 1994 (1) Description of Business, Summary of Significant Accounting Policies and Other Matters Description of Business American National Bancorp, Inc. (the Company) is the holding company of American National Savings Bank, F.S.B. (the Bank). The Bank provides a full range of banking services to individual and corporate customers through its subsidiaries and branch offices in Maryland. The Bank is subject to competition from other financial and mortgage institutions. The Bank is subject to the regulations of certain agencies of the federal government and undergoes periodic examination by those agencies. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank and the Bank's subsidiaries, American National Insurance Agency, Inc. (ANIA), ANSB Corporation and National Development Corporation (NDC). ANIA acts as agent in offering annuity and mortgage life insurance products to customers of the Company. ANSB Corporation was incorporated in June 1994 for the purpose of holding investment securities for the Company. NDC is a partner in various real estate joint ventures formed for the purpose of acquiring and developing real estate for sale. All significant intercompany accounts and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and income and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of investments in real estate. In connection with these determinations, management obtains independent appraisals for significant properties and prepares fair value analyses as appropriate. Management believes that the allowances for losses on loans and investments in real estate are adequate. While management uses available information to recognize losses on loans and investments in real estate, future additions to the allowances may be necessary based on changes in economic conditions, particularly in the State of Maryland. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and investments in real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. (1) Description of Business, Summary of Significant Accounting Policies and Other Matters, Continued Investment and Mortgage-Backed Securities Debt securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost. Debt and equity securities that are purchased and held principally for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings. All other debt and equity securities are considered available for sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity (net of tax effects). If a decline in value of an individual security classified as held to maturity or available for sale is judged to be other than temporary, the cost basis of that security is reduced to its fair value and the amount of the write-down is included in earnings. Fair value is determined based on bid prices published in financial newspapers or bid quotations received from securities dealers. For purposes of computing realized gains or losses on the sales of investments, cost is determined using the specific identification method. Premiums and discounts on investment and mortgage-backed securities are amortized over the term of the security using methods that approximate the interest method. On August 8, 1994 the Company transferred approximately $36.3 million of its collateralized mortgage obligations (CMOs), net of unrealized loss of approximately $1.8 million, from the available for sale portfolio to held to maturity. On that date certain accounting issues were resolved permitting the Company to transfer substantially all of these securities from the available for sale portfolio to the held to maturity portfolio as originally intended. The unrealized loss at the time of the transfer is being amortized over the remaining lives of the securities as an adjustment of yield. The unrealized loss, net of taxes, was $1.1 million at the date of transfer. The unrealized loss has been recorded as a component of stockholders' equity and is being reduced in subsequent periods through the amortization. In November 1995, the Financial Accounting Standards Board announced its intention to allow a one-time change in the classification of securities, providing such change was effected by December 31, 1995. Management utilized this opportunity and designated as available-for- sale approximately $87.1 million of investment and mortgage-backed securities previously classified as held to maturity with an unrealized loss of approximately $348,000. Loans Held for Sale Loans held for sale are carried at the lower of cost or market on an aggregate basis. Investments in and Advances to Real Estate Joint Ventures Investments in and advances to real estate joint ventures are accounted for using the equity method. The carrying values are subject to subsequent adjustment to the extent they exceed net realizable value. Interest income and fees on loans to real estate joint ventures are deferred. Such interest and fees, in excess of related capitalized interest cost, are recognized as the loans are repaid. (1) Description of Business, Summary of Significant Accounting Policies and Other Matters, Continued Investments in and Advances to Real Estate Joint Ventures, continued Interest costs are capitalized based on the Company's average cost of funds and its average investment in and advances to real estate joint ventures with development in progress. Interest capitalized was approximately $56,000, $95,000, and $160,000 for the years ended July 31, 1996, 1995, and 1994, respectively. Investments in Real Estate Ground rents are carried at cost. Real estate acquired through foreclosure is recorded at the lower of cost or estimated fair value less estimated costs to sell. Management estimates fair value based on appraisals and/or cash flow analyses. Costs relating to improving such properties are capitalized and costs relating to holding such properties are charged to expense. Property and Equipment Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are recorded on a straight-line basis over the estimated useful lives of the assets or leases as appropriate. Additions and improvements are capitalized and charges for repairs and maintenance are expensed when incurred. Gains or losses on sales of property and equipment are recognized upon sale. Loans Receivable Origination and commitment fees and direct origination costs are deferred and amortized to income over the contractual lives of the related loans using the interest method. Under certain circumstances, commitment fees are recognized over the commitment period or upon expiration of the commitment. Unamortized loan fees are recognized in income when the related loans are sold or prepaid. Interest on potential problem loans is not accrued when, in the opinion of management, the full collection of principal or interest is in doubt. Any amounts ultimately collected on such loans is recorded as a reduction of principal, as interest income or combination thereof depending on management's evaluation of the recoverability of the loan principal. Provisions for loan losses are charged to operations based on management's review of the loan portfolio and analyses of the borrowers' ability to repay, past loan loss and collection experience, risk characteristics of individual loans or groups of similar loans and underlying collateral, current and prospective economic conditions and status of nonperforming loans. Loans or portions thereof are charged- off when considered, in the opinion of management, uncollectible. (1) Description of Business, Summary of Significant Accounting Policies and Other Matters, Continued Provision for Loan Losses, continued The Company adopted the provisions of Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" and by Statement 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" (collectively referred to as "Statement 114") as of August 1, 1995. Statement 114 addresses the accounting by creditors for impairment of certain loans. It is generally applicable for all loans except large groups of smaller- balance homogenous loans, including residential mortgage loans and consumer installment loans that are collectively evaluated for impairment. It also applies to all loans that are restructured in a troubled debt restructuring involving a modification of terms. However, if a loan that was restructured in a troubled debt restructuring involving a modification of terms before the effective date of Statement 114 is not impaired based on the terms specified by the restructuring agreement, a creditor may continue to account for the loan in accordance with the provisions of Statement 15, "Accounting for Troubled Debt Restructurings" prior to its amendment by Statement 114. Statement 114 requires that impaired loans be measured on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are generally placed in nonaccrual status on the earlier of the date that management determines that the collection of principal and/or interest is in doubt or the date that principal or interest is 90 days or more past-due. An allocated valuation allowance, if any, is included in the Bank's allowance for credit losses. An impaired loan is charged-off when the loan, or a portion thereof, is considered uncollectible or transferred to real estate owned. The Bank recognized interest income for impaired loans consistent with its method for nonaccrual loans. Specifically, interest payments received are recognized as interest income or, if the ultimate collectibility of principal is in doubt, are applied to principal. Changes resulting from the implementation of SFAS Nos. 114 and 118 did not materially impact the financial condition or results of operations of the Company as of and for the year ended July 31, 1996. Income Taxes Deferred income taxes are recognized, with certain exceptions, for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets (including tax loss carryforwards) are recognized only to the extent that it is more likely than not that such amounts will be realized based on consideration of available evidence, including tax planning strategies and other factors. (1) Summary of Significant Accounting Policies and Other Matters, Continued Income Taxes, continued A continuing exception allows qualified thrift lenders not to provide a deferred tax liability on certain bad debt reserves for tax purposes that arose in fiscal years beginning before July 31, 1988. Such bad debt reserves for the Company, which are included in retained income, amounted to approximately $11.5 million at July 31, 1996 with an income tax effect of approximately $4.4 million. As specified in legislation enacted by Congress and signed by the President on August 20, 1996, this bad debt reserve would become taxable if the Bank fails to meet certain conditions. Changes in tax laws or rates on deferred tax assets and liabilities are recognized in the period that includes the enactment date. Statement of Cash Flows For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents. Cash equivalents consist of federal funds sold and certain securities purchased under agreements to resell. Interest Rate Cap Agreements The Company may use interest rate cap agreements to hedge interest rate risk associated with its money market and short-term certificate of deposit accounts. The premiums paid for such agreements are amortized over the life of the agreements using the straight-line method. The interest differential received, if any, on interest rate cap agreements is recorded as an adjustment to interest expense. Reclassifications Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform to the 1996 presentation. (2) Securities Available for Sale The amortized cost and fair value of securities available for sale are summarized as follows at July 31:
1996 ------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value (In Thousands) U.S. government and agency obligations $7,069 - (262) 6,807 Federal National Mortgage Association (FNMA) mortgage-backed securities 17,552 - (654) 16,898 Federal Home Loan Mortgage Corporation (FHLMC) mortgage- backed securities 4,527 - (166) 4,361 Government National Mortgage Association (GNMA) mortgage- backed securities 3,698 37 - 3,735 FNMA collateralized mortgage obligations 6,510 33 (88) 6,455 FHLMC collateralized mortgage obligations 1,676 - (4) 1,672 ------- --- ------ ------- 41,032 70 (1,174) 39,928 Accrued interest receivable 338 - - 338 ------- --- ------ ------- $41,370 70 (1,174) 40,266 ------- --- ------ ------- ------- --- ------ -------
1995 ------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value (In Thousands) FHLMC Collateralized Mortgage Obligations $2,909 108 - 3,017 Accrued interest receivable 13 - - 13 $ 2,922 108 - 3,030
The proceeds from the sales of securities available for sale and the gross realized gains and losses were $4.75 million, $228,000 and $800,000, respectively, for the year ended July 31, 1996, $4.1 million, $25,000 and $15,000, respectively, for the year ended July 31, 1995 and $63.6 million, $1.3 million and $221,000, respectively, for the year ended July 31, 1994. (2) Securities Available for Sale, Continued A summary of maturities of securities available for sale as of July 31, 1996:
Amortized cost Fair value Due within 12 months $2,989 3,002 Due beyond 12 months but within 5 years 19,236 18,530 Due beyond 5 years but within 10 years 5,839 5,601 Beyond 10 years 13,306 13,133 $ 41,370 40,266
(3) Investment Securities The amortized cost and fair value of investment securities are summarized as follows at July 31:
1996 ------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value (In Thousands) U. S. government and agency obligations due: 1 through 5 years $1,500 - (82) 1,418 5 through 10 years 9,947 - (28) 9,919 Greater than 10 years 12,235 - (348) 11,887 ------ --- ---- ------- 23,682 - (458) 23,224 Accrued interest receivable 427 - - 427 ------ --- ---- ------- $24,109 - (458) 23,651
1995 ------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value (In Thousands) U. S. government and agency obligations due: 1 through 5 years $4,486 - (133) 4,353 5 through 10 years 5,129 - (149) 4,980 Greater than 10 years 4,000 16 - 4,016 ------ --- ---- ------- 13,615 16 (282) 13,349 Accrued interest receivable 303 - - 303 ------ --- ---- ------- $13,918 16 (282) 13,652 ------ --- ---- ------- ------ --- ---- -------
There were no sales of investment securities held to maturity during the years ended July 31, 1996, 1995 and 1994. (4) Mortgage-Backed Securities The amortized cost and fair value of mortgage-backed securities are summarized as follows at July 31:
1996 ------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value (In Thousands) FNMA $ 27,623 - (450) 27,173 FHLMC 8,222 - (92) 8,130 FNMA Collateralized Mortgage Obligations 28,091 - (919) 27,172 FHLMC Collateralized Mortgage Obligations 35,731 - (1,107) 34,624 Other Collateralized Mortgage Obligations 52 - - 52 ------ --- ------ ------- 99,719 - (2,568) 97,151 Accrued interest receivable 476 - - 476 ------ --- ------ ------- $100,195 - (2,568) 97,627 ------ --- ------ ------- ------ --- ------ -------
1996 ------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair cost gains losses value (In Thousands) FNMA $ 65,372 59 (1,992) 63,439 GNMA 13,710 258 (5) 13,963 FHLMC 21,359 121 (214) 21,266 FNMA Collateralized Mortgage Obligations 21,635 29 (1,152) 20,512 FHLMC Collateralized Mortgage Obligations 33,803 222 (1,481) 32,544 Other Collateralized Mortgage Obligations 142 1 - 143 -------- ---- ------ -------- 156,021 690 (4,844) 151,867 Accrued interest receivable 754 - - 754 -------- ---- ------ -------- $ 156,775 690 (4,844) 152,621 -------- ---- ------ -------- -------- ---- ------ --------
There were no sales of mortgage-backed securities held to maturity during the years ended July 31, 1996, 1995 and 1994. (4) Mortgage-Backed Securities, Continued A summary of maturities of mortgage-backed securities as of July 31, 1996:
Amortized cost Fair value Due within 12 months $533 533 Due beyond 12 months but within 5 years 5,378 5,217 Due beyond 5 years but within 10 years 6,939 6,651 Beyond 10 years 87,345 85,226 --------- ------- $ 100,195 97,627 --------- ------- --------- -------
The amortized cost of mortgage-backed securities at July 31, 1996 includes unrealized holding losses totaling approximately $1.6 million for securities transferred from the available for sale portfolio. The Company had pledged as collateral for advances under its short- term line of credit from the Federal Home Loan Bank of Atlanta, FNMA mortgage-backed securities and FHLMC and FNMA CMOs with amortized cost and fair values of $29.7 million and $28.8 million, respectively, at July 31, 1996 and FHLMC and FNMA mortgage-backed securities and FHLMC and FNMA CMOs with amortized cost and fair values of $36.5 million and $35.1 million, respectively, at July 31, 1995. In addition, FNMA and FHLMC CMOs and mortgage-backed securities were pledged as collateral for reverse repurchase agreements with amortized cost and fair values of $47.2 million and $45.6 million, respectively, at July 31, 1996; and $38.5 million and $36.8 million, respectively, at July 31, 1995. (5) Loans Receivable Substantially all of the Company's loans receivable are mortgage loans secured by residential and commercial real estate properties located in the state of Maryland. Loans are extended only after evaluation by management of customers' creditworthiness and other relevant factors on a case-by-case basis. The Company generally does not lend more than 90% of the appraised value of a property and requires private mortgage insurance on residential mortgages with loan-to-value ratios in excess of 80%. In addition, the Company generally obtains personal guarantees of repayment from borrowers and/or others for construction, commercial and multi-family residential loans and disburses the proceeds of construction and similar loans only as work progresses on the related projects. (5) Loans Receivable, Continued Residential lending is generally considered to involve less risk than other forms of lending, although payment experience on these loans is dependent to some extent on economic and market conditions in the Company's primary lending area. Commercial and construction loan repayments are generally dependent on the operations of the related properties or the financial condition of its borrower or guarantor. Accordingly, repayment of such loans can be more susceptible to adverse conditions in the real estate market and the regional economy. Loans receivable are summarized as follows at July 31:
1996 1995 -------- -------- (In Thousands) First mortgage loans: One-to-four family residential $156,374 123,413 Multi-family residential 35,930 39,361 Commercial 37,695 38,894 Construction 23,320 5,617 Land development 14,183 10,854 FHA insured and VA guaranteed 11,974 10,372 Loans held for sale 350 1,831 -------- -------- Total first mortgage loans 279,826 230,342 Consumer and other loans 13,026 10,644 Second mortgage loans 3,434 1,961 Loans secured by deposit accounts 508 222 Participation in loans fully guaranteed by Agency for International Development 152 179 Accrued interest receivable 1,547 1,323 -------- -------- 298,493 244,671 -------- -------- Less: Unearned loan fees, net 1,202 1,083 Undisbursed portion of loans in process 14,837 5,138 Allowance for loan losses 4,412 6,361 -------- -------- 20,451 12,582 -------- -------- Loans receivable, net $ 278,042 232,089 -------- -------- -------- --------
Nonperforming and restructured loans are summarized as follows at July 31:
1996 1995 -------- -------- (In Thousands) Nonaccruing loans $3,773 8,437 Accruing loans 90 days or more delinquent 136 170 Restructured loans 1,636 1,870 $ 5,545 10,477
(5) Loans Receivable, Continued Interest income that would have been recorded under the original terms of nonaccruing and restructured loans and the interest income actually recognized are summarized below for the years ended July 31:
1996 1995 1994 ----- ------ ------ (In Thousands) Interest income that would have been recorded $567 898 1,072 Interest income recognized 151 274 650 ----- ----- ------ Interest income foregone $ 416 624 422 ----- ----- ------ ----- ----- ------
The Company is not committed to lend additional funds to debtors whose loans have been restructured. In addition to the loans included above as nonperforming and restructured, the Company, through its normal asset review process, has identified certain loans which management believes involve a degree of risk warranting additional attention. Included in loans at July 31, 1996 are approximately $5.5 million of such loans which, while current in required payments, have exhibited some potential weaknesses that, if not corrected, could increase the level of risk in the future. In addition, at July 31, 1996 management has identified approximately $807,000 of loans which have exhibited weaknesses in the paying capacity of the borrower or the collateral pledged which may result in a loss if such deficiencies are not corrected. Included in the Company's nonperforming loans above are certain impaired loans as defined by Statement 114. Impaired loans and the allocated valuation allowances at July 31, 1996 were:
Loan Valuation balance allowance (In thousands) Impaired with valuation allowance $2,953 1,368 Impaired without valuation allowance - - ------ ------ Total impaired loans $2,953 1,368 ------ ------ ------ ------
The allocated valuation allowance for impaired loans at July 31, 1996, and activity related thereto for the year ended July 31, 1996 is included in the allowance for loan losses summary. The average recorded investment in impaired loans and the amount of interest income recognized for the year ended July 31, 1996 were (in thousands): Average recorded investment in impaired loans $3,988 Interest income recognized during impairment - (5) Loans Receivable, Continued Activity in the allowance for loan losses is summarized as follows for the years ended July 31:
1996 1995 1994 ------- ------ ------ (In Thousands) Balance at beginning of year $6,361 3,669 2,326 Provision charged to expense 772 3,386 1,989 Charge-offs (3,043) (1,033) (688) Recoveries 322 339 42 ------- ------ ------ Balance at end of year $ 4,412 6,361 3,669 ------- ------ ------ ------- ------ ------
Loans serviced for others, which are not included in the Company's assets, were approximately $50.0 million, $50.3 million and $55.8 million at July 31, 1996, 1995 and 1994, respectively. A fee is charged for such servicing based on the unpaid principal balances. Commitments to extend credit are agreements to lend to customers, provided that terms and conditions established in the related contracts are met. The Company had the following contractual commitments to extend credit, exclusive of undisbursed loans in process at July 31:
1996 1995 --------------- -------------- Fixed Floating Fixed Floating Rate Rate Rate Rate ------ -------- ----- -------- (In Thousands) Mortgage loans $3,480 5,440 4,896 345 Lines of credit - 9,219 - 7,629 Irrevocable letters of credit - 2,097 - 1,895 ------ ------ ----- ------ ------ ------ ----- ------ The interest rate ranges on fixed rate mortgage loan commitments were 7.125% to 9.25% at July 31, 1996 and 6.75% to 8.875% at July 31, 1995. Commitments for mortgage loans generally expire in 60 days. Commitments under lines of credit are generally longer than one year and are subject to periodic re-evaluation and cancellation. Irrevocable letters of credit expire within two years. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The commitments may be funded from principal repayments on loans and mortgage-backed securities, excess liquidity, savings deposits and, if necessary, borrowed funds. Substantially all of the Company's commitments at July 31, 1996 and 1995 are for loans which would be secured by real estate with appraised values in excess of the commitment amounts. The Company's exposure to credit loss under these contracts in the event of nonperformance by the other parties, assuming that the collateral proves to be of no value, is represented by the contractual amount of those instruments. (6) Investments in Real Estate Investments in real estate are summarized as follows at July 31:
1996 1995 -------- -------- (In Thousands) Ground rents $4,904 4,938 Acquired through foreclosure 766 890 ------- ------ Investments in real estate, net $ 5,670 5,828 ------- ------ ------- ------
Changes in the allowance for losses on investments in real estate are summarized as follows at July 31:
1996 1995 1994 ------- ------ ------ (In Thousands) Balance at beginning of year $ - 8 - Provision charged to expense 158 44 191 Charge-offs (158) (52) (183) ---- ---- ----- Balance at end of year $ - - 8 ---- ---- ----- ---- ---- -----
Loss on investments in real estate consists of the following for the years ended July 31: 1996 1995 1994 ------- ------ ------ (In Thousands) [S] [C] [C] [C] Operation of investments in real estate $ 232 286 180 Provision for losses on investments in real estate 158 44 191 ----- ---- ---- $ 390 330 371 ----- ---- ---- ----- ---- ---- (7) Investments in and Advances to Real Estate Joint Ventures National Development Corporation is a partner in various real estate joint ventures formed for the purpose of acquiring and developing real estate for sale. Combined condensed financial information for the joint ventures is presented below as of and for the years ended July 31:
1996 1995 -------- -------- (In Thousands) Assets: Real estate under development $1,378 2,688 Other 204 431 ------- ------ $ 1,582 3,119 ------- ------ ------- ------ Liabilities: Due to American National Savings Bank, F.S.B. $701 1,618 Due to others 382 763 Partners' equity: National Development Corporation 499 738 Other - - ------- ------ $ 1,582 3,119 ------- ------ ------- ------
1996 1995 1994 ------- ------ ------ (In Thousands) Operations Sales $3,085 3,234 5,270 Costs of sales 2,918 3,067 4,686 ------- ------ ------ 167 167 584 Other income 9 8 12 Other expense (415) (837) (811) ------- ------ ------ Net loss $ (239) (662) (215) ------- ------ ------ ------- ------ ------
(8) Property and Equipment Property and equipment are summarized as follows at July 31:
Estimated 1996 1995 useful lives ------ ------ ------------ (In Thousands) Leasehold improvements $3,133 2,920 5 - 15 years Furniture and equipment 3,233 2,701 3 - 10 years Automobiles 78 57 3 years ------ ------ 6,444 5,678 Less accumulated depreciation and amortization 5,246 4,713 ------ ------ Property and equipment, net $ 1,198 965 ------ ------ ------ ------
At July 31, 1996 the Company was obligated under noncancellable long-term operating leases for the main office, operations center and eight of its branch offices. The leases, five of which have renewal options, expire on various dates extending to 2007 and have aggregate minimum lease payments for succeeding fiscal years approximately as follows (in thousands):
1997 $1,051 1998 1,034 1999 998 2000 893 2001 800 Subsequent to 2001 1,600 ------- Total minimum lease payments $ 6,376 ------- -------
Rent expense for the years ended July 31, 1996, 1995 and 1994 was approximately $980,000, $949,000, and $982,000, respectively. (9) Deposits Deposits are summarized as follows at July 31: Weighted average rate
1996 1995 Type of ------------------- ------------------- service 1996 1995 Amount % Amount % ------- ---- ---- -------- ----- -------- ----- (Dollars in Thousands) Certificate 6.00% 6.16% $216,119 69.0% $210,906 67.0% Noncertificate: Passbook 3.04 3.13 40,781 13.0 41,138 13.1 NOW 1.56 1.65 15,038 4.8 13,991 4.5 Money Fund 3.03 4.27 41,145 13.2 48,578 15.4 -------- ----- -------- ----- $ 313,083 100.0% $ 314,613 100.0% -------- ----- -------- ----- -------- ----- -------- ----- Certificate accounts maturing: Under 12 months $118,772 55.0% $108,226 51.3% 13 months to 24 months 41,271 19.1 38,388 18.2 25 months to 36 months 18,552 8.6 24,820 11.8 37 months to 48 months 10,172 4.7 13,668 6.5 49 months to 60 months 9,539 4.4 9,296 4.4 Beyond 60 months 17,813 8.2 16,508 7.8 -------- ----- -------- ----- $ 216,119 100.0% $210,906 100.0% -------- ----- -------- ----- -------- ----- -------- -----
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $22.4 million and $21.0 million at July 31, 1996 and 1995, respectively. Interest expense on deposits is summarized as follows for the years ended July 31:
1996 1995 1994 ------- ------ ------ (In Thousands) Certificate $12,847 11,343 10,399 Passbook 1,230 1,332 1,422 NOW 237 240 264 Money Fund 1,511 2,008 1,842 $15,825 14,923 13,927
(9) Deposits, Continued The Company may use interest rate caps in the management of its interest rate risk. Interest rate caps purchased by the Company enable it to limit its interest rate risk by transferring a portion of the risk of increasing interest rates on money fund and short-term certificate accounts to the issuer of the interest rate caps. The Company's interest rate caps provide for the Company to receive variable interest rate payments based on the spread between the variable three-month London InterBank Offered Rate (LIBOR) and the strike price of the caps if the variable three-month LIBOR is higher than the strike rate. The Company held no interest rate caps at July 31, 1996 and 1995 and held interest rate caps with a notional principal amount of $30 million at July 31, 1994. The range of the strike rates on the Company's interest rate caps was 5.5% at July 31, 1994. In the opinion of management, at July 31, 1994, the likelihood of the variable three-month LIBOR rate exceeding the strike rates during the remaining term of the interest rate caps was remote. Accordingly, the remaining premiums were charged to expense in 1994. Amortization expense was $200,000 in 1994. (10) Securities Sold Under Agreements to Repurchase The Company sells securities under agreements to repurchase (reverse repurchase agreements). These fixed-coupon reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities in the statements of financial condition. The dollar amount of securities underlying the agreements remains in the asset accounts. The securities underlying the agreements were delivered to the dealers which arranged the transactions. The dealers may have loaned such securities to other parties in the normal course of their operations and have agreed to resell to the Company either substantially identical securities or the same securities at the maturities of the agreements. The amortized cost and market values of such securities were $47.2 million and $45.6 million, respectively, as of July 31, 1996, and $38.5 million and $36.8 million, respectively, as of July 31, 1995. At July 31, 1996 and 1995 the securities sold under agreements to repurchase involved the purchase of the same securities. The weighted average interest rate of the agreements was 5.60% at July 31, 1996 and the agreements mature within one month. Certain additional information regarding securities sold under agreements to repurchase is as follows at July 31:
1996 1995 1994 ------- ------ ------ (In Thousands) Maximum amount outstanding at month-end $39,011 34,338 14,808 Approximate average balance 34,005 20,741 9,307 ------- ------ ------ ------- ------ ------
(11) Advances from the Federal Home Loan Bank of Atlanta Advances from the Federal Home Loan Bank of Atlanta (FHLBA) are summarized as follows at July 31:
1996 1995 -------- -------- (In Thousands) 5.97% - 6.83%, due in 1995 $ - 14,000 7.49% - 7.55%, due in 1995 - 5,600 4.57% - 5.19%, due in 1996 - 4,000 5.53% - 6.50%, due in 1996 7,373 4,675 6.93% - 7.46%, due in 1996 - 4,000 4.89% - 5.58%, due in 1997 17,550 4,000 5.84% - 6.21%, due in 1997 10,500 1,000 6.27% - 7.09%, due in 1997 4,476 5,112 5.45% - 6.14%, due in 1998 9,000 - 7.32%, due in 1998 1,000 1,000 4.64% - 5.42%, due in 1999 10,675 - 6.43%, due in 2006 1,500 - 5.00%, due in 2014 750 750 ------- -------- $ 62,824 44,137 -------- -------- -------- --------
The Company has a $95 million credit availability agreement with the FHLBA which is secured under a blanket floating line security agreement or by mortgage-backed and investment securities specifically pledged as draws are made. Under the blanket floating lien security agreement with the FHLBA, the Company is required to maintain, as collateral for its advances, qualifying first mortgage loans or mortgage-backed securities in an amount equal to 133% of the advances. In addition, its stock in FHLBA is pledged as collateral for its advances. Interest on advances is at the FHLBA's established rate for advances with the same maturity or at the FHLBA's variable rate. (12) Income Taxes The income tax provision (benefit) is composed of the following for the years ended July 31:
1996 1995 1994 ------- ------ ------ (In Thousands) Current: Federal $370 126 575 State (28) (30) 127 342 96 702 Deferred: Federal $376 (119) (6) State 83 (27) (1) 459 (146) (7) Income tax provision (benefit) $801 (50) 695
(12) Income Taxes, Continued The tax effects of temporary differences between the financial reporting basis and income tax basis of assets and liabilities relate to the following at July 31:
1996 1995 ------ ----- (In Thousands) Net unrealized holding losses on securities $1,056 807 Allowances for losses on loans and investments in real estate 773 948 Interest and fees on loans 279 545 Equity in net income of joint ventures, net - 137 Other assets 336 299 -------- ------- Total deferred tax assets 2,444 2,736 Federal Home Loan Bank stock dividends 353 477 Other liabilities 225 183 -------- ------- Total deferred tax liabilities 578 660 -------- ------- $ 1,866 2,076 -------- ------- -------- -------
A reconciliation between the income tax (benefit) provision and the amount computed by multiplying income before income taxes by the statutory federal income tax rate of 34% is as follows for the years ended July 31:
1996 1995 1994 ------- ------ ------ (In Thousands) Federal income tax provision (benefit) at statutory rate $798 (14) 675 Adjustments: Bad debt deduction - - (66) State income taxes, net of federal income tax benefit 36 (38) 83 Other (33) 2 3 Provision (benefit) for income taxes $801 (50) 695
(13) Stockholders' Equity Conversion and Reorganization In June 1995, the Board of Directors of American National Bankshares, M.H.C. (MHC), a mutual holding company, and the Bank approved a plan of conversion and reorganization which resulted in the merger of the MHC into the Bank and the formation of a new Delaware stock chartered holding company, American National Bancorp, Inc. The conversion was completed on October 31, 1995. In the offering, 2,182,125 shares of common stock were sold at a subscription price of $10.00 per share resulting in net proceeds of approximately $19.3 million after taking into consideration the $1.7 million for the establishment of an ESOP and $782,000 in expenses. Of the net proceeds, $8.9 million was contributed to the Bank in exchange for all of its outstanding common stock. In addition to the shares sold in the offering, 927,000 shares of the Company's stock were issued in exchange for shares of the Bank's stock previously held by public shareholders at an exchange ratio of 1.94 shares for each share of the Bank's common stock resulting in 3,980,500 total shares of the Company's stock outstanding as of October 31, 1995. Federal regulations require that upon conversion from mutual to stock form of ownership, a "liquidation account" be established by restricting a portion of net worth for the benefit of eligible savings account holders who maintain their savings accounts with the Bank after conversion. In the event of complete liquidation (and only in such event), each savings account holder who continues to maintain his savings account shall be entitled to receive a distribution from the liquidation account after payment to all creditors, but before any liquidation distribution with respect to capital stock. This account will be proportionately reduced for any subsequent reduction in the eligible holders' savings accounts. At conversion the liquidation account totaled approximately $28.8 million. In July 1992, the American National Savings Association's members approved a plan of reorganization from a mutual savings association to a mutual holding company. Pursuant to the plan of reorganization the Association transferred substantially all of its assets and all of its liabilities to a new federally-chartered stock savings association which became a wholly-owned subsidiary of American National Bankshares, M.H.C. (MHC), a federal mutual holding company. The reorganization was consummated on October 29, 1992 and the Bank capitalized MHC with $10,000. On November 3, 1993, the Bank's initial public offering of commons stock was completed. On such date, 927,000 shares of common stock were issued and sold at $10.00 per share, and 1,125,000 shares of common stock were issued to the MHC. The initial public offering resulted in proceeds after expenses of the offering of approximately $8.3 million. As a part of the offering, the Bank created a management recognition and retention plan trust for employees and outside directors equal to 3% of the shares issued in the public offering or 27,000 shares of common stock at a price of $10.00 per share. The trust was designed to provide directors and officers a proprietary interest in the Bank to encourage such persons to remain with the Bank. The shares are awarded at a rate of 25 percent per year commencing one year from the date of grant. Compensation expense in the amount of the grant is being recognized pro rata over the four years during which the shares are vested and payable. (13) Stockholders' Equity, Continued Stock Option Plans The Board of Directors and stockholders adopted the 1993 Incentive Stock Option Plan for officers and employees of the Company (the Stock Plan) which authorized the grant of stock options to officers and certain employees for an aggregate of 122,866 shares of authorized but unissued common stock. Options are exercisable at the market price at the time of the grant on a cumulative basis in installments at a rate of 25, 50 and 25 percent per year commencing one year from the date of grant and expire 10 years from the date of grant. All share data and option prices have been adjusted to give retroactive effect to the 1.94 exchange ratio effective October 31, 1995 in the conversion from the mutual to stock form of organization. A summary of changes in shares under option and options exercisable for the years ended July 31 is presented below:
1996 1995 -------- -------- Outstanding at beginning of year 117,046 120,926 Granted - 5,820 Cancelled - (9,700) Outstanding at end of year 117,046 117,046 Exercisable at end of year 87,300 27,806
The options outstanding are exercisable as follows at July 31, 1996: Stock Option price Expiration options per share year 111,226 $ 5.15 2003 5,820 5.35 2004 The Board of Directors and stockholders adopted the 1993 Stock Option Plan for Outside Directors (the Directors' Plan) which authorized the grant of non-statutory stock options to outside directors for an aggregate of 51,734 shares of authorized but unissued common stock. Options are immediately exercisable at the market price at the time of the grant and expire 10 years from the date of grant. In connection with the offering, the Company granted options to purchase 49,794 shares at $5.15 per share. In fiscal 1995, the Company granted options to purchase an additional 194 shares at $5.35 per share. Net Income Per Common Share Net income per share from the date of conversion, October 31, 1995 to July 31, 1996 has been computed based on 3,766,389 weighted average shares of common stock outstanding. The pro forma net income per share for the year ended July 31, 1996 has been calculated as if the conversion had been completed on August 1, 1995. The net proceeds of the offering are assumed to have been invested at a net effective yield of 7.87%, (the approximate weighted average yield on all interest earning assets during the period from August 1, 1995 to October 31, 1995) for the period from August 1, 1995 to October 31, 1995, and income so calculated, reduced for income taxes at an assumed effective rate of 38.6%, was added to reported net income for the period to obtain the pro forma net income used in the calculations. (13) Stockholders' Equity, Continued Net Income Per Common Share, continued Net income per share of common stock for the year ended July 31, 1995 and from the date of conversion, November 3, 1993 to July 31, 1994 is computed by dividing net income for the years ended July 31, 1995 and period November 1, 1993 to July 31, 1994, respectively, by 2,052,000, the number of shares of common stock issued and outstanding for the period. The pro forma net income per share for the year ended July 31, 1994 has been calculated as if the 2,052,000 shares issued had been sold on August 1, 1993. The net proceeds of the offering are assumed to have been invested at a net effective yield of 7.19%, (the approximate weighted average yield on all interest earnings assets during the period from August 1, 1993 to October 31, 1993) for the period from August 1, 1993 to November 3, 1993, and income so calculated, reduced for income taxes at an assumed effective tax rate of 38.6%, was added to reported net income for the period to obtain the pro forma net income used in the calculations. Dividends on Common Stock From January 31, 1994 to October 31, 1995 the Bank declared a quarterly cash dividend of approximately $.10 per share. Upon approval by the OTS, the MHC elected to waive receipt of its dividends on its 1,125,000 shares thereby reducing the actual dividends declared in 1996, 1995 and 1994 to $92,600, $371,000 and $276,000, respectively. The most recent dividend waiver approval by the OTS has the following terms: (i) the mutual holding company's board of directors determines that such waiver is consistent with such directors' fiduciary duties to the mutual holding company's members; (ii) for as long as the savings Bank subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company are considered as a restriction on the retained earnings of the savings Bank, which restriction, if material, is disclosed in the public financial statements of the savings Bank as a note to the financial statements; (iii) the amount of any dividend waived by the mutual holding company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with Statement of Financial Accounting Standards No. 5, where the savings Bank determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a liability; (iv) the amount of any waived dividend is considered as having been paid by the savings Bank (and the savings Bank's capital ratios adjusted accordingly) in evaluating proposed dividends under OTS capital distribution regulations; and (v) in the event the mutual holding company converts to stock form, the appraisal submitted to the OTS in connection with the conversion application takes into account the aggregate amount of the dividends waived by the mutual holding company. OTS regulations impose limitations on all capital distributions. The rule establishes three tiers of institutions. An institution that exceeds all fully phased-in capital requirements before and after a proposed distribution ("Tier 1 Institution"), may after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year; or (ii) 75% of its net income over the most recent four-quarter period. The Institution is a Tier 1 Institution and accordingly had available at July 31, 1996, approximately $9.0 million for distribution. (13) Stockholders' Equity, Continued Dividends on Common Stock, continued In addition, the OTS would prohibit a proposed capital distribution by any institution which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. In addition, FDICIA provides that, as a general rule, a financial institution may not make a capital distribution if it would be undercapitalized after making the capital distribution. Also, an institution meeting the Tier 1 capital criteria which has been notified that it needs more than normal supervision will be treated as a Tier 2 or Tier 3 Institution subject to additional capital distribution limitations unless the OTS deems otherwise. (14) Pension and Other Benefit Plans Substantially all full-time employees of the Company are included in a noncontributory defined benefit pension plan. The following tables set forth the plan's funded status at April 30, 1996 and 1995, amounts recognized in the statements of financial condition as of July 31, 1996 and 1995 and the composition of net pension cost for the years ended July 31, 1996, 1995 and 1994:
1996 1995 -------- -------- Actuarial present value of benefit obligation: Vested $ 1,111 1,120 Nonvested 6 13 Total accumulated benefit obligation $ 1,117 1,133 Projected benefit obligation for service rendered to date $ (1,607) (1,615) Plan assets at fair value (primarily common stocks and U.S. Government and government sponsored agency securities) 1,662 1,396 Plan assets greater (less) than projected benefit obligation 55 (219) Unrealized transition asset at April 1, 1987 being recognized over 26 years 81 95 Unrecognized prior service cost (118) (129) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (57) 187 Accrued pension cost included in other liabilities $ (39) (66)
1996 1995 1994 ------- ------ ------ (In Thousands) Net pension cost included the following components: Service cost-benefits earned during the period $101 96 109 Interest cost on projected benefit obligation 122 118 120 Actual return on plan assets (200) (68) (41) Net amortization and deferral 87 (48) (81) Net pension cost $110 98 107
(14) Pension and Other Benefit Plans, Continued In determining the actuarial present value of the projected benefit obligation the weighted average discount rate used was 8.0% in 1996 and 7.5% in 1995 and the expected long-term rate of return on assets was 8.50% in 1996 and 1995. The rate of increase of future compensation levels used was 5% in 1996 and 1995. The Company also has a 401(k) profit sharing plan covering substantially all full-time employees. Employee contributions are voluntary and the employee may elect to defer from one percent to twenty percent of base (qualifying) compensation. Employer contributions are discretionary and there were no such contributions for the fiscal years ended July 31, 1996, 1995 and 1994. (15) Employee Stock Ownership Plan (ESOP) In connection with the Conversion and Reorganization, the Company formed an ESOP. The ESOP covers employees who have completed at least one year of service and have attained the age of 21. The ESOP borrowed $1.7 million for a ten year term from the Company and purchased 174,570 shares, equal to 8% of the total number of shares issued in the offering. The Bank makes scheduled quarterly contributions to the ESOP sufficient to service the debt. The cost of shares not committed to be released is reported as a reduction in stockholders' equity. Dividends, if any, on allocated and unallocated shares are used for debt service. Shares are released to participants based on compensation. In connection with the formation of the ESOP, the Company adopted Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" (SOP 93-6). SOP 93-6 requires that (1) compensation expense be recognized based on the average fair value of the ESOP shares committed to be released; (2) dividends on unallocated shares used to pay debt service be reported as reduction of debt or accrued interest payable and that dividends on allocated shares be charged to retained earnings; and (3) ESOP shares which have not been committed to be released are not considered outstanding for purposes of computing earnings per share and book value per share. Compensation expense related to the ESOP amounted to $118,000 for the year ended July 31, 1996. The fair value of unearned ESOP shares at July 31, 1996 totaled $1.6 million. The ESOP shares as of July 31, 1996 were as follows: Allocated shares 2,909 Shares earned, but unallocated 8,728 Unearned shares 162,933 174,570 (16) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (Statement 107), requires all entities to disclose the estimated fair value of certain on- and off- balance sheet financial instruments. (16) Fair Value of Financial Instruments, Continued In many instances, the assumptions used in estimating fair values were based upon subjective assessments of market conditions and perceived risks of the financial instruments at a certain point in time. The fair value estimates can be subject to significant variability with changes in assumptions. Furthermore, these fair value estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. In addition, the tax ramifications related to the realization of unrealized gains and losses are not permitted to be considered in the estimation of fair value. Fair value estimates are based solely on existing on-and off- balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Examples would include portfolios of loans serviced for others, net fee income from the Company's subsidiaries, core deposit intangibles, mortgage banking operations, and deferred tax assets. Fair value estimates, methods and assumptions are set forth as follows for the Company's financial instruments. Cash, Investments and Mortgage-Backed Securities For cash and cash equivalents the carrying amount is a reasonable estimate of fair value. The fair value of investment and mortgage- backed securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of ground rents owned is estimated by discounting the cash flows using the current 30 year treasury bond rate. The fair value of Federal Home Loan Bank stock is estimated to be equal to its carrying amount given it is not a publicly traded equity security, it has an adjustable dividend rate, and all transactions in the stock are executed at the stated par value. The following table summarizes the carrying amount and estimated fair value of securities available for sale, investment securities, mortgage-backed securities and other investments at July 31:
1996 1995 --------------------- --------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value -------- ---------- -------- ---------- (In Thousands) Securities available for sale $ 40,266 40,266 3,030 3,030 Investment securities 24,109 23,651 13,918 13,652 Mortgage-backed securities 100,195 97,627 156,775 152,621 Ground rents owned 4,903 3,863 4,938 4,025 Federal Home Loan Bank of Atlanta stock 3,141 3,141 2,914 2,914
(16) Fair Value of Financial Instruments, Continued Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Mortgage loans are segregated by type, including but not limited to residential, commercial, and construction. Consumer and other loans are segregated by type, including but not limited to automobile loans, home equity lines of credit and commercial. Each loan category may be segmented, as appropriate, into fixed and adjustable interest rate terms, ranges of interest rates, performing and nonperforming, and repricing frequency. The fair value of each loan portfolio is calculated by discounting both scheduled and unscheduled cash flows through the remaining contractual maturity using the origination rate that the Company would charge under current conditions to originate similar financial instruments. Unscheduled cash flows take the form of estimated prepayments and are generally based upon anticipated experience derived from current and prospective economic and interest rate environments. For certain types of loans, anticipated prepayment experience exists in published tables from securities dealers. The estimated fair value of loans held for sale is based on the terms of the related sale commitments. The fair value of significant nonperforming mortgage loans is based on recent external appraisals of related real estate collateral, or estimated cash flows and are discounted using a rate commensurate with the credit risk associated with those cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. The fair value of nonperforming consumer loans is based on the Company's historical experience with such loans. The following table represents the carrying value and estimated fair value of loans receivable at July 31:
1996 1995 --------------------- --------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value -------- ---------- -------- ---------- (In Thousands) Mortgage loans $242,668 237,499 214,111 206,351 Construction and land development loans 22,666 22,666 11,333 11,083 Consumer and other loans 17,120 16,891 13,006 12,560 282,454 277,056 238,450 229,994 Less allowance for possible losses 4,412 - (6,361) - Total loans $ 278,042 277,056 232,089 229,994
Deposits and Borrowings The fair value of deposits with no stated maturity, such as interest-bearing or non-interest-bearing checking accounts, passbook, money fund accounts and mortgage escrow accounts, is equal to the amount payable upon demand. The fair value of certificates of deposit is based on the lower of redemption (net of penalty) or discounted value of contractual cash flows. Discount rates for certificates of deposit are estimated using the rates currently offered by the Company for deposits of similar remaining maturities. (16) Fair Value of Financial Instruments, Continued Deposits and Borrowings, continued The fair value of advances from the FHLBA is based on the discounted value of contractual cash flows. Discount rates are estimated using the rates currently offered for advances with both similar contractual terms and remaining maturities. For securities sold under agreements to repurchase the carrying amount is a reasonable estimate of fair value, as the agreements mature within 90 days. The following table represents the carrying value and estimated fair value of deposits and borrowings at July 31:
1996 1995 --------------------- --------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value -------- ---------- -------- ---------- (In Thousands) Mortgage escrow accounts and deposits with no stated maturities $98,724 98,724 105,559 105,559 Certificates of deposit 216,119 219,024 210,906 212,310 Securities sold under agreements to repurchase 34,445 34,420 34,338 34,338 Advances from the Federal Home Loan Bank of Atlanta 62,824 62,029 44,137 43,881
(17) Regulatory Matters The Federal Deposit Insurance Corporation, through the Savings Association Insurance Fund, insures deposits of account holders up to $100,000. The Bank pays an annual premium to provide for this insurance. The Bank is also a member of the Federal Home Loan Bank System and is required to maintain an investment in the stock of the Federal Home Loan Bank of Atlanta equal to at least 1% of the unpaid principal balances of its residential mortgage loans, .3% of its total assets or 5% of its outstanding advances from the Bank, whichever is greater. Purchases and sales of stock are made directly with the Bank at par value. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (as defined in the regulations and as set forth in the table below, as defined) of total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of July 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. (17) Regulatory Matters, Continued The most recent notification from the Office of Thrift Supervision (OTS) categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are also presented in the table (in thousands). (a) Percentage of capital to average assets. (b) Percentage of capital to average assets for actual and capital adequacy purposes and percentage of capital to risk weighed assets to be well capitalized under prompt corrective action provisions. (c) Percentage of capital to risk weighted assets. (18) Condensed Financial Information (Parent Company Only) Summarized financial information for the Company are as follows as of and for the year ended July 31, 1996 (in thousands):
Statement of Financial Condition Cash $ 6,709 Equity in net assets of the Bank 42,261 Note receivable - Bank 1,629 $50,599 Accrued expenses and other liabilities $ 1 Stockholders' equity 50,598 $50,599 Statement of Income Income from note receivable $ 107 Expenses 137 Loss before equity in net income of subsidiary and income taxes (30) Equity in net income of subsidiary 1,564 Income before income taxes 1,534 Income taxes (benefit) (12) Net income $ 1,546 Statement of Cash Flows Operating activities: Net income $ 1,546 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiary (1,564) Other, net 1 Net cash used in operating activities (17) Investing activities: Purchase of stock of subsidiary (8,899) Loan to fund ESOP (1,746) Loan repayment 117 Net cash used in investing activities (10,528) Financing activities: Proceeds from common stock offering net of expenses 21,040 Common stock acquired by ESOP (1,746) Purchase of treasury stock (2,040) Net cash provided by financing activities 17,254 Increase in cash and equivalents 6,709 Cash and equivalents, beginning of year - Cash and equivalents, end of year $ 6,709 /TABLE Independent Auditors' Report The Board of Directors American National Bancorp, Inc. Baltimore, Maryland: We have audited the accompanying consolidated statements of financial condition of American National Bancorp, Inc. and subsidiary (the Company) as of July 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American National Bancorp, Inc. and subsidiary as of July 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1996, in conformity with generally accepted accounting principles. Baltimore, Maryland September 5, 1996 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of selected quarterly financial data for the years ended July 31 is as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter (In thousands except per share data) 1996: Interest income $8,171 8,252 8,324 8,671 Net interest income 2,776 3,139 3,424 3,526 Provision for loan losses 290 210 62 210 Income before provision or income taxes 285 596 1,020 446 Net income 183 431 673 259 Net income per common share (from date of conversion) $ N/A .11 .18 .07 1995: Interest income $7,295 7,524 8,095 8,055 Net interest income 3,041 2,810 3,144 2,751 Provision for loan losses 1,850 300 942 294 Income (loss) before provision for income taxes (813) 537 (5) 241 Net income (loss) (480) 343 (30) 177 Net income (loss) per common share $ (.23) .17 (.02) .08
CORPORATE INFORMATION Annual Meeting. The Annual Meeting of Stockholders will be held at 4:00 p.m., on November 21, 1996, at the Company's main office at 211 North Liberty Street, Baltimore, Maryland. Stock Listing. The Company's Common Stock trades over-the-counter on the Nasdaq National Market under the symbol "ANBK." Board of Directors Howard K. Thompson, Chairman A. Bruce Tucker Lenwood M. Ivey Jimmie T. Noble David L. Pippenger Joseph M. Solomon Betty J. Stull Officers A. Bruce Tucker, President and Chief Executive Officer Joseph M. Solomon, Executive Vice President and Chief Operating Officer Mark S. Barker, Senior Vice President Howard I. Scaggs, III, Senior Vice President James M. Uveges, Senior Vice President and Chief Financial Officer Susan C. Arrington, Vice President Linda L. Farndon, Vice President Eugene P. Helldorfer, Vice President Robert F. Hickey, Vice President Karen S. Harrity, Controller Mary Jayne Engelhardt, Counsel Special Counsel Luse Lehman Gorman Pomerenk & Schick, P.C. 5335 Wisconsin Avenue, N.W. Washington, D.C. 20015 Independent Auditor KPMG Peat Marwick LLP 111 South Calvert Street Baltimore, Maryland 21202 Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 (800) 368-5948 Consolidation of Multiple Accounts. Stockholders who receive multiple dividend checks or quarterly reports probably have duplicate accounts with the Company. These may be consolidated into a single, more convenient account by contacting the Transfer Agent. Annual Report on Form 10-K. A copy of the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1996 will be furnished without charge to stockholders upon written request to the Corporate Secretary, American National Bancorp, Inc., 211 North Liberty Street, Baltimore, Maryland 21201, (410) 752-0400. Branch Locations Baltimore - (410) 752-0400 211 North Liberty Street Baltimore, Maryland 21201 Towson - (410) 825-5330 Towson Town Center 825 Dulaney Valley Road Suite 275 Baltimore, Maryland 21204 Perry Hall - (410) 256-6700 Perry Hall Square Shopping Center 4371 Ebenezer Road Baltimore, Maryland 21236 Pikesville - (410) 764-6841 Fallstaff Shopping Center 6832 Reisterstown Road Baltimore, Maryland 21215 Glen Burnie - (410) 761-4545 Harundale Mall 206 Harundale Mall Glen Burnie, Maryland 21061 Ellicott City - (410) 461-1500 Valley Mede Plaza 9469 Baltimore National Pike Ellicott City, Maryland 21043 Eastpoint - (410) 285-6671 7848 Eastpoint Mall Baltimore, Maryland 21224 Reisterstown/Owings Mills - (410) 526-4400 11700 Reisterstown Road Reisterstown, Maryland 21136 Catonsville/Woodlawn - (410) 788-9214 2 West Rolling Crossroads, Suite 110 (North Rolling Road at Johnnycake) Baltimore, Maryland 21228 EX-10.11 3 EMPLOYMENT AGREEMENT WITH JAMES M. UVEGES AMERICAN NATIONAL SAVINGS BANK, F.S.B. EMPLOYMENT AGREEMENT This Agreement is made effective as of the 1st day of December, 1995 by and between American National Savings Bank, F.S.B., a federally- chartered stock savings bank (the "Bank"), with its principal administrative office at 211 N. Liberty Street, Baltimore, Maryland 21201-3978, and James M. Uveges (the "Executive"). Any reference to "Company" herein shall mean American National Bancorp, Inc., the stock holding company parent of the Bank or any successor thereto. WHEREAS, the Bank wishes to assure itself of the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive agrees to serve as Senior Vice President and Chief Financial Officer of the Bank. During said period, Executive also agrees to serve, if elected, as an officer and director of any subsidiary or affiliate of the Bank. Failure to reappoint Executive as Senior Vice President and Chief Financial Officer in accordance with the terms of Section 2(a) without the consent of the Executive during the term of this Agreement, shall constitute an Event of Termination. 2. TERMS AND DUTIES (a) The period of Executive's employment under this Agreement shall begin as of the date first above written and shall continue for a period of twenty-four (24) full calendar months thereafter. During said term the Executive shall perform the normal and customary duties associated with the position of Senior Vice President and Chief Financial Officer. Commencing on the first anniversary date of this Agreement, and continuing at each anniversary date thereafter, the Agreement shall renew for an additional year such that the remaining term shall be two (2) years unless written notice is provided to Executive at least ten (10) days and not more than thirty (30) days prior to any such anniversary date, that this Agreement shall not renew, in which event this Agreement shall expire at the end of twenty-four (24) months following such anniversary date. Prior to each notice period for non-renewal, the disinterested members of the Board of Directors of the Bank ("Board") will conduct a comprehensive performance evaluation and review of the Executive for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement (it being understood that membership in social, religious, charitable or similar organizations does not require Board approval pursuant to this Section 2(b)). 3. COMPENSATION AND REIMBURSEMENT (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $____________ per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease, Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive with all such other benefits as are provided uniformly to full-time employees of the Bank. (b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder. Without limiting the generality of the foregoing provisions of this Section 3(b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate (and he shall be entitled to a pro rata distribution under any incentive compensation or bonus plan as to any year in which a termination of employment occurs, other than termination for Cause). Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by this Section 3(a), the Bank shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement and may provide such additional compensation in such form and such amounts as the Board may from time to time determine in accordance with standards set by the Board of Directors. (d) Compensation and reimbursement to be paid pursuant to Sections 3(a), 3(b) and 3(c) shall be paid by the Bank and the Company, respectively on a pro rata basis based upon the amount of service the Executive devotes to the Bank and Company, respectively. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION The provisions of this Section shall in all respects be subject to the terms and conditions stated in Sections 8 and 15. (a) The provisions of this Section shall apply upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than (A) Disability or Retirement, as defined in Section 6 hereof, (B) following a Change in Control, as defined in Section 5(a) hereof, or (C) Termination for Cause as defined in Section 7 hereof; or (ii) Executive's resignation from the Bank's employ, upon any: (A) failure to elect or reelect or to appoint or reappoint Executive as Senior Vice President and Chief Financial Officer during the term of this Agreement in accordance with Section 2(a) of this Agreement, (B) material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1, hereof, (C) a relocation of Executive's principal place of employment by more than 30 miles from its location at the effective date of this Agreement, or a material reduction in the benefits and perquisites to the Executive from those being provided as of the effective date of this Agreement, (D) liquidation or dissolution of the Bank or Company other than liquidations or dissolutions that are caused by reorganizations that do not affect the status of Executive, or (E) breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E), of this Section 4(a), Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon sixty (60) days prior written notice which must be given by Executive within a reasonable period of time not to exceed four calendar months after the initial event giving rise to said right to elect, which shall be deemed to constitute an "Event of Termination." Notwithstanding the preceding sentence, in the event of a continuing breach of this Agreement by the Bank, the Executive, after giving due notice within the prescribed time frame of an initial event specified above, shall not waive any of his rights solely under this Agreement and this Section 4 by virtue of the fact that Executive has submitted his resignation but has remained in the employment of the Bank and is engaged in good faith discussions to resolve any occurrence of an event described in clauses (A), (B), (C), (D) and (E) of this Section 4(a). (b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or two (2) times the average of the five preceding years' Base Salary, including bonuses and any other cash compensation paid to the Executive during each of such years, and the amount of any contributions made to any employee benefit plans, on behalf of the Executive, maintained by the Bank during such years; provided however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance. At the election of the Executive, which election is to be made on an annual basis during the Month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, any payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment. (c) Upon the occurrence of an Event of Termination, the Bank, in its sole discretion, shall either (i) contribute the same amount as the Bank contributed prior to such Event of Termination towards the purchase for Executive of, or (ii) cause to be continued for Executive under the Bank's existing employee benefit plans, life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his termination (provided nothing herein shall be deemed to require the Bank to contribute more towards such coverage than it contributed prior to such Event of Termination). Such coverage shall cease upon the expiration of the greater of (i) the remaining term of the Agreement or (ii) twenty-four (24) months. 5. CHANGE IN CONTROL (a) No benefit shall be payable under this Section 5 unless there shall have been a Change in Control of the Bank or Company, as set forth below. For purposes of this Agreement, a "Change in Control" of the Bank or Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act'); or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Home Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office of Thrift Supervision (or its predecessor agency), as in effect on the date hereof; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "Person' (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Company representing 25% or more of the Bank's or the Company's outstanding securities except for any securities of the Bank purchased by the Company in connection with the conversion of the Bank to the stock form and any securities purchased by the Bank's employee stock ownership plan and trust; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided, however, that this sub-section (b) shall not apply if the Incumbent Board is replaced by the appointment by a Federal banking agency of a conservator or receiver for the Bank and, provided further that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least two-thirds of the directors comprising the Incumbent Board or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company; or (d) a proxy statement soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or Bank or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Company shall be distributed and the requisite number of proxies approving such plan of reorganization, merger or consolidation of the Company or Bank are received and voted in favor of such transactions; or (e) a tender offer is made for 25% or more of the outstanding securities of the Bank or Company and shareholders owning beneficially or of record 25% or more of the outstanding securities of the Bank or Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. (b) If any of the events described in Section 5(a) hereof constituting a Change in Control have occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 upon his subsequent termination of employment at any time during the term of this Agreement (regardless of whether such termination results from (i) his resignation, provided such resignation occurs within one year of a change of control, or (ii) his dismissal), unless such termination is because of his death, normal retirement, termination for Cause or termination for Disability. Upon the Change in Control, Executive shall have the right to elect to terminate his employment with the Bank for a period of one year following a change of control, for any reason, during the term of this Agreement. (c) Upon the occurrence of a Change in Control followed by the Executive's termination of employment, the Bank shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or two (2) times the average of the five preceding years' Base Salary, including bonuses and any other taxable compensation paid or attributable to the Executive during such years. At the election of the Executive, which election is to be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, such payment may be made in a lump sum or paid in equal monthly installments during the twenty-four (24) months following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of the Agreement. (d) Upon the occurrence of a Change in Control followed by the Executive's termination of employment, the Bank, in its sole discretion, shall either (i) contribute the same amount as the Bank contributed prior to such termination of employment towards the purchase for Executive of, or (ii) cause to be continued for Executive under the Bank's existing employee benefit plans, life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his termination (provided nothing herein shall be deemed to require the Bank to contribute more towards such coverage than it contributed prior to such termination of employment). Such coverage and payments shall cease upon the expiration of twenty-four (24) months. (e) Upon the occurrence of a Change in Control, Executive will be entitled to any benefits granted to him pursuant to any Stock Option Plan of the Bank or Company. (f) Upon the occurrence of a Change in Control the Executive will be entitled to any benefits awarded to him under the Bank's Recognition and Retention Plan arising from a Change in Control. (g) Notwithstanding the preceding paragraphs of this Section 5, in the event that: (i) the aggregate payments or benefits to be made or afforded to Executive under said paragraphs (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code or any successor thereto, and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto. then the Termination Benefits to be paid to Executive shall be so reduced so as to be a Non-Triggering Amount. (h) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability; provided, however, that any amounts actually paid to Executive pursuant to any disability insurance or other such similar program which the Bank has provided or may provide on behalf of its employees or pursuant to any worker's compensation or social security disability program shall reduce the compensation to be paid to the Executive pursuant to this paragraph. (i) Notwithstanding the foregoing, if after the application of subparagraph (g) above, it is determined that the Executive received an excess parachute payment despite the reduction in the Executive's Termination Benefits, the excess of such Termination Benefits paid to the Executive over 2.99 times the Executive's "base amount", as defined in Section 280G of the Code, shall be treated as a loan to the Executive and the Executive shall be required to repay such amount to the Bank or the Company, or the successor of the Bank or the Company, within ten years of the date of such determination, with interest at the prime rate, as set forth from time to time in The Wall Street Journal. (j) The Executive shall not be entitled to any payments pursuant to this Section 5 if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such times as the Bank is in capital compliance, provided, however, that the severance compensation paid by the Bank shall in no event exceed the amount permitted by OTS RB27a. 6. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH Termination by the Bank of the Executive based on "Retirement" shall mean termination in accordance with the Bank's retirement policy or in accordance with any retirement arrangement established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party. Termination by the Bank of Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies Executive for disability benefits under the applicable long-term disability plan maintained by the Bank, or if no such plan applies, which would qualify Executive for disability benefits under the federal social security system. In the event Executive is unable to perform his duties under this Agreement on a full-time basis for a period of six (6) consecutive months by reason of Disability, the Bank may terminate this Agreement, provided that the Bank shall continue to be obligated to pay the Executive his Base Salary, including bonuses and any other cash compensation paid to Executive during such period, for the remaining term of the Agreement, or one year, whichever is the longer period of time, and provided further that any amounts actually paid to Executive pursuant to any disability insurance or other such similar program which the Bank has provided or may provide on behalf of its employees or pursuant to any worker's compensation or social security disability program shall reduce the compensation to be paid to the Executive pursuant to this paragraph. In the event of Executive's death during the term of the Agreement, his estate, legal representatives or named beneficiaries (as directed by Executive in writing) shall be paid Executive's Base Salary as defined in Paragraph 3(a) at the rate in effect at the time Executive's death for a period of one (1) year from the date of the Executive's death. 7. TERMINATION FOR CAUSE The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations, regulations that do not adversely affect the Bank, the Company, or their employees, or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institutions industry. For purposes of this paragraph, no act or failure to act on the part of Executive shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Bank. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice, in writing, to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any stock options granted to Executive under any stock option plan of the Bank, the Company or any subsidiary or affiliate thereof, shall not be exercisable from the date of the written notice to Executive set forth above, unless and until the matter is successfully resolved in the Executive's favor, and such stock options shall become entirely null and void effective upon a determination in arbitration that termination was for cause. 8. NOTICE (a) Any purported termination by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean (A) if Executive's employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that he shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), and (B) if his employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination for Cause is given, the Executive notifies the Bank that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by a binding arbitration award, and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. No compensation or benefits shall be paid to Executive during the pendency of any such dispute. In the event that it is determined by arbitration that "cause" for termination did not exist or such dispute is otherwise decided in Executive's favor, the Executive shall be entitled to receive all compensation and benefits which should have been paid under either Section 4 or 5, with interest at the prime rate on such cash payments that should have been made during such period. 9. POST-TERMINATION OBLIGATIONS (a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 9 during the term of this Agreement and for one (1) full year after the expiration or termination hereof. (b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. 10. NON-COMPETITION (a) Upon any termination of Executive's employment hereunder as a result of which the Bank is paying Executive benefits under Section 4, Executive agrees not to compete with the Bank and/or the Company for a period of one (1) year following such termination in any city, town or county in which the Bank and/or the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Bank and/or the Company. The parties hereto, recognizing that irreparable injury will result to the Bank and/or the Company, its business and property in the event of Executive's breach of this Section 10(a) agree that in the event of any such breach by Executive, the Bank and/or the Company will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employers, employees and all persons acting for or with Executive. Executive represents and admits that Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Bank and/or the Company, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Bank and/or the Company from pursuing any other remedies available to the Bank and/or the Company for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever (except for such disclosure as may be required to be provided to the Securities Exchange Commission ("SEC"), the OTS, the Federal Deposit Insurance Corporation ("FDIC"), or other federal or state banking agency with jurisdiction over the Bank, the Company or Executive). Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by Executive of this Section 10, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 14. MODIFICATION AND WAIVER (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. REQUIRED PROVISIONS (a) The Bank's Board of Directors may terminate the Executive's employment at any time, but any termination by the Bank's Board of Directors, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 7 herein above. (b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) (12 U.S.C. Section 1818(e)(3)) or 8(g) (12 U.S.C. Section 1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e) (12 U.S.C. Section 1818(e)) or 8(g) (12 U.S.C. Section 1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. Section 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Director of the OTS, or his or her designee, at the time the FDIC or the Resolution Trust Corporation ("RTC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) (12 U.S.C. Section 1823(c)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1982; or (ii) by the Director of the OTS or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the OTS to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. 16. SEVERABILITY If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. In the event of any conflict or discrepancies between any provision of the Agreement and existing federal or state laws and/or regulations, such laws and regulations shall prevail, and the Agreement shall be construed to be consistent therewith. 17. HEADINGS FOR REFERENCE ONLY The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 18. GOVERNING LAW This Agreement shall be governed by the laws of the State of Maryland but only to the extent not superseded by federal law. 19. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Bank within twenty-five (25) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 20. PAYMENT OF LEGAL FEES All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank and/or the Company, provided that the dispute or interpretation has been settled by Executive and the Bank and/or the Company or resolved in the Executive's favor. 21. INDEMNIFICATION The Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank). If such action, suit or proceeding is brought against Executive in his capacity as an officer or director of the Bank, however, such indemnification shall not extend to matters as to which Executive is finally adjudged to be liable for willful misconduct in the performance of his duties. No Indemnification shall be paid that would violate 12 U.S.C. Section 1828(K) or any regulations promulgated thereunder, or 12 C.F.R. Section 545.121. 22. SUCCESSOR TO THE BANK The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. [Remainder of Page Intentionally Left Blank] SIGNATURES IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed by their duly authorized officers, and Executive has signed this Agreement, on the day and date first above written. ATTEST: AMERICAN NATIONAL SAVINGS BANK, F.S.B. /s/ Judy Martinek By: /s/ A. Bruce Tucker Secretary A. Bruce Tucker, President ATTEST: AMERICAN NATIONAL BANCORP, INC. /s/ Judy Martinek By: /s/ A. Bruce Tucker Secretary A. Bruce Tucker, President WITNESS: EXECUTIVE: /s/ Judy Martinek By: /s/ James M. Uveges EX-10.12 4 EMPLOYMENT AGREEMENT WITH MARK S. BARKER AMERICAN NATIONAL SAVINGS BANK, F.S.B. EMPLOYMENT AGREEMENT This Agreement is made effective as of the 1st day of December, 1995 by and between American National Savings Bank, F.S.B., a federally- chartered stock savings bank (the "Bank"), with its principal administrative office at 211 N. Liberty Street, Baltimore, Maryland 21201-3978, and Mark S. Barker (the "Executive"). Any reference to "Company" herein shall mean American National Bancorp, Inc., the stock holding company parent of the Bank or any successor thereto. WHEREAS, the Bank wishes to assure itself of the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive agrees to serve as Senior Vice President of the Bank. During said period, Executive also agrees to serve, if elected, as an officer and director of any subsidiary or affiliate of the Bank. Failure to reappoint Executive as Senior Vice President in accordance with the terms of Section 2(a) without the consent of the Executive during the term of this Agreement, shall constitute an Event of Termination. 2. TERMS AND DUTIES (a) The period of Executive's employment under this Agreement shall begin as of the date first above written and shall continue for a period of twenty-four (24) full calendar months thereafter. During said term the Executive shall perform the normal and customary duties associated with the position of Senior Vice President. Commencing on the first anniversary date of this Agreement, and continuing at each anniversary date thereafter, the Agreement shall renew for an additional year such that the remaining term shall be two (2) years unless written notice is provided to Executive at least ten (10) days and not more than thirty (30) days prior to any such anniversary date, that this Agreement shall not renew, in which event this Agreement shall expire at the end of twenty-four (24) months following such anniversary date. Prior to each notice period for non-renewal, the disinterested members of the Board of Directors of the Bank ("Board") will conduct a comprehensive performance evaluation and review of the Executive for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement (it being understood that membership in social, religious, charitable or similar organizations does not require Board approval pursuant to this Section 2(b)). 3. COMPENSATION AND REIMBURSEMENT (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $____________ per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease, Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive with all such other benefits as are provided uniformly to full-time employees of the Bank. (b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder. Without limiting the generality of the foregoing provisions of this Section 3(b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate (and he shall be entitled to a pro rata distribution under any incentive compensation or bonus plan as to any year in which a termination of employment occurs, other than termination for Cause). Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by this Section 3(a), the Bank shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement and may provide such additional compensation in such form and such amounts as the Board may from time to time determine in accordance with standards set by the Board of Directors. (d) Compensation and reimbursement to be paid pursuant to Sections 3(a), 3(b) and 3(c) shall be paid by the Bank and the Company, respectively on a pro rata basis based upon the amount of service the Executive devotes to the Bank and Company, respectively. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION The provisions of this Section shall in all respects be subject to the terms and conditions stated in Sections 8 and 15. (a) The provisions of this Section shall apply upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than (A) Disability or Retirement, as defined in Section 6 hereof, (B) following a Change in Control, as defined in Section 5(a) hereof, or (C) Termination for Cause as defined in Section 7 hereof; or (ii) Executive's resignation from the Bank's employ, upon any: (A) failure to elect or reelect or to appoint or reappoint Executive as Senior Vice President during the term of this Agreement in accordance with Section 2(a) of this Agreement, (B) material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1, hereof, (C) a relocation of Executive's principal place of employment by more than 30 miles from its location at the effective date of this Agreement, or a material reduction in the benefits and perquisites to the Executive from those being provided as of the effective date of this Agreement, (D) liquidation or dissolution of the Bank or Company other than liquidations or dissolutions that are caused by reorganizations that do not affect the status of Executive, or (E) breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E), of this Section 4(a), Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon sixty (60) days prior written notice which must be given by Executive within a reasonable period of time not to exceed four calendar months after the initial event giving rise to said right to elect, which shall be deemed to constitute an "Event of Termination." Notwithstanding the preceding sentence, in the event of a continuing breach of this Agreement by the Bank, the Executive, after giving due notice within the prescribed time frame of an initial event specified above, shall not waive any of his rights solely under this Agreement and this Section 4 by virtue of the fact that Executive has submitted his resignation but has remained in the employment of the Bank and is engaged in good faith discussions to resolve any occurrence of an event described in clauses (A), (B), (C), (D) and (E) of this Section 4(a). (b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or two (2) times the average of the five preceding years' Base Salary, including bonuses and any other cash compensation paid to the Executive during each of such years, and the amount of any contributions made to any employee benefit plans, on behalf of the Executive, maintained by the Bank during such years; provided however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance. At the election of the Executive, which election is to be made on an annual basis during the Month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, any payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment. (c) Upon the occurrence of an Event of Termination, the Bank, in its sole discretion, shall either (i) contribute the same amount as the Bank contributed prior to such Event of Termination towards the purchase for Executive of, or (ii) cause to be continued for Executive under the Bank's existing employee benefit plans, life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his termination (provided nothing herein shall be deemed to require the Bank to contribute more towards such coverage than it contributed prior to such Event of Termination). Such coverage shall cease upon the expiration of the greater of (i) the remaining term of the Agreement or (ii) twenty-four (24) months. 5. CHANGE IN CONTROL (a) No benefit shall be payable under this Section 5 unless there shall have been a Change in Control of the Bank or Company, as set forth below. For purposes of this Agreement, a "Change in Control" of the Bank or Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act'); or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Home Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office of Thrift Supervision (or its predecessor agency), as in effect on the date hereof; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "Person' (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Company representing 25% or more of the Bank's or the Company's outstanding securities except for any securities of the Bank purchased by the Company in connection with the conversion of the Bank to the stock form and any securities purchased by the Bank's employee stock ownership plan and trust; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided, however, that this sub-section (b) shall not apply if the Incumbent Board is replaced by the appointment by a Federal banking agency of a conservator or receiver for the Bank and, provided further that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least two-thirds of the directors comprising the Incumbent Board or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company; or (d) a proxy statement soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or Bank or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Company shall be distributed and the requisite number of proxies approving such plan of reorganization, merger or consolidation of the Company or Bank are received and voted in favor of such transactions; or (e) a tender offer is made for 25% or more of the outstanding securities of the Bank or Company and shareholders owning beneficially or of record 25% or more of the outstanding securities of the Bank or Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. (b) If any of the events described in Section 5(a) hereof constituting a Change in Control have occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 upon his subsequent termination of employment at any time during the term of this Agreement (regardless of whether such termination results from (i) his resignation, provided such resignation occurs within one year of a change of control, or (ii) his dismissal), unless such termination is because of his death, normal retirement, termination for Cause or termination for Disability. Upon the Change in Control, Executive shall have the right to elect to terminate his employment with the Bank for a period of one year following a change of control, for any reason, during the term of this Agreement. (c) Upon the occurrence of a Change in Control followed by the Executive's termination of employment, the Bank shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or two (2) times the average of the five preceding years' Base Salary, including bonuses and any other taxable compensation paid or attributable to the Executive during such years. At the election of the Executive, which election is to be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, such payment may be made in a lump sum or paid in equal monthly installments during the twenty-four (24) months following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of the Agreement. (d) Upon the occurrence of a Change in Control followed by the Executive's termination of employment, the Bank, in its sole discretion, shall either (i) contribute the same amount as the Bank contributed prior to such termination of employment towards the purchase for Executive of, or (ii) cause to be continued for Executive under the Bank's existing employee benefit plans, life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his termination (provided nothing herein shall be deemed to require the Bank to contribute more towards such coverage than it contributed prior to such termination of employment). Such coverage and payments shall cease upon the expiration of twenty-four (24) months. (e) Upon the occurrence of a Change in Control, Executive will be entitled to any benefits granted to him pursuant to any Stock Option Plan of the Bank or Company. (f) Upon the occurrence of a Change in Control the Executive will be entitled to any benefits awarded to him under the Bank's Recognition and Retention Plan arising from a Change in Control. (g) Notwithstanding the preceding paragraphs of this Section 5, in the event that: (i) the aggregate payments or benefits to be made or afforded to Executive under said paragraphs (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code or any successor thereto, and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto. then the Termination Benefits to be paid to Executive shall be so reduced so as to be a Non-Triggering Amount. (h) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability; provided, however, that any amounts actually paid to Executive pursuant to any disability insurance or other such similar program which the Bank has provided or may provide on behalf of its employees or pursuant to any worker's compensation or social security disability program shall reduce the compensation to be paid to the Executive pursuant to this paragraph. (i) Notwithstanding the foregoing, if after the application of subparagraph (g) above, it is determined that the Executive received an excess parachute payment despite the reduction in the Executive's Termination Benefits, the excess of such Termination Benefits paid to the Executive over 2.99 times the Executive's "base amount", as defined in Section 280G of the Code, shall be treated as a loan to the Executive and the Executive shall be required to repay such amount to the Bank or the Company, or the successor of the Bank or the Company, within ten years of the date of such determination, with interest at the prime rate, as set forth from time to time in The Wall Street Journal. (j) The Executive shall not be entitled to any payments pursuant to this Section 5 if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such times as the Bank is in capital compliance, provided, however, that the severance compensation paid by the Bank shall in no event exceed the amount permitted by OTS RB27a. 6. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH Termination by the Bank of the Executive based on "Retirement" shall mean termination in accordance with the Bank's retirement policy or in accordance with any retirement arrangement established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party. Termination by the Bank of Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies Executive for disability benefits under the applicable long-term disability plan maintained by the Bank, or if no such plan applies, which would qualify Executive for disability benefits under the federal social security system. In the event Executive is unable to perform his duties under this Agreement on a full-time basis for a period of six (6) consecutive months by reason of Disability, the Bank may terminate this Agreement, provided that the Bank shall continue to be obligated to pay the Executive his Base Salary, including bonuses and any other cash compensation paid to Executive during such period, for the remaining term of the Agreement, or one year, whichever is the longer period of time, and provided further that any amounts actually paid to Executive pursuant to any disability insurance or other such similar program which the Bank has provided or may provide on behalf of its employees or pursuant to any worker's compensation or social security disability program shall reduce the compensation to be paid to the Executive pursuant to this paragraph. In the event of Executive's death during the term of the Agreement, his estate, legal representatives or named beneficiaries (as directed by Executive in writing) shall be paid Executive's Base Salary as defined in Paragraph 3(a) at the rate in effect at the time Executive's death for a period of one (1) year from the date of the Executive's death. 7. TERMINATION FOR CAUSE The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations, regulations that do not adversely affect the Bank, the Company, or their employees, or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institutions industry. For purposes of this paragraph, no act or failure to act on the part of Executive shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Bank. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice, in writing, to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any stock options granted to Executive under any stock option plan of the Bank, the Company or any subsidiary or affiliate thereof, shall not be exercisable from the date of the written notice to Executive set forth above, unless and until the matter is successfully resolved in the Executive's favor, and such stock options shall become entirely null and void effective upon a determination in arbitration that termination was for cause. 8. NOTICE (a) Any purported termination by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean (A) if Executive's employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that he shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), and (B) if his employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination for Cause is given, the Executive notifies the Bank that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by a binding arbitration award, and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. No compensation or benefits shall be paid to Executive during the pendency of any such dispute. In the event that it is determined by arbitration that "cause" for termination did not exist or such dispute is otherwise decided in Executive's favor, the Executive shall be entitled to receive all compensation and benefits which should have been paid under either Section 4 or 5, with interest at the prime rate on such cash payments that should have been made during such period. 9. POST-TERMINATION OBLIGATIONS (a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 9 during the term of this Agreement and for one (1) full year after the expiration or termination hereof. (b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. 10. NON-COMPETITION (a) Upon any termination of Executive's employment hereunder as a result of which the Bank is paying Executive benefits under Section 4, Executive agrees not to compete with the Bank and/or the Company for a period of one (1) year following such termination in any city, town or county in which the Bank and/or the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Bank and/or the Company. The parties hereto, recognizing that irreparable injury will result to the Bank and/or the Company, its business and property in the event of Executive's breach of this Section 10(a) agree that in the event of any such breach by Executive, the Bank and/or the Company will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employers, employees and all persons acting for or with Executive. Executive represents and admits that Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Bank and/or the Company, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Bank and/or the Company from pursuing any other remedies available to the Bank and/or the Company for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever (except for such disclosure as may be required to be provided to the Securities Exchange Commission ("SEC"), the OTS, the Federal Deposit Insurance Corporation ("FDIC"), or other federal or state banking agency with jurisdiction over the Bank, the Company or Executive). Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by Executive of this Section 10, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 14. MODIFICATION AND WAIVER (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. REQUIRED PROVISIONS (a) The Bank's Board of Directors may terminate the Executive's employment at any time, but any termination by the Bank's Board of Directors, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 7 herein above. (b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) (12 U.S.C. Sections 1818(e)(3)) or 8(g) (12 U.S.C. Section 1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e) (12 U.S.C. Section 1818(e)) or 8(g) (12 U.S.C. Section 1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. Section 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Director of the OTS, or his or her designee, at the time the FDIC or the Resolution Trust Corporation ("RTC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) (12 U.S.C. Section 1823(c)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1982; or (ii) by the Director of the OTS or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the OTS to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. 16. SEVERABILITY If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. In the event of any conflict or discrepancies between any provision of the Agreement and existing federal or state laws and/or regulations, such laws and regulations shall prevail, and the Agreement shall be construed to be consistent therewith. 17. HEADINGS FOR REFERENCE ONLY The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 18. GOVERNING LAW This Agreement shall be governed by the laws of the State of Maryland but only to the extent not superseded by federal law. 19. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Bank within twenty-five (25) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 20. PAYMENT OF LEGAL FEES All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank and/or the Company, provided that the dispute or interpretation has been settled by Executive and the Bank and/or the Company or resolved in the Executive's favor. 21. INDEMNIFICATION The Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank). If such action, suit or proceeding is brought against Executive in his capacity as an officer or director of the Bank, however, such indemnification shall not extend to matters as to which Executive is finally adjudged to be liable for willful misconduct in the performance of his duties. No Indemnification shall be paid that would violate 12 U.S.C. Section 1828(K) or any regulations promulgated thereunder, or 12 C.F.R. Section 545.121. 22. SUCCESSOR TO THE BANK The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. [Remainder of Page Intentionally Left Blank] SIGNATURES IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed by their duly authorized officers, and Executive has signed this Agreement, on the day and date first above written. ATTEST: AMERICAN NATIONAL SAVINGS BANK, F.S.B. /s/ Judy Martinek By: /s/ A. Bruce Tucker Secretary A. Bruce Tucker, President ATTEST: AMERICAN NATIONAL BANCORP, INC. /s/ Judy Martinek By: /s/ A. Bruce Tucker Secretary A. Bruce Tucker, President WITNESS: EXECUTIVE: /s/ Judy Martinek By: /s/ Mark S. Barker EX-21 5 SUBSIDIARIES OF THE 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. EX-10.9 6 1996 STOCK OPTION PLAN APPENDIX A AMERICAN NATIONAL BANCORP, INC. 1996 STOCK OPTION PLAN 1. Purpose The purpose of the American National Bancorp, Inc. 1996 Stock Option Plan (the "Plan") is to advance the interests of the Company and its stockholders by providing Key Employees and Outside Directors of the Company and its Affiliates, including American National Savings Bank, F.S.B., upon whose judgment, initiative and efforts the successful conduct of the business of the Company and its Affiliates largely depends, with an additional incentive to perform in a superior manner as well as to attract people of experience and ability. 2. Definitions "Affiliate" means any "parent corporation" or "subsidiary corporation" of the Company or the Bank, as such terms are defined in Section 424(e) or 424(f), respectively, of the Code, or a successor to a parent corporation or subsidiary corporation. "Award" means an Award of Non-Statutory Stock Options, Incentive Stock Options, and/or Limited Rights granted under the provisions of the Plan. "Bank" means American National Savings Bank, F.S.B., or a successor corporation. "Beneficiary" means the person or persons designated by a Participant to receive any benefits payable under the Plan in the event of such Participant's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Participant's surviving spouse, if any, or if none, his estate. "Board" or "Board of Directors" means the board of directors of the Company or its Affiliate, as applicable. "Cause" means personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or the willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease-and-desist order, any of which results in a material loss to the Company or an Affiliate. "Change in Control" of the Bank or the Company means a change in control of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Home Owners Loan Act, as amended ("HOLA"), and applicable rules and regulations promulgated thereunder, as in effect at the time of the Change in Control; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of Company's outstanding securities except for any securities purchased by the Bank's employee stock ownership plan or trust; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company or similar transaction in which the Bank or Company is not the surviving institution occurs; or (d) a proxy statement soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the Plan are to be exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means a Committee of the Board consisting of either (i) at least two Non-Employee Directors of the Company, or (ii) the entire Board of the Company. "Common Stock" means shares of the common stock of the Company, par value $.01 per share. "Company" means American National Bancorp, Inc., or a successor corporation. "Continuous Service" means employment as a Key Employee and/or service as an Outside Director without any interruption or termination of such employment and/or service. Continuous Service shall also mean a continuation as a member of the Board of Directors following a cessation of employment as a Key Employee. In the case of a Key Employee, employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Bank or in the case of transfers between payroll locations of the Bank or between the Bank, its parent, its subsidiaries or its successor. "Conversion" means the October 31, 1995, conversion of American National Bankshares, M.H.C. from the mutual to stock form of organization. "Date of Grant" means the actual date on which an Award is granted by the Committee. "Director" means a member of the Board. "Disability" means the permanent and total inability by reason of mental or physical infirmity, or both, of an employee to perform the work customarily assigned to him, or of a Director to serve as such. Additionally, in the case of an employee, a medical doctor selected or approved by the Board must advise the Committee that it is either not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of said employee's lifetime. "Effective Date" means the date of, or a date determined by the Board of Directors following, approval of the Plan by the Company's stockholders. "Fair Market Value" means, when used in connection with the Common Stock on a certain date, the reported closing price of the Common Stock as reported by the Nasdaq stock market (as published by the Wall Street Journal, if published) on such date, or if the Common Stock was not traded on the day prior to such date, on the next preceding day on which the Common Stock was traded; provided, however, that if the Common Stock is not reported on the Nasdaq stock market, Fair Market Value shall mean the average sale price of all shares of Common Stock sold during the 30-day period immediately preceding the date on which such stock option was granted, and if no shares of stock have been sold within such 30-day period, the average sale price of the last three sales of Common Stock sold during the 90-day period immediately preceding the date on which such stock option was granted. In the event Fair Market Value cannot be determined in the manner described above, then Fair Market Value shall be determined by the Committee. The Committee is authorized, but is not required, to obtain an independent appraisal to determine the Fair Market Value of the Common Stock. "Incentive Stock Option" means an Option granted by the Committee to a Participant, which Option is designated as an Incentive Stock Option pursuant to Section 8. "Key Employee" means any person who is currently employed by the Company or an Affiliate who is chosen by the Committee to participate in the Plan. "Limited Right" means the right to receive an amount of cash based upon the terms set forth in Section 9. "Non-Statutory Stock Option" means an Option granted by the Committee to (i) an Outside Director or (ii) to any other Participant and such Option is either (A) not designated by the Committee as an Incentive Stock Option, or (B) fails to satisfy the requirements of an Incentive Stock Option as set forth in Section 422 of the Code and the regulations thereunder. "Non-Employee Director" means, for purposes of the Plan, a Director who (a) is not employed by the Company or an Affiliate; (b) does not receive compensation directly or indirectly as a consultant (or in any other capacity than as a Director) greater than $60,000; (c) does not have an interest in a transaction requiring disclosure under Item 404(a) of Regulation S-K; or (d) is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K. "Normal Retirement" means for a Key Employee, retirement at the normal or early retirement date set forth in the Bank's Employee Stock Ownership Plan, or any successor plan. Normal Retirement for an Outside Director means a cessation of service on the Board of Directors for any reason other than removal for Cause, after reaching 60 years of age and maintaining at least 10 years of Continuous Service. "Offering" means the October 31, 1995 subscription offering of the Common Stock of the Company. "Outside Director" means a Director of the Company or an Affiliate who is not an employee of the Company or an Affiliate. "Option" means an Award granted under Section 7 or Section 8. "Participant" means a Key Employee or Outside Director of the Company or its Affiliates who receives or has received an award under the Plan. "Termination for Cause" means the termination of employment or termination of service on the Board caused by the individual's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or the willful violation of any law, rule or regulation (other than traffic violations or similar offenses), or a final cease-and-desist order, any of which results in material loss to the Company or one of its Affiliates. 3. Plan Administration Restrictions The Plan shall be administered by the Committee. The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it deems necessary for the proper administration of the Plan and to make whatever determinations and interpretations in connection with the Plan it deems necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants in the Plan and on their legal representatives and beneficiaries. All transactions involving a grant, award or other acquisition from the Company shall: (a) be approved by the Company's full Board or by the Committee; (b) be approved, or ratified, in compliance with Section 14 of the Exchange Act, by either: the affirmative vote of the holders of a majority of the securities present, or represented and entitled to vote at a meeting duly held in accordance with the laws of the state in which the Company is incorporated; or the written consent of the holders of a majority of the securities of the issuer entitled to vote provided that such ratification occurs no later than the date of the next annual meeting of shareholders; or (c) result in the acquisition of an Option or Limited Right that is held by the Participant for a period of six months following the date of such acquisition. 4. Types of Awards Awards under the Plan may be granted in any one or a combination of: (a) Incentive Stock Options; (b) Non-Statutory Stock Options; and (c) Limited Rights. 5. Stock Subject to the Plan Subject to adjustment as provided in Section 14, the maximum number of shares reserved for issuance under the Plan is 218,213 shares. To the extent that Options or rights granted under the Plan are exercised, the shares covered will be unavailable for future grants under the Plan; to the extent that Options together with any related rights granted under the Plan terminate, expire or are canceled without having been exercised or, in the case of Limited Rights exercised for cash, new Awards may be made with respect to these shares. 6. Eligibility Key Employees of the Company and its Affiliates shall be eligible to receive Incentive Stock Options, Non-Statutory Stock Options and/or Limited Rights under the Plan. Outside Directors shall be eligible to receive Non-Statutory Stock Options under the Plan. 7. Non-Statutory Stock Options 7.1 Grant of Non-Statutory Stock Options (a) Grants to Outside Directors and Key Employees. The Committee may, from time to time, grant Non-Statutory Stock Options to eligible Key Employees and Outside Directors, and, upon such terms and conditions as the Committee may determine, grant Non-Statutory Stock Options in exchange for and upon surrender of previously granted Awards under the Plan. Non-Statutory Stock Options granted under the Plan, including Non-Statutory Stock Options granted in exchange for and upon surrender of previously granted Awards, are subject to the terms and conditions set forth in this Section 7. The maximum number of shares subject to a Non-Statutory Option that may be awarded under the Plan to any Key Employee shall be 100,000. (b) Option Agreement. Each Option shall be evidenced by a written option agreement between the Company and the Participant specifying the number of shares of Common Stock that may be acquired through its exercise and containing such other terms and conditions that are not inconsistent with the terms of the Plan. (c) Price. The purchase price per share of Common Stock deliverable upon the exercise of each Non-Statutory Stock Option shall be the Fair Market Value of the Common Stock of the Company on the date the Option is granted. Shares may be purchased only upon full payment of the purchase price. Payment of the purchase price may be made, in whole or in part, through the surrender of shares of the Common Stock of the Company at the Fair Market Value of such shares determined in the manner described in Section 2. (d) Manner of Exercise and Vesting. Unless the Committee shall specifically state to the contrary at the time an Award is granted, Non- Statutory Stock Options awarded to Key Employees and Outside Directors shall vest at the rate of 20% of the initially awarded amount per year commencing with the vesting of the first installment one year from the date of grant, and succeeding installments on each anniversary of the date of grant. A vested Option may be exercised from time to time, in whole or in part, by delivering a written notice of exercise to the President or Chief Executive Officer of the Company, or his designee. Such notice shall be irrevocable and must be accompanied by full payment of the purchase price in cash or shares of Common Stock at the Fair Market Value of such shares, determined on the exercise date in the manner described in Section 2 hereof. If previously acquired shares of Common Stock are tendered in payment of all or part of the exercise price, the value of such shares shall be determined as of the date of such exercise. (e) Terms of Options. The term during which each Non-Statutory Stock Option may be exercised shall be determined by the Committee, but in no event shall a Non-Statutory Stock Option be exercisable in whole or in part more than 10 years and one day from the Date of Grant. No Options shall be earned by a Participant unless the Participant maintains Continuous Service until the vesting date of such Option, except as set forth herein. The shares comprising each installment may be purchased in whole or in part at any time after such installment becomes purchasable. The Committee may, in its sole discretion, accelerate the time at which any Non-Statutory Stock Option may be exercised in whole or in part by Key Employees and/or Outside Directors. Notwithstanding any other provision of this Plan, in the event of a Change in Control of the Company or the Bank, all Non-Statutory Stock Options that have been awarded shall become immediately exercisable for three years following such Change in Control. (f) Termination of Employment or Service. Upon the termination of a Key Employee's employment or upon termination of an Outside Director's service for any reason other than, Normal Retirement, death, Disability, Change in Control or Termination for Cause, the Participant's Non-Statutory Stock Options shall be exercisable only as to those shares that were immediately purchasable on the date of termination and only for one year following termination. In the event of Termination for Cause, all rights under a Participant's Non-Statutory Stock Options shall expire upon termination. In the event of the Normal Retirement, death or Disability of any Participant, all Non-Statutory Stock Options held by the Participant, whether or not exercisable at such time, shall be exercisable by the Participant or his legal representative or beneficiaries for five years following the date of his Normal Retirement, death or cessation of employment due to Disability, provided that in no event shall the period extend beyond the expiration of the Non-Statutory Stock Option term. (g) Transferability. In the discretion of the Board, all or any Non-Statutory Stock Option granted hereunder may be transferable by the Participant once the Option has vested in the Participant, provided, however, that the Board may limit the transferability of such Option or Options to a designated class or classes of persons. 8. Incentive Stock Options 8.1 Grant of Incentive Stock Options The Committee may, from time to time, grant Incentive Stock Options to Key Employees. Incentive Stock Options granted pursuant to the Plan shall be subject to the following terms and conditions: (a) Option Agreement. Each Option shall be evidenced by a written option agreement between the Company and the Key Employee specifying the number of shares of Common Stock that may be acquired through its exercise and containing such other terms and conditions that are not inconsistent with the terms of the Plan. (b) Price. Subject to Section 14 of the Plan and Section 422 of the Code, the purchase price per share of Common Stock deliverable upon the exercise of each Incentive Stock Option shall be not less than 100% of the Fair Market Value of the Company's Common Stock on the date the Incentive Stock Option is granted. However, if a Key Employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its Affiliates (or under Section 424(d) of the Code is deemed to own stock representing more than 10% of the total combined voting power of all classes of stock of the Company or its Affiliates by reason of the ownership of such classes of stock, directly or indirectly, by or for any brother, sister, spouse, ancestor or lineal descendent of such Key Employee, or by or for any corporation, partnership, estate or trust of which such Key Employee is a shareholder, partner or Beneficiary), the purchase price per share of Common Stock deliverable upon the exercise of each Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Company's Common Stock on the date the Incentive Stock Option is granted. Shares may be purchased only upon payment of the full purchase price. Payment of the purchase price may be made, in whole or in part, through the surrender of shares of the Common Stock of the Company at the Fair Market Value of such shares, determined on the exercise date, in the manner described in Section 2. (c) Manner of Exercise. Unless the Committee shall specifically state to the contrary at the time an Award is granted, Incentive Stock Options awarded to Key Employees shall vest at the rate of 20% of the initially awarded amount per year commencing with the vesting of the first installment one year from the date of grant, and succeeding installments on each anniversary of the date of grant. Incentive Stock Options granted under the Plan shall vest in a Participant at the rate or rates determined by the Committee. The vested Options may be exercised from time to time, in whole or in part, by delivering a written notice of exercise to the President or Chief Executive Officer of the Company or his designee. Such notice is irrevocable and must be accompanied by full payment of the purchase price in cash or shares of Common Stock at the Fair Market Value of such shares determined on the exercise date by the manner described in Section 2. (d) Amounts of Options. Incentive Stock Options may be granted to any eligible Key Employee in such amounts as determined by the Committee; provided that the amount granted is consistent with the terms of Section 422 of the Code. Notwithstanding the above, the maximum number of shares that may be subject to an Incentive Stock Option awarded under the Plan to any Key Employee shall be 100,000. In granting Incentive Stock Options, the Committee shall consider such factors as it deems relevant, which factors may include, among others, the position and responsibilities of the Key Employee, the length and value of his or her service to the Bank, the Company, or the Affiliate, the compensation paid to the Key Employee and the Committee's evaluation of the performance of the Bank, the Company, or the Affiliate, according to measurements that may include, among others, key financial ratios, levels of classified assets, and independent audit findings. In the case of an Option intended to qualify as an Incentive Stock Option, the aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which Incentive Stock Options granted are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and its Affiliates) shall not exceed $100,000. The provisions of this Section 8.1(d) shall be construed and applied in accordance with Section 422(d) of the Code and the regulations, if any, promulgated thereunder. (e) Terms of Options. The term during which each Incentive Stock Option may be exercised shall be determined by the Committee, but in no event shall an Incentive Stock Option be exercisable in whole or in part more than 10 years from the Date of Grant. If any Key Employee, at the time an Incentive Stock Option is granted to him, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company or its Affiliate (or, under Section 424(d) of the Code, is deemed to own stock representing more than 10% of the total combined voting power of all classes of stock, by reason of the ownership of such classes of stock, directly or indirectly, by or for any brother, sister, spouse, ancestor or lineal descendent of such Key Employee, or by or for any corporation, partnership, estate or trust of which such Key Employee is a shareholder, partner or Beneficiary), the Incentive Stock Option granted to him shall not be exercisable after the expiration of five years from the Date of Grant. The Committee shall determine the date on which each Incentive Stock Option shall become exercisable and may provide that an Incentive Stock Option shall become exercisable in installments. The shares comprising each installment may be purchased in whole or in part at any time after such installment becomes purchasable, provided that the amount able to be first exercised in a given year is consistent with the terms of Section 422 of the Code. To the extent required by Section 422 of the Code, the aggregate Fair Market Value (determined at the time the option is granted) of the Common Stock for which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under all plans of the Company and its Affiliates) shall not exceed $100,000. The Committee may, in its sole discretion, accelerate the time at which any Incentive Stock Option may be exercised in whole or in part, provided that it is consistent with the terms of Section 422 of the Code. Notwithstanding the above, in the event of a Change in Control of the Company, all Incentive Stock Options that have been awarded shall become immediately exercisable, unless the Fair Market Value of the amount exercisable as a result of a Change in Control shall exceed $100,000 (determined as of the Date of Grant). In such event, the first $100,000 of Incentive Stock Options (determined as of the Date of Grant) shall be exercisable as Incentive Stock Options and any excess shall be exercisable as Non-Statutory Stock Options. (f) Termination of Employment. Upon the termination of a Key Employee's service for any reason other than Disability, Normal Retirement, Change in Control, death or Termination for Cause, the Key Employee's Incentive Stock Options shall be exercisable only as to those shares that were immediately purchasable by such Key Employee at the date of termination and only for a period of three months following termination. In the event of Termination for Cause all rights under the Incentive Stock Options shall expire upon termination. Upon termination of a Key Employee's employment due to Normal Retirement, death, Disability, or following a Change in Control, all Incentive Stock Options held by such Key Employee, whether or not exercisable at such time, shall be exercisable for a period of five years following the date of his cessation of employment, provided however, that any such Option shall not be eligible for treatment as an Incentive Stock Option in the event such Option is exercised more than three months following the date of his Normal Retirement or termination of employment following a Change in Control; and provided further, that no Option shall be eligible for treatment as an Incentive Stock Option in the event such Option is exercised more than one year following termination of employment due to Disability and provided further, in order to obtain Incentive Stock Option treatment for Options exercised by heirs or devisees of an Optionee, the Optionee's death must have occurred while employed or within three (3) months of termination of employment. In no event shall the exercise period extend beyond the expiration of the Incentive Stock Option term. (g) Transferability. No Incentive Stock Option granted under the Plan is transferable except by will or the laws of descent and distribution and is exercisable during his lifetime only by the Key Employee to which it is granted. (h) Compliance with Code. The options granted under this Section 8 are intended to qualify as Incentive Stock Options within the meaning of Section 422 of the Code, but the Company makes no warranty as to the qualification of any Option as an Incentive Stock Option within the meaning of Section 422 of the Code. If an Option granted hereunder fails for whatever reason to comply with the provisions of Section 422 of the Code, and such failure is not or cannot be cured, such Option shall be a Non-Statutory Stock Option. 9. Limited Rights 9.1 Grant of Limited Rights The Committee may grant a Limited Right simultaneously with the grant of any Option to any Key Employee of the Bank, with respect to all or some of the shares covered by such Option. Limited Rights granted under the Plan are subject to the following terms and conditions: (a) Terms of Rights. In no event shall a Limited Right be exercisable in whole or in part before the expiration of six months from the date of grant of the Limited Right. A Limited Right may be exercised only in the event of a Change in Control of the Company. The Limited Right may be exercised only when the underlying Option is eligible to be exercised, provided that the Fair Market Value of the underlying shares on the day of exercise is greater than the exercise price of the related Option. Upon exercise of a Limited Right, the related Option shall cease to be exercisable. Upon exercise or termination of an Option, any related Limited Rights shall terminate. The Limited Rights may be for no more than 100% of the difference between the exercise price and the Fair Market Value of the Common Stock subject to the underlying Option. The Limited Right is transferable only when the underlying Option is transferable and under the same conditions. (b) Payment. Upon exercise of a Limited Right, the holder shall promptly receive from the Company an amount of cash equal to the difference between the Fair Market Value on the Date of Grant of the related Option and the Fair Market Value of the underlying shares on the date the Limited Right is exercised, multiplied by the number of shares with respect to which such Limited Right is being exercised. In the event of a Change in Control in which pooling accounting treatment is a condition to the transaction, the Limited Right shall be exercisable solely for shares of stock of the Company, or in the event of a merger transaction, for shares of the acquiring corporation or its parent, as applicable. The number of shares to be received on the exercise of such Limited Right shall be determined by dividing the amount of cash that would have been available under the first sentence above by the Fair Market Value at the time of exercise of the shares underlying the Option subject to the Limited Right. 10. Surrender of Option In the event of a Participant's termination of employment or termination of service as a result of death, Disability or Normal Retirement, the Participant (or his or her personal representative(s), heir(s), or devisee(s)) may, in a form acceptable to the Committee make application to surrender all or part of the Options held by such Participant in exchange for a cash payment from the Company of an amount equal to the difference between the Fair Market Value of the Common Stock on the date of termination of employment or the date of termination of service on the Board and the exercise price per share of the Option. Whether the Company accepts such application or determines to make payment, in whole or part, is within its absolute and sole discretion, it being expressly understood that the Company is under no obligation to any Participant whatsoever to make such payments. In the event that the Company accepts such application and determines to make payment, such payment shall be in lieu of the exercise of the underlying Option and such Option shall cease to be exercisable. No award under the Plan shall be transferable by the optionee other than by will or the laws of descent and distribution and may only be exercised during his or her lifetime by the Participant, or by a guardian or legal representative of the Participant. 11. Rights of a Stockholder A Participant shall have no rights as a stockholder with respect to any shares covered by a Non-Statutory and/or Incentive Stock Option until the date of issuance of a stock certificate for such shares. Nothing in the Plan or in any Award granted confers on any person any right to continue in the employ of the Company or its Affiliates or to continue to perform services for the Company or its Affiliates or interferes in any way with the right of the Company or its Affiliates to terminate his services as an officer, director or employee at any time. 12. Agreement with Participants Each Award of Options, and/or Limited Rights will be evidenced by a written agreement, executed by the Participant and the Company or its Affiliates that describes the conditions for receiving the Awards including the date of Award, the purchase price, applicable periods, and any other terms and conditions as may be required by the Board or applicable securities law. 13. Designation of Beneficiary A Participant may, with the consent of the Committee, designate a person or persons to receive, in the event of death, any stock option or Limited Rights Award to which he would then be entitled. Such designation will be made upon forms supplied by and delivered to the Company and may be revoked in writing. If a Participant fails effectively to designate a Beneficiary, then his estate will be deemed to be the Beneficiary. 14. Dilution and Other Adjustments In the event of any change in the outstanding shares of Common Stock of the Company by reason of any stock dividend or split, pro rata return of capital to all shareholders, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares, or other similar corporate change, or other increase or decrease in such shares without receipt or payment of consideration by the Company, the Committee will make such adjustments to previously granted Awards, to prevent dilution or enlargement of the rights of the Participant, including any or all of the following: (a) adjustments in the aggregate number or kind of shares of Common Stock that may be awarded under the Plan; (b) adjustments in the aggregate number or kind of shares of Common Stock covered by Awards already made under the Plan; or (c) adjustments in the purchase price of outstanding Incentive and/or Non-Statutory Stock Options, or any Limited Rights attached to such Options. No such adjustments may, however, materially change the value of benefits available to a Participant under a previously granted Award. With respect to Incentive Stock Options, no such adjustment shall be made if it would be deemed a "modification" of the Award under Section 424 of the Code. 15. Withholding There may be deducted from each distribution of cash and/or Common Stock under the Plan the amount of tax required by any governmental authority to be withheld. 16. Amendment of the Plan The Board may at any time, and from time to time, modify or amend the Plan in any respect, or modify or amend an Award received by Key Employees and/or Outside Directors; provided, however, that no such termination, modification or amendment may affect the rights of a Participant, without his consent, under an outstanding Award. Any amendment or modification of the Plan or an outstanding Award under the Plan, including but not limited to the acceleration of vesting of an outstanding Award for reasons other than the death, Disability, Normal Retirement, or a Change in Control, shall be approved by the Committee or the full Board of the Company. 17. Effective Date of Plan The Plan shall become effective upon the date of, or a date determined by the Board of Directors following, approval of the Plan by the Company's stockholders. 18. Termination of the Plan The right to grant Awards under the Plan will terminate upon the earlier of (i) 10 years after the Effective Date, or (ii) the date on which the exercise of Options or related rights equaling the maximum number of shares reserved under the Plan occurs, as set forth in Section 5. The Board may suspend or terminate the Plan at any time, provided that no such action will, without the consent of a Participant, adversely affect his rights under a previously granted Award. 19. Applicable Law The Plan will be administered in accordance with the laws of the State of Maryland. IN WITNESS WHEREOF, the Company has caused the Plan to be executed by its duly authorized officers and the corporate seal to be affixed and duly attested, as of the ____ day of ________, 1996. Date Approved by Stockholders: __________ Effective Date: _____________ ATTEST: AMERICAN NATIONAL BANCORP, INC. _________________________ ______________________________ Secretary President and Chief Executive Officer EX-10.10 7 RECOGNITION & RETENTION PLAN APPENDIX B AMERICAN NATIONAL BANCORP, INC. 1996 RECOGNITION AND RETENTION PLAN 1. Establishment of the Plan American National Bancorp, Inc. hereby establishes the Company Recognition and Retention Plan (the "Plan") upon the terms and conditions hereinafter stated in the Plan. 2. Purpose of the Plan The purpose of the Plan is to advance the interests of the Company and its stockholders by providing Key Employees and Outside Directors of the Company and its Affiliates, including American National Savings Bank, F.S.B. (the "Bank"), upon whose judgment, initiative and efforts the successful conduct of the business of the Company and its Affiliates largely depends, with compensation for their contributions to the Company and its Affiliates and an additional incentive to perform in a superior manner, as well as to attract people of experience and ability. 3. Definitions The following words and phrases when used in this Plan with an initial capital letter, unless the context clearly indicates otherwise, shall have the meanings set forth below. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural: "Affiliate" means any "parent corporation" or "subsidiary corporation" of the Company or the Bank, as such terms are defined in Section 424(e) and (f), respectively, of the Code, or a successor to a parent corporation or subsidiary corporation. "Award" means the grant by the Committee of Restricted Stock, as provided in the Plan. "Bank" means American National Savings Bank, F.S.B., or a successor corporation. "Beneficiary" means the person or persons designated by a Recipient to receive any benefits payable under the Plan in the event of such Recipient's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Recipient's surviving spouse, if any, or if none, his estate. "Board" or "Board of Directors" means the Board of Directors of the Company or an Affiliate, as applicable. For purposes of Section 4 of the Plan, "Board" shall refer solely to the Board of the Company. "Cause" means personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or the willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease-and-desist order, any of which results in a material loss to the Company or an Affiliate. "Change in Control" of the Company means a change in control of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Company within the meaning of the Home Owners Loan Act, as amended ("HOLA"), and applicable rules and regulations promulgated thereunder, as in effect at the time of the Change in Control; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's outstanding securities except for any securities purchased by the Bank's employee stock ownership plan or trust; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Company or similar transaction in which the Company is not the surviving institution occurs; or (d) a proxy statement soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the Plan are to be exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means a Committee of the Board consisting of either (i) at least two Non-Employee Directors of the Company, or (ii) the entire Board of the Company. "Common Stock" means shares of the common stock of the Company, par value $.01 per share. "Company" means American National Bancorp, Inc., the stock holding company of the Bank, or a successor corporation. "Continuous Service" means employment as a Key Employee and/or service as an Outside Director without any interruption or termination of such employment and/or service. Continuous Service shall also mean a continuation as a member of the Board of Directors following a cessation of employment as a Key Employee. In the case of a Key Employee, employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Bank or in the case of transfers between payroll locations of the Bank or between the Bank, its parent, its subsidiaries or its successor. "Conversion" means the October 31, 1995, conversion of American National Bankshares, M.H.C. from the mutual to stock form of organization. "Director" means a member of the Board. "Disability" means the permanent and total inability by reason of mental or physical infirmity, or both, of an employee to perform the work customarily assigned to him, or of a Director to serve as such. Additionally, in the case of an employee, a medical doctor selected or approved by the Board must advise the Committee that it is either not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of such employee's lifetime. "Effective Date" means the date of, or a date determined by the Board of Directors following, approval of the Plan by the Company's stockholders. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Key Employee" means any person who is currently employed by the Company or an Affiliate who is chosen by the Committee to participate in the Plan. "Non-Employee Director" means, for purposes of the Plan, a Director who (a) is not employed by the Company or an Affiliate; (b) does not receive compensation directly or indirectly as a consultant (or in any other capacity than as a Director) greater than $60,000; (c) does not have an interest in a transaction requiring disclosure under Item 404(a) of Regulation S-K; or (d) is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K. "Normal Retirement" means for a Key Employee, retirement at the normal or early retirement date set forth in the Bank's Employee Stock Ownership Plan, or any successor plan. Normal Retirement for an Outside Director means a cessation of service on the Board of Directors for any reason other than removal for Cause, after reaching 60 years of age and maintaining at least 10 years of Continuous Service. "Offering" means the October 31, 1995 subscription offering of the Common Stock of the Company. "Outside Director" means a Director of the Company or an Affiliate who is not an employee of the Company or an Affiliate. "Recipient" means a Key Employee or Outside Director of the Company or its Affiliates who receives or has received an Award under the Plan. "Restricted Period" means the period of time selected by the Committee for the purpose of determining when restrictions are in effect under Section 6 with respect to Restricted Stock awarded under the Plan. "Restricted Stock" means shares of Common Stock that have been contingently awarded to a Recipient by the Committee subject to the restrictions referred to in Section 6, so long as such restrictions are in effect. 4. Administration of the Plan. 4.01 Role of the Committee. The Plan shall be administered and interpreted by the Committee, which shall have all of the powers allocated to it in the Plan. The interpretation and construction by the Committee of any provisions of the Plan or of any Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules and procedures as it deems appropriate for the conduct of its affairs. The Committee shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. 4.02 Role of the Board. The members of the Committee shall be appointed or approved by, and will serve at the pleasure of, the Board. The Board may in its discretion from time to time remove members from, or add members to, the Committee. The Board shall have all of the powers allocated to it in the Plan, may take any action under or with respect to the Plan that the Committee is authorized to take, and may reverse or override any action taken or decision made by the Committee under or with respect to the Plan, provided, however, that except as provided in Section 6.02, the Board may not revoke any Award except in the event of revocation for Cause or with respect to unearned Awards in the event the Recipient of an Award voluntarily terminates employment with the Bank prior to Normal Retirement. 4.03 Plan Administration Restrictions. All transactions involving a grant, award or other acquisitions from the Company shall: (a) be approved by the Company's full Board or by the Committee; (b) be approved, or ratified, in compliance with Section 14 of the Exchange Act, by either: the affirmative vote of the holders of a majority of the shares present, or represented and entitled to vote at a meeting duly held in accordance with the laws under which the Company is incorporated; or the written consent of the holders of a majority of the securities of the issuer entitled to vote provided that such ratification occurs no later than the date of the next annual meeting of shareholders; or (c) result in the acquisition of common stock that is held by the Recipient for a period of six months following the date of such acquisition. 4.04 Limitation on Liability. No member of the Board or the Committee shall be liable for any determination made in good faith with respect to the Plan or any Awards granted under it. If a member of the Board or the Committee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of anything done or not done by him in such capacity under or with respect to the Plan, the Bank or the Company shall indemnify such member against expense (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in the best interests of the Bank and the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. 5. Eligibility; Awards 5.01 Eligibility. Key Employees and Outside Directors are eligible to receive Awards. 5.02 Awards to Key Employees and Outside Directors. The Committee may determine which of the Key Employees and Outside Directors referenced in Section 5.01 will be granted Awards and the number of shares covered by each Award; provided, however, that in no event shall any Awards be made that will violate the Bank's Charter and Bylaws, the Company's Articles of Incorporation and Bylaws, or any applicable federal or state law or regulation. Shares of Restricted Stock that are awarded by the Committee shall, on the date of the Award, be registered in the name of the Recipient and transferred to the Recipient, in accordance with the terms and conditions established under the Plan. The aggregate number of shares that shall be issued under the Plan is 87,285. In the event Restricted Stock is forfeited for any reason, the Committee, from time to time, may determine which of the Key Employees and Outside Directors will be granted additional Awards to be awarded from forfeited Restricted Stock. In selecting those Key Employees and Outside Directors to whom Awards will be granted and the amount of Restricted Stock covered by such Awards, the Committee shall consider such factors as it deems relevant, which factors may include, among others, the position and responsibilities of the Key Employees and Outside Directors, the length and value of their services to the Bank and its Affiliates, the compensation paid to the Key Employees or fees paid to the Outside Directors, and the Committee may request the written recommendation of the Chief Executive Officer and other senior executive officers of the Bank, the Company and its Affiliates or the recommendation of the full Board. All allocations by the Committee shall be subject to review, and approval or rejection, by the Board. No Restricted Stock shall be earned unless the Recipient maintains Continuous Service with the Bank or an Affiliate until the restrictions lapse. 5.03 Manner of Award. As promptly as practicable after a determination is made pursuant to Section 5.02 to grant an Award, the Committee shall notify the Recipient in writing of the grant of the Award, the number of shares of Restricted Stock covered by the Award, and the terms upon which the Restricted Stock subject to the Award may be earned. Upon notification of an Award of Restricted Stock, the Recipient shall execute and return to the Company a restricted stock agreement (the "Restricted Stock Agreement") setting forth the terms and conditions under which the Recipient shall earn the Restricted Stock, together with a stock power or stock powers endorsed in blank. Thereafter, the Recipient's Restricted Stock and stock power shall be deposited with an escrow agent specified by the Company who shall hold such Restricted Stock under the terms and conditions set forth in the Restricted Stock Agreement. Each certificate in respect of shares of Restricted Stock Awarded under the Plan shall be registered in the name of the Recipient. 5.04 Treatment of Forfeited Shares. In the event shares of Restricted Stock are forfeited by a Recipient, such shares shall be returned to the Company and shall be held and accounted for pursuant to the terms of the Plan until such time as the Restricted Stock is re- awarded to another Recipient, in accordance with the terms of the Plan and the applicable state and federal laws, rules and regulations. 6. Terms and Conditions of Restricted Stock The Committee shall have full and complete authority, subject to the limitations of the Plan, to grant awards of Restricted Stock to Key Employees and Outside Directors and, in addition to the terms and conditions contained in Sections 6.01 through 6.08, to provide such other terms and conditions (which need not be identical among Recipients) in respect of such Awards, and the vesting thereof, as the Committee shall determine. 6.01 General Rules. Unless the Committee shall specifically state to the contrary at the time an Award is granted, Restricted Stock shall be earned by a Recipient at the rate of 20% of the initially awarded amount per year commencing with the first installment being earned on the first trading day of 1998 and succeeding installments being earned on the first trading day of the following year, provided that such Recipient maintains Continuous Service; provided, however, that no shares shall be earned for any year in which the Bank is not meeting all of its fully phased-in capital requirements. Subject to any such other terms and conditions as the Committee shall provide with respect to Awards, shares of Restricted Stock may not be sold, assigned, transferred (within the meaning of Code Section 83), pledged or otherwise encumbered by the Recipient, except as hereinafter provided, during the Restricted Period. The Committee shall have the authority, in its discretion, to accelerate the time at which any or all of the restrictions shall lapse with respect to a Restricted Stock Award, or to remove any or all of such restrictions. 6.02 Continuous Service; Forfeiture. Except as provided in Section 6.03, if a Recipient ceases to maintain Continuous Service for any reason (other than death, Disability, Change in Control or Normal Retirement), unless the Committee shall otherwise determine, all shares of Restricted Stock theretofore awarded to such Recipient and which at the time of such termination of Continuous Service are subject to the restrictions imposed by Section 6.01 shall upon such termination of Continuous Service be forfeited. Any stock dividends or declared but unpaid cash dividends attributable to such shares of Restricted Stock shall also be forfeited. 6.03 Exception for Termination Due to Death, Disability, Normal Retirement or Following a Change in Control Notwithstanding the general rule contained in Section 6.01, Restricted Stock awarded to a Recipient whose employment with or service on the Board of the Bank or an Affiliate terminates due to death, Disability, Normal Retirement or following a Change in Control shall be deemed earned as of the Recipient's last day of employment with the Company or an Affiliate, or last day of service on the Board of the Company or an Affiliate; provided that Restricted Stock awarded to a Key Employee who at any time also serves as a Director, shall not be deemed earned until both employment and service as a Director have been terminated. 6.04 Revocation for Cause. Notwithstanding anything hereinafter to the contrary, the Board may by resolution immediately revoke, rescind and terminate any Award, or portion thereof, previously awarded under the Plan, to the extent Restricted Stock has not been redelivered by the Escrow Agent to the Recipient, whether or not yet earned, in the case of a Key Employee whose employment is terminated by the Company or an Affiliate or an Outside Director whose service is terminated by the Company or an Affiliate for Cause or who is discovered after termination of employment or service on the Board to have engaged in conduct that would have justified termination for Cause. 6.05 Restricted Stock Legend. Each certificate in respect of shares of Restricted Stock awarded under the Plan shall be registered in the name of the Recipient and deposited by the Recipient, together with a stock power endorsed in blank, with the Escrow Agent and shall bear the following (or a similar) legend: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in the American National Bancorp, Inc. 1996 Recognition and Retention Plan. Copies of such Plan are on file in the offices of the Secretary of American National Bancorp, Inc., 211 N. Liberty Street, Baltimore, Maryland 21201-3978." 6.06 Payment of Dividends and Return of Capital. After an Award has been granted but before such Award has been earned, the Recipient shall receive any cash dividends paid with respect to such shares, or shall share in any pro-rata return of capital to all shareholders with respect to the Common Stock. Stock dividends declared by the Company and paid on Awards that have not yet been earned shall be subject to the same restrictions as the Restricted Stock and the certificate(s) or other instruments representing or evidencing such shares shall be legended in the manner provided in Section 6.05 and shall be delivered to the Escrow Agent for distribution to the Recipient when the Restricted Stock upon which such dividends were paid are earned. Unless the Recipient has made an election under Section 83(b) of the Code, cash dividends or other amounts so paid on shares that have not yet been earned by the Recipient shall be treated as compensation income to the Recipient when paid. If dividends are paid with respect to shares of Restricted Stock under the Plan that have been issued but not awarded, or that have been forfeited and returned to the Company or to a trust established to hold issued and unawarded or forfeited shares, the Committee can determine to award such dividends to any Recipient or Recipients under the Plan, to any other employee or director of the Company or the Bank, or can return such dividends to the Company. 6.07 Voting of Restricted Shares. After an Award has been granted, the Recipient as conditional owner of the Restricted Stock shall have the right to vote such shares. 6.08 Delivery of Earned Shares. At the expiration of the restrictions imposed by Section 6.01, the Escrow Agent shall redeliver to the Recipient (or where the relevant provision of Section 6.02 applies in the case of a deceased Recipient, to his Beneficiary) the certificate(s) and any remaining stock power deposited with it pursuant to Section 5.03 and the shares represented by such certificate(s) shall be free of the restrictions referred to Section 6.01. 7. Adjustments upon Changes in Capitalization In the event of any change in the outstanding shares subsequent to the Effective Date by reason of any reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure or shares of the Company, the maximum aggregate number and class of shares as to which Awards may be granted under the Plan shall be appropriately adjusted by the Committee, whose determination shall be conclusive. Any shares of stock or other securities received, as a result of any of the foregoing, by a Recipient with respect to Restricted Stock shall be subject to the same restrictions and the certificate(s) or other instruments representing or evidencing such shares or securities shall be legended and deposited with the Escrow Agent in the manner provided in Section 6.05. 8. Assignments and Transfers No Award nor any right or interest of a Recipient under the Plan in any instrument evidencing any Award under the Plan may be assigned, encumbered or transferred (within the meaning of Code Section 83) except, in the event of the death of a Recipient, by will or the laws of descent and distribution until such Award is earned. 9. Key Employee Rights under the Plan No Key Employee shall have a right to be selected as a Recipient nor, having been so selected, to be selected again as a Recipient and no Key Employee or other person shall have any claim or right to be granted an Award under the Plan or under any other incentive or similar plan of the Bank or any Affiliate. Neither the Plan nor any action taken thereunder shall be construed as giving any Key Employee any right to be retained in the employ of the Bank or any Affiliate. 10. Outside Director Rights under the Plan Neither the Plan nor any action taken thereunder shall be construed as giving any Outside Director any right to be retained in the service of the Bank or any Affiliate. 11. Withholding Tax Upon the termination of the Restricted Period with respect to any shares of Restricted Stock (or at any such earlier time, if any, that an election is made by the Recipient under Section 83(b) of the Code, or any successor provision thereto, to include the value of such shares in taxable income), the Bank or the Company shall have the right to require the Recipient or other person receiving such shares to pay the Bank or the Company the amount of any taxes that the Bank or the Company is required to withhold with respect to such shares, or, in lieu thereof, to retain or sell without notice, a sufficient number of shares held by it to cover the amount required to be withheld. The Bank or the Company shall have the right to deduct from all dividends paid with respect to shares of Restricted Stock the amount of any taxes which the Bank or the Company is required to withhold with respect to such dividend payments. 12. Amendment or Termination The Board of the Company may amend, suspend or terminate the Plan or any portion thereof at any time, provided, however, that no such amendment, suspension or termination shall impair the rights of any Recipient, without his consent, in any Award theretofore made pursuant to the Plan. Any amendment or modification of the Plan or an outstanding Award under the Plan, including but not limited to the acceleration of vesting of an outstanding Award for reasons other than death, Disability, Normal Retirement or termination following a Change in Control, shall be approved by the Committee, or the full Board of the Company. 13. Governing Law The Plan shall be governed by the laws of the State of Maryland. 14. Term of Plan The Plan shall become effective on the date of, or a date determined by the Board of Directors following, approval of the Plan by the Company's stockholders. It shall continue in effect until the earlier of (i) fifteen years from the Effective Date unless sooner terminated under Section 12 hereof, or (ii) the date on which all shares of Common Stock available for award hereunder, have vested in the Recipients of such Awards. IN WITNESS WHEREOF, the Company has caused the Plan to be executed by its duly authorized officers and the corporate seal to be affixed and duly attested, as of the ____ day of _________, 1996. Date Approved by Shareholders: __________ Effective Date: __________ ATTEST: AMERICAN NATIONAL BANCORP, INC. _________________________ _________________________________ Secretary President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----