<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1997
------------------
Commission file number 0-13833
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GEORGE MASON BANKSHARES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1303470
-------- ----------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
11185 Main Street, Fairfax, Virginia 22030
- ------------------------------------ -----
(Address of principal executive office) (Zip Code)
(Registrant's Telephone number, including area code ) (703) 352-1100
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$1.11 Par Value Common Capital Stock
(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 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of the registrant's Common Stock ($1.11 Par
Value) was 5,193,542 shares at October 29, 1997.
<PAGE> 2
GEORGE MASON BANKSHARES, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE #
- ----------------------------- ------
<S> <C>
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Income - Three months
ended September 30, 1997 and 1996, Nine months ended
September 30, 1997 and 1996 4
Condensed Consolidated Statements of Shareholders' Equity - Nine months
ended September 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements - September 30, 1997 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to shareholders during the
third quarter of 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(a). The following exhibits required to be filed are filed
herewith:
Exhibit 10AS-Supplemental Retirement Benefits Agreement
for Bernard H. Clineburg. 33
"Computation of Earnings per Common Share," is presented as
Note 6 on page 12 of the third quarter report on Form 10-Q. 12
6(b). A current report on Form 8-K was filed on September 17,
1997, reporting the execution of a Definitive Agreement for
the acquisition of the Company by United Bankshares, Inc.
SIGNATURES 32
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEORGE MASON BANKSHARES, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $28,040 $41,158
Federal funds sold 8,200 23,800
-------------------------------------
Total cash and cash equivalents 36,240 64,958
Securities available-for-sale 335,952 280,859
Securities held-to-maturity 55,887 64,574
Mortgage loans held for resale 83,483 72,983
Loans, net of unearned discount and loan fees 442,269 373,613
Less: Allowance for loan losses (5,699) (5,659)
-------------------------------------
Loans, net 436,570 367,954
Bank premises and equipment, net 9,764 10,019
Accrued income receivable 5,771 4,480
Prepaid expenses and other assets 4,254 4,186
Deferred income taxes 1,606 2,059
Other real estate 51 398
-------------------------------------
TOTAL ASSETS $969,578 $872,470
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $154,322 $132,415
Interest checking 48,121 49,002
Savings 180,488 162,414
Time 377,396 349,763
-------------------------------------
Total Deposits 760,327 693,594
Borrowed funds 130,003 105,898
Other liabilities 7,876 7,979
Dividends payable 718 655
-------------------------------------
TOTAL LIABILITIES 898,924 808,126
SHAREHOLDERS' EQUITY
Preferred stock 0 0
Common stock 5,698 5,581
Surplus 39,932 38,472
Retained earnings 24,892 21,094
Treasury stock (39) 0
Unrealized holding gain (loss) on securities
available-for-sale 171 (803)
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY 70,654 64,344
-------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $969,578 $872,470
=====================================
BOOK VALUE PER SHARE $13.76 $12.80
=====================================
ACTUAL SHARES OUTSTANDING 5,134 5,028
=====================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
GEORGE MASON BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $10,347 $8,735 $28,987 $24,641
Interest on federal funds sold and repurchase
agreements 321 139 638 380
Interest on securities:
Taxable 5,696 5,110 16,777 12,987
Tax-exempt 287 272 852 880
------- ------ ------- -------
TOTAL INTEREST INCOME 16,651 14,256 47,254 38,888
INTEREST EXPENSE
Interest on deposits 7,384 5,923 20,972 15,960
Interest on securities sold under agreeements to
repurchase and other borrowed funds 1,179 1,137 2,978 2,550
------- ------ ------- -------
TOTAL INTEREST EXPENSE 8,563 7,060 23,950 18,510
------- ------ ------- -------
NET INTEREST INCOME 8,088 7,196 23,304 20,378
PROVISION FOR LOAN LOSSES 11 0 23 181
------- ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,077 7,196 23,281 20,197
OTHER INCOME
Service charges 1,092 687 2,801 2,101
Gain on sales of securities available-for-sale 0 8 40 328
Gain on sales of mortgage loans held for resale 3,536 2,533 8,520 7,575
Other 426 307 1,014 1,091
------- ------ ------- -------
TOTAL OTHER INCOME 5,054 3,535 12,375 11,095
OTHER EXPENSES
Salaries and employee benefits 5,871 4,833 15,342 14,082
Occupancy 857 784 2,561 2,299
Equipment 628 551 1,797 1,627
Other operating expenses 2,657 1,939 7,267 6,316
------- ------ ------- -------
TOTAL OTHER EXPENSES 10,013 8,107 26,967 24,324
------- ------ ------- -------
INCOME BEFORE APPLICABLE INCOME TAXES 3,118 2,624 8,689 6,968
INCOME TAXES 1,006 815 2,755 2,118
------- ------ ------- -------
NET INCOME $2,112 $1,809 $5,934 $4,850
======= ====== ======= =======
NET INCOME PER COMMON SHARE $0.40 $0.35 $1.13 $0.95
======= ====== ======= =======
CASH DIVIDENDS DECLARED PER SHARE $0.14 $0.12 $0.41 $0.33
======= ====== ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 5,344 5,148 5,252 5,116
======= ====== ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
GEORGE MASON BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $5,934 $4,850
Adjustments to reconcile net income to net cash used in
operating activities:
Net amortization of securities 498 230
Depreciation 1,407 985
Provision for loan losses 23 181
Gain on sales of securities available-for-sale (40) (328)
Benefit of deferred income taxes (70) (24)
Change in assets and liabilities:
Increase in mortgage loans held for resale (10,500) (2,883)
Increase in accrued income receivable,
other assets and other real estate (559) (5,630)
Increase (decrease) in other liabilities (103) 2,501
----------------------------------
Net cash used in operating activities (3,410) (118)
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturities of available-for-sale securities 58,542 101,793
Proceeds from maturities of held-to-maturity securities 9,777 6,241
Proceeds from maturities of trading securities 0 5,693
Purchase of available-for-sale securities (111,912) (196,335)
Purchase of held-to-maturity securities (2,226) (3,272)
Net increase in loans (68,639) (62,871)
Purchase of bank premises and equipment (1,152) (821)
----------------------------------
Net cash used in investing activities (115,610) (149,572)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 66,733 108,612
Net increase in borrowed funds 24,105 54,070
Net proceeds from sale of common stock 1,577 3,090
Purchase of treasury stock (39) 0
Dividends paid (2,074) (1,368)
----------------------------------
Net cash provided by financing activities 90,302 164,404
----------------------------------
Net increase (decrease) in cash and cash equivalents (28,718) 14,714
Cash and cash equivalents at beginning of period 64,958 49,639
----------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $36,240 $64,353
==================================
Interest paid $23,857 $17,715
==================================
Income taxes paid $2,456 $2,275
==================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 6
GEORGE MASON BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON TREASURY UNREALIZED
STOCK STOCK & GAIN (LOSS)
SHARES COMMON UNEARNED RETAINED ON
OUTSTANDING STOCK SURPLUS ESOP EARNINGS SECURITIES TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 4,755 $ 5,278 $ 35,523 $ (42) $ 16,416 $ 752 $ 57,927
Net Income 4,850 4,850
Common stock issuance 260 289 2,760 42 3,091
Cash dividends declared
($.33 per common share) (1,574) (1,574)
Change in unrealized holding
gain (loss) on securities
available-for-sale (3,640) (3,640)
---------------------------------------------------------------------------------------
Balance, September 30, 1996 5,015 $ 5,567 $ 38,283 $ - $ 19,692 $ (2,888) $ 60,654
========== ========== ========== ======== ======== ========== ==========
Balance, December 31, 1996 5,028 $5,581 $ 38,472 $ - $ 21,094 $ (803) $ 64,344
Net Income 5,934 5,934
Common stock issuance 106 117 1,460 1,577
Purchase of treasury stock (39) (39)
Cash dividends declared
($.41 per common share) (2,136) (2,136)
Change in unrealized holding
gain (loss) on securities
available-for-sale 974 974
---------------------------------------------------------------------------------------
Balance, September 30, 1997 5,134 $ 5,698 $ 39,932 $ (39) $ 24,892 $ 171 $ 70,654
========== ========== ========== ======== ======== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 7
GEORGE MASON BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1 - ORGANIZATION
George Mason Bankshares, Inc., (the "Company") is a Virginia bank holding
company that was formed in 1984 and is headquartered in Fairfax, Virginia. The
Company owns all of the outstanding stock of its subsidiary bank, George Mason
Bank, ("GMB"), which was incorporated in 1977 and opened for business in 1979.
George Mason Mortgage Corporation, ("GMMC") is a wholly owned subsidiary of GMB.
Additionally, the Company owns all of the outstanding stock of Mason Holding
Corporation, ("MHC") a bank holding company which acquired Palmer National
Bancorp, Inc. ("PNBI"), the holding company for The Palmer National Bank ("PNB")
on May 17, 1996. On June 9, 1997, PNB was merged into GMB.
NOTE 2- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
30, 1997, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain reclassifications were made to prior period financial statements to
conform to current year presentation.
<PAGE> 8
NOTE 3
SECURITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $7,505 $16 $0 $7,522
U.S. Government Agencies and Corporations 50,073 160 (50) 50,183
States and Political Subdivisions 3,401 62 (0) 3,463
Mortgage-Backed Securities 271,297 1,065 (687) 271,674
Other Securities 3,110 0 0 3,110
------------------------------------------------
TOTAL $335,386 $1,303 ($737) $335,952
================================================
SECURITIES HELD-TO-MATURITY
U.S. Government Agencies and Corporations $981 $18 $0 $999
States and Political Subdivisions 18,842 677 (17) 19,502
Mortgage-Backed Securities 36,064 407 (71) 36,400
------------------------------------------------
TOTAL $55,887 $1,102 ($88) $56,901
================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $10,010 $12 ($11) $10,011
U.S. Government Agencies and Corporations 24,247 54 (49) 24,252
States and Political Subdivisions 1,316 14 (6) 1,324
Mortgage-Backed Securities 243,274 646 (1,420) 242,500
Other Securities 2,772 0 0 2,772
------------------------------------------------
TOTAL $281,619 $726 ($1,486) $280,859
================================================
SECURITIES HELD-TO-MATURITY
U.S. Government Agencies and Corporations $4,671 $56 $0 $4,727
States and Political Subdivisions 18,818 448 (68) 19,198
Mortgage-Backed Securities 41,085 523 (176) 41,432
------------------------------------------------
TOTAL $64,574 $1,027 ($244) $65,357
================================================
</TABLE>
<PAGE> 9
NOTE 4
LOANS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Commercial $105,065 $100,986
Real Estate-Construction 55,520 32,203
Real Estate-Mortgage 172,864 156,958
Home Equity Lines 48,840 44,141
Consumer 60,790 40,083
----------------------------------
GROSS LOANS 443,079 374,371
----------------------------------
Less: Deferred loan fees and
unearned discount (810) (758)
----------------------------------
LOANS,NET OF UNEARNED DISCOUNT AND
DEFERRED LOAN FEES 442,269 373,613
----------------------------------
Allowance for loan losses (5,699) (5,659)
----------------------------------
LOANS,NET 436,570 367,954
----------------------------------
MORTGAGE LOANS HELD FOR RESALE 83,483 72,983
----------------------------------
TOTAL LOANS, NET $520,053 $440,937
==================================
</TABLE>
<PAGE> 10
NOTE 5
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $5,657 $5,687 $5,659 $5,529
Provision charged to expense 11 0 23 181
Charge-offs:
Commercial and other 39 84 69 86
Consumer 36 13 39 21
Real Estate-Mortgage 15 0 15 40
Real Estate-Construction 0 0 0 0
-------------------------------------------------------------------------------------
Total Charge-offs 90 97 123 147
Recoveries:
Commercial and other 2 32 15 30
Consumer 1 9 7 11
Real Estate-Mortgage 118 31 118 58
Real Estate-Construction 0 0 0 0
-------------------------------------------------------------------------------------
Total Recoveries 121 72 140 99
Net Charge-Offs (Recoveries) (31) 25 (17) 48
-------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $5,699 $5,662 $5,699 $5,662
=====================================================================================
Average Total Loans(1) $422,204 $349,947 $402,187 $323,648
Total Loans at Period End (1) $442,269 $362,562 $442,269 $362,562
Ratio of net charge-offs (recoveries)
to average total loans -0.01% 0.01% 0.00% 0.01%
Ratio of allowance for
loan losses to total
loans at period end 1.29% 1.56% 1.29% 1.56%
</TABLE>
(1) Total loans are reported net of unearned income and do not include
mortgage loans held for resale.
<PAGE> 11
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
SEPTEMBER 30, TOTAL DECEMBER 31, TOTAL
1997 LOANS 1996 LOANS
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $1,773 23.8% $934 27.0%
Real Estate-Construction 641 12.5% 511 8.6%
Real Estate-Mortgage 1,417 39.0% 2,337 41.9%
Home Equity Loans 895 11.0% 313 11.8%
Consumer 495 13.7% 256 10.7%
Unallocated 478 N/A 1,308 N/A
-------------------------------------------------------------------
Total $5,699 100.0% $5,659 100.0%
===================================================================
</TABLE>
<PAGE> 12
NOTE 6
EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER SHARE:
Net income $2,112 $1,809 $5,934 $4,850
Stock and stock equivalents (average shares):
Common shares outstanding 5,111 5,002 5,075 4,965
Stock options (a) 233 146 177 151
--------------------- -------------------
Total stock and stock equivalents 5,344 5,148 5,252 5,116
--------------------- -------------------
PRIMARY NET INCOME PER SHARE $0.40 $0.35 $1.13 $0.95
===================== ===================
FULLY DILUTED NET INCOME PER SHARE:
Net income $2,112 $1,809 $5,934 $4,850
Stock and stock equivalents (average shares):
Common shares outstanding 5,111 5,002 5,075 4,965
Stock options (b) 265 146 265 151
--------------------- -------------------
Total stock and stock equivalents 5,376 5,148 5,340 5,116
--------------------- -------------------
FULLY DILUTED NET INCOME PER SHARE $0.39 $0.35 $1.11 $0.95
===================== ===================
</TABLE>
(a) Shares were assumed to be repurchased at the average closing stock
prices for the three and six months ended September 30, 1997 and
1996.
(b) Shares were assumed to be repurchased at the September 30, 1997
closing price.
<PAGE> 13
NOTE 6- CONTINUED
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share", which is required to be adopted for the periods ended
December 31, 1997. At that time the Company will be 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 impact is expected to
result in an increase in primary earnings per share for the three months ended
September 30, 1997 and September 30, 1996 of $0.01 per share and $0.01 per
share, respectively. For the nine months ended September 30, 1997 and September
30, 1996, the impact is expected to result in an increase in primary earnings of
$0.04 per share and $0.03 per share, respectively. The impact of Statement No.
128 on the calculation of fully diluted earnings per share for these quarters is
not expected to be material.
NOTE 7- BUSINESS COMBINATION
On September 10, 1997, the Company entered into an Agreement and Plan of Merger
pursuant to which the Company will be merged with and into United Bankshares,
Inc., with United as the surviving corporation. Under the Merger agreement, each
share of the Company's common stock will be exchanged for 0.85 of a share of
United common stock. The merger is intended to constitute a tax-free
reorganization and, to be accounted for under the pooling-of-interests
accounting treatment. The transaction is subject to shareholder and regulatory
approval.
NOTE 8- YEAR 2000 PLAN
The Company is testing and modifying its computer systems, as necessary, to
ensure that the situation commonly referred to as the "year 2000 Problem" will
not have a significant effect on operations or financial condition. The problem
arises when computer programs cannot process data for the year 2000 and beyond.
Management is committed to the goal of having the Company year 2000 compliant
before any disruption occurs, to assure that customers are in no way negatively
impacted due to the change in the calendar on January 1, 2000. The Company has
formed a project team to develop a strategy to address the year 2000 problem.
The project team is developing a comprehensive strategy to implement the
conversion plan and minimize business risk through adequate testing. It is
estimated that the cost of addressing the year 2000 problem and making the
Company's computer systems year 2000 compliant will not be material.
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Effective May 17, 1996, Palmer National Bancorp, Inc., the
holding company for Palmer National Bank, merged into Mason Holding Corporation,
a subsidiary of George Mason Bankshares, Inc. The merger was accounted for as a
pooling of interests. Accordingly, all financial data for the current and prior
periods has been restated to reflect the financial position and results of
operations on a consolidated basis from the earliest period presented.
FINANCIAL SUMMARY
Net income for the three months ended September 30, 1997
increased by 16.7% over the same period last year, despite $172 thousand in
merger related expenses. Net income totaled $2.11 million or $0.40 per share for
the quarter, compared to $1.81 million or $0.35 per share for the third quarter
of 1996. Returns on average assets and average equity for the third quarter of
1997 were 0.90% and 11.68%, respectively, compared to 0.92% and 11.50% for the
same period in 1996. Net income for the first nine months of 1997 was $5.93
million compared to $4.85 million for the first nine months last year,
representing an increase of 22.4%. Earnings per share for the comparable nine
month periods of 1997 and 1996 were $1.13 and $0.95, respectively.
The Company continued to experience significant growth as total
assets increased to $969.6 million at September 30, 1997 compared to $872.5
million at December 31, 1996 representing an increase of $97.1 million or 11.1%.
Loan demand continued to improve as loans (net of unearned income) increased by
$68.7 million to $442.3 million at September 30, 1997 compared to $373.6 million
at year-end 1996. Total deposits rose to $760.3 million at the end of the
quarter compared to $693.6 million at December 31, 1996, representing an
increase of 9.6%.
Shareholders' equity at September 30, 1997 totaled $70.7 million
compared to $64.3 million at December 31, 1996. Book value per share of common
stock on September 30, 1997 was $13.76 compared to $12.80 at December 31, 1996.
<PAGE> 15
EARNINGS ANALYSIS
NET INTEREST INCOME
Net interest income is the Company's primary source of earnings
and represents the difference between interest and fees earned on earning assets
and the interest expense paid on deposits and other interest bearing
liabilities. Net interest income, on a fully taxable equivalent basis, totaled
$8.3 million for the third quarter of 1997, compared to $7.4 million for the
third quarter of 1996, an increase of 12.1%. Net interest income for the first
nine months of 1997 totaled $23.8 million, compared to $20.9 million for the
same period in 1996, representing an increase of 14.0%. The improvements in net
interest income were attributable to a higher volume of earning assets which was
partially offset by a tightening of the spread between interest rates earned on
loans, securities, federal funds sold and other investments, and interest rates
paid on deposits and borrowed funds. TABLE 2 and TABLE 2A present the Company's
analysis of changes in interest income and interest expense relating to volume
and rate for the periods indicated.
The Company's net interest margin for the quarter ended September
30, 1997 decreased to 3.68% from 3.93% for the third quarter of 1996. The
decrease in the net interest margin was primarily attributable to a 20 basis
point drop in the yield on earning assets combined with a 5 basis point increase
in the cost to fund earning assets. The net interest margin for the first nine
months of 1997 declined to 3.79% compared to 4.14% for the same period in 1996.
The drop in the net interest margin percentage for the first nine months of the
year was attributable to an increase in the Company's cost to fund earning
assets of 15 basis points combined with a decrease in the yield on earning
assets of 20 basis points. The increase in the cost of funds was primarily the
result of the Company's increased reliance on certificates of deposit, which pay
a substantially higher rate of interest than interest checking and money market
deposits. Average certificates of deposit (including $100 thousand and over)
represented 62.0% of total interest-bearing deposits for the first nine months
of 1997 compared to 57.5% for the same period last year.
In the first nine months of 1997, average earning assets
increased by $165.0 million or 24.5% to $838.9 million compared to $674.0
million for the first nine months of 1996. Average total loans (including
mortgage loans held for resale), the largest component of earning assets, grew
to $451.4 million for the first nine months of 1997, compared to $368.1 million
for the same period a year ago. The growth in earning assets was primarily
funded by an increase in certificates
<PAGE> 16
of deposit and savings accounts as average interest bearing deposits increased
to $602.4 million in the first nine months of 1997 from $475.2 million for the
same period in 1996, representing an increase of 26.8%. Average demand deposits
rose by $15.5 million to $118.6 million for the first nine months of 1997
compared to $103.1 million during the same period last year. TABLE 1 and TABLE
1A present an analysis of average earning assets, interest bearing liabilities
and demand deposits with the related components of net interest income on a
fully taxable equivalent basis.
<PAGE> 17
AVERAGE BALANCES AND INTEREST RATES (TAX EQUIVALENT BASIS)
(DOLLARS IN THOUSANDS)
TABLE 1
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets:
Securities:
U.S. Treasury Securities $7,667 $112 5.80% $25,157 $370 5.84%
Federal Agency and
Mortgage-Backed Securities 345,288 5,527 6.35% 287,876 4,622 6.37%
State and Political
Subdivision Securities (1) 22,025 414 7.47% 20,514 400 7.74%
Other Investments(4) 3,360 58 6.85% 2,959 88 11.80%
---------------------------------------------------------------------------------
Total Securities 378,340 6,111 6.41% 336,506 5,480 6.46%
Loans: (3)
Commercial (1) 100,783 2,393 9.42% 102,858 2,328 8.98%
Real Estate-Construction 53,278 1,235 9.20% 36,932 761 8.17%
Real Estate-Mortgage (2) 277,762 5,621 8.03% 226,268 5,090 8.92%
Consumer 57,379 1,137 7.86% 28,769 594 8.19%
-------------------------------------- -------------------------------------
Total Loans 489,202 10,386 8.42% 394,827 8,773 8.82%
Federal Funds Sold 23,346 322 5.47% 12,741 169 5.26%
-------------------------------------- -------------------------------------
Total Interest-Earning Assets 890,888 16,819 7.49% 744,074 14,422 7.69%
Noninterest-Earning Assets:
Cash and Due from Banks 27,011 26,039
Other Assets 20,610 21,863
Allowance for Loan Losses (5,627) (5,676)
Deferred Loan Fees (832) (1,483)
------------- -------------
Total Noninterest-Earning Assets 41,162 40,743
------------- -------------
Total Assets $932,050 $784,817
------------- =============
</TABLE>
(1) Interest income from tax-exempt securities and tax-exempt loans is
included on a taxable-equivalent basis using a 34% tax rate.
(2) Includes mortgage loans held for resale and home equity lines of
credit.
(3) For the purpose of these computations, nonaccruing loans are included
in the daily average loan amounts outstanding.
(4) Includes trading income
<PAGE> 18
AVERAGE BALANCES AND INTEREST RATES (TAX EQUIVALENT BASIS)
(DOLLARS IN THOUSANDS)
TABLE 1 (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest Checking Deposits $48,327 $260 2.13% $44,481 $241 2.15%
Money Market Deposits 85,236 648 3.02% 99,768 758 3.01%
Savings Deposits 98,164 1,081 4.37% 62,663 679 4.30%
Certificates of Deposit
$100,000 and over 84,482 1,170 5.49% 79,363 1,032 5.16%
Certificates of Deposit 303,580 4,225 5.52% 233,483 3,213 5.46%
------------------------------------ ----------------------------------
Total Interest-Bearing Deposits 619,789 7,384 4.73% 519,758 5,923 4.52%
Purchased Funds 102,041 1,179 4.58% 90,367 1,137 4.99%
------------------------------------ ----------------------------------
Total Interest-Bearing Liabilities 721,830 8,563 4.71% 610,125 7,060 4.59%
Noninterest-Bearing Liabilities:
Total Demand Deposits 133,030 106,788
Other Liabilities 8,116 8,165
--------------- -----------
Total Noninterest-Bearing
Liabilities 141,146 114,953
--------------- -----------
Total Liabilities 862,976 725,078
Shareholders' Equity 69,074 59,739
--------------- -----------
Total Liabilities and Shareholders'
Equity $932,050 $784,817
=============== ===========
Interest Spread 2.78% 3.10%
-------------------- ----------------------
Net Interest Margin $8,256 3.68% $7,362 3.93%
==================== ======================
Cost to fund earning assets 3.81% 3.76%
======= ========
</TABLE>
Note: Average balances are calculated on a daily average basis. Allowance
for loan losses is excluded from calculation of average balances and
average rates, as appropriate. Nonaccruing loans are included in the
average loan balance.
<PAGE> 19
AVERAGE BALANCES AND INTEREST RATES (TAX EQUIVALENT BASIS)
(DOLLARS IN THOUSANDS)
TABLE 1A
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets:
Securities:
U.S. Treasury Securities $8,664 $373 5.76% $21,310 $920 5.77%
Federal Agency and
Mortgage-Backed Securities 338,383 16,240 6.42% 247,593 11,782 6.36%
State and Political
Subdivision Securities (1) 21,552 1,215 7.54% 21,883 1,293 7.90%
Other Investments(4) 3,196 164 6.86% 5,813 285 6.56%
--------------------------------------------------------------------------
Total Securities 371,795 17,992 6.47% 296,599 14,280 6.44%
Loans: (3)
Commercial (1) 102,842 7,213 9.38% 99,947 7,540 10.09%
Real Estate-Construction 44,798 3,237 9.66% 30,439 2,151 9.45%
Real Estate-Mortgage (2) 253,268 15,660 8.27% 216,283 13,758 8.50%
Consumer 50,540 3,000 7.94% 21,441 1,276 7.96%
------------------------------------ ----------------------------------
Total Loans 451,448 29,110 8.62% 368,110 24,725 8.98%
Federal Funds Sold 15,701 639 5.44% 9,241 380 5.50%
------------------------------------ ----------------------------------
Total Interest-Earning Assets 838,944 47,741 7.61% 673,950 39,385 7.81%
Noninterest-Earning Assets:
Cash and Due from Banks 27,919 25,423
Other Assets 19,245 24,463
Allowance for Loan Losses (5,641) (5,660)
Deferred Loan Fees (781) (1,467)
------------ ----------
Total Noninterest-Earning Assets 40,742 42,759
------------ ----------
Total Assets $879,686 $716,709
------------ ===========
</TABLE>
(1) Interest income from tax-exempt securities and tax-exempt loans is
included on a taxable-equivalent basis using a 34% tax rate.
(2) Includes mortgage loans held for resale and home equity lines of
credit.
(3) For the purpose of these computations, nonaccruing loans are included
in the daily average loan amounts outstanding.
(4) Includes trading income
<PAGE> 20
AVERAGE BALANCES AND INTEREST RATES (TAX EQUIVALENT BASIS)
(DOLLARS IN THOUSANDS)
TABLE 1A (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest Checking Deposits $50,030 $784 2.10% $45,099 $723 2.14%
Money Market Deposits 89,378 2,034 3.04% 104,537 2,347 3.00%
Savings Deposits 89,516 2,911 4.35% 52,251 1,679 4.30%
Certificates of Deposit
$100,000 and over 82,994 3,363 5.42% 71,931 2,805 5.21%
Certificates of Deposit 290,480 11,880 5.47% 201,409 8,406 5.58%
--------------------------------------- ------------------------------------------
Total Interest-Bearing Deposits 602,398 20,972 4.65% 475,227 15,960 4.49%
Purchased Funds 85,141 2,978 4.68% 71,296 2,550 4.78%
--------------------------------------- ------------------------------------------
Total Interest-Bearing Liabilities 687,539 23,950 4.66% 546,523 18,510 4.53%
Noninterest-Bearing Liabilities:
Total Demand Deposits 118,624 103,130
Other Liabilities 7,198 7,352
--------------- -----------------
Total Noninterest-Bearing
Liabilities 125,822 110,482
--------------- -----------------
Total Liabilities 813,361 657,005
Shareholders' Equity 66,325 59,704
--------------- -----------------
Total Liabilities and Shareholders'
Equity $879,686 $716,709
=============== =================
Interest Spread 2.95% 3.29%
---------------------- ----------------------
Net Interest Margin $23,791 3.79% $20,875 4.14%
====================== ======================
Cost to fund earning assets 3.82% 3.67%
======== ===========
</TABLE>
Note: Average balances are calculated on a daily average basis. Allowance
for loan losses is excluded from calculation of average balances and
average rates, as appropriate. Nonaccruing loans are included in the
average loan balance.
<PAGE> 21
RATE AND VOLUME ANALYSIS (TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
FROM THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 TO THE
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED
TABLE 2 SEPTEMBER 30, 1996
CHANGE DUE TO:
--------------
TOTAL
INCREASE
(DECREASE) RATE VOLUME
--------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Securities:
U.S. Treasury Securities ($258) ($1) ($257)
Federal Agency and
Mortgage-Backed Securities 905 ($17) $922
State and Political
Subdivision Securities (1) 14 ($15) $29
Other Investments (30) ($42) $12
--------------
Total Securities 631 ($50) $681
Loans: (3)
Commercial (1) 65 $112 ($47)
Real Estate-Construction 474 $137 $337
Real Estate-Mortgage (2) 531 ($627) $1,158
Consumer 543 ($48) $591
--------------
Total Loans 1,613 ($484) $2,097
Federal Funds Sold 153 $12 $141
--------------
TOTAL INTEREST INCOME 2,397 ($448) $2,846
--------------
Interest expense:
Interest-Bearing Deposits:
Interest Checking Deposits 19 ($2) $21
Money Market Deposits (110) $0 ($110)
Savings Deposits 402 $17 $385
Certificates of Deposit
$100,000 and over 138 $71 $67
Certificates of Deposit 1,012 $47 $965
--------------
Total Interest-Bearing Deposits 1,461 $321 $1,140
Purchased Funds 42 ($105) $147
--------------
TOTAL INTEREST EXPENSE 1,503 $210 $1,293
--------------
NET INTEREST INCOME $894 ($558) $1,453
==============
</TABLE>
** Variances are computed on a line-by-line basis and are non-additive
The increase or decrease due to a change in average volume has been
determined by multiplying the change in average volume by the average
rate during the preceding period, and the increase or decrease due to
a change in average rate has been determined by multiplying the
current average volume by the change in average rate.
(1) Interest income from tax-exempt securities and tax-exempt loans is
included on a taxable-equivalent basis using a 34% tax rate.
(2) Includes mortgage loans held for resale and home equity lines of
credit
(3) For the purpose of these computations, nonaccruing loans are included
in the daily average loan amounts outstanding.
<PAGE> 22
RATE AND VOLUME ANALYSIS (TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
FROM THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 TO THE
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED
TABLE 2A SEPTEMBER 30, 1996
CHANGE DUE TO:
--------------
TOTAL
INCREASE
(DECREASE) RATE VOLUME
----------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Securities:
U.S. Treasury Securities ($547) ($1) ($546)
Federal Agency and
Mortgage-Backed Securities 4,458 $138 $4,320
State and Political
Subdivision Securities (1) (78) ($58) ($20)
Other Investments (121) $7 ($128)
----------------
Total Securities 3,712 $92 $3,620
Loans: (3)
Commercial (1) (327) ($546) $218
Real Estate-Construction 1,086 $71 $1,015
Real Estate-Mortgage (2) 1,902 ($451) $2,353
Consumer 1,724 ($8) $1,732
----------------
Total Loans 4,385 ($1,213) $5,598
Federal Funds Sold 259 ($7) $266
----------------
TOTAL INTEREST INCOME 8,356 ($1,286) $9,642
----------------
Interest expense:
Interest-Bearing Deposits:
Interest Checking Deposits 61 ($18) $79
Money Market Deposits (313) $27 ($340)
Savings Deposits 1,232 $35 $1,197
Certificates of Deposit
$100,000 and over 558 $127 $431
Certificates of Deposit 3,474 ($243) $3,717
----------------
Total Interest-Bearing Deposits 5,012 $741 $4,271
Purchased Funds 428 ($67) $495
----------------
TOTAL INTEREST EXPENSE 5,440 $664 $4,776
----------------
NET INTEREST INCOME $2,916 ($2,195) $5,111
================
</TABLE>
** Variances are computed on a line-by-line basis and are non-additive
The increase or decrease due to a change in average volume has been
determined by multiplying the change in average volume by the average
rate during the preceding period, and the increase or decrease due to
a change in average rate has been determined by multiplying the
current average volume by the change in average rate.
(1) Interest income from tax-exempt securities and tax-exempt loans is
included on a taxable-equivalent basis using a 34% tax rate.
(2) Includes mortgage loans held for resale and home equity lines of
credit
(3) For the purpose of these computations, nonaccruing loans are included
in the daily average loan amounts outstanding.
<PAGE> 23
PROVISION FOR LOAN LOSSES
The provision for loan losses for the first nine months of 1997
totaled $23 thousand compared to $181 thousand for the same period last year. A
more detailed discussion of nonperforming assets and the allowance for loan
losses appears in the "Asset Quality" section.
GAIN ON SALES OF MORTGAGE LOANS HELD FOR RESALE
Gain on sales of mortgage loans held for resale for the third
quarter of 1997 totaled $3.5 million compared to $2.5 million for the same
period last year, an increase of $1.0 million or 39.6%. Gain on sales of loans
held for resale for the first nine months of 1997 totaled $8.5 million, compared
to $7.6 million last year.
GAIN ON SALES OF SECURITIES AVAILABLE-FOR-SALE
Gain on sales of securities available-for-sale totaled $40
thousand for the first nine months of 1997 compared to $328 thousand for the
same period last year. The securities were sold in response to changes in market
interest rates, liquidity needs and other general asset/liability
considerations.
OTHER NONINTEREST INCOME
Service charges and other income for the third quarter of 1997
totaled $1.5 million, compared to $994 thousand for the third quarter of 1996,
an increase of 52.7%. Service charges and other income for the first nine months
of 1997 increased to $3.8 million compared to $3.2 million for the same period
last year an increase of 19.5%. The increase in service charge income was
primarily attributable to the addition of Trust, Asset management and Brokerage
services along with additional income from ATM surcharges and overdraft fees.
NONINTEREST EXPENSES
In support of the Company's strategic growth, total noninterest
expenses consisting of employee related costs, occupancy expenses, and other
overhead totaled $27.0 million for the first nine months of 1997, compared to
$24.3 million for the same period in 1996, representing an increase of $2.6
million or 10.9%. Noninterest expenses for the third quarter of 1997 totaled
$10.0 million compared to $8.1 million for the third quarter of 1996,
representing an increase of 23.5%.
<PAGE> 24
During the third quarter of 1997, the Company incurred $172 thousand in
non-recurring costs in conjunction with its pending merger with United
Bankshares, Inc.
Salaries and employee benefits, the single largest category of
noninterest expenses, totaled $15.3 million for the first nine months of 1997
compared to $14.1 million for the same period in 1996. This $1.3 million
increase accounted for 47.7% of the total increase in noninterest expenses. The
single largest increase in salaries and employee benefits for the first nine
months of 1997 was attributable to commissions and salaries expense at George
Mason Mortgage Company ("GMMC"). GMMC's employee expenses totaled $7.3 million
through September 30, 1997, compared to $6.4 million for the first nine months
last year, an increase of $846 thousand.
CAPITAL RESOURCES
Shareholders' equity on September 30, 1997 was $70.7 million
compared to $64.3 million on December 31, 1996.
Factors contributing to the increase in shareholders'
equity were net income (reduced by the quarterly cash dividend) and the issuance
of new shares through the Company's employee stock and dividend reinvestment
plans. Cash dividends declared for the first nine months of 1997 amounted to
$0.41 per share compared to $0.33 per share for the first nine months of 1996.
At September 30, 1997, the Company's Tier 1 and total risk-based
capital ratios were 11.8% and 12.7%, respectively, compared to 12.3% and 13.4%
at December 31, 1996. The Company's leverage ratio was 7.5% at September 30,
1997 compared to 7.6% at December 31, 1996. The Company's capital structure
places it above the Federal Reserve Board's minimum guidelines for a
well-capitalized institution. TABLE 3 details the various components of
shareholders' equity.
<PAGE> 25
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS) WELL CAPITALIZED
TABLE 3 SEPTEMBER 30, DECEMBER 31, REGULATORY
1997 1996 MINIMUMS
--------------------------------------------------
TIER 1 CAPITAL:
<S> <C> <C> <C>
Common Stock $5,698 $5,581
Surplus 39,932 38,472
Retained Earnings 24,892 21,094
Treasury Stock (39) 0
Unrealized holding loss on securities
available-for-sale 171 (803)
---------------------------------
Total Shareholders' Equity 70,654 64,344
Less: Unrealized holding loss on securities
available-for-sale (171) 803
Less: disallowed intangibles (165) (204)
---------------------------------
Total Tier 1 Capital 70,318 64,943
TIER 2 CAPITAL:
Qualifying allowance for loan losses 5,699 5,659
---------------------------------
Total Tier 2 Capital 5,699 5,659
---------------------------------
TOTAL RISK-BASED CAPITAL $76,017 $70,602
=================================
Risk Weighted Assets $598,102 $527,449
=================================
RATIOS:
Tier 1 Capital to risk weighted assets 11.8% 12.3% 6.0%
Tier 2 Capital to risk weighted assets 1.0% 1.1%
---------------------------------
Total risk-based capital ratio 12.7% 13.4% 10.0%
=================================
Leverage Ratio-Tier 1 Capital to quarterly
average assets less intangibles 7.5% 7.6% 5.0%
=================================
</TABLE>
<PAGE> 26
ASSET QUALITY
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's view as to
the amount necessary to absorb potential losses in the loan portfolio. The
amount of the provision charged to expense each period is dependent upon an
assessment of the loan portfolio quality, current economic trends and
conditions, evaluation of specific client compositions, past loan experience and
the level of net charge-offs during that period.
The ratio of allowance for loan losses to total loans at
September 30, 1997 was 1.29% compared to 1.51% at December 31, 1996. The
coverage multiple of allowance for loan losses to nonperforming loans was 5.37
at September 30, 1997 compared to 3.58 at December 31, 1996. The Company
charged-off $123 thousand in loans and recovered $140 thousand in previously
charged off- loans during the first nine months of 1997. Management believes
that the allowance for loan losses at September 30, 1997 is adequate to cover
credit losses inherent in the loan portfolio. Loans classified as loss,
doubtful, substandard or special mention are adequately reserved for and are not
expected to have a material impact beyond what has been reserved.
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets, consisting of nonaccrual loans,
restructured loans and other real estate decreased by $867 thousand to $1.1
million at September 30, 1997 compared to $2.0 million at December 31, 1996.
Nonperforming assets to total assets at September 30, 1997 were 0.11% compared
to 0.23% at December 31, 1996.
Nonaccrual loans, the single largest category of nonperforming
assets, are those loans on which the accrual of interest has been discontinued.
Commercial loans are generally placed on nonaccrual status when either principal
or interest is past due 90 days or more, or when management believes the
collection of principal or interest is in doubt. Nonaccrual loans decreased to
$1.1 million at September 30, 1997 from $1.5 million at December 31, 1996.
Past due loans are defined as those loans which are 90 days or
more past due as to principal and interest but are still accruing interest
because they are well secured and are in the process of collection. Past due
loans totaled $2.0 million at September 30, 1997. TABLE 4 details nonperforming
assets, past due loans and asset quality ratios.
<PAGE> 27
<TABLE>
<CAPTION>
CREDIT QUALITY
(DOLLARS IN THOUSANDS)
TABLE 4
SEPTEMBER 30, DECEMBER 31,
1997 1996
-----------------------------------
<S> <C> <C>
Nonaccrual Loans $1,062 $1,487
Restructured Loans 0 95
-----------------------------------
TOTAL NONPERFORMING LOANS 1,062 1,582
Other Real Estate 51 398
-----------------------------------
TOTAL NONPERFORMING ASSETS 1,113 1,980
Loans past due 90 days or
more and accruing interest 2,013 0
-----------------------------------
TOTAL NONPERFORMING ASSETS AND
LOANS PAST DUE 90 DAYS OR MORE $3,126 $1,980
===================================
Total Loans at Period End (1) $442,269 $373,613
Allowance for Loan Losses 5,699 5,659
Total Assets 969,578 872,470
ASSET QUALITY RATIOS:
Allowance for Loan Losses to
Period end Loans 1.29% 1.51%
Allowance for Loan losses to
Nonperforming Loans (Multiple) 5.37 X 3.58 X
Total Nonperforming Loans
to Total Loans 0.24% 0.42%
Total Nonperforming Assets to
Total Assets 0.11% 0.23%
Nonperforming Assets to Total
Loans plus Other Real Estate 0.25% 0.53%
Nonperforming Assets and Loans Past
Due 90 days or more to Total Loans
and Other Real Estate 0.71% 0.53%
</TABLE>
(1) Total loans are reported net of unearned income and do not include
mortgage loans held for resale
<PAGE> 28
ASSET/LIABILITY MANAGEMENT
LIQUIDITY AND INTEREST RATE SENSITIVITY ANALYSIS
The primary function of asset/liability management is to maintain
adequate levels of liquidity while minimizing fluctuations in net interest
margin as a percentage of total assets.
At September 30, 1997 cash, cash equivalents, and securities
available-for-sale totaled $372.2 million compared to $345.8 million at December
31, 1996. The cash flows from the securities and loan portfolios are relatively
predictable and satisfy the Company's need for liquidity. In addition, the
Company's capital position, a large core deposit base, the quality of assets and
continued earnings power will ensure that the Company's long term liquidity
needs are met. To further satisfy liquidity needs, the Bank maintains lines of
credit with the Federal Home Loan Bank of Atlanta and a number of larger
regional and money-center financial institutions.
An important element of asset/liability management is the
monitoring of the Company's sensitivity to interest rate movements. In order to
measure the effect of interest rates on the Company's net interest income,
management takes into consideration the expected cash flows from the securities
and loan portfolios and the expected magnitude of the repricing of specific
asset and liability categories. The Company evaluates interest sensitivity risk
and then formulates guidelines to manage this risk based upon their outlook
regarding the economy, forecasted interest rate movements and other business
factors. Management uses the securities portfolio, which consists predominantly
of fixed rate securities, to hedge against changes in the loan and deposit
portfolios, which contain both fixed and variable rate assets. Therefore, any
negative impact of holding below market securities should be offset by increases
in earnings in the variable rate loan portfolio and corresponding increases in
the market value of fixed rate liabilities. Also, the securities portfolio,
which has an average repricing term of less than 3 years, provides a steady
stream of cash flows which are reinvested at current market rates, which in turn
helps to manage long term exposure to interest rate changes. Management's goal
is to maximize and stabilize the net interest margin by limiting exposure to
interest rate changes.
The data in TABLE 5 reflects repricing or expected maturities of
various assets and liabilities at September 30, 1997. This gap represents the
difference between interest-sensitive assets and liabilities in a specific time
interval. Interest sensitivity gap analysis presents a position that existed at
one particular point in time, and assumes that assets and liabilities with
similar
<PAGE> 29
repricing characteristics will reprice at the same time and to the same
degree. Therefore, the Company's static gap position is not necessarily
indicative of the impact of changes in interest rates on net interest income.
Therefore, in addition to the traditional "static gap presentation," TABLE 5
also presents interest sensitivity on an adjusted basis using Beta coefficients.
Essentially, the Beta adjustments recognize that assets and liabilities do not
reprice to the same degree. The Beta adjustments reflect the tendency for
movements in bank deposit rates to lag movements in open market rates. It also
gives recognition to the fact that changes in bank money market, interest
checking and savings rates do not move to the same degree as open market rates.
On a cumulative one-year basis at September 30, 1997, the Company had a negative
beta adjusted gap of $40.7 million or (4.20)% excess interest sensitive
liabilities over interest sensitive assets. A negative gap position indicates
that the Company's earnings will be enhanced in a falling rate environment and
earnings will be negatively impacted in a rising rate environment. Management
believes that its current gap position effectively insulates the Bank from
significant interest rate risk exposure.
<PAGE> 30
INTEREST RATE GAP ANALYSIS
(DOLLARS IN THOUSANDS)
TABLE 5
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------------------------------------------
1-90 91-180 181-365 1-5 Over 5
INTEREST-SENSITIVE ASSETS: Days Days Days Years Years
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federal Funds Sold $8,200 $0 $0 $0 $0
Securities 34,848 19,965 53,127 222,435 61,464
Mortgage Loans Held for Resale 83,483 0 0 0 0
Loans 197,374 16,006 7,180 172,531 49,990
------------------------------------------------------------------------------------
Total 323,905 35,971 60,307 394,966 111,454
------------------------------------------------------------------------------------
Cumulative Totals 323,905 359,876 420,183 815,149 926,603
INTEREST-SENSITIVE LIABILITIES:
- ------------------------------------------
Interest Checking Accounts 48,121 0 0 0 0
Savings Accounts 100,482 0 0 0 0
Money Market Deposit Accounts 80,006 0 0 0 0
Certificates of Deposit 196,708 19,830 71,099 87,939 1,820
Federal Funds Purchased 17,000 0 0 0 0
Repurchase Agreements 84,503 0 0 0 0
FHLB - Advances 20,000 1,000 500 2,000 0
U.S. Demand Notes 5,000 0 0 0 0
------------------------------------------------------------------------------------
Totals 551,820 20,830 71,599 89,939 1,820
------------------------------------------------------------------------------------
Cumulative Totals 551,820 572,650 644,249 734,188 736,008
------------------------------------------------------------------------------------
Gap ($227,915) $15,141 ($11,292) $305,027 $109,634
====================================================================================
Cumulative Gap ($227,915) ($212,774) ($224,066) $80,961 $190,595
====================================================================================
Adjustments:
Beta Adjustments
Interest Checking (beta factor .15) 40,903 0 0 0 0
Savings Accounts (beta factor .10) 90,434 0 0 0 0
Money Market Accounts (beta factor .35) 52,004 0 0 0 0
------------------------------------------------------------------------------------
Cumulative Beta Adjusted Gap ($44,574) ($29,433) ($40,725) $264,302 $373,936
====================================================================================
As Reported Information:
- ------------------------------------------
Interest-Sensitive Assets/Interest-
Sensitive Liabilites (Cumulative): 58.70% 62.84% 65.22% 111.03% 125.90%
Cumulative Gap/Total Assets -23.51% -21.95% -23.11% 8.35% 19.66%
Beta Adjusted Information:
- ------------------------------------------
Interest-Sensitive Assets/Interest-
Sensitive Liabilites (Cumulative): 87.90% 92.44% 91.16% 147.98% 167.66%
Cumulative Gap/Total Assets -4.60% -3.04% -4.20% 27.26% 38.57%
</TABLE>
<PAGE> 31
PART II.- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the course of its operations the Company and its subsidiaries are
parties to various legal proceedings. Based upon information currently
available, and after consultation with legal counsel, management believes that
such legal proceedings, in the aggregate, will not have a material adverse
effect on the Company's business, financial position, or results of operations.
<PAGE> 32
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
GEORGE MASON BANKSHARES, INC.
(Registrant)
Date: November 7, 1997 /s/ Bernard H. Clineburg
---------------- ------------------------
Bernard H. Clineburg
President and Chief Executive Officer
Date: November 7, 1997 /s/ James J. Consagra, Jr.
---------------- --------------------------
James J. Consagra, Jr.
Treasurer, Principal Financial and
Accounting Officer
<PAGE> 1
EXHIBIT 10AS
GEORGE MASON BANKSHARES, INC.
SUPPLEMENTAL RETIREMENT BENEFITS AGREEMENT
This Agreement, made and entered into this 21st day of July, 1997, by
and between George Mason Bankshares, Inc., a Virginia Corporation, The George
Mason Bank, a Virginia-chartered bank which is its wholly-owned subsidiary
(collectively, the "Banks") and Bernard H. Clineburg ("Employee").
WITNESSETH:
WHEREAS, the Boards of Directors of the Banks have determined that it
is in the Banks' best interest to provide retirement benefits to the Employee
to supplement those to which he is entitled under the Banks' tax-qualified
retirement plan;
NOW, THEREFORE, in consideration of the premises and the benefits to
be derived hereunder, the parties hereby agree as follows:
1. SUPPLEMENTAL RETIREMENT BENEFITS GENERALLY. In addition to any
amounts payable under the qualified retirement plan or plans of the Banks (the
"Retirement Plans"), if Employee satisfies the conditions specified in
paragraph 3 of this Agreement, supplemental retirement benefits ("Supplemental
Retirement Benefits") shall be payable under this agreement in 180 equal
monthly payments, commencing as specified in paragraph 2 of this Agreement.
2. AMOUNT AND PAYMENT OF SUPPLEMENTAL RETIREMENT BENEFITS.
(a) DURING LIFE OF EMPLOYEE.
(i) Normal Retirement Date. If the Employee is still employed
by the Banks on the Employee's sixty-fifth birthday, the Supplemental
Retirement Benefits shall be paid to the
<PAGE> 2
Employee in the form of 180 equal monthly payments in the amount of $20,160.75
each, with the first such payment occurring as of the first day of the month on
or after the date of the later of the Employee's attainment of age 65 and his
retirement from employment with the Banks (within the meaning of the Retirement
Plans).
(ii) Early Retirement Date. If the Employee terminates
employment before age 65, but after both attaining age 55 and completing at
least ten years of continuous service with the Banks, the Supplemental
Retirement Benefits shall be paid to the Employee in the form of 180 equal
monthly payments, with the first payment occurring as of the first day of the
month on or after such Early Retirement Date. The amount of each such payment
shall be equal to the present value (as of the date of the first monthly
payment) of the first monthly payment that would have been payable to the
Employee if he had terminated employment on the date of his sixty-fifth
birthday and the first payment had occurred on the first day of the month on or
after the date of such termination. For purposes of determining present value,
interest shall be compounded semi-annually as of the date of the first payment
and at six month intervals thereafter. The interest rate shall be the rate
published in The Wall Street Journal's "Treasury Bonds, Notes & Bills" section
on the first business day immediately after the date of termination as the bid
rate payable on 182-day or 183-day Treasury bills for the date of termination
or, if the date of termination is not a business day, the business day
immediately preceding the date of termination.
(iii) Disability Retirement Date. If, prior to the Employee's
Early Retirement Date, there is a termination by Disability of the Employee's
employment with the Banks ("Disability Retirement"), the Supplemental
Retirement Benefits shall be paid to the Employee in the form of 180 equal
monthly payments, with the first payment occurring as of the first day of the
month on or after the Employee's termination of employment by Disability. The
amount of such payments shall
2
<PAGE> 3
be determined as provided in subparagraph 2(a)(ii) above based on the present
value as of the date the payments commence. Disability shall be defined in the
same manner as under Section 6(e) of the employment agreement presently in
effect between the Employee and the Banks.
(iv) Termination Without Cause of Constructive Termination.
If, prior to the Employee's Early Retirement Date, there is a Termination
Without Cause or Constructive Termination of the Employee's employment with the
Banks, the Supplemental Retirement Benefits shall be paid to the Employee in
the form of 180 equal monthly payments, with the first payment occurring as of
the first day of the month on or after the later of the Employee's termination
of employment or attainment of age 55. The amount of such payments shall be
determined as provided in subparagraph 2(a)(ii) above based on the present
value as of the date the payments commence. Termination Without Cause shall be
defined in the same manner as under Section 6(c) of the employment agreement
presently in effect between the Employee and the Banks. Constructive
Termination shall mean the Employee's resignation from employment with the
Banks because of the following actions by the Banks, taken without the express
written consent of the Employee and not remedied by the Banks within 60 days
after written notice thereof is given by Employee of the Banks, (A) any
material failure of the Banks to comply with the terms of the employment
agreement then in effect between the Employee and the Banks; (B) a material
reduction in the Employee's title, position, duties, or responsibilities other
than as the result of a material breach by the Employee of his employment
agreement with the Banks; (C) the relocation of the principal executive offices
of the Banks outside of the northern Virginia metropolitan area or the
requirement that the Employee be based anywhere other than the area where the
Banks' principal executive offices are located, except for required travel on
business of the Banks to an extent substantially consistent with the Employee's
business travel obligations; (D) a material reduction in the base salary or the
value of
3
<PAGE> 4
the fringe benefits package provided to the Employee not substantially
justified by economic conditions or the Banks' financial performance and/or
condition; or (E) the Banks' creation of working conditions that a reasonable
person in the Employee's position would find intolerable.
(b) PAYMENTS TO BENEFICIARY OR BENEFICIARIES. If the Employee
dies before his retirement or other termination of employment (where before or
after attaining age 65), his designated beneficiary or beneficiaries (as
defined in paragraph 5 of the Agreement) shall receive the Supplemental
Retirement Benefits as if the beneficiary or beneficiaries were the Employee,
with the first of the 180 monthly payments occurring as of the first day of the
month beginning after the date of the Employee's death and the amount of such
payments being determined as if the Employee had attained age 65.
If the Employee dies after the occurrence of a retirement or
termination of employment described in Subparagraph 2(a) above, but before he
has received 180 monthly payments of his Supplemental Retirement Benefits, the
remainder of such payments (reduced as provided in paragraph 3 of this
Agreement if the Employee was employed by a "significant competitor" of the
Banks before attaining age 65 as described in subparagraph 3(b)(i) or within 18
months after termination of employment as described in subparagraph 3(b)(ii)
shall be made to the Employee's designated beneficiary or beneficiaries.
3. CONDITIONS OF PAYMENT.
(a) NONPAYMENT FOR OTHER TERMINATION. Notwithstanding any
other provisions of this Agreement, if the Employee retires or his employment
is terminated other than as described in subparagraph 2(a) above, in either
case for any reason other than death, no Supplemental Retirement Benefits shall
be payable to the Employee or his designated beneficiary or beneficiaries (as
defined in paragraph 5 of this Agreement) under this Agreement.
4
<PAGE> 5
(b) NONPAYMENT FOR EMPLOYMENT WITH SIGNIFICANT COMPETITOR.
(i) Normal, Early or Disability Retirement. If the Employee
retired after his Normal, Early or Disability Retirement Date, each as
described in subparagraph 2(a)(i),(ii) or (iii), no payments under this
Agreement will be made during any period in which the Employee is employed by a
"significant competitor" of the Banks (as defined in (iii) below) at any time
before the Employee attains age 65. Payments that are discontinued under the
preceding sentence will recommence on the first day of the month on or after
the earlier of the date on which the Employee attains age 65 and the date on
which the Employee is no longer employed by a significant competitor. The
number of payments to be made following such a recommencement of payments shall
be 180 reduced by the sum of (i) and (ii), where (i) is the number of payments
previously made to the Employee and (ii) is the number of payments that would
have been made if the Employee had not been employed by a significant
competitor of the Banks. The amount of each monthly payment shall be equal to
the reduced monthly benefit to which the Employee was entitled on account of
his earlier retirement or other termination of employment.
(ii) Termination Without Cause or Constructive Termination.
If there was a Termination Without Cause or Constructive Termination, each as
described in subparagraph 2(a)(iv), no payments under this Agreement will be
made for any period if the Employee is employed by a "significant competitor"
of the Banks (as defined in (iii) below) at any time within 18 months of his
termination of employment with the Banks. The payments contemplated under
subparagraph 2(a)(iv) are made in exchange for Employee's agreement to refrain
from employment with such a "significant competitor" during the entirety of
such 18 month period.
(iii) Significant Competitor. The term "significant
competitor" shall mean any commercial bank, savings bank, savings and loan
association, or mortgage banking company, or a
5
<PAGE> 6
holding company affiliate of any of the foregoing, which at the date of its
employment of the Employee has total consolidated assets, or a loan servicing
portfolio, of $250 million or more and an office out of which the Employee
would be primarily based within fifty miles of either of the Banks' home
offices.
4. UNFUNDED CONTRACTUAL OBLIGATION. The Banks shall pay, or cause to
be paid, the Supplemental Retirement Benefits to which the Employee or his
designated beneficiary or beneficiaries (as defined in paragraph 5 of this
Agreement) become entitled under this Agreement. This Agreement shall in no way
be interpreted to require the Banks to transfer any amounts to a third-party
trustee or otherwise hold any amounts in trust or escrow for payment to the
Employee under the terms of this Agreement. The obligation of the Banks shall
be interpreted as a contractual obligation to pay only those amounts described
in paragraph 2 of this Agreement in the manner, at the times, and under the
conditions prescribed in paragraphs 2 and 3 of this Agreement.
5. DESIGNATED BENEFICIARY OR BENEFICIARIES. The designated
beneficiary (or beneficiaries) of the Employee is the person or persons
designated in a written notice to the Banks by the Employee to receive any
Supplemental Retirement Benefits that are payable under this Agreement after
the Employee's death. Absent such designation, the designated beneficiary or
beneficiaries of the Employee shall be the Employee's spouse and, if there is
no surviving spouse, the Employee's estate.
6. NO SEPARATE EMPLOYMENT RIGHTS. Except as otherwise stated herein,
the terms of the Employee's employment are not modified by this Agreement and
this Agreement creates no employment rights.
7. AMENDMENTS. No amendments or additions to this Agreement shall be
binding on any party to this Agreement or any heirs or successors thereto
unless in writing and signed by all
6
<PAGE> 7
parties hereto. The prior approval by the Boards of Directors of the Banks
shall be required in order for the Banks to authorize any amendments or
additions to this Agreement.
8. MERGER. In the event of a merger of either of the Banks in which
the Bank is not the resulting institution, the Bank's rights and obligations
under this Agreement shall become the rights and obligations of the successor
institution in the merger. For all purposes under this Agreement, employment
with a successor institution following a merger shall constitute employment
with the Bank.
9. OTHER PLANS. Nothing in this Agreement shall be construed to
affect the rights of the Employee, his designated beneficiary or
beneficiaries, or his estate to receive any retirement or death benefit under
any tax-qualified pension or retirement plan, deferred compensation agreement,
insurance agreement, or tax-deferred annuity of the Banks or any other person
or entity.
10. NON-ASSIGNABILITY. The rights and benefits under this Agreement
are personal to Employee and shall not be subject to any voluntary or
involuntary alienation, assignment, pledge, transfer, or other disposition.
11. TITLES. The titles to paragraphs in the Agreement are placed
herein for convenience of reference only, and the Agreement is not to be
construed by reference thereto.
12. CONTROLLING LAW. This Agreement shall be construed according to
the laws of the United States to the extent applicable and otherwise according
to the laws of the Commonwealth of Virginia, excluding the choice of law rules
thereof.
13. GENDER AND NUMBER. Whenever used herein, a masculine pronoun shall
be deemed to include the feminine pronoun, a singular word shall be deemed to
include the singular and plural, and a plural word shall be deemed to include
the singular and plural in all cases where the context requires.
7
<PAGE> 8
14. EFFECTIVE DATE. This Agreement shall be effective as of the date
set forth at the beginning of this Agreement.
IN WITNESS WHEREOF, the Banks have caused this Agreement to be signed
and their corporate seals to be affixed hereto and attested by their authorized
officers, and the Employee has signed this Agreement, as of the date and year
first written above.
ATTEST: GEORGE MASON BANKSHARES, INC.
[SIG] By: [SIG]
- ---------------------------- -----------------------------
Secretary
Title: Chairman
--------------------------
ATTEST: THE GEORGE MASON BANK
[SIG] By: [SIG]
- ---------------------------- -----------------------------
Secretary
Title: Chairman
--------------------------
EMPLOYEE:
/s/ BERNARD H. CLINEBURG
-----------------------------
Bernard H. Clineburg
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 28,040 28,040
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 8,200 8,200
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 335,952 335,952
<INVESTMENTS-CARRYING> 55,887 55,887
<INVESTMENTS-MARKET> 56,901 56,901
<LOANS> 442,269 442,269
<ALLOWANCE> 5,699 5,699
<TOTAL-ASSETS> 969,578 969,578
<DEPOSITS> 760,327 760,327
<SHORT-TERM> 130,003 130,003
<LIABILITIES-OTHER> 7,876 7,876
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 5,698 5,698
<OTHER-SE> 64,956 64,956
<TOTAL-LIABILITIES-AND-EQUITY> 969,578 969,578
<INTEREST-LOAN> 10,347 28,987
<INTEREST-INVEST> 5,983 17,629
<INTEREST-OTHER> 321 638
<INTEREST-TOTAL> 16,651 47,254
<INTEREST-DEPOSIT> 7,384 20,972
<INTEREST-EXPENSE> 8,563 23,950
<INTEREST-INCOME-NET> 8,088 23,304
<LOAN-LOSSES> 11 23
<SECURITIES-GAINS> 0 40
<EXPENSE-OTHER> 10,013 26,967
<INCOME-PRETAX> 3,118 8,689
<INCOME-PRE-EXTRAORDINARY> 3,118 8,689
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,112 5,934
<EPS-PRIMARY> 0.40 1.13
<EPS-DILUTED> 0.40 1.13
<YIELD-ACTUAL> 7.49 7.69
<LOANS-NON> 1,062 1,062
<LOANS-PAST> 2,013 2,013
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 5,569 5,569
<CHARGE-OFFS> 123 123
<RECOVERIES> 140 140
<ALLOWANCE-CLOSE> 5,699 5,699
<ALLOWANCE-DOMESTIC> 5,699 5,699
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
