<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 [FEE REQUIRED]
     For the Fiscal Year Ended July 31, 1997
                                       OR
[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 [NO FEE REQUIRED]

     For the transition period from                 to  
                                    ---------------     ---------------------

                        COMMISSION FILE NUMBER: 0-26870

                        AMERICAN NATIONAL BANCORP, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         DELAWARE                                               52-1943817
-------------------------------                           ----------------------
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                            Identification Number)

211 NORTH LIBERTY STREET, BALTIMORE, MARYLAND                     21201
---------------------------------------------                    --------
 (Address of Principal Executive Offices)                        Zip Code

                                (410) 752-0400
                        -------------------------------
                        (Registrant's telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:  NONE

Securities Registered Pursuant to 
Section 12(g) of the Act:  COMMON STOCK, PAR VALUE $.01 PER SHARE
                           --------------------------------------
                                      (Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES  X    NO      .
                                      ------   ------

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].

     As of September 30, 1997, there was issued and outstanding 3,613,011 shares
of the Registrant's Common Stock.

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, which amount includes voting stock held by officers and
directors, computed by reference to the last sale price on September 30, 1997,
as reported by the Nasdaq National Market, was approximately $72.9 million. 
<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, 1997, the Company had
total consolidated assets of $502.1 million, total consolidated deposits of
$329.7 million, and consolidated stockholders' equity of $46.9 million. The
Company's executive office is located at 211 North Liberty Street, Baltimore,
Maryland 21201 and its telephone number is (410) 752-0400.

AMERICAN NATIONAL SAVINGS BANK, F.S.B.

     The Bank is a federally chartered stock savings bank headquartered in
Baltimore, Maryland. The Bank conducts operations through ten full-service
offices in its market area consisting of Baltimore City and parts of the
Maryland counties of Baltimore, Howard, Harford, Anne Arundel, and Carroll. The
Bank is primarily engaged in the business of attracting deposits from the
general public in the Bank's market area, and investing such deposits together
with other funds, in loans collateralized by one- to four-family residential
real estate, mortgage-backed securities, and, to a lesser extent, construction
and land development loans, consumer loans and investment securities. In the
past, the Bank also actively originated multifamily residential real estate
loans and commercial real estate loans; however, originations of such loans have
decreased significantly in recent years as the Bank has sought to reduce the
credit risk and losses in its loan portfolio. The Bank also has reduced its
involvement in real estate joint ventures due to economic conditions and changes
in regulatory capital requirements.

RECENT DEVELOPMENTS

     On June 23, 1997, the Company entered into an Agreement and Plan of
Reorganization, dated as of June 23, 1997, and a related Plan of Merger
(together, the "Agreement"), by and among Crestar Financial Corporation, a
Virginia corporation ("Crestar"), Crestar Bank, a Virginia banking corporation
wholly-owned by Crestar ("Crestar Bank"), the Company and the Bank, pursuant to
which, among other things, the Company will merge with and into Crestar (the
"Holding Company Merger"). Immediately thereafter, the Bank will merge into
Crestar Bank (the "Bank Merger") (the Holding Company Merger and the Bank Merger
are referred to together as the "Transaction"). Upon consummation of the Holding
Company Merger, expected to occur no earlier than November 6, 1997 and prior to
December 31, 1997, each share of the Company's Common Stock (other than shares
held directly by Crestar) shall be converted into (upon an American National
shareholder's election) either (i) $20.25 in cash (provided that in the
aggregate the number of shares that may be exchanged for cash shall not exceed
40% of the number of outstanding shares of American National Common Stock
immediately prior to the effective time (the "Effective Time") of the Holding
Company Merger) or (ii) a fraction of a share of common stock of Crestar, par
value $5.00 per share

                                      -2-
<PAGE>
 
("Crestar Common Stock") determined in accordance with the Exchange Ratio.  The
"Exchange Ratio" shall be calculated as follows: (i) if the average closing
price of Crestar Common Stock as reported on the New York Stock Exchange (the
"NYSE") for each of the 10 trading days ending on the tenth day prior to the
Effective Time of the Holding Company Merger (the "Average Closing Price") is
between $30 and $50, the Exchange Ratio shall be the quotient (rounded to the
nearest one-thousandth) of (A) $20.25 divided by (B) the Average Closing Price;
(ii) if the Average Closing Price is $50 or greater, the Exchange Ratio shall be
0.405; and (iii) if the Average Closing Price is $30 or less, the Exchange Ratio
shall be 0.675.  A Special Meeting of Shareholders of American National will be
held on November 4, 1997 to consider and vote upon the Transaction.

MARKET AREA

     The Company's market area comprises Baltimore City and parts of Baltimore,
Howard, Harford, Anne Arundel and Carroll counties, which are part of the
Baltimore metropolitan area. Baltimore City is located approximately 30 miles
from Washington, D.C., and is part of the Washington-Baltimore Metropolitan
Statistical Area. The Company's market area has a diverse base, although it has
been significantly influenced by the federal government and the defense
industry. The Federal Government continues to be one of the area's largest
employers. Headquartered within the Company's market area are a number of
Federal Government agencies, including the Social Security Administration and
the Health Care Financing Administration. Other major employers and industries
within the Company's market area include General Motors Truck and Bus Group,
Pepsi-Cola Company, Black and Decker Corporation, Sweetheart Cup Company, Inc.,
John Hopkins University, the University of Maryland-Baltimore, McCormick and
Company, Inc., Bethlehem Steel Corp., Martin Marietta Aero and Naval Systems,
Northrop-Grumman, Fort Meade, Proctor and Gamble Cosmetic and Fragrance
Products, The Baltimore Sun, Baltimore Gas and Electric Company, Giant Food,
Inc., Bell Atlantic, Blue Cross and Blue Shield of Maryland, USF&G Corporation,
Crown Central Petroleum, and The Ryland Group, Inc. The Baltimore metropolitan
area also has an active tourism industry, and is home to the Baltimore Orioles
professional baseball team and Oriole Park at Camden Yards, the Baltimore Ravens
professional football team, the Inner Harbor, and the Baltimore Aquarium. As of
1990, the population of the Baltimore metropolitan area was approximately two
million.

LENDING ACTIVITIES

     Loan and Mortgage-Backed Securities Portfolio Composition. The principal
components of the Company's loan portfolio are conventional first mortgage loans
secured by one- to four-family residential real estate and, to a lesser extent,
multifamily residential real estate and commercial real estate loans. At July
31, 1997, the Company's total loan portfolio totaled $349.2 million, of which
$221.6 million, or 63.5%, were one- to four-family residential real estate
mortgage loans, $30.2 million, or 8.7%, were multifamily residential real estate
loans, and $35.1 million, or 10.0%, were commercial real estate loans. The
remainder of the Company's mortgage loans at July 31, 1997, consisted of $39.6
million of construction and land development loans. To supplement its loan
portfolio, the Company also invests in mortgage-backed securities that directly
or indirectly provide funds principally for residential mortgage loans made to
home buyers in the United States. See "--Investment Activities." Consumer loans,
consisting of home-equity loans, loans collateralized by deposit accounts and
other loans totaled $20.8 million, or 6.0%, of the Company's total loan
portfolio.

                                      -3-
<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.
<TABLE>
<CAPTION>
 
 
                                                                             AT JULY 31,
                             ------------------------------------------------------------------------------------------------------
                                    1997                  1996                  1995                1994                1993
                             -------------------  ---------------------  ------------------  ------------------  ------------------
                              AMOUNT    PERCENT     AMOUNT     PERCENT    AMOUNT   PERCENT    AMOUNT   PERCENT    AMOUNT   PERCENT
                             --------  ---------  -----------  --------  --------  --------  --------  --------  --------  --------
                                                                     (DOLLARS IN THOUSANDS)
<S>                          <C>       <C>        <C>          <C>       <C>       <C>       <C>       <C>       <C>       <C>
 
Real estate loans:
    One- to four-family
     residential...........  $221,604      63.5%     $168,698     56.5%  $135,616     55.4%  $114,181     52.9%  $107,883     47.1%
    Multifamily residential    30,230       8.7        35,930     12.0     39,361     16.1     38,886     18.0     43,913     19.2
    Commercial.............    35,071      10.0        37,695     12.6     38,894     15.9     41,747     19.4     48,812     21.3
    Construction (1).......    39,611      11.3        37,503     12.6     16,471      6.7      9,964      4.6     16,164      7.1
                             --------  --------      --------   ------   --------   ------   --------   ------   --------    -----
       Total real estate
        loans..............   326,516      93.5       279,826     93.7    230,342     94.1    204,778     94.9    216,772     94.7
 
Consumer loans:
    Home equity............     7,229       2.1         6,775      2.3      6,201      2.5      5,899      2.7      6,275      2.7
    Other (2)..............    13,591       3.9        10,345      3.5      6,805      2.8      3,758      1.8      4,587      2.0
                             --------  --------      --------   ------   --------   ------   --------   ------   --------    -----
        Total consumer
         loans.............    20,820       6.0        17,120      5.8     13,006      5.3      9,657      4.5     10,862      4.7
                             --------  --------      --------   ------   --------   ------   --------   ------   --------    -----
 
Accrued interest receivable     1,898        .5         1,547       .5      1,323       .6      1,278       .6      1,394       .6
                             --------  --------      --------   ------   --------   ------   --------   ------   --------    -----
 
        Total loans
         receivable........   349,234     100.0%      298,493    100.0%   244,671    100.0%   215,713    100.0%   229,028    100.0%
                             --------  ========      --------   ======   --------   ======   --------   ======   --------    =====
 
Less:
    Undisbursed loan
     proceeds..............    11,958                  14,837               5,138               2,513               3,786
    Unearned loan fees.....     1,342                   1,202               1,083                 989               1,321
    Allowance for loan
     losses................     3,647                   4,412               6,361               3,669               2,326
                             --------                --------            --------            --------            --------
        Total loans
         receivable, net...  $332,287                $278,042            $232,089            $208,542            $221,595
                             ========                ========            ========            ========            ========
 
Mortgage-backed securities
 (3).......................  $126,563                $133,466            $159,805            $160,139            $119,815
                             ========                ========            ========            ========            ========
</TABLE>
---------------------------
(1) Includes land development loans of $20.5 million, $14.2 million, $10.9
    million, $5.2 million and $9.7 million at July 31, 1997, 1996, 1995, 1994
    and 1993, respectively.
(2) Includes passbook loans, second mortgage loans, automobile loans and
    unsecured lines of credit.
(3) Includes $25.2 million, $33.3 million, $3.0 million, $42.3 million and $17.9
    million of mortgage-backed securities available for sale at July 31, 1997,
    1996, 1995, 1994, and 1993, respectively. See Note 2 to Consolidated
    Financial Statements.

                                      -4-
<PAGE>
 
     Loan Maturity Schedule.  The following table sets forth the maturity or
period of repricing of the Company's portfolio at July 31, 1997.  Demand loans,
loans having no stated schedule of repayments, and overdrafts are reported as
due in one year or less.  Adjustable and floating rate loans are included in the
period in which interest rates are next scheduled to adjust rather than in which
they mature, and fixed rate loans are included in the period in which the final
contractual repayment is due.
<TABLE>
<CAPTION>
 
 
                                                                                   BEYOND
                                      WITHIN     1-3      3-5      5-10    10-20     20
                                      1 YEAR    YEARS    YEARS    YEARS    YEARS    YEARS      TOTAL
                                     --------  -------  -------  -------  -------  -------   --------
                                                              (IN THOUSANDS)                
<S>                                  <C>       <C>      <C>      <C>      <C>      <C>       <C> 
Real estate loans:                                                                          
  One- to four-family residential..  $ 42,978  $17,566  $43,723  $34,834  $24,355  $58,148   $221,604
  Multifamily residential..........     5,962    8,815    6,238    5,233    3,008      974     30,230
  Commercial.......................    10,629   13,494    3,059    4,133    2,822      934     35,071
  Construction (1).................    32,677    6,793      141       --       --       --     39,611
 Consumer loans....................     9,060    2,107    6,082    1,088    2,135      348     20,820
   Accrued interest receivable.....     1,898       --       --       --       --       --      1,898
                                     --------  -------  -------  -------  -------  -------   --------
                                                                                            
    Total..........................  $103,204  $48,775  $59,243  $45,288  $32,320  $60,404   $349,234
                                     ========  =======  =======  =======  =======  =======   ========
</TABLE> 
------------------------------------
(1)Includes land development loans.


     Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
July 31, 1997, the dollar amount of all fixed-rate and adjustable-rate loans due
or scheduled next to reprice after July 31, 1998.
<TABLE>
<CAPTION>
 
 
                                      FIXED    ADJUSTABLE   TOTAL
                                     --------  ----------  --------
                                             (IN THOUSANDS)
<S>                                  <C>       <C>         <C>
 
Real estate loans:
  One- to four-family residential..  $119,770     $58,856  $178,626
  Multifamily residential..........    17,340       6,928    24,268
  Commercial.......................    14,337      10,105    24,442
  Construction (1).................        --       6,934     6,934
Consumer loans.....................    11,760          --    11,760
                                     --------     -------  --------
    Total..........................  $163,207     $82,823  $246,030
                                     ========     =======  ========
</TABLE> 
-----------------------------
(1)Includes land development loans.


     One- to Four-Family Residential Real Estate Loans. The Company's primary
lending activity consists of the origination of one- to four-family, owner-
occupied, residential mortgage loans collateralized by properties located in the
Company's market area. The Company generally does not originate one- to four-
family residential loans collateralized by properties outside of its market
area, although from time to time the Company may purchase loans collateralized
by properties outside the Company's market area if such loans satisfy the
Company's internal underwriting standards. At July 31, 1997, $221.6 million, or
63.5% of the Company's total loan portfolio consisted of one- to four-family
residential mortgage loans, and approximately $215.6 million, or 97.3%, of the
Company's one-to four-family residential real estate loans were collateralized
by real estate located in the state of Maryland.

     The Company's one- to four-family residential real estate loans generally
are originated and underwritten according to standards that qualify such loans
to be included in Freddie Mac ("FHLMC") and Fannie Mae ("FNMA") purchase and
guaranty programs and that otherwise permit resale in the secondary mortgage
market. The Company generally retains its adjustable rate mortgage ("ARM")
originations. Whether the Company can or will sell fixed rate loans into the
secondary market, however, depends on a number of factors including the yield
and the term of the loan,

                                      -5-
<PAGE>
 
market conditions, and the Company's current interest rate gap position.  For
example, in the current interest rate environment, fixed rate loans with terms
of less than 15 years and with above-market yields are currently retained by the
Company.  During the fiscal years ended July 31, 1997, 1996, and 1995, the
Company sold into the secondary market $4.5 million, $4.2 million and $2.2
million of one- to four-family residential mortgage loans, generally from
current period originations.  From time to time, the Company may also exchange
one- to four-family residential real estate loans for FNMA securities.  As of
July 31, 1997, the Company had no such securities in its portfolio.

     The Company generally retains the servicing rights on loans it has sold.
The Company receives fees for these servicing activities, which include
collecting and remitting loan payments, inspecting the properties and making
certain insurance and tax payments on behalf of the borrowers. As of July 31,
1997, the Company serviced loans for others aggregating $49.5 million.

     The Company currently offers one- to four-family residential mortgage loans
with terms typically ranging from 10 to 30 years, and with adjustable or fixed
interest rates. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option. The average
length of time that the Company's one- to four-family residential mortgage loans
remain outstanding varies significantly depending upon trends in market interest
rates and other factors. In recent years, the average maturity of the Company's
mortgage loans has decreased significantly due to the volume of refinancing
activity. Accordingly, estimates of the average length of one- to four-family
loans that remain outstanding cannot be made with any degree of accuracy.

     The Company's fixed rate mortgage loans amortize on a monthly basis with
principal and interest due each month. The Company's fixed rate loans are
generally originated with terms ranging from 10 to 30 years. The Company also
offers seven year "balloon" loans with an interest rate for the first seven
years set at 25 basis points less than the Company's 10 year fixed rate loans.
At the end of the first seven years the interest rate for the remaining 23 year
term is set at a margin over the then current FNMA 30-day purchase price.

     Originations of fixed rate mortgage loans versus ARM loans are monitored on
an ongoing basis and are affected significantly by the level of market interest
rates, customer preference, the Company's interest rate gap position, and loan
products offered by the Company's competitors. The Company's ARM loans are
generally for terms of 30 years, with interest rates that adjust annually. In
some instances, the Company offers three and five year ARM loans. Interest rate
adjustments, are limited to 2% per year and 6% over the life of the loan. The
Company's current index on its ARM loans is the one year Treasury Bill rate,
plus a margin. The Company will originate ARM loans with initially discounted
rates, often known as "teaser rates." The Company determines whether a borrower
qualifies for an ARM loan based on the fully indexed rate of the ARM loan at the
time the loan is originated. One-to four-family residential ARM loans totaled
$97.9 million, or 28.0%, of the Company's total loan portfolio at July 31, 1997.
During the fiscal year ended July 31, 1997, the Company purchased $20.7 million
of ARM loans collateralized by one- to four-family residential real estate
located primarily in Maryland.

     The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. Management believes that although ARM
loans better offset the adverse effects of an increase in interest rates as
compared to fixed-rate mortgage loans, the increased mortgage payments required
of adjustable-rate mortgage loan borrowers in a rising interest rate environment
could potentially cause an increase in delinquencies and defaults. The Company
has not historically experienced a material difference in the delinquency rate
between its fixed-rate and adjustable-rate one- to four-family loans.

     The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.

                                      -6-
<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 $30.2 million, or 8.7%, of the Company's total loan
portfolio at July 31, 1997, compared to $51.9 million, or 19.9%, of the total
loan portfolio at July 31, 1992. At July 31, 1997, the Company's portfolio of
multifamily residential real estate loans included 5 loans with principal
balances that exceeded $1.0 million. Multifamily residential real estate
originations totaled .5%, 4.9%, 3.8%, and 1.0%, of total loan originations
during the fiscal years ended July 31, 1997, 1996, 1995, and 1994, respectively.
The Company decreased its originations of multifamily residential real estate
loans to $390,000 during the fiscal year ended July 31, 1997, from $3.7 million
during the fiscal year ended July 31, 1996, and conformed to the Company's
strategy of originating such loans only to existing or previous customers who
had made timely payments on loans. None of the multifamily originations during
the fiscal year ended July 31, 1997, were loans to facilitate the sale of real
estate acquired by the Company through foreclosure. The Company's multifamily
real estate loans are primarily collateralized by multifamily residences, such
as apartment buildings and condominium buildings. The Company also includes in
its multifamily residential real estate loan portfolio loans made to investors
collateralized by more than four single-family residences. Multifamily real
estate loans are offered with fixed and adjustable rates and are structured in a
number of different ways depending upon the circumstances of the borrower and
the type of multifamily project. Fixed rate loans generally amortize over 15 to
25 years, and generally contain call provisions permitting the Company to
require that the entire principal balance be repaid at the end of five to seven
years. Such loans are priced as five to seven year loans. The Company's
adjustable rate multifamily loans are currently offered for terms of 15 to 30
years and are often callable by the Company after five to ten years. The Company
has generally not exercised call provisions of multifamily residential real
estate loans that have a good payment history and are priced at market rates or
higher. Interest rates adjust monthly or annually, subject to limitations, and
are tied to a margin over the one year Treasury index. The Company's adjustable
rate multifamily residential real estate loans currently include limitations on
interest rate increases in any one year and over the life of the loan.

     Loans collateralized by multifamily real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multifamily real
estate is typically dependent upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.

     Commercial Real Estate Loans. In recent years, the Company has
significantly reduced its originations of commercial real estate loans and the
total amount of such loans in its loan portfolio. The Company currently makes
commercial real estate loans only to existing or previous customers who have
made timely payments on loans that are current, or to facilitate the sale of
commercial real estate acquired by the Company through foreclosure. Loans
secured by commercial real estate constituted approximately $35.1 million, or
10.0% of the Company's total loan portfolio at July 31, 1997, compared to $55.6
million, or 21.3% of the total loan portfolio at July 31, 1992. At July 31,
1997, the Company's portfolio of commercial real estate loans included 12 loans
with principal balances that exceeded $1.0 million. Commercial real estate loan
originations totaled 5.5%, 8.6% and 3.7% of total loan originations during the
fiscal years ended July 31, 1997, 1996, and 1995, respectively. The Company
decreased its originations of commercial real estate loans to $4.4 million
during the fiscal year ended July 31, 1997, from $6.6

                                      -7-
<PAGE>
 
million during the fiscal year ended July 31, 1996 and such loans conformed to
the Company's strategy of originating commercial loans primarily to existing or
previous customers who had made timely payments on loans.  Of the Company's
originations of commercial real estate loans during the fiscal year ended July
31, 1997, none was for the purpose of facilitating the sale of REO.  The
Company's commercial loans are secured by improved property such as shopping
centers, warehouses, office buildings, and other nonresidential buildings.
Commercial real estate loans currently are offered with fixed and adjustable
rates and are structured in a number of different ways depending upon the
circumstances of the borrower and the nature of the project.  Fixed rate loans
generally amortize over 15 to 25 years, and generally contain call provisions
permitting the Company to require that the entire principal balance be repaid at
the end of five to seven years.  Such loans are priced as five to seven year
loans.  The Company's adjustable rate commercial real estate loans are currently
offered for terms of 15 to 30 years and are often callable by the Company after
10 years.  The Company has generally not exercised call provisions of commercial
real estate loans that have a good payment history and are priced at market
rates or higher.  Interest rates adjust monthly or annually, and are tied to the
one year Treasury index.  The Company's adjustable rate commercial real estate
loans currently include limitations on interest rate increases in any one year
and over the life of the loan.

     Loans secured by commercial real estate generally involve a greater degree
of credit risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial real
estate is typically dependent upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.

     Construction and Land Development Loans. The Company offers construction
loans to individuals for the construction of their residence as well as to
builders for the construction of one- to four-family residential units and to a
much lesser extent commercial and multifamily units. In addition, the Company
offers land loans, including loans to purchase developed single family lots and
land acquisition and development loans to develop single family lots. At July
31, 1997 the Company's $39.6 million of construction and land development loans
included $19.1 million of constructions loans and $20.5 million of land
development loans. As of July 31, 1997, all construction and land loans were
collateralized by properties located within the suburbs of Baltimore and
Washington, D.C.

     Construction loans to individuals typically convert to permanent loans at
the end of the construction phase. The maximum loan amount does not typically
exceed 80% of appraised value, and the Company requires private mortgage
insurance where the loan amount exceeds 80% of appraised value. Construction
loans to individuals have a maximum construction term of one year, after which
the loan may be converted to a 15 to 30 year fixed- or adjustable-rate mortgage
loan at the option of the borrower. The interest rates typically float at a
margin over the prime rate and adjust monthly. The loan application process
requires that the builder submit accurate plans, specifications and cost
projections. In addition, the Company reviews the borrower's existing financial
condition, including total outstanding debt. Construction loans on speculative
units are restricted and in most instances homes are required to be pre-sold
before construction advances are made. Advances are made on percentage of
completion basis and all construction inspections are performed by the Company's
appraisers prior to disbursement. Construction loans to builders generally
require the payment of interest only during the construction term. Depending
upon the number of units to be built and the absorption rate as determined by
the appraisal, loan terms can vary between 12 to 24 months.

      All recent land loan originations are secured by single family lots,
although a portion of prior originations included loans for commercial purposes.
The maximum loan amount generally does not exceed 75% of appraised value. Loans
made to purchase developed lots have terms that are negotiated on a case-by-case
basis. The Company does not make loans for speculation purposes--land loans are
typically made to builders or individuals who intend to build within a three-
year period. The loan application process requires that the developer submit
accurate cost estimates, development and site plans and cash flow projections.
In addition, the Company reviews the borrower's existing financial condition
including total outstanding debt. Land acquisition and development loans
generally require the developers to have the lots pre-sold to local or national
builders. Depending upon the number of lots to be

                                      -8-
<PAGE>
 
developed and the absorption rate as determined by the appraisal, the loan term
can vary between 12 to 36 months. Interest rates typically float at a margin
over the prime rate and adjust monthly.  Loan proceeds are advanced as land
development progresses, and in all instances, the Company's appraisers inspect
the property and the work completed before the Company will disburse funds.

     Construction and land development loans involve additional risks
attributable to the fact that funds are advanced upon an appraisal of the
completed project, which is of uncertain value prior to its completion. Because
of the uncertainties inherent in estimating construction and land development
costs, as well as the market value on the completed project and the effects of
governmental regulation of real property, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related loan-
to-value ratio. The Company's loans typically do not exceed 80% of the appraised
value of the completed project. As a result of the foregoing, construction and
land development loans often involve the disbursement of substantial funds with
repayment dependent, in part, on the success of the ultimate project rather than
the ability of the borrower or guarantor to repay principal and interest. If the
Company is forced to foreclose on a project prior to or at completion due to a
default, there can be no assurance that the Company will be able to recover all
of the unpaid balance of, and accrued interest on, the loan, as well as related
foreclosure and holding costs. In addition, the Company may be required to fund
additional amounts to complete the project and may have to hold the property for
an unspecified period of time.

     Consumer Loans. To a lesser extent, the Company originates consumer loans.
As of July 31, 1997, consumer loans totaled $20.8 million, or 6.0%, of the
Company's total loan portfolio. The principal types of consumer loans offered by
the Company are adjustable rate home equity lines of credit with terms up to 20
years, automobile loans with terms up to five years, loans secured by deposit
accounts and other loans consisting primarily of 5 to 15 year fixed-rate second
mortgage loans, personal loans, and checking account lines of credit. Consumer
loans, other than home equity lines of credit and automobile loans, are offered
primarily on a fixed rate basis with maturities generally of less than ten
years. The Company's home equity and residential second mortgage loans are
secured by the borrower's principal residence with a maximum loan-to-value
ratio, including the principal balances of both the first and second mortgage
loans, of 80% or less. At July 31, 1997, home equity loans totaled $7.2 million,
or 34.7% of consumer loans, and 2.1% of the Company's total loan portfolio. At
July 31, 1997, the Company had $10.1 million of contractual commitments for
lines of credit.

     Consumer loans entail greater credit risk than do residential mortgage
loans but have smaller balances and tend to have higher interest rates. See "--
Delinquencies and Classified Assets--Delinquent Loans, Nonperforming Assets and
Restructured Loans" for information regarding the Company's loan loss experience
and reserve policy.

     Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as mortgage originators
employed by the Company, real estate agent referrals, existing customers,
borrowers, builders, attorneys, and walk-in customers. Upon receiving a loan
application, the Company obtains a credit report and employment verification to
verify specific information relating to the applicant's employment, income, and
credit standing. In the case of all multifamily residential and commercial real
estate loans, a third party appraiser approved by the Company appraises the real
estate intended to collateralize the proposed loans. The Company's internal
appraisers review all third party appraisals. Either the Company's internal
appraisers or a third party appraiser performs appraisals of one- to four-family
residential properties. An underwriter in the Company's loan department checks
the loan application file for accuracy and completeness, and verifies the
information provided. Pursuant to the Company's written loan policies, all loans
of less than $1.0 million are approved by the Loan Committee that meets weekly
and consists of four officers of the Company, including the President and the
Executive Vice President. Such policies also require that all loans of $1.0
million or more be approved by the Loan Committee consisting of three directors.
For multifamily residential and commercial real estate loans the Company
requires that the borrower provide operating statements, pro forma cash flow
statements and, if applicable, rent rolls. In addition, the Company reviews the
borrower's credit standing and expertise in owning and managing the type of
property that will collateralize the loan. For construction loans, the Company
requires that the borrower provide detailed construction plans and
specifications, and pro forma cash flow statements. In addition, the Company
considers the feasibility of the project and the pertinent experience of the
borrower. Proof of fire and casualty insurance is required

                                      -9-
<PAGE>
 
at the time the loan  is made and throughout the term of the loan.  After the
loan is approved, a loan commitment letter is promptly issued to the borrower.

     If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Commitments are typically issued for 60-day periods. The
Company typically collects a commitment fee on conventional, construction, and
land development loans. The Company requires a title search and, in the case of
all real estate loans except home equity loans, a title guaranty. At July 31,
1997, the Company had commitments to originate $6.9 million of mortgage loans.

     The Company also enters into commitments to extend credit. At July 31,
1997, the Company had contractual commitments to extend credit (exclusive of
undisbursed loans in process) for lines of credit and irrevocable letters of
credit of $10.1 million and $1.7 million, respectively. The commitments may be
funded from principal repayments of loans and mortgage-backed securities, excess
liquidity, savings deposits, and, if necessary, borrowed funds. Commitments
under lines of credit are generally longer than one year and are subject to
periodic reevaluation and cancellation. Irrevocable letters of credit expire
within two years. Because certain of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.

                                      -10-
<PAGE>
 
     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.
<TABLE>
<CAPTION>
 
 
                                                  At July 31,
                                       ----------------------------------
                                         1997         1996        1995
                                       ---------  ------------  ---------
                                                 (In Thousands)
<S>                                    <C>        <C>           <C>
 
Total loans receivable at beginning
   of year...........................   $278,042      $232,089   $208,542
Loans originated:                     
  Real estate:                        
    One- to four-family residential..     37,382        30,297     25,559
    Multi-family residential.........        390         3,711      1,785
    Commercial.......................      4,426         6,586      1,727
    Construction (1).................     31,511        30,421     12,501
  Consumer:                           
    Home equity......................      1,959         1,141      1,273
    Other............................      4,622         4,269      4,237
                                        --------      --------   --------
      Total originations.............     80,290        76,425     47,082
Loans purchased......................     27,414        17,972     11,216
Transfer of mortgage loans            
    to foreclosed real estate........       (543)       (2,960)    (1,400)
Repayments...........................    (48,197)      (40,659)   (27,763)
Loan sales...........................     (4,451)       (4,194)    (2,159)
Other (2)............................       (268)         (631)    (3,429)
                                        --------      --------   --------
Net loan activity....................    (26,045)      (30,472)   (23,535)
                                        --------      --------   --------
    Total loans receivable at end     
       of year (3)...................   $332,287      $278,042   $232,089
                                        ========      ========   ========
                                      
                                      
Mortgage-backed securities at         
  beginning of year..................    133,466      $159,805   $160,139
Purchases............................      9,148        42,703     17,364
Sales................................     (7,972)      (56,036)    (3,100)
Repayments...........................     (8,519)      (11,823)   (15,001)
Other (4)............................        440        (1,183)       403
                                        --------      --------   --------
Mortgage-backed securities            
  at end of year (5).................   $126,563      $133,466   $159,805
                                        ========      ========   ========
</TABLE> 
-------------------------------------
(1) Includes land development loans.
(2) Consists of changes in the allowance for losses, undisbursed loan proceeds,
    unearned discounts, and net deferred fees.
(3) Includes $718,000, $350,000 and $1.8 million of loans held for sale at July
    31, 1997, 1996 and 1995, respectively.
(4) Consists of gain (loss) on sale of securities, discount or premium
    amortization, changes in accrued interest receivable, and mark-to-market
    adjustment.
(5) Includes $25.2 million, $33.3 million and $3.0 million of mortgage-backed
    securities available for sale at July 31, 1997, 1996 and 1995, respectively.


     Loan Origination Fees and Other Income.  In addition to interest earned on
loans, the Company generally receives fees in connection with loan originations.
Such loan origination fees, net of costs to originate, are deferred and
amortized using an interest method over the contractual life of the loan.  Fees
deferred are recognized into income immediately upon prepayment or sale of the
related loan.  At July 31, 1997, the Company had $1.3 million of deferred loan
origination fees.  Such fees vary with the volume and type of loans and
commitments made and purchased,

                                      -11-
<PAGE>
 
principal repayments, and competitive conditions in the mortgage markets, which
in turn respond to the demand and availability of money.

     In addition to loan origination fees, the Company also receives other fees,
service charges, and other income that consist primarily of deposit transaction
account service charges and late charges.  The Company recognized fees and
service charges of $805,000, $640,000 and $592,000, for the fiscal years ended
July 31, 1997, 1996, and 1995, respectively.  Income received from loans
serviced for others was $143,000, $146,000 and $165,000, for the fiscal years
ended July 31, 1997, 1996, and 1995, respectively.

     Loans to One Borrower.  Federally chartered savings banks, such as the
Bank, are subject to the same limits on loans to a single or related group of
borrowers as those applicable to national banks, which under current
regulations, is limited to 15% of unimpaired capital and unimpaired surplus on
an unsecured basis, and an additional amount equal to 10% of unimpaired capital
and unimpaired surplus if the loan is secured by readily marketable collateral
(generally, financial instruments, but not real estate).  The Bank's maximum
loan to one borrower limit was $7.0 million at July 31, 1997.  The Bank
currently is in compliance with its loans-to-one-borrower limitations.

     The Bank's largest lending relationship at July 31, 1997, included (i)
several loans originated in 1987, 1988 and 1991, collateralized by single family
and multifamily residential units and two small office buildings located in the
Baltimore Metropolitan area, and (ii) a fixed rate loan refinanced in 1986 with
an eleven year call, collateralized by a 190 unit apartment complex located in
Easton, Maryland.  In 1992 the loans were restructured at market rates and
consolidated into two loans as part of a bankruptcy proceeding which involved
other properties of the borrower not financed by the Bank.  At July 31, 1997,
each of the two loans had a principal balance of $2.6 million and the aggregate
amount of the two loans was $5.2 million.  As of July 31, 1997, the loans were
current with respect to their repayment terms and were designated as special
mention.

     The Bank's second largest lending relationship at July 31, 1997 included an
adjustable rate and two fixed rate loans collateralized by two retail shopping
centers in the Baltimore Metropolitan area. The loans were originated in 1995,
and in June 1996 the Bank originated a fixed rate second mortgage collateralized
by one of the shopping centers. Each loan has a ten year call date. At July 31,
1997, the loans ranged from $289,000 to $3.2 million and totaled $4.3 million.
As of July 31, 1997, the loans were current with respect to their repayment
terms.

     The Bank's third largest lending relationship included the following loans
to one borrower:  (i) ten adjustable rate loans originated during 1987 through
1990 collateralized by one- to four-family residential properties located in the
Baltimore Metropolitan area in amounts ranging from $61,000 to $609,000; and
(ii) a fixed rate loan originated in 1985 with a ten year call collateralized by
a multifamily apartment building in Baltimore City.  The loans described in (i)
above were current with respect to their repayment terms as of July 31, 1997,
and had a carrying value of $2.8 million.  The loan described in (ii) was
restructured in 1992, at which time the Bank changed the interest rate to a one
year adjustable rate at .5% below market and classified the loan as substandard.
The Bank obtained an appraisal on the property described in (ii) in 1995.  At
July 31, 1997, the loan described in (ii) had a carrying value of $426,000, net
of specific reserves of $250,000 and was current with respect to its
restructured repayment terms.

     The Bank's fourth largest lending relationship at July 31, 1997, included
an adjustable rate loan and three fixed rate loans collateralized by apartment
buildings and an office building in the Baltimore Metropolitan area.  The loans
were originated in 1987 and 1988.  In June 1994, the Bank originated a fixed
rate second mortgage loan collateralized by all of the properties.  As of July
31, 1997, the loans ranged from $337,000 to $1.1 million, and totaled $3.4
million.  As of July 31, 1997, the  loans were current with respect to their
repayment terms.

     The Bank's fifth largest lending relationship at July 31, 1997 included
four adjustable rate loans collateralized by a retail shopping center and three
apartment buildings in the Baltimore Metropolitan area. The loans were
originated in 1988 with a ten year call. At July 31, 1997, the loans ranged from
$247,000 to $1.4 million and totaled $2.9 million. As of July 31, 1997, the
loans were current with respect to their repayment terms.

                                      -12-
<PAGE>
 
DELINQUENCIES AND CLASSIFIED ASSETS

     Delinquencies.  The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge.  This is followed with a letter
again requesting payment when the payment becomes 20 days past due.  If
delinquency continues, at 30 days another collection letter is sent and personal
contact efforts are attempted, either in person or by telephone, to strengthen
the collection process and obtain reasons for the delinquency.  Also, plans to
arrange a repayment plan are made.  If a loan becomes 60 days past due, the loan
becomes subject to possible legal action if suitable arrangements to repay have
not been made.  In addition, the borrower is given information which provides
access to consumer counseling services, to the extent required by regulations of
the Department of Housing and Urban Development. When a one- to four-family
residential real estate loan continues in a delinquent status for 90 days or
more, and a repayment schedule has not been made or kept by the borrower, a
notice of intent to foreclose is sent to the borrower, giving 30 days to cure
the delinquency.  If not cured, foreclosure proceedings are initiated.  For
multifamily residential and commercial real estate loans, foreclosure
proceedings may be initiated at the end of 30 or 60 days.

     Nonperforming Assets.  Loans are reviewed on a regular basis and are placed
on a nonaccrual status when, in the opinion of management, the collection of
interest is doubtful.  Mortgage loans are placed on nonaccrual status generally
when either principal or interest is more than 90 days past due.  Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income.

     Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is deemed REO until such time as it is sold.  When REO is
acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its estimated fair value, less estimated selling expenses.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations.  Net REO totaled $165,000, $766,000 and
$890,000, at July 31, 1997, 1996, and 1995, respectively.

     Delinquent Loans, Nonperforming Assets, and Restructured Loans.  The
following table sets forth information regarding nonperforming loans, real
estate owned by the Company, and restructured loans within the meaning of SFAS
15, at the dates indicated.
<TABLE>
<CAPTION>
 
                                                         AT JULY 31, 1997               AT JULY 31,
                                                        ------------------  -------------------------------------
                                                         NUMBER   BALANCE    1996      1995      1994      1993
                                                        -------- ---------  -------   -------   -------   -------    
<S>                                                     <C>      <C>        <C>       <C>       <C>       <C> 
                                                                        (DOLLARS IN THOUSANDS)
 
Nonperforming loans:
 One- to four-family residential real estate.........          7 $     277            $ 1,023   $ 1,403   $ 1,164
 Multifamily residential real estate.................          1        94              1,479       216     2,227
 Commercial real estate..............................          2        40              5,907       734     2,720
 Construction (1)....................................          1       300                 --       996     1,350
 Consumer loans......................................         13        87                198       269       186
                                                        -------- ---------            -------   -------   -------    
  Total nonperforming loans..........................         24       798              8,607     3,618     7,647
Total real estate owned (2)..........................          5       165                890       663     1,285
                                                        -------- ---------            -------   -------   -------
  Total nonperforming assets.........................         29       963              9,497     4,281     8,932
                                                        ======== =========            =======   =======   =======
                                                                                    
Restructured loans (3)...............................          2       776              1,870     8,864     1,713
                                                        -------- ---------            -------   -------   -------
Total nonperforming assets and restructured loans....         31 $   1,739            $11,367   $13,145   $10,645
                                                        ======== =========            =======   =======   =======
                                                                                    
Total nonperforming loans to total loans receivable..                  .23%              3.52%     1.67%     3.34%
Total nonperforming loans to total assets............                  .16%              2.02%      .90%     2.00%
Total nonperforming loans and real estate owned                                     
   to total assets...................................        .19%     2.23%              1.07%     2.33%
</TABLE> 
-----------------------------------------------------
(1) Includes land development loans.
(2) Represents property acquired by the Company through foreclosure or deed in
    lieu of foreclosure.
(3) All restructured loans are performing in accordance with their restructured
    payment terms.

                                      -13-
<PAGE>
 
     During the fiscal years ended July 31, 1997, 1996 and 1995, respectively,
gross interest income of $166,000, $567,000 and $898,000, would have been
recorded on nonperforming and restructured loans, under their original terms, if
the loans had been current throughout the period.  The amount of interest income
on non-accrual loans actually included in income during the same periods
amounted to $94,000, $151,000 and $274,000.

     The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 114 "Accounting by Creditors for Impairment of a Loan" and
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures" (collectively referred to as "Statement 114") as of
August 1, 1995. Statement 114 requires that impaired loans be measured on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. Impaired loans are generally placed in nonaccrual status on
the earlier of the date that management determines that the collection of
principal and/or interest is in doubt or the date that principal or interest is
90 days or more past-due.

     The Company's policy concerning restructured loans and loans to facilitate
the sale of REO is to take a realistic approach to resolving its problem loans
based on current market conditions, and to work with each borrower on a case-by-
case basis.  For all such loans, the Company obtains a current appraisal and
reviews the borrower's and guarantor's financial statements.  The review
includes an analysis of the balance sheet and income statement, as well as a
review of the cash flow and operating results.  In addition, the Company
considers the borrower's past performance.  The rates and terms are then
established based on the viability of the project and the cash flow generated.

     Classification of Assets.  Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any.  "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected.  Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable."  Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.  The
Company establishes a reserve for its "loss" assets, and may classify a portion
of a loan as substandard and another portion of the same loan as "loss."

     The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
<TABLE> 
<CAPTION> 
                                                        At July 31,
                                       ---------------------------------------------
                                            1997           1996            1995
                                       -------------  --------------  --------------
                                                      (In Thousands)
<S>                                    <C>            <C>             <C>
Substandard assets (1)...............       $  4,389        $  5,300        $  8,757
Doubtful assets......................             --              --              --
Loss assets..........................            312           2,411           3,909
                                            --------        --------        --------
   Total classified assets...........       $  4,701        $  7,711        $ 12,666
                                            ========        ========        ========
</TABLE>
____________________________________
(1)  Includes REO.

     One of the loans in the Bank's third largest lending relationship with a
carrying value of $426,000 as of July 31, 1997 was classified substandard and
$250,000 relating to such loan was classified as loss.

                                      -14-
<PAGE>
 
     The following is a discussion of classified assets with net carrying values
in excess of $500,000 as of July 31, 1997. Amounts identified below as specific
reserves have been classified as "loss" in the above table.

     In 1995 the Bank originated a loan collateralized by two
warehouse/industrial buildings in the Baltimore metropolitan area. The interest
rate was fixed at 9.5% through the call date of January 1, 2001. In September
1996 the Bank classified the loan as substandard and had the collateral
appraised in October 1996. The borrower filed bankruptcy in September 1996 and
the Bank foreclosed on one warehouse in August 1997 and the other warehouse in
October 1997. As of July 31, 1997, the loan had a carrying value of $769,000 and
based on the appraised values of the collateral, no reserve was considered
necessary.

     Other Loans of Concern. Assets that do not expose the Bank to risk
sufficient to warrant classification in one of the aforementioned categories,
but which possess some weaknesses, are designated "special mention" by
management. Loans designated as special mention are generally loans that, while
current in required payments, have exhibited some potential weaknesses that, if
not corrected, could increase the level of risk in the future. At July 31, 1997,
the Bank had $6.2 million of special mention loans, including two loans to the
same borrower that constituted the Bank's largest lending relationship. 
See "--Lending Activities--Loans to One Borrower."

     Allowance for Loan Losses. Management's policy is to provide for estimated
losses on the Company's loan portfolio based on management's evaluation of the
risk inherent in the loan portfolio. The Company regularly reviews its loan
portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans of which full
collectability of interest and principal may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral. Other factors considered by management include the size and risk
exposure of each segment of the loan portfolio, present indicators such as
delinquency rates and the borrower's current financial condition, and current
economic conditions that may affect the borrower's ability to pay. Management
calculates the general allowance for loan losses in part based on past
experience, and in part based on specified percentages of loan balances. While
both general and specific loss allowances are charged against earnings, general
loan loss allowances are added back to capital, subject to a limitation of 1.25%
of risk-based assets, in computing risk-based capital under OTS regulations.

     During the fiscal years ended July 31, 1997, 1996 and 1995, the Company
added $500,000, $772,000 and $3.4 million, respectively, to the allowance for
loan losses. The Company's allowance for loan losses totaled $3.6 million, $4.4
million and $6.4 million, at July 31, 1997, 1996 and 1995, respectively.

     Management believes that the allowances for losses on loans and investments
in real estate are adequate. While management uses available information to
recognize losses on loans and investments in real estate, future additions to
the allowances may be necessary based on changes in economic conditions,
particularly in Baltimore City and the state of Maryland. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses on loans and investments
in real estate. Such agencies may require the Company to recognize additions to
the allowances based on their judgments about information available to them at
the time of their examination.

                                      -15-
<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.
<TABLE>
<CAPTION>
 
                                                              Years Ended July 31,
                                              -----------------------------------------------------
                                                1997       1996       1995       1994       1993
                                              ---------  ---------  ---------  ---------  ---------
                                                                 (In Thousands)
<S>                                           <C>        <C>        <C>        <C>        <C>
 
Total loans outstanding, net................  $349,234   $278,042   $232,089   $208,542   $221,595
Average loans outstanding...................   307,640    254,090    225,633    217,662    241,437
 
Allowance balances (at beginning of year)...     4,412      6,361      3,669      2,326      1,468
Provision for losses:
    One- to four-family residential.........       157         40        184        368        396
    Multi-family residential................        70        249         49        100      1,543
    Commercial..............................       253        482      2,589        704      1,473
    Construction............................        --         --        528        646        190
    Consumer................................        20          1         36        171          9
                                              --------   --------   --------   --------   --------
        Total provision for losses..........       500        772      3,386      1,989      3,611
 
Charge-offs:
    One- to four-family residential.........      (184)      (157)      (178)        (8)      (406)
    Multi-family residential................      (516)      (391)       (54)      (202)      (965)
    Commercial..............................      (932)    (2,492)      (517)        --     (1,083)
    Construction............................        --         --       (279)      (380)      (460)
    Consumer................................        (3)        (3)        (5)       (98)       (11)
                                              --------   --------   --------   --------   --------
        Total charge-offs...................    (1,635)    (3,043)    (1,033)      (688)    (2,925)
 
Recoveries..................................       370        322        339         42        172
                                              --------   --------   --------   --------   --------
    Allowance balance (at end of year)......  $  3,647   $  4,412   $  6,361   $  3,669   $  2,326
                                              ========   ========   ========   ========   ========
 
Allowance for loan losses as a percent
  of net loans receivable at end of period..      1.10%      1.59%      2.74%      1.76%      1.05%
Net loans charged off as a percent
  of average loans outstanding..............       .41%      1.07%       .31%       .30%      1.14%
Ratio of allowance for loan losses
  to total nonperforming loans
  at end of period..........................    457.02%    112.87%     73.90%    101.41%     30.42%
Ratio of allowance for loan losses
  to nonperforming loans and REO
  at end of period..........................    378.71%     94.37%     66.98%     85.70%     26.04%
</TABLE>
     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.
<TABLE>
<CAPTION>
 
                                                                       At July 31,
                                       -------------------------------------------------------------------------
                                              1997                     1996                    1995
                                       ----------------------  ----------------------  ----------------------
                                                   % of                    % of                    % of
                                       Amount  Total Loans(1)  Amount  Total Loans(1)  Amount  Total Loans(1)
                                       ------  --------------  ------  --------------  ------  --------------
                                                                  (Dollars in Thousands)
<S>                                    <C>     <C>             <C>     <C>             <C>     <C>
Balance at end of year
 applicable to:
  One- to four-family residential..    $  541        63.5%     $  523      56.5%       $  530       55.4%
  Multi-family residential.........       865         8.7       1,128      12.0         1,265       16.1
  Commercial.......................     1,503        10.0       2,042      12.6         3,892       15.9
  Construction (2).................       586        11.3         586      12.6           547        6.7
  Consumer.........................       152         6.0         133       5.8           127        5.3
  Accrued interest receivable......        --          .5          --        .5            --         .6
                                       ------       -----      ------     -----        ------      -----
                                                                                                   
   Total allowance for                                                                             
    loan losses....................    $3,647       100.0%     $4,412     100.0%       $6,361      100.0%
                                       ======       =====      ======     =====        ======      =====
</TABLE>
____________________________________
(1) Represents the percent of the Company's total loan portfolio that is
    composed of loans in each specific loan category.
(2) Includes land development loans.

                                      -16-
aw
<PAGE>
 
INVESTMENT ACTIVITIES

     General.  To supplement local mortgage loan originations where available
funds exceed mortgage loan demand, the Company maintains a substantial portfolio
of liquid investments with low credit risk.  These investments, however, are
subject to interest rate risk.  These investments are composed primarily of
mortgage-backed securities and United States Government and agency obligations.
At July 31, 1997, mortgage-backed securities totaled $126.6 million, or 25.2%,
of the Company's total assets, and United States Government or an agency or
sponsored corporation of the United States Government totaled $23.6 million, or
4.7%, of the Company's total assets.  By investing in these types of assets, the
Company's strategy has been to reduce significantly the credit risk of its asset
base in exchange for lower yields than would typically be available on real
estate loans.  The Company's mortgage-backed securities represent interests in,
or are collateralized by, pools of mortgage loans originated by private lenders
that have been grouped by various governmental, government-related, or private
organizations.  The Company manages its interest rate risk, in part, by
maintaining a substantial amount of adjustable-rate mortgage-backed securities
in its investment portfolio.  At July 31, 1997, $99.4 million, or 78.5%, of the
Company's $126.6 million of mortgage-backed securities had adjustable interest
rates ("ARM Securities").

     In addition, the Bank is required under federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified short-term
securities and certain other investments.  The Bank has generally maintained a
portfolio of liquid assets that exceeds regulatory requirements.

     The Bank's Loan/Investment Committee meets on a regular basis to decide
whether any alterations need to be made in the investment portfolio, based on
market levels and conditions, current economic data, political and regulatory
information, and the Bank's internal needs.  Based on the parameters of the
investment policy, the Bank tries to diversify its holdings through the purchase
of short- and medium-term and fixed- and variable-rate instruments, which
provide both an adequate return as well as some insulation from interest rate
risk.  All investment decisions are made by the Committee after analysis and
market price cross-checks have been completed.

     Effective February 1992, the OTS adopted Thrift Bulletin 52 ("TB 52").
Among other things, TB 52 sets forth certain guidelines with respect to
depository institutions' investment in certain "high risk mortgage securities."
"High-risk mortgage securities" are defined as any mortgage derivative product
that at the time of purchase, or at any subsequent date, meets any of three
tests that are set forth in TB 52.  High-risk mortgage securities may be
purchased only in limited circumstances, and if held in a portfolio, may be
reported as trading assets at market value, available-for-sale assets at the
lower of cost or market value, or as held to maturity at cost.  In certain
circumstances, OTS examiners may seek the orderly divestiture of high-risk
mortgage securities.  Prior to purchasing a mortgage derivative security the
Loan/Investment Committee obtains an analysis of whether the mortgage security
meets any one of the three TB 52 tests, and falls into the category of "high-
risk mortgage security."  The Committee thereafter presents such analysis to the
Board.  The Bank documents no less frequently than annually whether a change in
the characteristics of any mortgage derivative security in its portfolio causes
such security to become a "high-risk mortgage security."  As of July 31, 1997,
the Bank did not hold any "high-risk mortgage securities" in its portfolio.

     Mortgage-Backed Securities.  The Company's mortgage-backed securities
include pass-through securities and CMOs.  Pass-through securities provide the
Company with payments consisting of both principal and interest as mortgages in
the underlying mortgage pool are paid off by the borrowers.  The average
maturity of pass-through mortgage-backed securities varies with the maturities
of the underlying mortgage instruments and with the occurrence of unscheduled
prepayments of those mortgage instruments.  Mortgage-backed securities also
include $78.9 million of CMOs, which are debt obligations collateralized by the
cash flows from mortgage loans or pools of mortgage loans.

     Mortgage-backed securities may be classified as, according to the issuer or
guarantor;

          Securities that are issued by a government sponsored agency 
          but that are not backed by the full faith and credit of the 
          United States Government. The primary issuers of these 
          securities include Fannie Mae ("FNMA") and Freddie Mac ("FHLMC"). 
          FNMA is a United States Government-sponsored corporation owned
          entirely by private stockholders. Pass-through securities

                                      -17-
<PAGE>
 
          issued by FNMA are guaranteed as to timely payment of principal 
          and interest by FNMA.  FHLMC issues securities representing 
          interests in residential mortgage loans that it pools.  FHLMC is 
          a United States Government-sponsored corporation that guarantees 
          the timely payment of interest and ultimate collection of 
          principal, and its stock is publicly traded.  At July 31, 1997, 
          $126.6 million, or 100.0% of the Company's mortgage-backed 
          securities, consisted of such securities.

     The Company's mortgage-backed securities include both fixed-rate and ARM
Securities.  Unlike fixed-rate mortgage-backed securities, ARM Securities have
periodic adjustments in the coupons on the underlying mortgages. Management
believes that the adjustable rate feature of the mortgages underlying the ARM
Securities generally will help to reduce sharp changes in the value of the ARM
Security in response to normal interest rate fluctuations.  As the interest
rates on the mortgages underlying the ARM Securities are reset periodically
(generally one to twelve months but as long as five years), the yields of such
securities will gradually align themselves to reflect changes in the market
rates so that the market value of such securities will remain relatively
constant as compared to fixed-rate instruments.  Management believes that this,
in turn, should cause the value of an ARM Security to fluctuate less than fixed-
rate mortgage-backed securities.

     If the Company purchases mortgage-backed securities at a premium, mortgage
foreclosures and unscheduled principal prepayments may result in some loss of
the principal investment to the extent of the premium paid.  On the other hand,
if mortgage-backed securities are purchased at a discount, both a scheduled
payment of principal and an unscheduled repayment of principal will increase
current and total returns.

     CMOs are securities created by segregating or partitioning cash flows from
mortgage pass-through securities or from pools of mortgage loans.  CMOs provide
a broad range of mortgage investment vehicles by tailoring cash flows from
mortgages to meet the varied risk and return preferences of investors.  These
securities enable the issuer to "carve up" the cash flow from the underlying
securities and thereby create multiple classes of securities with different
maturity and risk characteristics.  Each class has a specified maturity or final
distribution date.  In one structure, payments of principal, including any
principal prepayments, on the collateral are applied to the classes in the order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class until all classes having an
earlier stated maturity or final distribution date have been paid in full.  In
other structures, certain classes may pay concurrently, or one or more classes
may have a priority with respect to payments on the underlying collateral up to
a specified amount.  The Company has not and will not invest in any class with
residual characteristics.  Additionally, the Company will not invest in any
subordinated class that is not rated in one of the two highest rating categories
by at least one nationally recognized statistical rating organization.

                                      -18-
<PAGE>
 
     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.
<TABLE>
<CAPTION>
 
                                                                            AT JULY 31,
                                 --------------------------------------------------------------------------------------------------
                                        1997                1996                1995                1994                1993
                                 ------------------  ------------------  ------------------  ------------------  ------------------
                                  AMOUNT   PERCENT    AMOUNT   PERCENT    AMOUNT   PERCENT    AMOUNT   PERCENT    AMOUNT   PERCENT
                                 --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
                                                                       (DOLLARS IN THOUSANDS)
<S>                              <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
 
Pass-through certificates:
    Adjustable.................  $ 20,413     16.1%  $ 25,494     19.1%  $ 11,934      7.5%  $ 10,863      6.8%  $ 13,834     11.5%
    Fixed (1)..................    26,685     21.1     35,345     26.5     88,640     55.4     97,021     60.6     46,372     38.7
                                 --------    -----   --------    -----   --------    -----   --------    -----   --------    -----
        Total pass-through
         certificates..........    47,098     37.2     60,839     45.6    100,574     62.9    107,884     67.4     60,206     50.2
 
CMOs:
    Adjustable (2).............    78,938     62.4     71,949     53.9     58,322     36.5     46,342     28.9     29,430     24.6
    Fixed......................        --       --         52       --        142       .1      5,156      3.2     29,641     24.7
                                 --------    -----   --------    -----   --------    -----   --------    -----   --------    -----
        Total CMOs.............    78,938     62.4     72,001     53.9     58,464     36.6     51,498     32.1     59,071     49.3
 
Accrued interest receivable....       527       .4        626      0.5        767       .5        757       .5        538       .5
                                 --------    -----   --------    -----   --------    -----   --------    -----   --------    -----
 
    Total mortgage-backed
     securities................  $126,563    100.0%  $133,466    100.0%  $159,805    100.0%  $160,139    100.0%  $119,815    100.0%
                                 ========    =====   ========    =====   ========    =====   ========    =====   ========    =====
</TABLE>
-------------------------------
(1) Includes mortgage-backed securities available for sale of $16.0 million,
    $25.0 million, $6.0 million, and $17.9 million, at July 31, 1997, 1996, 1994
    and 1993, respectively.
(2) Includes CMOs available for sale of $9.2 million, $8.1 million, $3.0 million
    and $36.3 million at July 31, 1997, 1996, 1995 and 1994, respectively.

                                      -19-
<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, 1997, the market
value of the Company's investment securities, and interest-earning deposits in
other institutions, federal funds sold, and FHLB stock was approximately $30.3
million.
<TABLE>
<CAPTION>
 
 
                                                          At July 31,
                                                   -------------------------
                                                    1997     1996     1995
                                                   -------  -------  -------
                                                        (In Thousands)
<S>                                                <C>      <C>      <C>
Investment securities:
    U.S. Government and agency obligations (1)...  $23,193  $30,489  $13,615
    Accrued interest receivable..................      403      615      303
                                                   -------  -------  -------
        Total investment securities..............   23,595   31,104   13,918
 
Interest-earning deposits in other institutions..    2,313    1,837    2,240
Federal funds sold...............................       --      394      950
Federal Home Loan Bank stock.....................    4,194    3,141    2,914
                                                   -------  -------  -------
        Total investments........................  $30,103  $36,476  $20,022
                                                   =======  =======  =======
</TABLE>
________________________________
(1) Includes securities available for sale of $3.0 million, $6.8 million and
    $1.0 million at July 31, 1997, 1996 and 1995, respectively.


     Investment Portfolio Maturities.  The following table sets forth the
carrying values, annualized weighted average yield, and market values for the
Company's investment securities at July 31, 1997.
<TABLE>
<CAPTION>
 
                                                                         AT JULY 31, 1997
                             -------------------------------------------------------------------------------------------------------

                                  ONE YEAR             ONE TO            FIVE TO          MORE THAN
                                  OR LESS            FIVE YEARS         TEN YEARS         TEN YEARS      TOTAL INVESTMENT SECURITIES

                             ------------------ ------------------ ------------------ ------------------ ---------------------------

                             CARRYING AVERAGE   CARRYING AVERAGE   CARRYING AVERAGE   CARRYING AVERAGE   CARRYING  MARKET  AVERAGE
                              VALUE   YIELD (1)  VALUE   YIELD (1)  VALUE   YIELD (1)  VALUE   YIELD (1)   VALUE    VALUE  YIELD (1)

                             -------- --------- -------- --------- -------- --------- -------- --------- --------- ------- ---------

                                                                       (DOLLARS IN THOUSANDS)
<S>                          <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>       <C>     <C>
Investment securities:
U.S. Government
  agency securities (2)....    $1,500      3.80% $    --       --%   $8,950     7.29%  $12,743     7.86% $23,193  $23,341      7.38%

Accrued interest receivable       403        --       --       --        --       --        --      403      403       --        --
                               ------  --------  -------  -------    ------  -------   -------  -------  -------  -------  --------
   Total...................    $1,903      3.80% $    --       --%   $8,950     7.29%  $12,743     7.86% $23,596  $23,744      7.38%

                               ======  ========  =======  =======    ======  =======   =======  =======  =======  =======  ========
---------------------------
</TABLE>
(1)  Represents annualized weighted average yield.
(2)  Includes securities available for sale.


SOURCES OF FUNDS

     General. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from the amortization and prepayment of loans and mortgage-backed
securities, the sale or maturity of investment securities, operations and
advances from the FHLB. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes.

     Deposits. Consumer and commercial deposits are attracted principally from
within the Company's market area through the offering of a broad selection of
deposit instruments including checking and NOW accounts, savings, money market
deposit, term certificate accounts and individual retirement accounts. The
Company accepts deposits of $100,000 or more and offers negotiated interest
rates on such deposits. Deposit account terms vary according to

                                      -20-
<PAGE>
 
the minimum balance required, the period of time during which the funds must
remain on deposit, and the interest rate, among other factors.  The maximum rate
of interest which the Company must pay is not established by regulatory
authority.  The Company regularly evaluates its internal cost of funds, surveys
rates offered by competing institutions, reviews the Company's cash flow
requirements for lending and liquidity, and executes rate changes when deemed
appropriate.  The Company has sought to decrease the risk associated with
changes in interest rates by advertising and pricing certificates of deposit to
provide customers with incentives to choose certificates of deposit with longer
terms.  The Company typically does not obtain funds through brokers, nor does it
solicit funds outside its market area.

     Deposit Portfolio. Savings and other deposits in the Company as of July 31,
1997, are composed of the following:
<TABLE>
<CAPTION>
 
   WEIGHTED                                                                                  PERCENTAGE
    AVERAGE                                                                MINIMUM            OF TOTAL
 INTEREST RATE         MINIMUM TERM        CHECKING AND SAVINGS DEPOSITS   AMOUNT  BALANCES   DEPOSITS
---------------  ------------------------  ------------------------------  ------- --------  ----------
                                                                                (IN THOUSANDS)
 
<S>              <C>                       <C>                             <C>     <C>       <C> 
      --%                 None             Checking/demand deposit         $    --  $ 3,875      1.18%
                                             accounts ("DDA")                 
    1.96%                 None             NOW Accounts                         --   11,024      3.34
    2.99%                 None             Regular Savings                     100   31,007      9.40
    2.50%                 None             Christmas Club Accounts               5      556      0.17
    2.99%                 None             Super Passbook                    1,000    8,228      2.50
    3.06%                 None             Investment Manager               20,000   11,754      3.57
    3.89%                 None             Money Market                      2,500   37,496     11.37
 
                                           Certificates of Deposit
                                           ------------------------
 
    4.01%                 3 months         Fixed term, fixed rate              500    1,728      0.52
    4.83%                 6 months         Fixed term, fixed rate              500   14,938      4.53
    5.19%                12 months         Fixed term, fixed rate              500   31,590      9.58
    5.31%                12 months         Fixed term, fixed rate           25,000   22,727      6.89
    5.19%                13 months         Fixed term, fixed rate              500    6,184      1.88
    5.61%                18 months         Fixed term, fixed rate           25,000   28,800      8.74
    5.27%                24 months         Fixed term, fixed rate              500    9,744      2.96
    5.67%                30 months         Fixed term, fixed rate              500    4,400      1.33
    5.95%                30 months         Fixed term, fixed rate           25,000   28,074      8.52
    5.60%                36 months         Fixed term, fixed rate              500    4,547      1.38
    5.43%                48 months         Fixed term, fixed rate              500    2,370      0.72
    5.97%                60 months         Fixed term, fixed rate              500   41,686     12.64
    6.53%                84 months         Fixed term, fixed rate              500   11,138      3.38
    6.61%               120 months         Fixed term, fixed rate              500   17,797      5.40
                                                                                   --------     -----
                                                                                   $329,663     100.0%
                                                                                   ========     =====
</TABLE>

                                      -21-
<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.
<TABLE>
<CAPTION>
 
                                                                          AT JULY 31,
                             ------------------------------------------------------------------------------------------------------
                                            1997                              1996                              1995
                             ---------------------------------  ---------------------------------  --------------------------------
                             BALANCE   PERCENT (1)  CHANGE (2)  BALANCE   PERCENT (1)  CHANGE (2)  BALANCE   PERCENT (1) CHANGE (2)
                             --------  -----------  ----------  --------  -----------  ----------  --------  ----------- ----------
<S>                          <C>       <C>          <C>         <C>       <C>          <C>         <C>       <C>         <C>
                                                                     (DOLLARS IN THOUSANDS)
 
Checking DDA and NOW
 Accounts (3)..............  $ 14,899         4.5%     $  (139) $ 15,038         4.8%     $ 1,047  $ 13,991         4.5%    $  (158)

Super and regular savings..    39,791        12.1         (990)   40,781        13.0         (357)   41,138        13.1      (5,392)

Money market and investment                                                                                
    manager (4)............    49,250        14.9        8,105    41,145        13.2       (7,433)   48,578        15.4      (7,989)

                                                                                                           
Time deposits that mature                                                                                  
 (5):                                                                                                      
    within 12 months.......   130,188        39.5       11,416   118,772        37.9       10,546   108,226        34.4      21,098
    within 12-36 months....    55,405        16.8       (4,418)   59,823        19.1       (3,385)   63,208        20.1       1,523
    beyond 36 months.......    40,130        12.2        2,606    37,524        12.0       (1,948)   39,472        12.5      (3,458)

                             --------       -----      -------  --------       -----      -------  --------       -----     -------
                                                                                                           
                 Total                                                                                     
                 deposits..  $329,663       100.0%     $16,580  $313,083       100.0%     $(1,530) $314,613       100.0%    $ 5,624
                             ========       =====      =======  ========       =====      =======  ========       =====     =======
---------------------------
</TABLE>
(1) Represents percentage of total deposits.
(2) Represents increase (decrease) in balance from end of prior year.
(3) Includes Super NOW with a minimum average balance requirement of $2,500.
(4) Money market accounts require a minimum average balance of $2,000 and the
    investment manager accounts require a minimum average balance of $20,000.
(5) Individual Retirement Accounts ("IRAs") are included in the respective
    certificate balances.  IRAs totaled $42.8, $43.0 million and $43.1 million,
    as of July 31, 1997, 1996 and 1995, respectively.

                                      -22-
<PAGE>
 
     The following table sets forth the certificates of deposit in the Company
classified by rates as of the dates indicated:
<TABLE> 
<CAPTION> 
                                     At July 31,
                            ----------------------------
                              1997      1996      1995
                            --------  --------  --------
                                   (In Thousands)
<S>                         <C>       <C>       <C>
3.01- 4.00%...............  $     81  $    459  $  4,541
4.01- 6.00%...............   162,227   134,910    81,782
6.01- 8.00%...............    63,411    80,716   121,866
8.01-10.00%...............         4        34     2,717
                            --------  --------  --------
                            $225,723  $216,119  $210,906
                            ========  ========  ========
</TABLE>
     The following table sets forth the amount and maturities of certificates of
deposit at July 31, 1997.
<TABLE>
<CAPTION>
                                                   Amount Due
                              -----------------------------------------------------
                              Less Than      1-2       2-3       After   
                              One Year      Years     Years     3 Years     Total
                              ---------   --------   --------   --------   --------
     Rate                                         (In Thousands)                    
     ----                                                                  
 <S>                          <C>         <C>        <C>        <C>        <C> 
 3.01- 4.00%...........       $     80     $     1   $     --   $     --   $     81
 4.01- 6.00%...........        109,642      29,035      8,785     14,765    162,227
 6.01- 8.00%...........         20,464       7,625      9,957     25,365     63,411
 8.01-10.00%...........              2          --          2         --          4
                              --------     -------    -------    -------   --------
                              $130,188     $36,661    $18,744    $40,130   $225,723
                              ========     =======    =======    =======   ========
</TABLE>
     The following table indicates the amount of the Company's negotiable
certificates of deposit of $100,000 or more by time remaining until maturity as
of July 31, 1997. 
<TABLE>
<CAPTION>
 
                                           Certificates
  Maturity Period                          of Deposit
  ---------------                         --------------
                                          (In Thousands)
<S>                                      <C>
 
  Three months or less...................        $ 5,459
  Over three months through six months...          4,092
  Over six months through twelve months..          6,913
  Over twelve months.....................          6,105
                                                 -------
   Total.................................        $22,569
                                                 =======
</TABLE>
     The following table sets forth the activity in the savings deposits of the
Company for the years indicated:
<TABLE>
<CAPTION>
                                                     Years Ended July 31,
                                                 ---------------------------
                                                  1997      1996       1995
                                                 -------  --------   -------
                                                        (In Thousands)
<S>                                              <C>      <C>        <C>
 
Net deposits (withdrawals).....................  $   926  $(17,355)  $(9,299)
Interest credited..............................   15,654    15,825    14,923
                                                 -------  --------   -------
  Net increase (decrease) in savings deposits..  $16,580  $ (1,530)  $ 5,624
                                                 =======  ========   =======
</TABLE>

                                      -23-
<PAGE>
 
BORROWINGS

     Deposits are the Company's primary source of funds. The Company, through
its subsidiary, the Bank, also obtains funds from the FHLB and through reverse
repurchase agreements. FHLB advances are collateralized by selected assets of
the Company. Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank, for purposes other than meeting withdrawals, fluctuates from time to time
in accordance with the policies of the OTS and the FHLB. As of July 31, 1997,
the Company had a $95 million line of credit with the FHLB, and FHLB advances of
$75.8 million. The maximum amount of FHLB advances to a member institution
generally is reduced by borrowings from any other source. See "Regulation and
Supervision--Federal Home Loan Bank System."

     The Company sells securities under agreements to repurchase with selected
dealers (reverse repurchase agreements) as a means of obtaining short-term funds
as market conditions permit. In a reverse repurchase agreement, the Company
sells a fixed dollar amount of securities to a dealer under an agreement to
repurchase the securities at a specific price within a specific period of time,
typically not more than 180 days. Reverse repurchase agreements are treated as
financings of the Company and the obligations to repurchase securities sold are
reflected as a liability of the Company. The dollar amount of securities
underlying the agreements remain an asset of the Company. There were $42.6
million in securities sold under agreements to repurchase at July 31, 1997.

     The following table sets forth certain information regarding borrowings by
the Company during the periods indicated.
<TABLE>
<CAPTION>
 
                                            Years Ended July 31,
                                        ----------------------------
                                          1997      1996      1995
                                        --------  --------  --------
                                           (Dollars in Thousands)
<S>                                     <C>       <C>       <C>
 
Weighted average rate paid on:
    Securities sold under agreements
        to repurchase.................     5.73%     5.71%     5.77%
    FHLB advances.....................     5.73      5.87      6.06
 
Agreements to repurchase:
    Maximum balance...................  $46,423   $39,011   $34,338
    Average balance...................   38,522    34,005    20,741
FHLB advances:
    Maximum balance...................   86,327    62,824    60,229
    Average balance...................   77,623    46,851    50,182
</TABLE>

SUBSIDIARIES' ACTIVITIES

     The Company has five indirect subsidiaries that are wholly-owned by the
Bank, National Development Corporation ("NDC"), American National Insurance
Agency, Inc., ("ANIA") Liberty Street, Inc. ("LSI") and Fayette Street Realty,
Inc. ("FSR") which are Maryland corporations, and ANSB Corporation ("ANSB"),
which is a Delaware corporation. ANIA acts as agent in offering annuity and
mortgage life insurance products and mutual funds to customers of the Company.
ANIA does not underwrite insurance. NDC was formed in May 1983 primarily to
acquire and develop land, through joint ventures with others, for the
construction of single-family residences in the Company's market area. ANSB was
incorporated in June 1994 for the purpose of holding investment securities for
the Company. LSI and FSR were incorporated in May 1996 for the purpose of
acquiring selected real estate at foreclosure for the Company. At July 31, 1997,
the Company had a $26.3 million equity investment in ANSB, a $70,000 equity loss
in NDC, a $54,000 equity investment in ANIA, a $4,000 equity investment in LSI,
a $400 equity investment in FSR, and loans of $243,000 to NDC, and no loans to
ANIA or ANSB. For the year ended July 31,

                                      -24-
<PAGE>
 
1997, NDC had  net income of $613,000, ANIA had net income of $12,000, ANSB had
net income of $1.2 million, LSI had a net loss of $12,000, and FSR had a net
loss of $1,000.

     NDC has been winding down its operations, and as of July 31, 1997, it was
participating in one joint venture, Quarterfield Development Partnership ("QDP")
which was formed in January 1989 to purchase raw land in Anne Arundel County,
Maryland. QDP has developed 136 building lots to sell to builders or to
construct single family residences for sale to individuals, and as of July 31,
1997, had no lots remaining. NDC provided QDP with $1.3 million in equity, and
the Company provided a $6.0 million loan, and a $2.5 million line of credit. As
of July 31, 1997, QDP paid off the original $6.0 million loan and $2.5 million
line of credit.

COMPETITION

     The Company encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, other savings
associations, and credit unions in its market area. The Company expects
continued strong competition from such financial institutions in the foreseeable
future, including increased competition from "super-regional" banks entering the
market by purchasing large banks and savings banks, as well as institutions
marketing "non-traditional" investments. Many of these regional institutions
have greater financial and marketing resources available to them than does the
Company. The Company competes for savings deposits by offering depositors a high
level of personal service and a wide range of competitively priced financial
services.

     The competition for real estate and other loans comes principally from
commercial banks, other savings institutions, and mortgage banking companies.
The Company is one of a large number of institutions that compete for real
estate loans in the Company's market area. This competition for loans has
increased substantially in recent years. Many of the Company's competitors have
substantially greater financial and marketing resources available to them than
does the Company. The Company competes for real estate loans primarily through
the interest rates and loan fees it charges and advertising.


                          REGULATION AND SUPERVISION

GENERAL

     The Bank is subject to extensive regulation, examination and supervision by
the OTS, and the FDIC as the deposit insurer. The Bank is a member of the FHLB
System and its deposit accounts are insured up to applicable limits by the SAIF,
which is managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on the Company, the Bank and their operations. The
Company, as a savings and loan holding company, is also required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS.
Certain of the regulatory requirements applicable to the Bank and to the Company
are referred to below or elsewhere herein.

FEDERAL REGULATION OF SAVINGS INSTITUTIONS

     Business Activities. The activities of savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act (the "FDI Act"). The federal banking statutes, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989

                                      -25-
<PAGE>
 
("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") (i) restrict the solicitation of brokered deposits by savings
institutions that are troubled or not well-capitalized, (ii) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (iii) restrict the aggregate amount of loans secured
by non-residential real estate property to 400% of capital, (iv) permit savings
and loan holding companies to acquire up to 5% of the voting shares of non-
subsidiary savings institutions or savings and loan holding companies without
prior approval, and (v) permit bank holding companies to acquire healthy savings
institutions.

     Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the Bank's unimpaired capital and surplus. An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if such loan is secured by readily marketable collateral, which is defined to
include certain securities and bullion, but generally does not include real
estate. At July 31, 1997, the Bank is in compliance with its loans to one
borrower limitations. See "Business of the Bank--Lending Activities--Loans to
One Borrower."

     Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months. A savings association
that fails the QTL test must either convert to a bank charter or operate under
certain restrictions. As of July 31, 1997, the Bank maintained 85.6% of its
portfolio assets in qualified thrift investments and, therefore, met the QTL
test.

     Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters; provided that the institution would not be undercapitalized, as
that term is defined in the OTS Prompt Corrective Action regulations, following
the capital distribution. As of July 31, 1997, the Bank had $13.4 million of
capital that could be paid as dividends under such regulations. Any additional
capital distributions would require prior regulatory approval. In the event the
Bank's capital fell below its fully-phased in requirement or the OTS notified it
that it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.

     The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
institution may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition and would remain adequately capitalized (as
defined by regulation) following the proposed distribution. Savings institutions
that would remain adequately capitalized following the proposed distribution but
do not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings association may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. A savings institution will be considered in
troubled condition if it has a CAMEL rating of 4 or 5, is subject to an
enforcement action relating to its safety and soundness or financial viability
or has been informed in writing by the OTS that it is in troubled condition. As
under

                                      -26-
<PAGE>
 
the current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice.  No assurance may be given as to
whether or in what form the regulations may be adopted.

     Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified U.S.
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement which is
currently 5%, may be changed from time to time by the OTS to any amount within
the range of 4% to 10% depending upon economic conditions and the savings flow
of member institutions. The Bank's liquidity ratio averaged 6.2% during the
month of July 1997. OTS regulations also require each savings institution to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of its net withdrawable deposit accounts
and borrowings payable in one year or less. Monetary penalties may be imposed
for failure to meet these liquidity requirements. During the month of July 1997,
the Bank's short-term liquidity ratio averaged 1.5%. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.

     Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a quarterly basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The Bank paid
assessments of $2.5 million, $772,000 and $809,000, for the fiscal years ended
July 31, 1997, 1996 and 1995, respectively.

     Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA rating system identifies four levels of performance
that may describe an institution's record of meeting community needs:
outstanding, satisfactory, needs to improve and substantial non-compliance. The
CRA also requires all institutions to make public disclosure of their CRA
ratings. The CRA regulations were recently revised. Effective July 1, 1995, the
OTS assesses the CRA performance of a savings institution under lending, service
and investment tests, and based on such assessment, assigns an institution in
one of the four above-referenced ratings. The Bank received an "Outstanding" CRA
rating under the current CRA regulations in its most recent federal examination
by the OTS.

     Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary. At July 31,
1997, the Bank was in compliance with the transactions with affiliates rules
governed by Sections 23A and 23B.

     The Bank's authority to extend credit to executive officers, directors and
10% stockholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder.
Among other things, these regulations generally require such loans to be made on
terms substantially the

                                      -27-
<PAGE>
 
same as those offered to unaffiliated individuals and do not involve more than
the normal risk of repayment. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to such persons based, in part,
on the Bank's capital position, and requires certain approval procedures to be
followed.

     Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.

     The federal banking agencies have adopted a regulation and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement the safety and soundness standards required under the FDI Act. The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The standards set forth in the Guidelines
address internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. The agencies also adopted additions to the
Guidelines which require institutions to examine asset quality and earnings
standards which, if adopted, would be added to the Guidelines. If the
appropriate federal banking agency determines that an institution fails to meet
any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final regulations establish
deadlines for the submission and review of such safety and soundness compliance
plans.

     Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain
purchased mortgage servicing rights ("PMSRs"). The OTS regulations also require
that, in meeting the tangible ratio, leverage and risk-based capital standards,
institutions must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. The activities of NDC are not
permissible for national banks, and, accordingly, the Bank's investment in and
extensions of credit to NDC must be excluded from regulatory capital. See
"Business of the Bank--Subsidiaries' Activities."

     The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.

                                      -28-
<PAGE>
 
     At July 31, 1997, the Bank exceeded each of the three OTS capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of July 31, 1997.
<TABLE>
<CAPTION>
 
                           At July 31, 1997
                          -------------------
                                   Percent of
                          Amount   Assets (1)
                          -------  ----------
                         (Dollars in Thousands)
<S>                       <C>      <C> 
Tangible capital:
 Capital level..........  $43,557       8.65%
 Requirement............    7,544       1.50
                          -------      -----
 Excess.................  $36,013       7.15%
                          =======      =====
Core capital:
 Capital level..........  $43,557       8.65%
 Requirement (2)........   15,088       3.00
                          -------      -----
 Excess.................  $28,469       5.65%
                          =======      =====
Risk-based capital:
 Capital level..........  $46,755      18.28%
 Requirement............   20,457       8.00
                          -------      -----
 Excess.................  $26,298      10.28%
                          =======      =====
 
------------------------
</TABLE>
(1) Tangible and core capital levels are calculated on the basis of a percentage
    of total adjusted assets; risk-based capital levels are calculated on the
    basis of a percentage of risk-weighted assets.
(2) The OTS has proposed a core capital requirement for savings associations
    comparable to the new requirement for national banks. The OTS proposed core
    capital ratio would be at least 3% of total adjusted assets for thrifts that
    receive the highest supervisory rating for safety and soundness, with a 4%
    to 5% core capital requirement for all other thrifts.


PROMPT CORRECTIVE REGULATORY ACTION

     Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital ratio of less than 6.0%, a Tier 1 core risk-based capital
ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered
to be "significantly undercapitalized" and a savings institution that has a
tangible capital to assets ratio equal to or less than 2.0% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date
an institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.

INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC

     The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.

                                      -29-
<PAGE>
 
     The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.

     The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

     In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
30, 1996. For the Bank, the assessment amounted to $2.1 million (or $1.4 million
when adjusted for taxes), based on the Bank's deposits on March 31, 1995. As of
January 1, 1997, pursuant to the legislation, interest payments on FICO bonds
issued in the late 1980's by the Financing Corporation to recapitalize the now
defunct Federal Savings and Loan Insurance Corporation are paid jointly by Bank
Insurance Fund ("BIF") -insured institutions and SAIF-insured institutions. The
FICO assessment is 1.29 basis points per $100 in BIF deposits and 6.44 basis
points per $100 in SAIF deposits. Beginning January 1, 2000, the FICO interest
payments will be paid pro rata by banks and thrifts based on deposits
(approximately 2.4 basis points per $100 in deposits).

     The legislation further provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would eliminate
the federal thrift charter and OTS. The bills would require that all federal
savings associations convert to national banks or state depository institutions
by no later than January 1, 1998 in one bill and June 30, 1998 in the other and
would treat all state savings associations as state banks for purposes of
federal banking laws. Subject to a narrow grandfathering, all savings and loan
holding companies would become subject to the same regulation as bank holding
companies under the pending legislative proposals. Under such proposals, any
lawful activity in which a savings association participates would be permitted
for up to two years following the effective date of its conversion to the new
charter, with two additional one-year extensions which may be granted at the
discretion of the regulator. The legislative proposals would also abolish the
OTS and transfer its functions to the federal bank regulators with respect to
the institutions and to the Federal Reserve Board with respect to the regulation
of holding companies. The Bank is unable to predict whether the legislation will
be enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Bank is also unable to
predict whether the SAIF and BIF funds will eventually be merged.

     While the legislation has reduced the disparity between premiums paid on
BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Bank, and BIF-insured
institutions will continue until at least January 1, 1999. Under the
legislation, the Bank anticipates that its ongoing annual SAIF premiums will be
approximately $210,000.


FEDERAL HOME LOAN BANK SYSTEM

     The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances

                                      -30-
<PAGE>
 
(borrowings) from the FHLB, whichever is greater.  The Bank was in compliance
with this requirement with an investment in FHLB-Atlanta stock, at July 31,
1997, of $4.2 million.

     The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the fiscal year ended July 31, 1997, dividends
from the FHLB-Atlanta to the Bank amounted to $298,000. If dividends were
reduced, or interest on future FHLB-Atlanta advances increased, the Bank's net
interest income would likely also be reduced.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $54.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $54.0
million. The first $4.2 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS.

HOLDING COMPANY REGULATION

     The Company is a non-diversified savings and loan holding company within
the meaning of the HOLA, as amended. As such, the Company is registered with the
OTS and is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. The Bank is required to
notify the OTS 30 days before declaring any dividend to the Company.

     As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to be a QTL. See "--Federal
Regulation of Savings Institutions--Qualified Thrift Lender Test" for a
discussion of the QTL requirements. Upon any nonsupervisory acquisition by the
Company of another savings association or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the
prior approval of the OTS, and activities authorized by OTS regulation. The OTS
is prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions.

     The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and

                                      -31-
<PAGE>
 
managerial resources, future prospects of the company and institution involved,
the effect of the acquisition on the risk to the insurance fund, the convenience
and needs of the community and competitive factors.

     Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.

FEDERAL SECURITIES LAWS

     The Company's Common Stock is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.

     The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the Common Stock which were issued in connection with the mutual-to-
stock conversion of American National Bankshares, M.H.C. did not cover the
resale of such shares. Shares of the Common Stock purchased by persons who are
not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company are subject to the resale restrictions
of Rule 144 under the Securities Act. If the Company meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
the Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Company or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks. Provision may
be made in the future by the Company to permit affiliates to have their shares
registered for sale under the Securities Act under certain circumstances.

                          FEDERAL AND STATE TAXATION

GENERAL

     The Company and its subsidiaries currently file a consolidated federal
income tax return on a July 31 fiscal year basis. Consolidated returns have the
effect of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur. The following discussion of tax matters is intended only as
a summary, and while it does not purport to be a comprehensive description of
all tax rules applicable to the Bank or the Company, all matters deemed material
by management have been discussed.

FEDERAL TAXATION

     Tax Bad Debt Reserves. Savings associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code (the "Code") are permitted to
establish reserves for bad debts and to make annual additions thereto which may,
within specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction for "non-qualifying loans" is computed under the experience method.
For tax years beginning before December 31, 1995, the amount of the bad debt
reserve deduction for "qualifying real property loans" (generally loans secured
by improved real estate) may be computed under either the experience method or
the percentage of taxable income method (based on an annual election). If a
saving association elected the latter method, it could claim, each year, a
deduction based on a percentage of taxable income, without regard to actual bad
debt

                                      -32-
<PAGE>
 
experience.  Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings and loan association over a period of years.

     Under recently enacted legislation, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995, and "large"
associations, i.e., the quarterly average of the association's total assets or
of the consolidated group of which it is a member, exceeds $500 million for the
year, may no longer be entitled to use the experience method of computing
additions to their bad debt reserve. A "large" association must use the direct
write-off method for deducting bad debts, under which charge-offs are deducted
and recoveries are taken into taxable income as incurred. If the Bank is not a
"large" association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take into
income) over a six-year period its applicable excess reserves, i.e, the balance
of its reserves for losses on qualifying loans and nonqualifying loans, as of
the close of the last tax year beginning before January 1, 1996, over the
greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988
reserves) or (b) in the case of a bank which is not a "large" association, an
amount that would have been the balance of such reserves as of the close of the
last tax year beginning before January 1, 1996, had the bank always computed the
additions to its reserves using the experience method. Postponement of the
recapture is possible for a two-year period if an association meets a minimum
level of mortgage lending for 1996 and 1997. As of July 31, 1997, the Bank is
not required to recapture any of its bad debt reserve.

     If an association ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in the
tax year the association no longer qualifies as a bank. The balance of the pre-
1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.

     Corporate Alternative Minimum Tax. For taxable years beginning after
December 31, 1986, the Internal Revenue Code of 1986, as amended (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
Only 90% of AMTI can be offset by net operating losses. For taxable years
beginning after December 31, 1989, the adjustment to AMTI based on book income
will be an amount equal to 75% of the amount by which a corporation's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million
is imposed on corporations, including the Company, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Company does not expect to be subject to the
AMT.

     The Company was last audited by the Internal Revenue Service for tax years
through July 31, 1993. For additional information regarding taxation, see Notes
1 and 14 of Notes to the Consolidated Financial Statements.

STATE AND LOCAL TAXATION

     Maryland Taxation. The State of Maryland generally imposes a franchise tax
on thrift institutions computed at a rate of 7% of net earnings. For the purpose
of the 7% franchise tax, net earnings are defined as the net income of the
thrift institution as determined for federal corporate income tax purposes, plus
(i) interest income from obligations of the United States, of any state,
including Maryland, and of any country, municipal or public corporation
authority, special district or political subdivision of any state, including
Maryland, (ii) any profit realized from the sale or exchange of bonds issued by
the State of Maryland or any of its political subdivisions, and (iii) any
deduction for state income taxes.

     Delaware Taxation. As a Delaware business corporation, the Company will be
required to file annual returns and pay annual fees and an annual franchise tax
to the State of Delaware. These taxes and fees are not expected to be material.

                                      -33-
<PAGE>
 
ITEM 2.  PROPERTIES
-------------------

PROPERTIES

     The Company conducts its business through two offices including its main
office and an operations center located in Baltimore, Maryland, and seven full
service branch offices located in three counties. The following table sets forth
certain information concerning the main office and each branch office of the
Company at July 31, 1997. The aggregate net book value of the Company's premises
and equipment was $1.8 million at July 31, 1997.
<TABLE>
<CAPTION>
 
                                            Owned        Lease
                                    Year     or        Expiration
                                   Opened  Leased        Date
                                   ------  ------  -----------------
<S>                                <C>     <C>     <C>
MAIN OFFICE:
 
211 N. Liberty Street              1986    Leased  March 2001
Baltimore, Maryland  21201
 
BRANCH OFFICES:
 
825 Dulaney Valley Road, #275      1959    Leased  December 1999
Baltimore, Maryland  21204
 
4371 Ebenezer Road                 1961    Leased  September 2001 (1)
Baltimore, Maryland  21236
 
6832 Reisterstown Road             1961    Leased  September 2011
Baltimore, Maryland  21215
 
206 Harundale Mall                 1962    Leased  May 1999
Glen Burnie, Maryland  21061
 
9469 Baltimore National Pike       1990    Leased  November 2000
Ellicott City, Maryland  21043
 
7848 Eastpoint Mall                1985    Leased  March 2005
Baltimore, Maryland  21224
 
3476 Emmorton Road                 1997    Leased  July 2017
Abington, Maryland  21009
 
11700 Reisterstown Road            1986    Leased  June 2006
Reisterstown, Maryland  21136
 
2 West Rolling Crossroads, #110    1987    Leased  October 1997 (1)
Baltimore, Maryland  21228
 
OPERATIONS CENTER:
 
5801 Moravia Boulevard             1989    Leased  September 1999
Suites 5815-5817
Baltimore, Maryland  21206
</TABLE> 
____________________________________
(1)  Excludes five-year renewal option.

                                      -34-
<PAGE>
 
ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     There are various claims and lawsuits in which the Company and the Bank
periodically are involved incident to their businesses. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     During the fourth quarter of the fiscal year covered by this report, the
Company did not submit any matters to the vote of security holders.


                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------------------

     On October 31, 1995, the Company acquired all of the outstanding common
stock of the Bank, sold 2,182,125 shares of Company common stock for a purchase
price of $10.00 per share and issued 1,798,402 shares of Company common stock in
exchange for the Bank's outstanding common stock held by shareholders other than
American National Bankshares, M.H.C. On that date, the Company's common stock
began to trade on the Nasdaq National Market using the Bank's previous symbol,
"ANBK." As of September 19, 1997, the Company had 855 registered stockholders of
record and 3,613,011 outstanding shares of common stock. This does not reflect
the number of persons whose stock is in nominee or "street" name accounts
through brokers.

     The following table sets forth the high and low trading prices of the
Company's common stock and dividends declared subsequent to the completion of
the Offering.
<TABLE>
<CAPTION>
 
                                                Dividends
                                                Declared
     Three Months Ended        High      Low    Per Share
     -----------------------  -------  -------  ---------
     <S>                      <C>      <C>      <C>
 
     January 31, 1996.......  $ 10.25  $ 9.375  $      --
     April 30, 1996.........    10.25    9.50          --
     July 31, 1996..........    10.625   9.50          --
     October 31, 1996.......    12.625   9.75         .03
     January 31, 1997.......    13.375  11.375        .03
     April 30, 1997.........    14.75   12.625        .03
     July 31, 1997..........    21.00   14.00         .03
 
</TABLE>

     Payment of dividends on the Common Stock is subject to determination and
declaration by the Board of Directors and depends upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions.

                                      -35-
<PAGE>
 
ITEM 6.   SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
--------------------------------------------------------

     Prior to October 31, 1995, the Company had no assets or operations. The
following tables set forth certain consolidated financial and other data of the
Company at and for the years ended July 31, 1997 and 1996, and of the Bank at
and for the years ended July 31, 1995, 1994 and 1993.  This information is
derived in part from and should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto presented elsewhere
herein. For additional information about the Company and the Bank, reference is
made to "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
 
                                                                       AT JULY 31,
                                                    ------------------------------------------------
                                                      1997      1996      1995       1994      1993
                                                    --------  --------  --------  --------  --------  
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA:                      (IN THOUSANDS)
<S>                                                 <C>       <C>       <C>       <C>       <C>
                                     
Total assets................................        $502,092  $461,271  $426,174  $400,046  $383,259
Loans receivable,  net (1)..................         332,287   278,042   232,089   208,542   221,595
Mortgage-backed securities..................         101,329   100,195   156,775   117,597   102,478
Investment securities.......................          20,521    24,109    13,918     6,825     8,583
Securities available for sale...............          28,309    40,266     3,030    43,600    27,141
Cash and cash equivalents...................           5,468     4,902     5,360     7,109     5,112
Investments in real estate, net.............           5,057     5,670     5,828     5,623     6,282
Investments in and advances to                                
    real estate joint ventures..............             159     1,270     2,215     3,676     4,576
Deposits....................................         329,663   313,083   314,613   308,989   317,711
Borrowed funds..............................         118,369    97,269    78,475    58,197    40,968
Stockholders' equity........................          46,860    47,270    28,959    29,160    21,193

SELECTED CONSOLIDATED OPERATING DATA:

Net interest income.........................        $  5,421  $ 12,865  $ 11,746  $ 11,084  $ 11,176
Net income..................................           2,283        10     1,289       695       196
 
PER SHARE DATA:
 
  Book value per share......................        $  13.51  $  13.06  $  14.11  $  14.21      N/A
  Earnings per share (2)....................             .64       .36        --       .41      N/A
  Pro forma net income per share (2)........              --       .47      N/A        .67      N/A
  Dividends declared per share..............             .12      N/A        .40       .30      N/A
  Dividend payout ratio.....................             .19      N/A       N/A        .73      N/A
</TABLE>
-----------------------------------
(1) Includes loans held for sale.
(2) See Note 13 of Notes to Consolidated Financial Statements.

                                      -36-
<PAGE>
 
<TABLE>
<CAPTION>
                                                      AT OR FOR THE YEARS ENDED JULY 31,
                                                  -------------------------------------------
                                                   1997     1996     1995     1994     1993
                                                  -------  -------  -------  -------  -------
<S>                                               <C>      <C>      <C>      <C>      <C>
 
KEY FINANCIAL RATIOS AND OTHER DATA:
 
PERFORMANCE RATIOS:
Return on average assets (1)(2).................      .47%     .35%      --%     .33%     .18%
Return on average equity (1)(3).................     5.02     3.63      .03     4.68     3.27
Net interest rate spread (4)....................     2.71     2.44     2.48     2.56     2.73
Net interest margin (5).........................     3.19     2.93     2.87     2.89     2.97
Net interest income to noninterest expense......   122.52   128.15   125.76   120.11   127.70
Net interest income after provision for          
    loan losses to total noninterest expense....   118.54   120.46    89.51    98.56    86.44
Noninterest expense to average assets...........     2.57     2.25     2.24     2.36     2.28
                                                 
QUALITY RATIOS:                                  
Nonperforming loans to total loans (6)..........      .23     1.31     3.52     1.67     3.34
Nonperforming assets to total assets (7)........      .19     1.01     2.23     1.07     2.33
Allowance for loan losses to                     
  nonperforming loans...........................   457.02   112.87    73.90   101.41    30.42
Allowance for loan losses to                     
  nonperforming assets (7)......................   378.71    94.37    66.98    85.70    26.04
                                                 
EQUITY RATIOS:                                   
Stockholders' equity to assets at period end....     9.33    10.25     6.80     7.29     5.53
Average stockholders' equity to average assets..     9.30     9.55     6.95     7.05     5.54
Average interest-earning assets to               
    average interest-bearing liabilities........   110.40   110.54   108.04   107.84   105.16
OTHER DATA:                                      
Number of full-service offices..................       10        9        9        9        9
</TABLE>
-----------------------------------
(1) Net income for the fiscal year ended July 31, 1993, includes $583,000
    representing the cumulative effect of change in accounting for income taxes.
(2) Return on average assets represents net income divided by average total
    assets.
(3) Return on average equity represents net income divided by average equity.
(4) Net interest rate spread represents the difference between average yield on
    interest-earning assets and average cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
    average interest-earning assets.
(6) Nonperforming loans include nonaccrual loans and accruing loans 90 days or
    more delinquent.
(7) Nonperforming assets consist of nonperforming loans and foreclosed assets.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------
          RESULTS OF OPERATIONS
          ---------------------

AMERICAN NATIONAL BANCORP, INC.

     American National Bancorp, Inc. (the "Company") is a Delaware corporation
that was organized in July 1995.  On October 31, 1995, the Company acquired 100%
of the capital stock of American National Savings Bank, F.S.B. (the "Bank"),
sold 2,182,125 shares of common stock in a subscription offering for a purchase
price of $10.00 per share (the "Offering"), and issued 1,798,402 shares of
common stock in exchange for 927,000 shares of the Bank's common stock held by
shareholders other than American National Bankshares, M.H.C. (together with the
Offering, the "Conversion").  Immediately following the Conversion, the only
significant assets of the Company were the common stock of the Bank and $19.3
million of the proceeds from the Offering.  The Company is registered as a
savings and loan holding company with the Office of Thrift Supervision (the
"OTS").  At July 31, 1997, the Company had total consolidated assets of $502.1
million, total consolidated deposits of $329.7 million, and consolidated
stockholders' equity of $46.9 million. The Company's executive office is located
at 211 North Liberty Street, Baltimore, Maryland  21201 and its telephone number
is (410) 752-0400.

                                      -37-
<PAGE>
 
AMERICAN NATIONAL SAVINGS BANK, F.S.B.

     American National Savings Bank, F.S.B. (the "Bank") is a federally
chartered stock savings bank headquartered in Baltimore, Maryland.  The Bank
conducts operations through ten full-service offices in its market area
consisting of Baltimore City and parts of the Maryland counties of Baltimore,
Howard, Harford, Anne Arundel, and Carroll.  The Bank is primarily engaged in
the business of attracting deposits from the general public in the Bank's market
area, and investing such deposits together with other funds, in loans
collateralized by one- to four-family residential real estate, mortgage-backed
securities, and, to a lesser extent, construction and land development loans,
consumer loans and investment securities.  In the past, the Bank also actively
originated multifamily residential real estate loans and commercial real estate
loans; however, originations of such loans have decreased significantly in
recent years as the Bank has sought to reduce the credit risk and losses in its
loan portfolio.  The Bank also has reduced its involvement in real estate joint
ventures due to economic conditions and changes in regulatory capital
requirements.

GENERAL

     The Company's results of operations are primarily dependent on its net
interest income, which is the difference between interest income earned on its
loans, mortgage-backed securities, and investment portfolios, and its cost of
funds consisting of interest paid on deposits and borrowed funds. The Company's
net income also is affected by its provisions for losses on loans and
investments in real estate, as well as the amount of noninterest income,
including fees and service charges, gains or losses on sales of loans, mortgage-
backed securities, investment securities, and other noninterest income, and
noninterest expense, including salary and employee benefits, net occupancy,
federal deposit insurance premiums, operations of investment in real estate,
other noninterest expense, and income taxes. During the fiscal years ended July
31, 1997, 1996, and 1995, net interest income constituted 94.1%, 97.8% and
92.6%, of gross earnings (i.e., net interest income and noninterest income), and
noninterest income constituted 5.9%, 2.2% and 7.4%, of gross earning,
respectively. Net income of the Company is also affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies, and actions of regulatory authorities.

FINANCIAL CONDITION

     Total assets increased by $40.8 million at July 31, 1997 from $461.3
million at July 31, 1996 due largely to an increase in originations and
purchases of loans during fiscal 1997.  Loans receivable increased by $54.3
million, or 19.5%, to $332.3 million at July 31, 1997 from $278.0 million at
July 31, 1996.  Securities available for sale decreased $12.0 million, to $28.3
million at July 31, 1997 from $40.3 at July 31, 1996 due to the sale of
mortgage-backed securities.  Investment securities decreased by $3.6 million to
$20.5 million at July 31, 1997 from the call of notes.

     Deposits increased by $16.6 million, or 5.3%, to $329.7 million at July 31,
1997 from $313.1 million at July 31, 1996.  Securities sold under agreements to
repurchase increased $8.2 million to $42.6 million at July 31, 1997 and advances
from the Federal Home Loan Bank of Atlanta increased $12.9 million to $75.8
million at July 31, 1997. These increases were used to fund loan originations
and purchases.

     Stockholders' equity decreased by $410,000, to $46.9 million due to the
stock buyback and dividends paid, partially offset by net income for the year
and a decrease in net unrealized holding loss on securities.

RESULTS OF OPERATIONS

     General.  The Company reported net income of $2.3 million, $1.5 million and
$10,000, for the fiscal years ended July 31, 1997, 1996, and 1995.  The $800,000
increase for the fiscal year ended July 31, 1997 resulted from the increase in
net interest income of $2.6 million, a decrease in the provision for loan losses
of $272,000 and an increase in noninterest income of $675,000, partially offset
by an increase in noninterest expense of $2.5 million.

                                      -38-
<PAGE>
 
Net income represented a return on average assets of .47%, .35%, and .00% and a
return on average equity of 5.02%, 3.63% and .03% for the fiscal years ended
July 31, 1997, 1996 and 1995, respectively.

     Interest Income.  Interest income totaled $37.8 million for the fiscal year
ended July 31, 1997, compared to $33.4 million for the fiscal year ended July
31, 1996.  The $4.4 million, or 13.2%, increase in interest income was due to an
increase of $44.9 million in average interest earning assets to $483.4 million
at July 31, 1997 and a 19 basis point increase in the yield on average interest
earning assets to 7.81% from 7.62%.  The increase in average interest earning
assets resulted primarily from a $50.7 million, or 21.1%, increase in average
mortgage loans to $291.4 million from $240.7 million and a $14.8 million, or
79.1%, increase in average investment securities to $33.5 million from $18.7
million, partially offset by a $23.6 million, or 15.2%, decrease in average
mortgage-backed securities.

     Interest income totaled $33.4 million for the fiscal year ended July 31,
1996, compared to $31.0 million for the fiscal year ended July 31, 1995. The
$2.4 million, or 7.9%, increase in interest income for the fiscal year ended
July 31, 1996 compared to the fiscal year ended July 31, 1995 was due to an
increase of $27.4 million in average interest earning assets to $438.5 million
from $411.1 million and a 9 basis point increase in the yield on average
interest earning assets to 7.62% from 7.53%. The increase in average interest
earning assets resulted primarily from a $27.0 million, or 12.6%, increase in
average mortgage loans to $240.7 million from $213.7 million and a $5.6 million,
or 42.7%, increase in investment securities to $18.7 million from $13.1 million,
partially offset by a $7.2 million, or 4.5%, decrease in mortgage-backed
securities.

     Interest Expense.  Interest expense totaled $22.3 million for the fiscal
year ended July 31, 1997, compared to $20.6 million for the fiscal year ended
July 31, 1996.  The $1.7 million increase was due to a $41.2 million, or 10.4%,
increase in average interest-bearing liabilities to $437.9 million from $396.7
million, offset partially by an 8 basis point decrease in the average cost of
interest-bearing liabilities to 5.10% from 5.18%.  Total average deposits
increased $5.9 million, or 1.9% and total borrowed funds increased $35.3
million, or 43.6%.

     Interest expense totaled $20.6 million for the fiscal year ended July 31,
1996, compared to $19.2 million for the fiscal year ended July 31, 1995. The
$1.4 million increase was due to a $16.2 million, or 4.3%, increase in average
interest-bearing liabilities to $396.7 million from $380.5 million, and a 13
basis point increase in the average cost of interest-bearing liabilities to
5.18% from 5.05%. Total average deposits increased $6.3 million, or 2.0% and
total borrowed funds increased $9.9 million, or 14.0%.

     Net Interest Income.  Net interest income increased by $2.5 million, or
19.4%, to $15.4 million for the fiscal year ended July 31, 1997, compared to
$12.9 million for the fiscal year ended July 31, 1996.  The increase in net
interest income was primarily due to the results of operations discussed above
and an increase in the Bank's interest rate spread of 27 basis points to 2.71%
from 2.44%.

     Net interest income increased by $1.2 million, or 9.5%, to $12.9 million
for the fiscal year ended July 31, 1996 from $11.7 million for the fiscal year
ended July 31, 1995. The increase in net interest income was primarily due to
the results of operations discussed above, which resulted in an increase in the
ratio of average interest-earning assets to average interest-bearing liabilities
to 110.54% from 108.04%, partially offset by a 4 basis point decrease in the
Bank's interest rate spread to 2.44% from 2.48%.

     Provision for Loan Losses.  The Company maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Company's past loan loss experience, the volume and
type of lending presently being conducted by the Company, adverse situations
that may affect borrowers' ability to repay loans, estimated value of underlying
loan collateral, current economic conditions in the Company's market area, and
other relevant factors.  Management calculates the general allowance for loan
losses in part based on past experience, and in part based on specified
percentages of loan balances.  The allowance is reviewed by management and the
Board of Directors, both of which believe that the Company's allowance for loan
losses is reasonable and adequate to cover losses reasonably expected in its
loan portfolio.  Although management uses the best information available and its
best judgment in providing for possible losses, no assurance can be given as to
whether future adjustments may be necessary. The Company's allowance for loan
losses was $3.6 million. or 1.0% of total

                                      -39-
<PAGE>
 
loans receivable at July 31, 1997, compared to $4.4 million, or 1.5%, of total
loans receivable at July 31, 1996.  The Bank's provision for loan losses was
$500,000 for the fiscal year ended July 31, 1997, compared to $772,000 for the
fiscal year ended July 31, 1996.  The decrease in the provision for loan losses
reflected a reduction in nonperforming assets to $1.0 million, or .2% of total
assets, at July 31, 1997 from $4.7 million, or 1.0% of total assets, at July 31,
1996.

     During the fiscal year ended July 31, 1996, the Company's provision for
loan losses was $772,000, compared to $3.4 million for the fiscal year ended
July 31, 1995. The decrease in the provision for loan losses for the fiscal year
ended July 31, 1996, compared to the fiscal year ended July 31, 1995, reflected
a reduction in nonperforming assets to $4.7 million, or 1.0% of total assets, at
July 31, 1996 from $9.5 million, or 2.2% of total assets, at July 31, 1995.

     Noninterest Income.  Noninterest income, consisting primarily of deposit
fees, loan servicing fees and gains and losses on sales of loans, mortgage-
backed securities and investments, totaled $968,000 for the fiscal year ended
July 31, 1997, compared to $293,000 for the fiscal year ended July 31, 1996.
The $675,000 increase was due primarily to nominal sales of securities during
the fiscal year ended July 31, 1997 as compared to the sale of low yielding
securities at a loss of $572,000 during the fiscal year ended July 31, 1996.

     Noninterest income totaled $293,000 for the fiscal year ended July 31, 1996
compared to $940,000 for the fiscal year ended July 31, 1995. The $647,000
decrease for the fiscal year ended July 31, 1996 compared to the fiscal year
ended July 31, 1995 was due primarily to the sale of low yielding mortgage-
backed and investment securities at a loss, and to a decrease in revenue from
the Bank's subsidiary, American National Insurance Agency, Inc.


     Noninterest Expense.   Noninterest expense, consisting primarily of
salaries and employee benefits, occupancy and equipment, federal deposit
insurance premiums and losses on investments in real estate ("REO") increased
$2.5 million to $12.6 million in fiscal 1997 from $10.0 million in fiscal 1996.
The increase was due to an increase in equity in net loss of real estate joint
ventures of $414,000 as additional loss on the investment in Quarterfield Farms
Joint Venture, as well as the Federal Deposit Insurance Corporation ("FDIC")
one-time special assessment to recapitalize the Savings Association Insurance
Fund.  On September 30, 1996, legislation was enacted and signed into law which
provided a resolution to the disparity in the Bank Insurance Fund/Savings
Association Insurance Fund ("SAIF") premiums.  In particular, SAIF-insured
institutions paid a one-time assessment of 65.7 cents on every $100 of deposits
held at March 31, 1995.  As a result of the new law, the Company paid
approximately $2.1 million.  The special assessment is tax deductible,
therefore, the cost, net of income tax benefits, is approximately $1.4 million.
The Company has made a one-time charge to earnings of this amount for the fiscal
quarter ended October 31, 1996. Also, beginning January 1, 1997, the previous
annual minimum premium of 23 basis points was reduced to 6.5 basis points.

     Noninterest expense, totaled $10.0 million for the fiscal year ended July
31, 1996 compared to $9.3 million for the fiscal year ended July 31, 1995.  The
$700,000 increase for the fiscal year ended July 31, 1996 compared to the fiscal
year ended July 31, 1995 was the result of increased advertising expense for
mortgage and consumer loans and deposits, salary increases, as well as costs
associated with the formation of the ESOP.

     Income Taxes.  The Company's income tax provisions (benefit) were
$1,019,000, $801,000 and $(50,000), in the fiscal years ended July 31, 1997,
1996, and 1995, respectively.  The effective tax rates for 1997 and 1996 were
30.9% and 34.1%, respectively.

                                      -40-
<PAGE>
 
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.
<TABLE>
<CAPTION>
 
                                                                               YEARS ENDED JULY 31,
                                              --------------------------------------------------------------------------------------

                                                          1997                          1996                        1995
                                              ----------------------------  ---------------------------  ---------------------------
                                                                  AVERAGE                                AVERAGE            AVERAGE
                                              AVERAGE              YIELD/   AVERAGE             YIELD/   AVERAGE             YIELD/
                                              BALANCE   INTEREST    COST    BALANCE   INTEREST   COST    BALANCE   INTEREST   COST
                                              --------  --------  --------  --------  --------  -------  --------  --------  -------
                                                                              (DOLLARS IN THOUSANDS)
<S>                                           <C>       <C>       <C>       <C>       <C>       <C>      <C>       <C>       <C>
Interest-earning assets:
    Mortgage loans (1)......................  $291,446   $24,783     8.50%  $240,713   $20,652    8.58%  $213,701   $18,120    8.48%

    Consumer and other loans................    16,194     1,397     8.63     13,377     1,102    8.24     11,932       916    7.68
    Mortgage-backed securities (2)..........   131,390     8,364     6.37    154,945     9,630    6.22    162,178    10,355    6.38
    Investment securities  (3)..............    33,549     2,437     7.26     18,749     1,255    6.70     13,139       831    6.32
    Other (4)...............................    10,815       770     7.12     10,742       779    7.25     10,158       747    7.35
                                              --------   -------     ----   --------   -------    ----   --------   -------  ------
        Total interest-earning assets.......   483,394    37,751     7.81    438,526    33,418    7.62    411,108    30,969    7.53
                                                         -------                       -------                      -------
Noninterest-earning assets..................     6,108                         6,986                        5,896
                                              --------                      --------                     --------
        Total assets........................  $489,502                      $445,512                     $417,004
                                              ========                      ========                     ========
 
Interest-bearing liabilities:
  Deposits:
    Passbook accounts.......................  $ 40,328     1,221     3.03   $ 41,468     1,230    2.97   $ 43,347     1,332    3.07
    NOW accounts............................    16,088       242     1.51     15,356       237    1.54     14,675       240    1.64
    Money accounts..........................    42,039     1,388     3.30     45,601     1,511    3.31     51,652     2,008    3.89
    Certificates of deposit.................   223,269    12,803     5.73    213,428    12,847    6.02    199,922    11,343    5.67
                                              --------   -------     ----   --------   -------    ----   --------   -------  ------
        Total deposits......................   321,724    15,654     4.87    315,853    15,825    5.01    309,596    14,923    4.82
                                              --------   -------     ----   --------   -------    ----   --------   -------  ------
  Borrowings:
    Advances from Federal Home
      Loan Bank.............................    77,623     4,465     5.75     46,851     2,770    5.91     50,182     3,084    6.15
    Securities sold under agreements to
      repurchase............................    38,522     2,211     5.74     34,005     1,958    5.76     20,741     1,216    5.86
                                              --------   -------     ----   --------   -------    ----   --------   -------  ------
        Total borrowed funds................   116,145     6,676     5.75     80,856     4,728    5.85     70,923     4,300    6.06
                                              --------   -------     ----   --------   -------    ----   --------   -------  ------
        Total interest-bearing liabilities..   437,869    22,330     5.10    396,709    20,553    5.18    380,519    19,223    5.05
Noninterest-bearing liabilities.............     6,114                         6,245                        7,512
                                              --------                      --------                     --------
            Total liabilities...............   443,983                       402,954                      388,031
Stockholders' equity........................    45,519                        42,558                       28,973
                                              --------                      --------                     --------
            Total liabilities and
                stockholders' equity........  $489,502                      $445,512                     $417,004
                                              ========                      ========                     ========
Net interest income.........................             $15,421                       $12,865                      $11,746
                                                         =======                       =======                      =======
Net interest rate spread (5)................                         2.71%                        2.44%                        2.48%
                                                                     ====                         ====                         ====
Net interest margin (6).....................                         3.19%                        2.93%                        2.86%
                                                                     ====                         ====                         ====
Ratio of average interest-earning
    assets to average interest-bearing
    liabilities.............................                       110.40%                      110.54%                      108.04%
                                                                   ======                       ======                       ======
</TABLE> 
--------------------------------------------
(1)  Includes nonperforming loans.
(2)  Includes mortgage-backed securities available for sale.  Separate yields
     for available-for-sale portfolio are not available as the income from the
     available-for-sale securities has not historically been segregated from the
     income from the held-to-maturity securities.
(3)  Includes investment securities available for sale.  Separate yields for
     available-for-sale portfolio are not available as the income from the
     available-for-sale securities has not historically been segregated from the
     income from the held-to-maturity securities.
(4)  Includes interest-bearing deposits in other financial institutions, federal
     funds sold, securities purchased under agreements to resell, Federal Home
     Loan Bank stock, and ground rents.
(5)  Net interest rate spread represents the difference between the average
     yield on interest-earning assets and the average cost of interest-bearing
     liabilities.
(6)  Net interest margin represents net interest income as a percentage of
     average interest-earning assets.

                                      -41-
<PAGE>
 
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.

<TABLE>
<CAPTION>
 
 
                                                                           YEARS ENDED JULY 31,
                                         -----------------------------------------------------------------------------------
                                                1997 VS. 1996                                        1996 VS. 1995
                                         -------------------------------------------  --------------------------------------
                                               INCREASE/(DECREASE)                      INCREASE/(DECREASE)
                                                     DUE TO                                   DUE TO  
                                         -------------------------------    TOTAL     --------------------------    TOTAL 
                                                                 RATE/     INCREASE                       RATE/    INCREASE
                                           VOLUME      RATE     VOLUME    (DECREASE)  VOLUME     RATE    VOLUME   (DECREASE)
                                         ----------  --------  ---------  ----------  -------  --------  -------  ----------
                                                                              (IN THOUSANDS)   
<S>                                      <C>         <C>       <C>        <C>         <C>      <C>       <C>      <C>
                                                                                               
Interest income:                                                                               
     Mortgage loans.....................     $ 4,353     $(183)      $(39)    $ 4,131   $2,291     $ 214     $ 27      $2,532
    Consumer and other loans...........         232        52         11         295      111        67        8         186
    Mortgage-backed securities.........      (1,464)      234        (36)     (1,266)    (462)     (276)      13        (725)
    Investment securities..............         991       107         84       1,182      354        49       21         424
    Other interest-earning assets......           5       (14)        --          (9)      43       (10)      (1)         32
                                            -------     -----       ----     -------   ------     -----     ----      ------
        Total interest-earning assets..     $ 4,117     $ 196       $ 20     $ 4,333   $2,337     $  44     $ 68      $2,449
                                            =======     =====       ====     =======   ======     =====     ====      ======
                                                                                                 
Interest expense:                                                                                
    Passbook...........................     $   (34)    $  25       $ (1)    $   (10)  $  (58)    $ (46)    $  2      $ (102)
    NOW................................          11        (5)        --           6       11       (13)      (1)         (3)
    Money fund.........................        (118)       (4)        --        (122)    (235)     (297)      35        (497)
    Certificate........................         592      (609)       (28)        (45)     766       691       47       1,504
    Advances from FHLB.................       1,820       (76)       (49)      1,695     (205)     (117)       8        (314)
    Reverse repurchase agreements......         260        (6)        (1)        253      777       (21)     (14)        742
                                            -------     -----       ----     -------   ------     -----     ----      ------
        Total interest-bearing                                                                    
            liabilities................     $ 2,531     $(675)      $(79)    $ 1,777   $1,056     $ 197     $ 77      $1,330
                                            =======     =====       ====     =======   ======     =====     ====      ======
                                                                                                  
Change in net interest income..........     $ 1,586     $ 871       $ 99     $ 2,556   $1,281     $(153)    $ (9)     $1,119
                                            =======     =====       ====     =======   ======     =====     ====      ======

</TABLE> 

ASSET AND LIABILITY MANAGEMENT-INTEREST RATE SENSITIVITY ANALYSIS

     The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to positively affect net interest income. Similarly, during a
period of falling interest rates, a negative gap would tend to positively affect
net interest income while a positive gap would tend to adversely affect net
interest income.

     The Company's deposit accounts typically react more quickly to changes in
market interest rates than interest-earning assets such as fixed rate mortgage
loans, because of the relatively shorter maturities of deposits. When interest
rates are rising, interest expense will increase more rapidly than interest
income if a higher volume of interest-bearing liabilities than interest-earning
assets reprice to higher interest rates. In a falling interest rate environment,

                                      -42-
<PAGE>
 
interest income will decrease less rapidly than interest expense if a higher
volume of interest-bearing liabilities than interest-earning assets reprice to
lower interest rates.

     Management seeks to manage the Company's interest rate risk exposure by
monitoring the levels of interest rate sensitive assets and liabilities while
maintaining an acceptable interest rate spread. To reduce the potential
volatility of the Company's earnings in a changing interest rate environment,
the Company invests in mortgage-backed securities that have adjustable rates
and/or relatively short expected terms. At July 31, 1997, $99.4 million, or
78.5%, of the Company's $126.6 million of mortgage-backed securities had
adjustable interest rates. The Company also originates adjustable-rate loans,
and from time to time may purchase ARM loans. During the fiscal year ended July
31, 1997, the Company purchased $20.7 million of adjustable-rate one- to four-
family mortgage loans. At July 31, 1997, $97.9 million, or 28.0%, of the
Company's one- to four family mortgage loans receivable had adjustable interest
rates. The Company also seeks to reduce the term of its interest-earning assets
by offering fixed-rate one-to four-family mortgage loans with terms of 15 years
or less.

     In addition, the Company manages its interest-bearing liabilities by
offering competitive interest rates on deposit accounts and pricing certificates
of deposit to provide customers with incentives to choose certificates of
deposit with longer terms. At July 31, 1997, time deposits maturing beyond 12
months totaled $95.5 million, or 42.3%, of the Company's total time deposits.

     At July 31, 1997, the Company's total interest-bearing liabilities maturing
or repricing within one year exceeded its total interest-earning assets maturing
or repricing within one year by $30.0 million, representing a cumulative one-
year gap ratio of negative 6.0%. The Company's gap measures indicate that net
interest income is moderately exposed to increases in interest rates. In a
rising interest rate environment, the Company's net interest income may be
adversely affected as liabilities would reprice to higher market rates more
quickly than assets. This effect would be compounded because the prepayment
speeds of the Company's long-term fixed-rate assets would decrease in a rising
interest rate environment. Although the Company could reduce its exposure to
interest rate risk by investing more of its assets in short-term securities and
adjustable-rate mortgage-backed securities, management believes that the
benefits of such a strategy would be outweighed by the loss of earnings from an
increased concentration on short-term and adjustable-rate investments, which may
offer lower yields.

     The Company has an Asset-Liability Management Committee, which is
responsible for reviewing the Company's asset and liability policies. Management
presently monitors and evaluates the potential impact of interest rate movements
upon the market value of portfolio equity and the level of net interest income
on a quarterly basis. This evaluation is performed in compliance with OTS
regulations and is compared to Board-established limits to ensure that interest
rate risk is maintained within these guidelines. The Committee meets quarterly
and reports quarterly to the Board of Directors on interest rate risks and
trends, as well as liquidity and capital ratios and regulatory requirements.

                                      -43-
<PAGE>
 
     Gap Table. The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at July 31, 1997, that are
expected to reprice or mature, based upon certain assumptions, in each of the
future time periods shown. Except as stated below, the amounts of assets and
liabilities shown that reprice or mature during a particular period were
determined in accordance with the earlier of term or repricing or the
contractual terms of the asset or liability.
<TABLE>
<CAPTION>
 
 
                                                                        AT JULY 31, 1997
                                             -----------------------------------------------------------------------
                                              WITHIN       1-3        3-5       5-10      10-20    OVER 20
                                              1 YEAR      YEARS      YEARS      YEARS     YEARS     YEARS    TOTAL
                                             --------   --------   --------   -------   --------   -------  --------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                          <C>        <C>        <C>        <C>       <C>        <C>      <C> 
Interest-earning assets:
 Real Estate Mortgages:
  Adjustable Rate..........................  $ 94,691   $ 26,990   $ 23,385   $ 5,443   $     --   $    --  $150,509
  Fixed (1)................................    29,687     35,532     25,598    35,038     26,295     6,910   159,060
 Consumer..................................    13,420      4,510      3,670       865        253        --    22,718
 Mortgage-backed securities................    92,410      4,293      1,921     2,208        452        45   101,329
 Investment securities.....................     5,820         --         --     7,952      6,749        --    20,521
 Securities available for sale.............    12,900      8,238      3,451     1,469      2,251        --    28,309
 Other interest-earning assets (2).........     6,508         --         --        --         --     4,892    11,400
                                             --------   --------   --------   -------   --------   -------  -------- 
   Total interest-earning assets...........   255,436     79,563     58,025    52,975     36,000    11,847   493,846
                                                                                          
Rate sensitive liabilities:                                                               
 Passbook accounts.........................    31,435      4,378      2,084     1,598        289         7    39,791
 NOW accounts..............................     8,940      2,022      1,336     1,679        807       115    14,899
 Money accounts............................    38,908      5,418      2,580     1,978        357         9    49,250
 Certificates of deposit...................   130,188     55,405     26,774    13,356         --        --   225,723
 Borrowings................................    75,976     29,293     11,000     1,350        750        --   118,369
                                             --------   --------   --------   -------   --------   -------  -------- 
    Total interest-bearing liabilities.....   285,447     96,516     43,774    19,961      2,203       131   448,032
                                             --------   --------   --------   -------   --------   -------  -------- 
 
Interest sensitivity gap...................   (30,011)   (16,953)    14,251    33,014     33,797    11,716    45,814
                                             ========   ========   ========   =======   ========   =======  ======== 
Cumulative interest-sensitivity gap........   (30,011)   (46,964)   (32,713)      301     34,098    45,814    45,814
                                             ========   ========   ========   =======   ========   =======  ======== 
Cumulative interest-sensitivity gap
 to total assets...........................      (6.0)%     (9.4)%     (6.5)%      .1%       6.8%      9.1%
Ratio of interest-earning assets to
 interest-bearing liabilities..............      89.5       82.4      132.6     265.4    1,634.1   9,043.5
Cumulative ratio of interest sensitive
 assets to interest sensitive liabilities..      89.5       87.7       92.3     100.1      107.6     110.2
</TABLE> 
---------------------------------
(1)  Includes loans held for sale.
(2) Includes federal funds sold, interest-bearing deposits in other banks,
    Federal Home Loan Bank stock, and ground rents.


     The above table was prepared based on the Company's historical experience
and OTS decay rate assumptions. Management believes that the assumptions used to
prepare the table approximate the standards used in the savings industry, and
considers the assumptions appropriate and reasonable.  However, certain
shortcomings are inherent in the analysis presented by the foregoing table.  For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates.  Also, interest rates on certain types of assets and liabilities
may fluctuate in advance of or lag behind changes in market interest rates.
Additionally, certain assets, such as ARM loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the asset.
Moreover, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table.

     Net Portfolio Value.  The OTS has adopted a rule that incorporates an
interest rate risk ("IRR") component into the risk-based capital rules.  The IRR
component is a dollar amount that will be deducted from total capital for the
purpose of calculating an institution's risk-based capital requirement and is
measured in terms of the sensitivity of its net portfolio value ("NPV") to
changes in interest rates.  NPV is the difference between discounted incoming
and outgoing cash flows from assets, liabilities, and off-balance sheet
contracts.  An institution's IRR is measured as the change to its NPV as a
result of a hypothetical 200 basis point change in market interest rates.  A
resulting change in NPV of more than 2% of the estimated market value of its
assets will require the institution to deduct from its

                                      -44-
<PAGE>
 
capital 50% of that excess change.  The rule provides that the OTS will
calculate the IRR component quarterly for each institution from the
institution's Thrift Financial Reports.  The OTS has deferred for the present
time the date on which the IRR component is to be deducted from total capital.
The following table presents the Bank's NPV as of June 30, 1997, as calculated
by the OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
 
 
                 
   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)
<S>              <C>        <C>          <C>           <C>
 
     400         $17,007    $(34,291)       (67)%             6.79%
     300          25,680     (25,619)       (50)              5.07
     200          34,707     (16,591)       (32)              3.28
     100          43,354      (7,945)       (15)              1.57
    Static        51,298          --         --                 --
    (100)         57,920       6,622         13               1.31
    (200)         60,709       9,410         18               1.86
    (300)         62,362      11,063         22               2.19
    (400)         64,667      13,369         26               2.65
</TABLE>

     As shown by the table above, increases in interest rates will result in net
decreases in the Bank's NPV, while decreases in interest rates will result in
smaller net increases in the Bank's NPV. As is the case with the gap table,
certain shortcomings are inherent in the methodology used in the above table.
Modeling changes in NPV requires the making of certain assumptions that may tend
to oversimplify the manner in which actual yields and costs respond to changes
in market interest rates. First, the models assume that the composition of the
Bank's interest sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured. Second, the models
assume that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements do provide an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income.

LIQUIDITY AND CAPITAL RESOURCES

     The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required ratio currently is 5%. The
Bank's liquidity ratio averaged 6.2% during the month of July 1997. In addition
the Bank is required to maintain short term liquid assets of at least 1% of the
Bank's average daily balance of net withdrawable deposit accounts and current
borrowings. The Bank adjusts liquidity as appropriate to meet its asset and
liability management objectives. Certain mortgage-backed securities, time
deposits, federal funds sold and other assets outstanding at July 31, 1997,
1996, and 1995, that qualify for liquidity amounted to $23.5 million, $11.9
million, and $26.4 million, respectively. At July 31, 1997, the Bank was in
compliance with such liquidity requirements.

     The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, FHLB advances and other borrowings,
and earnings and funds provided from operations. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. The Bank manages
the pricing of its deposits to maintain a desired deposit balance. In addition,
the Bank invests excess funds in federal funds, and other short-term interest-
earning and other assets, which provide liquidity to meet lending requirements.

                                      -45-
<PAGE>
 
     The Company's borrowings increased to $118.4 million at July 31, 1997 and
an average of $116.1 million for the fiscal year ended July 31, 1997. The $21.1
million increase was used to fund loan originations and purchases. The Company's
borrowings increased to an average of $80.9 million for the fiscal year ended
July 31, 1996, from an average of $70.9 million for the fiscal year ended July
31, 1995. The Company's deposits increased to $329.7 million at July 31, 1997,
from an average of $315.9 million over the fiscal year ended July 31, 1996.

     The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $4.0 million, $5.4
million and $1.8 million, for the fiscal years ended July 31, 1997, 1996, and
1995, respectively and are primarily determined by the aforementioned results of
operations and the timing of cash receipts and disbursements.

     Net cash used in investing activities consisted primarily of disbursements
for purchases of mortgage-backed securities, loan originations and purchases,
and purchases of investment securities, offset by proceeds from the sales and
repayments of mortgage-backed securities, loan principal repayments, and sales
and maturities of investment securities totaled $39.9 million, $39.8 million and
$29.4 million for the fiscal years ended July 31, 1997, 1996, and 1995,
respectively. Disbursements for purchases of mortgage-backed securities totaled
$9.1 million, $42.7 million and $17.4 million for the years ended July 31, 1997,
1996, and 1995, respectively. Disbursements for loans originated and purchased
were $107.7 million, $94.4 million and $58.3 million for the years ended July
31, 1997, 1996, and 1995, respectively. Disbursements for purchases of
investment securities totaled $11.0 million, $29.2 million and $7.8 million for
the years ended July 31, 1997, 1996 and 1995, respectively. Proceeds from the
sales and repayments of mortgage-backed securities totaled $16.5 million $67.9
million and $18.1 million for the years ended July 31, 1997, 1996, and 1995,
respectively. Proceeds from loan principal repayments totaled $48.2 million,
$40.7 million and $27.8 million for the years ended July 31, 1997, 1996 and
1995, respectively. Proceeds from the sales and maturities of investment
securities totaled $18.5 million, $12.0 million and $1.9 million for the years
ended July 31, 1997, 1996 and 1995, respectively.

     Net cash provided by financing activities consisting primarily of net
activity in deposit accounts, proceeds from funding and repayments of FHLB
advances, and net activity in securities sold under agreements to repurchase
totaled $36.4 million, $33.9 million and $25.8 million for the fiscal years
ended July 31, 1997, 1996 and 1995, respectively. Additionally, on October 31,
1995, the Company completed its conversion to a stock holding company and
received net proceeds of $19.3 million. The net increase (decrease) in deposits
was $16.6 million, ($1.5) million and $5.6 million for the years ended July 31,
1997, 1996 and 1995, respectively. The activity in net proceeds (repayments)
from FHLB advances was $12.9 million, $18.7 million and $(6.6) million for the
years ended July 31, 1997, 1996 and 1995, respectively. The net increase in
securities sold under agreements to repurchase was $8.2 million, $107,000 and
$26.9 million for the years ended July 31, 1997, 1996 and 1995, respectively.

     Federal regulations require thrift institutions to maintain certain minimum
levels of regulatory capital. The regulatory capital regulations require minimum
levels of tangible and core capital of 1.5% and 3%, respectively, of adjusted
total assets and risk-based capital of 8% of risk-weighted assets. The Bank was
in compliance with the regulatory capital requirements with tangible, core and
risk-based capital ratios of approximately 8.65%, 8.65% and 18.28%,
respectively, at July 31, 1997.

     The Bank has other sources of liquidity, including a $120 million line of
credit with the FHLB. At July 31, 1997, the Bank's FHLB advances totaled $75.8
million.

IMPACT OF INFLATION AND CHANGING PRICES

     The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.

                                      -46-
<PAGE>
 
IMPACT OF NEW ACCOUNTING STANDARDS

     Earnings Per Share. In February 1997, the FASB issued SFAS No. 128,
Earnings Per Share ("SFAS 128"), which is effective for financial statements
issued for periods ending after December 15, 1997. SFAS No. 128 establishes
standards for computing and presenting earnings per share ("EPS") and replaces
the presentation of primary EPS with a presentation of basic EPS. It requires
dual presentation of basic and diluted EPS on the face of the consolidated
statement of income and reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Earlier application is not permitted but disclosure for pro forma
EPS amounts computed using the standards established by SFAS No. 128 is
permitted for periods ending prior to the effective date. Adoption of SFAS No.
128 would not have a material effect on current earnings per share disclosures.

     Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. It does not, however,
specify when to recognize or how to measure items that make up comprehensive
income.

     SFAS No. 130 is effective for both interim and annual periods beginning
after December 15, 1997.  Earlier application is permitted.  Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement.

     In June 1997, the FASB issued No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131").  SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders.

     SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997.  Earlier application is encouraged.  Management has not
determined when it will adopt the provisions of SFAS No. 131 but believes that
it will not have a material effect on the Company's financial position or
results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------


                                      -47-
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
July 31, 1997 and 1996

<TABLE>
<CAPTION>
                   Assets                                                   1997      1996
                   ------                                                 --------   -------
                                                                            (In Thousands)
<S>                                                                       <C>        <C>
Cash:
  On hand and due from banks                                              $  3,155     2,671
  Interest-bearing deposits                                                  2,313     1,837
Federal funds sold                                                              --       394
Securities available for sale, at fair value (note 2)                       28,309    40,266
Investment securities, fair value of $20,669 and
  $23,651, respectively (note 3)                                            20,521    24,109
Mortgage-backed securities, fair value of $101,902
  and $97,627, respectively (notes 4 and 11)                               101,329   100,195
Loans receivable, net (notes 5 and 11)                                     332,287   278,042
Federal Home Loan Bank stock, at cost (note 17)                              4,195     3,141
Investments in real estate, net (note 6)                                     5,057     5,670
Investments in and advances to real estate joint ventures (note 7)             159     1,270
Property and equipment, net (note 8)                                         1,792     1,198
Prepaid expenses and other assets                                              728       612
Deferred income taxes (note 12)                                              2,247     1,866
                                                                          --------   -------
                                                                          $502,092   461,271
                                                                          ========   =======
     Liabilities and Stockholders' Equity
     ------------------------------------                                
Liabilities:
  Deposits (note 9)                                                       $329,663   313,083
  Securities sold under agreements to repurchase  (note 10)                 42,596    34,445
  Advances from the Federal Home Loan Bank of Atlanta (note 11)             75,773    62,824
  Drafts payable                                                             3,076       859
  Advance payments by borrowers for taxes and insurance                      2,043     1,760
  Income taxes payable                                                         877        --
  Accrued expenses and other liabilities                                     1,204     1,030
                                                                          --------   -------
      Total liabilities                                                    455,232   414,001
                                                                          --------   -------
Stockholders' equity (notes 13 and 17):
  Serial preferred stock, 1,000,000 shares authorized, none issued.             --        --
  Common stock, $.01 par value, 8,000,000 shares authorized, 3,980,500
    shares issued and 3,613,011 and 3,781,475 shares outstanding                40        40
  Additional paid-in capital                                                30,677    30,705
  Unearned common stock acquired by management recognition
    and retention plans (MRRP)                                                (903)      (77)
  Unearned employee stock ownership plan (ESOP) shares                      (1,440)   (1,629)
  Treasury stock at cost, 367,489 and 199,025 shares at July 1997 and
    1996, respectively                                                      (4,145)   (2,040)
  Retained income -- substantially restricted                               23,740    21,970
  Net unrealized holding loss on securities, net of income taxes            (1,109)   (1,699)
                                                                          --------   -------
      Total stockholders' equity                                            46,860    47,270
Commitments (notes 5, 8, 13 and 14)
                                                                          --------   ------- 
                                                                          $502,092   461,271
                                                                          ========   =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       48
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
                                                                1997     1996     1995
                                                              --------  -------  -------
                                                                    (In Thousands)
<S>                                                           <C>       <C>      <C>
Interest income:
 Loans receivable                                             $26,180   21,754   19,036
 Mortgage-backed securities                                     8,364    9,630   10,355
 Investment securities                                          2,437    1,255      831
 Other                                                            770      779      747
                                                              -------   ------   ------
   Total interest income                                       37,751   33,418   30,969
                                                              -------   ------   ------
Interest expense:
 Deposits (note 9)                                             15,654   15,825   14,923
 Borrowed funds                                                 6,676    4,728    4,300
                                                              -------   ------   ------
   Total interest expense                                      22,330   20,553   19,223
                                                              -------   ------   ------
   Net interest income                                         15,421   12,865   11,746
Provision for loan losses (note 5)                                500      772    3,386
                                                              -------   ------   ------
   Net interest income after provision for loan losses         14,921   12,093    8,360
                                                              -------   ------   ------
Noninterest income:
 Fees and service charges                                         805      640      592
 Gain (loss) on sales of:
  Loans receivable, net                                            23       41       20
  Mortgage-backed securities, net                                  (7)    (558)      (5)
  Investment securities, net                                      (59)     (14)      15
 Other                                                            206      184      318
                                                              -------   ------   ------
   Total noninterest income                                       968      293      940
                                                              -------   ------   ------
Noninterest expenses:
 Salaries and employee benefits                                 4,715    4,276    4,066
 Net occupancy                                                  1,320    1,341    1,300
 Professional services                                            452      380      399
 Advertising                                                      794      684      442
 Federal deposit insurance premiums                             2,457      772      809
 Furniture, fixtures and equipment                                487      324      286
 Equity in net loss of real estate joint ventures (note 7)        607      193      288
 Loss on investments in real estate (note 6)                       53      390      330
 Other                                                          1,702    1,679    1,420
                                                              -------   ------   ------
   Total noninterest expenses                                  12,587   10,039    9,340
                                                              -------   ------   ------
   Income (loss) before income taxes                            3,302    2,347      (40)
Income tax provision (benefit) (note 12)                        1,019      801      (50)
                                                              -------   ------   ------
   Net income                                                 $ 2,283    1,546       10
                                                              =======   ======   ======
Net income per share of common stock (note 13):
 From date of conversion                                          .64      .36       --
                                                              =======   ======   ======
 Proforma                                                         N/A      .47      N/A
                                                              =======   ======   ======
</TABLE>

See accompanying notes to consolidated financial statements.

                                      49
<PAGE>

American National Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
                                                                  Unearned
                                                                  common                                      Net
                                                                  stock                                    unrealized
                                                     Additional  acquired Unearned                           holding
                                           Common     paid-in       by      ESOP     Treasury   Retained     loss on
                                           stock      capital      MRRP    shares      stock     income    securities    Total
                                          --------  -----------  -------- ---------  ---------  ---------  -----------  -------
                                                                             (In Thousands)
<S>                                       <C>       <C>          <C>      <C>        <C>        <C>        <C>          <C>
Balance at July 31, 1994                  $ 2,052        7,652     (177)        --         --     21,081       (1,448)  29,160
Change in net unrealized loss      
  on securities, net of            
  income taxes (note 2)                        --           --       --         --         --         --          115      115
Amortization of net unrealized     
  holding loss (note 4)                        --           --       --         --         --        (58)          58       --
Cash dividends declared (note 13)              --           --       --         --         --       (371)          --     (371)
MRRP expense                                   --           --       45         --         --         --           --       45
Net income                                     --           --       --         --         --         10           --       10
                                          -------   ----------   ------   --------   --------     ------   ----------   ------
Balance at July 31, 1995                    2,052        7,652     (132)        --         --     20,662       (1,275)  28,959
Change in net unrealized           
  loss on securities,              
  net of income taxes              
  (note 2)                                     --           --       --         --         --         --         (570)    (570)
Amortization of net unrealized     
  holding loss (note 4)                        --           --       --         --         --       (146)         146       --
Proceeds from common stock         
  offering, net of expenses        
  (note 13)                                (2,012)      23,052       --         --         --         --           --   21,040
Cash dividends declared (note 13)              --           --       --         --         --        (92)          --      (92)
MRRP expense                                   --           --       55         --         --         --           --       55 
Borrowings for employee            
  stock ownership plan             
  (ESOP) (note 15)                             --           --       --     (1,746)        --         --           --   (1,746)
Compensation expense ESOP -        
  (note 15)                                    --            1       --        117         --         --           --      118
Purchase of common stock                       --           --       --         --     (2,040)        --           --   (2,040)
Net income                                     --           --       --         --         --      1,546           --    1,546
                                          -------   ----------   ------   --------   --------     ------   ----------   ------ 
Balance at  July 31, 1996                      40       30,705      (77)    (1,629)    (2,040)    21,970       (1,699)  47,270
Change in net unrealized loss      
  on securities, net of income     
  taxes (note 2)                               --           --       --         --         --         --          510      510
Amortization of net unrealized     
  holding loss (note 4)                        --           --       --         --         --        (80)          80       --
Cash dividends declared (.12)      
  (note 13)                                    --           --       --         --         --       (433)          --     (433)
Common stock acquired by MRRP                  --           --   (1,096)        --         --         --           --   (1,096)
MRRP expense                                   --           --      270         --         --         --           --      270
Compensation expense - ESOP        
  (note 15)                                    --           77       --        189         --         --           --      266 
Exercise of stock options                      --         (105)      --         --        211         --           --      106
Purchase of common stock                       --           --       --         --     (2,316)        --           --   (2,316)
Net income                                     --           --       --         --         --      2,283           --    2,283 
                                          -------   ----------   ------   --------   --------     ------   ----------   ------
Balance at July 31, 1997                  $    40       30,677     (903)    (1,440)    (4,145)    23,740       (1,109)  46,860
                                          =======   ==========   ======   ========   ========     ======   ==========   ======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       50
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
 
                                                                  1997      1996      1995
                                                               ---------  --------  --------
                                                                      (In Thousands)
<S>                                                            <C>        <C>       <C>
 
Cash flows from operating activities:
 Net income                                                    $  2,283     1,546        10
 Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation                                                     542       532       483
   Noncash compensation under stock-based
     benefit plans                                                  536       173        45
   Amortization of loan fees                                       (424)     (398)     (437)
   Amortization of premiums and discounts, net                      324       177       (38)
   Provision for losses on loans and
     investments in real estate                                     512       930     3,430
   Loss (gain) on sales of assets, net                               43       531       (30)
   Loans originated for sale                                     (4,842)   (2,754)   (3,990)
   Sales of loans originated for sale                             4,451     4,194     2,159
   Deferred income taxes                                           (844)      409      (138)
   (Increase) decrease in prepaid expenses and other assets        (116)       12       202
   Increase in accrued expenses and other liabilities               174        43       163
   Decrease (increase) in income taxes receivable                    --       380      (112)
   Increase in income taxes payable                                 877        --        --
   Other, net                                                       488      (338)       66
                                                               --------   -------   -------
     Net cash provided by operating activities                    4,004     5,437     1,813
                                                               --------   -------   -------
Cash flows from investing activities:
 Sales of investment securities available for sale                3,941       969     1,015
 Maturities of investment securities available for sale              --        --       842
 Purchases of investment securities available for sale               --    (2,000)     (842)
 Sales of mortgage-backed securities available for sale           7,972    56,036     3,100
 Repayments of mortgage-backed securities available
  for sale                                                        3,776     4,082       432
 Purchases of mortgage-backed securities available
  for sale                                                       (3,164)  (10,989)   (3,894)
 Maturities and redemptions of investment securities             14,520    11,000        --
 Purchases of investment securities                             (11,040)  (27,176)   (6,983)
 Repayments of mortgage-backed securities                         4,743     7,741    14,569
 Purchases of mortgage-backed securities                         (5,984)  (31,714)  (13,470)
 Loan principal repayments                                       48,197    40,659    27,763
 Loan originations                                              (75,448)  (73,671)  (43,092)
 Loan purchases                                                 (27,414)  (17,972)  (11,216)
 Increase in deferred loan fees, net                                564       515       533
 Federal Home Loan Bank stock purchases, net                     (1,054)     (227)       --
                                                                                 (Continued)
</TABLE>

See accompanying notes to consolidated financial statements.

                                       51
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
 
                                                           1997       1996       1995
                                                        ----------  ---------  ---------
                                                                 (In Thousands)
<S>                                                     <C>         <C>        <C>
Cash flows from investing activities, continued:
 Decrease in investments in real estate                 $   1,144      2,960      1,151
 Decrease in investments in and advances to
  real estate joint ventures                                  504        752      1,173
 Purchases of property and equipment                       (1,136)      (764)      (438)
                                                        ---------   --------   --------
     Net cash used in investing activities                (39,879)   (39,799)   (29,357)
Cash flows from financing activities:
 Net increase (decrease) in deposits                       16,580     (1,530)     5,624
 Net increase in securities sold under
  agreements to repurchase                                  8,151        107     26,871
 Proceeds from Federal Home Loan Bank advances            164,376    215,147    123,698
 Repayment of Federal Home Loan Bank
  advances                                               (151,427)  (196,460)  (130,291)
 Increase (decrease) in drafts payable                      2,217       (429)       111
 Increase (decrease) in advance payments
  by borrowers for taxes and insurance                        283        (92)       153
 Proceeds from common stock offering, net                      --     21,040         --
 Common stock acquired by ESOP                                 --     (1,746)        --
 Dividends paid on common stock                              (433)       (93)      (371)
 Purchase of treasury stock                                (2,316)    (2,040)        --
 Proceeds from exercise of options                            106         --         --
 Purchase of stock to fund 1996 MRRP                       (1,096)        --         --
                                                        ---------   --------   --------
     Net cash provided by financing activities             36,441     33,904     25,795
                                                        ---------   --------   --------
Net increase (decrease) in cash and cash equivalents          566       (458)    (1,749)
Cash and cash equivalents at beginning  of year             4,902      5,360      7,109
                                                        ---------   --------   --------
Cash and cash equivalents at end of year                $   5,468      4,902      5,360
                                                        =========   ========   ========
 
Supplemental information:
 Interest paid on deposits and borrowed funds           $  22,390     20,457     19,152
 Income taxes paid (received), net                      $     946       (104)       165
                                                        =========   ========   ========
 
Noncash activities:
 Loans transferred to real estate acquired
  through foreclosure                                   $     543      2,960      1,400
                                                        =========   ========   ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       52
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1996, and 1995


(1)  Description of Business, Summary of Significant Accounting Policies and
     -----------------------------------------------------------------------
     Other Matters
     -------------

     Description of Business
     -----------------------

     American National Bancorp, Inc. (the Company) is the holding company of
     American National Savings Bank, F.S.B. (the Bank). The Bank provides a full
     range of banking services to individual and corporate customers through its
     subsidiaries and branch offices in Maryland. The Bank is subject to
     competition from other financial and mortgage institutions. The Bank is
     subject to the regulations of certain agencies of the federal government
     and undergoes periodic examination by those agencies.

     Basis of Presentation
     ---------------------

     The consolidated financial statements include the accounts of the Company
     and its wholly-owned subsidiary, the Bank and the Bank's subsidiaries,
     American National Insurance Agency, Inc. (ANIA), ANSB Corporation and
     National Development Corporation (NDC). ANIA acts as agent in offering
     annuity and mortgage life insurance products to customers of the Company.
     ANSB Corporation was incorporated in June 1994 for the purpose of holding
     investment securities for the Company. NDC is a partner in various real
     estate joint ventures formed for the purpose of acquiring and developing
     real estate for sale. All significant intercompany accounts and
     transactions have been eliminated in consolidation.

     In preparing the consolidated financial statements, management is required
     to make estimates and assumptions that affect the reported amounts of
     assets and liabilities as of the date of the statements of financial
     condition and income and expenses for the period. Actual results could
     differ significantly from those estimates. Material estimates that are
     particularly susceptible to significant change in the near term relate to
     the determination of the allowance for loan losses and the valuation of
     investments in real estate. In connection with these determinations,
     management obtains independent appraisals for significant properties and
     prepares fair value analyses as appropriate.

     Management believes that the allowances for losses on loans and investments
     in real estate are adequate. While management uses available information to
     recognize losses on loans and investments in real estate, future additions
     to the allowances may be necessary based on changes in economic conditions,
     particularly in the State of Maryland. In addition, various regulatory
     agencies, as an integral part of their examination process, periodically
     review the Bank's allowances for losses on loans and investments in real
     estate. Such agencies may require the Bank to recognize additions to the
     allowances based on their judgments about information available to them at
     the time of their examination.

                                      53
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Description of Business, Summary of Significant Accounting Policies and
     -----------------------------------------------------------------------
     Other Matters, Continued
     ------------------------

     Investment and Mortgage-Backed Securities
     -----------------------------------------

     Debt securities that the Company has the positive intent and ability to
     hold to maturity are reported at amortized cost. Debt and equity securities
     that are purchased and held principally for the purpose of selling in the
     near term are reported at fair value, with unrealized gains and losses
     included in earnings. All other debt and equity securities are considered
     available for sale and are reported at fair value, with unrealized gains
     and losses excluded from earnings and reported as a separate component of
     stockholders' equity (net of tax effects).

     If a decline in value of an individual security classified as held to
     maturity or available for sale is judged to be other than temporary, the
     cost basis of that security is reduced to its fair value and the amount of
     the write-down is included in earnings. Fair value is determined based on
     bid prices published in financial newspapers or bid quotations received
     from securities dealers. For purposes of computing realized gains or losses
     on the sales of investments, cost is determined using the specific
     identification method. Premiums and discounts on investment and mortgage-
     backed securities are amortized over the term of the security using methods
     that approximate the interest method.

     On August 8, 1994 the Company transferred approximately $36.3 million of
     its collateralized mortgage obligations (CMOs), net of unrealized loss of
     approximately $1.8 million, from the available for sale portfolio to held
     to maturity. On that date certain accounting issues were resolved
     permitting the Company to transfer substantially all of these securities
     from the available for sale portfolio to the held to maturity portfolio as
     originally intended. The unrealized loss at the time of the transfer is
     being amortized over the remaining lives of the securities as an adjustment
     of yield. The unrealized loss, net of taxes, was $1.1 million at the date
     of transfer. The unrealized loss has been recorded as a component of
     stockholders' equity and is being reduced in subsequent periods through the
     amortization.

     In November 1995, the Financial Accounting Standards Board announced its
     intention to allow a one-time change in the classification of securities,
     providing such change was effected by December 31, 1995. Management
     utilized this opportunity and designated as available-for-sale
     approximately $87.1 million of investment and mortgage-backed securities
     previously classified as held to maturity with an unrealized loss of
     approximately $348,000.

     Loans Held for Sale
     -------------------

     Loans held for sale are carried at the lower of cost or market on an
     aggregate basis.

     Investments in and Advances to Real Estate Joint Ventures
     ---------------------------------------------------------

     Investments in and advances to real estate joint ventures are accounted for
     using the equity method. The carrying values are subject to adjustment to
     the extent they exceed net realizable value. Interest income and fees on
     loans to real estate joint ventures are deferred. Such interest and fees,
     in excess of related capitalized interest cost, are recognized as the loans
     are repaid.

                                      54
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Description of Business, Summary of Significant Accounting Policies and
     -----------------------------------------------------------------------
     Other Matters, Continued
     ------------------------

     Investments in and Advances to Real Estate Joint Ventures, continued
     --------------------------------------------------------------------

     Interest costs are capitalized based on the Company's average cost of funds
     and its average investment in and advances to real estate joint ventures
     with development in progress. Interest capitalized was approximately
     $22,000, $56,000, and $95,000 for the years ended July 31, 1997, 1996 and
     1995, respectively.

     Investments in Real Estate
     --------------------------

     Ground rents are carried at cost.

     Real estate acquired through foreclosure is recorded initially at its lower
     of cost or estimated fair value and subsequently at the lower of cost or
     estimated fair value less estimated costs to sell. Management estimates
     fair value based on appraisals and/or discounted cash flow analyses. Costs
     relating to improving such properties are capitalized and costs relating to
     holding such properties are charged to expense.

     Property and Equipment
     ----------------------

     Property and equipment are carried at cost less accumulated depreciation
     and amortization. Depreciation and amortization of property and equipment
     are recorded on a straight-line basis over the estimated useful lives of
     the assets or leases as appropriate. Additions and improvements are
     capitalized and charges for repairs and maintenance are expensed when
     incurred. Gains or losses on sales of property and equipment are recognized
     upon sale.

     Loans Receivable
     ----------------

     Origination and commitment fees and direct origination costs are deferred
     and amortized to income over the contractual lives of the related loans
     using the interest method. Under certain circumstances, commitment fees are
     recognized over the commitment period or upon expiration of the commitment.
     Unamortized loan fees are recognized in income when the related loans are
     sold or prepaid.

     Interest on potential problem loans is not accrued when, in the opinion of
     management, the full collection of principal or interest is in doubt or the
     date that principal or interest is 90 days or more past-due. Any amounts
     ultimately collected on such loans is recorded as a reduction of principal,
     as interest income or combination thereof depending on management's
     evaluation of the recoverability of the loan principal.

     Provisions for loan losses are charged to operations based on management's
     review of the loan portfolio and analyses of the borrowers' ability to
     repay, past loan loss and collection experience, risk characteristics of
     individual loans or groups of similar loans and underlying collateral,
     current and prospective economic conditions and status of nonperforming
     loans. Loans or portions thereof are charged-off when considered, in the
     opinion of management, uncollectible.


                                      55


<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Description of Business, Summary of Significant Accounting Policies and
     -----------------------------------------------------------------------
     Other Matters, Continued
     ------------------------

     Provision for Loan Losses, continued
     ------------------------------------

     In accordance with Statement of Financial Accounting Standards (SFAS) No.
     114, "Accounting by Creditors for Impairment of Loan" (SFAS No. 114) and
     SFAS No. 118, "Accounting by Creditors for Impairment of a Loan Income
     Recognition Disclosures" (SFAS No. 118), the Company identifies impaired
     loans and measures impairment (i) at the present value of expected cash
     flows discounted at the loan's effective interest rate; (ii) at the
     observable market price; or (iii) at the fair value of the collateral if
     the loan is collateral dependent. If the measure of the impaired loan is
     less than the recorded investment in the loan, an impairment is recognized
     through a valuation allowance and corresponding provision for credit
     losses.

     A loan is determined to be impaired when, based on current information and
     events, it is probable that the Company will be unable to collect all
     amounts due according to the contractual terms of the loan agreement. A
     loan is not considered impaired during a period of delay in payment if the
     Company expects to collect all amounts due, including interest past-due.
     The Company generally considers a period of delay in payment to include
     delinquency up to 90 days.

     SFAS No. 114 does not apply to larger groups of smaller-balance homogeneous
     loans such as consumer installment, residential first and second mortgage
     loans and credit card loans. These loans are collectively evaluated for
     impairment. The Company's impaired loans are therefore comprised primarily
     of commercial loans, including commercial mortgage loans, and real estate
     development and construction loans. In addition, impaired loans are
     generally loans which management has placed in nonaccrual status since
     loans are generally placed in nonaccrual status on the earlier of the date
     that management determines that the collection of principal and/or interest
     is in doubt or the date that principal or interest is 90 days or more past-
     due.

     An allocated valuation allowance, if any, is included in the Bank's
     allowance for credit losses. An impaired loan is charged-off when the loan,
     or a portion thereof, is considered uncollectible or transferred to real
     estate owned.

     The Bank recognizes interest income for impaired loans consistent with its
     method for nonaccrual loans. Specifically, interest payments received are
     recognized as interest income or, if the ultimate collectibility of
     principal is in doubt, are applied to principal.

     Income Taxes
     ------------

     The Company and its subsidiary file a consolidated federal income tax
     return. Deferred income taxes are recognized, with certain exceptions, for
     temporary differences between the financial reporting basis and income tax
     basis of assets and liabilities based on enacted tax rates expected to be
     in effect when such amounts are realized or settled. Deferred tax assets
     (including tax loss carryforwards) are recognized only to the extent that
     it is more likely than not that such amounts will be realized based on
     consideration of available evidence, including tax planning strategies and
     other factors.


                                      56

<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Summary of Significant Accounting Policies and Other Matters, Continued
     -----------------------------------------------------------------------

     Income Taxes, continued
     -----------------------

     A continuing exception allows qualified thrift lenders not to provide a
     deferred tax liability on certain bad debt reserves for tax purposes that
     arose in fiscal years beginning before July 31, 1988. Such bad debt
     reserves for the Company, which are included in retained income, amounted
     to approximately $11.5 million at July 31, 1997 with an income tax effect
     of approximately $4.4 million. As specified in legislation enacted by
     Congress and signed by the President on August 20, 1996, this bad debt
     reserve would become taxable if the Bank fails to meet certain conditions.

     Changes in tax laws or rates on deferred tax assets and liabilities are
     recognized in the period that includes the enactment date.

     Statement of Cash Flows
     -----------------------

     For purposes of the consolidated statements of cash flows, the Company
     considers all highly liquid investments with maturities at date of purchase
     of three months or less to be cash equivalents. Cash equivalents consist of
     federal funds sold and certain securities purchased under agreements to
     resell.

     Stock-Based Compensation
     ------------------------

     In October 1995, the Financial Accounting Standards Board issued SFAS No.
     123, Accounting for Stock Based-Compensation (SFAS No. 123). SFAS No. 123
     permits companies to adopt a new fair value-based method to account for
     stock-based employee compensation plans or to continue using the intrinsic
     value method.

     The Company uses the intrinsic value method to account for stock-based
     employee compensation plans. Under this method, compensation cost is
     recognized for awards of shares of common stock to employees only if the
     quoted market price of the stock at the grant dates (or other measurement
     date, if later) is greater than the amount the employee must pay to acquire
     the stock. Information required by SFAS No. 123 concerning the Company's
     stock based compensation plans is provided in note 13.

     Transfers and Servicing of Financial Assets and Extinguishments of
     ------------------------------------------------------------------   
     Liabilities
     -----------

     The Company adopted the provisions of SFAS No. 125 "Accounting for
     Transfers and Servicing of Financial Assets and Extinguishments of
     Liabilities" (SFAS No. 125) as of January 1, 1997. SFAS No. 125 is
     effective for transfers and servicing of financial assets and
     extinguishments of liabilities and requires, among other things, the
     Company to record at fair value, assets and liabilities resulting from a
     transfer of financial assets. In December 1996, SFAS No. 127 was issued
     which deferred the effective date of certain provisions of SFAS No. 125
     related to repurchase agreements, securities lending and similar
     transactions until January 1, 1998. The adoption of the currently effective
     portions of SFAS No. 125 did not have a material impact on the Company's
     financial statements.

                                      57


<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2)  Securities Available for Sale
     -----------------------------

     The amortized cost and fair value of securities available for sale are
     summarized as follows at July 31:
<TABLE>
<CAPTION>
                                                                   1997
                                                  ------------------------------------------
                                                               Gross       Gross
                                                  Amortized  Unrealized  Unrealized    Fair
                                                    cost       gains       losses     value
                                                  ---------  ----------  -----------  ------
                                                                (In Thousands)
       <S>                                        <C>        <C>         <C>          <C>
       U.S. government and agency obligations       $ 3,001          --          (6)   2,995
       Federal National Mortgage Association    
         (FNMA) mortgage-backed securities           12,931          --        (207)  12,724
       Federal Home Loan Mortgage               
         Corporation (FHLMC) mortgage-          
         backed securities                            3,371          --         (52)   3,319
       FNMA collateralized mortgage             
         obligations (CMOs)                           2,238          39          (6)   2,271
       FHLMC CMOs                                     6,762          56          --    6,818
                                                    -------        ----      ------   ------
                                                     28,303          95        (271)  28,127
       Accrued interest receivable                      182          --          --      182
                                                    -------        ----      ------   ------
                                                    $28,485          95        (271)  28,309
                                                    =======        ====      ======   ======
<CAPTION>                               
                                                                     1996
                                                  ------------------------------------------
                                                               Gross       Gross
                                                  Amortized  Unrealized  Unrealized    Fair
                                                     cost      gains       losses     value
                                                  ---------  ----------  ----------   ------
                                                                 (In Thousands)
       <S>                                        <C>        <C>         <C>          <C>
       U.S. government and agency obligations       $ 7,069          --        (262)   6,807
       FNMA                                          17,552          --        (654)  16,898
       FHLMC                                          4,527          --        (166)   4,361
       Government National Mortgage             
         Association (GNMA) mortgage-           
         backed securities                            3,698          37          --    3,735
       FNMA CMOs                                      6,510          33         (88)   6,455
       FHLMC CMOs                                     1,676          --          (4)   1,672
                                                    -------        ----      ------   ------
                                                     41,032          70      (1,174)  39,928
       Accrued interest receivable                      338          --          --      338
                                                    -------        ----      ------   ------
                                                    $41,370          70      (1,174)  40,266
                                                    =======        ====      ======   ======
</TABLE>

     The proceeds from the sales of securities available for sale and the gross
     realized gains and losses were $11.9 million, $59,000 and $125,000,
     respectively, for the year ended July 31, 1997, $57.0 million, $228,000 and
     $800,000, respectively, for the year ended July 31, 1996 and $4.1 million,
     $25,000 and $15,000, respectively, for the year ended July 31, 1995.

                                      58
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2)  Securities Available for Sale, Continued
     ----------------------------------------

     A summary of maturities of securities available for sale is as follows at
     July 31, 1997:
<TABLE>
<CAPTION>
      
                                                                                             Amortized
                                                                                               cost      Fair Value
                                                                                             ---------   ----------
       <S>                                                                                   <C>         <C>   
       Due within 12 months                                                                    $   182          182
       Due beyond 12 months but within 5 years                                                  14,535       14,305
       Due beyond 5 years but within 10 years                                                    1,001          999
       Beyond 10 years                                                                          12,767       12,823
                                                                                               -------       ------
                                                                                               $28,485       28,309
                                                                                               =======       ======
</TABLE> 
      
(3)  Investment Securities
     ---------------------
 
     The amortized cost and fair value of investment securities are summarized
     as follows at July 31:
<TABLE> 
<CAPTION> 
                                                                                                          1997
                                                                                       -------------------------------------------- 
                                                                                                    Gross        Gross
                                                                                       Amortized  Unrealized   Unrealized      Fair
                                                                                         cost       gains        losses       value
                                                                                       ---------  ----------  -------------   ------
                                                                                                        (In Thousands)
       <S>                                                                             <C>        <C>         <C>            <C>   
        U. S. government and agency obligations due:     
           Less than 1 year                                                              $ 1,500          --            (36)   1,464
           5 through 10 years                                                              7,951         153             --    8,104
           Greater than 10 years                                                          10,747          59            (28)  10,778
                                                                                         -------      ------           ----   ------
                                                                                          20,198         212            (64)  20,346
        Accrued interest receivable                                                          323          --             --      323
                                                                                         -------      ------           ----   ------
                                                                                         $20,521         212            (64)  20,669
                                                                                         =======      ======           ====   ======
</TABLE> 
<TABLE> 
<CAPTION> 
                                                                                                          1996
                                                                                       -------------------------------------------- 
                                                                                                    Gross        Gross
                                                                                       Amortized  Unrealized   Unrealized      Fair
                                                                                         cost       gains        losses       value
                                                                                       ---------  ----------  -------------   ------
                                                                                                        (In Thousands)
       <S>                                                                             <C>        <C>         <C>            <C>   
        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
                                                                                         =======      ======           ====   ======
</TABLE>

     There were no sales of investment securities held to maturity during the
     years ended July 31, 1997, 1996 and 1995. Investment securities were
     pledged as collateral for reverse repurchase agreements with amortized cost
     and fair values of $19.7 million and $19.9 million, respectively, at July
     31, 1997.

                                      59
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)  Mortgage-Backed Securities
     --------------------------

     The amortized cost and fair value of mortgage-backed securities are
     summarized as follows at July 31:
<TABLE>
<CAPTION>
                                                                                                            1997
                                                                                     -----------------------------------------------
                                                                                                   Gross         Gross
                                                                                     Amortized   Unrealized    Unrealized     Fair
                                                                                        cost       gains         losses       value
                                                                                     ----------  ----------  --------------  -------
                                                                                                     (In Thousands)
       <S>                                                                           <C>         <C>         <C>             <C> 
       FNMA                                                                            $ 24,509         139           (236)   24,412
       FHLMC                                                                              6,546         150            (55)    6,641
       FNMA CMOs                                                                         27,600         297           (272)   27,625
       FHLMC CMOs                                                                        42,249         659           (109)   42,799
                                                                                       --------    --------                  -------
                                                                                        100,904       1,245           (672)  101,477
       Accrued interest receivable                                                          425          --             --       425
                                                                                       --------    --------        -------   -------
                                                                                       $101,329       1,245           (672)  101,902
                                                                                       ========    ========        =======   =======
 <CAPTION>                             
                                                                                                          1996
                                                                                     -----------------------------------------------
                                                                                                   Gross        Gross
                                                                                     Amortized   Unrealized   Unrealized      Fair
                                                                                       cost        gains        losses        value
                                                                                     ----------  ----------  -------------   -------
                                                                                                        (In Thousands)
       <S>                                                                           <C>         <C>         <C>             <C> 
       FNMA                                                                            $ 27,623          --           (450)   27,173
       FHLMC                                                                              8,222          --            (92)    8,130
       FNMA CMOs                                                                         28,091          --           (919)   27,172
       FHLMC CMOs                                                                        35,731          --         (1,107)   34,624
       Other CMOs                                                                            52          --             --        52
                                                                                       --------    --------        -------   -------
                                                                                         99,719          --         (2,568)   97,151
       Accrued interest receivable                                                          476          --             --       476
                                                                                       --------    --------        -------   -------
                                                                                       $100,195          --         (2,568)   97,627
                                                                                       ========    ========        =======   =======
</TABLE> 
 
     There were no sales of mortgage-backed securities held to maturity during
     the years ended July 31, 1997, 1996 and 1995.
     
     A summary of maturities of mortgage-backed securities as of July 31, 1997:

<TABLE> 
<CAPTION> 
                                                                        Amortized
                                                                           cost       Fair value
                                                                        ---------     ----------
      <S>                                                               <C>           <C>   
      Due within 12 months                                               $    425            425
      Due beyond 12 months but within 5 years                               3,212          3,238
      Due beyond 5 years but within 10 years                                5,560          5,484
      Beyond 10 years                                                      92,132         92,755
                                                                        ---------        -------
                                                                         $101,329        101,902
                                                                        =========        =======
</TABLE>

     The amortized cost of mortgage-backed securities at July 31, 1997 includes
     unrealized holding losses totaling approximately $1.5 million for
     securities transferred from the available for sale portfolio.

                                      60
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)  Mortgage-Backed Securities, Continued
     -------------------------------------

     The Company had pledged as collateral for advances under its short-term
     line of credit from the Federal Home Loan Bank of Atlanta, FNMA mortgage-
     backed securities and FHLMC and FNMA CMOs with amortized cost and fair
     values of $25.6 million and $25.1 million, respectively, at July 31, 1997
     and FNMA mortgage-backed securities and FHLMC and FNMA CMOs with amortized
     cost and fair values of $29.7 million and $28.8 million, respectively, at
     July 31, 1996. In addition, FNMA and FHLMC CMOs and mortgage-backed
     securities were pledged as collateral for reverse repurchase agreements
     with amortized cost and fair values of $23.7 million and $23.3 million,
     respectively, at July 31, 1997; and $47.2 million and $45.6 million,
     respectively, at July 31, 1996.

(5)  Loans Receivable
     ----------------

     Substantially all of the Company's loans receivable are mortgage loans
     secured by residential and commercial real estate properties located in the
     state of Maryland. Loans are extended only after evaluation by management
     of customers' creditworthiness and other relevant factors on a case-by-case
     basis.

     Residential lending is generally considered to involve less risk than other
     forms of lending, although payment experience on these loans is dependent
     to some extent on economic and market conditions in the Company's primary
     lending area. Commercial and construction loan repayments are generally
     dependent on the operations of the related properties or the financial
     condition of its borrower or guarantor. Accordingly, repayment of such
     loans can be more susceptible to adverse conditions in the real estate
     market and the regional economy.

                                      61
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5)  Loans Receivable, Continued
     ---------------------------

     Loans receivable are summarized as follows at July 31:
<TABLE>
<CAPTION>
 
                                                   1997     1996
                                                 --------  -------
                                                  (In Thousands)
     <S>                                         <C>       <C>
     First mortgage loans:
       One-to-four family residential            $207,643  156,374
       Multi-family residential                    30,230   35,930
       Commercial                                  35,071   37,695
       Construction                                19,134   23,320
       Land development                            20,477   14,183
       FHA insured and VA guaranteed               13,243   11,974
       Loans held for sale                            718      350
                                                 --------  -------
          Total first mortgage loans              326,516  279,826
     Consumer and other loans                      15,498   13,026
     Second mortgage loans                          4,745    3,434
     Loans secured by deposit accounts                461      508
     Participation in loans fully guaranteed by
       Agency for International Development           116      152
     Accrued interest receivable                    1,898    1,547
                                                 --------  -------
                                                  349,234  298,493
                                                 --------  -------
     Less:
       Unearned loan fees, net                      1,342    1,202
       Undisbursed portion of loans in process     11,958   14,837
       Allowance for loan losses                    3,647    4,412
                                                 --------  -------
                                                   16,947   20,451
                                                 --------  -------
          Loans receivable, net                  $332,287  278,042
                                                 ========  =======
 
</TABLE>
     Nonperforming and restructured loans are summarized as follows at July 31:
<TABLE>
<CAPTION>
 
                                                 1997    1996
                                                ------   -----
                                                (In Thousands)
     <S>                                        <C>     <C>
     Nonaccruing loans                          $  765   3,773
     Accruing loans 90 days or more delinquent      33     136
     Restructured loans                            776   1,636
                                                ------   -----
                                                $1,574   5,545
                                                ======   =====
</TABLE>

                                      62
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5)  Loans Receivable, Continued
     ---------------------------

     Interest income that would have been recorded under the original terms of
   nonaccruing and restructured loans and the interest income actually
   recognized are summarized below for the years ended July 31:
<TABLE>
<CAPTION>
                                      1997   1996  1995
                                      -----  ----  ----
                                       (In Thousands)
<S>                                   <C>    <C>   <C>
   Interest income that would have
     been recorded                    $ 166   567   898
   Interest income recognized            94   151   274
                                      -----  ----  ----
   Interest income foregone           $  72   416   624
                                      =====  ====  ====
</TABLE>

     The Company is not committed to lend additional funds to debtors whose
   loans have been restructured.

     In addition to the loans included above as nonperforming and restructured,
   the Company, through its normal asset review process, has identified certain
   loans which management believes involve a degree of risk warranting
   additional attention. Included in loans at July 31, 1997 are approximately
   $6.2 million of such loans which, while current in required payments, have
   exhibited some potential weaknesses that, if not corrected, could increase
   the level of risk in the future. In addition, at July 31, 1997 management has
   identified approximately $2.7 million of loans which have exhibited
   weaknesses in the paying capacity of the borrower or the collateral pledged
   which may result in a loss if such deficiencies are not corrected.

     Impaired loans as defined by Statement 114 and the allocated valuation
   allowances at July 31 are as follows:
<TABLE>
<CAPTION>
                                        1997                      1996
                                ----------------------    ----------------------
                                  Loan       Valuation      Loan       Valuation
                                 balance     allowance     balance     allowance
                                ---------    ---------    ---------    ---------
                                                (In thousands)
   <S>                          <C>          <C>          <C>          <C>
 
   Impaired with valuation
     allowance                  $     757          300        4,235        2,053
   Impaired without valuation
     allowance                         24           --           --           --
                                ---------    ---------    ---------    ---------
       Total impaired loans     $     781          300        4,235        2,053
                                =========    =========    =========    =========
</TABLE>

     The allocated valuation allowance for impaired loans at July 31, 1997 and
   1996, and activity related thereto for the years ended July 31, 1997 and 1996
   is included in the allowance for loan losses summary.


                                      63
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5)  Loans Receivable, Continued
     ---------------------------

     The average recorded investment in impaired loans and the amount of
     interest income recognized for the years ended July 31, 1997 and 1996 were
     (in thousands):
   <TABLE>
   <CAPTION>
                                                                                                 1997         1996
                                                                                              ---------    ---------
       <S>                                                                                    <C>          <C>
                                                                                             
       Average recorded investment in impaired loans                                          $   3,101        5,270
       Interest income recognized during impairment,                                         
         all on cash basis                                                                           82           87

   </TABLE> 
     Activity in the allowance for loan losses is summarized as follows for the
     years ended July 31:

   <TABLE> 
   <CAPTION>  
                                                                                   1997          1996        1995
                                                                                 ---------    ---------    ---------
                                                                                           (In Thousands)
       <S>                                                                       <C>          <C>          <C> 
       Balance at beginning of year                                              $   4,412        6,361        3,669
       Provision charged to expense                                                    500          772        3,386
       Charge-offs                                                                  (1,635)      (3,043)      (1,033)
                                                                                
       Recoveries                                                                      370          322          339
                                                                                 ---------    ---------    ---------
       Balance at end of year                                                    $   3,647        4,412        6,361
                                                                                 =========    =========    =========  
   </TABLE> 

     Loans serviced for others, which are not included in the Company's assets,
     were approximately $49.5 million, $50.0 million and $50.3 million at July
     31, 1997, 1996 and 1995, respectively. A fee is charged for such servicing
     based on the unpaid principal balances.

     Commitments to extend credit are agreements to lend to customers, provided
     that terms and conditions established in the related contracts are met. The
     Company had the following contractual commitments to extend credit,
     exclusive of undisbursed loans in process at July 31:
   <TABLE>
   <CAPTION>
                                                        1997                   1996
                                                --------------------    --------------------
                                                  Fixed     Floating     Fixed      Floating
                                                   Rate      Rate         Rate        Rate
                                                --------    --------    --------    --------       
                                                               (In Thousands)                                                     
       <S>                                      <C>         <C>         <C>         <C>
       Mortgage loans                           $  2,637       4,221       3,480       5,440
       Lines of credit                                --      10,139          --       9,219
       Irrevocable letters of credit                  --       1,716          --       2,097
                                                ========    ========    ========    ========
   </TABLE>

     The interest rate ranges on fixed rate mortgage loan commitments were
     6.875% to 10.5% at July 31, 1997 and 7.125% to 9.25% at July 31, 1996.

     Commitments for mortgage loans generally expire in 60 days. Commitments
     under lines of credit are generally longer than one year and are subject to
     periodic re-evaluation and cancellation. Irrevocable letters of credit
     expire within two years. Since certain of the commitments may expire
     without being drawn upon, the total commitment amounts do not necessarily
     represent future cash requirements. The commitments may be funded from
     principal repayments on loans and mortgage-backed securities, excess
     liquidity, savings deposits and, if necessary, borrowed funds.

                                      64
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5)  Loans Receivable, Continued
     ---------------------------

     Substantially all of the Company's commitments at July 31, 1997 and 1996
     are for loans which would be secured by real estate with appraised values
     in excess of the commitment amounts. The Company's exposure to credit loss
     under these contracts in the event of nonperformance by the other parties,
     assuming that the collateral proves to be of no value, is represented by
     the contractual amount of those instruments.

(6)  Investments in Real Estate
     --------------------------

     Investments in real estate are summarized as follows at July 31:
<TABLE>
<CAPTION>
                                                                                  1997          1996
                                                                                 ---------    ---------    
                                                                                     (In Thousands)
       <S>                                                                       <C>          <C>
       Ground rents                                                              $   4,892        4,904
       Acquired through foreclosure                                                    165          766
                                                                                 ---------    ---------    
       Investments in real estate, net                                           $   5,057        5,670
                                                                                 =========    =========
</TABLE> 
 
     Changes in the allowance for losses on investments in real estate are
     summarized as follows at July 31:
<TABLE> 
<CAPTION> 
                                                                      1997         1996         1995
                                                                   ---------    ---------    ---------
                                                                             (In Thousands)
       <S>                                                         <C>          <C>          <C> 
       Balance at beginning of year                                $      --           --            8
       Provision charged to expense                                       12          158           44
       Charge-offs                                                       (12)        (158)         (52)
                                                                   ---------    ---------    ---------
       Balance at end of year                                      $      --           --           --
                                                                   =========    =========    =========   

</TABLE> 
     Loss on investments in real estate consists of the following for the years
     ended July 31:
<TABLE> 
<CAPTION>  
                                                                      1997          1996         1995
                                                                    ---------    ---------    ---------
                                                                              (In Thousands)
       <S>                                                         <C>          <C>          <C> 
       Operation of investments in real estate                     $      41          232          286
       Provision for losses on investments in real estate                 12          158           44
                                                                   ---------    ---------    ---------
                                                                   $      53          390          330
                                                                   =========    =========    =========   
</TABLE>

                                      65
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7)  Investments in and Advances to Real Estate Joint Ventures
     ---------------------------------------------------------

     National Development Corporation is a partner in various real estate joint
     ventures formed for the purpose of acquiring and developing real estate for
     sale. Combined condensed financial information for the joint ventures is
     presented below as of and for the years ended July 31:
<TABLE>
<CAPTION>
                                                            1997       1996
                                                           -------    -------
                                                             (In Thousands)
     <S>                                                   <C>        <C>
     Assets:
      Real estate under development                        $    --      1,378
      Other                                                    235        204
                                                           -------    -------
                                                           $   235      1,582
     Liabilities:
      Due to American National Savings
       Bank, F.S.B                                         $    --        701
      Due to others                                             60        382

     Partners' equity:
      National Development Corporation                         175        499
                                                           -------    -------
                                                           $   235      1,582
                                                           =======    =======
</TABLE> 
<TABLE> 
<CAPTION>  
                                                  1997      1996       1995
                                                -------    -------    -------
                                                        (In Thousands)
     <S>                                        <C>        <C>        <C> 
       Operations
       ----------
 
     Sales                                      $ 2,313      3,085      3,234
     Costs of sales                               2,196      2,918      3,067
                                                -------    -------    -------
                                                    117        167        167
     Other income                                     4          9          8
     Other expense                                 (445)      (415)      (837)
                                                -------    -------    -------

       Net loss                                 $  (324)      (239)      (662)
                                                =======    =======    =======

</TABLE>

                                      66
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(8)  Property and Equipment
     ----------------------

     Property and equipment are summarized as follows at July 31:
<TABLE>
<CAPTION>
                                                                    Estimated
                                                1997       1996    useful lives
                                               -------    -------  ------------
                                                 (In Thousands)               
     <S>                                       <C>        <C>      <C>
                                                              
     Leasehold improvements                    $ 3,652      3,133   5 - 15 years
     Furniture and equipment                     3,666      3,233   3 - 10 years
     Automobiles                                    78         78   3 years
                                               -------    -------  
                                                              
                                                 7,396      6,444
     Less accumulated depreciation                            
      and amortization                           5,604      5,246
                                               -------    -------  
     Property and equipment, net               $ 1,792      1,198    
                                               =======    =======
</TABLE>

     At July 31, 1997 the Company was obligated under noncancelable long-term
     operating leases for the main office, operations center and nine of its
     branch offices. The leases, five of which have renewal options, expire on
     various dates extending to 2017 and have aggregate minimum lease payments
     for succeeding fiscal years approximately as follows (in thousands):
<TABLE>
<CAPTION>
 
          <S>                                                      <C>
          1998                                                     $1,142
          1999                                                      1,155
          2000                                                      1,801
          2001                                                      1,062
          2002                                                        770
          Subsequent to 2002                                        1,995
                                                                   ------
             Total minimum lease payments                          $7,925
                                                                   ======
</TABLE>

     Rent expense for the years ended July 31, 1997, 1996 and 1996 was
     approximately $1,066,000, $980,000, and $949,000, respectively.

                                      67
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(9)  Deposits

 
     Deposits are summarized as follows at July 31: 
<TABLE> 
<CAPTION> 
                                Weighted average rate
                                ---------------------                       1997                     1996
                                                                   ----------------------    ----------------------
                                    1997      1996                  Amount          %         Amount          %
                                  -------    -------               ---------    ---------    ---------    --------- 
                                                                                (Dollars in Thousands)
       <S>                          <C>        <C>                 <C>          <C>          <C>          <C> 
       Certificate                    5.79%      6.00%             $ 225,723         68.5%   $ 216,119        69.0%
       Noncertificate:                                                                           
         Passbook                     3.03       3.04                 39,791         12.1       40,781        13.0
         NOW                          1.47       1.56                 14,899          4.5       15,038         4.8
         Money Fund                   3.75       3.03                 49,250         14.9       41,145        13.2
                                                                   ---------    ---------    ---------    --------- 
                                                                   $ 329,663       100.0%    $ 313,083       100.0%
       Certificate accounts maturing:                              =========    =========    =========    =========
       Under 12 months                                             $ 130,188        57.7%      118,772        55.0%
       13 months to 24 months                                         36,661        16.2        41,271        19.1
       25 months to 36 months                                         18,744         8.3        18,552         8.6
       37 months to 48 months                                          9,484         4.2        10,172         4.7
       49 months to 60 months                                         17,290         7.7         9,539         4.4
       Beyond 60 months                                               13,356         5.9        17,813         8.2
                                                                   ---------    ---------    ---------    --------- 
                                                                   $ 225,723       100.0%    $ 216,119       100.0%
                                                                   =========    =========    =========    =========
</TABLE>
     The aggregate amount of certificates of deposit with a minimum denomination
     of $100,000 was approximately $22.6 million and $22.4 million at July 31,
     1997 and 1996, respectively.

     Interest expense on deposits is summarized as follows for the years ended
     July 31:
<TABLE>
<CAPTION>
 
                                               1997     1996    1995
                                              -------  ------  ------
                                                  (In Thousands)
     <S>                                      <C>      <C>     <C>
                 
     Certificate                              $12,802  12,847  11,343
     Passbook                                   1,221   1,230   1,332
     NOW                                          242     237     240
     Money Fund                                 1,389   1,511   2,008
                                              -------  ------  ------
                                              $15,654  15,825  14,923
                                              =======  ======  ======
</TABLE>

                                      68
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) Securities Sold Under Agreements to Repurchase
     ----------------------------------------------

     The Company sells securities under agreements to repurchase (reverse
     repurchase agreements). These fixed-coupon reverse repurchase agreements
     are treated as financings and the obligations to repurchase securities sold
     are reflected as liabilities in the statements of financial condition. The
     dollar amount of securities underlying the agreements remains in the asset
     accounts. The securities underlying the agreements were delivered to the
     dealers which arranged the transactions. The dealers may have loaned such
     securities to other parties in the normal course of their operations and
     have agreed to resell to the Company either substantially identical
     securities or the same securities at the maturities of the agreements. The
     amortized cost and market values of such securities were $43.4 million and
     $43.2 million, respectively, as of July 31, 1997, and $47.2 million and
     $45.6 million, respectively, as of July 31, 1996. At July 31, 1997 and 1996
     the securities sold under agreements to repurchase involved the purchase of
     the same securities. The weighted average interest rate of the agreements
     was 5.73% at July 31, 1997.

     Certain additional information regarding securities sold under agreements
     to repurchase is as follows at July 31:
<TABLE>
<CAPTION>
                                                                                            1997         1996         1995
                                                                                          ---------    ---------    --------- 
                                                                                                     (In Thousands)
       <S>                                                                                <C>          <C>          <C>
       Maximum amount outstanding at month-end                                            $  46,423       39,011       34,338
       Approximate average balance                                                           38,522       34,005       20,741
                                                                                          =========    =========    =========   
</TABLE> 
 
(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:
<TABLE> 
<CAPTION>   
                                                                                              1997          1996
                                                                                             -------       -------
                                                                                                 (In Thousands)
       <S>                                                                                   <C>           <C> 
       5.53% -- 6.50%, due in 1996                                                           $    --         7,373
       4.89% -- 5.58%, due in 1997                                                            13,550        17,550
       5.84% -- 6.21%, due in 1997                                                                --        10,500
       6.27% -- 7.09%, due in 1997                                                                --         4,476
       5.45% -- 6.14%, due in 1998                                                            28,443         9,000
       6.21% -- 6.48%, due in 1998                                                             5,405            --
       7.32%, due in 1998                                                                      1,000         1,000
       4.64% -- 5.42%, due in 1999                                                             5,975        10,675
       6.04% -- 6.63%, due in 1999                                                             2,300            --
       5.56% -- 6.28%, due in 2000                                                             7,000            --
       5.29% -- 6.12%, due in 2002                                                            10,000            --
       6.43%, due in 2006                                                                      1,350         1,500
       5.00%, due in 2014                                                                        750           750
                                                                                             -------       -------
                                                                                             $75,773        62,824
                                                                                             =======       =======
</TABLE>


                                        69
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11) Advances from the Federal Home Loan Bank of Atlanta, Continued
     --------------------------------------------------------------

     The Company has a $120 million credit availability agreement with the FHLBA
     which is secured under a blanket floating line security agreement or by
     mortgage-backed and investment securities specifically pledged as draws are
     made. Under the blanket floating lien security agreement with the FHLBA,
     the Company is required to maintain, as collateral for its advances,
     qualifying first mortgage loans or mortgage-backed securities in an amount
     equal to 133% of the advances. In addition, its stock in FHLBA is pledged
     as collateral for its advances. Interest on advances is at the FHLBA's
     established rate for advances with the same maturity or at the FHLBA's
     variable rate.

(12) Income Taxes
     ------------

     The income tax provision (benefit) is composed of the following for the
     years ended July 31:
<TABLE>
<CAPTION>
                                                          1997     1996     1995
                                                         ------   ------   ------
                                                              (In Thousands)
        <S>                                              <C>      <C>      <C>
                                          
        Current:                          
          Federal                                        $1,698      370      126
          State                                             109      (28)     (30)
                                                         ------   ------   ------
                                                          1,807      342       96
                                                         ------   ------   ------
                                          
        Deferred:                         
          Federal                                        $ (645)     376     (119)
          State                                            (143)      83      (27)
                                                         ------   ------   ------
                                                           (788)     459     (146)
                                          
          Income tax provision (benefit)                 $1,019      801      (50)
                                                         ======   ======   ======
</TABLE>
     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:
<TABLE>
<CAPTION>
 
                                                                  1997      1996
                                                                 ------     -----
                                                                   (In Thousands)      
        <S>                                                       <C>        <C>
                                                                        
        Net unrealized holding losses on securities               $  593     1,056
        Allowances for losses on loans and                              
          investments in real estate                               1,288       773
        Interest and fees on loans                                   200       279
        Other assets                                                 544       336
                                                                  ------     -----
             Total deferred tax assets                             2,625     2,444
        Federal Home Loan Bank stock dividends                       353       353
        Other liabilities                                             25       225
                                                                  ------     -----
             Total deferred tax liabilities                          378       578
                                                                  ------     -----
                                                                  $2,247     1,866
                                                                  ======     =====
</TABLE>

                                      70
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12) Income Taxes, Continued
     -----------------------

     A reconciliation between the income tax (benefit) provision and the amount
     computed by multiplying income before income taxes by the statutory federal
     income tax rate of 34% is as follows for the years ended July 31:
<TABLE>
<CAPTION>
 
                                               1997    1996   1995
                                              -------  -----  -----
                                                  (In Thousands)
     <S>                                      <C>      <C>    <C>
 
     Federal income tax provision (benefit)
       at statutory rate                       $1,123    798    (14)
     Adjustments:
       State income taxes, net of federal
        income tax benefit                        (22)    36    (38)
       Other                                      (82)   (33)     2
                                               ------   ----   ----
     Provision (benefit) for income taxes      $1,019    801    (50)
                                               ======   ====   ====
</TABLE>

(13) Stockholders' Equity
     --------------------

     Conversion and Reorganization

     On June 23, 1997 American National Bancorp, Inc. and Crestar Corporation
     (Crestar) announced the signing of a definitive agreement under which
     Crestar will acquire the Company in a transaction to be accounted for under
     the purchase method. The merger is expected to be completed no earlier than
     November 6, 1997 and prior to December 31, 1997.

     For the purpose of determining the Exchange Ratio, each share of American
     National Common Stock has been valued at $20.25 (the "Common Stock Price
     Per Share"). In the Merger, each share of American National Common Stock
     shall be converted into a fraction of a share of Crestar Common Stock
     determined in accordance with the Exchange Ratio. The "Exchange Ratio"
     shall be calculated as follows: (i) if the average closing price of Crestar
     Common Stock as reported on the NYSE for each of the 10 trading days ending
     on the tenth day prior to the effective time of the Holding Company Merger
     (the "Average Closing Price") is between $30 and $50, the Exchange Ratio
     shall be the quotient (rounded to the nearest one-thousandth) of (A) $20.25
     divided by (B) the Average Closing Price; (ii) if the Average Closing Price
     is $50 or greater, the Exchange Ratio shall be 0.405; and (iii) if the
     Average Closing Price is $30 or less, the Exchange Ratio shall be 0.675.

     In June 1995, the Board of Directors of American National Bankshares,
     M.H.C. (MHC), a mutual holding company, and the Bank approved a plan of
     conversion and reorganization which resulted in the merger of the MHC into
     the Bank and the formation of a new Delaware stock chartered holding
     company, American National Bancorp, Inc. The conversion was completed on
     October 31, 1995.

                                      71
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) Stockholders' Equity, Continued
     -------------------------------

     Conversion and Reorganization, continued

     In the offering, 2,182,125 shares of common stock were sold at a
     subscription price of $10.00 per share resulting in net proceeds of
     approximately $19.3 million after taking into consideration the $1.7
     million for the establishment of an ESOP and $782,000 in expenses. Of the
     net proceeds, $8.9 million was contributed to the Bank in exchange for all
     of its outstanding common stock. In addition to the shares sold in the
     offering, 927,000 shares of the Company's stock were issued in exchange for
     shares of the Bank's stock previously held by public shareholders at an
     exchange ratio of 1.94 shares for each share of the Bank's common stock
     resulting in 3,980,500 total shares of the Company's stock outstanding as
     of October 31, 1995.

     Federal regulations require that upon conversion from mutual to stock form
     of ownership, a "liquidation account" be established by restricting a
     portion of net worth for the benefit of eligible savings account holders
     who maintain their savings accounts with the Bank after conversion. In the
     event of complete liquidation (and only in such event), each savings
     account holder who continues to maintain his savings account shall be
     entitled to receive a distribution from the liquidation account after
     payment to all creditors, but before any liquidation distribution with
     respect to capital stock. This account will be proportionately reduced for
     any subsequent reduction in the eligible holders' savings accounts. At
     conversion the liquidation account totaled approximately $28.8 million.

     Stock Option Plans

     The Board of Directors and stockholders adopted the 1993 Incentive Stock
     Option Plan for officers and employees of the Company (the Stock Plan)
     which authorized the grant of stock options to officers and certain
     employees for an aggregate of 122,866 shares of authorized but unissued
     common stock. Options are exercisable at the market price at the time of
     the grant on a cumulative basis in installments at a rate of 25, 50 and 25
     percent per year commencing one year from the date of grant and expire 10
     years from the date of grant. All share data and option prices have been
     adjusted to give retroactive effect to the 1.94 exchange ratio effective
     October 31, 1995 in the conversion from the mutual to stock form of
     organization.

     The Board of Directors and stockholders adopted the 1996 Stock Option Plan
     for directors, officers and employees of the Company which authorized the
     grant of stock options to directors, officers and certain employees for an
     aggregate of 218,213 shares of authorized but unissued common stock.
     Options are exercisable at the market price at the time of grant on a
     cumulative basis in installments at a rate of 20% per year commencing one
     year from the date of grant and expire ten years from the date of grant.

                                      72
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) Stockholders' Equity, Continued
     -------------------------------

     Information with respect to stock options is as follows for the years ended
     July 31, 1997 and 1996:

<TABLE> 
<CAPTION> 
                                                  1997                      1996
                                           -----------------------   ---------------------
                                                          Weighted                Weighted
                                                          average                 average
                                                          exercise                exercise
                                           Shares          price     Shares        price
                                           -------       ---------   -------     --------- 
     <S>                                   <C>           <C>         <C>         <C> 
     Outstanding at beginning of year      117,046            5.16   117,046          5.16
     Granted                               142,442           11.54        --            -- 
     Canceled                               21,256            5.15        --            -- 
                                           -------       ---------   -------     --------- 
     Outstanding at end of year            238,232            8.97   117,046          5.16
                                           -------       ---------   -------     --------- 
     Exercisable at end of year             98,700                    87,300
                                           =======                   =======               
</TABLE> 

     The weight average remaining life of options outstanding at July 31, 1997
     was 8 years.

     The Company applies the intrinsic value method in accounting for its stock
     options and accordingly, no compensation cost has been recognized for its
     options in the financial statements. Had the Company determined
     compensation costs based on the fair value at the grant date for its stock
     options under SFAS No. 123, the Company's net income would have been
     increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
 
                                      1997   1996
                                     ------  -----
       <S>                           <C>     <C>
                                  
       Net income:                
           As reported               $2,283  1,546
           Pro forma                  2,226  1,546
       Net income per share:      
           As reported                  .64    .36
           Pro forma                    .62    .36
</TABLE>

     The weighted average fair value of options granted during 1997 was $2.40 on
     the date of grant. The fair values of the options granted were calculated
     using the Black-Scholes option-pricing model with the following weighted
     average assumptions used for the grants in 1997: risk-free interest rate of
     5.80%; expected volality of 22%; expected option lives of three years and
     expected dividends of 1.00%. The required exclusion of the proforma
     compensation adjustment for stock option grants prior to the 1996 fiscal
     year causes the disclosed proforma net income not to be indicative of
     proforma net income for future periods.

     The Board of Directors and stockholders adopted the 1993 Stock Option Plan
     for Outside Directors (the Directors' Plan) which authorized the grant of
     non-statutory stock options to outside directors for an aggregate of 51,734
     shares of authorized but unissued common stock. Options are immediately
     exercisable at the market price at the time of the grant and expire 10
     years from the date of grant. In connection with the offering, the Company
     granted options to purchase 49,794 shares at $5.15 per share. In fiscal
     1995, the Company granted options to purchase an additional 194 shares at
     $5.35 per share.

                                      73
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) Stockholders' Equity, Continued
     -------------------------------

     Net Income Per Common Share

     Net income per share of common stock for the year ended July 31, 1997 is
     computed based on 3,582,913 shares of common stock and common stock
     equivalents. Net income per share from the date of conversion, October 31,
     1995 to July 31, 1996 has been computed based on 3,766,389 weighted average
     shares of common stock and common stock equivalents. The pro forma net
     income per share for the year ended July 31, 1996 has been calculated as if
     the conversion had been completed on August 1, 1995. The net proceeds of
     the offering are assumed to have been invested at a net effective yield of
     7.87%, (the approximate weighted average yield on all interest earning
     assets during the period from August 1, 1995 to October 31, 1995) for the
     period from August 1, 1995 to October 31, 1995, and income so calculated,
     reduced for income taxes at an assumed effective rate of 38.6%, was added
     to reported net income for the period to obtain the pro forma net income
     used in the calculations. Net income per share of common stock for year
     ended July 31, 1995 is computed by dividing net income for the year by
     2,052,000, the number of shares of common stock issued and outstanding for
     the year.

     Dividends on Common Stock

     From January 31, 1994 to October 31, 1995 the Bank declared a quarterly
     cash dividend of approximately $.10 per share. Upon approval by the OTS,
     the MHC elected to waive receipt of its dividends on its 1,125,000 shares
     thereby reducing the actual dividends declared in 1996 and 1995 to $92,600
     and $371,000, respectively.

     The most recent dividend waiver approval by the OTS has the following
     terms: (i) the mutual holding company's board of directors determines that
     such waiver is consistent with such directors' fiduciary duties to the
     mutual holding company's members; (ii) for as long as the savings Bank
     subsidiary is controlled by the mutual holding company, the dollar amount
     of dividends waived by the mutual holding company are considered as a
     restriction on the retained earnings of the savings Bank, which
     restriction, if material, is disclosed in the public financial statements
     of the savings Bank as a note to the financial statements; (iii) the amount
     of any dividend waived by the mutual holding company is available for
     declaration as a dividend solely to the mutual holding company, and, in
     accordance with Statement of Financial Accounting Standards No. 5, where
     the savings Bank determines that the payment of such dividend to the mutual
     holding company is probable, an appropriate dollar amount is recorded as a
     liability; (iv) the amount of any waived dividend is considered as having
     been paid by the savings Bank (and the savings Bank's capital ratios
     adjusted accordingly) in evaluating proposed dividends under OTS capital
     distribution regulations; and (v) in the event the mutual holding company
     converts to stock form, the appraisal submitted to the OTS in connection
     with the conversion application takes into account the aggregate amount of
     the dividends waived by the mutual holding company.

     OTS regulations impose limitations on all capital distributions. The rule
     establishes three tiers of institutions. An institution that exceeds all
     fully phased-in capital requirements before and after a proposed
     distribution ("Tier 1 Institution"), may after prior notice but without the
     approval of the OTS, make capital distributions during a calendar year up
     to (i) 100% of its net income to date during the calendar year plus the
     amount that would reduce by one-half its "surplus capital ratio" (the
     excess capital over its fully phased-in capital requirements) at the
     beginning of the calendar year; or (ii) 75% of its net income over the most
     recent four-quarter period. The Institution is a Tier 1 Institution and
     accordingly had available at July 31, 1997, approximately $13.4 million for
     distribution.

                                      74
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) Stockholders' Equity, Continued
     -------------------------------

     Dividends on Common Stock

     In addition, the OTS would prohibit a proposed capital distribution by any
     institution which would otherwise be permitted by the regulation, if the
     OTS determines that such distribution would constitute an unsafe or unsound
     practice. In addition, FDICIA provides that, as a general rule, a financial
     institution may not make a capital distribution if it would be
     undercapitalized after making the capital distribution. Also, an
     institution meeting the Tier 1 capital criteria which has been notified
     that it needs more than normal supervision will be treated as a Tier 2 or
     Tier 3 Institution subject to additional capital distribution limitations
     unless the OTS deems otherwise.

(14) Pension and Other Benefit Plans
     -------------------------------

     Substantially all full-time employees of the Company are included in a
     noncontributory defined benefit pension plan.

     The following tables set forth the plan's funded status at April 30, 1997
     and 1996, amounts recognized in the statements of financial condition as of
     July 31, 1997 and 1995 and the composition of net pension cost for the
     years ended July 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
 
                                                                                   1997        1996
                                                                                 -------     -------
                                                                                    (In Thousands)
       <S>                                                                       <C>          <C>
       Actuarial present value of benefit obligation:                                    
         Vested                                                                  $ 1,394       1,111
         Nonvested                                                                    13           6
                                                                                 -------     -------
               Total accumulated benefit obligation                              $ 1,407       1,117
                                                                                 =======     =======
       Projected benefit obligation for service rendered to date                 $(2,030)     (1,607)
       Plan assets at fair value                                                   2,062       1,662
                                                                                 -------     -------
                                                                                         
       Plan assets greater than projected benefit obligation                          32          55
       Unrealized transition asset at April 1, 1987 being recognized                     
         over 15 years                                                                68          81
       Unrecognized prior service cost                                              (106)       (118)
       Unrecognized net gain (loss) from past experience different                       
         from that assumed and effects of changes in assumptions                      20         (57)
                                                                                 -------     -------
       Accrued pension cost included in other liabilities                        $    14         (39)
                                                                                 =======     =======

<CAPTION>                                                                                  
                                                                      1997         1996        1995
                                                                    -------      -------     -------
                                                                              (In Thousands)
       <S>                                                          <C>          <C>         <C>    
       Net pension cost included the following components:                               
         Service cost-benefits earned during the period             $   108          101          96
         Interest cost on projected benefit obligation                  132          122         118
         Actual return on plan assets                                  (279)        (200)        (68)
         Net amortization and deferral                                  136           87         (48)
                                                                    -------      -------     -------
              Net pension cost                                      $    97          110          98
                                                                    =======      =======     =======
</TABLE>

                                      75
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) Pension and Other Benefit Plans, Continued
     ------------------------------------------

     In determining the actuarial present value of the projected benefit
     obligation the weighted average discount rate used was 7.5% in 1997 and
     8.0% in 1996 and the expected long-term rate of return on assets was 8.5%
     in 1997 and 1996. The rate of increase of future compensation levels used
     was 5% in 1997 and 1996.

     The Company also has a 401(k) profit sharing plan covering substantially
     all full-time employees. Employee contributions are voluntary and the
     employee may elect to defer from one percent to twenty percent of base
     (qualifying) compensation. Employer contributions are discretionary and
     there were no such contributions for the fiscal years ended July 31, 1997,
     1996 and 1995.

(15) Employee Stock  Ownership Plan (ESOP)
     -------------------------------------

     In connection with the Conversion and Reorganization, the Company formed an
     ESOP. The ESOP covers employees who have completed at least one year of
     service and have attained the age of 21. The ESOP borrowed $1.7 million for
     a ten year term from the Company and purchased 174,570 shares, equal to 8%
     of the total number of shares issued in the offering. The Bank makes
     scheduled quarterly contributions to the ESOP sufficient to service the
     debt. The cost of shares not committed to be released is reported as a
     reduction in stockholders' equity. Dividends, if any, on allocated and
     unallocated shares are used for debt service. Shares are released to
     participants based on compensation.

     In connection with the formation of the ESOP, the Company adopted Statement
     of Position 93-6, "Employers' Accounting for Employee Stock Ownership
     Plans" (SOP 93-6). SOP 93-6 requires that (1) compensation expense be
     recognized based on the average fair value of the ESOP shares committed to
     be released; (2) dividends on unallocated shares used to pay debt service
     be reported as reduction of debt or accrued interest payable and that
     dividends on allocated shares be charged to retained earnings; and (3) ESOP
     shares which have not been committed to be released are not considered
     outstanding for purposes of computing earnings per share and book value per
     share.

     Compensation expense related to the ESOP amounted to $175,000 and $118,000
     for the year ended July 31, 1997 and 1996, respectively.  The fair value of
     unearned ESOP shares at July 31, 1997 totaled $2.8 million.

     The ESOP shares as of July 31 were as follows:
<TABLE>
<CAPTION>
 
                                           1997      1996
                                         -------    -------
<S>                                      <C>        <C>
                                                
     Allocated shares                     20,881      2,909
     Shares earned, but unallocated        9,652      8,728
     Unearned shares                     144,037    162,933
                                         -------    -------
                                         174,570    174,570
                                         =======    =======
</TABLE>

                                      76
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(16) Fair Value of Financial Instruments
     -----------------------------------

     Statement of Financial Accounting Standards No. 107, "Disclosures about
     Fair Value of Financial Instruments" (Statement 107), requires all entities
     to disclose the estimated fair value of certain on- and off-balance sheet
     financial instruments.

     In many instances, the assumptions used in estimating fair values were
     based upon subjective assessments of market conditions and perceived risks
     of the financial instruments at a certain point in time. The fair value
     estimates can be subject to significant variability with changes in
     assumptions. Furthermore, these fair value estimates do not reflect any
     premium or discount that could result from offering for sale at one time
     the Company's entire holdings of a particular financial instrument. In
     addition, the tax ramifications related to the realization of unrealized
     gains and losses are not permitted to be considered in the estimation of
     fair value.

     Fair value estimates are based solely on existing on-and off-balance sheet
     financial instruments without attempting to estimate the value of
     anticipated future business and the value of assets and liabilities that
     are not considered financial instruments. Examples would include portfolios
     of loans serviced for others, net fee income from the Company's
     subsidiaries, core deposit intangibles, mortgage banking operations, and
     deferred tax assets. Fair value estimates, methods and assumptions are set
     forth as follows for the Company's financial instruments.

     The carrying value and estimated fair value of financial instruments is
     summarized as follows at July 30:
<TABLE>
<CAPTION>
 
                                                             1997                  1996
                                                     --------------------  --------------------
                                                     Carrying  Estimated   Carrying  Estimated
                                                      Value    Fair Value   Value    Fair Value
                                                     --------  ----------  --------  ----------
                                                                   (In Thousands)
      <S>                                            <C>       <C>         <C>       <C>
                                               
      Assets:                                  
           Cash and interest-bearing deposits        $  5,468       5,468     4,508       4,508
           Federal funds sold                              --          --       394         394
           Ground rents owned                           4,892       4,156     4,904       3,863
        Federal Home Loan Bank of              
            Atlanta stock                               4,195       4,195     3,141       3,141
           Securities available for sale               28,309      28,309    40,266      40,266
           Investment securities                       20,521      20,669    24,109      23,651
           Mortgage-backed securities                 101,329     101,902   100,195      97,627
           Loans receivable                           332,287     338,508   278,042     277,056
                                               
      Liabilities:                             
           Savings accounts                           329,663     331,823   313,083     315,988
        Securities sold under agreements       
            to repuchase                               42,596      42,633    34,445      34,420
        Advances from the Federal Home         
            Loan Bank of Atlanta                       75,773      75,100    62,824      62,029
        Advances payments by borrowers         
            for taxes, insurance and ground rents       2,043       2,043     1,760       1,760
</TABLE>

                                      77
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(16) Fair Value of Financial Instruments, Continued
     ----------------------------------------------

     Cash, Investments and Mortgage-Backed Securities

     For cash and cash equivalents the carrying amount is a reasonable estimate
     of fair value. The fair value of investment and mortgage-backed securities
     is estimated based on bid prices published in financial newspapers or bid
     quotations received from securities dealers. The fair value of ground rents
     owned is estimated by discounting the cash flows using the current 30 year
     treasury bond rate. The fair value of Federal Home Loan Bank stock is
     estimated to be equal to its carrying amount given it is not a publicly
     traded equity security, it has an adjustable dividend rate, and all
     transactions in the stock are executed at the stated par value.

     Loans

     Fair values are estimated for portfolios of loans with similar financial
     characteristics. Mortgage loans are segregated by type, including but not
     limited to residential, commercial, and construction. Consumer and other
     loans are segregated by type, including but not limited to automobile
     loans, home equity lines of credit and commercial. Each loan category may
     be segmented, as appropriate, into fixed and adjustable interest rate
     terms, ranges of interest rates, performing and nonperforming, and
     repricing frequency.

     The fair value of each loan portfolio is calculated by discounting both
     scheduled and unscheduled cash flows through the remaining contractual
     maturity using the origination rate that the Company would charge under
     current conditions to originate similar financial instruments. Unscheduled
     cash flows take the form of estimated prepayments and are generally based
     upon anticipated experience derived from current and prospective economic
     and interest rate environments. For certain types of loans, anticipated
     prepayment experience exists in published tables from securities dealers.
     The estimated fair value of loans held for sale is based on the terms of
     the related sale commitments.

     The fair value of significant nonperforming mortgage loans is based on
     recent external appraisals of related real estate collateral, or estimated
     cash flows and are discounted using a rate commensurate with the credit
     risk associated with those cash flows. Assumptions regarding credit risk,
     cash flows and discount rates are judgmentally determined using available
     market information and specific borrower information. The fair value of
     nonperforming consumer loans is based on the Company's historical
     experience with such loans.

     Deposits and Borrowings
     -----------------------

     The fair value of deposits with no stated maturity, such as interest-
     bearing or non-interest-bearing checking accounts, passbook, money fund
     accounts and mortgage escrow accounts, is equal to the amount payable upon
     demand. The fair value of certificates of deposit is based on the lower of
     redemption (net of penalty) or discounted value of contractual cash flows.
     Discount rates for certificates of deposit are estimated using the rates
     currently offered by the Company for deposits of similar remaining
     maturities.

                                      78
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(16) Fair Value of Financial Instruments, Continued
     ----------------------------------------------

     Deposits and Borrowings, continued

     The fair value of advances from the FHLBA is based on the discounted value
     of contractual cash flows. Discount rates are estimated using the rates
     currently offered for advances with both similar contractual terms and
     remaining maturities.

     For securities sold under agreements to repurchase the carrying amount is a
     reasonable estimate of fair value, as the agreements mature within 90 days.

(17) Regulatory Matters
     ------------------

     The Federal Deposit Insurance Corporation, through the Savings Association
     Insurance Fund, insures deposits of accountholders up to $100,000. The Bank
     pays an annual premium to provide for this insurance. The Bank is also a
     member of the Federal Home Loan Bank System and is required to maintain an
     investment in the stock of the Federal Home Loan Bank of Atlanta equal to
     at least 1% of the unpaid principal balances of its residential mortgage
     loans, .3% of its total assets or 5% of its outstanding advances from the
     Bank, whichever is greater. Purchases and sales of stock are made directly
     with the Bank at par value.

     The Bank is subject to various regulatory capital requirements administered
     by the federal banking agencies. Failure to meet minimum capital
     requirements can initiate certain mandatory - and possibly additional
     discretionary - actions by regulators that, if undertaken, could have a
     direct material effect on the Bank's financial statements. Under capital
     adequacy guidelines and the regulatory framework for prompt corrective
     action, the Bank must meet specific capital guidelines that involve
     quantitative measures of the Bank's assets, liabilities, and certain off-
     balance-sheet items as calculated under regulatory accounting practices.
     The Bank's capital amounts and classification are also subject to
     qualitative judgments by the regulators about components, risk weightings,
     and other factors.

     Quantitative measures established by regulation to ensure capital adequacy
     require the Bank to maintain minimum amounts and ratios (as defined in the
     regulations and as set forth in the table below, as defined) of total and
     Tier I capital (as defined) to risk-weighted assets (as defined), and of
     Tier I capital to average assets (as defined). Management believes, as of
     July 31, 1996, that the Bank meets all capital adequacy requirements to
     which it is subject.

     The most recent notification from the Office of Thrift Supervision (OTS)
     categorized the Bank as well capitalized under the regulatory framework for
     prompt corrective action. To be categorized as well capitalized the Bank
     must maintain minimum total risk-based, Tier I risk-based, and Tier I
     leverage ratios as set forth in the table below. There are no conditions or
     events since that notification that management believes have changed the
     institution's category.

                                      79
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(17) Regulatory Matters, Continued
     -----------------------------

     The Bank's actual capital amounts and ratios are also presented in the
     table (in thousands).

<TABLE> 
<CAPTION> 
                                                                                                       To Be Well          
                                                                             Required               Capitalized Under     
                                                                            For Capital             Prompt Corrective     
                                                        Actual           Adequacy Purposes          Action Provisions
                                                -------------------     -------------------    -----------------------------
                                                  Amount      Ratio       Amount      Ratio      Amount          Ratio      
                                                ----------    -----     ----------    -----    ----------    ---------------
        <S>                                     <C>           <C>       <C>          <C>       <C>          <C>             
       As of July 31, 1997:             
           Tangible capital (a)                 $  43,557      8.65%    $   7,554     1.50%    $  25,181     greater than  5%   
           Core capital (a)                        43,557      8.65%       15,108     3.00%       30,217     greater than  6  
           Risk-based capital (b)                  46,755     18.28%       20,457     8.00%       25,571     greater than 10%   
       As of July 31, 1996:             
           Tangible capital (a)                    39,800      8.64%    $   6,907     1.50%    $  23,022     greater than  5%   
           Core capital (a)                        39,800      8.64%       13,813     3.00%       27,626     greater than  6  
           Risk-based capital (b)                  41,801     18.20%       18,380     8.00%       22,975     greater than 10%   
----------------------------------------------------------------------------------------------------------------------------
</TABLE> 
     (a) Percentage of capital to average assets.

     (b) Percentage of capital to risk weighted assets.

                                      80

<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(18) Condensed Financial Information (Parent Company Only)
     -----------------------------------------------------

     Summarized financial information for the Company are as follows as of and
     for the year ended July 31 (in thousands):

<TABLE>
<CAPTION>
                                                                        1997         1996
                                                                      -------      -------
     STATEMENT OF FINANCIAL CONDITION                                             
    <S>                                                               <C>           <C>
     Cash                                                             $ 2,900        6,709
     Equity in net assets of the Bank                                  43,852       40,562
     Note receivable - Bank                                             1,440        1,629
     Other receivable                                                     209           --
                                                                      -------      -------
                                                                      $48,401       48,900
                                                                      =======      =======
     Accrued expenses and other liabilities                           $   101            1
     Stockholders' equity                                              48,300       48,899
                                                                      -------      -------
                                                                      $48,401       48,900
                                                                      =======      =======
     STATEMENT OF INCOME                                                       
     Income from note receivable                                      $   131          107
     Expenses                                                             360          137
                                                                      -------      -------
     Loss before equity in net income of subsidiary and income taxes     (229)         (30)
     Equity in net income of subsidiary                                 2,434        1,564
                                                                      -------      -------
     Income before income taxes                                         2,205        1,534
     Income taxes (benefit)                                               (78)         (12)
                                                                      -------      -------
     Net income                                                       $ 2,283        1,546
                                                                      =======      =======
</TABLE>

                                      81
<PAGE>
 
American National Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(18) Condensed Financial Information (Parent Company Only)
     -----------------------------------------------------
<TABLE>
<CAPTION>
                                                                     1997          1996     
                                                                   -------       -------
     STATEMENT OF CASH FLOWS
     <S>                                                           <C>           <C>
     Operating activities:                                                    
       Net income                                                  $ 2,283         1,546
       Adjustments to reconcile net income to net cash provided               
         by operating activities:                                             
           Equity in net income of subsidiary                       (2,434)       (1,564)
           Other, net                                                 (108)            1
                                                                   -------       -------
            Net cash used in operating activities                     (259)          (17)
                                                                   -------       -------
     Investing activities:                                                    
       Purchase of stock of subsidiary                                  --        (8,899)
       Note receivable repayment (disbursement)                        189        (1,746)
       Loan to fund ESOP                                                --           117
                                                                   -------       -------
            Net cash provided by (used in) investing activities        189       (10,528)
                                                                   -------    
     Financing activities:                                                    
       Puchase of stock to fund MRP                                 (1,096)           --
       Dividends paid on common stock                                 (433)           --
       Common stock acquired by ESOP                                    --        (1,746)
       Proceeds from common stock offering net of expenses              --        21,040
       Proceeds from exercise of options                               106            --
       Purchase of treasury stock                                   (2,316)       (2,040)
                                                                   -------       -------
            Net cash (used in) provided by financing activities     (3,739)       17,254
                                                                   -------       -------
     Decrease in cash and equivalents                               (3,809)        6,709
     Cash and equivalents, beginning of year                         6,709            --
                                                                   -------       -------
     Cash and equivalents, end of year                             $ 2,900         6,709
                                                                   =======       =======
</TABLE>

                                      82
<PAGE>
 
Independent Auditors' Report

                   [KPMG Peat Marwick LLP LOGO APPEARS HERE]


The Board of Directors
American National Bancorp, Inc.
Baltimore, Maryland:


We have audited the accompanying consolidated statements of financial condition
of American National Bancorp, Inc. and subsidiary (the Company) as of July 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended July 31, 1997.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American National
Bancorp, Inc. and subsidiary as of July 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended July 31, 1997, in conformity with generally accepted accounting
principles.


                              /s/ KPMG Peat Marwick, LLP
                              KPMG Peat Marwick LLP

Baltimore, Maryland
September 4, 1997

--------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of selected quarterly financial data for the years ended July 31 is as
follows:
<TABLE>
<CAPTION>
                                   First     Second     Third     Fourth
                                  Quarter   Quarter    Quarter    Quarter
                                 --------   --------   --------   --------
                                   (In thousands except per share data)
<S>                              <C>        <C>        <C>        <C>
 
1997:
----
  Interest income                 $ 8,910      9,431      9,482      9,928
  Net interest income               3,516      3,864      3,955      4,086
  Provision for loan losses           210        210         40         40
  Income before provision                                           
    for income taxes               (1,042)     1,172      1,476      1,696
  Net income                         (688)       773        981      1,217
                                  =======    =======    =======    =======
  Net income per common share     $  (.19)       .22        .28        .34
                                  =======    =======    =======    =======
1996:                                                               
----
  Interest income                 $ 8,171      8,252      8,324      8,671
  Net interest income               2,776      3,139      3,424      3,526
  Provision for loan losses           290        210         62        210
  Income before provision                                           
    for income taxes                  285        596      1,020        446
  Net income                          183        431        673        259
                                  =======    =======    =======    =======
  Net income per common share                                       
    (from date of conversion)     $   N/A        .11        .18        .07
                                  =======    =======    =======    =======
 
</TABLE>

                                      83
<PAGE>
 
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------------------------------------------------------------------------
          FINANCIAL DISCLOSURE
          --------------------

     Not Applicable


                                   PART III
                                   --------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

     The Company's Board of Directors is currently composed of seven members.
The Company's bylaws provide that approximately one-third of the directors are
to be elected annually.  Directors of the Company are generally elected to serve
for a three year period or until their respective successors shall have been
elected and shall qualify.

     The table below sets forth certain information, as of September 19, 1997,
regarding the composition of the Company's Board of Directors, including the
terms of office of Board members.  Except as indicated herein, there are no
arrangements or understandings between any nominee and any other person pursuant
to which such nominee was selected.
<TABLE>
<CAPTION>
 
                                                                                       Shares of
                             Age at        Positions                                  Common Stock
                             July 31      Held in the       Director   Current Term  Beneficially   Percent
           Name (1)           1997         Company          Since (2)   to Expire      Owned (3)    Of Class
           --------           ----  ----------------------  ---------  ------------  -------------  --------
<S>                           <C>   <C>                     <C>        <C>           <C>            <C>
                            
Howard K. Thompson            84    Chairman of the Board      1973           1999        63,619        *
                              
Lenwood M. Ivey               64    Director and Treasurer     1979           1999        26,257        *
                              
Betty J. Stull                67    Director and Corporate     1972           1999        28,268        *
                                          Secretary
                              
David L. Pippenger            57           Director            1989           1997        36,706        *
                              
Jimmie T. Noble               55           Director            1994           1997        12,405
                              
A. Bruce Tucker               60    President, Chief           1981           1998       135,351        *
                                    Executive Officer
                                      and Director
 
Joseph M. Solomon             47    Director, Executive        1990           1998        77,327        *
                                    Vice President and
                                    Chief Operating Officer
</TABLE> 

------------------
(*)  Less than 1%.
(1)  The mailing address for each person listed is 211 North Liberty Street,
     Baltimore, Maryland 21201. Each of the persons listed is also a director of
     American National Savings Bank, F.S.B.
(2)  Reflects initial appointment to the Board of Directors of the Bank.
(3)  For the purposes of this table, pursuant to rules promulgated under the
     Exchange Act, an individual is considered to "beneficially own" any shares
     of American National Common Stock over which he or she has or shares (a)
     voting power, which includes the power to vote or direct the voting of the
     shares; or (b) investment power, which includes the power to dispose or
     direct the disposition of the shares.

                                      -84-
<PAGE>
 
     A person also is deemed to have beneficial ownership of any shares of
     American National Common Stock which may be acquired within 60 days
     pursuant to the exercise of stock options. Unless otherwise indicated, the
     individuals listed in the table have sole voting power and sole investment
     power with respect to the indicated shares. Shares of American National
     Common Stock which may be acquired within 60 days of September 19, 1997 are
     deemed to be outstanding shares of American National Common Stock
     beneficially owned by such person(s) but are not deemed to be outstanding
     for the purposes of computing the percentage of American National Common
     Stock owned by any other person.

     The business experience of each of the above directors for at least the
     past five years is as follows:

     Howard K. Thompson is Chairman of the Board of the Company and has been
Chairman of the Bank or Company since 1989.  He has been a director of the Bank
or Company for 24 years, and was elected Chairman in April 1989.  Mr. Thompson,
currently retired, is the former President of Thompson Industries, Inc.

     Lenwood M. Ivey is a special consultant to the Mayor's Office of Baltimore
City.  He is also President of The Baltimore City Foundation, a Board member of
the Office of Enterprise Development, a member of the Baltimore Urban League and
NAACP, and a member of the Maryland Chapter of the National Association of
Community Development. Mr. Ivey is a member of the Audit, Budget and Commercial
Income Producing Loan Committees.

     Betty J. Stull is presently retired.  She has been affiliated with the Bank
or Company since 1951, and is a member of the audit and executive compensation
committees.

     David L. Pippenger is Senior Attorney for Amoco Corporation.  He is
chairman of the executive compensation committee and a member of the executive,
audit and delinquent loan committees.

     Jimmie T. Noble has been a partner in the local certified public accounting
firm of Sturgill and Associates since April 1994.  From September 1973 to March
1994, Mr. Noble was affiliated with Grant Thornton, an international certified
public accounting firm in which he became a partner in August 1980.  He is
chairman of the audit and budget committees, and a member of the executive
compensation committee.

     A. Bruce Tucker is President and Chief Executive Officer of the Company and
has been President of the Bank since October 1981, and was named Chief Executive
Officer of the Bank in January 1985.  He has been an employee of the Bank or
Company since 1966.  He is a member of the Neighborhood Housing Services of
America, Housing Task Force on Housing Opportunities, and a Director of Harbel
Housing Partnership.

     Joseph M. Solomon has been employed by the Bank or Company since 1972.  He
was elected Executive Vice President in 1985, appointed Chief Operating Officer
in 1990, and elected to the Board in 1990.  He is a Director and past Chairman
of the Maryland League of Financial Institutions, a Director of the Maryland
Mortgage Bankers Association, a Director of Baltimore Corporation for Housing
Partnerships, and a Director of the Maryland Chapter, Neighborhood Housing
Services of America.

     The following table sets forth certain information as of July 31, 1997
regarding the executive officers of the Company who are not also directors.
<TABLE>
<CAPTION>
 
           NAME             AGE   POSITION WITH THE BANK
          ------            ---  -------------------------
<S>                         <C>  <C>
 
Mark S. Barker............   44  Senior Vice President
 
Howard I. Scaggs, III.....   52  Senior Vice President
 
James M. Uveges...........   47  Senior Vice President and
                                 Chief Financial Officer
</TABLE>

     The business experience of each of the above executive officers for at
least the past five years is as follows:

                                      -85-
<PAGE>
 
     Mark S. Barker has been employed by the Bank or Company since 1974, and
presently serves as Senior Vice President of the Savings Division and Branch
Operations. Mr. Barker serves as an officer or director of various community and
charitable organizations.

     Howard I. Scaggs, III, has been employed by the Bank or Company since 1965,
and presently serves as Senior Vice President of the Appraisal/Construction
Division.

     James M. Uveges has been employed by the Bank or Company since March 1990,
and presently serves as Senior Vice President/Chief Financial Officer. Prior to
joining the Bank, Mr. Uveges was Senior Manager for over nine years at an
international certified public accounting firm. He is a Director of the United
Way of Central Maryland, and past President and member of the Central Maryland
Chapter of Maryland Association of CPAs.

OWNERSHIP REPORTS BY OFFICERS AND DIRECTORS

     The Common Stock is registered pursuant to Section 12(g) of the Exchange
Act. The officers and directors of the Company and beneficial owners of greater
than 10% of the Common Stock ("10% beneficial owners") are required to file
reports on Forms 3, 4 and 5 with the SEC disclosing beneficial ownership and
changes in beneficial ownership of the Common Stock. SEC rules require
disclosure in the Company's Annual Report on Form 10-K of the failure of an
officer, director or 10% beneficial owner of the Common Stock to file a Form 3,
4 or 5 on a timely basis. Based on the Company's review of such ownership
reports, no officer, director or 10% beneficial owner of the Company failed to
file ownership reports on a timely basis for the fiscal year ended July 31,
1997.

ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

DIRECTORS' COMPENSATION

     Cash Compensation. Members of the Boards of Directors of the Company and
Bank each received $8,500 during the fiscal year ended July 31, 1997, plus $200
($250 effective June 1997), each for each meeting attended. The Chairman of the
Board received an additional $17,300. Members of the Board committees were paid
$200 ($250 effective June 1997) for each meeting attended during the fiscal year
ended July 31, 1997. The Company paid a total of $76,000 in directors' and
committee fees for the year ended July 31, 1997. Officers who are also directors
of the Company receive no additional compensation or fees for serving as
directors of the Company.

     1993 Directors Option Plan. In 1993, the Board of Directors of the Bank
adopted the 1993 Stock Option Plan for Outside Directors (the "1993 Directors
Option Plan"), which was approved by the Bank's stockholders at the 1993 Annual
Meeting. Under the 1993 Directors Option Plan, options to purchase 17,054,
7,445, 11,048 and 7,445 shares of Common Stock (as adjusted) were granted to
directors Thompson, Ivey, Pippenger, and Stull, respectively. Additionally, on
September 19, 1996, options to purchase 608, 271, 333, 300 and 234 shares were
awarded to directors Thompson, Ivey, Pippenger, Stull and Noble. The exercise
price of the options is equal to the fair market value of the shares underlying
such option on the date the option is granted, or $5.15 per share (as adjusted)
for options granted on the date of completion of the Bank's initial stock
offering, and $12.50 for options granted on September 19, 1996. All options
granted under the 1993 Directors Option Plan may be exercised from time to time
in whole or in part, and expire upon the earlier of 10 years following the date
of grant or three years following the date the optionee ceases to be a director.
As of July 31, 1997 no options awarded under the 1993 Directors Option Plan had
been exercised. The duration and vesting schedule of such options were not
affected by the Conversion, but the aggregate number of shares and exercise
price were adjusted pursuant to the Exchange Ratio.

     1993 Directors Recognition Plan. In 1993, the Board of Directors of the
Bank established the 1993 Recognition and Retention Plan for Outside Directors
(the "1993 Directors Recognition Plan"), which was approved by the Bank's
stockholders at the 1993 Annual Meeting. Under the 1993 Directors Recognition
Plan, the Bank contributed funds to the 1993 Directors Recognition Plan to
enable it to acquire 17,460 shares of Common Stock (as adjusted). Awards are
granted in the form of Common Stock that are restricted by the terms of the 1993
Directors Recognition Plan ("Restricted Stock"). Under the 1993 Directors
Recognition Plan, 5,573, 2,434, 3,612 and 2,434 shares of Restricted Stock (as
adjusted) were awarded to directors Thompson, Ivey, Pippenger, and Stull,
respectively. Restricted Stock is nontransferable and nonassignable.
Additionally, on September 19, 1996, 270, 121, 148, 133 and

                                      -86-
<PAGE>
 
104 shares of Common Stock were awarded to directors Thompson, Ivey, Pippenger,
Stull and Noble.  Participants in the 1993 Directors Recognition Plan become
vested in the shares of stock covered by an award, and all restrictions lapse,
at a rate of 25% per year commencing one year from the date of the award;
provided, however, that in the case of a Director age 70 or older, the award
will become fully vested at the end of 12 months of consecutive service after
the date of the award. Awards to non-employee directors become fully vested upon
a director's disability, death, or following a termination of service in
connection with a change in control of the Bank or the Company.  The holders of
Restricted Stock have the right to vote such shares during the restricted
period. In the Conversion, Restricted Stock was converted into restricted shares
of Common Stock of the Company pursuant to the Exchange Ratio.

     1996 Stock Benefit Plans. Following approval by the Company's stockholders
at the Annual Meeting of Stockholders held on November 21, 1996, the directors
of the Company who are not full time employees received awards of options to
purchase shares of the Company's common stock under the 1996 Stock Option Plan
as follows: Mr. Thompson--21,636 options; Mr. Ivey--9,677 options; Ms. Stull--
10,672 options; Mr. Pippenger--11,868 options; Mr. Noble--8,340 options. These
directors also received an award of shares of restricted stock under the
Company's 1996 Recognition and Retention Plan as follows: Mr. Thompson--8,654
shares; Mr. Ivey--3,869 shares; Ms. Stull--4,269 shares; Mr. Pippenger--4,747
shares; and Mr. Noble--3,339 shares. Vesting of these awards was to occur in
five equal annual installments, provided that all awards become exercisable in
the event the recipient terminates service due to normal retirement, death or
disability, or in the event of a change in control of the Company.

EXECUTIVE COMPENSATION

     The Company has not paid any compensation to its executive officers since
its formation. However, the Company does reimburse the Bank for services
performed on behalf of the Company by its officers. The Company does not
presently anticipate paying any compensation to such persons until it becomes
actively involved in the operations or acquisition of businesses other than the
Bank.

     The following table sets forth for the fiscal years ended July 31, 1997,
1996, and 1995, certain information as to the total remuneration paid by the
Company to the Chief Executive Officer and Chief Operating Officer of the
Company as of July 31, 1997 ("Named Executive Officers"). 

                                      -87-
<PAGE>
 
<TABLE>
<CAPTION>
                                    ANNUAL COMPENSATION               LONG-TERM COMPENSATION
                                 ----------------------------    ---------------------------------
                                                                         AWARDS           PAYOUTS                 
                                                                 ---------------------   ---------       ALL 
       NAME AND          YEAR                       OTHER        RESTRICTED   OPTIONS/                  OTHER
 PRINCIPAL POSITION     ENDED    SALARY             ANNUAL         STOCK      SARS (#)     LTIP      COMPENSATION
         (1)             7/31     (2)     BONUS  COMPENSATION     AWARDS(3)     (4)       PAYOUTS        (5)
-------------------     -----  --------   -----  ------------    ----------   --------   ---------   ------------ 
<S>                     <C>    <C>        <C>    <C>             <C>          <C>        <C>         <C> 
A. Bruce Tucker          1997  $155,548    $--       $--          $231,763     41,795       $--         $24,991
President and Chief      1996   147,903     --        --                --         --        --          24,991
 Executive Officer       1995   140,860     --        --                --         --        --          21,000
-------------------     -----  --------   -----  ------------    ----------   --------   ---------   ------------  
Joseph M. Solomon        1997  $113,302    $--       $--          $135,538     26,666       $--         $ 6,065
Executive Vice           1996   107,907     --        --                --         --        --           6,065
 President and Chief     1995   103,757     --        --                --         --        --           5,530
 Operating Officer
</TABLE>
--------------
(1) No other executive officer received salary and bonuses that in the aggregate
    exceeded $100,000.
(2) Includes amounts deferred at the election of the Named Executive Officers
    pursuant to the Bank's 401(k) Plan and amounts awarded pursuant to the
    Bank's Deferred Compensation Plan.
(3) Relates to awards of 20,000 and 11,700 shares of Common Stock granted to Mr.
    Tucker and Mr. Solomon, respectively, pursuant to the Company's 1996
    Recognition and Retention Plan in November, 1996.  The market value per
    share of the Common Stock was $11.50 on the date of grant. Such awards vest
    in five equal installments, and will be 100% vested upon termination of
    employment due to death or disability or following a change in control. Also
    relates to awards of 141 and 79 shares of Common Stock granted to Mr. Tucker
    and Mr. Solomon, respectively, pursuant to the Company's 1993 Recognition
    and Retention Plan in September 1996. The market value per share of the
    Common Stock was $12.50 on the date of the grant.
(4) Relates to options granted pursuant to the Company's 1996 Stock Option Plan
    in November 1996, which become exercisable in equal installments at a rate
    of 20% per year commencing one year from the date of grant, subject to
    accelerated vesting upon termination of employment due to death or
    disability or following a change in control.
(5) Includes payments made on behalf of the Named Executive Officer pursuant to
    the Company's life insurance plan maintained for executive officers.  The
    Company also provides certain members of senior management with the use of
    an automobile and other personal benefits which have not been included in
    the table.  The aggregate amount of such other benefits did not exceed the
    lesser of $50,000 or 10% of each named person's cash compensation.


     Executive Compensation Committee Interlocks and Insider Participation.
During the fiscal year ended July 31, 1997, directors David L. Pippenger,
Chairperson Betty J. Stull and Jimmie T. Noble served on the Executive
Compensation Committee.

     Report of the Compensation Committee on Executive Compensation. The
Executive Compensation Committee evaluates the performance of the Chief
Executive Officer and Chief Operating Officer, and reviews and approves
increases to base compensation as well as the level of bonus, if any, to be
awarded. The Executive Compensation Committee also approves any perquisites
payable to such officers. In addition, the Executive Compensation Committee
determines the budget for salaries for other executive officers, and reviews the
report of the Chief Executive Officer regarding the allocation of compensation
of such other officers. In determining whether the base salary of the Chief
Executive Officer and Chief Operating Officer should be increased, the budget
for other executive officers and whether to approve the Chief Executive
Officer's allocation of such amounts, the Executive Compensation Committee takes
into account individual performance, performance of the Company and information
regarding compensation paid to executives performing similar duties for
financial institutions in the Company's market area. The Executive Compensation
Committee uses a peer comparison employing at least two published compensation
surveys in determining the salary and benefits of the Chief Executive Officer
and Chief Operating Officer.

     While the Executive Compensation Committee does not use strict numerical
formulas to determine changes in compensation for the Chief Executive Officer
and Chief Operating Officer, and while it weighs a variety of different factors
in its deliberations, it has emphasized and will continue to emphasize earnings,
profitability and return on average assets as factors in setting the
compensation of such officers. Other nonquantitative factors considered

                                      -88-
<PAGE>
 
by the Committee in fiscal 1996 included general management oversight of the
Company, the quality of communication with the Board of Directors, and the
productivity of employees.  Finally, the Committee considered the standing of
the Company with customers and the community, as evidenced by the level of
customer/community complaints and compliments.  While each of the quantitative
and nonquantitative factors described above was considered by the Committee,
such factors were not assigned a specific weight in evaluating the performance
of the Chief Executive Officer and Chief Operating Officer.  Rather, all factors
were considered, and based upon the effectiveness of such officers in addressing
each of the factors, and the range of compensation paid to officers of peer
institutions, the Committee approved an increase in the base salary of the Chief
Executive Officer of 5%.

     The above report has been provided by the current members of the Executive
Compensation Committee: Directors Pippenger, Stull and Noble.

     Employment Agreements. The Bank has entered into employment agreements with
Messrs. Tucker, Solomon, Uveges and Barker. Mr. Tucker's employment agreement
provides for a term of up to three years, and Messrs. Solomon, Uveges and
Barker's employment agreements provide for a term of up to two years. Commencing
on the first anniversary date and continuing each anniversary date thereafter,
the Board of Directors may extend each agreement for an additional year such
that the remaining terms shall be up to three years and two years, respectively,
unless written notice of nonrenewal is given by the Board of Directors after
conducting a performance evaluation. The agreements provide that the base salary
of the executive will be reviewed annually. In addition to the base salary, the
agreements provide that the executive is to receive all benefits provided to
permanent full time employees of the Bank, including among other things,
disability pay, participation in stock benefit plans and other fringe benefits
applicable to executive personnel. The agreements permit the Bank to terminate
the executive's employment for cause at any time. Termination for cause is
defined in the employment agreements to mean termination because of the
executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation or final cease-and-
desist order, or material breach of the employment agreement. In the event the
Bank chooses to terminate the executive's employment for reasons other than for
cause, or upon the termination of the executive's employment for reasons other
than a change in control, as defined, or in the event of the executive's
resignation from the Bank upon (i) failure to be reelected to his current
office, (ii) a material change in his functions, duties or responsibilities,
(iii) relocation of his principal place of employment, (iv) the liquidation or
dissolution of the Bank or the Company, or (v) a breach of the agreement by the
Bank, the executive, or in the event of death, his beneficiaries, would be
entitled to receive an amount equal to the greater of the remaining payments due
under the remaining term of the agreement or three times the average base salary
of Mr. Tucker, or two times the average base salary of Messrs. Solomon, Uveges
and Barker, including bonuses and other cash compensation paid, and the amount
of any benefits received pursuant to any employee benefit plans maintained by
the Bank. A change in control is defined in the employment agreement generally
to include (i) a plan of reorganization, merger or sale of substantially all of
the assets of the Bank or the Company or similar transaction in which the Bank
or the Company is not the resulting entity; (ii) certain changes in the Board of
Directors of the Bank or the Company; (iii) a change of control within the
meaning of the Home Owners' Loan Act and the rules and regulations thereunder;
and (iv) an event that would be required to be reported in response to Item 1(a)
of the Current Report on Form 8-K.

     If termination, voluntary or involuntary, follows a change in control of
the Company or the Bank, as defined in the agreement, the executive or, in the
event of his death, his beneficiaries, would be entitled to a payment equal to
the greater of (i) the payments due under the remaining term of the agreement or
(ii) in the case of Mr. Tucker 2.99 times his average annual compensation over
the five years preceding termination, and in the case of Messrs. Solomon, Uveges
and Barker, two times average annual compensation over the five years preceding
termination. The Bank would also continue the executive's life, health, and
disability coverage for the remaining unexpired term of the agreement to the
extent allowed by the plan or policies maintained by the Bank from time to time.

     Each employment agreement provides that for a period of one year following
termination, the executive agrees not to compete with the Bank in any city, town
or county in which the Bank maintains an office or has filed an application to
establish an office.

                                      -89-
<PAGE>
 
     Pension Plan. The Company makes available to all full-time employees who
have attained the age of 21 and completed one year of service with the Company,
a defined benefit noncontributory pension plan. The pension plan provides for
monthly payments to or on behalf of each covered employee upon the employee's
retirement at age 65. These payments are calculated in accordance with a formula
based on the employee's "average monthly compensation," which is defined as the
highest average of total compensation for the last five consecutive calendar
years of employment.

     The following table illustrates annual pension benefits at age 65 under the
most advantageous plan provisions available at various levels of compensation
and years of service. 
<TABLE> 
<CAPTION>
 
 
                                    Years of Benefit Service
                  ------------------------------------------------------------
 Average Salary      5       10       15       20       25       30       35
----------------  ------  -------  -------  -------  -------  -------  -------
<S>               <C>     <C>      <C>      <C>      <C>      <C>      <C> 
    $ 20,000      $1,100  $ 2,200  $ 3,300  $ 4,400  $ 5,500  $ 6,600  $ 7,700
    $ 30,000       1,650    3,300    4,950    6,600    8,250    9,900   11,550
    $ 50,000       2,750    5,500    8,250   11,000   13,750   16,500   19,250
    $ 75,000       4,125    8,250   12,375   16,500   20,625   24,750   28,875
    $100,000       5,500   11,000   16,500   22,000   27,500   33,000   38,500
    $125,000       6,875   13,750   20,625   27,500   34,375   41,250   48,125
    $150,000       8,250   16,500   24,750   33,000   41,250   49,500   57,750
</TABLE>

     Under the Plan, the Company makes an annual contribution for the benefit of
eligible employees computed on an actuarial basis. Total pension expenses for
the year ended July 31, 1997, were $97,442. Employee benefits under the plan do
not vest until five years of credited service. After five years, benefits under
the plan are 100% vested. As of July 31, 1997, Mr. Tucker and Mr. Solomon had 31
and 25 years of creditable service, respectively, under the pension plan.

     1993 Stock Option Plan. The Board of Directors of the Bank adopted the
American National Savings Bank, F.S.B. 1993 Incentive Stock Option Plan (the
"1993 Incentive Stock Option Plan") in connection with the Bank's initial stock
offering. Senior officers and certain key employees are eligible to participate
in the 1993 Incentive Stock Option Plan. The 1993 Incentive Stock Option Plan
authorizes the grant of the equivalent of 122,220 stock options (as adjusted).
Pursuant to the 1993 Incentive Stock Option Plan, grants may be made of (i)
options to purchase Common Stock intended to qualify as incentive stock options
under Section 422 of the Code, (ii) options that do not so qualify ("non-
statutory options") and (iii) limited rights (described below) that are
exercisable only upon a change in control of the Bank or the Company. The grant
of awards under the 1993 Incentive Stock Option Plan is determined by a
committee of the Board of Directors consisting of all non-employee Directors
(the "Option Committee"). The Option Committee presently consists of four
directors, none of whom is eligible to receive options under the 1993 Incentive
Stock Option Plan.

     1996 Stock Option Plan. The Board of Directors of the Company has adopted
the American National Bancorp, Inc. 1996 Stock Option Plan (the "Stock Option
Plan"), which has been approved by the stockholders.

     Certain directors, officers and employees of the Bank and the Company are
eligible to participate in the Stock Option Plan. The Stock Option Plan
authorizes the grant of stock options and limited rights to purchase 218,213
shares of Common Stock. Pursuant to the Stock Option Plan, grants may be made of
(i) options to purchase Common Stock intended to qualify as incentive stock
options under Section 422 of the Code, (ii) options that do not so qualify
("nonstatutory options") and (iii) limited rights (described below) that are
exercisable only upon a change in control of the Bank or the Company.
Nonemployee directors are eligible to receive only nonstatutory options.

                                      -90-
<PAGE>
 
     Set forth below is information relating to options granted under the 1993
and 1996 Stock Option Plans to the named executive officers during the year
ended July 31, 1997.
<TABLE>
<CAPTION>
 
                                OPTION GRANTS IN LAST FISCAL YEAR
=============================================================================================
                                         INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------------
                                      PERCENT OF TOTAL OPTIONS     EXERCISE OR                
                                      GRANTED TO EMPLOYEES IN          BASE        EXPIRATION 
      NAME           OPTIONS GRANTED          FY 1996                 PRICE          DATE     
------------------   ---------------  ------------------------   --------------    ---------- 
<S>                  <C>              <C>                        <C>               <C>
A. Bruce Tucker           1,795               23.7%                   $12.50         9-19-06
                         40,000               20.1%                   $11.50        11-21-06
------------------   ---------------  ------------------------   --------------    ---------- 
Joseph M. Solomon         1,200               15.9%                   $12.50         9-19-06
                         25,466               12.8%                   $11.50        11-21-06
==================   ===============  ========================   ==============    ==========
</TABLE>

     Set forth below is certain additional information concerning options
outstanding to the named executive officers at July 31, 1997 under the 1993 and
1996 Stock Option Plans. During fiscal 1997, 3,000 options were exercised.
<TABLE>
<CAPTION>
 
 
                        AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                                    FISCAL YEAR-END OPTION VALUES
======================================================================================================
                                                  NUMBER OF UNEXERCISED      VALUE OF UNEXERCISED IN-
                                                        OPTIONS AT             THE-MONEY OPTIONS AT
                                                     FISCAL YEAR-END              YEAR-END (1)
                                                 -------------------------   -------------------------
                     SHARES ACQUIRED   VALUE     EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
       NAME           UPON EXERCISE   REALIZED             (#)                         ($)
-------------------  ---------------  --------   -------------------------   ------------------------- 
<S>                  <C>              <C>        <C>                         <C>
A. Bruce Tucker            3,000       $14,190          35,655/40,000             $498,456/$320,000
-------------------  ---------------  --------   -------------------------   ------------------------- 
Joseph M. Solomon             --         --             22,540/25,466             $314,629/$203,728
===================  ===============  ========   =========================   =========================
</TABLE>
-----------------
(1)  Equals the difference between the aggregate exercise price of such options
     and the aggregate fair market value of the shares of Common Stock that
     would be received upon exercise, assuming such exercise occurred on July
     31, 1997, at which date the closing sales price of the Common Stock as
     reported on the Nasdaq National Market was $19.50.

                                      -91-
<PAGE>
 
PERFORMANCE GRAPH


     Set forth hereunder is a performance graph comparing (a) the total return
on the Common Stock for the period beginning with the last trade on October 31,
1995, the first day the Common Stock traded on the Nasdaq National Market,
through July 31, 1997, (b) the cumulative total return on stocks included in the
Nasdaq Composite Index from the close of business on October 31, 1995, though
July 31, 1997, and (c) the cumulative total return on stocks included in the
Nasdaq Bank Index from the close of business on October 31, 1995, through July
31, 1997. There can be no assurance that the Company's stock performance will
continue in the future with the same or similar trend depicted in the graph.
The Company will not make or endorse any predictions as to future stock
performance.

               COMPARISON OF 21 MONTH CUMULATIVE TOTAL RETURN/*/
           SINCE THE COMPANY'S INITIAL OFFERING ON OCTOBER 31, 1995


<TABLE> 
<CAPTION>
                               American                          
Measurement Period             National        NASDAQ Stock       NASDAQ
(Fiscal Year Covered)        Bancorp, Inc.     Market (U.S.)    Bank Index
---------------------        ---------------   -------------    ----------
<S>                          <C>               <C>              <C>  
Measurement Pt-10/31/1995    $100.00           $100.00          $100.00
FYE 07/31/1996               $101.00           $105.00          $112.00
FYE 07/31/1997               $197.00           $155.00          $191.00
</TABLE> 


* $100 INVESTED ON 10/31/95 IN STOCK OR INDEX-
  INCLUDING REINVESTMENT OF DIVIDENDS.
  FISCAL YEAR ENDING JULY 31.

                                      -92-
<PAGE>
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

     Persons and groups owning in excess of five percent of the Common Stock are
required to file certain reports with the Securities and Exchange Commission
regarding such ownership pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act").  The following table sets forth, as of July 31, 1997, the
shares of Common Stock beneficially owned by all directors and executive
officers as a group and by each person who was the beneficial owner of more than
five percent of the Common Stock.  This information is based solely upon
information supplied to the Company and the filings required pursuant to the
Exchange Act.
<TABLE>
<CAPTION>
 
                                         AMOUNT OF SHARES
                                         OWNED AND NATURE    PERCENT OF SHARES
         NAME AND ADDRESS OF               OF BENEFICIAL      OF COMMON STOCK
          BENEFICIAL OWNERS                OWNERSHIP (1)        OUTSTANDING
--------------------------------------  -------------------  ------------------
<S>                                     <C>                  <C>
 
John Hancock Advisers, Inc.                    336,070                9.3%
101 Huntington Avenue                                                
Boston, MA  02199                                                    
                                                                     
Jeffrey L. Gendell                             326,500                9.0
Tontine Financial Partners, L.P.                                     
2000 Park Avenue, Suite 3900                                         
New York, NY  10166                                                  
                                                                     
Brandes Investment Partners, L.P.              246,770                6.8
12750 High Bluff Drive, 2nd Floor                                    
San Diego, CA  92130                                                 
                                                                     
Franklin Resources, Inc.                       180,500                5.00
777 Mariners Island Boulevard                                        
San Mateo, CA  94404                                                 
                                                                     
All Directors and Executive Officers           502,241(2)            12.7%
as a Group (10 persons)
</TABLE>

--------------------
(1)  In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
     be the beneficial owner for purposes of this table, of any shares of Common
     Stock if he has shared voting or investment power with respect to such
     security, or has a right to acquire beneficial ownership at any time within
     60 days from the date as of which beneficial ownership is being determined.
     As used herein, "voting power" is the power to vote or direct the voting of
     shares and "investment power" is the power to dispose or direct the
     disposition of shares.  Includes all shares held directly as well as by
     spouses and minor children, in trust and other indirect ownership, over
     which shares the named individuals effectively exercise sole or shared
     voting and investment power.
(2)  Includes 309,432 shares of Common Stock underlying options granted pursuant
     to the American National Savings Bank, F.S.B. 1993 and 1996 Stock Option
     Plans.  Also includes 78,128 shares of Common Stock subject to restrictions
     under the American National Savings Bank, F.S.B. 1996 Recognition and
     Retention Plan with respect to which shares the recipients have voting or
     investment power.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

     Federal law requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors.
The Bank provides loans to its officers, directors, and employees to purchase or
refinance personal residences as well as consumer loans. Loans made to officers,
directors,

                                      -93-
<PAGE>
 
and executive officers are made in the ordinary course of business on the same
terms and conditions as the Bank would make to any other customer in the
ordinary course of business.

     The Bank intends that all transactions between the Bank and its executive
officers, directors, holders of 10% or more of the shares of any class of its
common stock and affiliates thereof, will contain terms no less favorable to the
Bank than could have been obtained by it in arm's-length negotiations with
unaffiliated persons and will be approved by a majority of independent outside
directors of the Bank not having any interest in the transaction. At July 31,
1997, the Bank had loans with an aggregate balance of $64,000 outstanding to its
executive officers and directors. All such loans were made in the ordinary
course of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of collectibility
or present other unfavorable features.


                                    PART IV
                                    -------

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FROM 8-K
--------------------------------------------------------------------------

     (a)(1)  Financial Statements
             --------------------

     The following information is included elsewhere in this Form 10-K.


          Consolidated Statements of Financial Condition
          as of July 31, 1997 and 1996........................................48

          Consolidated Statements of Operations for the years ended
          July 31, 1997, 1996 and 1995........................................49

          Consolidated Statements of Stockholders' Equity for the years
          ended July 31, 1997, 1996 and 1995..................................50

          Consolidated Statements of Cash Flows for the years ended
          July 31, 1997, 1996 and 1995........................................51

          Notes to Consolidated Financial Statements..........................53

          Report of Independent Auditors......................................83

     (a)(2)  Financial Statement Schedules
             -----------------------------

     All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Financial
Statements. 

                                      -94-
<PAGE>
 
<TABLE> 
<CAPTION>
(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
--------------           --------                      -----------------   ---------------------
<S>                 <C>                                <C>                 <C>                   
        2           Plan of acquisition,                     (2)              Not Applicable
                    reorganization, arrangement,
                    liquidation or succession
 
       3.1          Articles of Incorporation                (1)              Not Applicable
 
       3.2          Bylaws                                   (1)              Not Applicable
 
        4           Instruments defining the                 (1)              Not Applicable
                    rights of security holders,
                    including debentures
 
        9           Voting trust agreement                  None              Not Applicable
 
       10.1         1993 Incentive Stock Option Plan         (1)              Not Applicable
 
       10.2         1993 Stock Option Plan                   (1)              Not Applicable        
                    for Outside Directors
 
       10.3         1993 Recognition and Retention Plan      (1)              Not Applicable
                    for Employees
 
       10.4         1993 Recognition and Retention Plan      (1)              Not Applicable
                    for Outside Directors
 
       10.5         Employment Agreement of A. Bruce         (1)              Not Applicable
                    Tucker
 
       10.6         Employment Agreement of                  (1)              Not Applicable
                    Joseph Solomon
 
       10.7         401(k) Plan, including Amendment         (1)              Not Applicable
 
       10.8         Employee Stock Ownership Plan            (1)              Not Applicable
 
       10.9         1996 Stock Option Plan                   (3)              Not Applicable
 
      10.10         1996 Recognition and Retention Plan      (3)              Not Applicable
 
      10.11         Employment Agreement of                  (3)              Not Applicable
                    James M. Uveges
 
      10.12         Employment Agreement of                  (3)              Not Applicable
                    Mark S. Barker
 
        11          Statement re: computation                Not              Not Applicable
 
</TABLE>

                                      -95-
<PAGE>
 
<TABLE>
<CAPTION> 
        <S>         <C>                                <C>                    <C> 
                    of per share earnings                  Required
 
        12          Statement re: computation                Not              Not  Applicable
                    of ratios                              Required
 
        13          Annual Report to Security Holders        None             Not Applicable
 
 
        16          Letter re: change in certifying          None             Not Applicable
                    accountants
 
        18          Letter re: change in accounting          None             Not Applicable
                    principles
 
        21          Subsidiaries of Registrant                21                98
 
        22          Published report regarding               None             Not Applicable
                    matters submitted to vote of
                    security holders
 
        23          Consents of Experts and Counsel       Not Required        Not Applicable
 
        24          Power of Attorney                     Not Required        Not Applicable
 
        27          Financial Data Schedule                   27              Not Applicable
 
        28          Information from reports                 None             Not Applicable
                    furnished to state
                    insurance regulatory
                    authorities
 
        99          Additional Exhibits                      None             Not Applicable
 
</TABLE>
-----------------------------
(1)  Filed as exhibits to the Registrant's Registration Statement on Form S-1
     filed with the SEC on July 13, 1995, as amended on August 30, 1995.  All
     such previously filed documents are hereby incorporated by reference in
     accordance with Item 601 of Regulation S-K.
(2)  Filed as an Exhibit to the Registrant's Current Report on Form 8-K filed
     with the SEC on July 3, 1997.  Such document is hereby incorporated by
     reference in accordance with Item 601 of Regulation S-K.
(3)  Filed as exhibits to the Registrant's Annual Report on Form 10-K for the
     fiscal year ended July 31, 1996.  All such previously filed documents are
     hereby incorporated by reference in accordance with Item 601 of Regulation
     S-K.

     (b)  Reports on Form 8-K:
          ------------------- 

     On July 3, 1997, the Registrant filed a Current Report on Form 8-K
     reporting that it had entered into an Agreement and Plan of Reorganization
     with Crestar Financial Corporation ("Crestar") by and among the Registrant,
     the Bank, Crestar, and Crestar Bank.  See "PART I-ITEM 1-Business."

                                      -96-
<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:     October 27, 1997                       By: /s/ A. Bruce Tucker
                                                    -------------------
                                                    A. Bruce Tucker, President, 
                                                    Chief Executive Officer
                                                    and Director


     Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE> 
<CAPTION> 
<S>                                                     <C>
By: /s/ A. Bruce Tucker                                 By: /s/ James M. Uveges
   --------------------                                    --------------------
   A. Bruce Tucker, President, Chief Executive             James M. Uveges, Senior Vice President and 
   Officer and Director                                    Chief Financial Officer (principal accounting officer) 

Date:  October 27, 1997                                 Date:  October 27, 1997



By: /s/ Howard K. Thompson                              By: /s/ Lenwood M. Ivey 
   -----------------------                                 --------------------
   Howard K. Thompson, Chairman of the Board               Lenwood M. Ivey, Director

Date: October 27, 1997                                  Date: October 27, 1997



By: /s/ David L. Pippenger                              By: /s/ Joseph M. Solomon 
   -----------------------                                 ----------------------
   David L. Pippenger, Director                            Joseph M. Solomon, Director

Date:  October 27, 1997                                 Date: October 27, 1997



By: /s/ Betty J. Stull                                  By: /s/ Jimmie T. Noble 
   -------------------                                     --------------------
   Betty J. Stull, Director                                Jimmie T. Noble, Director

Date: October 27, 1997                                  Date: October 27, 1997
</TABLE> 

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