================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From To
---------- ------------
Commission file number 333-38673
RB ASSET, INC.
--------------
(Exact name of registrant as specified in its charter)
Delaware 13-5041680
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
645 Fifth Avenue Eight Floor, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 848-0201
--------------
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock as of November
15, 1998 was 7,100,000. The number of shares outstanding of the Registrant's 15%
Non-cumulative Perpetual Preferred Stock, Series A as of November 15, 1998 was
1,400,000.
================================================================================
778176.1
<PAGE>
RB ASSET, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 1998 (unaudited) and June 30,
1998................................................ 3
Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997
(unaudited)......................................... 4
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended September 30, 1998
and 1997 (unaudited)................................ 5
Consolidated Statements of Cash Flows for the three
months ended September 30, 1998 and 1997
(unaudited)......................................... 6
Notes to the Consolidated Financial Statements ..... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and the Results of
Operations............................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................... 23
Item 2. Changes in Securities ................................... 23
Item 3. Defaults Upon Senior Securities ......................... 23
Item 4. Submissions of Matters to a Vote of Securities Holders .. 23
Item 5. Other Information ....................................... 23
Item 6. Exhibits and Reports .................................... 23
SIGNATURES...................................................................... 24
</TABLE>
778176.1
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 and June 30, 1998
(Dollars in Thousands)
Assets
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
1998 1998
------ ----
<S> <C> <C>
Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $1,160 and $583, respectively $ 81,342 $ 82,835
Real estate held for disposal 5,300 5,013
Allowance for fair market value reserve under SFAS-121 (1,363) (1,363)
---------------- -----------------
Total real estate held for disposal, net 3,937 3,650
Real estate loans receivable:
Secured by real estate 55,842 59,006
Loans sold with recourse, net 14,939 15,781
Allowance for possible credit losses (16,752) (17,697)
---------------- -----------------
Total loans receivable, net 54,029 57,090
Investments in joint ventures 1,536 1,536
---------------- -----------------
Total real estate assets 140,844 145,111
Cash, due from banks and cash equivalents 11,295 12,532
Cash, due from banks - restricted 26,217 19,555
Investment securities available for sale 1,260 1,373
Commercial and consumer loans 10,324 10,431
Allowance for possible credit losses (2,388) (2,340)
---------------- -----------------
Commercial and consumer loans, net 7,936 8,091
Other assets 4,192 4,248
---------------- -----------------
Total Assets $ 191,744 $ 190,910
================ =================
Liabilities and Stockholders' Equity
Borrowed funds $ 68,760 $ 68,760
Other liabilities 15,463 14,967
---------------- -----------------
Total Liabilities 84,223 83,727
---------------- -----------------
Stockholders' equity:
15% non-cumulative preferred stock, Series A par value $1,
liquidation value $25 (1,400,000 shares authorized, issued
and outstanding at September 30, 1998 and June 30, 1998) 1,400 1,400
Common stock par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at September 30,
1998 and June 30, 1998) 7,100 7,100
Additional paid in capital 111,170 111,170
Accumulated deficit (11,111) (11,561)
Accumulated comprehensive income (1,038) (926)
---------------- -----------------
Total Stockholders' Equity 107,521 107,183
---------------- -----------------
Total Liabilities and Stockholders' Equity $ 191,744 $ 190,910
================ =================
</TABLE>
See notes to Consolidated Financial Statements
778176.1
3
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, 1998 and 1997
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------------------
1998 1997
--------------- -----------------
<S> <C> <C>
Revenue:
Rental revenue and operations:
Rental income and other property revenue $ 3,770 $ 3,273
Property operating and maintenance expense (2,564) (2,264)
Depreciation - real estate held for investment (577) (50)
--------------- -----------------
Net rental operations 629 959
Other property income (expense):
Net gain/(loss) on sale of real estate 488 (914)
Writedown of investments in real estate - (350)
--------------- -----------------
Total other property income/ (expense) 488 (1,264)
Other income:
Interest income:
Loans receivable 640 767
Investment securities - 55
Money market investments and other 227 59
Provision for possible credit losses - -
--------------- -----------------
Total interest income 867 881
Realization of contingent participation revenues 1,000 769
--------------- -----------------
Total other income 1,867 1,650
Total revenues 2,984 1,345
--------------- -----------------
Expenses:
Interest expense:
Borrowed funds 1,426 1,637
Other 5 21
--------------- -----------------
Total interest expense 1,431 1,658
Other expenses:
Salaries and employee benefits 50 205
Legal and professional fees 202 745
Management fees 617 671
Other 65 101
--------------- -----------------
Total other expenses 934 1,722
Total expenses 2,365 3,380
--------------- -----------------
Loss before other income (expense) and before
provision for income taxes 619 (2,035)
--------------- -----------------
Other income (expense):
Net gains (losses) on sales of investment securities - 1,697
--------------- -----------------
Total other income (expense) - 1,697
Net income (loss) after other income (expense) and before
provision for income taxes 619 (338)
--------------- -----------------
Provision for (benefit from) income taxes 169 51
Net income (loss) 450 (389)
Dividends declared on preferred stock - -
--------------- -----------------
Net income (loss) applicable to common stock $ 450 $ (389)
=============== =================
Basic and diluted income (loss) per common share $ 0.06 $ (0.05)
=============== =================
</TABLE>
See notes to Consolidated Financial Statements
778176.1
4
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three months ended September 30, 1998 and 1997
(dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Series A
Non-
cumulative
Perpetual Additional Retained Accumulated Total
Preferred Common Paid-in Earnings Comprehensive Stockholders'
Stock Stock Capital (Deficit) Income Equity
------------ ---------- ------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997 $ 1,400 $ 7,100 $ 111,170 $ (10,055) $ (1,105) $ 108,510
Net loss for the three months
ended September 30, 1997 - - - (389) - (389)
Preferred stock dividends payable - - - - - -
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale - - - - - -
Balances at September 30, 1997 $ 1,400 $ 7,100 $ 111,170 $ (10,444) $ (1,105) $ 108,121
========== ========== =========== ============ ============== =============
Balances at June 30, 1998 $ 1,400 $ 7,100 $ 111,170 $ (11,561) $ (926) $ 107,183
Net income for the three months
ended September 30, 1998 - - - 450 - 450
Preferred stock dividends payable - - - - - -
Change in comprehensive income
resulting from changes in unrealized
loss on securities available-for-sale - - - - (112) (112)
Balances at September 30, 1998 $ 1,400 $ 7,100 $ 111,170 $ (11,111) $ (1,038) $ 107,521
========== ========== =========== ============ ============== ===============
</TABLE>
See notes to Consolidated Financial Statements
778176.1
5
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Operating Activities:
Cash Flows Provided by (Used in) Operating Activities:
Net (loss)/income $ 450 $ (389)
Adjustments to reconcile net (loss)/income to cash
used in operating activities:
Net (gain) loss on sale of real estate assets (488) 914
Write downs of real estate assets - 350
Depreciation and amortization 577 50
Net gain on sales of loans, other investments
and investment securities - (1,697)
Change in operating assets and liabilities:
Net decrease/(increase) in accrued interest receivable (11) 181
Net (decrease)/increase in accrued interest payable 15 (360)
Net (decrease)/increase in accrued income taxes 505 (207)
Net (decrease)/increase in accrued expenses
and other liabilities (24) (1,314)
Net (increase)/decrease in prepaid expenses and other assets 67 814
Cash effect of increases/(decreases) in allowance for
possible credit losses 86 173
Other (10) -
Net cash (used in)/provided by operating activities 1,167 (1,485)
---------------- ---------------
Investing Activities:
Cash Flows Provided by (Used in) Investing Activities:
Proceeds from sales and maturities of investment
securities, available for sale - 6,871
Net repayment/(origination) of loans secured by real estate, net 3,164 472
Net repayment/(reacquisition) of commercial and consumer loans 59 (2,404)
Net decrease/(increase) in loans sold with recourse 406 3,516
Proceeds from sales of real estate held 938 4,217
Additional fundings on real estate held (309) (3,067)
Net cash provided by investing activities 4,258 9,605
---------------- ---------------
</TABLE>
(Continued on next page)
See notes to Consolidated Financial Statements
778176.1
6
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
(Continued from previous page)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Financing Activities:
Cash Flows Provided by (used in) Financing Activities:
Increase in restricted cash (6,662) (2,935)
Proceeds from borrowed funds 116
Repayment of borrowed funds - (5,259)
Increase/(decrease) in borrowed funds secured by loans
sold with recourse, net of construction advances - (2,410)
----------------
Net cash used in financing activities (6,662) (10,488)
---------------- ---------------
Net increase/(decrease) in cash and money market investments (1,237) (2,368)
Beginning cash 12,532 8,940
---------------- ---------------
Ending cash $ 11,295 $ 6,572
================ ===============
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 1,416 $ 1,052
Federal, state and local taxes 152 258
</TABLE>
See notes to Consolidated Financial Statements
778176.1
7
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(dollars in thousands)
(Unaudited)
1. Organization and Formation of the Company
RB Asset, Inc. (the "Company") is a Delaware corporation that, as a result of
the completion of reorganization steps (the "Reorganization," described in
detail below), on May 22, 1998, succeeded to the assets, liabilities and
business of River Bank America ("River Bank" or the "Predecessor Bank"). Prior
to the Reorganization, River Bank was a New York State chartered stock savings
bank and was regulated by the New York State Banking Department ("the Banking
Department" or the "NYSBD") and, until December 31, 1997, the Federal Deposit
Insurance Corporation (the "FDIC"). The Company's principal business continues
to be the management of its real estate assets, mortgage loans and investment
securities, under a business plan intended to maximize stockholder value.
Following the Reorganization, the Company intends to manage its business and
assets without the regulatory constraints previously imposed on the Predecessor
Bank by the Banking Department. This report is for the three month period ended
September 30, 1998. Unless the context otherwise requires, references to the
business, assets and liabilities of the Company prior to May 22, 1998 include
the business, assets and liabilities of the Predecessor Bank
The Predecessor Bank was founded in 1848. In 1925, the Predecessor Bank adopted
the name "East River Savings Bank" which it continued to use in its retail
business through June 28, 1996. The Predecessor Bank converted to a stock-form
savings bank through a plan of conversion in 1985. Effective October 1, 1988,
East River Savings Bank formally changed its corporate name to "River Bank
America." On June 28, 1996, the Predecessor Bank sold its remaining eleven
branches ("the Branch Sale") to Marine Midland Bank ("Marine"), inclusive of the
name East River Savings Bank. Following consummation of the Branch Sale, all
retail banking operations of the Predecessor Bank ceased.
On May 22, 1998, River Bank completed its Reorganization into a Delaware
corporation named RB Asset, Inc., under a plan that was approved at the
Predecessor Bank's special meeting of stockholders reconvened on May 1, 1998. RB
Asset, Inc., as the successor in the Reorganization, succeeded to the assets,
liabilities and business of River Bank. As a result of the reorganization and
related dissolution discussed below, the capital stock of River Bank was
canceled and, as of the close of business on May 22, 1998, River Bank's stock
transfer records were closed.
Following stockholder approval of the Reorganization, on May 18, 1998, all of
the Predecessor Bank's assets, liabilities and business were transferred to, or
assumed by, the Predecessor Bank's wholly-owned subsidiary, River Asset Sub,
Inc. on May 11, 1998, pursuant to the terms of an assignment and assumption
agreement and related transfer documents. Thereafter, the Board of Directors
declared distribution of the capital stock of its wholly-owned subsidiary, River
Distribution Sub, Inc. ("River Distribution"), payable on a book-entry basis to
the Predecessor Bank's stockholders of record on May 22, 1998. At the time of
such distribution the capital stock of River Distribution had no value.
In the distribution, all of the issued and outstanding shares of common stock
and 15% noncumulative perpetual preferred stock, series A of River Distribution
("River Distribution Series A Preferred") held by the Predecessor Bank were
distributed to the Predecessor Bank's stockholders on a share-for-share basis
such that each holder of the common stock of River Bank ("River Bank Common
Stock") received one share of River Distribution Common Stock for each share of
River Bank Common Stock held by such stockholder and each holder of River Bank
15% noncumulative perpetual preferred stock, series A ("River Bank Series A
Preferred") received one share of River Distribution Series A Preferred Stock
for each share of River Bank Series A Preferred Stock held by such stockholder.
Finally, upon book-entry payment of the distribution, on May 22, 1998, River
Distribution merged with and into River Asset whereupon the stockholders of
River Distribution became stockholders of the surviving corporation which
changed its name to RB Asset, Inc. In the merger, the shares of capital stock of
River Distribution were converted into identical shares of capital stock of RB
Asset, Inc. Accordingly, subsequent to the merger, the capital stock of River
Bank had no value. Stock certificates representing shares of capital stock of RB
Asset, Inc. were then distributed to holders of record as of May 22, 1998.
778176.1
8
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(dollars in thousands)
(Unaudited)
In connection with the reorganization steps, on May 19, 1998, a petition for an
order of dissolution declaring River Bank dissolved and its legal existence
terminated was filed in the Supreme Court of the State of New York. The Supreme
Court issued the order on June 18, 1998 and, upon the filing of the order of
dissolution with the Banking Department, on June 23, 1998, the Predecessor Bank
was dissolved and its legal existence terminated. Prior to dissolution, the
stock transfer records of River Bank were closed and upon such dissolution, the
capital stock of River Bank was canceled.
On June 28, 1996, the Predecessor Bank consummated the transactions (the "Branch
Sale") contemplated by the Purchase of Assets and Liability Assumption Agreement
(the "Branch Agreement") by and between the Predecessor Bank and Marine.
Pursuant to the terms of the Branch Agreement, Marine assumed $1,159.6 million
of deposit liabilities (the "Assumed Deposits") and acquired assets with an
aggregate carrying value of $1,066.6 million (the "Transferred Assets"). The
Transferred Assets consisted primarily of loans secured by real estate,
mortgage-backed and investment securities, and 11 bank branch offices, inclusive
of the name East River Savings Bank. Included in the Transferred Assets was
approximately $32.4 million of loans in which the Predecessor Bank was granted
subordinated participation interests. Also included in the Transferred Assets
were the proceeds of dispositions from five individual asset sale transactions
with third parties, aggregating $60.4 million, composed of real estate assets,
loans and other receivables (the "Asset Sale Transactions"). The Asset Sale
Transactions were structured to include ongoing recourse to, and participation
by, the Predecessor Bank with respect to the assets sold, based upon the net
proceeds realized on disposition of assets by the purchasers.
The Assumed Deposits exceeded the Transferred Assets by approximately $93.0
million, which represented the premium received by the Predecessor Bank in the
Branch Sale. Marine also purchased the Predecessor Bank's branch office realty
at 96th Street in Manhattan for $1.3 million. The Predecessor Bank recorded a
net pretax gain on the sale of offices and branches of $77.6 million reflecting
the deposit premium of $93.0 million, partially offset by Branch Sale
transaction costs of $5.8 million, professional fees of $3.2 million, employee
benefits and severance costs of $4.6 million, net losses on the sale of assets
of $1.1 million and other net costs of $700,000. During the year ended June 30,
1997, the Predecessor Bank's indemnification agreements with Marine were amended
and a $3.3 million contingency reserve was recorded.
At June 30, 1996, the Predecessor Bank retained $285.5 million in assets,
including primarily real estate assets and non-performing loans. The balance of
the retained assets consisted of performing loans (including loans sold with
recourse, subordinated participations, junior subordinated participations, loans
to facilitate the sale of real estate owned and mortgage and other loans) and a
modest amount of cash and investment securities (collectively, the "Retained
Assets"). Subsequent to the Branch Sale, the Predecessor Bank continued
substantially the same asset management strategy for Retained Assets as had been
previously employed by the Predecessor Bank, in the years immediately prior to
the Branch Sale.
Following the Branch Sale, the Company engaged RB Management Company, LLC (the
"Management Company") to manage its operations on a day-to-day basis, including
developing and recommending strategies to the Company's Board of Directors
regarding the ongoing management of assets. The Management Company is a
privately-owned entity that was newly formed in June 1996 and is controlled by
Alvin Dworman, who owns 39.0% of the outstanding Common Stock of the Company.
The closing of the Branch Sale was conditioned upon the Predecessor Bank's
obtaining financing with terms and in an amount reasonably acceptable to the
Predecessor Bank and determined to be reasonably adequate to permit consummation
of the Branch Sale. The Predecessor Bank obtained from Marine a loan facility
(the "Facility" or "Initial Facilities") consisting of eleven independent
mortgage loans with additional collateral, in an aggregate amount not to exceed
$99.1 million. As of June 30, 1996, Marine had extended $89.8 million under the
Facility to the Predecessor Bank, which has been reduced by repayment activity
to $60.6 million at September 30, 1998, with an additional $26.2 million in
proceeds maintained in a restricted cash account pending negotiation with Marine
as to the application of such proceeds to reduce the outstanding balances of the
Facility. Proceeds of the Facility were utilized by River Bank to (i) refinance
all or part of the certain indebtedness secured by assets to be transferred to
Marine, including all or a substantial part of the outstanding advances from the
Federal Home Loan Bank ("FHLB") and (ii) provide additional funds for the
development and completion of two individual real estate assets as part of the
Predecessor Bank's operations subsequent to the Branch Sale.
778176.1
9
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(dollars in thousands)
(Unaudited)
Marine assumed substantially all of the Predecessor Bank's retail deposits in
connection with the Branch Sale. In addition, the Predecessor Bank ceased
accepting retail deposits on the date of the Branch Sale. At June 30, 1996, the
Predecessor Bank held certain non-retail deposits, which aggregated
approximately $3.0 million. During the quarter following the Branch Sale, the
Predecessor Bank arranged for the assumption by other insured depository
institutions of its remaining non-retail deposits. Accordingly, the Predecessor
Bank held no deposit liabilities at June 30, 1997. However, at June 30, 1997,
the Predecessor Bank continued to be regulated by the FDIC and the NYSBD. On
October 31, 1996 the Predecessor Bank requested that the FDIC terminate its
insurance of accounts in accordance with the requirements of the NYSBD's
approval of the Branch Sale. On April 14, 1997, the Predecessor Bank received
notice that the FDIC, as requested by the Predecessor Bank, intended to
terminate the Predecessor Bank's status as an insured state nonmember Bank on
December 31, 1997. Upon the issuance of this order by the FDIC, the Predecessor
Bank was no longer subject to banking regulation by the FDIC. In connection
therewith, the Predecessor Bank also received from the Banking Department a
waiver of any applicable New York State deposit insurance requirements.
Conditions imposed in connection with the NYSBD's approval of the Branch Sale
included: (i) the Predecessor Bank's agreement to file an application with the
Banking Department, within one year of the closing of the Branch Sale, for
approval of a plan of dissolution; (ii) the Predecessor Bank's agreement to file
with the Supreme Court of the State of New York an application for a closing
order within 13 months of the closing of the Branch Sale and an application for
a final order of dissolution within five months following the filing of an
application for a closing order; (iii) increased levels of minimum regulatory
capital requirements; (iv) the Predecessor Bank's agreement to continue to
submit its proposed capital transactions to the NYSBD for prior approval; (v)
the continuation of the Predecessor Bank's then-current periodic reporting
obligations with respect to its retained assets, as well as in connection with
its ongoing activities subsequent to the Branch Sale; and (vi) such other
conditions and obligations as the Banking Department may have deemed
appropriate.
In June 1997, the Predecessor Bank submitted an alternate proposal (the
"Alternate Proposal") to the NYSBD pursuant to which the Predecessor Bank would
implement Conditions No. 1 and No. 2 of the approval of the Branch Sale,
described above. The Predecessor Bank proposed to adopt a plan under which it
would transfer all of its assets and liabilities, including all contingent
liabilities, to a successor corporation ("Successor") incorporated under
Delaware General Corporation Law. Successor would acquire all of the assets of
the Predecessor Bank and continue all of the business of the Predecessor Bank
under the same business plan as adopted by the Predecessor Bank. Following the
transfer of its assets and liabilities to Successor, the Predecessor Bank would
surrender its banking charter and dissolve. The implementation of the proposed
plan would result in a mere change of form from a banking corporation to a
corporation incorporated under the Delaware General Corporation Law, which would
not be subject to the jurisdiction of the Banking Department. The proposed
transfer was expected to qualify as a tax-free reorganization under the Internal
Revenue Code and, as such, the Company expected (and continues to expect) that
certain of the Predecessor Bank's tax attributes would be preserved. In
connection with the Alternate Proposal, common and preferred stockholders of
River Bank would receive shares of Successor on a share-for-share basis so that
Successor will be owned by the same stockholders, in the same proportions, as
owned the Predecessor Bank on the record date.
Prior to June 30, 1997, the Predecessor Bank received the NYSBD's letter
indicating their conditional approval of the Alternate Proposal as meeting the
Conditions of the Banking Department's approval of the Branch Sale, if
implemented by the Predecessor Bank on a timely basis. The NYSBD's conditional
approval of the Alternate Proposal and related modification of Condition No. 1
of the Approval of the Branch Sale provided that the approval of stockholders of
the Alternate Proposal not later than September 30, 1997 would be deemed to
satisfy Condition No. 1. Condition No. 2 of the Banking Department's approval of
the Branch Sale would be deemed to be satisfied if the petition required by
Condition No. 2 was filed by the Bank by October 15, 1997. The Predecessor Bank
met Condition No. 1 and Condition No. 2 on a timely basis. A copy of the
Alternate Proposal and the NYSBD's letter indicating their conditional approval
of the Alternate Proposal were included as Exhibits 14 and 15 to FDIC Form F-2,
dated June 30, 1997.
778176.1
10
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(dollars in thousands)
(Unaudited)
The Banking Department had also advised the Predecessor Bank that the
Predecessor Bank's minimum capital requirement, set at $115 million in the
NYSBD's approval of the Branch Sale and subsequently amended to $106 million in
May 1997, was to remain at $106 million until the Predecessor Bank's final
dissolution. Further, the Banking Department's conditional approval of the
Alternate Proposal required that the Predecessor Bank seek prior approval from
the NYSBD for any material sale or transfer of assets, or expenditures for
development or renovation of any properties held by the Predecessor Bank prior
to the completion of the dissolution of the Predecessor Bank.
The Company will continue to be subject to the requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") as amended and will be required to
file periodic reports and other information with the Securities Exchange
Commission (the "SEC").
The Company's principal business continues to be the management of its real
estate assets, mortgage loans and investment securities, under a business plan
intended to maximize stockholder value. Primarily as a result of deterioration
in the real estate markets and a general economic recession in the New York
metropolitan area and, later in other areas in which the Predecessor Bank was
engaged in lending activities, particularly California, the Company's
non-performing assets began increasing in 1989 and continued to increase in the
aggregate through 1992. The resolution of non-performing assets, which
substantially resulted from the Predecessor Bank's lending strategy of the
1980s, required significant time and attention by the Predecessor Bank's
management. Over the five year period preceding the Branch Sale, the Bank's
primary loan origination focus was single-family (one-to-four units) and, to a
lesser extent, multi-family (five or more units) residential loans secured by
properties in the New York City metropolitan area. Primarily as a result of
conditions imposed by the NYSBD, subsequent to June 28, 1996, the Predecessor
Bank has not originated a material amount of loans.
The Predecessor Bank has previously received notice that the approvals necessary
to declare or pay dividends on the Predecessor Bank's outstanding shares of
River Bank Series A Preferred Stock would not be provided. In June 1996, the
Predecessor Bank's Board of Directors declared a Series A Preferred Stock
dividend for the quarter ending June 30, 1996, payment of which was subject to
the receipt of required approvals from the FDIC and the NYSBD (the Predecessor
Bank's regulators at the time), as well as Marine (the Predecessor Bank's and
the Company's principal lender). Primarily as a result of the above, neither the
Company's or the Predecessor Bank's Board of Directors has taken any action
regarding a quarterly dividend on the Company's Series A Preferred for any of
the quarterly periods ended from September 30, 1996 through September 30, 1998.
Although the Company is no longer subject to the jurisdiction of either the FDIC
or the NYSBD, declaration or payment of future dividends on the Company's Series
A Preferred Stock will continue to be subject to the approval of Marine for so
long as the Facility remains outstanding. The Company has received notice from
Marine that the approval necessary to declare or pay dividends on the Company's
Series A Preferred Stock will not be provided at this time. There can be no
assurance that the Board of Directors of the Company will deem it appropriate to
pay dividends on the Series A Preferred Stock, even if permitted to do so by
Marine.
2. Presentation of Interim Financial Statements
The accompanying unaudited consolidated financial statements of the Company
include all adjustments which management believes necessary for a fair
presentation of the Company's financial condition at September 30, 1998, the
results of its operations for the three months ended September 30, 1998 and 1997
and the statements of changes in stockholders' equity and cash flows for the
three months ended September 30, 1998 and 1997. Adjustments are of a normal
recurring nature. These unaudited consolidated financial statements have been
prepared in conformity with the accounting principles and practices in effect as
of June 30, 1998, as set forth in the consolidated financial statements of RB
Asset, Inc., at such date. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
of RB Asset, Inc. as of June 30, 1998.
The consolidated financial statements include the accounts of RB Asset, Inc. and
its wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation. Due to the anticipated short-term nature of such
investments, investments in unconsolidated real estate partnerships are
778176.1
11
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(dollars in thousands)
(Unaudited)
generally carried at cost, subject to periodic assessment of net realizable
value. Losses on sales or dispositions and any adjustments related to
redetermination of net realizable value are charged, as real estate charge-offs
to operations of the current period.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the Company's financial condition
as of September 30, 1998, the results of operations for the three months ended
September 30, 1998 and 1997, and changes in stockholders' equity and cash flows
for the three months ended September 30, 1998 and 1997.
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 dates of the consolidated statements of financial
condition and operations for the period. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for possible credit losses, the valuation of
investments in real estate for investment.
Management believes that the allowance for possible credit losses is adequate
and that other real estate owned and real estate held for investment are
properly valued. While management uses available information to establish
reserves, future additions to the allowance or write downs of other real estate
owned or real estate held for investment may be necessary based on changes in
economic conditions, as well as changes in management strategies.
Management determines the appropriate classification of debt and equity
securities (collectively, "marketable" securities) at the time of purchase and
reevaluates such designation as of each balance sheet date. Available-for-sale
securities are stated at estimated fair value, with unrealized gains and losses,
net of tax, reported in a separate component of stockholders' equity. The cost
of marketable securities classified as available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity, or in the case
of mortgage-backed securities, over the estimated life of the security using a
method approximating the level yield method. Such amortization is included in
interest income from investments. Interest and dividends are included in
interest income from investments. Realized gains and losses, and declines in
value judged to be other-than-temporary are included in net securities gains and
losses. The cost of securities sold is based on the specific identification
method. At September 30, 1998, the balance of stockholders' equity included a
$1,038,000 unrealized loss on marketable securities classified as
available-for-sale.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the income (loss) before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. At
September 30, 1998 the Company reviewed its potential current and deferred
federal and state tax liabilities in light of the results of operations for the
Company since June 30, 1998. As a result of this analysis, the Company
recognized income tax expense in the amount of $169,000, during the quarter
ending September 30, 1998.
For the purpose of the statements of cash flows, cash equivalents are defined as
those amounts included in cash and due from banks and money market investments.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year's presentation.
3. Commitments, Contingencies and Other
As of September 30, 1998, the Company had deferred tax assets that were
primarily attributable to NOLs, an allowance for loan losses and suspended
passive activity losses and credits which were partially offset by a deferred
tax liability in its consolidated financial statements. However, a valuation
allowance was set up equal to the amount of the difference between the tentative
deferred tax asset and the tentative deferred tax liability due to the
uncertainty of the Company's ability to utilize the deferred tax assets in the
future. Accordingly, neither a net overall asset nor a net overall liability was
reflected in the Company's
778176.1
12
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(dollars in thousands)
(Unaudited)
consolidated financial statements.
Under current tax law, the Company's ability to utilize certain tax benefits in
the future may be limited in the event of an "ownership change," as defined by
the Internal Revenue Code Section 382 and the regulations thereunder. In the
event that the Reorganization in Note 1 is deemed to be an ownership change, or
if, transactions in the Company's capital stock subsequent to the Reorganization
result in an ownership change, the subsequent utilization of net operating loss
carryforwards, suspended passive activity losses and credits, alternative
minimum tax credit carryforwards and certain other built-in losses would be
subject to an annual limitation as prescribed by current regulations. The
application of this limitation could have a material effect on the Company's
ability to realize its deferred tax assets. The Company is of the view that no
ownership change of the Company will be deemed to have occurred as a result of
the Reorganization or otherwise. However, the application of Section 382 is in
many respects uncertain. In assessing the effects of prior transactions and of
the Reorganization under Section 382, the Company has made certain legal
judgments and certain factual assumptions. The Company has not requested or
received any rulings from the IRS with respect to the application of Section 382
to the implementation of the Reorganization and the IRS could challenge the
Company's determinations.
In the normal course of the Company's business, there are outstanding various
claims, commitments and contingent liabilities. The Company also is involved in
various other legal proceedings which have occurred in the ordinary course of
business. Management, based on discussions with legal counsel, believes that the
Company will not be materially affected by the actions of any outstanding legal
proceedings. However, there can be no assurance that any outstanding legal
proceedings will not be decided adversely to the Company and have a material
adverse effect on the financial condition and the results of operations of the
Company.
4. Regulatory capital requirements
Prior to the reorganization of the Predecessor Bank into a Delaware corporation,
which was completed on May 22, 1998, the Banking Department had advised the
Predecessor Bank that the Predecessor Bank's minimum capital requirement, set at
$115 million in the NYSBD's approval of the Branch Sale and subsequently amended
to $106 million in May 1997, was to remain at $106 million until the Predecessor
Bank's final dissolution, unless the Banking Department shall provide prior
approval of the Company's written request to amend the Company's minimum capital
requirement. So long as the Company's deposit accounts were insured by the FDIC,
as a Federally-insured state-chartered bank, the Company was required to
maintain minimum levels of regulatory capital. Under those FDIC regulations,
insured state-chartered banks were generally required to maintain (i) a ratio of
Tier 1 leverage capital to total assets of at least 4.0% to 5.0% (3.0% for the
most highly-rated banks) and (ii) a ratio of Tier 1 capital to risk weighted (as
defined by regulation) assets of at least 4.0% and a ratio of total capital to
risk weighted assets of at least 8.0%.
On October 31, 1996, the Company requested that the FDIC terminate its insurance
of accounts as a result of having transferred all of its remaining non-retail
deposits and mortgage escrow accounts to other insured institutions or servicing
entities. On April 14, 1997, the Company received notice that the FDIC, as
requested by the Company, intended to terminate the Company's status as an
insured state nonmember Bank on December 31, 1997.
Subsequent to the termination of the Predecessor Bank's status as an insured
nonmember bank by the FDIC and the reorganization of the Predecessor Bank into
a Delaware corporation, the Company is no longer subject to the regulatory
capital requirements of either the FDIC or the Banking Department.
778176.1
13
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(dollars in thousands)
(Unaudited)
5. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common
Stock outstanding during the three months ended September 30, 1998 and 1997,
respectively. The Company had no securities outstanding that were convertible to
common stock at September 30, 1998 or 1997.
In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 128, "Earnings Per Share" ("SFAS-128"), which was
required to be adopted on December 31, 1997. At that time, the Company was
required to change the method it previously used to compute earnings per share
and to restate all prior periods. Under the new requirements of SFAS-128, the
dilutive effect of stock options was excluded. The implementation of SFAS-128
has not had any effect upon the Company's reported primary earnings per share
for the periods ended September 30, 1998 and 1997, or for the fiscal years ended
June 30, 1998, 1997 and 1996.
6. Comprehensive Income
As of July 1, 1998, the Company adopted Statement of Accounting Standards No.
130, "Reporting Comprehensive Income " ("SFAS-130"). SFAS-130 establishes new
rules for the reporting and display of comprehensive income and its components.
However, the adoption of this Statement has had no effect on the Company's net
income or stockholders' equity. SFAS-130 requires unrealized gains or losses on
the Company's available-for-sale securities, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS-130.
During the quarters ended September 30, 1998 and 1997, total comprehensive
income (loss) was $338 and $(389), respectively. The following table describes
the components of comprehensive income and accumulated comprehensive income for
the dates indicated:
<TABLE>
<CAPTION>
Components of Comprehensive Income
(Unaudited):
Three months ended September 30,
1998 1997
---------------- -----------------
<S> <C> <C>
Net income $ 450 $ (389)
Unrealized losses on securities (112) -
Comprehensive income $ 338 $ (389)
================ =================
</TABLE>
<TABLE>
<CAPTION>
Components of Accumulated
Comprehensive Income:
(Unaudited)
September 30, June 30,
1998 1998
<S> <C> <C>
Unrealized losses on securities $ (1,038) $ (926)
Accumulated comprehensive income $ (1,038) $ (926)
================ =================
</TABLE>
778176.1
14
<PAGE>
RB Asset, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(dollars in thousands)
(Unaudited)
7. Legal Proceedings
An action entitled Strome Global Income Fund et al. v. River Bank America et
al., Index No. 605226198, was commenced against the Registrant, its predecessors
and certain of its current and former directors in New York State Supreme Court,
New York County on October 27, 1998. Plaintiffs are holders of the Company's 15%
non-cumulative perpetual preferred stock, Series A, and were formerly holders of
River Bank America 15% non-cumulative perpetual preferred stock, Series A. The
complaint alleges various claims for breach of contract, fraudulent conveyance,
violations of Sections 604 and 605 of the New York Banking Law, breach of
fiduciary duty and the duty of disclosure and ultra vires acts based upon the
reorganization into the Registrant, and subsequent dissolution, of the
Registrant's predecessor, River Bank America, and an amendment made to River
Bank America's certificate of designations for the preferred stock in connection
with the reorganization. Among other things, plaintiffs claim that as a result
of the reorganization and dissolution they were entitled to receive a $25 per
share liquidation payment, as well as unpaid dividends, and were also entitled
to appraisal rights as dissenting stockholders. Plaintiffs seek judgment against
the defendants for the liquidation payment, other unspecified compensatory
damages, avoidance of the transfer of assets from River Bank America to the
Registrant, punitive damages and other relief. The Registrant believes that the
reorganization and dissolution of River Bank America was in the best interests
of all of the River Bank America stockholders and did not violate plaintiffs'
rights as preferred stockholders in any respect and intends to defend the
lawsuit vigorously.
778176.1
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition:
At September 30, 1998 the consolidated assets of the Company totaled $191.7
million, an increase of $834,000, or 0.4% from June 30, 1998.
Real estate held for investment, net of accumulated depreciation, declined $1.5
million, or 1.8%, from $82.8 million at June 30, 1998 to $81.3 million at
September 30, 1998. The decline in real estate held for investment, net of
accumulated depreciation at September 30, 1998 was attributable to transfers of
$938,000 to real estate held for disposal and depreciation charges of $577,000.
Real estate held for disposal, net of allowance for fair market value reserve
under Statement of Accounting Standards No. 121 (SFAS-121), increased $287,000,
or 5.7%, from $3.6 million at June 30, 1998 to $3.9 million at September 30,
1998. During the quarter ended September 30, 1998, sales of real estate held for
disposal primarily consisted of apartment units sold from inventory held at June
30, 1998. Such sales totaled $938,000 during the quarter ended September 30,
1998. Offsetting the effects of the sales on the book value of real estate held
for disposal, net at September 30, 1998 were transfers of additional apartment
units from real estate held for investment, net totaling $938,000 and additional
capitalized fundings of $287,000. Apartment units transferred into real estate
held for disposal during the quarter ended September 30, 1998 are expected to be
sold within the next twelve months.
Total real estate loans receivable, net of the related allowance for possible
credit losses declined $3.1 million, or 5.5%, from $57.1 million at June 30,
1998 to $54.0 million at September 30, 1998. The $3.1 million decline in real
estate loans, net, during the quarter ended September 30, 1998, was attributable
to a decline in loans receivable, secured by real estate of $3.2 million and a
decline in loans sold with recourse, net of $842,000, partially offset by a
decline in the related allowance for possible credit losses of $897,000.
The Company's loans secured by real estate decreased by $3.2 million, or 5.4%,
from $59.0 million at June 30, 1998 to $55.8 million at September 30, 1998.
During the quarter ended September 30, 1998, the Company received payments in
satisfaction of $3.2 million in loans secured by real estate, recognizing a net
gain of $488,000. This decrease in loans secured by real estate, net was
partially offset by $80,000 in loan fundings advanced during the quarter.
The Company's loans sold with recourse, net decreased by $842,000, or 5.3%, from
$15.8 million, at June 30, 1998 to $14.9 million at September 30, 1998. During
the quarter ended September 30, 1998, the Company sold $837,000 in loans sold
with recourse, net, which was partially offset by additional asset fundings of
$430,000. In addition, $435,000 in losses related to the asset sales were
charged against the allowance for possible credit losses, thereby reducing the
remaining book value of loans sold with recourse, net and the allowance for
possible credit losses by that amount.
The Company's allowance for possible credit losses related to loans secured by
real estate decreased by $897,000, or 5.1%, from $17.8 million, at June 30, 1998
to $16.8 million at September 30, 1998. The decrease resulted from chargeoffs of
$483,000 net of recoveries of $86,000 for asset disposition transactions
previously provided for at June 30, 1998. In addition, the allowance for
possible credit losses was reduced during the quarter ended September 30, 1998
by $500,000 when a junior subordinated participation loan secured by real
estate, that had been fully reserved for at June 30, 1998, was repaid in full.
As a result of this transaction, the allowance for possible credit losses was
reduced by $500,000 and a gain of $500,000 was recognized. The Company's
allowance for possible credit losses is maintained at a level which management
considers adequate based on its periodic review of the Company's loans secured
by real estate portfolios and certain individual loans, taking into
consideration, among other things, the likelihood of repayment, the diversity of
the borrowers, the type of loan, the quality of the collateral, current market
conditions and the associated risks. At September 30, 1998, the allowance for
possible credit losses was 30.1% of real estate loans as compared to 30.0% at
June 30, 1998.
Cash and due from banks decreased by $1.2 million, or 9.9%, from $12.5 million
at June 30, 1998 to $11.3 million at September 30, 1998. Allocations to
restricted cash, scheduled asset fundings and the payment of operating expenses
exceeded the total operating revenues and asset sales proceeds, resulting in the
decrease in unrestricted cash during the quarter ended September 30, 1998.
778176.1
16
<PAGE>
At September 30, 1998, Marine had restricted a total of approximately $26.2
million in funds, held on deposit at Marine, in accordance with the terms of the
Branch Sale and the Marine Facility agreements. Marine had restricted
approximately $19.6 million at June 30, 1998. Restricted funds held by Marine
are not available to the Company for settlements of any of the Company's current
obligations. The restricted cash reserves arose from the sale of assets which
had served as primary or supplemental collateral for the Marine Facility. The
restricted cash held by Marine is intended to serve as substitute collateral for
the Marine Facility, until such time as the Marine Facility is reduced in
accordance with the Company's Asset Management Plan and the Marine Facility
Agreements. See "Liquidity and Capital Resources," below.
Commercial and consumer loans, net of the related allowance for loan losses,
totaled $8.0 million at September 30, 1998, a decrease of $107,000, or 1.3%,
from the June 30, 1998 balance of $8.1 million. This decrease was primarily the
result of the effects of normal amortization and prepayment of individual loans
in the portfolio.
Other liabilities totaled $15.5 million at September 30, 1998, an increase of
$496,000, or 3.3%, from the June 30, 1998 balance of $15.0 million. The net
increase in other liabilities during the quarter ended September 30, 1998 as
compared to the same date in the previous year, was related to the relative
timing of payments for certain accrued liabilities during the current and
previous fiscal years.
During the three months ended September 30, 1998, total stockholders' equity
increased by $338,000 or 0.3% to $107.5 million, as compared with $107.2 million
at June 30, 1998. This increase was due to the net income recorded for the three
months ended September 30, 1998 in the amount of $450,000, partially offset by
an increase in the securities valuation account (allowance for unrealized losses
on marketable securities) of $112,000.
The following table summarizes the calculation of the Company's book value per
share at September 30, 1998 and June 30, 1998.
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
----------------- ----------------
<S> <C> <C>
Total stockholders' equity $ 107,521,000 $ 107,183,000
Less: liquidation value of preferred stock
($25 per share issued and outstanding) 35,000,000 35,000,000
----------------- ----------------
Net stockholders' equity $ 72,521,000 $ 72,183,000
================= ================
Total shares of Common Stock issued and
outstanding 7,100,000 7,100,000
================= ================
Book value per share $ 10.21 $ 10.17
================= ================
</TABLE>
Results of Operations:
General. The Company reported net income attributable to common shares of
$450,000, or $0.06 per share, for the three months ended September 30, 1998, an
increase of $839,000 as compared with a net loss attributable to common shares
of $389,000, or ($0.05) per share, for the three month period ended September
30, 1997. The primary reason for the increase in the Company's net operating
results for the quarter ended September 30, 1998, as compared to the same
quarter in the previous year, was the recording of other property income of
$488,000 in the quarter ended September 30, 1998, an increase of $1.8 million as
compared with a net loss from other property operations of $1.3 million in the
same quarter of the previous
778176.1
17
<PAGE>
year. In addition, contingent participation revenues increased $231,000 to $1.0
million in the quarter ended September 30, 1998 as compared to $769,000 in same
quarter of the previous year. Interest expense and other expenses also declined
$227,000 and $788,000, respectively, in the quarter ended September 30, 1998 as
compared with the same period in the previous year. Interest expense declined
from $1.6 million in the quarter ended September 30, 1997 to $1.4 million during
the same quarter of the current year. Other expenses declined from $1.7 million
in the quarter ended September 30, 1997 to $934,000 during the quarter ended
September 30, 1998.
Partially offsetting the effects of increased other property income, increased
contingent participation revenues and reduced interest and operating expenses on
the results of operations reported for the quarter ended September 30, 1998, as
compared to the same quarter of the previous year, were reductions in net rental
operations and net gains on sales of investment securities of $330,000 and $1.7
million, respectively. Net rental operations declined from $959,000 in the
quarter ended September 30, 1997 to $629,000 during the same quarter of the
current year. Net gains on sales of investment securities declined from $1.7
million in the quarter ended September 30, 1997 to $0 during the quarter ended
September 30, 1998.
Net Rental Operations. For the three months ended September 30, 1998, net rental
operations resulted in income of $629,000, a decrease of $330,000, or 34.4%,
from $959,000 for the same three month period in the previous year. The primary
reason for the decline in net rental operations income was the recognition of
$527,000 in depreciation expense attributable to real estate held for investment
in excess of the amount recognized in the same period of the previous year.
Excluding the $527,000 increase in depreciation charges recorded in the quarter
ended September 30, 1998, as compared with the same quarter in the previous
year, income from rental operations increased $197,000, or 20.5%, in the quarter
ended September 30, 1998 as compared to the quarter ended September 30, 1997.
This increase was due to various, individually immaterial operating factors
affecting aggregate rental income and expenses within the Company's rental
properties.
For the three months ended September 30, 1998, depreciation charges associated
with real estate held for investment were $577,000, an increase of $527,000, or
1,054.0%, as compared with depreciation charges associated with real estate held
for investment in the quarter ended September 30, 1998 of $50,000. Under
SFAS-121, the Company is required to depreciate real estate held for investment
over the estimated useful life of the assets. No depreciation charges are made
for the portion of the assets attributable to land values. During the three
months year ended September 30, 1998, the Company recorded depreciation charges
of approximately $577,000, of which $525,000 represents depreciation of the
capitalized costs of the real estate held for investment (less land value) for
five of the Company's six real estate assets from the period June 30, 1998 to
September 30, 1998. The remaining $52,000 in depreciation charges recorded
during the year ended June 30, 1998 were for the sixth property, consistent with
depreciation charges taken in prior periods for that property. On May 22, 1998,
as a consequence of the Reorganization, the Company was no longer subject to the
categorization and depreciation regulations for investments in real estate
previously imposed by the Predecessor Bank's regulators. Accordingly, on that
date, the Company began to record depreciation charges, as required by SFAS-121,
for all real estate held for investment, net that had not been subject to
depreciation charges in prior periods.
Other Property Income. Total other property income was $488,000 for the quarter
ended September 30, 1998, an increase of $1.8 million as compared with a net
loss of $1.3 million in the quarter ended September 30, 1997. For the quarter
ended September 30, 1998, the $488,000 income was primarily attributable to the
recognition of a gain of $500,000 resulting from the full satisfaction of a
junior subordinated participation loan secured by real estate which had been
fully reserved for in prior periods.
For the quarter ended September 30, 1997, the net loss of $1.3 million in other
property income was attributable to losses on the sale of real estate in the
amount of $914,000 and a write down of a real estate joint venture asset in the
amount of $350,000. The loss on the sale of real estate during the quarter ended
September 30, 1997, was primarily attributable to the sale of one real estate
property with a book value of $3.3 million, which resulted in a net loss of
$932,000.
778176.1
18
<PAGE>
Interest Income. For the three months ended September 30, 1998, total interest
income, net of provisions for possible credit losses, was $867,000, a decline of
$14,000, from $881,000 for the same quarter in the previous year. Loan interest
declined $127,000 in the quarter ended September 30, 1998 as compared with the
same quarter in the previous year due to reduced average balances for loan
assets resulting from dispositions and the effects of normal amortization and
repayment activity. This decline in interest income from loan assets was
substantially offset by other interest income, which increased $113,000 in the
quarter ended September 30, 1998 as compared with the quarter ended September
30, 1997. The increase in other interest income in the quarter ended September
30, 1998, as compared with the same quarter in the previous year was primarily
due to increased average cash balances in the quarter ended September 30, 1998,
which earned interest at the prevailing money market rates.
Contingent Participation Revenues. The Company realized contingent participation
revenues of $1.0 million and $744,000 in the quarters ended September 30, 1998
and 1997, respectively. The Company may realize contingent participation income
when a loan secured by real estate's underlying collateral property achieves a
level of predetermined economic performance sufficient to activate contingency
clauses in the loan agreement that allow the Company to share, on a limited
basis, in the economic performance of the collateral property. The Company
recognizes such revenues in the period when the loan is repaid and the terms of
all additional contingent payments are finalized.
Contingent participation revenues of $1.0 million were recognized on one
subordinated participation loan and one junior subordinated participation loan
made to the same borrower with a combined principal balance of $1.3 million.
These loans were paid in full during the quarter ended September 30, 1998. A
portion of the subordinated participation loan and the junior participation loan
had been sold to Marine on June 28, 1996 and the junior subordinated
participation loan was fully reserved for on the Company's books following the
Branch Sale. The full repayment of the junior subordinated participation loan
resulted in the recognition of an additional gain in the amount of $500,000
during the quarter ended September 30, 1998. See "Other Property Income," above.
During the quarter ended September 30, 1997, contingent participation revenues
of $744,000 were realized on one junior participation loan, which was paid in
full during the period. A portion of the loan had been sold to Marine on June
28, 1996 as part of the Branch Sale. The Company had retained a contingent
interest in the underlying property's economic performance and an interest in
the loan's unpaid principal balance approximating $10.1 million following the
Branch Sale.
At September 30, 1998, the Company had a remaining contingent interest in two
junior subordinated participation loans in which the Company retains an interest
of approximately $2.4 million in principal amount, which are fully reserved for
(100%) by the Company. All of such loans have been modified since origination
and are currently performing in accordance with their terms.
Interest Expense. During the three months ended September 30, 1998, the Company
recorded interest expenses in the amount of $1.4 million, a decline of $227,000,
or 13.7%, as compared with interest expenses of $1.7 million in the same quarter
during the previous year. Interest expenses declined in the quarter ended
September 30, 1998 as compared with the quarter ended September 30, 1997,
primarily as a result of declines in the average amount borrowed by the Company.
During the quarter ended September 30, 1998, the Company borrowed an average of
$68.8 million, a decline of $11.7 million, or 14.6%, as compared with average
borrowings of $80.5 million during the quarter ended September 30, 1997. The
decline in the average amount of borrowed funds was attributable to the
repayment of outstanding obligations which occurred in fiscal 1998 primarily as
a result of asset dispositions.
Other Expenses. During the quarter ended September 30, 1998, the Company
recorded total other expenses in the amount of $934,000, a decline of $788,000,
or 45.8%, as compared with other expenses of $1.7 million in the same quarter of
the previous year. Other expenses declined in the quarter ended September 30,
1998, as compared with the quarter ended September 30, 1997, primarily as a
result of declines in salaries and employee benefits expenses and legal and
professional fees of $155,000 and $543,000, respectively.
Salaries and employee benefits expense declined in the quarter ended September
30, 1998, as compared with the same period in the previous year, as a result of
the continued reduction of staff employed by the Company. At September 30, 1998,
the Company employed one full time employee engaged in administrative duties.
778176.1
19
<PAGE>
Legal and professional fees expense decreased $543,000, or 72.9%, to $202,000
during the quarter ended September 30, 1998 from $745,000 during the quarter
ended September 30, 1997, primarily as a result of the reduction of professional
fees incurred in connection with the Reorganization described in Note 1. The
Company accrued and paid $290,000 and $159,000, respectively, in the quarter
ended September 30, 1997 and $0 and $0, respectively in the quarter ended
September 30, 1998, for legal and professional fees associated with the
Reorganization. In addition to this $290,000 reduction in accrued professional
fees related to the Reorganization, the Company incurred approximately $253,000
more in other professional fees during the quarter ended September 30, 1997 than
in the same quarter of the current year. The additional fees incurred in the
quarter ended September 30, 1997 as compared with the same quarter of the
current year related to services such as actuarial evaluations and tax
preparation which were primarily related to the finalization of the Company's
employee- and tax-related affairs as a business entity that had operated as an
insured depository institution.
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
management and disposition of Company assets. The Management Company was a newly
formed, privately-owned entity controlled by Alvin Dworman, who owns 39.0% of
the outstanding Common Stock of the Company. During the quarter ended September
30, 1998, the Company accrued $664,000 in fees payable to the Management
Company, of which $46,000 related to fees incurred for the successful
disposition of assets. During the quarter ended September 30, 1997, the Company
accrued $793,000 in fees payable to the Management Company, of which $121,000
related to fees incurred for the successful disposition of assets. At September
30, 1998 the Company had accrued fees payable to the Management Company and its
affiliate, Fintek, Inc., aggregating $846,000.
Other Income (Expense). The Company did not recognize any other income (expense)
in the quarter ended September 30, 1997, a decrease of $1.7 million as compared
with the same quarter of the previous year. Other income (expense) in the
quarter ended September 30, 1998 was primarily due to the $1.8 million recorded
gain on sale of the Company's largest preferred stock holding, with a book value
of approximately $5.0 million.
Provision for Income Taxes. Statement of Financial Accounting Standards No. 109
(SFAS-109), "Accounting for Income Taxes," requires the Company to recognize a
deferred tax asset relating to the unrecognized benefit for all temporary
differences that will result in future tax deductions and for all unused NOL and
tax credit carryforwards, subject to, in certain circumstances, reduction of the
asset by a valuation allowance. A valuation allowance is recorded if it is more
likely than not that some portion or all of the deferred tax asset will not be
realized based on a review of available evidence. Realization of tax benefits
for deductible temporary differences and unused NOL and tax credit carryforwards
may be based upon the future reversals of existing taxable temporary
differences, future taxable income exclusive of reversing temporary differences
and carryforwards, taxable income in prior carryback years and, if appropriate,
from tax planning strategies.
The high levels of loan charge-offs and other losses, which were largely
responsible for losses during the periods, effectively eliminated federal income
tax liability for the quarters ended September 30, 1998 and 1997. The Company's
income tax provision includes state and local taxes on the greater of combined
entire net income, combined alternative entire net income or combined taxable
assets. Certain subsidiaries provide for state and local taxes on a separate
company basis on income, capital, assets or an alternative minimum tax.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the reported loss before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. During
the quarters ended September 30, 1998 and 1997, the Company recorded a net
provision for income taxes of $169,000 and $51,000, respectively, primarily to
reflect the effects of operations and asset disposition on its current state and
local income tax liability at September 30, 1998 and 1997, respectively.
Liquidity and Capital Resources
The Company must maintain sufficient liquidity to meet its funding requirements
for scheduled debt repayments, operating expenses (including current income
taxes payable) and for development costs related to certain real estate
projects.
778176.1
20
<PAGE>
At September 30, 1998, the Company had $68.8 million in borrowed funds. In
connection with the Branch Sale, the Company obtained financing with Marine
(Initial Facilities) totaling $89.8 million. At September 30, 1998, the
remaining outstanding balance of the Initial Facilities due to Marine was $60.6
million. Borrowed Funds related to Asset Sale Transactions amounted to $8.2
million at September 30, 1998. The Company actively monitors and manages its
cash inflows and outflows in an attempt to maximize payment of its debt
obligations to Marine and to invest, to the extent possible, all cash balances.
The Company seeks to maintain liquidity within a range of 5% to 10% of total
assets. Liquidity for this purpose is defined as unrestricted cash. At September
30, 1998, the Company's liquidity ratio, as so defined, amounted to 5.9% which
was within the maintenance range.
Recent Accounting Developments
From time to time the Financial Accounting Standards Board ("FASB") adopts
accounting standards (generally referred to as Statements of Financial
Accounting Standards, or "SFASs") which set forth required generally accepted
accounting principles. Set forth below is a description of certain of the
accounting standards recently adopted by the FASB which are relevant to
financial institutions such as the Company.
SFAS No. 128. In February 1997, the FASB issued SFAS No. 128, "Earnings per
Share," which was required to be adopted on December 31, 1997. At that time, the
Company was required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The implementation of SFAS No. 128 did not have any effect on
the Company's primary earnings per share for the quarters ended September 30,
1998 or 1997 or for the years ended June 30, 1998 or 1997.
SFAS No. 130. As of July 1, 1998, the Company adopted Statement of Accounting
Standards No. 130, "Reporting Comprehensive Income " ("SFAS-130"). SFAS-130
establishes new rules for the reporting and display of comprehensive income and
its components. However, the adoption of this Statement has had no effect on the
Company's net income or stockholders' equity. SFAS-130 requires unrealized gains
or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income.
Impact of Inflation
The consolidated financial statements and related consolidated data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial positions and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of dollars over time due to inflation. The primary
impact of inflation on the operations of the Company is reflected in increased
operating costs and increases in interest rates paid on borrowed funds. Over any
given term, however, interest rates do not necessarily move in the same
direction or in the same magnitude as changes in prices for goods and services.
Impact of Year 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems. The Year 2000 issue
is the result of computer programs being written using two digits rather than
four digits to define the applicable year. Any of the Company's computer
programs or hardware that have date-sensitive software or embedded computer chip
technology may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
The Company believes that modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant operational problems
for its computer systems. Further, due to the limited number of assets managed
by the Company and the limited scope of the Company's continuing operations,
which could be managed and accounted for by methods not relying on the computer
systems currently employed by the Company, if such modifications are not made,
or if such modifications and conversions are not completed in a timely manner,
the Year 2000 issue is unlikely to have a material impact
778176.1
21
<PAGE>
on the operations, liquidity or capital resources of the Company. In addition,
the Company believes that the implementation of modifications to components of
the building systems, affecting the operations of its properties held as
investments in real estate, is unlikely to have a material affect on the
operations, liquidity or capital resources of the Company.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase. The Company's plan to resolve the Year 2000
issue involves four phases: assessment, and where necessary, remediation,
testing and implementation.
To date, the Company has completed an assessment of all systems that could be
significantly affected by the Year 2000. The Company's completed assessment
indicated the need to modify or replace portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. Since the Company's accounting software is maintained and
supported by a third party, the total Year 2000 cost has been, and is expected
to be, minimal.
In addition, the Company has completed the assessment of all systems related to
the operations of its properties held as investments in real estate. Such
assessments were performed to ensure that remediation of building equipment
(such as security systems and elevators) could be completed and tested prior to
the year 2000. The Company's completed assessment indicated the need to modify
or replace portions of its buildings' systems so that these systems will
function properly with respect to dates in the year 2000 and thereafter. All
necessary remediation is expected to be completed as an integral part of
regularly scheduled building maintenance and repair activities. As a result, the
cost of such remediation is expected to be immaterial to the operations,
liquidity or capital resources of the Company.
Nature and Level of Third Parties and their Exposure to the Year 2000 Issue. The
Company has queried its significant suppliers and subcontractors that provide
accounting or information processing services to the Company (external agents).
To date, the Company is not aware of any external agent with a Year 2000 issue
that would materially impact the Company's results of operations, liquidity or
capital resources. However, the Company has no means of absolutely ensuring that
external agents will be Year 2000 ready. Due to the limited number of assets
managed by the Company and the limited scope of the Company's continuing
operations, which could be managed and accounted for by methods not relying on
the computer systems and services currently provided by external agents employed
by the Company, if such modifications are not made, or if such modifications and
conversions are not completed in a timely manner, the Year 2000 issue is
unlikely to have a material impact on the operations, liquidity or capital
resources of the Company.
Contingency Plans. The Company has contingency plans for all critical
applications and systems. These contingency plans involve, among other planned
actions, the use of alternative manual procedures, the temporary use of
increased or alternative third party services and adjusting staffing strategies.
Risks Associated with Forward-Looking Statements
This Form 10-Q, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-
looking statements involve known and unknown risk, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following, which are
discussed in greater detail in the "Risk Factors" section of the Company's
Registration Statement on Form S-4 (File No. 333-386730 and File No.
333-386730-01) filed with the Securities and Exchange Commission ("SEC"),
general economic conditions, which will among other things, affect demand for
commercial and residential properties, availability and credit worthiness of
prospective tenants, lease rents and the availability of financing: difficulty
of locating suitable investments; competition; risks of real estate acquisition,
development, construction and renovation; vacancies at existing commercial
properties; dependence on rental income from real property; adverse consequences
of debt financing; risks of investments in debt instruments, including possible
payment defaults and reductions in the value of collateral; illiquidity of real
estate investments; lack of prior operating history; and other risks listed from
time to time in the Company's reports filed with the SEC. Therefore, actual
results could differ materially from those projected in such statements.
778176.1
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
An action entitled Strome Global Income Fund et al. v. River Bank America et
al., Index No. 605226198, was commenced against the Registrant, its predecessors
and certain of its current and former directors in New York State Supreme Court,
New York County on October 27, 1998. Plaintiffs are holders of the Company's 15%
non-cumulative perpetual preferred stock, Series A, and were formerly holders of
River Bank America 15% non-cumulative perpetual preferred stock, Series A. The
complaint alleges various claims for breach of contract, fraudulent conveyance,
violations of Sections 604 and 605 of the New York Banking Law, breach of
fiduciary duty and the duty of disclosure and ultra vires acts based upon the
reorganization into the Registrant, and subsequent dissolution, of the
Registrant's predecessor, River Bank America, and an amendment made to River
Bank America's certificate of designations for the preferred stock in connection
with the reorganization. Among other things, plaintiffs claim that as a result
of the reorganization and dissolution they were entitled to receive a $25 per
share liquidation payment, as well as unpaid dividends, and were also entitled
to appraisal rights as dissenting stockholders. Plaintiffs seek judgment against
the defendants for the liquidation payment, other unspecified compensatory
damages, avoidance of the transfer of assets from River Bank America to the
Registrant, punitive damages and other relief. The Registrant believes that the
reorganization and dissolution of River Bank America was in the best interests
of all of the River Bank America stockholders and did not violate plaintiffs'
rights as preferred stockholders in any respect and intends to defend the
lawsuit vigorously.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
The Company held its annual meeting of stockholders on September 16, 1998. The
submission of matters to a vote of the Company's stockholders which occurred at
the annual meeting, and the results of the stockholders' vote on such matters,
were previously reported in the Company's Annual Report on Form 10-K, dated June
30, 1998, and are incorporated herein by reference.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(i) Form 8-K, dated October 27, 1998, to report information disclosed in Part
II, Item 1 of this Form 10-Q, as filed on November 4, 1998.
778176.1
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RB ASSET, INC.
(Registrant)
Date: November 13, 1998 By: /s/ Nelson L. Stephenson
----------------- -------------------------
Nelson L. Stephenson
President and Chief Executive Officer(principal
executive and principal financial officer)
778176.1
24
