<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 June 30, 1997
-------------
Commission file number 0-13833
-------
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 5,105,975 shares at August 12, 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 - June 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Income - Three months ended
June 30, 1997 and 1996, Six months ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Shareholders' Equity - Six months
ended June 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows - Six months ended
June 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements - June 30, 1997 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
- --------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(a). The following exhibits required to be filed are filed herewith:
"Computation of Earnings per Common Share," is presented as
Note 6 on page 12 of the second quarter report on Form 10-Q. 12
6(b). Reports on Form 8-K
No reports on Form 8-K were filed
during the quarter ended June 30, 1997.
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>
JUNE 30, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $42,637 $41,158
Federal funds sold 62,300 23,800
--------------------------------------------------
Total cash and cash equivalents 104,937 64,958
Securities available-for-sale 298,646 280,859
Securities held-to-maturity 59,594 64,574
Mortgage loans held for resale 69,651 72,983
Loans, net of unearned discount and loan fees 414,951 373,613
Less: Allowance for loan losses (5,657) (5,659)
--------------------------------------------------
Loans, net 409,294 367,954
Bank premises and equipment, net 9,862 10,019
Accrued income receivable 4,950 4,480
Prepaid expenses and other assets 4,073 4,186
Deferred income taxes 2,111 2,059
Other real estate 175 398
--------------------------------------------------
TOTAL ASSETS $963,293 $872,470
==================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $141,006 $132,415
Interest checking 49,288 49,002
Savings 183,372 162,414
Time 391,387 349,763
--------------------------------------------------
Total Deposits 765,053 693,594
Borrowed funds 123,701 105,898
Other liabilities 6,322 7,979
Dividends payable 713 655
--------------------------------------------------
TOTAL LIABILITIES 895,789 808,126
SHAREHOLDERS' EQUITY
Preferred stock 0 0
Common stock 5,640 5,581
Surplus 39,226 38,472
Retained earnings 23,496 21,094
Unrealized holding loss on securities available-for-sale (858) (803)
--------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 67,504 64,344
--------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $963,293 $872,470
==================================================
BOOK VALUE PER SHARE $13.29 $12.80
==================================================
ACTUAL SHARES OUTSTANDING 5,081 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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $9,706 $7,867 $18,640 $15,906
Interest on federal funds sold and repurchase agreements 156 92 317 241
Interest on securities:
Taxable 5,728 4,080 11,081 7,877
Tax-exempt 285 281 565 608
------------- ----------- ----------- -----------
TOTAL INTEREST INCOME 15,875 12,320 30,603 24,632
INTEREST EXPENSE
Interest on deposits 7,018 5,126 13,588 10,037
Interest on securities sold under agreeements to
repurchase and other borrowed funds 997 745 1,799 1,413
------------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 8,015 5,871 15,387 11,450
------------- ----------- ----------- -----------
NET INTEREST INCOME 7,860 6,449 15,216 13,182
PROVISION FOR LOAN LOSSES 8 0 12 181
------------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,852 6,449 15,204 13,001
OTHER INCOME
Service charges 900 759 1,708 1,414
Gain (loss) on sales of securities available-for-sale (1) 39 40 320
Gain on sales of mortgage loans held for resale 2,444 2,675 4,984 5,042
Other 340 340 588 784
------------- ----------- ----------- -----------
TOTAL OTHER INCOME 3,683 3,813 7,320 7,560
OTHER EXPENSES
Salaries and employee benefits 4,719 4,511 9,471 9,249
Occupancy 852 753 1,704 1,515
Equipment 625 532 1,168 1,076
Other operating expenses 2,404 2,177 4,610 4,377
------------- ----------- ----------- -----------
TOTAL OTHER EXPENSES 8,600 7,973 16,953 16,217
------------- ----------- ----------- -----------
INCOME BEFORE APPLICABLE INCOME TAXES 2,935 2,289 5,571 4,344
INCOME TAXES 929 667 1,749 1,303
------------- ----------- ----------- -----------
NET INCOME $2,006 $1,622 $3,822 $3,041
============= =========== =========== ===========
NET INCOME PER COMMON SHARE $0.38 $0.32 $0.73 $0.60
============= =========== =========== ===========
CASH DIVIDENDS DECLARED PER SHARE $0.14 $0.11 $0.28 $0.21
============= =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 5,229 5,138 5,214 5,107
============= =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
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 3,041 3,041
Common stock issuance 244 271 2,347 42 2,660
Cash dividends declared
($.21 per common share) (971) (971)
Change in unrealized holding
gain (loss) on securities
available-for-sale (4,519) (4,519)
-----------------------------------------------------------------------------------------------------
Balance, June 30, 1996 4,999 $ 5,549 $ 37,870 $ - $ 18,486 $ (3,767) $ 58,138
======== ========== ========== ========== ======== ========== ==========
Balance, December 31, 1996 5,028 $ 5,581 $ 38,472 $ - $ 21,094 $ (803) $ 64,344
Net Income 3,822 3,822
Common stock issuance 53 59 754 - 813
Cash dividends declared
($.28 per common share) (1,420) (1,420)
Change in unrealized holding
gain (loss) on securities
available-for-sale (55) (55)
-----------------------------------------------------------------------------------------------------
Balance, June 30, 1997 5,081 $ 5,640 $ 39,226 $ - $ 23,496 $ (858) $ 67,504
======== ========== ========== ========== ======== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 6
GEORGE MASON BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED) SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
---------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $3,822 $3,041
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Net amortization of securities 302 48
Depreciation 906 773
Provision for loan losses 12 181
Gain on sale of securities available-for-sale (40) (320)
(Benefit) provision of deferred income taxes (52) (49)
Change in assets and liabilities:
(Increase) decrease in mortgage loans held for resale 3,332 (4,323)
(Increase) in accrued income receivable,
other assets and other real estate (134) (4,628)
Increase (decrease) in other liabilities (1,657) 1,130
---------------------------------------------
Net cash provided by (used in) operating activities 6,491 (4,147)
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturities of available-for-sale securities 44,899 82,183
Proceeds from maturities of held-to-maturity securities 5,885 5,086
Proceeds from maturities of trading securities 0 5,693
Purchase of available-for-sale securities (61,855) (153,041)
Purchase of held-to-maturity securities (2,051) (3,272)
Net increase in loans (41,352) (32,588)
Purchase of property and equipment (749) (767)
---------------------------------------------
Net cash used in investing activities (55,223) (96,706)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 71,459 50,035
Net increase in borrowed funds 17,803 41,708
Net proceeds from sale of common stock 811 2,660
Dividends paid (1,362) (723)
---------------------------------------------
Net cash provided by financing activities 88,711 93,680
---------------------------------------------
Net decrease in cash and cash equivalents 39,979 (7,173)
Cash and cash equivalents at beginning of period 64,958 49,639
---------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $104,937 $42,466
===================== ======================
Interest paid $15,251 $11,388
=============================================
Income taxes paid $1,578 $1,426
=============================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 7
GEORGE MASON BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 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
six months ended June 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>
JUNE 30, 1997
- --------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $8,004 $3 ($3) $8,004
U.S. Government Agencies and Corporations 36,615 45 (127) 36,533
States and Political Subdivisions 2,634 36 0 2,670
Mortgage-Backed Securities 249,232 429 (1,332) 248,329
Other Securities 3,110 0 0 3,110
---------------------------------------------------------------------------------
TOTAL $299,595 $513 ($1,462) $298,646
=================================================================================
SECURITIES HELD-TO-MATURITY
U.S. Government Agencies and Corporations $1,970 $14 $0 $1,984
States and Political Subdivisions 19,102 629 (14) 19,717
Mortgage-Backed Securities 38,522 390 (141) 38,771
---------------------------------------------------------------------------------
TOTAL $59,594 $1,033 ($155) $60,472
=================================================================================
</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>
JUNE 30, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $102,341 $100,986
Real Estate-Construction 42,032 32,203
Real Estate-Mortgage 167,505 156,958
Home Equity Lines 48,135 44,141
Consumer 55,715 40,083
-----------------------------------------------------
GROSS LOANS 415,728 374,371
-----------------------------------------------------
Less: Deferred loan fees and
unearned discount (777) (758)
-----------------------------------------------------
LOANS,NET OF UNEARNED DISCOUNT AND
DEFERRED LOAN FEES 414,951 373,613
-----------------------------------------------------
Allowance for loan losses (5,657) (5,659)
-----------------------------------------------------
LOANS,NET 409,294 367,954
-----------------------------------------------------
MORTGAGE LOANS HELD FOR RESALE 69,651 72,983
-----------------------------------------------------
TOTAL LOANS, NET $478,945 $440,937
=====================================================
</TABLE>
<PAGE> 10
NOTE 5
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $5,646 $5,704 $5,659 $5,529
Provision charged to expense 8 0 12 181
Charge-offs:
Commercial and other 0 2 30 42
Consumer 3 8 3 21
Real Estate-Mortgage 0 40 0 40
Real Estate-Construction 0 0 0 0
--------------------------------------------------------------------------------------------
Total Charge-offs 3 50 33 103
Recoveries:
Commercial and other 2 4 13 26
Consumer 4 2 6 7
Real Estate-Mortgage 0 27 0 47
Real Estate-Construction 0 0 0 0
--------------------------------------------------------------------------------------------
Total Recoveries 6 33 19 80
Net Charge-Offs (Recoveries) (3) 17 14 23
--------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $5,657 $5,687 $5,657 $5,687
============================================================================================
Average Total Loans(1) $402,385 $317,789 $391,905 $310,390
Total Loans at Period End (1) $414,951 $332,304 $414,951 $332,304
Ratio of net charge-offs (recoveries)
to average total loans 0.00% 0.01% 0.00% 0.01%
Ratio of allowance for
loan losses to total
loans at period end 1.36% 1.71% 1.36% 1.71%
</TABLE>
(1) Total loans are reported net of unearned income and do not include mortgage
loans held for resale.
<PAGE> 11
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES PERCENT OF PERCENT OF
(DOLLARS IN THOUSANDS) LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
JUNE 30, TOTAL DECEMBER 31, TOTAL
1997 LOANS 1996 LOANS
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $1,588 24.6% $934 27.0%
Real Estate-Construction 668 10.1% 511 8.6%
Real Estate-Mortgage 1,172 40.3% 2,337 41.9%
Home Equity Loans 469 11.6% 313 11.8%
Consumer 414 13.4% 256 10.7%
Unallocated 1,346 N/A 1,308 N/A
----------------------------------------------------------------------------------
Total $5,657 100.0% $5,659 100.0%
==================================================================================
</TABLE>
<PAGE> 12
NOTE 6
EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------ ----------------------------------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER SHARE:
Net income $2,006 $1,622 $3,822 $3,041
Stock and stock equivalents (average shares):
Common shares outstanding 5,070 4,971 5,057 4,948
Stock options (a) 159 167 157 159
------------------------------------- ----------------------------------
Total stock and stock equivalents 5,229 5,138 5,214 5,107
------------------------------------- ----------------------------------
PRIMARY NET INCOME PER SHARE $0.38 $0.32 $0.73 $0.60
===================================== ==================================
FULLY DILUTED NET INCOME PER SHARE:
Net income $2,006 $1,622 $3,822 $3,041
Stock and stock equivalents (average shares):
Common shares outstanding 5,070 4,971 5,057 4,948
Stock options (b) 249 167 249 159
------------------------------------- ----------------------------------
Total stock and stock equivalents 5,319 5,138 5,306 5,107
------------------------------------- ----------------------------------
FULLY DILUTED NET INCOME PER SHARE $0.38 $0.32 $0.72 $0.60
===================================== ==================================
</TABLE>
(a) Shares were assumed to be repurchased at the average closing stock prices
for the three and six months ended June 30, 1997 and 1996.
(b) Shares were assumed to be repurchased at the June 30, 1997 closing price.
<PAGE> 13
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 June 30, 1997 and June 30, 1996 of $.02 per share and $.01 per
share, respectively. For the six months ended June 30, 1997 and June 30, 1996,
the impact is expected to result in an increase in primary earnings of $.03 per
share and $.01 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.
<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 June 30, 1997 increased by
23.7% over the same period last year, as net income totalled $2.01 million or
$.38 per share for the quarter compared to $1.62 million or $.32 per share for
the second quarter of 1996. Returns on average assets and average equity for
the second quarter of 1997 were .92% and 11.90%, respectively, compared to .93%
and 10.67% for the same period in 1996. Net income for the first six months
of 1997 was $3.82 million compared to $3.04 million for the first half of 1996,
representing an increase of 25.7%. Earnings per share for the comparable six
months of 1997 and 1996 were $.73 and $.60, respectively.
The Company continued to experience significant growth as total
assets increased to $963.3 million at June 30, 1997 compared to $872.5 million
at December 31, 1996 representing an increase of $90.8 million or 10.4%. Loan
demand continued to improve as loans (net of unearned income) increased by
$41.3 million to $415.0 million at June 30, 1997 compared to $373.6 million at
year-end 1996. Total deposits were $765.1 million at the end of the quarter
compared to $693.6 million at December 31, 1996, representing an increase of
10.3%.
Shareholders' equity at June 30, 1997 totalled $67.5 million
compared to $64.3 million at December 31, 1996. Book value per share of common
stock on June 30, 1997 was $13.29 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 totalled
$8.0 million for the second quarter of 1997 compared to $6.6 million for the
second quarter of 1996, while net interest income for the first six months of
1997 totalled $15.5 million compared to $13.5 million for the same period in
1996, representing an increase of 15.0%. 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 the 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 June 30,
1997 decreased to 3.87% from 4.01% for the second quarter of 1996. An increase
in the yield on earning assets of 17 basis points was offset by a 30 basis
point increase in the cost to fund earning assets. The net interest margin for
the first six months of 1997 declined to 3.85% compared to 4.22% for the same
period in 1996. The drop in the net interest margin percentage for the first
six months of the year was attributable to an increase in the Company's cost
to fund earning assets of 23 basis points combined with a decrease in the yield
on earning assets of 15 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 61.7% of total interest-bearing deposits
for the first six months of 1997 compared to 56.0% for the same period last
year.
In the first six months of 1996, average earning assets increased
by $169.4 million or 26.2% to $815.0 million compared to $645.6 million for
the first six months of 1996. Average total loans (including mortgage loans
held for resale), the largest component of earning assets, grew to $434.7
million for the first six months of 1997 compared to $361.5 million for the
same period a year ago. The growth in earning assets was primarily funded by
an increase in
<PAGE> 16
certificates of deposit and savings accounts as average interest bearing
deposits increased to $593.6 million in the first six months of 1997 from
$452.7 million for the same period in 1996, representing an increase of 31.1%.
Average demand deposits rose by 11.8% to $113.5 million for the first six
months of 1997 compared to $101.6 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
JUNE 30, 1997 JUNE 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 $8,727 $125 5.74% $16,478 $240 5.84%
Federal Agency and
Mortgage-Backed Securities 343,589 5,509 6.43% 241,652 3,772 6.26%
State and Political
Subdivision Securities (1) 21,722 412 7.61% 20,315 406 8.02%
Other Investments(4) 3,360 94 11.22% 6,061 83 5.49%
------------------------------------------------------------------------------------------
Total Securities 377,398 6,140 6.53% 284,506 4,501 6.35%
Loans: (3)
Commercial (1) 104,731 2,365 9.06% 97,845 2,250 9.22%
Real Estate-Construction 37,146 944 10.19% 33,931 799 9.44%
Real Estate-Mortgage (2) 251,321 5,499 8.78% 219,995 4,449 8.11%
Consumer 51,008 940 7.39% 19,542 391 8.03%
---------------------------------------------- -----------------------------------------
Total Loans 444,206 9,748 8.80% 371,313 7,889 8.52%
Federal Funds Sold 11,385 156 5.50% 6,197 92 5.95%
---------------------------------------------- -----------------------------------------
Total Interest-Earning Assets 832,989 16,044 7.73% 662,016 12,482 7.56%
Noninterest-Earning Assets:
Cash and Due from Banks 29,422 25,691
Other Assets 18,288 17,786
Allowance for Loan Losses (5,645) (5,693)
Deferred Loan Fees (779) (1,549)
---------------- -----------------
Total Noninterest-Earning Assets 41,286 36,235
---------------- -----------------
Total Assets $874,275 $698,251
---------------- =================
</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
JUNE 30, 1997 JUNE 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 $51,522 $304 2.37% $45,140 $236 2.10%
Money Market Deposits 91,630 699 3.06% 105,478 781 2.97%
Savings Deposits 90,685 982 4.34% 53,494 571 4.28%
Certificates of Deposit
$100,000 and over 84,274 1,132 5.39% 68,736 913 5.33%
Certificates of Deposit 287,530 3,901 5.44% 192,863 2,625 5.46%
------------------------------------------- ------------------------------------------
Total Interest-Bearing Deposits 605,641 7,018 4.65% 465,711 5,126 4.41%
Purchased Funds 82,544 997 4.84% 65,576 745 4.56%
------------------------------------------- ------------------------------------------
Total Interest-Bearing Liabilities 688,185 8,015 4.67% 531,287 5,871 4.43%
Noninterest-Bearing Liabilities:
Total Demand Deposits 113,985 100,500
Other Liabilities 6,911 7,343
-------------- ---------------
Total Noninterest-Bearing
Liabilities 120,896 107,843
-------------- ---------------
Total Liabilities 809,081 639,130
Shareholders' Equity 65,194 59,121
-------------- ---------------
Total Liabilities and Shareholders'
Equity $874,275 $698,251
============== ===============
Interest Spread 3.06% 3.13%
----------------------------- ---------------------------
Net Interest Margin $8,029 3.87% $6,611 4.01%
============================= ===========================
Cost to fund earning assets 3.86% 3.56%
============ ============
</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>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
--------------------- ---------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C>
Assets
Interest-Earning Assets:
Securities:
U.S. Treasury Securities $9,171 $261 5.74% $19,365 $550 5.73%
Federal Agency and
Mortgage-Backed Securities 334,874 10,713 6.45% 227,231 7,160 6.35%
State and Political
Subdivision Securities (1) 21,311 807 7.64% 22,574 893 7.98%
Other Investments 3,113 106 6.87% 7,256 167 4.64%
-------------------------------------------------- -----------------------------------------
Total Securities 368,469 11,887 6.51% 276,426 8,770 6.40%
Loans: (3)
Commercial (1) 103,888 4,687 9.10% 99,328 4,741 9.63%
Real Estate-Construction 35,206 1,733 9.93% 29,732 1,390 9.43%
Real Estate-Mortgage (2) 248,538 10,574 8.58% 215,517 9,139 8.55%
Consumer 47,063 1,734 7.43% 16,886 682 8.14%
-------------------------------------------------- -----------------------------------------
Total Loans 434,695 18,728 8.69% 361,463 15,952 8.90%
Federal Funds Sold 11,858 317 5.39% 7,753 241 6.27%
-------------------------------------------------- -----------------------------------------
Total Interest-Earning Assets 815,022 30,932 7.65% 645,642 24,963 7.80%
Noninterest-Earning Assets:
Cash and Due from Banks 28,339 25,121
Other Assets 18,865 19,195
Allowance for Loan Losses (5,651) (5,651)
Deferred Loan Fees (758) (1,439)
----------------- -------------
Total Noninterest-Earning Assets 40,795 37,226
----------------- -------------
Total Assets $855,817 $682,868
----------------- =============
</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.
<PAGE> 20
AVERAGE BALANCES AND INTEREST RATES (TAX EQUIVALENT BASIS)
(DOLLARS IN THOUSANDS)
TABLE 1A (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 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 $50,895 $525 2.08% $45,411 $482 2.14%
Money Market Deposits 91,483 1,386 3.06% 106,947 1,589 3.00%
Savings Deposits 85,121 1,830 4.34% 46,988 1,000 4.29%
Certificates of Deposit
$100,000 and over 82,238 2,192 5.38% 66,165 1,773 5.40%
Certificates of Deposit 283,821 7,655 5.44% 187,205 5,193 5.59%
------------------------------------------- -----------------------------------------
Total Interest-Bearing Deposits 593,558 13,588 4.62% 452,716 10,037 4.47%
Purchased Funds 76,620 1,799 4.73% 61,938 1,413 4.60%
------------------------------------------- -----------------------------------------
Total Interest-Bearing Liabilities 670,178 15,387 4.63% 514,654 11,450 4.49%
Noninterest-Bearing Liabilities:
Total Demand Deposits 113,541 101,600
Other Liabilities 6,840 6,928
-------------- --------------
Total Noninterest-Bearing
Liabilities 120,381 108,528
-------------- --------------
Total Liabilities 790,559 623,182
Shareholders' Equity 65,258 59,686
-------------- --------------
Total Liabilities and Shareholders'
Equity $855,817 $682,868
============== ==============
Interest Spread 3.03% 3.31%
----------------------------- ---------------------------
Net Interest Margin $15,545 3.85% $13,513 4.22%
============================= ===========================
Cost to fund earning assets 3.81% 3.58%
============ ============
</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
JUNE 30, 1997 TO THE
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED
TABLE 2 JUNE 30, 1996
CHANGE DUE TO:
-----------------------------------
TOTAL
INCREASE
(DECREASE) RATE VOLUME
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Securities:
U.S. Treasury Securities ($115) ($2) ($113)
Federal Agency and
Mortgage-Backed Securities 1,737 $146 $1,591
State and Political
Subdivision Securities (1) 6 ($22) $28
Other Investments 11 $48 ($37)
------------------
Total Securities 1,639 $169 $1,470
Loans: (3)
Commercial (1) 115 ($44) $158
Real Estate-Construction 145 $69 $76
Real Estate-Mortgage (2) 1,050 $416 $634
Consumer 549 ($81) $630
------------------
Total Loans 1,859 $310 $1,549
Federal Funds Sold 64 ($13) $77
------------------
TOTAL INTEREST INCOME 3,562 $338 $3,224
------------------
Interest expense:
Interest-Bearing Deposits:
Interest Checking Deposits 68 $35 $33
Money Market Deposits (82) $21 ($103)
Savings Deposits 411 $14 $397
Certificates of Deposit
$100,000 and over 219 $13 $206
Certificates of Deposit 1,276 ($12) $1,288
------------------
Total Interest-Bearing Deposits 1,892 $352 $1,540
Purchased Funds 252 $59 $193
------------------
TOTAL INTEREST EXPENSE 2,144 $410 $1,734
------------------
NET INTEREST INCOME $1,418 ($290) $1,707
==================
</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 SIX MONTHS ENDED
JUNE 30, 1997 TO THE
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED
TABLE 2A JUNE 30, 1996
CHANGE DUE TO:
-----------------------------------
TOTAL
INCREASE
(DECREASE) RATE VOLUME
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Securities:
U.S. Treasury Securities ($289) $1 ($290)
Federal Agency and
Mortgage-Backed Securities 3,553 $161 $3,392
State and Political
Subdivision Securities (1) (86) ($36) ($50)
Other Investments (61) $34 ($95)
--------------------
Total Securities 3,117 $197 $2,920
Loans: (3)
Commercial (1) (54) ($272) $218
Real Estate-Construction 343 $87 $256
Real Estate-Mortgage (2) 1,435 $35 $1,400
Consumer 1,052 ($167) $1,219
--------------------
Total Loans 2,776 ($456) $3,232
Federal Funds Sold 76 ($52) $128
--------------------
TOTAL INTEREST INCOME 5,969 ($580) $6,549
--------------------
Interest expense:
Interest-Bearing Deposits:
Interest Checking Deposits 43 ($15) $58
Money Market Deposits (203) $27 ($230)
Savings Deposits 830 $18 $812
Certificates of Deposit
$100,000 and over 419 ($12) $431
Certificates of Deposit 2,462 ($218) $2,680
--------------------
Total Interest-Bearing Deposits 3,551 $428 $3,123
Purchased Funds 386 $51 $335
--------------------
TOTAL INTEREST EXPENSE 3,937 $477 $3,460
--------------------
NET INTEREST INCOME $2,032 ($1,513) $3,545
====================
</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 six months of 1997
totaled $12 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 second
quarter of 1997 totalled $2.4 million compared to $2.7 million for the same
period last year, a decrease of $231 thousand or 8.6%. Gain on sales of loans
held for resale for the first six months of 1997 and the first six months of
1996 were $5.0 million.
GAIN ON SALES OF SECURITIES AVAILABLE-FOR-SALE
Gain on sales of securities available-for-sale totalled $40
thousand for the first six months of 1997 compared to $320 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 on deposit accounts for the second quarter of 1997
totalled $900 thousand compared to $759 thousand for the second quarter of
1996, an increase of 18.6%. Service charge income for the first six months of
1997 increased to $1.7 million compared to $1.4 million for the same period
last year an increase of 20.8%. The increase in service charge income was
primarily attributable to the Company's growing deposit base. The Company
currently derives most of its service fee income from checking accounts, money
market accounts, NOW accounts and ATM transaction fees.
NONINTEREST EXPENSES
In support of the Company's strategic growth, total noninterest
expenses consisting of employee related costs, occupancy expenses, and other
overhead totalled $17.0 million for the first six months of 1997, compared to
$16.2 million for the same period in 1996, representing
<PAGE> 24
an increase of $736 thousand or 4.5%. Noninterest expenses for the second
quarter of 1997 totalled $8.6 million compared to $8.0 million for the second
quarter of 1996, representing an increase of 7.9%.
During 1996, the Company incurred significant merger related costs in
conjunction with the acquisition of PNBI. For the first six months of 1996
merger related expenses totalled $368 thousand of which $262 thousand were
incurred in the second quarter.
CAPITAL RESOURCES
Shareholders' equity on June 30, 1997 was $67.5 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.
The decline in the unrealized holding gain (loss) on securities
available-for-sale amounted to $55 thousand (net of tax) from December 31, 1996
to June 30, 1997. The effect of the unrealized losses in the securities
available-for-sale portfolio reduced book value by $.16 per share on June 30,
1997. For a detailed discussion of the impact on earnings from holding below
market securities, see" Asset/Liability Management."
Cash dividends declared for the first six months of 1997 amounted
to $.28 per share compared to $.21 per share for the first half of 1996.
At June 30, 1997, the Company's Tier 1 and total risk-based
capital ratios were 12.2% and 13.2%, respectively, compared to 12.3% and 13.4%
at December 31, 1996. The Company's leverage ratio was 7.8% at June 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
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) WELL CAPITALIZED
TABLE 3 JUNE 30, DECEMBER 31, REGULATORY
1997 1996 MINIMUMS
---------------------------------------------------------------------
<S> <C> <C> <C>
TIER 1 CAPITAL:
Common Stock $5,640 $5,581
Surplus 39,226 38,472
Retained Earnings 23,496 21,094
Unrealized holding loss on securities
available-for-sale (858) (803)
-------------------------------------------
Total Shareholders' Equity 67,504 64,344
Plus: Unrealized holding loss on securities
available-for-sale 858 803
Less: disallowed intangibles (178) (204)
-------------------------------------------
Total Tier 1 Capital 68,184 64,943
TIER 2 CAPITAL:
Qualifying allowance for loan losses 5,657 5,659
-------------------------------------------
Total Tier 2 Capital 5,657 5,659
-------------------------------------------
TOTAL RISK-BASED CAPITAL $73,841 $70,602
===========================================
Risk Weighted Assets $559,892 $527,449
===========================================
RATIOS:
Tier 1 Capital to risk weighted assets 12.2% 12.3% 6.0%
Tier 2 Capital to risk weighted assets 1.0% 1.1%
-------------------------------------------
Total risk-based capital ratio 13.2% 13.4% 10.0%
===========================================
Leverage Ratio-Tier 1 Capital to quarterly
average assets less intangibles 7.8% 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 the period.
The ratio of allowance for loan losses to total loans at June 30,
1997 was 1.36% compared to 1.51% at December 31, 1996. The coverage multiple
of allowance for loan losses to nonperforming loans was 4.58 at June 30, 1997
compared to 3.58 at December 31, 1996. Management believes that the allowance
for loan losses at June 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 $569 thousand to $1.4 million at June
30, 1997 compared to $2.0 million at December 31, 1996. Nonperforming assets
to total assets at June 30, 1997 were .15% compared to .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 $1.2 million at June 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 totalled $2.8 million at June 30, 1997. TABLE 4 details nonperforming
assets, past due loans and asset quality ratios.
<PAGE> 27
CREDIT QUALITY
(DOLLARS IN THOUSANDS)
TABLE 4
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------------------------------------------
<S> <C> <C>
Nonaccrual Loans $1,236 $1,487
Restructured Loans 0 95
--------------------------------------------
TOTAL NONPERFORMING LOANS 1,236 1,582
Other Real Estate 175 398
--------------------------------------------
TOTAL NONPERFORMING ASSETS 1,411 1,980
Loans past due 90 days or
more and accruing interest 2,788 0
--------------------------------------------
TOTAL NONPERFORMING ASSETS AND
LOANS PAST DUE 90 DAYS OR MORE $4,199 $1,980
============================================
Total Loans at Period End (1) $414,951 $373,613
Allowance for Loan Losses 5,657 5,659
Total Assets 963,293 872,470
ASSET QUALITY RATIOS:
Allowance for Loan Losses to
Period end Loans 1.36% 1.51%
Allowance for Loan losses to
Nonperforming Loans (Multiple) 4.58 X 3.58 X
Total Nonperforming Loans
to Total Loans 0.30% 0.42%
Total Nonperforming Assets to
Total Assets 0.15% 0.23%
Nonperforming Assets to Total
Loans plus Other Real Estate 0.34% 0.53%
Nonperforming Assets and Loans Past
Due 90 days or more to Total Loans
and Other Real Estate 1.01% 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 June 30, 1997 cash, cash equivalents, and securities
available-for-sale totalled $403.6 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 as well as the expected magnitude of the repricing of
specific asset and liability categories by assigning earnings change ratios to
individual balance sheet items. 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 June 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
<PAGE> 29
existed at one particular point in time, and assumes that assets and
liabilities with similar 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 June 30, 1997,
the Company had a negative beta adjusted gap of $93.8 million or (9.7)% 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>
JUNE 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 $62,300 $0 $0 $0 $0
Securities 20,342 22,221 37,847 207,969 70,810
Mortgage Loans Held for Resale 69,651 0 0 0 0
Loans 193,736 3,540 6,527 150,073 61,018
----------------------------------------------------------------------------------
Total 346,029 25,761 44,374 358,042 131,828
----------------------------------------------------------------------------------
Cumulative Totals 346,029 371,790 416,164 774,206 906,034
INTEREST-SENSITIVE LIABILITIES:
- ---------------------------------------
Interest Checking Accounts 49,288 0 0 0 0
Savings Accounts 87,319 0 0 0 0
Money Market Deposit Accounts 96,054 0 0 0 0
Certificates of Deposit 261,853 65,146 12,020 37,213 15,155
Repurchase Agreements 115,201 0 0 0 0
FHLB - Advances 0 500 500 2,500 0
U.S. Demand Notes 5,000 0 0 0 0
----------------------------------------------------------------------------------
Totals 614,715 65,646 12,520 39,713 15,155
----------------------------------------------------------------------------------
Cumulative Totals 614,715 680,361 692,881 732,594 747,749
----------------------------------------------------------------------------------
Gap ($268,686) ($39,885) $31,854 $318,329 $116,673
==================================================================================
Cumulative Gap ($268,686) ($308,571) ($276,717) $41,612 $158,285
==================================================================================
Adjustments:
Beta Adjustments
Interest Checking (beta factor .15) 41,895 0 0 0 0
Savings Accounts (beta factor .10) 78,587 0 0 0 0
Money Market Accounts (beta factor .35) 62,435 0 0 0 0
----------------------------------------------------------------------------------
Cumulative Beta Adjusted Gap ($85,769) ($125,654) ($93,800) $224,529 $341,202
==================================================================================
As Reported Information:
- ---------------------------------------
Interest-Sensitive Assets/Interest-
Sensitive Liabilites (Cumulative): 56.29% 54.65% 60.06% 105.68% 121.17%
Cumulative Gap/Total Assets -27.89% -32.03% -28.73% 4.32% 16.43%
Beta Adjusted Information:
- ---------------------------------------
Interest-Sensitive Assets/Interest-
Sensitive Liabilites (Cumulative): 80.14% 74.74% 81.61% 140.85% 160.41%
Cumulative Gap/Total Assets -8.90% -13.04% -9.74% 23.31% 35.42%
</TABLE>
<PAGE> 31
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on May 16, 1997. The following
Directors were elected Webb C. Hayes, IV; Edward H. Kaplan; William G. Buck, C.
Barrie Cook, M.D.; William H. Gordon; William H. Hazel; and John M. McMahon.
The tabulation of the votes cast was as follows:
<TABLE>
Three Year Terms:
<S> <C> <C>
William G. Buck For: 4,132,621 Against: 28,987
C. Barrie Cook, M.D. For: 4,136,713 Against: 24,896
William H. Gordon For: 4,138,255 Against: 23,354
William A. Hazel For: 4,133,553 Against: 28,056
John M. McMahon For: 4,138,255 Against: 23,354
Two Year Term:
Edward H. Kaplan For: 4,148,444 Against: 13,165
One Year Term:
Webb C. Hayes, IV For: 4,141,129 Against: 20,479
</TABLE>
Each of the seven Directors nominated to hold office for the designated terms
and until their successors shall be elected and qualify, was approved by 99%
(ninety-nine percent) of the votes cast and 81% (eighty-one percent) of the
total votes outstanding.
The following Directors' terms of office continued following the Annual Meeting
of Shareholders: Elizabeth C. Dahlin; Edward S. DeBolt; Barnard F. Jennings;
Arthur Kellar; Alan L. Box; Randolph W. Church, Jr.; Bernard H. Clineburg;
Lawrence K. Doll; and Paul E. Kyle.
Shareholders ratified the selection of Ernst & Young LLP as the Company's
independent auditors for fiscal year 1997. The tabulation of the votes cast was
as follows:
For: 4,113,688
Against: 29,819
Abstain: 18,103
Shareholders ratified the action of the Board of Directors increasing the
maximum number of directors from 15 to 18. The tabulation of the votes cast was
as follows:
For: 4,033,490
Against: 92,889
Abstain: 35,231
<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: August 12, 1997 /s/ Bernard H. Clineburg
--------------- ------------------------------------------
Bernard H. Clineburg
President and Chief Executive Officer
Date: August 12, 1997 /s/ James J. Consagra, Jr.
--------------- ------------------------------------------
James J. Consagra, Jr.
Treasurer, Principal Financial and
Accounting Officer
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